Kevin Muir: The Fiscal Flood Driving Global Reflation
Summary
Market Outlook: Kevin Muir discusses the current volatile trading environment, emphasizing the need for caution and smaller trading positions due to increased market volatility.
Investment Strategy: Muir advises against chasing short-term market trends like gold's recent fluctuations, suggesting that investors should focus on long-term strategies and trim positions when volatility increases.
Fiscal Policy Impact: The discussion highlights a shift from monetary to fiscal policy post-COVID, with governments globally increasing spending, leading to concerns about sustainability and potential inflationary pressures.
Global Reflation: Muir points out that non-US markets are experiencing significant growth, with the MSCI World Index excluding the US outperforming US indices, indicating a broader global economic recovery.
US Fiscal Concerns: The US is running a high deficit relative to GDP in a non-recessionary period, raising concerns about long-term fiscal sustainability and potential market reactions.
Sector Opportunities: Muir expresses optimism about the energy sector, particularly natural gas, due to increasing global energy demands and underinvestment in the sector.
AI and Market Valuations: There is skepticism about the sustainability of current valuations in AI and tech sectors, with potential overvaluation risks similar to past market bubbles.
Bond Market Insights: Despite prevailing bearish sentiment, Muir suggests that the bond market might not be as weak as perceived, hinting at potential opportunities if economic conditions shift unexpectedly.
Transcript
I feel like I'm taking crazy pills. The idea that we should be spending 7% of GDP and cutting rates in this environment is absolutely insane and yet here we are. Hello and welcome to Wealthon. I'm Maggie Lake and here to discuss the trends driving global markets right now is Kevin Mure, author of the macro tourist substack and newsletter. Hi Kevin, how are you? >> Oh, great. It's always terrific to be with you, Maggie. >> It is and we are gonna cover a lot of ground or we're gonna try to. If you have any if you're listening and you have any reactions or questions about anything you hear, please leave them in the comments below. We read them all. And if you want to explore what asset mix is right for you right now, you can get a free portfolio review from an adviser in the Wealthy Network. Just hit the link in the description or head over to wealthon.comfree. Um, so Kevin, this is a pretty intense trading environment. We have a daily barrage of headlines out of Washington. US stocks hitting record highs on an almost daily basis and some dramatic action in gold which has been ripping higher but lately gapping lower even today as we record this. So, you know, if you sort of try to cut through some of the noise, what are you most focused on right now? What should we all be paying attention to? Well, I just kind of remind people back to when Trump was elected and and I kind of joked and I said he's going to make macro great again. And one of the things I I said was we were about to, you know, embark on an environment that was reminiscent of the 1980s when the George Soros's Paul Tudtor Jones, you know, Michael Steinhart's um made fortunes trading these asset classes. And I think that's actually been a pretty good call. It has been extremely volatile as you mentioned like for example gold. We haven't seen a move like this since the 80s and it's been extremely wild and it's extremely crazy. And one of the things that I guess I'm a little hesitant to do right now is, you know, start telling you I know for sure the gold's topped or I know for sure that goal is a great investment. The reality is that we're in this part of the cycle right now that it's manic. And and you've correctly identified it. It is manic. And one of the things that I've learned over the years is that when volatility starts going up, you need to get smaller. And I know that's boring. I know that's not really what most people want to hear. They want someone to come on the TV show and say, you know, you should buy gold because it's going to the moon because of, you know, all the problems with debasement or something or someone that says, you know, you should sell gold because gold is so overbought and we're about to have a huge correction. And the reality is both of those could be true, >> but like I I was more interested in talking about gold 6 months a year ago when no one was talking or not no one but less people were talking about it. And for me, you know, giving this playbyplay and trying to call the next, you know, day or week in these asset classes is just it doesn't really add any value and it's and it's more entertainment than it is truly investing. So, one of the things that I just tell everyone is that over the years that I've learned as my portfolio gets more volatile, even when it's more volatile to the upside, I trim my positions down. And the reason that I trim them down is because, you know, it's I've learned the hard way, Maggie, that in the past I used to try to be like all the market wizards. I used to say, well, you know, upside volatility is terrific. And so if you know, you're used to 100 basis point up moves and that's, you know, your regular day and then all of a sudden you get a 500 basis point up move, you know, you should live with it because it's to the upside and not the downside. But one of the things that I've learned the hard way is that that 500 point up move, you know, might have a 300 point move the other way. So if your tolerance, you know, is 100 basis points, now all of a sudden you're moving 500 to the up. That means that chances are you're going to have a 300 to the down. So one of the things that I just I'm counseling folks is is to trade smaller. And that is it's boring. It's it's not exciting. It's not what people want to hear, but it's something they need to do. So that means instead of buying more gold up here, you should be trimming back your gold. Not that I don't think gold's a great investment, but it was a much better investment when when people weren't talking about it than it is today. >> This October, Wealthian's putting the spotlight on silver with expert interviews, deep analysis, and a special in-depth report from our partners at SCP Resource Finance. To receive this report and other exclusive benefits, you can sign up to become an accredited investor with Wealthon at wealth.com/acredited or by finding the link in the description below. Speaking of silver, Wealthon will be on the ground in Toronto for the SCP Resource Finance Second Global Silver Conference happening on Thursday, October 23rd. Legendary investor Eric Sprat headlines the event alongside 15 silver mining companies presenting their top projects. It's a mustattend for anyone serious about investing in silver. Tickets both in person and virtual are now available. Find out more in the description below. Yeah, listen, it's great advice and uh you know, we say boring, but maybe it's just smart and strategic, right? I mean, like that could be true, too. But and it sounds super obvious, right? It sounds obvious, but it is so hard to do. And you're right. There's a whole cottage industry of people ride your winners, you know, to the right and up. And, you know, that is that is a lot of entertainment and and that, you know, we're not we're we're not in that business. We're trying to sort of, you know, help people sort of navigate through this. So, what kind of regime are we in right now? For folks who don't maybe follow global macro, you know, it felt like a lot of people have kind of commented, you just touched on debasement, but a lot of people have commented we were in this super low interest rate, worried about deflation environment for so long and we all got used to operating it. That was the operating system and now there's a sense that maybe we're changing. Do you have a sense of where we are, what we're in or what what we need to be how we need to think about this period or is it in flux? Where is your head on that? >> No. So, I I completely agree that the world changed and I've been arguing this for a while that in it changed in essence in CO and what changed in COVID was the previous 40 years we had always tried to fix things with monetary stimulus, you know, or monetary, you know, uh contraction. So the economy gets too hot, we raise rates. The economy gets, you know, weakens, we lower rates. This went on for 40 years from 1982 all the way to 2020. Every time we had a a slowdown in the economy, we lowered rates. And we lowered rates more and more and more. And if you look through that period, each high in the interest rate cycle was lower than the previous one. And each low was lower than the previous one until eventually we got to the great financial crisis. We went down to zero. We found the economy was still suffering. We were like, "Okay, what do we do now?" That's when they do the extraordinary, you know, monetary measures, the QE, the, you know, operation twist, negative rates in in Europe, all sorts of things like that. And it didn't work. We found that there was limits to the monetary side. Then in 2020, in the COVID crisis, we finally woke up to the power of fiscal. And my push back has been that we've woken up to the power of fiscal, but we've used it way too much. >> And as as people that, you know, have followed me for a while know I'm somewhat MMT sympathetic. And I know instantly people will be like MMT like that's like leftwing crazy stuff. Yes. And and they'll be like those guys just want to spend spend spend. And and I always say, you know, you have to be careful with MMT because there's the prescription that some people are using when they understand the system and then there's those who understand how the system works using that sort of plumbing, you know, facility and understanding how the the economy works under various scenarios. And if those people were actually very bullish in 2020 when everyone else was bearish, we thought, oh, we couldn't fill the economic hole. lots of folks like it's easy to forget now but there was tons of bears out there that thought there's no way the government can spend their way out of this hole >> and yet you know the MMT folks said no no the government can fill the hole and I agree and and the the kind of the crux of MMT is that the government is never financially constrained it's just real resource constraint >> and what that means in practice is the government can spend up until the point where they create inflation at which point the government has a limit what I think we're finding now that's so interesting is that we're spending and we are still above the inflation target and theoretically we should be cutting back on this on on the fiscal stimulus but here we are with the government was with sorry with the central bank having achieved its inflation target for what 3 4 years you know we went up to 10% we're down to three but we still have not achieved our 2% target and yet the government is running a 7% deficit to GDP, which is unheard of in a nonrecessionary, nonwar time. And not only that, the part that I find the most amazing is that Wall Street is arguing that rates should be lower. >> So when you ask what how the regime has changed, it's just mindboggling. Like I just feel like uh that Mr. Mugato in uh uh in Zoolander, like I feel like I'm taking crazy pills. The idea that we should be spending 7% of GDP and cutting rates in this environment is absolutely insane. >> And yet just so and when you're talking about 7% of GDP, you're talking about the US, but it's not just the US, right? We're talking about um it's everywhere. So it's so it's so useful and interesting for you to lay it out like that because I'm as I'm listening to it, you're absolutely right. We had monetary policy, i.e. central banks at the center of the universe through that whole period. Then when during COVID we shifted to governments um as a you know thought experiment happening in real time a real life experiment and it worked but then we sort of forgot politicians are in charge of that. >> You're absolutely >> as stewards of that um let's just say restraint is not part of the political landscape right now or maybe or maybe Wall Street's landscape. So this is where it seems to be going off the rails. You could argue that if you So maybe this is going to be very interesting and we'll we'll put a pin on it and save it for another conversation, but the resolution of all this is going to come politically either through structured politics or through unrest and fractured dangerous politics. But