Market Valuations: Guest highlights near-record valuation levels (CAPE and Cresmont PE) and a late-1990s-like setup, implying below-average returns over the next 5–10 years.
Earnings and Margins: Elevated profit margins and earnings disconnects from GDP suggest vulnerability, reinforcing caution on long-term equity returns.
Housing Affordability: Payment dynamics drove prices higher when mortgage rates collapsed, and prices have not normalized with higher rates, making renting more attractive than buying.
Inflation Outlook: Base effects may lift near-term CPI before drifting toward the mid-2% range, but sticky inflation and higher yields could cap P/E multiples.
Debt/Private Credit Risks: The guest flags frothy conditions and vulnerability in credit markets after a long period without a true correction, adding to macro misalignments.
Index Concentration: The S&P 500’s heavy reliance on a small group of mega-cap tech names reduces diversification and heightens potential drawdown risk.
AI Hype vs Reality: Examples like Oracle (ORCL) and Nvidia (NVDA) illustrate uncertain AI monetization and long-tailed capex paybacks, with productivity gains likely modest versus past tech booms.
Policy and Sentiment: A dovish Fed cut amid mixed data sustains momentum and ambiguity, allowing froth to persist before eventual mean reversion.
Transcript
This episode is brought to you by Interactive Brokers. So, are you ready to take control of your financial future? Meet portfolio analysts from Interactive Brokers, the free all-in-one dashboard that lets you consolidate, track, and analyze all your financial accounts in one place. You don't need an IBKR account to use it. Just connect your accounts and see your complete financial picture, your investments, performance, and allocation in one single screen. Plan smarter with IBKR's new tax and retirement planners built around your goals and market assumptions. Get deep portfolio insights with detailed risk assessments and compare performance against more than 300 benchmarks. Plus, manage with confidence thanks to GIP's verified returns. Ready to get started? Sign up for portfolio analyst free for everyone at ibkr.com/freepa. Interactive Brokers, the best informed investors. Choose IBKR, member SIPC. [music] The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of the Disciplined Investor podcast. [music] This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, [music] cultivating financial success, [music] the Fed cuts and keeps the markets guessing. Silver hits a record, up more than 100% this year. Looking at frameworks and fake transparency. And our guest today is Ed Easterling, founder and president of Cresmont Holdings. All this and much more on episode number 951 of the Disciplined Investor podcast. [music] [music] Well, there goes the Fed again. And markets were pretty happy about [music] the lack of hawkish tilt. That was the expectation going into this. In fact, we looked at all the things that were said and tried to round it all up and looked at all the various news outlets and analysts and researchers and everybody concurs that this was a much more dovish tilt due to the fact that not only are they bringing forward their quantitative easing, which they they swear it's not quantitative easing, pal said, "No, no, no, it's not quantitative easing, but it is quantitative easing when you're buying bonds and uh using well just just cash off of a Excel spreadsheet, not anywhere really to be found to buy those bonds. And that's what's happening. On top of that, there was a discussion about what was going to happen in the future. All this going into play, pretty interesting. So, there we have that. Hey, uh, by the way, if you don't know me, I'm Andrew Horowitz and, uh, we are barreling into the end of 2025. And, uh, yeah, Marcus, we're a bit worried about this potential for a really hawkish Fed, but if you really think about it, we we also thought there was going to be a bit of hawkishness, meaning that Powell would say that they're worried about inflation or something like that, but he didn't. He talked about inflation saying that it was there, it was sticky, you know, kind of went around the corners of it, but was much more focused on the fact that they're seeing weakness in the employment situation. Even though they don't have the reports that are as current as could be because of the government shutdown, we have a lot of well, there's a bit of a a black hole when it comes to economic indicators right now. But again, markets were not unpleased. In fact, we saw the Dow Jones Industrial Average move dramatically after that through the through the week and uh through the end of the week and that was pretty good overall. Then we hear about this great deal with China and they're going to be able to get Nvidia chips, a a certain chips set that is older, not as advanced as the latest Blackwell. And that was pretty exciting, but still pretty exciting for a moment. And I bring this up for a very specific purpose because I think now towards the end of the year where we have a lot of things that are going on and and and we want to get to the bottom of the the discussion to find the truth from the fluff. And this is exactly what's going on right now. The reason that we're not getting too excited about any deals, any frameworks, or maybe even announcements, because they are filled with holes despite President Trump's authorization of the sale of the Nvidia H200 chips to China, we find out that China refuses to accept them and is increasingly putting restrictions on their use. That was a story right out of the Financial Times. No, no, no, no, no. Well, that's not true. Everybody's saying that's not true and that, you know, everybody's excited about this. The fact is that the administration's idea of transparency government these days in total, in fact, it's even leaked into the financial markets and corporate America. This idea of transparency, it looks a lot much more like theater than it does substance. Because what's happening is we're seeing this rush, this incredible need to trumpet this good news, but with limited detail on any of it. That's where the word framework comes into play. Got a framework. What is a framework? There's no detail. It's a it's a theoretical handshake and maybe a wink on what could be maybe I don't know. We'll see what happens kind of thing. This is all optics. It's headlines without the meat. That's really what it is. And this vacuum of clarity, it breeds incredible amounts of confusion. And maybe maybe as we've been talking about for some time. That's exactly the point. Keep the public guessing. Keep me guessing. I'm not exactly sure if I should believe this or that. Let's keep this whole narrative going and very fluid and we can maintain this control through ambiguity, confusion, uh lack of anybody's ability to really pin down. It's kind of like trying to Have you ever tried to squeeze a watermelon that is all vaselined up? And crazy enough of I have. We have sometimes, you know, when you're young, you have pool games. get in the pool in the summertime. You you grease up a a a watermelon and you put it one end of the pool and everybody's got to try to grab it and bring it to the other end of the pool. Two different teams. What happens? It you can't hold on to it for long. It just it gets loose. That is what we're seeing now. This ambiguity and the ability to bob and weave and today's Fed move or this week's actually this what was it was on Wednesday. The meeting was Tuesday, Wednesday. So a couple days back this modest 0.25% rate cut only amplifies the uncertainty as I see it because markets were whipsawed. Traders tried to decide, okay, is this is this good news? How do I how do I decode what he's saying here? Nothing different, by the way, than any other time. And I and I got to congratulate Scott Besson, the Treasury Secretary, for bringing up the subject of having the Fed step back a little, of having the Fed less stage center and maybe back left for a while because what they're doing is creating more problems than they are solving. And the markets are trying to understand is this the start of a cutting cycle? Is this just an appeasement? because the expectations from various betting predictive and Fed funds markets were all about 90% sure that he was going to or that the Fed was going to cut was just a way just to calm the nerves from that because these contradictions of what we're seeing are glaring. Think about it for a second. Just think about the fact that we have GDP expectations that were increased. The Fed just did it in their in their meeting. They said that GDP was going to be higher than expected. Inflation's still sticky. And yet the Fed in their wisdom decides, well, we are not loose enough. Not only are we going to stop the quantitative tightening program and and reissue and and pull it up further about four months faster than we anticipated, but we're going to reduce rates even further. the Fed's signaling their concern about growth of employment as the number one issue. And yes, we did see also this week, the first time in I think two years, a negative print on housing prices on a year-over-year basis. I think it was a year-over-year basis. No, month over month basis. Sorry, month over month. Year-over-year is still up. So, yes, there is a problem in the housing market and that is due to the fact that housing prices are too high. Now, a lot of people want to make this all about the rate. You drop that rate enough, housing prices are going to go back up. It's just a matter of what it is. The affordability problem we have, and we've been looking at this for a long time of the differential between renting and buying, it's stark. The cost factors of owning a house are dramatic. And it is not the fault of uh even I don't even think it's the fault necessarily of rates that has made it out of the reach of many people. We're talking about hundreds and hundreds of thousands of dollars 50% or more of your of your income has to go to housing to get your bare bones basic starter house these days. That makes no sense. So don't blame the fact that there's a higher rates of this. Don't blame the fact that there's only a 30-year mortgage out there and you want to try to do a 50-year mortgage and really screw folks that are trying to get ahead in life by locking them into something where they're going to pay an extraordinary amount of interest over their lifetimes and never get from underneath the the the strangle hold that is put upon them by a bank that is giving them a 50-year mortgage. Run the numbers on that. By the way, go and use your Excel spreadsheet, use your favorite AI, and and look at the differential in interest costs between a 30-year mortgage and a 50-year mortgage for, let's say, a 250 or $300,000 house at 5%. The numbers are frightening. So, here's the question. Is the economy strong? And if it is, why are we cutting rates? If inflation is stubborn, why risk a loosening policy? H, right? Fed claims it's all about balance. But the optics right now are suggesting from the way that I see it here, something is deeper. Now, I don't want to go and start saying things like, well, they know something we don't know because I don't think they do. They may know at this exactual this exact juncture. they may know more because we're in the dark on a lot of things like the CPIP PPI that's a little bit uh held up and the unemployment and employment numbers are a little bit held up and a few other major important economic data points are not there because of the government shutdown. But what I think this is really the deeper issue that I think is a problem is a lack of conviction or or even worse a deliberate attempt to manipulate sentiment. Because again investors are left playing this guessing game while policy makers hide behind this vague language and well as they call it data dependency. [laughter] data dependency. I mean, that has got to be the most ridiculous thing since we heard uh you know, inflation transparency. And by the way, uh trans transitionary. Do you know that there was another statement that I read and I and I put this on Twitter, by the way, Andrew Horowitz is my handle on Twitter. Make sure to follow me there. Make sure to go there right now and follow Andrew Horowitz, one word. You'll get all the podcast stuff information um and and uh releases very, very quickly. But here's the thing. They're talking about how the tariff cost factors are going to be uh just a moment in time. They don't want to use the word uh like they did last time. That is transitory, right? This that that we have um the same issue that we had before. So, I don't know what he's trying to do there because he made that big blunder. He's kind of making it again. So, what's with Powell? You know what this feels like to me? This is last his his Powell's last stand. A a calculated move. A calculated move, which what he's trying to do is uh he's trying to shape his legacy. That's what it looks like and feels like. this is only a short time that he has left to do so. I think he he he he really wants all of us and maybe even history to reflect that he was a steady hand that navigated a storm. He's not he's not the chair who let inflation spiral out of control or growth collapse. But as he's trying to in his final days craft this narrative, he may be adding more confusion than clarity. And that that's what it is about this economy right now, right? And you got to wonder if what he's doing is for the econ economy really or or just for the for the history books. just just so that the written word will be that you know here lies Powell, a great leader that navigated us through uh crisis and left the economy better than when he