Record Highs On Bad News?

[0:00] Dano: Back to school, back to On The Markets, full gang. The whole gang is here today and we're ready to talk about record highs on bad news. My name is Dano Weir, joined shortly by our managing principals from Sonoma Wealth Advisors, Fermata Advisors, talking about how is it possible that this honey badger Market keeps on ticking up and up and up when we've got consumer spending coming in soft, consumer confidence even lower than that, rate hikes possibly on the horizon. We're going to discuss it all as we look at how the Market keeps on going up and to the right. Also, why data centers are being exempted from selling shares in a way that other businesses are not.

[0:41] Dano: And corporate bank lending hits an all-time low. Why does private credit rule the kingdom now? And how did that end up eventually forcing the sale of the L. A. Lakers this week? Let's get it going.

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[1:24] Dano: Sonoma Wealth Managing Principals Daren Blonski and Chris Sipes and myself, Dano, we are the marketing director. All three of us guys are dads. And I saw a meme this week that said, every parent cannot believe that their kid is insert number grade this year. Everyone is like, I've got a fourth grader. I can't, but I've got an eighth grader. I can't. And I'm doing it this week. I sent my oldest to junior high this week. I don't know if you guys have been tripping as well, but that was me.

[1:54] Chris: Yeah, absolutely. It's, mixed, mixed feelings to say the least. Right. It, it's, it's so taxing to help with some of the stuff that kids need help with. But at the same time, and you start to think about like, I'm not going to do that with them again. It's, it starts to, you know, really pull at the heartstrings. You're like, I'm going to miss, I'm going to miss all that work. Some, one of these days.

[2:22] Daren: But you know what I. As a dad, I have learned to just absolutely cherish, and that is driving my kids to and from school. I've had so many wonderful conversations with them about life, about friends, about boyfriends, girlfriends, all that stuff. And my daughter gets her license in a week and a half, and now she's going to drive herself, then drive my middle son to high school. And it's just like this moment of like, but wait. I need these moments to talk with you and to share life and to talk. And like I'm having to reconstitute my entire like day and how it's structured just to figure out like, how do I create these moments of 15 uninterrupted moments where I get something other than good.

[3:10] Dano: Right. Yeah. Right. You can text me, dad. That's when you can share your, your wisdom with me. Just text me, dad.

[3:17] Daren: I legit set up my Instagram account a couple of weeks back because that's where my.

[3:22] Chris: Two oldest kids are just so like i had another like communication avenue with them and so we can send stupid memes back and forth i didn't have Instagram but that's where they're at you know so what Dan i know you'll know the answer to this was the song was it by Cat stevens was the Cat cats in the cradle in the cradle yeah was that Cat stevens okay yes yeah boy that that song i remember when i was a kid i was like oh that's a that's kind of a sad song and like As a dad, I'd listen to it and I'm like, oh man, this song is really sad.

[3:57] Dano: We'll get to the show in a second, but specifically because of that song, I will say as a dad, I'll be doing the dishes, something very important, right? Life changing. I have to do these dishes and my son will come up inopportune moment and say, dad, will you come play Lego star, star Wars with me on the, on Nintendo Switch? I will literally drop exactly what I'm doing and go do something like that with them. Not always, but sometime because of that song.

[4:20] Chris: Yes.

[4:21] Dano: Cat, your work is changing lives. We're the investing show. We're getting to the Market, but we'd like to start with a little bit of life too because that's the whole reason you have a portfolio is to live a little bit.

[4:33] Chris: Yeah. So this was kind of cool from Visual Capitalist showing career earnings adjusted for inflation. I guess no surprise that Michael Jordan's at the top and by a long shot, I wish I had the exact story. I should have looked it up before we put this slide in here. But I I think he attributes most of that to the fact that I think it was his mom told him that instead of taking like a dollar amount when he signed with Nike, I believe he took some sort of equity.

[5:02] Dano: He got stuck. He got stuck.

[5:04] Chris: Yes. And he kind of gives her credit for the fact that his lifetime earnings were that high. So I would not have guessed that Ronaldo was on there or Messi, but my kids were just telling me about, I guess they have some sort of car competition, the two of them, where they're both really into cars and they kind of compete over who's going to get the cooler car. Which, you know, I guess that's still fun when you're a billionaire. So that's good to know. And then LeBron from my home state of Ohio, just a guy from Akron, and he's on that list. So interesting.

[5:48] Dano: Interesting to see no football players in the top 10, and yet the NFL is, you know, the biggest sport in the world, at least. So the highest, the riskiest of the sports is... Still the lowest paid, which is interesting.

[6:04] Chris: Yeah, that is interesting. It'd be fun to look into that further why that is, but we talk about this concept a lot On The Markets. So it's nice to have it illustrated in such a simple way. And that is that the, the value of gold, is, has been at least considered money for millennia. And so instead of thinking of the value of gold going up, you really should think of it in the second picture, which is the value of the dollar going down relative to gold. And not just US dollars, but global dollars. And that gold is kind of the benchmark, if you will.

[6:50] Chris: Not only is there the famous one ounce of gold can buy a nice suit in any time period in history. Measurement, but also recently learned listening to a cattle farmer say that apparently a productive cow, usually, the, the cost of a full grown productive, productive cow is about the same as one ounce of gold. And it has been that historically. So interesting knowledge from a.

[7:23] Dano: That's fascinating from a rancher.

