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Flagship Pod 8-22: In the Jackson Hole

market & industry analysis Aug 22, 2022

Published on August 22, 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 3 key things we went over: 

  • How the Inflation Reduction Act is sending ripples through the green energy space

  • What we're looking forward to seeing from Jerome Powell's speech at Jackson Hole this Friday

  • Why we're still worried about China and the broader crypto market

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! 


From Moby.co, this is The Flagship Pod, a weekly 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 one more solo episode, where we go through the happenings of the market this week with just one guy sort of reviewing what happened in the economy this week.

Our CEO, co-founder and chief analyst, Justin Kramer, will be back this week, and so we'll be back to our regular conversation about the economy, but frankly, the whole economy has been on this kind of sleepy run for the past three weeks anyway, so it's one of those things where the state of this podcast kind of reflects the state of the whole economy, because there just really isn't that much to talk about in terms of understanding where we are in the market, because in a lot of ways, our stock market takes a big old breath in the back half of August as we gear up for September and then the wild run that is Q4.

So let's just go ahead and get into all of the happenings from last week, what we're looking forward to this week as we gear up for everything to start ramping back up here.

 

1) Jerome Powell @ Jackson Hole:

So, when I say ramping back up, what I mean is the whole world is kind of waiting for Friday when Jerome Powell is going to be making his speech from the annual Fed Retreat at Jackson Hole, out in Wyoming. This is the closest thing the Fed gets to a state of the union address, and it's the Fed's way of giving us a look forward to what they're going to do for the whole year in terms of monetary policy.

The main thing the economy is going to be watching is just how hawkish Jerome Powell is going to allow himself to be during this speech. Are we going to see more and more tightening or are we going to see a relaxing Fed that's potentially getting very confident after the July CPI print that came out a few weeks back? Really, honestly, no idea how this is going to play out here.

The main thing we need to keep in mind is there's just so many factors weighing on the Fed right now. Keep in mind that yes, inflation did go down a little bit, mainly because gas prices went down, but at the same time, the Fed is closely monitoring a pretty hot job market that's honestly a little bit strange because there's a weird disparity between non-farm payrolls and actual employment data.

There's a lot of reasons why this could be happening. People having multiple jobs, immigration is a little bit going up. There's a lot of macroeconomists all over the internet trying to suss this out. It could either be a quiet boom or a sign of stagflation. A lot of things remain to be seen, but the main reason the Fed is watching the jobs rate is because more people employed making more money means that more people spend money, means prices go up, inflation continues to rise.

One of the tools the fed has to curtail inflation is trying to disincentivize new hires, which seems a little bit backwards if you kind of monitor the economy from the ground level, but it's one of those things where a small amount of unemployment is actually pretty healthy for the economy, and we are in a situation where the labor market remains pretty strong for a lot of reasons, at least in certain sectors.

Of course, if you're tech or anything that's trading on the NASDAQ, you basically have a one in five chance of being unemployed right now, but that's more of a great reshuffle than anything.

And so with all that being said, the Fed essentially has both reason to be a little bit more relaxed in terms of the rates raises they are going to announce. They're not announcing any rates raising during this retreat. This is kind of their state of the union, their lookout for the whole year, but it sets expectations for a whole year of monetary policy, and this whole reaction to inflation or getting inflation under control is based on those expectations.

And so it's really important to see through all this conflicting data how the Fed sees their role in the coming year. Are they going to really pump the brakes in the economy and just say, "Let's have a tiny little recession just to make sure things can get out of hand," or are they going to say, "We've done our job here. Inflation was kind of transitory. We just started a little bit too early," theatrically dust off hands, walk away. That sort of thing.

The main thing we can guarantee is that the market will absolutely overreact to that. Meanwhile, on the ground floor here in our stock market, we're obviously seeing a lot of the momentum of this little bull run play out. We're obviously seeing this little rally we had post-CPI lose a little steam, which is a little bit expected. No matter what, inflation is still 8.5% higher than it was last year, which is basically four times what it should be. And companies are still feeling a lot of pressure. It's just when you get any kind of positive trend, you're going to get a little bit of a bull run afterwards.