it seems to me that a political solution is going to have to be part of this if the kind of >> But will a political solution come before the markets dictate it? And I think that >> that's what I'm worried about. That's what I'm talking about. >> Fractured and I really truly think that I that Bill Fleenstein has that great line. He says that they're going to keep spending and printing until the bond market takes the keys away. And that very well could be >> but this is this environment of more volatility. Now, you know, 2020 comes, we do some suspending that changes the environment, but it's also changed in, you know, in the Trump era, and Trump changed things in very dramatic fashions by two different things. One was this idea that he was going to come and he was going to put tariffs on there. And I know we've been kind of lulled into thinking that tariffs aren't that big a deal, >> but I think that they are. And I and and I suspect that we're going to find that that the market did overreact over the short run but has underreacted over the long run and that is actually a very big deal. It's changing the fundamental nature of our economy and that I suspect in a year's time we'll look back and say oh tariffs were more important than we think. But the other >> I was going to ask you if we're too complacent. So that's one. What's the other thing that >> So the other thing that I think is that was that's been missed by a lot of folks is that when Trump came and did his aggressive policies versus other members of the financial system and I'm a Canadian so I'll just use Canada as a good example because I can speak to it. We we've come and we've gone from having a deficit of 2%. So like everyone thinks that the US was running 6 7% deficits and then if you'd ask them well what do you think Canada is and they will those guys are socialists they're for sure going to be higher than us but the reality was that we weren't. We were running a deficit that was much more in line with what traditional you know Wall Street would would suggest is proper. So what happened when Trump came and started calling us the 51st state and then we started getting into a trade war? We realized, hey, wait, you know what? We can't rely on America like we used to be able to. And and good or bad, I'm not here to judge. I'm just telling you how the we perceive it and how the economy is adapting to it. So we said instead of us, you know, running this deficit, we need to spend because we need to invest in ourselves. We need to make it so we have pipelines so that we can ship our oil to the to the coast and actually send it to other nations. We need to go and make it so we're competitive on a corporate basis. So we've gone from a deficit of 2% probably to 5% and being much more pro business. And this is happening throughout the world. Let's just take Germany. Germany used to go and their deficit to GDP was.35%. Like less than 1%. You guys in the US were running 7%, Germany was less than 1%. And all of a sudden they were like, "Holy smokes, you know what? We actually are going to have to spend we're going to have to spend more on Ukraine in terms of arming them. We're also going to have to spend more on ourselves in terms of spending on infrastructure." So what has happened is in the post GFC world the US was one of the countries or actually the country that was willing to run the largest fiscal deficits and the largest trade deficits and what that meant was capital was attracted to the US and that the economy was the strongest there >> and it was a it was a self-fulfilling you know feedback mechanism like you're sitting there and you're an entrepreneur in Milan and you're sitting there looking should I stay in Milan where interest rates are negative there's not much going on or should I go to the US where there's all this economic activity and it's all the smart people are going there it was kind of a a self-fulfilling positive feedback loop okay so now though all of a sudden the rest of the world is spending so in the past it was only America that was willing to spend and now we're seeing the rest of the world spending and so what I think was one of the biggest underappreciated stories of the past year is how well the rest of the world is doing and how we're going through a global reflation. So everyone's focused on US stocks like everyone's talking about how you know America new highs like you you know at the beginning of this thing you started talking about how US was hitting new highs. Well the reality is that yes the US is hitting new highs but so is the rest of the world. And in fact when you go look at the other indices they're actually doing better. And so one of the best examples that I kind of like to remind people of is the MSCI World Stock Market Index X the US. So think about this is all every other stock except for the ones that are in the US. It's up 28% year to date. >> Wow. >> 28%. Like the S&P is up 15. Let me just check and see what the NASDAQ is because I think I bet you that it's even the NASDAQ's not even that much up. Let me just see. Putting it in here. NASDAQ's up 20. So the MCI world index XUS is up 28%. And then the really interesting part about it is when you look on it on a risk adjusted basis, meaning you adjust it for the volatility and you figure out the sharp ratio, it's three times what the US is. So risk adjusted, it's much much better. And I think that that is the big long-term story that people should really be focusing on instead of going out and trying to chase AI or chase the meme stocks and chase all these things is they need to realize that the rest of the world has changed and Donald Trump is responsible for that. And you know, you say what you like about the guy, but the reality is the rest of the world was not spending enough. That was a problem. >> Yeah. And you might not like how he's gotten the rest of the world to spend, but I think it's like just it's a great thing. And I think that it's a it's something you should be aware of and it's a trend that's going to last for a long time. And I I think that this outperformance in terms of non US stocks has just started. >> That's so interesting. And I in a in a global reflation environment, are equities the biggest beneficiary of that around the world? Is that where all that spending makes its way to? >> It's it's definitely one of the first and it's and and a lot of those other countries were so cheap in terms of their their PE. So was there was a lot of juice in them. And and if you don't believe that, by the way, just go look at Germany the moment that they announced that they were abandoning their what's called their debt break. Like they didn't even they just announced that they were doing it and the stock market just went shooting up. So the market understands that the that the world the rest of the world wasn't spending enough. Now one of the things that I think is interesting though back to our comment about the US running the largest deficit in the right now and 7%. There is going to be a point where the market's going to push back and say hey you can't keep spending this. And I and I do think it's kind of amusing that that everyone's forgotten that you know like the the Rogoff and Reinhardt book like it was like they they were so worried about debts and now all a sudden they've just put it aside and it's party on. And you know what's funny Maggie? I was going and looking at um it was it was recently the uh the anniversary of the 1987 crash. So I went and I pulled up the old Wall Street week with Lewis Rukiser and I went and watched the videos and most of the people are probably have watched the one where the legendary Marty's wag predicted the crash on the Friday. So the Friday we were down a little bit. We had been down 15% and then he came and said, "No, no, we're going to crash. It's going to be ugly." And the thing puked. But I had never seen the next week. And you know, a subscriber of mine suggested I go watch it and I found it fascinating because they had the head of the Meil Lynch and the head of uh Goldman Sachs uh the strategist on and they were talking about different things and the triggers for the 1987 crash and all these things. But one of the most interesting things about it was that they thought that one of the reasons that the crash happened was because the government didn't raise taxes enough and they were worried about them not like spending too much. And back to my point about, you know, in the past in the post GFC world, there was not enough government spending going on throughout the world. There really wasn't. And part of the reason that the US did so well was because they were the only ones that were willing to do the spending. Now in this Trump world, the rest of the countries are also spending. And so I think slowly there's going to be less capital available and also when you combine it with the what I think is an AI bubble and the huge amounts of money that's required there. So now all of a sudden we've gone from a period where there was all this excess capital looking for a home. I think we're going to hit to a point where there's going to be worries about the spending and we're going to return back to the things that we saw in that 1987 um Wall Street week thing where people start saying hey wait we can't go keeping this up like just think back to Liz Trust Liz Trust with the you know the prime minister of the UK she announced a budget that was unrealistic the market shot it like shot the the the guilt market like they just went out and they just like and they got it and all of a sudden she was forced to retrace. I don't know if we're not closer than we think to that sort of worry. >> If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardassalliance at hardassallalliance.com. That's hardassallalliance.com. So, it's interesting, Kevin, because I think that has been a consistent worry of people I talked to, right? that we could we we could have the potential this time to have a sovereign bond crisis which is far scarier because who then steps in right if the government is the source of the problem and by government pick your choice not just the US there are you know you mentioned the UK still struggling France has been through what four governments and you know so there are other candidates because we're all dealing with the same problem to different levels but we're watching bond yields currently you know we're we're we're taping this uh on October is it 21st? Yes. >> Um current currently >> bond yields are going lower. Why would that be happening if everyone's so concerned about >> this sovereign? That's what's confusing people I think. >> Yeah. And this is back to your thing about how this is such a manic crazy market and it's so difficult. There's so many different crossurrens. And not only that, I feel like in this environment of social media and all these great podcasts and the ability for people to express their opinion, you get a narrative that just gets grabbed hold of and like hammered home and explained. And so one of the things that you're seeing now is that you mentioned it earlier, gold was exploding higher. >> Gold was originally going up not because of worries about the debasement of the US dollar. gold originally was rising for like last year I was on your show and I and I would talk about why I was bullish gold and I always said it's I'm bullish gold because when Ukraine or sorry when Russia invaded Ukraine and they zeroed the Russian foreign exchange reserves we China looked around and they had no choice but to say I need to go and diversify into gold and even now they are still woefully under represented on gold and that is ultimately why gold is probably still headed a lot higher. Okay, but that was the the bull market, you know, a year ago. Today, a lot of what's driving the gold bull market is this idea from Western investors that there's this debasement trade going on and you see all this worry about the end of QT. Like the other day um Jerome Powell got it got got in front of some uh I can't remember he was speaking somewhere and they announced and he started talking about the how QT was winding down and all of a sudden instantly stocks went bid and the gold market went bid and straight up and everyone says this is it. This is the debasement and I was sitting there and I was scratching my head Maggie because I was like he's been talking about this for a year. There was nothing new in that speech. like I mean zero. So one of the things you have to watch in these markets is that they have become so fast and so prone to these whips of like just the price moving so far. Like let's remember back was it