Well, welcome to Trader Talk here at

Yahoo Finance. I am Kenny Polcari, your

host. And today we're talking to Chad

Morganlander, who's the senior portfolio

manager and co-founder of Washington

Crossing Advisors, and Ben Emons, who's

the founder and chief investment officer

of Fed Watch Advisors, as well as the

managing director of Highline Wealth

Partners located in LA. Gentlemen, thank

you for Thank you for joining me today

and welcome to the conversation cuz

there is a lot to talk about concerning

the markets, the Fed. But look, let's

start with the Fed because that's going

to be very important. And the death of

this Greenspan put, while Alan

Greenspan's historic legacy relied on

market microstructure and pragmatism and

the rapid crisis-averting liquidity

injections, otherwise known as the

Greenspan put, the central bank's

mechanism is drastically pivoting under

Kevin Warsh, right? He'd like to

eliminate the systemic market

distortions that that creates. So, let's

talk about whether or not I actually

think that's a great idea cuz I thought

there was way too much Fed talk by

everybody in the committee. But why

don't we start Why don't we start with

you, Ben? Tell us a a little bit

considering you are also you have this

Fed Watch advisory group. I think it's

perfect that you're here.

>> Yeah, I know it it will be a significant

change because if we're ever getting

another type of financial crisis or

another sort of pandemic style type of

meltdown,

the markets were conditioned that the

Fed would bail everybody out, would come

in to the rescue

>> all the time.

>> all the time. So, if that truly is

changing, then we're in unprecedented

territory in a crisis like that. Now, I

don't believe that Kevin Warsh would let

it come to that, actually. In fact, he

said in a Hoover Institute interview

last year that QE should not continue on

a continuous basis, but in a crisis

situation, it was an effective tool.

>> Which I agree.

>> Right.

>> I think in a crisis situation, it is an

effective tool. But the way it's been

happening since

2009 or 2010 when the when the great

financial crisis happened, they've just

kept it running and running and running,

right? And so, that that's part of the

problem because the market had gotten so

used to it. It's elevated. I think this,

you know, now Kevin Warsh is coming out

and saying, "You might see some more

volatility, I think, at least in the

short term."

>> I think that's right because, you know,

if you have so much QE pumped into the

system, prices are distorted.

>> That's right.

>> And if you think of this is a real good

example, the Silicon Valley Bank crisis

that happened 2023

>> Right.

>> is a product of QE in the past.

>> That's right.

>> They brought rates down too far.

>> Right.

>> That bank bought a bunch of long-term

Treasuries and mismanaged the duration

risk with the interest rate risk, but

it's really the effect of QE

>> Right.

>> and the bank is out of business.

>> Right.

>> So, I I think that is one of the ideas

of that the Fed's influence can be not

so significant that it causes financial

market No, financial system

>> Right. That bank went out of business,

but created all kinds of chaos in the

you know, during

>> Yeah.

>> during its during that whole process.

>> was just a bump in the road.

>> Right.

>> That wasn't a financial crisis, and

you're 100% right. Price discovery up

and down the quality spectrum has been

distorted for the last 10 years. In

fact, right now, credit spreads are

historically tight when you look at

high-yield bond spreads, similar to

2007, similar to '99.

>> And so, what's that tell you?

>> It tells me that they're not properly

pricing risk in not only for fixed

income, but for private credit as well

as venture capital and equities. And

that is in a carbon monoxide detector,

that's not chirping, it's actually going

off.

>> So, is that is that

a direct result of prior Fed policy

which Kevin Warsh wants to attempt to

change?

>> I think it is, you know, that that

that's

really because there's so much liquidity

that's been generated in the system,

not just those reserves as in the

banking system. There's like 3 trillion

still, but it led to all these market

value gains that have been accumulated

in money market funds.

>> Right.

>> And because it's there and even that it

doesn't get deployed people are seeking

out investment grade markets to quote

unquote park cash so to speak and I

think that's that's a distortion.

In addition that those spreads are tight

probably because the economy is on fire

right now so so there's not much default

risk. So that is another major like

change if that were to happen we're

getting a different economy and gain

more risk.

>> So let me ask you a question cuz you say

the economy is on fire which I agree cuz

I think the economy is fairly robust

considering the macro data that comes

out continues to sign none of it

suggests we're falling off the edge at

all.

