That Wasn't the Bottom | The Compound and Friends 87

Introduction and Bird Dogs Sponsorship

JB introduces the episode and talks about his experience with Bird Dogs clothing. He encourages listeners to check them out using a promo code in the show notes.

JB's Experience with Bird Dogs Clothing

• JB got shorts and pants from Bird Dogs.

• They have stretchy fabric, making them more comfortable than other shorts and pants.

• The versatility of being able to wear one pair of shorts or pants anywhere is appealing.

• Listeners can enter a promo code in the show notes to get a free Yeti-style tumbler with every order.

Robinhood Margin Call

JB shares his experience with Robinhood, including getting margin called, deleting the app, and still receiving collection notices.

Getting Margin Called on Robinhood

• JB used a bug on Robinhood that allowed him to get infinite leverage.

• He got $50k of margin off of a $1k deposit but lost it all buying zero data expert options.

• After deleting the app, he still received collection notices for $75k from a collection company.

• In the end, Robinhood may have taken some loss because JB hasn't paid anything.

The History of Small Order Execution System (SOES)

JB discusses how SOES was created after the crash of 1987 to help retail traders trade alongside institutions. However, high-frequency trading has since wrecked liquidity.

Creation of SOES

• SOES was created after the crash of 1987 to allow retail traders to trade alongside institutions during fast markets.

• Retail traders had their own system on a parallel thing that they would be able to trade in.

• The system was created to help the little guy and pick off market makers.

• High-frequency trading has since wrecked liquidity.

Sherwood Securities and the Evolution of Market Making

In this section, Tony Dwyer talks about his early days on Wall Street and how market making has evolved over time.

Early Days on Wall Street

• Tony Dwyer got into the business in May of 1987, one week out of college.

• He worked at Prudential Bache with a group of people that included Greg Smith, who was the number one II portfolio strategist for dozens of years, and Joe Feshback, who taught him point and figure charting.

• Dwyer learned about the psychology of the market from Greg Smith and watched Ed Migrate through the practical application of economic data.

Evolution of Market Making

• The market making business disappeared because there's no margin in it anymore.

• This has hurt liquidity in fast markets where it is difficult to sell stock quickly.

• Dwyer recommends young people say hello to people at higher levels as he did when he started out.

Larry Wachtel and the American Stock Exchange

In this section, Jim Cramer talks about his early days working with Larry Wachtel at the American Stock Exchange.

Working with Larry Wachtel

• Jim Cramer worked with Larry Wachtel at the American Stock Exchange before CNBC.

• He was the only analyst on FNN and would be on TV after walking up a big flight of stairs.

• Jim would answer his phone when no one else wanted to because there were no computers yet.

• When Larry had surgery on his knee, he gave Jim a chance to go on TV for the first time.

Bond Market vs. Stock Market

In this section, Jim Cramer discusses how both the bond market and stock market are fighting against the Fed in opposite directions.

Bond Market vs. Stock Market

• The bond market is fighting against the Fed due to falling yields while tech stocks are rising.

• Six out of eleven S&P sectors were down for the year, including Russell 2000.

• The S&P equal-weighted has given back all relative performance gains from H2 2020.

The State of the Stock Market

In this section, Jim Cramer talks about how different parts of the stock market are performing.

Performance of Different Parts of Stock Market

• Six out of eleven S&P sectors were down for the year, including Russell 2000.

• Technicians are talking about Russell 2000's relative performance being back to March 2020 lows.

• S&P equal-weighted has given back all relative performance gains from H2 2020.

Understanding Market Sound Bites

In this section, the speaker discusses how sound bites can be misleading and how he tries to avoid them by having a fundamental thesis that doesn't change with market fluctuations.

The Problem with Sound Bites

• Sound bites can be misleading and easily spread around.

• Making statements on TV shows or other platforms without proper research can lead to viral but inaccurate information.

• The problem in the business is that people tend to rely on sound bites instead of doing their own research.

Having a Fundamental Thesis

• The speaker has a fundamental thesis that doesn't change because of market fluctuations.

