Second-Half Market Outlook & Playbook with Liz Thomas

[00:00:00] Guy Adami: A warm welcome to the Risk Reversal Podcast. Of course, I'm Guy Adami. More, of course, that's Elizabeth Thomas. She of SoFi, dear friend, brilliant individual, and somebody that when she's on the television, and I've said this before, I make sure to turn the sound up. Hello, Elizabeth. [00:00:21] Elizabeth Thomas: Hello. Do you ever think it's odd that now in this day and age we record all podcasts on video? Why do we do that? Why do we still call them podcasts? Aren't they just shows now? [00:00:31] Guy Adami: What would you call it? You know what? You make an excellent point. I haven't thought about it. [00:00:36] Elizabeth Thomas: A video on demand. [00:00:37] Guy Adami: A vodcast. [00:00:39] Elizabeth Thomas: A vodcast. [00:00:41] Guy Adami: Welcome to the Risk Reversal Vodcast. All right. Enough of the tomfoolery, although we could do this all day long, as you know. Dropping on a Monday, we're talking on a Thursday, today. But let's talk about sort of the week that has been and the week that was. And as we get into bank earnings, what has sort of stood out to you? There are a couple of things that have sort of captured my fancy. [00:01:05] Elizabeth Thomas: Well, if we're talking about the week that was, I mean, obviously, we've had a lot of movement in the market, this sort of momentum on, momentum off trade, where we've had semiconductors not doing really well, and then suddenly they rebound. It's almost as if every time we get used to a certain direction, things change again. And I think that's a characteristic of where we are in this market cycle. I expect this sort of volatility to continue. Now, next week, starting earning season is exciting. And as usual, the banks are going to set the tone. They kick it off for everybody. What's been really interesting about financials in general, banks especially, in the last few weeks, is that they've done really well. They've traded well. Now, they've had a couple days here and there where they didn't do so well. But they've traded well in a flattening yield curve environment. So I'm interested to hear from the banks where that good revenue is coming from, what they see for the second half, and whether they're more constructive on things like capital markets activity than they are, obviously, on the yield curve, because the yield curve is actually providing a headwind for them right now. [00:02:09] Guy Adami: All right. Let's shelve that for a second, because in addition to what we're going to talk about in terms of what's happening this week and potentially next week, we're also going to preview your second half outlook that I'm sure you and Mario, I just like saying it that way, have worked extensively on. Is that fair to say? [00:02:27] Elizabeth Thomas: Well, no. So we didn't do a written outlook this year because it just didn't seem like feel right. It did. But sometimes, you know, you don't want to just force content to force content. So I don't feel all that different than I did in the outlook that I put out in December of last year. There are some things that changed and obviously a war that came about, but we didn't create a whole written outlook. Although I have been talking about my outlook for the second half for about a week now. [00:02:55] Guy Adami: Fair. Okay. So we'll do it under those, the auspices of that. By the way, when you said that, it made me think of, are you a good witch or a bad witch? Glenda. Of course she said that. And Dorothy was perplexed by that because as she said to Glenda, I'm not a witch at all. Well, you must be a witch, but that's for another time. As many of you know, Elizabeth portrayed Dorothy in her middle school's performance of Wizard of Oz. We'll share a picture in the show notes. All right. So one of the things that have obviously, you know, I'm a bond market freak and maybe too much and maybe, listen, there's a very good chance I laser focus too much on what's going on, but very quietly, depending on where you look, 30-year yields back up, 10-year yields approaching 4.6%. I think I understand the reasons why. I don't think the reasons why are particularly good. Thoughts on that? I'm going to take this out [00:03:51] Elizabeth Thomas: into a broader conversation about rates and inflation too, because even the idea of rate hikes right now, people are looking at the bond market and saying, see, we need hikes. Yields are rising. We have a problem. They're higher than they've been for decades. This is not good. We need the hikes. Rate hikes, in my opinion. Now, I don't get a call from the Fed. I don't get a dot on the dot plot. But in my opinion, you hike rates when you're trying to contain an economy that's overheating. You're trying to contain inflation, inflation that's been created by too much demand. I don't think that's the situation we're in. Yields, I believe, are rising because the conflict in the Middle East has reignited again. And now we're nervous that oil prices are not going to