But what does that really mean for Kevin

Warsh in the sense of

I I don't see how he can possibly

justify cutting rates.

>> No I I he cannot. In fact even if energy

prices are declining right which is

important that ultimately inflation will

start moderating cuz we had a big energy

shock.

>> Right but that still wouldn't be even if

inflation comes down and the economy

remains strong there's still no reason

to cut rates.

>> No in fact actually the fact that gas

prices will go down likely is going to

be stimulus to the economy. And we're

accelerating investment in the economy

to AI right so you're coming at a

juncture here where the Fed's going to

confront a economy picking up. So how

would you cut rates into a picking up

economy?

>> Somebody in the White House is not going

to be very happy about that.

>> Unfortunately [laughter]

but you know he I do think that that's

got passion who's sort of managing that

situation can convince that message

saying

keeping rates on hold at still low rates

it won't stand in the way of the economy

in

>> Well because I think rates are I don't

think rates are usurious by any stretch

of the imagination.

>> Not not really they're not.

>> No 3 and 1/2 375 is relatively at the

low end of the of the range

historically.

>> And if and Warsh said in the press

conference that he didn't see the rate

being restrictive except for housing.

Now the president has canceled his bill

but they're going to sign this bill on

improving the housing market right just

new bill that came out and so it's

really there about cost and supply and

demand and balance but rates don't have

much of an influence. So I think the war

is set like we're just in a very neutral

zone in with policy. So

>> Yeah.

>> No, no, and I agree which is why I which

is why I'm amazed because actually the

market is pricing in a rate hike by the

end of this year. And I think one of the

banks, I don't know if it's Bank of

America, somebody was pricing in

multiple rate hikes.

>> You may Do you know what it I don't know

if you know what it is.

>> No, I don't. But you you may say that

perhaps they don't raise rates this

year, early part of next year they bump

up the short end of the curve. And the

effect of that may actually be that the

long duration bond actually rallies,

yields go down which may be somewhat

more of a stimulative effect.

>> Yes, if they can do that that's great,

but the Fed doesn't typically manage

they they can't manage the long end. The

long end is completely a market kind of

market regulated, right?

>> Yeah, even at the Fed, believe it not,

they control 40% of the outstanding

monetary bonds.

>> Right.

>> And yet you can't really control what

long-term rates do. Like see what

happened with the war, they went up from

from 3.75 to almost 4.75 in the on the

10-year.

>> And and the 30 is kissing 5% right now.

And the 2-year is at 4.2%.

>> Right, so

>> Right, which is up dramatically.

>> So I do think that this rate hike is a

bit mispriced if you base upon energy

prices just itself. But my other

conclusion on that is that well, if this

economy is picking up, right, and we're

having all those investments with AI,

then this rate hike probability, so to

speak, may not be so mispriced because

the Fed will always have to keep some

sort of eye on that if an accelerating

economy in a fiscally inflationary

inflation, they need to keep at least a

rate unchanged.

>> And I agree. I think they'll keep them

unchanged. I think they have to put the

idea of a hike on the table. I think

they have to put it out there so no

one's surprised, right? That it's kind

of that it's kind of permeated the

conversations, so people wouldn't

necessarily be surprised.

Although, I'm not sure it's actually

going to happen. But, let's move on.

Let's talk about the muting now of the

Fed speak, right? Because under under

under

prior

um

Fed chairs, everybody went to the

market. Everybody went out in the

market. But, Chairman Warsh, he's

aggressively dialing that back the

frequency of which individual Fed

governors and members of the committee

have media appearances as slashing their

monthly average speaking arrangements,

right? Um

from what was about probably 35 down to

maybe 10 or 11, which I actually think

is a good idea because I think too much

talk created way too much confusion.

>> That's absolutely correct. And what

you're going to see now is perhaps just

a lot more silence, which is actually

bodes well for the overall markets. The

real question is, when credit spreads

start to widen out, what the definition

of a crisis will be? And when what the

reaction function to that behavior in

the in the credit system,

uh and what the actual signaling will be

from all of the players within the Fed.

>> So, what's your definition of the

crisis? What's it going to be?

>> Look, I mean, if you turn around and

spreads blow out by 400 basis points,

that's going to be a shock to not only

the fixed income market, but all risk

markets across the globe.