got there. That's what that that's kind of what I see here. But what's going on with the government, with companies, with the Fed, it's not transparency. Let's get back to that for a second. This is controlled chaos. And if confusion, by the way, is the new policy tool, communication tool, and guidance that companies provide, then well, mission accomplished. The question is, how long can they keep the markets and the public dancing to this tune before competence confidence starts to crack? Because we know what happens when these pockets of reach reality. We see it very plainly again this week. is on show and on stage and we're looking behind the curtain when we saw what happened with Oracle's earnings Wednesday night after the close they came out they uh had some numbers that looked okay on some fronts but then the reality was that it's a royal mess over there now we had the stock in full disclosure uh sold it in our last rotation fortunately made some nice money on it but that stock as we have signaled by the way for the last few months has been the absolute poster child of these wild moves in AI related stocks and of the underlying question of how this is all going to work in the future. And this is this is a problem when you start trying to project capital expenditures and income out for many many years and even a decade when you have no reality or knowledge of what is actually happening from the perspective of how much money is going to be generated from an unknown new technology. And that gets us into the confidence discussion that I think we really need to finish up this segment on because there's a large differential, a chasm between consumer sentiment and investor sentiment. It's also showing up in the economy as this K economy where those with money and the halves are doing really well and those with less money are not. One of those things has to move towards the other eventually. We either get consumer sentiment is going to start picking up to reach in investor sentiment or investor sentiment is going to start souring to reach consumer sentiment. It's hard to keep those separate for long. Think about that. And when we think about sentiment, I think we have to talk about the oh my gosh, wow, did we see what silver is doing? And gold. Silver up about 100% this year. Uh on fire, reaching all-time highs. Gold on just incredible. What is it telling us? What is it telling us? Clearly, uh there is some commercial and industrial usage of silver. That's a story that goes back years that we've talked about. That's no question about that. But I think the uncertainty and the course of central banks and the central banks buying and the government's buying and some holidays in there, this is really where the punch for this is, the central banks and the governments. And you have to wonder what they're worried about. why there are are bulking up on this and why individuals are following along aside from just the momentum trade that's happening right now. A short break and then we're gonna get to our guest today. I want to talk about Interactive Brokers because they have competitive advantages, key competitive advantages for sophisticated investors like you. IBKR's margin loan rates are just from 4.37% to 5.37%. In fact, IBKR was rated one of the lowest margin fees by stockbrokers.com. Compare IBKR's clients low margin borrowing costs to other brokers like Schwab and E Trade, Fidelity, and Vanguard who charge hundreds of basis points above IBKR's low rates. The best informed investors, they choose interactive brokers. Please note that margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. Rates are also subject to change. Get started today at ibkr.com/compare member sipc. And our guest today is Ed Easterling. He's the founder and president of Cresmon Holdings, an Oregonbased investment management and research firm that publishes provocative research on financial markets at cresmonress research.com. He has over 30 years of alternative investment experience including financial markets, private equity, and business operations. He's also the author of recently released probable outcomes, secular stock market insights and unexpected returns. Uh in addition, he is a contributing author to just just one thing and co-authored of chapters in bull's eyes investing by John Molden. Pretty good. We've had him on before. He's great. Let's get right to it. Hey Ed, how are you >> doing? Great Andrew. Great to be with you again. So um been a little while since uh we were together last and markets have become have have continued not become continued to be extraordinarily just incredibly resilient in the face of a lot. [laughter] Let's just say that I just did an opening monologue on the podcast uh before you got on talking about how um there's an interesting blend of transparency and obiscation at the same time and how you know we see things, hear things, uh read things, but yet are we quite sure with what's going on and whether or not it is purposeful or it is, you know, in in a plan uh to control things or if it's just a haphazardly chaotic methodology. I don't know. uh not gonna really ask you about that, but that's kind of where we are right now. What I want to start with today and we can get back into that is um I want to talk about Cresmont and what you do. I want I want our listeners, you've been on a few times, a day in the life uh of what you do kind of, you know, not every single thing, but research, news, charts, writing, give me a glimpse into the day in the life of Ed Easterling at Cresmont, what you do. >> Sure. So keep in mind Cresmont's approach to a financial market research analysis and and presentation is that of a climatologist, a market climatologist and not a weather forecaster. So I'm not trying to discern the daily trends etc. So it it is it is always stepping back with that big picture view trying to understand what the next five or 10 years offer. So, we're trying to provide that landscape view for investors to understand the environment that we're in in general, and then they've got to work to navigate the ups and downs. Now, for long-term investors, the short-term ups and downs aren't as big a deal. For short-term traders, knowing the long-term trend can be a big deal just because it's helpful to know the momentum, >> right? Got it. So, you're looking at a variety of different charts, technical indicators, market movement, sentiment, but I guess what you're trying to tell me is that it it is not uh it's not whether it's going to rain in five minutes that concerns you. It's it's it's it's global warming, which may be a bigger issue or not in the vernacular of investing. >> In the vernacular of investing. Exactly. And you know, just for example, just this past week looking into uh you mentioned the market's just roaring ahead. They're talking about new highs. Um the highs in the market, how highs in the market price aren't as relevant as what we're reaching now are highs or near highs in market valuation uh relative to earnings. So looking back to you know Bob Schiller's data going back to 1871 154 years >> we are now at the highest level for the cycllically adjusted PE >> that we've other than two years other than 1999 and 2000 uh in that 154 years this is the highest level of relative valuation for the market that's significant that's significant for investors over the next 5 years and 10 years and 20 >> well I mean one of the things you hear about that when the cape ratio is is those levels that it can't necessarily stay at those levels for a prolonged period of time and you get a reversionary type of trade which is going to bring things down and and that is not one year two-year but you know you look at a 10-year period where it was and and look at the next 10-year period and you know how can it be that we're going to see another well let's just take it five year period how could it be that you know you're going to see a 25% compounded annual growth rate of the of of the tech stocks the NASDAQ and or the S&P 500 at you know 16% um with PE ratios at these levels and how long is it going to be that people will stand for that kind of outlook if in fact if in fact Yeah, we have I think we have to qual quantify qualify this if in fact earnings aren't going to keep up that extraordinary momentum that they had before. >> Exactly. And two and and then we dig deep and that's so you said in the in the life of the analysis at Cresma Research. So key drivers of earnings uh will earnings continue up well let's look at where earnings margins are in relation to where they've been historically and we're at very high levels of profit margin. So again that would suggest that there's some vulnerability to margin decline potentially. Um what's it run in relation to? How about the economy? Is the economy set to surge ahead over the next 5 or 10 years and catch up with market valuation? But again you start looking at some of the macro factors affecting um the economy. uh some of the predictions of the economy even in the short run with all the fiscal stimulus that's been put in place. Um I I I think it's um that's what we're looking at and and again there's no it's it's uh it's it's more propensities than it is necessarily um uh expected outcomes. You know, I find it really kind of fascinating that um that this cape ratio has risen so dramatically and this is a long-term calculation. It's not a short-term like so I'm not saying that the PE ratio is you know 25 times uh 25 times where it was right what we're saying is that there is a um a situation out there that uh is is telling us that something is wrong with the valuations in terms of history on a long-term basis not just a short-term basis. How do we reconcile the two? Absolutely, Andrew. So, the way you reconcile that is uh what Schiller is doing is he's looking back at 10 years worth of earnings because what uh Benjamin Graham noticed over 100 years ago is that earnings go through a cycle. And so it often takes periods of seven years or longer according to Graham. Schiller uses 10. So 10 years worth of earnings inflation adjusted forward so we're not understating it according to inflation. Uh and then use that as a metric. Uh what that does is it it creates a and the reason they call it the cape the cycllically adjusted PE is the cycle the cycle excuse me cycle the cycle that it's adjusting for is the earnings cycle. >> So it's taking those ups and downs and smoothing them out. So that's much more relevant to market valuation, especially long-term valuation, than it would be to look at just any one year, whether if earnings spike or earnings dip that can um uh distort the value of PE on a on a short-term basis. But but Cape does that. Now, Cresmont also has a method. >> Yeah. Now, you have your own, >> right? Right. The crest my PE and and that's built on looking at the long-term relationship historically between gross domestic product and and the uh and earnings and earnings tend to rise and fall in the long term in a in a tight correlation to GDP. >> That would make sense. That would just make sense. >> Well, because essentially GDP represents the the sales of all companies in the economy, right? That's the gross domestic product. is what everybody's making on net. Earnings um we use earnings in the S&P 500 uh is a surrogate for earnings for the economy. But essentially what we're looking at there is earnings in relation to sale. Yeah. >> So it normalizes for margins. It's just a different method. >> The Crestmont PE and the cape have a very tight correlation even though they're different methodologies partially because they're both fundamentally based. Fundamentals as in value versus earnings. It's just both are using different methods to adjust for the cyclicality of of earnings. >> And and it's interesting because you have a raw number like a PE ratio that a lot of times these talking schmucks on TV talk about you know that oh you know the PE of this is 17 on this bank which is cheaper than the 25 on this tech company. I'm like oh my god. You know, it's like, are we really doing this game of of just talking about a one-dimensioned valuation tool that really shouldn't be used the way they're using it? But here's the question. >> Yeah. >> Is the cape at these levels number one at the highest level except for two points in history? And by the way, significantly above its 10-year average because a lot of times the cape ratio is plotted along its 10-year average. And it's way above its 10ear average, which tells you the smoothing average of the smooth index is way out of whack. Is that something that's concerning? And if so, uh, what do you do about it? If not, why? >> Sure. And I would tend to look at this as the cape ratio would be a data point. It's it if it were the only data point out there showing that we had this uh ultra high valuation then we could call that anomaly. Instead it's really a confirmation. It's a confirmation of other me measures of of excess valuation whether it's whether it's uh um uh the u valuation in relation to price in relation to assets >> or assets rather book value whether it's what you know the other different measures of valuation that that um that analysts use. We're finding that all of them right now have very high values. So I think I think there's a recognition the market's high. In my mind, the question is whether it's high in anticipation of things happening or is it high because it's gotten very frothy because we have a very speculative um uh tone in in the markets right now, right? It's not just in equities. >> We're seeing it over in the in the debt markets uh with with >> debt markets. I was just looking at some of the performance of our debt this year. I'm like, what? I mean, I