Inflation is on the top of everyone's minds as expenses continue to pile up and cause volatility throughout the market. Oil (BZ=F, CL=F) remains in flux as geopolitical tensions endure while the flow of goods through that region are also in trouble. While issues persist, parts of the market continue to thrive on the heels of a big week of earnings and economic data.
Yahoo Finance Markets Reporter Jared Blikre is joined by NewEdge Wealth Senior Portfolio Manager Ben Emons for the latest episode of Stocks in Translation to discuss where to find resilience in the market, give incredible insight into potential moves from the Federal Reserve, the energy sector, and more.
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This post was written by Nicholas Jacobino
Video Transcript
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JARED BLIKRE: Welcome to "Stocks in Translation," "Yahoo Finance's" podcast cutting through the mayhem, the noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio.
Today, I'm joined by Ben Emons. He is a senior portfolio manager at NewEdge Wealth, along with our all-star producer Sydnee Fried. Thank you both for joining us here today.
And on the docket, we're going to be talking about the inflation eclipse. The story that never dies. It never gets old. And our word of the day, resilience, in the market, earnings season, and even life. And this episode, by the way, is brought to you by the number 100 dollars that is, dollars a barrel.
Could geopolitical risk end up goosing black gold prices back up to triple digits? We're talking Brent, WTI. Ben, let's go beyond the noise. We want to talk some markets. And we're coming off a spate of strong economic data in the US.
We just had ISM print above 50. That was a week or two ago. We had jobs a week or two, just really accelerating to the upside, 300,000 payrolls, which you called, by the way.
But you got to think, are investors getting this wrong because it looks like things are getting stronger? This prevents-- this presents possibly a problem for the Fed.
BEN EMONS: It could be. It's a strong economy. So the narrative now shifted to like, why should you cut rates in a strong economy? You cut rates, typically, when things go South, when things go bad.
So I think the Fed can stay on hold here. But it has to watch what it's doing. Because even being on hold-- there was one Fed member last week, again, voicing the word hike. It's still on the table. And that, I think, is not the narrative in the market.
So if you're getting a strong economy, and it continues, and you have to bring in the hike idea, again, I will really change sentiment.
JARED BLIKRE: Yeah. Well, let me just bring up Jamie Dimon who just released his annual shareholder letter for JP Morgan. He thinks rates are going to 8%. And the 10-year yield right now is something like 4.45%. So not even quite at 4.5%. But it's been up to five. He thinks it's going to eight. That is substantially higher than anybody's pricing in.
What do you think about that coming from the most important banker in the world?
BEN EMONS: It's definitely to take note of, because these numbers are, let's say, long-term averages for the 10-year. If you go back to the 1600s until now, the average is about 7.5%, 8% in that range.
JARED BLIKRE: That's a long time.
BEN EMONS: Very long time. But you would what we call mean revert. So, meaning, like, you go back to the average. Why would this be possible? We do have a deficit problem. And we're not getting out of it.
Amazingly, with a strong economy, we're not actually narrowing it because we just don't have enough tax revenues. And we're spending far more than what we've ever done in the past. So this will, at some point, have to be reconciled, either change the whole course of fiscal policy, or let the market sell itself out.
This is what Jamie Dimon is really talking about. There will be, at some point, a new equilibrium in interest rates, where people say, I want more yield for all this deficit risk.
JARED BLIKRE: Yeah. It's always when we're searching for that new equilibrium that things tend to go haywire. But you look like you had a question.
SYDNEE FRIED: Well, I was going to say, is Jamie Dimon the only one with that kind of call?
JARED BLIKRE: I don't know anybody else of his stature that has an 8% handle on the 10-year. Do you?
BEN EMONS: Not 8%. But you have Bill Ackman last year--
JARED BLIKRE: 6%.
BEN EMONS: Yeah. He was making the case. And then he backed away from it, when he saw that he thought it was high enough. Trader.
JARED BLIKRE: You've got to talk to your book for a while. And when the market comes in line with your book, you set up. That's the way it works. But we're talking yields and stocks and all this kind of stuff.
And I know you always have questions for us based on your armchair work.
SYDNEE FRIED: Yeah. I'm thinking, so why is it-- explain yields and stocks, essentially, why is it price up, yield down, I think, is the question.
JARED BLIKRE: So in bonds.
SYDNEE FRIED: Yeah.
