True or False - Private Credit Is This Generation’s Subprime

18:52Downtown Josh Brown:I think the maximum number of days that money sits in a money market is like three days. And then three days go by the world doesn't come to an end. Right. And they're like, they're like, what should I buy? Right. And I understand it's not that simple. And, you know, it's not as it's not as contained a world where It's the same dollar amounts and we don't have money moving in and out of banks, et cetera. But just big picture, I think it explains the Vs. I think it explains – I just think it's a different investor class, both professional and retail these days. And they don't bide their time. And I think some of that just has to do with the pace of life in general.

19:33Downtown Josh Brown:100%. Everything we do is sped up. Yep. So why would that reallocation into a new stock process not be sped up? 100%. What do you think about that?

19:41Garrett Baldwin:Well, I just, I think that there's a, there's a couple of moving parts. One, there's incentive for, you know, brokers to try to get people to sell. There's, there's incentive, you know, for as much market action, as much money flowing around as possible. And if you look at it, there's that one crazy chart where it says like the average holding time in the 1970s was like 10 years. Now it's down to what? Like six days. Yeah. And I think that there, you speak to the immediacy of the market. You speak to the fact that we can trade on our phone at any given time. Everybody's got a tip. Everybody's got an opinion and everybody's, you know, bouncing from one platform to the next, trying to find something.

20:21Garrett Baldwin:And I think that in an environment like this, where we're at all, we're within 2 % of all time highs. And most of us feel like what's going on like the, again, we talked about JC. JC is going to say that it's going to go to 8 ,000, But like the rest of us are sitting here going, there's a war. There's constant money printing. There's a lot of uncertainty around earnings.

20:43Downtown Josh Brown:New Fed chair coming in.

20:45Garrett Baldwin:Right. And I was going to say this earlier. There's that one meme that says, while the end of times will be horrifying, the pre-end of times will be extraordinarily profitable, defining on the opportunities that you can invest in. That's what this feels like. And when I think when markets are at highs, right, it's it's people are looking for I missed out on this. I missed out on this. I missed out on this. So do I try to buy this stock that is trading at 20 times sales, but is unprofitable, but it's down 40 percent? You know, it's going to go back and I'm going to and I'm going to be I'm going to be smart because I, you know, I timed that.

21:21Garrett Baldwin:And that's a very that's just kind of the way that the market.

21:24Michael Batnick:I think I think the market is lying to us. I think you remember the remember the vibe session the hard data and the soft data I think the hard data is the market and the soft data is how we all feel aside from JC and by the way I'm more team JC and they're not on this one I don't think anybody feels FOMO I don't think anybody's like I can't miss the next rally I think people are very anxious and I think that the market has swallowed so much like I can't believe the rally on Tuesday I really can't I was shocked that we didn't close on the lows after opening like that down uh EM down seven percent the Dow down whatever was down at the open, the market continues to be hit with these super bearish narratives and it just won't go down.

22:05Michael Batnick:Like at some point you have to say like, okay, like, yeah, I'm, I'm anxious too, but clearly there is an overwhelming demand for stocks. There are so many more buyers and sellers despite the way that we all feel like this doesn't feel great.

22:19Garrett Baldwin:But what about, what about the narrative or the argument of, and I'll go back to what Stanley Druckenmiller said in 2018.

22:26Michael Batnick:You already got me. I mean, I can't rebut it. Whatever you're about to say.

22:29Garrett Baldwin:So all he said was, look, you know, like trend investing is very complex now. Like if I'm if I'm down, if I'm looking to go down on something and short it, this this stock moves into the third standard deviation and the algos step in and start buying it. And if you want, if you just look at volume weighted average price on a one minute chart, watch, you know, watch somebody like Jamie Dimon say something about the bond market. Watch it dip into the fourth standard deviation and then watch it rally to the fourth deviation on the upside. Like it's, it's absolutely wild, this type of price action that we're seeing.

23:02Garrett Baldwin:And the, and I think the difference between, you know, the 1990s and now we would see three, four, 5 % moves. We would see moves to the downside. We would see a continuation of trend. And now what we're seeing is kind of like this round tripping during the day. And I don't know how that's possible. I don't know what's necessarily driving it. I do understand, you know, what's going on with zero date, but I'm not going to blame zero date.

23:24Michael Batnick:Dude, on liberation, liberation day. So we were down like 10%, 12%, whatever it was. And I'm staring at my screen as I always do. I am staring at the screen and I blink and the market went from down 4 % to up 7%.

23:38Downtown Josh Brown:Yep. How, how does that happen? Because the, so what the algorithms have done is they've, they've made it, they've made it. So all intuitive thinking, at least in the short term is completely worthless. any sort of like linear, like if A happens and then B happens, therefore the probabilistic result will be C and then D and then E. The people who think that way, the most intelligent people in the market who understand all of these connections between cross asset, it's blah, blah, blah, blah, blah. It's not that they're stupid now. It's that the machines are speed racing, speed running that whole process in minutes rather than weeks.

24:23Downtown Josh Brown:I remember there were weeks for a story to play out and then it would go too far. And then the buyers or the sellers would come in and correct that. And that's where the term correction comes from. Now you're wasting your time. And actually one of the most popular trader memes for this reason is that thing where it's like the bell curve and you have a complete moron with crossed eyes on the left. The midway. Yeah. And then all the way on the other side, on the far right, you have a complete genius egghead. And both of them, their returns are zero. And then in the middle of the meme, you have like a Jedi figure who's just like, I don't even think.

25:04Downtown Josh Brown:Like I just basically buy the index and I don't even know what you guys are trying to do. And that's what those –

25:11Michael Batnick:Don't you think that this is awesome for people that have a brain? because we saw what happened when Schwab fell 10 % because of the altruist news. I know we keep bringing it up, but it's important. And when CBRE and all these related names just got whacked and CrowdStrike fell 10 % one day and then 8 % the next day, doesn't that provide opportunity for people that aren't trading with an algorithm that can think for a second? Yeah.

25:35Garrett Baldwin:I couldn't agree

25:36Downtown Josh Brown:more.