• His opinion on the market may change multiple times a day, but his actions and public opinion don't change because he sticks to his fundamental thesis.

• Even if the market disagrees with him, he defers to it because it's not always wrong.

Market Performance vs. Economic Indicators

In this section, the speaker talks about how despite anticipating an economic contraction, the market hasn't shown any signs of agreeing with him yet.

Anticipating Economic Contraction

• The speaker anticipates an economic contraction but hasn't seen any attractive valuations in stocks relative to bonds.

• Despite anticipating an economic contraction, the market hasn't shown any signs of agreeing with him yet.

Market Performance

• In Q1, half of S&P's gains were from Apple and Microsoft while cyclical sectors typically do well off the bottom were down.

• Industrial, materials, energy, and financial sectors were down in Q1.

• The market was flat in Q1 without the tech sector.

S&P 500 and Two-Year Note Yield

In this section, the speaker discusses the relationship between the S&P 500 and the two-year note yield.

Relationship between S&P 500 and Two-Year Note Yield

• The S&P 500 has never made a low of a bear market prior to a peak in the two-year note yield.

• Stocks bottomed in October with a low, but it would be historically unique not to take out the October low.

• Anytime the yield curve version percentage of possible yield curve inversions has hit this level, anytime that bank lending standards have hit the current level, and anytime that conference board leading economic indicators have hit this level, there has been a recession.

• Economic data points from ISM Manufacturing indicate things are going in the wrong direction.

Market Low Before Peaking

In this section, the speaker talks about how stocks bottom before peaking.

Stocks Bottom Before Peaking

• The implication is that stocks bottom before peaking.

• The peak in the two-year note will yield on that bottom was March 8th.

• It doesn't matter what he thinks; history says it would be historically unique not to take out October's low.

Recession Point

In this section, the speaker discusses recession points.

Recession Points

• Anytime bank lending standards have hit their current level or when conference board leading economic indicators have hit their current level, there has been a recession.

• Economic data points from ISM Manufacturing indicate things are going in the wrong direction.

Unemployment Claims Revisions

In this section, the speaker talks about unemployment claims revisions.

Unemployment Claims Revisions

• The FED is creating interest rate policy off of sticky weekly initial unemployment claims.

• Continuing claims are now not fading away like the all of those open job thing and the jolts thing we're starting to realize that those were not real open jobs.

• The FED is making interest rate policy off of data that gets highly revised even the best data.

• Weekly initial unemployment claims continuing claims are probably the highest frequency best data that just got totally revised in a different direction.

Unemployment Data Collection

In this section, the speaker talks about how unemployment data is collected.

Unemployment Data Collection

• The household survey goes door-to-door, calls people, or sends them a fax to collect unemployment data.

• The Bureau of Labor Statistics or Census Bureau would call you on your landline to collect information.

• The FED is making interest rate policy off of data that gets highly revised even the best data.

The Fed's Focus on Inflation vs. Jobs

In this section, the speakers discuss what the Federal Reserve is more focused on: inflation or job market.

What is the Fed Focused On?

• The speakers discuss whether the Fed is more focused on inflation or job market.

• If inflation comes down but unemployment stays low and claims don't blow out, would they pause?

• It's always the labor market that matters to the Fed.

• When unemployment rate is at a historic low, it's easy for the Fed to say they will stay tough on inflation until they see two percent eyes.

Unemployment Rate and Hiring Plans Index

In this section, the speakers talk about how small business hiring plans index correlates with unemployment rate and leads it by four months.

Unemployment Rate and Hiring Plans Index

• Once you see alarm bells in hiring plans index, it's not long before unemployment rate goes up.

• Small business National Federation of Independent Business (NFIB) tracks hiring plans index which correlates with 0.8 against unemployment rate and leads it by four months.

• Hiring plans have come down pretty hard in last six months.

Consumer Savings and Credit Card Debt

In this section, the speakers discuss consumer savings during pandemic and credit card debt.

Consumer Savings and Credit Card Debt

• Excess savings are there but people are paying higher interest rates on so much credit card debt that just hit a new high record high.

• People may not spend that money even if the labor market weakens because they have enough in the bank.

