Description:
BUY YOUR TICKET ATTHE EARLY BIRD PRICE FOR OUR OCTOBER 18 CONFERENCE at ...
Transcript:
and we should be live. Welcome to Thal Money. I'm Thulful Money founder and your host, Adam Tagert. Um, I am very happy to be joined this Wednesday for our live stream by portfolio manager Michael Liboitz. Michael, how you doing? >> I'm doing great. Thanks, Adam. >> Hey, thanks for joining us. So, folks, uh, normally this is one of Stephanie Pomboy's uh, bi-weekly sessions with me, live streams with me. Um Steph had a a curveball that that she had to deal with and unfortunately can't make it this week very kindly. Michael agreed to to step in when I pinged him late last night. Uh so Michael, thanks for thanks for being game here. Um and it's very timely. Anyways, I've been meaning to bring you on. Um we have a lot of uh people that have been asking about or asking for an update on bonds, especially as the Fed has returned to a rate cutting regime. It looks like, you know, we just got a 25 basis point cut last week and uh Fed has signaled more rate cuts to come. The market certainly is expecting that. So, love to get any general reaction that you have uh to uh the latest with the Fed, but at a higher level, um what do you think this means for bonds? Um you guys at RAIA, you and your partner in crime there, Lance Roberts, um have been generally pretty optimistic on bonds. Um, and you know, as I've said many times on this program, probably the single greatest topic that I see the greatest division on with the experts I interview is inflation expectations and thereby where bond yields are going to head because bond yields in most cases are a function of inflation expectations. And you guys historically have said, hey, you think they're going to trend down, say, over the coming 6 to 12 months. Not everybody agrees with you on that. Are is that still your outlook? >> Yeah, absolutely. Um, so when we talk about inflation, we've been calling for inflation to fall towards 2%. It was. It got held up with the tariffs. Now, you know, it seems like it's kind of stuck, maybe inching a little higher. It's not surging like some people thought it would be. It's not dropping like some other people thought it would be. But you have a mix of contributors that are keeping it relatively flat for lack of a it's not really trending anymore. Goods prices have risen. Service prices are coming down and we're watching the tariffs work themselves through the economy. And it's always a question of who's going to pay the tariff. Is it the exporting country? Is it the company that is importing the good? or is it the consumer that's buying the good? And so far what we've seen is that the weight has overwhelmingly fallen on the companies, not the exporting country and not the consumer. So the good news with that is that it doesn't really affect our inflation readings too much and that's what we've seen. Now the problem with it is that the companies aren't going to accept low margins. And this is, you know, we we we're we we're kind of in the first phase. The first phase is where the tariff effects impact prices, but the second phase and third phase are what comes next. And you know, I have firsthand uh knowledge of this. My daughter works for a marketing company and they've recently had to lay off a few employees and it's because their customers, companies that sell products are are seeing their margins get hurt. They're cutting back on spending. So what are they doing? They're cutting back on marketing expenses. Obviously, they're probably laying off employees. All that reduces economic activity, which is disinflationary or deflationary. M >> so the tariff effect comes first and now we're seeing some of the economic impacts seeping in which helps mitigate some of the tariff effect and we think eventually will overwhelm it especially since a lot of the tariff effect you know this is kind of the the the math that we use for for inflation a lot of the tariff effect is one time so if you raise the price of sneakers 10% they go up in the month of June by 10%. But they're going to be flat every month thereafter. >> Yeah. I've been talking about that tariffs in general are one time price shock. It's not a continued inflationary impulse. >> Right. Now, now to some people's point, what can happen is the company absorbs it in month one and then they slowly leak it out over time, >> dribble it out. Yeah. Yeah. >> Right. Now, they can do that if the economy is strong and if there are not good substitutes for their product. And what we're finding is with most goods, there are many suitable substitutes or they're not necessities. I don't have to buy um a new car. I can wait on buying a new car. I do need to buy certain drugs. >> Right. Sorry to interrupt too, but you could also buy a American car, right? A car that's not impacted by tariffs. or I can decide to take the bus or the train or a walk. U so there's plenty of substitutes. So So what we're finding is that consumers are already strapped. The economy has been slowing down now for a few years. It just came at such a high high rate of growth and there was so much stimulus that it was just a slow slow trend down. Not what we typically see. But, you know, as we're starting to see in economic data, you know, GDP is running on average this year below 2%. That's it's running below trend. We're seeing the employment situation weaken. You know, we would have argued it's been weakening for six months, but the BLS just learned it's weakening with the revisions over the last month or two, but there have been clear signs of weakening employment. And with that, consumers are a being let let go and they don't have the same money they have or b they're just concerned and it weighs on sentiment when you see your neighbors getting fired or or you don't get a pay raise or you don't get a bonus and that can greatly affect consumption as well. So, you know, regarding uh inflation, we think there's more and more of a dampening effect on inflation and less and less of a tariff impact. And the the here's the other important part, and we've talked about this before, Adam, that shelter prices are wrong in CPI and in PCE. We know based on Fed data and based on private sector data that rent prices are basically zero. There's 0% uh inflation in rent prices and house prices are now trending lower. So any kind of