It's the state of the union. What's the state of the economy? Welcome to a special edition of the Danny Moses Show.
Over 30 years of beating Wall Street, predicting the famous Big Short. Now he's here for you. This is the Danny Moses Show. I'm Danny Moses. My promise is to tell it like it is. Most weeks we only have half an hour. This time it's different. In the hour ahead, in-depth conversations with people who understand the economy better than most. In this best-of edition, we will bring you some of those highlights, including why you should care about our national debt levels more than the Dow hitting 50,000, what the surge in gold prices is telling us, what is happening with energy prices and why Three Mile Island is back in the news, who will be running the Federal Reserve and why its independence is so important, as well as the best ways to express themes in the markets from the vantage point of my guests and in the form of cash event contracts. So, sit back and enjoy.
Although Federal Reserve Chairman Jerome Powell's term ends in May, it hasn't stopped President Trump from hammering him. He has nominated Kevin Warsh to replace him, but Powell will still serve on the Fed's board. But the independence of the Federal Reserve is very much in question. And it's among the topics I discussed with Cameron Dawson.
The economy overall growth is on a solid footing, it looks like. And it's not just those things. It's just the consumers. The consumer is filling out, you know, surveys that sound really negative and then spending. So, there's been a disconnect for some time between downbeat surveys and, you know, reasonably good spending data.
So, obviously you wrote that about, but let's talk about the K-shaped economy as we call it and the impact. And we're going to need the consumer to keep spending, and at some point that K just stretches. Explain what that is and how you see that continuing.
So the K-shaped economy is effectively a way to say that there are two legs of the economy that are experiencing very different things, whether it's consumers, but it also goes the same for corporates. And the whole notion here is that the largest consumers or the highest income consumers are very strong and they're driving the majority of the spending in the US. The stat is pretty incredible. The top 10% of income earners make up 50% of consumption in the US. And if you think about those high-income earners, they're in a position where not only incomes are strong for them, but they also have home prices that have appreciated a lot over the last five years and a stock market that's been absolutely booming. So you get what's referred to as the wealth effect that also boosts consumers. And this is exactly why we are seeing this divergence between what we see within surveys, which that's effectively an equal weight. Everybody's vote counts the same. You pick up the phone to a survey respondent or you fill out a survey online, and so the high-income consumers count the same as the lower-income consumers. You think of that consumption data though as very weighted to those high-income consumers. So effectively their strength is masking some of the weakness that we're seeing under the surface. So the aggregate data looks great, but there certainly is pain when you look underneath.
As long as we're on the Fed here, on the topic, the independence of the Fed is obviously very important here. I think it's important whether you like the Federal Reserve or not. I think it's an important thing to talk about. Powell's probably at this point probably saying to himself, thank goodness I only have two more meetings because he probably doesn't want to deal with this anymore. What does the, what should, where should rates be potentially, or how do you think that, you know, the Fed's handling this? And what is the impact if someone does come in potentially and cut rates just to please somebody when actually it might just spur inflation?
So there's this concept in Fed policy that's called the neutral rate, and you might have heard it referred to as neutral or what's called r-star, and it's effectively this hypothetical rate that exists somewhere in the ether that is neither stimulative to growth nor restrictive to growth. And the idea is that the Fed at this current juncture wants to be pretty close to neutral. The challenge is there's a lot of debate as to what neutral is. You have some members of the Fed suggesting that we are actually already below neutral. But then you have other members of the Fed, such as the recently appointed Miran, as well as people like Secretary Bessent, arguing that the neutral rate is lower, and that's how they're making the justification for much lower interest rates today. The question on what is the ramification of a non-independent Fed is really fascinating because not only do you potentially have to have an entire board that will vote in line with what you want. So it's not just the chairman, there's an entire board that has to have a majority to cut rates one way or another. Then if you have that control of the board, the next question is, do you commit a policy mistake? Now, a policy mistake by the Fed would look something like them cutting rates when they should be holding rates higher, or potentially hiking rates because of inflation or where growth is. A policy mistake on the other side is them holding rates far too low when things are booming. So first you have to have control of the Fed, then you have to have a policy mistake. The last piece of it is also important. There have to be ramifications to that policy mistake. Meaning you have to see inflation start to turn higher. You have to see inflation expectations start to become what they call unanchored. So all three of these pieces have to happen for the bond markets to really care about a lack of Fed independence, which is probably why we have seen the bond market shrug thus far at some of these threats to Fed independence.
We're in the middle of earnings season here. We're probably a third of the way through, I think, at this point somewhere. We've seen some big companies report. What is it telling you so far? And as far as earnings growth is concerned, we need to have a pretty high number in 2026 to justify, I think, where the S&P 500 is trading.
