4 Things You Need To Know This WeekAug 29, 2022
Every single Thursday we host a live discussion in our Discord channel at 5:00pm EST. This gives you the opportunity to ask us questions and hear our thoughts on the things you want answers to!
Here are the 4 key things we went over:
Why the market reacted so poorly to Jerome Powell's Jackson Hole Speech
What long-term narratives we're watching as we get closer to the next inflation report
How the crypto market could turn, on this slightly more bearish environment
- If the Real Estate market crashes or bounces back
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Check out a broader summary & transcript below!
From Moby.co, this is The Flagship Pod, a weekly podcast about the economy, the stock market, and the various market forces that power the world around you. As always, I'm your host, Peter Starr, finally bringing back our regularly scheduled program. Ladies and gentlemen, Justin Kramer, our CEO, co-founder, and chief analyst is back. Justin, dude, so glad to have you back. What's up, man? How's it been?
Good, good. I'm excited to be back. A lot to talk about today. There's obviously a lot going on in the markets right now, but it's summer. If you're ever going to take a break, good time to just do your education now, and learn what's going on, because the fall and the winter are going to be set to be crazy.
Exactly. The main thing about the market is we take this lull in August, and then the minute Labor Day hits, we all collectively as a country sprint to Christmas or Black Friday, basically. So a lot to cover from that end right there. But it's also, for the August audience, you've obviously seen us covering a lot of long-term narratives. We'll be covering those. We'll be covering a lot of macro stuff as well. But let's just start off by just saying sleepy August has ended with a hammer.
Judge Jerome Powell came out from Jackson Hole, like Groundhog Day, and said, "No, we're going to keep raising rates, you all." And the market is not responding well.
What do you think about this, Justin? How's this bull period been in August for you? And what do you think about Jerome Powell remaining hawkish despite everything going on?
Yeah, the bull period's been interesting. We obviously had Jerome Powell, and if you don't know this, about a month ago, say to everyone that he sees an end to the interest rates rising. And that's what spurred this bull run we've seen over the last month or so. Not necessarily saying that things were anytime soon, but the fact that he is saying there's an end in sight made investors just very happy.
That's why we saw a bunch of stocks go flying upwards. He's been telling people for the last month that we definitely want the clear by any means. It's good to see inflation start to come down. Jerome talked about an end, but none of those things are happening anytime soon. Until we can point to the date and say, "It'll be over next week," a lot of this is just going to be smoke and mirrors until then.
So today, Jerome Powell came out basically just reiterating that. Continuously, the interest rates, they're still way above their target inflation. The economy's likely to be taking a hit. People might lose their jobs, but this is unfortunately what they need to do to keep inflation under control.
So the markets saw that and just fell off. The Dow, as of now, is down over 600 points, and the NASDAQ is down 3.9%. So this is definitely a bit of an overreaction or correction to what has been happening over the last month. But unfortunately, it's just the reality of which we're living in, and there's still issues with the economy. Things aren't terrible but we're still a long way away from everything being fixed. There's no new news per se, but just a reconfirmation of what's going on from our government officials.
Precisely. And it's one of those things too when there's just not going to be any actually bad news until the middle of September when we get an idea of where inflation is. Meanwhile, at the same time, the market is just trying to get as much value out of this bear period as possible, which has been artificially inflating prices. We're at this period where we're not going to get any real genuine answers until A, midway through September, and then B, once earning season hits in October. So what we're seeing now is just a lot of just long-term narratives. What we're seeing right now is the market just trying to maintain any semblance of good vibes, and you're just watching people buy up and buy up. But of course, that is entirely driven by hype and not fundamentals, which is why even the smallest hint of bad news can completely snap this little bull period we saw. It's not quite back to bear territory yet, so don't celebrate just too soon if you're in the bear zone, you all. But it's really interesting to see exactly where we are in this.
And so I guess the other thing too is just talking about where we are in the macro environment because there's been a lot of awesome news this week that is potentially good, bad, or so-so. I've been trying to make sense of the market's response to the announcement that Joe Biden's administration is going to be forgiving $10,000 of student loans or 20,000 if you've gotten Pell Grants. And my entire position has been in SoFi on that, and I've been watching SoFi either A, pop 8% or go down 6%. It's up 2% on the week.