stay where they were. Maybe they're headed back up into the 90s or so. They had gotten down to the low 70s, which is great for consumers. So oil prices on the rise again give people a little bit of nerves about inflation going back up again. Maybe we haven't seen the peak and yields are now on the rise too. So this whole conversation about rate hikes, this is why I am of the camp that we are not going to see hikes this year because this is not a situation when you hike rates. You don't hike rates into a slowing economy, particularly an economy that's being slowed by geopolitical problems [00:05:07] Guy Adami: that we have created. I agree with you, by the way. I don't think there's any pressing reason to raise. I also don't think there's any particularly strong reason to cut. And I said last night on CNBC's Fast Money, last night being Wednesday evening when you're listening to this, that I think you can make a very cogent argument that absent of some extraordinary event, which none of us can foresee, the Fed should be basically sitting on their hands until sometime early next year, if not next summer. And I know that sounds preposterous, but the status quo is not the worst thing in the world. But I'm with you. Now, what I'll say to you, and you can't do the counterfactual, I'm aware of that. But I'm of the belief that regardless of what's been transpiring in the Middle East, and if you look at it, crude prices are not fundamentally different than they were a couple months ago prior to this thing starting, I think yields would be here anyway. Now, I know you can't prove that, and I'm not looking for you to do it, but just thoughts on the trajectory in general, because I think there was an inevitability [00:06:07] Elizabeth Thomas: to this. Yeah. I mean, the amount of debt that we have and the fiscal indiscipline, and this is on both sides of the aisle that we've had for a while now. And when you look at the charts from the CBO that suggest where our debt will be in five to 10 years' time, they're terrifying. Now, I think the assumption is that we're going to take care of it and everything is going to be okay. But yields at these levels, and in a period where even before the war, inflation was not solved. It wasn't terrible, but it wasn't solved. It wasn't at that target. And with a Fed that continues to reiterate under Jerome Powell's purview, and now under Kevin Warsh's purview, that we are committed to 2%. We will get it back down to 2%. And it's almost as if the bond market is saying, no, you won't. It's like playing chicken with the Fed and saying, we don't think it's going back down there. And you and I have talked about this a number of times. It used to be, or I should say, maybe it always has been the belief in the finance world that the bond market was smarter than the stock market, that the bond market knew things and sniffed things out before the stock market did. If that's the case, bond yields rising and showing some need for what's called a term premium, and some sort of premium to investors to take that sort of duration risk in treasuries, that would suggest that we're actually in a more risky environment than equities are telling us we are. So this is one of those relationship problems. There are a couple of problems going on in the bond market right now. But what's happened over this market cycle, even this entire economic cycle, is that the bond market gets proven wrong by the equity market, and equities tend to prevail. So at some point, maybe that changes. Perhaps this is the moment when that changes. [00:07:53] Guy Adami: All right, a couple things there. We've also said, and I know you've said this, the bond market historically challenges every new Fed chair. Man, woman, doesn't matter. That's been the pattern. And if you remember, and we talked, you and I talked about this extensively late last year, earlier this year, that the way things were going, and then you throw on top of that, obviously, this war in the Middle East, that was going to be a very challenging environment for Kevin Walsh. And I think it will prove to be. So I think that's what's going on. In terms of relationship problems, how long have you and I known each other? It's got to be six, seven years now. I think we're on six years, something like that. Have we ever encountered said relationship? Not that I'm aware of. Well, I mean, what does that mean? Not that you're aware of. You'd be aware of it or not. I mean. [00:08:37] Elizabeth Thomas: Well, sometimes somebody in the relationship is upset with the other and you don't know about it. [00:08:41] Guy Adami: Oh, well, I've never been upset with you. [00:08:43] Elizabeth Thomas: Okay, well, then we haven't had a problem. [00:08:45] Guy Adami: Although there are times when, you know, like, for example, prior to this show, you were eating salmon, which I'm just. [00:08:52] Elizabeth Thomas: The L is silent. [00:08:53] Guy Adami: Oh, it is. [00:08:54] Elizabeth Thomas: Yeah. [00:08:54] Guy Adami: Let me say that again. Prior