25:36Garrett Baldwin:Yeah. And to compliment that, one of the things that I focus on, there used to be a very distinct pattern that would happen in the market. The S &P 500 would fall under its 20 and its 50 day moving average. It would peter out. There wouldn't be any buying. Then it would squeeze back up to its 20 and then it would just tank. And then insiders would start buying and there would be some sort of policy accommodation. You can see that in 08, 11, 15, 18, 20, 21, 22, 23, 24, and last April, of course. And then the best one of the year was insiders picked up on November 19th and Japan announced$117 billion in stimulus.

26:15Garrett Baldwin:And I just, it was a Sunday night. I just sent an email out. I said, you better cover your shorts because this is just going to move. And now what's happening is we're seeing policy moves. We're seeing repo. We're seeing the support of the Fed. But like even that right now in the last couple of weeks and months, all we're doing is we're hitting a hundred day moving average and we're going right back up. We're hitting a hundred day moving average. And now what's happening, the 100 day moving average is now moving right in line with the 50. That's where I think it can get interesting, particularly tax season into April.

26:45Garrett Baldwin:But this is a market where you better be compressing, if you are a trader, compressing the time frame that you are trading on. If you're long term, if you have a thesis, if you believe in capital efficient businesses, if you want to buy pull corporation because there was just a massive amount of insider buying, that's a good company. That's got a good thesis. I'm good with that. But from a trading perspective, I mean, it is. Oh, that's a great point. It's wild.

27:11Downtown Josh Brown:So I actually believe this very strongly. It has never been more important for people to decide whether or not they are investors or traders, whereas I think that you could have had sort of a more nebulous definition about what you do in the markets as a regular person over the last couple of years. You could say like, yeah, I'm an investor. and then every once in a while, I'll throw on a day trade, like that kind of thing. I just, I don't think that this is an environment that's conducive to tourism on either side of the fence. If you're a trader, don't miss your opportunity to stop out and then become an investor by accident and vice versa.

27:52Downtown Josh Brown:Like if you want to bet against the trend, you have to decide I'm an investor and I'm going to let that trend keep going against me. And I might buy a third, a third a third on the way down because i'm determined to be an investor here or you sell but you have to but you but you have to know what are you doing like what are you doing and i think i think there was a long time where you could kind of just be like a whatever i don't think

28:14Garrett Baldwin:people should be a whatever right now no totally and and again i i focus heavily on momentum and insider buying so there's a chart that i you guys have but it's it's all of the stocks that are breaking down right now the worst of the worst it's like campbell's soup and it's all the it's all the credit companies. It's KKR. It's Huntington Bank shares, CBREs on that list, Aries Management. And we're seeing a massive amount of insider buying on a lot of different equities. The moment that that stock falls off that momentum list, that negative momentum list, and there's insider buying, look at a stock like MSCI.

28:50Garrett Baldwin:Fernandez, the CEO, he bought it at 520. It broke down. It fell to like 500. Every time he buys the stock, it goes from 520 to 600. and yeah like you just look for these you just look for these themes these strategies and you return to it and by the way i'm i'm i would love to buy kkr like i would love to buy i i think it's a phenomenal company but i'm not going to touch it yet and also when do i really want to own it when we do our next round of qe like that's it like the second that we the second they really print money and they will our our financial sector goes up because we're a financialized economy

29:28Downtown Josh Brown:Let's stay there. You think – you're not saying they'll print money because of the KKRs of the world, but you do think we're going to have a credit cycle that goes heavily against some of these companies, but it will also go against publicly traded – it's not going to be – if we have a credit cycle, it's not going to be a private equity, private credit only situation.

29:52Garrett Baldwin:Well, the theme right now in monetary policy is you have Warsh who wants to reduce the balance sheet, but then you have Besant who wants to issue more capital, more T-bills for refinancing purposes. And that matters because when you move out of 10, 15 years not having to lock things up in bonds and you start issuing treasuries, go back and look at the 2017 chart of the S &P 500. We have gone from what, 3 ,000 to 7 ,000? You know what happened that year? The Tax Cut and Jobs Act. And the Tax Cut and Jobs Act, in order to afford it, they started to sell aggressively at the short end of the treasury bills.

30:37Garrett Baldwin:So instead of trying to fund it with 10 years, they funded it. We've gone from 11 % of our debt being funded under a year to roughly 23 % to 24%, and Bank of America thinks it's going to go higher. That is bullish. That's bullish for the amount of money that is sloshing around in the system, and that helped.

31:00Downtown Josh Brown:Why is it bullish?

31:01Garrett Baldwin:Because those treasury bills are liquid assets that could be utilized for the purposes of repo. And that is what has helped drive that leverage trade. You can call it 60-40, however you want. But we rehypothicate. Somebody made fun of me for using rehypothicate last time. But it's the most wonkish term in the world. Wasn't me. I love it. You lever up T-bills. And then you borrow. And then you borrow. you go out, you buy Facebook, you take it back to the repo market, you do this 10 times, and now you have turned$100 million position into$2.5 billion.

31:39Michael Batnick:Wait, who's doing that? I'm not doing that. You're not doing it. Maybe you should. Michael, we should be hypothecating. What am I doing? Moron. All right, let's get back to the stock market. So there's all sorts of weird shit, as I keep saying. So our friend Todd Stone has this killer chart. I guess it's a table. and he updates us all the time. And we're looking at every year that the S &P 500 was positive. Yep. And then also how much did the top 10 stocks contribute as a percentage of the total? And of course, 2023 and 2024, it was all the big boys that did the heavy lifting. It was like 68 % of the overall return.

32:20Michael Batnick:But year to date, the S &P is marginally positive. Right. So I don't know how Todd did this math. It doesn't matter. Yeah, I don't get it. It doesn't matter.

32:29Downtown Josh Brown:Minus 533%. I don't know. Whatever. Yeah, no, I have it. The top 10 stocks are a detracting.

32:35Michael Batnick:No, we know. I know. But the negative, Todd's my quant. I don't care. The point is this. It's never happened before. You've never seen an environment like this. That's the weird.

32:44Downtown Josh Brown:That's one of the weirdest things about this year. That's right. And I've got. It's anti-leadership.

32:49Michael Batnick:I've got.

32:50Downtown Josh Brown:It's like anti-matter.

