David Hunter：美联储刚刚加息，你需要知道这些｜The Outlier Podcast

Today is FOMC. Warsh just announced a 25-bps hike, which the markets seem to have priced in pretty well overall coming into the event. I do a lot of trading, obviously, and there's some pretty defined index and VIX activity coming into different events. This one was a little bit different in that small caps were trending quite a bit lower than they typically do into either an expected hike, cut, or hold, so that was interesting to me.

But before we talk about where the path forward is, I do want to get your thoughts on the lead-in to this hike that we just got, because obviously there is a lot of disagreement. I don't know what was happening behind closed doors—nobody knows—but there was a lot of disagreement in the market about it, as well as between Trump and Warsh directly. Obviously, Trump has called for rates to go in the other direction. So, what was your impression coming into FOMC, and what were your expectations?

Sure. Hi, Eric. I did expect the rate hike today. A quarter-point hike is not a surprise. I don't think anybody was surprised; 90% of traders were expecting it, and I just didn't see the Fed going against that. If you've got that kind of strong expectation, it's usually not a good idea to go against it.

I realize Warsh is his own man and says, “I'm not hostage to the markets.” The markets, over time, are kind of—we don't want to be telling them what to do. We don't want to be giving them forward guidance and then having them react to us; we want them to react to the economy, the data, inflation, and so on. I wasn't surprised, given how strong the expectation was.

It's funny: In his press conference, he pretty much said, “I look at the markets, but this decision was based on the committee's decision, based on the data, based on everything we look at.” Whether that's true or not, I really think the Fed rarely is going to go against that kind of strong expectation. So, the quarter-point didn't surprise me.

The markets, as you say, are pretty well behaved here. The Dow is down 1%, but most of the markets are pretty well behaved. The Nasdaq, at least the one I'm looking at—I don't know if my thing's updating—shows it up a little. Is that right?

Yeah, that's exactly right. One interesting thing I just want to mention is that after the initial hike came out, everything was still up, and it wasn't until the press conference that we saw E-minis and small caps dip slightly negative. So, that's an interesting point, I think, but it's super common, by the way.

Yeah, I think his comments probably surprised people a little. Traders saw the hike and said, “Yeah, that's what we expected.” The market basically said, “That's discounted,” and they took it. With the press conference, I think maybe they were a little surprised that he was talking so strongly about price stability being our biggest goal. We need to look at that.

He said that, when he and the committee looked over the course of what's been going on lately, they felt they were a little behind, that they weren't restrictive enough. I think the committee would tend to agree with me that the policy is not restrictive. Yet, over the course of the last month, the economy strengthened. All the data we look at generally would lead you to believe the economy is strengthening, not weakening, and that inflation is strengthening, not weakening—or is certainly above target by quite a bit—and isn't going the right way yet.

That may have taken the market a little aback. They said, “Oh, he's more of a hawk than I expected.” Frankly, I think the market's pretty well behaved here. Obviously, he wasn't going to come out and say, “Hey, everything's rosy. This is a one-time hike. We're going back to…” He's not going to say anything like that.

So, I think he came across as a little bit more hawkish than they initially expected, but overall I don't disagree with what he's doing, and I don't disagree with his comments. I think he's behaving as a Fed chairman should. Frankly, we don't know what's really in his head.

Clearly, most of the committee—I think you'd have to be pretty blind not to expect that most of the committee was expecting a hike. They wanted a hike. Even if he disagreed, I don't think he'd be out there saying, “I disagree with 11 committee members, and they outvoted me.” He's going to go along. It was a 180-degree decision, I guess, and I just don't think it's a big deal.

I think it's what was expected. It's the first hike in 3 years, so that gets headlines. Some of what you have to step back and realize is that it's really a statement that the economy has been surprisingly hanging in there despite oil prices going from the low $60s to over $100. That's a big statement: They've been able to overcome that, been able to overcome $6-plus diesel fuel prices, and some other commodity prices have moved up.

Yet, the market is now probably 3% off the S&P's all-time high. To me, that speaks to the strength of the underlying market. It speaks to the fact that the stock market isn't panicking over a quarter-point hike, the first in 3 years. It speaks to the fact that we have very strong earnings that are continuing to propel the market.

My expectation—I don't pretend to know what's going to happen in the next day, 2, or 3—but my expectation would be that whatever sell-off we get here is pretty short-lived, and that a quarter-point hike is not going to get in the way of this bull market.