JARED BLIKRE: So you have bonds, which are inversely correlated with yields. So you talk about bond prices. When people are buying bonds, that means the yield goes down. Your explanation.
BEN EMONS: Yeah. It's what we call the teeter totter.
JARED BLIKRE: Teeter totter.
SYDNEE FRIED: I love that. Not tater tot, teeter totter.
BEN EMONS: Teeter totter. It's like the idea that this is math really. But if your yield goes up, you're going to be having more interest to earn in the future. But it is discounted over time. That's why our bond is a cash flow. And that leads you to a lower price in the future.
That's the math behind it. So yes, you should buy bonds when yields go up. And then you earn more interest. And then, eventually, if the economy goes a different direction, gets weaker, then that high yields will be your return. And you make that back into the price.
JARED BLIKRE: Yeah. And I think it's important to understand that there are different buyers of bonds all around the world. If we're just talking about US government bonds, you might have US individual retail investors buying through Treasury direct. They have investment directives of their own.
You might have Japanese people, not so much anymore, but, historically, when we have interest rate differentials, such that the US is paying a lot more money on bonds, people overseas will want to invest in the US bonds. So when yields here get to a certain level, even though that means that the price of the bond is going down.
When it hits that level, automatically, people say, OK, I should be buying some of that. So 3%, 4%, 5%. Correct me, if I'm wrong here, but that's, I think, basically, the way it works.
JARED BLIKRE: Now, we want to get to our word of the day. This is resilience. And this is not just about the persistently high GDP that we've seen. That could be characterized as resilient, the US economy, not just about sticky inflation, and not just the machinations of Jay Powell and Cole at the Fed.
We want to talk about interest rates and company earnings because company earnings have been very resilient recently. We have climbed out of an earnings recession last year, I believe. And where do you see? We're heading into big bank earnings season. What's your outlook?
BEN EMONS: So right now, we're still having a year-on-year negative growth rate apparently in earnings. That's if you take everything. If you strip out the Mag Seven, which is really high growth rate. And you end up with this negative rate. But the forecast then starts to improve.
In fact, actually, it's really interesting. My colleague was showing me this graph that it starts to really broaden out, at least, the analysts expect that the earnings will improve from a negative 3% to plus 10% to plus 15%, 20% in the following quarters.
I think that's really your expectation about a resilient economy. It doesn't get thrown off course.
JARED BLIKRE: It sounds like we're at the beginning of this cycle. So it's not even we're in the middle and wondering, are we going to inflect up or down. There's going to be some potential momentum to the upside then. That's what you would expect.
BEN EMONS: Yeah. That's what it looks like. And, to an extent, we've had a bit of a preview of it in the market since the October lows, where we had a real momentum building, but we haven't seen a major rotation out of these Mag Seven stocks just yet.
Some in the banks or in energy, but not major. So that's, I think, next, when those earnings come out in the future.
JARED BLIKRE: OK. I was looking at the sector action year-to-date. Energy, now, the number one sector. But we also have industrials creeping up. That's a cyclical play. We also have materials. That's a cyclical play. Financials, which is value and cyclicals.
What of these groups, like, we're waiting-- we've seen a broadening out. But what are we waiting for? Is there an all clear signal, where everybody's finally on the same team. I have an answer for that, because I've been in this business long enough. But your answer.
BEN EMONS: Yeah. I think people are watching the data of the economy. And what's interesting, these groups that you mention, every one of these data points have been really strong. When you look at manufacturing data, durable goods, data out of production, data that's all linked into that those groups that have rallied over time.
But I think what people are waiting for still is that the real green light as in green where we are right now is, obviously, with the Federal Reserve will do. If this is an economy that expands and supplies, Powell, says, that will bring ultimately prices down.
The green light really for that rally is that rate cut that the Fed can deliver, as it has reached his inflation goal. I think that's what people are still waiting for.
JARED BLIKRE: Yeah. And when the Fed starts, I think it's important to differentiate too. The Fed can cut rates proactively as an insurance, or it can be reactive. In other words, historically, they've seen, OK, we got the economy wrong. Things are deteriorating quickly.
We need to cut by 50 basis points. We need to cut four rate cuts today. That's much different than these proactive rate cuts that I think we're talking about now.
BEN EMONS: Yeah. That's exactly the right word, proactive. And the reason why it's proactive is because if you get inflation further down towards where the Fed target is, and you will not be cutting rates, you could actually have the situation of the complete opposite of what we've been through--
JARED BLIKRE: Spiral-- the deflationary spiral.