32:51Michael Batnick:I've got two more data points and then I'll shut up. So our friend Andy Thrasher has a chart that shows, as of yesterday, the S &P 500 has a three-month negative return. However, more than half of large-cap stocks are up 5 % or more over the last three months, and 38 % have advanced 10 % or more. We'd have to go back to 1990, 2000 to find a similar setup. Dun, dun, dun. And then lastly, so you've got this tug of war between the top 10 sucking wind, giving everybody else an opportunity to make some alpha, which is great, and the rest of the market and they're netting each other out, right? That's a tug of war.

33:25Michael Batnick:And we're not moving. So this is the tightest range for the S &P 500s to start a year in history. And this just feels so wrong. It doesn't feel like this is possible given, like even prior to the missiles flying, it just feels like there's so much noise and anxiety between private credit, the software, Like all of this, it just feels like the AI build out. What is happening?

33:53Downtown Josh Brown:Well, don't you see that this proves my idea? Yeah, you're always right. No, no, no. In this particular case, though, doesn't – go back to the second chart for a second. So the S &P is a three-month negative return, but more than half of large caps are up 5 % or more during that period and almost 40 % are up 10%. So chart off what's happening. Halo. Very simply, no, people are selling the AI trade that they were along last year. They're coming out of the Metas and the Microsofts and the Amazons because those stocks are not working. And they're not sitting around and doing nothing. They're saying, well, shit, look at Exxon.

34:36Downtown Josh Brown:I'll buy that. Look at Lilly. These are mega cap stocks that institutions can buy in size, liquid as water. and they're going up and they have nothing to do with data centers. And that's my point. Nobody is sitting on their hands when they get out of Microsoft. They're like, okay, what else are we doing? And that's happening like that. They're not waiting. They're not deliberating. You can't deliberate. So I really do think it's money coming from the left pocket to the right. And the S &P is so far able to hang right where it's been and not give up anything.

35:10Garrett Baldwin:If you are a person who subscribes to the idea of cycles and credit cycles and investing accordingly, this is that this is the idea of liquidity expands. You start to buy high beta right off the bat. Right. So the second that the second that they engage in QE or the liquidity bottom is in that that was early 2023 high beta stocks. And then once everybody misses that rally, because most people do, because they're still bearish from previous events, that's where you start to see movement into some commodities and financials. Then as we move into the later part of the cycle. We are there now. Yeah, we're on the other side of the cycle now.

35:49Garrett Baldwin:So now you're seeing the mag seven, the higher beta stuff drop. It is a rotation to energy, materials, and consumer defensive. So it's right on time. And then what's the last stage? Duration. you know actually moving into bonds and looking at looking at the possibility of

36:05Downtown Josh Brown:the 10 year coming down we'll see what happens that's parties over that's parties over and then

36:11Garrett Baldwin:yeah you're going out you're looking at corporate bonds how long do these how long does this phase 65 65 months according to cross border 65 months is the entirety of the cycle or the period of the

36:23Downtown Josh Brown:that we're in trough to trough how long does the consumer staples energy commodity phase typically buy us to start getting all bared up?

36:35Garrett Baldwin:If we were not providing a significant amount of$55 billion a month and Japan doesn't step in and Besant doesn't tell them to get their crap together, we'd be there. I have a very hard time believing that we would see SOFR blowing out right now. That's exactly what Powell hinted to. And that's what Logan hinted to in Dallas. They said, we've got problems in SOFR and our banking reserves are too low. so that's why they're providing the support now this can this can go they're not gonna call they're not gonna call it qe ever again oh it's called reserve asset management or something like that and they'll come up with a new name for the next time yeah come on you muppet keep up so um so but the thing is this can this can either be a slow process and if you look at 2022 it lasted nine months really you know but we also did have a war at the same time but in 2008, it went fast and we were at the top of a cycle in mid-2008 and then it just went.

37:35Garrett Baldwin:So this is why we follow momentum. This is why we watch these key moving averages. I think right now, if we were not providing the support the way that we are, we would be in a much different place.

37:48Downtown Josh Brown:Rate this phrase on a scale of one to 10, 10 being very accurate, one being ridiculous.

37:56Garrett Baldwin:private credit is this generation's version of subprime seven seven come on yes come on does not like it how do you know prime dude all right go ahead you first no no so so subprime

38:11Michael Batnick:you have to which did not matter until it mattered qualify your statement josh are you saying that are you um analogizing them just in the sense that subprime was is like the the epicenter of

38:22Downtown Josh Brown:spark or that these companies are subprime great i'm glad you asked for that clarification yes i'm not the one making that statement but i think it's meant to mean that it's a sign of something worse beneath the surface not as it being causal okay now in the case of subprime in 06 07 it was both it was both a sign that there was up underwriting taking place and it was causal because it was pulling out the Jenga pieces at the bottom of the tower. I'm not the one making that statement. I am the one hearing that statement, and I would love to hear from Garrett.

39:00Michael Batnick:Private credit is pricing a massive default cycle. It is. So, Garrett, what do you think about this?

39:05Garrett Baldwin:But again, it doesn't have to be a subprime crisis of the proportion of everybody losing their house. I'm not saying it to that degree. I'm saying that the source of the crisis is in private credit, like it wasn't subprime and like it was in unprofitable tech stocks and like it was savings and loan, you know, paying 20 percent, having to pay 20 percent to make eight. This is this is where this is where a lot of people who are banking experts that I listen to on a regular basis have consistently said, look, this is going to be the source of the next crisis. And if we look at if we look at the we look at what this really is, this is the shadow banking system.

39:43Garrett Baldwin:Right. It's the it's it's private. It's private equity. It's hedge funds. It's all largely unregulated. What was this?

39:50Michael Batnick:Being financed, being financed by the traditional banking system.

39:53Garrett Baldwin:But what was there? The, these banks are originating loans and then just can't wait to get rid of them, get them off their, get them off their balance sheet. That's what they're doing. Like since Dodd-Frank banks don't bank anymore.

40:05Michael Batnick:They originally, but the banks, but the banks are making the loans.

