LFG with Jefferies’ Chief Optimist David Zervos
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On the Tape.

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They are also the people behind the alternative investment industry's largest and most exciting in-person events. To find out more about iConnections events and members-only platform, visit iConnections.io. Welcome to the Risk Reversal Podcast. I'm Dan Neath, and I'm joined by David Zervos. He is the Chief Market Strategist at Jefferies and the Head of Global Macro,

Welcome to the pod, David. Great to be here. All right. This is a long time coming. I've seen you on CNBC. You're a contributor over there. I feel like forever. I don't think we've kind of crossed paths on our show. I know you do a lot of those other great shows. You came on with us in Miami last month. Now, to be very fair.

After we saw you at Global Arts Eye Connections last year, we tried to get you on. I don't know what happened there. All right. But here you are. You're on the pod. We're going to talk about a whole host of things. Obviously, markets, policy, geopolitics, and how they all kind of mash up together. But because you're a first time on the Risk Reversal Pod, I'd love to get a little bit of your background. It's pretty fascinating. You've done a lot of really interesting things in policy and markets and the like here. So walk us through that a little bit.

Sure. You want to go backwards or forwards? I want to go backwards because I read the bio and I think where you started is pretty interesting and you've done a lot of really interesting things in between where you are right now. So I've been at Jefferies for 15 years, which actually on wall street is a lifetime at the same firm. Um,

And it's been a great run and I love it there. And I've had a kind of free run to be our macro strategy guy across equities, fixed income banking. I get to see all corporate clients, hedge funds, sovereign wealth funds, insurance companies, banks. It's such a fun way to do macro. Whereas

In my old incarnations, I was really focused in on macro clients that were trading macros. Now I'm talking more just to people who want to understand macro but don't necessarily trade macro all the time. Been great at Jefferies for 15 years. I love what I do, writing, talking.

speaking at a lot of events. Prior to that, I was really doing research and trading. I traded for a long time, almost a decade. Traded macro. Traded macro. I was at Brevin Howard. I was at UBS O'Connor. I was at Greenwich Capital. I was at a place called- Were you a derivatives guy? Because O'Connor- I was a derivatives guy. Oh, no way. Yeah. I was actually trained. I started in the business at O'Connor, SPC O'Connor, when they bought

when O'Connor was bought by SBC. Legendary derivative shop. Yeah, we had some unbelievable people. I mean, I was trained by what I consider some of the best guys in the business. You know, that training has stuck with me. I came out of, uh,

When the O'Connor guys hired me into Swiss Bank in London in the early 90s, I came out of the Fed. So I started as a kind of geeky economist with a PhD, doing my academic research, trying to get published, doing briefings for Alan Greenspan. Never thought I was going to be on Wall Street, but the money came and it was like, hey, you want to make five or six times your money and pay your student loans off? I'm like, okay, I'll go to London. Let me give that a whirl and never really looked back. I will say,

I was 15 years on the street up until 2009 between Swiss Bank Corporation, Greenwich Capital, Brevin Howard, O'Connor, a big chunk of that trading, some in research.

I went back and was an advisor to the Federal Reserve Board. So we had a really good '08. I had a really good '08. My best trading month in history was October of 2008, which tells you a little bit about how I was positioned in '08. I had a really rough start to '08 when they bailed out Bear Stearns, but got that back on track. And the fund I was working for at the time kind of moved everybody overseas.

And I couldn't really go for personal reasons. And I decided to go back and actually probably take the most interesting year of my career, which was in 2009, walking back into the Federal Reserve Building as a visiting advisor to the board, trying to help design programs to get us out of the mess.

and didn't make a lot of money. But I had probably, I will still say, 30 plus years on Wall Street, probably the most interesting year of my career. I'm sure. I mean, you had a front row seat for all of it. And I think a lot of folks forget, I mean, that period in Q3, Q4 of 2008, it felt like the world was going under, at least the financial world. I was at Merrill Lynch. I was actually on their derivatives desk. I was trading prop at the time. And you know,

John Thain, I think, took over at some point in 2008. And it's funny, after the Bank of America bailout had already happened, I think on the Q4 or Q3 call, he gave the derivatives group a shout out because we made like a billion dollars or something. So it was probably not too different than what you were experiencing over there. And then you just called yourself geeky. I don't, you know, again, I'm looking at you right here. If you're just listening to this

I think David is anything but geeky. But I remember seeing you with Sarah Eisen from the Florida New York Stock Exchange. I can't remember how long ago it was, but it was on CNBC and you lost a bet.

Is that right? And you had to, it was either cut your hair or shave the beard or something. What was going on there? Wasn't it a bet that I lost? I was basically, it was a marketing gimmick in a way. I was growing my hair long for the first time. You know, I turned 50. I decided to get fit and grow a beard, grow my hair long. These things you do when you go through these midlife changes. I don't know what my midlife thing is going to be. Lost a bunch of weight, went vegan. Now I'm kind of bringing back some other sort of,

dairy and things like that. But I basically, you know, Sarah was asking me why, you know, why my hair, why I was growing my hair out. I said, well, you know, it's a kind of statement to clients. I said, I'm not going to cut my hair until the Fed cuts rates. Oh, that was it. Okay. And they cut rates on July 31st of 2019. Yeah.

after Jay got very stubborn in 2018, if you remember, he was, you know, we're a long way from neutral. They were on autopilot, right? Christmas of 2018, for anybody that remembers, really stunk. It was like, we had a 20% downtrend. We were down 20% from October, yeah. And Jay was just being super stubborn on rates. He was kind of fighting with Trump. It was his first real fight with Trump and independence. And, and, um,

It didn't really make sense to me why we were going up in rates. I kind of pushed back on it and then I had to cut my hair on July 31st. When the rate cuts, Sarah's like, well, let's do it on TV. I'm like, great. Well, I'm going to raise some money for charity. So we actually raised a quarter million dollars. What?

