Data Without Government

Interactive Broker’s Mary MacNamara and Jose Torres unpack the U.S. government shutdown, AI-fueled market highs, and gold’s surge as investors weigh optimism against economic uncertainty.

Summary – Cents of Security Podcasts Ep. 119

Mary MacNamara

Hello everybody and welcome to the Cents of Security Podcast. I’m Mary MacNamara, and today we’re talking to Jose Torres. Hi Jose. How are you?

Jose Torres

Hi, Mary. Great to be here. I love doing this weekly series we have going on.

Mary MacNamara

Yeah, me too. Okay, so we’re in day six, I believe on this shutdown in the United States of America and tell us what’s going on.

Jose Torres

The Republicans and Democrats remain in a standoff. The Democrats want Medicaid cuts that were implemented in the big, beautiful bill to be paired back. They also don’t want the health insurance subsidies to expire at year end. They’re essentially saying that the Republican party is eliminating access to healthcare for a lot of lower- and middle-income Americans.

The Republican party is, doesn’t want to make those concessions, is willing to negotiate only after a bill is passed. So that’s really the standoff at this particular juncture. Now next week it’s the day where federal workers get paid, so they already missed a paycheck. Next week they’re going to miss another paycheck.

You’re going to start seeing presumably increased delays in government services. You’re going to start seeing government workers start to call out at a higher rate since they aren’t getting paid. Morale is going to be low. And Mary, as time goes, essentially there is more and more pressure. For both parties to get a deal done.

Right now, our November 1st forecast contract has a 30% chance, 30% yes. That the government is going to remain closed through November 1st. So, 30% chance, according to our prediction market, that this government shutdown is going to last at least 30 days.

Mary MacNamara

Are there any green or red flags that you’re looking at between the executive branch and the legislative branch of the government at this point in the data?

Jose Torres

Yeah, in the day to day, the executive branch waiting to see if President Trump what he is going to end up doing. Sometimes he’s threatening to get rid of hundreds of thousands of federal workers. Other times it looks like they’re going to have a meeting. So a red flag would be when President Trump gets really upset.

A green flag or a yellow flag or more positive aspect or development would be when President Trump is looking to negotiate with folks in the Democratic party. Also, with calculating how many votes the Republicans have. So, the Republicans in the Senate need five more Democrats to come across and vote with the Republicans and break party lines.

But that’s, that is a lot. There’s, there’s only a hundred senators and the Republicans already have a few Democrats that broke party lines and are agreeing to vote with the Republicans, so they need five more. Waiting to see if a few other ones come onto the Republican side.

That’s part of the analysis as well. And the n also. To see if the Republicans feel like negotiating or working with the Democrats to try to implement some of those concessions. But so far, it’s really been an augmented standoff. The Republicans really don’t want to entertain any of the Medicaid cuts or the health insurance, Obamacare health insurance.

Subsidies that expire at year end and the Democrats without improved healthcare, they are unwilling to move forward. That’s where we are at this juncture.

Mary MacNamara

So there have been some recent AI announcements today too with NASDAQ and the Russell hitting all-time highs, how much of this rally is really being driven by AI related optimism versus broader economic fundamentals? Because the market looks pretty good.

Jose Torres

Oh my goodness, grace.

It’s definitely the former, it is definitely more ai, because if the market was rallying off of economic fundamentals, and the economy’s doing good, but if the market was rallying off of economic fundamentals. You wouldn’t need so much valuation expansion to drive prices higher.

You could allow earnings to drive prices higher, but the reason it’s an AI craze it because we’re pricing in the future, earnings a lot faster than usual. And you can quantify that by a Forward PE on the S&P 500 of roughly 23, meaning that the next 12 months of profits trade 23 times the S&P’s price.

So theoretically, if earnings were stable, you would have to wait 23 times to get your investment back as an investor. So that’s the price to earnings. Multiple is a important valuation metric. In general, and basic terms, when it’s low, stocks are cheap. When its high, stocks are expensive. And right now, stocks are very expensive.

