Bill Fleckenstein: The Market Is In A Dangerous Set-up That Could Get Ugly Quickly

Summary

• Market Outlook: The current market setup is described as dangerous, with a potential for chaos if the passive bid is overwhelmed by bad news, highlighting the importance of understanding the market dynamics driven by passive investments.
• Economic Conditions: Despite signs of a slowing economy, asset prices are surging, with stocks at all-time high valuations and bond yields remaining elevated, while inflation has not yet reached the Fed's 2% target.
• Interest Rates: An interest rate cut of at least 25 basis points is expected, and the reaction of the bond market to the upcoming FOMC meeting will be crucial in determining future market movements.
• Investment Strategy: Investors are advised to focus on individual stock selections that can perform well regardless of economic conditions and to hold cash as a risk management strategy against potential market changes.
• Gold and Miners: The role of gold and miners in portfolios is emphasized as a hedge against potential inflationary pressures and monetary policy decisions, with recent price increases reflecting a catch-up to past undervaluations.
• Passive Capital Flows: The dominance of passive capital flows in driving market movements is highlighted, with potential risks if these flows reverse due to factors like employment changes or demographic shifts.
• Yield Curve Control: The possibility of the Fed implementing yield curve control is discussed as a response to manage long-term interest rates, which could significantly impact gold prices and market dynamics.
• Long-Term Considerations: The aging baby boomer demographic may impact passive capital flows over the next few decades, potentially creating headwinds for market growth.

Transcript

This is a very dangerous setup and it may continue to be for you know two more years. I mean or or or I it's not possible to know when the passive bid will get swamped by by enough bad news or the balance of the passive bid in terms of the money going in versus what comes out can can can get diminished enough to allow the the fundamentals to matter or if we at some point we'll see see red you know the the passive bid start redeeming. I mean if that were to happen it would be absolute chaos. So, you have to be aware that it's a very dicey setup. It'll be hard to change it, but if it changes, things could get ugly quickly. [Music] Welcome to Thoughtful Money. I'm founder and your host, Adam Tagert. It's a tricky time for investors right now. We're seeing increasing signs the economy is slowing down, but nearly all assets are surging in price right now. Some, like many stocks, are at all-time high valuation levels, even though the weakening economic data increasingly makes their forward earnings forecast look less and less attainable. Bond yields remain elevated and inflation is not yet at the Fed's 2% target. Yet, it seems highly likely that an interest rate cut of at least 25 basis points will happen this month. So, what'll win out from here as we head into the end stretch of 2025? Will the momentum and investor exuberance keep driving asset prices higher? Or will they finally start to buckle under the gravity of the underlying data? For answers, we've got the great fortune today of turning to veteran money manager Bill Fleenstein, founder of Fleenstein Capital. Bill, thanks so much for joining us today. Nice to be back, Adam. Well, Bill, it's great to have you back on a beautiful day in the Pacific Northwest. I'm glad you guys are still having a great Indian summer there as you mentioned. Um, lots to talk about. Um, I went back and reflected on um, our previous conversation from a few months back and a lot of the questions we were raising then we have more answers to now. So, very interested in getting your latest update here. If we can, let's start at the market valuations. Um, how concerned, if at all, uh, are you by the disconnect that I mentioned between today's elevated and still rising asset prices, uh, versus the slowing economic data? Well, the problem is that valuation means almost nothing anymore because the the the driving force in investing in the market today is the passive bid. And given its market share at roughly 50% and then all the people have reverse engineered what appears to have worked. Uh you you have a smaller subset of people who are actively trying to look at securities and and and and look at the fundamentals and and try to weigh them, right? I mean the market is 100% voting machine in the short run always but now it's far the voting machine aspect is is entirely what what moves the market and that's why incremental flows seem to help to on the upside and that's why so many people are focused on flows now because it seems it is currently working. It's not that the flows necessarily from a logical perspective are why you know would work in a period where the market wasn't as dominated by passive but that's what has worked and so the the valuations mean literally nothing right now to the market to the system to all that it might matter to you and me how we run our money or it might manage ma matter to people who try to manage risk but um um if you're a professional That's been a dangerous thing to do because if you try to use your good judgment as to what to do, you get left behind by the passive monster and then people think you don't know what you're doing and they take the money away and then you know the the process continues. And so that process is still underway. It's been underway for the last group of years. Every time we've spoken, it's bigger and more powerful than ever. And um you have to be willing to hold two thoughts in your head. one this uh this is a very dangerous setup and it may continue to be for you know two more years I mean or or it's not possible to know when the passive bid will get swamped by by enough bad news or the balance of the passive bid in terms of the money going in versus what comes out can can can get diminished enough to allow the the fundamentals to matter or if we at some point will see red, you know, the the passive bid start redeeming. I mean, if that were to happen, it would be absolute chaos. So, you have to understand, you know, as Mike Green said so eloqu eloquently the first time he explained this to me, um, you know, you have to know the the rules of the game that you're playing. You know, you can't you can't think the rules are one thing. You have to know what the rules are. You may not like them. So, um, you have to be aware that it's a very dicey setup. It'll be hard to change it, but if it changes, things could get ugly quickly. Um, if the bond market were to get weak enough, that could matter from a balancing standpoint of the passive uh, you know, balances and portfolios, they try to keep them, you know, if they're you're 9010 or 8020 or 7030, they try to keep them in line. So bonds got weak enough like we saw in 22 uh or was it 22 or 23 now I can't remember exactly but then that that could it was 22 when they started yeah that's right uh so that could matter so those things could matter but right now none of that's working even though I could argue that the bond market has begun the process of taking the printing press away from the Fed. That was always been a theory of mine that eventually would happen. And you know, it's been a year now, but you know, in let me see where did I put this? I looked at this this morning. So, in the last year, you know, leading up to the last FOMC meeting, uh short rates are down 100 basis points. Uh and uh while three-year rates are only down, call it maybe 25. So the biggest the biggest declines have been at the short end. Once you get out past seven years, rates are actually higher. So I think you and I talked a couple of times since those rate hikes, sorry, rate cuts began last year. And I said, well, it's, you know, the bond market has done the opposite of what the Fed has done. And if, you know, people made up a lot of rationalizations why it didn't really matter and and I didn't know whether it would, it wouldn't. But here we are one year later and that's that's the case. So when the Fed cuts this next at