So, a couple of follow-ons. The first one is, do you think there's any sort of significant follow-on probability for additional hikes? Do you think that this quarter-point hike is enough to accomplish what they're trying to accomplish?

Yeah. I listened to some of the dialogue on CNBC prior to the Fed meeting, and it was interesting. There are different opinions out there. Somebody made the comment, “They're called Fed hiking cycles for a reason.” They were making the case that, if you have one, you could have more.

I disagree. There are other people, I think, who would agree with me that this might be a one-and-done. You could make the case that core inflation got boosted by the Iran war and by the big run-up in oil prices, but the last release from CPI—core CPI—was 2.4-something. So, you can make the case that, getting away from the more volatile oil factor and other volatile factors, underlying inflation is still very much intact and contained, and that inflation expectations aren't really running away here.

I get that, from the Fed's standpoint, they want to nip it in the bud. They want to make sure. But I think this may be a one-and-done. Warsh isn't committed to that. The Fed, if you ask Fed members, may actually say, “Yeah, we're probably going to hike again in December,” or what have you, or they may lean toward that. But I think as we go through here, we're going to find that inflation is still well contained and that there are issues like housing that are being hit by higher rates.

I don't think they're going to—we'll see what traders do over the next couple of weeks in terms of pressing their luck and seeing whether they want to price in more—but right now the bond market's pretty well behaved. It may be down a couple of ticks on rates, but it's only a couple of basis points on the 10-year. When I came on, I guess it was 5%, so it's pretty much in where it's been.

Personally, I think the economy is slowing and that there are things that will be slowing. I think that, with rates having moved up here in the last month, it's having some impact. As data comes in over the course of the next couple of months, I think you're more likely to see slowing than not.

What complicates that is that the manufacturing side and the AI-driven side are so strong. But the part that the Fed really controls, in terms of the consumer and housing, is only going to get harder for them.

Yeah. Yeah. Did you see—I even think it was yesterday—that 30-year mortgages were just over 7%? I think they were 7.17% or something.

Yep. I think they may be over 7.2% today. You're already seeing a slowdown in certain real estate markets—the Dallas area, the Atlanta area, and other areas in the South. It can't help it. Housing has always been an important part of our economy, particularly at the margin.

I would just caution people not to extrapolate too much from one meeting. I realize they're saying, “Well, it's only happened once before that it's been a one-and-done.” I don't care about precedents.

Warsh has made it clear that he's all about today. He's not driven by something that happens in history or what's the norm. He's been very honest and straightforward: “I look at trends. I look at the data trends. I take all of it into account and then come up with my best guess of what we should be doing at this moment in time.”

And he's not going to give you forward guidance because he doesn't have it. He's got to see how the data comes in. Again, we're not going to be, as a Fed, out there giving forward guidance.

What I think is interesting, as an aside, is my perception in listening to some of the voices over the last hour prior to the Fed meeting and the Fed release. Clearly, in my opinion, people are still fighting that war of, “They don't like that Kevin Warsh isn't giving forward guidance, so they're still saying that's a mistake,” or they're still trying to make this into something.

He's still got people he's got to win over. They don't like the changes. They want to be spoon-fed. Then you've got Steve Leeman at CNBC cheerleading it along. They have their biases, and you see them in their commentary. They'll deny it all day long, but clearly he's doing something different, and these guys don't like change.

What do you think of the removal of forward guidance? That seems to have really caught some people's attention more than I expected, but I also don't know if that's been done before. You would have a much better line of sight on that than I would. What's your take on that?

As I was thinking when you asked the question, having been a Fed watcher going back to 1973, I've seen plenty of different regimes in there and plenty of different styles. There was a time—I can't remember exactly when it was—when we were watching M1, and that was all we cared about every Thursday: “What's M1?” because that's how the Fed was going to determine policy. Obviously, we don't even have M1 to watch anymore. It went away anyway.

We go through these periods where things change, and it takes the markets a while to get used to it. I agree with what he's doing. He's absolutely right when he says, “I don't want the markets trying to determine rates by what we think, by what our guidance is. I want the markets to figure that out based on their analysis of the economy and the data.”

He's absolutely right. They're a group of people who have power because they're on the FOMC. That doesn't mean they have more ability to call future inflation or future interest rates. Having spent 50-plus years in the market, I'm a huge believer that markets are a much better predictor of the future in terms of inflation and the economy.

It doesn't mean they always get it right, but it's the law of large numbers. I don't mean to say any one person or any group of people in the marketplace has a better idea or is what you should follow. But when you put all the market forces into a response in terms of what the market is doing at any point in time, that's the law of large numbers, and it tends to be a much better predictor of the future.