Man, the bar is extraordinarily high. It's like pole vaulting in the Olympics as we think about how high these businesses are going to have to be able to grow earnings just to meet expectations, let alone beat expectations. So, effectively, the equity market is saying that they expect not only to have a really strong economy in 2026, but effectively a productivity boom in 2026 as well. So, that creates that high bar. The other thing that's happened is that since November, the beginning of November, we've had a very pro-cyclical risk-on rally. So, when we think about the different pockets of the stock market, there's some pockets that do well when things are bad. Those are your defensive type of names. Then there's other pockets of the stock market that need really strong economies in order to do well. And those tend to be things like industrials, materials, energy stocks, consumer discretionary, on down the line of things that are very economically sensitive. Those stocks, in addition to things like industrial commodities, your coppers of the world, as well as cyclical currencies, so things like the Australian dollar, have all been rallying very aggressively, which suggests that traders are positioning for and expecting a global reacceleration. So we have to watch really closely for the data to start supporting that. As of right now, we feel like the Wendy's lady who's saying, where's the beef? We're like, where's the acceleration? But always remember, price leads data. So the price will move long before the data comes.
Up next, Wall Street hitting records. I'll explain why it may not mean what you think. Plus, power bills hitting crazy levels this winter. Don't expect relief anytime soon, and where to look for opportunities in the markets right now. This is a special edition of the Danny Moses Show.
I remember when I first won, they said if he gets the Dow up to 50,000 by the end of his fourth year, he will have done miracles, and we're at the end of the first year.
That's President Trump talking about the Dow passing the 50,000 mark. Right after he said it, I explained why the Dow is not a great way to evaluate the overall strength of the US markets. Let me start with a little background. The Dow Jones Industrial Average made its debut in 1896 and was a brainchild of Charles Dow, who along with Edward Jones launched the Wall Street Journal several years earlier in 1889. It was originally comprised of 12 stocks with a focus on industrial companies given their importance at the time. While investing in stocks in the late 19th century was common, it was dominated by the wealthy and connected financiers. It became more widespread during the Roaring Twenties before the 1929 crash, which for better or worse cemented the Dow as the market barometer. The S&P 500, originally called the Standard 500, was created in 1957. And while it was also heavily focused on industrials, it represented over 90% of total US stock market value. From its inception, the index was market cap weighted, taking both price and shares outstanding into account, unlike the Dow, which is calculated on price alone. Let me give you an example. Goldman Sachs, whose stock price is around $950, the highest of the 30 stocks in the Dow, has a market cap of $285 billion, but moves the index more than Apple stock, whose price is $270 and has a market cap of $4 trillion. A 10% move in Goldman Sachs would equate to around 95 Dow points, and a 10% move in Apple would be around 27 points. Yet a 10% move in Apple would represent roughly $400 billion in value, bigger than the entire market cap of Goldman Sachs. One other quick example of two more Dow components. Walmart is roughly three times the size of Home Depot in terms of market cap. Yet Home Depot's weighting in the Dow is three times larger than Walmart because its stock price is around $390, or roughly three times larger than Walmart's of just under $130. I hope that proves my point. So, why is the Dow still so widely used as a measure of stock market performance? Well, the original Dow Jones and Company, acquired by News Corp in 2007, owned several financial publications including the Wall Street Journal and Barron's, and also benefited from the creation and trading of index-linked products such as ETFs, futures, and options until it sold its remaining rights in the index to a joint venture between S&P and the CME Group in 2013. The State Street managed DIA ETF alone has almost $50 billion in assets, and State Street pays a fee to that joint venture to license that index. I don't see a scenario where either the Wall Street Journal stops talking about the Dow or the index providers stop licensing the rights. So, while it might be a prestigious honor for companies to be included as one of the 30 stocks in the Dow, investors looking for proper market weight diversification should look to the S&P 500, where, you guessed it, all 30 Dow stocks are included. Still to come on this best-of edition of the Danny Moses Show, continued pain from our power bills, and why the explosive growth in AI may prevent it from getting better anytime soon, and the growing danger from our record-breaking national debt, why you should care, and why I like gold so much.
This is a special State of the Union edition of the Danny Moses Show. I'm Danny Moses. The US national debt is at a record level, nearing $39 trillion and growing every day. It was a topic of my recent conversation with my fellow Big Short partners Vincent Daniel and Porter Collins. The US debt is now the biggest expenditure on your budget. How do we get out of that?
