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#FinanceDaily: Russian Oil | $GS downgrades $TSLA | European Recession
Recorded: June 26, 2023 Duration: 1:36:43Space Recording
Short Summary
The discussion primarily focused on global economic conditions, including geopolitical tensions in Russia, oil market dynamics, and potential recessions in Europe and Canada. The impact of these factors on energy prices, inflation, and housing markets was explored, alongside the implications for the stock market, particularly in relation to Tesla and its competitive landscape in the EV market.
Full Transcription
All right.
Eugene, how you doing?
I'm doing well.
How are you, Donish?
Is it my audio or yours?
How's my audio?
Your audio sounds good.
Is mine?
How's mine?
Yeah, I don't know.
Yours sounds choppy to me.
So we, well, I'm in a part of the house that I need to get like a Wi-Fi
repeater or something.
I'm going to blame it on my internet and not the team since I hate on the spaces team on a weekly
basis.
So I'm going to try anything better.
Hey, it held up this and it was kind of crazy.
So, you know, we'll give them some credit.
Good job, spaces.
Good job.
Please don't.
Please don't break my show.
Thank you.
All right.
Awesome.
Let's give it maybe like two more minutes for everybody that's waiting.
We're going to get all of our people up here.
Lots and lots to talk about today.
Reminder for everybody that's joining.
Okay.
We try our best not to talk about politics.
We have amazing shows that do that,
usually around 6 p.m. Eastern-ish.
What we want to focus on is what happens
because of the politics.
And so that's sort of our MO.
So if you're looking for something incredibly entertaining,
where a bunch of pundits fight each other on politics,
this is the wrong show for you.
We're nerds that enjoy talking about
finance and the markets and what's happening on the macro. So just know who you're listening to.
Let me get Caleb up here real quick and then we can probably get started.
Hey, Mark, how you doing? Good morning, my friend. How are you?
Good, good. I just want to make sure. Mark, you're cutting in and out a little for me.
Just want to give you a heads up.
Coming through the Holland Tunnel to do some media appearances on the floor of the New York Stock Exchange this morning.
So my apologies for that.
That's okay.
We'll forgive you.
No, I appreciate it.
Thanks for joining us, Mark, this morning.
That's my pleasure.
So, you know, the weekend, I just want to give a quick wrap up of the weekend so we can get it out of the way for everybody that's listening.
We're going to get started.
So...
Over the course of the weekend, we had some of the most interesting things happen on the political side that have happened in a long time.
I don't want to comment on what was happening exactly, but I want to talk about how the markets were thinking about everything that was happening.
So over the weekend, we had a 24-hour space where...
By the way, Mario gets credit for being up here for 24 straight hours.
But we had a 24-hour space where there was concerns around a Russian coup from the Wagner group that ended super anti-climatically, probably best for everyone involved.
But the question really being like actually happened, I don't think any of us here are experts on what actually happened.
So what we're going to focus on is how is the market thinking about what happened.
And that is probably, you know, the most important point of it.
So let's start with what.
supposedly happened. What supposedly happened was that we had the head of the Wagner group
go in and literally lead an army back to now to then have a meeting and then get in a car
and then be sent to Belarus. I don't know. The reason why it's important is because when
you were looking at all this happening, the entire oil markets was like frozen, trying to
figure out what was going on. So what we saw was...
significant movement for the positive and significant movement for the negative,
but the overall movement wasn't as crazy during that time.
Now, I will say that this morning, a bunch of the oil traders are breathing a sigh of relief.
We're seeing some early gains this morning on the news that we will have the status quo.
And so...
You know, for people that are not aware, Russia, if there was an insurrection, Russia,
it would disrupt energy supplies from one of the world's largest producers.
And, you know, just for some context, WTI futures are up about 0.6% at 695,
and actually now are up even more.
And then...
Just as a heads up also, Brent Crude, so West Texas Instrument, sorry, just want to make sure here I'm saying it correctly.
Yeah, West Texas Intermediate, sorry, was up slightly this morning.
Brent Crude was up slightly this morning.
It seems like acting, oh, David's here, good.
The is reacting appropriately to it.
Now, from a market's perspective, it is kind of confusing about where things go.
and the disruptions that may be ahead.
I wanted to understand, again, not on the politics, to be honest, man, but more on
how do you think that this affects things.
And then we'll talk a little bit about OPEX numbers this morning as well, but wanting
to kind of understand like how you're thinking about the markets right now.
And I know it's a core part of your approach, but I think you do look at macro quite a lot,
Caleb.
All right. Mark, how are you thinking about the global oil markets right now?
And just the supply situation first, then we'll talk to demand.
Yeah, sure.
Listen, I think what's happening this morning, both in equity markets as well as commodity markets,
is definitely, as you said, sort of that sigh of relief.
And we just don't have enough information in terms of what happens next.
I think it's very interesting.
I was looking this morning.
The Wagner Group.
actually has troops that are protecting under the contract with the Russian military, of course,
a number of locations that are strategic production sites, not only for oil, but also for some
important mineral reserves and strategic mineral reserves.
So I think the commodities markets are just basically happy that we didn't wind up with a coup, sort of
hard to believe that people would be happy that Putin remains comfortably in power,
maybe not so comfortably.
And I think a lot of the focus this morning from the traders that I've been speaking to
is more to your point, Dinesh, on the demand side, right?
And if we really do have this continued recession,
I'm not going to say whether or not we have a recession, because I think that's foolish.
If we have this continued recession, what does it mean for the demand side of things,
particularly from here in the United States?
Notwithstanding that I think we saw production, particularly from Iran, coming in higher than most oil traders estimated.
But my expectation is until we see some additional news, some meaningful news that we can actually dissect as it relates to the whole situation in Russia that we're going to see and continue to see oil in the sort of $70 a barrel range.
Fascinating. Caleb, are you with us? What are your thoughts on it?
Yeah, I'm back. Look, I've been a notable oil bear pretty much all year.
I think it was the most overcrowded trade going into 2023, long oil stocks, long crude.
Everyone was concerned about, you know, reacceleration and commodity prices.
None of those things have transpired.
And so despite the most, you know, bullish type of behavior that we can see,
from a fundamental perspective, which is OPEC supply cuts, we're still seeing oil fall in a downtrend.
And so one of the things that I talk about is if an asset responds poorly to fundamentally good news, that's probably not a good sign.
The same way that it's probably good news or a good sign if bad news is priced to the upside, right?
Right. And so I think that, you know, given the fact that, you know, the Biden administration has come out at least last year and said that they plan to, you know, refill the strategic petroleum reserve under a certain price point. Look, we've fallen below that price point. I haven't seen them refill that SPR.
And despite the fact that, you know, we've seen OPEC announced these supply cuts, we're still seeing price trend lower and lower.
And so if you go to my Twitter profile, I literally just minutes ago shared some analysis on crude oil futures, trading below their 21 day moving average, below their 55 day moving average and below their 200 day moving average.
And all of those three key EMAs have a negative slope.
We're clearly in a downtrend here.
One of the things I love to say,
I'm not,
you know,
I'm not some genius to say this,
but the trend is your friend.
you know,
if you're a small brain person like me
and you just see something going down,
it's probably the case that that thing is going to keep falling.
I could tie this back really quickly to fundamental economic behavior by highlighting the correlation between crude oil futures and the five-year break-even inflation rate.
And so the five-year break-even inflation rate is basically an alternative way of measuring consumers or investors' expectations of where inflation is going over the next five years and what
amount of return they want to be compensated for that perceived level of inflation over those
five years. And so there's a crystal clear relationship between crude oil prices and five year
break-even inflation rates, both of which are in downtrends. They overlay perfectly on top of each other
And so my general view and thesis and outlook, which has been the case since December, for disinflation predicts that we are likely going to see lower five year break-even inflation rates and therefore lower crude oil prices.
likely through the remainder of this year. I won't be, I won't pretend to have a crystal ball far
far enough into the future to know what's going to happen next year in 2024. But given my outlook
on disinflation, I know Danish, you know, I've made some pretty bold claims on these calls before.
My general view is that five year break-even inflation rates are going to be falling. Crude oil,
commodities, everything is going to be falling in that sense. So, yeah.
that's kind of my outlook there combining both, you know, a technical basis perspective with the moving averages and more of like the fundamental macro side of things.
But Caleb, if let's say that some form, let's say that this is not over. And again, we can we can be armchair pundits on this Monday morning.
You know, let's say that, you know, because as a person that
that just looks at the macro and not really just day-to-day swings.
You know, I think your thoughts will be helpful here.
So let's say that, you know, you're planning for a worst-case scenario.
Let's say that some sort of weakness occurs.
Russia gets destabilized.
You would expect to go up, right?
I mean, like, that that would be the obvious thing because Russian supply would decrease precipitously.
Yeah, I think on net or all else being equal, if there's an escalation of war or an attack against Russia, some counterattack, whatever.
Look, and I am certainly not a geopolitical strategist, and by all means, you know, my views on where crude oil is going next is absent of geopolitical stuff, is generally absent of government intervention, so on and so forth.
So I try to focus just on price and on markets and fundamental economics.
So generally, if my view is that the economy...
is more likely to deteriorate than reaccelerate.
Demand for crude oil is likely to fall.
And therefore, on a simple perspective, I mean, look, go back to the beginning of this year, right?
Going into January of this year, everyone was talking even about the China reopening.
And it's been, you know, crude oil is going way higher because Chinese demand is going to skyrocket.
And, you know, all the manufacturers were, you know, going to be reopening back in China.