imputed rent formula that calculates rents is also flat to negative. Yet the BLS still tells you that shelter prices are rising at I don't know the recent number but roughly 3 and a half%. So when that comes down, not if, but when you can shave off easily half a percent or more off CPI and 3 4% off PCE, which gets your inflation closer to the 2% target the Fed's looking for. >> Got it. Okay, those are all great points and let me just underscore >> a lot to unpack in there. >> No, no, no, it's it's great. Um, so you know, something that Lance has talked a lot about that you referenced there is, um, the fact that we started at at such a high height, uh, and have come down a lot. The analogy I think of in my mind is an airplane. Um, if you come down from 30,000 ft to 3,000 ft. If you're a passenger on the plane, you really don't notice that much difference, right? Uh but if you go from 3,000 ft down by 3,01 ft, you really feel it as a passenger on the airplane, right? So we're much closer to the ground now, right? Uh meaning, you know, uh any continued downdrafts in the plane may have a lot more noticeable impact around us in the economy because we're now so much closer to the ground. um you talk about um kind of the first order of cost cutting as as companies are seeing margin squeezed and and by the way too I just should note that like I mean this is on on average but corporate profits have been at record highs as a percent right so they've had some fat to cut right so um you know there may be some opportunity for these corporations to pass some material percent of the or eat some material percent of these tariffs and kind of nobody gets hurt because they were just having real salad days. But as they're getting to the point where >> wait, stop there for one second. You know who gets hurt? It's the executives. >> The executives whose pay is solely based on the price of the stock. >> And unfortunately, even though it's a very select few, they're the ones that get hurt. They're the ones that want to preserve their operating margins. So, >> and they're the ones who's who who are the decision makers. So sadly, you know, they they make the decisions, >> right? So it it may not, you know, work out as nice as you're portraying that they're just going to drop their profit margins because who cares? There's, you know, 500 executives that care. >> So 300 something million people, >> right? I agree with that. And look, and I'm I I'm kind of guessing here, but my point is is you could have some percentage where they're like, you know what, we had the the getting was really good, guys. We don't want to cut too much and kill the golden goose here. Maybe we'll accept a a few fewer golden eggs out of this this thing that we have here. Probably not. Human nature being what it is. What you're saying and what we're starting to see is they're now saying, "Okay, look, well, where can we cut costs that are not here amongst our employee base yet? Well, we can ratchet down our advertising. We can get rid of some of these agencies that, you know, we're contracting with. But at some point, and you're saying we're already starting to see that, and it's already potentially having a little bit of a dampening effect in the economy as people are feeling less confident about their jobs. We've certainly seen the quit rate come way down. We're now starting to see people who who sadly are seeing people like your daughter, Michael, who are saying, "Oh, that person just lost their job. It didn't hit me yet, but I'm getting a little nervous, so maybe I'll I'll be a little more financially conservative." But what happens if and when we get to the next layer of this, right? We're seeing the job market continue to weaken. We're seeing the economy continuing to slow. If corporate profits start getting pinched both from tariffs and just from weakening consumer demand, well, then they have to start laying some people off, right? And then then that dampens the economy even further. You get sort of the danger of potentially entering one of those vicious cycles that then leads into recession. Um is how how credible of a danger is that right now? I think it's a very credible danger, especially considering that what we've heard for the last five years is that companies have held on to employees because it's very costly to let them go and then rehire new employees. So, they've been holding on to employees. At some point, they're going to have to feel like, you know what, there's the the job market has stabilized. I feel like we can easily get employees if we need to get them, but we don't need to keep holding on to employees that are not as productive or do not bring in as much profits as we hope for. >> So, I think that's a real threat that that kind of is sitting out there. You you know, the job numbers, even though they've gotten worse, they're not that bad. Um, payroll growth is actually, you know, averaging about 30 40,000. That's well below trend, but the unemployment rate is low. The number of jobless claims are ticking up, but they're not awful. U but you know, the trend in all of the jobs data is not good if it continues. >> All right. And again, too, you know, we have something that's a little bit different this time, too, is you've got AI there kind of poking the job situation too, saying, "Hey, you know, corporate executive, maybe just decide to invest more in technology." and you know get rid of these expensive employees >> and the flip side is that the new immigration policies may be helping right if I believe there's what a million to million and a half uh ille illegal or you know immigrants in general have left the country those are jobs available so >> there may be some upside from that as well >> okay yeah that's a good point too all right and then last I just want to make sure folks didn't miss it which is that um uh you know in terms at least as we talk about um CPI and trying to use that as a measure as to whether inflation is rising or falling you're right you know shelter is what 40% of the CPI calculation >> yeah and it's a lagging data um and b to your point it is so lagging that it is actually wrong right now um where in the CPI calculation it still is rising uh whereas we know from a lot more real-time sources is that it's actually falling, right? So, you know, we can kind of have mathematical confidence >> that the