Get Think Tanked Distilled with Gary Brode

Gary Brode spent much of his career executing hedge fund strategies, including long/short, concentrated and special situations. His Twitter/X profile says that he “turned to the good side” when he launched Deep Knowledge Investing in 2020 with the goal of helping investors, family offices and others achieve long-term wealth and generate better risk-adjusted returns. He joins the ETF Think Tank to offer his current thought process around the financial markets.

Brode starts by explaining that he never bought into the narrative in Q4 of last year that the Fed was going to cut rates a half dozen times in 2024. In many ways, it’s become Powell and the Fed vs. the Treasury and Congress. At this point, everything they’re doing is offsetting. Brode says that Powell’s goal is to keep the U.S. economy out of recession and the government is spending money like they’re trying to pull us out of recession. Powell knows that he has one shot to get this right and he doesn’t want the reputation of being the person who cut rates too soon and ignited a second round of inflation.

One of the biggest global risks right now is Japan. Brode thinks they’re trapped. Because the BoJ kept rates ultra-low and ran up debt at no cost, they’re limited in what kind of stimulative efforts they can make. The problem is if they don’t hike rates, the yen will keep falling. If they do, they’ll blow up the debt and the budget. They’ve talked big about tightening policy, but the 10 basis point hike earlier this year was pretty much laughed at by the markets. Interventions haven’t worked and they’re not addressing the underlying issues. Brode believes that they’re going to need to raise rates, but that’s going to create more problems.

Brode believes that the labor market is incredibly difficult to get a read on and the numbers have become so unreliable that his company isn’t even covering it. If you believe the numbers, there’s been no full-time employment growth in years. Everything is part-time. We don’t have more people working, we have people taking more jobs in order to make ends meet. That isn’t indicative of a strong economy. Most of the new labor coming in is from overseas. They are more competitive in terms of cost and that’s negatively impacted higher wage U.S. workers.

People are hoping for inflation to go down, but there’s no real evidence that this is happening yet. The Fed should be best positioned to have an accurate read on where rates and inflation are going to be, but it’s been historically demonstrated that they have no idea where interest rates are going to be in 12 months. If they can’t do it, who can? Everybody wants to assume that inflation will trend towards 2%, but government spending suggests we’ll have a different reality. Brode believes that the moral inflation rate should be 0% and that makes people upset. A stable interest rate encourages long-term investment. The idea of inflation encourages spending because people think their money will be worth less later. All of the tech toys will be worth much less in a year, but that doesn’t stop people from buying anyway.

Stagflation would be the worst of all worlds. If you take a look at the difference between OER and Case Shiller, you quickly realize that housing costs have gone up a lot more than the CPI. We’re told food inflation is only up 1%, but try to find somebody whose grocery bills are only up by that much. Part of the inflation data may be backward looking and some numbers are slow to adjust, but the overall picture is still not positive. Brode thinks the real economy is in a recession, but the nominal one is not and the difference is government spending. They’ll do whatever they need to in order to keep the economic growth number in the black.

In terms of his overall investment outlook, Brode thinks we’ll be seeing more inflation. He likes dollar alternatives, such as gold and bitcoin. His company owns large amounts of energy at the moment. The future of nuclear power will be fantastic.

Other key takeaways:

  • There’s a difference between price levels and the rate of change. Economists look at rates of change. Consumers look at absolute price levels.
  • Brode believes the Fed doesn’t want the appearance of political favoritism, which is why he favors December as the start of the rate cutting cycle.
  • In terms of international investing, Brode is mixed. China’s issues are regulatory and accounting. India is interesting. People want to invest in what they know, which leads to home bias. People just have more confidence in U.S. companies.
  • Is there a positive outcome from the election? Brode believes we are over-regulated. Trump reduces regulation and that helps outcomes. With either candidate, w e need to cut the budget. Neither, unfortunately, has any plans to do this. Both parties overspend. That means more inflation ahead.


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