That's amazing. For that haircut, which was pretty cool. Got a lot of clients involved. And it was fun. They shaved my head on TV. I remember seeing it. And I remember turning up the volume to see what the hell's going on here. And then I really haven't had a haircut since. Yeah. Since July 31st, 2019. All right. So Alan Greenspan, let's go back to your time in the vet. So what is...

have you learned? I mean, I think you're starting at the Fed, being a macro trader, going to be an advisor to the Fed in one of the craziest periods, I think, in 100 years for the U.S. financial system, right? And now, obviously, that was what led you to be a strategist. It kind of probably gave you a lot of your chops, you know, that sort of thing. But you're also a really interesting strategist because very few of them, and we have a lot of them on the pod, and we've

known a lot of them from our time on the buy side and all over the street and the like, and they come on CNBC, they don't have that in the trenches trading experience. They don't know what it's like to actually take risks. They go down to their desk, they talk to those guys, but most of those guys aren't really taking, you know, they're facilitating the risk.

So going back to 30 years of being involved at least with what the Fed's doing, advising them, but also being a very close Fed watcher, what's changed in the last 30 years as you think about from Greenspan here to Jay Powell, who's been here for a while? I mean, so much, Dan. I mean, to be honest, the importance of policy driving policy

markets macro and the day-to-day that people have to deal with. I mean, these balance sheets just became colossal. The Fed's balance sheet was $9 trillion. ECBs was $9 trillion. These guys invaded the markets.

And prior to '08, I remember sitting, this was way back into my O'Connor days, I remember sitting there on payroll day, right? I'm strapped in, I'm like 500 grand at base point, 600 grand at base point. I'm ready to make or lose millions of dollars on the capital I was running.

And, you know, the guy trading long, short business services that sat next to me was like, you know, just sort of going to the water cooler, grabbing a coffee. Didn't care in the least about a payroll print. Didn't care about a Fed meeting. I started at SAC in 1997. I was the lowest guy in the totem pole. I was, you know, a

execution trader for a PM. And I remember, you know, I had smart friends who were working at O'Connor and stuff. And those things were really important to us. We were just, the only thing that mattered was Intel's Q3 guidance. You know what I mean? Like when we were-

they could care less about macro. They had no idea what I was doing, which was great. We had a nice multi-strategy fund at the time, Dawn Fitzpatrick, who now runs Sources Money, that CIO there. I was managing some money for her, managing some money for a couple people. I was the lone macro guy in this world of long, short equity traders. We had a macro fund in London.

08 changed everything. 08 basically brought macro to the masses because the central banks became so invasive into the marketplace. And so when I went to the Fed and kind of watched the game plan that was built to fix things, the QE, the TARP, the TALF, the

CPFF, AMLF, everything. We FF'd everything, right? Just put an FF on the end of it and get a funding facility and go. I came out, it was just the demand from credit traders, the demand from ETF guys, the demand from corporate C-suite executives to talk about macro exploded.

And, you know, a lot of guys hired a macro guy to be in their fund when they never had macro. And usually what they did is they hired a guy who was kind of a doomsayer because he's the one that, you know, called the crisis, right? And then three or four years after and things are going well in 13, 14, 15, they all got fired. So, and then they said, well, I don't need a macro guy telling me the world's going to blow up all the time. So I guess where I positioned myself is I just became a kind of go-to macro voice that people could

use inside of the Jefferies client base across all those different products. Never labeled a perma bear, perma bull, any of that? I think labeled an optimist. And I've always generally structured myself in a risk parity kind of setting. So a long stock, long bond, levered long bond trade to hedge my equities. So I guess I got labeled a perma risk parity guy.

Although I did pull out of it in 2022, which I think was my best trade of the last 15 years because it was obviously terrible. But I think I would say I get labeled an optimist that...

that they have the policy tools to get us out of these crises. Are there side effects? Should we think about the side effects? Is it inflation? Is it losing credibility? We could go through all the gamut. But when everybody was talking about QE pushing on a string and the Fed couldn't do anything and we were going to be in a liquidity trap, I was like the guy out there saying, no, no, no, this stuff is super powerful. It might create a bunch of inflation. We don't know. But

they're going to keep going and pushing until they get everything reflated. Maybe they do too much, but they're not going to do too little. They're not going to the Great Depression. That was my basic message to clients coming out of the Fed was Ben Bernanke is not going back to the 30s. He may get the 70s.

