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Flagship Pod: Why the Market Cooled Off

market & industry analysis Sep 06, 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 for this week: 

  • How the market is reacting to cooling job growth and a declining housing market

  • What investors are doing while the bear market re-emerges

  • How we should be playing the highly volatile crypto situation

  • Why the Fed ramping up Quantitative Tightening is a bigger deal than it seems

If you'd like to listen live and ask us questions throughout the next live session, just join the weekly Thursday afternoon session at 5:00pm EST.

Check out a broader summary & transcript below! 

Peter Starr:

From, this is the Flagship Pod, a weekly live podcast about the economy, the stock market, and the various market forces powering the world around you. As always, I'm your host Peter Starr bringing you, this time, just the beginning of September and therefore the beginning of the end of the lamest period in any market.

We're gearing up for a CPI coming out on September 13th that should let us know exactly what's going to happen for the rest of the year, but for now we've got a lot of economic reports that are showing that what the Fed is doing to cool things off is working. We're seeing a slowing jobs report. We're seeing a kind of cooling off in the housing market. And we're beginning to see real hardcore quantitative tightening.

It's some really, really exciting stuff. I'm saying that sarcastically, but hopefully we can find some interesting insights in the middle of that. Joining me to do that, of course as always, is Justin Kramer, CEO, co-founder, and chief analyst here at Justin, man, how do you handle the driest period of the market right now? How do we make this interesting?


Justin Kramer:

Yeah. It's a good time, honestly, for people starting to get involved who don't know much about investing or just trying to educate themselves more. Luckily it is a little bit quieter. Having said that, there still is a lot going on.

Mostly the news selling us doom and gloom. So we're excited about this episode to dive into all the different specifics. But there's a lot to parse through, more than I think most people realize. At least for our premium members, they're getting a lot of information. So for anyone who hasn't checked it out yet, shameless plug, definitely head to the site, check it out. But excited just to dive into the episode today.


Peter Starr:

Exactly, yeah. Because it's all on the surface level, can be kind of spun either very bearish or very bullish because we're really very much in the middle of the road right now, which is just what happens in September. That's the game.

So Justin, first let's go through the most immediate thing. Our jobs report just came out. The US added 315,000 jobs between this latest report, which sounds sick. But then we see that the rate of job growth is actually slowing. Good thing, bad thing? How do we think about this jobs report right now as we think about the larger macro environment?


Justin Kramer:

Yes, so the macro environment's really tough right now. We've been saying this for a year, and so you really need to be paying attention to what the Fed is doing. You should not be trying to fight the Fed. If they're raising interest rates, that is not going to be good for asset prices, specifically equities. And then because crypto is so related to equities, those ultimately are going to sell off as well.

So you just need to constantly be watching what the Fed is doing and what they're saying. And that's where the market has really gone over the last 10 years. We've seen it go up, we've seen to go down if the Fed is loosening or tightening. But right now the Fed just came out, when they were in Jackson Hole, and said that they are actually going to be continuing to raise for the foreseeable future.

The jobs report did come out today and ultimately the numbers were pretty good, which leads us to believe that they're going to continue with their 75 basis point raise. But again, things are very fluid, very constant so we need to be paying attention to what they're saying, the economic numbers. And that ultimately is dictating really just where the market goes right now. It's very, very driven by what they're doing and just the macroeconomics.


Peter Starr:

Exactly, yeah. And when we look at that and we think about exactly where we are in terms of that potential cooling, one thing that nobody is talking about right now... We can dive more into the jobs report if we really want to, but it's kind of everything you'd expect. Things are going up, just not as fast as they used to be. Most of that growth is in professional services, which can be all over the place and is just genuinely a grab bag of things you can do in this economy. We're maintaining strong growth in healthcare, which is really important. Professional services is where a lot of that actual growth is happening. But again, slowing down. The thing that we're going to start seeing the real effects of is what started yesterday, which is quantitative tightening, Justin. We are taking, what? Like $90 billion off the balance sheet every month for the next rest of the year, basically. Is that exactly how we're thinking about it? And how does quantitative tightening continue to affect the market after just this insane injection of capital we saw for the past two years?


