Even though

you're buying the same exact value, right? Right.

so but what they're doing is they're splitting the stock so if you own a share of meta you own class a or b they're going to create a class c which is a non-voting class so if you have let's say one share of one class a share right now you're gonna own the stock price will be cut in half and in the future you're gonna have a class a and a class c so You know, in theory, your vote will be diluted in half, but not really because everyone's vote is diluted in half.

So from the get-go, your voting power remains the same.

But the company is telling you that they're planning to issue more Class C.

So Class C can't vote.

So from a voting perspective, even though they're raising money, these new shares are not voting shares.

rates and falling oil prices, and you get an acceleration in the process.

Even though

you're buying the same exact value, right? Right.

so but what they're doing is they're splitting the stock so if you own a share of meta you own class a or b they're going to create a class c which is a non-voting class so if you have let's say one share of one class a share right now you're gonna own the stock price will be cut in half and in the future you're gonna have a class a and a class c so You know, in theory, your vote will be diluted in half, but not really because everyone's vote is diluted in half.

So from the get-go, your voting power remains the same.

But the company is telling you that they're planning to issue more Class C.

So Class C can't vote.

So from a voting perspective, even though they're raising money, these new shares are not voting shares.

rates and falling oil prices, and you get an acceleration in the process.

You know, that's, that's, that's, that's a difference that we didn't have for a long time.

Right.

Right.

And i- so, so, l- so what, so let's...

I, I think what happened yesterday was, was very important to understand, and I think there's potentially two reasons.

And, uh, I'm not 100% sold of either one, but let's just walk through them.

CPI was a 10th of a percent higher than expected.

You ex- explain why.

You know, that's, that's, that's, that's a difference that we didn't have for a long time.

Right.

Right.

And i- so, so, l- so what, so let's...

I, I think what happened yesterday was, was very important to understand, and I think there's potentially two reasons.

And, uh, I'm not 100% sold of either one, but let's just walk through 'em.

CPI was a 10th of a percent higher than expected.

You ex- explain why.

[laughs]

And it, and it largely, it...

You know, where we would like to see it happen is because they, their estimates for inflation or jobs were wrong.

That's their job.

If those are, if their estimates are wrong and they hike because they saw, they overestimated inflation, that is what it is.

No one can predict these things.

They're so hard to predict.

Mm-hmm

We give you kind of a market trading update, what's going on with, you know, you know rotations or what's happening technically with the markets etc um kind of give you some trading guidance for the day as well um but again you can subscribe to that absolutely for free deliver it to your email box sharply at 7 30 just so that you have it before the market actually opens every morning um but yesterday you had a good little note in there about lori logan um let's talk about that a bit because i thought her comments were very interesting

Yeah, they were.

They really it was one of those things.

It was a very short speech she gave.

And it was one of those things I had to read a few times to really grasp what she was saying.

But she said her initial statement is that the Fed funds rate needs to be about 50 basis points higher.

Like, OK, you know, everyone has their opinion.

This is all about the economy.

Let's talk about Tina versus Tyga.

Tina versus Tyga.

We coined that phrase last week.

There is no alternative Tina versus Tyga.

There is a good alternative now.

And, you know, we spoke about it last week and it prompted me to write a bigger article on the whole topic, which just came out yesterday morning.

And the point of it was that from pretty much the post-financial crisis to the pandemic, bond yields were kept extremely low.

Mike?

Is there a point at which things start to crack under yields this high? Yes.

So yields take, depending on what yield you're looking at, they take a while to impact the economy, right? Mortgage rates are very slow to impact the economy.

We've seen the housing market come to a standstill, but that has a limited impact on the economy.

When shorter rates, shorter rates have more of an impact.

So when the Fed raised Fed funds, that changed instantly.

Credit card rates, floating rate, corporate borrowing rates.

It had an immediate impact.

But I'm curious to hear why it's a misconception because I always thought mathematically, you know.

It's just the differential between expectations and reality.

So, Lance, yeah, let me just I just pulled up some stats on the auction.

They were auctioning 70 billion five years, the bid to cover.

So how many bids were there versus the 70 billion was 2.21.

So that means there were about 150 billion bids for the 70 billion in bonds.

So some of the things that deemed it a bad auction was that the bid to cover ratio was only 2.21. That was averaging 2.3.

So typically, maybe they would have got 160, 165 billion in bids versus 150.

What types of bonds have you been looking at recently and buying outside of treasuries?

So just on the surface, what do you think? Do you think he did the right thing? Do you think it's a mistake potentially? What's your overview?

