The Mismanagement of Corporate Profits

SPEAKERS

Lindsey Bell, Bob Lang

 

Lindsey Bell  00:05

Welcome back everybody to another episode of What Does It Mean? the Podcast. I'm Lindsey Bell, and I am here today with my pal Bob Lang. Chris Versace, got the week off, Lucky guy, but I think you're in good hands with the two of us, right. Bob, have you been watching the Olympics?

 

Bob Lang  00:23

Oh, yes. Lindsey, it's been. It's been fantastic. The United States team has won some, won some nice medals. The gymnastics men's team, which where they, they were atrocious on Saturday, came back and won a bronze yesterday. It's been, it's been great. And it's only been five days so far, with another week and a half left to go, so I'm really looking forward to some of the track and field events next, next week. Lindsay to a little history here. The last time the Olympics were on the West Coast, it was in Los Angeles of the Summer Games, and I was about 17 years old, and I was there, I went to the track and field events, saw guys like Carl Lewis and Jackie John and Kersey and some of his others. And what was funny is that I didn't have a car. Then Lindsay and I rode my bike across miles and miles of traffic in Los Angeles to get to the Coliseum. I was so obsessed with going to watch the Olympic Games. So, and as you know, maybe the Olympics are going to be coming back to Los Angeles in four years. So hopefully I'll be out there again, but not riding my bike.

 

Lindsey Bell  01:31

I know hopefully you have a car. You have an Uber driver or a self driving car, right?

 

Bob Lang  01:36

That's right, that's right. So, so Lindsey, what have you? What have you been watching? What is, what sticks out to you, and what's your favorite events out there?

 

Lindsey Bell  01:45

So I've been really into the gymnastics. I'm totally into that. I'm totally into the swimming. So I've been all over that the women's gymnastics. I told you guys last week I watched the Simone Biles special on Netflix, and it was absolutely fantastic. But I was surprised when you know, the women's gymnast came out, they did their first round of beams. They just seemed rattled and out of it. I don't know if I'm the only one that picked up on that. I was like on Twitter looking to see if other people were feeling that same way. But anyway, they're just fantastic, and I think they're especially Simone's level of difficulty is above and beyond. But the one sport that always blows my mind. Bob that like I just can't wrap my head around why it would be enjoyable to anyone. Is water polo, and I actually came across this story that did you? Did you hear about flavor flavs, partnership with the captain?

 

Bob Lang  02:37

Yes, I did. It's amazing, right? I mean, it's, kind of silly and ridiculous, but, I mean, it works, you know, I mean,

 

Lindsey Bell  02:46

But it's just like what you see too, with, like, a lot of the women sports and athletes here in the US in general, like, the story for women is they don't get paid what the men do. And yet, even some of the sports, like women's soccer, they still get the the viewership, but they don't have the sponsorship, they don't have the money from the brands. And I think in general, when you look at the Olympic athletes, at least from the US, I think partnership with sponsors for the athletes, it's actually been down since 2012 in London and 2016 in Rio. So so to see a partnership like this is it just like, it brings fun and excitement back to the sport, right? And I was reading the story about it. It's just like, really random that that it's, it's Megan Stephan. She's the captain of the water polo team, and she her, her agent encouraged her to tweet out asking for sponsorship. Actually, I can't remember if it was a tweet or an Instagram post, and he told his, his, I guess his, his friend that manages is a talent manager for Flavor Flav, about the the connection, and the two of them decided to get flavor, flav and Megan Stephens together, and the rest is, I guess, history. And he's like, like, their biggest hype man of the of the sport. So it's, it's just been fun to watch, right?

 

Bob Lang  04:10

Would be really funny, uh, Lindsey is, if we saw these water, uh, all these uh, players wearing, um, large clocks on their necks, right? I mean, following flavor in the water, right?

 

Lindsey Bell  04:23

But the point is, it's like the Olympics is also a big it's a big money, money making thing too, for some of these brands, or at least it's a place for them to get viewership and build up their brand awareness and marketing. So there's money to be spent.

 

Bob Lang  04:40

There's absolutely money to be spent, money to be made. Also what I've been watching Lindsey. Now, when I'm back, when I was back in school, I played volleyball a lot. So love volleyball. Been watching the beach volleyball competitions. But more recently, last few years, Lindsay, I've been into tennis. I've been playing a lot of tennis here so and. Been really obsessed with watching some of the tennis, Tennis Channel, and maybe, you know, here and there, picking up some tips. So the tennis matches that have been gone on the last, you know, couple of days have been great. Um, you know that there's been a swarm of young players coming on on the tour, on on the professional tour, like people you know, like Alcaraz and center and some of these more popular players, but what I found issuing last few days is some of the older players, and I say older because they're in their late 30s. I'm still way older than they are, but people guys like Rafael, madal, Novak, Djokovic, Stan roenka and even Andy Murray, who recently announced he's going to retire this year, these guys all won matches in the first round, so it's great to see and good to the competition. And even, you know, age isn't really much of a difference when it comes to competing at this level.

