Broken Pie Chart

Derek Moore is joined once again by ZEGA Financial CEO Jay Pestrichelli to talk yield curve inversion. What is the yield curve inversion and why do investors care? Plus, reviewing historical precedent on prior yield curve inversions prior to recessions. What is the average time to recession from yield curve inversion? When has it not worked? Later, they discuss inflation's effect US Large Cap earnings. What are the consequences from higher inflation? What about deflation?

What is the yield curve inversion?

Why 10-year US Treasury minus 2-year US Treasury yields are watched by market prognosticators

What about the 5 year and 10-year treasury inversion?

Reviewing historical yield curve inversions and recessions

Idea that inversion alone doesn't cause a recession without a catalyst

What does higher inflation mean for corporate earnings?

What does higher inflation mean for net profit margins?

Touching on deflation effect on companies

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Jay Pestrichelli Book Buy and Hedge https://amzn.to/3i2UZoL

Derek Moore is joined once again by ZEGA Financial CEO Jay Pestrichelli to discuss whether now is finally the death of the 60/40 portfolio? A Bloomberg article points out when 10-year treasury yields move up or through long term channel resistance things happen. Plus, travel back in time to 1982 where we read some expert comments in NY Times article around predictions on interest rates. Finally, how markets have historically done in midterm election years.

Bond yields spike while the curve flattens or inverts

What happens historically when the 10-year treasury yield moves to long term channel resistance?

Equities during midterm election years

Reviewing year to date total returns in US Aggregate Bond Index (AGG) vs the S&P 500 Index (SPY)

How bonds may not provide the same protection this time.

How housing prices still rose even during a 10-year period of high inflation and rising interest rates.

Going to the archives of a 1982 NY Times article when the 30-year treasury yield was pushing 16%

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Jay Pestrichelli Book Buy and Hedge https://amzn.to/3i2UZoL

Derek Moore is back to talk about inflation and how there are some misconceptions about what happens if inflation subsides. At the same time, many things we use are enjoying decades long deflation making them cheaper to use. Hint: long distance calling. Plus, why low interest rates do and don't cause inflation. Will raising rates reduce oil prices? Supply and demand is still king.

What are some misconceptions around inflation?

Inflation coming down is a reduction in the upward rate of change

How to inflation adjust prices across periods

CPI Consumer Price Index

Low interest rates and inflation

Discount rate for future earnings in stocks

Housing and asset price inflation

Oil prices and supply and demand

Oil rig counts and inventories

Will raising rates cause a recession?

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

CPI Consumer Price Index historical https://fred.stlouisfed.org/series/CPIAUCSL

Derek Moore is joined once again by ZEGA Financial CEO Jay Pestrichelli to discuss why volatility remains high. How the VIX Index stays elevated even after the initial reasons subside. What is driving the market pricing of the S&P 500 Index and how it compares to prior 10-year periods. Plus, comparing this high oil price period to prior ones on an inflation adjusted basis.

What are driving returns right now (earnings or multiples)

Is the market getting cheap on a forward PE multiple base?

Comparing 10-year periods (referencing Sempres Augustus letter)

Looking at price inputs like revenues, share count, margins, multiples, and dividend yield

Is the embedded volatility premium (VIX Index) here to stay?

Discussing oil prices on an inflation adjusted basis

When do high oil prices matter?

When does inflation matter to the economy and margins for companies?

Will CPI released in April for the month of March reveal a +10% YoY?

Plus, Derek admits a bad beat on the contrarian corner

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Jay Pestrichelli Book Buy and Hedge https://amzn.to/3i2UZoL

Sempres Augustus letter (see page 24 for where returns come from) PDF https://static.fmgsuite.com/media/documents/8b3d617a-4dc3-4dec-a621-23b1f6333833.pdf

Derek Moore explains in easy-to-understand terms what risk parity strategies are. Plus, he explains Harry Browne's Permanent Portfolio and Ray Dalio's All Weather Portfolio. How standard deviation is used and how some versions use leverage including futures to create risk parity weighted exposure.

What are risk parity strategies?

What are All Weather Portfolios?

What is the Permanent Portfolio?

Equalizing risk via standard historical deviation

Using futures to create leveraged notional value

What are the risks in a rising rate environment?

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Derek Moore relays how markets have done historically around geopolitical events. Plus, how being hedged allows investors to stay in the market. Interesting stats on markets 1-year later after drawdowns. It may surprise you. What the latest Russia/Ukraine situation means for inflation and interest rates.

How markets perform around geopolitical events

Does the Russia conflict increase inflation risks?

Will the Fed raise interest rates less in 2022 now?

Energy prices and inflation

Commodities rallied in the short term

After corrections how do markets do a year later?

What percentage of corrections turn into bear markets?

