Bubble Bursting Now? Expect 40% Drop In This Sector Warns Fund Manager | Chance Finucane
Summary
Market Outlook: The guest expects a long-term higher inflation regime, making it harder to keep inflation at 2% and challenging the classic 60/40 portfolio.
AI Concentration: The rally is driven by AI beneficiaries across tech, industrials, and utilities, raising concerns about overconcentration and sustainability.
Semiconductor Valuations: Semiconductors have doubled in six months and are seen as significantly above fair value with potential 40% downside in a typical bear market.
Key Companies: Detailed discussion on NVDA vendor-financing dynamics, interlinkages with AMD, and monitoring long-held positions in MSFT and GOOGL for capex vs. earnings quality.
Fixed Income Stance: Avoid long-term Treasuries due to deficits and inflation risk; favor short-term Treasuries and maintain caution on bond proxies.
Precious Metals: Long-term bullish on gold and silver with central bank buying as a structural tailwind; trimmed miners after strong gains but keeping sizable exposure.
Gold Miner Pick: Preference for larger, jurisdiction-safe miners like AEM, emphasizing free cash flow discipline and shareholder returns.
Housing/Homebuilders: Cautious on homebuilding equities despite lower rates, citing stagnant demand and potential for further downside before becoming attractive.
Transcript
We think we're actually starting into more of a long-term inflationary cycle uh where it's just going to be harder to keep inflation down. And even if they had no cash flows, no profits, nobody cared. And those share prices were pushed up to record levels. In 2022, [music] once interest rates started to move higher and you had an actual comparison for a base rate of return, then investors changed their mind. >> The US stock market has seen some of the strongest rallies in the last 75 years. We're going to talk about what's next. Is this an inflection point? Is this the end of the rally? Or is there a lot more room to climb? That's the theme of our discussion. We'll be talking about all asset classes today. Stocks, bonds, gold, precious metals, um, real estate as well. Chance Van joins us once more. He's the CIO of Oxbow Advisors. Welcome back to the show, Chance. Always good to see you. Welcome back. >> Great to see you, David. Thanks for having me back on the show. you warned in one of your recent um video summaries of the economy and I encourage people to check out Oxbow Advisor's YouTube channel linked down below where uh uh they give regular summaries and outlooks um presentations. We can talk about uh what you discussed in your last video where you warned that the US stock market is dangerously close to euphoric territory um after more than a 30% surge over the last couple of months. Uh this comes on the back of some warnings by uh big banks. CEO of Goldman Sachs, David Solomon, recently said in a conference in Hong Kong a couple days ago that he's expecting a 10 to 15% correction which he says is normal even for uh bull markets. Uh this was echoed by um another banking chief. So we have here warnings by large financial institutions, leaders of large financial institutions that uh this rally may see some bumps ahead. Uh I'm wondering what your view is and uh whether or not you think a pullback uh from here or maybe a little bit higher from here is reasonable. >> It would be reasonable. It does not mean that it has to happen. Uh a lot of the short-term activity is less to do with current valuations and more with just investor behavior. And uh one thing we do look at is uh just the trends in economic growth. And one thing we are looking at for the first quarter to start next year is the comparisons with the very low economic growth reported in the first quarter of 2025 is going to make the economy look like like it's accelerating in the first quarter of 2026. Uh it's difficult for stocks to really fall off. Um if you got accelerating economic growth. So it may not be that there's a a significant correction or bare market in the next few months. But we do think that at current valuations if you look out on a longer term horizon like we do where we try to look out 3 to 5 years uh we have lower expected returns for the market indices given that they're trading at 23 times forward earnings and are really just being driven by the one AI theme where nearly half of the market cap of the S&P 500 is these AI related stocks whether that's in tech industrials or utilities that are considered beneficiaries and they've appreciated by more than 70% in the last 6 months. months. While all the other names, the other half of the market's only appreciated by 11%. And so when you see a move like that, we don't think it can continue forever. And we would expect a correction at some point in the intermediate term. Let's just take a look at the performance so far. This is uh the year-to-date chart of the S&P 500. It's up about 16%. Now, I did state that uh it's up more than 30% as of May. This comes following the Liberation Day um uh market crash. Uh if you take a look at the sector breakdown uh year-to- date tech to nobody's surprise was the top performer up 26% followed by communication services industrials and utilities. Uh these sectors all did very well and uh most of those sectors outperformed the S&P. The other sectors actually underperform the overall index. So, if you're taking a look at overall performance thus far, we're talking uh now on the 5th of November, and of course, gold and silver has done quite well. Bitcoin is flat on the year now. Um, are you thinking of rotating capital at all? Are you thinking of taking profits in some sectors or uh assets and uh rotating into something else? >> We have rotated some. Uh the decisions we make are always incremental. I think that's something that maybe people don't uh sort of see what's happening behind the scenes, but you're not making a full flip of your portfolio at a right specific point in time. The decisions you make are incremental. You know, 1% here, half percent there, and then over the course of a year, you might have a 20 or 30% different allocation within your portfolio. So, you mentioned the the gold and silver miners. That was an allocation that we had especially in the high income strategy that we run that's been an outstanding performer for us and we trimmed a number of those big winners uh in the last month or so uh just trying to get back to more of a normal allocation closer to a high singledigit uh percentage of the portfolio after it had done so well here over the last year or two. Another highlight uh sorry a risk that you highlighted uh recently is the concentration of AI and tech in the S&P I think it's climbed from 26% to 34% you said now given how dominant this sector is now in the overall stock market index we have to track what individual companies are doing uh just this week Palanteer Oracle both missed earnings estimates Oracle in particular you highlighted I'll let you talk more about this in the video. Uh they they are now uh expanding at a rapid pace, but you highlighted the fact that they now need to expand using debt financing. And you likened this to past speculative mania similar to the railroads in the 1800s, Japan in the 1980s, the docom bubble, and so on and so forth. Tell us about this cycle and how it's different from the past or similar. Yeah, it say what's different is that these large businesses that are pushing so much into the AI boom uh have solid businesses to begin with and they have a lot of free cash flow that they were able to pull from uh to start doing more capital expenditures to try and finance the buildout for AI. But what's happened in the last year is they're now spending so much on capex that these companies have to start issuing debt. And that's where you now become relying on external investors to finance the buildout. And right now investors on the outside are very keen to want to uh invest in the debt. But this only works for as long as those external investors are happy to keep doing this. And there are examples that we and others have cited like you mentioned the dotcom bubble or the railroads more than a century ago. Uh but just thinking of a more recent example uh where you got to pay attention to what investors are really trying to incentivize company management to do in 2021 uh when rates were still at zero the thing that investors were most interested in was revenue growth and what was the biggest addressable market. So you had all sorts of companies talking about these huge opportunities in e-commerce or other areas that they were pushing towards and even if they had no cash flows, no profits, nobody cared and those share prices were pushed up to record levels. In 2022, once interest rates started to move higher and you had an actual comparison for a base rate of return, then investors changed their mind. They weren't caring about revenue growth anymore. They wanted to see profits and free cash flow. and those company management teams adjusted really quick. But what changed is they stopped spending so much. So taking that back to today, right now, if there's an announcement about a deal made and there's going to be hundreds of billions of dollars spent in capex, that's being rewarded, but at some point it will not be rewarded by external investors anymore. And you're going to see a shift in behavior by company management to try and preserve uh the gains that they've had. And that's what we're really waiting for is what's going to be the fallout when that inevitably occurs. >> Before we continue with the video, let's talk about our sponsor today, ODU. ODU is an all-in-one business management software that helps entrepreneurs streamline their operations from accounting and inventory to websites and project management. Today, I want to focus on their project app. It gives you a clear overview of all your projects. You can create custom stages, assign tasks, set deadlines, and even add checklists. Everything's customizable. You also collaborate in real time. Tag teammates, comment, attach files, and manage everything in one place using their built-in chatter. And the best part, you can choose from different views. Canban for board style view, Gant for timeliness, or list for detailed data. Like all of ODU, it's built to scale. Click the link in the description and get one app for free with unlimited users. No credit card required. So this slide summarizes uh what you've just said and um it actually echoes the viewpoints of a lot of other investors uh right now. Circular AI deals look like com bubble and I'll let you explain what this chart means. Chance. Yeah, sure. So Nvidia is the easiest example. So um it's a great business. They have fantastic profit margins. But to finance this AI buildout, what they're doing is they're making agreements where they'll make an investment in a company that does not have the cash flow to buy Nvidia chips to uh build out their own data centers. So Nvidia makes an investment and now that company has the money to turn around and buy chips from Nvidia to build out their data centers. It's okay to do this, but it only works for as long as these external investors are helping finance the deals. And so, uh, well, there's no telling how long it will last. It could be over