Joey 0:00

All right, it's 11:00 AM on Friday, August the 21st. Welcome back to another episode of Market Chatter on Wealth Unplugged. My name is Joey Loss.

Adam Van Wie 0:09

And I'm Adam Van Wie.

Joey 0:11

And we've definitely got some action in the markets. I want to start with some good news. A week ago, we were looking at this market and saying, how is everything this good? I think it was, we were talking about how it was one of the healthiest environments for company profits in revenue growth that we've seen in a long time. Looking at quarterly earnings reports that were put out by corporate, by companies in America, 76% of companies beat expectations. Nearly 1 in 6 then raised their forward guidance, which is roughly double what the 25-year norm is on a quarterly basis. And breadth looked pretty good. I mean, it wasn't just like the big guys. In fact, the big guys weren't really the source of a lot of the growth. It was the other 493 that were doing a lot of the lifting. And all of that started to change this week. So based on that, I mean, Adam, where do you want to start as far as picking apart what's going on?

Adam Van Wie 0:59

Well, I think you bring up a great point there. If it weren't for some external factors, if you just look at the market right now and how well corporate America, you know, corporate earnings are, how strong they are, you could make a case that the market is potentially undervalued right now. But that isn't how the market works. The market looks at everything, and there are definitely some major external factors that are playing into this. And we've talked about this several times on this podcast, on our radio show, there is this battle going on between the Iran war and everything that has been caused by that. So I'm talking about higher oil prices, higher interest rates, and then how well companies are doing. And those 2 things are directly at odds. And that's why you're seeing these, this back and forth trading on a daily, weekly basis. We're sitting just a couple percent off of an all-time high, so it's not like we're in a bad spot right now, but— It feels like maybe we should be doing a bit better if we're just looking at earnings. But then you look at the backdrop of interest rates, especially this week, yields are just spiking, and then you kind of wonder, well, are we overvalued? And so there's a real dichotomy there between these 2 different things, and it's hard to say which one is going to win out.

Joey 2:20

Yeah, those are, I think that's right. And one of the things that is easy to overlook is when rate yields when yields spike like this in the bond market, sometimes it's because equities are doing so well that if bonds want to get any looks, they have to raise what they're willing to offer because they're just, the competition is so powerful. I mean, for how many years now have equities provided 20-plus percent returns?

Adam Van Wie 2:43

Well, definitely the last 3, and if you remove 2022, probably 5 of the last, or 5 of the last 6, 4 of the last 5, something like that.

Joey 2:51

Yeah. And, you know, people have risky parts of their portfolio and non-risky parts, but the allure of 5 years of risk doing that much performance does have an impact on the floor of rates because these bonds really have to make some kind of case to compete with equities that perform that well. That's part of it. But the other part of it is the irony is that when rates start to come up like this, it can have a downward impact on equities because now that risk premium that was present for several years has been closed a little bit. It's been narrowed. And so I think maybe the rising rates in the short term is a little bit of the explanation for why we see equities falling in price. Just what'd you say, 1 or 2% from all-time highs over the last week?

Adam Van Wie 3:36

Yeah, roughly. I mean, I think the NASDAQ's a little bit more, maybe the Dow a little bit less, but yeah, roughly in that range.

Joey 3:43

Yeah. And then yields, I think just before the call you were saying it's kind of remarkable. The 10-year has touched 4.7-something,

Joey 3:51

and just in March before the war started, it was 3.92. That's a big jump on a material.

Adam Van Wie 3:58

Huge jump on a 10-year. Yeah. Without the Fed really doing anything especially. I mean, that, not that they control the 10-year, but you know, they do when they move, the market tends to move with it. But this has been just trading driving yields higher and people being scared about the level of debt that's been taken on by not just the US, but by some of these AI infrastructure projects as well. So there's a, More risk in the bond market right now. At least that's what the market is telling us.