 

Lindsey Bell  05:59

Yes, no, with you. I'm always like, Oh, they're in their mid 20s, or even you're right, like the 30 year olds or the old ones, but they're still so young. They have so much life ahead of them. The other thing too is, a lot of these folks, getting back to the sponsorship point, is they actually have full time jobs, and that they showed. I forget the swimmer, the one bronze in the US. He, you know, he's a project manager. And they showed, like, a little clip, a video clip of him. But they do have day jobs. And I think the Wall Street Journal made a really good point over the weekend too, about the Olympics being, what did they call it? They said it was, I'm having here in front of me. They said it was, can the Olympics save the summer? And I think the point that they were making is that it's just, it's a nice reprieve from, for us the volatility that we've been seeing in the market, right? Or maybe it's the election, you know, banter and the, you know what's going on there. So it just gives you something, something to move away from. And I think, like they, they put it the best way at the end of that article was just like the Olympic Games. They're a genuine athletic competition and an uplifting realization that every day you get to see the best day of someone else's life. Like, how cool is that? Like, it's a positive.

 

Bob Lang  07:13

Oh and, you know, just to wrap that up, you know, in the men's gymnastics, they had this fellow who's actually from my area near Boston, came out, and he only was in one position. I can't Steve. Can't remember, no, I can't pronounce his last name anyway. So so he only is in one event, is the Palma horse, and he finished up and he nailed it off the palm of horse, and he enabled the men's team to win the bronze. And they were ecstatic that they got the bronze, because they were awful in the preliminaries on Saturday, but they ended managing it. So this guy, I mean it, just as you said, just, you know, made his life so great. They compared him to like, you know, Clark Kent Superman, because he sits there and wears glasses, and all sudden he takes his glasses off and gets on the pores. It was just a lovely story and and, like you said, it makes it puts it imprint on these guys lives, guys and gals, lives that allows them to show some, some pride in their in their country, and, you know, for one moment they get, they get to be the star.

 

Lindsey Bell  08:25

Yeah, and it's so great for all the hard work they put in. Well, why don't we wrap this section up? I think that's going to be a great segue, though, into what we want to talk about this week with, with increased volatility in the markets. Right? The Olympics really has been that relief, perhaps, from the daily volatility in the market. We're going to get into that. We're going to get into the consumer, what's going on with them, the job market, GDP in our economic zone. And we'll talk about what all this means for investing in the markets and your money right after this short break. Good to do. All right, let's get back into it, Bob, let's talk about the volatility of the market. It's really picked up since about mid July. You look at the VIX, for example, and we were, we were pretty, pretty calm market, if you're just looking at the VIX as an indicator, right? We were under or around 12 since mid May through mid July, in the last two weeks, that's all changed. So here we are, volatility picking up. And I know that you particularly what one of the things that caught your eyes was, was last week, last Thursday, it was, you know, we started the day in the red, then we bumped up to the green in a really big way, end of the day in a in the red What are you looking at when you see the volatility like this on a single day that like we haven't, we haven't just been we just haven't been used to it.

 

Bob Lang  09:52

Well, there's a strong correlation Lindsey, between uncertainty and implied volatility, right? And what happens is that when there's a lot of uncertainty. In the markets or elsewhere, whether it's, you know, geopolitical concerns or macro concerns, or even if there are battles going on that we really don't know how those are going to end, we see rises implied volatility. And why is that? Just because people get nervous and people get worried and scared that things aren't going to fall in place for them. So when, when we see rises in volatility, it doesn't necessarily mean markets are going to go down. It simply means that the ranges are expanding, right? So when we had a good long period of time earlier this year, when the VIX was 12, 13% maybe 14% but it was just really cemented in that low level for a while, we would have large rallies up, but we wouldn't have any pullbacks. And then any pullbacks that we had were really short and shallow, but as you referenced last week, we had a big rise in volatility up towards 19% now put that in terms of where we were just a couple of weeks prior to that, when we were at 12% so if you if you do the math from 12 to to 19, that's better than a 50% rise in volatility in just a very short period of time. And the reason for that is because a lot of the uncertainties that are out there. Let's talk about Fed policy. Let's talk about the election. Let's talk about some of the battles and the wars that are going on around around the world, lots and lots more of uncertainty, and it continues to to change and evolve each and every day and week. So that is problem for for traders and for investors, because there's a lot less reliability and a lot more worry about on the uncertainty going on, and so until that that is released. Now, when, when we have news releases Lindsay that come out, like the jobs report or a Fed report or an earnings report, we see some of that volatility recede and go down. Makes sense, right? Because once that's passed us, all we have to do is think about the future. Implied volatility is all about looking at the future, not necessarily what's happening now, but when that that implied volatility starts to come down, people get a little bit more comfortable, and they start adding stock. So that is kind of a long winded answer as to why we have imply implied volatility, but it's simply put, that the fact that we have larger ranges well.