Where is that thesis going, right?
It hasn't played out.
And so, you know, we're actually seeing deflation in China now in a lot of ways.
And so, you know, from that perspective, if you're kind of approaching economics from a Keynesian perspective where growth and inflation are directly correlated, you know, it's, you know, the contraction that we're seeing in China certainly doesn't bode well for the rest of the world.
from a kind of fundamental economic standpoint, right?
So it's creating headwinds for global growth if China is not performing well.
And so I think, again, look, I've been an oil bear all year and I'll kind of keep beating the drum on there.
I certainly respect people who are bullish oil so we can have that to be.
But these are just my views and my perspectives on things.
No, no, it's super helpful.
Thank you, Caleb.
Mark, did you have a response?
Yeah, well, I wanted to say that I agree generally with most everything that Caleb said, and I think the thesis plays out even if we do have a continuation of this bull run and the year ends up in the way that a lot of the historical data tends to show.
And what I'm talking about is...
when you have the S&P perform the way that it has in the first half of the year,
you know, this week, of course, being the last trading week,
not only of the month of the quarter, but also of the first half of 2023,
when you've had the types of returns in the S&P that we've enjoyed so far,
82% of the time,
Dinesh,
the market ends an additional
almost 8% higher,
right,
over a very,
very long historical period.
And I think if that plays out,
and I think there's a good chance
that that will not play out
because of all of the pressure
on the demand side and what,
the American consumer is experiencing, the very real pain the American consumer is experiencing.
But even if we do actually fall into that 82% of the time that the market trends significantly higher for the balance of the year,
I think those gains are not going to come from the kinds of stocks.
that are associated with industrial manufacturing and oil demand.
I think it's going to be continued tech, AI, SaaS, data, all of that sort of stuff.
So I think that Caleb's thesis holds true, even if we continue the bull run, because I don't think those bulls are going to be major oil consumers.
Yeah, David, what are your thoughts on this?
So similar to what, and I've mentioned to you before, crude oil peaked on a month, on a month-on-month basis, crude oil peaked in May of last year.
I know inflation peaked in June, right? That's when the CPI peaked.
Of course, like the core PCE hasn't peaked. It's actually still, it's at its highest level now.
But crude oil...
The contract, the futures contract, peaked in May of 2022.
And so when you look at now the May year over year number, it dropped to minus 41%.
So crude oil, the contract fell 41% year over year at the end of last month.
which if you go back the last there's been in multiple times it's dropped that much it was
COVID it dropped more than that it dropped down to like 70% the again the contract
on a month on a closing basis obviously it dropped like way way low on an intram
month basis but by the end of that month I'm gonna recover back to kind of a
semi normal level it was down 70% and at the end of the 15 to 2014 15 you know
that kind of global slowdown period crude oil had dropped 50% on a year-over-year basis
and that finally ended
and September 15.
And after,
the Lehman collapse and the great financial crisis,
crude oil dropped about 50% on a year-over-year basis.
And then after the tech bubble,
during that bare market,
crude oil dropped 42% on a year-over-year basis.
And so there's been multiple instances,
just a handful, actually,
that crude oil has fallen 40% or more
on a year-over-year basis.
And then once it
bounces. So after all those bounces, so after the 2000, there's actually another one here in 98
during that whole Russia long-term capital management when the ruble failed and long-term capital
management collapsed. In 98, crude oil fell there 41% on a year-over-year basis. After that,
it ramped up to 148% year over year by February 2000.
After the tech bubble bottom, it ramped up 72% to a new high on a year over year basis.
After the great financial crisis, it ramped up to 78%.
didn't get up to a new high but it jumped up really really strongly in 2009 the after the 2015 14
it ramped up 56 percent after COVID of course it ramped up huge ramped up like 200 and so
I mean there's there there are plenty of precedent
for when scruidol has had a decline like this to ramp up,
especially when the Fed
at some point in time starts cutting rates because, you know, I agree with Caleb.
I don't think necessarily we're going to just be in a deep, this, this inflationary event.
I expect we're headed towards a deflationary event because I don't think you can get to
2% inflation because we'll hit 3% the next release.
And I think that, and I told you before that, I think that's a low point.
I think to get to 2% or lower, you need a deflationary event and you need
commodities that come down and you need the Fed start cutting rates.
Especially with shelter being so sticky, you're going to need everything else to come down
way past 2% right?
I mean like it being such a big part of shelter.
I know that some people disagree with me.
I'm just not convinced that shelter is going, you know, is going to go below 2%.
So as things are the rest of the basket.
I don't know.
Yeah, the asset prices are just really, really high across the board.
And so you just need a deflationary event.
And the Fed will start cutting rates in that case.
They're not going to cut rates if we're just in disinflation.
They're going to cut rates.
when they when we're in more of a deflate and and at that point in time crude oil kind of bounces when the fed's cutting because you know the dollar's getting cheaper the fed's cutting rates the dollars getting lower and commodities rise again and so that's that's there i i
We've had a good drop this year.
It's in a response to the dollar actually, you know,
with everything kind of coming back down and correcting,
commodities are correcting.
That's what they do.
When they go parabolic, they correct.
But they're not in a bare market themselves.
They're not below the 200-week moving average.
They just start coming down to it.
Kuroa is actually sitting on it.
It's 200-week moving average.
And usually you get a balance off of that.
So I wouldn't be surprised if crude oil starts to bounce back up again,
simply because it's coming off of a year-over-year low point that's very typical.
And that's what it does.
When it has this kind of year-over-year low, it bounces back up to a similar year-over-year high.
And then Eugene will go to you.
But I was going to say, you know, another thing that kind of supports him is Mohammed Al-Ran, his...
He put out a pretty interesting tweet a few minutes ago,
just kind of talking about what we've all been talking about,
but it's interesting that,
No one's talking about the risk of this, but except for the 210 curve inversion continues to deepen.
We saw that, you know, it became more shallow earlier this month and late last month, and then now it kind of fell back down.
There must be something that they, you know, again, the market doesn't lie.
Pundits do. Markets don't.
Go ahead, Eugene.
Okay.
Yeah, I was going to comment.
So I appreciate the analysis of my fellow speakers.
I think the one, you know, commodities are not that correlated with equities and bonds, right?
I think it's what makes it sort of useful as sort of, you know, if you want to like optimize your sharp ratio, it's like a great asset.
to have in your portfolio in a certain percentage because, you know, I mean, you see it time and time again.
For example, in 07 as equities were going down, oil was, of course, you know, like peaking.
I think other speakers were mentioning this.
So, you know, that's one thing to consider.
And, you know, I think, Donish, you posted something about how OPEC is talking about, you know, demand going up.
And I think there's two sides of this equation, right?
And that's actually a really interesting question.
So I think you said, OPEC says oil demand will hit 110 million barrels.
per day in 2045 so that's an increase of 23%.
So we have around, you know, 89, 90 million barrels a day of production today.
So the question is, does that number go up or does it go down, right?
I think that's like, you know, the open question.
And so on one side, so you talk about prices versus production, right?
So everyone who talks about green energy and like how solar and all this is going to make things, you know, us need less to oil.
That's counterbalance.
And that's true to some degree.
But anyone who hasn't been in energy doesn't know how much, how many like billions,
upon billions upon billions of dollars it takes to sort of,
you know,
remake our energy infrastructure,
right?
It's not like something that happens overnight.
And this is going to happen over generations upon generations of,
of like these cycles of these sorts of,
you know,
plans and factories and stuff that are needed,
just to maintain our,
you know,
our energy grid,
our energy infrastructure,
et cetera.
So there's not just going to happen overnight.
So there's some,
there's some thoughts that what OPEC says could be true.
But at the same time,
you know,
one things we didn't see were like the things that happened with,
all of the things related to shale production, right?
And also, you know, the U.S. went from is now like the top oil producer, right?
I mean, 10 years ago, the U.S. had about half the daily production that does today.
And now it's, you know, it's over Russia, it's over Saudi Arabia.
The other two, the number two and three player.
when it comes to oil production.
So I guess the one question is,
what kinds of innovations could come into play that could affect the oil markets?
I think we didn't even realize those of us in the energy industry,
didn't realize the impact it would have to this degree, right?
So that's been kind of amazing.
And at the same time, what happens with green energy, right?
So I think there's ways to sort of say, you know,
what OPEC is saying might not actually pan out,
but there's obviously no questions as well.
really that was one of the comments uh thank you for the thread because i think that is one of the
things that i want to talk about people talk about this guy a lot from a political standpoint and from
uh we always this is like the the traditional saying you always overestimate the short term and
underestimate the long term and so there's been this like narrative on that that look by 2045 our
reliance on oil is going to be lower um um um
And then there's the other side which is saying, like, look, yes, are we going to see renewable energies become a larger portion of, actually, the complete other side is renewable energies are a waste.
We shouldn't put any money into it.
Blah, blah, blah, blah, blah.
And then the middle people, poor little homeless middle people like me, there's a high likelihood that with all of this innovation that's occurring in our industries, that our use of energy to go up.
where our needs for energy are just going to go up.
You know, obviously population and demographics,
but also new technologies like AI actually are bigger consumers of energy than anything in the world.
And so as AI becomes more important, robotics becomes more important,
other technologies become more important,
we're just going to need more overall.
And everything needs to be on the table.
What you don't want is the demand...
energy outstripping the supply of energy, but that causes wars. And so it is kind of like this
existential thing. Wizard, one way in on not only what your expectations of oil are in the
short term with this Russia situation, but also kind of what do you think about this longer thread?