Market corrections vs bear markets

Historical market returns after worst days, 3-months a year later

Probability of Fed ¼ point vs ½ point rate hikes

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Cleveland Fed Inflation Nowcast https://www.clevelandfed.org/our-research/indicators-and-data/inflation-nowcasting.aspx

Atlanta Fed GDP Now https://www.atlantafed.org/cqer/research/gdpnow

JP Morgan Guide to the markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

Fed Rate Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

CNN Business analysis on inflation with higher oil prices due to Russia Ukraine conflicthttps://www.cnn.com/2022/02/15/economy/russia-ukraine-inflation/index.html)

Mohamed El-Erian from Allianz discusses impact of Russian Ukraine conflict on 2022 Fed interest rate moves https://www.youtube.com/watch?v=Yh-RKSbS_hI&t=22s

Schwab market correction article showing corrections and bear markets since 1974 https://www.schwab.com/resource-center/insights/content/market-correction-what-does-it-mean

Table with market shock events and stock market performance historical https://www.investopedia.com/solving-the-war-puzzle-4780889

Derek Moore explores how stock and bonds have done after the Fed starts raising rates. Is there any difference between when they raise greater than 1% compared to less than 1%? Why people should be surprised in March when February CPI numbers are released. More debate about what caused inflation. Plus, stocks continue to rerate with multiples contracting while earnings are up year to date.

Examining stocks and bonds after the Fed starts raising rates

Inflation causes

February CPI released in March indicated to be high still by Cleveland Fed Nowcast

Supply side vs demand side inflation

How fiscal policy contributed to inflation

How have high yield bonds done after the Fed starts raising rates

Small caps vs large caps after the Fed starts raising rates

Cleveland Fed Inflation Nowcast

Atlanta Fed GDP Now

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Surprising stock market returns by President, Senate, and House party make up podcast. https://podcasts.apple.com/us/podcast/surprising-historical-returns-by-presidents-senate/id1432836154?i=1000489545724

Cleveland Fed Inflation Nowcast https://www.clevelandfed.org/our-research/indicators-and-data/inflation-nowcasting.aspx

Atlanta Fed GDP Now https://www.atlantafed.org/cqer/research/gdpnow

JP Morgan Guide to the markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

Fed Rate Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Jay Pestrichelli, CEO ZEGA Financial, is back with Derek to say congratulations to our government debt reaching $30 Trillion! What are the ramifications of high debt levels? What the interest on that debt could be if rates rise? Does this put pressure on the Fed NOT to raise rates so much? Plus, interest in hedging at the highest levels since April of 2020. Is that a sign of contrarian optimism for the stock market? And contrarian corner is back where we each give some contrarian picks that go against the grain.

US Debt – debt held by the public vs. overall debt

How much of the budget do net interest payments make up?

Average interest rate US pays on Treasury bonds

Effect of rise of 1% in rates to interest payments on debt

Political pressure to keep rates down?

Treasury bonds do not have call provisions

Investors are buying put options

Hedging appetite highest since April of 2020

Contrarian Trades Emerging Market Value – Betting Against Too Many Rate Hikes

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Jay Pestrichelli Book Buy and Hedge https://amzn.to/3uRbuMa

Average maturity of US Treasury debt https://data.nasdaq.com/data/USTREASURY/AVMAT-average-maturity-of-total-outstanding-treasury-marketable-securities

Average interest rate on US Treasuries https://www.treasurydirect.gov/govt/rates/avg/2022/2022_01.htm

Marcel Benjamin explains how TIPS bonds work https://podcasts.apple.com/us/podcast/tips-inflation-protected-bonds-explained-interest-rate/id1432836154?i=1000535445537

JP Morgan Guide to the markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

Fed Rate Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Derek Moore discusses how the recent selloff is due to a multiple contraction rather than an earnings one. How 2021 and now so far in Q1 22 stocks are rerating by shrinking the multiple. Plus, what the shape of the yield curve is telling us in light of expected Fed action on interest rates.

Driver of stock prices multiple declines vs earnings expansion

PE Ratios coming down on a forward basis

Earnings estimates on the S&P 500 Index for 2022 only shrink nominally

What is the yield curve

Yield curve steepness vs inversion

What the yield curve is telling us about views on continued economic expansion

Inversions before recessions

Inflation breakeven rates

Probability of Fed hikes updated

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

Marcel Benjamin explains how TIPS bonds work https://podcasts.apple.com/us/podcast/tips-inflation-protected-bonds-explained-interest-rate/id1432836154?i=1000535445537

JP Morgan Guide to the markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

Fed Rate Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Derek Moore discusses how markets have experienced selloffs but many times wind up positive at the end of the year. Plus, answering questions around small caps and the Russell 2000 Index ETF IWM PE Ratio. How the index differs from others in not including negative earnings in the computation. Then, watching latest inventory data reported this week.

Intrayear stock market selloffs vs end of year total returns

PE Ratios computation in Russell 2000 Index ETF vs S&P 500 Index PE calculations

Most indexes just aggregate all companies earnings

Index divisor to convert index market cap to index levels

New inventory levels show GDP was buoyied by restocking during Q4

Mentioned in this Episode:

Contact Derek Moore [email protected]

Derek Moore's Book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547?ref_=nav_signin&

JP Morgan Guide to the markets https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

Fed Rate Probability Tool https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html