>> 100%.

>> But, what happens when it drifts up by

150 basis points? Is that when you pull

the the panic button where you start to

signal that you're going to be more

accommodative? And this definition is

the or the signal is going to be the

real tricky

situation

where they're going to have to evolve

into county coming in with a kind of a a

a a process for how they actually behave

and and signal to the market.

>> Well, so do you think under Warsh

And do you think under Warsh that that's

going to change? Like that that that

that that he's not going to be as quick

to come to the rescue. He's going to

have to let the market hash it out and

figure it out. So, he takes sort of the

same Greenspan approach, right? Let the

market figure it out.

But without promising that I'm going to

step in right away when there's a little

flare-up, right?

If these credit spreads move, you know,

let's just say 150 basis points, not bad

turbulence. Oh my god, we got to jump

in, we got to fire put out that fire

because it's going to cause all this

ripple effect in the economy. That

stance seems unlikely.

I'd also think that he, by the way, will

will move the Federal Reserve and the

FOMC particularly to more centralized

message as opposed to all the speakers

out there that, although they can have

their opinion, and particularly the

regional presidents always have that,

but they they have at least a

consistency about this is our policy,

this is what we're following, and we

should keep that message out at the same

way. I think that's

>> You know, listen, I got to tell you,

when I came into this business in 1980

when Greenspan was the Fed chair, and I

worked on the floor of the New York

Stock Exchange, and I remember when the

Fed used to come out and make an

announcement, Greenspan would come out

behind the curtain, he'd put his book on

the podium, he'd open it up, he'd say,

"This is the decision we made." He'd

close up, he'd walk away. He wouldn't

sit there and ask questions, he wouldn't

take questions. He said, "You go figure

it out." And then the market would have

to figure it out.

Now, we've got to the point where

everybody's lying on the couch and

holding my hand and taking a Xanax, and

oh my god, like that that's got to go

away.

>> Yeah, that it will be cuz that got so

exaggerated.

>> And I think that's a good thing. The

problem with that is there's a whole

generation of people that grew up having

their hands held.

>> Yeah. And then when spreads widen out by

an additional 150 basis points, the

Nasdaq is going to not going to be down

5%. It could be down potentially 25 to

30%. And that's the the Xanax

That's the

Right, but that's the Kenny that's the

Xanax moment where

where he's going to have They're going

to have to centralize their messaging.

>> Right. Well, so let's let's hope it

doesn't get to that point, but I will

say when we talk about Kevin Warsh and

he talks about trying to dial it back.

I think back to, you know, when

Greenspan was there and I think back

about how little

direction there was. He just came out

and said, "Here's the decision we made.

You guys, that's your job. You go figure

it out."

>> So, if you take that statement that they

put out now, it's so brief and short and

choppy. I love it cuz it's like this is

exactly what you need to know. That's

all we need to know. And I can go back

and go trade it and doesn't matter,

right? Instead of this really lengthy,

long statement, all kinds of stuff in

there that could be and ultimately

become just too much information.

>> then you get you get all the journals in

the room, they're all asking questions.

Everybody hears what they want to hear.

You know, he can say X, Y, Z, you know,

that the sky is blue and the sun is out

and somebody hears that it's raining out

and cloudy.

He didn't say that at all, but that's

what ends up happening and so creates

this, you know, one person writes his

story, the other person writes that so

it creates complete chaos.

>> So, so I actually that's the one thing I

think is great about this new Kevin

Warsh, the fact that he's going to dial

that back cuz I actually think the

market will be better served by having

less

chaos. So, let's talk about single stock

referendum. So, tonight's a perfect

example. MU, which has become the poster

child of the technology trade, right?

Certainly the memory part of the

technology trade is due to come out and

you can feel you can feel the excitement

kind of everyone you talk to.

Everybody's in on this MU trade that

like that. They can't on the edge of

their seat uh whether they're retail

investors, whether they're institutions

or whatever, but you know, they're

they're they're looking at MU as if it's

the bellwether for the whole AI trade.

I'm not sure it is at all. I like MU. I

think it's going to I think they're

going to come out with a great report

tonight, but I think that the stock has

acted so well this month. I mean, it's

up 290% this quarter alone. And up 300

and some odd percent for the year.