knew the numbers, but I looked again and I'm like, wow, that's unbelievable. That is literally unbelievable. The uh fact that we've earned, you know, 8 and a half% on our debt, for example, for this client uh this year on a on on on the international side, it has been outstanding. But the bigger question is I think when we look at this is that if in fact we have powers uh beings uh institutions that don't care about valuations for example you have an announcement by ex company that they're going to do a six billion 7 billion 10 billion2 billion buyback and the the the reason for that is to buy back shares to help their earnings on an EPS basis, right? And on top of that to hold up the stock because the uh options exercises that are going on by the insiders need uh to have stocks that are you know need to have um buyers of them and and being held up and they don't really care about the timing nor the valuation and because of the share shrinkage because the share shrinkage and the number of compan but there is a a fascinating story story on the amount of actual companies that are in the market. the amount the the amount of actual stocks you can buy has shrunk dramatically over the last 20 years. >> Mhm. >> And and the share count has shrunk dramatically on not in totality because new companies come out, but uh on a company by company basis. I mean, they keep on shrinking it. And that being the case, they're gooseing their EPS. Uh there's another data point for you. Is that something that is uh in your radar? >> Oh, let's see. It um it's certainly something to to consider. I think the goal though is to recognize or the one uh one of the aspects is to recognize that just because we're reducing the available stocks that may reduce the supply available to investors. Um and therefore it may bid up prices out of scarcity. >> Yep. >> But what that doesn't change is the fact that those investments because of their price in relation to their earnings and their growth in earnings are setting up for below average invest below average returns >> or well below average returns. So, I I guess what what um if I'm an investor and I hear gosh markets high valuation, I'm looking for does that necessarily mean that I'm going to have below average returns because historically high values led to below average returns. Below average values led to above average returns because if you pay less for something a stream of earnings, you get a better return than if you pay a whole lot more for it. I just don't know. I just don't know necessarily if >> um with all the confusion, chaos, central bank tinkering, buybacks, sovereign wealth funds, I just don't know if price discovery is even a thing right now. I don't mean to sound all der about it. >> No, no. Oh, I think I think what you're describing when you say price discovery, what I hear there is, is the market functioning normally to recognize that uh that it's buying something in relation to a future return. >> Right. That's that's what I mean. >> Instead, instead it's really buying it more in relation to momentum or scarcity. I mean, I we've we've seen um but those but but that then misalign a fundamental relationship, the relationship of the return for investors coming out of a company, the fundamental return of the earnings in relation to the price they're paying. >> Right? It's distorted by the fact that their current price of their investment is going up despite the fact that it's getting well beyond the reach of those earnings, >> right? >> But but interestingly, we're seeing the same thing happening in the housing market today. >> Well, house prices ridiculous. I was just talking about that before. House prices are it's not, you know, this whole notion or it's misguided notion that housing that people are are are not able to buy houses because interest rates are too high. No. Hello. They can't buy houses because prices are absurd. >> And and people as well and as it drives down into payment, right? Because at the end of the day, people don't buy homes on price. They buy it on payment. And what happened four or five years ago when mortgage rates went down to 3%. The the the value of the house that they could afford to pay to still keep a pay a low payment was very high. And it boosted prices up significantly. >> Right. >> Okay. And and by the way, we talked about the fact how prices are going up because mortgage rates had gone in half from over 6% to less less than 3%. >> And that's a natural re you know action reaction. That's like uh that that's that's physics of finance. >> No, but the what what changed though was suddenly in the last few years mortgage rates have gone from that below three to now 6 and a half. We should have found that physics would would have tempered if not caused those prices to return back to levels that were normalized with that level of payment. >> Yes. >> But it hasn't happened. Matter of fact, I think I I saw a report out that the one of the first reports came out that housing prices may have declined by one and a half or 2% last year. >> Right >> now that which that doesn't that doesn't realign to payments at all. that that that that does not matter in fact most of the charts are showing right now housing price to income. But what housing price to income doesn't show is the the housing price to payment or the or the payment to income you might say. >> Yeah. Or or the the the um the the affordability of housing. And now I have a chart the National Association of Realtors put this out um and and we did some calculation on that as well. about this. You could look at what the housing afford the the housing affordability index is and when it's better uh when it's above or below this particular line. It's it's either better to buy or rent and it's still better to rent, >> right? >> And that's been like that for for a few years now because of the income stream that that takes in consideration all the things you're talking about here, >> right? So I think the key message here that we're hitting on, we started talking about market valuation, stock market valuation. Now we're talking about the real president residential real estate market valuation that we look at we look at the debt markets and look at the misalignments that are occurring there. Um so I think sort of the message is we've got this this basket of misalignments uh that are all val fundamental valuation based and and so therefore and therefore it feels frothy. It feels like there is a a uh uh an optimism that's that's actually different than it was in 99. Let me just mention because in 99 there was an expectation that the that the technology surge at the time would cause GDP to upsurge to 4%. Greenspan wrote about that at the time. >> So his contemporaneous view at the time was that that would cause economic growth therefore earnings growth etc for a decade or longer according to Greenspan go up to 4% real growth. So that was justification for it. I'm not seeing the same thing here today. Even AI, the Fed's saying it might add maybe a point a year over the next decade. Not not even that, maybe a half a point over the next decade. >> I mean, there's some definite productivity issues. I mean, I feel it. Um, for and I'm just a small little, you know, nothing when it comes to what the real use factor and real use case is for AI. >> Um, even even if you stop, >> even if right now is the top tier is the ultimate of what AI is ever going to get to right right here. I find a lot of really good use for it. And in fact, uh, just the other day, I was doing an Excel spreadsheet and there was some complexity to it that I needed to do a comparison between a few different columns that were u dependent on the other column. You follow what I'm saying? And I'm like, oh, these V lookups, I could do this. I don't want to do this. Let me hand it off to someone in the office. I said, you know, hey, I got an idea. Let me just prompt co-pilot in Excel. by golly took me about three different prompts because I had to get right what I was saying and it gave me the full thing and created the spreadsheet with the information I needed. >> Uh that that's pretty cool. >> Yes. >> So um but let's also agree or maybe not you can disagree if you want but I'm thinking you can agree is that uh well go back to um Greenspan. you know, you have irrational exuberance and you have the old phrase that markets can stay um you know, irrational longer than you can stay solvent um if you're going against it. But there is the there there's there's there's a lot of ways this can come out and and part of it is, you know, markets can stay at this level and earnings can grow into it. uh economies can continue to push forward and it could be various uh factors like lower taxes for example is one of the reasons why margins are so good over the last 5 years or so. We know that the lower tax rate on on on companies. Um but it it can it can stay here for a while and doesn't necessarily have to end in in like a lot of these doomsayers in a crash. It could just be or or massive correction. It could just be just a slowdown for a little while. a little bit of a of a layoff for a period of time. It doesn't and maybe not 20% growth a year like someone who just entered the market thinks it has been over the last 3 years but maybe 5% 6%. And certainly over the very short run over you know a handful of years or so. Uh what happens ultimately though is if those margins are excessively wide, therefore the return on capital is excessively high, it will bring new entrance into the market, >> right? >> Or the existing entrance will use that as an opportunity to build market share. It's the it's the age-old business cycle that's gone back since business and those competitive forces will will normalize those margins over time. In the short run, they can certainly be windful profit, but in the long run, financial economics will drive those things back in line. And and that again is what But again, this is not a new phenomenon. We look back over the last 150 years in the stock market and in the economy, we've seen the same thing happen over and over and over. >> Yep. But let's switch over because you mentioned GDP and you mentioned your particular gauge and you you know the way of using GDP and the cle the Cleveland Fed's inflation uh now casting forecast >> in December is looking at CPI to increase by you know 3%. Right. Um and we don't exactly know because we don't have the data because the government was close. We're not exactly sure. PCE came in they say at the lower than expected but it was I mean look 3% is 3% okay higher than the 2% by the way just for those that want to keep score at home 50% higher 50% higher than where they want it to be >> and and they feel they could bring it down quickly which they have not been able to and mark my words lowering interest rates is not going to help that cause but um is inflation stabilizing in your opinion or even beginning to decline or where we going here? >> Well, I think uh so the two messages there. The first is uh the the the um the Cleveland Fed does estimate 3% for November's report which comes out in December, next week. Um there they did not have the Fed the Bureau of Labor Statistics did not produce uh a uh a bottoms up number Yeah. for October, >> right? They did do an extrapolated number because they needed a number to be able to use for for uh for tips, securities, etc. And and the number they extrapolated was 3%. >> Or or extrapolated equals guest. Go ahead. Continue. >> Exactly. Just a [laughter] mathematical exactly. Um so this this number we're going to come out with is going to capture two months worth of underlying market information. Now, all that being said, I would anticipate that we're seeing a moderation of inflation uh beginning to occur, but because last November, November, a year ago's report, inflation report for the one month of November was uh was negative just for that month. And that month is falling out of the averages. So if we come in with even a zero level of inflation for the month of November, we will still see an increase in the in the in the reported >> on year over year on the year over year. Yeah. >> Um and I got to tell you, so I'm going to take the over on the Cleveland Fed's estimate uh because of that. Now I Cleveland Fed has been remarkably their their now casting number has been remarkably accurate monthtomonth. So I I would uh I would uh I would give a lot of weight to that. At the same time, we have some underlying seasonal factors that would suggest that we could see a number well, when I say well over 32, 33 between now and and December's report. So, November's report will probably be up a little bit. December's report will probably be up a little bit, but then the fun happens because the first quarter of 25 had some really, really high monthly inflation reports. So, as those roll off into the early 26, expect that CPI is headed back down. probably we may we may recover half the ground between three and and two. I wouldn't be surprised if we saw 25 on inflation before summer. >> But that's because of a >> technical statistical >> technical mathematical calculation base. The fact of the matter is it's still 2.5%. It still means that if you look at a chart of prices they will be the highest ever at that point. >> Right? So why is also important? Number one, it probably explains why the Fed uh found the liberty to do one more cut >> this past week, right? Going down a quarter because they said, you know what, we may get a little heat here in the next month or two because inflation's ticking up, but you know what? They're going to look back and see that we were wise and for saw the decline in inflation. The second is they're also seeing