 

Lindsey Bell  12:18

I think what you a really important point that you just made is that the Swift moved higher. It wasn't a gradual increase, but we know that the VIX usually doesn't move just gradually, but when it does make those spikes up, that's when you got to wake up and pay attention, right? But I will still say that being said is that even at it's come back down to 16, or what that's still not, that's not usually a red indicator that even that level, the historical average, I think, if I recall correctly, it's like 19. So anything below that, usually market participants are comfortable with. But again, it's, it's the move, and the in the sharpness and quickness of that move that I think will be, will be the most important so, you know, we talked a little bit about it last week, but you know, the election can add volatility because of the uncertainty around it. Heading usually do see volatility pickup going into the election. But do you think that there's a chance, given that we know, kind of know potentially both candidates, I know Kamala Harris hasn't been completely locked in yet. Do you think that that's this time could be different in that volatility may smooth out as we at least in the next couple months?

 

Bob Lang  13:36

Well, Lindsey, the VIX term structures talked about a couple weeks ago, is pricing out higher volatility out into the future. It's pricing out higher volatility in October because the market is expecting some turmoil or chaos for something to happen. Now, the last couple of times we had elections in 2020 and 2016 The same thing happened, but volatility pulled back because everything seemed to fall into place, right? Even though in 2020 we had to controversy and so forth and everything would happen in the beginning of January 2021 it was, it wasn't a smooth transition, but it was a transition. Now, I think the problem this time around is there's a lot of worry and a lot of new things that are coming out and developing about this election and will a change in power actually, actually happen smoothly? Right? The markets like smooth. They like reliability, and they like things that they can count on. When there's a lot of uncertainty going on right there, it creates a lot of chaos, and that chaos tends to make people hit the sell button and when they hit the sell button all at once, you know where, you know where the market's going to go. So for, you know, again, probably for the wrong reasons, you know, maybe, maybe it doesn't mean anything about fundamentals or earnings or that sort of server valuation. But remember something that the emotions in the in the short term? I tend to drive market performance much more than they do in the long term. I'm with you on the long term, Lindsay with earnings and valuation and that sort of thing in the economy and looking at those metrics. But as far as the short term is concerned, it's all about emotions and feelings and how people are are reacting to two different things happening.

 

Lindsey Bell  15:24

Speaking of emotions and feelings, we did get PCE inflation last week, which did, it seems like it put gave, gave investors at least, at least what they wanted, right? It's it calmed the markets. It seemed to kind of help stop the slide that we had seen in the s, p5, 100 over the last, you know, week or so. And so we saw a bump up in stocks at the at the end of last week, especially, you know, a revitalization of the rotation trade that we've seen. And so I think I went back and I looked at what what sectors were doing well versus what sectors weren't doing well since July 16, which is really when the pullback started, which, you know, never quite made official pullback definition of 5% to 9.9% but we got close at 4.7% and we're starting to move a little Little higher in a choppy way now, but the sectors that led the downside were tech communication services, consumer discretionary and industrials, and, of course, tech earnings questions about the future there, and really kind of sort of led that volatility in those sectors. But on the upside, you had utilities, consumer staples, real estate, healthcare, even financials were hanging in there. Some of that was like better earnings, but some of it is like a trade to to prepare for getting defensive, to get prepared, or getting prepared for rate cuts, just depending on what side of the what side you're on, and you know, the narrative is that a rebalancing is happening. It's really just we're getting out of tech because they've had this massive run valuations of getting gotten stretched. It's time to take profits in those sectors and and move our money into sectors that maybe have underperformed. You know the value versus growth conversation too. You can also see it in the in the equal weight versus the market capped weight, S, p5, 100 indexes. But is it, is it really just we're rebalancing, and we're so smart that we're we're locking in profits, or is it that people are starting to get a little defensive? And, you know, I I wonder that myself. Where do you stand?