BEN EMONS: You can go to the downside. And then you end up in a really bad situation where the Fed has no choice but to rates. So being proactive is in putting one, two rate cuts ahead of that event happening should keep you from that say, that a bear, so to speak, in prices.
That's why they want to achieve. They want to do that. Now, will they? They're currently on a holding pattern, as we were talking about, because the economy being that strong that there's no need for it. But they are watching it.
I've seen on both sides, if inflation starts to pick up, again, they may have to hike. But, conversely, if you're having a situation where things turn the other direction.
JARED BLIKRE: Binary situation. Yes. Very binary.
SYDNEE FRIED: So if they cut in June, you consider that a proactive cut because the economy is still doing well?
BEN EMONS: Yeah. And, in fact, now, in the market, people have expectations that probability is less than 50% in June on the basis of all the strong data. So if they were to go ahead in June, markets would take it, like you're throwing a little heat here on the fire.
JARED BLIKRE: I just want to bring up. You wrote something really interesting in one of your newsletters that I want to bring up. And that's when we talk about central banks in the Fed, we've got to consider that there are other central banks in the world. And that this is an entire ecosystem.
And you were saying in one of your newsletters. How the ECB, could actually cut first and that could potentially, if I'm reading this right, take pressure off of the Fed.
That's something I hadn't considered before. So explain that dynamic for us.
BEN EMONS: So if you look at since the pandemic, that all the central banks followed each other almost in a synchronized way. Everybody had to ratchet up the policy rate, much higher than they have ever done over the last 20 years and much faster.
So emerging markets were first to do that. And once they did that, they were able to lower rates exactly for similar reasons. Somewhat proactive because inflation started to come off in emerging markets. But in the developed markets, Europe, US, Japan, we haven't gotten to that point yet.
So now, the ECB seems to be much more in that position to do so. They have this meeting this week, by the way, they will likely signal strongly that they will go ahead and lower rates in June. And that does take the pressure off the markets of everybody's expectations.
Because once central bank like that goes ahead with lowering rates, there will be others that will follow. That is being historically that way. And that's really because these economies are so linked to each other, that if the ECB is in a position to lower rates because the economy is weak enough that the prices are moderating, then the Fed will, eventually, follow too.
JARED BLIKRE: All right. We got to pause for a quick break here. So for our viewers on streaming platforms, we're going to take a quick break. And for everybody else, we're going to carry on with the show here.
Syd, you look like you had a question on the tip of your tongue.
SYDNEE FRIED: It wasn't a question I was going to state for the record that I would like the Fed to cut in May for the drama.
JARED BLIKRE: Wow.
SYDNEE FRIED: I want everyone to be shocked. I want us to not have the full screen prepped or whatever.
JARED BLIKRE: The Dow was down 1,500 points. I can just show you the screen. And say, it's Syd's fault.
SYDNEE FRIED: And say my money's draining from my account. But I like the drama of a surprise--
JARED BLIKRE: We got you.
SYDNEE FRIED: --cut.
JARED BLIKRE: We might get some drama.
BEN EMONS: Well, it really plays into the idea of [? salomé ?] and go away.
SYDNEE FRIED: Yeah.
BEN EMONS: Got at it and recover [INAUDIBLE]. And [? salomé ?] and go away.
JARED BLIKRE: All right. Now, it's time to get technical on some definitions here that we call jargon busters. And today, we're going to take a look at net interest margin.
And according to Investopedia, net interest margin is a measure of the difference between the interest rate paid and the interest rate received. And this is adjusted for the total amount of interest generating assets held by the bank.
So, basically, banks try to borrow at low rates. They try to lend at a higher rate. And they pocket the difference. So this is a cyclical phenomenon. So where are we in the business cycle? And what's happening with net interest margin now and going short term into the future?
BEN EMONS: So it's amazing that the net interest margin has been fairly stable, even though the yield curve is in now the term structure of interest rates is a two-year, five-year, 10-year, 30--
JARED BLIKRE: It's been inverted for over 15 months.
BEN EMONS: Yeah. Lowest inversion we've had since the 1980s. People have always connected the inversion of the yield curve with a narrowing interest rate margin. But I think what banks have been able to do is that they earn a lot of interest on short dated assets, securities, or deposits.