Justin, I'd love to get your view here, because this is a very complex financial topic. I thought student loan forgiveness meant bank apocalypse, especially for a stock like SoFi, which relies so heavily on what is it called? Student loans and student loan fees. What are we looking at here in terms of the market's response to this income stream being taken out of the market or more liquidity being entered into the market from the bottom upside? It's very confusing. It's all very much political noise right now. Would love your perspective in terms of what the actual fundamentals here will be and how this can potentially shake out.
Yeah. A lot of this has been priced into SoFi for some time to a certain extent. Obviously, not the loan forgiveness per se, but SoFi is down over 70% from its all-time high. So for a while now, the Biden administration has been pushing this student loan moratorium into perpetuity. It's supposed to end one month. It gets pushed to another month.
That month gets pushed to another month, and so on and so forth. And so it's given a lot of investors pause into thinking, this probably is never going to get paid back or it's going to get pushed so far down the road that a lot of the future revenue streams associated with SoFi would likely just essentially evaporate or just be pushed years out.
And so over the last five days, the stock's up 2% roughly. And it's just, again, being priced into what's already going on the 10,000 forgiveness. And what we're hearing so far is likely to be potentially the final stage in this, so give some investors some forward-looking hope that whatever happens next is good for SoFi's business. Again, it's too early to say right now. But even with the stock reacting positively over the last few days, it's still so much down over the last year that we still need more news before we can definitively say one way or another.
Exactly, and so it's one of those things too. We have to see where this shakes out because this is not going to be a big test or anything for inflation heads. We're still trying to assess exactly what is contributing more to this inflationary environment. Is it just supply side situations wherein energy costs and supply chain costs got so high that everything got expensive and therefore that's why inflation was up? Or is it also monetary policy since we had not only the $2,000 checks that came out a bunch in 2020 and 2021, but the payment protection program loans which all just gotten forgiven?
So the main question moving forward is going to be, where exactly are we in this inflationary environment? Is it being driven by monetary policy? Is it something that Jerome Powell can actually solve by freezing the markets? Or is this something that we just have to wait for supply chains to shake out? No matter where we are in that conversation, both things look goofy right now because natural gas prices are popping off again as Russia is temporarily freezing supply to Europe. That's cool. Awesome. Love that. Love how that situation is going. So now, natural gas can start driving the bus as oil prices continue to fall in terms of making everything more expensive.
There's a lot of little factors there, and so we're still going to wait for that to shake up. But we're not going to get any definitive answer until we see inflation, the CPI, come in roundabout mid-September. So a lot of this is going to be... You're not necessarily spinning our wheels, but looking into, "Okay, if we can't watch the market short-term, if we're still in a gray zone in regards to inflation, where exactly are we? Was this bull run justified? Is this overall bear environment justified?" Big old question marks right there. So Justin, let's get into those long-term narratives, then let's look ahead and see where the overall market is going so we can still make some of these long-term bets.
We've been going back and forth a bunch in terms of what we're seeing in the next 10 years of government investment. You had a really solid analysis on Lockheed Martin a little bit back in the day. We then put out an update for Plug Power, which continues to pop off now that Amazon is also jumping on the Plug Power train. And then this week, we also started to talk about the flip sign of the Lockheed Martin equation, which is reassuring. And so we put out an analysis on Rockwell Automation, which stands to benefit from a lot of jobs coming back to America. But I would love to get your high-level view. I know I'm the one who did this analysis here, but this is something we've been talking about a bunch.
When you look at things like nations becoming more self-reliant, getting a little bit more protectionist, is there anything else we can look at in terms of investment returning to America as it just American companies bringing jobs back? Or is it going to be foreign investment that drives the bus here?