 

Bob Lang  17:44

Well I think Lindsey that people are getting wise the fact that it's not only seven stocks that can carry the market any longer, right? We had the mag seven, and they were driving the action in the markets for a good part of 2024, and now we're seeing a little bit of of separation between those names. And look, it's not just seven, it's probably 15, right? Let's call it 15 out of 500 that's still a very, very small percentage of names that are driving the action, but, but now we see what's called the RSP, or the equal weighted S, p5, 100. Now what is that versus the s the regular S P, simply put, it's an equal weighted index that every stock in the S p5 100 gets one vote, right? They get the apple, the most valuable company in the world, gets one vote. Uber, which is a far cry of it's a fraction of the valuation of Apple gets the same one vote. It's like the Senate Lindsey. It said everybody gets one vote, and regardless of what your population is. Well, the equal analogy, good analogy. Thank you very much. It works the same exact way right now. The SP 500 on the other hand, is a valuation index, and the highest valuation names in the s, p5, 100 get the highest weight. So that's why I wouldn't call the mag seven, which is Apple, Amazon, alphabet, Tesla, Nvidia, and so forth, and a couple other names. Those are a large portion. I can't remember the the percentage, uh, Lindsey, maybe you, maybe you know, but it was like 26% of the S, p5, 100 is driven by those seven names. Is, that's that sound about right?

 

Lindsey Bell  19:29

That's the market cap weighting. Yeah, that sounds about right. It's, well, it's 30 it's actually 35 32% right now?

 

Bob Lang  19:35

Well, 32% so, and that's even after these stocks have been have corrected over the past few weeks. So what? But then we but now what we're seeing here Lindsay in the past few weeks is a separation. We're seeing the S, p5, 100 underperforming the RFP, or the equal weighted. And that's interesting, because when the equal weighted is doing much better, it seems. Is the breadth of the market is much stronger and a lot more participation, which what you talked about, not just from technology, but healthcare and energy and utilities and so forth, and home builders, materials, industrials, a lot of these other companies that were overlooked earlier this year are now starting to perform better alongside alongside each other, even as the other names, like a Microsoft or actually performing poorly. So I think it's important to watch this. I think that this is we've had months and months of underperformance by the RSP, and now they've finally turned the tables Lindsay and started to move, move back up.

 

Lindsey Bell  20:43

Well, I'll just quickly say that turning of the tables is is a positive sign. It does. It indicates that, you know, more, like you said it, more sectors, more stocks, are participating in the bull market. So it's a healthy sign that it could have some legs. But I think I land, and where you it sounds like you might be landing too, is we're sort of in this no man's land where we don't really exactly know what it means. Because, is the rotation happening because we want to get defensive, because the economy is slowing, or is it just we want to take advantage of of these value oriented sectors that are actually going to do really well if the economy does take off. So I think that, like, from my perspective, we just we're in a wait and see mode. The good news is, is that more stocks participating is a positive. But why don't you tie it in a nice little bow for us? What does it all mean, this volatility and rotation that we're seeing?

 

Bob Lang  21:34

Well, the as far as the rotation is concerned, as you said, it's very healthy. It's good to see a broad amount of sectors participating to the upside. It means that the sectors are attracting funds and money. They aren't just places to hide out. You know, back in the 1970s they referred to something called the Nifty 50, and there was a group of stocks that were attracting so much money, but none of the other stocks in the in the in the index were getting any, any funds at all. So it was just a matter of time before these 50 some odd stocks got so overvalued that that eventually somebody had to pull the plug and pull the pin out of that, out of that balloon, and it would, it would implode. Now I'm not saying that that's the case with these mag seven stock. But certainly you can make an argument for the past, you know, several months, a lot of money has been flowing to those names Lindsay, and people were just, you know, becoming very complacent when it came to putting putting money to work. And they would say, Well, look, you know what? It's just got to be in video. That's all I have to put my money into. I can just put my money in there, fall asleep and then wake up in a couple of years, and I'll probably double or triple my money. And that's really been the attitude, frankly, and it's really the wrong approach to far as I'm concerned. I think you as well, too, for investing. It's not there's there's no hard work done there. There's no nothing really, nothing really to do other than just to follow the lead of anybody out there who seems to be pretty smart. But as it relates to volatility, yeah, you know what? Increases in volatility bring out great opportunities for us, right? Because when volatility starts to rise, people get nervous, and they start selling stocks for the wrong reason, and when stocks get knocked down for to a certain extent, we tend to find opportunities right there. So between the equal weighted moving, moving strongly, versus the S, p5 100, and then the higher volatility, meaning that some stocks are coming down, I think it creates a great, great opportunity, excellent opportunity to start picking up stocks.