Wizard, thanks for joining us.
Hey, what's up guys? Thanks for having me.
You know, any geopolitical risk in general is, you know, sort of net-net going to be bullish for commodities of all kinds, like, metals and energy and so on, right?
Because, you know, you always have these, like, supply chain constraints.
So all that ends up being that bullish.
I think the biggest thing, you know, not even like looking at Russia, but there's a big concern with the U.S. reserves, right?
Like, so U.S. reserves got depleted the emergency reserves that, you know, the government has quite a bit.
And there's in the market, there's like a, and if you talk to a lot of traders, there's like a soft floor on crude at like this, you know, around the $70, $72.
Yeah.
that the government will have to buy back a lot of reserves.
So, you know, I just see like a, you know, soft perma bid.
Like so if there's any big pullbacks on crude oil, you know, as an investor for me,
you know, we're just going to be looking, you know,
especially if it gets down to that level because you know,
that, you know, worst-case scenario,
the government's going to have to come in
and buy back their reserves that they depleted.
So net net for me, you know, is just looking at energy
in a more bullish way in the short term.
I mean, long-term, I think there's a lot of, you know,
psychological and social things you could say
that will kind of, you know,
gradually bring down oil over time.
But the amount of demand coming out of third world countries
still emerging markets,
you know, is still pretty significant.
And then as, you know, obviously inflation sits up that people use, you know, crude oil as a hedge as well.
So, you know, that creates a whole different additional supply demand narrative.
So, you know,
For me, always, the way I look at energy is, you know, even though energy is seen not part of core and so on in the inflation terms, you know, it's definitely a very important tool for most inflation investors.
to hedge their overall exposure or get core exposure as well.
Because a lot of times if you're a large-scale manager and you want to get exposure to core,
there's no real synthetic way to do that.
So you'll see a lot of volatility on energy regardless.
Like, Nat gas has been great as well.
Like, you know, we're looking to buy Nat gas and our funds and so on.
But yeah, I think the biggest thing is, you know, there's definitely, anytime there's any geopolitical risk, there's always a concern with supply chain getting kind of disrupted, which ends up being a bullish, you know, bullish push to...
Energy overall.
European, I see you have a thing about European recession up there too.
I mean, Europe is just, you know, I feel like they're just in perma recession.
Just, you know, I think, you know, I mean, maybe that's a whole different topic.
But, you know, creation of euro, I think, was one of like the most bearish things for Europe.
And you're basically, and then letting in all these other countries who don't add value.
to the euro just kind of, you know, net, net bleeds it,
where Germany is just, you know, purely kind of supporting the whole European,
you know, the whole euro by themselves.
So I think that's a whole different topic for discussion, I guess.
Oh, yeah, yeah.
Not to talk about the German PMI and the data that just came out,
which was incredibly bearish.
For people that don't know, I'll put something up.
I have a tweet lined up that I'll post and put it up in the nest.
But.
But yeah, no, your commentary around Europe being in a permanent recession is probably kind of true.
It's often to say, but it's likely true.
But we'll talk more about that.
That's a whole different topic.
Yeah.
But the other thing I saw you just posted about,
Al Wren talking about, you know, two tens.
I mean, so this is, I think you guys were talking
about inflation relative to energy as well.
So, you know, I'll just give my little quick bit on that.
You know, obviously, I think, you know,
definitely the market is a very interesting place.
Because if you look at bond market, you know,
as me coming from the bond,
world, you know, was a 15 years macro trader for a bunch of buzz bracket banks, you know,
this is always, you know, we always make fun of equity markets like, hey, they're kind
of like, you know, the disparate money and dumb money kind of thing, like retail.
Not that, you know, I completely agree with that, but if you look at the bond market right
now, it's signaling a whole different thing and you look at the equity market, it's, it's
It feels like, you know, like NASDAQ is what, 5%, 5, 6% maybe from all-time highs.
I mean, it kind of doesn't, it completely underscores, you know, the pipelines off the market.
Like what's actually going on behind the scenes, you know, where the bond market, where, you know, find the two-stance curve.
Sure, it's signaling a recession, but every other part in the, in the market is signaling a recession,
except for the equity market, which is kind of,
on this fake AI tech-driven pump where, you know, it's only a matter of time.
Like, you know, we saw a very similar thing when EV became a huge thing in like early 2021,
late 2020.
Like, we had that huge EV pump.
This is kind of what I'm seeing similar right now.
Right now.
with the AI pump.
Not that I don't think AI is going to be a huge thing and a big part of a drive for a lot of
companies,
but I think it's just a little premature from a market expectation,
like pricing in all those future cash flows very aggressively.
So I think we're going to see a similar type of correction come off the back.
And the bond market is kind of signaling that, right?
And in general, bond market is usually right over.
you know, equity markets.
You saw this in the summer a lot in 2020 when we had that big bear market rally
in like June, July, where we, you know, kind of pumped up all the way where bond market
was just signaling like, hey, this is going to be going to see fresh new lows after
this.
And we did see fresh new lows, you know, in the second half of 2022.
Now, I don't know if we'll see fresh new lows, but I definitely think we'll see a significant
correction as we see unemployment kind of, you know, move higher.
which we're seeing, you know, that's been the one sticky thing, right?
And that's kind of been pissing off the Fed a lot is that unemployment's been kind of sticky
until like we just saw it kind of move over the last like, you know, I'll say like two months.
And, you know, that's when we get the true, true pivot, right?
Like when unemployment gets to like that four and a half, five percent, I think that's where you see like the true pivot.
That's where you see the big market correction.
And then that starts...
the gradual recovery with rate cuts and so on down the line.
But yeah, that's kind of my view.
But yeah, I think that makes a lot of sense.
I think we talk to most bond traders will or like, you know, macro people will agree with that.
Like, you know, a recession is definitely.
But Wizard, I want to let you know.
I just want to give you a heads up that there are people on stage that completely disagree with your analysis.
now. And that's okay. That's why we have these stages. Caleb, I want to give you a chance to respond. I know it is, this is, Wizards analysis was, seems like the complete inverse of yours.
walk us through, you know, his commentary around bonds versus equities and how equities are giving us a different story than bonds is not incorrect.
But why do you think that you should still continue to remain bullish on equities and why isn't the bond market, the 210 inversion is getting deeper and why that's a false signal in your opinion?
for a recession since I know you're bullish overall.
Yeah, so I don't think it's a false signal.
Um, what I will, so what I want to say is this is, you know, I mean, I don't disagree with what was just mentioned. Um, I do have some pushbacks. Um, I think that, you know, what we're seeing in the bond market right now is very unique to the times given this, you know, just given the fact that the Treasury is out issuing a bunch of debt. And in my opinion, we're at an inflection point in monetary policy.
And so maybe the bond market has it wrong and maybe equity investors have it right this time.
Right. So I don't know. What I will say about why I'm bullish on equities is just simply because, you know, I have a couple of rules of investing. One of them is don't fight the Fed. So what has the Fed been doing? They've been reducing their aggressiveness and their hawkishness with respect to monetary tightening. So policy has become on net. It's shifted.
in terms of rate of change to a less aggressive monetary policy regime.
And as such,
we've seen equities rally.
We've also seen equities rally because of disinflation.
We've also seen equities rally because of better than expected earnings.
And now,
You know, another thing that I talk about is don't fight the tape, right?
Don't fight the Fed.
Don't fight the tape.
Sometimes those things can contradict each other.
I think maybe right now we're seeing one of those contradictions.
So, yeah, sure.
Maybe the equities market is very wrong, which is why I'm operating with extremely, extremely tight risk management in this market.
And I have been.
But when we see the S&P 500 trading above the 21 day moving average, which is above the 55 day moving average.
which is above the 200 day moving average.
We're in an uptrend making higher highs and higher lows since October of last year.
If you look at the median stock and the S&P, you know, basically the same exact thing, right?
So I fully concede that this has been a tech-driven rally.
But even within tech, you can look at the equal weight version of the NASDAQ 100.
I think last time I checked, that's up about 17% year to date, certainly lagging the market
cap weighted version.
So yes, mega-cap tech has been leading the market higher.
In and of itself, that is certainly not bearish, right?
It's not a bad thing when LeBron James scores 28 points,
eight rebounds, and eight assists and leads his team to victory.
If anything, we'd be concerned if LeBron only had 10 points,
two rebounds, and two assists, right?
And so with the MVPs of the market performing as MVP should,
in and of itself, that's not an alarm in my opinion.
I want to just briefly comment on the, you know, the inversion here.
Okay.
between the tens and the twos,
I prefer to focus on the 10-year versus the three-month.
The godfather of the Yield Curvin version,
when he wrote his dissertation back in the 70s,
he focused specifically on the 10-year-verse-three-month,
and somehow some way the 10-year or two-year has become more popular,
but even he himself acknowledges that the 10-year-three-month
is a much more powerful indicator
of a recession, so on and so forth.
Again, deeply inverted, the thing is,
typically once this inversion occurs,
it stays inverted for on average
of at least 18 months before that recession happens.
So we're basically one year removed.
So hey, newsflash, it could stay inverted
for another six months before that recession occurs
at minimum.
Maybe it's two months.
I don't know.
I don't have a crystal ball.
But I think given the fact that we have not seen a recession yet, this quote unquote late into the inversion isn't a surprise because we're, you know, we're not even at the average level of when that recession occurs after the inversion happens.
One thing that I've been mentioning to investors is we should start to get worried about a recession once that inversion starts to re-approach zero again, right?
