Fatal Conceits Podcast with Dan Denning

In this week’s Fatal Conceits Podcast we are joined by Bonner Private Research’s own macro man, Dan Denning... When we last touched base with Dan, back in late March, markets were enjoying (what hindsight now reveals was) something of a bear market bounce off their mid-month lows. But Dan was not convinced. He warned that “The Generals” (mega-cap S&P 500 stocks) were poised to beat a disorderly retreat… dragging the broader markets lower as investors “re-evaluated and repriced the future.” Fast-forward to this week and we see the Dow down 9%… the S&P off 13%… and the Nasdaq lower by almost 20%… just since that powwow. No surprise then that we were keen to get Dan’s insights on the state of play today… from Mr. Powell’s reappointment at the Fed to the greenback’s relative strength against foreign fiat currencies over the past month… to his outlook on gold and the Bonner Private Research asset allocation strategy in general. We’ve got all that and more to get to today, in Episode #65 of your Fatal Conceits Podcast. Please enjoy… Cheers, Joel Bowman P.S. If you’re not already receiving all of Dan’s premium research - including his weekly Friday market notes, plus research reports like the BPR Asset Allocation Strategy and the upcoming Dollar Report - make sure you get access to it all here. Good for what ails ya. Thank you for listening to this episode of the Fatal Conceits Podcast - A show about money, markets mobs and manias. This one is public, so please feel free to share it, with market leaders and followers alike… TRANSCRIPT: Joel Bowman:Welcome to the Fatal Conceits Podcast, dear listeners, a show about money markets, mobs, and manias... not necessarily in that order. My name is Joel Bowman. I'm coming to you from the literal and geographical end of the world down here in Argentina. If this is your first time listening, please head over to our Substack page. That's at bonnerprivateresearch.substack.com where you can check out 100s of articles on everything from high finance to lowly politics, and also plenty of research reports and market notes many of which are penned by my guest today, Mr. Dan Denning. Dan, welcome from the high plains of Laramie. How are you doing?Dan Denning:Good. Thank you. It's nice to see you again.Joel Bowman:Well, I don't know if you know this, Dan, but just in preparation for our discussion today, the last time that you and I recorded a conversation for this show was at the very end of March, which now in retrospect looks a bit like a bear market trap for those of us who are following the money off the March lows. And I just went back and did the math since our last recorded discussion. The Dow is down 9%. The S&P is down 13%. The Nasdaq, almost 20%. And during that conversation, you were warning that "the generals" may be beating a disorderly retreat. That turns out to have been a very prescient call. What did you know then that others were not predicting... And where do we lay now?Dan Denning:Yeah. I remember that conversation. And I guess to be fair-minded, I probably didn't say anything different then than I haven't been saying for the last three to five years. So, I don't want to be one of those guys that say, See, I told you so, and people say, Yeah, but it's the whole stop clock thing. But I would say that the overall thesis for Bill and I, and Tom Dyson had bought in Bonner Private Research and it has been now for well for a while, is that if you looked at all the traditional metrics for valuation in the stock market, not at the company level, but at the market level, they all were historically massively overvalued.So, the price of sales ratio on the S&P500 was over three. The market cap to GDP ratio for US stocks was over, it may have been over 200 at one point on the Nasdaq, but it was certainly well over the historic average of 80 and was closer to 150. And on an earning basis, too, if you looked at Robert Schiller's specifically adjusted price, earnings ratio, stocks were expensive.And then, there were other indicators that we used and have used over the years like margin debt, that show that when liquidity is available and interest rates are low, stock prices are very high and risk or growth assets become, as they say on Wall Street, elevated. So, we've been saying that for a long time and they just kept going up. So, that didn't make them less risky though.So, I think what happened and what's happened since you and I last talked is, one, there's been a discussion of higher interest rates, which definitely affects the pricing of growth assets, but more broadly, people have been thinking about the future and saying, "Well, maybe the next 10 years are not going to be as great as the last 10." And that shift in sentiment has been coupled with changes in liquidity.And that's probably the big thing for investors to realize is that when liquidity starts to thin out or dry up in financial markets, then it generally means lower prices for everything. And that means not just growth stocks, but most stocks and also government bonds, and also, to some degree, gold. Oil seems to be the exception, which we can talk about later if you want. But yeah, I think at the top end, the generals were the best performing highest flying growth stocks of the last 10 years.Especially since, you could go all the way back to 2009, but really since March of 2020 when the S&P doubled and the fed got extremely accommodative. We said, those stocks, and by those generals, I mean Apple, Microsoft, Amazon, Google, Facebook had already fallen, Meta. Netflix had already fallen. Peloton. These other outlier stocks. They weren't very large, but they were the most overvalued.So, we think there's still more to go, but it doesn't go in a straight line, and our central bankers aren't powerless, so it's going to be an interesting summer for sure.Joel Bowman:Well, let's talk about our dear leaders in the central bank, Dan. Mr. Powell has been recently reappointed as fed head in chief. Is this just exercise in that old definition of insanity, just repeating the same thing and expecting a different result, or is there something more sinister at work here? It's a little bit of a toss-up it seems between some manufactured breakdown in the old monetary system if you want to get conspiratorial.Or is these just people who really down to their core belief that what they're doing is competent handling of the economy and that they can turn dials and pull levers and get it going in the way that they think that they can?Dan Denning:Yeah. It's funny you ask that question because I was just reviewing Tom Dyson's weekly update, which he publishes on Wednesdays. And he sends his draft to me and I just give him my reaction and some thoughts and observations. And it reminds me of an old, when I used to go to the barbershop in Estes Park, Colorado, it was run by an old friend, family friend. And I got to know him over many years, because I first went there when I was like five, and I kept going all the way through my adult life until he passed away. But he was a member of the John Birch Society. He carried a copy of the constitution in his front pocket, and we always talked about politics.And the one point I always made with him, which wasn't original to me was, it's hard to imagine a conspiracy of 3000 people being effective and efficient when it comes from the same organization that can't deliver the mail. How's the government capable of masterminding or faking a moon landing or doing this or that, or killing Kennedy, and at the same time, they're just ruthlessly incompetent at other stuff?But with respect to monetary policy, I think there's three different constituencies that Federal Reserve works for. One is political. One is financial, and one is institutional. So, if you look at all three, the institutional constituency are the 400 PhDs or economists that have only ever worked for the fed and whose livelihoods depend on providing research that justifies the government… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bonnerprivateresearch.com/subscribe