Ophir Gottlieb on Untangling Economic Paradoxes: Wage Inflation, Small Business Challenges, and Bitcoin Diversification

Can Americans truly be in a recession when wage inflation surpasses overall inflation? Financial wizard Ophir Gottlieb unravels this economic paradox in our latest episode. With a background in financial mathematics, AI, and hedge fund management, Ophir lends his expertise to untangle the complexities of the post-COVID economy. From the Federal Reserve's missteps to the widening gulf between large and small-cap stocks, we dissect the factors that shape the current economic sentiment and the persistent cooling that many feel.

Small businesses face a myriad of challenges today, and we tackle how rising unemployment rates and rental woes are signaling deeper economic troubles. Ophir and I explore historical patterns in housing prices during inflationary periods and contrast these with the unique impacts of the Great Recession. We emphasize how the Fed's policy decisions are influenced by the trajectory of economic data, and what that means for small and medium-sized businesses amid fluctuating credit spreads and inflation metrics.

Are small-cap stocks and Bitcoin the future of diversified portfolios? As we shift our focus internationally, we consider the potential for growth in these sectors and the impact of fiscal policies post-COVID. We also discuss the role of currency volatility and its implications on global markets, particularly Japan. Wrapping up, we express our immense gratitude to Ophir for his valuable insights and to our audience for their unwavering support. Stay connected, keep engaging with our content, and let's continue to navigate these economic waters together.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:09

My name is Michael Guyot, publisher of the Lead Langer Report. Joining me for the rough hour is Ophir Ghalib, who is one of my favorites, by the way, and I say that truthfully, even though I've never actually met Ophir. It's the first time he and I are actually doing something visual, so hopefully this is probably more for me than for you, the audience, just so you're aware I'm selfish like that. But if you're introduced to the audience, who are you, what's your background, what have you done throughout your career and what are you doing?

Speaker 2: 0:29

currently Sure. Thanks for having me, michael. My background's in financial mathematics, measure theory, ai, computational finance and, just in straight down the middle, fundamental finance. Former hedge fund manager. Former option market maker on NYC, arca and SIBO. Former institutional guy had companies bought by Morgan Stanley Capital Investment, which is MSCI and, as of now, for the last 10 years, just had our 10th birthday. Ceo of Capital Market. Laboratory is a place where you can read my research on the economy and on particular tech stocks, and also on the other half, we have something called Trade Machine, which is a product for options traders which incorporates some of my AI which I've been published for, into that. So yeah, I usually have been institutional and now kind of my career has shifted a little bit to like at least 50% or more retail.

Speaker 1: 1:30

Uh, so you mentioned, uh, your work focuses also on reading the economy. Um, has it been weird and strange and difficult to read the economy the last three years.

Speaker 2: 1:43

I mean for sure it has. I think that I see two things that are well. I see three things that have made it really, really difficult. One is that there are a lot of new entrants into economic data and the data they're using isn't particularly. It's not wrong. It's just that economic data in and of itself it's not like stock data. So if you're used to doing fundamental research and you look quarter by quarter at you know I don't know revenue or depends on the industry looking at um that that is meant to be looked at pretty short term. Uh, economic data really isn't.

Speaker 2: 2:19

So there's this hyper focus on these economic reports that come out every month and there's so many. I mean from PMIs to jolts reports, to weekly jobless claims, just so much and that's not really how we look at the economy. So that's one problem is that we're now hyper, hyper data focused because there's so many new entrants into this and they're getting people used to that and we're used to that with stock charts and fundamentals. That's one problem. Another problem is that the Fed was just wrong, which means we're learning to lean back into credibility with the Fed, but that made it hard and also just fundamentally, if you can throw all of that out. Covid was the irritant. The further we get from the irritant, the less irritated we will be. But that irritant was substantial and it's still going to take us a while to get through that irritant and things still don't look normal. So it's difficult. I think conclusions can be drawn, but it's certainly much harder than it was in 2018.

Speaker 1: 3:17

So there was a I think it was a Gallup poll. I did a morning few on this that showed that three in five Americans think we're in a recession. Right, and that kind of hits on divergences not just in markets and the economy, but just in terms of the way people perceive things. Beneath the surface portion of the country it feels like a recession even though you don't have the job losses because people have to take on part-time jobs and all these side hustles just to pay for the higher price of things.

Speaker 2: 3:52

So I think there's two answers to that. One part is you know, let us not discard someone who says I feel like my financial situation is I'm in a recession. It's who are we to say, no, no, you don't. You don't feel like it's a recession. So one part is yeah, it's a reality. A part of it is a perceived reality.

Speaker 2: 4:10

Wage inflation has finally outpaced inflation, I mean through all of this. So wage inflation is now at 22%. Since this inflation boom came in, inflation is at 20%. I'm talking cumulative Also, in fairness, the lower the jobs on the lower end of the spectrum, the lower pay rates, have actually shown greater wage inflation than the other ones, which is a radical change from what we've had for the prior 40 years, where it was always the top 10% 1% that were getting the wage gains or the wealth gains. So a part of it is just that we have a generation or two that's not used to inflation and when we see prices going up, it just, it, it, it.