It does not mean that they can’t get more expensive. They can certainly get more expensive. But because multiples have really rallied to dotcom bubble levels. Levels from the dotcom era back near the year 2000. You know that points to the rally. Being driven by artificial intelligence rather than economic fundamentals.

On top of that, when you look at which sectors of the market are leading the gains, as well as which specific companies, you realize that they’re all very AI influenced and they’re huge providers, supporters and users of artificial intelligence. So absolutely an artificial intelligence rally. Since ChatGPT came out back in 2023.

Mary MacNamara

Absolutely. So, what about gold? It also reached a high too. So, what is that signal about investor sentiment, especially in the context of rising equity markets and the shutdown risk?

Jose Torres Yeah, gold is unbelievable. You have a huge rally this year. I think it’s up 47%. I’ll give you the exact number in a second. Year to date, you’re up 51% Mary. Wow. 51% on gold. And really, it’s the, we’re calling it the monetary debasement trade. Essentially, a lot of central banks around the world are allowing tolerating inflation to be above their targets.

So debt, national debt is incrementally becoming less of a safe haven. So, institutions, central banks, namely international central banks, instead of buying a lot more US Treasuries or having a share of their portfolio, have a heavy amount of US Treasuries. They’re choosing now to diversify a lot more with gold because US Treasuries can be subject to.

Too many rate cuts from the Federal Reserve or inflation expectations that become unanchored, and the dynamics between the Fed’s employment mandate and inflation mandate beginning to change quite significantly. In fact. The Fed hasn’t been at its 2% target in a really long time, since roughly March 2021.

So, you know, four and a half years, more than four and a half years, the Fed’s not at its 2% target global investors. All of a sudden, they’re seeing saying if we hold treasuries, we are now accepting inflation risk. So, let’s turn to gold. To be fair, it’s not a problem just in the US you’re seeing problems with fixed income in terms of their desirability and their changing characteristics over time.

You’re seeing the Japanese bond market has been long in yields have been significantly higher due to debt concerns, deficit issues, political upheaval, also in France to see the same thing. Similar dynamic UK, the same thing. So it’s something we’re seeing around the world where national debt isn’t as relied on as it was in the past.

Opening the door for gold, which can’t really be manipulated by fiscal authorities, monetary authorities, right? So central banks, governments, political leaders, they can’t really manipulate gold, right? It’s a me, it’s a natural resource, but they could manipulate. The currency in circulation. They can manipulate interest rates, they can manipulate a lot of things, but gold they can’t manipulate.

And that’s why a lot of folks have been flocking to gold and marry Bitcoin didn’t make an all-time high today, but it did make an all-time high over the weekend. So, it’s also Bitcoin. It’s weird because Bitcoin is not, it’s some folks think speculative, others think it’s safe haven others. Qualify it in their own asset class in their own named asset class.

A totally different asset class, but some folks speculative or safe haven. So, Bitcoin is also, benefiting from folks leaving government debt assets to an extent, opting for other safer haven assets or assets that can’t be directly controlled or influenced heavily by governments.

Mary MacNamara

So, you mentioned in your article that economists are getting information from the private markets.

Jose Torres

Last week we got a jobs report from ADP, so we didn’t get one from the government. We got numbers from ADP, so we got something folks. We got something, we got numbers from Revelio Labs. They’re now increasing their prominence as a firm because of the government shutdown; they have their own publication that sort of mirrors and tries to predict what the official Bureau of Labor Systems report is going to be. We also get on Thursdays a Challenger, Gray & Christmas report on layoffs and hires. We got ISM Surveys, Manufacturing and Services, S&P Global as well. So, we have some data, it’s not the significance as the government data, but we do get some data. So, for example on October 7th, we are going to get used car prices. That’s also from Cox Automotive. That’s going to be a private sector release. We’re going to get data from the Fed.

So, folks might ask how come the Fed is releasing data, aren’t we in the government shutdown? Some agencies like the Fed, they continue operating even in a shutdown state. So, we’re going to get data from the Fed, like industrial production, the Beige Book, the regional surveys, the weekly economic index, et cetera, so that, now that’s more public sector data.