Joey 4:31

Yeah. Yeah. So if we like build this whole story, I think we get it like in small pieces and it's messy in our heads. And I think for people who just pop in and they're like, what's going on in the market? It can be very difficult to be like, okay, well, here's this thing going on, which is affecting this thing, which is affecting this thing. And that's how we get what we're seeing today. You know, for the first few years of the AI, I'm going to, so Before I start rambling, I want to try and build this together. I think it's kind of interesting. And I guess maybe you help guide me and chime in on as we build this story and you tell me where I'm, maybe I'm misunderstanding stuff. Um, but I feel like you're plugged in. You have a better sense of knowledge about it. I'm kind of a better representation of like, kind of knows what's going on guy. And so maybe together we can build this. So over the last several years of this AI boom that's going on, You had the mega players, the hyperscalers spending free cash flow to build the future. And the stock market initially looked past it and said, okay, you know, we're building the future. Everybody's excited about AI. They can do this for some period of time and we're not gonna have a big problem with it. And whenever there's a little bit of stress in the market, the market in the short term would decide, you know what, we don't love this spending. Like, why is all this free cash flow going toward it? But for the most part, it didn't have any major problems with it. And then we get to this year and the temperature seems to rise a little bit on sensitivity about that free cash flow going to effort of the infrastructure buildout for AI in the future. And then you have the Iran war start, and then we notice for the first time that these AI companies are starting to borrow to do this infrastructure buildout instead of just using free cash flow, which is a big moment because one of the defenses that we had when everybody says, hey, this is an AI bubble, it's an AI bubble, which has been floating around for 2 years, one of the defenses is, well, they're not borrowing, they're spending free cash flow. That's very different. Well, that's no longer something we can say because it's not true. And so the companies are obviously bullish. They think that this is worth spending on or they wouldn't be spending on it. It's worth borrowing for or they wouldn't be borrowing for it. But all of this extra activity is creating bonds that then have high rates, which treasuries then have to compete with, which is part of why—

Adam Van Wie 6:37

Not one-to-one. The treasuries still have lower risk than a corporate bond, theoretically. But that's another problem right now is that the US did hit $40 trillion in debt, I believe this week. And so now there's nothing about $40 trillion that makes it any special number, but it is a psychological number that we crossed. It just sounds like a lot more than $37 trillion for some reason. And so the fact that we're that much in debt also, that Seems like a bit of risk in investing in treasuries as well.

Joey 7:14

Yeah, I get, I mean, I remember recording the tax episode right after the tax bill came out and launched on July 4th, and I was saying 38 and change or something. I mean, it's growing fast. That was yesterday. So I get it.

Adam Van Wie 7:25

Yeah, really fast.

Adam Van Wie 7:28

And it doesn't seem like we want to do anything about it either. I mean, it just continues to grow on deficit spending.

Joey 7:36

And so to build on that story, I mean, first of all, does that seem fair so far? Like that's where we're at?

Adam Van Wie 7:42

Yeah, I do think So I think that the one piece that maybe that we didn't touch on was the LLMs, the large language model providers. So think ChatGPT, they've always borrowed because they didn't have any cash flow to begin with. So, but the amounts there, I don't think are the same as the amounts that the large companies are now spending on these infrastructure buildouts. I think that the scale has ramped up considerably.

Joey 8:13

Yes. And you have regulatory risk. People, there's a lot of negative sentiment about data centers, which we should probably spend a few minutes on because I feel like we are plugged in on that.

Adam Van Wie 8:23

We should. Yeah.

Joey 8:25

And midterms coming up, a lot can change. So there's a lot of reasons for the market to maybe want to take a breath. And you got rising rates, you've got regulatory risk. There's plenty of reason for everybody to just want to pause and see where do things land by January of next year before ripping higher again. And if that were true, it'd still be a good year. But the data center thing is big. And Adam, you've had a pretty good grasp on that. You wanna share why that matters?

Adam Van Wie 8:48

The data, see, the data centers are a complicated topic. They've become a real hot button issue, especially around the midterm elections. Data centers have existed in the US for just a long, long time. They've just now gotten on the radar of people because of the scale of what's being done now. And so these are not a new thing. And you may have lived near a data center for your entire life and not ever have had an idea because essentially it's just a huge warehouse with a bunch of servers in it. That's it. I mean, it sounds evil and nefarious, but it really isn't. But the fact is we need this computing power to stay in the pole position on the AI race. The big risk here is China. We can't let China win this race. It's kind of like the nuclear race back in the day. I mean, it's maybe not on the same level of destruction that's possible, but it could be potentially. This AI technology, who knows where it's going and how powerful it'll be. And so these are absolutely, in my opinion, essential to the future of America. And knowing that, I think there's been a huge information campaign against them coming from There's been, there's talk about the water usage. There's talk about the electricity increase in prices. None of these things are extremely big threats to local communities. And the reason is that they've gotten better at this technology. The water usage thing is not the case anymore. Most of them use a closed-loop system that uses the same water over and over for cooling. Electricity thing, there, there is a, I think it was, I don't know if it was an executive order or something similar, but the most, most, excuse me, most municipalities are ensuring that when the data centers get built, that they are responsible for any increase in cost in electricity in that local area. So they can't raise rates because of a data center. So these things that are fears have been largely taken care of. However, that doesn't mean that people want them in their neighborhood. I mean, it's much like anything else. Not in my backyard is a famous saying. NIMBYs, not in my backyard. It's always like that. People might want the benefits of them, but they don't want it in their community. And I understand that argument completely, but there are other areas of the country where people are saying, yes, let's do this. Ironically, the most data centers per square foot currently, I believe, is in Loudoun County, Virginia, a very populated area near Washington, DC. And so it's already in their backyard and a lot of people don't know that. So I think that ultimately cooler heads will prevail and data centers will get built. They might be built in very remote areas in Texas, but I think that it's going to happen. It's almost inevitable and we absolutely need them, although they're very unpopular right now.

