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The Fed is 'jawboning' to bring down demand and inflation, strategist says

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Thomas Hayes, managing member and chairman at Great Hill Capital, joins Yahoo Finance Live to discuss the latest moves by the Fed and how they might respond to the recent inflation data.

Video Transcript

RACHELLE AKUFFO: Well, joining us now to break down the rest of this market action is Thomas Hayes, Great Hill Capital chairman and managing member. Good to see you, Thomas. So, obviously, a lot of data for markets to digest this week, ending most recently with consumer sentiment and this retail data. How do you think markets are feeling about this picture overall and where, perhaps, the Fed may be in terms of how aggressive it will need to be?

THOMAS HAYES: Well, I think a lot better, Rachelle. Thanks for having me. One thing that I noticed today with the University of Michigan's Consumer Sentiment, it was at 51.1%, which was up from 50. Now, since 1980, the last three times you've seen consumer sentiment below 58, it marked the lows in sentiment and the peak in inflation. And I think people are starting to feel that more and more, despite the train wreck of CPI and PPI numbers earlier this week. They literally couldn't have been any worse. That's the bad news. The good news is they're backward-looking.

But when you've seen sentiment get this low, in the next 12 months, the average returns for the S&P 500 are 20.87%. So I think what you're seeing here is the Fed trying to walk the tightrope. They wanted to bring down demand, which they've certainly done. But they don't want to destroy the economy. And a perfect example of this, Rachelle, is if you look at last month's quantitative tightening in June, they promised to do $47.5 billion of liquidity withdrawal or tightening.

What they actually did was they wound up buying about $3 billion net of treasuries. And they reduced liquidity by only $7 and 1/2 billion in mortgage-backed securities. So they're jawboning to kind of bring down demand to bring down inflation. But they don't want to push too hard because you see things like the jobless claims jump to 244,000. They don't want to destroy the economy. So they're trying to navigate and hopefully get some type of softest landing.

The key is going to be, does the commodities roll over from June, where you saw corn, soybeans, copper, oil, cotton, platinum, cocoa all roll over? How quickly does that get to the cash register for the consumer? And can they jawbone until the actual prices come down? Or do they have to move aggressively? And if we listen to Waller, Waller said if you're thinking 100 basis points, you might be getting ahead of yourself. We're at 75.

SEANA SMITH: Well, Tom, what about the 75 versus 100 basis point debate that we're having right now? What does the market want?

THOMAS HAYES: Well, I think the market wants 75 at this point. I know there are a lot of people out there that say we have to crush inflation. But they're backward-looking numbers. One of the things we saw yesterday, Seana, with Taiwan Semiconductor, they beat on the top line, the bottom line, and forward guidance. That's in the face of consumer electronics were dampening. The demand was dampening for appliances for consumer electronics.

Where were they getting production and demand was in auto chips. And why that's so important is a huge component of the CPI is used in new car prices because there's been a shortage. Those prices have gone up dramatically. The reason there's been a shortage is because they've got cars ready to go with no semiconductor chips to go in them, so they could get them on the road. And now those chips are going to come in dramatically that these producers are able to get them to the OEMs.

And once you see that glut of new cars come on the road, prices are going to come down. That's also going to alleviate inflation. And I think we're going to see, just as we saw despondency earlier this week, I think we could get to euphoria towards the end of the year, as sentiment starts to change, and people realize that maybe we've already had a decent portion of the recession in the rear view mirror.

And we're going to find out really soon with those GDP numbers at the end of the month. You could certainly see a situation where they raise 75 basis points the next day GDP comes out negative for Q2, and they go on pause. And that would kind of be the best of all worlds in the sense of creating a soft landing moving forward.

DAVE BRIGGS: We had a couple of guests yesterday said it doesn't really matter 75 versus 100. But then you have Raphael Bostic today, saying, moving too dramatically, i.e. 100 points, would undermine a lot of the other things that are working well. What is the risk of 100 basis points?

THOMAS HAYES: Well, the risk is that monetary policy, Dave, it works on a lagged basis. So they've done a meaningful amount of tightening in the first half of this year. We're seeing it in reduced demand. We're seeing it in some of these jobless numbers start to tick up. We're seeing it in consumer sentiment. So they want to move aggressively to tamp down inflation.

But it's also, again, a lag basis. And we did see that entire commodity basket roll over in June. So that's going to take a month, two months, three months before we actually see it at the cash register and at the gas pump. But even gasoline prices, as pessimistic as we all are about that, going to fill up our cars, they were down $0.40 in the month of June, as the administration so aptly pointed out after the tremendous CPI print on Tuesday.

RACHELLE AKUFFO: And you've identified biotech and value tech as groups that you think will do well in this slower growth environment. What are the standouts for you within those groups?

THOMAS HAYES: Yeah, so I think in terms of looking for high quality businesses that have really come on sale in the first half of the year, cyclicals led the way, coming out of the pandemic. And now I think we're going to move into a slower growth environment, as inflation comes down, as GDP starts to come down, as we saw in Q1 and probably Q2. So we like biotech as a basket, number one, for a couple of reasons.

Number one, animal spirits are back. OK, you've seen a handful of deals just in the past six weeks, starting with Pfizer taking out Biohaven for $11 billion, and most recently, the CGEN deal at $40 billion. That's going to continue to happen. And you're seeing these biotech companies, besides trading at multi-decade lows across all metrics, price to book, price to cash, price to operating cash flow, forward PE, et cetera, now you've got pharma boards across the US on notice if they don't buy these companies for innovation and growth, their competitors are. They've got tons of cash, little innovation.

And the second catalyst we're seeing, FDA's been totally focused on COVID the last two years, vaccines, antivirals. Now they're back to approving normalized drugs. We're going to see some of that data come out in coming months. That will be a further catalyst. And on the value tech front, I mean, you can't go wrong. Facebook trading at 12 times next year's earnings. Mark Zuckerberg, he always figures it out, even if there's a short-term slow in ad spend. And then Amazon down 40%, that's happened seven times in its career. It always works back to new highs. And we think this time will be no different.

DAVE BRIGGS: Tom, it's always hard to take much away from Chinese data. Tough to believe it with a grain of salt, obviously, but China's 0.4% GDP growth the worst since early in 2020 when the pandemic just breaking out. What is your takeaway from that?

THOMAS HAYES: Well, I think it's a miracle that they had positive GDP growth with big cities shut down for 2/3 of the quarter. So, you know, it's interesting about China data. Everyone says it can't be true when it's positive, but when it's negative, no one says a whisper. And they've had a lot of negative numbers in the last six to nine months.

So I do think they're coming out of this. They're doing trillions of dollars of stimulus on the fiscal side. They've been aggressively easing for the last four to six months. It's not showing up yet because it's basically like driving a Ferrari. You've got one foot on the brake with the shutdowns and one foot floored with the stimulus on the gas. You're just burning rubber and standing in place. But the minute this lockdowns are completely over, and they go back, that stimulus is going to be felt on a lag basis.

And I think by the end of the year, you're going to see some amazing growth. And you're going to see some amazing results in Chinese stocks, you know, albeit we had a tough week this week. They did bottom in March. Many of these companies are up 30%, 40%, 50%, while the US indices have been weak. And I think we're going to see some follow-through after this short-term bumpiness.

DAVE BRIGGS: As for the driving a Ferrari par, I'm gonna have to take your word for it, brother. Good to see you, Thomas Hayes. Have a good weekend, my man.

THOMAS HAYES: Thanks so much, Dave.