 

Lindsey Bell  23:41

I think that's a great bottom line. Volatility and rotation means opportunity. So I'll take it. I think you're absolutely right. But now the question is, moving on to our next topic. Let's talk about, let's talk about the consumer right? Is there opportunity in consumer land? We're not going to get the, you know, pure play retailer earnings for a couple more weeks, like mid August, August 15, is Walmart earnings targets. The following week, and we'll get some of the other department stores and other retailers. But we have heard from some consumer directed companies from an earnings perspective. The most recently is McDonald's. We kind of laughed about and joked about their extension of their $5 meal deal, which is great, but they reported earnings, and it was bad. They missed across the board, Bob, it wasn't just same sort of sales missed, which is kind of what you are expecting given that announcement the prior week, but revenues missed, earnings missed, and not just slightly they they really missed same sort of sales for the, you know, whole company overall were negative. For the first time since 2020 we saw a down 1% in the US. That was down point 7% and it was driven by a drop in foot traffic. And basically what I heard on the earnings call was, was that this company is a company that. Is acknowledging that their meals, their product, is becoming less affordable with you know, by extending their promotions, by by actually saying on the call that the gap between the value that they offer has shrunk them versus their competitors. So they know that their pricing is the problem. Another, a couple other things I pulled out of the earnings call was, you know, the CEO said, we have an opportunity to improve our value execution. And they also mentioned that over the last several years that they were able to sustain the inflationary pressure, the inflationary cost that they've dealt with by raising prices from 20 to 40% 20 to 40% which I you know, overall inflation, I think is up. I think CPI is up 20% something like that, since 2019 I don't have an exact number in front of me, but so the numbers make sense. But when you think about that on a like an overall, holistic basis, what you were paying for your Big Mac just three or four years ago versus what you're paying today. Like, that's for the consumer. It's no wonder they're pulling back. And I'm gonna say it again, and I've been saying it for a year now, but I just like, I really, truly believe we are living in a real life experiment of the price elasticity demand, and these companies are finally feeling, they're starting to feel the pain, and so they know that the price point is the problem. You even saw Chipotle, which is a complete and I know you probably have thoughts on this, Chipotle a completely different animal versus McDonald's. And you know, they had a good quarter, but you know what, Bob they they said their sales growth or cooling, and that that was reflected in their outlook. Domino's Pizza also, they gave a tepid outlook on the on the full year. So you could say maybe it's prices. Grocery prices are coming down faster than prices of eating out, and that's so the consumer is is taking advantage of that. But I think it also goes to show, if we look at other other industries, Sherwin Williams, they've talked about the macro environment being softer for longer than than they anticipate. Polaris which does ATVs, their inventory is building. The consumer is watching what they're spending. We see inflation on goods coming down nicely, but, but inflation on price on services, has remained elevated and is still up like four, 4% year over year, consistently, every single month. And so the consumer is being stretched, and they're being forced to make a decision, where am I going to spend my money? And it's not just my whole point here is it's not just the low end consumer, which, by the way, we brush off as like, oh, it's the low end consumer. They always struggle, but they're the ones that got the highest wage increases over the last several years, but those that still wasn't enough to offset these price increases. And so I just think that it's what we're starting to see is this is creeping into the middle class, and that is something in an election year you need to start to worry about, but not just an election year from an economic perspective in general. So I think consumers are making choices with their wallet. And I my, you know, I just, I think it's more than than the low end consumer. I think it's and we could talk about the jobs report, I think it's bleeding into the middle income. Is there anything that's standing out to you about the consumer, or any data points that you've been really keeping your eye on with the consumer?

 

Bob Lang  28:31

Yeah, I think that McDonald's worries are valid. But then, you know, if I look at the stock Lindsey, it's down 20, down 20. Prior to yesterday was down 20% for the year. So you have to wonder is, you know, some of that bad news was it already baked into the price of the stock. And I think that that's that's certainly really valid there. And then also, some of these other companies had some rich valuations, much like Chipotle, and while they did to have good, good earnings, there were some nicks and bruises on their, on their on their earnings report that people really took issue with. And that stock went up after hours, and it dropped down the prior day and the next following day, and then for a couple more days after that. So I think that certainly the consumer, I agree with you, kind of slowing down. And I really love your thesis about the elasticity in real time, because, you know when, when do you often get that opportunity to watch prices move in in real time here? I mean, I don't, I don't know, usually it's some sort of a rear view mirror look on what happened. But this is, it's a great, like I said, it's a great experiment going on here, and it's really, really fun to watch, to see how these companies adjust in real time to what's happening in the future, and whether they can get their forecasts about the economy. To me and consumer and about growth, correct? Look, I mean, talk about high end brands, Lindsay. I mean, other, are there two other brands that that, that are, that are so great, but the stocks have just been clobbered, other than Nike and Lululemon. I mean, come on these. Yes, I think the I want to say that these two companies, two stocks, are well below their October lows from 2023 everybody remembers that was kind of like right around the bottom, where the SB 500 bottomed out about 4100 and we thought we were going to fall off a cliff there, but then we rallied right back. These two stocks have been battered and bruised, and they have no compass going forward, I think. And listen, if McDonald's is having trouble with pricing, and you're talking about $5 meals, some of these other companies like this, what does Nike do with a $200 pair of shoes? Or what does Lululemon do with I mean, I don't even know how much those the leggings cost, 80 $100 what do they do with that? I mean, if the economy is starting to slow down, and the consumer is starting to dial it back. What do they do? Are they going to mark it all down and send it over to Ross, Ross and and TJ Maxx and mark it down 80% who knows?

