The Fed's In A Finger Trap: Cut Rates or Fight Inflation?

DANO WEIR: Happy Friday. Welcome to On The Markets From Fermata Advisors and our private wealth arm, Sonoma Wealth. My name is Dano Weir. I'm the marketing director, joined shortly by our managing principals. And today On The Markets, we are talking about the Fed finger trap. Remember those things from when you were a kid, somebody would give it to you and be like, oh, check this out.

DANO WEIR: And then all of a sudden you're sitting there like, wait, how do I get my fingers out of this? That is the position the Fed is in right now. Should they cut rates or fight inflation? Today on the show, we're going to look at rate hikes and cuts over the years. What does the rest of 2026 hold in store?

DANO WEIR: And what could either decision, either a hike or a cut due to the market? Inflation wipes out wage growth completely for the first time in three years. We'll look at that. And Chris is very excited because he has a chart dating back to the Civil War that shows that the market has only been this expensive one other time in history.

DANO WEIR: Chris Sipes, managing principal of our firm, joined shortly too by Darren Blonsky. But Chris, let's start with this week's theme. And if you can explain just briefly, we'll get into it in detail, but what is the finger trap? What is the corner that the Fed is in right now?

CHRIS SIPES CFP®: Well, it's very appropriate too, because now Jerome Powell is officially out as the Fed chair and Kevin Warsh is being sworn in. So it's kind of the end of one era and the beginning of another. But Kevin is inheriting an environment where inflation is really taking off.

CHRIS SIPES CFP®: And we got some numbers this week with the CPI and the PCE, which would be the consumer price index and the producers' consumption expenditures. And those are two measures of inflation. They came in way hotter than expected. They're obviously on the uptrend. And so the Fed has a dual mandate, what's known as a...

CHRIS SIPES CFP®: Dual mandate, which is maximum employment, aka keep unemployment low, and price stability, aka don't allow prices to get too high, which is inflation. Don't allow them to get too low, which is deflation, because both of those states of interest rates can be self-feeding if they get enough momentum going in one way or the other. You can get runaway inflation, you can get runaway deflation.

CHRIS SIPES CFP®: And so the Fed is there to really help try to smooth that out and keep that price stable. So when they are coming into office with obviously a strongly hinted from the White House that they want lower interest rates to help fuel things like mortgages and car purchases and all the things that people borrow money for, putting in.

CHRIS SIPES CFP®: Starting businesses, they have to balance that with the fact that inflation is going up because if they make money easier to come by, that can fuel inflation. So inflation can get out of control. So it really puts Warsh in a pickle, as we'll see here, or the Chinese finger trap as a metaphor.

DANO WEIR: So if he cuts rates... Because he's trying to spur the economy that could potentially send inflation even higher and it's already hot. If he leaves them the same or raises them, that's going to help with inflation, but that's going to negatively impact an already suspect job market and economy.

CHRIS SIPES CFP®: Correct.

CHRIS SIPES CFP®: So it's been a while since we've had some good, somewhat funny memes, Dan. This one literally made me laugh out loud. And it says, I just realized the paper towels at the side of the gas pump are there so you can wipe your tears after you fill your tank. And it shows a lady crying with the towels in her hand. Oh, I thought that was funny.

DANO WEIR: Chris, if you've ever gotten gas at a Chevron in Sonoma County, you know they have Chevron has a relationship with Safeway. And so if you've spent enough money at Safeway.

DANO WEIR: You put your phone number into the Chevron pump. It's like, put in your Safeway card. We'll give you a discount, you know? And so, and that's, you know, they're trying to spur you to do both. So I did that this week and I got my little 20 cent discount. And then it was, the price was.

CHRIS SIPES CFP®: You know 619 and i was like what the heck it hasn't done the discount yet and i was like oh no no it has it was 60 that 20 cents doesn't help as much anymore does it there is a nice little psychological trick though it's kind of like credit card rewards or they try to make you feel good about spending more money all right so this was a a quote from Walter baggett who was alive during the mid...

CHRIS SIPES CFP®: Early to mid 1800s he passed in 1877 so and this quote says at particular times a great deal of stupid people have a great deal of stupid money at intervals from causes which are not to the present purpose the money of these people the blind capital as we call it of the country is particularly large and craving it seeks for someone to devour it and there is a plethora it finds someone you and there is speculation.

CHRIS SIPES CFP®: It is devoured and there is a panic. So these kinds of booms and busts are nothing new. There's nothing new under the sun. These have historically happened many, many times in the past in market history.

CHRIS SIPES CFP®: We, although it may feel different this time for all different kinds of reasons, we're really just living through the same historical pattern repeating. I feel once again, you know, but when you're actually going through it, especially as someone who's managing money, it is really, it's a lot easier to see, oh, that's how that happens.

CHRIS SIPES CFP®: Right. You know, when you read in history books, sometimes you read how things happen and you're, you're from a different perspective where you're kind of more, you know, outside the emotions of it and you can kind of more objectively look at it and go, why would people ever do this? Right.

CHRIS SIPES CFP®: And then when you're actually in it, you're like. Oh, I get it. I see how the wisdom of crowds or even the panic of crowds or all these things can kind of direct our minds in certain ways where we just have this hurting instinct. There's all these psychological things that play on us and on our emotions. And we're all emotional about money.