Justin Kramer:

Yeah. We released a reel on this yesterday, but basically the Fed, they've been doing this for a long time but COVID really escalated it, they've been pumping money into the marketplace, which ultimately led to... A large reason it led to inflation, but they did it not just to inflate the dollar or inflate the economy for no reason. They did it because all of a sudden COVID started. We saw this massive pullback. Industries almost shut down overnight and people were scared. And so markets crashed, people were getting fired. And we entered into this multi-month period where just no one knew what was coming next. And so when that happened and people started losing their jobs and people weren't spending as much, the Fed needed to start, A, lowering interest rates, but they also needed to do other things. And so they started injecting the market with a lot more cash in the hopes that there'd be all this cash out there, it would then be invested back into assets, and hopefully the market would continue rising upward.

And so they were injecting a lot of cash into the economy, which in retrospect ultimately led us to this point in some capacity. But past that, they've now been doing the opposite. And so what you're seeing right now is this really large focus on interest rates. Are they going up? They're going down? But the Fed is also taking money out of the market every single month, which isn't being talked about to the same extent. But just starting yesterday, they increase that number every single month up to $90 billion a month. And so over the course of this month and through the end of the year they're going to be taking over $300 billion out of the market. So when you combine increasing interest rates, you combine more money being taken out of the markets, you combine inflation, you combine a slow down in the economy, that's why we've been seeing over this entire year the markets continue to slide down and down further.

As we've talked about before, we're looking for that light out at the end of the tunnel when things start reversing. We said two weeks ago, if you were paying attention, that we were not out of the clear, even though we just saw a huge rally through most of August. And then this week we're starting to see, and last week, the reversal. People realizing, "Hey, you know what? This isn't over yet." And so until there are clear signs that we are going to be on the other side of this shortly, we're going to continue to be in this downturn. Having said that, it's not necessarily a bad thing if you're an investor. If you're looking at different asset prices. If you're looking at crypto, stocks, real estate, whatever it is, you're seeing massive, massive selloffs.

And while it's really hard to get in now, if you liked a stock and you liked a company and they're continuing to do well at a price that's 50%, 70%, 80% above what it is now, when it's down this much there's no reason you shouldn't be getting involved. We're seeing indiscriminate selloff across all of asset prices, across all equities. And there's just really, really once in a generation or once in a decade buying opportunities to get all these assets on the cheap. And so when they start appreciating, your cost basis will be so low and ultimately have some pretty significant gains. It's hard to see it in the moment. But when you look back in a few years from now, that's ultimately going to be one of the largest takeaways.


Peter Starr:

Exactly, yeah. So we're anticipating a little bit more of this downturn, a little bit more of pain moving forward because that's exactly what the Fed is trying to do. It's trying to not cause pain, but make sure the economy doesn't over-inflate too quickly. And so we've been watching this happen over and over and over again, and then watching the macro environment of the rest of the world completely go just bonkers as we've seen war in Eastern Europe, we've seen absolute ridiculous climate situations that are putting a lot of pressure on every other... Lots of countries. Looking at Pakistan, we're looking at China, we're looking at the rest of Europe even, too. And so we're seeing a huge amount of pressure being placed on this global system by a lot of different forces all going a little bit goofy at the worst possible time.

And so when we think about that, we keep trying to find long-term narratives that are going to carry us through this. And so the main thing is us, when you're seeing our stock picks you're seeing us thinking about what's going to win long-term. I guess one thing that was really surprising for our audience, though, this week, Justin, was your analysis on NetEase two days ago or yesterday, I should say. When we're looking into Chinese tech stocks in a period where Chinese tech stocks are a little bit goofy. Can you take us through, why NetEase, a video game developer that's starting to really take over the world, really, is a solid play here, even in this very, very strange environment?