CPI is going to be under pressure to head downwards next year as that lagging data catches up uh to the the CPI uh algorithm. >> Correct. everything else being assuming nothing else changes in price inflation will fall by you know half a percent to possibly a full percent purely because of shelter prices catching up to reality unless of course CPI the BLS has changed their formulas without letting anyone know but I I doubt that's the case >> okay so um as you look forward then it sounds like you think uh the economy will be weaker next year, at least in the first half of next year than it has been for the past year. Um, for structural mathematical reasons like this, you think the CPI number will be under pressure to come down as well. Um, all right. And of course, now we have the Fed starting to cut rates. So, I guess some one would hear that and probably think in general, yeah, all right, that's a probably a pretty good environment for bonds. Is that pretty much the thesis or is there are there other components as well? >> Yes. I mean, you have Fed funds rate that is 1 and a half, 1 and 3/4% above the inflation rate. You have an economy that is growing at a rate below trend growth, and trend growth isn't that spectacular, but it's growing below that. That's a very restrictive environment. I know there's a lot of people saying that the Fed is being too accommodative. They should be raising rates. They they throw out all kinds of reasons like the stock market, like speculation, you know, you name it. But at the end of the day, on an economic basis, the Fed is decently restrictive here. And I actually just put out an article this morning which quantifies it. You see a lot of people just saying things, you know, saying it. It's they're they're very easy. They're too easy. They're creating a Goldilocks environment. That's not the case. It's a it's a restrictive environment. And it's interesting. Stephen Moran, who is uh President Trump's appointee to the Fed, who just started, I think a day or two before the last Fed meeting, put out a really interesting paper uh speech a couple days ago. I'm I'm I'm uh actually in the process of summarizing the speech for an article next week. and he kind of lays out the case we've been making for 9 months that the natural rate of Fed funds is is much lower. He would argue around 2% is where it should be over time. And for many of his reasons like demographics, like uh some of the changes to immigration policy, inflation, he mentions shelter inflation in particular, and he incorporates some of the the the the big uh beautiful bill. He incorporates other policy changes, but when you mash it all together, the Fed funds rate is too high. And accordingly, mortgage rates are too high, auto loan rates are too high, corporate borrowing rates are too high. And that's restrictive on an economy that is starting to tr to to be troubled. If the economy was going gang busters, that's appropriate, but that's not the case right now. >> So, first off, um you're in good company. Uh Lacy Hunt would agree with you. Um remember talking to Lacy a few weeks ago and he was saying look the Fed is way too restrictive. In fact he thinks its first cut should be a 100 basis point cut. So he thinks the Fed is very much um behind the curve here. Um all right. Well look um I want to get to some um specific questions about bonds. Um and I do folks um because we have Michael here and it's a live stream I do want to take your your questions as well. Michael, if if I can if I can start with this comment that was made here. Uh, and I'll warn you it's a little confrontational. Um, uh, Gigum says, "Hey, Lance and Michael are multi-year wrong on bonds." And I I think what he was referring to was, you know, two plus years ago or so, Lance was talking about TLT as an investment. And first off, folks, Michael and Lance, they have to be invested in bonds. They run a 60/40 portfolio by definition. and they have to have a a good chunk of the portfolio in bonds. But but Lance was talking at you know at one point in time about prospects of TLT and um you know over the past let's say recent year you know it's not performed super well um so what gives you more confidence now than perhaps you had back then? >> What do you what do you mean it hasn't performed well? Uh I I should pull up a price of it here, but I >> What's TLT done over the last year? It's probably flat to slightly higher in price. >> Is it okay? Then maybe two years then it went down a fair amount. >> Yeah. Yeah. Uh but but you're also clipping coupons. So, you know, I think a lot of people look at price and don't think about that dividend paid. Yeah. Okay. >> But but look, we have been on the wrong side of the ball. we earlier um we've been bullish when the trade hasn't been that bullish uh for all the right economic and fundamental reasons. What's tripped us up has been this term premium, which we've talked about before, too, which is a combination of fears about budget deficits and inflation and whatever else the market can think of to justify pushing rates higher than where they fundamentally should be. Uh so regardless of whether we were right or wrong a year ago, two years ago, 5 years ago, 10 years ago, what matters most is what what we me as investors think today >> and that's all we have and that's all you as an investor can do is what does the future hold? It doesn't matter if you bought Nvidia at $10 and it's now $180. What matters that's great. you had a great run. What do you think about Nvidia today? And the same holds true for every other investment that you have and any investment advice you should be seeking. What do they think about the environment going forward? >> All right. >> And to the point we our our portfolios are balanced. They do hold stocks and bonds. And we didn't put all 40% of our bonds in TLT. In fact, we had a duration, a weighted average duration on average that was less than the benchmark. So, that being said, we like TLT today. We like it a lot. We liked it two years ago. I'm not going to run away from that either, but you know, I'm just going to tell you that our outlook remains bullish despite the track record. >> Okay. Um, great. No, and I think that's a fair answer. Um, and folks too, to the extent you have questions for Michael, ask them in the live chat here and I'll do my best to pull them in as I