CHRIS SIPES CFP®: And these patterns just continue to... To repeat. I'm guessing they're going to repeat in the future as long as there's humans involved in the financial Markets.

DANO WEIR: Yeah. This quote applies to when he said it, would you, what year did you say?

CHRIS SIPES CFP®: I'm not sure exactly when he said this, but he passed in 1877.

DANO WEIR: So 77. So, so, I mean, this could be very applicable to the railroad. It could be applicable to radio and television, plastic, oil, the internet, and now AI. This, this exact quote applies to all of those.

CHRIS SIPES CFP®: Yeah. Now, we're just talking about interest rates. This is from, gosh, Jim Bianco, sorry, space there for a second. Jim Bianco, and let me just read what he says, because I think he puts it very, very well. Jim says, dear Kevin Warsh, later today, you'll be sworn in as the next. Chairman of the Federal Reserve.

CHRIS SIPES CFP®: Congratulations. You got the job by convincing the president you share his vision of the Fed needing to cut rates. The problem is that today, on your first day as chairman, the market is pricing in a 64% probability that rates will hike before the end of the year. And Jim wraps it up saying, good luck.

CHRIS SIPES CFP®: You know, it's one of those positions, I can't understand why anybody would want to take that. Job. It's a thankless job, obviously.

CHRIS SIPES CFP®: And no one's ever going to be happy no matter what you do. But this particular set of circumstances seems to be extra difficult for Mr. Warsh. So we all obviously wish him the best, given that he's got a huge impact on the success of our country, and we need him to be successful. But no doubt he's coming in. In a real pinch.

DANO WEIR: I asked Google, how much does the Fed president make? $190,000 to $250,000. That is nowhere near enough salary to get me to do that job.

CHRIS SIPES CFP®: Yeah. No, it's one of those things you do for power and influence. It's not about the, at least not the stated salary.

DANO WEIR: For speaking gigs after the fact.

CHRIS SIPES CFP®: Yes. Yes. Okay, so sentiment. Let's take a look at sentiment this week from AAII. Kind of in line with normal ranges. I wouldn't say there's anything particularly... Outside the norms here with the AAII indicators. The CNN Fear and Greed Index is unchanged at 66 greed this week.

CHRIS SIPES CFP®: And we've had a little drop in Bitcoin down to 34 fear, which was up at 47 neutral last week, which is kind of strange because Bitcoin's really been kind of hovering in that 80,000 range. I think we're at 79 today, but it's not like... Bitcoin has sold off, but it has not been able to break above its 200-day moving average. It's been knocking on the ceiling there over and over.

CHRIS SIPES CFP®: But nonetheless, there's a little more fear in the Bitcoin market this week than there was last week, which is something to note because all these sell-offs, most of these sell-offs, you can never say all, you can never say never, but most of the sell-offs that we've seen you over the last few years have been preceded by Bitcoin.

CHRIS SIPES CFP®: Most of the rallies that we've seen over the last few years have been preceded by Bitcoin. Bitcoin seems to be the first mover for whatever reason, the most sensitive kind of telltale in the risk market as to what is coming. So interesting there that we've kind of stalled out here in Bitcoin. It's not really given us a sense of direction either way.

DANO WEIR: And I've shared this before, but I'm newer to the market. To, you know, studying it this closely. And so I'm sort of learning, at you and Darren's knee as it were. And, just following Bitcoin point closely for the first time in my life, man, it is a drama queen.

DANO WEIR: I mean, it is like, it's just, it's like, it's, it's the kid in class who's just always got, you know, something good or something terrible. It's very interesting. It's just very interesting to follow it. And you're right. It definitely, if you want to take a, you know, put your finger up. Up the air and figure out which way the wind's blowing. It seems like it's Bitcoin.

CHRIS SIPES CFP®: Yes, that's for sure. That's for sure. All right. So we're talking a lot about inflation this week and we've been talking about it over the last few weeks, pretty regularly. And, this chart was from, Walter Bloomberg, sorry. And he says the financial squeezes back. Inflation is wiping out all wage gains for the first time in three years.

CHRIS SIPES CFP®: So wage growth in April was 3.6% for the past year, while inflation was at 3.8%. So meaning that basically all the gains that people saw in their wages was wiped out by the increase in prices over the last year. And that's the first time that's happened in a while. We keep an eye on inflation because that goes into the price of money.

CHRIS SIPES CFP®: It can have an impact On The Markets and it definitely has an impact on the societal feel, right? Because people, we talked about this a lot in late 21, early 22, and all throughout 22, that people really hate inflation. They really hate high inflation. It causes a lot of societal issues. So. Nobody wants to see that getting out of control.

CHRIS SIPES CFP®: And people feel, I guess, less upset about it if their wages are also going up at the same time. I mean, think about going into that inflation in 22, Dan, when they were throwing money at people with the PPP loans and the stimulus checks. And I mean, it just seemed like the government was dumping money everywhere. And so I think people felt a little less.

CHRIS SIPES CFP®: Chapped about it at that time because it was kind of spread out everywhere. And now, if inflation is coming back this time, it seems like it's going to have a little bit more of an impact because that is no longer the case, especially in the lower income cohorts. And if they start to fall behind because of the inflation, that can create some societal social issues.

DANO WEIR: It's not good. And you've been saying it for a while, which is that they, you know, pumped a big lump into the anaconda and it's just slowly been making its way through. And I still don't feel like all that COVID cash is out, you know, and how much of it was fraudulent. You know, there was a ton of fraudulent PPP.