Justin Kramer:

Yeah. It's a really good question because NetEase is one of those stocks that most people have never heard of. And we told all of our premium members about this yesterday. But basically when companies release games, they release different titles, they do so across basically a plethora of geographies. And so what we've seen is popular titles like Lord of the Rings, Harry Potter, they're really big in America, they're really big in Europe, but they're also huge in Asia. But they need an Asian partner to ultimately roll out those games. So NetEase, while they have contributed many games that some people have and haven't heard of, some of the more popular ones that are household games are the ones I just mentioned. And they have these major partnerships in place and have been rolling these out in Asia for years and years and years now.

But what's crazy is that they've been focusing on Asia for a very, very long time. And they've had minority investments in parts of Europe, parts of America. But this year they actually made a massive acquisition of Quantic Dream, which is a huge, huge video game producer in Western and Eastern Europe. And so this acquisition, while amazing in isolation, is ultimately going to be massive for them because this signals to us that yes, they are growing extremely well. Their video game division is growing over 30% year over year. But this signals to us that they're making this international push. And so they don't see themselves as just limited to the Asian continent. What they're seeing themselves is as a player who ultimately wants to emerge in not only Europe but also America, in South America. And so while this is going to be years and years in the making, this is a massive step in the right direction for someone who wants to expand internationally and already has an amazing proven track record of success.


Peter Starr:

And that's something very key and critical to focus on, right audience? Because when you're looking at what wins and what loses in any particular market, you have to realize that even in an ongoing downturn, if the bear period continues there's still going to be winners that are doing decently well despite significant broader market headwinds. And so that's what we're trying to do as we find these long-term narratives, which is why NetEase looks awesome, because they are in a significant period of international expansion where they're going to get access to a much larger market for not the insane kind of capital investment you'd see if literally Walmart went and had to go and open stores in a new country. That's a huge upfront investment, whereas when you're dealing with more SaaS style products, games and what have you, that's literally software. It costs no money to beam it to another continent.

So it's just marketing costs, it's positioning that. And once you set all that up, it's much lower on the front end and the opportunity is much bigger on the back end as we watch our gaming industry become more and more international, as we see more and more actually worldwide hits for games. If you think about League of Legends, it's gigantic here and in Asia. And we're seeing the beginnings of the coalescence around a lot of really cool international opportunities as we look through everything we're seeing in games. So that's why we like this opportunity. But let's make sure we're still focusing on the things that are cooling here in America. One thing, there is just so much noise here, Justin. I am just hearing people shriek about this. "It's 2008 all over again. We're doomed. Get ready for Leman Brothers part two, Electric Boogaloo boys. The housing market's cooling off. We're all going to die."

Obviously a lot of folks like you and me, who literally started investing the day the market crashed in 2008, are experiencing a little bit of that trauma all over again. Is a housing crash imminent? Is it just going to be 2008 all over again? What's the deal there? Why are people freaking out about finally housing prices coming down a little bit? I thought this would be kind of a good thing.


Justin Kramer:

Yeah. There's a long road that ultimately got us here. And so not to dive too much into the background, but basically since 2007, 2008, they've been dropping interest rates for a very long time. They briefly tried to raise them several years ago, but it was a quick blip before it went back down. And so yeah, if interest rates are cheaper or they're lower, it's more affordable to buy a house. And so as interest rates have been falling and falling and falling, home prices have been going up and up and up. And so on top of that, over the last few years we've seen insane growth in rent. So if you are an investor, you're a buyer of real estate, you're seeing this asset class that's appreciating 10%, 20%, 30% year over year, which is definitely not the norm historically.

And you're saying, "Okay, I can buy something that's going to appreciate a ton." And then rent growth is increasing so much month over month or year over year that even if it's a little expensive now, from the appreciation, from the tax benefits, and from the rent growth, ultimately I'll be in a position to make some serious money. And so we saw that spurred for landlords. Airbnb. This has been massive people buying up properties and then just trying to use the platform to ultimately make money. And it worked for a really long time, and it's still working in some capacity. But a lot of those investors who bought deals that were really expensive are starting to be burned as interest rates swing back up because that million dollar home, half a million dollar home, whatever it is that you wanted to buy at a 3% interest rate now costs significantly more at 5%, 6% interest rate.