But the point is that we still have a lot of private sector data. That’s going to be coming out. We still have the Fed surveys data and other publications that are coming out. So even though we don’t have the significant figures that we’re used to, like non-farm payroll, CPI, PPI, retail sales, we have other things to lean on.

Final point here, the retail sales report, CNBC also has their statistics that run near the government’s numbers that are usually released a day or two before. So, we have these proxies that we can rely on as we move forward. Now, what have these proxies been telling us? These proxies have been telling us that the economy remains strong, remains on solid of footing, but there are some areas of weakness like hiring.

Employment sector, that’s a significant risk. So, in a growing economy, but the labor market is weakening that essentially emboldens investors because that means, okay, corporate earnings are going to be buoyant, but the Fed has to watch the labor market and deliver some rate cuts. So that’s really a nice balance for equity market participants where they get the buoyancy in corporate earnings via positive economic data.

But the struggling labor market opens the door up to rate cuts. Now, of course, the question is how much longer is the labor market going to weaken and can the Fed deliver some cuts and save the labor market just in time before we presumably go into a downturn? That’s the bet that Wall Street is making.

I think it’s a pretty good bet. I don’t think we go into a downturn because the growthy aspects of the economy right now are on solid footing, namely lighter taxation, milder regulations, subdued energy costs, incentives to provide capital expenditures domestically, et cetera. So, we have, a really strong overall economic backdrop.

And the thing with the labor market is that you have two things really working against it. Right now. You have immigration restrictiveness, where the pool of prospective workers is way tighter than what it usually is, way less workers to choose from if you’re an employer looking for additional labor.

and then AI. Firms are starting to use AI. They’re starting to see, hey, what can I do here to maybe eliminate or reduce some of the entry level jobs that I have that perhaps the AI tools can do? So those are really two significant factors that are dominating the labor market as to why we can’t produce numbers that are, a 100,000 a month or 200,000 a month in job gains.

We just don’t have the immigrants, and the AI is also taking up some of that demand.

Mary MacNamara

Okay. So, to wrap up coming this week, is there anything else that we should be, on the lookout for, for the rest of the week in your opinion?

Jose Torres

Yeah, absolutely. We’re going to be looking every day at the government shutdown news. We’re going to be looking to see if the downsizing efforts from the federal government are meaningful and if they actually become enacted because they’re expected to be challenged in court. The issue with a significant downsizing, it’d be good for the budget and good for government expenditures because that’ll reduce them and be conducive to lighter interest rates.

But the issue with the downsizing is that all of a sudden. A lot of folks start to lose their jobs and their incomes, so it’s a headwind to consumer spending. It could drive uncertainty north, and that could limit our growth potential. In terms of what we have coming up, we have used car prices tomorrow October 7th. We have plenty of fed speakers coming out. We have the challenger survey, private sector survey. We also have the fed’s weekly economic index.

So not high-profile indicators until Friday when you have the University of Michigan’s consumer sentiment print that’s closely watched, that’s going to be for October. We’re expecting a decline from 55.1 to 54.2. Current conditions and consumer expectations expected to be lower, as well as inflation expectations ticking down a bit as well.

Mary MacNamara

Also, at some point in the future I want to address this Fed speak speeches because there seems to be like quite a number this week and next week. How do you listen to that? And the information you glean from these speeches.

Jose Torres

Thank you. What a week, right? It’s beautiful here. Very warm. I’m not sure how Florida is you guys are getting rain. We are not getting any rain up here, but we’re hoping to get some rain soon, I think on Wednesday. So, thank you so much. We appreciate your insights.

Jose Torres

My pleasure. Yeah, down here we’re wrapping up hurricane season without much damage due this year, so maybe some insurance premium relief for South Florida families this year. We’ll see.

Mary MacNamara

That would be good. Absolutely. Good. All right. Thank you so much, Jose.

Jose Torres

Bye, Mary. Great to be here.