He hopes to get the 90s. And in the end, he actually got the 90s and even better. He got kind of the 60s, which was 3.5% unemployment and less than 2% inflation by the time we got out of this a decade later. So I was optimistic on the efficacy of monetary policy and the efficacy of

all of the new creations that we had concocted at the board of governors in 09 and that was a different story for a lot of people there were a lot of haters out there you know the first hat i ever made always make a hat every year i gotta bring you one uh we got good ones this year but um the first time i ever met just had the word haters across with a big circle in a line through it no haters so i was running around and i remember i wrote a piece 2012 i was handing out the hats i think and uh

It's called stocks are for lovers, spools are for lovers, gold is for haters. And both the S&P was at like 1400 and gold was at like 1400, 1500. They were both right around the same level. Now we're 6,000 and 3,000. Exactly. I can do that math. I need a hat. Do I need a free hat? And I got 2% dividend. I'm going to get you no haters hat. Cool. No, this year's hat says LFG on it, which you'll be shocked that I got. Well, it's- It's a play on the words. It's a play on the words.

Couldn't get that through compliance and have Jeffries on the hat if it said what you just said. So on the back in little letters, it just says less federal government. I love that. So it's really just a, it's basically a doge hat. It's a hat saying we're going to have a smaller government footprint, less regulation, and that's going to drive

All right. A fairly optimistic equity. We're definitely going to hit doge, but I want to focus on the last word that you just said, optimistic. And you had said optimism before. And I'm just curious because you were a former, obviously, advisor, a trader. You managed real money. And now here you are as a strategist. How important is optimism when you think about investing in general? Because we, you know...

You get exposure to retail investors through all the media that you do. You talk to some of the smartest minds who manage money. You talk to some of the most informed people as it relates to policy. And so I'm just curious what the through line is with optimism. Because again, you know, you can talk about every financial chart that we know about is bottom left, upper right. Now there's some peaks and valleys here and there, but

Like, give me a sense, you know, about optimism, being optimistic, because I'm sure you see the haters all the time. That's why you make hats every year. Like, give me give me your 411 on that. It's a great question, because.

You know, they call economics the dismal science, right? Doom sells. It's always, you know, the guy that's getting on TV telling you it's all going to end tomorrow. You kind of want to listen to him and go, maybe that guy's right. I got to be careful. The guy that's getting on there tells you everything's going to be okay. Don't worry about it. Just like ride the wave. You're kind of like, well, okay.

it's not as exciting. I mean, the excitement is Norio Rubini, you know, basically telling you the world's going to end, which he does pretty regularly. I don't know. I just bring him up because he was one of the classics, but there's plenty of others like Norio. He's actually a very smart guy. Super smart. The book that he wrote a few years ago, he came on the pod. We just found it really interesting. But to your point, because everyone wants to hear the worst case scenario. Yeah, but you know, if the market pulls back five to 10%,

those guys will, there'll be a whole sequence of people that come on CNBC and come on to different shows and they'll bring them in to tell why, see, I told you it was all going to go wrong. Now, I found myself getting called onto CNBC early days as the kind of foil for that. So the market would go down five or 7% and they say, hey, let's get that Zervos guy on because he's usually pretty optimistic. And I'd be like, you know, this QE stuff, it's going to work. Like,

They're probably going to have to do more, maybe not. Maybe we get inflation in the end, but at the end of the day, we're not going to lose the anchor of long-run inflation expectations. I was still optimistic about that. So I think I got called up as the kind of

optimist foil for a lot of the negativity that sells very well when things are going wrong. And I find myself not getting called up that often to be on when everything was going right. And even the way I wrote, I mean, I don't write a regular weekly, daily, monthly. My number one rule in research after, and you would appreciate this being at Merrill for so long, my number one rule was never waste client's time. If you know something to say,

Just don't say it. If there's a Fed meeting, I don't write just because there's a Fed meeting. I write if there's something important that happened. So I might write twice in a week. I might write twice in a month. That's my style. And so when you see something, you go, oh, Zervos has something to say. So I probably open that and I keep it short. I have a funny title and try to make you laugh and give you some information. That method has worked very well. And what I find is I don't write that often when everything's going my way.

in the more optimistic times, and I find myself kind of defending and writing more when things are getting a little messier. Well, that's a really important point, and I'm sure Jefferies is the perfect place to kind of have that model because you just mentioned Merrill. I was there from '07, '08, and the beginning of '09, and I was trading prop on a derivatives desk, and I was on the buy side before that, but to get inside and see how the sausage is made on the sell side

was really interesting to me. And I have a ton of respect. I always did on the buy side. I think it's a kind of game that the buy side plays all the time is shitting on the sell side a little bit, but, uh, the people there are earnest, you know what I mean? And they, and they're trying to help out and then flash forward to the way I think about, um,

markets, you know, I was trained that if you have a bullish case for something, you better understand what the bearish case is, right? And the first show that I ever did on CNBC in 2009, I was a contributor right out of the gate and I started doing the show called Options to Action. I did it for 10 years. I've been doing Fast Money since 2011. What I always found useful, and because I was on Fast Money the last guy in, you know, guy was the first guy in, you know,

So I would go last around the panel and I would always find there was a level of – not guy, but there was a level of universal bullishness. And most of the guests, other than those one times you trot out the perma bears. And so what I try to do is pick apart what I thought was a consensus bullish trade because to me that made the most sense. Now, if people on Twitter wanted to label me a bear or whatever, that's fine. I'm not on –

CNBC to get my rocks off. You know what I mean? Like, you know, I want to be right, but I also want to kind of help people think about it, you know, because a lot of these people, they take these podcasts, they take those shows, um, very seriously, you know? So I don't know. I, I just, you know, I wanted to kind of get that two cents in there.