to this show, you were eating salmon, which it never really sat well with me. Anyway, I digress. You brought up banks next week. Now, you're right. Money center banks, investment banks have traded extraordinarily well. I mean, Goldman Sachs and Morgan Stanley feels like they're a biotech stock. And we'll see, you know, the duration, how durable that is. The flip side of that coin is, and I'm not asking you to opine on individual names, but these private equity names, which sold off into the spring hard, bounced to a certain extent, they're seemingly sort of reversing that bounce. Now, I'm not sure necessarily what it's on the back of. A lot of debt offerings from these companies. Amazon, I think, is the latest. Google, Amazon. What do you think is going on? Is that problematic or is that just sort of idiosyncratic? [00:09:41] Elizabeth Thomas: I think it's idiosyncratic right now. If we had other things that were proving it out, like credit spreads were widening to a concerning degree. And that doesn't mean that they're hitting levels that they've hit before in prior crises. I just mean the speed of widening or maybe it's going a lot each day, something like that. And that's not happening. High yields are still pretty tight. Even investment grade corporate is still pretty tight. You know, all of that. Even the spread between the twos and tens is pretty tight right now. So there's not a lot going on in the rest of the credit market, the non-private credit market, that would suggest we have a credit cycle starting. I think part of what's happening in that private area is the stocks themselves were probably technically oversold and were due for some sort of rebound. We've had a lot of rotation in the market lately. And when you have a momentum unwind in certain stocks, there are other places that benefit for no real fundamental reason other than the money just needs somewhere to go. So where does it go? It searches for opportunities that are much more low valued than the ones that just came out of. So perhaps that was some of the bounce as well. Now, your point is well taken, and honestly, I hadn't thought about that until you said it, and then you said it, and I thought that makes a lot of sense, that we're going to get a lot of debt issuance from other places in public markets. And if that's the exposure that investors were looking for, was exposure from a credit perspective to AI, to technology, to some of that stuff, you're going to get that opportunity in public markets. So maybe you don't need that anymore. And also, perhaps some of the, I don't want to call them weaker hands, have been shaken out, and you've got now an opportunity in some of these private names for more fundamental long-term holders. [00:11:28] Guy Adami: Let me ask you the following question, because I'm actually struggling with this. You mentioned credit cycles, and historically, there are credit cycles. Are there still credit cycles? And I'm not trying to be a wise guy by asking that. I mean, we really haven't seen anything remotely close in quite some time, and I'm not exactly sure why. Thoughts on that? [00:11:51] Elizabeth Thomas: Well, I feel like why is probably that we get saved most of the time. Anytime something starts to inch towards a problem, it gets saved. And ever since the Fed started to focus on what's called financial stability, that's been the case. And there's the functioning of financial markets that need to still stay a certain level of healthy. And they have a vested interest in the markets staying healthy that way, particularly debt markets. And a credit cycle has probably been prevented a few times. Do they still exist? I do think they'll still exist. And I still think that it will happen at some point. Maybe not to the degree that it has before, but I still do think they exist. [00:12:41] Guy Adami: You know, I do as well. And it's going to be interesting to see under this Warsh administration if he allows them to exist. Because I obviously don't know anything, but I'm of the belief that he's sort of old school in so much as, you know, at a certain point, you sort of let nature take its course and let things figure themselves out. Now, there will be the safety net that you speak of. I just don't think it's going to be as close as it's been in prior administrations. That's just me. Obviously, I don't know that. We'll see what happens. In terms of what's going to happen next week, though, we have some inflation data that comes out. And you've talked about these things extensively, both PPI and CPI. I think, please correct me if I'm wrong, this is the first one under this sort of new regime. So it's going to be watched, I think, more closely than usual. Although it's going to be watched closely, given what's been going on, obviously, in energy and all the other things. Thoughts on that? [00:13:37] Elizabeth Thomas: Yes. So we have CPI coming out on Wednesday, Wednesday the 14th. And then PPI is the following day. So if everybody recalls, the PPI report last month