a potential softness in the job market. You know, Pal's that was to me the big report yesterday, the whole headline is about this quarter of a point. I agree >> this past week. But I think the real story under that he thinks that they may be overstating jobs, 60,000 jobs a month and and that number doesn't come out. You mentioned, you know, obscure obscurity and transparency. Uh they're not going to they're not going to revise the numbers until February. So we're going to finally find out in February whether we've been overstating jobs by hundreds of thousands cumulatively. I mean, we saw that one report that showed, I think it was ADP, that showed, was it 120,000 jobs lost in the small businesses in the last month, >> right? >> That was substantial. And it's funny because you don't see it in the economy. You don't see it in the stock market. You don't see it in most metrics any I mean I mean look around, it's not there, but it's pockets of little things here and there that are adding up to a bigger picture. you see some layoffs from companies and AI is is the excuse they're using. Um, but the economy itself, you know, it's very hard to to to to put together the idea that something is a problem when you have a Fed that's even talking about 2.9 to 3% GDP number, right? >> Uh, unemployment at 4.4% round number and uh, it's nothing's falling off a cliff. May maybe it's a slow motion uh but it doesn't look horrible as of yet >> and that so the chances of the rec you know that right now the the uh poly betting market's view of recession in 26 is now dropped below 30%. So uh and that's probably even only that high because of the exogenous risk that there's >> all this that government shutdown took away a lot of good data. Fed is going to be doing some revisions to this uh uh payroll number that won't a jobs number but that won't happen till February. this inflation numbers, the reports that come out each month, the 12 month report that comes out every month um is uh is showing some statistical anomalies that will look a much different picture in four months than it does today. Matter of fact, you mentioned that only takes us two and a half and that's part of the reason that uh the St. Louis Fed publishes two numbers that uh we watch closely. One is the three-year expected inflation rate and they're saying that that number right now is 2.4%. So, even if we get down to 25, it sort of says we're going to stay up in the mid twos for the next three years on average. Um, even more discouraging though is the 5year 5year forward, which is the average for the five years that starts in five years, right? So, that's the back half of the next 10 years. And even that's only 2.2. They're still not getting us back to the 2% target. >> Yeah. >> Even though they say they will because they have to maintain that >> status of that we'll get there. Right. And the big tieback end of all of this to the first part of our conversation is that the PE ratio has typically had a strong relationship to the inflation rate. As inflation goes higher, that causes bond yields to go higher. That causes PE ratios to go lower. So higher inflation is bad for valuation. Lower stable inflation is good for that's when we get our best >> pees. Mhm. >> So the fact that we're staying elevated, I mean, it's not like it's not like the markets anticipated we're headed back to one and a half, which is where we were just, you know, 5 years ago, 7 years ago. >> But again, but again, you're still still with that. It's a good environment. Everything's good right now. You know, if the economy is not good, they're lowering interest rates. That's good for the stock market. If GDP comes at a good number, that's good for the stock market. If unemployment comes in at 4.5%, that's good. If it comes in at 3.9, that's good. Everybody is looking at everything being good. And and the fact is there's a couple of small pockets of issues that are going on, you know, but everybody's trying to see the future. One of the reasons has been at least I'm thinking that there's a again back to this whole controlled chaos and this this this artificiality of this transparency which is really um saying projections that are not actually happening but nobody checking on it. for example, you know, we know things like, you know, we hear these great piece of information of things that are going to be happening, but we never, you know, oh, Nvidia chips being sold to China, but then China's like, "No, we're not doing that. We're not buying that." Um, you know, we hear things like, uh, Sam Oldman, um, Oracle, uh, these players have been boosting and touting, they know there's no there's no ramifications of this. It used to be that look, I'm not going to How am I going to give you a two-year u outlook? Most companies can't give an outlook past a quarter. That's the only visibility they have. Maybe six months, maybe. Maybe if they are established. Meanwhile, Sam Oldman is saying he's going to spend a trillion and a half dollars over the next 10 years doing XYZ. It's like, wait, dude, you haven't even made any profit yet. You're you how are you going to get all this money? But nobody's nobody was looking at that. And I think that's continues to be what the investors are. There's a gigantic here's a point. There's a gigantic carrot that just will not go away because I think investors are resigned to the fact and and and this is good actually that we're not looking this this is actually not bad. We're not looking at today or tomorrow. We're looking 5 years from now, 10 years from now. Does it really matter if there's a little bit of a correction and overvaluation and a little bit of bubbly right now? I get in now. If it's going to be higher later, what's the difference? I'll get a couple extra points. Maybe that's nice, but it doesn't really matter. >> Well, we could replay that scenario by think about asking ourselves the same thing in the late 90s. >> But it took 10 years to get it all back, but you got it back and a lot more. >> Uh, >> well, not all of it. I'm talking about index wise >> with the with the with the subsequent 10 or 15 years providing a mid single digits return. >> I get it. I get it. >> Well, so you're right. Let's see. I I guess um and people often say if you the nice thing about stocks if you stay invested long enough you you know you'll make money. Um but you may not make as much money as you can make in alternatives alternative investments like uh bonds or otherwise real estate a variety of investments that people use. Um the the second is that timing is important too because for a lot of investors those going into retirement or those that are in retirement having a that 15-year dir before you recover while you're taking capital out >> can have a significant impact on on on their their ultimate uh success investment success. >> You you brought up just now alternative investments. There's a lot of different definitions to that, but private equity, private credit, clearly we define as alternatives, right? >> Yeah. And and what I was and when I threw out alternatives, I realized at that moment that I didn't want to imply the capital A alternatives. I was really thinking about alternatives like bonds, >> alternatives to stocks. Alternatives to >> alternatives to stocks. Exactly. But but you're right, there there is a there's a a broad marketplace out there of of alternative investments um that are that are packaged and available to a broad base of investors. What what is your what is your thinking or research or at least your insight into what's going on right now with uh some of the private credit private equity put aside this there's some issues there that I'm I'm hearing bubbling up to buying things at valuations that are dumb and uh some people trying to cash out not getting out you know some of the players trying to do the round trip what private equity usually does but private credit it seems to me that there is an an insatiable appetite for debt which I don't know where it exactly comes from, but it's from a lot of places. Uh, private credit has had his little issues lately with Yield Street, with Blue Owl, a few others out there. Um, and we're starting to see little I don't know if it's canaries in the coal mine or if it's just aberrations of bad firms doing uh poor deals. Any insights into that at all? >> Yeah. Well, let's see. Just only insight from just from a macro standpoint. uh you know all the signs are there that uh that there's a lot of vulnerability in that market uh that you know it's it's it's not often that until the tide goes out that you see who's um whose boat's floating and I I think what we've not seen as a correction in that marketplace for quite a while. So again, I don't have direct insight into specific subsectors or the or issues other than to say that uh when we look at the macro factors, that's that's another area that's showing uh frothy valuations or or or low uh margins that aren't necessarily protective of the risk. Hm. So, if we back off of this and look back at this conversation and if you reflect and you had to tell me um I know you're not short-term minded, but I get that. But if you had to tell me your best guess as to the next, let's give it 135 135 years in the future based on all this right about your various the macro environment, the valuations, the various indicators, things you know, things you see. I mean, is there anything that is flashing a red light that's like, you know, oh, this is a problem or that you've seen before that you'll act on or is this more of your run-of-the-mill frothiness and how does the outlook look over the next few years? >> Sure. So, as the climatologist, I will answer your question about one, three, and about about 1, three, and five. Let's go to the back one year for the one-year view. Let me just flip it. Okay, it said heads. I'm going to go with the markets >> [laughter] >> uh down uh let's see, three years. flipped it again. Okay, that says it's up. Uh now fiveyear, when we start getting to five years or 10 years, I predict that we're going to that investors will have well below average returns. Uh that there will be a single digit mid- single digits or below uh on a cumulative basis over that period. That this level of valuation uh and I think it's a much more likely case over the next 10 than the next five. Uh just because the momentum is so strong, we could end up seeing a few years here of continue. This could I'm not sure right now if we're at 96 or we're at 99. >> Yeah, that makes sense. >> You know, the year 96 and 99. >> Oh, I get that. Yeah. Yeah. >> But but at the same time, I I think we're definitely quote unquote in the late 90s again and that if we look out over no matter where you were in the late 90s, if you look then to the late 2000s, that cumulative return was consistently mid- single digits or below. and and for some sectors if you were in the more aggressive and that's that's the one challenge and I know you you probably talk a lot on uh uh to uh market analysts about this that we have an S&P 500 that's really a small group of high tech high valuation stocks and a broad market that's that's kind of a separate set of that and those are kind of combined together. This is kind of an unusual level of of the lack of diversification in that index right? >> Yeah. 38% of the index I think is the top 10, >> right? >> That's right. That's that that is anybody who's anybody will tell you that is not diversified and and and that's that that is the potential. But at the same time >> because of the way the mechanics of the market, right, and because of all those companies are the big buyback kings and because those are the players that everybody wants to be with with a big cash cow, etc. Um, you know, right now listen, would it take a lot to topple them? uh yes and no but you know because there's so much money flowing into the passive investments right now the bigger are just getting bigger much bigger >> right helps the index >> so so this is an environment so so again I think the forecast look we look back I think we're going to say yes valuations have gotten high there was you know we definitely needed a correction a correction has helped to put us back on better on more solid footing uh and we'll probably look at uh uh some small but significant economic challenges over the next decade Good stuff. Ed, Ed, Ed, Ed. Um, tell us where people can get information on Cresmont Holdings. >> Uh, Cresmont Research. So, it's cresantress research.com. If you uh online, it's Crestmont. C R S T O N T research.com. Uh, it's an open access website with uh uh articles uh charts, graphs, and other information that are available to investors to use as a as a as a tool, as a resource uh to help in their investment needs. If that particularly perks your interest, uh there are a couple of books out there, Unexpected Returns and Probable Outcomes, that go into more detail about this and uh uh I welcome uh uh uh reader comments on any and all those materials. >> Great stuff. Great stuff. Listen, you have a happy and healthy holiday, a great new year, best to you and yours, your family, and uh all things that are uh wonderful should be uh coming your way. >> And and back to you, Andrew. Uh all the best. Uh, and I'll see you in the new year. >> All right. Thanks. See you. You bet. >> That's going to wrap it up for this episode of the disciplined investor podcast. Thanks for joining me this week and uh we have some great things happening. We have Harry Dent coming up, Todd Tre Treader uh in the next week or so and uh next couple weeks actually coming up. So, we're pretty excited about that. We're going to end the year with Jack Schwagger. We have a great interview, I'm sure, going to happen with him talking about the greatest of the great investors of this age. So, don't miss that. Make sure to be there. Thanks for joining me and I'll see you again real soon. This podcast is [music] intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits & Company Inc., an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horo is a company is properly registered or is excluded from registration requirements. Any mention of thirdparty companies, products, or services is provided forformational purposes only and does not constitute an endorsement. Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for US residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial adviser before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form [music] CS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or any affiliates of Horowitz Company. [music]