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You want to flash forward to what's going on right now? Sure. Let's do it. It was a great conversation, again, that we had down there in Miami. And you had a lot to say about what Jay Powell is doing and what you think about what he's doing. I think it's important to remember we are only, what, five weeks into the new administration. The transition felt exhausting, as it did the first time around.

And I think you and I said this on the show. They just flood the zone. You know what I mean? I'm sure there's a through line there at some point, but markets don't seem to care too much right now. So how does this shake out in the near term? The president has said he's not going to infringe on at least monetary policy and how Jay Powell relates.

runs it. But some of the stuff that they've done through the executive orders just this week suggests that the way they operate could be, you know, could fall under the guise of, let's say, the executive branch a little bit. So let's give a report card to date. And this is, again, there was one Fed meeting, you know what I mean? And what you expect of Jay Powell. And do you think this is going to be a face-off between him and the president if the president doesn't like at least

I don't think there's going to be any surprises, as you don't think, as far as what they're going to do on the rate, but it's going to be the tone. I guess up front, I would say I don't think this is a repeat of 2018. I think Jay has marked his territory. He was adversarial with the president after his nomination. The president went after him. I think he...

referred to him as a bonehead in public a number of times. Wait, president of Jay Powell? Yeah, this was Trump. This was Trump in 18. I want to be really clear. Trump went pretty hard on Powell in 18. I mean, very hard. Did you start to feel bad for him? Did you feel bad for him? Not really. Look, I was growing my hair long. I was kind of sympathetic to the president's view. I was like, I don't know why he's doing this, but I get it now. Look, no Fed chair wants to go down in the history books as Arthur Burns or-

or someone that got run over by the president, right? It's just, you don't want to be that chapter in the macroeconomics 101 textbook where it's like, you know, Richard Nixon's henchmen come in and basically get you to do something and you lose control of credibility and the inflation. Jay stood his ground. He,

It caused a lot of pain for the markets for a very short period of time, which was the end of 18. So I don't think Jay will ever go down in the history books as a guy that was kind of under the thumb of either president, to be honest with you. They're never going to be buddies. They're never going to golf together. I don't think there's any love loss, my guess. Don't know that for a fact, but that's my guess. And things change. But I will say-

I think Jay's going to be a little more conciliatory. He's done on May 26th. Okay, that's the end date. It's a hard end date. And there's no question he wants to go and the president wants him to go. There will be a new chair. The interesting thing will be, is there an appointed heir apparent?

coming that we're going to get to see in action starting as early as the summer or the fall and that could be the new uh a new person they put up for january's nomination i have your hat

Okay. Zervos 2020. That's the hat. Okay. I think you're already putting them in production here. Maybe. I don't know. So you're saying the heir apparent would come from where? It would come from the private sector, you think? We know that the players that are interested in that and there's people that were in the running before we have –

you know, Kevin Hassett, who's at the NEC. We have Kevin Warsh, good friends of mine and they're good guys. Warsh seems like a very talented, very talented economist. I think they have the presidency here. I'm not sure, you know, look, so far he's been going a little more off the beaten path with picks. So we could find someone that's a little more, let's call it controversial. I think from the market's perspective, going into the summer, going into the end of this year,

I think we'll find out who he's thinking about earlier than just January when he's got a- And do you think market participants will start reorienting a little bit towards what might be a different philosophy on monetary policy? It really depends on who he picks. I think either of the Kevins know. I think if he goes kind of a little rogue, maybe. But-

Again, I mean, I look at the committee, I look at the board. He's got Chris Waller, he's got Mickey Bowman. So those are his two people that he put in there. He's got a pick in January to put another governor on. We're going to have a retiree. And then he's got Jay leaving. So he's going to have four. By May 26th, he has four out of seven seats that are kind of his world. And then you've got three that are definitely not his world. And Michael Barr, who's now not going to be doing any of the reg stuff, they kind of pushed him out of vice chair.

I mean, I'm not sure. Maybe he doesn't stick around. Maybe he's even going to have five. So you've got, by May, I think a very cooperative organization at the Fed that will be working with Treasury, working with the administration, I think, in a more, let's just use the word cooperative way. Don't you think, I mean, I got a couple of questions there. Like,

May 26 is a world away, right? If you think about what's going on in the uncertainty, at least here as far as policy and really geopolitics and how we basically forget China right now, how we deal with trade with some of our biggest trading partners and our longstanding allies. So I think anything could happen. I don't mean anything, but there's a lot of stuff that could happen there that could affect this.

And then I go back to what you're talking about in 17 and 18, because I think, what were they raising? 25 basis points at a clip. And they went from, I'm just looking at my fact set machine here. They went up to two and a half from zero. And then all of a sudden, if we recall what happened in Q4 of 18, it wasn't a US growth scare.