later this month, it will be really interesting to see what happens. If the bond market continues to not like what the Fed's doing, that's going to be a sign of tr of of of real trouble because rate cuts will make bond rates go up perverse perversely. And that that'll be a different regime than any of us have seen probably since the 70s. Um um so but we have to see how that starts to play out. I mean maybe they cut rates and long rates fall. I mean my my theory is the process has started and uh but hasn't hasn't done much damage because of the passive bid. You know what it started out with. So anyway, I think this F upcoming FOMC meeting is going to be really interesting to see how the market responds. Okay. The bond market. And let me ask you this. What are you expecting at the next FOMC meeting? A quarter basis cut. I don't know. They'll cut. I don't know. I don't pay attention to that crap. I mean, who I mean, who you know, they're going to cut. So whether 25 or 50, I mean, I don't know. Okay. But you think they're going to cut, which the majority of the market does, too. Um, all right. So, a lot to react to there. And look, I I I totally get it, right? We've got this um passive capital flow juggernaut, right? That just crushes everything in its path. Um uh or or crushes anybody that tries to to fight it, right? And has done so for for a long time. So, you got to be very cognizant about trading the market you you have versus trading the market you wish you had or or think we should have. Um, let me ask you this because you've you you've you've said um you know that trade that's going to work until it till it stops working, right? And I totally agree with you. Um, and it's dangerous to to jump in front of that and try to try to time tick, you know, the actual ending of of of the those that juggernaut or the giant mind. Well, you what you can't do is it's you can't really anticipate it. You can look for signs that something may be changing and and then and then try to act. But to to just say, you know, to pick a spot and anticipate the change is really, I think, asking for trouble. Yeah. And I think there's been years of enough um uh you know, bodies uh on on the on the highway of folks that tried to do that that we know, okay, look, that's a very dangerous kind of reckless thing to do. Um so, let me ask you this. So, um, you know, that'll continue until at such point it it likely, you know, changes. Um, I mean, I guess it could go on forever, but I I don't think that that that's likely. Um, as I mentioned in the intro, the economy, we're starting to see increasing signs that the economy is slowing, right? In your mind, when does that become material enough to perhaps impact the trajectory of that juggernaut of the giant mindless robot? I you know I can't I can't say you know it has to do with employment and I don't I don't know I don't know that there's a direct link between you know x amount of GDP growth and the just the right amount of of sorry um what the amount of job growth needs to be I I you know because there's the other variable of what what what if uh people that are retiring take more money out right so it's there's there's both sides of that equation. So I don't again I don't it's not anticipatable you know it it's not it's not but I guess my question is is if if the economy starts slowing and let's say starts slowing enough where we start seeing indicators that we normally associate with recessions including the unemployment rate starting to materially move higher. It's beginning to nudge too. We're not in that danger zone yet, but but we we could be if if current momentum continues. Could that be something that eventually if it got big enough could actually stop juggernaut? You start to see um you know um you know unemployment or sorry employment really slow down or to see uh uh more jobs lost any of those kind of things. That'll that'll really matter. You know, you'd have to ask Mike if there's some sort of precise formula, but I I doubt that there is. You know, it'll just, you know, it it I don't think it's knowable in advance what level of GDP growth triggers what level of job growth triggers a dimmunition in flows. That is going to matter. Right. Right. And I agree with you, and I'm not trying to push you for like the magic formula. The question I'm trying to ask is is, you know, are we potentially seeing enough risk factors to make somebody like yourself who studies the passive capital flow say, "Hey, I could see this thing maybe turning at some point in the future if these trends get worse." And let me just name a couple of them so you can react to it. Um, we've got consumer spending that is, I think, you know, best described as anemic right now. um we're seeing lots of uh you know debt delinquencies spike and that leads to you know debt defaults at some point in time along the consumer debt spectrum. Similarly on the corporate debt side we're seeing you know we're getting into the the heart of the the rerating of corporate debt right where the debt and corporate balance sheets is is now coming up for maturity and it's it's it's having to be refinanced at substantially higher rates. Um we are beginning to see a real um uh uh you know worsening of the employment market. Um you know we just had the kind of a string of of bad economic reports last week. Unemployment rates starting to tick up here. Um and we have a housing bubble that seems to be an increasing number of states in the process of bursting. So collectively, could those things get to a point where they could they could they could really impair those capital flows, those passive flows? Well, the only thing that matters is employment growth visav the passive bid, job growth or not enough job growth, right? You're talking about factors that impact the economy. And I agree with you, the econ the economy is slowing and there's all kinds of troubling bits of data that normally would probably have caused the market to start to anticipate trouble. Um, but the market doesn't do that anymore because of the passive bid, right? So, um, it really gets it really gets down to you employment. You know, what is the it's it's not about sentiment. It's not about it's not about the human nature aspect of the market. It's purely mechanical. How many dollars are going to get sent in this week? And what's going to change that? Fewer fewer people entering the the the the workforce where where where they're getting that kind of compens um retirement compensation to go with their regular compensation, right? Or a contracting workforce, which according to the latest payroll numbers, we're not that far from. Yeah. Yeah. Um it depends on the you know the remember the the data that we see from the from the be BLS is wicked imperfect. Yeah. And that's being charitable not the birth death model and the birth death model doesn't impact any flows. It's all imagination. Right. Yeah. It attempts to to capture business formation. And everyone who's paid attention knows that it's always wrong at the turns. So it's possible that the uh employment data is already weaker than it seems visav the passive bid. Yeah. But but it's it's not like it's not it's not like the national debt clock where you can watch it go up every second, right? It's not there's no it's the data doesn't exist like that. I mean Mike may I don't have the ability to track that stuff. I don't feel like I'm going to be able to figure out exactly when it's turning. You'll be able to see it in the tape. You know, I mean, you you know, you're not going to anticipate a a top in the market, which is always imposs always hard to do, but one that's inspired because this variable is shifting, which is a monster variable. I don't think you're going to be able to anticipate it. You'll it it will have to make itself apparent. And you know, we had a nasty sell-off last spring. And part of that was because the news got bad enough when some of the other factors, sort of the pilot fish that that that go with the passive bid, you know, these mechanical strategies were kind of fully loaded and maybe the the passive bid was only a certain size and we got all the bad news on the tariffs and all other stuff and the