TDI Podcast: The Physics of Finance (#951)
Summary
Transcript
This episode is brought to you by Interactive Brokers. So, are you ready to take control of your financial future? Meet portfolio analysts from Interactive Brokers, the free all-in-one dashboard that lets you consolidate, track, and analyze all your financial accounts in one place. You don't need an IBKR account to use it. Just connect your accounts and see your complete financial picture, your investments, performance, and allocation in one single screen. Plan smarter with IBKR's new tax and retirement planners built around your goals and market assumptions. Get deep portfolio insights with detailed risk assessments and compare performance against more than 300 benchmarks. Plus, manage with confidence thanks to GIP's verified returns. Ready to get started? Sign up for portfolio analyst free for everyone at ibkr.com/freepa. Interactive Brokers, the best informed investors. Choose IBKR, member SIPC. [music] The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of the Disciplined Investor podcast. [music] This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, [music] cultivating financial success, [music] the Fed cuts and keeps the markets guessing. Silver hits a record, up more than 100% this year. Looking at frameworks and fake transparency. And our guest today is Ed Easterling, founder and president of Cresmont Holdings. All this and much more on episode number 951 of the Disciplined Investor podcast. [music] [music] Well, there goes the Fed again. And markets were pretty happy about [music] the lack of hawkish tilt. That was the expectation going into this. In fact, we looked at all the things that were said and tried to round it all up and looked at all the various news outlets and analysts and researchers and everybody concurs that this was a much more dovish tilt due to the fact that not only are they bringing forward their quantitative easing, which they they swear it's not quantitative easing, pal said, "No, no, no, it's not quantitative easing, but it is quantitative easing when you're buying bonds and uh using well just just cash off of a Excel spreadsheet, not anywhere really to be found to buy those bonds. And that's what's happening. On top of that, there was a discussion about what was going to happen in the future. All this going into play, pretty interesting. So, there we have that. Hey, uh, by the way, if you don't know me, I'm Andrew Horowitz and, uh, we are barreling into the end of 2025. And, uh, yeah, Marcus, we're a bit worried about this potential for a really hawkish Fed, but if you really think about it, we we also thought there was going to be a bit of hawkishness, meaning that Powell would say that they're worried about inflation or something like that, but he didn't. He talked about inflation saying that it was there, it was sticky, you know, kind of went around the corners of it, but was much more focused on the fact that they're seeing weakness in the employment situation. Even though they don't have the reports that are as current as could be because of the government shutdown, we have a lot of well, there's a bit of a a black hole when it comes to economic indicators right now. But again, markets were not unpleased. In fact, we saw the Dow Jones Industrial Average move dramatically after that through the through the week and uh through the end of the week and that was pretty good overall. Then we hear about this great deal with China and they're going to be able to get Nvidia chips, a a certain chips set that is older, not as advanced as the latest Blackwell. And that was pretty exciting, but still pretty exciting for a moment. And I bring this up for a very specific purpose because I think now towards the end of the year where we have a lot of things that are going on and and and we want to get to the bottom of the the discussion to find the truth from the fluff. And this is exactly what's going on right now. The reason that we're not getting too excited about any deals, any frameworks, or maybe even announcements, because they are filled with holes despite President Trump's authorization of the sale of the Nvidia H200 chips to China, we find out that China refuses to accept them and is increasingly putting restrictions on their use. That was a story right out of the Financial Times. No, no, no, no, no. Well, that's not true. Everybody's saying that's not true and that, you know, everybody's excited about this. The fact is that the administration's idea of transparency government these days in total, in fact, it's even leaked into the financial markets and corporate America. This idea of transparency, it looks a lot much more like theater than it does substance. Because what's happening is we're seeing this rush, this incredible need to trumpet this good news, but with limited detail on any of it. That's where the word framework comes into play. Got a framework. What is a framework? There's no detail. It's a it's a theoretical handshake and maybe a wink on what could be maybe I don't know. We'll see what happens kind of thing. This is all optics. It's headlines without the meat. That's really what it is. And this vacuum of clarity, it breeds incredible amounts of confusion. And maybe maybe as we've been talking about for some time. That's exactly the point. Keep the public guessing. Keep me guessing. I'm not exactly sure if I should believe this or that. Let's keep this whole narrative going and very fluid and we can maintain this control through ambiguity, confusion, uh lack of anybody's ability to really pin down. It's kind of like trying to Have you ever tried to squeeze a watermelon that is all vaselined up? And crazy enough of I have. We have sometimes, you know, when you're young, you have pool games. get in the pool in the summertime. You you grease up a a a watermelon and you put it one end of the pool and everybody's got to try to grab it and bring it to the other end of the pool. Two different teams. What happens? It you can't hold on to it for long. It just it gets loose. That is what we're seeing now. This ambiguity and the ability to bob and weave and today's Fed move or this week's actually this what was it was on Wednesday. The meeting was Tuesday, Wednesday. So a couple days back this modest 0.25% rate cut only amplifies the uncertainty as I see it because markets were whipsawed. Traders tried to decide, okay, is this is this good news? How do I how do I decode what he's saying here? Nothing different, by the way, than any other time. And I and I got to congratulate Scott Besson, the Treasury Secretary, for bringing up the subject of having the Fed step back a little, of having the Fed less stage center and maybe back left for a while because what they're doing is creating more problems than they are solving. And the markets are trying to understand is this the start of a cutting cycle? Is this just an appeasement? because the expectations from various betting predictive and Fed funds markets were all about 90% sure that he was going to or that the Fed was going to cut was just a way just to calm the nerves from that because these contradictions of what we're seeing are glaring. Think about it for a second. Just think about the fact that we have GDP expectations that were increased. The Fed just did it in their in their meeting. They said that GDP was going to be higher than expected. Inflation's still sticky. And yet the Fed in their wisdom decides, well, we are not loose enough. Not only are we going to stop the quantitative tightening program and and reissue and and pull it up further about four months faster than we anticipated, but we're going to reduce rates even further. the Fed's signaling their concern about growth of employment as the number one issue. And yes, we did see also this week, the first time in I think two years, a negative print on housing prices on a year-over-year basis. I think it was a year-over-year basis. No, month over month basis. Sorry, month over month. Year-over-year is still up. So, yes, there is a problem in the housing market and that is due to the fact that housing prices are too high. Now, a lot of people want to make this all about the rate. You drop that rate enough, housing prices are going to go back up. It's just a matter of what it is. The affordability problem we have, and we've been looking at this for a long time of the differential between renting and buying, it's stark. The cost factors of owning a house are dramatic. And it is not the fault of uh even I don't even think it's the fault necessarily of rates that has made it out of the reach of many people. We're talking about hundreds and hundreds of thousands of dollars 50% or more of your of your income has to go to housing to get your bare bones basic starter house these days. That makes no sense. So don't blame the fact that there's a higher rates of this. Don't blame the fact that there's only a 30-year mortgage out there and you want to try to do a 50-year mortgage and really screw folks that are trying to get ahead in life by locking them into something where they're going to pay an extraordinary amount of interest over their lifetimes and never get from underneath the the the strangle hold that is put upon them by a bank that is giving them a 50-year mortgage. Run the numbers on that. By the way, go and use your Excel spreadsheet, use your favorite AI, and and look at the differential in interest costs between a 30-year mortgage and a 50-year mortgage for, let's say, a 250 or $300,000 house at 5%. The numbers are frightening. So, here's the question. Is the economy strong? And if it is, why are we cutting rates? If inflation is stubborn, why risk a loosening policy? H, right? Fed claims it's all about balance. But the optics right now are suggesting from the way that I see it here, something is deeper. Now, I don't want to go and start saying things like, well, they know something we don't know because I don't think they do. They may know at this exactual this exact juncture. they may know more because we're in the dark on a lot of things like the CPIP PPI that's a little bit uh held up and the unemployment and employment numbers are a little bit held up and a few other major important economic data points are not there because of the government shutdown. But what I think this is really the deeper issue that I think is a problem is a lack of conviction or or even worse a deliberate attempt to manipulate sentiment. Because again investors are left playing this guessing game while policy makers hide behind this vague language and well as they call it data dependency. [laughter] data dependency. I mean, that has got to be the most ridiculous thing since we heard uh you know, inflation transparency. And by the way, uh trans transitionary. Do you know that there was another statement that I read and I and I put this on Twitter, by the way, Andrew Horowitz is my handle on Twitter. Make sure to follow me there. Make sure to go there right now and follow Andrew Horowitz, one word. You'll get all the podcast stuff information um and and uh releases very, very quickly. But here's the thing. They're talking about how the tariff cost factors are going to be uh just a moment in time. They don't want to use the word uh like they did last time. That is transitory, right? This that that we have um the same issue that we had before. So, I don't know what he's trying to do there because he made that big blunder. He's kind of making it again. So, what's with Powell? You know what this feels like to me? This is last his his Powell's last stand. A a calculated move. A calculated move, which what he's trying to do is uh he's trying to shape his legacy. That's what it looks like and feels like. this is only a short time that he has left to do so. I think he he he he really wants all of us and maybe even history to reflect that he was a steady hand that navigated a storm. He's not he's not the chair who let inflation spiral out of control or growth collapse. But as he's trying to in his final days craft this narrative, he may be adding more confusion than clarity. And that that's what it is about this economy right now, right? And you got to wonder if what he's doing is for the econ economy really or or just for the for the history books. just just so that the written word will be that you know here lies Powell, a great leader that navigated us through uh crisis and left the economy better than when he got there. That's what that that's kind of what I see here. But what's going on with the government, with companies, with the Fed, it's not transparency. Let's get back to that for a second. This is controlled chaos. And if confusion, by the way, is the new policy tool, communication tool, and guidance that companies provide, then well, mission accomplished. The question is, how long can they keep the markets and the