 

Lindsey Bell  31:13

Well, and that's like, I for one first of all, would be very pleased if Lululemon would would reduce their prices. Just personally, speaking, that's a personal story, but no, but it's you're bringing a really good point too, though, that the high end is also feeling it. So if you're starting to see cracks in the high end, it's, we haven't, like gotten enough information, I think, about the middle yet. But if you're seeing cracks in the high end, you know the middle's got to be feeling it. LVMH also had a horrible quarter part of the story in McDonald's. And LVMH and some of these others, too, is China. That's concerning, right? There's weakness in China and the Chinese consumer. And then also, I think what we've, what we've, what we're realizing, is we've had these rolling recessions, people talking about, you know, housing and manufacturing, the auto business, like and it's all been okay because of the resilience of the consumer. So this is what we really do. Need to be concerned about that. So we've got a jobs report coming out on Friday, and it's, you know, there are concerns out there that it could trigger what, what is called the psalm role, and it's a rule that was put into place or found, discovered, I shouldn't say discovered by economist Claudia som. And the gist of that is, is that it theorizes that we are likely in a recession, in a recession if the three month moving average of the unemployment rate rises half a percentage point from its low point in the prior 12 months. So if the unemployment rate increases to 4.2% on Friday, which it's not expected to, it's expected to hold study at 4.1% this role would be trigger now triggered, and it's predicted every recession since 1970 and but she herself has gone into the media and said, You know, I don't know if, if this is actually necessarily going to play out this time, if it is triggered at this time, this time might be different. Bob right, Famous last words, but I guess it might be different. She says, the post pandemic economy is different. The the rise in unemployment is, is, is really being driven by more people participating in the labor market, which is a good thing, not because people are getting laid off. The layoff rate is still very, very low in this country. And and I know you have concerns about the July jobs report, and I like part of it is, as you hear other comments talk about, you know, borough, Hurricane borough in Texas, that's going to, that's going to play a role. But so I don't know, what do you, what do you? What are your feelings about what we're going to see out of the jobs market this this week?

 

Bob Lang  33:56

Well, I think that eventually we have to see job growth slowing down, right? And we know that there's always a this been somewhat of a consistent eight to nine month lag period when it comes to job growth slowing down, versus where we're at at the at with the numbers. So you know, if job growth was starting to slow down about four or five months ago, it may show up in August or September numbers. Lindsay, so there's a little bit of a little bit of a lag period over there, but the trend is, is certainly in place. And I think what what we talked about with the with the mentioned about the recessions interesting that I don't think the Fed has been any more worried or concerned about a recession coming up than they are now, right? And I think that the last couple of times we've heard chair Powell talking whether it was after a meeting or whether it was at a Q and A. Okay? He dismissed a recession and said it was basically off the table couple of different times. And in the same breath, he would say, Well, you know, we do have a chance for a soft, for a soft, smooth landing, right? And so you can't have both of those exist in the same in the same universe, right at the same time, because one's going to be a crash landing and in the other one's going to be a soft landing, maybe we'll have no landing. Chris has referenced that quite a bit, so I think that the Fed is has got their finger on on the Cut button. And if, if things go a certain way, they will not be hesitant to use that. And there's plenty of room to move. I mean, you know, we talked about neutral rate a couple of weeks ago. We're kind of in the same, same, same ballpark, three, three and a quarter, maybe three and a half percent. That's all they're going to go to. They're not going to zero unless something you know, I'm not going to say never.

 

Lindsey Bell  36:06

Never say never.

 

Bob Lang  36:07

I said never after the financial crisis, and sure enough, we had a pandemic, and we went right back to zero. So I'm never going to say never again.

 

Lindsey Bell  36:16

You've learned your lesson. That's good. That's right. I think for the Fed, like I do think the unemployment rate matters, because that's like the job market, they did not care about, we're not even talking about it. Was all about, what is inflation doing for forever, right? For the last several years, and now, I think it was May. It was the May report in June, when the unemployment rate ticked up to 4% for the first time since the pandemic and and that, like, I think turned, like, turned things, but, oh, we have a dual mandate. It's not just prices, it's also, it's also the job market. So I think it's going to be something, it is something that the Fed is focused on. Friday is a big day. We'll definitely be keeping our eye on it. I think, I don't know. Like for me, the takeaway on the state of the consumer and the job market is, is that there are signs of cracks, and it's, it's time for us to really keep a closer eye on on the job market and on the consumer. Then we just automatically assumed that they were okay. The situation is definitely changing. And I write a lot about this in my newsletter, the shift at Lindsay bell.com so, you know, people want to know more about my thoughts about the job market. They should go there. But that's, you know, that's my thoughts. I think that's really the takeaway for us on the consumer and jobs.