• The pandemic didn't create a credit cycle because the Fed came to bat for corporate and all bonds right away.

Refinancing Debt and Unemployment Rates

In this section, the speakers discuss refinancing debt and unemployment rates.

Refinancing Debt

• To refinance debt, mortgage rates need to be brought down to about 1.5% to 1%.

• The likelihood of this happening is low due to current inflation rates.

• Low mortgage rates have been maintained for a long time, which has led to people being able to refinance their debt multiple times.

• Refinancing debt is an effective way of coming out of a recession and increasing spending.

Unemployment Rates

• Each recession begins with a spike in the unemployment rate from a low level.

• The rate of change to the downside is much slower than the rate of change upwards.

• Margins peak because costs are going up, not because sales are going up.

• Elevated cost structures built on high employment levels can lead to revenue shortfalls when sales slow down.

• Layoffs happen when revenue shortfalls occur, but it's difficult to cut costs as fast as sales decline.

Unemployment Rates During Pandemic

In this section, the speakers discuss how the pandemic affected unemployment rates.

Unemployment Rates During Pandemic

• The pandemic caused an elevator effect on unemployment rates in both directions instead of just a spike followed by a gradual decrease like in previous recessions.

• The pandemic caused a revenue shortfall, which led to layoffs and an elevated cost structure.

Catalysts for Stock Market Rally

In this section, the speakers discuss catalysts for the stock market rally.

Catalysts for Stock Market Rally

• Interest rates falling and stocks anticipating a Fed pause were two pillars of the stock market rally.

• The dollar falling was also a tailwind.

• People not being prepared for a rally was another factor.

Market Performance in 2022 and 2023 Q1

The best performing stocks in 2022 did the worst in 2023 Q1, while the worst performing stocks in 2022 did the best. This is shown on a scatter plot with returns from worst to best on the X-axis and Q1 returns for 2023 on the Y-axis.

Stock Performance Reversal

• Best performing stocks in 2022 did worst in Q1 of 2023.

• Worst performing stocks in 2022 did best in Q1 of 2023.

• People had to reposition their portfolios, which fueled short covering or rallies.

Rally Fueling and Exacerbation

The rally that occurred during Q1 of 2023 was fueled by repositioning portfolios. This led to short covering or rallies, which exacerbated nascent trends until buyers ran out.

Repositioning Portfolios

• If you were underweight Tech at the beginning of January and February, you had to buy Apple and Microsoft by March.

• This reinforces nascent trends until buyers run out.

Lending Standards for Small and Mid-Sized Banks

Lending standards are tightening for small and mid-sized banks as loan demand falls. The only way this trend could reverse is if the Fed drops rates significantly.

Tightening Lending Standards

• Senior loan officer survey shows lending standards tightening for large and small businesses' commercial and industrial loans.

• Loan demand is falling as lending standards tighten.

• After Silicon Valley Bank, lending standards have worsened.

Bearish Scenario

• Soft landing keeps the yield curve inverted indefinitely.

• A recession or credit cycle is needed to get the next cycle going.

• The Fed dropping rates significantly is the only way to reverse this trend.

The Impact of the Inverted Yield Curve on the Economy

In this section, the speaker discusses how long an inverted yield curve can last and its impact on the economy.

Inverted Yield Curve

• An inverted yield curve is a sign of economic purgatory.

• It has never lasted for three years before.

• The market bottoms in the middle of a recession because the FED drops rates enough that you steepen the yield curve enough that you can have money availability improvement.

Money Supply Chart

• For the first time post-world war II, money supply has gone negative year over year.

• The money availability is not there as banks are tightening their lending standards and Wall Street isn't booming.

• The explosion in money supply led to inflation as people spent or invested it.

How People Used Their Stimulus Checks

This section discusses how people used their stimulus checks and its impact on inflation.

Stimulus Checks

• The government deliberately exploded the money supply by giving out stimulus checks to businesses, regular people, unemployed individuals, hospitals, etc.

• People used their stimulus checks to invest or spend it which led to inflation.

• Consumers are running out of money now.