can. Um, so a couple of questions I guess let me start with this one. Um, so you mentioned that obviously in your 40% it's not all in long bonds. Um and a lot of investors I think many on this live stream here uh have I think been heavily in T bills uh over the past years right finally you could get a pretty good yield for no risk right um if it seems as if the T- billill and chill trade is coming to an end um if the Fed is cutting again planning to cut I mean TBD but it wouldn't surprise me to see 100 to 200 basis points of that go away over the next year plus. Right. >> Absolutely. >> Where where do you think that capital is likely to go and and in raia to the extent that you guys have had a chunk in T bills? Where are you planning on putting it? Are you going to move it out in duration or put it into a different asset class? >> Yeah, so we did push some of it out to the three to five year sector recently to try to lock in some yields. Uh >> so like lock in those 4% for the next 3 years, >> right? So so if you look at the 2-year yield, it's what about 360 today and money markets are now in the low 4%. So that's the question you have to ask yourself is over the next two years, am I better in lot better off locking in three point let's just say 3.6%. for two years or do I want to gamble on what the money market rates are going to be? If the Fed cuts rates by 50 at the next meeting, money market rates are going to be 360, 350, right in line with the 2-year. >> If the Fed doesn't cut it off in the next two years, you're probably much better off in money markets. So, that's the decision all investors are making, all bond investors are making. So I think when you make that decision, the more the market gets comfortable with the Fed cutting rates more aggressively, not kind of one and done or one and take a siesta and come back, you know, in March and take another 25. But the more the market starts pricing in more aggressive Fed easing, the more that money is likely going to leave the money markets. So then the question is, what is that money? Is it all fixed income money that's just sitting there or is it money that that will be put to other uses? So, at least from the investment side, it's hard to see how that money would really go into chasing the stock market. I I think anyone that's interested in the stock market has been in the stock market. It's at a point where it's decently overvalued here. And I don't see anyone that's been so conservative saying waking up and saying, you know what, I'm only earning three and a half% of my money market. Time for me to go into stocks because that's where I'm I'm I'm going to make my steady returns. >> Yeah. >> So, I think a lot of it just trickles out into the bond market. Um, so when you look at bonds, you could buy Treasury bonds, you could buy two-year Treasury bonds, you could buy 30-year Treasury bonds, you could buy corporate bonds, municipals, there's all, you know, you could buy AAA rated corporates or junk bonds. Um, so when you look at the spreads or the difference between the corporate bond yields, municipal bond yields, and US treasuries, you're not you're the the premium or the amount you're getting paid to take on that credit risk, the default risk is the lowest it's ever been. So, so again, you put yourself in someone that's been sitting in a money market instrument. They can buy a two-year note at 360. They can buy an Apple bond at 375 or a junkier bond at 3.9% or 4 and a.5%. I think a lot of that money stays in the treasury market because we're talking about people that have been so conservative despite a riskon environment, >> right? >> So, so I think that that fact tells you that a lot of that money market money is very conservative money. It's not willing to chase additional risk. So that leads me to believe that poor a decent portion of that stays in treasuries whether it's two years five years 10 20 30 and you know we don't know and some of it will go to corporates some of it will go to munis some of it will go to CDs um and some will go to stocks but again I think the big proportion will go to treasuries for that reason >> okay let me ask you this um So, let's assume for a moment, no guarantees, but let's assume for a moment that the economy slows enough to enter recession at some point next year. Would you also expect some help from like a flight to safety trade in the bond market? >> Absolutely. Because you're going to get that from a number of sources. People pulling out of the stock market, money leaving the stock market has to go somewhere. uh will it go into the money markets at 4% maybe but if the Fed keeps cutting that becomes less and less uh if we go into a recession credit default risk rises. So all of a sudden, the fact that you're accepting 20, 30, 40 basis points and assuming default risk, people are going to get scared and they're going to either move up in credit. So they may move from junk to triple B or from triple B to double A, but there'll be some gravitation from corporates to treasuries as well, which is what we often see. And it's not that necessarily the corporate, the tripleB bond you own is going to default. it's that its spread could widen significantly. So if you're getting So if you're earning a yield that's 40 basis points more now than treasuries, that could rise to 200 or 300 more than treasuries. Meaning that as treasuries gain in price, drop in yield, your corporate bond may actually drop in price as it rises in yield. >> So the time to buy that tripleB bond is at the end of when it's at a high premium, not a low premium. And that's probably when we'll make some more wholesale changes to our models, sell our treasuries, take on riskier bonds for the the fixed income portion of our portfolios. >> All right. So, super interesting. Okay. Um and obviously folks, we'll have Lance um or Mike on the channel on a weekly basis going forward. So, if and as that starts happening, they'll be alerting us as to their decision-m then. Um all right. So, let's say there is a recession. Um at some point prevailing thinking is is if it gets painful enough there'll be a reaction function from the central planners. Um uh at that point in time what would you want to do with bonds? >> It I you're right and that's I think a big risk to the bond market. How do they react? We know what the Fed will do. Fed will likely cut