We’re dealing with an economy that is not as good as people think: Analyst

Dave Ellison, Hennessy Funds Large and Small Cap Financial Funds Portfolio Manager joins the Yahoo Finance Live panel with the latest on the markets.

Video Transcript

BRIAN CHEUNG: Of course, all eyes on the market right now, and that's where we'll begin this hour. We're chatting more about that with Dave Ellison, Hennessy Funds large and small cap financial funds portfolio manager. Dave, thanks for stopping by this morning. Again, some interesting movement. We started off negative in the red this morning, but things have kind of popped back up. You don't want to read too much into one day's action. But what are you gleaning from what we've seen, specifically in the bond market, because that might suggest some more risk of activity as people go into fixed income? What do you think this market dynamic is telling us?

DAVE ELLISON: Well, I think it's, again, we've got the end of the month came last week, and now we have earnings season coming up, and that's people are positioning around earnings season. The great thing is it's a crazy story. I think the textbooks that we used in college and business school about the stronger economy and higher rates, they're all going to have to be rewritten. And I think we're just dealing with an economy that I think is not as good as people think.

And there's just such a voracious demand for yield and that it's overwhelming, whatever the Fed is doing and whatever the economy's doing. So I've been saying for many, many years that we're going to end up like Japan. We're going to have very, very low rates, and the economy is going to live on growth stocks and a little bit of return in your bank and that's going to be it. It's going to become a very narrow economy. And you see that now with the growth stocks doing what they're doing for the last four or five years. So we'll see what happens.

AKIKO FUJITA: With that said, is that where you're putting your money behind right now? What does your portfolio look like when you consider the fact that you just mentioned that you just don't think the economy is as strong as maybe the market has suggested?

DAVE ELLISON: Well I think the economy is-- the market is basically saying, look, I believe in growth, I don't believe in price or inflation. And I think they started to change their mind a couple of months ago, and now they're realizing that the only real opportunity in the marketplace is companies that can grow. I don't care if your price goes up or down. Lumber goes up, it goes down, it doesn't matter.

There's no real growth in the demand for lumber, but there's growth in the demand for tech services and all the other stuff that's around that industry. And that's why those stocks continue to do well. I run two financial funds. And in the large cap portfolio, I'm basically buying the growth payment company, whether it be Visa, Mastercard, PayPal, Square, World Pay. You name it. I own some banks but the banks are really going to struggle here if rates don't come back up. And I just don't think rates are going to go up. I think we're missing the truth of the market. In a sense, the economy ran on the leverage for many years. I started in the early '80s.

The economy and the market ran on the leverage. And every little downturn, every big downturn in the market was because the leveraged trade didn't work. And it broke, and it had to be fixed by the Fed, primarily with lower rates. And now we're in a situation where the market and the economy runs on liquidity. And the liquidity flows in and out. It's not leverage. And so that's a new dynamic that I don't fully understand. But I think the market's trading as if we're a leveraged economy, and we're not. We're a liquidity economy now. And you see that with the Fed funds, you see that with the Fed, and you see that with rates. There's just too much liquidity, too much demand for collateral. And so rates are going to stay low for a generation plus.

BRIAN CHEUNG: Yeah. When you talk about the humility of not understanding what's going on this low rates environment, we don't know what the next step is going to be when it comes to whether or not the next downturn maybe pushes us into negative territory. Regardless, what we know is that this is more of a reach for yield market than it was in the past. So I guess my question to you is, what do you think is going to be the next cycle that could be the next downturn? And what does that advising you in terms of maybe asset classes that, if you don't like them, look, I'm just going to stay away from that. I don't want to be anywhere close to there.

DAVE ELLISON: Well, I think you're seeing it now. The market is doing a lot of the work for you. You look at the best performing stocks the last three or four years or the last-- maybe not the last three or four months because it's all been this reflation trade. And Wall Street loves that because they want trades. They want people to think there's a change in the weather so people will buy new clothes, in a sense. It's a metaphor for buying new stocks.

We've had that change in the weather. It didn't work. And the market's jumping right back into the growth phase of the market in terms of the stock. So my sense is that the Fed tapering is actually going to make rates go lower, not higher. And that's why the Fed is resisting the tapering.

And so I think what's happening in the market is the exact opposite of what people think should be happening because there's so much liquidity in the system that is looking for collateral. If you look at the bank, the loan-deposit ratios at the banks, meaning that the loans are much, much higher than the-- excuse me, the deposits are much, much higher than the loans.

And in a lot of the cases, the loans are twice-- excuse me, the deposits are twice the loans on the books of these banks. That's at all-time historic highs. And every bank I talked to in the last month, month and a half leading up to earnings season, they're all telling me that deposits are still coming in. And they're paying them basically nothing. So that tells me that consumption is just not there. People are still putting money in the banks now.

BRIAN CHEUNG: Yeah. These banks were swelling on the balance sheet. That's because of the amount of quantitative easing that the Fed's done, you have some banks actually turning away wealth management funds now. But again, Dave Ellison, Hennessy Fund's large and small cap financial fence portfolio manager. Thanks for stopping by.