It was a global growth scare. And so, you know, again, we have global growth right now that's tracking, you know, well below where we are, what, 2.8, 3% or something like that. So I don't, I think the China stuff is probably close to bottoming out. I don't know. I'm not an economist, but, you know, it might get,

you know, are they going to export deflation around the world? And, you know, do we ratchet up stuff and, you know, that sort of thing. I just feel like that the stock market in 2023 and 2024 was not bothered about a Fed funds at four and a half percent. They got bothered every once in a while when the tenure started moving a bit. Right. And so I guess my question to you right now is that

that are we in an economic environment? Are the markets taking what might not be rate cuts for the balance of this year and saying, hey, we can operate. The pre-pandemic GDP was about 2.2% or something like that. Inflation was at that 2%. So I guess I'm asking, what is the neutral rate and where is it that you think

think the equity market, the economy can kind of hang in there still. There's two parts to your question. I'm going to answer it in two ways. By the way, I'm lucky the guy's not here because he hates two-part questions. Yeah. I think that the real question is, you're asking a question we asked a lot in our notes and thinking about Fed policies. Does the market really need rate cuts to go up? I mean, it's a pretty simple question. And we had six rate cuts

almost seven priced into the beginning of 2024 and we didn't get anything until September and the market ripped that whole time. We were pricing in rate cuts by March and it never happened. If you go back to 2023, the market was pricing in a recession and rate cuts by the end of the year and the Fed raised another 123 from four and a quarter to five and a quarter.

And the market ripped in 2023. But they also added liquidity in the first quarter with the banking crisis, the regional banking crisis. They did. They did the SVB bailout. The balance sheet grew by 300 billion. I mean, but you still had a regional banking crisis. So I mean, at the end of the day, there was some offsetting financial tightening, conditions tightening. I guess what I would say is the answer to that question is no. Like, I don't need rate cuts to go up. I really don't. I don't think that's a...

prerequisite. And I think 2023 and 2024 kind of show that, that these rates that we saw, which I think most people would have thought were very high by historic standards,

didn't do nearly as much damage as many had forecast, which is what's leading all of these economists to say the neutral rate is higher. It's not that they're wrong. It's not that they just are miraculously moving the goalposts and going, well, it must be my theories of the world aren't changed. I just have a higher neutral rate. That solves all my problems. I think it's one of the greatest cop-outs in history. And it's actually a really misguided view of

of one, where rates are headed over the long run, but two, what really happened in the 2023, 2024 period and what's likely to happen going forward.

So I'm going to go a little geeky on you. You said I don't look like geek, but I can be geek. You do not look like geek. In answering your question, because the neutral rate discussion requires... By the way, you look like a guy I want to go have a beer with. Okay. So I just want to be clear on that. Well, let's go do it. I like tequila better than beer. Have you ever tried Comos tequila? Comos, I've had it, yeah. Yeah, I want to send you a bottle. It's very good. Yeah, it's delicious. Yeah, it's really good. It's...

Good friend of mine. He's a Greek guy, right? Well, no, two good friends of mine. So Richard Betts and Joe Marchese. Richard Betts is a former Master Psalm. And Joe is a VC here in New York and they met and they partnered up. I've had it. It's cool. It's delicious. I'm gonna send you a bottle. It also sounds like a Greek name. Yeah. No, it's Greek inspired in the bottle and the like here. Yeah. I remember, I got it when I was in Greece last summer. They had it at one of the beach bars I was at. Anyways,

geeking out for 60 seconds. I have made it a principle of my whole career at Jefferies and my whole post-Fed experience to say that the Fed's balance sheet matters more than you think. That has been used in a way that is just so incredibly important that you can't just discount it and think it's going to go away. When we started this rate hike cycle, the balance sheet was at $9 trillion, close to 40% of GDP.

In the old days, it used to be 5% of GDP. It had massive duration, all these securities that were 30 years in length. And one of the things, the question I was always asked at the end of 22, after the Fed had raised a lot, over 400 base points, was why hasn't anything broken yet?

These are huge rate hikes. And I kind of had the light bulb moment in early 23, two years ago, where I said, wait a minute, the balance sheet is still producing stimulus. The stock of reserves, the stock of liquidity is still with us. And when rates went up, the balance sheet lost a lot of money. And so they socialized the losses on a lot of securities that would normally have been in

the system and those losses would have been taken by private sector entities, banks, insurance companies, hedge funds. I don't know if you remember the 94 cycle when they raised rates, but the 94 cycle was my first one sitting on a trading floor. And after 300 base points of rate hikes, Orange County was bankrupt. The Mexicans blew their peg up. Goldman Sachs had lost 25% of its partner's capital. Kidder Peabody went out of business. The list goes on. You couldn't trade bonds in Europe. The banks were a mess. Financial markets were a mess.

I mean, all we really did is blow up a few tech bros in Northern California that didn't know how to hedge a Fannie 1 and a half. That's kind of what happened. And the rest of it is this rate move just didn't push like it usually pushes. My argument with clients has been that balance sheet was a buffer. So it never really felt like 500 because you had this pillow, this pillow-like thing, the balance sheet that cushioned the

the blow of that 500. And that stimulus was still in our system. So the stock of QE mattered. That served me very well because it made me bullish in 2023 when everybody thought a recession was coming. Because I was saying, rates really aren't five and a quarter. They're kind of, if you adjust them for the balance sheet, they're probably only three. So we really aren't that restrictive. And in 2024, when everybody was predicting lots of rate cuts, I was like, I don't think we're going to get them. The economy's doing great. Like,

I don't know. I mean, I don't need them for the market to go up. And I think the balance sheet is still providing stimulus. Here's the problem with 2025. And now we're going to get to today and future. The balance sheet is now kind of back to something that looks pretty neutral as a percentage of the size of the economy. It's about 20%. That's where we were in 2019. So that story that I was telling for two years on why we were going to be higher for longer, why the rate hikes weren't going to hurt, and why rate cuts weren't likely, that's gone.