It's had this massive move. So, I I even

if he says everything's perfect, you

can't necessarily always count on how

traders and algos for sure going to

react.

>> Yeah, I think like the way the stock

price looks

it looks really like one stock

>> stock parabolic

>> parabolic straight up. That's it. So,

that's that's mathematically

unsustainable.

Any trader will understand like a slight

change of of of news around the stock is

going to meet immediately to a big

drawdown. And that happened like about 2

weeks ago. I mean like about

>> It happened yesterday, too, right?

>> So, 13 or 14% the risk of that stock is

that if you were to buy right now, I've

been telling my own clients like, "Okay,

the Micron story is really cool story,

but you cannot buy 5% of your portfolio.

You got to buy maybe half a percent."

>> not up here you can't.

>> No, not at these levels. Even even it

can go even higher from here.

>> The street I think has 15 or 16 on it

all as as a target on it. I think that's

the consensus around the street, right?

So, everyone's all very excited about

it, but

like you said

>> chart is just a straight line up. Um,

and it doesn't make sense. Like it just

doesn't make sense, right? This is a

commodity.

>> It's like lumber back during COVID. It

went straight up.

>> Right.

>> Uh, we've been through this before.

>> Right.

>> This whole super cycle story, this pitch

about a super cycle,

it could be here today, gone tomorrow.

What I mean by that is in 2027

you may see that there is a lot of

capacity starting to come online from

China that you least expected. And then

all of a sudden you'll start to see all

of these these memory makers start to

roll over. And keep an eye out on on on

Korean the Korean market. That's up 100%

year-to-date. Doing in part because of

this supply constraint.

>> Right, which is also unsustainable.

The index is up

a 195%.

>> Correct.

>> I mean, it's ridiculous.

Yes and no, but to your point, the

memory

this high bandwidth memory is so key to

the whole AI trade, and there is a

shortage, so I get it. But

you know, and you can feel you can feel

that it's very stretched. Look what

happened yesterday in South what 2 days

ago in South Korea, right? They had

the place started to unravel a little

bit, which makes sense, but then all

those leverage trades and the margin

trades and and people are getting margin

calls and this forced liquidity creates

more chaos in the market.

>> Absolutely. They start to get the

derivative unwind and that creates more

volatility in the

>> from Asia to Europe to the United

States, which is where exactly

>> And the expectation is that the

hyperscalers will continue to spend from

infinity to beyond. Uh and that is not

actually reality. Eventually they're

going to rationalize their CapEx

spending and then you'll see all these

stocks limit down.

>> Well, I guess you're going to find out

tonight when whoever CEO or CAO or CFO,

whoever's going to speak tonight on this

call.

What they really say about the demand

going forward, you know, what the all

hyperscalers are doing, how much they're

spending, how far behind we are, how far

behind you know, the the the the the the

memory industry is to the demands that

are going to be upon them.

>> So the slightest change of tone in that

press

>> could really move the stock one

direction. Also, the the options right

now price at something like 14% of a

right move.

>> or down?

>> Up or down.

>> Right.

>> That's that's that's the highest I've

seen over many quarters

>> Right. On average it was like a four per

Micron always had like a 4% move priced

in by the options. That

>> That was 14%

>> That was three times the size. The size,

right? Um and the fear is that they

could come out with a great report. But

if there's but it's but it's already

priced to perfection and if somebody

senses that there's one line in there

that doesn't sound right, that's where

you get the trader types that will hit

the sell button, which I think is okay

because that'll help it It's got to It's

got to pull back a little bit, right? I

wouldn't buy I'm not saying it's the end

of that trade by any stretch, but I

think it would be a great opportunity

for a long longer-term investor. And to

your point, if you had somebody that

wants to add it to their portfolio, it'd

be a great way to start.

>> Yeah, because, you know, if you look at

the last pullback, that was almost 400

bucks on the on the stock itself. So, if

this pullback happens, something like

that will probably be the case of sort

of a four maybe 600 bucks. It's not so a

lot of value, right?

>> It sure is a lot of value. Look, I don't

suspect it's going to I think it's going

to be a very good report.

>> Sure, yeah.