rates aggressively. They'll go back to QE. But my big question is what will the government do? I I think the powers that be learned a lesson in 2020 2021 that you can write checks to the public. That's that's a new thing and it had you know based on what we saw a great impact on the economy very beneficial impact on the economy. So my fear is that that tactic comes back to life. At which point we may say, you know what, even though we're going into a depression, you know, a very bad recession, we're we're out of bonds because the government is intent on figuratively printing money to boost the economy. This is not going to end well. So >> and this would be stagflationary in the near term in bonds. Yeah, >> potentially. I mean, you got to remember that you have to be careful not to draw too many links to 2020 because 2020 was a period where the supply lines were completely shut down. >> Yeah. >> Where people hadn't spent money in a few months where people didn't know if they'd have jobs. The the economy who knew what the economy even was. Then they found out their job was solid. The economy was coming back. They not only had the money from their job because they either got let go and got rehired quickly or they never got let go uh and they had these excess savings and then they had checks from the government and you had an incredible demand push while there was no supply. >> That would not necessarily be the case if we had a really bad recession. you would have demand push but the supply side should be much more balanced. So, >> so presumably we should see some inflation just not as extreme as we saw before >> in theory. You know, again it depends what they do, how they do it u and you know we you know the the Fed too has expanded over the years. You know will they buy stocks? What effect will that have on the psyche of consumers? Uh so there's a lot to think about. >> Okay. Now of course QE if they started QE just buying treasuries I mean that would help treasuries initially right >> in theory. Yeah. >> Yeah. But but okay so I'm focusing on the bad here. Um but uh yeah at some point the the stimulus may arrive in full force and or you know could be one could be both. Um uh the intent of the administration's policy, economic policies, is to really boost the econ is to boost economic growth, right? Deregulations, locking in the tax cuts, passing in some additional tax relief. Um bringing lots of foreign investment into the country, you know, tariff revenue, also using tariffs to get foreign countries and and companies to build factories here, employ Americans, all that type of stuff. So if the administration is successful in in those policies, which is very debatable, but assuming for a moment they are, that would also then start to to spur economic growth. Um, and and in that environment, would you still want to be holding bonds as much? >> There's a lot of variables there. Uh look what the what the government what President Trump is doing is aiming to boost productivity which is very positive for economic activity for economic growth. The question is will what he's doing really benefit productivity and then when and how long will it take till you receive the full benefits of of everything he's done. So, you know, there's a lot of whatifs embedded in that question, but on the margin in theory that some of what he's done will promote economic growth. That in turn argues again from a equilibrium position that interest rates should be slightly higher. But what does it do to inflation? Productivity should lower the prices of goods. So, so when you think about what the rate of interest should be, it's it's a combination of inflation and economic activity. And if productivity can bring prices down and make economic growth more, you may end up in a place where rates just stay right where they are. >> Okay. The reason I'm asking all this is to get a sense for is your outlook on bonds, and I know you have to hold a big chunk just having a 6040 portfolio, but we're talking kind of on the margin here. Um, you know, you're looking at this more of a trade, right? That like, hey, we think in the next six months, whatever timeline you want to put on it, Michael, we think we got a tailwind of lower bond yields and higher bond prices. But then, you know, we see the potential for that to turn into a headwind either from big stimulus or, you know, all of a sudden these policies are really starting to boost the economy and and at full steam. Um, and then we'll reassess them. Is that kind of how you're looking at it? >> I think everything we own is a trade. You know, we're not buying stuff to hold for 20 years and crossing our fingers and hope it works out. We we have to play the environment that's given to us. And that environment like the weather is always changing. And unfortunately, the the investing environment isn't like the weather in that it's somewhat dependable. You go from summer to fall to winter to spring. It's it's changing in various ways. You can go from summer to winter, from spring to fall. So, uh, our investments are based on our outlook, on the fundamentals, on what the economy is doing, on on the global political situation, on so many different factors. And as those change, we're forced to make changes to stocks, to bonds, to the allocation between those two, uh, what types of bonds, what types of stocks we hold. And that's a process that occurs every day. It's not that we're we're selling 10 stocks and buying 12 stocks every day and just we're not trading in the kind of like a trader does minute by minute, you know, even day by day. But we adjust the portfolio as opportunities or risks present themselves. >> Okay? >> And that that's just as much for stocks as bond as bonds as stocks, >> right? And and that is the role of a portfolio manager. This is why you want one, folks. Um, >> where dove >> you're active? Yeah. >> Yeah. Let let Okay. So, let me ask you this and then we'll we'll get to stocks real quick and then I want to take more questions here from the audience. Um, so um that's your that's your primary thesis right now. Now, you'll be amending it as you get more data along the way. Um, if you had to guess right now, what what are the biggest risks to this thesis? I think the biggest risk is a recession where the government prints money where they just print an obnoxious amount of money to