It's an interesting point. It's something we've been talking about for a while, is this whole nation of bringing things, or whole notion rather of bringing things back on shore. Back when China was first emerging as an economy and people were exploiting trade there, the world started moving towards this globalization effort where you could export a lot of things to Mexico, to China, to the other parts of the world where labor were cheaper so that companies A, could give things to consumer at lower prices, but also increase their profitability. And it worked really well for a long time. And it is not that it's not working well per se anymore, but people are starting to see a lot of issues with all these global trade and being so reliant on other countries for your product.
It first started in the pandemic with a lot of our goods being shipped from overseas and built overseas. And so when China took a really hard standpoint on COVID and said, "If there's even a ounce of COVID somewhere, we're going to shut down." Well, a lot of the companies that source materials, source goods from China ultimately found themselves at the mercy of China's government, which became a pretty big issue for these globalization efforts.
And then that really got amplified during this war right now with Russia and Ukraine, where Russia is a major exporter of energy to Europe and the rest of the world. And so in Europe in particular, you're seeing gas prices that are just astronomically high because the availability of energy in these countries is just so well and so reliant in other countries. So what's happening is you're seeing a lot of companies realize that they need to bring some of these things back on shore, and not necessarily for long-term profitability, but more so from the standpoint of just long-term sustainability. If a war breaks out, if famine breaks out, if a pandemic breaks out, if just anything breaks out, companies and governments do not want to be reliant on other powers at be and beholden to them to ultimately get what they need.
And so yes, we're not going to shut down and go pure isolationists and never trade with anyone again. But there's going to be much more of an effort to create things onshore, and not because they necessarily want to say it's American-made or put jobs here, but it's so that these products can be sustainable and we don't have to worry about any external conflicts going outside of our walls.
Precisely. And so what we look for there then is opportunities as countries try to find those moments where they can establish more of that food security, so to speak, because that is definitely the next big worry as we look forward to harvest season, as we look for crop yields. Because one thing we are seeing a bunch is that first of all, a huge amount of the world's wheat supply is tied up in that war. And then a potentially world-saving amount of wheat got blown out by a heat dome that hit India a little bit earlier in the year. And so the main question is, are we going to see food prices go up? Right now, it's not looking like that.
But the other key indicator is A, natural gas is also essential for manufacturing ammonia, which makes nitrogen fertilizers, which is the single most important chemical on the planet that we manufacture right now, considering that all of the nitrogen we have is not literally usable. And the other big thing that nobody talks about is that Russia is also one of the top suppliers of phosphorus, because Siberia is just full of bogs that are full of dead things. And so you find a lot of phosphorus up there, which is also essential to maintain crop yields at a good level. So we're not necessarily saying that food prices are going to go up, but it is an indicator that we are watching as well.
And so as you look at that, you're also watching companies either try to find ways to explore more of those resources within their borders. Like no one's mining for phosphorus here in America that much right now, and there's no real indication that's going to happen, but that's what we're looking at too. Just trying to see those commodities, those assets as their prices either rise or fall. It's really good, the genuine good sign. Not to completely jump ship here, but one good sign is seeing how far down lumber prices have gone, because we thought those were going to be absolutely out of hand by now. And they're at least a little bit more under control, which can help with building, which gets us to the next long-term narrative.
As rates continue to rise, the other slow narrative that's building up here, Justin, is we're seeing A, mortgage rates go up, and then B, fewer and fewer houses are finally being bought. And we found a way to finally slow our roll on the housing market. So the main question, there's a lot of alarmists at least on Twitter saying, "Oh God, we're in for a housing crash." Is that founded at all? Or is it just one of those things where housing prices were just deeply over inflated by a lack of supply, and now we're getting back to more natural levels?
Yeah. I don't think we're, by any means. People are freaking out about the housing market. Have things slowed down? 100% they have. But you compare that to the 30-year averages and they're still extremely elevated. It's similar to interest rates in general. People are freaking out that interest rates are so high.
But if you look back the last 50 years, they're still close to historical lows, respectively. So I think that's something that people need to be very aware of. Are things slowing down? Yes, they inevitably will slow down as rates increase. It's just one of the most directly caused things of raising rates, is this slow down and mortgages taken out. But it's still really high. If you look at homes being sold, if you look at the value of homes in the US across markets, they're still really high. They're down from their all-time highs, but they're still really high.