September of 2023 when a lot of the people were worried about the bond market and they were worried about the again a sovereign bond crisis and we had this you know meltdown in bonds and oh that's right it was the term premium back then it was everyone was worried about the term premium. people that didn't even understand what term premium that was and were confusing it with the yield curve were explaining to me why the term premium made it like inevitable that we were going to have a crisis. And so one of the things that's really difficult as you go and you try to trade your way through this market is that the the the voices have become so loud and they move the market so quickly that it's easy to get caught up in a narrative and say that this is what's going to happen. So although I do believe that eventually we're going to have spent too much and there will be a problem in the bond market, I actually think the fact that everyone's worried about that currently is why you probably shouldn't be worried about it. And I'm going to bring this back to the stock market because we haven't talked about the general level of the US stock market because I think it's woefully overpriced and I'm shocked at how everyone is so bullish. And I'll just remind people and I and I'll, you know, back to 2023 and I'll tell a story. I had I had um I we had an event and it was me and another buddy and uh we had people that wanted to come in and like go to this event with us and we basically said to appear with us and to drink beer with us, you were going to have to sing for your supper. So you're going to have to come up with a trading idea. So this is 2023, early 2023. And so we do this thing and we get 20 people coming and we have a great night out. And it started off me and my buddy and we both were bullish. He was bullish because he's more of a like a stock market analyst and he reads reports and he talks to companies and he was bullish because he was talking, you know, to the CEOs and listening to conference calls and he was like saying, "No, no, the economy is actually really strong." And I was bullish because I was saying, "No, no, there's way more fiscal in the pike than everyone realizes." the the reality is that this this fiscal takes a while to to go through the system and just because the government spended, it's actually sitting at the state level and we're going to be surprised. So, we were both bullish. This is in early 2023 and if you remember 2022 was a bad year for stocks. Everyone was bearish. There's a there's a data series from the St. Louis Fed that measures the professional forecasters belief that there's going to be a recession in a year's time. This series was the highest it had ever been, meaning that never before had more professional forecasters being sure there was going to be a recession in a year's time. Everyone was bearish. And I and I would say to people, I go, "Listen, maybe you're right. Maybe the economy is going to roll over, but the reality is that even if you're right, it's already in the price. Like I I I'm buying something where you guys have already discounted it and and it's in the price." So, at the time the S&P was trading at 70 times, we do our bullish things. Then the next 20 people tell us bare stories and like they by far are way more popular than our than than our stories. At the end when we're out for dinner, they all come to us and say, you know, you guys are really nice guys, but you just don't understand how bad the economy is. And I would contend that if I was to have that same event today, I would contend that everyone would tell us, you know, you don't understand how good the economy is today. And one of the things back then, everyone used to say to me, are you worried about a stock market crash? And I said, no, I'm not worried about a stock market crash. And they said, why not? And I said, because you asked me about it. and and and the fact that you're worried about a stock market crash means that there's enough people concerned about that that it's probably being accounted for and priced in >> today there's nobody that's saying that like really in fact they're more worried about missing >> Andrew Ro Sorcin come out with 1929 so >> yeah but he but yes and he's doing that but the reality is that if you go and talk to people they go yeah that's a great story and stuff like that like even people listening now will be like oh that's great but you're probably a perma bear, which I'm not. Like, I'm truly not a perma bear. I'm not one of these guys that's been bearish the whole way up. I'm just saying that at this point for the, you know, like when you think about how markets work, markets are a forward discounting mechanism. And when everybody is bearish, that means that you that to be correct, it has to be even worse than what is priced in, right? Like it's it's like not only you it doesn't just have to be bad, it has to be worse than what's priced in. And to me today with the S&P at 23 times the next 12 months earnings, I go, "Okay, great. You're telling me all these great things about, you know, the stock market and things like that, but what do you know that other people don't know?" So you actually, it has to be better than this already bullish, you know, scenario. And when I look look at the US stock market, the concentration is at levels that is last seen since like 2000, 1962, and 1929. There's this gold there's this great Goldman chart. Yeah, Becky, you get it. You look at that thing and you're like, "Okay, great." Uh the reality is that it's not >> That doesn't make anybody feel good, right? It doesn't make any Let me ask you because we're sitting here right now and we we have earnings that are still coming in strong and that's that's what makes it so hard because I think that what you said is going to resonate with people but then they look at it's like this one beat this one beat. So that it seems that that that argument that but this time there are real earnings, right? It's not just a dot slapped on the on a name or on a billboard. There are real earnings and and that is true. We saw banks do well with earnings. >> Yeah, you're absolutely correct that the economy is like the real economy is actually doing okay right now. Not as bad as everyone thinks. I did think it was interesting. I pulled up this chart from Schroers. Um they went and looked at like the year-to-day performance based upon different subsets, right? Like and they so they started with Mag 7. Mag 7 up 18%. So as much as everyone's bullish on AI and talking about what a great trade it is, 18%. Okay, let's like think about that. I just told you that the MCI World Index XUS is up 28%. So, you've you've lost against that. But then you go look at the different things. The S&P 493 like the rest of the S&P >> 8%. Okay. NASDAQ no revenues like meaning stocks with no revenues 34%. Unprofitable NASDAQ 18%. Unprofitable US small and mids 12. NASDAQ with revenues 11 so you get punished for having revenues profitable NASDAQs like companies are actually making money 7%. And profitable small and mid 5%. So yeah I I hear you guys but the reality is that things aren't like things are seeming this is more like the dot than than people are admitting. And one of the things that I just kind of makes me laugh so much is that whenever I start talking about this, people will say, "Okay, Kev, I completely get it." And they'll tell me, you know, how this time is different. And I say to them, "Do you really think we didn't think the last time was different?" >> Yeah. >> And we always think it's different and and and it's just a question of are you to me, you always when you're investing, you always have to ask yourself like what do I know that the rest of the world doesn't know? like what where is my edge? And it just feels like, you know, going back to my 2023 example, I thought my edge was that the rest of the world didn't understand fiscal stimulus properly and that they were under they were overemphasizing the rising rate environment and in fact I could make the case that the rising rate was actually stimulative and that it was making the deficits larger. But so they didn't understand that. So I thought there was an edge there. Now, I look at this and I go, I I just don't see where people's edge are. It's not like this is new. And then the one last thing about this AI, if you think about it from like the the mag 7 or the tech oligarchs point of view, if they believe that there's a chance that we do this AGI, which is artificial general intelligence, right? Like if you think about it and I think I think Elon Musk said there's a 10% chance, right? 10%. So which probably means there's like really a one but anyways let's assume it's 10%. But if there's 10% chance that this occurs, it's going to make your company worthless like if you're Meta or if you're Microsoft and you're not there like you know that's an ex existential threat to you that if if if there's a AGI. So they have no choice but to spend. And like you can even hear them say it like I I think Zuckerberg has said something to the effect like I have no choice but to spend. And so what we're getting is this absolute just asinine, you know, oneupsmanship and just spending and spending and spending without anyone thinking about it because it's almost like they need to spend. And then it's created this self-fulfilling prophecy. And not only that, they're actually running out of money now. Like you mentioned the fact that, oh, these companies are profitable. Go look at their cash flow statements. Like the old argument used to be that there was all this cash flow. Well, this cash flow is now going to buy all these things. Not only that, we see that a lot of these things are getting financed through SPV, special purpose vehicles. Like when was the last time you heard about SPVS? 2008. And I'll tell you when >> that has a lot of people really concerned. And if you think about before 2008, the last time you heard about it before that was like Enron in 2000 in 2001. Anytime that the people are hiding this, it's a problem. So, >> and by the way, I I noticed the last earnings to that point that they weren't really responding to revenue. They were responding to the capex is going to keep they're going to keep spending on capex. That seemed to be the trigger because that mean that sort of, you know, means that the Nvidia of the world and stuff are going to have those orders. But that's super interesting to your point. they're spending the revenue which is something shareholders are usually give them a hard time about. So there there are there is a lot there. So let me let me by the way I just want to just want to throw into all of that too in in case we weren't concerned on the day that we're recording this you know you've got this meme activity you referenced it really early but did you see beyond me today? It was like it's because it was added to a meme stock I think like poor but yeah so there there's there's fraud. So let me let me ask you a question. So, we've got the Fed, we've got the Fed meeting next week. Yeah. >> I mean, it almost seems like it's like an afterthought right now because I, you know, there's a lot of lot of questions about what's going on there. But, um, do if the Fed lowers rates, are we in a situation where the bond market will not follow the Fed? What do you think the Fed is focused on? >> So, it is really difficult and you've highlighted the fact that long rates are actually behaving well, >> right? And and that's actually from a bond bear's point of view, that's actually concerning, right? Like we're having talk about debasement and like all this worry about this lack of ability to fund themselves. And meanwhile, the bonds market is doing better than it's done in a long time. And I always think back to that Bruce Cner line that I love. He goes, "What I'm looking for is a market that is not confirming consensus." and consensus right now is that the bond market is doomed. And I have another story for you on this. Um I remember in 2022 it was that there was a year 2021 was a bad year for the bond market. And up until that point, it had never had two years in a row of negative returns in the bonds because if you think about it, we've had 40 years of interest rates going down. I wrote this Bloomberg oped saying that we could have two years of, you know, negative bond yields. And holy smokes, Maggie, I got push back from guys that were running billions of dollars that were way smarter than me telling me, you arrogant guy, you're going to learn the hard way about the bond market. And one of the things that I think is interesting is that it used to be that everyone