What Could Move Markets Next? Fed Policy, Inflation & SpaceX
00;00;00;16 – 00;00;08;13 Unknown Hello, and welcome to blue Chip. Now, the podcast that gives you insider access to content that we tailor specifically for our clients.
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00;00;15;27 – 00;00;26;22 Unknown Hello, and welcome back to another episode of Blue Chip NOW! You have Daniel Dusina, chief investment officer, Matt Mondoux, senior financial advisor, and Dan Seder, managing partner.
00;00;26;24 – 00;00;37;11 Unknown Big items to talk through today. Main topics are going to be three things. Number one US and Iran. Peace. Breakthrough shifting through markets.
00;00;37;13 – 00;01;06;01 Unknown Point number two Space-X completing the largest IPO in market history. We’ll talk about why it’s important, what the market reaction was, why investors should care. And then third and finally we will talk through inflation and the Federal Reserve. And how that does somewhat remain the key risk at this juncture. So the US and Iran, the relationship there really has been the dominant market story for the last almost three months at this point.
00;01;06;03 – 00;01;27;22 Unknown And so you’ve had this back and forth where there is perceived progress on a ceasefire, formal agreement and then breakdowns. And then more recently, as of right now, we do have reports of a formal agreement being struck after months of conflict in the Persian Gulf. So this is obviously important for a number of reasons, one of which is around oil.
00;01;27;25 – 00;01;49;24 Unknown A formal agreement would open the Strait of Hormuz. That’s one of the world’s most important oil shipping routes. That strait handles a substantial share of global oil exports, as we’ve talked about on this podcast before, during the conflict, you had massive fears around supply disruptions. And that’s why oil prices moved sharply higher to begin the second quarter and the first quarter of this year.
00;01;49;26 – 00;02;12;01 Unknown So, Dan, why should investors. I’m sorry, Matt, I think you’re probably better suited to talk about this. But why should investors care about this perceived peace progress between the US and Iran? Yeah. I mean, this is, really it’s been sort of tangled wide, right? So, so number one, you know, we think of rising oil, you know, inflation because oil is an input costs for a lot of businesses.
00;02;12;01 – 00;02;37;09 Unknown Right. So, so yeah, we pay at the pump. But there’s also transportation to get goods from a port to a store. So so energy is, is just interwoven into the fabric of all consumer prices that we end up paying. So obviously that, you know, oil following is going to ease the pain in the palm, hopefully reduce costs, you know, make food costs, etc..
00;02;37;11 – 00;02;58;06 Unknown But also, you know, we can even get as deep as this potentially could pave the way for the fed to cut rates. So as inflation continues to ease, the fed is going to have a little more leeway to potentially cut rates, which will flow even more through the economy. Right. So so a lot of things, you know, we think of oil, we think we feel that the gas pump.
00;02;58;06 – 00;03;20;18 Unknown But it can really touch a lot of different areas of the economy. Yeah. Daniel real quick on gas prices. How long will it take for this to impact gas prices for the. It’s tough to say, but I feel like this analogy that is often used with regards to commodity prices and how it relates to gasoline is evident here.
00;03;20;21 – 00;03;43;29 Unknown There is this phenomenon called the rocket and feather effect. So as you see this conflict emerge in the Middle East, oil prices shoot up like a rocket. Well, the perception is then that at the pump, what consumers experience, prices fall like a feather. So I wouldn’t expect gas prices to drop precipitously. Meaning I don’t think you’re going to get back to sub $3 a gallon anytime in the next couple of weeks.
00;03;44;01 – 00;04;04;20 Unknown And the same can be said for inflation readings. I mean, it’s not like this, this conflict ending and supply through the Strait of Hormuz normalizing is going to just completely dissipate all of, all of our price concerns overnight. But it does pave the way for progress. And that’s honestly, in my view, what investors are going to care more about for consumers.
00;04;04;21 – 00;04;29;28 Unknown Yes. I don’t think it’s going to be a, an immediate drop at the pump, but I think the, the flow through from in terms of the economy and the relevant companies, I think is more important. So generally, if it if it’s this deal is struck and and transportation of oil normalizes. Are we looking at days weeks or months.