Joey 11:57

Yeah, that, that was a good summary. I remember you talked about one of the biggest concerns is an innocent misunderstanding. about the water usage, and it was someone who is pro data centers wrote a book trying to explain it to the public for the first time several years ago and just kind of fumbled that explanation of water usage. Very badly. I honestly want to go read it because I don't understand how this is what came out of it if what he meant was so different. But the, what he wrote made it seem like, you know, you're just pounding water as you use these, as you type in prompts to Claude, you know, it's like, how many bottles of water are you using? The reality is the data center uses less net water than a golf course, and I've not heard people picketing golf courses, at least not nationally. Bernie Sanders isn't talking about that issue. So I think it was a misunderstanding. And, and I do think like a lot of the opposition to data centers comes down to this is just what municipal, municipal governments are set up to deal with is, okay, if this thing's going to come to our town, how do we make this mutually beneficial? What are the rules of engagement that allows everybody to do this peacefully? And if you can't get to those rules, you don't allow a data center in your town. That's a local issue. And I think, I think the first year or two, you had some, a lot of municipalities that just did not understand what they were doing. And I bet there were some predatory deals, you know, curated by data center companies. And now there's a lot more information out there and people need to do their due diligence and figure out how to deal with this issue. But I do think it's something that can be addressed to everybody's benefit, including local municipalities who invite a data center to their town. The rules just have to be the right rules for that area. Agree. Again, I think we're figuring it out.

Adam Van Wie 12:16

Badly. Yeah.

Adam Van Wie 13:40

It's become a very emotion-driven issue and it's really not an emotional type of argument. I mean, I think you laid it out very well as to how this could be done with, without, with removing emotion and just looking at facts. It just doesn't make sense to make a data center an emotional issue. It doesn't. It's not that type of issue that people should have very strong feelings about when they largely don't even understand what it is that's happening inside these things.

Joey 14:09

Yeah. And the last point I care to make for now on this, I think we've wrapped it up well, is just that the, there are now cases where the grid for towns that accept data centers is made stronger and the cost of energy has actually gone down for residents. And that's because a lot of municipalities have realized you can have a bring your own energy policy. And if these data centers still choose to go somewhere and that's the policy that they're given, Well, they're bringing a lot more power to the grid that exists in a given municipality. And when you have greater scale, as any American business enterprise has shown, you have better cost controls, you have better resilience, everything seems to improve. So I think that particular rung of policy is the most impactful, and we can end up with better grids everywhere there's a data center while also getting the benefits of data centers if these rules are set up right.

Adam Van Wie 14:58

Yeah. And there's some great examples of what Meta's been able to do around those. I think particularly in, I wanna say in rural Louisiana, they have some real success stories where they've invested in local schools and taken them from failing schools to some of the better schools in the state. So there can be real bargains made here between the companies and the municipalities that benefit everyone living in the area.

Joey 15:22

Yep. Yep, for sure. So looking at year-to-date data, we've got the NASDAQ at just over 15%. We've got emerging markets sitting at 23.3% year-to-date. That's incredible. Yeah, we've got S&P 500 at just over 12%. We've got developed international at 14% and the Dow at over 10%. Small caps over 20% as well. I mean, I'm not, there's almost nothing to talk about aside from the bond yields, I think, as far as this week's activity.

Adam Van Wie 15:48

Yeah. And then you've got the bond market at basically zero for the year. So that's, yeah, anyone with a 60/40 portfolio, it's not the stock side that's weighing you down right now. It's the bond market.

Joey 15:59

We know the market's doing well. Bessent made some announcements this week. Adam, can you run us through what they're doing at the Treasury?