And as a result, have been able to sustain that margin, while there's a lot of loan demand in the economy, because the economy is good. And that spread is relatively stable. And I think for-- the yield curve is, therefore, not mattered at this point.
At some point, it will. But banks have always been able to capitalize on that too. Once the yield curve becomes normally slope, positive slope, then banks would probably buy longer dated assets and earn that yield and have the remainders in the past is pay out at a very low interest and make money that way.
So I think they've been pretty smart about how to manage it. But that it is a cyclical phenomenon. It's clear because it will change. Margins could-- actually, if you're getting a normal yield curve, it probably will widen the net interest margins.
JARED BLIKRE: All right. Something to pay attention to, as we get these big bank earnings starting later this week. And now, yes.
SYDNEE FRIED: Yeah. I was just going to say, I know delta is Wednesday. And delta is big. But bank earnings are always first. Why?
JARED BLIKRE: Back in the day, it was Alcoa, which was an aluminum. It's an aluminum--
SYDNEE FRIED: Alcoa?
JARED BLIKRE: Alcoa was number one, just because they were number one. Banks are huge entities. And they're reporting on a quarter, which just ended basically 10 days ago for them, not even 10 business days. So that's incredibly short.
They have the resources to do this. I think it's just because they're so big on their game. Your thoughts.
BEN EMONS: Yeah. I think that's really more of a goal, like, a red herring. There's a counter issue here.
JARED BLIKRE: The smaller companies get up to 90 days, something like that. Big guys go pretty quickly.
SYDNEE FRIED: I don't know.
BEN EMONS: It was also board driven, when companies can make a decision when to report. There's been companies who either they also, by the way, make a decision, whether they would give guidance on future earnings.
We've had for some companies not giving guidance for some time because of the pandemic.
JARED BLIKRE: Yes.
BEN EMONS: Others have given guidance much sooner. So that matters, I think, too. I'm not, otherwise, sure why the bank's at first. But everybody is looking at the banks first. And maybe, with the way it is, as the banks goes, the rest of the earnings season goes.
They are definitely in the big attention right now because there's a lot of market activity happening.
SYDNEE FRIED: Yeah, for sure.
BEN EMONS: So their results are probably going to be strong.
JARED BLIKRE: From reads on the consumer to the M&A market, IPOs, everything. We got to move on here. This episode brought to you by the number 100. And that refers to dollars a barrel. That is the WTI price.
And this is a number that is woven its way through the financial fabric of the space time continuum recently, as the debate about $100 crude oil returns to the fore. We're talking about the impact of geopolitics and oil, like, most commodities, is mean reverting. So it's range bound.
And most of the price activity that we've seen in WTI over the last year has been from the mid 60s to the low 90s. So maybe $25 a barrel. But what happens if we see WTI and Brent ticking higher? $85 for WTI, Brent, $90. Another $10. We're talking about $100 oil. How does that change the game?
BEN EMONS: I want to add the psychological, as in this is an important milestone, $100 barrel is like-- you can see the headlines in the newspaper.
SYDNEE FRIED: I'm picturing a barrel with the Benjamin on top.
BEN EMONS: And people will look at gas prices immediately, which, by the way, have also been on the rise nationwide. It's up about 6% over the past month. And so I think that is for that reason, it's not targeted by OPEC in itself. They don't have put out a specific number.
What is interesting from OPEC, maybe not as known, is that all these countries calculate the oil price where they break even on their fiscal budget. Now, that price, that fiscal break even price, is, actually, about $95 on average currently across most OPEC members.
So there's something about $100 a barrel that's important to them. Ultimately, the oil market is much about supply and inventory. As we know, OPEC is being continued to cut production. Not everybody is complying with that. But they've been able to do it so far and keep it together.
That's why the market has been pricing towards that $100 a barrel as opposed to, if they didn't, can they get all this discord with each other, then that $100 a barrel would not be so likely.
JARED BLIKRE: Yeah. And you're right. It is a lot about the headlines. Because anytime I see a $100 barrel of oil, especially, when it's been locked in a lower trading range, it piques my attention as well. I want to stick with commodities here and talk about gold. And something really interesting-- another thing I learned from your newsletter, you've been tracking the term structure of gold, not only in the futures market, but spot gold versus futures gold.
And just real quick, if you have a gold contract in a futures, let's say, you want to invest in gold through the futures market, you're buying maybe December 2024 delivery goal. That means gold that's going to be delivered at the end of this year.