So currently it's negative.
I don't even know what the spread is right now, but it's deeply, deeply negative.
As soon as we start to re-accelerate back towards zero, as that relationship, as that spread starts to close back towards zero and increase, that's when we should be worried because that's the bond market pricing in a recession.
So when did that start to happen?
When the bank failure started to occur.
Everyone was shitting bricks about a recession, about a financial crisis, about bank failures.
No one's going to have their deposits.
Everything's going to hell.
Oh, my God, a recession is on our doorstep.
What started to happen, the yield curve started to not uninvert, but trend back towards zero.
And so the fact that we're not saying, the fact that we're not that restening happened right now,
in my opinion indicates that, you know, we'll, you know, maybe be in this kind of like no man's
land between like recession and economic recovery.
For like I said, maybe another several months, right?
I just, I don't know.
But I think, first of all, there's reasons to be structurally bullish on the stock market.
I'm in that camp.
There's also reasons to be structurally bearish on the market.
This is coming from someone, by the way, who predicted my base case for the year is that we would see a recession
and that we would see failures within the traditional financial system.
We've seen those things.
We have not seen the formal recession yet.
But I would also agree with the assessment that, you know, we've also started to see
you know, early stages of a deterioration in the labor market, which would be congruent with a recession, right?
So exactly like Wizard said, you know, the labor market is always the last thing to fall and we're starting to see weakness there.
We need to see much more weakness in order for us to get that recessionary signal, but we're getting very close.
Yeah, it's fascinating.
Wizard, I'll let you respond real quick, and then we'll go to David.
Yeah, sounds good.
Yeah, great point.
So I think the part of what the two stands curve, you know, a lot of the two stands curve
is inverted more also because not just like as a recession, you know, indicator,
there's a lot of supply, like you was saying, you know, Caleb was saying, there's a lot of,
you know, structural changes in the market where a lot of, you know,
large pension funds.
So it's a lot of like supply related reason why it's inverted and not necessarily because,
you know, it's supposed to be predicting a recession.
The bigger concern for me, uh, when it comes to, you know, recession is more a fed-driven
recession.
And it's,
This is the main thing is that, you know, I think the time to be bullish, super bullish stocks was in January when we saw like the initial average hourly earnings print coming lower.
And, you know, that's kind of when you saw everything, like even crypto, everything started, you know, kind of pumping aggressively stocks as well.
And now you're in this AI-driven tech next leg.
But the bigger thing is the earnings.
So all these, if you see, like, you know, stocks are just crushing earnings, right?
Like all the tech companies are crushing earnings.
And the problem with that is that you have a feedback loop on wage inflation.
So as earnings are getting crushed, employees are like, hey, you know, inflation is still sitting like four or five percent.
I need to get my raise.
So the company is like, yeah, we want to retain talent because there's still a big shortage in the marketplace.
There's not enough people getting back in, which is changing over the last like two, three months.
Right.
But what that does is that that creates a wage inflation feedback loop.
And what that does is that it kind of negates what the Fed's trying to do, which is reduce wage inflation.
So if you look at the, you know, on the first Friday of every month when you get the employment data,
one of the numbers with the employment data, which is actually a bigger driver of the market than the actual headline is,
it's the average hourly earnings, which is essentially wage inflation.
So what's happening is as these stocks are doing good, these earnings are doing good,
that rage inflation is getting a little bit stickier and stickier.
And if you look at the chart,
it's kind of like starting to like,
you know,
flatten out,
which is making the Fed's job hard where they want this number to go down.
They kind of want to see more people get laid off and see job,
you know,
like average hourly earnings come down.
And because these stock companies are doing good,
they're able to pay their people.
So this feedback loop is actually quite bearish.
You know,
it's tough to know like when exactly this will break on the downside or upside.
But that feedback loop is that something that concerns me over the next six months if you don't see that coming.
So, I mean, that's kind of my main thing.
I think, you know, I don't see, and I'm sure Caleb, I think he kind of mentioned that he's, the risk management is pretty tight here.
Like, yeah, if you're in stocks right now and you've kind of caught most of this move since January, you know, everybody's kind of in mostly in profit-taking mode.
You know, it's tough to short.
But, you know, listen, we were kind of started, you know, our funds started buying puts for like September, October, around these level, buying Wix calls and so on.
But I think the thing to look for is the wage inflation and that's curating the feedback loop on earnings.
So I want to see earnings kind of drop.
So on the wage inflation, though, like we've seen the Atlanta Fed's wage growth tracker that, you know, that peaked in July of last year.
And it's been, you know, decelerating.
It's still up on a historical basis.
It's still very high, but it's declining on a year-over-year basis.
That's good news.
You mentioned average hourly earnings.
I'll agree that that's been stickier than I've anticipated.
But it is decelerating as well on a year-over-year basis.
So, again, the Fed doesn't want to see that number, like average hourly earnings, you know, flip negative or outright decline.
You know, if you're just measuring it on a nominal basis, they're concerned about the rate of change.
Yeah, yeah, of course, of course.
No, no, I mean, I agree that, you know, everything, I don't think anything's going to be worse than it was in like 2022.
I think it's just that we need to see like the rate of change.
Yeah, like nobody wants like if.
then the Fed's going to have to cut, right?
But then it's when it comes to the point that, okay, if they go too far,
which I think that it's possible that they might have gone too far or might go too far with two more hikes,
you know, possibly we'll see a November hike and maybe one before.
And I, yeah, 100%.
I don't think there's anybody wants, same with core inflation, right?
Like nobody wants to see it go like too low.
They want to bring it closer to two overall, which is,
I think it's going to be very challenging.
I think it's more, yeah, I completely agree with that part.
But I think that it's way too sticky, both core and average hourly earnings.
And if it stays sticky too long and they have to keep rates high too long,
you know, because if it stays too sticky too long, they will have to keep rates high too long.
And they will have to do two more hikes, which will push us, you know, closer into a potential, you know, proper recession,
which is like, you know, move...
unemployment to like, you know, four, half, five percent.
Because if you get to a four and a half, five percent, the Fed will cut rates, right?
So I think that's, and then you'll see a crash in the market.
And that's the crash that you can buy again.
You know, that will take you back to like the all-time highs.
But who knows?
You know, it's maybe the first time that Fed has possibly done a situation where they're going to get that soft landing.
And we'll just gradually.
Oh, man.
During the J-POW soft landings.
Who knows?
I mean, it's, who knows?
Let me get David in here, Wizard.
I'll just say that.
Anyway, those are my thoughts.
No, I appreciate that.
David, go ahead.
Yeah, so I'm the follow up kind of on what Caleb was saying,
and I also look at the three months.
I think the three month is more of your kind of a, it's like a proxy for the effective
Fed fund rate.
It's kind of seized where the market is for the Fed's fund rate right now.
It was a two years more kind of a pricing mechanism.
The three month is the effective rate, as a proxy for the effective rate.
So I also look at that spread between the tens and the three months.
and and it's like it's it's negative it's it's it's it's it's
it's not just negative.
Like, you know, it bottomed out at about 60 basis points
and negative before the financial crisis.
It bottomed out about 75 basis points when the tech bubble burst.
It was negative before that in the early 90s
when Bush senior losses, you know,
election with the recession there that didn't really produce a bare market,
but there was a recession there in the early 90s.
Those were the, and then there was a dip below zero in 2019, when we have the quote-unquote mid-cycle adjustment, right, with the Fed cut rates a few times in the summer or fall of 2019.
We are currently...
You know, it's about a year ago.
It was like last November-ish when it dropped below zero finally.
We're currently at a hundred and fifty, hundred sixty-five basis points negative on the 10 year to three month.
How can that not be the most bearish signal?
I'm so confused.
You guys are sort of speaking around it.
It's a reflection of how bullish the markets are because an inverted yoke curve is actually a correlated, there's a correlation with a bullish market.
So it's a reflection of just how bullish we are to get to this point.
Eventually it will be like when the like he was saying, when the inverted yoke curve, when it's bearish is when it's rising.
Exactly.
But like how is it going to go deeper, David?
Sorry, to clarify my question, how do we expect it to go deeper?
I mean, at this point, it is incredibly deep.
It is incredible, but it can stay deep, right?
It can, I mean, there's two ways it goes back up.
Either the three-month drops, which means the Fed's cutting rates or the 10-year rises,
which means inflation is reared its ugly head again.
And faster than what the Fed is raising rates, because obviously the Fed is really slowed down its rate hikes.
That's the only two ways.
And traditionally it's been Fed rate cuts that causes it to go back up again.
And until the Fed cuts rates, it's going to stay negative.
Right. Until the Fed starts cutting rates, it will stay at this level and it will just grind down here.
But I feel like that's like a circular argument here. So the Fed will cut rates because there's concern for a recession. They won't cut rates until unemployment hits a certain percentage. So I'm a little bit confused about.
you know what we think Caleb keeps giving me the thumbs down so I got to let Caleb jump in here
and tell me why I'm wrong I so I just want to step in because I um I want to be very clear for I don't
know how many people are on this call over 5,000 people who are listening there is no correlation
between the severity or the magnitude of the inversion and the subsequent recession I
A deeper and deeper and deeper inversion does not imply a steep recession or a depression.
There is no evidence to suggest a correlation between the magnitude of the inversion
and the ensuing recession that happens thereafter.
So I want to be very clear on that.
One of the reasons why this spread is so deeply inverted on a historic basis is
is because of the severity of the monetary intervention that we've experienced over the course of the last, let's call it 15 months, right?