thing fed on itself, right? broke through the passive bid and and the thing uh uh fed on itself and then and then uh the market rided itself uh and and and now here we are and it's to the passive bids totally in control once again. Yeah. So where I'm trying to go with this, Bill, and I'm not trying to to sell doom. So if if you disagree with sort of what I'm saying again, please just just be real clear about that. What I'm trying to say or trying to ask is okay you could you could on one hand you could say um you know let's just learn to love the juggernaut and just you know invest with what's working right and you can just say you know what I'm just going to be long because this juggernaut is unstoppable right there's that side of the spectrum there's the way other side of the spectrum which is I think this thing you know is going to stop tomorrow and I'm going to jump in front of it now and you've said hey that's really reckless for you you know, all the dead casualties we've seen over the past bunch of years and that. I totally agree with that, too. There's kind of a middle ground where you could say, "Hey, look, I think the market is sending false signals because of how much the passive bid is overwhelming everything, but the fundamentals are hollowing out because a lot of the things I mentioned on my list, shrinking corporate profit margins, anemic consumer spending, a worsening housing situation, stuff like that, def, you know, increasing in consumer debt defaults and things. Those are all things that will basically translate into tighter corporate profit margins and eventually layoffs, right? To your point, it doesn't matter until it impacts the employment market. So if if you have that concern, you could say, "Hey, look, I'm not ready to jump into this to to bet against this market yet, but I'm not going to be screamingly for it and I'm basically going to be kind of maybe building up dry powder and and being positioned so that if indeed that stuff does eventually start to win out, I know how to move." Which environment do you think is is the most or which stance do you think is the most appropriate for this environment? Well, I I well to say, well, it's worked and therefore it's going to keep working and therefore I don't care about any of these risk factors, it would be rather foolish. So, I think that uh it's more important to to you you you have to figure out a way to uh um be able to not like I'm trying to participate. You have to make individual stock selections that you think can do well regardless of the period we're going into. And you have to be mindful of the fact that there's this enormous amount of risk out there in the form of what if this passive thing starts to reverse at some point. So you have to figure out how you want to manage that risk. I I've tried to find securities that I think can do well regardless of the economic environment. Stagflation, inflation, recession. I think I have securities that that won't be nec that won't be impacted by that given the where they are. Um and then I want to hold cash to offset the risk of the unknowable just that's what makes that's what makes it easier for me to sleep at night. Right? Everyone has to make that decision. But you have to know that if you're fully invested right in the right in the the um the the wild animal that um there's going to be a moment in time when things change and you'll have to have a plan of what what you're going to do and what you're looking for. I can't tell you exactly what to look for. I know what I think I'm looking for, but again, you're just going to have to respond to the fact that it seems like things have changed and there will maybe be some data. You know, maybe Mike Green will be nice enough to stand up and say, "Okay, everything's changing. Guys, batten down the hatches." Yeah, we'll see. Okay. But thank you. You just actually provided the answer, the type of the answer that I was looking for. Okay. Um, and spec, so, you know, you are, you know, I would say you built up a fair amount of dry capital in addition to your cash that you mentioned. Um, I know you've also been in the precious metals and in the miners. Those have done quite well. I want to ask you about those in a moment. You talked about your companies that that you know your your targeted companies you're picking that you feel you know could do well in almost any environment. I think the last couple times we've talked you've called those your rifle shots, right? Um and as an example um not can't remember the name of the company, but I know one of the examples was you know sort of a biotech company that if No, Pure not biotech. Uh I talked about Pure Cycle last time I think. Okay. I think I think you're you are correct. So maybe I'm forgetting, but basically it's a company that if you know if what comes out of the lab does well, it's going to have a a step function in its valuation, right? Well, it's it's like a biotech in that sense. Um and I I have had a couple biotech. So I mentioned those in the past, but but Pure Cycle recycles polyropylene, of which there's, you know, way too much in the world. Way too much in the world. That's why you we can't use paper we have to use paper straws here and you have to use paper straws there. So anyway, they they actually can actually recycle and take postconumer polyropylene and turn it into virgin polyropylene. But anyway, so that that that to finish the thought on that idea, that's that's that one. Okay, great. And I'm not and I I know you kind of went deep into that company the last time and folks if you're interested in learning more about it, go go listen to my last um interview with with Bill. I'm just trying to say the the these are companies that they're working on something that isn't tied to whether we go into inflation or deflation. You know, a biotech if you had this that you know that those kinds of kinds of companies or this one or a couple other Yeah. those kind of companies that aren't dependent on GDP growth. That's right. If if you come up with a cure for cancer, it doesn't really matter what GDP does. The world's going to beat the path to your door. Exactly. So you need to find idiosyncratic companies that can grow in any environment and can keep their margins up. It's another and so there's only a certain kind of companies that can do that. And of course just because you pick one because you think it can do it doesn't mean you'd be right either. But right and I I'll give you a chance at the end to direct folks to it. But if you want to kind of get a idea of where some of these companies, you know, what some of these companies are to go investigate, subscribe to Bill's letter, uh, and, uh, you can see, you know, get visibility into his mindset on this going forward. Um, all right. So, Bill, you know, again, I mentioned a bunch of factors there that uh are contributing to the slowing of the economy. I'm just curious, how how um what's your outlook on the US economy? Um, a do you agree that it's slowing and b how how much do you think it may slow over the next year? Well, I think it's not debatable that it's slowing and there's a a lot of crossurrens. Um, you know, it's particularly unusual to have young people coming out of college having as much difficulty getting jobs as it appears is going on now. Particularly, it seems like, you know, it's not just um, you know, somebody who had a polyai degree. It seems like some of the kids in STEM, you know, are also having trouble. So, that's a little bit uh um disconcerting and a little unusual. A lot of that is blamed on AI, but but um based on what I've read, I don't know that it's really had as big a factor. It has been as big of it's been AI has been a scapegoat for that. I don't think it's really been the reason, I guess. Um so, the economy is is is is kind of muddling along. It's a little it's worse probably than it was a year ago. um uh we're gonna have rate we're going to get some more rate cuts which may help although if longer rates go up that's not necessarily going to help the housing market uh you know unless you want to finance via an ARM. Um so um I think the economy is going to be kind of in a a weak stagflation at best and