JACK JANASIEWICZ: Wow. We sure have come a long way. We started this podcast back in 2022, with me simply talking about the markets. And since then, it's evolved and grown into a full blown video production where we're not only talking about markets, but also discussing the models and our moves we've made in them. And we added you, Brian, back in the mix in May of 2024, which also marked the day when we launched Tactical Take as a video podcast.
BRIAN HESS: Over the years, we've had the opportunity to talk about many significant market moving events from COVID to the Russia-Ukraine war, a presidential election in the US, and even Liberation Day.
JACK JANASIEWICZ: Yield curve inversions, tariffs and inflation and deficits, the dollar blowing up the treasury market, the list goes on and on. And we've tried to remain pretty consistent, offering up thoughts on what's top of mind for investors and what these headlines mean for portfolios, sometimes right and sometimes wrong.
BRIAN HESS: But maybe we are doing something right. I mean, we've made it to episode 50, and we've made it this far, in large part, thanks to you, our listeners. So thank you. Our viewership numbers have been nothing short of flattering, and we appreciate your support and interest in what we have to say. Because if there were no interest, we certainly wouldn't be sitting here recording episode number 50.
JACK JANASIEWICZ: It's been quite a journey. So thank you to our listeners. Thank you, Brian, for your hard work and dedication. And thank you to those who make this production possible. There are a few of you sitting off screen here that make all this work.
BRIAN HESS: Next milestone, episode 100.
JACK JANASIEWICZ: I'm Jack Janasiewicz.
BRIAN HESS: I'm Brian Hess.
JACK JANASIEWICZ: This is Tactical Take, 50th episode.
BRIAN HESS: Hey, Jack. Welcome back.
JACK JANASIEWICZ: Back to it. Here we go.
BRIAN HESS: Been a long time since we recorded an episode, so I'm happy to be back here with lots of topics to discuss today. I think we should start with President Trump's latest attempts at tackling some of the affordability issues in the economy today. You wrote a note about this a few weeks back and highlighted three proposals. One is already in place, but a few proposals.
The first, efforts to cap credit card interest rates at 10%, the second, having the GSEs, so Fannie Mae and Freddie Mac, buying $200 billion worth of mortgage backed securities to try to push mortgage rates down and help with housing affordability, and then the third potential proposal is an executive order to punish defense companies that buy back stock, pay high dividends or large CEO pay packages, while some of their CapEx isn't happening. So we don't have time to go into all the details you went through in your note. I would encourage our listeners who have access to that note or who wanted to reach out and read it. But I'd say, what are your main takeaways on the affordability measures, just kind of the summary points? And let's consider them one by one, starting with that credit card proposal.
JACK JANASIEWICZ: Yeah, and maybe it's worth just taking a high level snapshot. I think affordability is going to be one of the key election items coming up for midterms. I know the Democrats feel like they have an opportunity here to make some headway. So not surprising that they'll be going after the affordability issue between now and November, and President Trump is trying to get out in front of that and try to nip that in the bud before it becomes a major headline issue. So not surprising that we're getting into this.
But when we start to think about all of these affordability issues that you've just outlined, I think the big takeaway is simply, and this applies for, basically, all of them, it's very difficult for these to be enacted via executive order. They still do need congressional approval. And when we start talking about, for example, capping interest rates on credit cards, that's certainly something that would be interesting from a credit borrowing perspective. But again, there's the National Banking Act that gets involved here.
So there are certainly a number of legislative issues that would have to be undertaken to address this, and it's simply something that, I'm sure, the Democrats are not going to want to do, give Trump a win in front of the midterms.
Probably zero chance of that happening. So bottom line, a lot of these things sound great. But the ability for them to be enacted, it's going to be challenging. Maybe the one thing that he can go after is put a little bit of pressure on them, investigate them, however the political leverage could be used to pull that. But that's more about just trying to coerce these banks into actually potentially lowering credit card rates, rather than actually forcing them by law to do so.
BRIAN HESS: OK. So before we even talk about whether it would make a difference to the economy, I guess, moving credit card rates down to 10%, that would be significant, because currently, they're quite high in the 20% range, I believe, on average. So that would be-- this is one that would make a difference to the average consumer. But you're saying, it's going to be pretty difficult.