I personally would not have raised rates because I do think that inflation is somewhat elevated due to what's going on in Iran and to a lesser degree, some of the tariff activity that's still occurring.

But I think he's under intense pressure to get bond yields down.

And what the market wants to hear, regardless of whether it's right or not, what the bond market wants to hear is that he's going to be vigilant against inflation.

So, you know, I think that's what drove all of the Fed members, not just Warsh, it's all of them because they all voted for it to do something.

And it's...

It's probably going to be a policy mistake because they're hiking for the, you know, why do you hike rates? Why do you increase interest rates? There's only one thing the Fed can really impact.

So how much of the work has already been done by the Treasury market that the Fed may be not taking into account for?

The question is, is the market going to let you?

Right.

And what's interesting about Warsh is that at the Jackson Hole speech, there was a paragraph or two in his speech where he started quoting some inflation data.

And he was talking about something like 54% or 55% of the components were above 3%.

And that's well above the pre-pandemic norm, even though it's below what it was after the pandemic.

What's really fascinating about that statement is that Warsh has argued from his Senate confirmation hearings all the way up to his first speech that the Fed should use trimmed mean, the Dallas Fed trimmed mean CPI.

which is essentially it's almost like core CPI.

On top of

Right

... which means they have to sell their bond holdings.

Now, that's a debatable one because the Treasury does a repo, the Fed does a repo program with them, so they may not be selling US Treasury bonds.

But either way, it's a story.

There's a, uh, there's, this is the cocktail party inflation problem.

Inflation is outrageous.

You know, people will tell you, right? The price of this and the price of that is so high.

Okay

rates in the future being more sustained and if i'm worried about an overheating economy because of this build out etc certainly makes sense to start hiking in that environment but to hike into an environment where you just have an oil price issue for the most part occurring and when you look underneath the surface you you see demand destruction through personal consumption expenditures that's weaker employment's weaker you're seeing that demand destruction come in it would seem a little bit kind of contradictory to go and hike into that and then immediately have to turn around and cut rates if you get an oil price decline.

Right.

That's my point.

This seems like a PR hike if they're going to hike versus a fundamental hike.

And you made a great point, right? Inflation expectations.

What are they telling us, right? What are five-year, 10-year inflation expectations telling us? What they actually tell us is that the inflation, the expected inflation based on the way bonds trade, not surveys where people can just willy nilly say whatever they want, but based on how money is being invested by the largest investment firms, by countries, you know, all the insurance companies, endowment funds, pension funds.

It's telling us that inflation expectations are actually a little bit lower today than they were before the war started.

And we've certainly seen that over the last few years, Mike.

Mm-hmm

... and Meta and Microsoft and companies that have very good credit ratings and have incredible, you know, amounts of revenue or cash flow coming in.

So it's very good quality.

Uh, and you know what this is, it gets a bad rap, but this happens in every business.

I, you know, I think the, the...

And, like, mentally, I kind of compare this to the automakers.

When you go buy a car, they're pushing you to take a loan with them.

So kind of what, what's your take with your article and, and well as, as on that data?

... what actually happened yesterday.

So the Treasury has a refunding announcement every quarter where they tell you what they're gonna issue, how many of what type of bonds, so they give a range.

They also tell you what they, what they're, what they can buy back, how much, how much debt they can buy back.

So what they did was increase the amount of debt they could buy back in the 10 and 30-year sector, and it now matches the amount of debt they can buy back in the two to 10-year sector.

So th- what they did is something they've been doing.

But it caught attention because yields are at highs, and it's certainly gives the appearance that the, that Scott Bessent has drawn a line in the sand that we're not letting yields, especially on the long-term, you know, 10-year, 30-year, go any higher.

So, you know, it's a normal, relatively normal operation that was enacted at a time when yields were hitting...

Mm-hmm

Mm-hmm

... which had to unwind very fast.

Um, so I think a lot of lessons were lear- learned there, both in Japan and here.

So I think this intervention that's going on will be done in a way, and we're very supportive of it, right? Because we want it done in a way that is not detrimental to the U.S.

bond market, the stock market, the financial system.

So the yen doesn't necessarily bother me.

Yes, there is more debt, right? That, that, that is an issue, and that's pushing yields up for everything.

Mm-hmm.

It makes it looks like things are blowing out the roof, but it's really only one company.

Right.

So part one went through all their on- basically was an on-balance sheet analysis.

What, what kind of debt do they have? What's the problem? And it clearly pointed out that Oracle had a debt to equity ratio above four.

Everyone else was below one, so they were in great shape.

Y- you know, also keep in mind there's incredible cash flows from those four companies to help fund some of this.