That doesn't mean it goes in one direction. It can be all over the place, but ultimately I put more faith in what the market tells me than any Fed chairman or any Fed member.

I think Warsh would agree with that. He's not looking to the market for guidance, but he does believe that it's not our opinion on where we think rates are going that matters. It's what the market in the aggregate decides. The market determines rates—

Right.

—and then self-corrects. Going back to rates, right now it looks like there's a probability of at least 1 more hike this year. Right now it's showing December at around 52% at 4% to 4.25%, and then 35% at 4.25% to 4.5%, with a 13% probability of no change. How does that strike you?

That probably makes sense. Given what he said—that they're worried about price stability and want to make sure they're ahead of the curve, or that they get on top of the curve—it makes sense that traders would be slightly over half toward saying, “Well, this isn't the last hike.”

On the other hand, it's not like they're running right up to 70% or 80%, at least not at this moment. I wouldn't be surprised by that number, but I think you'll see, as we move away from this meeting—not necessarily tomorrow or the next day, but in the weeks to come—that number is going to trend down, not up.

What does that mean for federal funds rates going forward? Do you think after this hike we stay relatively static and then, at some point, go back down? Do you think this is a new normal? What's your take on that?

I've been pretty consistent that I'm in the camp that says rates are at a top. Basically, we're at a 3-year top. You went back and retested 5% in October 2023. Right now we're at 5.016%, so we're through 5%.

As you well know, with lots of tops and bottoms, you go through that level by a little bit and then reverse. I'm not saying we can't go a little higher on rates, but I think we're in the area of a top and that rates will be heading down in the not-too-distant future.

Ultimately, as I've said for a long time, I do believe we're moving toward a global bust, toward a recession, and ultimately something worse than that because of leverage. In that bust, you could get a 0% 5-year.

I'm either going to be all wet on that because I'm way outside the consensus, or I'm going to be dead right or dead wrong.

Going to some basic mechanics for a minute, out of my own curiosity, how long does it take for a hike like this to be fully integrated across the financial system? Secondarily, how long does it typically take to see the effect of it? Is it a 6-month thing? I've seen a lot of different research and calculations on these things, but I genuinely don't know the best way to think about it.

Frankly, a quarter-point hike will impact certain things. Like I said, it pushes mortgage rates up and loan rates up. But a quarter-point hike isn't something that's going to stop an economy on a dime or maybe make much of a difference, because companies and consumers are out there buying, and companies are placing orders. They're not going to say, “Wow, that extra quarter point means I'm not doing that.”

I think generally it's more of a signal that the Fed is tightening or wants to be a little more restrictive. Psychologically, I think it has more of an impact than any real change in how it impacts economic activity, except in very interest-sensitive areas like mortgages.

From a standpoint of discounting in the market, it can happen pretty fast. It could be a day or 2 or 3 days, depending on what comes after that. It's really what comes next that either reinforces that move by saying, “Oh, yeah, that's just the beginning,” or comes back the other way and says, “Maybe they jumped the gun a little bit here. The economy is not as strong as I thought it was, or as strong as they thought it was.”

What comes in the days and weeks to come, in terms of the data that either supports the hike or refutes the hike, will matter. The instant reaction is pretty fast. You're now at almost 5.02% in bonds, and the S&P is off 72 points, so you're seeing a reaction now.

I can't predict what it will do tomorrow, but I would expect that whatever this is—disappointment or surprise at his comments, or reaction to his comments—usually takes place over the course of the next 24 hours or a little more.

Do you think there's any effect around when the meeting minutes come out, or is that normally just performative—“Here are the minutes”?

Rarely. Once in a while, there's a real question mark: How did the committee split, and how split was it? What was the underlying thought process that led to that surprise, whatever that was? Then it can have some impact because they don't know. They're waiting, and they get more clarification in the minutes a month later.

But generally, on something like this, where it's a unanimous hike and you pretty much know where the thought process is coming from, I think the minutes are kind of—it's almost like a revision on GDP.

By the time you get to the 2nd or 3rd revision, you go, “Yeah, it doesn't matter.”

Right. Okay, that makes sense. We obviously just had some fair economic news come out. What else is catching your eye from the more macro level for now? Then we'll get into the asset-class level in a few moments, but at the macro level, what sticks out to you?