to either save off a recession or to lessen a recession and it just flows right into the economy and all of a sudden all those companies that were eating tariffs, why am I eating tariffs anymore? I got so much demand. I can just jack my prices higher. So, that's probably the number one risk. And that and that's that creates a a really tough double-edged sword for bond investors. Typically, a recession is a great time to hold bonds going into a recession and through a recession, but there's that that risk kind of hanging over the market that could really be upsetting to the bond market. And then on top of that is the government spending that goes with writing those checks. if it's really a huge amount of money, the bond market has to absorb that money. So, you know, nothing's there's no such thing as a free lunch and bonds certainly aren't a free lunch either. >> Okay. And and under that that situation, let's say we do enter recession, would your plan be to to hold bonds up and until the government announcement? >> Sure. >> Yeah. I >> I'll let you know. I'll let you know the day before that. I I mean I really don't know, Adam. It's hard to know what we're going to be doing with any of the things in our portfolio six months from now, three months from now, let alone, you know, a year or two down the road. >> Okay. Um All right. Well, let me let me ask you this question and we'll folks will get to more questions. So, feel free to keep asking questions like several of you have been doing. Um so, we just talked about bonds. Um I want to talk about equities for a moment because you mentioned earlier that that I think in your term you said stocks are uh quite overvalued here in the near term. Um, you know, there are a lot of indicators out there that valuations are stretched to quite extreme levels in some cases to the most extreme level as we've seen depending upon the metric. And as your partner Lance does a good job of reminding us, it's valuations are terrible timing metrics. So don't don't take them as a timing indicator. But what's your outlook and attitude right now around stocks um as an active investor? So as an active investor you have to you have kind of two main uh types of analysis you do fundamental and technical. Fundamental like you said every just about every gauge of valuation is either historically rich or right on the cusp of being historically rich. Uh, here's the problem with that and like you said, Lance has talked about this, but in 19 I'm going to butcher the date, but call it 1998. That is when the at the the cape valuation on the S&P 500 matched the level from 1929. At that point, you would have said, "Holy s, it's time. We're at the same level as 1929 and we all know what happened for the decade after 1929. I'm out. We're at those levels. Well, the market proceeded to go up another 50% from those levels. So, so you have to be understanding that just because we've reached a certain level doesn't mean we're rich doesn't mean you can't be richer. And right now, the cape is right around 40. the 1999 high was 44. We get to 44 and earnings don't change, that's another 10% increase. But what if we get to 50? What who's to say that 44 is the top? >> So So from a fundamental perspective, we're very very mindful that valuations are extremely rich. We're we're very mindful that the behavior of the market is very speculative. And you know, you could show that a million different ways. Uh but we use technicals to help guide us through these periods. And what you'll find in 1929, what you'll find in 1999 is that you had these long beautiful bullish ascents followed by volat up and down volatility where the market was kind of racing up and down and and becoming more volatile. That is the point where the bears are finally gaining strength against the bulls that have driven a bus for such a long time. And what happens during that period of volatility is your technical indicators get triggered there. The the momentum is leaving the market. You're getting various quantitative in indicators that something is changing in the market. You'll see various sector the behavior of sectors changing versus other sectors. Industry performance changes. Maybe large cap won't be carrying the weight anymore. I mean it could be a number of things. But the markets don't just fall out of thin air. They they give you warning. I it it's it's not a the bulls are driving a bus today and we're going to wake up tomorrow and all of a sudden the bears are just going to crash that bus off the cliff. That's not how it works. Bulls are very emboldened right now. If the market drops 3%, what's going to happen? >> They're gonna they're going to buy the dip, right? >> But what happens? Let's say it drops five, six% over the next week. Buy the dip. Everyone's going to buy the dip. >> If it goes up, what if it only goes up three or 4%. Then it starts selling off again and and goes back to a a lower low. And then the bulls say, "Okay, I bought it. I lost a little money, but but I'm all in. I'm doing it again. And this happens a few times where the bulls are are are getting the bears are getting more emboldened. I'm selling. I'm shorting. I'm making a little money or I got out and I'm happy I got out. I'm going to sell a little more. And the bulls are like, "Wait, buy the dip isn't working as well as it used to. What's going on? I'm gonna buy the dip this time, but I'm only going to put in X amount instead of Y amount." and and that's where the turnover happens and ultimately there will probably be an event that really tips it. Um but but usually a combination of event or events with a market where the the momentum is changing is the signal. So we're not going to call the top. I will guarantee you that we will not call the top of the market. We may start getting out early. We may get out a little late, but our intent is to to stay relatively uh fully allocated until our technical indicators tell us otherwise. But we are much more attentive to those technical indicators than we would be if valuations were very cheap. >> Like if you go back to the 70s, early 80s when valu when pees were singledigit, I don't care. you know, and you you can that's when you can buy and hold. That's when it's so cheap. Can't really get much cheaper and you can kind of you don't have to be nearly as reliant on technicals. Now you have to be extremely