Speaker 2: 4:50

It doesn't feel right Enough people talk about it and it feels like a recession. I've said this and I know. You know this, michael, but it was. I don't know what the probabilities are. I'm just going to make up a number, but, like a recession is 50%, 50% reality and it's 50% sentiment, and so you keep banging on that sentiment and it's going to feel like a recession. I will say the economy is cooling. So I would say that's a proper analysis. We're not in a recession and for people who feel like we are, I'm sorry. I don't mean to mitigate or not even mitigate. I don't mean to ignore what you feel, but, broadly speaking, we're not in a recession. And for people who feel like we are, I'm sorry, I don't mean to mitigate or not even mitigate. I don't mean to ignore what you feel, but, broadly speaking, we're not.

Speaker 1: 5:31

But to your point, that's not to say that people aren't suffering, right, that's right. That's right, and I think you can see that even in the relative performance of large caps versus small caps. Right and you made this note to me that the pain is real for things outside of the tech sector.

Speaker 2: 5:48

Yeah, yeah, I mean okay. So what do I look at? What if I'm really looking at the economy? Okay, this is really, first of all, this hyper-focus on job openings and quits and things. That's all super interesting and I've done it too, but what we really do historically when we look at the economy is we look at GDP so how's the broad economy doing? And we look at the unemployment rate. Everything else is not actually normally carried over. What is the okay? So the unemployment rate has gone from unbelievably low, 3.4% to 4%. That's real. And, yes, some economists will tell you month to month that the change, the change, is not statistically significant. So 3.9 to 4 isn't statistically significant, but 3.4 to 4 is statistically significant.

Speaker 2: 6:27

So don't get caught in that logical trap. Like I look at small and medium-sized businesses, that's the heart of the US and therefore that's the heart of the world economy. So let's take out the Magnificent Seven, which is really the Magnificent Six, and blah, blah, blah. Okay, I look at SMBs and I talk to CEOs, in particular CEOs that have small and medium-sized businesses as customers. So there's one in particular infrastructure company which is kind of like the AWS for SMBs and they have almost 700,000 SMBs as customers and you can argue, some of those are kind of sole proprietorships. Okay, let's say they have almost 700,000 SMBs as customers and you can argue, some of those are kind of sole proprietorships. Okay, let's say they have about 200,000 actual SMBs.

Speaker 2: 7:08

And this is tech. And then I'll get to non-tech Tech. How are they feeling? They're feeling like things aren't better but they stopped getting worse. Okay, so they're not really ready to spend more, but they're ready to stop cutting spending. So, on the tech side, things are not worse, which is not bullish, but not worse On the non-tech side.

Speaker 2: 7:33

So, restauranteurs or whatever, things are terrible. The number of SBA loans, these small business association loans these are small loans that. These are loans that banks give to small businesses, which part of them are guaranteed by the United States government various qualifications 42% of them can't pay their rent or they're having trouble paying their rent. However, they answer the question Um, and that's the highest since, like 2021. So that that's not good, um. 52% of restaurants, uh, are unable to pay their rent. So there's two versions of the SMB world, but in general, smbs aren't great and that's that's what people will feel. Unless you work for Google or Apple, you're going to be feeling pain, um, or you'll at least feel a sentiment that the company isn't doing great and you might lose your job, and the pain of the thought of losing your job is fairly close to actually losing your job.

Speaker 1: 8:35

The the trajectory of the unemployment rate is interesting. I'm sure you've seen the SOM rule Right and sort of the argument that when you have this type of behavior, I know Claudia very well.

Speaker 1: 8:50

I have a podcast with her once a month bit, you know, to be played devil's advocate is we're in a weird environment where it's not just sort of the part-time employment, it's the the immigration which might be throwing things off in terms of not just discouraged work workers, but how big the the employment forces, labor forces. So who knows if any of this stuff is actually going to follow the script historically but let's get into that a little bit. The sum rule so okay.

Speaker 2: 9:24

So claudia samba's uh former senior economist at the fed, uh have the fortune of um being on a podcast with once a month and the sum rule says that if the unemployed, the average of the last three months unemployment rate, okay is more than unemployment rate, is more than half a percent higher than the prior, then it's been an unbelievably accurate predictor of recession. The SOM rule has not triggered yet because the unemployment rate is rising very, very slowly. So her rule would not say we're in a recession yet. But it's a reminder that in real economic theory not even theory, real economic analysis we're generally just looking at the unemployment rate. We're not doing all these job openings things. So we're not in a recession yet. Per the Exxon rule, we could be in the future.

Speaker 2: 10:20

There are dynamics to the unemployment rate which I'm sure many of you viewers know. Some don't Like. It's labor force participation, the number of people that are actually in the workforce that are counted like in this denominator. It changes and if there's a lot of immigration, then there's a lot more people in there who are looking for jobs, which will make the unemployment rate look higher, when in fact it's not that people are losing jobs, there's just more people entering. There's also something called the discouraged worker effect, which is when people who are looking for a job so you have to at least be looking for a job to be included in the unemployment rate If you just give up, then you're not included in the unemployment rate, you just drop out of the labor force. That's called the discouraged worker effect. If someone has been looking for a job for some amount of time, they just say I can't find a job, I'm out. It actually makes the unemployment rate go down, even though they're unemployed. I think the dynamics and the unemployment rate are partially immigration, but it's partially that unemployment rate.