Momentum and Corporations' Credit Binging

This section talks about momentum in Q2 2021 and corporations' credit binging in 2021 and 2022.

Momentum

• There's great momentum but indicators cannot be rationalized.

• There will be somebody epically wrong here just on the money supply alone.

Corporations' Credit Binging

• Corporations did a good job binging on credit in 2021 and 2022.

• They are flush with cash while consumers are running out of it.

The Money Supply and Growth

In this section, the speakers discuss the importance of new money going into the economy to drive growth. They also talk about how long it takes for a 25-year explosion of the money supply to get worked off.

New Money and Growth

• Growth comes from new money going in.

• There needs to be a source of cash for growth.

• If there is no new money coming in, growth will not happen.

Working Off an Explosion in Money Supply

• It could take a very short time for a 25-year explosion of the money supply to get worked off.

• Jerome Powell mentioned Paul Volcker's name, indicating that raising rates might be necessary.

• Paul Volcker inverted the yield curve on purpose to create a recession and shut down double-digit inflation.

• Rates have been raised faster than when Paul Volcker did it.

• October would be the weakest bounce after six months ever if it was low.

Music and Disco

In this section, one speaker talks about how he thinks Paul Volcker saved not only the economy but music as well.

Saving Music

• Paul Volcker really saved not only the economy but music too.

Stock Market Bounce After Lows

In this section, Warren Pies' data is discussed regarding stock market bounces after lows.

Stock Market Bounce After Lows

• Warren Pies' data shows that the bounce after six months of the S&P 500 being at its lowest point would be historically unique.

• October would be the weakest bounce after six months ever if it was low.

Leveraged Credit Cycle

In this section, the speakers discuss how this is the most levered credit cycle with the most rises.

Leveraged Credit Cycle

• This is the most levered credit cycle with the most rises.

• Silicon Valley Bank broke and other banks may not have marked to market on government debt, private debt, private credit, private equity, or venture capital.

• The bull story is that we are 15 months into this and it doesn't happen at the beginning; it happens toward the end.

Understanding Economic Indicators

In this section, the speaker discusses how the stock market reacts to changes in economic indicators and how to identify a recession.

The Impact of ISM on the Stock Market

• When the ISM drops below 50, stocks tend to perform poorly.

• Stocks usually go up in a 12-month period, but they don't go up prior to the ISM dropping below 50.

• Six to eight months after the initial drop is when recovery begins.

Identifying a Recession

• The FED pivots when unemployment rates increase. This can be scary for democratic systems with elections every two years.

• A pivot is not always a pre-recession buy signal. It was only a buy signal in 1995 when there wasn't a recession coming.

• You know you're in a recession when everything is based on markets and it's been 23.5 weeks since the start of the recession.

Bad News Becomes Bad News

• The end of decline happens when bad news becomes bad news because it makes the FED get aggressive.

• If bad data comes out, lower interest rates steepen yield curves and improve money outlook.

Commercial Real Estate: UBS vs Morgan Stanley

In this section, the speaker discusses commercial real estate and differing opinions from UBS and Morgan Stanley.

Commercial Real Estate Exposure

• Banks are most exposed to commercial lending and commercial real estate.

Differing Opinions from UBS and Morgan Stanley

• UBS says not to worry about commercial real estate while Morgan Stanley says it will be worse than 2008.

Commercial Real Estate Risk

In this section, the speakers discuss the risks associated with commercial real estate and its potential impact on the banking system.

Risks in CRE not a Wider Systemic Risk

• UBS believes that while risks in commercial real estate (CRE) have increased, it does not pose a wider systemic risk.

• Morgan Stanley analysts forecast a peak-to-trough CRE price decline of up to 40%, worse than during the Great Financial Crisis.

Concerns for Regional Banks

• More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points.

• Small and medium-sized banks hold 80% of US commercial real estate debt, which is nearly $450 billion due to mature in 2023.

• Charlotte flags an outsized risk to regional banks given their exposure to small and medium-sized businesses.

Systemic Risk vs Lending Availability

• The speakers debate whether CRE poses a systemic risk or not, but agree that it could affect lending availability if enough people are worried about it.