DANO WEIR: And it's just, it's just floating around out there in the system and, you know, it prices start going up.

CHRIS SIPES CFP®: Yes, exactly. So, let's see, Monday or Tuesday, I can't remember which day at this point, but we got the new CPI. And you can see this, this is on a 10-year scale on this chart. And the consumer price index rose to 3.8%. And you can see that's a marked change from the last year and a major jump from where we were previously. I believe the expected number was 3.6.

CHRIS SIPES CFP®: I could be wrong on that, but I think it was 3.6. So it exceeded expectations. You can see that gray bar is the recession, the COVID recession, where briefly prices dropped off a cliff because demand collapsed. And so prices dropped dramatically. And then they, of course, went up very quickly going into 22 when demand came back on after everybody had money, but there was no production.

CHRIS SIPES CFP®: And so this is, again, a production-based you know, jump in prices. Basically we can't get the supplies through the Strait Of Hormuz and, and that's causing, that's causing a, an increase in prices. And especially when it's energy related, which although it has a lower impact on the economy now than it used to, still has a major impact given that basically everything has to go on a ship or a truck.

CHRIS SIPES CFP®: You know, energy is, is involved in everything. Oil is involved in everything in some way. So the price of oil going up as fast as it has can have a big impact in all these areas. And you're starting to see it in the official numbers. CPI was the first one this week.

CHRIS SIPES CFP®: Now, if we look at the producer price index on the next slide, this is one that the Fed pays close attention to because this is considered kind of a step before the consumer price index. So think about it in the chain, right? The producers have to make it first and then the consumers are going to buy it.

CHRIS SIPES CFP®: And so if you're seeing an increase in the producers' prices, then that usually flows through to CPI. And this one has really taken off even more. Now those producers are trying, I'm guessing, they're trying not to pass on.

CHRIS SIPES CFP®: Those price increases as much as possible at this point because they don't want to lose market share and they don't want people to stop buying so they're probably taking a little bit more of the hit through their margins although that is not showing in S&P earnings yet we don't have a chart of that this week but the S&P earnings have been doing great the S&P 500 has really had no problems slowing down.

CHRIS SIPES CFP®: So you're not seeing it in the margins of the S&P at all so far. Now, but these producer prices have gone up pretty dramatically. Strangely enough, when these two numbers came out, CPI came out, I think it was Monday, could have been Tuesday. But anyway, PPI came out the next day and the market was up. Market was up a lot.

CHRIS SIPES CFP®: So the market just seemingly shrugged it off, which has just been a real characteristic of this market over the last few years where it just doesn't seem to care.

CHRIS SIPES CFP®: Prices up on everything. The whole narrative about interest rates going down as a fueling for Markets, that narrative's gone at this point. But the market hasn't seemed to process that as a worry. At least until today. Of course, we're seeing a sell-off today, kind of absent of much data, but nothing major, really.

CHRIS SIPES CFP®: The stock market has continued to show real signs of strength, despite the fact that we've got inflation going up, we've got interest rates going up, we've got commodity prices going up, kind of all the string of bad news that you would expect.

CHRIS SIPES CFP®: But the market seems to be saying, hey, there's going to be so much spending via AI, so much CapEx by the handful of companies that are making all the money, that this is going to make up for all the sins of the rest of the market at this point. That's what it seems to be saying. Who knows? But just, you know, in general, when you see this much kind of news coming out about.

DANO WEIR: Inflation and etc it's just very surprising to see the the market really just shrug it off it's it's it's such a rubber band because it was i feel like it's we're back to last summer you know last summer it was all you know we're on the AI hype train something happened in the fall and people got skittish and then the fall it was like done gpt's done and we're mad about x y and z and.

CHRIS SIPES CFP®: Now it's cranking back up again and so you can you know the seven stocks are not all seven but i mean you know the big the big players are the ones who are propping everything up yeah yeah we've really seen this rally specifically that when i'm talking about over the last like couple weeks or a month which is one of the fastest rallies that the market has seen in recent history, most of that is back to the Mag7.

CHRIS SIPES CFP®: We've seen a big spike in NVIDIA, Micron, which is one of the big Mag7S, but it's really been technology-focused again. And we've just seen a huge run-up in just a few of the stocks, making these all-time highs again.

CHRIS SIPES CFP®: So we'll see if that continues, if we're kind of back to that old regime that we kind of left for a little while, or if this is just a blip on the radar. But when we check in on the two-year treasury rate, which is in dark blue here, we're over 4% now on the two-year, even though this chart when it was made was 3.98, but we're over 4% now.

CHRIS SIPES CFP®: And you can see the Fed funds rate at 3.75 in the lighter gray or the darker gray. Lighter color here. Now notice that historically the Fed funds is following that two-year rate. And a lot of people, a lot of experts would say that the two-year treasury rate is kind of the market's pricing of what the short-term interest rate should be, the one that's set by the Fed, the Fed funds rate.

CHRIS SIPES CFP®: So meaning that the market is saying the Fed needs to be tighter at this point, that they're too loose. Which is a change of pace from where we were prior to the war starting. You can see that we went through really since, what was that, maybe late 22, kind of going into 23, the market was saying the Fed was too tight.