So exactly as David said, that three-month treasury yield is a very, very, very good representation of the effective federal funds rate.
And given the fact that the federal funds rate has increased so substantially over the course of the last 15, 16 months,
That inversion has become historically deep, right? Because we've just, surprise, surprise, everybody, we've just undergone the fastest tightening cycle in U.S. history. And at the same time, we're also seeing the deepest inversion of the treasury yield curve that we've ever seen in history. Is that a coincidence? Absolutely not. They're correlated. It's a causational relationship here.
So I just want to be very clear on that.
Second point is the uninversion does not start to happen once the Fed cuts rates.
It starts to happen once we've formally entered a recession that the market believes is here.
And then the market, the Fed's response is to cut rates.
The Fed does not cut rates before a recession.
It's always after the recession is at our front door.
And it's already knocked on the door.
The Fed opens that door.
So I don't want to put the cart before the horse here.
And I just want to make that point clear as well.
The Fed did cut rates.
I mean, the Fed started cutting rates in September of 2007,
and the recession didn't start until, like, early 2008,
according to the National Bureau of the economic research.
Correct.
And the same thing in 2000.
The market was already pricing in that recession, given the fact that, you know, Lehman was going under.
All the failures were occurring, right?
So on and so forth.
Lehman didn't go under until September of 08.
So we were well into it by the time Lehman went under.
And Bear Stearns went under.
And that's, go ahead.
Bear Stearns went under in the summer of 08.
You know, so it was, I mean, all of that happened.
That was like the apex of the, of the bear market.
We broke the 200 week moving average.
The stock market broke the 200 week moving average,
which in my opinion is the stock market saying
we're going into bear market like in early 2000,
like January of 2008.
And the Fed started cutting rates in September 2007.
Same thing in 2000.
The Fed started cutting rates
in 2000, the NBR didn't start its recession signal until 2001 is when they said it officially
started. So they will start cutting rates early. And then that yield spread will, the yield spread
has always started to go up before the recession has actually started. If you look at the Fred
database, and it goes up with the Fed cutting rates. It's only two ways. It either goes up because of
three months is dropping faster or the 10 years rising faster.
And it's not been the latter.
It's always been the former.
The three months is dropping faster.
And the three months not a pricing mechanism.
It's the effective rate.
So it's dropping as the Fed is cutting rates.
The two year is the one that will drop ahead of the Fed cutting rates.
Yeah, it's fascinating because what people, so for everybody that's listening, I have to say, considering how much of a deep dive that we've done on this topic, I'm actually learning a lot about our audience.
And so, you know, if you guys like that we're doing these crazy deep dives and kind of getting really into the weeds.
Do let us know in the comments.
I feel like sometimes I feel the need to move on from topic to topic.
And this is just me being vulnerable with our audience on a Monday morning about the stupidity that goes through my head.
I think about like, well, should we like keep it fresh and surface level or should we go super deep?
And so I have to learn from our community.
And again, as Caleb was mentioning,
we actually have even more people today than usual.
So it's 5,364 right now, according to the numbers.
I wonder if people actually enjoy us,
just keeping it dispassionate, talking about the details,
and maybe our audience is very different
than the general audience,
kind of interesting in many ways.
So do let us know in the comments on the bottom right.
And then we've had a lot of really good comments.
I'm gonna be bringing them up later.
So your comments are not going unread,
we're actually reading them on the back end.
You know, I wanted to move on to the second big, big news this morning.
And wanted people to weigh in.
Jeff Lutz is not here with us.
He's our sort of Tesla bull, but, you know, Cody can play it or somebody else can play it because, you know, there's a lot of people that believe in Tesla long term.
Today, Goldman Sachs downgraded Tesla.
The shares are down about 2% pre-market, likely will be a pretty deep day for Tesla, not financial advice, just how it goes.
And they were downgraded for two main reasons.
Um, number one, the pricing, which we've talked about before.
And number two, they don't think that it's, uh, uh, that the current price of the stock is, is appropriate.
So it's been, you know, it's way too bullish right now, according to Goldman.
And there's too much pricing pressure across EVs.
You know, Tesla is not the only game in town anymore.
And there's a bunch of other EV companies that are working on it.
You know, um,
wanted to see how people think about this.
Clearly, the market's reacting quite poorly to this,
wanting to get people to weigh in.
David, I'll go to you.
I don't know if you follow Tesla or currently have Tesla in your portfolio.
If you do, please do tell everybody so that we know where you stand.
Do you currently have Tesla?
No, I don't own it.
Perfect. All right.
So that's good.
So you don't, and you're not, you know, that's helpful.
By the way, I've been told by some of our audience, that would be really helpful if people
can talk their, you know, share and disclose if they can, what they own before they speak.
So if you do, please do let us know.
So, David, what are your thoughts on this downgrade overall?
Let's start with like the broader EV market and the competition that's brewing and then kind
of this Tesla downgrade.
Yeah, so I don't own it, but it's obviously, if you're not watching it, I mean, it's one of the seven, right? It's one of these seven, so you do need to pay attention to. And it's been the laggards, one of the laggards of the seven for all the reasons I think you've been talking about. It's marketplace.
has been getting a lot more competitive.
Obviously, it's still the lead dog in that marketplace.
And their pricing power, they're losing a little bit of their pricing power,
which is not good, which I believe is why they've been a laggard.
And you look at today's downgrade, and I'm not like,
When I hear downgrades, I'm not a big, I don't necessarily think that they're a bad thing.
Because I don't, I mean, how often, like, when they, people have downgraded stocks that are in bullish markets have the stocks actually declined.
I mean, they're down today, but they're down to, they're,
They're not even below the low point on Thursday.
Like, they're not down very much.
So it's not that big of a decline.
And it's still very bullish.
The stock is really rallied to catch up to where all the other...
Is that just Tesla mania?
Or is there why we should be bullish?
It was oversold.
It was oversold.
It was, like I said, it was the biggest laggard.
You know, I've talked to you about, you know,
Stots getting below the 200-week moving average.
Tesla was below its 200-week moving average.
It was, and nothing else was close, and it was below.
It got further below it at the end of 2022.
And I was going to say this earlier.
The NASDAQ 100, of course, Tesla's a part of that.
NASDAQ 100,
The reason why its year-to-date move is so strong.
And because the Dow's not.
The Dow's only up like one and a half percent.
The Russell's up three and a half percent.
The reason why the NASDAQ's return is so strong this year, Tesla included, is because
the NASDAQ was at its October lows at the end of the calendar year.
So once that calendar year flips and we.
and we have now year to date returns right because now that's a thing year to date returns
that the year to date return for the nasdaq happened to be the basis for the nasdaq happened to
be the lowest out of all the indexes because it was at its lows once the calendar flip so now
it's rally to catch up to where the Dow was and and what the you know and everything else it's
it's rally to catch up to that and and because of that it's year to date returns are really good
Whereas it's just basically caught up to where everything.
And Tessa was the last one to catch up.
It was further below.
And now it's back up to near its highs.
And I don't like...
a downgrade like this whenever i hear a downgrade if i look at the chart and it's you a lot of
times the sock is already kind of in a bearish move because the analysts are so late to come to the
party right hey let's downgrade something it's already in a bearish move um but in this particular
case where it's in a bullish move it almost
always tends to be a really decent buying opportunity.
Because you get the headline, you get the algorithm, like the headline knee-jerk reaction
to the downside like you're seeing, which is not that big of a deal.
And then it continues the trend, which right now has been pretty darn bullish.
And I think that...
So I'll give the bullish case just from like a understanding of their technology perspective.
And now I'll go to Eugene to weigh in as well.
So...
You know, for people that are not aware, what makes Tesla great is not the car.
So that's a really important understanding of their business.
So what makes Tesla great is that they put the car in the software domain.
They put the car on the internet, which means that they can iterate on their cars at the speed of software.
That's super important for people that don't understand what we're talking about.
Happy to go in deeper.
If you want us to go in deeper, go in the comments and let us know.
Because once you put the car on the internet, as all of this technology comes in, it can actually be monetized as software.
So EV margins, physical hardware margins, car margins are actually really low.
But software margins are really high.
We have yet to see software margins really take form.
And so we haven't seen the FSD, the full self-driving, really kind of take over.
And I think that as that becomes more and more popular, especially as Tesla not only uses it for
its own cars, but for other cars, that second part is kind of really important and becomes the
platform for self-driving across all the EVs or all the car companies, that becomes really,
really powerful.
So number one.
There's this bull case for margin expansion through software sales.
Number two is infrastructure.
So when you think about what they're building, this charging infrastructure across the country is quite exciting in many ways because it's a really big barrier to entry for other people.
you know, we're seeing their standard for charging, the supercharging standard,
actually being adopted across multiple EV companies.
As multiple EVE companies adopt their charging standard,
suddenly not only are they using their software,
they're also using them for charging,
and both of those are really sticky.
That's kind of the bull case for margin expansion.
building cars and selling cars, even the way Tesla has done,
if that ends up being their whole company,
I agree completely with Goldman,
that it's a bad business,
a ton of competition in EV,
and it's only going to get more competitive.
But at this point, on the full self-driving side,
the one big competitor that everybody needs to watch out for
is cruise auto motion under GM,
that's the other one.
Just keep an eye on that, but with,
with FSD now being, you know,
with deals now happening between the EV makers,
we might see some of that change.
But I was going to go to Eugene.
I know we have hands up, but Eugene, did I...
summarize the bull case appropriately,
just want to make sure.