• The psychology of how these things work is that at the onset of a banking crisis, people worry about systemic risk and then start worrying about what banks will do with this new environment; they're not going to lend and don't even have interest rates going in the direction typically seen during a banking crisis.

Wall Street Journal Chart

• As of Tuesday or this week, investors were demanding an average extra yield or spread above US treasuries of 9.46 percentage points to hold commercial mortgage-backed securities (CMBS) with a triple B rating, the lowest broad investment grade tier.

• The average price of CMBS bonds has dropped to around 75 cents on the dollar; a year ago, it was 89 cents. This index comprises nine percent of all commercial mortgage-backed loans.

Vacancy Rate in Downtown Offices

• The vacancy rate in downtown offices is 17.5%, and for perspective, the chart shows that this is higher than during the Great Financial Crisis.

Real Estate Investor on the Current Economic Climate

The real estate investor discusses how businesses are trying to cut costs faster than revenues are falling, and how this affects the real estate market. He also talks about pension plans and their investments.

Impact of Spending Less Money at Businesses

• Businesses try to cut costs faster than revenues are falling.

• When people spend less money at businesses, it leads to more real estate problems.

• Buildings get handed back to banks when they can't be sold due to lack of buyers, leading to a credit crunch.

• Pension plans may sell credit if they need to make 7% per year but only receive 3.75% from fixed income.

S&P 500 Earnings Per Share During Hiking Cycles

• During hiking cycles, S&P 500 earnings per share continue to go up because the economy is overheating and companies pass along the cost.

• When the FED pauses, there is an upward bias towards earnings per share.

• When the FED cuts rates, earnings start coming down like in a recession.

Outlook for Market Improvement

• It's hard to be bullish given that stocks aren't cheap, there is competition in bonds, and the economy isn't expanding.

• Not everyone is bearish; some strategists expect earnings per share or multiples to go up besides Roboski.

• The earning yield from when we started this show was about 4.75%, not much higher than a six-month T-bill on decline.

• The only thing that really bottoms out a market and allows you to look forward after a rate hike cycle is an outlook that the money can improve.

Market Analysis

In this section, the speakers discuss the current state of the market and provide insights into international stocks, gold, and Bitcoin.

International Stocks

• Analysts expect a 6% decline in earnings growth for Q1.

• Europe is experiencing massive rallies away from the US. The reason behind this trend is unclear.

• Money flowing into Europe on a weaker dollar may be contributing to this trend.

Gold and Bitcoin

• Gold and Bitcoin were previously inversely correlated but are now correlated when the dollar is weak and markets are under pressure.

• Gold has increased by 50% this year. It may have a ways to go since it takes time for gold to move in one direction or another.

• The speakers cannot find a way to get bullish on gold. They caution against making investments based solely on other people's advice.

Investing Strategy

In this section, the speakers discuss their investing strategy and how they approach market predictions.

Investing Strategy

• The speaker has a fundamental thesis based on money that doesn't change because of fluctuations in the S&P.

• The speaker predicts that there will be fireworks in the ninth inning of market trends but believes that things will improve after inflation moderates enough for the Fed to cut rates.

• The speaker emphasizes that he wants to be wrong for a little while so people can take advantage of his call. He cautions against making investments based solely on other people's advice.

Bill Ackman's Tweet

In this section, the speakers discuss a controversial tweet by Bill Ackman.

Bill Ackman's Tweet

• Bill Ackman tweeted a stork throwing a disabled baby out of the nest with the caption "Capital allocation." This tweet did not go over well.

Encouragement to Experience Small Creature Survival

In this section, the speaker encourages people to experience nursing a small creature back to health, especially alongside a child. He also talks about his decision to stop using Twitter and social media.

Experiencing Small Creature Survival

• The speaker encourages people to take advantage of opportunities to nurse small creatures back to health.

• He believes that it is an incredibly moving experience, especially when done with a child.

• The speaker shares his decision to stop using Twitter and social media due to negative interactions with strangers on the platform.