in a matter of months or a year or 2 years or 5 years, but this does not go on forever. And it's very similar to some of the vendor financing we saw at the height of the.com bubble with companies like Cisco, Nortell, Lucent. Uh, so that's where it's giving us a little bit of a reminder. And um as I pointed out in the video, we own a couple of companies uh on a chart like this like Microsoft and Alphabet that we've owned for a decade or longer. We're monitoring them closely. Uh the earnings quality of their reporting is very good. The price momentum of their stocks is very good. For now, that's more than offsetting the increase in capital expenditures. But you have to keep watching all of this together because if all of a sudden all of it turns negative, that would be the time that we'd be thinking about trying to reduce those positions or getting out entirely. I think another point we have to discuss which may have slipped some people is that if one company takes stakes in others and they're all taking stakes in each other or not even taking stakes equity positions but just investing in capex uh in infrastructure or buying equipment or buying um IP for example then basically the valuations of other companies will directly affect the valuations of one company and vice versa. So basically if let's say um Microsoft's results don't deliver or if let's say their infrastructure um doesn't exceed expectations it could potentially pull down the valuations of any other company that has made stakes in Microsoft or Microsoft's projects and vice versa. Uh so we're basically seeing not just the emergence of not just an entire sector but one mega company if you want to think about it that way chance. >> Sure. My favorite example of this is uh Nvidia one of their biggest rivals for over a decade has been AMD advanced uh micro devices and Nvidia invested in open AAI. Open AAI took some of that money turned around and invested in AMD. So Nvidia now is a significant shareholder of AMD, one of its chief rivals. So to your point about it all being interrelated, it's definitely drifted that way. >> So then what happens if let's say you know one company misses earnings or starts underperforming? Uh one one of two things could happen. one, it could pull the entire sector down or two, actually uh their ear their negative earnings uh could be offset by more positive growth from their competitors, which is kind of a clever strategy when you think about it. >> It's possible. Uh you could try to pick out which one you think is going to be the winner. What's interesting is watching interviews with um really top uh specialist investors in this sector. Everyone has a different opinion about, you know, would you rather own Google or Meta or would you rather own Microsoft or Amazon. Nobody has a clear picture of who has the real edge. So, it makes it difficult to really know who's going to be the winner. You could try owning all of them uh which is what everyone's been doing and it's been working out uh over the past couple of years, but you got to know when to get out uh because there will be a fallout on the other side of this cycle. uh when we look at it, we're just just to keep it simple, we'll look at the valuations of an industry like the semiconductor stocks which have done incredibly well. They've essentially doubled in the last 6 months. And uh we just look at it from a what do we think their f fair value is today? And then if you look at the last uh decade, what's been a great buy spot? uh if you look at their valuations that you could have bought at two to four different times in the last decade and we think they're trading pretty significantly above fair value. But the downside in a typical bare market for these semiconductor stocks, not even a terrible bare market, just a garden variety 20 to 30% drop for the market would be more than 40% drop for these semiconductor stocks. So just the way that we invest, we're very focused on the downside protection for what we choose to put in our clients portfolios. that's just not going to be a fit for us. Uh if these stocks all came down by 25%, we would be taking a look at them again and see, you know, if there's a few that we might want to put in small positions and start looking at more closely. But with all of the optimism that's pushed into the valuations today, we just don't think it's worth it. Now another slide I want to uh bring to the viewer's attention is allocation which ultimately is the most important part of uh any um discussion uh with with a fund manager. We do not recommend 7 to 8% stock weights. Why not? We just think for most people, especially for our clients, uh, who are more high- netw worth individuals, many of them, uh, own their own businesses. Uh, they're, you know, in the second half of their lives, uh, and they're really just trying to protect the purchasing power of the wealth they've already accumulated. You don't need to be taking big concentrated positions. So, uh there are plenty of great investors in history that have had very concentrated portfolios and done uh tremendously well, but we think for most people having a more diversified portfolio, more balanced across individual positions and sectors and asset classes uh is going to do better for you in the long run. And if you look at this chart, there are a couple different areas that we thought that the market was a little bit healthier on this diversification point. So if you look from 1990 to 1995, the biggest position wasn't more than 3% of the S&P 500. The three largest positions combined were less than 10% of the overall index. And then same thing again from 2010 till about 2016, uh which Apple was the biggest company, but it wasn't more than 3% of the index. And then the three largest positions, same thing. Uh less than 10% of the overall portfolio. Uh if you just own the index, we think that's a healthier backdrop. And that was a great time to own stocks uh at reasonable valuations. Today, you know, you you buy in, you've got three 7 to 8% positions. Uh and you pointed out how interrelated these stocks are. It's a pretty big implicit bet that you're making that this is all going to work out uh well in the longer term. we would just rather be spread out more uh in a very intelligent intentional fashion across more industries and sectors. >> Given that the Fed is in an easing cycle and given that uh quantitative tightening is expected to end in December which we can discuss, wouldn't you be more risk overall uh in your allocation and your attitude? And uh this comes after the fact that uh people have pointed out that the Fed is now cutting into a market where the stock market is at all-time highs when they've done this historically in the past. Um there have been a few examples when they've cut rates at all-time highs. The market has continued to climb much higher a year later. Maybe there's been fluctuations during that year. Uh but it's always been uh much higher into that bull market following a Fed cut. Is this time any different? >> Hey, you could be right that for the next 6 to 12 months, uh, and we do agree that it seems like the Fed, they're they're ending quantitative tightening on December 1st, it would not surprise us if the next Fed chairman that's appointed in the spring of 2026 is more dovish and cuts short-term interest rates further than people might anticipate. Um, but we're looking at this further out, looking out 3 to 5 years and saying that when we look at the things that you're mentioning there, we're thinking this means that inflation is going to be higher for longer. Uh, it's going to be difficult to get it back down to that 2% target that the Fed has. And so we're trying to make sure the portfolios are positioned for businesses with pricing power and for businesses uh especially in our high income strategy that have more exposure to uh commodities because we think that's an area that's continued to be underlooked uh and underowned and it's uh it served us well to have a a significant allocation there and we plan to continue to do so uh probably for the rest of the 2020s. It certainly looks like if you just take a look at the last couple of uh Fed easing cycles um they've cut during periods of either financial distress or um after a major collapse in capital markets. So 2019 um they've already started cutting rates before COVID. Uh so that actually didn't count but they exacerbated or they uh escalated uh the pace of the rate cuts following a global pandemic which was a disaster for all markets. Um 2007 2008 again they started cutting before the Leman collapse but same thing happened they accelerated the pace of quantitative easing and easing monetary policy after a major financial crisis. Same thing happened in 2000. And now, you know, it's interesting because the only historical precedence that we have for the last three easing cycles are major collapses in the stock market. That's not what's happening here, right? That's the Fed isn't reacting to the capital markets falling as was the case in 2020, 2008, and 2000. This was, you know, this is obviously very different. chats, can you can you just maybe Yeah. explain uh as an investor, you're looking at this pattern and it's broken. So, um Sure. >> What does this mean? >> Well, we would actually go further back and our managing partner Ted Oakley likes to mention Arthur Burns in the 1970s uh when they were trying to cut rates before they really got inflation contained. And then what ends up happening is the inflation rate accelerates higher again and you have to raise rates to try to counteract that. uh which then hurts the economy, hurts financial asset prices. Uh and that's the sort of thing that we're watching out for. And we went through that in 2022 when uh they kept rates low for too long and then they had to raise rates faster than people anticipated and they would have wanted to uh and you saw asset classes across the board underperform. Uh that's the sort of thing that we're trying to monitor for is more of a cycle like that rather than you know what you're citing that was the middle of a period uh the final 20 years of a 40-year disinflation cycle. But since 2020 we think we're actually starting into more of a long-term inflationary cycle uh where it's just going to be harder to keep inflation down. And unless they really want to see it through to get the inflation rate back to a 2% rate or lower, every time they cut rates like this, uh it's going to allow the inflation rate to drift higher and they're going to be stuck in a difficult position to have to try to either let the inflationary bubble run or uh try to raise rates, which is going to hurt asset prices. >> That's a very good point you brought up, Chance. This is the first time in basically three decades where they've cut rates or two and a half decades rather where they've cut rates uh during a time that is not a deflationary event. It's not the pandemic. It's not the financial crisis of08 and it's not a dotcom bubble that wiped out 99% of tech stocks. This is a time when inflation is actually running hotter. The economy is still grinding along and there is no capital markets collapse. So, what do you think is going to happen to inflation then? >> We would expect if they keep cutting rates and if they put in a Fed