 

Bob Lang  37:39

Well, you just stole my thunder there, because I was going to ask you, what does it all mean? But that's okay. We're right there. Sorry, Bob, I'm sorry. That's all right. So let's see, where do we go from there? Where do you want to where do you want to

 

Lindsey Bell  37:54

Let's go to our economic zone? Because we're kind of in it anyway, right? Let's talk about what you and I have dubbed the economic zone. We're going to talk a little macro picture here. Let's dive into, I don't know where you want to go. You want to go with GDP? GDP or yeah, let's talk about what you thought about the GDP report and where we're going to q3 right?

 

Bob Lang  38:18

So the first, first look GDP came out on july 25 before the market opened, and it showed a 2.8% growth rate, which is a little which was a little bit better than expected. And the number that I look at, not just the headline number there Lindsay, is the chain deflator, which or, or the deflator on, and that really basically tells us how much of that growth was driven by inflation. And it turns out that some of it was driven by inflation, but that number is starting to come down, which is going to please the Fed. So I think that depending on what your divisions are all about, and we'll get some more data that will help us determine where that number is that, you know, we have imports, exports, number that's going to come out in a couple of weeks, that's going to help refine that GDP number that came out last week. And so I think that the Fed is looking at this and saying, Look, growth is still strong, the labor market is still strong, but we're seeing some cracks, as you said, in the labor market and in the consumer. So we just have to be vigilant. We have to pay attention to what's happening in front of us, and we don't want anything to go awry. But certainly, a 2.8% print in the second quarter is pretty impressive when you come when it comes down to it, we had a strong fourth quarter of 2023 came back a little bit down. I think it was 1.9 and first quarter 1.8 and we're right back up again. So it's interesting. It's not all AI driven either, which is which is surprising to a lot of people, but I think that by and large, we're looking at a an economy that is still pretty robust. Is pretty resilient. And I think the Fed is keeping their keeping their watch on it.

 

Lindsey Bell  40:04

Yeah, and the Atlanta Fed GDP, now their estimate for q3 is to hold steady at 2.8% with the biggest contribution they're coming from consumer spending, followed by business investment, and then government spending. And I think business investment, that was another highlight in the second quarter. So you do see companies ramping up their spending on investment. And so these are all, these are all good things for the resilience of the economy, the consumer spending there. You just gotta wonder in the PCE report last week, what we did see is wages are up, but spending is up more, and savings is down. The savings rate is down. So again, just like, let's monitor the situation. But I think that the economy is, you know, I've been saying the economy is due for a little bit of a slow time and given the slowdown in the consumer, but it looks like we're on solid ground here.

 

Bob Lang  40:59

Well and you know, when you couple that that strengthen the economy with, you know, tax receipts and so forth, and businesses are strong, and consumers are if they're paying their share of taxes and so forth. The problem I have is, you know, you have fiscal policy which has been out of control for 40 something years. And the fiscal problem is not going to disappear. It's not going to go away. We have increasing deficits. What do we hear? Wednesday? How fast is the debt going up, a trillion dollars every few weeks, or something like that, a month. I don't know, some ridiculously fast number that you know, once it hits a certain level, I think, I think there's going to be people in the bond market who are going to say, You know what, I've had enough. I don't, I don't, I don't think this is, I don't trust the fact that I'm going to get repaid in the same dollars, and, and, and certainly, if we get another administration, different administration that we have right now, the only thing I see is that I see inflation running rampant, and I see the dollar getting getting trashed, say, for instance, under a Republican regime, but, but that's maybe for another for another day.

 

Lindsey Bell  42:12

On the positive note, I think chair probably agrees with you on that, but he said something to that, to that liking. But I think the positive note on that is that if GDP does continue to come in better than expected, and like in this mid two and a half to maybe 3% range, that could be a positive for, you know, lowering the debt situation, hopefully, if we don't continue to spend like drunken sailors, but yeah, so what does it all mean? What does all this economic data mean? Bob, what's the takeaway for our listeners?

 

Bob Lang  42:49

Wel I think it means that that the again, the economy is on pretty good footing right now, and even though jobs may be starting to recede and the opportunities for people to go to move to another job, or to get a new job and get higher wages is it's going to slow down a little bit. I do think that the economy is so relatively strong. And look, I mean so many for so many years, Lindsay people have counted out the consumer and counted out the public, which is about 70% of the economy. And still, if do the math, we did 70% of the if 70% of economy is spending by consumers, and we did a 2.8% GDP growth, you know, that's, that's a huge amount. That's 2% of the growth is being driven by the consumer. So, I mean, that's, that's a large amount of spending going on. And it's not all. I mean, I'm sure some of it's all credit card driven, some of it is savings driven, and some of it is wage driven. But still, people are still willing to spend, still are willing to go out there. And again, I learned my lesson a long time ago, never count out the consumer when it seems like they're down and out.