[7:26] Chris: Yeah. So you And it's interesting that there's not like price controls on this stuff. It's just how humans calculate the value of things over time. So speaking of that, we may be getting more of those dollars coming into the system because a lot of the economic data that we got this week shows that some of the activity is a little cooler than expected. So we've got non-farm payrolls. Were down last week. We talked about that on Friday. Cpi up just a little bit, the consumer price index, producer price index pretty much flat, and then retail sales were down. So the reminder is the dovish Fed is that there's more liquidity, they're more apt to kind of ease off the markets, looser monetary conditions.

[8:24] Chris: Whereas a hawkish Fed is tighter, tighter money. They are, you know, cruising over the markets and ready to strike. And so as of right now, the dubs have it at the Fed. And it looks like that is affecting the expectations for rate hikes in September.

[8:48] Dano: Now, Chris, last week we focused on the Japanese yen and weakness in the yen. And... Scott Besant's post-it note to himself, buy Japanese yen from Japan. Go to Japan.com. Or whatever, like the very explicit instructions he had for himself. So what are we looking at here one week later?

[9:10] Daren: Would this be fair in retrospect, that was such a plant? Like he totally wrote that there for people to read.

[9:17] Dano: Yeah, 4D chess. They're playing 4D chess. They know what they're doing.

[9:21] Chris: Yeah. Well, this from... Robin Brooks and he says, here's Japan's problem. Every time it intervenes in increasingly bigger size and now with the help from the US, it gives markets more evidence that intervention doesn't work. It's a self-defeating strategy. We'll get to where markets totally ignore intervention. And you can see that dotted line shows that the intervention in the end And. Obviously, they reduce the value of it kind of temporarily. And sort of like when you push a... Beach ball under the water and it just pops right back up as soon as you let the pressure off of it, that's the interventions in the markets. And that's why we keep talking about those that feel the Fed is always going to step in or the Treasury or both are always going to step in and save the Market from every little thing that happens.

[10:24] Chris: While that is likely true in the fact that they're probably going to intervene. I am a little more cynical around the fact that it's actually going to lead to a productive outcome. And especially the more of it you do and the more of it you do while our debt is so high, I think it has a smaller and smaller impact. Sort of like how the body adjusts to drugs as you are trying to heal from something. Let's say they give you like a painkiller to... Get past a broken ankle or something. And the more and more of it you take, the more and more of it, the body's tolerance just builds up to it. And I think the markets work very similar to that and that those, those interventions are not always going to have the same impact that they have in the past.

[11:13] Dano: And to put it in another light, if an American light, if you want to process it this way, I mean, look at 2008, Chris, we were talking about this. We have a, we have a, just for our listeners know we have a pretty spicy group shred. Where we share a lot of hot takes. And this week we were talking about 2008 and you had people in the financial industry who were being reckless on the mortgage side and the investment side. And the end result of that was nobody was arrested. There was a bunch of regulation per se, but the money printing began and has continued even to today. And so... Because the message basically is, yeah, you can blow something up and we'll backstop you. Essentially, that's the macro message. So it's happening in Japan and some could say that similar environment here.

[12:09] Chris: Yeah. Okay, so sentiment indicators this week, kind of, I guess, back to normal. One interesting fact that you guys may be interested to know is that the AA... Ii website has been updated so they've got a totally new interface so if you are into that kind of thing go check it out it's much more modern looking and then we've got the cnn fear and greed index i can just see you sitting tonight.

[12:37] Daren: On the couch kicked back and go updated the interface yes yes and your wife's like what's that grin on your face you're smiling about Chris I'm like, they have.

[12:50] Chris: Updated the interface yes yes this is true now the cnn fear and greed index that jumped up to 66 greed so we're we're definitely firmly planted in the in the greed zone now that's up from 58 greed last week the bitcoin fearing in greed index as at 29 fear up a little bit from 25 extreme fear last week. So I would say that Sentiment-wise, we're bullish to neutral across most of the readings. Markets are feeling pretty sanguine at the moment.

[13:33] Chris: A few of the economic charts that came out this week, producer price index, and these are all pretty much good news on the inflation side of things on the short term. Now, the producer price index, as it sounds, this is for those that the producers, so the manufacturers and such that are producing the goods. And the reason why Market participants pay attention to this is usually this is kind of a leading indicator for consumer prices in that once they create whatever it is that they're producing and it costs more to do that, usually that gets passed on to the consumer. So we had a downtick in that this week. And this is a 10. A 10 year chart. So you can see kind of what that's been doing overall. Still looks like we're in an uptrend really since call it 2024.

[14:26] Chris: And really you could even say we're in an uptrend since going back 10 years on this. But definitely, not, not moving up as quickly as we were last month, which is a good thing. Then we've got the consumer price index, the much, much anticipated consumer price index. That one curled off. Pretty dramatically at 3.3%. This is a year-over-year number. So a nice reading this week on that. I welcome relief. For the markets. And remember, this all plays into what is the Fed going to do in the September meeting? Because up until this point, the inflation readings were pretty bad.

[15:11] Chris: And so that was kind of painting the Fed into a box where they're going to have to start raising rates to attack inflation. So with the relief on that front, it's possibly giving the Fed a little more room on the rate side of things. And a big part of that slowdown in inflation is the housing piece. So housing makes up about a third of the overall CPI, the Consumer Price Index. And you can see here that the existing home sales have just really been on the mat since call it mid-23. When interest rates got increased so much in 2022, you can see the big drop off from 22 into 23.