JACK JANASIEWICZ: Yeah. And even if they did enact this, this sort of measure, there's ramifications for that, right? You're probably going to see credit cards now maybe limit the access to credit.
BRIAN HESS: Sure, right.
JACK JANASIEWICZ: Part of the business model is charging higher rates that are going to subsidize other parts of that lending book. And when you start to crimp that sort of cushion that they're generating, that's the cushion that enables them to absorb some of these losses. That's going to be going away. So they need to make up for those revenues elsewhere, which means either you can't charge higher rates elsewhere. It elsewhere means you're probably going to lend less, and the people that you lend are going to be the higher credit worthy people, which means the people on the lower end of the spectrum aren't going to get access to credit, which squeezes them even more, which is part of the affordability problem.
BRIAN HESS: Yeah, we could probably spend an hour talking about the moral implications of this one and what might happen in terms of bank profitability and availability of credit. So I think we'll leave it there for now, just with an idea in mind that it's probably not going to have a hard time happening.
JACK JANASIEWICZ: Exactly.
BRIAN HESS: All right, so next, let's move on to the GSEs and the idea of Fannie Mae and Freddie Mac buying up the mortgage, which they've already started doing, right? They're already buying these mortgage bonds, expanding their balance sheets. How do you see this as a driver of mortgage rates?
JACK JANASIEWICZ: Yeah. So like you said, they've already done $200 billion. I think the market is expecting to do another $100 billion. So the number that's being thrown around is an incremental $200 billion more. So $100 billion, I should say, was expected by the market
So that means another $100 billion that wasn't expected, that's really kind of the difference here. And you've already seen mortgage spreads, I think, react to that, right? It's going to price that in immediately, and so you've got some of that bang for your buck already. The bigger mover here, I think, for mortgage rates is still going to be the treasury market.
BRIAN HESS: Right.
JACK JANASIEWICZ: You got to get the treasury yield down, and that's going to be a little bit harder to do, because it's going to be a function of what the markets are saying with regard to inflation and growth prospects. So that's going to be a tougher one, too, to move. But again, the issue here is you start to bring mortgage rates down. That just basically opens up more demand.
Demand pushes the price of said house up higher and makes the affordability issue just move from one end of the spectrum to the other. This time around, it's going to be housing prices are now out of reach again. So it's one thing, it's another. The point here is, I think, this is more just a supply issue.
You got to build more houses, and you got to lift some of the red tape that's around that. So again, sounds great. But I think the longer term, lasting impact from pushing mortgage rates down, you've probably already seen a lot of that, and you're probably going to have a limited reaction as a result going forward.
BRIAN HESS: Yeah. In order to really boost housing affordability via the mortgage rate channel, we probably need, like, a deep recession. That would push unemployment up, and I don't think the administration wants that. So you're probably right, that it's going to be these longer term supply responses that need to happen. And maybe we are moving in that direction incrementally. There's definitely been some efforts there, and we'll see if that plays out.
OK, so we're not turning majorly bullish on the housing market for this year based on this policy. I think we still have a view that housing will remain sluggish. It's still going to be a market characterized by limited turnover, particularly in the existing housing market.
JACK JANASIEWICZ: Yep.
BRIAN HESS: So no change there. OK, and then lastly, this is probably the quickest of the three, the idea of punishing defense companies?
JACK JANASIEWICZ: Yeah. I mean, some of these are already written into contracts, so it's already in a lot of these issues that we're talking about. It's already written into some of these defense contracts that are already existing. So the question is just enforcing that, and I think this gets a little bit tricky, just because the defense industry is such a big portion of the marketplace. They do quite a bit of lobbying in DC.
BRIAN HESS: Oh, sure.
JACK JANASIEWICZ: So this will be an interesting one. But again, I think a lot of this is just pandering to the public. I think there's more bark than bite on all these things that we're talking about.
BRIAN HESS: Even though you're saying there's more bark than bite, and they might not be all that effective in changing the economics of the areas they're targeting, do you think the administration's focus on affordability is a good thing for the economy overall, though, particularly as we head into the midterm elections? Like, I'm thinking there might be less willingness to use tariffs as a punitive measure in terms of foreign policy, because affordability is in the back of their minds. So would you agree the fact that the administration's is focusing on this, in general, provides a little bit of a tailwind, even if these specific measures aren't maybe the silver bullets?