Adam Van Wie 16:05

Yeah, they recognized that there was a major sell-off in the bond market, obviously, and they had been buying long-term treasuries, but they decided to double that buying this week to try and calm the bond market. It seemed to work briefly. We saw a nice update on Wednesday, and that was a direct result of that announcement. But then Thursday, it seemed like the market shrugged that off and just yields spiked again, and the bond market and the stock market were down. So it They're doing what they can to try and control some of this fear that's gripped the bond market, but so far it hasn't been enough. There, there more needs to be done, I think.

Joey 16:48

Where is the fear just all about Iran at this point, or is it, is there domestic concern?

Adam Van Wie 16:54

I think the, the fact that we hit $40 trillion in debt and Iran, I think Iran started it, and I think that that psychological barrier that was crossed this week is just sort of, I think everyone's just caught up in it. Yeah.

Joey 17:08

Yeah. I guess oil's back over $90.

Adam Van Wie 17:10

Not oil isn't, or what is it? Brent oil's at $86.58 today.

Joey 17:17

Oh, it's $86.50 today. Okay. Yeah. So I mean, what does this suggest? What, how do you feel about Kevin Warsh's job right now? Do you like it more or less than 2 weeks ago?

Adam Van Wie 17:19

Yeah. Okay.

Adam Van Wie 17:28

Well, I never liked that job. I hate that job. That job is so thankless. I think it's become harder.

Joey 17:35

Yeah.

Adam Van Wie 17:36

What are you going to do? Are you going to raise rates right now and slow the economy down? How is that helpful? We're not— remove rising rates and the stock market from everything. Are we in a position where the economy is just on fire so much that raising rates is going to slow it down and slow inflation? No, I don't think so. I would say a resounding no to that. The inflation right now is caused mainly by rising oil prices and raising rates is not going to bring down oil prices. I just don't see how it's helpful. And this neutral stance is probably the right stance, but it also gives the impression of they're not doing anything. And so people are going to be angry about that as well. I just don't think there's a good solution right now.

Joey 18:26

Yeah, I kind of agree with, I feel like they have to just hold tight because the— there's not, I mean, when you look at the breakdown of inflation in the Bureau of Economic Reports, like there, there's not, you don't see inflation in material inflation in other areas. It's not creeping up, it's just oil. And we've talked about this a few times in the past. The longer oil stays elevated, the more real the inflation impact can become. And then now you're having a legitimate conversation about, okay, maybe we need to raise rates to combat inflation. But the problem is when it's temporary, then it's not necessarily truly inflation. It's just an elevation of price until oil goes back down. And I think a good way to symbolize this, as I've explained it to clients, is if you see oil spike in the short term and you buy something on Amazon or Target and it, you might notice a surcharge and it says shipping fuel charge or whatever it is, right? Just some, but it's its own line item and it's acknowledging the fact that oil has hit a certain point. And temporarily this costs a little bit more. When that line item goes away and the cost of the good just becomes more expensive because Amazon's lost faith that this is a temporary thing, that's real inflation. That's the moment it becomes an enduring inflation and not a temporary thing.

Adam Van Wie 19:41

Absolutely. And, you know, technically inflation is too much money chasing too few goods, but that's not the situation we're in right now. That's what happened in 2022. Money, money was so easy to come by. That we just flooded the entire system with excess cash and everybody was feeling wealthy and things were getting bought before they— things were selling out before they— people couldn't make enough goods and services to sell to everyone. That caused that inflation. And that is truly what inflation is. Yes, these price increases because of oil can become inflation, The actual definition is a little bit different. Yeah.

Joey 20:26

So I guess that creates the juxtaposition we've kind of painted here in the podcast is at the short end, you just have this battle over, is there inflation? Is there not inflation? We've expressed our position. We'll see what Kevin Warsh thinks when the next meeting comes around. And then you have the long end of the curve where as rates rise because there's more and more borrowed money, you potentially compress the growth stock element. which has, because the risk premium just gets a little bit less attractive if bonds are paying higher money, right? So that's part of what causes this momentary blip in the values, and that can potentially hurt the people who've borrowed the money, which raised the bond rates in the first place. And so it's just kind of interesting to watch. I don't think it's forecasting any sort of doom because we see broadly like market, you know, the companies are doing so well across the entire stock market, but it is kind of interesting to watch. I can't really think of another moment where I've seen that particular combat going on between them. Can you think of any?

Adam Van Wie 20:40

Yeah.