probably a little worse than that. Um, I I don't think there'll be be a lot of economic uh surprises on the upside in the next year, but who knows? I think it's just going to be kind of an unex uninspiring economic environment for the next year. Okay. Um, more inflationary pressures, more more, you know, more more things like that, more more negative developments than positive. Okay. And and I know that you have um leaned towards stagflation in our past recent conversations. Could the economy slow so much that you stop worrying about the inflationary impulse? No. I mean, come on. We're we're we're gonna Fed's Trump's going to have four people running the Fed probably in within the next what six to eight months. and um they're going to lower they're going to lower rates and they're going to lower rates as much as they think they they can and if that doesn't work they'll probably go to yield curve control. So I'm not going to start borrowing trouble. I mean they're you know you normally when you're looking into uh the kind of rate reductions we might see. That's normally when you would would think you're in a recession in the past. That's why I'm asking the question. Yeah. Yeah. But but remember and stocks would have gone down and that would have reinforced that and we would have had a whole cycle. But now stocks didn't go down during that part so far during that part of the movie. So then if they just throw more gasoline on the fire, who's to say that we don't have another leg blowoff to the upside? I don't know. And I think if it's very it's it's why I say it's it's really dangerous to have a strong opinion about what can't happen, you know. Um and you so You're going to tell me if let's say they wind up cutting 50 basis points. Um, you know, in the past they never cut rates when the market was stock market was doing as well as it's been doing in the last, you know, we've already had four cuts now. This will be five, you know, since they started. No, three. We had three, 25, and 25. This will be the fourth. Um, but there there's no major sign of trouble for any of that, right? what what what what what bad thing happened other than you know tariffs and and and and a lot of uh machinations around Trump and the way and his approach to things and changes his mind all the time but we got these rate cuts and nothing bad happened right that sure the inflation rate dropped the in the rate of gain of inflation going up fell so what happened we had this huge increase in inflation related to COVID and the money supply Sorry. Monetary badness and fiscal madness and and and now and broken supply chains. But yeah, what's that? Yeah. And broken supply chain. All of that. But now we keep talking about the rate of change of this number that's way up here from that used to be down here. So this little dance around 2% blah blah blah doesn't matter. People have experienced this to this and they haven't forgotten about it because this is not going back down there. Right? So the psychology which I have harped about since before it started happening has changed and that's the thing that people don't appreciate and if you had been around in the early 80s you could have you could have seen how this went in in n vulkar broke the back of inflation and we had the the stock market uh this epic bull market began in August of 82 um and and They Fed lowered rates, but but but by 84 and the economy was growing. The bond market freaked out and rates went back to 12%. Long rates went back to 12%. Yeah. They they thought the Fed ah we don't all right now now we know inflation's coming back. We believed your your BS of the Fed and and and now it's going to be a problem. The bond market didn't believe the Fed. They they they thought the the Fed was going to produce inflation again and that was going to be a problem. But that didn't happen. And so that's that that that was the human psychological component that did that. And then for the next 30 years, people believed the Fed no matter how bad mistakes they made. So now we're in a situation again where the bond market may be about to has been for the last year kind of disagree with the Fed and we'll see how how that goes, right? So my point is the psychology people's psychology of be about being uh concerned about inflation is is not because they care about whether next month is you know you know annualizes the 21 238. They're worried about this huge jump that's never going to get unwound. Yeah. So let let me ask about that though. So how do you how do you get beyond that? Do people just finally get uh inured to where prices have ended up? Yeah. But I mean, is that going to make them um believe that inflation is under control or not under control? Again, so my question to you, when do they start believing it's under control? Is it just a factor of time that they hang out at these new prices for I don't think I I don't think they will because the policies that we're going to pursue are going to be pro-inflation. I mean, I know that I I know that if the asset markets break, that that provides a a a dis a deflationary pulse through the stock market, but the Fed is going to be easing and we're going to probably get yield curve control if that doesn't if that doesn't bring long rates down. And those things are going to make people more are going to keep the the concern about inflation up. And if the currency gets worse uh gets weaker then to the extent that you know we import things that that might matter. uh um uh but it it it's I I don't think that the inflation psych I think it would take time for people to to stop worrying about inflation and you'd need a lot of these prices that have gone up and up and up to have to really roll back and then maybe people would change their mindset. They may they may not be thinking that inflation is going to go from two to 10, but they might they might continually think inflation is the problem and at the margin be worried about it. Right? Once you've once you've experienced a period like this, just like when COVID started, I said that the shortages might make people think differently about what might happen because when you have shortages, then you have price hikes. So, people buy in advance and those those psychologies all uh wound together and people aren't going to forget about it'll take time. It take it take time and I think you'd need to see a lot of prices get rolled back really pretty hard. I don't see how that's going to happen like insurance or I mean there's a whole whole group of prices that are up substantially. Um and so um I think I think that they would have to be unwound. I just I don't see that happening. Okay. Yeah. I I don't really too. Now that being said, you know, in some there are, right? We can look at eggs, we can look at the price of gas, you know, we can look at things like that that are down a lot from where they were. Not in my state, not in your not not in Washington, not in California. It depends on where you live, right? But but nationally th those have I just want to acknowledge that we we have seen some price declines in some of the staples, but but in the vast majority and the vast average of people's cost of living, no, it's not getting dialed back anywhere near close to precoid times. Um, and and Bill, look, I I I find your logic compelling and I think sort of Cedus Parabus, um, you know, I I it makes a lot of sense to me. The the question I'm trying to dig in, and I think I'm getting your your general sense of it, is to your point about be careful about having too strong an opinion about any outcome. I'm just wondering how much of a door we should leave open to the fact that like hey if we lose enough jobs uh over the next couple of quarters um you know could that potentially create a period of time where um you know the economy slows enough people lose their jobs it disrupts the the juggernaut of the the passive capital flows we have a correction in the market that then freaks out the system even more and and yes the Fed is cutting end in all that but but those Fed cuts act with a delay. And so, you know, could we potentially have a and I'm making this up, but you know, a a a start to the first half of 2026 where