Inflation Outlook Threatened by Persistent Oil Prices

[00:00:00] Speaker 1: This week, the NASDAQ 100 capped its worst two-week drop since April of last year, while measures of credit risk and turbulence both jumped. [00:00:06] Speaker 2: That's right. AI-linked equities baskets also tanked percent this week as investors piled into treasuries, driving the 10-year yield below 5% for the first time in a month, now reviving haven trade that went missing over the summer. [00:00:19] Speaker 1: Joining us now is CPOR Research Partners Chief Equity Strategist Jonathan Golub. Great to see you here on set in New York. Let me start with this debate that played out over the course of the week. Our colleague Danny Berger sat down with Ken Griffith. He said, look, we're in a bubble. Then she had John Gray on a couple of days later. He disputed that. So you've got this feud playing out, not directly, but back-to-back. What do you make of this, the conversation about whether or not we're in a bubble? Of course, you can't call it in real time, but do things feel like we are in one-two ways? Are we bubble-ish? [00:00:47] John Gray: No, we're not in a bubble. I mean, if there's a story this year, it's that the earnings are up, let's say, on the S&P by 32%, 33%, and the multiple is down on the S&P by about 18%. So the market is way cheaper, partially because interest rates are higher, which makes stocks actually less attractive. And people are concerned about the long-term sustainability of these trades. And so if you look at it not in terms of stock price, but if you look at it in terms of the multiple people are willing to pay, you can almost argue that stocks are not in favor. So, no, I think it's a silly argument. [00:01:24] Speaker 1: You're in John Gray's camp. I am. There you go. Okay. [00:01:26] Speaker 2: Well, we were just talking in the green room, and you were saying it's a little bit hard for people to figure out what to do right now with the market going in different directions. Can you walk us through what you were just saying to me about the different elements? Some going up, or you think they're going to go down? And I don't know. You're smarter than me, but it sounded smart when you said it. [00:01:40] John Gray: I think that we're talking in the green room. If you look at the stock market, let's say, for the current month, we're kind of flat. Right. But if you talk to a professional investor, not to somebody. Versus retail investors. Right, but if somebody opens up their brokerage statement, they're like, ah, I'm down a quarter of a percent. All right, shoulder shrug, no big deal. You talk to a professional investor, and he's seeing that semiconductors are down 15%, and then he's seeing that defensive things, the things that you go into when you think the world is coming to an end, you know, health care and consumer staples are up really big, and so the market is taking a rotation as if something is really awry. And it's not only the tech trade, but, you know, other things that rhyme with it, but like industrial stocks, things that do well, or, you know, materials companies, things that do well when the economy is good, those are not doing as well. So there's a lot of movement that's creating concern among people who do this for a living, and yet the public is a shoulder shrug on the whole thing. [00:02:39] Speaker 2: So back to David's question, why is this not feeling bubbly? [00:02:43] John Gray: Well, I mean, a bubble is when you're paying more and more and more for the same dollar in earnings. You know, like, you know, we pay, you know, back in, you know, in Amsterdam, you paid, you know, these gazillions of dollars for a tulip. We're not paying more dollars for a dollar of AI profits. You're paying less dollars for AI profits. The market is actually very skeptical of these in terms of if they were more optimistic, they'd be trading at 30. I mean, you have names, you know, I don't want to call out a name, but if you look at Samsung or if you look at Micron or some of these memory and some, they're trading at below a 10 multiple. So the market is clearly, you know, treating them as if they're out of favor, even though the stocks are doing really well. [00:03:23] Speaker 1: How hard is it for you as a strategist to look beyond AI? And otherwise, is AI suffused in everything today? If people are anxious about being directly involved in AI, what are the other sectors that they could or should be looking at? [00:03:37] John Gray: Well, you have to compare the economy to the market. I mean, in our day-to-day lives, we eat at restaurants and we, you know, when we drive cars and we go to the grocery store and those things are not infused with AI. But the S&P 500, not yet, not yet. But if you look at the S&P 500, it's about, I think it's about 49 and a half percent tech, if you define tech broadly. And then if you add on top of that, the energy sector is the thing, some of that is related to building data, you know, to building out that, the power capacity and you have industrial companies that are building the data centers and they're, you know, they're mining the copper that goes into, you know, these components. So when you add it together, it's probably 70% of the S&P. And then on top of that, if you said, okay, well, how much of the day-to-day fluctuation in the S&P? And you're probably at 95%. So from a stock market perspective, it's the only story. As a, you know, as a citizen, it's an important story, but it's not the same. [00:04:37] Speaker 2: All right. Let me ask you about my other favorite topic, and that's crypto. You had Bitcoin retreat below 82K on Thursday, and this became, you know, this