chairman next year that significantly cuts rates further, um that very likely is going to push inflation higher. And we would expect it to stay at around 3% uh inflation rate for the remainder of this year, but it risks uh the inflation rate drifting higher again and putting them in a a difficult position that they have to decide what they want to prioritize. Right now they say they're prioritizing an employment and they're not so worried about inflation. But uh we'll see what happens. Uh especially just other things moving around the world where a lot of the tailwinds to a disinflationary environment that we had from 2000 to 2020 are not really there anymore. And so we'll see uh how things play out. But if they keep cutting rates, it's going to make it difficult to uh to keep that inflation rate low. But it's not a certainty that even the next Fed chair who will most likely be more amendable to Trump's um wishes for a lower rate, the next the next Fed chair is not going to dramatically cut rates if inflation runs significantly hotter than 3%. Right. That would just be nonsensical. I mean, political pressures aside, >> what do you think? >> You would think so? Yes, I we would agree with that. But we also didn't expect them to start cutting rates when the inflation rate was still at 3%. So fair to the point it kind of goes back to the idea about market concentration. The inflation rate target is just a feature like if they want to target a 3% inflation rate we might disagree with that but um they're saying that the target is 2% and they're cutting you know before we're even close to getting there. So uh we're just trying to monitor what we think they're doing and then what are the ramifications for that. And so when we look at that, um, uh, we didn't touch on this, but like a a high budget deficit that's not going away, uh, plus inflation running higher, we don't want to own long-term treasury bonds in that sort of an environment. We're going to stay shorter term treasuries. We're going to have a higher allocation to commodities. We're going to try to stay very highquality, reasonably priced uh, stocks that we think can kind of control their own destiny regardless of what's happening in the economy. We think that's the right allocation to have rather than trying to chase a trend at high valuations or try to go against the inflationary trend u with bond proxies that might struggle a bit if uh if inflation rate stays high. >> You actually brought this up in one of your slides. US debt is risky for long-term bonds. Can you just explain uh how that works? Why rising debt uh actually uh is risky for uh for the long end of the curve? Well, we're worried about the debt levels in the US, the debt to GDP ratio, the high budget deficit because you need external investors to want to own uh the long-term US Treasury bond uh at a reasonable yield. Uh and if external investors start to be concerned about the fiscal trajectory for the United States, they may demand a higher yield for the 10 or 20 or 30-year Treasury bond, uh which would put the United States in a tough spot. So um part of this is thinking that inflation could remain higher for longer. The other part is we think more attention is going to be paid on the part of investors to this uh deteriorating fiscal situation. And just to put it in perspective, you can go back through decades of history and the income for the United States from collecting taxes from businesses or individuals uh things of that nature. It's about 18% of GDP. And we usually run a little like a small low singledigit uh budget deficit just based on the way that our economy is made up. Right now though, we're spending 23% of GDP uh on fiscal spending, which is almost like the equivalent of being in the middle of a recession. Uh it's not what would be considered sort of a peacetime growing economy if you look back at our history. So that puts us in a tough position because if we actually do have a recession, that budget deficit is going to widen. it's going to make our long-term treasury bonds less attractive and that risks uh the yields going even higher. So when we look at that sort of a thing, you might have shorter or uh lower long-term treasury yields in the near term, but when you look out several years, it makes it difficult to say that's a great place to be. >> Yields have been grinding higher since 2020 and they've stabilized somewhat this year. Um and they've fallen a little bit since 2024. If you zoom out chance, people have pointed out that there is a multi-deade secular uh there has been a multi-deade secular decline in long uh longdated bond yields uh and that trend has reversed in the middle of 2020. Do you think that this reversal is the beginning of a return to uh high um high single digit if not even doubledigit 10-year bond yields which is what we got in the8s and uh and uh and uh obviously that that implies higher inflation as well or is you is this really just a shorter term trend where we have the end of zero interest rate end of ZERP. Uh the Fed ended their zero interest rate environment and we're just going to stabilize around here. What's your view here on the on the on the future of the 10 year 10-year yield? >> Yeah. Well, and you had it when you expanded it out. That was a 40-year bond bare market from 1940 to 1980 or 81. And then we had a more or less 40-year bond bull market where yields yields were falling. Uh and we would agree that we're now starting we're 5 years into a new multi-deade cycle. We do not know, you know, we're not trying to predict how high this goes, you know, if it goes to a 10% yield or higher. Um, we're just acknowledging that the tailwinds you had with uh consistently lower inflation and falling interest rates that was such a benefit to investors with balanced portfolios. The idea of the 60/40 portfolio that 40% in bonds was just working for you the whole way over the last 40 years through 2020. uh we think that becomes significantly more difficult to achieve and would expect that interest rates uh moving higher will act as a headwind to some of those sort of bond proxy type asset classes. Uh and so from our perspective we've adjusted especially our high income strategy uh which I was telling some uh people here back in 2019 we had 10% allocations to long-term treasury bonds 10% to preferred stocks 10% to REITs. Uh and that's very different now. We're way more focused on short-term treasuries, commodity based businesses. Uh very little allocated to REITs and preferred stocks, zero allocated to long-term treasury bonds. And that's an acknowledgement of what we think the start of this multi-deade trend could look like. >> Another slide I want to uh bring up is the amount of leverage in our system. So this uh is something that uh may be concerning for some people. So market speculation is reaching new highs as the title of this slide. Number of leverage ETFs at record highs. What does this signify? Could it could this mean that we're going to have more volatility in the future if let's say uh the market moves in either direction? More leverage means um uh yeah basically more movement on the periphery. >> Yeah, I think there is more movement um when we look at this. So the leveraged ETFs that would be like uh ETFs that are issued that will give you two times the return on Tesla or you know two times shorting Tesla or three times and then the amazing one is a company came out with five times levered returns on an underlying stock or industry. Uh and the risk of this unless you're like a very short-term day trader um you really don't want to be dealing with these. And the best example I saw was uh AMD, the semiconductor company, had an earnings release or announcement that was very positive. Uh the stock was up more than 30% in a day and there was a three times short AMD ETF that went to zero overnight because all of a sudden it was up more than 30%, multiply it by three, you lost all your money if you were in that. And that's the risk that people are taking if they're trying to speculate in these levered ETFs. We just wouldn't recommend it. And we think it's sort of a sign of the rise of the retail trader, which there are plenty of great retail investors out there. But I think there are there are a lot of people that might be speculating uh when they don't need to or are getting caught up that we would just say, you know, try to keep that desire for risk more reigned in and just try to keep things more balanced. Just to be clear, this this chart shows the number of leverage ETFs issued and offered on the market, not the volume of ETFs or the volume of total market cap of ETFs held. Right? It's just the number of products available. >> It's just the number of products available. But to put some numbers behind the volume side, uh Mike Green, I I'd seen an interview he did where he was studying uh he's writing a book on the financial markets that should come out soon. and he was pulling some data that showed that if you look back 30 years to the mid1 1990s uh almost 80% of the trading volume was coming from active fundamental investors. That's now down to more like 10%. In the meantime, the retail investor uh with the rise of Robin Hood and and free trading and regular stocks or options uh has gone from singledigit percentage of all volume now 20% of the volume. So, retail traders are now double the volume of sort of the the active uh money managers that are trying to think long-term uh investments. So, it just tells you the increase in noise in the system. And we really don't even pay too much attention to some of the meme stocks or things that are moving so much up and down. Uh we're just trying to focus on what we think is the best fit for for our clients and what's going to serve them well with the wealth they've accumulated. Well, if the fund management industry is correct in speculating that more retail investors are going to dominate the market, which is ultimately why they're offering these products for retail investors, what does that mean uh for the market overall? If a higher percentage of stocks and equities are held by the retail side versus the institutional side, I believe, correct me if I'm wrong, but 40 years ago, almost none of the market was held by retail investors. Is that correct? >> Yeah, that's correct. it was just expenses were high, access to information was way more difficult. And uh that's actually a a nice thing to have. There's a wealth of information, a lot of it freely available. Um and there are plenty of people out there uh who just have a really good sense of how to invest and it's nice that it's available for them to do that individually. But there's also plenty of people that might be speculating that we would say you're best off speaking or finding a financial adviser to just assist you with these decisions uh over the course of a lifetime. To your point about about what this means for the market, retail traders, from what we've seen in the data uh tend to push the momentum factor. They're going to play what's been working. And what that means is bigger swings up like what we've seen since April, but then also bigger swings down because they're going to want to get out all at the same time. As soon as something a news piece like Liberation Day in early April, something happens