would sit there and bet on lower rates. It was a very common thing in like 2022, 2023. It was this idea that as they raised rates, eventually the economy would collapse and then we would be back to zer situation. So there was people buying 1% call options on on sulfur trying to bet on this collapse. That is completely and utterly changed. Now it's cool to be a bond bear. It's cool to bet against the stock market, sorry, against the bond market. It's cool to say that we're never going back down to those rates. >> And one of the things that I worry about is that actually the economy is not as strong as we all think it is. And I think that is what the bond market is telling you. And I am I will admit my bias. I am a huge bond bearer. I have been bearish for a long long long time. And for the first time in years, I am not short. I I actually think that there's a ch I and I can't bring myself to buy them, Maggie, because I'm still worried. I'm still worried that they're going to cut rates and they're going to go and then the yield curve is going to steepen and we are going to actually have a funding problem. So, I can't bring myself to buy them, but I almost think I should and I feel like that's actually the difficult trade here. And one of the things I think that people should think about is right now the market is priced in a terminal rate of 3%. Meaning that that's where they think the Fed's going to cut down to. And this terminal rate of 3% is occurring um you know in an environment where the stock market is at all-time highs. Uh you know yield curve sorry the the um credit spreads are really tight. There's all sorts of really great things happening in the economy and everyone's bullish and yet we're still have this terminal of 3%. And one of the things that I kind of like imagine to myself is what if the economy rolls over? What if we get a situation that surprises folks and it it we actually get some layoffs and next thing you know it cuts. And I could see a situation where that 3% goes down to two really quickly. And I'm not smart enough to tell you what I think the 10 and the 30 years is going to do because I do worry that the yield curve will as I say steepen, >> but I think that betting on the terminal rate not being three is probably a pretty good bet and it's probably a good hedge. And one of the things that bringing this back to my idea about the fact that the US has been running this massive fiscal stimulus is that increasingly it's going to be difficult for the government to spend in an economic downturn. So if we go back and think about the previous times, it was actually easier. There was lots of room. The government was running a 3% or 4% thing. So you, you know, crank it up to eight for some. If you're already at eight, what are you going to do? you going to go to 16 like there there does reach a point and this is one of the things that I worry about. So if I'm correct we could have a situation where the next downturn is actually we need to go back and rely on monetary measures just and and how ironic would that be tapped out fiscal. >> Yeah. And you know what's funny is that me who's been very much arguing that fiscal is so important and fiscal is everything and that everyone should focus on fiscal and now I'm sitting here telling you that you know what you actually are probably hitting the point where the fiscal is no longer able to do the heavy lifting and that the next one might have to be on the monetary side. So I think that that could be a surprise that no one's thinking or few are thinking about and that would then put rates down to like lower and if we kind of go from there I think the dollar sells off commodities run gold goes again um and that's why ultimately I am probably an inflation bull but I think that >> we might have a deflationary wave to create the next one >> but it it's complicated Maggie like I I'm with you like this is there's so many different things. And I just want to remind folks like be careful, be aware when you're listening to people and they seem like they're so smart and they got it all figured out. Like Paul Tudtor Jones was on the other day talking about on CNBC talking about the fact that, you know, we're going to rally just like in 99 we're going to we're going to repeat the the NASDAQ where we go from um you know, we double in the last part of the cycle. Well, I I went and did the math. Like I can't remember the exact number, but the the stock market as a percent of GDP in 1999 was like 50 or or 75. So it went from 75 to 150. Well, today we're already starting at 225 or, you know, some big huge number. So what is he implying? That we're going to go to a 450% of GDP. Like there there's just like people have just completely and utterly not bothered doing any math. Like it's same with this AI stuff. You know, we're all just tossing around numbers and it's like these are like huge numbers and like that Oracle guide that that sent the market screaming there's no way they're going to spend that. And yet everyone was so bullish on it. So just be aware that when you hear these things, you got to be careful and don't get too caught up in the emotion. And I'll just remind you, Paul Tudtor Jones, I love the guy. He is the greatest trader that's ever lived. If I was half the trader, even a quarter the trader he was, I would consider myself a huge success. But he gets it wrong all the time. And he's going to change on a dime. He'll go and he'll move his policy. So, if you go back and you look at September of 2023 when I was talking about how the bond market was going no bid, he was really bearish bonds at the lows. by the time he's on TV and by the time he's telling you about it, he's got his position. He's feeling smart. It's in the money. >> Don't you and and I I joked and I said, "You don't get to see his blotter in real time. You don't get to see his trades in real time. So, be really wary when you're thinking about that." >> I think that's such great advice, Kevin. Everyone's talking their book, right? Everyone's no one's no one's walking you through it when they're thinking about doing anything. They've already done it and they and it's locked in. And often, you know, folks, ordinary folks sitting at home are the last to know. And that's always where the danger is and and you don't want to be last in that line. Um, do you So, you think that that's really interesting about bonds, you know, in the short term and on the short end that, you know, we might be in for a rally in prices, a drop in yields that no one's expecting. When it comes to stocks, clearly you have a lot of concern about AI. Is there a part of the stock market that you like or think is a good place to hide in this very uncertain environment or put money to work? Maybe longerterm money to work. You use the verb you're >> I People are going to hate this and that's probably why I think it's a good trade. I love energy. I think energy is just forgotten. Nobody cares about it. It's just one of these things. My buddy Paulo Macro, he has a line. He says, "Energy stocks today are what gold stocks were a year ago." >> And that is just a terrific, terrific line. Um, one of my subscribers was was just reminding me that the mutual fund uh year end is October 31st and so they'll be selling a lot of the the stocks that are big losses, right? So that that might be a good point to look at them. Um, and then that gas to me when I look at the amount of electricity we're going to need for this AI and not just the AI like we were already >> right >> with electric cars needing a ton of electricity, right? That's the part that I think is just amazing. We, you know, mandated all these electric cars and we didn't think about, you know, making the the electricity first. We were just like, you know, oh no, you have to be x% of electric cars. And those have kind of economy scrapped those ideas. But it wasn't that long ago that people were saying by 2025 or 2030 or whatever it was like, you know, it was going to all have to be electric. There was this crazy push and yet they didn't think about like how are you going to actually, you know, put the electricity in there? You know, someone has to make it. Um, so you had this strange environment where you were mandating people drive electric cars, but they were electricity was getting produced by coal. So when I think about the fact that we already were having needing a lot more electricity and then you throw this AI boom on it where the amount of electricity is just massive like there was some expert on CNBC the other day and he was explaining like how much electricity we're going to need and it was just mindboggling like I don't remember the facts but like I I I clipped it and included it in one of my letters. It was just shocking to me how much we're going to need. So when I think about it, yes, nuclear is the long-term solution about that. No doubt about it. That's what we should be doing. It's tough to do nuclear over the medium run. >> To me, it's pretty clear we're going to have to do nat gas. That'll be how we do it. So, you know, going back to my idea about buying energy, I think that that's going to be a huge uh demand source in the in the future. And I think you should own energy. And then one last thing I'll just, you know, put on the on the on the energy bull story. Everyone's focused always on the supply side. You'll hear analysts talk on CNBC. They'll talk about how, you know, Saudi Arabia's got this much, the shale has got this much, all the things. Very few people work on the demand side. They don't they don't really think about that. And one of the things that I've always long argued is that when countries become wealthier, you hit this hockey stick of energy usage per capita. >> So we get this situation where it's a little bit a little bit a little bit and then they get wealthy enough that they can afford an air conditioning. They get wealthy enough they can buy a car and it just like the demand usage goes through the roof. So we saw that in Japan in the postw World War II period. We saw that in Korea um and we've seen that in China a little bit. I think that we're going to see that in India. And then even more interesting is that I think that Africa is experiencing not an increase in their actual wealth. Like they're not at the point of the part of the curve where they're all of a sudden they're going to start using a lot of more energy. But one of the things that's interesting is that the price of ICE like internal combustion engine cars because of China has come way down. Like we all know the story about China, you know, BYD selling cheap electric cars, but Africa can't do that. They don't have the infrastructure to go and uh you know have the refilling or the the recharging of those things. So that it's not going to happen in Africa. But I think that a lot of folks are missing that there's also cheap ice cars out there. M >> I was in Grand Cayman the other day and I was like staying at a buddies and when I got there I I had rented a a car and he's like oh you got a Chenang or something and I was like and I was like what is this thing? I didn't even know what it was and it's like a Chinese name and he was telling me how like the entire island everyone's buying it like people this is in Grand Cayman it's like the third highest GDP per capita in the world like these people are really wealthy and they're like why would I pay up for like a like a car when I could get a Chenang for half the price right? So I think especially since they only have to drive this far. >> Yeah, that's true. So one of the things I think that's might happen in Africa is that you might not be increasing their wealth, but what you're doing is decreasing the cost of getting into that car. And so there might be a lot more demand by people that can all of a sudden afford a cheaper ICE car from China. >> So I just look at this and it just feels to me like energy is underloved, cheap, uh with lots of possibility of it headed higher. And if I'm right about eventually there's going to be an AI correction, one of the things about the stock market that that I'm sure that most people will recognize by now is that the internal rotations are violent. >> Meaning that when all of a sudden one sector goes offered, another sector goes bid and it ends up being really large. So I could see a situation where whether it be in the post October 20 31st period or the post new year period all of a sudden um mutual funds and and other hedge funds and long only people that are actively managing money go you know what I want to sell some of my AIS that were winners and I got to put it back to work and the energy is cheap I'm going to buy that. So interesting, Kevin. You gave us so many good things to think about, but also I think a lot of really sage advice in there um in this murky time to try to make sure that we're looking at the risk we're taking and and being comfortable and maybe being a little patient and a little boring, which may come out to be really smart in the end. Thank you so much. It's always such a pleasure catching up with you. >> Oh, it's really great to be with you, Maggie. >> Fantastic stuff. And if you would like to explore any of the themes we just discussed and get a free portfolio review from an adviser in the Wealthy Network, just click the link in the description and head over to wealthon.comfree. Thank you so much for watching. We'll see you all again next time. [Music]