was as you're seeing pressures around global markets and kind of pull on these currencies that weren't, the whole idea of cryptocurrencies where they weren't so tied to conventional market swings. And now you're seeing them more and more up and down with these other factors. Can Bitcoin really rebound at this point? [00:05:02] John Gray: I'm not your crypto guy. I mean, let me ask you, how many times have you gone to a grocery store and paid for something in crypto? I mean, what does crypto do? Like, we can talk about what AI does in our lives. I can, on my car ride over here, I can say, what do I think that David's going to ask me on this thing? And it'll go and it'll look and it'll say, he's probably going to ask about these three things. What does crypto, there's all kinds of uses. It helps you, you know, plan your next vacation or do your job better. What does crypto do in your day-to-day life, other than the fact that it's a trading asset on a Bloomberg terminal? I don't know. I mean, so do you think that skepticism is growing? Do you think the rose is off the bloom there? I think that people use it as a trading vehicle, but, you know, but people trade collectibles and other things, too. So, I'm, listen, I'm the wrong guy to ask about the topic. [00:05:53] Speaker 1: Let me ask you about energy. We've talked about that over the course of the morning. That was certainly a big driver this week as we saw WTI moving higher once again. And we talked about how the risks in the Middle East, according to our colleagues at Bloomberg Economics, are kind of analogous to what we saw in the early stages of this war. Things are looking worse directionally than better. How is that kind of manifesting itself in the earnings that we've seen thus far? We're not even a third of the way through this earnings season. What's the impact that it's having, not just on energies and utilities, but other companies as those results come in? [00:06:19] John Gray: So, I think that there's a couple of stories here. The first one is, I think that we need to get our head around the idea, and I don't think this is what's in the oil futures right now, but the fact that we are probably going to be mired in the Middle East. And when I say Middle East, I'm talking about the Iran theater for a protracted period of time. We don't have a kinetic war going on. There's not a lot of shooting between the U.S. and Iran. However, if we were to just say, you know what, all right, things are quiet, let's leave, they would shut the straits again. So, we're going to be there. And that means that oil is going to be higher, not lower over the intermediate term. And I think that the market thinks that this is going to kind of magically quickly go away, and I think that that's a mistake. Now, if you're looking at S&P profits, the energy side, U.S. is now an oil exporter. So, we are all paying more money at the pump and may be surprised by that. But the profits of these companies is very accretive to the S&P 500 or the broad market, and they're growing earnings at over 100%. The market, if we look forward, the market is assuming that they're going to have negative profit growth next year because oil is going to be lower and this is going to go away. And I think that that's probably, you know, I'm not sure that that's the right bet. [00:07:38] Speaker 2: The other big factor here when you look at the markets and the economy overall is, of course, inflation. We're waiting on a Fed decision. Everyone is still expecting, it seems, no action this time. But what is your forecast for the next six months of the year? [00:07:50] John Gray: So, I mean, first of all, I think that on this oil thing, it's a very big deal on inflation. And I want to get back to David's question tied to yours. It's not only that we're all feeling it when we go to the pump and we see that it costs more money to fill our car. It's the fact that let's say you buy a piece of furniture and now the cost of diesel is up. So, they're passing that along. And it doesn't happen immediately. It takes a period of time for them. Well, they ate it last time, the furniture manufacturer, and now they're passing it on to you. So, it does. Right, those prices aren't going to just drop. Right. So, it's not only the headline. Even people who look at core inflation, when you take, you know, oil prices out, it's still in there. So, let's say if you look at, you know, 90 basis points or so of, you know, a hit to, let's say, PCE inflation. The core, which is up 30, that whole 30 increase is actually oil as well. But, you know, you're asking about the Fed, we had the last couple of inflation readings were hot or even meaningfully hot compared to expectations. And the Fed is taking a pass. The market is not saying, oh, therefore, don't worry about it. You know, and as a matter of fact, if you look at interest rates, which have come down recently, and you could say, okay, interest rates are really the market's reflection on how them, you know, what they think of the inflation problem is. Yeah. Yeah, but high-yield spreads are beginning to blow out. And maybe that's too strong a word. They're widening, you know, meaningfully over the last, you know, month or six weeks. So it's the market's read that the Fed is eventually going to have to take away a bit of the punch bowl. That's going to make it more difficult for companies or individuals to borrow from their local bank. And that's ultimately going to cause defaults of small businesses. It's going to put strain on people. So the market is saying, okay, yes, I get it. The Fed's not moving this time, but there's an inflation problem. They're going to have to address it.