disinflation is really in charge and then we don't return to a inflationary or stagflationary state until the impacts of the policies uh start to make them ripple through the economy. Well, that's a whole lot of if then statements, but it is. It is. I but I to your point I'm trying not to hold too tightly to any one outcome. I know but but but think about what you're saying. If this this this and this happens over the next couple of quarters. Well, if we go through the next couple quarters and you start to see that happening, then you have to start to plan on what you're going to do about it. But you don't want to make a you don't want to do something now because you think in a couple quarters this may happen, right? that that's what what what I'm trying to say is that you you have to have yourself set up for the the the the risks that exist. However, you also have to be aware of the fact that uh any adjustment or any major price price decline in the market is requires this these group of variables to change as we've talked about. Y if a couple of months from now or a couple of quarters from now uh it turns out that the data was weak enough to to impact the employment and therefore the passive bid you'll see it as it starts to happen and you can re you can start to react then I mean I'm not I'm not saying you know you should own 100% be 100% in equities and then try to you know run out the door at the last minute. I'm just saying I'm not going to get myself all worked up about protecting myself on the downside any more than I already am by my setup. I'm not going to take any defensive measures to to to hedge a lot or to try to get short net net short or anything like that until until I see some sort of change. I I can I can keep I can have I can have less risk now overall just because of the things we've talked about but that doesn't mean I'm do can want to do anything extra about it until I start to see something happening that's that where things are changing. Got it. Okay. So let me see if I can summarize that. um you're saying look, it's such an uncertain time for all the reasons we've been talking about that you have um let's say partially derisked your position and you're sitting here kind of in this middle ground and you're not going to really change all that much until the data proves to you one way or the other which way it's heading. Yeah. Yeah. I mean because if you have a if you have a a healthy allocation of gold and gold miners that protects you through a lot of this trouble and if what if the scenario you talked about happens if we get to that point um you you know the stock market will decline maybe some of the miners go down with it. Maybe gold does for a time but the response is going to be to pour more monetary stimulus on and that that train ought to keep moving right it may be bumpy along the way. So I mean so you you may have to decide how to reduce your your reduce reduce your risk then but I think you can set yourself up in a way that uh that that you have a chance to have you can pick businesses that can do well regardless of the environment and then if the market environment turns nasty then you can try to hedge out the market risk. I guess that's what I'm saying. Okay, got it. And specifically on gold and the miners, um, uh, I totally understand the role they play in the portfolio for the reasons you just mentioned. I I think a additional compelling reason to own them in the previous times you and I have talked, Bill, is they seemed, especially the miners, quite undervalued. Uh, you could make a real case that they were quite undervalued, even the miners relative to the metal. Now we've finally had a really, you know, bonanza year for the precious metals and the miners. um are you changing your allocation in any way um because of how far and fast the their prices have moved here? Well, uh, so, so two things. The price of gold itself is higher and therefore potentially riskier. Um, even though, um, uh, and so that, you know, it's gold at 2,000 or 2500 or 1,800 relative to the cost of production, which is the only real guide you have as is gold expensive or not. Yeah. Um uh is certainly elevated and the the miners while not expensive in general um aren't as depressed as they were, right? They're not the screaming deals they were back when we were talking about No. No. But but but but of course anyone who's been around uh watched the stock market, this the stock market's been able to do quite well for 20 plus years not being any kind of compelling value. it's gone up because it's gone up for a lot of the reasons we've talked about in QE. So, the hard part is especially if you've been around these miners for a long time. Um, you know, they were like red the redheaded stepchildren all the time, right? And so, um, people are scared of their own shadow in the sector. And um but meanwhile some of the better ones now have have uh you know like if you look at AEM or or Alamos Gold you know they're two of the best positioned of that have any kind of market capitalization especially AM and now they're they're you know they're they're you know 18 to 22 times depending on what you think the estimate is going to be but in order to have a good estimate you need to know where the price of gold's going to be next year. And of course we don't know that. So trying to figure out what the earnings are going to be is is difficult. Uh but you can look at where they've been and and now they're they're they're not priced way out of line relative to the S&P. I mean, you know, we could talk a couple of multiple points either way. So some of them have gotten um uh like Alamos and Alamos and AM are two of the two of the very best managed and best positioned and they have some size. um some of the smaller ones. Uh there's a lot there's there's a lot of mediocrity in the industry. It's a tough business. And so there's a lot of minds that either have low grades, are in bad places, uh or in the past would have bad balance sheets or only mediocre management. And I don't really I don't particularly care to own those. I don't I don't want to own one where I got to worry about what the government where they are might might cause. So the the companies that I own are all in Canada and North America or maybe a smidge in you know smidgen in Mexico. Um and um but but but there's some that are still quite cheap. Uh you know and and some of some of the one other ones have short reserve lives too. That's another problem. Any case um so I I I they're not they're not the com. So before we had gold at a price it didn't seem like it had gone up all all that much. In hindsight, we can we know that it didn't go up all that much, but at the time it seemed like it had a lot of room to go on the upside. Not Yeah. Um and the valuation of the miners was depressed visav whatever a market valuation is. Now, I'm not saying the market valuation is right, but you got to pick some yard stick. um you know um uh so any case the problem with mining is the an so many of the analysts do this uh lame um uh analysis where they look at the then what they call the net asset value the net asset value is going to be a function of what you're going to find in the property and in some mines if they're deep underground mines you don't know till you get down there and drill so the exploration drilling to prove our preserves always lags so the NAV is a bad thing to look at but it's the lazy thing that people do tend to look at. You could take a look at a company like West who people argue which is another stock I own. Um well I mean it's a Canadian value is see it's trading for like uh $19 and uh based on where gold is they they they may make around the estimate is like 240 for next year. So it's like less than eight times earnings. They have two fantastic mines in two with great growth opportunities but they've made they've had a couple of operational issues along the way. So people don't quite give them the the love that they should get. Happens in the industry all the time. Um you know um I used to have a big position in new gold and you couldn't give that thing away and I've since sold mine because I I don't like the length of their reserves. But now that