Well, that's several months away. And so you're paying-- you have to-- somebody else has to store it in the interim. And so there's going to be a price there. If you want to buy it, you have to, maybe, borrow money. So there is a risk-free interest rate. And so storage costs and interest rates, risk-free interest rates, those play mathematically into these calculations of future prices.
So what we're seeing now is an aberration. That's where the spot price that looks to be climbing above the futures prices. And just explain what that means for us.
BEN EMONS: It's a very unique situation in the gold market. It happens a lot in oil because of that. It is, ultimately, really about supply. And as we know with gold, it has a very limited outstanding supply. And mining activities have slowed down a lot. And they haven't found much gold over the last couple of years.
And China has been one of the central banks has been on the physical gold market accumulating large volumes of gold. So that has driven up the spot gold price, the actual price that where you pay for physical gold. You can actually go to gold exchanges or retailers, and if you try to buy gold, it's not that simple anymore. it gets sold out pretty quick.
So I think what we call backwardation is that's the term for in the futures market when the spot price gold is higher than futures, that's really, I think, there's just not enough gold supply available in the market. And, therefore, you're getting a higher spot price.
SYDNEE FRIED: When you buy gold futures, what you were saying earlier, someone literally has to store the gold for you somewhere. What does it mean? Is it a piece of paper?
JARED BLIKRE: So we've opened up a giant can of worms. If we had another three hours, we could explain. Basically--
SYDNEE FRIED: We don't have three hours.
JARED BLIKRE: We don't have three hours.
SYDNEE FRIED: Short explanation.
JARED BLIKRE: Is there a short explanation? The question-- what was the question?
SYDNEE FRIED: If you buy-- when you're buying gold futures, is it gold that someone is storing for you? Or you're just buying something in the universe that--
JARED BLIKRE: It's a theoretical calculation.
SYDNEE FRIED: It's a theoretical calculation.
BEN EMONS: It's, basically, a promise, so to speak, on the future.
SYDNEE FRIED: Promise. Promise. I want my bar of gold.
JARED BLIKRE: And in the end--
BEN EMONS: Then promise, it will be $2,500 in the future.
JARED BLIKRE: And it's paper gold. And there's all kinds of nice conspiracy theories there. So we're just going to leave that where it is, and not touch that.
We have a fun segment before we go. So here at "Stocks in Translation," we do like to roll out the red carpet. But no movie stars today. No movie stars. We do have charts-- yes, we do have movie star-- along with a new spin on an old Hollywood gossip segment, who wore it better.
And today, we're zeroing in on Bitcoin and gold. That's right. The other Bitcoin. Don't write letters. Both the yellow metal and digital gold recently surged to fresh record highs. But each took a vastly different journey. Bitcoin, it peaked in late 2021. Promptly shed over 3/4 of value over the next year before furiously launching to record highs late last year.
And we've seen it continue this year. Meanwhile, gold peaked in early in the pandemic. And this was a year before Bitcoin peaked. It spent over three years trying to punch through $2,100 per ounce. Max drawdown was only 22% in gold versus a 78% drawdown in Bitcoin.
So the bottom line is both Bitcoin and gold, they rocketed from technical purgatory. But which one wore that better? Which one wore the breakout better?
BEN EMONS: I think it was Bitcoin because it was a currency that was such in hibernation, as they I call it.
JARED BLIKRE: Oh, winter--
BEN EMONS: Winter.
JARED BLIKRE: --of sorts.
BEN EMONS: Sleeping.
SYDNEE FRIED: Bitcoin is coming.
BEN EMONS: Bear sleeping in hibernation in winter. And it awoken suddenly. And it was all about that one, I guess--
JARED BLIKRE: It's exciting.
BEN EMONS: Yeah. Exciting. It's a recognition that technology is adopted more and more everywhere, and blockchain technology in this case. And they talk about what they say halving health.
JARED BLIKRE: Well, a big one. Look at the previous halvings, they've been tremendously bullish. And I think the bottom line is, I got to vote with crypto too. I got to go with crypto because it's exciting.
And gold-- so we're talking about a replacement currency. Some people talk about that. You don't want a lot of volatility. So that's not necessarily a feature. You probably want something with less volatility like gold. Nevertheless, we do look like we have to go here.
So we got to say thank you for Ben. Ben, thank you for joining us here today. Sydnee, as always. And we will see you another day.