And so if the Fed continues to raise rates, rates go up. They'll continue to come down, but there's no reason to believe that there'll be this massive housing recession that we saw in 2007, 2008. That was just structurally so different and was built on predatory lending and subprime mortgages and all these other issues. That's not going on today. There could be some sort of black swan event happening behind the scenes that no one in the world is aware of.
But when we look at the housing market today and we look at all the numbers, structurally, everything is exactly where it should be. The news in terms of selling this hype on that we're in this massive housing recession is just, it's so far over bond.
Which is awesome to hear. Of course the only other actual property crisis we're worried about is whatever's going on in China, but we're seeing some positive indicators there. I'm not going to pretend I'm an expert in Chinese macroeconomics, so that's just something we're going to be watching for not necessarily a black swan event, but more trouble in terms of how China is going to manage their monetary system with their absolutely wild glut of property and just small property issues.
There's not going to be a Lehman Brothers situation over yonder, but it's one of those things where it's hard to see.
And so that gets us to the back half here, Justin, as we slowly but surely... You begin to understand where we're moving in terms of what September's going to be like, what this is all going to be like. And so now that we've had at least 30 minutes to digest Jerome Powell's comments, do we have any indication of how we believe inflation is going to peak out?
If he's going to say we're going to continue raising rates for some time, does that mean we can hopefully see rates taper off around about the end of this year? Or do you potentially see the Fed continuing to raise rates even into early next year?
It really just all depends on how much inflation comes back to their 2% target and the magnitude of how quickly it moves down. Right now, again, things are starting to trend in the right direction, but they're still very, very elevated. And the Fed has reiterated today. They've been saying over the last year that this is their number one effort or something.
They want to solve this problem of high inflation. So a lot of it just depends on how inflation plays out, and predicting inflation month-to-month numbers is a really, really tough game to play.
They even said during their speech today that their typical ways of ultimately helping combat inflation is on the demand side, and they can continue to hammer home the demand side via raising interest rates as much as they can. But at the end of the day, this is mostly a supply-side issue. Until supply chains get fixed, until things are brought back on shore, inflation can only go down so much. So I think this is going to be a problem for longer than most people care to admit, but saying how long is it's impossible.
Exactly. And so that always is going to be the line here until the CPI itself comes out. It's one of those things where literally nobody can predict where exactly inflation is going to be. And everything depends on how the market is going to react to inflation as it is right now. And so as you watch this, the main thing is to find these long-term narratives, find the fundamentals you like, and ride the wave, so to speak, in terms of if your portfolio is going up and down, dollar cost averaging into positions you already like, companies you believe in long-term.
And the only other solution is obviously just being a long-term investor. Your stocks will go up and down. My portfolio is noisy mayhem right now. Frankly, there's it's going in a million different directions because so many companies in this economy are going in millions of different directions.
And so we're nearing the end here, Justin. That gets us to a couple of audience questions we did have. We've been talking a lot about long-term narratives, and a lot of those narratives have focused on government investment. And one thing we haven't really talked that much about is the CHIPS Act that passed a little while back where we're trying to bring semiconductor manufacturing back here to America. There hasn't been a lot of positive motion in terms of companies popping off from that so far.
So is there anything that you see? Is it one of those things where are we looking for an American manufacturer to swap out some of our NVIDIA position for? Or is it one of those things that we need to see how it shakes out before we go overinvest in it, so to speak?
Yeah. We definitely need to see in some capacity how it shakes out just because right now, so much of chip manufacturing is done offshore. AMD, which is one of the larger ones in the US, they don't even really make their own chips. A lot of it is outsourced to other people and manufacturers in Taiwan. So if China invades Taiwan or there's any issues, the whole chip shortage going on now could really be amplified. So a lot of it, I think from my perspective, wait and see. I'm not sure if you have any insights of your own.
That's the main thing, yes. It's wait and see, because so much of it is offshore right now that we need to see actual plans. The main issue with chip manufacturing of course is it's just so complex to manufacture. And so I think the main thing that we're going to be looking at right here is we are trying just to establish who is going to be able to do this cheaply. And so therefore, you probably shouldn't even be looking at the companies that manufacture chips. You should be looking at the companies who service companies that manufacture the chips.