Yeah, I think so, definitely.
And to add some color around it,
but by the way, I want to add some bearish factors around it.
But on the FSD side,
you're totally right about software generally,
but also with Tesla being one of the
biggest AI companies in the world,
I mean,
I mean, its FSD has gone from $5,000 per car for driver in April 2019 to like today,
if you want to get it's like 15K.
And that number only creeps up, right?
It's not going back down, even though the marginal cost to reduce that is in theory
zero.
Obviously, R&D and CAPEX is very high, but the marginal cost to distribute to cars is nothing
and they're raising the prices.
Makes sense, by the way.
Yeah.
So the, I mean, the one thing, though, is if you think of it as a car company, what's interesting is like, you know, one of the things about the Goldman report that you point out is around weakness in the car market in the U.S.
And by the way, if the market bought that, and I agree with, I think somebody said, you know, when our analyst actually right, you know, I mean, they're often as wrong as they are right, just like, you know, like many others.
But, you know, including myself, I mean, I think it's just very hard to know where things go.
Yeah.
GM and Ford, by the way, are moving at all free market, right?
So that's just something to consider.
But the bare side is, if you think about it compared to car companies,
I mean, it is kind of nuts where the valuation the company is, right?
It's over $800 billion in market cap.
And it's like four times bigger than the nearest competitor,
which is Toyota at around $200 billion, right?
And Ford and GM are sitting so low at like $50-ish billion or so a pop.
I mean, you have to think of Tesla.
I mean, obviously, people think of Tesla as not, you know, a typical car company, right?
They think of it as a software.
And even more interesting, I think Wizard and others talked about, like the AI boom.
I mean, it really is leaning into that AI boom because it is.
one of the most important AI companies out there.
So I guess that's, you know, one side this way, one side that way.
It's, you know, interesting to see.
But, I mean, if you compare it to car companies, I mean, it's clearly just, you know,
I mean, it's just so much larger.
And the valuation on a P.E. multiple, et cetera, perspective is just, you know.
Yeah, the P.E. multiple for people don't know is 755.
Nuts.
It's kind of nutty.
It's a little nutty.
At least it's not undefined, right?
Yeah, and especially considering that,
right now people are betting on a
revenue stream that has yet to materialize.
I mean, like really materialized.
So it's interesting, you know,
this is not like a,
a venture bet.
This is a public entity
and betting that they're going to do something
that they have yet to show
is truly a business model that people can do.
And, you know, to be completely honest,
with AI being, David, I'll let you go right after me.
I was going to say that, you know,
with AI being so much easier...
than before to build out.
And so many companies are working on infrastructure and, you know,
foundational models.
I am not 100% convinced that Tesla is going to be able to maintain its dominance on full self-driving for very long.
You know, we've seen work through Waymo.
We've seen work through, as I mentioned, Cruz.
And so Cruz is like actively...
full self-driving right now all over the Bay Area.
But Cody, I'll let you weigh in here, Matt and Patrick.
Thanks for joining us.
Go ahead, Cody.
Yeah, morning, guys.
I hope my audio is okay.
I was joke with my friends that these price predictions are kind of like the tote board
on a roulette table.
Yeah.
You know, they put these numbers out there and people just expect them to be right on the traditional side.
But, you know, if you guys listened to the interviews with CEO, Jim, both of them had strong comments on how far ahead of the curve Tesla is on...
on their vehicles being fully embedded to the internet.
Donish and Eugene, you both have most of the key points here.
But I think those two interviews really told a big story
because you can kind of sense the fear in their voices
knowing that they're going to have to create
some form of licensing agreement with Tesla moving forward.
As car demand starts to creep down in the general markets,
these legacy capital-intensive...
companies like Ford and GM are going to get crushed and they're going to be forced to move to Tesla, I think.
Interesting. Yeah. What do you think, Justin?
And also, by the way, guys, please do share whether you own the stock or not.
That would be super helpful.
Justin, go ahead.
I'm a shareholder.
Yeah, back in, I think it was 2017, I was on some radio show talking about Tesla.
And what I had said was they're basically the Exxon Mobil of the future.
That's essentially been their goal for a long time.
I think there was a point where Elon didn't even care if the cars made it.
I mean, I'm sure he cared.
But if the cars ended up not.
not being viable. I think that was kind of his loss leader or just part of the strategy,
maybe a pawn to be sacrificed. I'm not, you know, I don't have any insider information. And yes,
I am a Tesla shareholder, by the way.
But I think a lot of people forget about power wall in this discussion.
They forget about solar tiles that they're still working on.
The end game for Tesla is to become that infrastructure for all EVs.
And of course, with the announcements from GM and Ford, I wouldn't say it's checkmate for Tesla,
but I definitely say it's check.
And then just a really quick note on all the EV competitors they have.
I don't I I I and maybe someone who understands battery technology better can explain this to me
but they're still the competitors are still really struggling on range
And that's something Tesla seems to be really good at.
Actually, really interesting that you brought that up, Justin.
Actually, Toyota came up with a solid state battery.
That is three times further.
We've been hearing announcements like that for years about the Tesla killer,
and this battery is finally going to be better, and they don't materialize.
And I hope we do see something materialize.
And then,
And then there was a one more element is their whole semi like fleet and semi infrastructure that'll be rolling out.
And from a logistics standpoint, is more companies onshore manufacturing into the United States.
And Asia will do this as well.
So will the European Union.
I imagine that aspect of Tesla's infrastructure game gets even stronger in the future.
So one thing I always like to think about when companies reach such scale, you have a couple things going against them.
One is their ability to just absorb more market share, like no ability to surpass like 30, 40% of any market as possible for any company in any market.
And the other problem is the human capital element of Tesla is also reaching its critical mass,
where some of the earliest and brightest employees that have been with the company solving the deepest and biggest problems are,
are starting to realize that, oh, maybe there's only a little bit left to solve and I'm not so passionate about it anymore.
But Ford or somebody else who's really struggling, I could have a huge impact on.
And I want to go work and solve problems over there or solve something else.
I mean, we're seeing a lot of X Tesla, SpaceX engineers starting companies in the startup space.
But when I start to see...
companies gaining traction, it's not because they all of a sudden just turned on the light bulb
internally. It's because they figured out ways to attract talent from the best leaders in the
market like Tesla and Tesla maybe isn't fighting hard enough to keep them or they're just not
realizing that there's enough things for them to solve. And so they're going over to the next
biggest thing for them to solve. And that's when the shift starts to happen is when the human
capital gets...
Either disenfranchised or just not really excited about what's left to do at their company they've been at for a while, like Tesla.
And then they go find somewhere else to start putting their energy.
And that's where I think it takes a longer time to see it to happen, but it is happening.
Yeah, it's fascinating because I've been thinking a lot about this specific issue, which is what is Tesla's next big move?
I'm going to make a crazy, I'm going to make a, you know, Caleb the other day made a pretty crazy prediction that he thought that inflation was going to hit 2% by the end of 2023.
And I was like, okay, dude.
And we pushed back.
But you know what?
Everybody has a right to crazy predictions.
Y'all want to hear my crazy prediction that is 99.9% likely to be incorrect.
I'm going to do it.
All right.
I think Tesla is going to buy one of the electric airline companies, and that will be its next big move.
That is my crazy prediction that makes no sense from a financial perspective, because all of them are way too expensive.
You've been watching an Iron Man 2 over the weekend, huh?
That is literally what happened. That is literally what happened.
Yeah.
I think I think I think I think I think Elon is bored I think he wants to go all the way and he wants to build an iron man suit all right anyways that's my fun prediction for the day I think it's likely you know why a utility provider yeah more likely way more likely but you know Texas is private utilities and I think they can buy a private electricity utility provider
Yeah, especially for the charging stations.
What I was going to say, though, Matt, is that Elon does always say that the most entertaining outcome is the most likely.
So that's the reason why I brought that up.
Elon was actually in the movie Iron Man, too, and he actually did tell the character, Tony Stark, that he had an idea for an electric jet.
So there you go.
You see, like that's what I'm trying to say
that ultimately that might be on the radar.
Patrick, you nest us,
you put something up in the nest,
so wanted to give you a chance to walk us through.
So, you know, just to kind of frame it, Patrick,
since you joined,
or before you joined, we were talking about Tesla,
and we were talking about how Goldman downgraded Tesla
because they believe that the price is too high
and that the competition is too thick.
What are your thoughts?
What is the market telling us broadly about Tesla right now?
And Patrick, if you don't mind,
if you can just share whether you will hold a position or not, let us know.
Yeah.
Who's this Goldman guy?
What are we talking about there, Goldman?
Look, I see these price targets from all these entities, these banks.
I would never...
they're like, they're not looking,
I don't know what they're looking at when they do this price.
They're probably looking at the fundamentals.
But look, you know how I've been repeating this.
Look at the Tesla chart.
Look, meta, Bitcoin, all this stuff,
all these US tech speculative plays,
they've all been going up.
It's not because of,
a downgrade or an upgrade.
Look, in the bull run, you could get downgrades
and the price could still rock it upwards.
And in a bear market, they could get upgrades from all,
from all, they'll keep doing upgrades, upgrades,
upgrades while the price tumbles, tumbles down, right?
So I would really take that with a grain of salt.
Just look at the price action.
Tesla right now overcame the $215.
barrier. So that was an important wall. Now it's discovering the huge topping pattern that
Tesla did from 380 all the way to 267. And that's where the price is halting right now.