40:08Garrett Baldwin:And then they're dumping them and then they're handing them and then they're handing them off. And, and that's, and that's the real issue at the end of the day. Like where did the origination of the housing crisis start? It didn't start at Goldman. It started with MBS in the shadow banking system, according to Posner and the people who really covered that. So I think that this is, if we were to ask, what's the highest likelihood of where the current crisis is? Oh, and by the way, we've already seen a lot of issues. We already are seeing refinancing challenges coming. And we're also seeing the fact that the United States government is going to have to refinance a lot of its debt and could potentially crowd out those private credit companies.

40:52Garrett Baldwin:And that's very comparable to some of the things that we've seen in the past.

40:55Downtown Josh Brown:The private credit guys, though, would say, OK, so we're the only people who are going to have defaults. Right. But come on. Everyone's going to have everybody.

41:05Garrett Baldwin:Yeah. This is so. But unless we print more money, let's just print another seven hundred and fifty billion dollars and plug the holes because that's. That seems to be the play.

41:14Downtown Josh Brown:If only we could have a health crisis to give us cover to do that.

41:17Michael Batnick:There will be no appetite, obviously, to bail out these private credit companies that took loans from KKR and Blackstone and the like. I mean, obviously. There won't be any appetite, but they'll still try to do it.

41:30Downtown Josh Brown:Can I ask you, as a follow-up, one of the things that's really interesting is that we used Dodd-Frank and Basel III and all of these things to keep banks out of this business of making these loans. And that is why we have the Apollos and the Aries of the world at the scale that they are. And it's a good thing. We separated the deposit taking banks with, you know, nurses and police and firefighters where they're putting their money. We separated that from people making loans to, let's call them lower quality borrowers or riskier loans or whatever. Good. Right. However, the banks over the last couple of years couldn't stand to stay on the sidelines completely.

42:16Downtown Josh Brown:So they're not directly making the loans. They're funding.

42:18Michael Batnick:They're financing the loans.

42:20Downtown Josh Brown:They're financing the loans. I'm not suggesting that that's some sort of like systemic thing, but I would say they're not ring fenced from this circus if it goes sideways.

42:33Garrett Baldwin:One of the things that I think we have to take a little bit of a step back in discussing this. is you have to look at what has happened in this market for the better part of 18 months. Let's go back to Japan. Let's go back to the Japanese crisis. Biggest drop since 1987 on August 5th, 2024, right? Since then, and I think it probably happened again, since then we have had volatility spike and then pull back by 40 % in 10 trading days. that had never happened before, before 2011. And my point is, this is what is, this is policy related. This is being, this is Japan stepping in. This is, this is the treasury department stepping in.

43:19Garrett Baldwin:This is the federal reserve stepping in and it's just become constant. It's just this process. And I think that that is one of the other underlying reasons why this market's just doing what it's doing. There's ample capital in the system. And as we know, there's always ample capital capital until there isn't. And that is why my concern is in the private credit side, because it's opaque and because we've already seen what's transpired. We've already seen these, these types of moves. And I don't, I think it's just going to be a constant theme that we're not going, it'll go away for a month and then it's going to come back in April.

43:55Garrett Baldwin:And then I totally agree.

43:56Michael Batnick:So everybody is concerned. Blackstone's equity is down 40 plus percent. All right. Nobody, does not know what's happening here. But I think you're so right because Bcred, which they just had a big redemption for, which they met, 26 % of the portfolio is in middle market software companies. So if Salesforce is under trouble, if their business model is under trouble, can you even imagine companies that are one one hundredth of the size? So the payment the kinds that we keep hearing about, the defaults, which we haven't heard anything yet. There's really been nothing. There's been some fraud, some write downs, but we haven't even started to see the underside of some of the stress in these portfolios.

44:47Michael Batnick:And that is what makes this even just so much more bizarre. The returns are good. The defaults are not there, but they're pricing in GFC-like defaults. And in 2008, 2009, I think high yield, I know it's not a perfect proxy. I think defaults were like just above 10%, maybe 12%. And that's what is being priced into some of these BDCs right now. There's leverage there. So that's getting washed out.

45:11Downtown Josh Brown:Yeah. Ironically, the HYG and JNK ETFs, which you used to be able to use as a proxy for visually being able to see stress in the high yield market, in the junk bond market, they're not as effective because those portfolios are way higher quality than they used to be. So like the bonds that make those, that, that index, both of the indices upon which those products are based, they're just better credits. I don't know if they'll stay that way. Um, but that's not a good, that's not a good canary anymore. That canary has been upgraded to, I don't know, a cockatoo. Like it's not, it's not even in the coal mine.

45:51Downtown Josh Brown:Those are better credits. I think in this cycle, the publicly traded BDCs are a way better. And it's not to say that they couldn't be wrong, but I told you six months ago, I'm watching those more than anything else, because that's like real time stress.

46:06Garrett Baldwin:There's this, there's that scene in the big short where they're talking about mortgages and they're like, who shorts housing? And then they stop and they go, Oh my God, this is like the MBS is down like 30%. And it's like, it just comes at you really, really quickly. And you don't even realize in real time that it's happening. And I have a, I have a value reversion model that we built that I pulled from a lot of different academic sources. And right now looking at this, it's all BDCs, like from like, from like value quality perspective, from reversion perspective, from the ability, like Warren Buffett rankings, it's Chicago Atlantic bdc manhattan bridge capital um chicago atlantic real estate financing bp bcp invested corp carlisle secured lending like this stuff looks dirt cheap so this is my point yeah everybody

46:59Michael Batnick:sounds like anything i want to buy right hold on hold on risk is like risk the subprime is always and it's not to say that people didn't see subprime coming right but everybody is all over this private credit trade. Everybody is bearish. The equities are bombed out. And guess what? What makes me feel a lot better about this not being the next subprime? These things are illiquid. So yeah, they'll bleed 5 % a quarter until people calm down. And if the returns stay reasonable, eventually the 5 % selling pressure will abate. So that makes me much more optimistic, not that I'm naive to the risk, that this is not the next subprime.

47:36Downtown Josh Brown:Do you think that there are a lot of people that want it to be? Yes.

47:39Michael Batnick:The Financial Times certainly does.