that people aren't predicting and everyone turns bearish, that means things can go down very quickly uh in a way that we hadn't experienced until really the last 5 years. Starting with uh the COVID drop in 2020, which was a huge external event. Um 2022 was a little bit longer uh of a more of a nine-month bare market, but then what we experienced this year, that all happened over the course of about a month uh that you had a 20% drop, 30% and some of the the more volatile names. And so that's the thing that you just need to be prepared for. For us, we're just trying to focus on things that are reasonably valued and then we're ready to act when that noise and that movement provides uh really good things on sale, even if it's just for a short time and we can take action. uh have you and your colleagues looked at the real estate sector? So, I've pulled up here uh XHB, which is the uh State Street Homebuilders ETF? Now, most of this year saw the ETF correlated with um the uh the S&P. Now, you can take other uh home builders ETFs and construction, home building construction ETFs, and they all have similar patterns here over the course of the year. They started to diverge from the S&P around midepptember. And that's kind of interesting because that's that's when we had the Fed pivot. You would think that a lower interest rate would incentivize home building activity, but that the the exact opposite seems to be happening. At least what's reflected in the valuations. I'm not sure if that's actually a reflection of home building activity in the real economy, but I'll let you comment on this. >> Yeah, the the whole space, the home builders, the the construction materials companies, um they've been trading down the last few months, like you mentioned, we look at those, they have very wide trading ranges. three. They're working really well and then when people want to get out, they really underperform. So, for us, even though they've pulled back some, uh we think there's room for them to fall a lot further before we would become interested in some of those businesses. um we think it's still just kind of a stagnant uh home market right now where even though you've had a little bit of a drop uh in the mortgage rate and and things like that, it's still not like it's been enough to make a lot of homeowners uh want to move or a lot of potential buyers really want to actively seek out uh something they could buy. So, we think even though you've had a little bit of a dip, you've had a little bit of a drop in the Fed funds rate, you're a long way away from the rates that people were achieving in 2020 and 2021. So, if you had to speculate, you think that 2026 is still going to be a buyer market given that we're not going to have a lot more demand even if rates come down a little bit >> for the the home market. >> Yeah, I I think you'll be able to negotiate a deal. Uh it's interesting though to see that prices are still remaining pretty high because you don't have a whole lot of new inventory coming on the market. Um, so these homebuilders, uh, they're making a lot of, uh, deals, trying to do, uh, mortgage rate buyowns, things like that to get deals done. Um, and just speaking anecdotally, I know plenty of people that that's been their route is buying a new build from a a major home builder that's willing to make those sorts of negotiations. But the existing home market, you still have a lot of homeowners uh either trying to sell or thinking about selling that don't want to take much of a price cut from where they think their home was worth a couple years ago. And uh we'll see uh if or when that starts to break down further. >> And finally, I want to touch on uh the uh gold market, precious metals, gold and silver, but we can focus on gold for now. Um, I know that your firm has um has liked gold for quite some time and that has paid off very well. Uh, uh, but now we're kind of seeing a bit of a reprieve in this rally and people are speculating whether or not this is the end. And this looks an awfully awful lot like what happened every single other time that gold has rallied parabolically. 2011 hovered around for a while then collapsed. 1980 hovered around for a while and collapsed. It's basically a spitting mirror image of what happened before. Again, this time could be different for a lot of fundamental macro reasons. Um, we have a lot more central bank demand. We have a lot more debt as you know. Um, and uh it just seems like the mining space hasn't really uh fired off all cylinders when it comes to M&A activity just yet, which is unlike what happened in 2011 around the same uh time in the cycle. So there are some differences between now and the past, but I'll let you talk about it. What do you think? >> Sure. Uh, we've fortunately been very bullish on gold and silver for the last couple of years. Um, in the near term, we got a little bit more of a neutral outlook. As I mentioned earlier, we trim some of our largest winners of the mining stocks that we owned. Um, and it would not surprise us if there's a pullback here in the gold and silver price over the course of couple of quarters. Um, and with the way that gold moves, just for instance, it got above $4,000. Uh, if it fell even all the way back to $3,000 an ounce, that that wouldn't shock us. Um, but this is a long-term holding for us. We plan on continuing to maintain an allocation to precious metals, I would imagine, through the rest of this decade. Uh, and I had included a chart in my presentation just talking about the central bank, their share of reserves of all central banks in the world that were in gold. And if you look back at 1980 at the peak, uh it was something like 60% of their reserves were in gold. And then over the course of 20 or 30 years, uh they reduced those holdings down to only being about 10% of the reserves. And what changed was a few years ago, um when they uh the United States and others really went after the US debt holdings in Russia, um that made a lot of countries start to think that they need to diversify their reserves. And there's been steady structural buying uh from countries around the world of gold. Until you start seeing that trend change, we think that structural buying from uh large considerable institutional type investors uh is going to be a thing that that helps the gold price uh stay in this sort of range that they've gotten into and then potentially even continue higher in the years to come. So wouldn't surprise us in the near term if it shows some weakness, but we still maintain nearly a 10% allocation uh to gold and silver or businesses in that world in our high- income strategy and we own a few royalty businesses in our stock portfolio for clients. Uh and I would expect we continue to hold that sort of allocation uh for the foreseeable future. >> You mentioned you took some profits off the table uh for the miners. At what point, this is the GDX chart. At what point in this rally did it look a little frothy to you and at what point did that, you know, did this chart trigger that kind of a decision? >> It was in the last couple of months, uh, that we ended up doing that. Uh, I think when we really when it got to 4,000 in the gold price, um, that was where, you know, didn't expect it to get there that fast and then, um, thought that could have been it just because that's sort of a a mental trigger for people, a big round number. Uh, then went even higher towards 4,400. But we really try not to play with price targets on something like this. It's more about the the direction and who are the long-term buyers or sellers uh in an asset class like this. And we just think there's been a shift in behavior from some major players uh in these global central banks. And we would expect that to continue. And then if you flip that and think about the fiscal activity uh like the United States uh and what they're trying to do uh with their you know trying to deal with the budget deficit um increasing debt loads uh we think that could lead to weakness in major currencies uh around the world which is a good thing for gold. And finally, on the miners themselves, how do you assess uh whether or not a minor has a future, especially in an environment like $4,000 gold when it seems like everyone's printing money, but you've these companies have to still stay disciplined what they're spending. Uh so what do you walk us through your decisions when picking miners in one of the best rallies in bull markets in gold history? Yeah, I'd say the biggest thing I you'll know if there's a management team that's just making uh decisions, major allocation decisions that you just think are are not prudent uh for the future of that business. But the biggest thing is the jurisdictions that that minor uh has their minds. So, a company we've owned for a while, Ago Eagle Mines, AEM is the ticker. Um they've got jurisdictions in areas that we think are safe places to be. good regulatory framework by those governments. Um and so that's something that you know we're more happy to own that there rather than um some other miners that might be in other jurisdictions that it's just it's more unknown uh if any governments where they have mines might say you know we want that mine back for ourselves and that's the risk that you take on some of these. The other factor is uh by and large uh almost all the time we want to focus on u miners that uh are more the larger miners more established already have existing free cash flow and then when you get a run up in the gold or silver price like this the margins they're reporting are really outstanding I mean almost as good as a tech company or even better uh and then you just want them to make the right decision in terms of uh returning it to shareholders not doing dumb acquisitions things of that nature. Final question before I let you go. Uh, Chance, what is the next major uh, piece of news either politically, geopolitically, or a macro event that you're watching for that would impact your portfolio allocation decisions one way or another? >> Just thinking I I I'll be curious to see going into next spring um, what they end up doing with we've heard different reports on who the next Fed chairman will be. Um, and there are one or two that um, might be more in line with Fed chairman's uh, that we've had in the past. And there are one or two that might really want to cut rates significantly and that might have a significant impact on where the inflation rate goes, uh, how the views of long-term Treasury bonds look on the part of investors, uh, and what that does to other asset classes. So, uh, that's one that I think going into next year, we'll be very curious to see how that plays out. >> Oh, I appreciate it. Thank you very much, Chance, for your time today. Where can we learn more uh from you and Oxbow Advisors? >> Yeah, if you'd like to learn more about our firm, you can check our website at oxbowadvisors.com or David had mentioned we have our own YouTube channel if you search for Oxbow Advisors. >> Yeah, please do follow Oxbow Advisors there. Links down below and uh I encourage everyone to check out the YouTube channel as well. Thank you very much, Chance. We'll speak again next time. Take care for now. >> Thanks, David. >> Thank you for watching. Don't forget to like, subscribe, and like this video.
