This week's conversation with Chris provides a comprehensive analysis of current market dynamics, emphasizing the nuanced interplay between economic indicators, geopolitical tensions, and the impact on investment strategies. Our discussion underscores the complexity of financial markets, urging caution amidst shifting tones from central banks and global conflicts' potential repercussions on various sectors, encouraging a deeper understanding beyond surface-level market trends.
We discuss that despite global turmoil, the focus remains on market dynamics, predominantly influenced by the Fed rather than geopolitical unrest. Chris, well-versed in derivatives trading, brings a data-driven perspective. We delve into the job market's softening, citing a decline in job additions, elevated unemployment rates, and a cautious rise in average hourly earnings. While the Fed previously emphasized strong job growth and spending, Chairman Powell's recent dovish tone signals potential shifts in interest rate policies. Chris cautions against over-optimism in the market's response to the Fed's tone, highlighting the unaddressed impacts of conflicts in the Middle East and Russia-Ukraine zones, specifically on energy supply chains and global economies.
Disclaimer: note that this discussion does not constitute investment advice.
MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of interplay. I'm on a mission to help entrepreneurs advance society. And this podcast is definitively part of that effort. Today, we've got a market recap with Chris Zhang. He is one of my partners and the CIO of our family office side of our business. He's a highly educated derivatives and trippy traded kind of everything at Morgan Stanley before joining up with us. So we're going to do a deep dive today into the market dynamics that are happening. Interestingly the story is more driven still by the fed than by any of the turmoil, , in the middle East or in the Russia Ukraine zone.
a Lot of interesting narrative around that. And we've talked about how things might move in markets in the coming months based on what we're seeing now. So hopefully this is helpful to everyone. Without further ado, enjoy.
Chris, what's up,
Chris: buddy? Hey, Mark. Good to see you. Feels like it's been a century. Yeah, it's
MPD: been 15 minutes since we walked across the office by each other.
Chris: That's how much I miss you.
MPD: The market update today, I was thinking we should Frame a little bit in all of the awful stuff happening around the world.
Yep. Probably hard not to, I feel like the headlines right now are that in my feet is Warren Trump, like it's Warren politics. Those are the two stories that are pervasive.
Chris: Yeah. I don't want to keep talking about bad news here too. I feel like the general impression of these calls is we'll think I I'm the harbinger of bad news.
I think you're
MPD: just negative as in general just a disposition now.
Chris: That's not true. I'm a . I'm a my wife, think my wife thinks I'm a, I'm an optimist compared to her. So maybe we're both negative. It's all relative. There you go. Could be all relative. , but I do. The data's I mean I'm I'm a data-driven person.
I the data basically always tells me something negative, unfortunately. It's hard to see. Things that are with a positive light when, yeah, when you just don't see the data. So there's some stuff I was shared today. Obviously, I want to share with everyone on the macro side in the U. S. But yeah to your point, the headlines are always focused on the negative stuff.
So you can't get away with it. But what on my level, what I care most about is, yes, with all these war, election and. All these things in our news feed what is the ultimate impact that translates into data? That's what I really want to look at. And, that's I think where we should start without just the macro picture to,
should we talk about, if you want to just dive in, I have a few things I want to talk about regarding the job market and of course yeah, et cetera. So 1st thing 1st, I think since we have these chats now, once a month I, it gives me more time to reflect on what was the most important thing that happened in the past month on a macro level in the US and abroad.
As far as data is concerned. It's job, it's the jobs market for the first time in two years. We're finally seeing some softness in the job market. People have been waiting for this because without job market cooling down the expectation is the fed is going to keep hiking, which is bad for all.
So October NFP non farm payroll, which is the leading job data that came out last week, um, indicated that, that. The economy added about 150, 000, 150, 000 jobs against an expectation of 170 which is a sharp decline against what the September number was almost at three to 200, 000 and the unemployment rate rose finally to 3.
9%, which is the highest since January, 2022. And if you look at onto the underlying data, a lot of the gains in non farm payroll came from. Healthcare government production, so which are more viewed as seasonal, but they're not, stable. Even though we gain it and we added more jobs.
But there's a sign of a weakness in the secondary data. And our unemployment rate rose. Importantly, as part of the job data, you also get the average hourly earnings, right? With this, we talked about this a lot internally. We view this as more of a indication of who we're spending power. It's been rising steadily outpacing inflation for the past few months.