was pretty upsetting because it was over 6%. And I believe for the month before that, over 6% as well. Still expected to be 6.2% for this reading, which is for the month of June. CPI is expected to be 3.8% for the month of June. Now, if CPI comes in at 3.8%, that would be down from 4.2%, which is what it sits at right now for the month of May. If this war has actually de-escalated and we don't go back into really high oil prices, I am of the mind that CPI probably has already peaked. If that's not the case, then perhaps we have more to go. But bringing oil prices back down, I think, alleviates a lot of that. That's a big question mark. If we have re-escalation, which will have happened in July, which won't be involved in this reading. So you are right to say that these are the first inflation readings where Warsh is going to actually have a chance to respond to them. Right. The first ones where he has a meeting that he can respond to afterwards. I think the first meeting was more about him basically laying the groundwork for here's who I'm going to be as the Fed chair. Nobody expected movement there. Nobody really even expected him to say we plan to cut or hike rates this year. In the next meetings, I think he'll probably make some more statements, not necessarily forward-looking, but make some more statements in reaction to the data that they're seeing. So could this move markets? Of course. I don't think that it's going to change all that much the trajectory of what people think is happening with hikes for the rest of the year. But I do eventually think that hikes get priced out for the later part of the year. [00:15:27] Guy Adami: Yeah. I'm with you on that as well. We rarely diverge, which means we're sort of mind-melding. A few minutes ago, as you recall, I mentioned the fact that we've never had a relationship problem as far as I'm aware of. And you sort of reiterated that as well. You thought we're both on terra firma. What is not on terra firma, and people are going to be like, oh, I can't believe we're 16 minutes into this thing and the guy's finally mentioning it. Japan continues to be absolutely puzzling to me. Their currency continues to weaken at an alarming pace. Their bond market continues to deteriorate at a historic pace. And nobody seems to care. Nobody. Those, by the way, are real relationship problems. Yep. [00:16:17] Elizabeth Thomas: So the yen right now, I'm looking at it, 162. Now, again, we're recording this on Thursday. Most market watchers expected the BOJ to intervene around 160 and continue intervening around 160. Now, maybe they've widened their tolerance band a little bit and they're allowing it to move more. But that's historically where they've intervened. I mean, I don't want to oversimplify this. Japan doesn't have a whole lot to do with AI. It doesn't have a whole lot to do with the tech trade. And the bond market, I think the big unwind that we saw back in, when was that, 2024? [00:16:51] Guy Adami: It was July of 2024 on a Thursday. CPI, I think it was a CPI number came out. The dollar yen was 161 at 8.30 a.m. on the East Coast. It proceeded to trade down to 157 and change in a matter of minutes at a very alarming pace. And by August 2nd, we were talking about a VIX, I think, that was north of 60 for a brief period of time. Now, again, that was a whole different set of circumstances. The bond market wasn't under pressure. It was a yen on wine trade. Everybody became a dollar-yen expert in that whole thing. So here we are two years later at similar levels, except the bond market's different. But I hear you. You're right in bringing up the fact that this AI semiconductor trade doesn't really seem to care, which maybe is a great thing, or maybe it's masking this underlying problem that is just sort of this sort of Damocles. [00:17:47] Elizabeth Thomas: Well, yeah, and let me ask you this. What do you think – if the market was reacting correctly to this Japan stuff, what would be happening? [00:17:56] Guy Adami: Okay. I think that's fair. I think our bond market would be moving in a faster pace. I think rates would be going higher than they've been. Rates would be higher than they've been, as Bank of Japan probably has to unload treasuries. I think the equity market would sort of wake up to the fact I think the VIX at 16.5 or wherever it's currently trading is completely mispriced. And I think we learned that a couple years ago. So maybe that's what would be – but again, you can't – going back to what I said earlier, the counterfactual never really – doesn't help anybody. But it doesn't mean it's not there. Right. [00:18:31] Elizabeth Thomas: Okay. So the big risk here is treasury yields going higher. Yeah, I think so. Particularly long-term treasury yields. And I might be misquoting this. So forgive me, anybody, if you go check and I'm wrong. But I want to say that Japan is the largest holder still of treasuries. But the percentage is only like 13% or something like that of outstanding treasuries. So it's a big number, but it's