Of course, when the CPI comes out again and inflation is down even more, you'll probably see the same kind of bull run kickoff. You'll probably see a similar kind of bull run kickoff, but we're not going to see that really hit until, roundabout I'm going to... but that's obviously not happening until mid-September when the next CPI comes out. And that's probably not going to be as big as this bull run, considering it's the second time this news happens.

I think one big theme from this month is going to be the second time something happens, it's never going to be as big, which is literally the whole meme stock movement, because last week we saw this pretty wild spike and then collapse of Bed Bath and Beyond stock off a meme stock interest driven primarily by Ryan Cohen, who's the chair of GameStop and also a significant shareholder in Bed Bath and Beyond, who made a filing showing some pretty aggressive options calls he put in that he almost immediately sold out of the... Bed Bath and Beyond stock was briefly up 400% in the last month. It's now down, and then it closed on Friday down 70% on the day, with more potential of going down further on Monday.

This, of course, played out across just three days, and unless you were really glued to Twitter, you might have missed the whole thing. Bed Bath and Beyond as an actual company is, they're in a lot of trouble, but they certainly are not in a collapse as a business position yet. But this is a situation that definitely doesn't help. We don't anticipate that stock going back up after this, despite all of the folks across the stock social media space trying to recapture the magic they had with GameStop and saying they're going to diamond hand their way through this. It's just one of those things where it didn't last as long and it wasn't as cool as it was the first time around.

Of course there is some people who managed to make a lot of money, timing this perfectly, but if you are in a position where you're only able to make money if you time your trades perfectly, that's not necessarily a good trade. We didn't cover this at all. We're covering more long-term narratives right now because there is genuinely a lot of long-term stuff happening.

 

2) The Inflation Reduction Act:

Of course, last week we saw the Inflation Reduction Act finally get signed into law, which basically caused a bunch of green tech stocks to absolutely go ballistic. Our favorite, of course, we were very excited of course, to see one of our old favorites, Plug Power, go absolutely ballistic, as hydrogen as a huge staple of a lot of the subsidies the Inflation Reduction Act is putting out.

We really like to see not necessarily... The cool thing about the Inflation Reduction Act is that it's focused more on subsidies, and carrots rather than just blanket spending, hoping for the best. It's focusing on good business and good labor practices that sort of lead to long-term healthy economic growth. 4

At the same time, people who are a little bit more hawkish on spending should be happy to see that it's literally 20% of the original Build Back Better plan, which was a $10 trillion spending plan. This is a $2 trillion spending bill that's spread out along a long scope. But the main thing we're focusing on here is just industry by industry, how are growth stocks going to be affected here?

One of the big winners is going to be Plug Power. I mean, they're already a huge winner.

They did get a little overbought in the middle of the week, but the thing that we need to discuss about Plug Power, if you didn't get a chance to read our report... Pro members of moby.co can obviously read the report we put out on Friday, but if you missed that or are not a Pro member, feel free to hit up moby.co/free-trial and get a free trial, just to get an understanding of where we think Plug Power is going to go from here.

Long story short, there are these new tax credits being offered to companies that meet certain labor requirements and are also producing green hydrogen at a certain rate, and it's basically three bucks a kilogram if you do super well. And if you're kind of mediocre at it, like the worst it can be is 60 cents per kilogram. So basically, companies are getting as little as a 10% and as high as like a 50% discount on their actual margins for the actual product they produce, green hydrogen.

For Plug Power, if you look at their old earnings call, this basically means that these tax credits put all four of their core industries right at break even, right within their break even ranges.

They can still, since there's emerging technologies, there's obviously a lot of room for error. There's potential for them to not be at break even till about 20, 25, but they're essentially right there hitting break even, hitting profitability with their current green hydrogen tech, and then it opens them up for a lot of way more sort of revenue-saturated businesses moving forward, puts them right into profitability, puts them right within their break even targets as long as they hit those sort of labor requirements.

When we say labor requirements, we just mean certain compensation/union percentages that have to be met by these companies. Classic Democrat stuff, nothing too fancy, but people might whine about it being like, "Oh, labor costs are too high," but whatever, man. Those kinds of things tend to go either way, and if you just do technology right, you can hit certain awesome margins there. So we're really excited to see that.