Speaker 2: 11:11

Unemployment is rising, just not yet. I mean historically, 4% unemployment rate, 3.96% unemployment rate, which is where we are now, is just remarkably, remarkably good. But trajectory and economic data is kind of everything right. You call it the first derivative and it's rising. And the thing about economic data is that when it starts a trajectory it's really, really hard to get off that trajectory. Just look at inflation when it was rising, it was very hard to get off that trajectory. So that's why I have been starting to be more. I don't know if critical is the right word, but I have a very strong opinion about what the Fed's next moves should be and how fortunate for us that we have a FOMC meeting ending in an hour and 40 minutes. But because it's trajectory. Trajectory is what matters with state. It's not stock price, it's not quarterly income statement. It's a much, much larger thing, this $20 trillion thing we call the US economy. You don't look at it day to day and month to month.

Speaker 1: 12:13

I wonder if the immigration dynamic maybe throws off the idea that with rising unemployment comes falling house prices right and disinflation on the shelter side. Falling house prices right and disinflation on the shelter side, I mean, usually there's supposed to be a link there. But to the extent that you have more immigration increases the labor pool, but these people need a house, right, there's demand for housing. Unemployment rates are rising but it's more because of that than you people, right, they're joining the army.

Speaker 2: 12:40

So there's something super interesting about housing that I think people misunderstood. If you look at our inflation cataclysm in the late 70s to 80s, housing prices and rates were at 18%. Just the Fed funds rate was huge and Arthur Burns and the famous he just came in Reagan let him. He just came in and broke everything and just raised rates through the roof. Housing prices went up all the time Housing prices, in fact.

Speaker 2: 13:03

In 1983, the BLS took housing prices the price of a house out of the inflation computation, introduced this new thing called owner's equivalent rent, because it was making inflation look worse, even though we knew inflation was coming down. So housing prices generally go up. I mean I know we're hypersensitive to the great recession where housing prices definitely didn't go up. I mean I know we're hypersensitive to the Great Recession where housing prices definitely didn't go up. But in general, in an inflationary time which is then getting reversed with restrictive monetary policy, housing prices don't go down. That's not the norm. They didn't go down during Arthur Burns' era when mortgage rates were 20%. So again, so much so that the BLS took that thing out. They're like, okay, we can't have this in there, it's not reflective of inflation. Of course, they replaced it with owner's equivalent rent, which might, if possible, be worse. But on the rental side, there are more units. More units were constructed I believe this is true, you can check me on this in the last six months than in any full year over the last 30 years. So rents are coming down.

Speaker 2: 14:08

So the shelter part of CPI and PCE is rent. It's rent of primary residence and owner's equivalent rent. And owner's equivalent rent is what. They poll owners of their homes and say okay, if you had to rent your home, how much rent would you have to pay? And they just make up a number. That number has been particularly frustrating because it's just wrong and it's lag. But home prices will continue to go up unless we really face a recession like 2007, 2009. And historically we have seen that even in incredibly restrictive monetary regimes, rent is coming down.

Speaker 1: 14:46

You mentioned that you have strong opinions on what the Fed should do next, which makes it sound like they're probably going to cut next as sort of your bet which now, given the cooler inflation and everyone else, seems to be starting to price in. Maybe Talk about what those opinions are. So I'll tell you out of the gate. I find it hard to believe the Fed can comfortably cut, let's call it, until credit spreads widen more than they have from very low historic levels, because low credit spreads are a form of liquidity. Now you've got to throw even more liquidity with lower rates into already a cycle which has been shockingly good for default risk being crushed. Right, even more liquidity with lower rates into already a cycle which has been shockingly good for default risk being crushed. So let's try to reconcile those two issues, because I think that's where there might be concern that if they do cut too early with credit spreads as tight as they are, then that overly chart people show of inflation now to where we were in the 70s kind of gets back into the forefront.

Speaker 2: 15:46

Sure, so it was a lot to unpack with that question. So credit spreads are another part, a measure of economic stability that you kind of don't want to see worsen, because when you do, you can't reverse it very quickly. Having said that, it is true that credit spreads have been mind-bogglingly tight. Just what that means to your listeners and your viewers is that the spread between what people would consider safe credit I'll try not to get like sort of technical safe credit and less than safe credit, let's say that spread between those rates is very, very small and it doesn't make sense. I mean, we had a small banking crisis and it didn't really widen during that either. Granted, we have a kind of since 1994, we now have a federal government that just backstops losses, but that that might be part of it, but it's.