And now you got to say to yourself, well, what does a four and a quarter, four and a half percent rate do when the balance sheet isn't a pillow anymore, when you don't have any pillows, there's no cushion. And the answer is it probably could hurt you a little more. And so I think policy is actually more restrictive today than it's been in a very long time. And we're going to start to see the impacts of that more. And that's why I've changed my views to a much more

a much more aggressive set of moves and rates coming in the next 18 to 24 months as we learn that neutral is probably kind of where it always was back before the COVID crisis. And that this moving of neutral was really just a way for a lot of people that screwed up their forecast in 2023 and 2024 to save face.

So a long way of saying, I think rates are coming back down to like two and a half percent. Wow. Okay. Um, let's bring it back to, let's say the markets and risk assets in general. Right? So when we think about the last two years, 25% gains for 23, 24, here we are, we're up three and a half percent. Um, or so people feel pretty good about growth where it is kind of surprised last year, especially when you consider fed funds, you know, was 5% for, uh, yeah, for most of it. Um,

And I, you know, listen, you can't prove a counterfactual. I think the hundreds of billions of dollars in CapEx spend by, you know, the biggest tech companies, I think, had a lot to do with what's going on in 2022. They rationalized their costs a great deal. Right. So, you know, you had these despite the spend, you had a margin story that kind of worked. Right. And then you had double digit earnings growth. I mean, people are still worried about, you know, CPI at three percent. Like,

One narrative that I think could make some sense is that, okay, this CapEx investment starts to be utilized by the hyperscalers customers driving efficiencies, right? Which could be helpful to GDP. And then you have a scenario where that starts obviously working its way through other parts of the economy.

And then that is the force that is deflationary, right? That brings you back. Totally. And then totally. So that could be the sort of thing when people talk about you just talked about 94, which seemed pretty bad. I was still in college. But from 95 to 99, we had 25 percent plus years on average, I think, you know, for that five year period. So if you're a naysayer and say, I don't know how you get to another 20 plus percent gain in the S&P,

That could be it. Now, you could have the MAG-7 go sideways and maybe it's, you know, look what happened to Walmart over the last year. Doubled. You know what I mean? Maybe that starts to happen in other names. Now, the problem is, is the concentration of those top 10 names. So let's start with, and it's not going to be a two-parter, let's start with the concentration of the top 10 names, 30-some percent of the S&P, 50% of the NASDAQ 100. You've had this question been asked of you a thousand times.

Is it important? I don't. It doesn't bother me. And I'll tell you why. If I had the choice of every company in the S&P 500 last year being up 25%, so every company, 25 exactly, or the top 10% up 100% and then a bunch of zeros and negatives, I'd take the latter. Why? Because

It's the same reason why I don't like participation trophies at sports games in our high schools, our middle schools, our elementary schools. I don't think we should have a participation. You shouldn't just get a trophy for being in the S&P 500. There should be people that win and people that lose. And that's the beauty of capitalism, winners and losers. There are people who are innovating, people who have run better business models. They compete. The winners make 100% to 200% and the losers go bankrupt.

That's what our model is. Our model is a meritocracy. Our model is not equality for all in returns. So when I see people wanting more equality,

But equality, it kind of bums me out. Now, do I want everything going to one company? No, I get it. That said, one could argue some of the Mag7, like an Amazon, is a natural monopoly. Do we really need two Amazons? Probably not. It probably is more efficient to have one of them. Does that mean they end up having to be regulated in the future? We could get into all the debates about that. But

My only point is it doesn't bother me to have concentration. In fact, to me, in a weird way, concentration is almost correlated with innovation. It means that somebody's really pressing the envelope with new and interesting ideas. But it suppresses innovation. You could use Meta as an example. They bought Instagram on the eve of their IPO 13 years ago for a billion dollars. It had five employees, had no revenue. And again, within Meta, they've made it this monstrosity. It is the

company, right? It's a $1.8 trillion market cap. And I think you'd probably assign half of that to Instagram. And so when you think about, and I just said Imran Khan here, he was a COO of Snap and it's got a $19 billion enterprise value. It's growing double digits, earnings and sales. It's got a 55% gross margin, which could be higher and it's left for dead in a market

you know, a tech market that's been raging. And so, you know, some of the regulation, we could maybe shift to regulation for a second, you know, of these mega cap tech stocks started under Trump 1.0 and they were continued, but, you know, obviously a lot more came and it got broadened out during the Biden administration, which I think was a massive own goal on their, on their part, not recognizing that these companies are ones that you could probably do some light, you know,

and kind of work on, because, you know, U.S., you just look over the last 100 years, 98% of the technological innovation has come from here. Why would you want to suppress that? We saw what China just did over the last five years. So how do you think about, because a lot of folks think about deregulation as one of the pillars of this, you know, pro-growth agenda or whatever. How do you think of it?