CHRIS SIPES CFP®: Excuse me, but they stayed tight, remember, because inflation stayed so persistently, stubbornly high. And so it was difficult to... For the Fed to lower interest rates given where inflation had been. And so now we went through all that time where the Fed was too tight. And now it's looking like they're too loose with inflation heading up and heading up very rapidly according to these most recent readings of the data.

CHRIS SIPES CFP®: Now you got that with the backdrop of a very expensive US stock market. Now, this is the Shiller price-to-earnings ratio. This is from Professor Shiller, and he's the Yale professor that came up with this metric of smoothing out the price-to-earnings ratio over a 10-year period so that it kind of helps eliminate some of the noise of a standard price-to-earnings ratio.

CHRIS SIPES CFP®: Now you can see here that the highest... According to this chart that we've ever been was in the dot-com bubble at 44.19. And we're knocking on the door of 43 today. And now some people will say, yeah, but this time is different.

CHRIS SIPES CFP®: These companies are amazing. Artificial intelligence is like nothing we've ever seen before, et cetera, et cetera. Now, reading history though, will tell you that That's exactly what everybody thought about railroads, about TV, about electricity. You know, the other things that people have gotten excited about, about the internet.

CHRIS SIPES CFP®: That was one that we all lived through, you know. Remember when Netscape came out and the browser and all the dreams we all had while we were sitting there waiting on our dial-up to beep through and download the picture of the website that we were at.

DANO WEIR: Only Chris brings up Netscape on his chart that has the Civil War on it. Like, Chris, if you wanted to know, Chris knows this history over a very long period of time. Yes, I do recall Netscape.

CHRIS SIPES CFP®: Yeah. So, look, it's like, hey, it's going to be difficult for them to kind of justify stimulating even further when you've got stock prices so high.

CHRIS SIPES CFP®: And threading the needle there because people across America have the highest allocation to the stock market now that they've ever had, or maybe not ever, but it's at a high level. And so meaning that basically people that are invested, most people have a very high allocation to stocks and feel a sense of... That security, like you're talking about, Dan, that, you know, being with the herd, you don't want to miss out, right?

CHRIS SIPES CFP®: I mean, the market's been going up a lot and you don't want to miss out. These are the best companies that have ever been created by man and jump in, right? The powers that be have to balance that with like, look, if we get a, you know, bursting of this bubble, that could create a pretty major spiral given that, you know, the S and P 500 is like America's pension plan at this pro at this point, you know?

CHRIS SIPES CFP®: So, so they have to be really careful, I think, and delicately try to, to, to handle this. Not sure what the right way is going back to, I don't. I wouldn't want to be Kevin Warsh at this point, but here we are. So extremely high valuations, people are chasing the fear of missing out. And this from Bank Of America, and it says AI Bubble Watch.

CHRIS SIPES CFP®: This is from Bank Of America's Ian Hartnett. AI Bubble Watch railroads were 63% of the US stock market in 1881. Again, going back to the fact that these things are recognized even in their time, that they're going to be revolutionary and that they're going to be life-changing and people bid them up. And sometimes they bid them up to a price that they can never fulfill no matter how well they do.

CHRIS SIPES CFP®: But if you're asking yourself, well, how long can this last? The answer is it could last a lot longer because the AI... Concentrations at about 40% now. So if we were to go to railroad levels of concentration in the stock market, we've got a long way to go and it's possible. So that's the hardest thing about investing in environments like this is that you question yourself.

CHRIS SIPES CFP®: Stan Druckenmiller talks about it all the time. He's one of the best traders of all time that during the... Dot-com bubble in 2000. It nearly broke him because he got out. He said, this is crazy. I can't believe that the market's bid up this high. I'm going to get out. He got out and the market went up another, I don't know, 30% in three months or something crazy.

CHRIS SIPES CFP®: It just burned him so bad. He got back in. Of course, he got back in and then the market just dropped out from under him.

CHRIS SIPES CFP®: And he literally impacted him so. Badly that he had to take time away from his job. It just destroyed him emotionally for a period of time. So really interesting to listen to somebody talk about that situation because you really can just start questioning yourself like, gosh, maybe this time is different.

CHRIS SIPES CFP®: Maybe I am missing out. Maybe none of these metrics matter anymore. It really does play games with your mind when you're in the middle of it for sure.

CHRIS SIPES CFP®: Now, one thing that you could consider is that if you are concerned about that type of risk, that maybe there's other areas of the market that would be possibly the probabilities might be more in your favor of looking forward, say, over the next 10 years of better prospects of returns, right?

CHRIS SIPES CFP®: So if you look at this also from Bank Of America, They're showing the small cap versus large cap. So small companies versus big companies, that cap just stands for capitalization, meaning what is the market value it at. Small caps over large caps. So if that line is going up, that means small caps are outperforming. If that line is going down, that means large caps are outperforming.

CHRIS SIPES CFP®: And we're at a cycle where large caps have been outperforming for quite a while. You can see the 2000. Time frame where the last time we were at these valuations. And after 2000, while the NASDAQ collapsed, the small cap, especially small cap value stocks actually did really well coming out of that.

CHRIS SIPES CFP®: And they were kind of, because nobody owned them, they kind of were like, you know, it wasn't impacted as badly as the stocks that everybody did own. So that little red line that we see where It says May 26th, negative 4%, meaning that small caps have been outperforming large caps for the beginning of this year.