And just logically if a household level you're getting, you're your salaries are increasing at a faster pace and inflation, your net spending power increases. Which triggers down to more spending. But this past month average hours earning increased by basically 0.
2%, which is about year on year 4. 1%. And we're going to get the CPI data in I think on the 14th. So in about a week, and we're going to compare that the whole markets and compare that to the average hourly earning data because. The theory is that if, again, if inflation is now all of a sudden higher pace than your job data and your average hourly earnings, people will feel poorer and therefore less spending will happen.
And that's another signal that Fed will be looking for as they consider. Rising interest rates, raising interest rates or drop or being on hold. Speaking of the Fed they just had their meeting and most recent meeting earlier this month in November. And, uh, for the second consecutive meeting, they've decided to hold interest rates steady.
And for the first time since this hiking cycle the chairman Powell came out with more, what I would consider dovish tone, right? He questioned, a few places in his statements. Whether we should raise interest rates and that's the 1st time I've ever said that before.
This has always been inflation is not under control. A job is so strong spending still strong. We need to keep raising this time is. Should we continue to raise, right? The question's been asked, um, the market loved it. If you just stare at any indices, any any parts in equity market in the past few weeks, you saw this turning point.
We're on our way down and all of a sudden, this is 180 reversal and people really think that the regime has shifted now that we're in a the risk is more cutting rates as opposed to raising rates. I think if you ask me, I think Mark. Probably to to positively and to optimistically to that data has not shown that we're near the inflation target and.
Spending is still very strong job market. Yes, we can weaker compared to last few months, still strong. So we're not there yet. We're not there yet. So I do expect active marketing bounce back from, the rally that we've seen recently. This
MPD: is, can I just, Chris, just clarify this is there's a, am I correct?
There's a lag between the time they raise interest rates and that kind of economic factors adapt hearing the dynamic that the fed is saying, Hey, Things are starting to trend the direction they want, pausing on raising interest rates further for the time being to see the unraveling of the work they've already done.
Seems rational, right? Isn't that kind of, you don't keep turning a boat after you, it seems like it's on course. You let it ride a little bit and see if it stays there.
Chris: Yeah, I think the Fed is rational. They are. They're supposed to be forward looking, right? But the data are mostly backward looking and they have to be reliant on the data.
And so before this turn, market or sort of a little bit nervous about them overshooting it. So hiking it too much to a point where we put us in a sort of part landing scenario and then have to cut aggressively. Get us out of the hole, but now I think it's the other way around where the Fed is acting somewhat rationally, right?
They're impacting the market is finally trickling down. They're seeing the trends going in their favor, but market is now being overly optimistic. And it's as if we're not, the real estate bubble, the real estate collapse is not happening as if. Where hard lending is not even a possibility anymore and all of these, and as if war is not happening, as if, elections, all these risk factors are being ignored in the market currently, simply because of a shift in tone in the in, by by chairman Powell.
So it's a very emotional reaction to, but is that justified?
MPD: Is the interest rate more impactful on outcomes economically than wars and. Elections. Yeah,
Chris: it's so powerful, right? For sure. Interest rate, probably the fundamental force behind equity markets, but it's a shift in tone, right?
We're not seeing, it's not like we're seeing their calls and decided to call 100, 100 basis point rates and commit to cutting it back to 2%. We're still at 5. 25%. And the 10 year, as you will see in treasuries is still at the high of recent decades and would trickle down to mortgage or trickle down all these secondary rates that, that the impact they spending consumers.
We're not seeing any of that shift yet. None of it. It's just a tone, a shift in time by, by the Fed. And yes, somehow the equity market already rallied back to recent highs. So that's why I personally view as more of a reaction. Let's see the data first. Let's see what actually happens. And then let's react to it right now.
Is this more of an unbinding position? That's more technical than the fundamental driven. ChRis, on
MPD: the conflict, you mentioned it. We've got two conflicts going on globally now. Seem to just be adding them every six to 12 months at this point. That's not factored or it's not showing up in the market as you're describing, how significant is it from a market perspective?
And are there areas that people should be concerned about her watching? Yes, because there's got to be some forces that come out of that. I'd imagine maybe some oils and weapons industries for sure.
Chris: Absolutely. I think winners losers in every scenario, but. The biggest, as you mentioned, the biggest area people should be paying more attention to is energy.