Yeah, I think there are 2 big issues. Today's issue was one of them, but there are probably 2 other big issues hanging over the market. Iran is one. Well, Iran and oil prices are one. You can't escape that, especially the fact that we ran from the high $80s and low $90s into $105.6 on crude in just a couple of days. That gets people's attention, and again, if you look at a chart, it's momentum. It's going the wrong way if you want to see oil prices come down.

That has the market nervous, and I think it's something you have to watch. I personally believe that, again, just like rates, I don't think we're very far from a rollover. I realize the evidence right now—the burden of proof—is on people like me who think oil prices are going to head lower, not higher. But people are so pessimistic about what's going on in Iran, and you start hearing things like, “This is another Iraq and Afghanistan,” or, “This is just like Ukraine and Russia. This is going to go on for years.”

I just don't think that's the case. What I do think is that Trump probably tipped his hand a little bit when he said, “I'm not worried about the election, and we're probably not going to see any resolution at least until after the election.” I think reality sets in that he understands, as we all should understand, that Iran knows there's a midterm election. They probably knew it anyway, but they've been helped along by the left in this country, encouraging them to say, “Do anything you can to help us hurt Trump,” and then hurt Republicans in the midterms.

They're much more allied with our left than anybody else. They're not allied with our right in this country, that's for sure. So I think he's come to the realization that he can't worry about the election in terms of trying to get a deal. He's not going to get a meaningful deal with them. He's pretty much said, “Whatever happens, happens between now and the midterms. I'm not worried about it.” But after the midterms, they lose their leverage, if they thought that was their leverage.

I think the likelihood is that nothing really major happens between now and the midterms, but that period after the election, between then and the time new members take office, gives him a couple-month window to get whatever he has to get done. That will be an interesting thing to watch.

Rates are obviously important. I think we need to see the dollar and rates come down, or I think we're going to see that. Ultimately, if they keep going in the wrong direction, at some point the markets will get hit by that, but I don't necessarily expect it. The other issue is the midterm elections. I don't know how to factor them in for the markets because you do have that period after the election; it's not like they take office immediately.

But if the numbers show that the Democrats get control of both the House and Senate, number 1, you can pretty much say Trump is a lame duck. He may be more than a lame duck because they're being very clear that they want to impeach him. I think they'll probably make a more concerted effort than the first time, when they impeached him a couple of times and it didn't matter.

They've also been pretty clear—at least the more extreme end of their party, while the others aren't fighting them on it—that they want to pack the court and do away with the Electoral College. The more extreme factions even want to do away with the Senate. When you add it all up, the market would have to react to that at some point. If the left gets any kind of serious control here without checks and balances, I don't think that would be a bullish factor.

I'm not saying that ends the market here, because I do think you've got a few months before you have to worry about that.

It's funny—you talked about 2 things. I have 2 things on my notes for you, and you already hit one of them loosely, which is Iran. The second is the midterms. I just finished a massive bit of research on midterms. I refresh it every time we go into the cycle. It's just a really interesting market effect for me to trade.

This one, as you point out, does seem a little more charged in different ways. If you think about the midterms and potential outcomes, how does that impact your broader thesis of the melt-up? I think the last time we spoke, you were talking about the S&P up to 10,000. You raised it from 9,500 when we spoke, I think, and the Nasdaq to 36,000 from 32,000. I think the Russell to around 4,000. I don't know—

That sounds about right. That's exactly right. Yep. And the Dow at 70,000. I have not revised any of my numbers. Those numbers are still my numbers.

The only change I had in my 3rd-quarter letter was raising my copper target from $8 to $9. Other than that, everything is pretty much what it was when we talked back in June, and I'm not feeling like I need to revise anything. Everything I see says full speed ahead.

Again, you get these little sell-offs around things like Fed meetings, oil-price hikes, oil-price rises, and things like that. But underneath the surface, earnings still look good, and I don't think that's going to change. If I'm wrong, then I may have to change, but rates right now, to me, are in a peaking area, not something that's going to go a lot higher from here.

Pretty much everything is unchanged: very bullish on stocks, very bullish on the metals, and at the beginning of a bull market in bonds.

So how do different scenarios in the midterms affect that? Let's say the Democrats don't win either chamber. That, to me, would probably be bullish in your eyes. But let's say the inverse does happen and the Democrats take both. How does that impact the prospects for your melt-up and what that would look like?

Yeah, I would say the middle ground is if the Republicans are able to hold on to the Senate but lose the House. I think that's still a bullish thing. It's probably gridlock, but it doesn't really change much. Again, it may be more of a lame-duck situation with Trump, but frankly, Trump hasn't gotten a lot of cooperation lately from his own party.