Speaker 2: 16:49

It's bizarre, I think, that inflation, uh as. So the feds target for inflation is 2%, but there's lots of inflation measures. It's one in particular. It's called P, c, e, um personal consumption expenditures. That's what they do. And you don't believe me, just go to the feds website and they say in very clear terms we look at PCE personal consumption expenditures. That's what they do. And you don't believe me, just go to the Fed's website and they say in very clear terms we look at PCE and we want that to be 2%. It's unambiguous Over 40% of PCE and CPI. Another measure of inflation, the one we got today, which is June 12th over 40% of core PCE, which is, if you take out energy and food. So this thing that's kind of you would think is sort of predictive. Over 40% of it is the sheltered component. If we take out the shelter component or if we just adjust the shelter component that is in CPI and PC and just put it with real-time data and, by the way, the BLS just in the last few months invented their own index for real-time rents because of course they're starting to feel the heat that this lag isn't coming down. If you replace it with that, inflation is now in the ones. So you could go so far as to say, hey, we better watch out, we're about to head to recession, and I'm not even talking about unemployment.

Speaker 2: 18:10

I don't believe that a liquidity. I don't think there's going to be a large liquidity change if the Fed cuts by a quarter point. What I will tell you and which I disagree pretty vehemently, just simply based on conversation I'm having when people say what does a quarter point mean? If the Fed cuts by a quarter point, that doesn't change anything. No, it doesn't change anything in capital, the cost of capital. It absolutely changes things in sentiment for SMBs hugely. So remember, I told you I talked to a company. They have 700,000 SMBs as customers. They're kind of their AWS, they're their cloud.

Speaker 2: 18:41

I talked to CEO of a quarter and I said okay, what has to happen? So you, you start really growing again. He said the Fed has to cut. I said the Fed has to cut because the cost of capital has to come down. He said no, the Fed has to cut. So they know that the cost of capital isn't going to go up. They're willing to start spending again. They just can't do it if they think the cost of capital is going to go back up and a cut would signal that it's not going back up.

Speaker 2: 19:01

And that's exactly what the ECB is doing. That's exactly what the Bank of Canada is doing. They're not saying we're now going on a cutting regime. They're just saying, okay, guys, we're not going higher. And how can we tell you we're not going higher? By making a cut? And I think they better cut sooner rather than later, otherwise, that trajectory I'm talking about is very, very difficult to turn around. And what is the show rate? Is the show rated R or PG-13? I don't want to use language like I can't. You know me Come on you know it's R, come on, okay.

Speaker 2: 19:30

So I wrote in February when Chairman Powell came out and said someone asked a question in his presser said, hey, why not just cut rates? And he said well, we don't actually have to cut rates now. I said, why is it? Well, because economic data is so strong. Okay, but that that sounds like a stock investor, okay. So I wrote up an article and even posted it to terminals and I said fuck around and find out. Okay, economic data is good. Well, in February, it was good then. But fuck around and find out. Keep rates too restrictive for too long and you're going to rue the day.

Speaker 2: 20:03

You said that because when economic data turns around, the trajectory doesn't change quickly in the other direction. Just take your cues from the unemployment rate, take your cues from inflation coming down, disinflationary trends See where inflation is. The BLS is even saying we got to get rid of this weird lagged measure of rent. So I think that if the Fed doesn't signal to SMBs small and medium-sized businesses the heartbeat of America, I think that might be Chevy's tagline. Sorry, I didn't mean to do that. Yeah, the heartbeat of America, okay. So the heartbeat of America if they don't signal to them that the cost of capital isn't going to go up. We're going to lose SMBs.

Speaker 2: 20:45

And you say, well, what's the big deal? We can recover? No, so in order to replace small and medium-sized businesses, to get it the trajectory that's going down to come back up, there has to be new business formation right. These businesses go out of business. New business formation takes a long time. That's why recessions hurt so much. It's not that Apple has a bad quarter. Sales go down and then people buy iPhones again. There's no risk that Apple's going away. Fuck around and find out. Don't push these businesses out of business. Signal to them your cost of capital isn't going up. Feel free to invest again and you can make a cut, like the EU, like the Bank of Canada. You don't have to then say we now have a series of cuts. Make the first cut sooner rather than later. If the argument is one cut doesn't make a difference to the cost of capital, well then, that means it doesn't make a difference to inflation either. That means it's a sentiment indicator and I'm telling you right now we need a sentiment indicator.

Speaker 1: 21:37

I talking to 700 000 smbs and they're hurting so it sounds like if you're going to consider, uh, public markets, the bet is going to be on small caps, because those are the smb equivalents right from the equity, yeah, yeah.

Speaker 2: 22:27

If you think there's going to be a cut and that the signal will be taken, then this ridiculously bad breath we have, then you would want to be. I mean, fuck At some point. This S&P 500 to Russell 2000, which this ratio? Let's take a Russell 2000 of S&P 500, which is now low since the 2001 dot-com bust that thing will turn around and if you think about it it's late. It's really. It's multi-decade low, was actually kind of the end of a bear market, but the history rhymes. It doesn't have to repeat.

Speaker 2: 22:57

The Fed has to signal to these SMBs that sentiment is okay. Again, business formation takes a very long time. You don't want these businesses to start going away, and they're not banks. The Fed's not going to bail out John's hardware store down the street or Michael's restaurant up the street. They just go away. And if SMBs start going away, we're in a recession and it's going to last, and so let's just not do that. And if the fear is inflation, fair, fair, inflation's gone. Come on, the inflation bomb is gone. Covid was the irritant. The less irritated we will be. Inflation is gone, guys, it's gone. Just look at the trend. It's gone, it's gone. And you take out, you just put in normal shelter and we're sub 2%. You look at CPI harmonized, which is using. It's like using market elements that have market prices, so it's similar to other countries. That's been at 2% for like six months. It's over. Don't cause a recession and yes, a quarter point does matter to sentiment and yes, sentiment does matter to SMBs and, yes, smbs do ultimately drive the economy.