CHRIS SIPES CFP®: You can tell on this long-term chart, that's nothing. It's literally a blip on the radar compared to the long-term trend. So if this is the beginning of a trend change or a regime change in leadership, it's likely that it's got a long way to go given that we've just barely even. You can't even tell that the charts turned at this point yet.

CHRIS SIPES CFP®: So a bit of good news to end on this week, homeowner equity. So unlike the last collapse that we went through in the great financial crisis, which was centered around real estate and therefore centered around a lot of people's homes, and I think kind of impacted people in a really awful way. So not only did they lose a lot of the value in their stock portfolios, but also the value in their homes.

CHRIS SIPES CFP®: Well, now homeowners equity is... Percentage of the real estate value is the highest it's been since 1960. And so people have a pretty good, overall have a pretty good situation on the home front in terms of overall equity and security there on that home front. So Dan, I think you had a chart you wanted to talk through.

DANO WEIR: Yeah, I had one I wanted to throw in here. And Darren, welcome to the show. It's good to have you on. I wanted to make sure you both were here so we could talk about the latest pandemic that seems to be taking over.

DANO WEIR: I'm sure you guys have heard of blue dot fever, which is...

CHRIS SIPES CFP®: I have not. Enlighten me. Dan, tell us more, please.

DANO WEIR: Yeah. It's a joke that a couple of publications have been making, which is...

DANO WEIR: I try to keep an eye on the vibes for us, you know, because I see I spend too much time in my feed and I see things that I go, wow, that's kind of an economic indicator. You know, it's kind of interesting. These are things that don't usually happen.

DANO WEIR: And so what the joke is, is they say, you know, if you look at when you go to buy your seat for a concert, you know, you go to the seat map and the seats that are available are a little blue dots and the ones that are purchased are gray dots.

DANO WEIR: Well, there's been a lot of unsold seats. And over the past two weeks. A number of really marquee tours that should be selling tickets, canceled, either canceled a number of dates or have canceled their shows outright, including, if you know, these artists, I know you guys celebrate their entire catalog, Megan trainer, the pussycat dolls canceled a big reunion tour.

DANO WEIR: One of the guys from one direction, Zane, post Malone and Jelly Roll, all canceled tours among many other artists who canceled dates.

DANO WEIR: I just thought it was kind of interesting to put out there. I don't know if it's a canary or not, but at a time where we're seeing economic stress, especially for the lower portion of the K, that $100, $500 concert ticket seems to be not selling.

DAREN BLONSKI CFP®: Yeah. Guys, the only one I'm actually surprised by that canceled was Post Malone Jelly Roll. The others, like, duh.

DANO WEIR: No, you were going to that pussycat dolls reunion. I know you were going there.

DAREN BLONSKI CFP®: Don't mind. Yeah. I mean, that's my thing, right?

CHRIS SIPES CFP®: You know, my wife and I took two of our kids and one of their friends to a concert last, I think it was last summer.

CHRIS SIPES CFP®: As the first time in like years, we've been to a concert and I could not believe how expensive it was. And it wasn't like, it wasn't like, what's her name? That the, the tickets are such Taylor, Taylor Swift. It was not that it was, Dave Matthews band. So, it wasn't even a concert. My kids will frankly wanted to go to, so it might've been money that was not well spent, but, but wow.

CHRIS SIPES CFP®: I told my wife, I was like, I cannot believe, how expensive it is to take kids to an event like this. And that's before, any food. You know Dan i told you when we were in in Nashville we went to the grand old opry to see that right and there wasn't even there wasn't even like a headlining artist and i was like okay this is this is a serious investment to have the kids you.

DANO WEIR: Know family for it's with when it's all said and done it ends up being 800 bucks so it could be a once in a lifetime thing you know it's crazy wow could be a sign of an oversaturated market too but just thought that was interesting that was Kind of some interesting economic headlines.

DANO WEIR: Darren, do you have some candles you'd like to pull up for the week? We've been talking about the pickles. I have a few.

DAREN BLONSKI CFP®: You want to see some candles? But I think we're going to start with Polymarket first.

DANO WEIR: We've been talking about kind of the pickle that New Fed President Kevin Warsh is in when it comes to rates and how that may or may not affect the market. So let's take a look at this week and see what's happening.

DAREN BLONSKI CFP®: Yeah, we're definitely going to talk about interest rates on the candlesticks. It just took a weed whacker to the market today. And why?

DAREN BLONSKI CFP®: So, but I thought I'd start off with just a piece of good news, right? Because... You hear all this hubbub in the news about the potential Hantavirus pandemic, and you know it's bad when the kids are coming home from school saying, Dad, what's Hantavirus? So people are talking about it.

DAREN BLONSKI CFP®: It made it, because I don't talk to my kids about stuff like that because I just think it's fear-mongering and stupid, but it's definitely going around. But just for those who might be worried about it, there is a 7% chance down from a 28% chance.

DAREN BLONSKI CFP®: The pandemic in 2026 from Hantavirus kicks off. And I look at Polymarket as, I guess, an insider trading board because it seems to be the place where people have information that other people don't go and bet on it because they have information that others don't. They say, I'm going to make some money on it.

DAREN BLONSKI CFP®: So it's actually been fairly accurate, right, over the last few years. Chris, when we've used this for elections, when we've used this for other things. So good news. I don't think we're going to have a haunted virus outbreak, which why would I care?