There have been a lot of things that he should have gotten in the last 2 years, particularly appointments to the courts. For whatever reason, the Republicans in Washington are fighting him almost as much as the Democrats are. I don't have a lot of good things to say about Thune. Whenever the Senate goes on recess, I think he's lined up all kinds of senators to come in and speak for 10 minutes or whatever so that Trump can't make recess appointments.

What is that about? I'm surprised that's not a bigger story—not from the media, because they're anti-Trump anyway—but I'm surprised it's not a bigger story in terms of really upsetting MAGA and upsetting the core. That's blatantly anti-Trump, what he's done. Thune, again, has stood in the way of the SAVE Act, among other things.

What you're seeing is an awful lot of RINOs in Washington—Republicans in name only. The Washington swamp is what they're loyal to, not the Republican or conservative agenda. If the House goes Democratic and the Senate doesn't, it really doesn't change much because, as I say, Trump hasn't been able to do much except through his executive orders.

Secondly, if we lose both the House and the Senate, I would say that really worries me. Particularly if it's a situation where there's nothing to stop it—if it's a 1-member margin one way or the other, you probably don't get much done. But if they have enough control of the House and Senate, this country should be very worried about that because this is not a minor thing. We could be seeing the end of America as we know it.

Again, I don't like to talk politics. I've done it on a couple of podcasts recently, and you get all kinds of people slamming you for being pro-Trump or what have you. This isn't about being pro-Trump. It's about understanding what the left in this country is trying to do. They want to remake America in a way most people are blind to and will not be happy with when it happens.

If they pack the court, do away with the Electoral College, and make Puerto Rico a state, there will never be a Republican president again. There will probably never be a Republican majority in Congress again. If you have 1 party, and that 1 party is very socialistic, if not communistic, and they have full control for as many years out as you can see, forget about it.

I mean, this is not America anymore.

I’m a little more bullish than that. I would say both the extreme left and the extreme right have extremes. The extremes tend to be pretty loud, but they tend to be smaller in number. So that could happen. Lots of stuff could happen. But I imagine it’s the same fear that the left has if Trump goes for a third term, which he himself has said, which is crazy.

Well, it’s one thing to—again, because we’ve had, obviously, two parties in control for many, many years, and I’ve always been of the opinion—

You know, the pendulum swings back and forth.

I’m saying this is a very different thing.

They want—again, it goes hand in hand with the New World Order, and I think they’re basically working in that direction anyway. It means you lose your sovereignty as a country. It’s not just the U.S.; this goes around the world.

Yeah. It means—

Again, there are people that want to say, “Ah, that’s not—you know, America has checks and balances.” We’re not seeing that anymore. I mean, you’re seeing rogue judges can stop every agenda that he’s tried, and that’s before they even have control of both houses. So, I don’t want to make this into a big political battle, but I just think people are grossly underestimating the risks.

Now, that being said, I’m still very bullish. I tend to believe we’re going to at least hold on to the Senate. And as I said, even if they get both houses, it’ll probably be a narrow margin, and hopefully there are some moderates who realize we can’t go there. Secondly, Trump will have at least a couple of months in there to keep going, and we’ll see.

But it’s hard for me to believe that the election is going to mark the top. That’s not typically what drives markets. Earnings are still going to be strong for a while yet. Everything I see, I’m as bullish as bullish can be for the stock market. There’s still another big run-up to that 10,000 top.

For metals, I think we’ve come through a long consolidation after that run-up in January, and I see those coming out of this consolidation with another steep run.

One of the things I’m always interested in is the catalyst. What gets us there? We talked about a couple of things that can certainly slow stuff down. A big driver of the economy so far has clearly been AI and the AI infrastructure build-out, with a lot of value generation from that. But what gets us from the S&P at 75 to 10,000? What are the potential catalysts that cause those kinds of moves in your eyes?

Yeah. As you know, I’m a contrarian, and sentiment matters a lot to me. I’d be a lot more cautious if I didn’t see how many people are nervous here. I think for an awful lot of people, if you pushed them, a lot of them are just biding their time and not coming out with a call. But if you pushed a lot of Wall Street, I think you’d hear, “Yeah, I think a top’s either been put in or it’s very close.”

You hear that from a few, but there are a lot of others who I think are closet bears. Everything that comes out makes them more skeptical, and they start getting nervous again. What I’ve used as a term over the last several years is that they have one foot out the door.