Speaker 1: 24:12

It's a comment from somebody on YouTube. Has anyone ever considered the Fed knows exactly what they are doing, and doing it on purpose, which, of course, sounds a little conspiratorial? I always go back to the idea that nobody can tell the future, including the Fed. There was a study that the Fed did over a decade ago where they looked at their projections versus Wall Street and guess what? They're no better than Wall Street, despite them having all this data and all these economists. But do you get a sense that the Fed really has a handle on exactly what you're talking about? Do you get a sense that the Fed really has a handle on exactly what you're talking about? They must see the data. Are they maybe purposely trying to, just in case, signal that they're not going to cut, just in case, so they don't get blamed?

Speaker 2: 24:48

Or do they want to push the edge a little bit? I mean, I don't think the Fed wants to cause a recession, so I will. You know, I don't think there's a reason to be conspiratorial, um, but I do think what you said is is apropos. The fed is afraid. I think I mean I'm guessing I don't mean to sound like I'm the definitive source I believe that that is afraid of what you brought up, I don't know, five minutes ago in our conversation, that graph of cpi where it was going down and then it went back up. I think think they're afraid. I think Powell's definitely afraid. I think they're all afraid when people say you know, no one who's been investing has seen inflation. It's been two generations. That's true. That goes for the same for the Fed.

Speaker 2: 25:23

So you know now, if you want to talk about what happened in the 70s, we can, and I can show you why it's wildly different. Remember, just because we have data on the past doesn't mean that it's going to repeat. I mean, there was an Iranian revolution. I don't think that's happening again. There was an OPEC embargo. The United States pumped more oil in the last month than has ever been pumped by any country ever in the history of the world. It's different now. It's different now. Those irritants are different. The end of the Vietnam War, I mean it's come on, guys, like we can see what's happening. We know what the irritant was. The irritant was COVID. Let's not pretend. It's like, oh my God, where did this inflation come from? Covid and the and the actions because of COVID. I'm not saying just COVID in and of itself, but okay, guys, that's over. Like we got it.

Speaker 2: 26:17

The fiscal policy pushed it up. You could make an argument although I don't loose monetary policy, fine, well, it's not loose and you know, relatively speaking, fiscal stimulus is lower. Just, we know what caused it. It's not this magical like whoa. How did this happen? We know what happened. The irritants going away don't cause a recession. Core PCE is at 2.7%, 2.6% year over year. And I'm not. I'm not mushing the numbers around, I'm not saying, oh, if you take out X and put in Y, I'm just saying what it is. Well, how about if we just take that as a matter of fact? Is a 2.7% inflation rate worth putting the country in a recession? I don't think it is.

Speaker 1: 27:06

A fun question from Darth Inflation. Wow, I have never seen Mr Guy say credit event this few times in a video. Maybe his self-control is improving. That may be true, although I said very clearly a credit event would be confirmed if small caps don't push higher because they are the most tied to credit. I mean, part of my concerns around this credit event thesis was that small caps never participated to begin with.

Speaker 1: 27:32

And you know, since we're talking about a rate cut cycle, I guess the question then becomes how does the currency market respond to that? Because part of the other thesis which you and I talked about before on that space several months ago is this sort of reverse carry trade idea, japan being in a real pickle, I think, in terms of their markets, how that could unleash volatility. Now, if you lower rates, you know, if the Fed lowers rates, okay, that changes some of the interest rate differential, but that could be substantial enough to really save Japan from the yen free-falling. But I want to get your thoughts on international volatility risks on the currency side as a result of whatever the Fed does next.

Speaker 2: 28:09

Yeah, so, first of all, I just want to say, when you said you thought there was going to be a credit event, the so? Uh, first of all, I just want to say when, when you said you thought there was going to be a credit event, the probabilities were on your side. Um, you know, probabilities are just probabilities If, if they're I'm just making up a number If there was a 63% chance that there was a credit event and it didn't occur, it doesn't mean that there wasn't a 63% chance, it just means it didn't occur. It meant that other 37% happened. Secondly, I mean this carry trade with the yen, which is, you know, roughly speaking, without getting too technical, under the currencies, is that people can invest in the US because money was free in Japan. Um, and with the yen and free fall, the bank of Japan probably has to raise rates. I don't know. They're definitely backing away in certain, in certain actions, like they're changing their thresholds without you know, officially, rates, and if we lower rates in the U? S and that would make the differential, as you said, michael, less and hypothetically would take a little bit of that pressure off.

Speaker 2: 29:17

I'm going to say something that maybe I'm going to regret because it's going to be replayed on social media. I think we're okay with the carry trade. I think the Fed's going to be cutting soon enough. I think the irritant is the same irritant in Japan, you know. I think we'll be all right If there's this sort of people would call it a red herring, but I think you would call it not the red herring, you would call it like the primary focus.

