‘Without a muscular stimulus, it will be hard to continue' this pace of improvement: Skybridge Capital Co-CIO

Troy Gayeski, Skybridge Capital Co-CIO, joins The Final Round panel to discuss his thoughts on the market, the recent jobless claim number, and what impact a new stimulus package could have.

Video Transcript

SEANA SMITH: Well, I want to get some more on today's market action and really what we've seen over the last couple of weeks. And for that, we have Troy Gayeski. He's the SkyBridge Capital-- the co-chief investment officer there. And, Troy, it's great to have you back on the program. Let's just start with that jobless claims number that we briefly mentioned at the top of the hour falling to below a million-- certainly is trending in the right direction.

I'm just curious just your take on how investors are looking at this number. Because on one hand, it's much better than what we've seen. But historically speaking, it's still a very high number.

TROY GAYESKI: Yeah, it's really tragic when under a million claims is viewed as good news. And you know, I think investors have come to the conclusion, like we talked about before, that the economy never contracted as much as people feared. It's expanded faster from a higher low than what people initially expected. But right now, a lot of the focus is on the upcoming stimulus bill.

Because without a muscular stimulus, it's going to be very hard to continue this trend in labor market improvement, in consumption improvement, in industrial production improvement. I mean, the real success we had from the federal government in Q2 and early Q3 was all taking place in March and April when they got legislation passed fast. And now it's almost political malpractice to drag this out. Because as you know, without the expanded unemployment claims payments as well as the direct stimulus, it's going to be much harder for consumers to consume and also service their debt, which could put us in for a mild contraction going into the election.

SEANA SMITH: Troy, I mean, it's interesting, because we've been talking about the fact as to whether or not, since we've been getting a little bit better econ data out recently, maybe there's a way that we could spin this that we don't need additional stimulus. But it sounds like you're saying that we need this [INAUDIBLE] to continue, because if we don't get it, then the labor market is just going to reverse and weaken again.

TROY GAYESKI: Yeah. So it's not that the world's going to end if we don't get the stimulus, but it's going to be very hard to maintain the pace of improvement that we've seen since the lows in the labor market or the economy in April. I mean, the V that we got off the bottom was directly tied to that-- personal incomes were up-- they're still up 6% through June from January of this year, yet consumption is down 5, which has led to these massive savings rates. So there is pent-up demand.

But if you want to drive unemployment down to the mid to, call it, 5% to 7% range by the end of 2021 and you also want to get back to peak GDP, which does not necessarily mean consumer incomes will be as healthy as they are now, you need another round of stimulus. And even if it's $1 trillion, that's still 5% of GDP. That's an incredible muscular number. But clearly, a number closer to $2 would be far better for the real economy, which is now almost completely divorced from the equity market which has become more dominated by the large cap tech names, as you guys know.

RICK NEWMAN: Hey, Troy, Rick Newman.

TROY GAYESKI: Hey, Rick.

RICK NEWMAN: What are your-- what are your clients and other people you talked to in the investing community saying about a Joe Biden presidency? It seems possible that maybe investors will be fine with a Biden presidency, and there may not be any real disruption in stocks as we get closer to the election and if it does appear that Biden has a good shot at winning. What do you think about that?

TROY GAYESKI: That's a great question. So obviously, typically, that would be the main event. But it's now it's almost a sideshow compared to the pace of recovery, the upcoming stimulus, and Fed policy. But you know, the expectation prior to the pandemic was if Biden was elected, the Senate would flip. And both of those more than likely have to happen together. You're not going to see the Senate flip without Biden winning and vice versa. Then there could be some fall in equity markets in the nearer term from multiple compression due to higher corporate tax rates.

Now, you know, the consensus has evolved more to if you get Biden in the White House and a foot of flip in the Senate, you're going to see more muscular stimulus that, again, benefits the real economy. So that, in the near term, will outweigh any fears of future higher corporate tax rates and higher rates in the-- you know, the upper decile to the population.

So you know, paradoxically, you will more than likely get more economic stimulus and output with a Biden win. And the issues around corporate taxes will probably be pushed towards Q3 or Q4 of 2021-- meaning, you know, it's highly likely that the first act he takes his president is going to be to raise corporate tax rates, right, when we're in such an economic hole. That will come. And of course, at some point-- late 2021-- there'll be more regulation of tech, we think. But that's more of a 2021 issue.

So I think there was a lot of concern early on, but as people have weighed the pros and cons of the Trump administration staying on versus a Biden and Democratic rule of the senate, markets have become more sanguine, and investors have become a little more relaxed about the policy shift in DC.

AKIKO FUJITA: Troy, I want to get back to what you said about the need for stimulus-- I think you said muscular stimulus.

TROY GAYESKI: I think I said it twice, actually.

AKIKO FUJITA: I think--

[INTERPOSING VOICES]

AKIKO FUJITA: I'm curious, you know, how significant that stimulus package needs to be in order to push the market higher. Is it enough to get some kind of agreement? I mean, right now, we're talking a significant divide between Republicans and Democrats. What's the number-- or what are the specifics in the stimulus you think need to be included in order to keep this momentum going?

TROY GAYESKI: Yes. So enhanced unemployment is $300 a week or maybe $400 if some of the states kick in, and is certainly better than nothing. However, that's no replacement for $600 a week plus the $1,200 in stimulus, which both sides had agreed upon, right? And so if you're doing a trillion dollars and you're spending it over, say, three months through stimulus checks, enhanced unemployment, another round of funding for PPP, that would be sufficient to carry us on over the next month or two. But it would be much better to do a larger stimulus that's going to be spent over a six-month period to give markets more confidence.

Now, again, we can't highlight enough the divorce between the real economy and the market. So the Fed has stopped expanding their balance sheet. If they start to fret over a lack of stimulus and they start to ramp up their balance sheet, you could see economic activity flatline and markets continue to go up. We just think that's getting less likely, given the fact that PE multiples for 2021 are roughly 21 to 22 times forward earnings, which is a very rich multiple, even with interest rates so low.

And you know, one of your commentators said before how important interest rates have been to this rally. And that's a fact, right? I mean, one of the drivers of it continues to be investors expect interest rates to stay low as far as I can see. You know, a 10-year that does hit 1% could cause a little multiple compression as well, even with economic improvement.

SEANA SMITH: Troy Gayeski of Sky Bridge Capital, great to have you back on the program. Thanks so much.

TROY GAYESKI: Great to see you, guys.