JACK JANASIEWICZ: Yeah, I think you've raised a good point there, because there are certain portions that, I think, will be positive for the economy going forward. But at the same time, you could be at risk of creating some distortions as well, and that's obviously never a good thing. So good and bad. I think there's better policy prescriptions for some of these that can be addressed. But maybe at the margin, it's helpful.
But again, you just have to look at the longer term issues here, where you could be creating inefficiencies in the market as a result of these distortions, and that's a problem. And like you said, we're seeing, in some cases, tariffs are being rolled back. There's even more talk this morning that I was reading about, where they're potentially going to pull back even additional tariffs. So at the margin, again, not bad. But some of the bigger issues that need to be addressed, I think, are still going to be outstanding here, not going to be tackled.
BRIAN HESS: Yeah, this is a hot button issue though. I presented on a panel at a retirement conference last week, and one of the questions we got towards the end of the panel was about the k-shaped economy and how even though the stock market is hitting highs and the wealth effect seems like it's well enforced, there's a large part of the economy, a large part of the US consumer base that's struggling.
JACK JANASIEWICZ: Yep.
BRIAN HESS: So this is definitely front and center.
JACK JANASIEWICZ: Exactly.
BRIAN HESS: All right, well, let's shift gears into a pretty different direction than what we were just talking about. I'd like to focus now on artificial intelligence and how disruptive it's been recently in markets. Now, we're going to kind of drill into the stock market specifically.
So we've been talking a lot here about software stocks, which have been being sold aggressively on fears about AI and the influence to their business models. Again, this is one where you wrote a very detailed note. That one just came out, I think it was last week or even earlier this week, so that's a fresh note. But I think, for starters, in case any of our listeners haven't been following this too closely, what's been driving the weakness in software stocks? What is the perceived threat from AI?
JACK JANASIEWICZ: Yeah, the perceived threat is that AI will basically replace software right now, and we're certainly seeing AI with the ability to write code. So it's doing a lot of the programming right now for a lot of these computer companies. A lot of those entry level positions are being taken away, because you get someone who can come in and basically code. Well, now we can have AI do that instead, so replacing somebody with AI.
BRIAN HESS: Another question we got at that same conference last week, by the way, someone from Seattle said, we're seeing a lot of tech jobs lost thanks to AI. What's your outlook for AI disruption to the employment market?
JACK JANASIEWICZ: Yeah, and it gets tricky, only because when you start to think about how AI interacts with a lot of these companies, when you start thinking about enterprise software, right, a lot of these actually rely on the current enterprise software systems in place, right? They're just sort of bolt ons. And so, I think the concerns with regard to the software industry was that they were just going to be replaced wholeheartedly by AI. Probably going to see something in the middle there in terms of how this plays out, but I think there's still some moats that exist for software, partly being these contracts are long term contracts. They're huge contracts that are very difficult to shift.
There's a lot of money that's at stake with these things. You're not going to see these things move at the drop of a hat, just to be replaced by AI. So what's ingrained, just think of all the systems that run off of Microsoft right now. It's almost everywhere.
BRIAN HESS: Right.
JACK JANASIEWICZ: It's very difficult for that to be replaced, and so that's a problem. And then, I think, the second one is also a lot of these AI models, you're going to be relying on data, and these large language models are not necessarily going to be able to just off the shelf, be able to tap into these databases. Whereas these companies that are running these system software programs have their own proprietary databases, you got to have to use the pipes that are already in place with that system and then leverage the AI on top of that. So there are some, I guess, moats, some barriers to entry for AI just to completely come in and take it over, and I think that's just simply the function of data centers, or I shouldn't say data centers, but data, proprietary data, and just how many people are in these current systems. The one I will say—
BRIAN HESS: An incumbent advantage.
JACK JANASIEWICZ: Yeah, exactly. First mover, you're in there. You're well established. The other one to think about, too, when you start to think about maybe the impact that might actually be out there, it's just repricing of the model, right? And I think when you look at how AI and these tools have been pricing, it's more about the output productivity gains, how much time are we saving, how much money are we saving, that sort of thing.
They're trying to quantify their leverage. With the Sas systems that we're seeing in place, it's really being charged for the number of users. And so, I think maybe that gets disrupted in here, where you start to have to maybe price a little bit more along the lines of what AI is currently doing.