not 50%. No. So – and the reason that they'd have to unload treasuries is to support their own currency. Because if they unload treasuries, it would put pressure on the dollar. So then the yen dollar cross rate would be favorable to the yen. Yeah, I think if it creeps much higher than 160, then perhaps there's an issue. But it's kind of – [00:19:15] Guy Adami: I'm making too much out of it, I think. And listen – [00:19:17] Elizabeth Thomas: Right now – and maybe that's my message. Right now, I think you are making too much out of it. Which is fair. And I have been. [00:19:22] Guy Adami: And I think the market is looking past it. Yeah, 100%. You're right to push back. [00:19:25] Elizabeth Thomas: Oh, and the other point that I was going to make is I think in 2024, a lot of the risk that was embedded in it unwound. The carry trade that was embedded in it. And those were big numbers. There was a lot of risk embedded in that. And nobody saw that big move coming. But a lot of it unwound at that point. Not to say that it doesn't still exist. It does. But I don't think it exists in a way that can be contagious across the globe, take down all the currencies and bond markets in a way that it could have back then. [00:19:52] Guy Adami: Fair. And I hope – listen, I obviously hope you're right. We'll see. Again, a couple differences now. Obviously, their bond market is much different than it was a couple years ago. And I don't want to pick on Japan because it's not fair. I mean, debt to GDP north of 200%, demographics problem, currency problem, bond market problem. Like, they got everything moving against them. And, you know, there's something called this negative feedback loop, which we really haven't seen in a while, that is still out there. I mean, these things do happen. So, I just bring that up just to bring it up. Okay. That's my Japan rant. Quickly, gold. You were spot on a couple months ago. You pulled the ripcord correctly. Oh, I did. You did. You thought this would happen. You've been right. Here we are. Now, I'll tell you what I think. And this is somebody, by the way, that I thought gold would stop at least 8% to 10% ago. So, that's been wrong. But, I think at some point, the stronger dollar and the rising yields in the United States, which have historically been a headwind, I think at some point, that turns into a tailwind. So, I've been saying that now for a while. That's been wrong. But, it doesn't mean I still don't believe it. So, thoughts on gold quickly. [00:21:00] Elizabeth Thomas: So, I'm going to reduce my rightness a little bit. I was right about the timing to pull the ripcord. The reasoning, it's not that I saw something more than somebody else did. It was that the thesis I had about gold up until that point was busted. And it didn't react. It stopped behaving the way that it would have under my thesis. And I thought, you know what? I don't understand what's going on here anymore. What I thought was going to be happening isn't. So, I'm out. Because I can't make sense of it. I can't make sense of this move and set the right expectations. So, what had happened up until that point was obviously supported by a lot of central bank buying. And then gold went parabolic in January because retail got in. Everybody was on this FOMO trade. You saw the ETF holdings skyrocket with the gold price. And now that has unwound. The ETF holdings have unwound with the gold price. Central banks stopped being active buyers because the war started. I think this is what went on. They stopped being active buyers because the war started. And they needed to raise liquidity for finding oil and paying for higher oil prices. And that persisted March, April, May, right? And parts of June. So, I think the gold buying that was driving the price up slowed down considerably, particularly in Asia. And that's what stopped the rise. So, for it to get back up to those levels, you need not only central banks to keep buying again, or you need retail to really flood back in in a big way. And I think it's now become too volatile for retail to feel comfortable with it. That's not to say that gold isn't a good long-term holding. I think it probably can still diversify over certain periods of time. But it's not diversifying right now like it was for the period when I had that thesis. So, I got out. [00:22:48] Guy Adami: There are a number of reasons why you're so much better at this than I am. And one of the many reasons is you're non-dogmatic. And I do my best not to be dogmatic in my views. But clearly, in terms of gold, I made that fatal flaw. With that said, earlier in the show, I mentioned that you have a second half outlook. And we caveat it by saying it's not a written thing. You sort of feel the same way about a lot of things. But in the final few minutes we have here, what has piqued your curiosity as July is in full throttle here? [00:23:24] Elizabeth Thomas: Yeah. So, I mean, what people want to hear in an outlook is what are the investment ideas? What do you think is going to happen