DAREN BLONSKI CFP®: And on a market show, why would I even be talking about that? Well, because it does impact the market. Unfortunately so. I think we're good there. Mark's safe from the pandemic, at least so far. And that's a little bit of good news on this Friday. I would say also some good news.

DAREN BLONSKI CFP®: I was watching all the headlines with Trump over in China, which I think the funniest part of that whole trip was if you, you look for the videos of, I don't know if you guys saw this of Elon Musk and Elon Musk is like, you know, they're in this big conference center and there's all these, you know, some of the most powerful leaders in the world, including the CEO of Apple.

DAREN BLONSKI CFP®: They're all like lining up to take pictures with Elon and he's just sitting there making funny faces and weird faces in their pictures. It's kind of hilarious.

DAREN BLONSKI CFP®: You know, for what you either like that guy or don't like that guy, he is an interesting cat. He is a source of entertainment.

DANO WEIR: Yeah, the Trump envoy to China has been interesting to watch this week. And I just kind of watched the body language in it. It's a different, considering all of the tariff stuff over the last year and all of the worries about, you know, their association with Russia and what do they think about the war in Iran?

DANO WEIR: It's been a different vibe this particular trip, and it feels cautiously optimistic, which I think is good for everybody because that means that we can maybe press pause on World War III.

DAREN BLONSKI CFP®: You know, it's interesting about that. I was reading this other kind of headline under the headline. The Chinese gave a lot of gifts to the United States delegation when they came. And before they could board any of the planes, they all had to throw it in a big dumpster, basically, because they didn't trust what was actually in the gifts.

DAREN BLONSKI CFP®: And they weren't going to get like some, you know, bug in it. I thought that was kind of interesting. But yes, you're right, Dan. There was a, it seemed more conciliatory. Thank you. You know, they certainly rolled out the red carpet for Trump.

DAREN BLONSKI CFP®: And anyone who watches the news knows that Trump loves to be the center of attention. And we certainly saw that. And I think they played their card pretty well when it came to positioning Trump. It seems that if you position him as all that wonderful and he's great. And whatever, he seems to love the ingratiation.

DANO WEIR: That's not a stretch. Yes, I would agree with that.

DAREN BLONSKI CFP®: No, not a stretch at all. All right, so let's take a look at the S&P 500 first before we get to the candlesticks. I know everyone's on the edge of their seats waiting to see the candlesticks for the week. Let's talk about the heat map. So this is the cap-weighted S&P 500. What it's looking at is the relative size of each of these companies in juxtaposition to the...

DAREN BLONSKI CFP®: Other companies in the S&P 500, which is the largest 500 US-based stocks. You can see NVIDIA, Amazon, Google, Apple, Facebook, Microsoft. These are the big ones. Microsoft perhaps turning around. They've been in the dumpster, speaking of dumpsters as of recent. NVIDIA getting a haircut whack today.

DAREN BLONSKI CFP®: I saw a headline. I don't know if you guys remember me mentioning this. It was months ago. And I was contemplating working in the garden one day on a weekend, thinking about all this AI stuff. And I said, you know, I really think what's going to come to a head is the need for power. And I think we'll be able to...

DAREN BLONSKI CFP®: Build enough hardware, but power is going to be the constraining factor to compute. And so for those who don't understand compute, compute is the ability to do the things we do on the computer, the ability to broadcast, the ability to tell the large language models and AI to do things for us.

DAREN BLONSKI CFP®: And the linchpin to compute is energy. And the CEO of NVIDIA made a comment, I believe while he was in China. And he said that, you know, we need something like 100 times the energy we have for all the compute that's going to be needed.

DAREN BLONSKI CFP®: And so I'm watching this whole energy draw pretty intensely. And I don't know if you all saw, there was a couple other headlines this week. There was, I forget what state it was in, but it was where an entire city council was recalled by their city. For allowing a big AI data center to come in.

DAREN BLONSKI CFP®: And I think you're going to see a lot more NIMBY, not my backyard. Why is that an issue? Because if the data centers are willing to pay any price for our energy, it prices all the day-to-day consumers like ourselves out of the market, and all our energy bills go through the roof.

DANO WEIR: That's what I was just about to say. That's what I just want to say, Darren, is that there's a world where, you know, if you're a small business owner, you're like, oh, I can just replace all my employees with AI. It's going to be so much cheaper. Well, great. Except your power bill quintupled. You know, you're just moving your human costs to a power plant cost potentially.

DAREN BLONSKI CFP®: Well, and here's the emphasis of that, Dan, because I've been thinking a lot about that. And I was listening to another podcast I like to listen to moonshots. And he was One of the main guys on there, he's a big investor out of MIT and whatnot, and he's been in the middle of the mix from the beginning of AI.

DAREN BLONSKI CFP®: And he said, and I thought it was pretty profound, he said, if you're a business and you haven't already locked down your compute, thus your energy resources, everyone's saying, oh yeah, AI everything, but it's actually not going to be everyone that will have access to AI because of the cost of compute, the cost of energy.

DAREN BLONSKI CFP®: And he said this very specifically, small and medium sized businesses are in trouble. And the reason is because they won't be able to afford the compute to compete in the AI era. And thus what will happen is that private equity will go by even more at discounts because they'll have access to the compute, which will then force.