00;04;30;00 – 00;04;50;11 Unknown I think for it to show up in the data, you’re probably looking at months. And I think that the reason that I’m okay with that is because investors are comfortable with it. For example, I mean, the the big trade that’s happened off of all of this, I mean, there’s three assets that you can look at that have been incredibly predictable through this whole thing.
00;04;50;14 – 00;05;15;06 Unknown When you got, the flare up of the conflict or break down in peace talks, what happens? Oil prices go higher, bond yields go higher, stocks go lower. And the opposite is true when there was perceived progress. That has been the playbook the entire time. So when you see progress being made and last week CPI comes in hot up four plus percent year over year.
00;05;15;06 – 00;05;35;02 Unknown And the market is okay with that. That tells me that investors are expecting this outcome. They are also not expecting it to last forever. If you look at break even inflation rates, which is essentially based on bond market yields, what investors are expecting from inflation over the next, say, five years. It’s not the 4.2% that’s running year over year.
00;05;35;03 – 00;06;02;04 Unknown It’s actually closer to the Fed’s target of two, 2.5%. So that’s why I’m okay with it taking a little bit longer and not not showing up immediately. The other thing I would say is a part of this, progress on negotiations trade. It has been into growth stocks. The AI trade tech sector in general, as the runaway has been perceived as more clear.
00;06;02;06 – 00;06;24;23 Unknown That’s been the primary driver of equity markets. So recent gains in semiconductor companies you know you can view it as yes, there’s there are tailwinds there that relate specifically to the industry, like shortages of memory chips and AI computing capacity. But also it’s more it’s also related to confidence in the market. Is the runway clear? Are there other disruptions that exist?
00;06;24;26 – 00;06;49;13 Unknown And I mean, it goes back to also interest rates, you know, lower the interest rates are the more investors going to value future cash flows that are further out. Right. Yeah. And that again, like that’s been the playbook. I mean, it’s it’s been almost scarily predictable. I mean, if you get to the desk and you see the news flow is negative between the US and Iran, you can almost assure yourself that oil prices are going higher.
00;06;49;15 – 00;07;10;00 Unknown Bond yields are going higher and stocks are going lower. So an official deal is supposed to be inked on Friday to be determined what happens between them? Yeah. Correct. So this has by far and away been the biggest market consuming event this year so far. And again, I think it’s hard to it’s hard to say for sure.
00;07;10;00 – 00;07;40;05 Unknown But any evidence that the runway is being cleared I think is ultimately a good sign, especially ahead of, earnings coming in for the second quarter. Second topic here. We had SpaceX completing the largest IPO in market history last week. So this is clearly been one of the most anticipated IPOs in history. SpaceX raised approximately $75 billion in its public offering, achieving a market valuation above $2 trillion.
00;07;40;08 – 00;08;06;08 Unknown I mean, the 75 billion they raised is a big figure because the largest previous, IPO was Saudi Aramco, and that was just a hair under 30 billion. So, a little more than double the the previous. And yes, you did see shares get the almost expected first day pop after after beginning trading on Friday June 12th.00;08;06;10 – 00;08;29;01 Unknown And you did see, the IPO attracting some pretty meaningful institutional demand from things like pension funds, sovereign wealth funds, but also retail investors. I have some comments as to some of my takeaways and why this is important. But I’d be curious to hear from from you too. Why was this so important and why should investors care?
00;08;29;03 – 00;08;57;07 Unknown Daniel, I think it’s a it’s a reflection of the confidence that investors have in the current market environment. So if investors have the ability to take on risk and appetite for risk, they’ll participate in this type of IPO. If the market environment is less than attractive, investors are worried they’re probably not going to be able to take, additional risk.
00;08;57;09 – 00;09;25;23 Unknown These are risky propositions. No one notes there is in price history in terms of where the stock has gone in the past. So it’s really, really hard to identify as an investor. There’s a there’s a headline, there’s a story behind it. It’s easy to get excited. It’s a cocktail party type conversation. And when investors feel aggressive and have an appetite for risk, don’t participate.