public dancing to this tune before competence confidence starts to crack? Because we know what happens when these pockets of reach reality. We see it very plainly again this week. is on show and on stage and we're looking behind the curtain when we saw what happened with Oracle's earnings Wednesday night after the close they came out they uh had some numbers that looked okay on some fronts but then the reality was that it's a royal mess over there now we had the stock in full disclosure uh sold it in our last rotation fortunately made some nice money on it but that stock as we have signaled by the way for the last few months has been the absolute poster child of these wild moves in AI related stocks and of the underlying question of how this is all going to work in the future. And this is this is a problem when you start trying to project capital expenditures and income out for many many years and even a decade when you have no reality or knowledge of what is actually happening from the perspective of how much money is going to be generated from an unknown new technology. And that gets us into the confidence discussion that I think we really need to finish up this segment on because there's a large differential, a chasm between consumer sentiment and investor sentiment. It's also showing up in the economy as this K economy where those with money and the halves are doing really well and those with less money are not. One of those things has to move towards the other eventually. We either get consumer sentiment is going to start picking up to reach in investor sentiment or investor sentiment is going to start souring to reach consumer sentiment. It's hard to keep those separate for long. Think about that. And when we think about sentiment, I think we have to talk about the oh my gosh, wow, did we see what silver is doing? And gold. Silver up about 100% this year. Uh on fire, reaching all-time highs. Gold on just incredible. What is it telling us? What is it telling us? Clearly, uh there is some commercial and industrial usage of silver. That's a story that goes back years that we've talked about. That's no question about that. But I think the uncertainty and the course of central banks and the central banks buying and the government's buying and some holidays in there, this is really where the punch for this is, the central banks and the governments. And you have to wonder what they're worried about. why there are are bulking up on this and why individuals are following along aside from just the momentum trade that's happening right now. A short break and then we're gonna get to our guest today. I want to talk about Interactive Brokers because they have competitive advantages, key competitive advantages for sophisticated investors like you. IBKR's margin loan rates are just from 4.37% to 5.37%. In fact, IBKR was rated one of the lowest margin fees by stockbrokers.com. Compare IBKR's clients low margin borrowing costs to other brokers like Schwab and E Trade, Fidelity, and Vanguard who charge hundreds of basis points above IBKR's low rates. The best informed investors, they choose interactive brokers. Please note that margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. Rates are also subject to change. Get started today at ibkr.com/compare member sipc. And our guest today is Ed Easterling. He's the founder and president of Cresmon Holdings, an Oregonbased investment management and research firm that publishes provocative research on financial markets at cresmonress research.com. He has over 30 years of alternative investment experience including financial markets, private equity, and business operations. He's also the author of recently released probable outcomes, secular stock market insights and unexpected returns. Uh in addition, he is a contributing author to just just one thing and co-authored of chapters in bull's eyes investing by John Molden. Pretty good. We've had him on before. He's great. Let's get right to it. Hey Ed, how are you >> doing? Great Andrew. Great to be with you again. So um been a little while since uh we were together last and markets have become have have continued not become continued to be extraordinarily just incredibly resilient in the face of a lot. [laughter] Let's just say that I just did an opening monologue on the podcast uh before you got on talking about how um there's an interesting blend of transparency and obiscation at the same time and how you know we see things, hear things, uh read things, but yet are we quite sure with what's going on and whether or not it is purposeful or it is, you know, in in a plan uh to control things or if it's just a haphazardly chaotic methodology. I don't know. uh not gonna really ask you about that, but that's kind of where we are right now. What I want to start with today and we can get back into that is um I want to talk about Cresmont and what you do. I want I want our listeners, you've been on a few times, a day in the life uh of what you do kind of, you know, not every single thing, but research, news, charts, writing, give me a glimpse into the day in the life of Ed Easterling at Cresmont, what you do. >> Sure. So keep in mind Cresmont's approach to a financial market research analysis and and presentation is that of a climatologist, a market climatologist and not a weather forecaster. So I'm not trying to discern the daily trends etc. So it it is it is always stepping back with that big picture view trying to understand what the next five or 10 years offer. So, we're trying to provide that landscape view for investors to understand the environment that we're in in general, and then they've got to work to navigate the ups and downs. Now, for long-term investors, the short-term ups and downs aren't as big a deal. For short-term traders, knowing the long-term trend can be a big deal just because it's helpful to know the momentum, >> right? Got it. So, you're looking at a variety of different charts, technical indicators, market movement, sentiment, but I guess what you're trying to tell me is that it it is not uh it's not whether it's going to rain in five minutes that concerns you. It's it's it's it's global warming, which may be a bigger issue or not in the vernacular of investing. >> In the vernacular of investing. Exactly. And you know, just for example, just this past week looking into uh you mentioned the market's just roaring ahead. They're talking about new highs. Um the highs in the market, how highs in the market price aren't as relevant as what we're reaching now are highs or near highs in market valuation uh relative to earnings. So looking back to you know Bob Schiller's data going back to 1871 154 years >> we are now at the highest level for the cycllically adjusted PE >> that we've other than two years other than 1999 and 2000 uh in that 154 years this is the highest level of relative valuation for the market that's significant that's significant for investors over the next 5 years and 10 years and 20 >> well I mean one of the things you hear about that when the cape ratio is is those levels that it can't necessarily stay at those levels for a prolonged period of time and you get a reversionary type of trade which is going to bring things down and and that is not one year two-year but you know you look at a 10-year period where it was and and look at the next 10-year period and you know how can it be that we're going to see another well let's just take it five year period how could it be that you know you're going to see a 25% compounded annual growth rate of the of of the tech stocks the NASDAQ and or the S&P 500 at you know 16% um with PE ratios at these levels and how long is it going to be that people will stand for that kind of outlook if in fact if in fact Yeah, we have I think we have to qual quantify qualify this if in fact earnings aren't going to keep up that extraordinary momentum that they had before. >> Exactly. And two and and then we dig deep and that's so you said in the in the life of the analysis at Cresma Research. So key drivers of earnings uh will earnings continue up well let's look at where earnings margins are in relation to where they've been historically and we're at very high levels of profit margin. So again that would suggest that there's some vulnerability to margin decline potentially. Um what's it run in relation to? How about the economy? Is the economy set to surge ahead over the next 5 or 10 years and catch up with market valuation? But again you start looking at some of the macro factors affecting um the economy. uh some of the predictions of the economy even in the short run with all the fiscal stimulus that's been put in place. Um I I I think it's um that's what we're looking at and and again there's no it's it's uh it's it's more propensities than it is necessarily um uh expected outcomes. You know, I find it really kind of fascinating that um that this cape ratio has risen so dramatically and this is a long-term calculation. It's not a short-term like so I'm not saying that the PE ratio is you know 25 times uh 25 times where it was right what we're saying is that there is a um a situation out there that uh is is telling us that something is wrong with the valuations in terms of history on a long-term basis not just a short-term basis. How do we reconcile the two? Absolutely, Andrew. So, the way you reconcile that is uh what Schiller is doing is he's looking back at 10 years worth of earnings because what uh Benjamin Graham noticed over 100 years ago is that earnings go through a cycle. And so it often takes periods of seven years or longer according to Graham. Schiller uses 10. So 10 years worth of earnings inflation adjusted forward so we're not understating it according to inflation. Uh and then use that as a metric. Uh what that does is it it creates a and the reason they call it the cape the cycllically adjusted PE is the cycle the cycle excuse me cycle the cycle that it's adjusting for is the earnings cycle. >> So it's taking those ups and downs and smoothing them out. So that's much more relevant to market valuation, especially long-term valuation, than it would be to look at just any one year, whether if earnings spike or earnings dip that can um uh distort the value of PE on a on a short-term basis. But but Cape does that. Now, Cresmont also has a method. >> Yeah. Now, you have your own, >> right? Right. The crest my PE and and that's built on looking at the long-term relationship historically between gross domestic product and and the uh and earnings and earnings tend to rise and fall in the long term in a in a tight correlation to GDP. >> That would make sense. That would just make sense. >> Well, because essentially GDP represents the the sales of all companies in the economy, right? That's the gross domestic product. is what everybody's making on net. Earnings um we use earnings in the S&P 500 uh is a surrogate for earnings for the economy. But essentially what we're looking at there is earnings in relation to sale. Yeah. >> So it normalizes for margins. It's just a different method. >> The Crestmont PE and the cape have a very tight correlation even though they're different methodologies partially because they're both fundamentally based. Fundamentals as in value versus earnings. It's just both are using different methods to adjust for the cyclicality of of earnings. >> And and it's interesting because you have a raw number like a PE ratio that a lot of times these talking schmucks on TV talk about you know that oh you know the PE of this is 17 on this bank which is cheaper than the 25 on this tech company. I'm like oh my god. You know, it's like, are we really doing this game of of just talking about a one-dimensioned valuation tool that really shouldn't be used the way they're using it? But here's the question. >> Yeah. >> Is the cape at these levels number one at the highest level except for two points in history? And by the way, significantly above its 10-year average because a lot of times the cape ratio is plotted along its 10-year average. And it's way above its 10ear average, which tells you the smoothing average of the smooth index is way out of whack. Is that something that's concerning? And if so, uh, what do you do about it? If not, why? >> Sure. And I would tend to look at this as the cape ratio would be a data point. It's it if it were the only data point out there showing that we had this uh ultra high valuation then we could call that anomaly. Instead it's really a confirmation. It's a confirmation of other me measures of of excess valuation whether it's whether it's uh um uh the u valuation in relation to price in relation to assets >> or assets rather book value whether it's what you know the other different measures of valuation that that um that analysts use. We're finding that all of them right now have very high values. So I think I think there's a recognition the market's high. In my mind, the question is whether it's high in anticipation of things happening or is it high because it's gotten very frothy because we have a very speculative um uh tone in in the markets right now, right? It's not just in equities. >> We're seeing it over in the in the debt markets uh with with >> debt markets. I was just looking at some of the performance of our debt this year. I'm like, what? I mean, I knew the numbers, but I looked again and I'm like, wow, that's unbelievable. That is literally unbelievable. The uh fact that we've earned, you know, 8 and a half% on our debt, for example, for this client uh this year on a on on on the international side, it has been outstanding. But the bigger question is I think when we look at this is that if in fact we have powers uh beings uh institutions that don't care about