[15:57] Chris: That's with interest rates going up so much during that year to fight inflation. And really since then, existing home sales have just been completely non-existent. And that is, we didn't have the chart this week, but that has led to the largest difference between sellers and buyers in the Market on that particular data series. So there are more more sellers and fewer buyers than there has been in the history of that data series. So it's definitely a buyer's Market when it comes to the housing Market. And I would say anecdotally, just speaking with clients, that seems to hold up.

[16:44] Chris: People are really having a hard time selling homes at the moment with interest rates as high as they are because buyers are having a hard time getting the money and the people that are potential sellers are saying like, why would I want to sell, go get another mortgage at, you know, six or 7% when my existing mortgage was, you know, two or 3%. It makes it really tough to give that up. All right. Now talk a little bit about what's going on in the private debt markets. You're probably starting to see some headlines about that. But before we get into that, it's like, what is driving the private lending? Why do people go to the private markets to borrow money? Why don't they just go to a bank? Well, banks don't really lend money anymore.

[17:39] Chris: I guess that's not what a bank does really. Since the 70s, we've been on a slow decline there. And to where we're at today, where this showing the U. S. Bank lending share of total non-financial corporate debt. Is below 20%. It's been there for quite a while. And this is what Torsten Slok at Apollo says. He says, banks provide less than one-fifth of non-financial corporate debt, down from half in the 70s. A wider lender base means borrowers have more places to go, which is good for growth and financial stability. I'm surprised he said it's good for financial stability, given that a lot of that borrowing is going into the private markets, which has less regulation and probably less transparency. Now, the banks really were set up for lending because they had experience in it, and they were set up to hopefully not go bust in bad times, even though that happened to a lot of banks over the years.

[18:47] Chris: But I think it's yet to be determined on the private side of things. This was an interesting note. That the SEC, the Securities And Exchange Commission, is going to exempt data center bonds from key securitization rules. Now, what's a data center Bond? Well, if they're going to go build a data center, they need to borrow money to do that. And in order to borrow that money, they would issue a Bond. And so it's borrowing money. And this was kind of shock to me, but maybe I shouldn't be shocked, but they are reducing a lot of the securitization rules because securitizing private assets has been a thing for a long period of time.

[19:36] Chris: And there's always been a significant amount of regulation around that in that you have to, you know, provide all the information to the potential borrower. And, you know, there's a lot of, there's a lot of things that have to be done to reach to. To reach the SEC's requirements for, you know, if you're going to issue debt to the public. And so I would just say, take that for what you will. Be careful because the public markets are pricing in a little more risk in these areas. These are credit default swaps. It's essentially like, what is the public Market saying the credit worthiness of some of these borrowers would be? And the larger the spread, the more risky.

[20:28] Chris: The more expensive these credit default swaps are, the more the public Market is saying, hey, you might want to make sure you get a little more return because these are getting riskier and riskier. So this is from Kurt Altrichter, probably mispronouncing that, but he says, credit markets are flashing the first real doubt about the AI trade. Investment grade spreads on the big hyperscalers have jumped since June. And high yield spreads on the data center and neocloud builders have turned up with them credit almost always cracks before stocks do the way Bond spreads widen before months before in 1873 before the panic ever hit the newspapers i thought that was interesting that he referenced the panic of 1873 but okay points for that today the s&p 500 sits at a record while the Bond Market demands more to fund the same build.

[21:26] Chris: When those two disagree, credit is the one that tends to be right, and the equity record is what gets revised. And I think the reason for that, so this is no longer Kurt talking but me, is that bonds are higher up on the credit structure. So if you picture a soup line, and there's only so much soup, the credit investors, the Bond investors, are the ones that are towards the front of the line. Equity investors are towards the end of the line. So in a liquidation event for a company, they're going to take that soup that's left and dole it out as it goes. Well, the bondholders are going to be closer to the front of the line. But they have, in a way, they have more risk because their upside is capped.

[22:16] Chris: Their best case scenario is they get their money back, whereas an equity investor, the upside is, in theory, unlimited. And so the credit investors pay a lot closer attention to how much soup is left. They don't want to be at the end of the line when that soup runs out. So keep an eye on that. I wouldn't say it's like a panic sell situation at this point, but it is interesting that you're starting to see some rumblings in the credit Market. And so what would be causing this? Well, this is from Goldman Sachs. They say, How meaningful are these non-debt financial obligations?

[22:59] Chris: And what they're talking about here are these leases that the hyperscalers are doing. So instead of taking out debt directly, they're leasing the data centers, but it's still a commitment. But the way it shows up on their balance sheet is different. It doesn't show up the same way as if they were just straight borrowing money through a Bond. They're doing it through a lease. And so Goldman Sachs says, just how meaningful are these non-debt financial obligations? Fortunately, the Goldman Sachs analysts have gone through all the fine print for us and totaled up a massive $1.5 trillion of lease commitments, of which about $1 trillion doesn't appear in the financial statements of the hyperscalers.

[23:44] Chris: So there's a significant amount of money being financed. And just through the way that the contracts read and through the way that the accounting is done, it doesn't quite show up as debt. And sort of like what we had been talking about, I can't remember if we talked about it on the show, Dan, or if we were talking about it before with the Dodgers and how the Los Angeles Dodgers have all these deferred payments to their baseball players. And is that debt? Is that a debt in the future or is that something different? To me, it's still debt. You got to pay these guys. And so it's sort of similar on the hyperscaler side of things. There's this phantom amount of money that's owed, but due to the way that it's being tracked, it's not showing up as debt. But as you can see with the credit default swaps, the public markets are sniffing it out anyway.

