Chris Verrone: There's Something Happening Here

Great to be here, Danny. Thank you for having me.

I did.

Definitely.

You know, we always say the less, you know, sometimes if you had told me on February 27th what the sequence of events would be, I don't think any rational person would have guessed where markets are. But, you know, we've called this the 'hit me again' market, meaning tariffs, boom, hit me again. Energy shock, hit me again. None of it has really seemed to matter. Now, I do think you kind of have to take the, you know, from the war lows, March 30th to maybe two or three weeks ago, it was a very narrowly focused type meltup. I take some comfort the last two, three, four weeks that it actually started to broaden out here a bit. Listen, I would not call this some rising tide, but we're also not in that '99 camp either where it's just a handful of names. I mean, you have 65% of stocks right now above the 200-day moving average. I think at the March 2000 peak that was something like 30%. So, we're not in the '99 category. I do think the question people ought to be asking themselves here, kind of during the throes of the war, did everyone go to the memory stocks and the tech stocks and the semis simply because they were kind of a beacon of certainty in a very uncertain moment? And if that is now changing as this deal gets done, where could money go if it leaves tech? Where could money go if it leaves the memory space? And I think this improvement you're seeing in stuff like healthcare, discretionary, financials is notable in that regard. I don't know what it means for the index because it's so top-heavy in terms of the weightings, but I think the average stock is probably getting better, not worse.

I mean like yes and no. So, I mean, if you look at credit conditions, they're as easy as they've been at any point this cycle. I think double-B spreads this morning are on the tights. But two-year yields are, you know, 30, 40 pips above Fed funds. So, there is some, you know, modest tightness in, you know, what the policy rate is relative to the market rate. I do think when you look at financials, you know, certainly, you know, if you put it in context of the IPOs, whether it's SpaceX or the ones to come, it's reflected in Morgan Stanley, it's reflected in Goldman Sachs. But, you know, maybe the improvement recently that I think is not getting enough attention, these regional banks are all starting to break out. Fifth Third, East West, PNC, BPOP, I mean, names people have not had to familiarize themselves with in a long time. I also think, you know, from weaker conditions, but maybe starting to get better, some of these consumer finance names, look at MX, look at Capital One, Affirm, kind of in the spirit of, you know, this consumer just continues to express a resiliency to everything going on in the world. So, I think that's notable. The big financials, JPM, BAC, were pretty lethargic the last three months. I didn't know what it was. I didn't know whether it was flattening curve or clarity act or midterms or private credit. So, you know, even there I'm a little bit comforted. You know, Bank of America broke out this week. JP Morgan made a three-month high today. So, there's some improvement there. And the Euro banks never faltered and the Japanese banks never faltered here as well.

Sure.

Well, I think importantly what you describe, I think Powell is a pragmatist. I believe he doesn't think with growth must come inflation, that you can have a relatively robust growth backdrop without these inflationary tendencies. I do think the decline in oil certainly helps. I mean we're down meaningfully from the highs. I think the high was maybe March 10th or March 12th. But when you look at a couple things here, you know, something I've learned in my career, there is nothing probably less satisfying than thinking you got the story right but losing money. And vice versa, right? There's nothing more satisfying, at least from my perch, of frankly getting the story wrong, but still being positioned on the right side. And I think about this year, you know, it's been fortunately a lesson in the latter. I went into '26 thinking, okay, there's a good chance you get a meltup here because Hassett or Powell would be cutting into a strong economy. Clearly, the reasoning is flat-out wrong. I think no cuts are the new Fed cuts in this environment. And just hold, I mean, listen, the two-year note, you know, somewhere in the low fours. The Fed funds rate, you know, 3.75. I think just holding here, the market's going to view that very accommodatively.

I think as you know, the best part about this business is the people you meet along the way and to count clients as mentors and friends. And Secretary Bessent has been a mentor of mine for a long time. He shaped how I think about macro. And you know, if there's one thing I've kind of learned from him over the years, it's always price before narrative. So I think if we put the world in those terms today, listen, the narrative will reveal itself in time. But you look at the strength in the regional banks and the renewed strength in the money centers. I still think there's a story out there that will reemerge that we're on the path of financial deregulation. And that's essential before you get to the balance sheet shrinkage from the Fed that the new Powell Fed is likely to embark upon. So Dan Clifton, who does our policy work, as you know, does a tremendous job. Kind of his loud chorus at the moment is financial dereg before the Fed shrinks the balance sheet. I think the regional banks are going to love that. I think the money center banks are going to love that. So I think there's a linkage here that has to happen before we're talking about Powell really shrinking the balance sheet. I've actually always said that, the irony, if you get a downturn in the economy and credit, you know, kind of really turns, that the small banks will all be bought by the... I believe that there's, you know, I think those are, you can buy them because if you're at a board meeting, you're a small bank like, okay, credit's okay. It's not great. What do you guys want to do? There's eight bids for our company. Let's just... I think we're going to see a ton of M&A on the... And listen, I think when you look at what the fissures in financials have been now for two years in the private side, it's not because of some great foresight the money centers avoided it or the Goldman or the Morgan. I mean, they were hamstrung for the better part of the last 15 years. Their hands were tied behind their back. They certainly would have been there if they could have been there. You know what I did think we learned this year is at least to... what's happened in private credit doesn't seem to be some big systemic threat to the broader financial system. And I think, you know, in the spirit of a 'hit me again' type market, you know, add that to the list of things that certainly haven't seemed to matter to the degree I think the bears really think that it should have mattered.