Bubble Bursting Now? Expect 40% Drop In This Sector Warns Fund Manager | Chance Finucane
Summary
Transcript
We think we're actually starting into more of a long-term inflationary cycle uh where it's just going to be harder to keep inflation down. And even if they had no cash flows, no profits, nobody cared. And those share prices were pushed up to record levels. In 2022, [music] once interest rates started to move higher and you had an actual comparison for a base rate of return, then investors changed their mind. >> The US stock market has seen some of the strongest rallies in the last 75 years. We're going to talk about what's next. Is this an inflection point? Is this the end of the rally? Or is there a lot more room to climb? That's the theme of our discussion. We'll be talking about all asset classes today. Stocks, bonds, gold, precious metals, um, real estate as well. Chance Van joins us once more. He's the CIO of Oxbow Advisors. Welcome back to the show, Chance. Always good to see you. Welcome back. >> Great to see you, David. Thanks for having me back on the show. you warned in one of your recent um video summaries of the economy and I encourage people to check out Oxbow Advisor's YouTube channel linked down below where uh uh they give regular summaries and outlooks um presentations. We can talk about uh what you discussed in your last video where you warned that the US stock market is dangerously close to euphoric territory um after more than a 30% surge over the last couple of months. Uh this comes on the back of some warnings by uh big banks. CEO of Goldman Sachs, David Solomon, recently said in a conference in Hong Kong a couple days ago that he's expecting a 10 to 15% correction which he says is normal even for uh bull markets. Uh this was echoed by um another banking chief. So we have here warnings by large financial institutions, leaders of large financial institutions that uh this rally may see some bumps ahead. Uh I'm wondering what your view is and uh whether or not you think a pullback uh from here or maybe a little bit higher from here is reasonable. >> It would be reasonable. It does not mean that it has to happen. Uh a lot of the short-term activity is less to do with current valuations and more with just investor behavior. And uh one thing we do look at is uh just the trends in economic growth. And one thing we are looking at for the first quarter to start next year is the comparisons with the very low economic growth reported in the first quarter of 2025 is going to make the economy look like like it's accelerating in the first quarter of 2026. Uh it's difficult for stocks to really fall off. Um if you got accelerating economic growth. So it may not be that there's a a significant correction or bare market in the next few months. But we do think that at current valuations if you look out on a longer term horizon like we do where we try to look out 3 to 5 years uh we have lower expected returns for the market indices given that they're trading at 23 times forward earnings and are really just being driven by the one AI theme where nearly half of the market cap of the S&P 500 is these AI related stocks whether that's in tech industrials or utilities that are considered beneficiaries and they've appreciated by more than 70% in the last 6 months. months. While all the other names, the other half of the market's only appreciated by 11%. And so when you see a move like that, we don't think it can continue forever. And we would expect a correction at some point in the intermediate term. Let's just take a look at the performance so far. This is uh the year-to-date chart of the S&P 500. It's up about 16%. Now, I did state that uh it's up more than 30% as of May. This comes following the Liberation Day um uh market crash. Uh if you take a look at the sector breakdown uh year-to- date tech to nobody's surprise was the top performer up 26% followed by communication services industrials and utilities. Uh these sectors all did very well and uh most of those sectors outperformed the S&P. The other sectors actually underperform the overall index. So, if you're taking a look at overall performance thus far, we're talking uh now on the 5th of November, and of course, gold and silver has done quite well. Bitcoin is flat on the year now. Um, are you thinking of rotating capital at all? Are you thinking of taking profits in some sectors or uh assets and uh rotating into something else? >> We have rotated some. Uh the decisions we make are always incremental. I think that's something that maybe people don't uh sort of see what's happening behind the scenes, but you're not making a full flip of your portfolio at a right specific point in time. The decisions you make are incremental. You know, 1% here, half percent there, and then over the course of a year, you might have a 20 or 30% different allocation within your portfolio. So, you mentioned the the gold and silver miners. That was an allocation that we had especially in the high income strategy that we run that's been an outstanding performer for us and we trimmed a number of those big winners uh in the last month or so uh just trying to get back to more of a normal allocation closer to a high singledigit uh percentage of the portfolio after it had done so well here over the last year or two. Another highlight uh sorry a risk that you highlighted uh recently is the concentration of AI and tech in the S&P I think it's climbed from 26% to 34% you said now given how dominant this sector is now in the overall stock market index we have to track what individual companies are doing uh just this week Palanteer Oracle both missed earnings estimates Oracle in particular you highlighted I'll let you talk more about this in the video. Uh they they are now uh expanding at a rapid pace, but you highlighted the fact that they now need to expand using debt financing. And you likened this to past speculative mania similar to the railroads in the 1800s, Japan in the 1980s, the docom bubble, and so on and so forth. Tell us about this cycle and how it's different from the past or similar. Yeah, it say what's different is that these large businesses that are pushing so much into the AI boom uh have solid businesses to begin with and they have a lot of free cash flow that they were able to pull from uh to start doing more capital expenditures to try and finance the buildout for AI. But what's happened in the last year is they're now spending so much on capex that these companies have to start issuing debt. And that's where you now become relying on external investors to finance the buildout. And right now investors on the outside are very keen to want to uh invest in the debt. But this only works for as long as those external investors are happy to keep doing this. And there are examples that we and others have cited like you mentioned the dotcom bubble or the railroads more than a century ago. Uh but just thinking of a more recent example uh where you got to pay attention to what investors are really trying to incentivize company management to do in 2021 uh when rates were still at zero the thing that investors were most interested in was revenue growth and what was the biggest addressable market. So you had all sorts of companies talking about these huge opportunities in e-commerce or other areas that they were pushing towards and even if they had no cash flows, no profits, nobody cared and those share prices were pushed up to record levels. In 2022, once interest rates started to move higher and you had an actual comparison for a base rate of return, then investors changed their mind. They weren't caring about revenue growth anymore. They wanted to see profits and free cash flow. and those company management teams adjusted really quick. But what changed is they stopped spending so much. So taking that back to today, right now, if there's an announcement about a deal made and there's going to be hundreds of billions of dollars spent in capex, that's being rewarded, but at some point it will not be rewarded by external investors anymore. And you're going to see a shift in behavior by company management to try and preserve uh the gains that they've had. And that's what we're really waiting for is what's going to be the fallout when that inevitably occurs. >> Before we continue with the video, let's talk about our sponsor today, ODU. ODU is an all-in-one business management software that helps entrepreneurs streamline their operations from accounting and inventory to websites and project management. Today, I want to focus on their project app. It gives you a clear overview of all your projects. You can create custom stages, assign tasks, set deadlines, and even add checklists. Everything's customizable. You also collaborate in real time. Tag teammates, comment, attach files, and manage everything in one place using their built-in chatter. And the best part, you can choose from different views. Canban for board style view, Gant for timeliness, or list for detailed data. Like all of ODU, it's built to scale. Click the link in the description and get one app for free with unlimited users. No credit card required. So this slide summarizes uh what you've just said and um it actually echoes the viewpoints of a lot of other investors uh right now. Circular AI deals look like com bubble and I'll let you explain what this chart means. Chance. Yeah, sure. So Nvidia is the easiest example. So um it's a great business. They have fantastic profit margins. But to finance this AI buildout, what they're doing is they're making agreements where they'll make an investment in a company that does not have the cash flow to buy Nvidia chips to uh build out their own data centers. So Nvidia makes an investment and now that company has the money to turn around and buy chips from Nvidia to build out their data centers. It's okay to do this, but it only works for as long as these external investors are helping finance the deals. And so, uh, well, there's no telling how long it will last. It could be over in a matter of months or a year or 2 years or 5 years, but this does not go on forever. And it's very similar to some of the vendor financing we saw at the height of the.com bubble with companies like Cisco, Nortell, Lucent. Uh, so that's where it's giving us a little bit of a reminder. And um as I pointed out in the video, we own a couple of companies uh on a chart like this like Microsoft and Alphabet that we've owned for a decade or longer. We're monitoring them closely. Uh the earnings quality of their reporting is very good. The price momentum of their stocks is very good. For now, that's more than offsetting the increase in capital expenditures. But you have to keep watching all of this together because if all of a sudden all of it turns negative, that would be the time that we'd be thinking about trying to reduce those positions or getting out entirely. I think another point we have to discuss which may have slipped some people is that if one