Deregulation as it relates to these names, because I honestly tell you, he did exactly what he wanted to do. He was so pissed off at all these folks back in 16 and 17. And I mean, the folks, these CEOs of these companies, he brought them to their knees. They are now on, they were on the dais at the inauguration. They were donating personally. And I think he's going to screw them all, man. I honestly, I really do. And you know what? They deserve it for their lack of back

bone, in my opinion. OK, so that's my take. What do you think of regulation of these monopolies at this point in Trump 2.0? So, I mean, a lot of what you say rings true. I really think you have a very valid set of points. And there is a pretty good risk that he takes a few of them down that he feels really

hurt him in the past and but he's letting him in he's sort of taking the money and then and then you know they're they're they're going to get hurt afterwards you know one of the things that

The students of regulation have always argued, I think George Stigler at the University of Chicago was probably the greatest economist when it came to thinking about regulation and government intervention. Milton Friedman was with him at the time and Gary Becker. He had the quote in one of his memoirs that said something, I'm going to bust the quote a little bit, but it's something like, regulation is always designed by the industry for the industry.

And it's a sort of statement that

that a lot of regulation is used to keep barriers to entry high so that new players can't come in and compete with you. And when you tear down regulation, what you're generally doing is making it easier for the little guys to come in and make changes. And a lot of regular, I've always said, look, Dodd-Frank came in after 08, 09 to sort of rectify systemic risk.

risk problems, but it got twisted into this thing that actually makes it really hard to compete with the biggest banks in our industry. Like for the Jefferies of the world, the smaller investment banks in the world. And these guys, look at what they've done. We have a $3 trillion balance sheet at JP Morgan. You know what it's like to go in and compete for a

a deal when someone's got $3 trillion worth of balance sheet, you got 50. And they're the buyer of last resort when you have a regional banking crisis and the like, and just kind of exactly. So, so that regulatory structure, what did it end up creating? It ended up creating even more market power. Yeah. And that's,

bad. So I think you're on to something with the tech guys, which is important. Are we going to tear down regulation that actually makes it easier for smaller tech companies, the snaps of the world or whatever it is, to come in and take these guys out? I don't know the answer to that. But

I hope the answer is yes. All right. So as you and I are speaking, it's just before noon. You don't have your machine in front of you. I do. And I want to talk about bank deregulation, okay? Because I'm looking at JP Morgan, for instance. This is a company that trades at a valuation that we have not seen for a very long time, largest bank in the world. Right now, it is down 4.5%.

on the day, which is a I don't think this stock has moved like this maybe on August 5th of last year and prior to that, maybe a couple of days during the regional banking crisis in early 23. And I say to myself, you want to take off regulation of these institutions that have done very well in an environment where yields, you know, rates and they've been higher. Right. And I go back to 2018 and some of the deregulation there, no matter where you sit on the political spectrum or whatever,

some of that deregulation led to the issues why Silicon Valley Bank and a half a dozen others went down. So why, you know, every time we give them an inch, they seem to fuck it up. You know what I'm saying? So like, why can't we just kind of, and the other thing about the mega cap tech stocks, they did just fine as they had DOJ, FTC up their asses, you know what I mean, for a few years or whatever. So you understand the question here a little bit? It's a great question because it begs the question, what kind of deregulation are we going to get? I actually think,

What Bob Rubin did to get rid of Glass-Steagall, which is effectively what Graham Leach Bliley was, set up the global financial crisis in 2008. It allowed Citibank to lever 40 or 50 to one with offshore vehicles that nobody really knew they had. And then the taxpayer had to bail them out. Was that good deregulation? No, because you left a taxpayer put to the unregulated entity. So you really didn't deregulate. You took away certain regulatory elements.

But you left a regulatory architecture around them that protected them. So that's the industry designing the regulation for themselves. That's a classic George Stigler outcome, which is they made the regulatory architecture to benefit themselves, to set up a government backstop.

So they had a put. They take it back to options theory. They had a free put from the American public and the call option that they used to not have because of regulation, because regulation made it very hard for them to make excess rents. They got the ability to lever at a crazy rate.

and exercise a much bigger call option than they ever could have exercised with Glass-Steagall in place. So that's using the regulatory structure or what we call regulatory arbitrage, as it's discussed, to really...

make an industry less stable, an economy less stable, financial market less stable, but benefit a very small few that are in the business that get protection and benefit from that regulation. Is that the type of regulation or deregulation that we're about to get? I don't think so. I don't think that the cast of characters that have been assembled on this team with Trump are the... I think they understand what these...

what has happened in the past, in particular in the financial markets, someone like Scott or Howard or any of them, I think they understand it. And they understand what the big bank's oligopoly power structure is. Now, does that mean the JP Morgan business model is under threat or can they maneuver? I mean, they're very talented. They have an amazing CEO. But there might be another one of those big banks that doesn't have that same maneuverability that is more threatened. We'll see.

I remain hopeful that the type of deregulation we're going to see in almost all of these industries, whether it's energy, whether it's tech, whether it's financials, whether it's business services, whatever it is, that the deregulation is really the type that doesn't protect the existing

incumbents in the industry, but allows more competition to come in so that we drive prices back toward marginal costs. We get rid of monopoly power. That's deflationary. That's better for consumers. And that I think is what they're trying to do. So I'm more optimistic on that D-reg story. That's my main story for 2020. - So, and let's be clear. I think we could probably agree on this. A lot of the stuff that's happened since inauguration, the 55 EOs and, you know, like,

Trump is consolidating power. He's put people in place, which is very different than the first administration that will not push back for the most part. He has very little opposition or effective opposition from the Democrats. I think we can kind of agree with that. And the Republicans. He had a lot from the Republicans the first time around. He had a whole set of Romney, Bush, McCain Republicans that he doesn't have now. Yeah. And he's picking fights with our allies and he's cozying up to Putin. You know, let's see what he does with President Xi. But

But if you think a large part of why he got reelected, it probably wasn't the geopolitics and that sort of stuff. It had to do with inflation. It had to do with the middle America and the hollowing out and trade and that sort of thing. This idea that all of our trading partners have a one-up with us, so let's use tariffs, right? So there's a whole host of things that really helped lower taxes and deregulation, right?