>> But that doesn't mean that you you know

that you never know what the you never

know what the trader times and algos are

going to do as a result. Long-term

investors I don't think they're going to

overreact at all. I can't imagine at

this point that they're going to come

out with a bad report because if they

have if they know they're coming out

with a bad report and they didn't kind

of they didn't lean into the market kind

of you know put that out there for

people to know versus they're going to

hit somebody at 4:00 and say, "Oh, by

the way, we completely missed all our

numbers." It's a disaster. They wouldn't

do that. I don't think they'd do that.

>> Yeah, that's an that's an interesting

point because

you would I mean there's a bit of an

insider issue there, right? Because you

But but to do just like with the Fed

that's what they

>> they could guide. They could guide the

expectation.

>> And this is not just a one story a stock

story. This is all of the memory makers

and they've been all beating and

raising.

>> That's right.

>> creating this high momentum high

velocity trade. The thematic here is

momentum and velocity and the low

momentum stocks are just being left in

the market really what you know just

>> Right, but to your point, look at the

South Korean market. It's up 95%.

>> Correct.

>> Right? So and and it's not even the year

it's not even over yet.

>> So going back to lumber prices during

COVID, it was here and then all of a

sudden all of a sudden it went it went

precipitously down eventually as that

glut started to come online. And this is

typical of memory makers.

>> Right. So so this this now this memory

supply shock which we're probably going

to hear about tonight because they're

going to say there's way too Too demand

and there's not enough supply.

>> Right.

>> Uh and maybe this mispricing of what the

Fed is going to do

hold rates steady or hike, right? Again,

the market's pricing in a hike. I don't

think it's going to be I don't think

they're going to hike, but I think you

have to keep that out there. Um it is

going to is going to create some

additional volatility. That's why we're

going to get the PCE report, uh which is

expected to be a little bit hotter. So,

we're going to get the MU tonight. We'll

see what they see, but tomorrow you're

going to get a PCE report, which is

speaking directly to the Fed. Um tell me

what you think about the PCE report. Do

you think it's going to be hotter than

the already hot expectation?

>> It's it's going to be hotter because it

still reflects the the sort of the

before the war really ended.

>> Right.

>> So, it's it's it's forecast at over 4%

annualized.

>> Right.

>> If you actually plug that number into

any of these Taylor models, the Fed

should actually be hiking by 100 basis

points.

>> Right.

>> But, that number is also somewhat lagged

information, right? Because as energy

prices already moved

>> Right.

>> the alt- alternative PCE data out there

now based on AI, which point more

closely to the target. So, there's this

big deviation, right? And I think the

market's sort of sitting here thinking

we're going to look at the specific kind

of nuances in that report. I I wrote

today that this DRAM HBM shock

>> Yeah.

>> actually does show up in PCE. This goes

through the information processing and

software category.

>> Okay.

>> That shows up. Yeah, that's uh 30% or

more annualized inflation running there.

Weight is not significant, but it has an

impact on a lot of services service PCE

because of all the different products

that are linked to this DRAM HBM.

>> Ah, that's interesting.

>> So, people will look at that and say,

you know, if that dynamic changes in

that space, then PCE could change,

right? That's that's another way as

opposed to the energy part part because

the Fed looks at ex-energy, right? So

>> Right. The core is ex-energy and food,

which are volatile sectors. But,

the DRAM thing is interesting now

because there's already the expectation

that there's a shortage going into 2027.

>> Right.

>> Right? Which will keep it prices

elevated.

>> Exactly.

>> Which will then keep the pressure on

inflation.

>> Yep.

>> At least in PCE. Now, on the other side

you got you got oil which has come way

down, but it's only started to come the

way down so it's not going to be

reflected yet in this PCE. Next month it

might be.

>> I don't think that market participants

are going to put too much weight on this

PCE and because

like you just mentioned this is a

dynamic market. They're already pricing

in future expectations for the PCE and

which we still continue to believe that

the Fed right now is just going to sit

on their hands.

>> do you think do you think the Fed is

going to look through this particular

They won't look report

>> They won't look through it but they I do

just points like as you I think within

the Fed there's a group of people who

are saying look this is so quickly

dynamically changing.

>> Yeah.

>> The the the gas price effect that it had

on CPI and PCE was enormous. I mean if

you actually look last few months

>> Yeah.

>> That was like 50% annualized change of

energy component in the CPI PCE index.

So that's huge. So that is where your

disinflation will come from. That is

like it will moderate quite a bit now.

>> Right.