So do we see maybe a little bit of a hit to top line revenues for some of these software companies? Maybe. I think that's the key here, and that's what the market's going to be focused on is over the next couple of quarters, what do we see from these companies in terms of revenues? Are they starting to get hit a little bit as a result? But they're not going out-- Microsoft's not going out of business next week.
BRIAN HESS: Right. [? It's just delayed ?] right now—
JACK JANASIEWICZ: Exactly.
BRIAN HESS: --because there's uncertainty about the earnings outlook.
JACK JANASIEWICZ: Exactly.
BRIAN HESS: So it's probably early, but do you see this as an opportunity in software?
JACK JANASIEWICZ: Yeah, again, the way I would look at it is that, to your point, it's sell first, ask questions later. And why are the why are investors doing this? It's because of the lack of clarity, the uncertainty. And I think you do need to see that clarity, that uncertainty cleaned up before there's investor confidence coming back.
Now, could we see a short covering rally in here? Obviously, yes. But to see a V-shaped recovery in some of these names, maybe a little bit hesitant, because you still don't what the outcome looks like in terms of that top line revenue, for example. So I think we need evidence of clarity, evidence that makes investors more comfortable, and I think that will then stabilize sentiment. And that's probably going to take a couple quarters, at least from an earnings perspective.
BRIAN HESS: Still thick cloud cover.
JACK JANASIEWICZ: Exactly.
BRIAN HESS: We need those clouds to lift a little bit before we can get some certainty on there, or at least some comfort with the future.
JACK JANASIEWICZ: Yep.
BRIAN HESS: It seems like up until recently that AI influence on markets had been universally positive and was pushing up valuations across the entire marketplace, but that has obviously shifted this year. Software is just one example of that. Can you talk about whether AI as a technology, as a force is still good for markets on net?
JACK JANASIEWICZ: Yeah. I think the theme that we're seeing right now is AI is good for the economy, bad for the stock market. And you could take a longer term perspective on the economy, and is this ultimately going to be deflationary, right? Are you going to, at least maybe in the interim, ceasefire job replacements or job losses?
BRIAN HESS: Haven't heard that in awhile, deflationary.
JACK JANASIEWICZ: Yeah, exactly. I think when you get these new industries that pop up, it takes a little while for new jobs to then start to pop up to service those industries, which I'm sure that's going to happen at this point. But maybe in the interim, we do lose some jobs, which then becomes a little bit-- you know, growth gets a little bit hit on that front, because you have less consumers with a paycheck. And, obviously, the productivity gains that you could get from AI leads to prices being lowered, so you have this disinflationary bust, so to speak.
But again, longer term how this plays out, who knows? But right now, it's certainly good for the economy, bad for the stock market. That's certainly the theme that we're seeing right now.
BRIAN HESS: But you're saying the stock market could be foreshadowing—
JACK JANASIEWICZ: It could be something. Yeah, let's see what happens.
BRIAN HESS: --potential rockiness, even in the economy.
JACK JANASIEWICZ: Yeah, we'll see. Again, not our base case scenario. We're still pretty bullish here. But looking out longer term, you're talking three, five years, maybe that is something we need to start thinking about.
BRIAN HESS: It's a risk.
JACK JANASIEWICZ: Yeah.
BRIAN HESS: Now, software stocks haven't been the only area of the market experiencing volatility recently. I mean, we just witnessed an epic reversal in precious metals, particularly silver prices. I think they fell almost 50% in less than two weeks before stabilizing. They're sort of bouncing now, but still well off their highs.
And even mega cap growth stocks have been exhibiting stark underperformance this year, turning in negative returns, while the broader market's flat to higher, in some areas, doing quite well. And mega-cap growth had been on a great run of positive relative strength for a couple of years, so it seems like we're in the midst of some sort of momentum unwind. And, I guess, I'd like you to walk us through how you think about the process whereby positioning builds up, it hits an extreme, there's some kind of catalyst to cause it to reverse, and then we get an unwind that, hopefully, resets the deck for a renewed leg up. But can you walk us through that process? Because it seems like that's kind of in play right now.