Kevin Muir: The Fiscal Flood Driving Global Reflation
Summary
Transcript
I feel like I'm taking crazy pills. The idea that we should be spending 7% of GDP and cutting rates in this environment is absolutely insane and yet here we are. Hello and welcome to Wealthon. I'm Maggie Lake and here to discuss the trends driving global markets right now is Kevin Mure, author of the macro tourist substack and newsletter. Hi Kevin, how are you? >> Oh, great. It's always terrific to be with you, Maggie. >> It is and we are gonna cover a lot of ground or we're gonna try to. If you have any if you're listening and you have any reactions or questions about anything you hear, please leave them in the comments below. We read them all. And if you want to explore what asset mix is right for you right now, you can get a free portfolio review from an adviser in the Wealthy Network. Just hit the link in the description or head over to wealthon.comfree. Um, so Kevin, this is a pretty intense trading environment. We have a daily barrage of headlines out of Washington. US stocks hitting record highs on an almost daily basis and some dramatic action in gold which has been ripping higher but lately gapping lower even today as we record this. So, you know, if you sort of try to cut through some of the noise, what are you most focused on right now? What should we all be paying attention to? Well, I just kind of remind people back to when Trump was elected and and I kind of joked and I said he's going to make macro great again. And one of the things I I said was we were about to, you know, embark on an environment that was reminiscent of the 1980s when the George Soros's Paul Tudtor Jones, you know, Michael Steinhart's um made fortunes trading these asset classes. And I think that's actually been a pretty good call. It has been extremely volatile as you mentioned like for example gold. We haven't seen a move like this since the 80s and it's been extremely wild and it's extremely crazy. And one of the things that I guess I'm a little hesitant to do right now is, you know, start telling you I know for sure the gold's topped or I know for sure that goal is a great investment. The reality is that we're in this part of the cycle right now that it's manic. And and you've correctly identified it. It is manic. And one of the things that I've learned over the years is that when volatility starts going up, you need to get smaller. And I know that's boring. I know that's not really what most people want to hear. They want someone to come on the TV show and say, you know, you should buy gold because it's going to the moon because of, you know, all the problems with debasement or something or someone that says, you know, you should sell gold because gold is so overbought and we're about to have a huge correction. And the reality is both of those could be true, >> but like I I was more interested in talking about gold 6 months a year ago when no one was talking or not no one but less people were talking about it. And for me, you know, giving this playbyplay and trying to call the next, you know, day or week in these asset classes is just it doesn't really add any value and it's and it's more entertainment than it is truly investing. So, one of the things that I just tell everyone is that over the years that I've learned as my portfolio gets more volatile, even when it's more volatile to the upside, I trim my positions down. And the reason that I trim them down is because, you know, it's I've learned the hard way, Maggie, that in the past I used to try to be like all the market wizards. I used to say, well, you know, upside volatility is terrific. And so if you know, you're used to 100 basis point up moves and that's, you know, your regular day and then all of a sudden you get a 500 basis point up move, you know, you should live with it because it's to the upside and not the downside. But one of the things that I've learned the hard way is that that 500 point up move, you know, might have a 300 point move the other way. So if your tolerance, you know, is 100 basis points, now all of a sudden you're moving 500 to the up. That means that chances are you're going to have a 300 to the down. So one of the things that I just I'm counseling folks is is to trade smaller. And that is it's boring. It's it's not exciting. It's not what people want to hear, but it's something they need to do. So that means instead of buying more gold up here, you should be trimming back your gold. Not that I don't think gold's a great investment, but it was a much better investment when when people weren't talking about it than it is today. >> This October, Wealthian's putting the spotlight on silver with expert interviews, deep analysis, and a special in-depth report from our partners at SCP Resource Finance. To receive this report and other exclusive benefits, you can sign up to become an accredited investor with Wealthon at wealth.com/acredited or by finding the link in the description below. Speaking of silver, Wealthon will be on the ground in Toronto for the SCP Resource Finance Second Global Silver Conference happening on Thursday, October 23rd. Legendary investor Eric Sprat headlines the event alongside 15 silver mining companies presenting their top projects. It's a mustattend for anyone serious about investing in silver. Tickets both in person and virtual are now available. Find out more in the description below. Yeah, listen, it's great advice and uh you know, we say boring, but maybe it's just smart and strategic, right? I mean, like that could be true, too. But and it sounds super obvious, right? It sounds obvious, but it is so hard to do. And you're right. There's a whole cottage industry of people ride your winners, you know, to the right and up. And, you know, that is that is a lot of entertainment and and that, you know, we're not we're we're not in that business. We're trying to sort of, you know, help people sort of navigate through this. So, what kind of regime are we in right now? For folks who don't maybe follow global macro, you know, it felt like a lot of people have kind of commented, you just touched on debasement, but a lot of people have commented we were in this super low interest rate, worried about deflation environment for so long and we all got used to operating it. That was the operating system and now there's a sense that maybe we're changing. Do you have a sense of where we are, what we're in or what what we need to be how we need to think about this period or is it in flux? Where is your head on that? >> No. So, I I completely agree that the world changed and I've been arguing this for a while that in it changed in essence in CO and what changed in COVID was the previous 40 years we had always tried to fix things with monetary stimulus, you know, or monetary, you know, uh contraction. So the economy gets too hot, we raise rates. The economy gets, you know, weakens, we lower rates. This went on for 40 years from 1982 all the way to 2020. Every time we had a a slowdown in the economy, we lowered rates. And we lowered rates more and more and more. And if you look through that period, each high in the interest rate cycle was lower than the previous one. And each low was lower than the previous one until eventually we got to the great financial crisis. We went down to zero. We found the economy was still suffering. We were like, "Okay, what do we do now?" That's when they do the extraordinary, you know, monetary measures, the QE, the, you know, operation twist, negative rates in in Europe, all sorts of things like that. And it didn't work. We found that there was limits to the monetary side. Then in 2020, in the COVID crisis, we finally woke up to the power of fiscal. And my push back has been that we've woken up to the power of fiscal, but we've used it way too much. >> And as as people that, you know, have followed me for a while know I'm somewhat MMT sympathetic. And I know instantly people will be like MMT like that's like leftwing crazy stuff. Yes. And and they'll be like those guys just want to spend spend spend. And and I always say, you know, you have to be careful with MMT because there's the prescription that some people are using when they understand the system and then there's those who understand how the system works using that sort of plumbing, you know, facility and understanding how the the economy works under various scenarios. And if those people were actually very bullish in 2020 when everyone else was bearish, we thought, oh, we couldn't fill the economic hole. lots of folks like it's easy to forget now but there was tons of bears out there that thought there's no way the government can spend their way out of this hole >> and yet you know the MMT folks said no no the government can fill the hole and I agree and and the the kind of the crux of MMT is that the government is never financially constrained it's just real resource constraint >> and what that means in practice is the government can spend up until the point where they create inflation at which point the government has a limit what I think we're finding now that's so interesting is that we're spending and we are still above the inflation target and theoretically we should be cutting back on this on on the fiscal stimulus but here we are with the government was with sorry with the central bank having achieved its inflation target for what 3 4 years you know we went up to 10% we're down to three but we still have not achieved our 2% target and yet the government is running a 7% deficit to GDP, which is unheard of in a nonrecessionary, nonwar time. And not only that, the part that I find the most amazing is that Wall Street is arguing that rates should be lower. >> So when you ask what how the regime has changed, it's just mindboggling. Like I just feel like uh that Mr. Mugato in uh uh in Zoolander, like I feel like I'm taking crazy pills. The idea that we should be spending 7% of GDP and cutting rates in this environment is absolutely insane. >> And yet just so and when you're talking about 7% of GDP, you're talking about the US, but it's not just the US, right? We're talking about um it's everywhere. So it's so it's so useful and interesting for you to lay it out like that because I'm as I'm listening to it, you're absolutely right. We had monetary policy, i.e. central banks at the center of the universe through that whole period. Then when during COVID we shifted to governments um as a you know thought experiment happening in real time a real life experiment and it worked but then we sort of forgot politicians are in charge of that. >> You're absolutely >> as stewards of that um let's just say restraint is not part of the political landscape right now or maybe or maybe Wall Street's landscape. So this is where it seems to be going off the rails. You could argue that if you So maybe this is going to be very interesting and we'll we'll put a pin on it and save it for another conversation, but the resolution of all this is going to come politically either through structured politics or through unrest and fractured dangerous politics. But it seems to me that a political solution is going to have to be part of this if the kind of >> But will a political solution come before the markets dictate it? And I think that >> that's what I'm worried about. That's what I'm talking about. >> Fractured and I really truly think that I that Bill Fleenstein has that great line. He says that they're going to keep spending and printing until the bond market takes the keys away. And that very well could be >> but this is this environment of more volatility. Now, you know, 2020 comes, we do some suspending that changes the environment, but it's also changed in, you know, in the Trump era, and Trump changed things in very dramatic fashions by two different things. One was this idea that he was going to come and he was going to put