Well, the big thing is growth. I mean, growth is the way. If we grow like this, we go from having at 36, 37 trillion, we go from having high debt to low debt. But we also are cutting expenses, you know, the old-fashioned way. We have extraordinary growth. I think we're going to be growing our way out. I think we're going to be paying off debt. We're taking in tremendous money from tariffs fairly. And again, I'm using them judiciously, you know. Switzerland's a case study. I could have gotten much more. I could have asked for much more, but we're using them judiciously. But I think growth most importantly, and then cutting costs.
Okay. My reaction to that is the debt's not 36 or 37, but what's a trillion here or there? It's approaching 39 trillion. Yes, we can stimulate growth, but I don't think we're going to be cutting much of the $1.8 trillion deficit, which I mentioned, which occurred last year. And so some of these policies, yes, can help, but when you're cutting taxes and so forth, I just don't see how this is going to happen. So guys, Vinnie, I'll start with you. How do we manage this? And is it ever going to matter?
Well, the way I think about it is we are managing it, but we are managing it in a way that most people don't see, right, Danny? And what we're doing is debasing the currency. And in many respects, so as the debt grows, we always ask ourselves the question, who in the world is going to buy this debt at the prices we need to buy it in order for us to continue to thrive? And whether we find real tangible buyers, let's say insurance companies or savers, or we don't, we're going to get it done by hook or by crook. And the way we're going to get it done is by either printing money, and they'll use some fancy terms like quantitative easing or a bunch of acronyms to explain what we're doing, or allow people, which we are doing, to lever themselves and buy treasuries on a small spread. Either way, the way we look at it, to keep it simple, is that they will continue to debase the currency so that we can continue to enjoy this fiscal largesse, and we'll probably get into that discussion in a bit. But all roads to us lead to gold as a result of what we're seeing.
You stole my thunder for Porter, which I'm sure he's going to mention. So Porter, why don't you weigh in on kind of the national debt and what we can do about it, if anything?
Well, Trump is right in the fact that we need to grow ourselves out of it. Where he's wrong is that we're not going to pay off debt, right? I think in 2023 we wrote our annual letter about how the national debt is going to approach 40 trillion in a couple years, and lo and behold, a couple years later here we are, right? And so that pace is not slowing down, and just the aggregate sheer size of the debt growing is a problem. And I think that whether that debt's going to be 40, 50, 60 trillion, it's not going to go down, and obviously the interest costs just compound upon that. So that's the way I see it. And listen, I want us to grow out of it, but we're going to need a lot more growth to really debase the debt out.
So all right, other topics out there that are moving markets, Federal Reserve independence and tariffs. So the Supreme Court is going to have a hand in both of those topics. It heard the Lisa Cook firing case. The justices seem prepared to protect her, and it'll decide whether these tariffs from the president are constitutional. So question for you, Vinnie. I know how we both feel about the Fed, how they handled the GFC, all the quantitative easing that needed to take place, I guess. What do you think about the independence of the Fed and how important is it to the markets?
Well, I'm sorry, I'm laughing as you're asking the question because first you have to start with my view is that I never believe the Fed was ever independent, and we would argue not with each other but against other people all day long about the Fed's supposed independence. To me, it's a false facade to separate the spending function which occurs in Congress with the money printer. But to the masses, this false facade is important. So there is a risk that President Trump upsets the apple cart. And if anyone is going to upset the apple cart, as we've seen, it's going to be him. To me, the funny thing is he also wants to appoint, so he has the ability this year to appoint a new chairman of the Fed. And I know it gets a little murky as exactly how it's going to happen, but we will more likely than not have a new chairman of the Fed by, I believe, May or at least this summer. I forget the exact date.
It'll be the end of May, June. So June is when the new Fed chair comes in.
Yeah. And in speeches that he has given, he has asked or suggested that whoever the new chairman is continue to lower interest rates even if the economy continues to percolate, which is kind of unprecedented, right? That's not usually the rules of engagement for the Federal Reserve. So again, that's President Trump upsetting the apple cart. And we joke around that there's so many reasons why we keep coming back to owning stores of value and things that are tangible and things that they can't print with fiat money. And it leads to things such as gold and silver and commodities. But when you start hearing this stuff, this is how we continue to revert back to the investments that we're making today.
All right, Porter, we just mentioned the tariff kind of the rhetoric, the implementation. It's been going on for almost a year. What do you make of it? I know we talk sometimes during the day about the markets as they're moving and pretty much by every tariff scare, I guess, but how are you navigating that?