The next thing our analysts are doing of course, is we're looking into various battery plays, because that's the next big thing within the Inflation Reduction Act. A lot of people are excited about certain... There's a lot of battery manufacturer... Hold on, I just need to do this real fast.

There's a lot of positive pressure in the analyst space, not from moby.co's analysts, but within the broader Wall Street environment about LG energy solution, LG being the South Korean mega-corporation conglomerate and their energy solution being a battery manufacturing arm that's both in South Korea, various other factories, but with also a factory in Michigan, which puts them right in the running for getting a lot of really cool tax breaks from the Inflation Reduction Act that will make them a lot more profitable moving forward and sort of give them the ability to really build a strong foothold for manufacturing batteries.

When you're looking at plays based around the Inflation Reduction Act, you're looking for companies that have strong fundamentals and strong footholds in industries like, say, green hydrogen, the way Plug Power is, batteries the way LG Energy Solution is, solar obviously, and wind. There's a lot more really complex subsidies in there as well that we're looking into, but it's really exciting to sort of watch a lot of development come into this space.

Now, the capital is going to flood this space, though, so we're only going to be looking at really well-established folks because there's always a potential for people to get a little too excited, overinvest in the wrong kind of business and have these things crater out. So we're excited to see that long-term narrative.

The main thing is just stay tuned as we sift through a lot of the noise that is entering into the green energy space before we eventually land on the best battery play from this and potentially some more solar winners as well, but main thing we're always going to ride or die with is Plug Power. They are really broad-based, they're really well diversified already. They already have four killer markets that they're basically hitting break even at now. Well, remains to be seen. We'll see their next earnings report and see how they lock that in, but we're really excited to see them grow through that. And we're just really excited to see this kind of investment, given that there's just not much other kind of development narrative during this bear market period.

 

3) What Will Happen in the Second Half of the Year:

Speaking of which, it's getting easier and easier to call this a full-on bear market again, as we watch the bull period of the last three weeks really lose steam. We're not going hit bear territory unless the S&P goes down way further, but we're watching things probably trade sideways until about September, which as a trader I know is kind of lame to watch. It sucks watching the oxygen get sucked out of the room again, but this is actually a very good thing because it's going to give our analysts the opportunity to see who gets overbought during bull periods and who gets oversold as the music stops again. So we're looking for a lot of growth plays that did maybe unreasonably well during their bull period who now get pulled back even harder because of this bear market.

You're watching that momentum between the overall market sentiment versus how well a stock plays. If it outperforms during a bull period and then underperforms during more bear sentiment, you know that stock is just a little bit too high volatility, whereas there are other stocks that are showing a lot of stability through this, and some upward pressure, even though the overall market is either too hot or too cold for them. So anticipate some really interesting analysis from us this week. We're specifically watching Draft Kings, as it's not only a period where they had some really good news and popped off during the bull period, they're not getting sold off too terribly much during the reemergence of bear times, and furthermore, this is kind of a calm before the storm period for Draft Kings, as we anticipate the NFL season being a really big period for them as sports betting matures within the American market, specifically within football and fantasy football betting. The amount of things you can bet on in American football now is staggering. Just the amount of stats people chug down in these sports.

So we're really excited to watch Draft Kings potentially pop off. I mean, that's an old, old pick from our chief analyst, Justin Kramer, that's been performing... before last November was performing brilliantly, and then when the rest of the market started freaking out over inflation, got a little oversold. And so it's one of those things where it's going to be a long-term hold as the market decides its volatility. And so that's the thing we have to keep thinking about. As you think about maintaining, trimming and diversifying your positions, you're finding those stocks that potentially have those moments where it's right before things are set to pop off for them, or you feel comfortable making these long-term hold, these two, three, five-year holds. That's our entire perspective.

 

4) China & Crypto:

That brings us more to the micro things we're looking forward to this week, as well. So one thing that's been really top of mind for us is just watching any and all economic data coming out of China. And so we're trying to see more just how shaky the Chinese economy is, because if they're starting to feel a lot of the pressure on the real estate and monetary policy side, too, that is sort of like half of the economic order getting kicked out. That is a very big leg of the table of the economic order getting kicked down from under us, which can have some pretty deleterious effects down the line. So the main micro moment we're watching is Tuesday when JD, another Chinese e-commerce Titan, puts out their earnings. And so we're going to be very eagerly watching that to see how well they do.