tariffs on there. And I know we've been kind of lulled into thinking that tariffs aren't that big a deal, >> but I think that they are. And I and and I suspect that we're going to find that that the market did overreact over the short run but has underreacted over the long run and that is actually a very big deal. It's changing the fundamental nature of our economy and that I suspect in a year's time we'll look back and say oh tariffs were more important than we think. But the other >> I was going to ask you if we're too complacent. So that's one. What's the other thing that >> So the other thing that I think is that was that's been missed by a lot of folks is that when Trump came and did his aggressive policies versus other members of the financial system and I'm a Canadian so I'll just use Canada as a good example because I can speak to it. We we've come and we've gone from having a deficit of 2%. So like everyone thinks that the US was running 6 7% deficits and then if you'd ask them well what do you think Canada is and they will those guys are socialists they're for sure going to be higher than us but the reality was that we weren't. We were running a deficit that was much more in line with what traditional you know Wall Street would would suggest is proper. So what happened when Trump came and started calling us the 51st state and then we started getting into a trade war? We realized, hey, wait, you know what? We can't rely on America like we used to be able to. And and good or bad, I'm not here to judge. I'm just telling you how the we perceive it and how the economy is adapting to it. So we said instead of us, you know, running this deficit, we need to spend because we need to invest in ourselves. We need to make it so we have pipelines so that we can ship our oil to the to the coast and actually send it to other nations. We need to go and make it so we're competitive on a corporate basis. So we've gone from a deficit of 2% probably to 5% and being much more pro business. And this is happening throughout the world. Let's just take Germany. Germany used to go and their deficit to GDP was.35%. Like less than 1%. You guys in the US were running 7%, Germany was less than 1%. And all of a sudden they were like, "Holy smokes, you know what? We actually are going to have to spend we're going to have to spend more on Ukraine in terms of arming them. We're also going to have to spend more on ourselves in terms of spending on infrastructure." So what has happened is in the post GFC world the US was one of the countries or actually the country that was willing to run the largest fiscal deficits and the largest trade deficits and what that meant was capital was attracted to the US and that the economy was the strongest there >> and it was a it was a self-fulfilling you know feedback mechanism like you're sitting there and you're an entrepreneur in Milan and you're sitting there looking should I stay in Milan where interest rates are negative there's not much going on or should I go to the US where there's all this economic activity and it's all the smart people are going there it was kind of a a self-fulfilling positive feedback loop okay so now though all of a sudden the rest of the world is spending so in the past it was only America that was willing to spend and now we're seeing the rest of the world spending and so what I think was one of the biggest underappreciated stories of the past year is how well the rest of the world is doing and how we're going through a global reflation. So everyone's focused on US stocks like everyone's talking about how you know America new highs like you you know at the beginning of this thing you started talking about how US was hitting new highs. Well the reality is that yes the US is hitting new highs but so is the rest of the world. And in fact when you go look at the other indices they're actually doing better. And so one of the best examples that I kind of like to remind people of is the MSCI World Stock Market Index X the US. So think about this is all every other stock except for the ones that are in the US. It's up 28% year to date. >> Wow. >> 28%. Like the S&P is up 15. Let me just check and see what the NASDAQ is because I think I bet you that it's even the NASDAQ's not even that much up. Let me just see. Putting it in here. NASDAQ's up 20. So the MCI world index XUS is up 28%. And then the really interesting part about it is when you look on it on a risk adjusted basis, meaning you adjust it for the volatility and you figure out the sharp ratio, it's three times what the US is. So risk adjusted, it's much much better. And I think that that is the big long-term story that people should really be focusing on instead of going out and trying to chase AI or chase the meme stocks and chase all these things is they need to realize that the rest of the world has changed and Donald Trump is responsible for that. And you know, you say what you like about the guy, but the reality is the rest of the world was not spending enough. That was a problem. >> Yeah. And you might not like how he's gotten the rest of the world to spend, but I think it's like just it's a great thing. And I think that it's a it's something you should be aware of and it's a trend that's going to last for a long time. And I I think that this outperformance in terms of non US stocks has just started. >> That's so interesting. And I in a in a global reflation environment, are equities the biggest beneficiary of that around the world? Is that where all that spending makes its way to? >> It's it's definitely one of the first and it's and and a lot of those other countries were so cheap in terms of their their PE. So was there was a lot of juice in them. And and if you don't believe that, by the way, just go look at Germany the moment that they announced that they were abandoning their what's called their debt break. Like they didn't even they just announced that they were doing it and the stock market just went shooting up. So the market understands that the that the world the rest of the world wasn't spending enough. Now one of the things that I think is interesting though back to our comment about the US running the largest deficit in the right now and 7%. There is going to be a point where the market's going to push back and say hey you can't keep spending this. And I and I do think it's kind of amusing that that everyone's forgotten that you know like the the Rogoff and Reinhardt book like it was like they they were so worried about debts and now all a sudden they've just put it aside and it's party on. And you know what's funny Maggie? I was going and looking at um it was it was recently the uh the anniversary of the 1987 crash. So I went and I pulled up the old Wall Street week with Lewis Rukiser and I went and watched the videos and most of the people are probably have watched the one where the legendary Marty's wag predicted the crash on the Friday. So the Friday we were down a little bit. We had been down 15% and then he came and said, "No, no, we're going to crash. It's going to be ugly." And the thing puked. But I had never seen the next week. And you know, a subscriber of mine suggested I go watch it and I found it fascinating because they had the head of the Meil Lynch and the head of uh Goldman Sachs uh the strategist on and they were talking about different things and the triggers for the 1987 crash and all these things. But one of the most interesting things about it was that they thought that one of the reasons that the crash happened was because the government didn't raise taxes enough and they were worried about them not like spending too much. And back to my point about, you know, in the past in the post GFC world, there was not enough government spending going on throughout the world. There really wasn't. And part of the reason that the US did so well was because they were the only ones that were willing to do the spending. Now in this Trump world, the rest of the countries are also spending. And so I think slowly there's going to be less capital available and also when you combine it with the what I think is an AI bubble and the huge amounts of money that's required there. So now all of a sudden we've gone from a period where there was all this excess capital looking for a home. I think we're going to hit to a point where there's going to be worries about the spending and we're going to return back to the things that we saw in that 1987 um Wall Street week thing where people start saying hey wait we can't go keeping this up like just think back to Liz Trust Liz Trust with the you know the prime minister of the UK she announced a budget that was unrealistic the market shot it like shot the the the guilt market like they just went out and they just like and they got it and all of a sudden she was forced to retrace. I don't know if we're not closer than we think to that sort of worry. >> If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardassalliance at hardassallalliance.com. That's hardassallalliance.com. So, it's interesting, Kevin, because I think that has been a consistent worry of people I talked to, right? that we could we we could have the potential this time to have a sovereign bond crisis which is far scarier because who then steps in right if the government is the source of the problem and by government pick your choice not just the US there are you know you mentioned the UK still struggling France has been through what four governments and you know so there are other candidates because we're all dealing with the same problem to different levels but we're watching bond yields currently you know we're we're we're taping this uh on October is it 21st? Yes. >> Um current currently >> bond yields are going lower. Why would that be happening if everyone's so concerned about >> this sovereign? That's what's confusing people I think. >> Yeah. And this is back to your thing about how this is such a manic crazy market and it's so difficult. There's so many different crossurrens. And not only that, I feel like in this environment of social media and all these great podcasts and the ability for people to express their opinion, you get a narrative that just gets grabbed hold of and like hammered home and explained. And so one of the things that you're seeing now is that you mentioned it earlier, gold was exploding higher. >> Gold was originally going up not because of worries about the debasement of the US dollar. gold originally was rising for like last year I was on your show and I and I would talk about why I was bullish gold and I always said it's I'm bullish gold because when Ukraine or sorry when Russia invaded Ukraine and they zeroed the Russian foreign exchange reserves we China looked around and they had no choice but to say I need to go and diversify into gold and even now they are still woefully under represented on gold and that is ultimately why gold is probably still headed a lot higher. Okay, but that was the the bull market, you know, a year ago. Today, a lot of what's driving the gold bull market is this idea from Western investors that there's this debasement trade going on and you see all this worry about the end of QT. Like the other day um Jerome Powell got it got got in front of some uh I can't remember he was speaking somewhere and they announced and he started talking about the how QT was winding down and all of a sudden instantly stocks went bid and the gold market went bid and straight up and everyone says this is it. This is the debasement and I was sitting there and I was scratching my head Maggie because I was like he's been talking about this for a year. There was nothing new in that speech. like I mean zero. So one of the things you have to watch in these markets is that they have become so fast and so prone to these whips of like just the price moving so far. Like let's remember back was it September of 2023 when a lot of the people were worried about the bond market and they were worried about the again a sovereign bond crisis and we had this you know meltdown in bonds and oh that's right it was the term premium back then it was everyone was worried about the term premium. people that didn't even understand what term premium that was and were confusing it with the yield curve were explaining to me why the term premium made it like inevitable that we were going to have a crisis. And so one of the things that's really difficult as you go and you try to trade your way through this market is that the the the voices have become so loud and they move the market so quickly that it's easy to get caught up in a narrative and say that this is what's going to happen. So