directionally in the market? So, directionally, I do think stocks are higher in the second half. But let's not forget that we have midterm elections coming. We have a momentum trade that has shown some warts, let's call it. And I think that the moves under the surface are going to be high velocity and high volatility. But directionally, I think the index ends higher. So, when you look at it that way, then what are the ideas? What are the places where the market could actually do well? So, MAG7 has trailed, people started calling it the LAG7, for the first half of the year. And that was one of the big surprises to a lot of investors. I think the MAG7 finds its way back into the forefront. Partially because of muscle memory. I think investors during periods of volatility go back to their stalwarts. And the MAG7 will be those. Partially because the technicals are attractive. And if you're unwinding a momentum trade, looking for something in that same space that still has opportunity for upside, some of them are actually better valued right now than they have been through much of this cycle. So, that's on the tech side. Other opportunities. I already kind of pounded the table about financials and how well they've done in a flattening yield curve environment. I'm going to be listening very closely to bank earnings, but I think financials can do well in the second half. Healthcare, I have pounded the table on viciously. I continue to do that. And I think healthcare can be not only a beneficiary of investors looking for growth, but during periods of volatility and healthcare, I remind people again, is one of the best performing sectors in midterm election years. And then commodities. I think you have to look at commodities here because if inflation becomes a problem again, if it stays a problem, you want something that's going to hedge that out. Mario and I just did some work. I gave a presentation this morning with the work in it on what a portfolio can look like in this new regime, this inflation regime, and this yield regime. We can't look at an efficient frontier and use the entire data set back to the 1970s because we had a 40-year period in there where interest rates were falling and bonds were bullish. We're not there anymore. So what does well in these periods? When you try to prove it out, commodities are actually a really good diversifier in portfolios. So don't sleep on commodities. And then lastly, I think energy can do well. Even despite what's going on with the war, I think actually de-escalation in the war has provided a buying opportunity. [00:25:57] Guy Adami: I agree with you on all fronts, especially commodities. I will throw in the fact that despite the fact that crude oil has been significantly cut from its prior high that we saw a month and a half, two months ago, names like Valero, Marathon, Petroleum continue to make new all-time highs. Before we leave, of course, it's metaphorically pounding the table. But have you ever been so exorcised that you actually did pound a table? [00:26:24] Elizabeth Thomas: Probably more of a slap, like an open hand. [00:26:26] Guy Adami: So not a pound. So you don't do like the fist thing? [00:26:30] Elizabeth Thomas: No. Yeah, no. It's a slap, which is like such a girl comment. [00:26:37] Guy Adami: It's really lame. [00:26:38] Elizabeth Thomas: I pulled her hair and I slapped it. Pulling hair. [00:26:42] Guy Adami: See, yes. Pulling hair is never cool. [00:26:45] Elizabeth Thomas: No, I've never done that. [00:26:47] Guy Adami: Have you ever punched anybody before we leave? [00:26:49] Elizabeth Thomas: No. And I'm not sure I'd be able to. I think I tried it like in a carnival game once and I missed, like whiffed. [00:26:57] Guy Adami: Uh-huh. [00:26:57] Elizabeth Thomas: I need a wet, like a bat. [00:26:59] Guy Adami: You need, you know, before, and I know you have to leave, I apologize. I worked at a Rye Playland, some of the listeners or viewers might be familiar. And I worked a number of the games. And one of the games I got extraordinarily good at was the bell ringing game with the large hammer, if you recall. And I would be able to do that with, uh, on my knees or with one hand because it's all technique. And what I would do is I'd find the biggest chooch in the crowd, you know, some muscle head wearing the, and I'd, and I'd bet him in front of his girlfriend that I could, you know, hit the bell on my knees. And he couldn't, and I would typically win. So, in case anybody cares. [00:27:38] Elizabeth Thomas: Is that how you met your wife? [00:27:40] Guy Adami: No. That's Elizabeth Thomas. She of SoFi. We're going to put all the things she talked about in the show notes. I'm Swizzle. And we'll have Elizabeth back, uh, for the market call this week. We look forward to it. So, thanks, ET. Thank you. This podcast is for informational purposes only. All opinions expressed by me, Dan Nathan, Guy Dami, and any other participants are solely our opinions and should not be relied upon for specific investment decisions.