JD is kind of the weaker kid brother of the Chinese tech scene. They're not quite an Alibaba. They're not quite an Alibaba or anything, but it's one of those things where they can still give us a lot of really important information at a pretty critical moment in the market as we, again, just watch the fundamentals that are happening in China right now. It really remains to be seen. Things could just be quietly cooling off in China, as opposed to on the verge of actual collapse. Their whole economic system obviously works very different from ours. Does their central government actually have enough power and authority to curtail a Lehman Brothers style collapse? Does it not? I don't know, man. I'm not here to tell you that I know anything about any kind of macroeconomics, let alone Chines macroeconomics.

So we're watching that closely. We're watching that closely, but it's one of those things where all of that data kind of pops out at you, but it's one of those situations where you can't really predict cycles... but we're in one of those situations where you can't really predict these cycles that are happening in the Chinese market.

Other than that, it's also a big week for chips as Nvidia and AMD are going to be reporting earnings later this week. And so we're still wondering how supply chain pressures are weighing on these stocks. We're wondering how the new Chip Set Act is going to be responded to by these chip manufacturers. So, I mean, Nvidia's obviously been a really strong standby for us here, but the whole macro environment is shifting now as we get into a lot of new incentives that are happening thanks to US government incentives and subsidies and all of that.

So we're watching chips, we're watching China, we're watching Jerome Powell. And other than that, it's going to be a relatively sleepy week everywhere but essentially crypto, because again, things are really heating up in the crypto market. Bitcoin is down 8% week over week as the whole world is sort of watching Ethereum like a hawk. All of Twitter is just people staring at Ethereum Delta charts and people wondering if the merge is going to work or not. If you're sort of new to us watching the crypto market, then the only thing you really need to know right now is that Ethereum is essentially carrying all of crypto in terms of positive buying pressure. Ethereum is up a hundred percent in the past month since it looks like the merge, which is Ethereum moving to a new system that'll make it a more efficient blockchain and therefore more scalable and blah, blah, blah, blah, nerd stuff... That is a pretty big moment for all of crypto, because it'll kind of be a huge proving moment for crypto moving forward.

There's potentialities for the Ethereum merge to go poorly and collapse the entire crypto ecosystem. That's not going to happen, but it's technically a possibility. If you want to learn more about where our crypto narratives are, we just put out a post about all of those crypto narratives. We're not quite ready for a full-on podcast about what's going on in the crypto market because we have to do a lot more analysis in terms of understanding all of the pressures that are acting on the Ethereum blockchain right now. Right now it's mainly retail interest pumping up the stock. If you want to see where we see this going, again, if you're a moby.co member, you can check out that post, or, again, you can head over to moby.co/go and we'll gladly give you a free trial just so you can get an idea of where we think the crypto market could go during this bizarre period of volatility, during, again, this period where the market is holding its breath before the end of September when this Ethereum merge could do whatever it's going to do.

 

5) Summary:

Short story here is that there is a lot of reason why people are buying up Ethereum right now. Short story is the Ethereum price is only rising right now because people are excited for the merge, but the minute the merge happens, and let's just say in this situation the merge goes well, there's two big possibilities. First one is all of the old school Ethereum folks who were holding onto their staked Ethereum until the merge now decide, "I made it. This is awesome. I'm going to liquidate now," putting enough sell pressure on the blockchain to tank Ethereum's price. And the same idea can also be merge goes well, people keep buying and people hold onto their staked Ethereum in order to now be this new class of validators on the Ethereum blockchain, which would cause the price to pop off.

There is no way to really tell which one of those scenarios is going to play out. It's not just a system wherein, "Oh, merge go well, price go up." Merge can go well and price go down. Merge can go poorly and probably not price go up, so I would say there's three main possibilities and there's no way to predict the likelihood of any of them.

Again, that's kind of where we are. We're in this really interesting period where the market can go a lot of different directions. Of course, this podcast can come out and the market can immediately open and pop right back off, just saying, "You know what? Good vibes only. Let's just keep powering through this." Personally, that's the most hilarious possible outcome, which in the past five years probably suggests it's the most likely outcome. Come back to us on that, but your main role as an investor right now if the bear period resumes, is just watching your position and seeing if anybody potentially gets a little bit oversold during this. Which one of your picks is riding more on hype than true fundamentals?