DAREN BLONSKI CFP®: Further consolidation, much like we saw in farming, where it's all corporate farms now, right? Mom and pop farmers of America, they go to farmer's market and there's a handful of them, but it's a hard living. Or grocery chains, or you go to any downtown America, there's not small drugstores left anymore, right? They're all big retailers.

DAREN BLONSKI CFP®: In general, the future of small, medium-sized businesses doesn't look good, especially if they don't have access to compute. Which I thought was a very profound statement of what's coming economically, but then also continues to reinforce this idea that this part of the S&P is becoming an even bigger part of the S&P. You look at NVIDIA and Broadcom and Micron and AMD.

DAREN BLONSKI CFP®: All of these stocks are so big compared to the entire utility sector over here. Basic materials. Look how teeny of a sector this is in comparison from the capitalization. And the reason is because all of this appears to eventually kill all of that. Look at financial, how small financial. We're talking the entire financial sector, guys, versus the semiconductors. Or energy. I mean, look at energy.

DAREN BLONSKI CFP®: This used to be all there ever was. Oil was the staple. XOM was the biggest in the S&P 500 and not anymore.

DAREN BLONSKI CFP®: And the thesis being that if you don't have access to compute, you're not engaged with compute, you're going to be limited and eventually will suffer. So fascinating. We'll see if it happens. But I am starting to see interesting cracks in the dam of these leaders saying like, we don't have enough compute. We don't have enough compute.

DAREN BLONSKI CFP®: I have a friend who's in the hardware business where he sells hardware as these big data centers. And then prices they're paying and the way they're gobbling up his hardware, it's just wild. It is like a gold rush to get the hardware. So getting to the charts and the candlesticks, because I know, Dan, you are on the edge of your seat for the candlesticks.

DAREN BLONSKI CFP®: The biggest and most important candlestick for the week is the interest rates. You heard Chris talk all about why this is so important, but this 10-year rate, this is telling us that inflation is live and well in the system. This downward trend line that we had seems to have now been invalidated significantly.

DAREN BLONSKI CFP®: I wasn't sure if it was going to come back in and test it here on this double top. Like last week, I think we talked about a double top and that was going to come back. Down, that is completely invalidated now. I think we need to start looking that we're on a pretty, pretty strong uptrend and start looking at the chart from an uptrend standpoint.

DAREN BLONSKI CFP®: So now with this, this uptrend in place, even if we came back into, you know, 440 on the 10 year rate, we would still be on an uptrend. So watch 440 is kind of the new. Holding line, you could also say there's support going to be right there. That's 444, so in change. That's your region for support.

DAREN BLONSKI CFP®: 440s, you go below that, we see lower. Other than that, it's going to get messy, folks. Inflation is live and well back in the system. Warsh, as you were saying, Chris, is in a tough, tough spot. Because with that mandate that, oh yeah, you need to lower rates, we got to get rid of Chair Powell. And it turns out Chair Powell was right.

DAREN BLONSKI CFP®: This whole thing going on over in Iran is not helping things. I think one of the conciliatory messages is probably BS, I don't know, but China did say to US group when they were over there that anything you need with Iran were in support of that. Mind you, China has literally had their intelligence boat parked off the coast telling the Iranians where all the US.

DANO WEIR: Military equipment is to bomb it so okay sure very supportive but a at least in principle right i don't know better why why does that matter outright it's better than an outright aggressive stance i guess right we can be passive aggressive but China imports in a.

DAREN BLONSKI CFP®: Significant amount of their oil from Iran and so they need that now China's built up significant resources so that they can last a little while. But I think last I heard they had about a month left. And then I think if the blockade, quote unquote, on Iran doesn't really heat up before then, I think magically you see the blockade go away here in the next few weeks because China will be out of oil and need Iranian oil again.

DAREN BLONSKI CFP®: That's why U.S. Can't just go bomb all the oil facilities of the Iranians because you There's other countries that actually need it and would actually be very unhappy should we take it.

DAREN BLONSKI CFP®: However, in a big game of chess, we took China's control of the Venezuelan market, harder oil to get out of the ground because it's, quote unquote, a sweeter crude. And the oil in Iran is much lighter, I guess, so it's much easier to process. But if you see what's happening from a geopolitical standpoint, we're trying to pinch in China to dissuade them from. Invading Taiwan.

DAREN BLONSKI CFP®: But the headlines aren't going to say that.

DAREN BLONSKI CFP®: All right. So most important chart of the day, interest rates go up. Well, yes, Ag, I'm sorry, Chris. We have like an anti-clap for your bonds today. Bonds are looking on shaky territory now because when rates go up, bonds go all turvy. And this is a...

DANO WEIR: That's the bond alarm.

DAREN BLONSKI CFP®: Whoa, man, that freaked me out, man. I was like, what's going on?

DAREN BLONSKI CFP®: Yeah, bonds aren't looking good right now. And we've fallen below support at 98 in the ugly close on bonds. So we'll see what happens in 10-year, but we need that 10-year turnaround. Rates go down, gold's going down. Gold's coming up against this 200-day moving average. That's going to push silver down. We're back down to $75 an ounce on silver.

DAREN BLONSKI CFP®: So I'd say the good news is it's almost like the risk off crew is getting punished right now. Right. If you really look at it, inflation is going up, but that's also driving other things. But the risk off crew is getting really punished. But you also have the S&P 500 down. But mind you, we just made a massive all time high yesterday, just right under 750.