There was a period for a very short time, when the market was running, where they brought that foot back in and started raising targets. But mostly they are one foot out the door and nervous. Having done this for a lot of years, sentiment tells me that you don’t get tops when that many people are nervous and skeptical. So that helps.

I don’t worry about a catalyst in terms of what’s going to spring-load this and make it go. All it takes is, let’s say, some data that comes in a little slower and rates come down a little bit, or the bond market rallies a little bit. We’ve seen that many times. The next thing you know, the market’s up on lower rates and a weaker dollar.

The driving element of why the market is where it is is obviously strong earnings. I realize a lot of those earnings are concentrated in AI and semiconductors, but I don’t see that changing yet either. Along with the other things I listed, like midterms and oil, AI is the other one.

Obviously, this week there’s been a lot of conversation about slowing down AI and the end of the world coming by 2030. People are nervous that a big part of the run-up in the stock market over the last year has been AI, and it’s corrected. Is this just the beginning of a lot more correction? I don’t think so. My read of the technicals and my read of the fundamentals tell me we’ve had a good correction in AI and a good correction in semiconductors, and I still expect higher highs in both.

Do you have any perspective on the required infrastructure build-out for AI as a general theme of interest, or not?

Oh, big time. I think it’s probably the easier thing to buy. There’s going to be such a demand for it, and again, because I have a bust forecast in the middle of this, I can’t straight-line it. But I think you can go out several years, and the needs in terms of construction materials, labor, commodities—all of that—this is not a short-term demand thing.

It may be that we’ve gotten ahead of ourselves, and when this market tops out, you get a pretty darn big correction in AI. But that doesn’t mean it’s over. There are still plenty of data-center construction, power needs, and construction projects. All those things are multiyear things.

The difference for me, compared to many people out there, is that I’ve got that canyon in between that tells me they can correct very sharply before we get to the next cycle. Again, I’m not saying from here, but after the rally, after the next run-up, I’d be careful about looking at these things in a linear way, where you think they can just go straight to 2030 or whatever.

I think the next cycle will be all about infrastructure: power needs, reshoring, and bringing things here. All we need to know is that Taiwan Semiconductor produces such a big percentage of chips around the world, and China is threatening to go into Taiwan at some point. We’ve got to bring more semiconductor plants over here. We’ve got to be self-sustaining in a lot of the things that we’re not self-sustaining in at this point—rare earths, et cetera.

I think there’s plenty of visibility through the balance of this decade in terms of infrastructure and build-out. But I have to worry about that bust in between.

If you were to think of a handful of interesting themes coming into the bust and then post-bust, what do you think is most aggressive into the bust first?

I’ll talk about that, because I do think semiconductors still have a big run. I’ve got an 800 target on SMH, so wherever that is now, that’s still a pretty good run.

543.

Yeah, 543. So, say 550, you’re talking about 40-something percent upside from here. The Magnificent 7 probably—I don’t look at that as closely, so I don’t know what the upside is—but there’s probably 40% or more upside in tech.

I have an 85 target on XLB, which is basic materials, and I think that one is down around 50, maybe. I think that’s right—35. So you’re talking about a 70% upside from here.

The chart looks good in that, and the story looks good to me in terms of materials being one of those places that’ll get rotated to. There’s no doubt some people are going to feel less comfortable being concentrated in AI or semiconductors after seeing what happened recently in terms of the correction, and also worrying about whether the story is changing and becoming less bullish. There are going to be people wanting to broaden out into other areas. I think materials is one area where you’re going to see that.

I continue to say financials are another. Healthcare has certainly picked it up. That has not been one of my favorite sectors, but I have to say that biotech and healthcare look like they’ll continue to push ahead and do pretty well. I’ve talked about biotech and healthcare a little bit in recent months.

I’d continue to say that the defensive areas, like consumer staples, are areas where I’d be more underweight. Utilities typically perform below average, so even though there’s a build-out there, that’s not one of my favorite areas. And energy—the big story—

Just really quickly on staples: why not? Why do you have that opinion on staples specifically?

Consumer itself obviously has the haves-and-have-nots story, or the K-shaped economy, et cetera. Necessities are something everybody has to have, but the bottom half of the income spectrum is having to substitute and find ways to stretch their dollars.

It means consumer staples don’t—I’ve been a bit of a cynic on consumer staples anyway, because for years and years and years, most of their earnings have been made through this incremental increase in product prices at the grocery store, for example.