Well, I mean, as Vinnie touched on here, one of the biggest themes in our portfolio we've been talking about is gold. And this is where it gets a bit complicated, and our background in the financial system really helped us understand what's going on. And foreign central banks around the world own a lot of dollars because it's the reserve currency of the world, right? And the thing is they actually don't own dollars. What they own is a lot of US government debt or treasuries. And this has really worked over the last 40 years. But recently, you know, central banks like China have started to wonder, do I need to own all this debt? Right? And the subtle shift that they've made and other central banks have made, they've decided to own an asset rather than a liability or debt. And so, you know, for centuries, gold has been the bedrock of the financial system. And so it's sort of a slight shift of return to what's worked over centuries. And so, you know, that subtle shift has caused a doubling of the gold price recently. And so, you know, we think that this will continue. And, you know, we think this is not a one or two-year trade. We think this is a trade for multiple years. And so, you know, most Americans don't own a lot of gold. They've owned the stock market. And that's been the thing to own for the last, you know, 40 years. But if you really look under the hood, gold's actually had a better performance than the S&P since 2000. And so we're happy to own it, and that's a big focus of what we're doing.
Yeah. I think for those people out there that aren't tracking, gold's around a $35 trillion asset at this point if you want to add it up, and maybe even more at that point. So I guess the question, Porter, is what happens if rates start to rise as a result of the US's inability to manage its debt? I mean, that's really for both of you, but Porter, I know gold's going to go up on that obviously, but that to me is the scary moment, right? And I opened in this episode, you know, about that, just the debt in general. And if, to Vinnie's point, if the Fed tries to lower rates in the face of inflation and people read into that, you could see rates going higher. So I guess that just adds to your gold thesis there as well.
Well, that, I mean, that is the scary moment. What happens if rates do go up? Obviously the interest expense on $40 trillion goes up a lot if rates go up a lot. And so you have to ask yourself, is it of national, you know, defense importance, national importance of the whole United States to keep this debt cost low and or rates low? And I would say yes. And, you know, you've seen this historically, the, you know, the Treasury's issuing a lot of two-year notes, not 10-year, because it's a lower rate, right? And Yellen did it and Bessent's doing it now. So it's, you know, it's bipartisan, right? And it's bipartisan. It's of national importance and security to keep rates low.
Thanks again to Vinnie and Porter. Next, what's driving our electricity prices higher?
Whether you own a home or rent an apartment, you likely deal with a monthly utility bill. While it might not be your largest expense, you might be noticing a decent increase over the past few years, even in non-peak usage times. Utility bills, when adjusted for inflation, have actually been tamed for the last several years. So, what has been the cause for the spike in rates? There are a few reasons depending on where you live. The construction and proposed construction of data centers as a result of the artificial intelligence boom require lots of power and put a strain on existing resources. Secondly, costs to upgrade existing utility infrastructure continue to increase. According to the US Department of Energy, the electrical grid is approaching the end of its expected lifespan. Utilities now spend millions of dollars a year to maintain and upgrade their facilities. While utilities can spread out those costs to consumers over several years, they are also dealing with natural disasters like wildfires and storms that add stress to the system. Yes, utilities are regulated and prevented from gouging the consumer, but they have to pass on costs in order to function properly. Another shift over the last several years has been the reliance on natural gas. Recent data shows the US relies on natural gas to generate more electricity than any other energy source. Gas-fired power generation accounted for 42% of US utility-scale electricity, followed by nuclear at 19% and coal at 16%, with most of the remaining share coming from renewables. While natural gas provides efficient and clean energy, it's vulnerable to price shocks like the one we are experiencing right now related to the massive storm and cold weather that is sweeping through the country. So what can we do about it? We have already seen a commitment from large technology companies such as Microsoft to pay for their fair share of power consumption and some of the costs related to grid expansion. We have also seen recent power auctions related to grid capacity that are being conducted by the government in an attempt to garner higher capital commitments in order to help utilities and regional grid operators like PJM, which alone is responsible for 13 states and over 67 million people, adapt to the increase in power demand. In conjunction with all of this, we are also seeing a resurgence in nuclear energy. Old reactors, like those on Three Mile Island, are being resurrected, and new, smaller, more efficient reactors are being constructed after decades of negative growth and exile. The primary source of energy for nuclear reactors is uranium. But these reactors take time to construct, and we are beginning to see the long-term...
secular play unfold, and uranium-related stocks are finally having their time in the sun. Nuclear power plants are now being included as part of these data center deals. So, pay attention to what's going on in your neck of the woods. That was a few weeks ago on the Danny Moses Show, a place you can come to every week to get a better understanding of what is really happening in the economy and where we break down complex issues. Let's talk about recent economic data and specifically the unemployment rate. It's down to 4.3%. And I talked about what to make of it with Peter Boockvar. Non-farm payrolls for January coming in twice expectations at 130,000.
130k. That would be the juiciest going back to April of last year when it was 158.
All right. So, Peter, you do a great job of breaking down headlines like that and then looking kind of underneath the hood for what's really going on. What's your takeaway from that? Just the headline number that we saw yesterday on the jobs number.