[24:42] Dano: And how does that apply to right now rather than down the road is you've got Palantir last week, quote, crushing earnings, or you've got SpaceX with a rebound. They met earnings or whatever it is. I haven't looked at those specifically, but if we're hiding debt, did you really? Did you really crush earnings? Because you're not, because you've, because of the way that you're reporting this debt? Well, don't worry about that part. But if we disregard the $500 billion commitment, we crushed earnings, you know? So I think that's the point that's being made is that the hyperscalers, can you really trust right now the way that earnings, quote unquote, are being reported if we're kind of hiding what the build out actually takes?

[25:29] Chris: Sure. Well, and all of these things are feeding into interest rates. So interest rates have continued to head higher. We're heading into the weekend here and the interest rates are heading higher. And this also from Goldman Sachs showing that Bond yields tend to track nominal growth. So and specifically the nominal GDP and stock valuations. Valuations, how much are people willing to pay for a dollar of earnings? They prefer low and stable inflation, meaning that if you get low and stable inflation, people generally are okay with paying higher prices for the earnings of stocks. So the stocks in general have an easier time of being priced at a rich valuation. Whereas when inflation gets high and volatile, they feel less apt to do that.

[26:35] Chris: And so if the Bond yields are continuing to head higher because we've got a lot of growth, which is definitely possible when you look at peerless artificial intelligence, this from, I'm going to really, there's no way I can pronounce the name of the professor at the Columbia Business School, but. There was a professor at the Columbia Business School that did a study on the largest CapEx-driven, in his opinion, the largest CapEx-driven boost to GDP in history. So we've talked about some saying this was close to the railroads, maybe a little bit below the railroads. Here's somebody from Columbia saying this is more than the railroads as a percentage of GDP. Regardless, it's a lot. And so there's a lot of...

[27:22] Chris: There's a lot of demand for money in the system right now, which is that growth is driving up interest rates pretty dramatically. And it's also driving up profit margins because again, if you don't have to sort of account for that quote unquote debt on your balance sheets and such, your profit margins are going to look really high. And you can see this from Charlie Bielo. He says, S&P 500 profit margins spike. To 16.9% in Q2, which is by far the highest level in history. And here they're quoting, he's quoting Jeremy Grantham from GMO. He says, profit margins are probably the most mean reverting series in finance. And if profit margins don't mean revert, then something has gone badly wrong with capitalism. If high profits don't attract competition, there's something wrong with the system.

[28:20] Chris: Similar to in nature, when you get a burst of population, say of rabbits, you would expect for there to be some sort of predator that comes in and naturally reduces that population. Or else you would just have this explosion in rabbits. And if it's not a predator, usually it's disease that comes in and takes over. So profit margins in a capitalist system have a similar... Similar concept in that generally high profit margins attract competition, which helps bring down those profit margins and deliver better products at better prices for all of us. So if that's been eliminated, there's something wrong with the system, obviously.

[29:08] Dano: I want to give a shout out to we've got this is a live stream of our show On The Markets. I want to shout out our viewers right now, our live viewers on both Chris Sipes' Twitter and Darren Blonsky's Twitter. Thank you so much for checking out the show live. Since we are live, you can ask questions. You can tweet at us. You can comment if it's on YouTube. And we will do our best to answer those live on the show. So send those in. We are monitoring those. And if you want to know something, you want to get feedback, go ahead and drop that in the comment section.

[29:43] Chris: Now, speaking of cycles, that tend to happen. This is a really cool chart from Jeff Weniger at Wisdom Tree. And here he's showing the S&P 500 equal weight energy. So if you were to take the energy companies that are in the S&P 500, so think like Exxon and Chevron and a bunch of others, but those are new equally weighted the dollars in there versus the S&P 500 Infotech cap weighted. So you can see that there's been long cycles where the tech was beating energy, then energy beats tech.

[30:27] Chris: Beats energy again. And here's where we're at today, where it starts that little uptick since 2020, where energy has been beating tech. I think that would be a surprise to most people, given the gains that we've seen in the tech sector. That's the one that gets kind of all the fanfare, but energy has been doing really well. And I'm sure, Darren, you remember the... Episode we did, I think it was in 2021 when we talked about the energy sector was its lowest portion of the S&P 500 in the history of the S&P 500. It got down to like 3% of the S&P and literally it was completely left for dead.

[31:10] Chris: And here those returns have come roaring back. And we'll see if that cycle continues or if this is broken, but typically, you know, tech technology, especially today needs energy. You know, everybody knows there's bottlenecks around the data centers and everything else that we're building out for AI, and the, and the big bottleneck being, being energy. So it's going to be interesting to see what's, what's the winner over the next 10 years or so, of the 2020s. So far one, one asset class that has not been the winner is Bond allocations. So, I feel it's incumbent upon us to discuss, not only what's doing well, but the things that are, doing horribly because sometimes that's where the opportunities lie is when, when people like the energy sector in 2021, when people were just kind of like, there's, there's nothing here or foreign stocks a few years ago.

[32:14] Chris: Well, here's where we're at with bonds. Like literally everybody hates bonds. Bond allocations are at their lowest in the survey's history. This is the Bank Of America Global Research Wealth Management Survey. And even sell-side Bond allocations has also been declining. So bonds are the hated asset class today. It's going to be interesting to see what that leads to over the next few years. I can't think of literally anybody that has bullish bonds right now. Even Lacey Hunt, who was like, I think the last holdout is out. So I don't know of anybody in the bullish bonds camp anymore.