47:41Downtown Josh Brown:There's a schadenfreude element to this where people who did not make money in this space and have watched these guys become billionaires and they think they have no exposure to it. I think there are a lot of people rooting for defaults and blowups and they want to see some of these guys personally humbled. And I think the same could be said about what was going on with Silicon Valley Bank and people wanting to see the startup economy implode. I think there's an element of that. And I'm not saying the reporters covering this are definitely in that camp, but it's really easy to spin every single headline as being dire because there's a huge audience who will click on that.

48:26Garrett Baldwin:There's I would say two elements of this. and I want to phrase this properly. I still think that there is a angst and anger that will always linger from 2008. So do I. Particularly for people who are under 50. And I want to point, I'm going to be 45 in a month. How many financial crises have I lived through in my lifetime post 2000? It's a lot. It's like, it's 2008, 11, 15, eight. It's a constant process. And on top of that, I think there's a cultural issue here in the US, and it's kind of emerged over time. But people are really, I don't want to use the word bloodlust, but there's an element of revenge that is kind of like an undercurrent of our system.

49:17Michael Batnick:Especially for the billionaires. Everybody wants people on top to have -

49:21Downtown Josh Brown:If you're on the bottom of the K, you would love nothing. more than to see private equity guys that bought your favorite sports team and whose kids are getting into the schools that your kids can't. You would love to see them taken down a peg. Dude, in handcuffs, people would celebrate it. Honestly, that's the world we live in.

49:41Garrett Baldwin:And even if we, and I think it's even if we are, if that group is impacted. So back in the day, well, we got to bail it. We got to bail out 2008 because the housing market's going to go down and that's going to impact you personally at this point though i think there are there is a large group of people that are willing to take down their own ship if it takes you know some other people down with it well and that's political special especially they'd love to see rents come

50:09Downtown Josh Brown:down yeah because yeah i mean look i don't think people want to see a ton of job loss that i don't people want to relive 2008 yeah but they they do want to see some karma come for uh the top half of the k we i live in maryland that's a normal human instinct i live in maryland right now where

50:28Garrett Baldwin:our electricity costs just keep going up and i mean the art the anger here is not only am i paying for all of the uh ai centers that are being built in virginia with my with my money in addition to that I'm paying for what will ultimately potentially take my job. Right. So that's like, that's like hiring your replacement and then giving them your money in the process while you're training them. And that, and that is very palpable here in Baltimore County. Yeah.

50:56Downtown Josh Brown:That's the crazy thing. Like there was an, there was an employee who was not laid off by block last week, uh, this week, I didn't lose track. This is like probably two days ago. Uh, Jack Dorsey came out and said he's firing 40 % of the company. Right. They're going to go from like 13 ,000 employees back to six or whatever, or seven. And somebody who was part of the 60 % that gets to stay quit anyway. And she went on like this social media tirade. And she's like, dude, they've been shoving this AI shit down our throats. We have to use AI in everything. None of it works. None of it is helpful. There are no efficiencies from it, but they've just been saying AI, AI, AI.

51:38Downtown Josh Brown:And then after two years of that, they fire half the company. And it's like, they made everybody use AI so they could figure out who they could get rid of sort of thing. And that was like the last insult. So I do, I agree. I think societally, there's an element to that out there.

51:56Michael Batnick:100%. I have a question for you guys on what can break this? So John, throw that bespoke chart up again, please. So I mentioned that these 1 % reversal days, like the down 1 % and finish is green is bullish. There's only so much that we can withstand. Like if you continue to see this, that will turn from bullish to bearish. And what I mean is the red dots that Bespoke has in this chart, I know it's a little bit hard to see. Those are the times where it's down 1 % at the low and finishes green, but it's the first time in three months, okay? So that's what we just had. That's the first time in three months that's happened.

52:37Michael Batnick:When you start seeing that cluster, and it's really only happened in the lead up to the dot-com bust in the aftermath and 2008, shut off. When that behavior starts to become a pattern, that's when eventually the flush happens. So if we start to see more and more of these, I'll become concerned because that's what changes behavior.

52:58Downtown Josh Brown:So what could break this meeting? What could break the cycle? and get us out of this kind of weird market behavior. I posited on Slack the other day, a really big strategic acquisition or two, not a private equity take, not an LBO or not a financial transaction, but if a big European bank made a bid for Apollo, that would get people to shut the up very quickly. I'm saying the opposite, Josh.

53:23Michael Batnick:I'm saying to the downside, what could break the retail's likelihood of saying, you know what? I touched the stove three times. So you mentioned the money. Boots on the ground in Iran would probably do it. The money goes from Microsoft to Halo stocks or whatever. The money doesn't stay still. Eventually, it will stay in the money market.

53:45Downtown Josh Brown:Job loss. That's the answer to your question. I think you're right.

53:48Michael Batnick:Tax payments.

53:49Downtown Josh Brown:People won't change their investment behavior until they lose their job. And if enough of them do, you could say goodbye to the 401k inflows for at least those people who are affected, but we haven't seen it. In fact, the ADP report this week, Garrett, you called it a narrative violation. What do we make of this situation? Where are all these job losses that we're pricing in?

54:14Garrett Baldwin:I just wanted to add one last, tax payments might be the other thing, right? So seasonally, we have a lot of, look at the money markets going back 2024, 2025. Yeah, but that's a short-term phenomenon. Sure, it would take us into April. But then the question is, all right, well, if it takes us into April, does the Fed continue with its asset management strategies? I mean, that's really what this is about.

54:40Downtown Josh Brown:But we're getting the benefits of the tax deal this year. The 2025 tax deal, the big, beautiful bill, those benefits haven't shown up yet. That's now. That's this year. So that might be a countervailing force.

54:53Garrett Baldwin:This is why I just follow one number and one thing with momentum, and then I just trade accordingly. because it's - I was gonna say, this is why I stress eat.

55:01Michael Batnick:Yeah, yeah, yeah, 100%. Garrett, let me ask you this. One of the things that I said, you know, if there's anything that's like flashing a yellow, maybe a shade of red light, it's the fact that staples were going parabolic.

55:14Garrett Baldwin:Yes.