And if the bear market resumes, then it's a great way to sort of dollar cost average into more long-term positions. We're genuinely excited that Plug Power went down a little bit after this recent pop off, because it gives us an opportunity to buy in at a lower price, because every earnings call from here on out for Plug Power is going to be just potentially awesome. Of course the trouble with subsidies, not to jump back here or anything and go on a tangent, but the trouble with subsidies is it's slightly easier money, and sometimes that can lead to a little bit of mismanagement if you believe in that more hawkish view of monetary policy and fiscal management over on company sides.

So again, we are really in the wilderness here. I mean, we are really in the wilderness here, and here you are listening to a stock journalist just kind of wander through said forest solo as we think about exactly where this market is going. Again, the major things we're watching are the Fed giving us a yearly report card, thinking about how they're grading themselves and how they're going to be moving forward. If they come out and say, "Hey, we're going to be a little bit more aggressive here," market's probably not going to respond well to that. There's going to be a period where the market's like, "Okay, we've done enough about inflation. Please make economy go fast again. Thank you, bye." And that's going to be a really break period between the Fed and the overall stock market.

No idea when that's going to happen. That's probably not going to be on Friday, but the market is looking like it's anticipating two more months of Fed raises, and then kind of hoping that once we get to November, we're going to say, "Okay, economy good now. We're going to go ahead, pack this in and roll forward with it." But all of that really does remain to be seen. So treat this moment as what it really is, which is a breath between two big periods in the market. Again, as we've been saying for weeks now, this all comes down to October. There's a little bit of magic happening in September when we get another CPI, and if that CPI comes out and inflation's going down at the right pace, things are probably going to pop off a little bit more again, but if inflation A, doesn't go down fast enough, or B, goes back up for various reasons like, say, food prices or natural gas prices, or God knows what, then we're going to have a very wild period in the market following that as we sort of really accelerate the bear period.

And then October is the big moment, of course, because that's when we're going to get back into earning season for Q3, which is going to be the make or break for bulls or bears. If it's one of those things where companies say, "We've done pretty well, despite circumstances," things are going to pop off and we're going to ride through this on the anticipation that we're going to grow our way through, regardless of our economic or circumstances are. I don't care how bad the economy is, number go up, period. Or, if companies just don't do well enough, we'll probably really deepen that bear period and basically not officially, but all but officially declare a recession. Just call it like we had some bad inflation, we're getting through it, but we're going to have this brief period maybe three to five-quarter period of recession that hopefully ends Q2 2023 and the market goes through its natural progression there.

Regardless of what happens in the market, you're in this game for the long period. And so what you're going to be doing during this is watching how various companies react here. Again, if some companies over-respond to hype, then you know potentially you can wait until another period of bear sentiment for them to over-crash and jump back in. If a company over-responds to hype and then doesn't respond so badly to bear sentiment, that shows a company that has strong fundamentals that the market strongly believes in, and so that should A, be a position that you feel confident in, and B, a position you should feel free to dollar cost average into it sort of a higher price point.

Of course this podcast is not financial advice. This is meant to supplement your actual research. This is meant to supplement your own research so you can build the portfolio that you want that plays the financial game you want it to, because at the end of the day, that's all we're doing. We're trying to play this game for as long as possible so we can compound our interest for as long as possible. This is the easiest game in the world, it's just you only get one chance to play it. I'm really excited to keep exploring what's happening in this market as we go through, again, kind of a slow period of that. It's literally just meme stocks and the government right now, and not much else as we wait for the next series of earnings season to come in as we wait for the economy to get back into the swing of things post-Labor Day and post-October.

Either way, if you have any questions for us, feel free to hit us up over at [email protected] We're starting to get a lot of really awesome questions from our audience that I'm actually going to be saving for when we bring Justin back, because there's a lot of nuance that I want to make sure happens in more of a conversational setting, as opposed to this riff and hope type scenario. Anticipate that for our next episode, as we get back into more audience questions. Feel free to ask them, though. Again, you have [email protected] You also have our Discord, which link in the bio and all that, but feel free to hit us up, and we're really excited to get back to business as usual here at moby.co.