Fed: 'Things break' when you start quantitative tightening, strategist says

Great Hill Capital Chairman and Managing Member Thomas Hayes joins Yahoo Finance Live to discuss the leadership behind the movements in meme stocks like Bed Bath & Beyond, crypto, and market outlooks ahead of the Fed's future interest rate plans.

Video transcript

SEANA SMITH: As we close out the trading week, all three are lower. But the Dow off just around 338 points. Financials, consumer discretionary, the worst performing sectors of the day.

Let's bring in Thomas Hayes, chairman and managing member at Great Hill Capital. And Thomas, you were sitting here for the second half of that interview when we were discussing the craze that we've seen around meme stocks. A lot of that driving the action this week. What's your big takeaway?

THOMAS HAYES: My big takeaway is the Wall Street bets traders would follow Ryan Cohen into a paper bag. I mean, that's exactly what happened. And unfortunately, they were left holding that bag.

And I think-- I hearken back to an anecdote where Jeff Bezos asked Warren Buffett, he said, if what you do is so simple, why doesn't everyone do it? And to that Warren Buffett responded, because no one wants to get rich slowly. And that's the lesson of this week. That's the takeaway from the meme stock mania.

DAVE BRIGGS: Thomas, good to see you. Dave Briggs here. And yeah, the two big stories of the week have been really the meme trade and of course, the news that we started with in the Bitcoin space, and a pretty considerable crash even before the breaking news. Is there any big picture takeaway from where crypto is headed?

THOMAS HAYES: Yeah, crypto's another thing that's very hard to figure out and hard to determine intrinsic value. I think that you really have to have a strong stomach if you believe in it, in Ethereum, in the smart contracts, et cetera.

But the crypto traders, they seem to be accustomed to these long crypto winters. And many of them are gonna stick it out. We'll see if they get another rise up in another year or two. But for now, I think the jury is out on crypto.

SEANA SMITH: And Thomas, you look at the action that we're looking at for the week, S&P and NASDAQ losing a bit of steam. We're looking at the same story for the Dow today, off just over 300 points. There's been some conflicting calls out on the Street, whether or not this recent rally that we've seen, if it's going to lose all of its momentum. What's your outlook?

THOMAS HAYES: Yeah, I think, well, certainly people were not positioned properly into earnings. And people were calling for 20% reductions in earning estimates. We got 2% reduction in earnings estimates. That said, we are 18% off the lows. So it would be natural to consolidate. You can consolidate in price or you can consolidate in time.

I'm in the latter camp. I think we could see some grinding sideways for the next month or so until we take our next leg up. But if you look at the Bank of America survey that came out this week, for instance, even after this big move, your institutional managers are still overweight in cash, the highest level since April of 2020 which was closer to the bottom than the top, and December 2008, and before that March of 2003. Those were three times you wanted to be a buyer, not a seller when everyone else was in cash.

The other thing is expectations for an imminent recession are very high. As high as they were in April of 2020, which was after the recession, effectively you were already through most of it. You'd already bought them in the stock market. And the last time expectations for a recession were this high was March of 2009 you wanted to be a buyer because the recession was already in the rearview mirror.

So we've already had a technical recession in the first half, two quarters of negative GDP. When or whether that will actually be declared, we don't know. But I think based on the positioning, these are not things that you historically see at tops. These are things you see closer to the bottoms in terms of that sentiment.

Managers are overweight cash and they're overweight defensives. Even after an 18% move, they're underweight emerging markets and they're underweight Europe. I think emerging markets is gonna be an interesting intermediate to long-term play.

DAVE BRIGGS: And Tom, we're gonna get PCE next week. We'll get some more housing data, which has been pretty grim in recent days, in recent months, quite frankly. What's the next big catalyst for the market? We'll also hear from the Fed at Jackson Hole.

THOMAS HAYES: I think Jackson Hole is the biggest thing going on next week, Dave. You know, right now-- the thing that everyone is aware of, when you start quantitative tightening, things break. OK? And I think the Fed is more acutely aware of this than anyone else.

As such, what we've seen is that they've only done one third of the balance sheet roll off that they had anticipated that they would have done by this point in time. And I think they could potentially take Jackson Hole as an opportunity to recalibrate that scheduling, and maybe potentially slow it down and say, listen, if things get too hot, we're gonna ramp up quantitative easing. If things are OK, we're gonna go at our own pace and be comfortable.

And that would be perceived as a continuation of the pivot and potentially, start to ease back some of the strength of the dollar. Because when you look at the strength of the dollar, when you look at the effect of quantitative tightening, that's equivalent to about consensus is about one full percentage rate hike. So with all the tightening that they've done so far, I think so long as the CPI and PPI in September come in reasonably like we saw this month, they could take things a little more slowly than people anticipate.