But for Tesla right now, it's not looking that bad because it's above a 700 day moving average.
It's probably going to want to retest a 215 level.
look, it's been going essentially sideways for over two years and a half.
So either this is a massive, massive top and it tumbles,
it grind somewhere and tumbles,
or this could be the base of a new move upwards, right?
So until that base resolves upwards or downwards,
the fast, crazy moves like it did back in when it broke out,
I forget when they're in 220 or 219 when it started moving upwards,
that's still...
not enacted.
And do I own Tesla?
No, I do not own Tesla.
I didn't know we had to divul
our personal...
positions is that is that going to does that mean if i have a bear few because i don't own it you'll
say oh you're biased patrick you want to sell it's that what oh no it's i see way more about whether
you hold a position at all so if you hold a and the reason why i'm doing this now is because i want to
be very clear that most of the people that are coming up here are not talking their book
you know we've been getting that quite a lot over the past few weeks and so if you hold a
position let us know if you don't hold the position let us know uh that's all who's trying to say
Right. Really quickly on that. That's a standard practice in like radio. The FCC regulates all that. You need to disclose things and make sure you're transparent and honest. So if Twitter really is new media, Donish and Mario, just kind of getting ahead of that, basically. It's good ethics, too, by the way. I appreciate it.
Yeah. Patrick?
Yeah.
If you feel super uncomfortable, you can let us.
No, I just, it doesn't matter because anybody could say anything, right?
I could say it, yes, I own it.
Like, it's just, it's, how do you call that?
It's, like you said, they're just to say it, right?
Yeah, exactly.
Doesn't hold anything.
But that's it for Tesla.
It did what it had to do on the shorter timeframe, so you can't say it's bearish now.
It's back above the seven and day moving average.
So a contrarian could probably see the gold man, what do you call it, downgrade as a positive, right?
Because if the price going up and these guys keep putting a bearish overhead there from the fundamentals, the market loves to prove these guys wrong.
Yeah, and that's probably what's happening right now.
Now, as a reminder for everybody, this is not financial advice, but there's a high likelihood
that what Patrick is talking about and what David agreed with is likely true, which is
that, you know, the analysts are late to the party.
They're showing up and they're saying, hey, hey, this is way higher than what our estimates
were.
We're going to downgrade.
And then along the way, the market's just like, let me kill them.
Let me kill them.
And that's what happens quite a lot.
The...
So, you know, the last big topic that I wanted to address was what's going on in Europe.
You know, I will say the wizard was not incorrect earlier.
And Wizard of Soho, just to know that I don't listen to, like, random wizards.
But, you know, the Wizard of Soho was not incorrect.
That there is something very specifically, specific going on in Europe right now.
There were two pieces of bearish news that came out.
One was the German PMI, which is now down precipitously over the last month or two.
And the other...
Big, big piece of news, in my opinion, was now there's a concern for a mortgage crisis in the UK,
both of which are incredibly worrisome for people that are not aware.
Unlike the U.S., most countries don't have 30-year fixed.
So let me explain this because we do have a pretty big, yeah, I know it's crazy, Cody.
That's what I learned this weekend as I was reading about this.
So for most of the country, they don't actually have 30-year fixed interest rates.
They have floating interest rates for their homes.
And the average person doesn't have access to fixed interest rates for their mortgage.
which by the way is nuts.
What the hell are you guys doing, Simon?
What kind of crazy shit is this?
You guys don't believe in fixed interest rates for homes?
That's crazy to me.
Because then how do you essentially have any lock-in
or any benefit long-term of owning a property?
We can talk about that separately,
about how silly Europe is.
But this is a big issue.
So now put into context that every time the ECB raises or the Bank of England raises
People's mortgage payments go up in real time.
Think about how scary that would be in the U.S.
Matt, I don't know about Canada.
Do you guys have, you're in Canada, right?
Yeah, you're in Toronto, I think.
Yeah.
Do you guys have 30-year fixed?
We actually just expanded to 30-year fix in the last like COVID stimulus boom, which is really funny because we've always been super conservative.
We have a 20% down payment requirement.
If you don't put 20% equity down payment on a house, then you don't get what's called Canadian Mortgage Insurance Corporation and CMI.
insurance coverage from the government.
And so then you have to get higher interest rates
and you usually get higher insurance premiums on your home.
So there is a huge incentive for you to put 20% down.
Some people can't afford that so they have to figure out other ways.
But we did just expand to a 30-year term, which is fucking crazy.
Imagine what would be happening in Canada right now
if you guys didn't?
Well, I think I said this on the last talk,
but our problem is not even the terms.
It's that...
the GDP or our wage inflation has not caught up to house inflation.
So the average home in Canada is almost a million dollars where the average salary is like, you know, only a hundred and something thousand.
So it's a crazy gap and multiple for us to buy our first homes in Canada.
And there's multiple reasons we talked about for that.
But the other thing that's also starting to happen is people are starting to hit their trigger rates and the rollover from people who took three-year mortgages in the last cycle.
Because a lot of people did take three-year fixed are going to be fucked when they're, you know, they'll call it 2% mortgage that they got in the beginning of the pandemic for three years expires next year.
Hold on.
So you guys do arms?
Sorry.
I thought you just said that you guys have a 30-year fixed.
No, amortization is 30 years.
The interest lock-in date is only for three years.
Yeah, the amortization is 30-year fixed.
We never had that.
It was always 20 or 25.
That's the amortization period for your payments.
But I'm talking about the actual mortgage rate, interest rate is only usually, you know, five-year fix is what people take or five-year variable.
I mean, variable don't matter.
Five-year fix is what people take.
We had people taking three-year fix at the beginning of the pandemic.
That is absolutely nuts.
So now when they get, when they, you know, right now, rates in Canada, I'm assuming are similar to the U.S.
I have no problem.
Oh my God.
Six percent.
Yeah.
So the question now is when we're looking around the world, you know, the U.S., we have lock-in, right?
So we have locked in rates for 30 years.
Your rates are locked in.
So for people that can afford to do it, they're in good shape.
But for everybody else...
you know, people that got arms, people that got other, you know, instruments, they're kind of screwed.
But that's pretty uncommon, I will say, in the current market, right, Cody?
So, you know, wanted to get your thoughts on what's happening in Europe with the mortgage crisis.
Apparently it's going to happen in Canada, which is freaking a nightmare.
And, you know, how do you think all this is going to affect the global real estate industry for, as a reminder, according to the IMF?
50% of global assets are owned by these shadow banks, these private equity firms, these pensions, these hedge funds that, you know, as a reminder, there's something called a denominator effect, which means when you're looking at their larger portfolio, as one part of their portfolio gets weak.
That has an effect across all of their portfolio and allocations.
And we know this to be true.
So, Cody, does this give you some pause around the real estate industry in the U.S.?
Do you think there's going to be any ripple effects?
Yeah, you can never underestimate the government's ability to jump into these situations.
On Friday last week, the Chancellor, executor of the UK announced that they're going to allow homeowners
on mortgages that are going to rotate over the next two years,
that they can at any time convert their notes into an interest-only payment and even push
that out to a 40-year AMort at a fixed rate.
So that's pretty interesting.
That tells you two things, right?
Either they're really concerned
or they think that this slowdown in the near term
is going to be short
and they want to insulate their economy.
I let the audience make their...
own assumptions on how that plays out.
But, you know, I do think that's really important, right?
So the government's going to step in in some capacity.
They've done it in the UK.
You can probably expect that they're going to have to do it in Canada.
Home prices have soared dramatically.
I mean, I think last month they were up like 17% or something nuts.
So I think that's kind of where we're at right now.
It'll be interesting to watch the next six months play out here.
You know, what's incredible is, you know, I was traveling through Asia recently.
And so there's a few problems, right?
Like scarcity of land, for one.
I mean, like in the UK, I mean, UK is not a huge country.
It's had, I mean, housing affordability, so housing prices to income hasn't changed much in
about 130 years.
I mean, it's gone down and up, et cetera.
So, I mean, I posted a chart up.
But, you know, I mean, it's interesting how, you know, these things can persist for long
periods of time, generations upon generations, right?
So, but like.
like, you know, like what's happening in Asia and other development countries, but particularly
in Asia, it's like people just build things really fast and really cheap.
And I'm not just talking about China.
I mean, China, if anyone goes there, you know, has been there, you see all the skyscrapers
everywhere.
But, you know, even places like Thailand, Vietnam, et cetera, you can get like really, I mean,
the question is around build quality, but they have some like at least very good looking
builds of pretty modern looking stuff, right?
That, you know, looks like a San Francisco Tech Bros house that he just built.
You're seeing that all over the place in...
at least sort of the quote, wealthier parts, at fractions,
wealthier parts of a certain city, at fractions of the prices of, you know,
what you see in the U.S. and other developed countries.
So, I mean, the problem we have here in the U.S. is one around just build costs,
it just cost so much money.
A lot of it's around wages, labor, things like, you know,
I think the regulatory regime shouldn't be overlooked, right?
I mean, if, you know, at San Francisco housing price,
San Francisco has an abandoned downtown, and they could convert that to,
to residential, right, to solve some of the housing crises, but, you know, companies that
try to do that have spent hundreds of millions of dollars on the regulation, the red tape,
et cetera, right? You have people who need houses. You have abandoned buildings. You know,
it seems like an easy equation, but apparently it's not. So I don't know. I think there's a
regulatory problem. And land itself is a scarcity, right? For those of us in crypto, like it's an
NFT, effectively, right? Like, the land, when you buy a house or whatever, the house doesn't go down. The house
depreciates.