reliant. >> Okay. Uh very very helpful. Let me just ask a couple clarifying questions. Um so first off, I don't get the sense from what you're saying you're seeing signs yet that the the the bull momentum is petering out. No, doesn't. We're We're getting more signs of of bad breath of speculative, you know, stocks, meme stocks, cryptocurrencies, all kinds of crazy stocks that are just shooting up in price, >> right? >> Kind of late stage indicators, but not final stage indicators. very both 1929 and 1999esque where you had just incredible amounts of speculation. But again, even if this is a late '9s event, are we in December 99 or October 98? And the answer to that, which none of us know, has huge ramifications for managing money. >> Yeah. Um Okay. So, uh, I just interviewed, um, Mark Newton, uh, who is, uh, Tom Lee's research partner at Funstrat. So, they're kind of famous for being, you know, the, you know, Tom Lee, right? The biggest of all bulls. Uh, Mark is a pure technical analyst. Um, and he basically says, "Yeah, you know, I'm I'm a momentum guy, right?" He said, "My I I I believe in the mantra. You ride the trend until the end." Right? And uh that goes with the old saying that the stock market in the short term is a voting machine and the long term it's a weighing machine. Um and uh you know a lot of folks on this channel have made the argument that it's it's it's become a lot more of a voting machine of late. Uh so to your point you know the bulls will be in charge uh until at some point they aren't. Um, but there should be indicators that a a reversal uh of sentiment uh and market direction is coming. So again, nobody's going to top ticket. I appreciate you being super transparent about that. Um maybe you guys at REA might step out of the party a little bit, you know, before it ends. It might still raise a little higher or maybe like Mark, you know, Mark said basically I'll ride it until I start, you know, seeing that I'm losing money in the trend and then I'll get out, right? But I'll have hopefully made so much money from the trend in general, my losses will be a tiny fraction. Uh, but it'll it'll prove to me that I got I got the whole trend right. Um, so sounds like there's a lot of sort of similarities of what you're and sort of how you're looking at it. And again, as you said, you know, it's it's in highly richly valued markets like this where sadly the fundamental analysis doesn't really help you very much. So the technicals do become the thing to really watch closely. >> Yeah. Yeah. And I I think one difference between Mark and us, Mark's in the middle, and I don't know Mark, but it sounds like Mark's in the middle dancing, having a great time. We're slowly taking steps towards the exit. Not that we want to leave the room, but we want to know where that exit door is and not be the last one out. So, we're a lot more mindful that fundamentals do matter. They're just a poor timing tool, but but they are giving us significant warnings that there is the potential for problems. So, um, we're both dancing, but but we're we take a look at the exit door every once in a while to make sure we know where it is. >> Is Yeah. And it's interesting because I, you know, I asked him a lot about the macro stuff and he does think about it, but he he he definitely takes into account in his mind, but he he says, but in terms of my trading, it's just on what the the data is telling me. Um, and just just to be full fully transparent, um, I I would agree. I think he's closer to the center of the dance floor than you guys are. He's aware of all the risks that, uh, you and I talk about because I talked about it with him, too. and he does think that um yeah, next couple weeks market could could still go higher from here. He does think that there's a his default is that there's going to be a 5 to 10% correction in October and November, which he then believes would be a buying opportunity to ride a traditional end ofear rally. Um he then gets more nervous about the first half of 2026 because of these heightened valuations. Um, but he's not going to take any action about that now. He's going to keep dancing while, you know, he he thinks the the party still has more time to go. >> And that that sounds like a very seasonalbased analysis, which I'm not going to argue with him. The but let's just say he's right and the market does drop 5 10%. the the the the important thing for everyone to watch and I'm sure Mark will be watching closely is how quickly does the market buy that dip and get it back to the new highs or does it fail to get it back to the new highs and it starts rolling over again. >> And you'll see that in the moving the moving averages and the divergences will and convergences will start to tell you that there's there's a lot of indicators that will tell you that that it's not coming back all the way. So that that would be the first test and like I was telling you earlier that markets kind of glide higher have a period of volatility and then the trend changes that would be a period of volatility that needs to be watched closely. >> Okay. sim similar to if you go back to April, you know, it was an eventdriven uh uh sell-off, but what happened? The market sold off, decent sell-off, came right back and resumed its trend. So, you know, that could happen if that happens in October. The bull trend is still on and Mark's Mark and us are dancing on the dance floor, but we want to see how the market reacts to something like that. >> Yeah. No, totally agree. And I think Mark would agree with it too, even though I'm not I don't want to speak for him. By the way, folks, if you want to watch that interview, it's the one that released right before this one, so feel free to watch that after. Here, um, let me ask you a question that that somebody asked here. I can't quite find it, but the the the spirit of it was, um, hey, you know, do these, um, advisors that come on Thoughtful Money, you know, are these guys really any better than owning the S&P? And um I want to give you a chance to answer this question because Lance addressed it recently. And my recollection of Lance's answer was um hey look, if you're young, uh maybe you just buy the S&P index and just just if you put your money in it in the long run, you you'll generally be fine. But especially as you get older and you have more assets to protect um you