You're looking for those more medium plays right now, because those are going to get some of that more positive buying pressure as companies decide how they're going to move operations to the US and start building chips here.
And that's the main thing is, is that right now in this bear period, you're looking for those boring plays, which is why our main analysis for this week was for Rockwell Automation. While they're not going to be doing anything for chips so to speak, they are a industrial automation powerhouse in terms of their ability to use software and industrial design to basically automate or streamline any process, from helping trucks pick up grain better to helping people bake cookies in Kentucky a little bit more.
That's their two most recent case studies, as well as finding air compressor technology. They can help make sure that solar powers can be more efficient. You can do basically anything if you're Rockwell Automation. And what we're seeing is a lot of that investment coming back to America in terms of building these more streamlined industrial processes.
So we're really excited to find more of those super esoteric, boring plays for you all, audience. And that's where a bulk of our research is going to right now, finding not service providers, but service providers for service providers. We're deep in the boring zone, which is pretty chill since we all have a lot of background in the B2B software space.
So we're all about selling software that sells software for folks who sell software to other software sellers. A lot of the middle of our economy is deeply recursive and a nightmare, but it's still a great place to invest in terms of just what exactly it is you're doing.
As always, the theme will be boring is beautiful. We're trying to find those mid-tier place since all of the sexier ones are frothy at this time. You're seeing a lot of volatility in the bigger plays, even some more established ones. And I guess that gets us since just we're right here at the end, a lot of our audience too is still trying to get your thoughts on the crypto space right now. Bitcoin had a tiny little rally that got just completely cut in half today. It's now hovering around 20K. Is there anything we can be watching before this Ethereum Merge?
Or we just literally waiting for the end of September as well on the crypto side?
Yeah, the Ethereum Merge is going to be interesting as well. It's a long time coming at this point, and a lot of the coins value again is just tied to the stock market. But I think a lot of whatever's happening right now there in terms of the Merge over is effectively not priced in fully. It's definitely down more than Bitcoin.
It's down more than some other coins that's relative in size to market cap.
There's still more to go, but by the time the announcement is already made, if anything, I could see it even reversing to some extent if it's fully priced in by then. It's again, this is a long time coming, an event that's been talked about for a while so I don't think this is catching anyone off guard.
Exactly. And so that's where we are right now in terms of the market. We have priced so much in right now, audience, that there's just so little to actually talk about. And so what you're seeing is the market either priced in both directions today for Jerome Powell speech. We're seeing a very, very reactive market right now. It's just a lot of capital deployed here in these markets as we think about a lot of the assets we have. You've seen a huge influx into the stock market ever since 2020 and 2021 when one of the biggest pound-for-pound bull runs of all time happened.
And so there's a lot of that energy in the stock market. And that means it's going to be potentially very noisy. And so we have to be mindful of that and try to really stretch our... We're trying to stretch our actual, what is it, perspective here so that we're focused more on the two to five-year time scale as opposed to the month-over-month time scale.
So when we think about that, we're always trying to revise our prediction. So Justin, I'm just going to hit you with one quick audience question. Last time you and I were on air together, we were hoping that we were approaching an all-time low in the crypto space at 17.
When you're looking at this, do you see potentially it going even lower? Do you think that was our all-time low or do you think we could potentially go lower than 17 if the E-Merge goes a little bit goofy on us?
It's tough to say. So for... Wait, sorry. You said $17,000 for Bitcoin, right?
For Bitcoin, yeah.
Because everything goes with Bitcoin, right? If Ethereum goes down to $800, Bitcoin's going to collapse as well. Not collapse, but follow it, so to speak.
Yeah. Bitcoin was trading in the high nines, low tens for years before this recent bull run, so there's no reason to think it can't fall further. Having said that, the amount of institutional capital and retail capital that's in crypto would have to be significantly decreased relative to what the levels were then ordered to get back to that stage. So I feel like that'd be pretty drastic to go 17, 15 to low teens ever again. Having said that, we've talked about this before. Things are getting indiscriminately sold off. It doesn't matter if it has merit, it doesn't have merit.