although I do believe that eventually we're going to have spent too much and there will be a problem in the bond market, I actually think the fact that everyone's worried about that currently is why you probably shouldn't be worried about it. And I'm going to bring this back to the stock market because we haven't talked about the general level of the US stock market because I think it's woefully overpriced and I'm shocked at how everyone is so bullish. And I'll just remind people and I and I'll, you know, back to 2023 and I'll tell a story. I had I had um I we had an event and it was me and another buddy and uh we had people that wanted to come in and like go to this event with us and we basically said to appear with us and to drink beer with us, you were going to have to sing for your supper. So you're going to have to come up with a trading idea. So this is 2023, early 2023. And so we do this thing and we get 20 people coming and we have a great night out. And it started off me and my buddy and we both were bullish. He was bullish because he's more of a like a stock market analyst and he reads reports and he talks to companies and he was bullish because he was talking, you know, to the CEOs and listening to conference calls and he was like saying, "No, no, the economy is actually really strong." And I was bullish because I was saying, "No, no, there's way more fiscal in the pike than everyone realizes." the the reality is that this this fiscal takes a while to to go through the system and just because the government spended, it's actually sitting at the state level and we're going to be surprised. So, we were both bullish. This is in early 2023 and if you remember 2022 was a bad year for stocks. Everyone was bearish. There's a there's a data series from the St. Louis Fed that measures the professional forecasters belief that there's going to be a recession in a year's time. This series was the highest it had ever been, meaning that never before had more professional forecasters being sure there was going to be a recession in a year's time. Everyone was bearish. And I and I would say to people, I go, "Listen, maybe you're right. Maybe the economy is going to roll over, but the reality is that even if you're right, it's already in the price. Like I I I'm buying something where you guys have already discounted it and and it's in the price." So, at the time the S&P was trading at 70 times, we do our bullish things. Then the next 20 people tell us bare stories and like they by far are way more popular than our than than our stories. At the end when we're out for dinner, they all come to us and say, you know, you guys are really nice guys, but you just don't understand how bad the economy is. And I would contend that if I was to have that same event today, I would contend that everyone would tell us, you know, you don't understand how good the economy is today. And one of the things back then, everyone used to say to me, are you worried about a stock market crash? And I said, no, I'm not worried about a stock market crash. And they said, why not? And I said, because you asked me about it. and and and the fact that you're worried about a stock market crash means that there's enough people concerned about that that it's probably being accounted for and priced in >> today there's nobody that's saying that like really in fact they're more worried about missing >> Andrew Ro Sorcin come out with 1929 so >> yeah but he but yes and he's doing that but the reality is that if you go and talk to people they go yeah that's a great story and stuff like that like even people listening now will be like oh that's great but you're probably a perma bear, which I'm not. Like, I'm truly not a perma bear. I'm not one of these guys that's been bearish the whole way up. I'm just saying that at this point for the, you know, like when you think about how markets work, markets are a forward discounting mechanism. And when everybody is bearish, that means that you that to be correct, it has to be even worse than what is priced in, right? Like it's it's like not only you it doesn't just have to be bad, it has to be worse than what's priced in. And to me today with the S&P at 23 times the next 12 months earnings, I go, "Okay, great. You're telling me all these great things about, you know, the stock market and things like that, but what do you know that other people don't know?" So you actually, it has to be better than this already bullish, you know, scenario. And when I look look at the US stock market, the concentration is at levels that is last seen since like 2000, 1962, and 1929. There's this gold there's this great Goldman chart. Yeah, Becky, you get it. You look at that thing and you're like, "Okay, great." Uh the reality is that it's not >> That doesn't make anybody feel good, right? It doesn't make any Let me ask you because we're sitting here right now and we we have earnings that are still coming in strong and that's that's what makes it so hard because I think that what you said is going to resonate with people but then they look at it's like this one beat this one beat. So that it seems that that that argument that but this time there are real earnings, right? It's not just a dot slapped on the on a name or on a billboard. There are real earnings and and that is true. We saw banks do well with earnings. >> Yeah, you're absolutely correct that the economy is like the real economy is actually doing okay right now. Not as bad as everyone thinks. I did think it was interesting. I pulled up this chart from Schroers. Um they went and looked at like the year-to-day performance based upon different subsets, right? Like and they so they started with Mag 7. Mag 7 up 18%. So as much as everyone's bullish on AI and talking about what a great trade it is, 18%. Okay, let's like think about that. I just told you that the MCI World Index XUS is up 28%. So, you've you've lost against that. But then you go look at the different things. The S&P 493 like the rest of the S&P >> 8%. Okay. NASDAQ no revenues like meaning stocks with no revenues 34%. Unprofitable NASDAQ 18%. Unprofitable US small and mids 12. NASDAQ with revenues 11 so you get punished for having revenues profitable NASDAQs like companies are actually making money 7%. And profitable small and mid 5%. So yeah I I hear you guys but the reality is that things aren't like things are seeming this is more like the dot than than people are admitting. And one of the things that I just kind of makes me laugh so much is that whenever I start talking about this, people will say, "Okay, Kev, I completely get it." And they'll tell me, you know, how this time is different. And I say to them, "Do you really think we didn't think the last time was different?" >> Yeah. >> And we always think it's different and and and it's just a question of are you to me, you always when you're investing, you always have to ask yourself like what do I know that the rest of the world doesn't know? like what where is my edge? And it just feels like, you know, going back to my 2023 example, I thought my edge was that the rest of the world didn't understand fiscal stimulus properly and that they were under they were overemphasizing the rising rate environment and in fact I could make the case that the rising rate was actually stimulative and that it was making the deficits larger. But so they didn't understand that. So I thought there was an edge there. Now, I look at this and I go, I I just don't see where people's edge are. It's not like this is new. And then the one last thing about this AI, if you think about it from like the the mag 7 or the tech oligarchs point of view, if they believe that there's a chance that we do this AGI, which is artificial general intelligence, right? Like if you think about it and I think I think Elon Musk said there's a 10% chance, right? 10%. So which probably means there's like really a one but anyways let's assume it's 10%. But if there's 10% chance that this occurs, it's going to make your company worthless like if you're Meta or if you're Microsoft and you're not there like you know that's an ex existential threat to you that if if if there's a AGI. So they have no choice but to spend. And like you can even hear them say it like I I think Zuckerberg has said something to the effect like I have no choice but to spend. And so what we're getting is this absolute just asinine, you know, oneupsmanship and just spending and spending and spending without anyone thinking about it because it's almost like they need to spend. And then it's created this self-fulfilling prophecy. And not only that, they're actually running out of money now. Like you mentioned the fact that, oh, these companies are profitable. Go look at their cash flow statements. Like the old argument used to be that there was all this cash flow. Well, this cash flow is now going to buy all these things. Not only that, we see that a lot of these things are getting financed through SPV, special purpose vehicles. Like when was the last time you heard about SPVS? 2008. And I'll tell you when >> that has a lot of people really concerned. And if you think about before 2008, the last time you heard about it before that was like Enron in 2000 in 2001. Anytime that the people are hiding this, it's a problem. So, >> and by the way, I I noticed the last earnings to that point that they weren't really responding to revenue. They were responding to the capex is going to keep they're going to keep spending on capex. That seemed to be the trigger because that mean that sort of, you know, means that the Nvidia of the world and stuff are going to have those orders. But that's super interesting to your point. they're spending the revenue which is something shareholders are usually give them a hard time about. So there there are there is a lot there. So let me let me by the way I just want to just want to throw into all of that too in in case we weren't concerned on the day that we're recording this you know you've got this meme activity you referenced it really early but did you see beyond me today? It was like it's because it was added to a meme stock I think like poor but yeah so there there's there's fraud. So let me let me ask you a question. So, we've got the Fed, we've got the Fed meeting next week. Yeah. >> I mean, it almost seems like it's like an afterthought right now because I, you know, there's a lot of lot of questions about what's going on there. But, um, do if the Fed lowers rates, are we in a situation where the bond market will not follow the Fed? What do you think the Fed is focused on? >> So, it is really difficult and you've highlighted the fact that long rates are actually behaving well, >> right? And and that's actually from a bond bear's point of view, that's actually concerning, right? Like we're having talk about debasement and like all this worry about this lack of ability to fund themselves. And meanwhile, the bonds market is doing better than it's done in a long time. And I always think back to that Bruce Cner line that I love. He goes, "What I'm looking for is a market that is not confirming consensus." and consensus right now is that the bond market is doomed. And I have another story for you on this. Um I remember in 2022 it was that there was a year 2021 was a bad year for the bond market. And up until that point, it had never had two years in a row of negative returns in the bonds because if you think about it, we've had 40 years of interest rates going down. I wrote this Bloomberg oped saying that we could have two years of, you know, negative bond yields. And holy smokes, Maggie, I got push back from guys that were running billions of dollars that were way smarter than me telling me, you arrogant guy, you're going to learn the hard way about the bond market. And one of the things that I think is interesting is that it used to be that everyone would sit there and bet on lower rates. It was a very common thing in like 2022, 2023. It was this idea that as they raised rates, eventually the economy would collapse and then we would be back to zer situation. So there was people buying 1% call options on on sulfur trying to bet on this collapse. That is completely and utterly changed. Now it's cool to be a bond bear. It's cool to bet against the stock market, sorry, against the bond market. It's cool to say that we're never going back down to those rates. >> And one of the things that I worry about is that actually the economy is not as strong as we all think it is. And I think that is what the bond market is telling you. And I am I will admit my bias. I am a huge bond bearer. I have been bearish for a long long long time. And