now people are reacting to the fact that it seems so cheap. Whereas a year or two ago you could have told people it was cheap based on uh um um what they could earn and no one cared. So there's starting to be there's been more sorting out. there's more people looking into the se sector, but there still is not a lot of North American demand. If you there hasn't been for gold. If you look at the the GLD uh shares outstanding is up this year, I think maybe 20%, but it's still down needs to go it will need to go up another 30 35% to get to the the peak of where it was in 11 or even in 20 in CO. So the the the moving gold has been by central banks and Asians more than Americans. So, we haven't really even seen Americans get involved. Now, what's that going to take? I I don't Is it going to Is Trump going to get all have to get all four of his people on the Fed? Uh, I mean, I'm assuming Lisa Cook is going to be gone. Uh, so uh I mean the the the the drivers for gold look to to to to want to push the price higher. The problem with gold is nobody knows what the price is supposed to be. Nobody. I mean, how would you? It doesn't matter if you're I don't care care if you're the CEO of Ago or any other mining company. You don't know. Nobody knows, right? It's it's it's and it's the same issue Bitcoin has. I mean, nobody knows what true value is. Yeah. Yeah. Where where where is it supposed to trade? If you can get the direction right, you're doing quite well, right? Um, so while gold's gone up a lot, um, um, you know, and and and now it's it it's, you know, today it's up 50 bucks, but that's, you know, back in the old days, um, or or back in the early days of this bull market, uh, a percentage gain like today would have been $5. I mean, would you if a $300 asset was up five bucks, would would you would you think it was outlandish? So today it's 50. Well, I mean, it's, you know, it's like when Bitcoin goes up a thousand, that's just 1%, right? So sometimes the size of the numbers get people confused about how speculative it is when they don't look at the percentage gains. Yeah. All right. So um thank you for giving such a detailed answer. Um you you anticipated a lot of the questions I was going to ask you. I am going to go back to my original question to you on this though which is I'm presuming Bill given your portfolio allocation where it was last time we talked versus now gold and the miners occupy a notably larger percentage of it because they've really appreciated. Well, are you changing that allocation in any way or you just letting it ride? I I I I reduced it earlier this year uh um already um uh because I had so much exposure. So, I cut it back to what's still a giant amount, but it's not as big as it was and I'm I'm lucky a couple of the other things that I've been involved in have done all right as well. So, um you know, I don't I'm not I don't feel like I have to things around much. Okay. Okay. Good. That was sort of more where I was going. If if if you had said, "Hey, look, I think it's made the majority of its run, at least for the near term, and I'm cutting it in half and I'll buy back later." No, no, no, no, no, no, no. I don't try to trade it. I mean, I think you're lucky to get the trend right. I don't try to trade small swings. If I thought something big was happening, may maybe I I I sometimes I have I have investing position and trading positions. I only have one trading position right now, so I only have one that I would let go. Um, you know, so I I I'm and and I and so I'm not I'm not I I I don't try to trade to make money. I trade to not lose money. In other words, I trade defensively. So I I I try to let things run as they will, whether they're longs or shorts, and then only trade when I think I have to, not to try to trade to make money incrementally. So, if I get the analysis right and the things going the direction I want, that's how I'm going to make the money. Not from trading the squiggles along the way. I trade the squiggles to try to reduce my risk along the way. That's okay. So, your trades are mostly hedges is what you're saying. Defensive. I would say defensive, not necessarily hedges. Defensive. Okay. Defensive. Okay. Um All right. Right. Well, look, um, you you mentioned this a little bit earlier, but I'd like to pull on the string a little bit more on, um, how you think the bond market may react going forward from here if things play out the way you think they they will. Um, last time you and I talked, uh, I think the hero quote from that conversation was you saying you expected bonds to quote remain problematic for a good time to come. I don't want to put words in your mouth, but it sounds like you you you're still in that camp. Yeah. I mean, recently, uh, long rates now have come down a little bit. Longer rates have come down a little bit. Um, thanks to some of the weak data we've seen. Um, again, nothing really matters until we get to the FOMC meeting and see how the bond market reacts to that. My my my belief, as I've stated, is I think longer rates will will rise. I if I somewhere around that I'm going to get short bonds and see if it works out. Whether that I get chased out and lose money or whether I make money, we'll have to see. But my plan is to get short bonds around the FOMC meeting or notes or I'm not sure exactly what I'm going to do. Tens tens or or longer dated paper, but um my plan is to get short bonds, put some money behind my thesis, and if it starts to work, I'll get bigger. If it doesn't, I'll throw in the towel. Okay. And just to let folks know, um, the FOMC meeting is the 16th and 17th of this month. Um, 17th is a Wednesday, and that's what, like a week and a half from now, Bill. So, it won't be all that long before we know the answer to this, right? Then we'll we'll see if there's something to do or not. And boy, if the bond market likes what the Fed does, I imagine the stock market will, too. But we'll see. Yeah. Okay. Well, I do wonder. I mean, at this point, the stock market has definitely bought in for a 25% basis point cut. If the Fed delivered a 50 basis point cut, I don't know if that would delight the market or freak it out. Do you have an opinion? It would delight it. Now, the people that say that the people, the line, this line of logic, um, oh, the Fed surprises, they cut extra. What do they know that we don't? It must be terrible. Oh, it's bad. Sell stocks. That line of logic will get you killed. um you know the Fed doesn't know anything. They're always late to everything. And that on that on that point, Trump happens to be correct. Um that that the Fed's always late regardless of what it is. So if they cut 50 basis points, they cut 50 basis points. Believe me, the stock market's not going to freak out if that happens. I mean, maybe they'll sell it for two days, but then they'll come back come back and it'll get bought twice as hard. The only way that's going to freak the only way the market's going to be allowed to freak out on that is if somehow between now and then the employment data has shifted enough to where then you know that that that the passive bid changes. Otherwise lower rates are going to be deemed bullish and the people that you know think that you know uh that you're supposed to buy stocks every day are going to continue to think that. Okay. All right. Well, let let me ask you this. So, I've interviewed a number of housing experts on this channel recently, and I I I always like to ask them when they're on about um the demographic wave that we're about to face, you know, with the baby boomers uh getting older. And in the case of housing stock, um, at some point in time, just as we've had for the past 20 years 10,000 baby boomers hitting retirement age every day, at some point that's going to start turning into 20,000 or 10,000 baby boomers a day having to sell their home because they're going to the nursing home or they passed away. Before we get to that, uh, or at least before we get to that in earnest, um, you know, we have a lot of baby boomers now that are retired and and have been retired for a good while. At what point does the baby boomers withdraw, you know, with withdrawals from their um retirement accounts start