And for investors it could be even higher at 7%, 8% interest rates. And so that would be fine right now, but it's continuing to be projected to go up and up and up and there's no end in sight for when the Fed will ultimately stop this program. What we're thinking is that it could progress all through the next 12 months. We'll see what ends up happening. But if that is the case and home prices are going to continue to get cheaper because it's more expensive to ultimately take out a mortgage and buy a home. So we need to see how this shakes out. But our take on it is two things. One, we are going to start to see a massive slowdown in home price appreciation. There's just no way that homes can go up 10%, 20%, 30% year over year. If you look at home prices over the last 30 to 50 years, they appreciate on average anywhere from 5% to 8% per year, so what we've been seeing over the last few years is not normal.

And so that'll go back to that long term trajectory of doing that. That's why we're starting to see more homes on the market, more sellers now dropping their asking prices, the housing market cools. This is just a part of the normal economy and ultimately will rebound in time. If you're looking for a good investment in real estate to buy REITs or to buy physical property for Airbnb, or be a landlord, or something of the sorts, this is starting to be a really good opportunity as things get cheaper. I think it's only going to get exacerbated over the next 12 months, so I'd definitely look for opportunities then. But the key is that this is fundamentally different than 2007, 2008. There's no imminent crash happening, barring some sort of black swan event.

We are looking at a structurally different market than what was taking place back then. Back then what was happening is that banks were lending out mortgages to people who shouldn't be qualifying for mortgages. They were giving million-dollar mortgages to people who were making $50,000, $100,000 a year. They would jack up the interest rates and ultimately try and make money and compile it. And then when those were issues, they would stick them in credit default swaps and mortgage-backed securities. I don't need to get too into details there, but long story short they were giving out predatory loans and loans to people who shouldn't be ultimately having them. People started accumulating debt they couldn't afford back. And then all of a sudden the bubble burst and all these banks then, a lot of them had to close their doors because they couldn't afford to ultimately take all of these assets on their balance sheet and not get the cash flow.

And so what's happening then, we put laws in place. We are in a fundamentally different place now. This is just a part of the markets. Everything we're seeing now is a part of the markets. The only actual real concerns we have outside of the normal ebb and flow of this is what we're seeing with bringing things back on shore, what we're seeing with this crazy high inflation, what we're seeing with supply chain woes. But everything else we're seeing in terms of the economy and the markets is exactly how it progresses. It's in cycles. It can not go up forever.


Peter Starr:

Exactly. And it's one of those things where you have to have these kinds of pressures to make sure that once you get to the point where it seems like it's going up forever, you're going to get to that period of hyperinflation. So let me get to the other side of that question because this period is going to be very interesting for people trying to invest in real estate, as they try to find those good buying opportunities as these prices keep cooling. But the other side here is that a lot of folks here in the premium community are a little bit more advanced in terms of where they are in their investment journey. A lot of them have been relying on home prices and their property value as a store of wealth, so to speak.

Sort of the classic 20th century model. Is that something that you see shifting now that we're seeing things cool off a bit, or is this just kind of the cyclical nature of the market? You should still buy a house, you should still let that equity appreciate for 30 years, so on and so forth? How do you think about that on the other side, being just the single property owner, just trying to own a home and gain of investment value that way?


Justin Kramer:

Yeah. It's similar to the stock market. Owning a home is a long-term game. Unless you can put some serious money in, build it up, and then flip it, if you're just looking for strict home price appreciation it is naïve to be thinking that prices are going to go up 10%, 20%, 30% every year. Home prices do not increase like that historically. If they did, we would be in a market where no one could afford it. There'd be a demand check and then it would go back down in pricing. So that's just the way things work. If you're a homeowner, if you can afford to continue holding this out, I would caution you or I would warn you against trying sell now and ultimately try to hold it out. I think if you are waiting you can ultimately get higher home prices. Right now we're in a downward trending market.