company takes stakes in others and they're all taking stakes in each other or not even taking stakes equity positions but just investing in capex uh in infrastructure or buying equipment or buying um IP for example then basically the valuations of other companies will directly affect the valuations of one company and vice versa. So basically if let's say um Microsoft's results don't deliver or if let's say their infrastructure um doesn't exceed expectations it could potentially pull down the valuations of any other company that has made stakes in Microsoft or Microsoft's projects and vice versa. Uh so we're basically seeing not just the emergence of not just an entire sector but one mega company if you want to think about it that way chance. >> Sure. My favorite example of this is uh Nvidia one of their biggest rivals for over a decade has been AMD advanced uh micro devices and Nvidia invested in open AAI. Open AAI took some of that money turned around and invested in AMD. So Nvidia now is a significant shareholder of AMD, one of its chief rivals. So to your point about it all being interrelated, it's definitely drifted that way. >> So then what happens if let's say you know one company misses earnings or starts underperforming? Uh one one of two things could happen. one, it could pull the entire sector down or two, actually uh their ear their negative earnings uh could be offset by more positive growth from their competitors, which is kind of a clever strategy when you think about it. >> It's possible. Uh you could try to pick out which one you think is going to be the winner. What's interesting is watching interviews with um really top uh specialist investors in this sector. Everyone has a different opinion about, you know, would you rather own Google or Meta or would you rather own Microsoft or Amazon. Nobody has a clear picture of who has the real edge. So, it makes it difficult to really know who's going to be the winner. You could try owning all of them uh which is what everyone's been doing and it's been working out uh over the past couple of years, but you got to know when to get out uh because there will be a fallout on the other side of this cycle. uh when we look at it, we're just just to keep it simple, we'll look at the valuations of an industry like the semiconductor stocks which have done incredibly well. They've essentially doubled in the last 6 months. And uh we just look at it from a what do we think their f fair value is today? And then if you look at the last uh decade, what's been a great buy spot? uh if you look at their valuations that you could have bought at two to four different times in the last decade and we think they're trading pretty significantly above fair value. But the downside in a typical bare market for these semiconductor stocks, not even a terrible bare market, just a garden variety 20 to 30% drop for the market would be more than 40% drop for these semiconductor stocks. So just the way that we invest, we're very focused on the downside protection for what we choose to put in our clients portfolios. that's just not going to be a fit for us. Uh if these stocks all came down by 25%, we would be taking a look at them again and see, you know, if there's a few that we might want to put in small positions and start looking at more closely. But with all of the optimism that's pushed into the valuations today, we just don't think it's worth it. Now another slide I want to uh bring to the viewer's attention is allocation which ultimately is the most important part of uh any um discussion uh with with a fund manager. We do not recommend 7 to 8% stock weights. Why not? We just think for most people, especially for our clients, uh, who are more high- netw worth individuals, many of them, uh, own their own businesses. Uh, they're, you know, in the second half of their lives, uh, and they're really just trying to protect the purchasing power of the wealth they've already accumulated. You don't need to be taking big concentrated positions. So, uh there are plenty of great investors in history that have had very concentrated portfolios and done uh tremendously well, but we think for most people having a more diversified portfolio, more balanced across individual positions and sectors and asset classes uh is going to do better for you in the long run. And if you look at this chart, there are a couple different areas that we thought that the market was a little bit healthier on this diversification point. So if you look from 1990 to 1995, the biggest position wasn't more than 3% of the S&P 500. The three largest positions combined were less than 10% of the overall index. And then same thing again from 2010 till about 2016, uh which Apple was the biggest company, but it wasn't more than 3% of the index. And then the three largest positions, same thing. Uh less than 10% of the overall portfolio. Uh if you just own the index, we think that's a healthier backdrop. And that was a great time to own stocks uh at reasonable valuations. Today, you know, you you buy in, you've got three 7 to 8% positions. Uh and you pointed out how interrelated these stocks are. It's a pretty big implicit bet that you're making that this is all going to work out uh well in the longer term. we would just rather be spread out more uh in a very intelligent intentional fashion across more industries and sectors. >> Given that the Fed is in an easing cycle and given that uh quantitative tightening is expected to end in December which we can discuss, wouldn't you be more risk overall uh in your allocation and your attitude? And uh this comes after the fact that uh people have pointed out that the Fed is now cutting into a market where the stock market is at all-time highs when they've done this historically in the past. Um there have been a few examples when they've cut rates at all-time highs. The market has continued to climb much higher a year later. Maybe there's been fluctuations during that year. Uh but it's always been uh much higher into that bull market following a Fed cut. Is this time any different? >> Hey, you could be right that for the next 6 to 12 months, uh, and we do agree that it seems like the Fed, they're they're ending quantitative tightening on December 1st, it would not surprise us if the next Fed chairman that's appointed in the spring of 2026 is more dovish and cuts short-term interest rates further than people might anticipate. Um, but we're looking at this further out, looking out 3 to 5 years and saying that when we look at the things that you're mentioning there, we're thinking this means that inflation is going to be higher for longer. Uh, it's going to be difficult to get it back down to that 2% target that the Fed has. And so we're trying to make sure the portfolios are positioned for businesses with pricing power and for businesses uh especially in our high income strategy that have more exposure to uh commodities because we think that's an area that's continued to be underlooked uh and underowned and it's uh it served us well to have a a significant allocation there and we plan to continue to do so uh probably for the rest of the 2020s. It certainly looks like if you just take a look at the last couple of uh Fed easing cycles um they've cut during periods of either financial distress or um after a major collapse in capital markets. So 2019 um they've already started cutting rates before COVID. Uh so that actually didn't count but they exacerbated or they uh escalated uh the pace of the rate cuts following a global pandemic which was a disaster for all markets. Um 2007 2008 again they started cutting before the Leman collapse but same thing happened they accelerated the pace of quantitative easing and easing monetary policy after a major financial crisis. Same thing happened in 2000. And now, you know, it's interesting because the only historical precedence that we have for the last three easing cycles are major collapses in the stock market. That's not what's happening here, right? That's the Fed isn't reacting to the capital markets falling as was the case in 2020, 2008, and 2000. This was, you know, this is obviously very different. chats, can you can you just maybe Yeah. explain uh as an investor, you're looking at this pattern and it's broken. So, um Sure. >> What does this mean? >> Well, we would actually go further back and our managing partner Ted Oakley likes to mention Arthur Burns in the 1970s uh when they were trying to cut rates before they really got inflation contained. And then what ends up happening is the inflation rate accelerates higher again and you have to raise rates to try to counteract that. uh which then hurts the economy, hurts financial asset prices. Uh and that's the sort of thing that we're watching out for. And we went through that in 2022 when uh they kept rates low for too long and then they had to raise rates faster than people anticipated and they would have wanted to uh and you saw asset classes across the board underperform. Uh that's the sort of thing that we're trying to monitor for is more of a cycle like that rather than you know what you're citing that was the middle of a period uh the final 20 years of a 40-year disinflation cycle. But since 2020 we think we're actually starting into more of a long-term inflationary cycle uh where it's just going to be harder to keep inflation down. And unless they really want to see it through to get the inflation rate back to a 2% rate or lower, every time they cut rates like this, uh it's going to allow the inflation rate to drift higher and they're going to be stuck in a difficult position to have to try to either let the inflationary bubble run or uh try to raise rates, which is going to hurt asset prices. >> That's a very good point you brought up, Chance. This is the first time in basically three decades where they've cut rates or two and a half decades rather where they've cut rates uh during a time that is not a deflationary event. It's not the pandemic. It's not the financial crisis of08 and it's not a dotcom bubble that wiped out 99% of tech stocks. This is a time when inflation is actually running hotter. The economy is still grinding along and there is no capital markets collapse. So, what do you think is going to happen to inflation then? >> We would expect if they keep cutting rates and if they put in a Fed chairman next year that significantly cuts rates further, um that very likely is going to push inflation higher. And we would expect it to stay at around 3% uh inflation rate for the remainder of this year, but it risks uh the inflation rate drifting higher again and putting them in a a difficult position that they have to decide what they want to prioritize. Right now they say they're prioritizing an employment and they're not so worried about inflation. But uh we'll see what happens. Uh especially just other things moving around the world where a lot of the tailwinds to a disinflationary environment that we had from 2000 to 2020 are not