Yeah.

So, as a citizen, as a human being, I certainly agree with the narrative. I think the arbiter for when it matters is when the bond market tells us it matters. And I mean, even two weeks ago, you know, 10-year yields trade as high as I think what, 4.67, 4.68. But frankly, in a pretty orderly fashion, and then back right off. I think if there's one thing we've learned over the last number of months, it's going to take a bond yield materially higher than I think many originally thought to get money to leave the asset class of equities. Right? Ultimately, if history has told us one thing, when you're in these bubble-like meltup environments, it takes a yield so much higher than you think. Go back to '99 and NASDAQ. People forget the 10-year yield in '99 went from 4 to 7. So I remember we found a yield that was finally competitive... in '89 with the Nikkei. I mean, Nikkei I think doubled in '89. JGB yields went 4 to 8 that year. The only place you're actually seeing that type of price action of bond yields right now, South Korea. South Korean bond yields are going bananas here as stock prices have gone up. So if you want the '99 comps, I'm not opposed to it. I just think you're looking at the wrong place. I think the South Korean market, you know, checks more of those boxes than this one. What level do I ultimately think on 10s where we start to, you know, revisit some of the real structural issues that you talk about? I got to imagine it's something with a five handle on it, not a four handle on it. Also remember, or let's say it this way, be skeptical of things that are supposed to protect you in a certain environment and then when they don't, the story changes. Gold, I think, is a great example of that this year. I went into the war bearish gold. I was nervous that weekend, February 27th. I'm like, 'Oh my gosh, we're going to be dead wrong here. Gold's going to 10,000 on this.' And by that Monday, it was already back on the day lows, and it's gone nothing but straight down since.

I thought January had blow-off like characteristics to it.

Basically from 3,500 to 5,600 in a straight line into a very climactic week in mid-January. I think it was January 26th. Silver was probably more extreme in that regard. I also have just seen in my career when everyone settles on the reason why, you're typically late in an advance. And suddenly by, you know, late 2025, early '26, there was this accepted logic of why gold was doing what it was doing. Oh, it's the de-dollarization or it's the debt story or maybe it was just two-year yields were falling for three years, so gold went up and now they've stopped falling. So gold has stopped going up. So I think often we over-complicate or over-intellectualize asset prices when it's as simple as what are bond yields doing. And falling two-year yield, bullish gold. Rising two-year yields, not so much.

Yeah. And I think you would agree like something happened last fall, last winter where gold stopped being whatever it was supposed to be and it became another chip in the casino and it traded like a risk asset for much of the last six, seven, eight months. You know, I'm not dogmatic about any of this stuff. My hunch was we were going back to 3,750. Maybe we got close enough earlier this week. We are oversold here. Let's see how it bounces. But I agree on the equity front, the related equities are in a better position here than the physical, particularly when you go to the industrial metal names. I mean Freeport, Rio, BHP, Glencore...

Breaking out of big, big bases. And our friend Peter Boockvar, who does great work on that sector, commodities, really a believer that the behavior now is changing permanently post-COVID, post this war, hoarding of materials, hoarding of commodities when people are going to start buying and storing, which I tend to buy into.

So, I'm going to get in trouble here. So, to begin with, um, you ever play blackjack with your wife or go to a casino with your wife?

All right.

And when I'm at the casino with my wife and you're up a little bit, you are going to get in trouble, right? Hey, you know, put the chips in your pocket. You know, that's our dinner that you just won. She's in the back of my head right now when it comes to these parabolic type names because I think you got to be putting chips in the pocket. Neither you nor I know the day or the moment when...

Table's been hot.

I'm on every... and you have bets out there that you don't even know that you have on.

Craps analog because when you get on a hot table, you have so much out. You don't even realize how much you have out. And you could say the same thing about what's tied to AI. I think there's a lot of stuff out there people don't even realize is correlated.

Which, you know, if seven comes out, you'll learn. You'll learn relatively quickly. So I'm trying to put chips in the pocket on that. It's funny. I'm trying to run this balanced book where you have to have some tech on, but on the other side of that, you can say, listen, where can money go if the party stops here? I think there's money coming into healthcare. I think there's money coming into consumer discretionary here. Like the sectors have to be big enough to absorb what comes out of tech. I think there's money coming into big banks here again. I think all of that can coexist on the other side of the real parabolic things. What I struggle with is this idea, and this has become popular recently, 'Oh look, Micron's still cheap.' Ooh, wait a second. Valuation was never the reason you ever owned it to begin with. Why should you even introduce it into the conversation right now?

What is JPM versus book now, 2.3, 2.4, somewhere in that...

Ticker SMOM.