valuations for example you have an announcement by ex company that they're going to do a six billion 7 billion 10 billion2 billion buyback and the the the reason for that is to buy back shares to help their earnings on an EPS basis, right? And on top of that to hold up the stock because the uh options exercises that are going on by the insiders need uh to have stocks that are you know need to have um buyers of them and and being held up and they don't really care about the timing nor the valuation and because of the share shrinkage because the share shrinkage and the number of compan but there is a a fascinating story story on the amount of actual companies that are in the market. the amount the the amount of actual stocks you can buy has shrunk dramatically over the last 20 years. >> Mhm. >> And and the share count has shrunk dramatically on not in totality because new companies come out, but uh on a company by company basis. I mean, they keep on shrinking it. And that being the case, they're gooseing their EPS. Uh there's another data point for you. Is that something that is uh in your radar? >> Oh, let's see. It um it's certainly something to to consider. I think the goal though is to recognize or the one uh one of the aspects is to recognize that just because we're reducing the available stocks that may reduce the supply available to investors. Um and therefore it may bid up prices out of scarcity. >> Yep. >> But what that doesn't change is the fact that those investments because of their price in relation to their earnings and their growth in earnings are setting up for below average invest below average returns >> or well below average returns. So, I I guess what what um if I'm an investor and I hear gosh markets high valuation, I'm looking for does that necessarily mean that I'm going to have below average returns because historically high values led to below average returns. Below average values led to above average returns because if you pay less for something a stream of earnings, you get a better return than if you pay a whole lot more for it. I just don't know. I just don't know necessarily if >> um with all the confusion, chaos, central bank tinkering, buybacks, sovereign wealth funds, I just don't know if price discovery is even a thing right now. I don't mean to sound all der about it. >> No, no. Oh, I think I think what you're describing when you say price discovery, what I hear there is, is the market functioning normally to recognize that uh that it's buying something in relation to a future return. >> Right. That's that's what I mean. >> Instead, instead it's really buying it more in relation to momentum or scarcity. I mean, I we've we've seen um but those but but that then misalign a fundamental relationship, the relationship of the return for investors coming out of a company, the fundamental return of the earnings in relation to the price they're paying. >> Right? It's distorted by the fact that their current price of their investment is going up despite the fact that it's getting well beyond the reach of those earnings, >> right? >> But but interestingly, we're seeing the same thing happening in the housing market today. >> Well, house prices ridiculous. I was just talking about that before. House prices are it's not, you know, this whole notion or it's misguided notion that housing that people are are are not able to buy houses because interest rates are too high. No. Hello. They can't buy houses because prices are absurd. >> And and people as well and as it drives down into payment, right? Because at the end of the day, people don't buy homes on price. They buy it on payment. And what happened four or five years ago when mortgage rates went down to 3%. The the the value of the house that they could afford to pay to still keep a pay a low payment was very high. And it boosted prices up significantly. >> Right. >> Okay. And and by the way, we talked about the fact how prices are going up because mortgage rates had gone in half from over 6% to less less than 3%. >> And that's a natural re you know action reaction. That's like uh that that's that's physics of finance. >> No, but the what what changed though was suddenly in the last few years mortgage rates have gone from that below three to now 6 and a half. We should have found that physics would would have tempered if not caused those prices to return back to levels that were normalized with that level of payment. >> Yes. >> But it hasn't happened. Matter of fact, I think I I saw a report out that the one of the first reports came out that housing prices may have declined by one and a half or 2% last year. >> Right >> now that which that doesn't that doesn't realign to payments at all. that that that that does not matter in fact most of the charts are showing right now housing price to income. But what housing price to income doesn't show is the the housing price to payment or the or the payment to income you might say. >> Yeah. Or or the the the um the the affordability of housing. And now I have a chart the National Association of Realtors put this out um and and we did some calculation on that as well. about this. You could look at what the housing afford the the housing affordability index is and when it's better uh when it's above or below this particular line. It's it's either better to buy or rent and it's still better to rent, >> right? >> And that's been like that for for a few years now because of the income stream that that takes in consideration all the things you're talking about here, >> right? So I think the key message here that we're hitting on, we started talking about market valuation, stock market valuation. Now we're talking about the real president residential real estate market valuation that we look at we look at the debt markets and look at the misalignments that are occurring there. Um so I think sort of the message is we've got this this basket of misalignments uh that are all val fundamental valuation based and and so therefore and therefore it feels frothy. It feels like there is a a uh uh an optimism that's that's actually different than it was in 99. Let me just mention because in 99 there was an expectation that the that the technology surge at the time would cause GDP to upsurge to 4%. Greenspan wrote about that at the time. >> So his contemporaneous view at the time was that that would cause economic growth therefore earnings growth etc for a decade or longer according to Greenspan go up to 4% real growth. So that was justification for it. I'm not seeing the same thing here today. Even AI, the Fed's saying it might add maybe a point a year over the next decade. Not not even that, maybe a half a point over the next decade. >> I mean, there's some definite productivity issues. I mean, I feel it. Um, for and I'm just a small little, you know, nothing when it comes to what the real use factor and real use case is for AI. >> Um, even even if you stop, >> even if right now is the top tier is the ultimate of what AI is ever going to get to right right here. I find a lot of really good use for it. And in fact, uh, just the other day, I was doing an Excel spreadsheet and there was some complexity to it that I needed to do a comparison between a few different columns that were u dependent on the other column. You follow what I'm saying? And I'm like, oh, these V lookups, I could do this. I don't want to do this. Let me hand it off to someone in the office. I said, you know, hey, I got an idea. Let me just prompt co-pilot in Excel. by golly took me about three different prompts because I had to get right what I was saying and it gave me the full thing and created the spreadsheet with the information I needed. >> Uh that that's pretty cool. >> Yes. >> So um but let's also agree or maybe not you can disagree if you want but I'm thinking you can agree is that uh well go back to um Greenspan. you know, you have irrational exuberance and you have the old phrase that markets can stay um you know, irrational longer than you can stay solvent um if you're going against it. But there is the there there's there's there's a lot of ways this can come out and and part of it is, you know, markets can stay at this level and earnings can grow into it. uh economies can continue to push forward and it could be various uh factors like lower taxes for example is one of the reasons why margins are so good over the last 5 years or so. We know that the lower tax rate on on on companies. Um but it it can it can stay here for a while and doesn't necessarily have to end in in like a lot of these doomsayers in a crash. It could just be or or massive correction. It could just be just a slowdown for a little while. a little bit of a of a layoff for a period of time. It doesn't and maybe not 20% growth a year like someone who just entered the market thinks it has been over the last 3 years but maybe 5% 6%. And certainly over the very short run over you know a handful of years or so. Uh what happens ultimately though is if those margins are excessively wide, therefore the return on capital is excessively high, it will bring new entrance into the market, >> right? >> Or the existing entrance will use that as an opportunity to build market share. It's the it's the age-old business cycle that's gone back since business and those competitive forces will will normalize those margins over time. In the short run, they can certainly be windful profit, but in the long run, financial economics will drive those things back in line. And and that again is what But again, this is not a new phenomenon. We look back over the last 150 years in the stock market and in the economy, we've seen the same thing happen over and over and over. >> Yep. But let's switch over because you mentioned GDP and you mentioned your particular gauge and you you know the way of using GDP and the cle the Cleveland Fed's inflation uh now casting forecast >> in December is looking at CPI to increase by you know 3%. Right. Um and we don't exactly know because we don't have the data because the government was close. We're not exactly sure. PCE came in they say at the lower than expected but it was I mean look 3% is 3% okay higher than the 2% by the way just for those that want to keep score at home 50% higher 50% higher than where they want it to be >> and and they feel they could bring it down quickly which they have not been able to and mark my words lowering interest rates is not going to help that cause but um is inflation stabilizing in your opinion or even beginning to decline or where we going here? >> Well, I think uh so the two messages there. The first is uh the the the um the Cleveland Fed does estimate 3% for November's report which comes out in December, next week. Um there they did not have the Fed the Bureau of Labor Statistics did not produce uh a uh a bottoms up number Yeah. for October, >> right? They did do an extrapolated number because they needed a number to be able to use for for uh for tips, securities, etc. And and the number they extrapolated was 3%. >> Or or extrapolated equals guest. Go ahead. Continue. >> Exactly. Just a [laughter] mathematical exactly. Um so this this number we're going to come out with is going to capture two months worth of underlying market information. Now, all that being said, I would anticipate that we're seeing a moderation of inflation uh beginning to occur, but because last November, November, a year ago's report, inflation report for the one month of November was uh was negative just for that month. And that month is falling out of the averages. So if we come in with even a zero level of inflation for the month of November, we will still see an increase in the in the in the reported >> on year over year on the year over year. Yeah. >> Um and I got to tell you, so I'm going to take the over on the Cleveland Fed's estimate uh because of that. Now I Cleveland Fed has been remarkably their their now casting number has been remarkably accurate monthtomonth. So I I would uh I would uh I would give a lot of weight to that. At the same time, we have some underlying seasonal factors that would suggest that we could see a number well, when I say well over 32, 33 between now and and December's report. So, November's report will probably be up a little bit. December's report will probably be up a little bit, but then the fun happens because the first quarter of 25 had some really, really high monthly inflation reports. So, as those roll off into the early 26, expect that CPI is headed back down. probably we may we may recover half the ground between three and and two. I wouldn't be surprised if we saw 25 on inflation before summer. >> But that's because of a >> technical statistical >> technical mathematical calculation base. The fact of the matter is it's still 2.5%. It still means that if you look at a chart of prices they will be the highest ever at that point. >> Right? So why is also important? Number one, it probably explains why the Fed uh found the liberty to do one more cut >> this past week, right? Going down a quarter because they said, you know what, we may get a little heat here in the next month or two because inflation's ticking up, but you know what? They're going to look back and see that we were wise and for saw the decline in inflation. The second is they're also seeing a potential softness in the job market. You know, Pal's that was to me the big report yesterday, the whole headline is about this quarter of a point. I agree >> this past week. But I think the real story under that he thinks that they may be overstating jobs, 60,000 jobs a month and and that number doesn't come out. You mentioned, you know, obscure obscurity and transparency. Uh they're not going to they're not