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bringing Tom Lee funstract Global advisors co-founder and a CNBC contributor right here at post nine as well as Warren pies co-founder of 314 research guys great to see you both appreciate you joining in the home stretch of the week toward the weekend Tom um yeah I think I frame it as a debate because the numbers are definitely encouraging in that Goldilocks manner not too hot not too cold you are seeing inflation move the right way you are seeing the labor market soften up but not fall apart on the other hand none of it's inconsistent with either sticky inflation or we're headed toward some kind of an economic downturn so where does that leave the market entering the new month uh well I think you've definitely described why investors are bifurcated you know there's folks who see hawkish things and bearish things and they stay bearish into the September and on the other hand I do think there's a lot of evidence of the soft landing and that inflation's on a Glide path much lower and given how hesitant people have been and how much cash is on the sidelines I think that resolves positively but the reason I would sort of emphasize that view is I think companies have been really managing this exceptionally well I mean X energy second quarter earnings were up three and a half percent year every year I mean the earnings recession has ended so we're in a profit recovery cycle as well the No Doubt about it you've seen an upturn in the uh in the forward estimates for uh for the S P 500 earnings although part of the August story when we got this ShakeOut we got this five or six percent pullback you definitely saw sentiment cool off but part of it was a rate scare in the sense of long-term bond yields going up to levels which at least recently have been uncomfortable are we out of the woods on that front what do you uh how do you interpret the way the stock market has tried to digest that uh it's I think it's two ways and again this is where it's indecisive because what we're seeing is a bear steepener uh which it's actually generally good for stocks because it's it's reflationary but we know when like today yields popped yields were higher today on a soft job support we know that hurts tech stocks so I think markets are reflective reflexively still reacting to higher rates and its rates are unpredictable so I I would have liked to have seen rates fall long-term rates but I what they're up today sure um and and Warren uh in terms of not really just the rate story but even the internals of the jobs report the general run of economic data which has somewhat cooled off what does that tell you in terms of where we might be going what the market has seemed to to price in from here yeah I mean I think that at this point it's clear to everybody that we're getting to be late cycle so even just a few months ago there was a kind of an open debate or where are we in the cycle and at this point in time uh you know we're starting to decelerate and that's pretty clear uh you know obviously we're creating fewer jobs the revisions are getting worse I mean that's something you see around recessions or in to slow downs where you get Negative revisions month over month we've had that through the beginning part of this year uh something we look at is residential construction payrolls those continue to decline and you're getting negative revisions there too so uh all these things point to a late cycle type of environment and then as Tom's alluding to you kind of have to ask yourself uh are we going to end up with the soft Landing or hard landing and that's a tough question to answer because I think at this stage of the cycle both of those outcomes feel the same you start decelerating on the data you start having a a softening of the labor market the very first signs of softening and it can go either way the the odds historically are that we're going to end up in a hard Landing soft Landings are really rare uh the bear steepener I agree with Tom we just had a bear steepener but when you get a bear steepener out of an inverted yield curve that's usually before you enter a recession and the most important thing here is not predicting the right outcome it's understanding what's priced into various markets and I would argue that you're not being paid to bet on a soft Landing anymore that right now markets in general are already pricing that in so if we get that outcome you have to look ahead and say okay what's next I think that under a hard land he's actually kind of underpriced at this point in time so you know that's the I think we all agree kind of on the lay of the land and the weakening of the data it's just a matter of what's priced in the markets here yeah I agree with you that it is a bit of an eye of the beholder situation because you can't fully extrapolate from here how the the numbers are going to go and interesting though I've been with you on this idea look it's hard to argue you're not late cycle when when the unemployment rate's already three and a half percent and the FED has had this you know tightening campaign they're just about the end of it that kind of defines a later part of the cycle on the other hand you've had a retrenchment in manufacturing you saw the ISM Manufacturing pickup housing got blasted but then maybe is showing uh maybe some signs of Life who knows and then the corporate earnings cycle maybe also had a little bit of a dip and a comeback so how does that play into this idea of of how exactly to price this moment in the cycle it is a weird cycle I mean everyone has to have there's a large forecast uncertainty at this point in time I think that housing just to take one point you brought up housing it's showing resilience but I would argue it's not re-accelerating and so there's been a bit of a confusion that uh the housing market is just kind of taking off from here we're actually seeing prices up and we're seeing starts continue to Trend lower I mean starts single family starts went from over a hundred thousand a month down to 70 000 a month and they're still kind of and you're seeing job losses in that segment of the economy as well so you know to me this is resilience