Speaker 2: 29:44

If the carry trade unwinds, yeah, I mean dude, all bets are off. That's a bear market here. That's cataclysmic to well, it's borderline cataclysmic to financial markets, certainly the stock market. Um, fed, lowering rates could ease some of that. It's sentiment too. You know currency markets work on sentiment also. I didn't look at the dollar today. Maybe you can tell me I'm guessing weaker. So yeah, I would watch the carry trade, but I'm feeling better in general about that. About six months ago I was at peak concern about the yen carry trade and that would be cataclysmic that unwind. Maybe I'm growing numb to it, but I feel like we might be okay. I've been looking at. If you guys really want to focus on it, just look. Just start looking at Japan, like you look at the US. Look at Japan's inflation, or core inflation measured in Tokyo, and things like that. What is the pressure for the Bank of japan to raise rates? Um, I think we're. Oh well, I think we're okay. I think the probabilities are that we're going to be okay.

Speaker 1: 31:01

That's not for sure but I don't, um, I would disagree. The probabilities are probably lower, right, only because the more time that goes by, the lower the probabilities. Yeah, because the market's discounted more and and the lags of the rate hike cycle start causing enough disinflation. I mean a lot of it. This is also around energy prices, right. When it comes to this, that, at least, was part of my thesis, it was the oil denominator of the yen is the problem, not the yen right itself. Let's talk okay, which then goes back to okay.

Speaker 1: 31:31

So the real bullish argument is yes, you finally have that catch-up trade, that ratio of large to small. There's tremendous catch-up potential there, right, absolutely, which would be I mean, yeah, it could be a multi-year cycle, which it should be right. Which, by the way, would, I think, make everybody's life a lot easier. Because, I keep going back to you really can't beat the S&P 500, the NASDAQ, when it's the only game in town. Yeah, I mean, at the core, from an asset allocation perspective, you only have two options you either tilt smaller mid-caps, small caps, or you tilt international. You're going to be equity along only so you can't really do anything. Otherwise, if you're an allocator in this environment, so it'd be great, because everyone naturally compares you against the S&P, so if small caps start to run, it becomes a lot easier on that comparison.

Speaker 1: 32:15

Let's talk about sectors, though. Within the small cap space, I have myself argued that the contrarian Paris trade would actually be you go long regionals and short tech, dollar for dollar, which sounds a little controversial, but regionals and tech have actually performed somewhat in line if you look at the ATF for the last year. But what are some of the more attractive parts of the small cap space in your view?

Speaker 2: 32:42

Okay, just so I understand. You're saying long regionals and short small cap tech, or?

Speaker 1: 32:46

large. Well, it would be large cap tech it's really both.

Speaker 2: 32:49

Okay, yeah, I like that trade. It wouldn't be my first choice, but I could get a hold of that. Regionals could be great. I think it's hard to believe. But small cap tech I know tech seems like it's just going up. Small cap tech is not going up. It's painful for asset allocators like me who are in the small and medium tech range. I think there's tremendous potential upside there. Regional banks have to be a part of the conversation. I think so I would be. If I'm doing long, only 70% small tech, 30, 30 regionals. If I'm going long short, I would be long small tech, short big tech, which is a pretty difficult trade. Um, I might. Um, I think I can't believe. I'm gonna say this I think owning duration might actually make money again, which is an unbelievable thought, meaning like longer end, let's say the 10 year plus. That's where I would look.

Speaker 2: 34:09

As I told you last time when we talked, I'm still very much of the mind. I have a portion of my portfolio which is just long-term stocks and I do research, I talk to CEOs and I share it. Blah, blah, blah. That's and it doesn't really take a lot of my day-to-day thought processes. My trading is still to this day hasn't changed since we spoke last time. As I'm taking small bursts of risks, I'm seeing the window. I was like, okay, this is my window to bet, it doesn't matter if it's bullish or bearish, it doesn't matter if it's volatility or it's directional, whatever it is. I see a window to take a bet, oftentimes two-sided. I was long Microsoft, short Apple, things like that. Sometimes I'm just playing in mega cap.

Speaker 2: 34:48

I took that trade off a while ago so I didn't get smashed. I still think, for traders, I would be short bursts of all, short bursts of risk, and I think there's a short burst burst right now and I think it started well, um, probably on the last pce report. From there, I thought there was a window to get pretty aggressively bullish and it was going to end today one way or the other and so far it's good. But Powell's going to speak and that could make the market rip or it could take all these gains away today. But the trade was basically from that date to the end of this date. And then I wait again and I say, okay, where is there opportunity? That's how it went and I say, okay, where is there opportunity?

Speaker 1: 36:05

That's how I would like it. Comment from Jag. Apparently, I got an email from you. Good stuff. I'd like to take a free trial before taking membership. Maybe touch on the service that you provide on a research end, what it is that you're providing, where people can access it. I am sincere when I say this. I'm a big fan of Afears, very impressed from our last conversation, and he and I every now and then text and go back and forth how you doing, hope you're well. So I want to support people that are not just smart but also are good people in general. So explain what you're doing business-wise.