00;09;25;26 – 00;09;51;25 Unknown And so I think it’s an indication or a reflection of the, of the general market environment that we’re in right now being generally positive. Yeah. No, I don’t think that’s a good point, because the timing of this, quite frankly, couldn’t be much better. So, yes, large publicly traded companies that IPO do generally get this first day pop, at least if you look back through history.
00;09;51;28 – 00;10;18;14 Unknown SpaceX is also getting the benefit of today. Second, for its second day and first full day of being publicly traded on June 15th. You’re getting the benefit of, you know, positive progress between the US and Iran lifting the entire market. S&P is up, you know, 1.5% today. So like it’s it’s well timed I would say that some of my takeaways there were some pretty interesting mechanics behind the scene on this IPO.
00;10;18;16 – 00;10;48;00 Unknown And some of them are somewhat nontraditional. So the fact that you had big brokerage houses lowering the minimum account balance required to invest in the IPO is interesting. And also interesting is the fact that SpaceX has kind of laddered their lock up periods for existing shareholders, whether that was current employees, previous employees or other folks that held this in the private market.
00;10;48;03 – 00;11;14;01 Unknown They are unlocking the ability to to sell shares to monetize those positions. At a bit earlier of dates than I think is traditional. And yes, there are metrics behind it which I won’t go through all of them today, but it is just a little bit interesting when you compare that to the fact that the previous ten largest IPOs in U.S. history, have all offered negative price return over the first year of trading.
00;11;14;07 – 00;11;47;05 Unknown So I’m not going to be a doomsday ist here, but like, the setup is kind of crazy. This is a company that’s being valued in a way that, expects growth over the next ten years to a level that we saw, over and above what Nvidia did over the last five years. And I’m not going to say that that’s not possible, but, I think it just hammers home your point, Dan, that this is reflective of market risk appetite and clearly risk assets are being absorbed by investors right now.
00;11;47;08 – 00;12;11;14 Unknown And SpaceX is a name. It’s Elon Musk. You know the stock’s trading at I think over 100 times revenue. Which you know might not be a big deal if it were a $10 billion company. But coming into a $2 trillion company trading at an over 100 times revenue, I think that that adds your case. Like the valuation, the future valuation, prospect is pretty damn.
00;12;11;16 – 00;12;37;28 Unknown Yeah. It’s just again, one interesting item is that, you know, this space will most likely when we run the numbers, you know, technically fall into our investment universe. So I personally am looking forward to digging into the weeds of the company a little bit, trying to understand if some portions of this elevated valuation are warranted and seeing where, you know, it might not be.
00;12;37;28 – 00;12;56;27 Unknown Right. And I mean, I also think, you know, investors need to be aware of there’s two other high profile IPOs that are expected this year, open AI and throwback. So so there was a lot riding on this IPO. I mean from your from a bankers perspective investment banking companies taking this at this company public this was a really this needed to go.
00;12;56;27 – 00;13;19;26 Unknown Well yeah. By all indications it has gone well. It’s going to pave the way for those two other companies to, to go public. So you know, we’ll see what the market environments like them. But, but that’s another, you know, potentially $200 billion of equity getting put on the market. So, so there’s a lot of US supply that needs to meet a lot of demand.
00;13;20;03 – 00;13;49;21 Unknown Yeah, yeah. Well said. Final topic here. We are going to touch on inflation and the Federal Reserve and how that as the US and Iran conflict kind of fades off into the distance, hopefully ends up becoming the key risk for markets. So, you know, I would say through the, the conflict between the US and Iran, you know, we’ve cited the fact that higher oil prices have have been a major driver of markets and they’ve been a major driver of inflation as well.
00;13;49;28 – 00;14;19;09 Unknown So annual CPI running at approximately 4.2%, that’s clearly above the level that the Federal Reserve would like. And at the same time, you know, you are getting kind of mixed readings from the labor market and other portions of the economy. So the fed faces a pretty difficult balancing act. If inflation remains elevated, you might have interest rates staying higher for longer, meaning borrowing costs remain elevated and stock valuations could come under pressure.