 

Lindsey Bell  43:59

I agree. You know, I always say, if the consumer has a job, they're going to continue to spend, which is good for the economy. So why don't we take a quick break before we wrap it all up at the end here. All right, welcome back. Welcome back to closing thoughts on what does it all mean the podcast Bob Lang and Lindsay bell here to clear everything up for you, Bob, you know, we talked about a lot of different things today. It was a really good conversation. We started with volatility to the consumer, and we ended with, you know, our take on the macro picture. Is there a takeaway from our conversation that really stood out to you, that really kind of summarizes everything that we talked about today.

 

Bob Lang  44:49

Well, I think what's interesting here, Lindsay, is that we're in a transition period right now. And I think the Fed is also in a transition period. I think they're pivoting, but they really don't know it. Do. That's That's been my, my call recently is that they're in a pivot moment, but they don't know it yet and or they haven't actually come out and set it. So I think they're, what are they pivoting from the pitting, pivoting from a a hawkish, tight money policy. And they're, they're, they're making that very, very slow transition into a more dovish, generous monetary policy, which is going to probably last for a long time. It's been about a year since the last rate move, and that was the last rate move was a hike when July of 2023, so it's been about a year. So I think that as the Fed sees more data, and as we see more data coming in, and as much becomes much more favorable, they're going to slowly turn the crank into where their position to to to cut rates. Now I know the market's going to get all excited about it. Of course. You know earlier this year, you remember that six, seven rate cuts were on the table. I thought that was kind of ridiculous, and eventually the market said it was ridiculous. Said it was ridiculous too, and we had that big correction in April. But I think by and large, what we learn here today is that, you know, the Fed is going to take a take their time, and, you know, watch the economy, watch the data, as we all should, and as they've been as which is what they've been saying for months and months and months. So I guess Steady as she goes.

 

Lindsey Bell  46:26

I hope to steady as she goes. And it's not doesn't always go up, right? We need, we need a volatility in our lives for opportunity. My takeaway is opportunity, that these transitionary periods that I agree too. I think our takeaway is, is that everything that we talked about shows that we're kind of in wait and see mode. We don't know where we're landing. If you want to talk about soft landing, no landings, I do think hard landing is, at this moment, off the table. Let's again study should go. Hopefully that stays that way. But I agree with you that in that we're just, we're just in a transitionary period which can feel uncomfortable. It's never fun to be in these periods. But that is where real, true investors are made, right? This is where you find the opportunity. You You know, find the courage to sell your high flyers, and you find the courage to buy the stocks that have underperformed for the last 12 months, right? So, so I do think that, you know, I you know, I think that the consumer is worth watching. But like I said, they still have jobs. That's a positive. Companies are spending corporate debt. Positions are solid. And I think that even though this earning season is a really good one, I believe that there could be a rerating downward, which isn't the worst thing in the world for the third quarter. And fourth quarter still going to be good versus what we've seen over the last couple years. But I think estimates need to come down and and I think that we just need to we're in the process of resetting before what can hopefully be a really good end end to the year. So that's my thinking.

 

Bob Lang  48:12

I agree with you. Yeah, totally. And hopefully we'll have some more good stuff to talk about next week Lindsay, because I know we have, you know, bed meeting to talk about, we'll talk about the jobs report next week. And it's the start of a new month of August. And I heard somebody has a birthday in the month of August. Is that right?

 

Lindsey Bell  48:35

Yes, because you told me that there are no holidays in the month of August, so it's your least favorite month. And I said there is one holiday. It's my birthday, August 17. If anyone wants to send me, you know, I love gummy candy.

 

Bob Lang  48:49

I've already marked it on my calendar. It's Lindsey day, and I'm going to, I feel like sending a note into the local newspaper and designating Lindsay day as a day off for everybody. In fact, you know what? Maybe they will, because it is a Saturday this year, right?

 

Lindsey Bell  49:09

Yes, new national holiday. Everybody gets August 17 off. It's a Saturday. Just ignore that part. But I love it. Bob, I love it. Bob, well, I think that wraps it up. It's been, it's been a great conversation. I hope we all got you thinking and gave you a little something to chew on over the weekend, and we'll be back next week with another episode of What does it mean the podcast. Until then, you know, you can find Bob, Chris and I in a couple different places. All of us are on Twitter. Bob's over@explosiveoptions.com or at Aztec 99 on Twitter. I'm just L Bell on Twitter. You can, like I said, you could check out my my newsletter, the shift at Lindsey bell.com and Chris Versace, who isn't here with us today, but is normally here with us, is there. Street Pro portfolio or thematic signals, so we will see you all next week. Thanks, everybody. Thanks.