So, your cereal that used to sell for $2.50 a box sells for $7.50 a box because, over decades, a couple of times a year you raise it by $0.25. Next thing you know, the prices are through the roof for something that probably cost them very little. They've had that game going forever. It's not a unit-growth story; it's just earnings growth coming through pricing.

I think with the economy being what it is, and with the have-nots being what they are, there's substitution into more generic brands and more careful grocery spending. So I think the consumer-staples area doesn't do well in an environment like this.

Got it. I'm just really curious about the sector in general. Do you think that within that sector there are certain entities that tend to capture more of the consumer base in that environment, or does it remain super interchangeable and the whole sector just kind of bogs sideways?

No, I'm sure there'll be winners and losers. I can't argue with Procter & Gamble or Colgate or something like that. I don't follow them, so I don't even know how they're doing. But some of those have more flexibility because they have brand extensions or new products, or they might be into drugs that bring them earnings and things. So there's more flexibility.

But with a Campbell Soup or a General Foods, I'd be more concerned because of where most of their earnings have come from over the years. It really has bothered me. That's part of what's wrong with the U.S. economy: it's driven by quarterly earnings, and these guys all figured out nobody's going to notice if we increase this by $0.25. Nobody's going to stop buying this if we increase this by a little bit.

And so they just did it over and over and over again. What are you doing? You're selling practically the same number of units that you always have. Maybe you've extended brands and you've got something else there.

Right.

Not only are the foods being questioned in terms of their safety and their health issues—Make America Healthy Again—but you're starting to see that hurt some of those companies. Look at Campbell Soup. I mean, it's a company that's having trouble.

So I think it's just not an area of growth. It's not an area where I think you can look to the future and say, "That's pretty good." Now, there may be sectors in there, groups within consumer staples, where they do have growth because they are a healthy alternative or what have you. But in general, it's just not an area of interest for me.

Yeah, fair. It's also one that I don't spend a ton of time in, specifically because it's typically lower volatility, so you just can't do a whole lot. That's why I'm generally curious about it. It's one of those places where every once in a while something will stick out to me, but most of the time I generally look at other places. Commodities were coming up, and we were coming up on time.

Just to comment, if you look at it from a macro perspective, obviously when the market sells off, it's a defensive area. They're steady growers—so-called steady growers. When there are other questions about the economy or what have you, or the market's backing up, usually they're the ones that outperform.

We oftentimes see the market rotate, so it's not like everything goes down in some of these corrections. They rotate out of the more aggressive things into something that's more defensive. Staples have done that, you know.

Which I think is the thing I find so interesting about that. With mega-cap stocks, it's almost like that's starting to slow down, where a lot of defensive rotation is now into Apple. That's just a really interesting change in the dynamic between staples and those.

Yeah, and again, I don't know how much—because I don't track it—I don't know how much they're seeing trends change because of Make America Healthy Again or limits on what they can do in terms of pricing. I'm not sure, but I just know it's not an area where you can look at it and say, "Gee, there's a real growth dynamic there that I want to be part of." And there are so many other places you can look.

Whereas materials—materials are also price-sensitive; a lot of it is pricing and commodity prices, et cetera. But materials, at least, if you make a case, are a cycle; they are a cyclical group. If you think there's going to be more demand for these commodities, for these materials, because of data centers or what have you, at least you can make a case for an earnings cycle there, whereas the other stuff is steady as she goes, and it may not even be able to maintain its slow growth.

I figure we should talk a little bit about commodities. We glanced over Iran earlier. There were also some changes with the Saudi Arabian East-West pipeline that went down. That's about 4% of global supply, obviously meant to circumvent all of the traffic going on in the Strait of Hormuz. So where do you see commodities currently, and where do you see them going forward from here?

Yeah, I mean, like I said, the only change I made in my 3rd-quarter letter was to raise my target on copper from 8 to 9. Maybe I'm too aggressive, but I don't think so. Again, some of these commodities, particularly copper, are in tight supply with growing demand. Data centers need that; the tech area needs copper.

So it's one of those where inventories are low, demand is strong, and supply is limited. To me, it's pretty much a no-brainer: prices are going to go up, and maybe go up aggressively if we see this demand pick up.

The metals in general, non-precious metals, generally you're seeing prices hold pretty steady and move up. So again, for somebody who's expecting inflation to trend down, I'm in the camp that materials are still moving the other direction, but I think it's not enough to push inflation indexes up a lot.

So you've got things like fertilizer, obviously impacted by the Gulf. What's interesting is that agricultural commodities have moved up after being dormant for years. They've moved up some. They're still well below previous cycle highs, and other cycles where they went through the roof, but they're up decently from their bottoms. That's after being kind of stuck—they couldn't get out of their own way for a long time.