If you need the liquidity it's obviously a different story, but for newer investors trying to come to the market it's actually a really interesting time, whether you're buying REITs or you're buying physical property, right now as interest rates go up, home prices come down, if you can sacrifice a little bit on your cash flow needs in the immediate future, you can get a home at a decent price that when they start then dropping interest rates, A, will appreciate faster and, B, you can refinance and ultimately lower your cash flow once those interest rates drop back down. It might take a year, it might take two years for that ultimately to get to that point. But that's actually a really good opportunity for people looking to get into residential real estate.


Peter Starr:

Which is awesome. And that's a really great thing to keep in mind as we think about how QT and rising interest rates are going to create these opportunities to actually get involved. Of course the main thing we need to figure out is supply of housing as well since housing building materials were so expensive back in 2020 that we have just been in a huge supply crunch on the housing side ever since, and still just trying to get labor and capital back together to build more homes. We'll see how that plays out across the country and even worldwide, especially as we watch whatever is playing out in the Chinese real estate market continue to play out.

But we are getting to the back half here and so we're getting to some of the classic questions we get from our audience. Number one thing being, okay, so Bitcoin's hit $20,000 again after being at $19,000 again. Is the bottom in for crypto? Is now the time I start really going all in, or is there anything I should be thinking about? I want to take a crack at this and then get your response real fast. We have two huge events coming up and literally two weeks that are going to decide the fate of the crypto market for the rest of the year. On the 13th we're going to get the CPI, which is going to tell us how much the Fed is doing is affecting inflation. If it's coming in hotter than expected, everything's going to just literally catch fire and crash.

If it comes in regular, you'll see the market pop off a little bit. But then immediately two days later, or approximately around two days later, September 15th, around then the Ethereum merge is actually going to happen. Rather than be the end of September like we were anticipating, it's looking more to be around mid-September. And that can literally send the whole market going in very negative or very positive directions. So again, I'd say right now is just kind of the hold onto your dry power period and wait these two weeks out and see how the CPI on the 13th and the potential merge on the 15th play it out. Is there anything else people should be thinking about as we look into this, Justin? How else should I be playing the crypto market right now as we're in this big period of just question marks?


Justin Kramer:

Yeah. People who are buying into the crypto market, especially us, were taking, like everything, a very long-term view on this. And so right now with Bitcoin obviously significantly lower than where it was several months, a year ago, we're looking at this as a good opportunity to ultimately continue to add more to our position. When Bitcoin was trading north of $60,000, given where it is today I would have to go up almost 3X to get to that point. And it went down almost 50% to get to this point. So while you lost 50% on the way up, if you're adding to your position now you can 3X back if it retraces back to its all time high. But again, this is such a long-term bet, whether it's crypto, whether it's equities. As investors, our job is to buy low and sell high.

That is plain and simple as easy as it boils down to. Having said that, doing that is really hard. And so when you see an asset price down 70%, you see it down 80%, what is the point of trying to get it down 85%, 90%? Your upside opportunity is just as high now as it is if it goes down a little bit more. So we'd rather as investors ultimately try to capture as much upside as possible than time the market perfectly. That is our number one goal. Get as much upside as possible. 100% of the upside is never possible. We want to buy as close to the bottom as we can and sell as close to the top. Trying to time it is an impossible game. So when we see asset prices now we ultimately can start adding to the things we still have conviction in.

 But as you mentioned, there is more events coming on the horizon, so we can continue to add to those positions. Not throw 100% of our excess capital into the market right now, but wait and continue to add some now, add some down the road, add some in a month from now as the market continues to ride out this volatility wave. Things will become more depressed. Our dollar cost averaging on our cost basis can push us down further. And then when things do rebound, because they will rebound, we ultimately will have some serious upside. And so the number one question to ask is, so many things are down right now. How much risk do you want to take? Do you want to buy an index that's down 20%, 30% and capture that upside? Or do you want to buy an individual stock that's down 50%, 60%, capture that upside?