it's not re-acceleration and that's the key is that we're in this cycle where fiscal spending has supported this cycle for a long time it may continue to do that for a while and where this long cycle is drawn out but re-acceleration it's I think that the PMI data has gotten screwed up this cycle already so I'm not going to really I'm putting that in the Penalty Box as far as earnings go uh you know it's priced in at this point in time you have double-digit earnings growth for 24 or double-digit earnings growth through 25 margin expansion for both years that's optimistic what happens if we we undershoot that if the hard Landing uh scenario starts to get repriced and then you usually go to Bonds in this scenario and that's been a big problem for stocks but usually at a Fed pause bonds are trading uh basically right in line with the FED funds rate and at this point in time you're seeing that this is the 10-year the 10-year is right now like 125 basis points below the FED funds rate so bonds are already priced from the cut cycle so across the asset Spectrum everything's priced for this soft landing and fed cutting rates what would you say to that Tom I mean you do have an S P 500 at you know 18 19 times forward earnings certainly not out of the realm but not cheap uh and you know the idea that this is a little bit of a disjointed cycle it's hard to handicap uh yeah I mean I heard all warrants points uh typically though a recession is a sudden change in business conditions because of Leverage or commodity shock we've had those shocks already we had two quarters of negative GDP last year businesses aren't over levered and households are not over levered in fact next year if the FED pauses mortgage rates could drop which is a huge easing of household Financial conditions um so and when it comes to valuations you know X the fangs the Market's really at 16 times which is not demanding and typically early in a cycle you get huge multiple expansion we haven't had that yet so I would say it's we it's undecided but I think a soft Landing stocks have 20 upside still sort of valid view I did mention that you know even today of course you see our performance by small caps some cyclicals the bank stock so on a given day you do start to see traction and the cyclicals did not really give way even in the August uh downturn on the on a relative basis you think the FED has done Tom I mean is this is this it yes that's one thing we're watching for this month I think when we get August CPI yeah I think the FED probabilities for both the September and November hike dropped to zero and it's seven percent and 35 so there's still a huge way to go and I think that's going to change positioning in fixed income and it's going to boost equities as well what about the idea that historically the first great card isn't necessarily A bullish sign I mean I know there's exceptions to that yes but you know as we all know like this hasn't even been typical cycle because normally stocks rise into the first few hikes and they you know fell 27 yeah even before the first one yeah exactly um Warren you mentioned that um It's tricky to maybe head for Bonds in this scenario even if you think the economy has some risk to it but you do prefer Commodities what's the the rationale there well this is the late cycle Playbook you know and as Tom talked about at the end of these Cycles you usually end up with some kind of commodity shock and that's specific to oil I mean that's the largest weight within any commodity index and uh right now we have the Saudis basically driving prices higher with a massive unilateral cut and at the end of the day demand has not fallen off a cliff in the United States it's not going to I think there's still strong underlying demand late cycle doesn't equal recession uh and China's honest counter-cyclical path to the United States and they're they're digging out of zero code but still so I think the backdrop is positive for oil prices and commodities here for a little bit longer and so that's that's our favorite spot I would put I would agree with Tom on one other thing is that I think the FED is done here and I think that the first few weeks of September into that fed meeting could be a little bit of this relief rally but I look for the FED to raise that terminal rate and that to me is the last lever that they pull in this cycle as they start trying to boost terminal rates that's where the the FED funds rate ends up at the end of the cycle the last time I did that was 2018 it was a lot of indigestion for for asset Market spawns and stocks so that's that's something I'm watching yeah I guess that is the question Tom because you know there has been this case well the stock market's banking on rate Cuts because they were priced in the forward curve we keep pushing that out when the rate cuts are priced in uh is a bullish case contingent on relief on on the FED funds rate within sight Michael because next year let's say inflation the Run rate is down to three and the FED funds is five and a half that's a massive real tightening of financial condition so that could as Warren says that could tip as easily into a recession so I think if the FED is trying to avoid huge job losses and not so worried about what Equity prices are doing I I think they'd be cutting next year yeah I mean that is the question I mean clearly that's why the inflation numbers need to move in their direction for them to have some kind of flexibility on that front final Point Tom you mentioned that you know it is the Fang complex that is magnifying the valuation of the overall index does that mean avoid that area or are they operating on just like a different energy source uh it's a great question you know I used to do wireless ad so I was a tech analyst for 15 years you should never sell a tech stock on valuation so for the fangs as long as they have visibility and positive revisions their multiples can go up far more than most people would like to see so it could get very uncomfortable yeah it's true if it does continue like this all right Tom Warren I appreciate it great conversation thanks very much we'll see you again
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