Speaker 2: 36:40

Thank you, michael, I appreciate that opportunity. So on the research side, it's something called CML Pro. So I do economic reports, like I did today, but it's in general focused on long-term tech, generally small cap and not always small cap well, small to medium cap technology companies and what I do is I do a normal analysis that any normal analyst would do, and then I speak with the CEOs and CFOs every quarter and then I talk to I have this sort of I talk to experts, so former employees, competitors, people who are selling their products, things like that and I try to get a sense for you know okay, where, where are we with this company. But the greatest focus right now it's called CML Pro. You can just type CML Pro in Google or just go to that scroll procmlviscom. I do serve institutions too, so there's more than 600 or 500 institutions read our research. So I'd like Goldman Sachs, jp Morgan, morgan Stanley, blackrock they've all read it. In fact there was a Morgan Stanley note out, I think, in March on a company and they're like why is the stock moving? And they just took my report. They said, oh for your golly, we've CML topped at the CEO. We think this is why the stock is moving. So I am.

Speaker 2: 38:02

I think I'm leveling the playing field a little bit for retail, Like you will get it at the same time that JP Morgan gets my research, which I think is pretty cool. So that's what it is, but there's a real focus for me now. I'm calling it. I wrote it once and now I kind of own the phrase, so I better just own it. Their own news, right. Um, so idiosyncratic rather than systematic. Um, and after this, you're going to be want to. You are going to have to understand how generative AI is going to impact things. It's going to be violent. Um, it's going to do things to funds that you've never seen before. Um, good and bad, it's not. It's not all roses, but it can be roses, roses.

Speaker 2: 38:56

And I'm focusing, I'm hyper focusing, on the after this period, and we have this great moment right now where small, medium size tech isn't really doing much, but you can watch their businesses, you can see what they're doing, and this gives you like a preview as to what's going to happen after this, and the ones that can outperform now are probably going to outperform after this. We're not in after this yet. We will soon, eventually, hypothetically, be after this, where macro is everything, but I think that's where the real wealth is going to be made. That's where almost all of my stock holdings are Not even almost that's where all of my stock holdings are least public, um, I have a lot of private investments, um, and that's what cml, cml pro talks about.

Speaker 2: 39:36

I just I it's ad nauseum I talk about after this and we give also give a webinar once a quarter, which will be in a couple weeks, where I review everything that happened in the quarter. That's what cml pro is. You want to hear me talk more about stuff like that. You want to read stuff like what I'm saying right now? Then it's going to be great for you. And yes, I named companies 13 of them. If you don't like what I'm saying, then yeah, probably not a good idea.

Speaker 1: 40:02

Any thoughts on international markets? I mean, if the small cap move does happen on a relative basis, from what I've seen, there's two knock-on effects. One is that value would outperform growth stylistically. And, uh, developed emerging international should outperform us, right? Because just small cap averages in general tend to tilt, even as a core more value from a sector allocation perspective. Um, any thoughts on that international diversification, or should everybody just stay in the US?

Speaker 2: 40:34

No, so everyone should not just stay in the US. That's what CML Pro is, because it's a hyper-focused research platform. But no, I don't think CML Pro should be 100% of your portfolio. I've said this for the last 10 years. This should be a portion of your portfolio, or could be a portion of your portfolio, but it should not represent all of your portfolio. You know, michael, I think Europe is starting to look better. It's hard to tell and it's a real mess, germany's a real mess, but emerging markets could really bounce back. Like I think there is opportunity internationally, and it's really for the same reason.

Speaker 2: 41:12

Covid was the irritant, and the further we get from the irritant, the irritated we will be. What has underperformed the most? You can just start looking at these markets, right, um, this mega, mega, mega cap trade I mean, in fairness, it's lasted far longer than I thought it would, so I've been wrong. Um, I own them. I just didn't think it would keep working. But if we roll out of that and everything reverses as it should, it should be a multi-year cycle. Barring a recession first should be a multi-year cycle. And, yes, you're right, emerging markets should outperform. If you look at the S&P 600, which is the S&P small cap if you look at the constituents of that to make it into the S&P 600, you actually you have to be profitable. It's not just small, there's 600 small caps, not like the Russell 2000, which is the smallest 2000. Sorry, it's just the largest 2000 market caps below the first thousand which is called the Russell 1000. So yeah, there's probably outperformance there.

Speaker 2: 42:09

I think developing markets do have a possibility. I think in my little world of small and medium-sized tech, if you're finding the after this winter, so you're gonna find plenty of returns in the us. But yes, diversify. You should also not, probably not just be all inequities, depends on your age. But like I mean, there's, I mean option. Adjusted spreads are awfully tight, but at some point at least. Uh, duration in in, in in govies should work, uh, and the 10 years showing it at least a little bit, uh. So yeah, I think there's there's opportunity in other places. I just want to be clear that in cml pro you won't. You won't get that from me. I don't want to misrepresent it.

Speaker 1: 42:57

Speaking about diversification, another question from YouTube Will Bitcoin be the best performing asset for another decade? If it's to the same extent as what we saw in the last decade, that would be really incredible, because that would mean the entire system has been upended. But let's talk about that. If you think about the idea as a best, best performing asset, just as a diversifier, man, this is such a hard one for me.