Corn, wheat, soy, and soybeans have picked up. I'm not sure they have big upside. I know some people who are trend followers are jumping on them, but I'd be careful because I'm not sure there's a lot of upside from here.

And what else has your eye right now? What are you looking forward to over the next couple of weeks, couple of months?

Yeah, I think the biggest story will be metals. You aren't seeing it today, obviously—not this week—but I think gold and silver, to me, the correction is over. Gold got down just below $4,000 back in July, and silver got down to $55. Silver rallied back to $72, and at that point—prior to it getting there, but I saw that was where it was headed—I said you could see a 10% to 15% correction before it moves higher.

And it went from $72 to, I think, $61 or $62. So, pretty much a 14% to 15% pullback, and it's back up in the mid-$60s. So I think probably the biggest part of the correction is over. It ran, had its first move out of that bottom, pulled back, and I would expect over the course of the next week or 2 to see that move up nicely, back into the $70s and then maybe even the $80s and $90s. My target's $200.

People want me to pinpoint whether that's going to happen before the end of the year. I think it can, but I'm not worried about whether it happens in December or February. It's sometime in the next 3 to 6 months—probably less than 6 months—I think you could see that, which would be, from here, basically a triple.

So if silver can triple, and gold—gold's currently $4,300, bottomed at $4,000 as I said, and I see that going to $7,000 in that same time horizon—those are areas that I think are going to be at the top of the performance list for this last run before we top out.

And finally, your expectation for the rally obviously has shifted out a few times from different things going on. Where do you sit with that now, and what's your expectation broadly, or specifically, for what you typically refer to as the final leg up?

Yeah, on a monthly basis, I'll just take the S&P to start. On a monthly basis, if you look at it on a daily or weekly basis, obviously it kind of topped out, I think, in June—early June, beginning of June—and then went sideways, and then had another little run back up to a new high here in the last month.

But if you look at it on a monthly basis, you could make the case, when you look back, that we started the parabolic move back at the end of March, when the market—I forget where the S&P went down to—but there was the Iran sell-off. Then it bottomed and turned around and has had a big run, but then kind of consolidated all summer.

If you look at it on a monthly basis, it hasn't violated anything; it's been making higher highs and higher lows.

If you look at it on a daily and weekly basis, you say no, but maybe we're not in one. But I keep telling people that parabolic is something you'll see when you look back and say, “Well, look at that last leg. That was really steep. That was almost vertical.” By the time it got there, I'm not too worried about whether we're in the parabolic or not.

But you can make the case that any of the pullbacks we've had here are really within the context of a month-to-month stair-step, and I think that's going to continue. Look at today: we're back down 33 after being down 70. The market's resilient, to me. I don't pretend to know whether it's going to happen in 2 or 3 months or 4 or 6 months, but if you get a 35% to 40% move in the stock market in 6 months, that's a hell of a run. If you get it in 4 months, that's an even bigger run.

So, to me, it really could all happen before year-end. But as I say, the markets don't really care about the calendar. They're not calendar-driven. There's no clock that strikes midnight and you turn into a pumpkin. It really is a case where it's going to happen in a steep and pretty fast fashion.

Awesome. Interesting, as always. Anything else that you want to hit before we wrap? David Hunter: I don't think so. I think, obviously, it's going to be important to see rates roll over here. Speaker 1: I think it's going to be important to see oil prices roll over. I don't necessarily think that corresponds with an end to Iran. It just may mean we did it once—we went down to 68 in that first run down from the hundreds—and I think we can do that again. My guess is we're going to know a lot more in the next week or 2 in terms of whether we have to wait until November or whether October could turn out to be a pretty bullish month. David Hunter: We will see. We will soon see. We will. Speaker 1: It's always the market tends to deliver something. Whether it's what you want or not is a matter of perspective. Everyone, thanks for hanging out. We will see you guys on the next one and catch you.

I don't think so. I think, obviously, it's going to be important to see rates roll over here.

I think it's going to be important to see oil prices roll over. I don't necessarily think that corresponds with an end to Iran. It just may mean we did it once—we went down to 68 in that first run down from the hundreds—and I think we can do that again. My guess is we're going to know a lot more in the next week or 2 in terms of whether we have to wait until November or whether October could turn out to be a pretty bullish month.

We will see. We will soon see. We will.

The market tends to deliver something. Whether it's what you want or not is a matter of perspective.