If you're in a certain sector, if you're in crypto, if you're in tech, if you're in whatever, even if you're a pretty good company or a pretty good project, you're getting sold off and getting moved with the rest of the market.
So it really creates honestly unreal buying opportunities over the long run because you have a lot of these stocks and coins that are down 70, 80, 90% from their all-time highs.
And yes, maybe not all of them will retest their all-time highs. And even if they do, it may take years. But if something's down 70, 80%, for it to go back up to its all-time high, it has to go up for to 5X. And it showed that once so there's no reason to think it can't happen again. The upside of really good companies right now that have been unfairly sold off is just, in my opinion, an unbelievable buying opportunity.
So I think the better question to be asking right now is who those companies are rather than asking what the low will be, because if it falls another 5, 10, 20%, it's going to hurt obviously in the short run, but it's nothing relative to what it will be in the long run.
And that's what I like to hear, too. And that's what we just really have to do is just keep that long-term perspective and understand even the boring companies are getting so oversold as people exit the market and move into air quotes, "more safer investments", or just liquidate profits and liquidate. That's why you see this 4% pullback with Plug Power after it goes up 70% on the month, because some people are just going to take profits at that point and walk away.
So that's what makes me really excited too, is just the potential for once we really start sorting this out to find those moments and find those picks that really work out on the long-term.
And that's why you have to be a long-term investor. You can't let these short-term froth spook you away, and you can't use these moments to either go into riskier bets or what we're trying to say, leverage yourself too, trying to think you can short your way to riches.
The thing that works is these long-term investments. And so that's where we're always going to be encouraging you to do.
But Justin, that is getting us very close to time here. So Justin Kramer, CEO, co-founder, and chief analyst here I'm so glad to have you back. The audience is. The solo shows were fine, but we're really, really just jazzed to have conversations back. It's not this weird, lonely, ramble-y 30-minute nonsense.
But any final thoughts from you, man, now that we're back on the game here? Anything else you want us to keep in mind as we roll through to the next week?
I don't think there's anything in particular. I think a lot of what's been going on this year is just reiteration of what's been going on. We're being built up for a while now. And so the biggest thing to stress is just to have patience. It's already end of August so we're eight full months into the year.
The notion of patience after a 10-year bull market and eight months down seems like the longest time ever, but things will rebound. It will take time.
But again, this is a multi-year journey investing. And so when you look back in a few years from now and hopefully if you even have listened to what we've been telling you, you'll be happy to know you bought companies at depressed prices and that you're able to make money up and above what the market was. So that the next time this happens, because things move in cycles and we will have another recession or depression at some point over there, the next a hundred years, you'll be like, "Oh. Well, I saw this happen before. I saw how things reacted."
And then you can act appropriately, on the next go-round, not be fearful and just do what's necessary and have the ability to sleep soundly at night.
So that's the biggest thing to stress right now is just patience, especially in these summer months when things aren't really going on and companies slow down a lot of their activities.
And that's the main thing, we're really just trying to find those moments that make this work a little bit better. And so I'm really excited to keep maintaining that long-term perspective with you guys, audience. I'm really glad that we have these conversations back. We're not going to do anything super irresponsible or say this is when peak inflation was. We're going to wait and see how that CPI shakes out in the next two weeks.
But audience, I really appreciate your time. Thank you all so much for being here. Just so you know, audience, if you ever any questions for us, you can us up at [email protected] or here on Discord. This is recorded live on Discord when it's a conversational podcast.
One on there, okay. Well, that'll get deleted from the recording, sic. Otherwise, audience, just check us out here. Check us out on Instagram and TikTok as well as we try to find other ways to educate you about the market.
We're really excited to get you more long-term perspectives next week. We're going to finally dive a little bit more to the Inflation Reduction Act and see other aspects that are going to happen in green energy. Otherwise, audience, we're really excited to keep this going and we just really appreciate your time.
So as always, we like to leave you with peace, love, and incremental gains. Everyone, be well. Thank you so much.