Interacting with People Who Care

In this section, the speaker discusses how he interacts with people who care about what he has to say. He emphasizes the importance of having self-respect and creating guardrails for social media use.

Interacting with People Who Care

• The speaker explains that he only cares about what his friends, family, and company think of him.

• He believes that it is important to create a situation where you can interact with people who actually care about what you have to say.

• The speaker emphasizes that he is held accountable by God, his wife, kids, friends, and company.

• He believes that interacting with fans on YouTube is great because their audience is amazing.

AI as a Technological Revolution

In this section, the speaker talks about AI as a technological revolution and its potential economic implications.

AI as a Technological Revolution

• The speaker wonders if AI is the next technological revolution that will act like an industrial revolution and cause dislocation.

• He mentions chat GPT and AI, and how his kids used it to learn about Tony Dwyer.

• The speaker believes that the economic implications of AI are significant, but people still don't know what to do with things like the inverted yield curve.

AI and the Productivity Revolution

In this section, the speakers discuss how serious Google is about AI and how it will change productivity. They also talk about how technology exponentially improves itself with speed, which can be both beneficial and dislocating.

The Seriousness of Google's AI Efforts

• The CEO of Google gave an interview to the Wall Street Journal discussing how serious they are about getting into AI.

• They have two big AI units that had nothing to do with the products we use, but that's going to change.

• The next time you do a Google search, you might see a little chatbot asking if it can help you.

Technology Exponentially Improves Itself with Speed

• Technology only exponentially improves itself with speed.

• This is great for cancer research, medical applications, and biotech.

• However, it will also be very dislocating for every industry all at once.

Dislocation Caused by Technology

• Dislocation caused by technology is similar to what happened when Home Depot replaced local hardware stores.

• This time it will happen in every industry all at once.

• It will be disinflationary.

Conference Board Composite Leading Economic Indicators Chart

In this section, the speakers discuss leading economic indicators and soft landings. They also analyze a chart provided by Bloomberg that goes back to 1960.

Leading Economic Indicators

• Leading economic indicators include credit indicators, lending indicators, stock market performance, etc.

• The conference board has a whole bunch of these indicators that lead you into knowing whether the economy is going to go up or down.

Soft Landings

• Soft landings are periods where the economy slows down but doesn't go into a recession.

• The conference board composite leading economic indicators chart shows that we're in a red shaded area, and every economic indicator is pointed at the same thing.

• Based on the data, they believe we're going into a recession.

Turbulence Ahead

• They predict turbulence ahead leading to one hell of an opportunity.

• They caution against writing big on the downside because it's easy to get excited about the wrong thing.

Finding a New Source of Money

In this section, the speakers discuss the need to find a new source of money and how the yield curve steepening can help with that.

Yield Curve Steepening

• The only way to find a new source of money is when the yield curve steepens.

• Lending institutions will give you money at a cheaper rate, which makes it affordable.

Selling Mud Room

• One speaker suggests selling their mud room as it may not have been the best investment for this economic environment.

Paris Trip and Movies about France

In this section, one speaker talks about their upcoming trip to Paris and how they plan on showing their son movies about France.

Kids' Frame of Reference

• Speaker's kids have no frame of reference about anything related to France.

• They spend most of their time on TikTok and haven't read or seen any movies related to France.

Watching "The Man in the Iron Mask"

• Speaker plans on showing his son movies about France before going there.

• They watched "The Man in the Iron Mask" together, which is an amazing movie from 1998.

• The movie stars John Malkovich, Leonardo DiCaprio, Gerard Depardieu, Gabriel Byrne, and Jeremy Irons.

• Speaker's son falls asleep 10 minutes into the movie because he started talking about politics in France in the 1600s.

Recommendations for Reading and Watching

In this section, the speakers recommend some books and shows to read and watch.

"The Night Agent"

• One speaker recommends reading "The Night Agent" as it is a good CIA kind of book.

"Dave"

• Another speaker recommends watching "Dave," but notes that it may not be for everyone.

• The show can be found on FX/Trailer.

"John Wick 4"

• Speakers plan on seeing "John Wick 4."

• One speaker notes that the movie requires turning your brain on.