going to revise the numbers until February. So we're going to finally find out in February whether we've been overstating jobs by hundreds of thousands cumulatively. I mean, we saw that one report that showed, I think it was ADP, that showed, was it 120,000 jobs lost in the small businesses in the last month, >> right? >> That was substantial. And it's funny because you don't see it in the economy. You don't see it in the stock market. You don't see it in most metrics any I mean I mean look around, it's not there, but it's pockets of little things here and there that are adding up to a bigger picture. you see some layoffs from companies and AI is is the excuse they're using. Um, but the economy itself, you know, it's very hard to to to to put together the idea that something is a problem when you have a Fed that's even talking about 2.9 to 3% GDP number, right? >> Uh, unemployment at 4.4% round number and uh, it's nothing's falling off a cliff. May maybe it's a slow motion uh but it doesn't look horrible as of yet >> and that so the chances of the rec you know that right now the the uh poly betting market's view of recession in 26 is now dropped below 30%. So uh and that's probably even only that high because of the exogenous risk that there's >> all this that government shutdown took away a lot of good data. Fed is going to be doing some revisions to this uh uh payroll number that won't a jobs number but that won't happen till February. this inflation numbers, the reports that come out each month, the 12 month report that comes out every month um is uh is showing some statistical anomalies that will look a much different picture in four months than it does today. Matter of fact, you mentioned that only takes us two and a half and that's part of the reason that uh the St. Louis Fed publishes two numbers that uh we watch closely. One is the three-year expected inflation rate and they're saying that that number right now is 2.4%. So, even if we get down to 25, it sort of says we're going to stay up in the mid twos for the next three years on average. Um, even more discouraging though is the 5year 5year forward, which is the average for the five years that starts in five years, right? So, that's the back half of the next 10 years. And even that's only 2.2. They're still not getting us back to the 2% target. >> Yeah. >> Even though they say they will because they have to maintain that >> status of that we'll get there. Right. And the big tieback end of all of this to the first part of our conversation is that the PE ratio has typically had a strong relationship to the inflation rate. As inflation goes higher, that causes bond yields to go higher. That causes PE ratios to go lower. So higher inflation is bad for valuation. Lower stable inflation is good for that's when we get our best >> pees. Mhm. >> So the fact that we're staying elevated, I mean, it's not like it's not like the markets anticipated we're headed back to one and a half, which is where we were just, you know, 5 years ago, 7 years ago. >> But again, but again, you're still still with that. It's a good environment. Everything's good right now. You know, if the economy is not good, they're lowering interest rates. That's good for the stock market. If GDP comes at a good number, that's good for the stock market. If unemployment comes in at 4.5%, that's good. If it comes in at 3.9, that's good. Everybody is looking at everything being good. And and the fact is there's a couple of small pockets of issues that are going on, you know, but everybody's trying to see the future. One of the reasons has been at least I'm thinking that there's a again back to this whole controlled chaos and this this this artificiality of this transparency which is really um saying projections that are not actually happening but nobody checking on it. for example, you know, we know things like, you know, we hear these great piece of information of things that are going to be happening, but we never, you know, oh, Nvidia chips being sold to China, but then China's like, "No, we're not doing that. We're not buying that." Um, you know, we hear things like, uh, Sam Oldman, um, Oracle, uh, these players have been boosting and touting, they know there's no there's no ramifications of this. It used to be that look, I'm not going to How am I going to give you a two-year u outlook? Most companies can't give an outlook past a quarter. That's the only visibility they have. Maybe six months, maybe. Maybe if they are established. Meanwhile, Sam Oldman is saying he's going to spend a trillion and a half dollars over the next 10 years doing XYZ. It's like, wait, dude, you haven't even made any profit yet. You're you how are you going to get all this money? But nobody's nobody was looking at that. And I think that's continues to be what the investors are. There's a gigantic here's a point. There's a gigantic carrot that just will not go away because I think investors are resigned to the fact and and and this is good actually that we're not looking this this is actually not bad. We're not looking at today or tomorrow. We're looking 5 years from now, 10 years from now. Does it really matter if there's a little bit of a correction and overvaluation and a little bit of bubbly right now? I get in now. If it's going to be higher later, what's the difference? I'll get a couple extra points. Maybe that's nice, but it doesn't really matter. >> Well, we could replay that scenario by think about asking ourselves the same thing in the late 90s. >> But it took 10 years to get it all back, but you got it back and a lot more. >> Uh, >> well, not all of it. I'm talking about index wise >> with the with the with the subsequent 10 or 15 years providing a mid single digits return. >> I get it. I get it. >> Well, so you're right. Let's see. I I guess um and people often say if you the nice thing about stocks if you stay invested long enough you you know you'll make money. Um but you may not make as much money as you can make in alternatives alternative investments like uh bonds or otherwise real estate a variety of investments that people use. Um the the second is that timing is important too because for a lot of investors those going into retirement or those that are in retirement having a that 15-year dir before you recover while you're taking capital out >> can have a significant impact on on on their their ultimate uh success investment success. >> You you brought up just now alternative investments. There's a lot of different definitions to that, but private equity, private credit, clearly we define as alternatives, right? >> Yeah. And and what I was and when I threw out alternatives, I realized at that moment that I didn't want to imply the capital A alternatives. I was really thinking about alternatives like bonds, >> alternatives to stocks. Alternatives to >> alternatives to stocks. Exactly. But but you're right, there there is a there's a a broad marketplace out there of of alternative investments um that are that are packaged and available to a broad base of investors. What what is your what is your thinking or research or at least your insight into what's going on right now with uh some of the private credit private equity put aside this there's some issues there that I'm I'm hearing bubbling up to buying things at valuations that are dumb and uh some people trying to cash out not getting out you know some of the players trying to do the round trip what private equity usually does but private credit it seems to me that there is an an insatiable appetite for debt which I don't know where it exactly comes from, but it's from a lot of places. Uh, private credit has had his little issues lately with Yield Street, with Blue Owl, a few others out there. Um, and we're starting to see little I don't know if it's canaries in the coal mine or if it's just aberrations of bad firms doing uh poor deals. Any insights into that at all? >> Yeah. Well, let's see. Just only insight from just from a macro standpoint. uh you know all the signs are there that uh that there's a lot of vulnerability in that market uh that you know it's it's it's not often that until the tide goes out that you see who's um whose boat's floating and I I think what we've not seen as a correction in that marketplace for quite a while. So again, I don't have direct insight into specific subsectors or the or issues other than to say that uh when we look at the macro factors, that's that's another area that's showing uh frothy valuations or or or low uh margins that aren't necessarily protective of the risk. Hm. So, if we back off of this and look back at this conversation and if you reflect and you had to tell me um I know you're not short-term minded, but I get that. But if you had to tell me your best guess as to the next, let's give it 135 135 years in the future based on all this right about your various the macro environment, the valuations, the various indicators, things you know, things you see. I mean, is there anything that is flashing a red light that's like, you know, oh, this is a problem or that you've seen before that you'll act on or is this more of your run-of-the-mill frothiness and how does the outlook look over the next few years? >> Sure. So, as the climatologist, I will answer your question about one, three, and about about 1, three, and five. Let's go to the back one year for the one-year view. Let me just flip it. Okay, it said heads. I'm going to go with the markets >> [laughter] >> uh down uh let's see, three years. flipped it again. Okay, that says it's up. Uh now fiveyear, when we start getting to five years or 10 years, I predict that we're going to that investors will have well below average returns. Uh that there will be a single digit mid- single digits or below uh on a cumulative basis over that period. That this level of valuation uh and I think it's a much more likely case over the next 10 than the next five. Uh just because the momentum is so strong, we could end up seeing a few years here of continue. This could I'm not sure right now if we're at 96 or we're at 99. >> Yeah, that makes sense. >> You know, the year 96 and 99. >> Oh, I get that. Yeah. Yeah. >> But but at the same time, I I think we're definitely quote unquote in the late 90s again and that if we look out over no matter where you were in the late 90s, if you look then to the late 2000s, that cumulative return was consistently mid- single digits or below. and and for some sectors if you were in the more aggressive and that's that's the one challenge and I know you you probably talk a lot on uh uh to uh market analysts about this that we have an S&P 500 that's really a small group of high tech high valuation stocks and a broad market that's that's kind of a separate set of that and those are kind of combined together. This is kind of an unusual level of of the lack of diversification in that index right? >> Yeah. 38% of the index I think is the top 10, >> right? >> That's right. That's that that is anybody who's anybody will tell you that is not diversified and and and that's that that is the potential. But at the same time >> because of the way the mechanics of the market, right, and because of all those companies are the big buyback kings and because those are the players that everybody wants to be with with a big cash cow, etc. Um, you know, right now listen, would it take a lot to topple them? uh yes and no but you know because there's so much money flowing into the passive investments right now the bigger are just getting bigger much bigger >> right helps the index >> so so this is an environment so so again I think the forecast look we look back I think we're going to say yes valuations have gotten high there was you know we definitely needed a correction a correction has helped to put us back on better on more solid footing uh and we'll probably look at uh uh some small but significant economic challenges over the next decade Good stuff. Ed, Ed, Ed, Ed. Um, tell us where people can get information on Cresmont Holdings. >> Uh, Cresmont Research. So, it's cresantress research.com. If you uh online, it's Crestmont. C R S T O N T research.com. Uh, it's an open access website with uh uh articles uh charts, graphs, and other information that are available to investors to use as a as a as a tool, as a resource uh to help in their investment needs. If that particularly perks your interest, uh there are a couple of books out there, Unexpected Returns and Probable Outcomes, that go into more detail about this and uh uh I welcome uh uh uh reader comments on any and all those materials. >> Great stuff. Great stuff. Listen, you have a happy and healthy holiday, a great new year, best to you and yours, your family, and uh all things that are uh wonderful should be uh coming your way. >> And and back to you, Andrew. Uh all the best. Uh, and I'll see you in the new year. >> All right. Thanks. See you. You bet. >> That's going to wrap it up for this episode of the disciplined investor podcast. Thanks for joining me this week and uh we have some great things happening. We have Harry Dent coming up, Todd Tre Treader uh in the next week or so and uh next couple weeks actually coming up. So, we're pretty excited about that. We're going to end the year with Jack Schwagger. We have a great interview, I'm sure, going to happen with him talking about the greatest of the great investors of this age. So, don't miss that. Make sure to be there. Thanks for joining me and I'll see you again real soon. This podcast is [music] intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits & Company Inc., an investment adviser registered with the US Securities and Exchange Commission. 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