55:15Michael Batnick:Like that was concerning. It just, at least I was concerned by it. And those stocks, if you look like, those stocks have gotten whacked off hard in the last four or five sessions. And as a matter of fact, we have a chart showing the sector dashboard. John, can you throw that up, please? So this is looking at a bunch of various factors above moving averages and making new highs versus making new lows. And I feel really good that staples are now at the bottom of the barrel in terms of weakest breadth. Now, I don't feel great that financials are down there with it. I don't feel great that at the top of the leaderboard -

55:52Downtown Josh Brown:How fast those cooled off. Wow. Yeah, I don't feel great.

55:55Michael Batnick:I don't feel great that utilities, energy, real estate are the best and industrials materials. Like that to me, that does feel late cycle. Like it just does. Now, maybe it's healthy rotation and maybe the tech trade comes back and it was just a short-term rotation. But what's your take on what we're seeing in terms of the leadership with these? What happened to me? Did I just chunk out? That's okay. We still hear you. Just put your, just click the video.

56:24Downtown Josh Brown:I think the data. What happened? I think the data center took your.

56:29Garrett Baldwin:Yeah, I think, I think they hear me. We hear them.

56:32Downtown Josh Brown:Took your juice. We hear you fine.

56:36Garrett Baldwin:No. Give me one second. All right.

56:40Downtown Josh Brown:This is pre-tape, so we can, don't worry. No, no, no pressure.

56:44Michael Batnick:And he's gone. By the way, this is awesome.

56:48Downtown Josh Brown:He's so smart, right?

56:49Michael Batnick:Really good conversation.

56:55Michael Batnick:there we go that was weird all right well you're back so so garratt what is your take

57:00Downtown Josh Brown:somebody's trying to silence you

57:04Michael Batnick:so what yeah he is near he is near the capital so i am what is what is your take on what i described as the defensive nature of the leadership board well it it it reminds me and it's very comparable

57:17Garrett Baldwin:to 2022 and you have geopolitical events transpiring and you ask like what can take this down well a significant move in oil can significant move in food can and then go back to June 8th I mean the XLE falls from 46 to 34 in like three weeks right so that that might be it it might just be a bunch of you know funds that are following the momentum in the defensives following the momentum in the energy following the momentum in the industrials they all just wake up one day and say, you know what? We're taking profits and we're doing it right now. And that's exactly what happened on June 8th. And I think we fell 15%, S &P maybe 12 % in a very short period of time.

57:57Garrett Baldwin:And it was just everybody woke up and said, that's it, time to exit. And then we had another hated rally through the summer. That was one of the most hated rallies I'd ever been a part of was after that huge fund sell-off, we burned higher all the way through when Jerome Powell spoke in Jackson Hole.

58:16Downtown Josh Brown:Do you think the rally in stocks and gold last year proves what you're saying about liquidity being the primary thing? Because what else would cause that? It's a very strange thing to have gold and stocks race each other higher. and and when i see stuff like that like my the obvious answer is yeah garrett's right this is just this is just money being pumped into the system and buying buying whatever it can it's

58:48Garrett Baldwin:it's not me saying that that's that's stanley drunkenmiller back in 1988 in barons saying hey you know you know what you really want to do you want to be involved in an environment where the central bank is accommodative and boom like you know absolutely nailed that call in 88 and had a great run through 90. You know, as far as gold, last time I was here, we chatted, I said, you know, what was the, what was the major catalyst that a lot of people still forget? And it was the fact that we weaponized the dollar against Russia and you, and you start to see that run in gold transpire. That's when all the central banks started to bid.

59:23Garrett Baldwin:And, and then the retail, the retail trade in China has just been off the charts. And one last thing to keep in mind, you know, we're at the top of our cycle. China's actually at the bottom of theirs. So if China is engaging in stimulus, that would benefit gold. It would benefit oil. It would benefit natural gas and other metals. And it goes back to that argument that China is a manufacturing economy and we are a financialized one. So that when we do QE, we tend to benefit our banks.

59:51Downtown Josh Brown:I want to hit your idea of CrowdStrike against Blackstone Minerals. Tell us what you're writing about and what's the idea here.

59:59Garrett Baldwin:I was watching you guys last week and Michael had a thesis around CrowdStrike, I believe. And I was curious about it because from a fundamental perspective, I found that stock to just be 20 times sales, unprofitable, potential AI disruption. And granted, it's a great momentum stock. But then you've got Blackstone Minerals, which is cheap, pays 8%, highly capital efficient, and owns the royalty rights on the fuels and natural gas that's going to actually be pumping energy into AI. So I was curious what you were seeing in CrowdStrike from a valuation perspective that made you excited about it.

1:00:41Michael Batnick:So I bought CrowdStrike at$355 ,000 and I sold it yesterday at the open at$400 ,000.

1:00:47Downtown Josh Brown:There we go.

1:00:47Michael Batnick:So that was, I mean, and it traded up to$425 ,000.

1:00:50Downtown Josh Brown:No 8 % mineral yields involved. No, but you know what? Unnecessary.

1:00:55Michael Batnick:I think one of the lessons that I've learned over a long period of making a lot of mistakes trading is what we said earlier. You have to know what environment you're in. Right. And I was not looking to be an investor. I think CrowdStrike is the best company in the space. I mean, this is what Josh says. I think his word for it. Right. But that's not what I'm doing here. I thought the two-day, the 10%, the 9 % back-to-back sell-off was absurd. And we know how these markets rebound. And I thought I'll shoot my shot. And if I was wrong, I would have taken – see, I'm winning either way, Garrett. If I was wrong, I'd just take a tax loss, right?

1:01:29Michael Batnick:No big deal. So that's my thesis. Josh could speak to the longer-term thing. So momentum reversion.

1:01:35Downtown Josh Brown:Yes. The CrowdStrike multiple needs to be thought of in the context of it being a network effects business, not a SaaS business. The way Falcon works, imagine an invisible shield all around the globe covering the most important governmental institutions, NGOs, megacorporations, small mid-business. Imagine this invisible shield. The more companies that join and utilize CrowdStrike, the more threats come in. And the CrowdStrike AI will take an attack on one company that's under this umbrella, learn from it, and instantly share that knowledge with every other company that's under that umbrella. So it's a network effects business.