putting enough selling pressure into the the market that it does start to overwhelm the the passive bid? And when that happens, are we looking at like a decade plus long period, two decade long period of just headwinds pushing against the passive capital flow? Well, well, for um I would hesitate to extrapolate anything that far, but uh um again, if people, you know, I if the dynamic of people that are retiring, you know, take take the their retirement money that's and start reducing the equity component. If that is enough to tip the passive bid, that will matter. Exactly where those levels are, I don't know. You don't I don't anybody knows. Mike Mike if anyone knows, Mike knows, you know, so you'd have to ask him. Um but uh if if you know if if if housing gets sold and housing prices come down, uh you know, that's that's good for younger people. Well, I mean, I I I don't again, we're talking about analyzing the fundamentals of the economy and the market as though fundamentals were the drivers, and they aren't. They aren't the drivers anymore. They're a secondary effect. Sorry. They're they're they're they're they're a coincident variable that matters and helps uh push data around that the markets react to, but that's not the market is not S&P is not at 6,500 because of the fundamentals. No chance. No, I totally I totally agree. I'm with you on it's much more of a voting machine than a waiting machine. Now, but but all that matters, right, is passive capital flows. It's what happens with them. Right. Right. Right. And but and and we keep going around and around on the same subject. Um I and and what everyone wants to know is when's that going to change? I don't know when. And just so you know, I'm not asking you that question. I'm just saying will it change? I know. I I know that. But in some ways, we're talking about how many angels can dance on the head of a pin because we we're talking about something is not knowable, not calculatable, right? We know the factors at work. If we if if okay all of a sudden uh um employment was shrinking at a rate of 3% annualized uh I'm pretty sure that that that would tip then the market would go south and then that would make some of the people who had been riding along that retired that were trying that were overallocated equities they might sell theirs so you could have a nasty fe I could paint you a super bearish case really fast and it could get out of control very fast. So I the reason I talk about all these things is so people understand ex what the what the what the dynamics are at work what it takes to change them if if it's possible to know in advance and um and yet you can't do much about it. You can have a plan. You you can you can know about okay I want to be set up in a certain way. So I have to figure out some aspect of this. But the the negative outcome is going to be horrendous. But that doesn't I could have said that to you two years ago, right? That the negative and it still will be horrendous. And the longer this goes on, the more horrendous it will be. It'll be Yeah. But but but but I don't want to get focused on that. That's why I don't want to I mean yes housing housing may get weak. Will it matter enough? I don't know. Is it a good thing? Well, for some people it is and some people it isn't. Right. Right. And sorry. And look, I think we see things real similar. The only thing I'm trying to to to do is when I was poking you earlier around this, it was more short-term outlook oriented like next 6 months, next year. This question is just a finger to the wind. Next couple decades. you know, do do we think that the aging out of the baby boomers may impact the the the passive capital flow to drive the bus the way that it has to date? Yeah. Yeah. Yeah. It it will. And and I'm not I'm not arguing with you and I don't sense you're arguing with me. What what I what I'm trying I'm not even making a case. I'm just simply asking you a question. Yeah. I I but your listeners like are going to or like most people are trying to figure out well what am I supposed to take away from this you know what what what what what actually matters. Y and it's very hard to do that because all of the all of the things that really matter to economies and and and the stock market are are pretty much tipping negative except for monetary policy which of course has been wrong for for the better part of 30 years at most junctures. Right? So um you know if we just looked at this as pure fundamental from a purely fundamental perspective we get we get very bearish and especially if we looked at valuations right but none of that matters. So you have to know what the real story is but then you have to know how it's going to if it's going to matter and for right now it doesn't matter. So the thing is you have to know what really matters and when it matters. Got it. And um I think it's a really good way to encapsulate it. And what I what I like about that bill is um in some ways it's sort of like what are the things we can have control over and not have control over. And like one of the things that I think you think really matters regardless of the current situation that we're in as to how long these passive capital flows continue or not is you don't want me to put words in your mouth here but I think you believe that the purchasing power of our fiat money is going to continue to erode which is one of the reasons why you hold on to correct the precious metals. Right. Correct. Correct. And that doesn't mean it's going to erode at the same amount all the time. Right. and and and and and I really believe part of the move like let's say in the last uh few years as gold's gone from let's call it like the high teens like 1800 so I' say it's gone from the high teens to 3500 I think some of that is catchup from what it didn't do along the way if that makes any sense no I agree I think it's price discovery entering in people like you know what we underpriced this yeah yeah because everyone everyone was looking in their rearview mirror and saying ah this there was a lot there was there was more inflation over from say 2000 to 2020 than than the market really priced in because and pe because people hadn't felt like inflation got out of control. They weren't really really worried about it. The stock market kept going up. So some part of gold's move is um reacting to what I I believe it's it's catching up to where it it maybe should have been. So all of this isn't necessarily about the f future. It's okay. Now we've we've repriced it for the environment we were in that for a long time we didn't believe we're in that environment. We thought we'd go back to the old one. So now we've had a we've had a repricing. Now where does it go from here? I think the pressures are still going to be to the to the upside because again if you look at you know we we we we're all aware of the negative factors at work in America in terms of out of control um um uh national debt and deficit and and other things that but other countries are in the same boat. I mean you want to be along the pound how about the euro? You want to be along the ren minim if they could act, you know, if they could just be men and raise rates over there a little bit. They I mean they they kind of won the QE battle. They monetized half their debt. I mean, I think we're going to I think we're going to try to do that here, too. So, there's no there aren't good color papers color good choices of color paper. Everyone's all in the same boat. So, if you're going to try to hedge yourself, you say, "Well, I don't I never really liked gold, but that as a currency, it seems to have been working, right? It's probably it's the other reason why Bitcoin one of the reasons Bitcoin has done what it's done. Yeah. Um so uh um I I I just think the pressures are going to be to cause people that need to own gold that that that don't own any or people that don't have enough to add more. The news events are going to tend to drive that in that direction. I think at least as we look out it, you know, a year, year and a half. All right. Um, look, Bill, thank you for being so uh generous and as specific in in your the way you're looking at the world here. Really very much appreciate