[32:59] Dano: And just as an example, because you're talking about energy getting clobbered, we discussed it before, but August 2020, ExxonMobil was taken off the S&P 500 at around $35 a share. And all they've done since is shoot to the moon to one 59. So when you're taught, when you're talking about, you know, sometimes the dog is where the opportunity lies. That's a perfect example.

[33:28] Chris: Yeah, absolutely. So I think it was Templeton that has that famous line about investing when there's blood in the streets. And that's what he's talking about in terms of like, when there's literally nobody that wants to invest in it because it just looks so. Awful. Just so awful. That's at least something that might pique your interest. Anyway, go ahead, Dan, with your year. This maybe will give us hope for the Dodgers not winning Every World Series for the rest of time.

[34:02] Dano: I was pleased. I was pleased as well. Maybe not pleased for the investors, but from a baseball perspective, this is certainly not a good thing for the Dodgers this week. We will get to Darren's candlesticks in a moment, but we've been talking about private credit. We've been talking about rates, and I felt it all come to a confluence this week because it blended with my other passion, which is sports and media. So you may have seen the headline this week that the Los Angeles Lakers, in a 72-hour window, went from owned by majority partner Mark Walter, who's also a majority partner of the Dodgers, to sold. To a Kushner and the former CEO of Disney for $12.5 billion.

[34:44] Dano: And that doesn't happen very often, let alone with a marquee franchise, let alone just 15 months ago is when Walter purchased the Lakers. Very rare. So not a team that is, that is just kind of tossed around. So I started digging into this because I heard that he was under federal investigation. And so I'm going to, you guys are the CFPs. I'm just the guy guy. So I'm going to try to explain this situation. The best I understand this is allegedly right. But, Mark Walter, Walter, who is the managing, who's now the manage, majority partner of the Dodgers guys, he owns two life insurance companies. Clear Spring Life, and Delaware Life. They shall sell life insurance and annuities.

[35:29] Dano: This investigation into him alleges that he took in $85 billion in client money, as in, here's $100,000 of my money to invest in an annuity. He did that, $85 billion worth. He then, through an intermediary, borrowed $16 billion of that, including client assets. And started funding his sports empire with it. But he said, oh, don't worry, this is a loan. I'll pay it back, allegedly. And then with that $16 billion that he borrowed of the client's money, he then put that on the books of his sports management company and said, oh, this is actually revenue. This is how much money my company's making. He then took that revenue and started shopping it around the world and got an investor from Abu Dhabi. Who says, well, sure, I'll get in on that. Here's $10 billion of my money.

[36:25] Dano: He took that money and bought the Lakers. Now he's under this federal investigation because of a whistleblower, suddenly needs liquidity. We've got private credit markets blowing up. We've got interest rates blowing up. He has to panic sell the Lakers. And the thought is perhaps other things in his portfolio, such as the Dodgers, may also have to be panic sold, depending on what happens with this investigation. But I share that to say, one, it's interesting, but two, I feel like these are the types of... Things that happen, Chris and Darren, when conditions get tight. When money is loose and free, it's sort of like you can let a lot of the stuff kind of float by. But it is another kind of indicator to me that the screws are tightening on some of these guys.

[37:09] Chris: Absolutely. As that price of money goes up and continues to go up, those screws continue to tighten. And Warren Buffett is famous for his line about You find out who's swimming naked when the tide goes out.

[37:24] Dano: Right, right. And then if you're a Giants fan, you see the Dodgers sign Shohei Otani too. It was, guys, a 10-year, $700 million contract. But actually, he was only going to make $2 million a year for the first 10 years, and he was going to get the other $680 in the years 2034 to 2043, so deferred. Right? It's just inexplicable why you would do a deal like that. That. And it's like, well, why did he do that? Well, because he's doing other weird kind of shell game stuff, potentially, allegedly. So just thought that was interesting. Certainly not tactics that we're familiar with.

[38:01] Chris: We just lost all of our Dodgers fans.

[38:03] Dano: Oh, sorry. And there's a whole Southern California audience.

[38:07] Chris: Sorry, guys.

[38:08] Dano: Sorry, guys. Darren, the sports talk is concluded.

[38:12] Daren: I don't support Dodgers because they took my Red Sox players.

[38:17] Dano: That's right. Yeah. See, they got Mookie. That's how he got Mookie from you, man.

[38:20] Daren: I'm still bitter about John Kelly and Mookie, man. And they even got JD at some point. I mean, come on. They gutted our team, but I guess they're doing better now. So whatever. Well, let's dive into the charts and talk about this week. I think the last couple of weeks, as I've mentioned, and we started talking about kind of the bullish look on the candlesticks. I believe on this candlestick three weeks ago. So that would have been as we closed up the week of the 27th of July. We said, hey, hard to look at this anything other than bullish. And sure enough, we had a monster candle last week and we had a pretty nice looking candle this week. Why is this candle? It's not monster this week. Looks so good is because it closed outside last week's candle. It just on the very tippy top of that wick.

[39:16] Daren: From the week previous and that's usually a pretty bullish sign for the overall s&p 500 and you might say this is crazy how could the Market be going up we're still at war with Iran and yada yada yada well Market doesn't care i guess and you know one of the interesting kind of theories that i was looking at this week i don't know Chris and Dan if you caught this i think i sent some stuff through to you but this week i think they started repaying those stimmy checks that came from all those tariffs back when we had the tariff panic. And some of these corporations now are getting these massive checks from the federal government to reimburse them for their tariff fees.