1:02:24Downtown Josh Brown:If CrowdStrike had three customers, the product is not as powerful because you're only Intel sharing amongst three potential victims of hacks. If you have 30 companies, it's 10 times more powerful. If you have 300 companies, what happens when you have 3 ,000 companies or more, which is the case with CrowdStrike? Then all of a sudden, every single attack just becomes Intel for how to better protect all of the other thousands of companies before that hacker could even get around to them. And that is why it's got the valuation that it has. I think at$100 billion being the most important cybersecurity company in the world, it's probably undervalued.

1:03:06Downtown Josh Brown:And that revenue, that$5 billion plus in annual run rate, ARR, it's catching up. it'll catch up slowly valuation has a premium because people understand once you're in and under the umbrella you don't leave you'd have to be crazy you'd have to be crazy literally crazy to rip this stuff out and go shopping for another vendor so this is not scientific but i think we

1:03:31Michael Batnick:all agree i think maybe we do not scientific but for the leader in cyber security to not be to not one day be a half a trillion dollar business. Like, yeah, you're going to have to eat shit, right? It's not going to be a smooth ride. It never is. But that's the type of like, Josh has the personality, which I don't, to ride massive winners, which is really fucking hard. Yeah, it's very hard. Right? Like Josh has been in NVIDIA forever. And that's what it takes. If you're going to make 3 ,000 % in a stock, I can't do it. I just know I can't. If I'm up, I saw the crash like for a 12 % gain in four days and I'm like, woohoo.

1:04:09Downtown Josh Brown:right like that's just my personality uh cybers cybers tam is faster bigger and bigger and faster the the cyber security opportunity tam is growing they can't like gartner and all these uh research organizations they they can't even keep up with their own estimates they keep going higher and ai ai is like a gift to cyber security because now you're 1000xing the amount of workloads and every workload needs to be secured. And every time Snowflake and Microsoft Azure pass some corporation's data between each other, that's a workload transaction that needs security around. So AI is an accelerator for threats, and obviously a revenue accelerator too, which I think Kurt's made the case for on the last call pretty effectively.

1:05:06Downtown Josh Brown:He says it better than I could say it.

1:05:07Garrett Baldwin:The reason I bring up B.S.O.M. and the way that I think in terms of CrowdStrike, I see that as something that I want to trade. I see it as a momentum stock up and down both ways. And what I look at, we talked about this briefly last time I was here. One of the things I went back and I did back in November, I started to look at, again, thinking about ends of times. What did all the wealthy families own over time? like back in back in rome back during the fall of judea back during the you know revolution uh the revolutionary war back during the uh you know uh french revolution it's always choke points it's always like toll roads things like that so land bridges land yeah waterways waterways

1:05:49Downtown Josh Brown:things that kick off concubines just saying baseball cards um so so what i so a name like

1:05:58Garrett Baldwin:bsm or energy transfer or is that related to blackstone bsm is that related minerals no no

1:06:05Downtown Josh Brown:no no no no so they just happen to be called blackstone mineral yeah there it's a it's an

1:06:09Garrett Baldwin:interesting company it started as a lumber company back in the 1800s and they they then found out that there was just a ton of oil under all of their land where is it became texas did you watch

1:06:22Michael Batnick:train dreams no holy shit oh come on holy shit are you serious now i gotta read the book you

1:06:31Downtown Josh Brown:loved it yeah what'd you watch what'd you what'd you watch on your phone yes okay that is a you

1:06:36Michael Batnick:i was watching a problem i was watching a nick game while i watched it no that is a that is a

1:06:40Downtown Josh Brown:no that is a you movie yeah no doubt i was floored stunned but you could say but anyway Oh, Nuremberg. Sorry, Nuremberg on the plane. 12 out of 10.

1:06:53Michael Batnick:I'm watching that tomorrow.

1:06:55Downtown Josh Brown:Michael Shannon. What's the kid with the overbite? Rami Malek, Freddie Mercury. And who's the third guy in it? Russell Crowe as Herman Goering. Holy shit. With a German accent. This is out of the park.

1:07:13Michael Batnick:So speaking of German accents, Garrett, how do you find – But you keep talking about liquidity and the repo market and what they're doing over there. What are you looking at? Like you keep talking about this phenomenon. What exactly, like for the listeners, are you seeing on the screen to judge whether or not there is favorable excess or a lack of liquidity?

1:07:34Garrett Baldwin:So the primary source that I pull from, I had studied cross-border capital in 2018. But I pay very close attention to what Michael Howell writes about. So Michael Howell's on Substack. He founded Cross-Border Capital. What's his last thing? Howell, H-O-W-E-L-L. Okay. And he created a global liquidity index, and he has written about this for years and years and years and wrote a book called Capital Wars back in 2020. and what was interesting about it and the reason that I subscribed to this I was trying to make sense of the 2023 rally because if we go back to 2022 and I know that JC had talked about this he's like everybody was bearish and we turned around and we went bullish I was trying to make sense of that because I remember there was a there was a number I think we were at 3800 there were people calling for$32.50 because the expectation was that the Federal Reserve was going to run off its balance sheet.

1:08:36Garrett Baldwin:And Hal wrote in the Financial Times, I think, December 2022, bottoms in. And he explained his cycle. And once I read that book, and then I started to analyze that and assess that, looking at Federal Reserve liquidity, looking at the type of auction sheets from the Treasury, focusing heavily on SOMA, SOMA, looking at what's happening with the Bank Japan. And what his number is, it's a liquidity index. It is all money outside in addition to the M2. And there's a multiplier effect on it. And he's got it somewhere around$185 trillion. And that's all of the money that is used for the purposes of refinancing.

1:09:14Garrett Baldwin:Because basically, six out of every seven new dollars that is created is used to refinance existing debt. It's not used to actually fund growth.

1:09:23Downtown Josh Brown:how much does that 185 trillion fluctuate from i don't know what periods month to month or

1:09:29Garrett Baldwin:yeah there's a chart there's a chart somewhere that i would have that i'd have to pull for you but i think that during the 2020 crisis it pulls back from like 100 down to 75 really quickly and then the fed prints and we we start to take back we start to take up again oh so this thing this thing can move yes and and one of the things that's interesting about it so we we built a momentum indicator. It's basically three different things that we look at. But the primary thing is we're just taking the number of stocks that are breaking out versus breaking down in a very academic perspective. This goes back to the work of Grant Henning, who's a very prominent momentum trader.