it. I know we're coming up in the hour, so I'll start landing the plane here. Here's the last big question. Um earlier you referenced that you could see the Fed um you know not only aggressively bringing interest rates down but maybe eventually go into some sort of yield curve control especially if if the current administration is able to kind of stack the deck there at the FOMC. you just talk a little bit about yield cirk control just for the few folks that don't know what it is explain it real quick but also what would you expect to happen if if if the Fed didn't indeed did indeed start being aggressive on on implementing it well what yield curve control is um is the Fed sets short-term rates and um but longer term rates can kind of go where they want to right they're set by the bond market yeah yeah by the market for the most part I mean Not totally, but anyway, um the the yield curve control is where the Fed comes in and says, "Okay, 10year rates are not going to trade above 350. We're going to buy the Fed's going to monetize as many as needed to hold that hold the 10-year 350 or what the seven-year or whatever whatever whatever tenor they pick at whatever rate they pick. They will do QE, but they're they're not doing QE to help the economy. They're doing QE to buy bonds to hold the interest rates at a certain place. Now, you can imagine if you do that into a bond market that doesn't trust you in the first place, what's that outlet going to be? Well, I think the price of gold would go crazy, right? Yeah. Because we are the world's reserve currency, you know, and and uh so I with that risk out there, you how can you not want to own gold or miners or some combination? because I think that I I don't see how the US government can get past the massive financing needs we have. You know, when Trump first came in and we talked in in January, February, there was there was some chance that maybe Doge was going to be able to pull off the M miracle cure and cut enough, you know, to to maybe, you know, bring the deficit down in a meaningful way or so and then we could grow our way past it. Well, it's not playing out that way. Yeah. And and I think that that that that you know I mean Bessett is a very smart guy. Um I I I I I suspect he's going to end up doing things that he would prefer not to do because his he's going to say, "Well, we we can either let it collapse or we can try to grow it hot and and and and we'll anestize the anesthetize the bond market via yield curve control for a few years and at the end it won't be that bad." See, the Japanese did it. I mean, they'll try to sell it that way somehow. Yeah. And we'll have to see how it plays out. My bias is that it will make the metals go crazy, but we'll see, right? Maybe maybe stocks will do fine, maybe they won't. I don't I don't know. I could I could argue both cases because it depends on the passive bid, but um you know, we can wait to see when we get there. Okay. And I'm just curious. And look, you know, I'm asking you to prognosticate here. So folks, you know, Bill's just doing his best guess. Um obviously they'll go after the 10-year because that's so many things are priced off of that. Um What do you think they'll do with the the long end of the curve, the 30 years? Just just let it be damned or do you think they'll have to do something? I I'm making up so much. I'm making up so many things here. I mean, I don't know. Maybe they'll buy tens and 20s or I I don't I don't you know, I don't know. Maybe they'll let the Maybe they'll let the the 20 Maybe they'll let the really long stuff go thinking, you know, the market will handle that, but we're gonna we're gonna we're going to keep everything. So, maybe the year yield curve, you know, won't be a curve. It'll be a step function. I I don't know because a lot else I mean probably if that's happening maybe the economy is weaker if the stock market gets weak you know there's so many things are going to play into that I'm just sketching out a road map and you know we'll have to see um you know you have to be able to hold a lot of thoughts and scenarios in your head at the same time when we're in the world we're in right now you know you have to know the market's a joke but it may go a lot higher still you have to know that the Fed's doing the wrong thing and the bond market's trying to revolt Maybe it will, maybe it won't. Uh, and then you've, you know, then we've got all these other wild cards. So, um, it's a it's a tricky environment. If you looked at the stock market, you wouldn't have any idea it was a tricky environment. And we know why that is that damn passive bit. So, it's not it is not a market that is conducive to analysis in the short run. Okay. And and folks, just just to underscore, this is why uh in the past I have brought up the uh what's happening in the employment market and what's happening with the unemployment rate. Um and and just full disclosure, we'll likely continue to do that. um maybe even more so in the near term going forward just because we're starting to really see some weakness there in the jobs market because as goes uh the unemployment rate that's basically the thing that impacts most the potential of work passive capital flows may go. So, you know, to Bill's point that has been hammering through this whole video here is that the capital passive flow is in charge. And until and unless that's not the case going forward, we could prognosticate all day long, but it's not really going to matter. See there, you condensed an hour conversation into three minutes. All right. Well, look, um, Bill, like I said, it's always such a pleasure talking to you. Um, thank you for giving us so much time. I I made a brief reference to your newsletter earlier on, but for folks that would like to get more Fleckenstein in between now and your next appearance on this channel, where should they go? Uh, my website is fleenstein capital.com and I'm on Twitter at fleckcap if anyone cares. Uh, I'm sure they do, Bill. When I edit this, I will put up the links um on the screen here so folks know exactly where to go. Folks, the links will be in the description below this video as well. All right. All right. Well, in wrapping up here, folks, please tell Bill how much you appreciate him being on here today by hitting that like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, and if you would like uh to get some professional help in terms of figuring out how to potentially position your portfolio for this really kind of uncertain time that that Bill has told us about. Um, and maybe, you know, potentially, uh, take a page from from Bill's book about trying to find ways to position your portfolio so that you're a little less exposed to what exactly happens with passive capital flows. Uh, I highly recommend that most the people watching this video, unless you've got a a really good DIY track record of investing in periods like this before, um, that you get that help from a good professional financial adviser and importantly one that understands and takes into account all the macro issues that Bill has laid out for us here. If you've got a good good one who's doing that for you, great. Don't mess with success. 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Everybody who registers will get sent replay videos of uh the whole conference, all the presentations, all the live Q&A sessions, uh including the transcript of the live chat that runs throughout the whole day. Um, so if you haven't bought your tickets yet, make sure you run notwalk at this point and go buy them at thoughtfulmoney.com/conference. And again, another reminder, if you are a premium subscriber to the thoughtful money substack, make sure you use the code that I've emailed you to get an additional $50 off of that low early bird price discount. Um, Bill, as usual, it's just such a pleasure. Thanks for giving us so much of your time today and really digging in today. case the so what like what really matters about all this. Um very much appreciate you being so generous and really look forward to having you back on this program again soon in the future. Sure thing, Adam. It's fun. All right, and everybody else, thanks so much for watching.