really there anymore. And so we'll see uh how things play out. But if they keep cutting rates, it's going to make it difficult to uh to keep that inflation rate low. But it's not a certainty that even the next Fed chair who will most likely be more amendable to Trump's um wishes for a lower rate, the next the next Fed chair is not going to dramatically cut rates if inflation runs significantly hotter than 3%. Right. That would just be nonsensical. I mean, political pressures aside, >> what do you think? >> You would think so? Yes, I we would agree with that. But we also didn't expect them to start cutting rates when the inflation rate was still at 3%. So fair to the point it kind of goes back to the idea about market concentration. The inflation rate target is just a feature like if they want to target a 3% inflation rate we might disagree with that but um they're saying that the target is 2% and they're cutting you know before we're even close to getting there. So uh we're just trying to monitor what we think they're doing and then what are the ramifications for that. And so when we look at that, um, uh, we didn't touch on this, but like a a high budget deficit that's not going away, uh, plus inflation running higher, we don't want to own long-term treasury bonds in that sort of an environment. We're going to stay shorter term treasuries. We're going to have a higher allocation to commodities. We're going to try to stay very highquality, reasonably priced uh, stocks that we think can kind of control their own destiny regardless of what's happening in the economy. We think that's the right allocation to have rather than trying to chase a trend at high valuations or try to go against the inflationary trend u with bond proxies that might struggle a bit if uh if inflation rate stays high. >> You actually brought this up in one of your slides. US debt is risky for long-term bonds. Can you just explain uh how that works? Why rising debt uh actually uh is risky for uh for the long end of the curve? Well, we're worried about the debt levels in the US, the debt to GDP ratio, the high budget deficit because you need external investors to want to own uh the long-term US Treasury bond uh at a reasonable yield. Uh and if external investors start to be concerned about the fiscal trajectory for the United States, they may demand a higher yield for the 10 or 20 or 30-year Treasury bond, uh which would put the United States in a tough spot. So um part of this is thinking that inflation could remain higher for longer. The other part is we think more attention is going to be paid on the part of investors to this uh deteriorating fiscal situation. And just to put it in perspective, you can go back through decades of history and the income for the United States from collecting taxes from businesses or individuals uh things of that nature. It's about 18% of GDP. And we usually run a little like a small low singledigit uh budget deficit just based on the way that our economy is made up. Right now though, we're spending 23% of GDP uh on fiscal spending, which is almost like the equivalent of being in the middle of a recession. Uh it's not what would be considered sort of a peacetime growing economy if you look back at our history. So that puts us in a tough position because if we actually do have a recession, that budget deficit is going to widen. it's going to make our long-term treasury bonds less attractive and that risks uh the yields going even higher. So when we look at that sort of a thing, you might have shorter or uh lower long-term treasury yields in the near term, but when you look out several years, it makes it difficult to say that's a great place to be. >> Yields have been grinding higher since 2020 and they've stabilized somewhat this year. Um and they've fallen a little bit since 2024. If you zoom out chance, people have pointed out that there is a multi-deade secular uh there has been a multi-deade secular decline in long uh longdated bond yields uh and that trend has reversed in the middle of 2020. Do you think that this reversal is the beginning of a return to uh high um high single digit if not even doubledigit 10-year bond yields which is what we got in the8s and uh and uh and uh obviously that that implies higher inflation as well or is you is this really just a shorter term trend where we have the end of zero interest rate end of ZERP. Uh the Fed ended their zero interest rate environment and we're just going to stabilize around here. What's your view here on the on the on the future of the 10 year 10-year yield? >> Yeah. Well, and you had it when you expanded it out. That was a 40-year bond bare market from 1940 to 1980 or 81. And then we had a more or less 40-year bond bull market where yields yields were falling. Uh and we would agree that we're now starting we're 5 years into a new multi-deade cycle. We do not know, you know, we're not trying to predict how high this goes, you know, if it goes to a 10% yield or higher. Um, we're just acknowledging that the tailwinds you had with uh consistently lower inflation and falling interest rates that was such a benefit to investors with balanced portfolios. The idea of the 60/40 portfolio that 40% in bonds was just working for you the whole way over the last 40 years through 2020. uh we think that becomes significantly more difficult to achieve and would expect that interest rates uh moving higher will act as a headwind to some of those sort of bond proxy type asset classes. Uh and so from our perspective we've adjusted especially our high income strategy uh which I was telling some uh people here back in 2019 we had 10% allocations to long-term treasury bonds 10% to preferred stocks 10% to REITs. Uh and that's very different now. We're way more focused on short-term treasuries, commodity based businesses. Uh very little allocated to REITs and preferred stocks, zero allocated to long-term treasury bonds. And that's an acknowledgement of what we think the start of this multi-deade trend could look like. >> Another slide I want to uh bring up is the amount of leverage in our system. So this uh is something that uh may be concerning for some people. So market speculation is reaching new highs as the title of this slide. Number of leverage ETFs at record highs. What does this signify? Could it could this mean that we're going to have more volatility in the future if let's say uh the market moves in either direction? More leverage means um uh yeah basically more movement on the periphery. >> Yeah, I think there is more movement um when we look at this. So the leveraged ETFs that would be like uh ETFs that are issued that will give you two times the return on Tesla or you know two times shorting Tesla or three times and then the amazing one is a company came out with five times levered returns on an underlying stock or industry. Uh and the risk of this unless you're like a very short-term day trader um you really don't want to be dealing with these. And the best example I saw was uh AMD, the semiconductor company, had an earnings release or announcement that was very positive. Uh the stock was up more than 30% in a day and there was a three times short AMD ETF that went to zero overnight because all of a sudden it was up more than 30%, multiply it by three, you lost all your money if you were in that. And that's the risk that people are taking if they're trying to speculate in these levered ETFs. We just wouldn't recommend it. And we think it's sort of a sign of the rise of the retail trader, which there are plenty of great retail investors out there. But I think there are there are a lot of people that might be speculating uh when they don't need to or are getting caught up that we would just say, you know, try to keep that desire for risk more reigned in and just try to keep things more balanced. Just to be clear, this this chart shows the number of leverage ETFs issued and offered on the market, not the volume of ETFs or the volume of total market cap of ETFs held. Right? It's just the number of products available. >> It's just the number of products available. But to put some numbers behind the volume side, uh Mike Green, I I'd seen an interview he did where he was studying uh he's writing a book on the financial markets that should come out soon. and he was pulling some data that showed that if you look back 30 years to the mid1 1990s uh almost 80% of the trading volume was coming from active fundamental investors. That's now down to more like 10%. In the meantime, the retail investor uh with the rise of Robin Hood and and free trading and regular stocks or options uh has gone from singledigit percentage of all volume now 20% of the volume. So, retail traders are now double the volume of sort of the the active uh money managers that are trying to think long-term uh investments. So, it just tells you the increase in noise in the system. And we really don't even pay too much attention to some of the meme stocks or things that are moving so much up and down. Uh we're just trying to focus on what we think is the best fit for for our clients and what's going to serve them well with the wealth they've accumulated. Well, if the fund management industry is correct in speculating that more retail investors are going to dominate the market, which is ultimately why they're offering these products for retail investors, what does that mean uh for the market overall? If a higher percentage of stocks and equities are held by the retail side versus the institutional side, I believe, correct me if I'm wrong, but 40 years ago, almost none of the market was held by retail investors. Is that correct? >> Yeah, that's correct. it was just expenses were high, access to information was way more difficult. And uh that's actually a a nice thing to have. There's a wealth of information, a lot of it freely available. Um and there are plenty of people out there uh who just have a really good sense of how to invest and it's nice that it's available for them to do that individually. But there's also plenty of people that might be speculating that we would say you're best off speaking or finding a financial adviser to just assist you with these decisions uh over the course of a lifetime. To your point about about what this means for the market, retail traders, from what we've seen in the data uh tend to push the momentum factor. They're going to play what's been working. And what that means is bigger swings up like what we've seen since April, but then also bigger swings down because they're going to want to get out all at the same time. As soon as something a news piece like Liberation Day in early April, something happens that people aren't predicting and everyone turns bearish, that means things can go down very quickly uh in a way that we hadn't experienced until really the last 5 years. Starting with uh the COVID drop in 2020, which was a huge external event. Um 2022 was a little bit longer uh of a more of a nine-month bare market, but