Because the 2 fronts where the wars are happening happen to be the most critical 2 fronts for net gas and oil. IRan, people not talking about Iran a lot currently, but they could easily get looped into the war. And as we talked about internally, Iran produces in somewhere around 3 million barrels a day, which is not a lot on a global demand perspective, but they control.
The straight of Hormuz, which is 100 percent control of straight Hormuz, which controls about 20 percent of the global production, the global supply chain in oil. And how does that impact your, if there is a sort of a cornering in the market happening, how does that impact oil prices, which has too many layers of secondary tertiary impacts in the global economy to even count.
And that gas in Russia, all these things that are impact global supply and demand in energy market people. I don't think are pricing it. Just looking at oil futures and these things, I don't think a market is necessarily pricing it fully. And yeah, and impact on really just global supply chains overall.
And we haven't talked about China yet because China as of today just shows the probably the weakest deflationary print in their economy. And CPI and PPI both strong and how do our people, and then naturally that that the impact of that actually was trickled down to some us companies, right?
Most importantly Apple's earning came out last week, the weakest, while they've shown four straight quarters of the client, mostly because of China, the demand simply not there, right? So the biggest company in the world is getting impacted. And this is the longest sort of slide in earnings they've seen in 22 years.
And these things are not being factored in to me, based on what I've seen as of yet into the equity market,
MPD: the equity markets are potentially inflated? Yeah,
When we any for any thoughts on connecting the dots, like where this goes the next few months that we should be paying attention to,
Chris: I would say I'm going to, it's a really hard question to answer. But what I would say is yeah.
If I'm going to put my traders on for a second, and if you ask me what would I put in my own personal money in terms of looking at all things, what would I put my money in for? Let's say 1 or 2 trades. Again, I'm not recommending to anybody. I'm just trying to use as an example to illustrate my views here.
The first trade I'll put on is a spread trade. I will long oil prices and short us indices. So that's S and P 500 or any of the tech indices you think. I think this is one of the fundamental forces that will drive the valuations going forward, oil prices, of course, real estate. It's hard to short real estate.
So I would basically long oil and short S and P. Okay. That's one spread trade that expresses my view. The second tray, I think this is probably there'll be more people even agreeing with this. Is that I want to put a steepener what's called a steepener trade in an interest rate market. I think that the long dated interest rate in the U.
S. still has room to rise. So 10 year, 20 year, but the risk on the front end is now shifted to downward. So I think the front is likely going risk reward wise, likely has more room to decrease rather than increase because softening an economy and if that guidance in interest rates. So I would basically short the 10 year, 20 year and long the two year.
And then obviously price and yield are inverse. So basically what I'm betting on is a going forward next couple of years, a decrease in product interest rate and an increase relative to the two year in 10 interest rates. So if you believe these two, so that those were this is where I will put my money and for these two, two spread trades.
And if those two materializes, You will see, this will impact everything. This will impact the dollar, the strength of the dollar, this will impact real estate domestically, internationally, because construction loans are tied to the front end, whereas mortgage rates are tied to the long end, that dynamic will play out, unfortunately, not in favor of the real estate market, residential or commercial.
And yeah, equity markets being a little bit rosy right now and what it was like, right? So people can think about the secondary tertiary impacts. It's really helpful.
MPD: Chris always here bringing us good news. Thank you so
Chris: much, buddy. Yeah, always a pleasure. Thank you, Mark. And a quick reminder for
MPD: everybody, Chris is a registered SEC advisor.
Nothing he has said should be misconstrued as
Chris: investment advice.
MPD: All right, everybody, thanks for listening. Chris, as always, is bringing us great news. I think that's becoming a running joke. Maybe when the market picks back up, he'll be on the other side of the story. It'll get boring because he'll be saying good stuff every month.
I want to give a quick heads up for everybody. If you haven't checked out interplay. vc, that's our website for our firm, a great place to land to see what we're up to and what we're doing. We've got a venture capital business, an incubator, a foundry, a number of service companies, and the family office side of the house.
You can find out a lot about the different types of things we're doing, get involved. If you're interested in working with us in something, you can just click buttons and get right to the front door, which is we require everyone to go through and that's interplay. vc slash engage. And that should get you into the system and in direct communication with the team and to the right people.
So with all that said, check us out on the website, socials. But remember we're here for more than just a podcast. And if there's ways we can help, let us know. Thanks for listening.