DAREN BLONSKI CFP®: You can't tell me that it sells off the next day and it's over. The party's done. There's more to go here. But like I always say, the faster in one direction it moves, the faster in the other direction it's going to go back. Case in point, we go back to when we had the tariff panic right here, fast down, fast up, fast up, fast down.

DAREN BLONSKI CFP®: And it just doesn't work. We want smoother Markets or better. But I will say there's a really long-term pattern kind of forming here that's, I think, pretty interesting. So for all you bears out there, I would hold your mouth a little bit because this is looking interesting. So you This is a double bottom in theory.

DAREN BLONSKI CFP®: And this is the neckline right along here. And we broke out of that this last week.

DAREN BLONSKI CFP®: So this could be the beginning of a really hard run in stocks, especially if we're starting to see inflation roll up, right? Because one of the only ways you can protect your portfolio with inflation is through stocks.

DAREN BLONSKI CFP®: So I could see a theory where... Inflation goes up and that drives stocks even higher. And then we see these big dogs that are such a huge concentration of the market really driving this market higher. But you can see these went down today and the whole rest of the market was kind of mixed, but yet the stock market still went down because they're just such a big portion of the overall S&P from a personal standpoint.

DAREN BLONSKI CFP®: So interesting kind of shifting, but I... I think risk is still the upside. I don't see how you argue it's to the downside. I would turn off the news. And the reason I really started with this Polymarket thing and showing you this haunt the virus piece, because if the news had its way, it'd scare the wet out of all of us, and we'd all go duck and hide.

DAREN BLONSKI CFP®: But if you look at the betting Markets, there's not many people betting that we're going to have an actual pandemic at this point. And I'll go with the insider betting Markets, which is Polymarket.

DANO WEIR: So you're telling me that the S&P is ripping right around the time of midterm elections. I can't believe that that would be.

DAREN BLONSKI CFP®: It is shocking, right?

CHRIS SIPES CFP®: Isn't that shocking?

DAREN BLONSKI CFP®: Totally shocking.

CHRIS SIPES CFP®: Right on time.

DAREN BLONSKI CFP®: Well, and I think, I don't know if, Dan, you've been following these headlines too, but there's a lot of redistricting going on.

DANO WEIR: Yes.

DAREN BLONSKI CFP®: Which, okay, this isn't a political show and it could be triggering to people. That's the point. Point is, if you have a lot of redistricting happening that's...

DAREN BLONSKI CFP®: Happening is putting the house and the Senate in favor of the Republicans the market i think i don't think it's about the Republicans or Democrats but i think it's seen it more as it's certainty right there's more certainty in place it's much less likely after all the redistricting that the Democrats at least at this point take the house and the Senate and we're seeing more of that and great we can go and argue about all the the socio-economic issues and tied into that.

DAREN BLONSKI CFP®: But at the end of the day, if we're looking at the predictive Markets on the midterm elections, we're now sitting in a 54% chance, the Republicans take the Senate. But we have a 79% chance. The Democrats take the house.

DAREN BLONSKI CFP®: It wasn't, it wasn't this clear just a few weeks ago.

DAREN BLONSKI CFP®: And so I think there's more. Sense of more certainty in the market. We'll watch this as the market, as we get closer to midterms. Again, I'm not trying to trigger anyone here, but it is a reality of how it impacts the overall economy and what happens in the Markets. Because you can't really talk about the Markets if you can't really talk about what's happening on the politics side.

DAREN BLONSKI CFP®: You could argue, though, we hit this long-term trend. So that would be the argument. We hit that trend line. And now we're going to go down to retest it and go up. But the fact that we moved into that long-term trend line so hard, usually when it goes that hard into a trend line, we see reversion in the opposite direction.

DAREN BLONSKI CFP®: I could see for a test, though, I could see a test somewhere around, you know, somewhere in this area in the next week or so. Wouldn't be shocking. So anyway, overall, I think pretty positive in the Markets. I think the China... U.S. Meeting in China was conciliatory.

DAREN BLONSKI CFP®: Quote, the Chinese said we should be working together as two giant powers. There was some rumors that they were going to invest like $10 trillion or something crazy like that in all of our manufacturing, et cetera. I'm not sure we want them putting that kind of money over here and pulling the rug out from under us, but that's another political story.

DANO WEIR: Just forgive the debt. Just forgive. You've already got our debt. You don't have to give us any money. Just forgive the money we've already taken from you.

DAREN BLONSKI CFP®: Yeah. Right.

DAREN BLONSKI CFP®: Anyway, I think we're in a high risk spot. And I think today's just a healthy pullback.

DAREN BLONSKI CFP®: Risk on.

DANO WEIR: Darren, thank you so much. As always, we asked a question on the episode and we can never truly answer it because you can't truly know until months down the line. But at least for now, hopefully I provided some insight onto the pickle that the Fed is in with the New Fed president and how the market has reacted to that both today and over the past couple of months.

DANO WEIR: Thank you so much to our clients for finding this show, for listening. If you've made it this far, you get a high five from me for sure. And if you haven't already, subscribe wherever you are, whether that's on YouTube, Apple Podcasts or Spotify.

DANO WEIR: If you're new to our show, you're new to our firm. You can learn more about Fermata Advisors, our private wealth arm, Sonoma Wealth at SonomaWealth.Com. You can book your wealth analysis to find out how we help clients with holistic financial plans. And we will be back next week On The Markets. Thanks for checking out the show.

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