[40:00] Daren: I guess they paid. But if you think about it, like that money's pure bottom line money, really, right? It just, it's almost like a stimulus from the federal government. You know, I don't know if this happened to you guys, but both my Doge dividend and my tariff refund check were lost in the mail. Can you guys believe that? I did not.

[40:21] Dano: Darren, I want to give you, I want to give you credit, Darren, because that is precisely what you said on liberation day. When Trump enacted all these tariffs, you said it's a win-win for him. He either gets his tariff money, which he can use for revenue for the federal government, or it's going to get shot down in court, and then he's going to get the stimulus when all that money comes back to all these companies. And in the meantime, he can use his tariffs to help negotiate stuff. So I have to give you credit, Darren, because it's precisely what you said is what's happening right now.

[41:00] Daren: But it happened even better than I thought it would happen. And that is that here we are, August 14th. We've got a midterm election all but 80 days out. And now he's basically started just cutting stimmy checks to the economy from the tariff money that he took from everyone earlier in the year.

[41:22] Dano: 4d chess.

[41:24] Daren: That's 4D chess. That's either a whole lot of luck or some serious 4D chess.

[41:31] Dano: He just he just throws he throws grenades in every direction and when one of them hits he's like see see i planned that yeah it's kind of one of those things i'll probably offend half the people saying this but like either just look at him like gosh this guy is just dumb or he's so smart that i can't even fathom the plane he's on I can't place it. It feels like either could be true. And I can't. But there are instances where like, okay, like, wow, that really worked out well, but not everything does.

[42:04] Daren: But he's, I mean, shoot, he's going to need those STEMI checks because we're looking at right now based upon the betting Market. So this is polymarket isn't for sure, but you can see 88% chance the Democrats take the house and 53% chance right now that they take the Senate. The Dems take... The house and the Senate, we get to spend the next two years watching the Dems try and impeach Trump. And, we go nowhere with anything, not saying that maybe we shouldn't, maybe that's better for the economy, that we don't go anywhere. And that's why I, I tend to, whenever we have these big, like political washouts, you know, it happens both ways, right? Like here come midterms and now we're going to get the other team going against, Trump.

[42:52] Daren: And we'll see what happens. Interesting though, and another note is the Fed decision coming in September because of the softness in the PPI with the producer prices index, retail, which came in today, inflation being a little softer than they expected. Now it's looking more and more like there's not going to be a 75% chance on the betting markets, at least they're not going to move the rate in September. If we look at the Fed watch tool, CME, right now we have a 32% chance they moved the rates. So it's looking right now and people say, well, why did the Market go up this week? Well, you've got this flood of tariff money coming back into the companies.

[43:39] Daren: And so the Market is pricing that in on some level, I suppose. And you've also got weaker than expected inflation numbers. Which then in turn translate into, oh, look, this is good for the Market because maybe they're not going to raise rates. Maybe they're going to lower rates. They lower the rates. That's good for the economy as long as it doesn't lower too quick. Interesting. I think it's also interesting to point out that if we look over on our, the Federal Reserve speakers come out, right, and they speak. We kind of like try to like understand what they're saying. And one of the key changes that is being communicated by Chair Warsh is that they're not going to forward guide the Market anymore, right?

[44:31] Daren: They're not going to say, hey, we're doing this, we're doing that. The signaling is changing. And so the Market now has less of a sense of what the Fed's going to do. And when they the Market doesn't understand what the Fed's going to do. And there's not this forward guidance that the Fed, I think the Market's become to rely on. Then you have a more problematic. Process for the Market, trying to figure out what the Fed's doing next. But it also gives the Fed the ability to move, and to make changes. And, and what Warsh is saying, and he said this at the ECB Sinatra Forum or Sintra Forum, and he just stressed that the Fed remains, really focused on, you know, one that we're, we're not political, right? Cause I suppose that, coming September that, Trump would actually love it if rates dropped. And all of a sudden they did a rate, they did a lower rate and surprised the Market going into the election.

[45:34] Daren: Although in September, it might be too late. I think people are pretty much deciding what they're going to do. At least the people that vote. And so he was just underscoring the policymakers independence in settling monetary policy. What I thought was interesting in the phraseology and what he was talking about is that they're saying, hey, inflation risks have eased, but we're committed to restoring the 2% inflation target, which Chris, I don't know if you remember this, that I'm sure you do when Fed Chair Powell said, hey, we're not really focused on 2% now, we're focused on about 2%. And that was like Earthshatter.

[46:17] Daren: Average. Average 2%. And it seems that Warsh is zeroing back in on that 2% target. Which I think is meaningful and just to understand like why he would be doing what he's doing. But then underscored independence of the policy makers and, said that, Hey, we're not going to give into any political pressure. But he reiterate what I thought was interesting that, they were really going to focus on price stability, which you versus focusing on inflation, which has been a lot of the rhetoric until recently.

[47:03] Daren: So I thought that was this kind of an interesting shift nuance. But as I mentioned, retail sales came in soft today. And that tells us that, hey, the retail might be slowing down a little bit. We had PPI slowing down. Let's see, core CPI month over month was surprised. They expected 0.3 and it was 0.2. And that's what the Market said. Whoa. And we saw that big jump. Jobless claims increased a little bit. Inflation rate month over month looks to be falling. So that's positive, giving more room. Although mortgages still remain very elevated, a 30-year mortgage. And that's problematic for buying homes. I. e. All the data coming out around, hey, there's like no one buying homes out there, FYI.