Or do you want to buy crypto or a certain name that's very risky that's down 70%, 80%, 90% and capture that upside? It's just how much upside do you want to capture for the relative amount of risk. The indexes, they will come back. Certain stocks will come back, others won't. And certain cryptos, that's where you're taking the most risk. Some will come back, many will not. It's just, how much upside do you want to capture and how risky are you willing to be? Should be the questions you're asking. Not, when's the actual bottom and when is the absolute top? And how can I buy in and sell in at those points?


Peter Starr:

And that's the most important thing to keep in mind. It's incrementality all the way. And that's why we have these kinds of conversations, because the crypto market is so prone to you thinking, "Okay, I want to get the 10,000x. I want to be that guy who spent $2,000 on Shiba Inu in 2019 and made $5 billion somewhere around the middle of 2021," in the ridiculous bull run we saw then. Those kinds of gains are almost impossible to make. So what you want to do is try to shave off as many percentage points as possible from your downside and put them into your upside. And that's always going to happen by consistently investing.

If you wait too long you'll mistime the market and miss out on a lot of the opportunity. You could have had, if you just split those investments up and you kept doing it weekly, kept doing it monthly, whatever... These bear market conditions look like they're going to stick around. Look like it's going to be a while. So DCA all the way. Make sure that you're just staying in the game and just gradually adding to all of your positions and as you watch the market shake out.

I'm so excited for continuing to add to our positions and really get back to the crypto bull run, but I'm also excited to make sure that we capture as much upside as possible. That is bringing us to the true end here, Justin. So real quick, man, any final thoughts for me before we go ahead and just read the credits here again? I'm amazed we can squeeze as much information out of literally the dullest possible period in the market. It's amazing to me we have this much to talk about, honestly.


Justin Kramer:

No, I fully and fundamentally agree. I think the most important thing is whether you are an investor in stocks, you are an investor in crypto, you're an investor in real estate, you're an investor in another asset class, they're all related. And so what you need to know if you are an investor in any of these is how to react. Right now more importantly is paying attention to the macroeconomics. Paying attention to the numbers that the economy is spitting out. From there, those will all trickle down into those investments and ultimately help you arrive at when and when not to sell or buy certain investments. And so typically for the people that are listening right now or listening to the recorded version later, typically most of our clients or customers are invested in stocks and/or invested in crypto. Real estate and the other things are a little bit more fringe.

And for those people, what I would highly recommend right now is to continue to exercise patience. For newer investors, it is scary, I understand, looking at your portfolio. Seeing it down 10%, 20%, 30%, 50%, 100%. But this is a long-term game. We're investing in companies that fundamentally are growing and financially going to go into a future that ultimately we want to be a part of. So when we put out recommendations on all of these stocks, when we put out recommendations on these portfolios, these are our best ideas. What our analysts are spending weeks, months, the entire year, and hours and hours dedicating their time to. These are some higher in risk, some lower in risk, but ultimately designed to help you find that upside over a multi-year period. So what I'll leave you with is, do not be scared by the market right now. If anything, it presents a good buying opportunity. You need to have a multi-year time horizon. And that is how you build true wealth over all the other day traders and all the other type of investors.


Peter Starr:

Investment gains are just like gym gains. Just be patient and watch your macros. That's the most important thing. And I think you can take both there. So I'm really excited to maintain that patience, maintain that perspective on the macro environment. Justin Kramer, thanks for putting a really solid bow on it, man. Audience, that was a great place to end it. Thank you so much for all of your awesome questions. If you have your other questions for us you can hit us up here in Discord. We actually record this live in Discord every week. Or you can just feel free to email us at [email protected].

Otherwise, audience. Thank you so much for being here with us. Just so you know, this podcast was produced, hosted, and voiced by me, Peter Starr. All of the intellectual value from this podcast comes from our analyst team, which is led by Justin Kramer, our CEO, co-founder, and chief analyst. Any other questions for us, hit us up at [email protected]. Find us over on TikTok and Instagram, or just feel free to hit up if you want to actually join our premium subscriber membership. Thanks for listening, audience. And as always, we'd like to leave you with peace, love, and incremental gains. Everyone be well. Thank you so much.