00;14;19;11 – 00;14;44;10 Unknown But if you do get inflation starting to run a little bit cooler as the impact of oil and broader energy dissipates, rate hikes, become a lot less likely. And instead, you might be looking again at rate cuts, lower bond yields and better support for stocks. I mean, outside of that, is there anything that you think investors should be paying attention to with regards to inflation and rates in the fed?
00;14;44;12 – 00;15;12;26 Unknown I think the investor community has to pay attention to the fed. It’s not exciting to talk about. It’s not a topic that, sparks a lot of enthusiasm because I really feel like headlines and politics drive sentiment. You have, those that might lead in one direction or the other politically and that that shapes how they view the direction of the markets.
00;15;12;26 – 00;15;39;26 Unknown You might have, other people that think, in terms of the economy and crises and yes, that matters, but boy oh boy, the fed is the ultimate driver there, and they are the puppet master. And what the fed does as a single organization is much more influence on the markets than the headline, than a war, than politics.
00;15;40;00 – 00;16;13;15 Unknown The fed is so influential and at the end of the day, interest rates impact stocks, bonds, real estate, currencies, commodities everything is impacted by interest rates. They know the fed funds futures right now on interest rates. Are we still pricing in one hike by December? Yeah that’s correct. So if if rates cool. If I ran everything that eases then maybe it’s not a record, but maybe it’s not a rate hike.
00;16;13;22 – 00;16;38;18 Unknown And that’s a move. That’s that’s a movement. And future interest rates in the right direction to support higher stocks. And but I think generally a good positive thing for investors. Yeah. And it’s going to be interesting because this week we have the recently appointed Kevin Warsh who’s the new chairman of the Federal Reserve, is going to have his first meeting with the FOMC.
00;16;38;24 – 00;17;01;20 Unknown So I think investors are going to be laser focused, not on just specifically the outcome, the interest rate decision or or call it guiding. It’s going to be about how he speaks about the current environment, and investors are going to be laser focused on that because they want to understand how are you thinking about the trajectory for interest rates right now?
00;17;01;20 – 00;17;23;11 Unknown How are you thinking about the size of the Fed’s balance sheet? What can we glean from your tone? This is a big deal. I mean, we’ve been with Jerome Powell for what, eight years, right? So big deal. Because the the markets are discounting mechanism for the future. They’re they’re looking forward 9 or 12 months into the future.
00;17;23;13 – 00;18;00;11 Unknown And so if, if they start giving guidance, if Kevin war starts giving guidance that rates could potentially come down that will impact pricing immediately. The other thing that I think is important here as as rates. And let’s hope that inflation doesn’t take on, let’s hope that inflation is is tempered at some level. But if rates come down and the yield that investors are earning on money markets starts or continues to drop in the direction, because at one point during Covid, a money market was paying, what, 6%, some crazy rate.
00;18;00;14 – 00;18;33;28 Unknown And that’s come down. And now they’re maybe mid to upper threes. But if that starts dropping all that much lower, all the money on the sidelines is going to go to where it’s treated. It’s like water that flows towards us. And if money flows out of money markets into assets like stocks that are that are getting gaining more momentum because of the market environment that we’re in, the fear of missing out on more attractive return profiles and stocks.
00;18;34;01 – 00;18;59;02 Unknown If you start getting a meaningful movement from all the trillions of dollars that’s in money markets right now on the retail side into things like stocks, that is going to be a secondary fuel for the market to continue its momentum. Then you go, right? Yeah, I agree with that. You can view that as somewhat of placing a floor under traditional assets like stocks and bonds.
00;18;59;04 – 00;19;29;18 Unknown Anything else before we wrap up today? Matt? Dan that’s it for me. All okay. Great. You know, just recap, we talked through some of our takeaways from potential piece breakthrough between the US and Iran, some of our our commentary, and why we think investors should care about SpaceX completing the largest IPO in market history and then closing out with, some of our own thoughts on inflation, the Federal Reserve, and how that could could be a pretty key key item for the markets over the coming months.
00;19;29;21 – 00;19;34;07 Unknown Thank you all, as always, for listening in. Until next time.