Adam Van Wie 21:22

I cannot. This is a, I think, I don't think it's completely unprecedented, but I don't personally remember another time like this. When you're thinking about inflation too, I think there's some really good examples in our daily lives right now. The biggest one that comes to my mind, concert tickets are seeing, have seen massive inflation over the last 5 years. That is a direct result of The K-shaped economy. So people at the top of the K have almost unlimited funds for things like concert tickets and airplane tickets. Like first-class tickets is another area that have seen inflation. That is because there is a whole lot of money chasing a scarce good in that one area. So these big concerts like Olivia Rodrigo and Noah Khan this summer, they were— the resale market on those tickets was $400 for nosebleeds, and some of them were selling for $8,000 a pop. That is inflation. But the thing that isn't inflation was the thing that you had a great example earlier that your good that was shipped from China when oil was $90 a barrel, temporarily costing more because of the cost of shipping. That's not inflation because that will go back down. Those concert tickets unlikely to go back down as long as the people at the top of the K continue to have this just abundance of money.

Joey 22:43

Yeah, that's a good comparison. And I actually talked with your dad on the radio last weekend about what I think is we need to like just split the K-shaped economy discussion into 2 parts. The first part being assets, the second part being cash flow, because over the last several years it's really been one story. You know, it's both income and cash flow. If you had assets going into COVID, I think you've said this many times on this podcast, like you're better off now than you've ever been. by a lot, and you're better off relatively than anybody who did not have assets at this point, you know, going into COVID. And, but it was also true at that time, several years ago, that the wages were growing very differently. So for people that likely had assets because they had high wages, their wages were growing faster, relatively speaking, to the cost of life than those at the bottom end of the K. Well, now this year we've actually seen a glimmer of positivity in that on the cash flow K-shaped economy discussion, there's been a convergence. Wages have been growing at a healthier clip relative to the rise in cost of living than they have been for several years. So I think that's worth distinguishing. Does it feel that different to the people that are at the lower end of either side? No, it still doesn't feel great. But I do think it's worth noting that that piece is positive because that is the piece that we can control in the short term. We can't just overnight redistribute assets, but we can focus on policy that helps people at the lower end of the K. You know, get more income this year. What they do with it is up to them.

Adam Van Wie 23:20

For sure.

Adam Van Wie 24:12

Yeah, that is a positive development, but it needs to go on for several more years to make a marked difference.

Joey 24:19

Yeah, I agree. So I guess I'd be remiss not to say Bitcoin woke up like 2 or 3 days ago. Yeah. Where did that come from?

Adam Van Wie 24:26

I don't know, man. It sure did though. It's up around $77,000 now from, let's see, as little as 6, a little as a few weeks ago. I mean, it is just a, it's a huge, Huge difference. It had like a 10% spike in the last week or so, or maybe more. But yeah, it was at $60K, now it's at $77K. I don't know where that's coming from. Maybe people selling treasuries and buying Bitcoin for safety. That would be really ironic, wouldn't it?

Joey 24:58

Yeah, that would be ridiculous, but interesting for sure.

Adam Van Wie 25:01

Yeah, I just don't know where else it would come from.

Joey 25:04

Yeah, I get, yeah, that's a fair point. But one thing that we know is that people are just not letting money sleep. Like no matter what was thrown at investors these days, they find someplace that makes sense to them to park it other than their mattress.

Adam Van Wie 25:17

That is true. And I don't blame them because as quickly as, as the yields on money markets and high yield savings came down, they do not go up at the same rate that they came down. So it's not like you're getting 4.5% return on your, on your savings right now, despite yields spiking like they have. It may happen, but it's going to take a while. So in the meantime, where do you deploy that cash? Yeah.

Joey 25:41

Yeah, that's the right question. So anyway, I feel like for 2 guys who've been sick on and off this week, I feel like we did a pretty good episode. You got anything else in mind that we should cover for people?

Adam Van Wie 25:51

No, no, I just, I hang in there. I mean, so everything feels dire in the moment. It always does, but things have a way of coming back around in unexpected ways. I don't know. I don't know what's going to turn yields around, but they're not going to climb forever. They're, something will happen where they will turn lower and it's, Trying to predict what that catalyst will be is impossible, but nothing lasts forever. So just hang in there. This too will pass.

Joey 26:22

Yeah, I think that's good advice. And each other time something like that's been said this year, it passed. And a new predicament arose.

Adam Van Wie 26:28

That's true.

Adam Van Wie 26:30

Yeah, I feel like every time we do this podcast, there's a new and exciting challenge in the market that has since been resolved a few weeks later.

Joey 26:39

Yeah, well, good for business, I suppose.

Adam Van Wie 26:41

That's right.

Joey 26:43

All right, Adam, thanks for your time, and I'll see you in a couple weeks.

Adam Van Wie 26:46

Thanks, Joey.