Is there a chance that everything's so chaotic, which it feels chaotic right now, you know, at least if you're a market participant, that maybe the bulk of that stuff doesn't really happen? You know, maybe, you know, at some point, the lack of opposition that he has his own party, you know, they don't like some of the stuff that's going on economically and as it relates to the budget, that maybe they don't get meaningful deregulation, which is pro-growth or tax and maybe the trade stuff doesn't

kind of becomes a headwind. I'm just curious how you think about that or how investors should be thinking about that. I mean, I think the lesson learned, this is my, now we're venturing off to politics a little bit more. Well, we have two minutes. So here's what I'm gonna say. I think Trump learned in his first administration when he went after the ACA and he went and he said, I was elected to repeal and replace Obamacare. I'm gonna go after it. And he spent two years doing it and he failed. Yeah.

What's he doing now? He's not going after ACA. He's not going after anything big. He's got these, he's just, it's death by a thousand cuts for the Democrats, right? It's like, I'm going to do plastic straws. I'm going to do, you know, a trade, you know, a tariff on this thing in Mexico. It's the ban and playbook. They can't keep track. And you can't keep up because there's a hundred of them going on at the same time.

And hopefully when you aggregate, and then he's got Elon over there cutting every program under the sun and advertising that we're doing stupid things with taxpayer money and we're going to get checks back to people so that USAID, you know, all this, all that stuff. He's selling it. He's selling it to the American public and he's selling it as money.

lower expenditures in government and less regulations in government. And he's doing it in his very small, but a barrage of steps. It's an entirely different strategy than 17. 17, he took the big bite out of the apple. He's like, I'm going to go after the big kahuna. And he had a 35 seat majority in the house and he couldn't get it done. Now he's got what? Two to five, depending on how you look at it.

But I think he's going after these little things. And that, I think, gives him a better chance of continuing the strategy. As we get closer to that May 2026 date, I mean, he becomes a little bit of a lame duck at some point. You know what I mean? He's got to run again. There's a good chance that they lose the house. You know what I mean? So my question to you, last question, is...

A year from now, do you think what they're able to accomplish on all those things that we just said, has it brought down inflation? Do you know what I mean? Has it kind of reaccelerated growth a bit? Has the economy gotten used to, and again, we haven't hit housing. Maybe we'll do that in another town. It's kind of stuck or whatever. Do you think it really does achieve what they hope to set out on the economy and do the markets reflect that? I think the D-reg story and the

and the less federal government LFG story are hugely disinflationary, and they outweigh the tariff immigration inflationary stories that people are trying to spin by a significant margin. And I think that at the end of the day, there is a real...

what we would call economics positive supply shock, stronger growth, less inflation, Goldilocks style outcome that can come from that reduction in the size of the government footprint, both from a red tape regulation standpoint, but also from a spending standpoint where you're freeing up resources to leave an inefficient public sector and return to a more efficient private sector, which is more productive.

That to me is a huge, huge win. I'm riding on that wave. I understand the tariff story. I understand the immigration story. I understand the risks that there are inflationary risks lurking in the sidelines. I've bet 30 years in my career that the inflationistas were going to lose. I watched everybody that predicted some spike and surge in inflation that was going to happen and be sustained and cause a de-anchoring and send us to the 70s. I watched them all die.

They're just, there's a graveyard full of them. They're in Germany and Japan and the US, everywhere. Some emerging markets they won, they got Zimbabwe, right? But by and large, that trade, that sort of, we're going to lose control of inflation trade, yields are going to go up, the central bank's credibility is gone. That trade has crushed more investors in my career than I've ever would care to imagine. And so I'm

I'm optimistic. You're not going to change a guy's video for 30 years betting the same way on the disinflationary trade from tech and from demographics. Those two things are too powerful. And you brought up the tech thing. The tech thing is so important. What's happening? I mean, I'm playing around with deep research now. I don't know if you've played with deep research. Holy crap. I mean, this thing is like- It's making us smarter on a real-time basis, by the way. It's a first-year analyst. It's a first-year investment banking analyst for

for 200 bucks a month you should i don't know if you listen to ben thompson stratechery it's a great great newsletter and check it out he does a lot of deep dives into this stuff and he tries it all out and and he has a couple great ones um from a couple weeks ago so check that out all right david zervos lfg i'm going to use my version of it you used your version of it hopefully i'll get it when i when i come on to the show uh with you uh with

when we're sitting in the studio, which will be in the next few months. Hopefully we'll get a date. I'll bring hats for everybody. Great. I'm really excited we got to do this. It's something that I know Guy and I wanted to do for a long time. And I'm really excited that also you're participating on Fast Money with us. All these other shows have gotten the benefit of your wisdom. So your optimism, I think, is well taken here. And we appreciate you being here. Thanks for having me, Dan.