1:10:09Garrett Baldwin:He wrote a book called The Value and Momentum Trader back in 2009. And then we layered that with JP Morgan's 2015 and then Cliff Asnes' Momentum is Everywhere report in 2012. And we built this model and it's just basically green minus red equals positive or negative. And I'm not saying that it predicts everything, but when this goes negative, that's where we've had these big events. So for example, it went negative on August 1st, 2024, three days later, Japan crashed.

1:10:39Michael Batnick:Will you email me the next time it goes negative, please?

1:10:41Garrett Baldwin:I will.

1:10:42Michael Batnick:Where do we stand? You have it.

1:10:43Garrett Baldwin:You're a subscriber to me and the money printer, aren't you? I'm not. Don't you get the capital wave report? I will be. All right, I'll give it to you for free. I will be. Okay. And the point of what that is measuring is there is a relationship between liquidity, momentum, and then returns, right? So momentum lives upstream, or forgive me, liquidity lives upstream, momentum is the result, equity returns are the consequence. And that's a pretty simplistic way of looking at markets, and I don't try to overthink things.

1:11:11Downtown Josh Brown:Where do we stand now?

1:11:13Garrett Baldwin:Right now we're negative. We've been negative since the last time that it went negative was January 28th. Two days later, gold and silver crashed. And then a week later, we had the biggest, that huge momentum move that transpired. I think it was the Wednesday.

1:11:27Michael Batnick:When did your model flip negative? January 28th. It's such a weird market.

1:11:35Garrett Baldwin:Even though we are at all-time highs, right? And that's what's really crazy about it. And then the last thing that we're focusing on, there is a slide that I put in the deck, and it's just a breakdown of all the breakdown stocks right now. So you've got – I don't know if you guys can throw it up or not.

1:11:52Downtown Josh Brown:Yeah, we have it.

1:11:53Garrett Baldwin:Yeah, yeah. So those are the stocks that are part of the equation that are breaking down right now. And as you'll see, Campbell's is on this list.

1:12:03Michael Batnick:What the hell is going on with Campbell? I just brought up the chart.

1:12:05Garrett Baldwin:It makes no sense because you would think consumer defensive. But didn't the guy say that they're serving horse meat or something? People don't.

1:12:14Downtown Josh Brown:No, this does make sense.

1:12:16Michael Batnick:It's a perfect downtrend. This stock looks like a perfect downtrend.

1:12:19Downtown Josh Brown:Generation Alpha is never going to drink metal cans filled with salt water. So this is a company that is constantly forced to reinvent itself every three years. And it never quite does. And it's been a value trap my entire career. um but put put that one aside brown foreman's interesting to me because it's also consumer defensive this is basically bourbon and whiskey right um when you have the alcohol stocks breaking down with the private equity stocks yeah that's a that's some that's some shit going on i don't like seeing citizens yeah i don't like seeing genuine parts on a list like this because of how pro cyclical that company is literally like you do not want to see the auto business in trouble that's one of the worst signs that exists in the stock market for the health of the economy because i don't love that interesting to see a bunch of banks on here too that crept up on us and happened out of nowhere um yeah i get it i like this this is uh this is a good window so what

1:13:17Garrett Baldwin:we do so what we do with that at that point is now now we i we created a i mean i love claude because as i said it's just like uh strapping a rocket to my back because i'm just naturally curious about building things. We built a free website for insider buying that scrapes from Edgar. So now what I'm doing is I'm taking those stocks that are breaking down. I'm looking for insiders to start buying. And we've seen this happen. We saw it with MSCI. We just saw a huge buy with the trade desk. Trade desk is up like 30 % today. That's performing stocks today. TDD was on that list, was on that breakdown list.

1:13:52Garrett Baldwin:And then there was a little bit of insider buying. the second that stock came off that list, there's two different things you can do. You can just trade it to try to buy it, trade it to the upside, set a tight stop. I saw spreads below where the CEO or the CFO purchased the stock. So I'm willing to take possession of the stock at a lower level, but I'm targeting like a 20 % return and 80 % probability of profit and an annualized return somewhere in the 100 % range. And I just do that over and over and over again. If the stock falls back on the breakdown list, I get back out. But what we're seeing is that even the insiders are not calling the bottom for names like KKR and Aries right now.

1:14:28Downtown Josh Brown:Garrett, I want to let people know where they can follow you for more. And something tells me your website might crash once this episode goes live. So give us the URLs.

1:14:42Garrett Baldwin:So that platform that we just showed, that stuff is not going to be live for another couple of weeks, but that's just on my website, GarrettBaldwin.com. We'll make it accessible. Me and the Money Printer is at Substack. I publish that. I never miss it. We have a paid level called Capital Wave Report that follows liquidity, momentum, insider buying. We put that reading up every day. If it goes positive, we send an email out letting everybody know. If it goes negative, we do the same thing. We created insider stock buys. I think we'll just read the article. It'll be in there. And then postcards from the edge of the world is my other thing on Substack.

1:15:20Downtown Josh Brown:That's a little bit more like poli-sci-ish almost, right? Yeah.

1:15:24Garrett Baldwin:And again, that focuses on the choke points, right? So I've talked about AI. I've talked about a lot of these other elements. But we do have a stock recommendation that aligns with it each week. And then in about a week, week and a half, I'm going to start writing more about the AI phenomenon and try to focus on that. So those are the two primary things. figuring out what else I'm going to do relatively soon.

1:15:49Downtown Josh Brown:My man, you crushed your first appearance on The Compound and Friends. We're so happy to have you. And we'll do this live in person in New York sometime maybe this summer. Sounds good?

1:15:58Garrett Baldwin:I love it. Great to meet you, Michael. Thank you both for your time.

1:16:00Downtown Josh Brown:All right, dude. Awesome. Guys, thank you so much for watching and listening. We appreciate all your reviews. It tricks the algorithm into thinking that this is a good podcast. So please help me be a part of that trickery. And don't forget to subscribe. And we'll talk to you soon. Thanks for listening. Thanks for watching.