for the first time in years, I am not short. I I actually think that there's a ch I and I can't bring myself to buy them, Maggie, because I'm still worried. I'm still worried that they're going to cut rates and they're going to go and then the yield curve is going to steepen and we are going to actually have a funding problem. So, I can't bring myself to buy them, but I almost think I should and I feel like that's actually the difficult trade here. And one of the things I think that people should think about is right now the market is priced in a terminal rate of 3%. Meaning that that's where they think the Fed's going to cut down to. And this terminal rate of 3% is occurring um you know in an environment where the stock market is at all-time highs. Uh you know yield curve sorry the the um credit spreads are really tight. There's all sorts of really great things happening in the economy and everyone's bullish and yet we're still have this terminal of 3%. And one of the things that I kind of like imagine to myself is what if the economy rolls over? What if we get a situation that surprises folks and it it we actually get some layoffs and next thing you know it cuts. And I could see a situation where that 3% goes down to two really quickly. And I'm not smart enough to tell you what I think the 10 and the 30 years is going to do because I do worry that the yield curve will as I say steepen, >> but I think that betting on the terminal rate not being three is probably a pretty good bet and it's probably a good hedge. And one of the things that bringing this back to my idea about the fact that the US has been running this massive fiscal stimulus is that increasingly it's going to be difficult for the government to spend in an economic downturn. So if we go back and think about the previous times, it was actually easier. There was lots of room. The government was running a 3% or 4% thing. So you, you know, crank it up to eight for some. If you're already at eight, what are you going to do? you going to go to 16 like there there does reach a point and this is one of the things that I worry about. So if I'm correct we could have a situation where the next downturn is actually we need to go back and rely on monetary measures just and and how ironic would that be tapped out fiscal. >> Yeah. And you know what's funny is that me who's been very much arguing that fiscal is so important and fiscal is everything and that everyone should focus on fiscal and now I'm sitting here telling you that you know what you actually are probably hitting the point where the fiscal is no longer able to do the heavy lifting and that the next one might have to be on the monetary side. So I think that that could be a surprise that no one's thinking or few are thinking about and that would then put rates down to like lower and if we kind of go from there I think the dollar sells off commodities run gold goes again um and that's why ultimately I am probably an inflation bull but I think that >> we might have a deflationary wave to create the next one >> but it it's complicated Maggie like I I'm with you like this is there's so many different things. And I just want to remind folks like be careful, be aware when you're listening to people and they seem like they're so smart and they got it all figured out. Like Paul Tudtor Jones was on the other day talking about on CNBC talking about the fact that, you know, we're going to rally just like in 99 we're going to we're going to repeat the the NASDAQ where we go from um you know, we double in the last part of the cycle. Well, I I went and did the math. Like I can't remember the exact number, but the the stock market as a percent of GDP in 1999 was like 50 or or 75. So it went from 75 to 150. Well, today we're already starting at 225 or, you know, some big huge number. So what is he implying? That we're going to go to a 450% of GDP. Like there there's just like people have just completely and utterly not bothered doing any math. Like it's same with this AI stuff. You know, we're all just tossing around numbers and it's like these are like huge numbers and like that Oracle guide that that sent the market screaming there's no way they're going to spend that. And yet everyone was so bullish on it. So just be aware that when you hear these things, you got to be careful and don't get too caught up in the emotion. And I'll just remind you, Paul Tudtor Jones, I love the guy. He is the greatest trader that's ever lived. If I was half the trader, even a quarter the trader he was, I would consider myself a huge success. But he gets it wrong all the time. And he's going to change on a dime. He'll go and he'll move his policy. So, if you go back and you look at September of 2023 when I was talking about how the bond market was going no bid, he was really bearish bonds at the lows. by the time he's on TV and by the time he's telling you about it, he's got his position. He's feeling smart. It's in the money. >> Don't you and and I I joked and I said, "You don't get to see his blotter in real time. You don't get to see his trades in real time. So, be really wary when you're thinking about that." >> I think that's such great advice, Kevin. Everyone's talking their book, right? Everyone's no one's no one's walking you through it when they're thinking about doing anything. They've already done it and they and it's locked in. And often, you know, folks, ordinary folks sitting at home are the last to know. And that's always where the danger is and and you don't want to be last in that line. Um, do you So, you think that that's really interesting about bonds, you know, in the short term and on the short end that, you know, we might be in for a rally in prices, a drop in yields that no one's expecting. When it comes to stocks, clearly you have a lot of concern about AI. Is there a part of the stock market that you like or think is a good place to hide in this very uncertain environment or put money to work? Maybe longerterm money to work. You use the verb you're >> I People are going to hate this and that's probably why I think it's a good trade. I love energy. I think energy is just forgotten. Nobody cares about it. It's just one of these things. My buddy Paulo Macro, he has a line. He says, "Energy stocks today are what gold stocks were a year ago." >> And that is just a terrific, terrific line. Um, one of my subscribers was was just reminding me that the mutual fund uh year end is October 31st and so they'll be selling a lot of the the stocks that are big losses, right? So that that might be a good point to look at them. Um, and then that gas to me when I look at the amount of electricity we're going to need for this AI and not just the AI like we were already >> right >> with electric cars needing a ton of electricity, right? That's the part that I think is just amazing. We, you know, mandated all these electric cars and we didn't think about, you know, making the the electricity first. We were just like, you know, oh no, you have to be x% of electric cars. And those have kind of economy scrapped those ideas. But it wasn't that long ago that people were saying by 2025 or 2030 or whatever it was like, you know, it was going to all have to be electric. There was this crazy push and yet they didn't think about like how are you going to actually, you know, put the electricity in there? You know, someone has to make it. Um, so you had this strange environment where you were mandating people drive electric cars, but they were electricity was getting produced by coal. So when I think about the fact that we already were having needing a lot more electricity and then you throw this AI boom on it where the amount of electricity is just massive like there was some expert on CNBC the other day and he was explaining like how much electricity we're going to need and it was just mindboggling like I don't remember the facts but like I I I clipped it and included it in one of my letters. It was just shocking to me how much we're going to need. So when I think about it, yes, nuclear is the long-term solution about that. No doubt about it. That's what we should be doing. It's tough to do nuclear over the medium run. >> To me, it's pretty clear we're going to have to do nat gas. That'll be how we do it. So, you know, going back to my idea about buying energy, I think that that's going to be a huge uh demand source in the in the future. And I think you should own energy. And then one last thing I'll just, you know, put on the on the on the energy bull story. Everyone's focused always on the supply side. You'll hear analysts talk on CNBC. They'll talk about how, you know, Saudi Arabia's got this much, the shale has got this much, all the things. Very few people work on the demand side. They don't they don't really think about that. And one of the things that I've always long argued is that when countries become wealthier, you hit this hockey stick of energy usage per capita. >> So we get this situation where it's a little bit a little bit a little bit and then they get wealthy enough that they can afford an air conditioning. They get wealthy enough they can buy a car and it just like the demand usage goes through the roof. So we saw that in Japan in the postw World War II period. We saw that in Korea um and we've seen that in China a little bit. I think that we're going to see that in India. And then even more interesting is that I think that Africa is experiencing not an increase in their actual wealth. Like they're not at the point of the part of the curve where they're all of a sudden they're going to start using a lot of more energy. But one of the things that's interesting is that the price of ICE like internal combustion engine cars because of China has come way down. Like we all know the story about China, you know, BYD selling cheap electric cars, but Africa can't do that. They don't have the infrastructure to go and uh you know have the refilling or the the recharging of those things. So that it's not going to happen in Africa. But I think that a lot of folks are missing that there's also cheap ice cars out there. M >> I was in Grand Cayman the other day and I was like staying at a buddies and when I got there I I had rented a a car and he's like oh you got a Chenang or something and I was like and I was like what is this thing? I didn't even know what it was and it's like a Chinese name and he was telling me how like the entire island everyone's buying it like people this is in Grand Cayman it's like the third highest GDP per capita in the world like these people are really wealthy and they're like why would I pay up for like a like a car when I could get a Chenang for half the price right? So I think especially since they only have to drive this far. >> Yeah, that's true. So one of the things I think that's might happen in Africa is that you might not be increasing their wealth, but what you're doing is decreasing the cost of getting into that car. And so there might be a lot more demand by people that can all of a sudden afford a cheaper ICE car from China. >> So I just look at this and it just feels to me like energy is underloved, cheap, uh with lots of possibility of it headed higher. And if I'm right about eventually there's going to be an AI correction, one of the things about the stock market that that I'm sure that most people will recognize by now is that the internal rotations are violent. >> Meaning that when all of a sudden one sector goes offered, another sector goes bid and it ends up being really large. So I could see a situation where whether it be in the post October 20 31st period or the post new year period all of a sudden um mutual funds and and other hedge funds and long only people that are actively managing money go you know what I want to sell some of my AIS that were winners and I got to put it back to work and the energy is cheap I'm going to buy that. So interesting, Kevin. You gave us so many good things to think about, but also I think a lot of really sage advice in there um in this murky time to try to make sure that we're looking at the risk we're taking and and being comfortable and maybe being a little patient and a little boring, which may come out to be really smart in the end. Thank you so much. It's always such a pleasure catching up with you. >> Oh, it's really great to be with you, Maggie. >> Fantastic stuff. And if you would like to explore any of the themes we just discussed and get a free portfolio review from an adviser in the Wealthy Network, just click the link in the description and head over to wealthon.comfree. Thank you so much for watching. We'll see you all again next time. [Music]