JACK JANASIEWICZ: Yeah, and you know. I mean, you sit in our investment committee meetings and participate. We've talked about this in terms of a structural shift in the market right now. And A, you have people that are going to be momentum players, that are going to just basically keep buying what's going up, buy what's working, and you have a lot of the leveraged players that also come in on the back of that.
So whether that's CTA accounts, trend following accounts, just hedge funds in general, leverage players that can, basically, put more and more money behind that, and so buying begets more buying.
And what also happens, as that buying starts to continue to kick in, it actually suppresses volatility, right? And so, vol starts to drop, and then that begets the vol players who come in. So the risk parity funds the vol control funds. So as vol drops, they can take even more risk. So they start piling into these same trades, again, and then take it one step further, and I think retail has become a bigger portion of this place, as well, and a bigger portion of the marketplace. And the financialization of a lot of these assets, I think, is giving access to retail players.
So think about your gold example, right? Retail can now go out and buy a gold ETF. They don't have to be a CTA. They don't have to have a futures account. It's easy for them to get access to it. And on top of it, you can trade zero DTEs or 3x leveraged ETFs and get that exposure.
So put all these things together, and it's not surprising that you can get these massive run ups in prices. But then, all of a sudden, you get a vol spike, and those things all quickly exit just as fast as they came in, and you know the old saying, right? The door is only so big on the way out. And you get these huge outsized moves down, so it's up the escalator, down the elevator shaft.
BRIAN HESS: As that process moves into reverse, where—
JACK JANASIEWICZ: Exactly.
BRIAN HESS: --the vol spikes. Now, the risk parity funds are de-leveraging—
JACK JANASIEWICZ: Exactly.
BRIAN HESS: --and so on and so forth. And zero DTE, zero Days Till Expiration options, right? We don't want too much jargon here. Just want to explain that one.
So yes, we've seen a lot of fancy financial innovations that give retail the ability to lever up, and so they get this feeling, like this trade can't lose, and they're coming in on top of all these institutional flow to just exacerbate these moves. It creates a lot of volatility. Now, the interesting thing is that while precious metals, Mag Seven have seen positioning unwinds, other areas of the market remain in firm uptrends, and many of these uptrends have been in place since Liberation Day in April.
Like, international stocks come to mind, which just continue to march higher. Do you feel like the washout in precious metals or the Mag 7 coming under pressure is maybe, like, an omen for the broader market and a sign that, great, we're losing that participant, we're losing that part? Is it a risk to the overall stock market?
JACK JANASIEWICZ: We'll see. That's the easy answer.
BRIAN HESS: Right, right.
JACK JANASIEWICZ: You know, I part of what we saw was some concerns on the geopolitical backdrop, where maybe new money was no longer being allocated to the US markets, it was being allocated overseas. And maybe you had some positions that had gotten a little bit stretched in terms of US markets have run for quite some time now. I mean, we're talking years. You never rebalance back to target, and then you get the geopolitical headlines, and ehh, I'm a little bit extended. Maybe I'll rebalance back.
So you can see at the margin, there's some tinkering that goes on, where flows come out of the US or new flows are going elsewhere. And again, think about the size of these foreign markets. They're not very big. So the incremental dollar impact into the US market is certainly not going to be the same impact that you see overseas. The overseas markets are going to be much more impacted by that.
So I think that's the start of it. But I'm wondering now, is part of what we're seeing, hey, we're just trying to get away from the AI trade? We don't know where it's going to be impactful, and so we're just going to step back. We still want to be invested in the market, but we're trying to take some cover here.
So maybe is it the international developed market's a safe haven? And if you think about the old school economy, i.e. manufacturing, that's basically what international developed is. Whereas you think about what the US is, we're much more services based economy, and AI probably has a bigger impact on those services economies, if you will. So maybe the international backdrop is a place where you can kind of hide out and not be subject to this uncertainty, this lack of clarity that AI is presenting.
BRIAN HESS: You made an interesting observation, even within the US equity market, pointing to sectors, like materials, energy, staples, as doing quite well this year and being fairly immune to disruption from AI. So that goes back to the other topic we were covering, like in software stocks. The winners lately have been those that are more immune.
JACK JANASIEWICZ: Yep.
