Wall Street Breakfast Catalyst Watch: Decoding R-Star

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Julie Morgan: Kim, next week, a big event, Jackson Hole.

Kim Khan: Yeah, a quiet economic calendar, but a big meeting of all major monetary players at the Jackson Hole Symposium that's going to start on Thursday. It's going to be a lot of the Fed officials talking, including Powell, and a lot of the media trying to get a sense of what they're thinking. Obviously, there's never anything or shattering that comes kind of off-script, but sometimes there are surprises on-script in the speeches. So, we'll look for that. And then you've got your kind of like buzzwords. It's like going into like the Oscars, only a lot more nerdy.

Right now, we're seeing a lot of talk about real interest rates. That's the interest rates taking into account inflation. The 10-year real yield has just hit yesterday, its highest level since 2009. It's bumping up against 1.9%. That's got big implications for mortgages. That's got big implications for the stock market. The MarketTech usually finds it tough going when real yields are higher to make any substantial progress. So, there'll be a lot of talk about that.

JM: Okay. What is R-star?

KK: Yeah, R-star is another kind of buzzword that is creeping up. And R-star essentially is this neutral rate of interest, or they call it the real natural rate of interest as well. And it's basically a hypothetical interest rate level of where everything's going great.

You're getting full employment or close to full employment. You've got inflation down to the 2% target, and growth is solid. And it's something that isn't even really easily calculated. Tried a couple of analogy for our listeners who have heard us talk about different topics before.

One, of course, we've talked about the Marvel Universe. So, I can say the R-star and the Marvel Universe would be the exact perfect amount of time between the next Marvel debut of show or movie, which obviously is tough to gauge; or in the case of we're talking about weather, it's the exact point on your thermostat where your AC goes on, cools the house just enough, doesn't make it too cold and doesn't boost your bills, or in other words, it doesn't exist. And nobody's really even sure how to calculate R-star. There's a couple of different models and a lot of different theories on what it should be.

So, what's the point in asking people about this, is basically to get a sense of what the Fed is thinking of whether the economy has really shifted since what we've seen post-COVID. And if they think that things are going to go back to a pre-COVID economy, then R-star or the natural rate of interest should go back pretty low around maybe 0.5. And that would be the target that they would aim for.

And if they think that there's been a major shift in the economy and that interest rates are going to be higher for longer, then they may hint that, oh, R-star is looking up from here. That would be a big message.

Even something as simple and off the cuff as that could shake the markets a bit because that means interest rates and inflation will be higher for longer than people are expecting. And that's got big implications again on how well stocks are going to do.

JM: Okay. So one thing that I got out of what you said is that this really does it like, this would be the perfect time for just about anything or the perfect balance, it doesn't exist.

KK: Precisely. I mean, it would be the perfect balance, but as an economy is such a dynamic thing, it's hard to say what is the perfect balance. And so, you'll have one payroll support that could put it out of whack, when inflation report, anything could change it and any number of things can happen in an economy.

So, you're just balancing on that. Because like, it's the point where monetary policy is neither restrictive nor accommodated. And it's always kind of one of those things working in one direction or the other. And that the idea is though, the goal is like to have this guiding light of R-star to show you the way of where you want to direct your monetary policy.

JM: Every time you say R-star, I think of OnStar, but you know what, let me keep going.

KK: It would be easier if the Fed had OnStar, just asked, “Hey, what does the rate of interest should be?”

JM: Exactly. Exactly. So, of course, we know earnings continues next week and we're going to talk mostly about one company, NVIDIA. I checked with our Editor, Chris, about this and he said, “Look out for information on data center sales.”

Chris wrote an article this week, where he included analysis for Morgan Stanley analyst, Joseph Moore. Moore noted that NVIDIA is likely to see data center revenue trend to $15 billion or more over the next few quarters, driven by the massive shift in spending toward artificial intelligence. Of course, there's that buzzword AI. Chris said that, guidance is also important as the stock is up significantly year-to-date.

So, any sizable jump in expectations is noteworthy. And if you're wondering how sizable, how significant is it up year-to-date? Year-to-date NVIDIA is up more than 208%, and heads up if you follow a Home Depot, you likely follow Lowe's as well.

We know this week, Home Depot reported earnings. Lowe's is next week. Home Depot slid past consensus estimates with its Q2 earnings report. Standing out, comparable sales fell 2% during the quarter, beating the consensus expectation for a drop of 4.1%. That's just one number that you can compare and contrast when Lowe's reports next Tuesday.

So, Kim, now let's chat about 13F filings. I got to say that something that has been on my mind is the fact that Warren Buffett's Berkshire Hathaway built stakes in homebuilders DHI, NVR, and Lennar. For some reason, I've just been questioning why, because I really want to understand this?

KK: Well, first of all, we got to take the perspective of, it's Warren Buffett and how long-term he's looking? He's definitely looking at a longer-term perspective. He buys inter-companies that he really likes the fundamentals of and the prospects of, and he's not kind of worried too much about the ups and downs that are going to happen this year or maybe even one or two years down the road.

But one reason he could be by is because we're thinking that the markets are priced in the Fed terminal rate now. And that any – the next move, whether the rates stay higher for longer or not is, next move will be a cut as far as the markets are concerned. That's going to bring mortgage rates down and that's going to spur some home buying.

Another reason could be there is a big demand already right now for single-family homes. And we saw it a bit in the housing starts numbers that we got this past week. And really single-family starts are kind of boosted by the lack of existing homes, because a lot of people are finding themselves trapped in a home that they maybe want to leave or move out of, but can't because they would just be trading-off to a mortgage that's much bigger than what they're paying currently. So, they're not putting these homes on the market. So, there is demand for these kind of newer single-family homes and that could be one reason why he's into that.

JM: And something else that I notice is that Michael Burry is making headlines. Kim, tell me why?

KK: Yeah, he's making headlines and everybody knows him from his representation in the Big Short. People probably think more about Christian Bale when they think of Michael Burry than the actual Michael Burry. But he did make that Big Short bet on the housing market that worked out tremendously for him.

And now his hedge fund, Scion Capital is making a bet against the overall stock market. And it's about a $1.6 billion bet and he’s buying puts on SPY, the S&P ETF; and QQQ, the Nasdaq -100 ETF. And it's essentially just a bet that the market will go down.

We didn't get anything more from the filing on what his reading is. He tends to go on and off Twitter or X as it is now. Deactivate, then reactivate his account and giving reasons, but we can speculate, and maybe he's concerned about a lot of things that people have also been concerned about this year that there was too much of a run-up in the AI enthusiasm. Things like you said, NVIDIA up 200% that it's time for a pullback in these major names that kind of hold so much power over the market. And when you've got real interest rates rising, that's a tough environment for growth stocks.

JM: Okay. And so, basically, we probably should just wait and see to see if he's really going to talk about why he did what he did.

KK: Yeah. He could be out of the trade already for all we know really. So, that's another thing with these 13F’s.

JM: Yeah, that's interesting. Kim, is there anything else you'd like to add?

KK: That's about it for this week.