[47:56] Daren: And that's problematic for everyone else. So how does that all impact the Market? Well, let's look at our heat map for the week of the S&P 500. This is our heat map. And this shows you, let's look at the, this is aftermarket, let's look at one week performance. And you can see a pretty across the board green week, even when we had our big dogs not really doing much. For us. And this Market, like we've talked about many, many times has been driven by these magnificent seven stocks and them going regardless of the rest of the economy. Interesting though, the energy now, so the S&P 500 is made up of 11 different sectors and the energy sector looking really strong right now had some Chevron up 7.8% for the week.

[48:46] Daren: And then our other bigger companies not doing as well when we look at the and let's look at the i think we go and i don't know i don't want to look there let's go here let's see no that's like where i want to be where's the okay so let's look at so these are those 11 different sectors and you can see how I perform on one day, one week. So one week. Energy had a rock star week. Consumer cyclical, basic materials, communication services, not so much. When we look at the one year performance or just look at year to date, you can see energy. And I was just looking at this this morning and I guess in my mind, I just didn't really think energy had outperformed so much this year. Energy sector just crushing it.

[49:46] Daren: Which is interesting when you think about like, let's go into our oil industrial complex. Like there's a lot of people that are pretty excited about the fact that. We're lobbing bombs at each other with Iran. Because there's a lot of people making a lot of money on that deal in a lot of very powerful seats. And when we go to our oil charts, if we look at those oil charts, we talked about this, I think, last week, how 90 is kind of that high Mark and 80 is that low Mark. Actually, I want to look at this chart. Here we go. So you can see 80. And this hundred Mark, right? So this range right in here, it seems like anytime we really get above a hundred or start approaching a hundred, like, oh, peace, we're going to have peace.

[50:36] Daren: Everything's okay. Anytime we get below 80, we'll kind of start lobbing bombs and it gives, you know, the politicians rooms to keep pushing on this war, which actually in turn is benefiting our domestic oil and our energy sector is benefiting greatly by this. The other thing that we're... Burning hard on is our our strategic petroleum reserve has been going down significantly and that's what's keeping gas prices lower while we're going through this uncertainty in the middle east and that you know is giving the politicians room to to take some action for sure so if we look at the spy we had this just breakout right over these two candlesticks and it's blue sky right now.

[51:25] Daren: I wouldn't bet against this Market. I would just assume at this point, we're going to keep rocking. Wouldn't it be something if going into the rest of August, September, and October, and the Market just kept rocking into the election, which would be the surprise, right? We expect that going into the election, we're going to see a lot of volatility, ups and downs. Now, if we juxtapose the SPY to the RSP, which is the equally weighted index, and this is what I was showing on the heat map a minute ago, you can see that the RSP looks even stronger. And the RSP just says, hey, all the boxes in the largest 500 US-based stocks, they're all equally weighted.

[52:12] Daren: Like no company's bigger than the other. If you put $100 or $500 to work, $1 would go to each of those companies where the SPY is weighted. So the bigger companies get more of those dollars.

[52:26] Dano: Darren, I was going to say, when was the last time that, you know, NVIDIA's earnings wasn't propping up the entire Market? I mean, how many times recently has it been really under the hood that's been driving this Market and the big dogs have been kind of flattered down?

[52:43] Daren: It's been a while. And the, you know, that's one thing we've talked about happening is this rotation, right? And needing to see this rotation for this. Market to continue to have legs. As we get later in cycle, we should see these rotations happen where these early leaders become more stalled out, but the other companies push it higher. And we see more of the money being pulled through the rest of the Market. So it looks pretty strong right now. I think you'd be foolish to bet against this one. The VIX, which is a measure of volatility looking 30 days out, it's really measuring how complacent that The people who bet on the futures markets are, and right now they're pretty complacent. They're not betting. However, when we tend to get to these lows like this, we see these spikes.

[53:32] Daren: So it wouldn't be shocking over the next few weeks to actually then see, because we moved really fast on the SP, why we come down. I wouldn't be looking at 756 as support. I'd really want to see what 756 did when the Market comes back into that. If it came back into that held and then bounced. Or if they came back into 756 and we lost, it went lower. My base case is we come back into that and go lower until we get through midterms. Then depending on how midterms look, and I think we would float higher into the end of the year. Or we just kind of stall out along here. That would be my base case. September tends to be a more dicey month of the year.

[54:16] Daren: Statistically, it's a month that we see a lot of negatives in the Market. People kind of float higher through the summer and then everyone goes back to work. And September 1st, we see this kind of volatile environment till midterms settle out. Dollar not doing really anything. This is just important to look at how strong the dollar is. It is interesting with everything going on with the yen and stimulating the yen that we're not really seeing. A lot of movement which to Chris's point earlier like this idea that you know you can really like stimulate the Market well you can do some stuff but you know it's pretty hard to do that consistently so what we look at is the u. s dollar to the Japanese yen jpy and you can see they're holding it kind of stabilizing it here but it's working higher and we don't for this what happens is if the Japanese...

[55:20] Daren: The Japanese yen goes too much higher, they have to start selling Treasury, our treasuries to support the Japanese currency. And so the idea of selling euros and buying yen, what the US is trying to accomplish there is it's trying to support the yen so that the Japanese don't have to sell our treasuries because if they sell our treasuries, that forces our rates higher. If our rates go higher, it gets much more costly for government to print money and it gets costly for are. Economy. It can put the skids on our economy because it's harder to function, right? If no one's buying houses, houses are where we all consume, right? If you look around your house, your consumption is done inside the walls of your home. And if we're not changing over homes, there's a lot less that needs to happen. And that ripples through the whole economy. So if rates stay high too long, it makes it harder for people to want to do stuff. And that becomes problematic.