A- and the day, literally the day we, the day I wrote it, or the day it got published, an hour later one of our advisors sent us a, uh, email from a, uh, client, and he said, "That's great, but what about all the off-balance sheet debt they had?" And that was a great question, and we hadn't addressed it in part one.

Mm.

I'm sorry about that.

Okay.

So what you would see is not an orange line but a blue line.

Um, yeah, it's weird that it's doing that.

A blue line that's very volatile, and i- it whips around between typically plus 35 and minus 15 correlation.

Sometimes there's a decent correlation with yields and oil prices.

A lot of times it's kind of negligible, hovering near zero.

Inverse correlation

Yeah

... and Intel, and then it shifted over a little bit to the hardware stocks.

Um, so I think the first thing we have to recognize when we're dealing with this is that there's these speculative impulses, and they're dying to chase whatever m- need, whatever looks like it needs chasing.

So, you know, right now I think we're still in this memory chip, hardware stock, uh, chase, but we kinda have to think about what's next.

Um, and does a really sour market stop that chase, stop that, that, uh, speculation a little bit? So that's the environment.

So now, now you can start layering on all the cold fronts and warm fronts and winds and everything else.

The, let's, we could start with SpaceX, I guess.

So I'm curious what you think about that.

So despite there's the dark cloud, there's also some some some silver linings to the out structure as well.

Yeah, I mean, I guess a way to think about it is there's going to be a labor churn.

People are going to be laid off, no doubt, but people are going to be hired at the same time.

So as economists, we're always looking at things in the aggregate.

And maybe that's a little callous, you know, because there are people getting laid off.

that are, you know, being hurt economically.

But, you know, the way the markets work and the way stock prices and bond prices react is to the broader economy.

But there is a case to be made that that bell curve shifts to the right, and we actually do increase the standard of living.

Right.

He was filling that temporary position for, uh, uh, what's her name, Kugler.

I think that it's Kugler.

That ended.

So effectively, Powell has taken Moran's seat, and now Warsh will step into Powell's seat.

So you took someone that was very dovish.

He was dissenting at every, I think it was six meetings he participated in.

What do you think?

Just kind of wanted to get your thoughts about what's going on and Is there more to go here, in your opinion, or do you think we may be getting a little bit ahead of the – despite the fundamentals are great, our prices may be getting a little bit ahead of the fundamentals?

Yeah, probably.

I think there's a couple of things going on.

You know, we talked about a couple of months ago, this market since COVID has been bubble chasing.

It finds a bubble, it chases it, it runs it higher and then it gives out, you know, meme stocks.

uh specs uh bitcoin uh the nfts you know it's been one thing after another we even saw a little bit of it with utilities and value companies you know earlier this year before iran started uh so i think what we're seeing now is i'm not going to call it a bubble because there are real revenues and real dollars behind it but we're seeing a shift in mindset that or You know, this understanding that A.I. starts off as a large language, the learning models that basically it's teaching A.I. everything there is to know.

Then you get to the agentic models that, OK, this all being this all knowing being, how can it help me? How can it help me book airline tickets or rent a car or bake dinner or whatever? you know, manage my wealth or do whatever it is I need to do.

I mean, you know, there is a case to be made that over the next couple of three years that the economy just kind of chugs along and does really pretty well because of this manufacturing throughput in the economy.

Mm-hmm.

And it should go through Congress really quickly.

Uh, so at the next meeting in six weeks, Warsh will be the chair.

Um, what was eventful is that he said he's gonna stick on, stick, linger on as a governor.

So he will get to vote, and we know where he stands.

He's not hawkish, he's not dovish, but you know, he's not gonna vote for a rate cut or a rate increase.

Um, and it sounds like that's applying a little bit of political pressure to the administration.

Mm-hmm.

So it basically, we shouldn't really be expecting a lot of clarity from either side here given all that I just mentioned.

mentioned.Right. A-and, uh, look, here, this is where managing money, whether it's professionally or, or for yourself, it becomes very difficult.

Everyone has an opinion on Iran.

Everyone has an opinion on the president.

Everyone has these views on what's going on in Iran.

Um, a-and it's ...

Th-those opinions are fed by social media and the mainstream news and, and all of those have been tailored to what you wanna hear, right? I-if you're liberal, you listen to CNN.

Mm-hmm

Right, Carmax Brands, yeah.

BlackRock, right.

BlackRock put a gate on their private equity funds yesterday or today.

They're only allowing private e- these private in- credit investors to take out 5% of what they own.

Apparently, the demand is for 9 or 10%.

So we're seeing gates put on these private credit, uh, funds.

So it's problematic.

Mm-hmm.