Speaker 2: 43:20

Um so okay, I think at this point there's 20 to 30 000 cryptocurrencies. I know the questions on bitcoin. I'm going to get to it. I'm not deferring. I just want to give it a little bit of context before my answer because otherwise my answer won't make sense. I think those are all going to go to zero.

Speaker 2: 43:38

Bitcoin is not those. It just isn't. It seems to have made it. It's kind of millennials' money. If you speak to millennial investors, people have money.

Speaker 2: 43:51

It's not unusual to have 70 or 75% of their wealth, their investable wealth, in cryptocurrencies, which might sound completely bizarre to people who are younger than that or older than that I'm older than that. Right To me it's like what. But if enough people believe it and it certainly seems like we could be getting there Bitcoin could continue to perform. It's not going to do what it did. It's not going to go from. You know, whatever the percentage return was, from like $4 to $70,000. Otherwise, like Michael said, we would have no world economy. It would just be Bitcoin. But I can't believe I'm going to say this, but I can't say I would tell someone not to put a small portion of their wealth in Bitcoin? I don't. I would tell someone not to put a small portion of their wealth in Bitcoin. I don't. But if someone says I want 5% of my investable assets risk assets in Bitcoin, I don't know how do I argue against it. I mean, I know how to argue against it. It's just those arguments aren't worth it. So I think Bitcoin is the only. As far as I know, it's true. It's the only version, the block, it's called the blockchain. It's only version of that technology that's actually worked at scale. I don't know, maybe that's the reason to invest in it.

Speaker 2: 45:06

I don't know what to say. Um, I don't think Bitcoin is going to replace the dollar at all. But yeah, I mean, sure you can have some of it. It's really hard for me to say, because I understand it, people, you don't understand it. I'm like I'll bet you I understand it better than you do. I could code a blockchain with Ethereum. I'm going to say I do understand it. I just don't understand why it's going up. But people say scarcity. There's a lot of things that are scarce. My toenails are scarce.

Speaker 1: 45:38

They are not worth money when I cut them, one toenail equals one toenail. I think that's what the toenail maxis uh would say. Uh, so, um, okay. So, as we wrap up, uh, for everybody, make sure you follow Afir and check out his service, his website as well. Any sort of parting thoughts as far as things that you're looking at that you think might get people off guard, either on the positive side or the negative side, just anything that's kind of in the periphery that you're paying attention to, and then we can wrap up from there.

Speaker 2: 46:08

Yeah, I would say great question. Thank you for that. I would say that good or bad, bad. So I'll try not to give it a bullish or bearish tilt. Good or bad. What the fed does and then in this, the fairly immediate future, which is measured in like quarters, um, is going to have an impact and it's either we're going to go into a recession, right, or a very large slowdown, or we're not. We're going to get out, and if you have a strong conviction on one of those two, then you necessarily have a strong conviction on what you should do with risk assets, right? Michael's talked about it, he brought it up, he handed it to me on a silver platter, which I appreciate.

Speaker 2: 46:44

The underperformance of the Russell 2000, or even the S&P 500, equal weight relative to the to the weighted index S&P, that is either the bottom for those indices and they have this multi-year rally, or it's oh shit. So that's going to happen and it's the after. This period is coming soon. I just don't know if after this is going to be after a recession. If you believe it's going to be before a recession, risk on in small caps, small and medium caps, just not mega caps. If you don't think so, then fucking duck. This whole fucking thing can unwind right. It was let out by six stocks and it can be let down by six stocks and whatever you think is the bottom, no go 50. Whatever you think the bottom is in the wrestle, take 50 lower. That's the bottom. You're wrong. It can get way worse.

Speaker 1: 47:35

That's an uplifting way to end this episode of Lead Lag, and.

Speaker 2: 47:37

Lower, or whatever you think the upside is.

Speaker 1: 47:41

No, no, listen, I agree with you and listen, the range of outcomes is so wide. You can make a compelling argument either way. I don't mind, I really don't. People seem to think I'm a perma-bear and I really don't. I mean, people seem to think like I'm a perma bear and like I really want to see things collapse. No, I wouldn't mind at all. Small caps running like hell. It's this environment of pure risk on pure large cap, only strength that is the hell. For any way. That's tactical Because it goes back to that point.

Speaker 1: 48:06

You can't beat the S&P when it's the only game in town. So at least get a different set of probabilities right for different leadership, and that's more than enough. And suddenly the game became much more fun. Yeah, let's get an actionable market man. I'm with you on that. Everybody, please make sure you follow Ophir. Somebody here said I'm counted among the Ophir Tonell Maxis, so I'm going to try not to put that in the description for the YouTube video. Everybody, please make sure you follow Ophir and appreciate those that joined for the YouTube video. I appreciate that, everybody. Please make sure you follow Ophir and appreciate those that joined. And please continue to engage where you can on all the various platforms that you see our content. Thank you, ophir, appreciate it.

Speaker 2: 48:42

Thanks, michael, I appreciate it. I appreciate it very much. Cheers.