>> Energy prices are down almost 25% over

the month, right? So next month the July

data will be acting very different than

what we're seeing this week. But the Fed

will still sit there and look at this

particular service component and say

services are sticky. There's more

underlying dynamic going on which keeps

them in that hawkish hold pattern.

>> Right. And I and I agree. They're going

to keep that idea of a hike on the table

but I don't I don't think it's ever

going to happen unless something really

changes but I think

>> Yeah.

>> If you get an acceleration like really

takes off like what we had in '21 '22

I'm not sure if that scenario will play

out the same.

>> No. All right. So listen real quick. You

know, SpaceX had that big IPO last week,

right? Out of control. Open at 150,

traded up to 225, trading back I think

today it's trading about 156 again,

right? Traded down below the opening

price couple of days ago. But they've

come out with this 20 bit they're

raising $20 billion in a bond

issue, right? Which is what puts some

pressure on the stock the other day when

that news came out. But it it introduces

this unique asset profile, right? So you

get this venture capture venture scale

optionality backed by this future space

economy with SpaceX. But it's wrapped in

this senior credit structure, right? So

you're buying you're buying equity like

upside with with some bond like risk.

Talk to me about that particular product

because because it's not really my

wheelhouse. I've always spent my time in

equities, but tell me what you think

about that product.

>> Yeah, so this this is actually kind of

unique bonds, right? It's like you're

right. This is based upon a future space

economy. Right. So it's a little bit

like the new economy from the dot com

era in a way.

>> Right.

>> But you have a company here that has

this addressable market of of the

trillions and trillions and trillions,

>> I don't even know what the addressable

market is.

>> Exactly. So it's in space. So it's bonds

in space and I think like, you know,

they are the pricing is coming

interestingly a little tighter than I

had myself priced. Like I but I you look

at certain peers like like take Rocket

Lab, which is kind of a

smaller sort of version of this.

>> Yeah.

>> That's junk bonds what they issued. So

they were lucky to get investment grade

rating I really think because of the

Elon premium that's in there.

>> Right.

>> So there's an Elon premium in there.

Then that is what it is.

>> There's definitely an Elon premium in

this. Come on, who's kidding who? But

you know, it's interesting cuz I don't

even know how when they come up with the

total addressable market figures like in

this How do we even come up with that

figure because it's just I can't even

wrap my head around it.

>> No. It's it's it's a nonsense type of

number. The TAM market is

>> The TAM market

>> whatever that you can make it whatever

it is.

>> make it exactly.

>> So you can price the bonds wherever you

would like to price them because you're

right now you're in this ultra euphoric

stage not only in the equity market but

also within the fixed income market up

and down the quality spectrum. Keep in

mind the S&P dividend yield yeah, the

five 500 dividend yield is at the

all-time lowest level today.

>> What is it?

>> It's about 1.05,

which is below the 2000 level.

>> Right.

>> And if you take it back to the

predecessor index, you can go back to

1870 and you you would never have seen

such a low level on the S&P 500 dividend

yield. So, this is a prime time to raise

assets either on the equity side or

either on the fixed income side. If you

know how to spell the letters A and I

and you have a a cage full of squirrels,

you can raise $2 billion.

>> Just one last question. Did you buy

SpaceX?

>> No.

>> Did you buy SpaceX?

>> buy.

>> Did you buy Wait, you bought it all on

the IPO? You bought it before?

>> So, the IPO came and I run up to this

second Well, I think it was 175, 180,

and I was just sitting there as a trader

watching it, and start to come off in

the close to the 156 area, and I I

bought it there.

>> Good for you. I haven't bought it yet. I

want to, but I haven't bought it yet.

Look, the the the the first lockup, I

think, is

August, right? When the when the when

the insiders can sell.

I I'm kind of just biting my time cuz

it's not going anywhere, I don't think,

but I'm biting my time. I haven't done

it yet.

>> Okay, we'll see.

>> All right. Gentlemen, listen, it was a

great conversation. I enjoyed it very

much. I'd like to kind of revisit this 6

months from now and see where we where

we end up versus where we thought we'd

end up, right? Whether or not we saw a

rate hike, we didn't see a rate hike,

what happened to the economy,

uh but I do appreciate you guys coming

and and spending your time with me.

Until the next time, take good care.

>> [music]