BRIAN HESS: It's an interesting turn of events, where AI goes from being this dominant driver of success to—
JACK JANASIEWICZ: Very good. You wanted it all in. You were happy with all the CapEx spend, and now it's flipped 180 degrees. We're not sure about CapEx spend, but careful what you wish for, because that AI CapEx spend is still a pretty big driver for US growth.
Too much, we've seen what happens. The market rerated you lower, because they're questioning the ROI on that. But too little, then we start to see a growth slowdown. So there's a little sweet spot in there that we have to find, I think, going forward.
BRIAN HESS: It's a delicate balance and worth watching. Absolutely. All right, well, before we wrap up, let's cover one more topic, and this is the Fed, because we've gotten some news there since the last time we chatted.
And so, we've been waiting and waiting to hear President Trump's announcement of the next Fed chairperson, and he finally made the decision, and it ended up being Kevin Warsh, which was an interesting-- I think it surprised many, an interesting choice. We knew he was in the running, but he wasn't always at the top of the probability rankings. So I think, first off, were you surprised by this choice?
JACK JANASIEWICZ: A little bit. I think when we start to take a step back and really look at the big picture backdrop here, we're talking about one person, and the Fed operates on a coalition basis, so to speak. And so, one person might have some input, but you still need to get seven other people on board to get to that majority to push through a rate cut, rate hike, whatever you're talking about. So certainly can set the agenda, but I think the impact and then ability to pack the Fed, so to speak, we've always been saying that that's a little bit over exaggerated by people. And so, we weren't quite as concerned about that.
BRIAN HESS: Yeah, I think he's much-- he's certainly a much more traditional selection than many had feared. There was this idea. You mentioned it, pack the Fed or Fed capture, and that had been behind this dollar debasement trade that had been running. And so, the correction we talked about in precious metals seemed to have been, in part, catalyzed by the announcement of Kevin Warsh.
JACK JANASIEWICZ: Yeah. And I think part of that is also, you know, he's an advocate of shrinking the balance sheet, and I think that's going to be a difficult challenge going forward. But that was partly of some of the stuff that you're talking about were fed into the concerns about liquidity maybe getting squeezed, and hence why some of the steam came out of the precious metals market.
The other one that people have been talking about, he's been a notorious hawk over his career for good or for bad. I think he's been on the wrong side of the hawkish call for quite some time, and that was also, I think, a little bit of the conundrum here. Because if he's a Fed appointee from the Trump administration, you'd think he wouldn't be putting a hawk forward. You'd want someone who's going to be willing to cut rates.
BRIAN HESS: I thought there was a litmus test, that you'd be willing to cut rates before you could—
JACK JANASIEWICZ: Exactly. So it's kind of an interesting backdrop, but again, we're talking about one person here.
BRIAN HESS: Right.
JACK JANASIEWICZ: And I think the market's overreacting to some of this.
BRIAN HESS: So with that, how does it impact our thoughts on Fed policy for the rest of this year?
JACK JANASIEWICZ: For us, it's still going to be the same thing, right? It's still a function of the economy, and it's still a function of growth and inflation. And we continue to look at the labor market, and I know the January jobs print seemed like it was a blowout number. But beneath the hood was kind of so-so.
We were still thinking the labor market is cooling, and that's probably going to lead to some continued downside pressure on prices. And as a result, inflation continues to head lower, and the risk will still be on the labor market side. And this is what we've been saying for quarters now. The biggest risk to the market remains the labor market side, and that leans dovish for the Fed.
BRIAN HESS: So rate cuts are a distinct possibility?
JACK JANASIEWICZ: Yeah. I think, what, they disappeared, I think, back to one? And I think, now, we're up to two and a half potentially just on what terms.
BRIAN HESS: Yeah, we've got two fully priced by October, one fully priced by July.
JACK JANASIEWICZ: Right.
BRIAN HESS: And so, I guess, that seems reasonable given our macro—
JACK JANASIEWICZ: Totally agree.
BRIAN HESS: --outlook.
JACK JANASIEWICZ: Yeah.
BRIAN HESS: All right, well, thank you, Jack. It's been good catching up again. And I have to say, congratulations on the 50th episode. You've been involved since the very beginning. I only joined well into it. So congratulations, job well done, and it's been a lot of fun doing this.
JACK JANASIEWICZ: Well, it's great working with you. I'm glad to have you aboard, and happy 50th.
BRIAN HESS: Exactly.