It's the land only that goes up, right?
And that's why the price of your quote house goes up.
And of course, there's a limited supply of land and limited supply of places that people like to live, particularly if you're well off, right, or if you have money to spare.
You know, things are happening in places like Canada and I'd love for others to find.
You know, it's like a lot of things are, and I've been doing a little more research into this is like, well, you have other people from elsewhere, but lots of money coming in saying, well, what can I buy?
I'm going to buy that NFT, the real life NFT, the land.
Right, or the house, whatever, whatever, whatever have you.
And I think it's just creating these crazy problems.
And it's getting, unfortunately, to the point,
and these will probably persist over multiple generations,
the point where certain age groups, maybe millennials,
maybe Gen Z will not be able to afford houses in their own countries in these developed countries.
I can believe it's called real estate.
So there's a big, there's a big solution that we have overlooked,
which is the way that builders are allowed to...
write off the cost of building a condo versus an apartment building.
Because apartment buildings are obviously rented out and they're not all owned by the builder,
you're not allowed to write off the cost to build all the different costs associated with it over the lifetime of the asset,
but only when you dissolve the asset.
where condos, you sell off the individual condos, create the condo corp, you're allowed to recoup
those dollars when you sell those assets and you can also write off the cost associated with it
from a capital gains perspective.
The biggest problem we have in Canada is that builders are not incentivized to build apartment buildings, but to only build condos.
And obviously, a lot of first-time buyers can't even afford condos because of everything you just said.
So it's actually a lot to do with the way the capital gains are treated by the money in-flow and outflow versus just all these things about the land costs and the building cost.
Fascinating. By the way, someone put up, people are putting in a lot of information from Canada.
Didn't realize we had so many Canadian brethren listening.
Thank you for your support from Canada.
We're getting like crazy numbers just so if you want to read through the comments, man, we got to do like one of these spaces on the Canadian real estate market.
I know it doesn't sound very interesting, but it sounds like to.
Canadians seem to love talk about real estate. I don't know what it is.
I hate to be stereotypical about it, but yeah, they seem to love talking about it.
It's fascinating.
So safe excellence.
Thank you for that comment.
I just wanted to post it up to the nest.
The median after-tax household income in Toronto is $62,400.
This is assuming an $84,000 job at an average tax rate of $2575, including CPP NEI.
That's $5,200 per month take home, which means that rent is 57% of median take-home pay.
Canada's broken. That is freaking nuts. For people that are not aware, it needs to be 33% or less for there to be an economically sustainable home. That's at least what the advisors will tell you. This is crazy. nuts. And then there's a bunch of other tweets in there. There was one about a TD variable mortgage in Canada, taken at 1.3%. That's going to be, that's going to go to 5.7% what Matt was saying. So literally...
I'm actually going to post this in an S.
This is, thank you,
Geo-economic Canada for that,
for that information.
Man, I love the Canadian love here.
But they, yeah, so that's it for people that cannot, by the way,
just so you all know, as Americans,
we think this is freaking nuts.
This looks so crazy.
Like, why would anybody sign up for this?
Can someone explain to me?
Is it just because you don't have any other choices?
Like, why would you ever sign up for a three-year fixed and then going to a variable mortgage coming out of COVID?
I mean, it sounds kind of nuts, Matt.
It's the only way people can enter into the home buying market because it's so competitive.
Right.
The only way to enter into the home buy market is to get pre-approved on the 60 to 90 day mortgage rate that you have to go and trigger on and close by in order for it to not expire before you have to go back and reapply.
The application to apply for mortgages is pretty cumbersome.
There's a lot of paperwork you have to go through.
And the supply is just super tight.
And so if you are looking to get into the market and find a way to just start getting
your family into its home, you have to do this.
Now, you're right.
Who's stupid enough to take the 1.3 for three years?
Well, everyone tried to do that.
Even Americans tried to do certain stuff when it was a ZERP environment.
not worrying, but the way our mortgages are structured is, yes, three, four, five years fixed.
And so people take their chances, maybe rates will come down.
You know, I personally, like I had fortunate enough, you know, not have to put a huge mortgage down, but I took the variable loan.
on a home equity line of credit, a heat lock.
And a lot of people did that during the pandemic because it was like my average interest rate,
I think for the first part of the pandemic was like 1%.
You know, so I was just paying down as much principal as I could if I could afford to.
But now it's flipped.
So I was like 70% principal, 30% interest.
And then as the interest rate started to rise really quickly,
I started paying 70% interest, 30% principal on my monthly payments.
But my monthly payments weren't changing.
So a lot of people are also, you know, starting to get up to that trigger rate where like, you know, over 80% plus of your monthly payment is part of your just going towards interest.
But the people who really thought that they could outpace their interest payments when they were really low, they didn't plan for a 6% prime rate for them to be benchmarked against, which is pretty scary.
So what this tells me is that in countries where this is the norm, expect there to be significant tightening of the purse.
I mean, that's kind of the most obvious commentary.
But I would not be surprised if we suddenly see those countries suffer on the consumer suffer.
much, much faster. Again, as a reminder in the U.S., we don't see the impact of that for years. We have a slow-moving car crash, whereas it seems like in other countries, the impact of interest rate increases on discretionary spending is much, much more immediate.
Right.
Not to turn this into a Canadian podcast, but it's funny because we get labeled as like a socialist country, right?
We have like a social safety net.
We have free health care.
We have free education.
Some of the most expensive things in the U.S.
But we also pay the most for groceries and for telephone bills in like G7 countries.
because we have such a massive landmass
and we have such a small population to support
that, yeah, it is unfortunate we do have, like, you know, great benefits
but we also pay a lot through the nose on a lot of other things,
like housing, like food costs, like basic utilities
and, you know, our basic needs are still very high,
even though we have free education, free health care.
You know, what's fascinating is that what you're saying right now is a libertarian's, like, dream.
Because now they would go in and they'd say, well, the reason why you're paying so much is because you tax a lot and because you are anti-business and because you're X, Y, or Z.
It's funny. I don't think that's true either. I think it's like all over the place. I think the truth is somewhere in the middle.
But Matt, like,
That is the counter argument is that, you know, because you're not as pro business and anti-taxation is the reason why growth series are so expensive, worse than usual.
And because, you know, it's because you haven't had as much business entry into Canada because of some of these reasons.
I think it's also because we spend first and then tax after, like most people do.
Yeah, I mean, that's true as well.
Even the U.S.
I don't take the flip side of what you said, Donish, because like the, so I mean, we
talked about the inverted yield curve, right, the expectation that the rates in the future
will be lower than they are now, you know, it's not a recession, et cetera.
But I think part of the reason why market participants are talking about or why they're
trading in this manner, part of the expectation, at least when I talked to the market participants,
is that, you know, there's so much debt.
Yeah.
not only mortgage debt, but debt in general in the system that we have to lower rates in the future,
right? And specifically on housing, which is interesting when it's on variable versus fixed,
when you have majority fixed, right? So post-financial crisis, you know, a lot of, most of those
mortgages are are fixed. There's still some arms around.
I forget the percentage breakdown, I thought, recently.
But then what you're doing is you're taking a levered bet as the homeowner.
You're taking a levered bet on inflation.
But that's not the case when you're in a situation where your rate is tied to inflation,
right, where you have a variable interest rate.
So I think...
So I think the interesting thing that you have to think about is, well, you know, if you're the government, if you're government of any country, I think in general, you like productive people to have houses, right?
Like in general, like that the whole American dream thing besides being a fun little, you know, PR thing for a government, and in this case, our government, the U.S., is at the flip side, actually just sound policy, right?
If you have someone who's productive, et cetera, you kind of want them to be locked into something for 30 years, right?
Right.
continue to produce in wherever they happen to live, Atlanta or whatever, right?
So I think as a government, you're incentivized.
You actually want people to have homes.
And I think that incentive is going to be stronger than a lot of other things that are in the market,
i.e., I believe that there's going to be strong incentives for governments to either have rates
be lower or do other things to figure out how to get people to keep their homes, right?
If you jack up rates to the point where people can't afford their homes, I think that's just like, I mean,
I mean, that's destructive in so many ways.
And I think governments around the world aren't going to like that.
Hence, potentially lower interest rates.
Yeah, I mean, by the way, is my audio okay?
I feel like I cut off for a second.
Yeah.
So, you know, I agree largely with that.
I do want to say,
As we close up today, you know, one of the things to kind of think about now is how does all this geopolitical global,
how do all these global issues affect you as a person living, you know, wherever you're living?
And I think it's really hard to put it all together.
So, you know, the geopolitical situation in Russia, how does that affect you?
Well, it affects potentially affects oil prices.
which then affects the cost of gas of the pump,
which is the greatest form of taxation.
You know, when we talk about Goldman downgrading Tesla,
it affects you because what it's telling you
is that EVs are gonna come down in pricing,
which means that you might actually be able to buy EV,
which then goes back to the commentary
around, well, is the future going to be oil, include oil or not? And the answer is probably.
And then, you know, this European recession and what seems to be in a Canadian recession
that continues to deepen, you know, this has to give you guys all some pause.
Because remember that the biggest players in the world own assets all over the world.
So keep that all in mind as you go about your day today.
I think, you know, I think this week is going to be a pretty interesting week with all the news that's coming out.
But you will hear about it here at 8 a.m. Eastern every day.
Thank you, everybody, for joining us.
Have a wonderful day.
See you tomorrow at 8 a.m.