[56:16] Dano: Darren, what you just described is when you need an HDMI cord from your TV and you try to pull it, but when you pull it, it's wrapped up with the Blu-ray cord, which is wrapped up with the router cord, which is wrapped up with the Nintendo Switch cord, which is wrapped up with the old Sega Genesis adapter. Like it's this rat's nest of stuff that it's like as soon as you start to pull on one, it's just a finger trap. It's just stuck together. You can't separate one from the other.

[56:43] Daren: That's true. That's right. And that's the global economy. So this whole isolationist mentality that still exists out there is, you know, a politician can run on isolationism, but they're just getting simple minds votes because there is no such thing as isolationism anymore. It's all interconnected. And anyone who thinks it is is just naive of how the economy works or just trying to sell people who are naive about how the economy works. It just does. Doesn't doesn't the economy doesn't function that way it's all connected this look at bonds Chris talked about bonds and that most people are not bullish on bonds they're they're kind of going sideways at this point we're trading under that 20 period moving average pretty hard to bet on the side of the Bond Market right at the moment you know but a good time like for people who wrote out 22.

[57:45] Daren: You know, to take a hard look at their Bond positions and say, do I really want to stay allocated this way? Because you've probably recovered if you hung on and, you know, we're kind of this spot now where it's looking more challenging for rates as rates climb higher. It appears that way. If we go much higher though, I do expect to see something kind of aggressive. To come out of the government. Because you can see when we get into this area of 4.7 on the 10 year, it starts to make a lot of problems for the economy and for the machinery and for the grease in the economy and oiling all the skids in the economy. So if we hang here much more longer, and this looks to me like it's going to break out higher, and then we're going to tap up into this area, approach 5% again, and I think we'll see some aggressive action.

[58:43] Daren: From the Fed. And I think Warsh is really going to then be really challenged by Besant and Trump to be like his whole statement that we're apolitical, that we're not going to make moves. I don't think Trump wants or the Republicans want us walking into midterms with 10 year up by five, up at 5%. That's problematic. Gold took a run the last two weeks. But what I will point out I get hearing a lot of excitement amongst the gold bugs out there. We couldn't clear this 20 week moving average this week. So the move on gold could be over for the moment. We need to prove that first. We get above that 20 period moving average and start trading on that. Then I would get excited right now. I just see this as a downward trend with a correction. And then we head back down south. But if we clear above, say, 4,400 an ounce. You know, then things could get really interesting with gold.

[59:44] Daren: We could talk about Bitcoin because why not? It's only fun to talk about when it's...

[59:50] Dano: Rocketing but it's not right now and it's looking weaker it's on the weak side right now and trending sideways can you posit any theories any reasons any vibes i mean why why was it a rocket ship why was it the thing last summer and why is it we're off that this summer well i think it just goes through cycles like any asset and i think but it's really susceptible to liquidity.

[60:21] Daren: And I think as long as the Fed's trying to keep inflation at bay, liquidity has to be muted. So I think that impacts it. I think there's other assets too that are interesting to people. I also think there's a lot of fear out there with AI and what AI is going to do to these digital platforms. And there's a natural kind of like diversifying away from. People's crypto positions, we've seen in recent weeks, hard wallets that were quote unquote safe. It turned out that the seed codes that were created in these very popular hard wallets actually had security issues.

[61:07] Daren: And so naturally, if you're an investor, you're going to diversify, right? You're not going to feel as wed to something that doesn't feel safe. Now, let me just be really clear. Bitcoin itself didn't get hacked. It was just what people kept their Bitcoin and got hacked. It's like a... Bank getting robbed effectively, a digital bank getting robbed. And that's made people unsure. So I think that doesn't help it. I think the fact that Michael Saylor had to unload some Bitcoin, that makes people feel less confident. As you see liquidity dry up around different parts of the Market, then there's less money to move into newer assets like this. But the fact that it's just hanging out around 62,000 a coin, you know. It used to be a lot less than that.

[61:52] Daren: So I still think I wouldn't bet against it at this point. You know, if we get started getting below 48,000 a coin down in that range, then, you know, then we can start conversations about how it was the biggest, you know, scam of all time. But I don't think we're going to get there with Bitcoin. That's not my base case. Well, I think we're going to leave it there. All in all, the stock Market looks pretty strong. Weakness throughout some of the other markets. But if you're a stock Market person, it's looking pretty good right now.

[62:31] Dano: I want to give a shout out to our sister podcast, It's All Money. Myself and Darren host that show and dropped a new episode last week on RMDs versus Roths. The RMD trap and strategies to optimize your situation. You can find that in many of the places that you're finding this show. So if you're listening to the podcast audio of On The Markets, click that little button that says 707 Media. That'll get you right here to this show, It's All Money. It's also on the same YouTube channel. So that episode is live. If you're having trouble finding it, it's also linked up at SonomaWealth. Com. So check out that, our sister podcast. Thank you to our clients and prospective clients for checking out It's All Money this week.

[63:14] Dano: Breaking down how we could be hitting record highs on seemingly bad news. Subscribe if this is your first time listening. Hit that subscribe button. And check us out at SonomaWealth. Com to find out how we help clients and families both in Northern California and across the country. SonomaWealth. Com. For Darren Blonsky, for Chris Sipes, my name is Dan O'Weir, and we'll see you next week on The Market.

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