then what we experienced this year, that all happened over the course of about a month uh that you had a 20% drop, 30% and some of the the more volatile names. And so that's the thing that you just need to be prepared for. For us, we're just trying to focus on things that are reasonably valued and then we're ready to act when that noise and that movement provides uh really good things on sale, even if it's just for a short time and we can take action. uh have you and your colleagues looked at the real estate sector? So, I've pulled up here uh XHB, which is the uh State Street Homebuilders ETF? Now, most of this year saw the ETF correlated with um the uh the S&P. Now, you can take other uh home builders ETFs and construction, home building construction ETFs, and they all have similar patterns here over the course of the year. They started to diverge from the S&P around midepptember. And that's kind of interesting because that's that's when we had the Fed pivot. You would think that a lower interest rate would incentivize home building activity, but that the the exact opposite seems to be happening. At least what's reflected in the valuations. I'm not sure if that's actually a reflection of home building activity in the real economy, but I'll let you comment on this. >> Yeah, the the whole space, the home builders, the the construction materials companies, um they've been trading down the last few months, like you mentioned, we look at those, they have very wide trading ranges. three. They're working really well and then when people want to get out, they really underperform. So, for us, even though they've pulled back some, uh we think there's room for them to fall a lot further before we would become interested in some of those businesses. um we think it's still just kind of a stagnant uh home market right now where even though you've had a little bit of a drop uh in the mortgage rate and and things like that, it's still not like it's been enough to make a lot of homeowners uh want to move or a lot of potential buyers really want to actively seek out uh something they could buy. So, we think even though you've had a little bit of a dip, you've had a little bit of a drop in the Fed funds rate, you're a long way away from the rates that people were achieving in 2020 and 2021. So, if you had to speculate, you think that 2026 is still going to be a buyer market given that we're not going to have a lot more demand even if rates come down a little bit >> for the the home market. >> Yeah, I I think you'll be able to negotiate a deal. Uh it's interesting though to see that prices are still remaining pretty high because you don't have a whole lot of new inventory coming on the market. Um, so these homebuilders, uh, they're making a lot of, uh, deals, trying to do, uh, mortgage rate buyowns, things like that to get deals done. Um, and just speaking anecdotally, I know plenty of people that that's been their route is buying a new build from a a major home builder that's willing to make those sorts of negotiations. But the existing home market, you still have a lot of homeowners uh either trying to sell or thinking about selling that don't want to take much of a price cut from where they think their home was worth a couple years ago. And uh we'll see uh if or when that starts to break down further. >> And finally, I want to touch on uh the uh gold market, precious metals, gold and silver, but we can focus on gold for now. Um, I know that your firm has um has liked gold for quite some time and that has paid off very well. Uh, uh, but now we're kind of seeing a bit of a reprieve in this rally and people are speculating whether or not this is the end. And this looks an awfully awful lot like what happened every single other time that gold has rallied parabolically. 2011 hovered around for a while then collapsed. 1980 hovered around for a while and collapsed. It's basically a spitting mirror image of what happened before. Again, this time could be different for a lot of fundamental macro reasons. Um, we have a lot more central bank demand. We have a lot more debt as you know. Um, and uh it just seems like the mining space hasn't really uh fired off all cylinders when it comes to M&A activity just yet, which is unlike what happened in 2011 around the same uh time in the cycle. So there are some differences between now and the past, but I'll let you talk about it. What do you think? >> Sure. Uh, we've fortunately been very bullish on gold and silver for the last couple of years. Um, in the near term, we got a little bit more of a neutral outlook. As I mentioned earlier, we trim some of our largest winners of the mining stocks that we owned. Um, and it would not surprise us if there's a pullback here in the gold and silver price over the course of couple of quarters. Um, and with the way that gold moves, just for instance, it got above $4,000. Uh, if it fell even all the way back to $3,000 an ounce, that that wouldn't shock us. Um, but this is a long-term holding for us. We plan on continuing to maintain an allocation to precious metals, I would imagine, through the rest of this decade. Uh, and I had included a chart in my presentation just talking about the central bank, their share of reserves of all central banks in the world that were in gold. And if you look back at 1980 at the peak, uh it was something like 60% of their reserves were in gold. And then over the course of 20 or 30 years, uh they reduced those holdings down to only being about 10% of the reserves. And what changed was a few years ago, um when they uh the United States and others really went after the US debt holdings in Russia, um that made a lot of countries start to think that they need to diversify their reserves. And there's been steady structural buying uh from countries around the world of gold. Until you start seeing that trend change, we think that structural buying from uh large considerable institutional type investors uh is going to be a thing that that helps the gold price uh stay in this sort of range that they've gotten into and then potentially even continue higher in the years to come. So wouldn't surprise us in the near term if it shows some weakness, but we still maintain nearly a 10% allocation uh to gold and silver or businesses in that world in our high- income strategy and we own a few royalty businesses in our stock portfolio for clients. Uh and I would expect we continue to hold that sort of allocation uh for the foreseeable future. >> You mentioned you took some profits off the table uh for the miners. At what point, this is the GDX chart. At what point in this rally did it look a little frothy to you and at what point did that, you know, did this chart trigger that kind of a decision? >> It was in the last couple of months, uh, that we ended up doing that. Uh, I think when we really when it got to 4,000 in the gold price, um, that was where, you know, didn't expect it to get there that fast and then, um, thought that could have been it just because that's sort of a a mental trigger for people, a big round number. Uh, then went even higher towards 4,400. But we really try not to play with price targets on something like this. It's more about the the direction and who are the long-term buyers or sellers uh in an asset class like this. And we just think there's been a shift in behavior from some major players uh in these global central banks. And we would expect that to continue. And then if you flip that and think about the fiscal activity uh like the United States uh and what they're trying to do uh with their you know trying to deal with the budget deficit um increasing debt loads uh we think that could lead to weakness in major currencies uh around the world which is a good thing for gold. And finally, on the miners themselves, how do you assess uh whether or not a minor has a future, especially in an environment like $4,000 gold when it seems like everyone's printing money, but you've these companies have to still stay disciplined what they're spending. Uh so what do you walk us through your decisions when picking miners in one of the best rallies in bull markets in gold history? Yeah, I'd say the biggest thing I you'll know if there's a management team that's just making uh decisions, major allocation decisions that you just think are are not prudent uh for the future of that business. But the biggest thing is the jurisdictions that that minor uh has their minds. So, a company we've owned for a while, Ago Eagle Mines, AEM is the ticker. Um they've got jurisdictions in areas that we think are safe places to be. good regulatory framework by those governments. Um and so that's something that you know we're more happy to own that there rather than um some other miners that might be in other jurisdictions that it's just it's more unknown uh if any governments where they have mines might say you know we want that mine back for ourselves and that's the risk that you take on some of these. The other factor is uh by and large uh almost all the time we want to focus on u miners that uh are more the larger miners more established already have existing free cash flow and then when you get a run up in the gold or silver price like this the margins they're reporting are really outstanding I mean almost as good as a tech company or even better uh and then you just want them to make the right decision in terms of uh returning it to shareholders not doing dumb acquisitions things of that nature. Final question before I let you go. Uh, Chance, what is the next major uh, piece of news either politically, geopolitically, or a macro event that you're watching for that would impact your portfolio allocation decisions one way or another? >> Just thinking I I I'll be curious to see going into next spring um, what they end up doing with we've heard different reports on who the next Fed chairman will be. Um, and there are one or two that um, might be more in line with Fed chairman's uh, that we've had in the past. And there are one or two that might really want to cut rates significantly and that might have a significant impact on where the inflation rate goes, uh, how the views of long-term Treasury bonds look on the part of investors, uh, and what that does to other asset classes. So, uh, that's one that I think going into next year, we'll be very curious to see how that plays out. >> Oh, I appreciate it. Thank you very much, Chance, for your time today. Where can we learn more uh from you and Oxbow Advisors? >> Yeah, if you'd like to learn more about our firm, you can check our website at oxbowadvisors.com or David had mentioned we have our own YouTube channel if you search for Oxbow Advisors. >> Yeah, please do follow Oxbow Advisors there. Links down below and uh I encourage everyone to check out the YouTube channel as well. Thank you very much, Chance. We'll speak again next time. Take care for now. >> Thanks, David. >> Thank you for watching. Don't forget to like, subscribe, and like this video.