have to be more more mindful about the the draw downs especially in a market where valuations are as stretched as they are right now and the party could go on for a few more years but when the piper demands to be paid you know there could be a 25 30 40 plus percent draw down and you might not have the time to recover from that in your life and so you know Lance has said hey at Ria my job roughly is to try to capture around 80% of the upside. You know, we're going to we're going to have some hedges and some other things in place that are going to keep us from from capturing the exact market return uh every year. Um but the goal is to only get hit with about 20% of the downside. You this is the benefit that active management brings in. Um what would you say if anything above and beyond that? >> That's exactly right. It it took from 199 from 1999 that that prior high wasn't or the high I think it actually happened in uh 2000 whenever that high was set before the the.com bust that wasn't reached again till 2013. That's 13 years in which you had lost money in theory. So the point is, and I think Lance's point is, if you were 20, it's not good because now you're 33 and you're basically where you were when you were 20, assuming you're not adding money to it, you know, and you now only have, say, 30 years to invest versus 40ome. But what if you're our age? Old men like us, Adam, >> can you afford to earn nothing for the next 13 years and retire comfortably the way you want to retire? >> Yeah, >> you probably can, but I can't. >> Yeah, >> but that's the point that that's why why time matters. Look, Warren Buffett is right. If you have unlimited time, buy the S&P and go to bed. Forget it. You don't need anyone because it will return 8 to n% annually for the next hundred years give or take a little. But for the rest of us that have limited time frames, especially old guys like us where that time frame may be 5, 10, 15 years or even if you're in retirement, you don't have that luxury of just buying and holding and you know buying uh people and chill that or stock and and don't worry about the shock. Uh that's not that's not really an option. >> Okay. Well, great answer. I just didn't want folks to think that we were shying away from the question. Um, here's a question from Trevor, and I'm just going to throw a bunch at you here in the last couple minutes, Michael. Um, where's the foreign bond demand for the next QE? It's not there. The Fed will buy bonds and gold will shoot the dang moon. Um, obviously, this is probably not an uncommon um belief amongst a lot of gold holders, but let let's start with the the first sentence there. Um, you know, there's a narrative out there that, hey, nobody wants the treasuries. You know, central banks around the world are countries are trying to deodorize their trade. Central banks are buying more gold than treasuries now. Um, kind of like, hey, nobody wants the US Treasury. Um, I think if you look at the data, that's actually not true. Um, so I want to give you a chance to react to that. >> Foreign bond holdings are rising. you know, yes, there are countries that they're declining like China, but in aggregate they're rising. U regarding the question, I don't really understand what he means. Where's the foreign bond demand for the next QE? Um, but foreign demand is still there. And look, foreign demand is a function of trade. They don't have a choice but to own bonds. they their transactions regardless of whether it's with the US or not are almost all in dollars and accordingly they all hold big bank accounts with dollars and like you or me they don't want to earn zero interest on their money so they invest it and primarily they buy bonds and I guarantee you and I know that the that the the managers that manage the money on behalf of these sovereign funds they're not buying corporates anymore with them so tight. They're buying treasuries. And so, you know, these countries don't really have an option to just sell their treasuries and either sit on cash or buy something else or not hold dollars. That's not the way the world works. And there's no indication that that's changing anytime soon. Uh but again, I don't understand what QE has to do with foreign demand. Okay. Um, all right. Sorry. I'm just looking here to see if I can pull any more questions out of the stream here. Um, well, let's um let's start wrapping up. Anyways, yeah, go ahead. >> I was going to talk about gold too a little bit. And look, this is coming from someone. >> I deliberately was skipping over a bunch of gold questions, so you'll make a lot of people happy. Okay. So, first and foremost, I own gold and I own I've owned the same percentage of gold since the early 2000s and it it's it's kind of my financial insurance policy. Whether that's right or wrong, doesn't matter. It it's it's done fine. I'm happy with its rise. I've actually been taking profits over the last week or so to just bring it back to the right percentage of my portfolio. Mhm. >> But I and I'm even though I do own gold, I'm not a gold bug. I I don't think it's necessarily, you know, that that it's rising for the right reasons. I think it's caught up in this speculative mania to some degree. There are some reasons that gold should be rising. I'm not saying that higher deficits and some of this other stuff isn't good for gold, but as a gold holder, you have to not only recognize all the other bubbles, but you have to recognize that when you're in a bubble, and Lance has probably shared with you, but the price of gold is trading at three, four standard deviations above the norm. It's going parabolic. So, I'm not going to sell my, you know, I'm going to reduce my gold back to where I want it to be as a weight of my portfolio. I'm not selling it because it is my insurance. But just be mindful when you're in these assets and it's not just gold that are going parabolic. Things assets don't go parabolic for for very long. >> Um so you are singing from a song sheet that I've been singing from for the past couple weeks. Um I own a lot of gold as folks know I'm very transparent about it and gold related uh precious metals related uh investments. I am loving uh the action that's going on. Um let me pull it up here because I think I showed it. Uh I'm the guy. Don't forget folks that uh when silver crossed 35 bucks uh an ounce uh gave myself gold eyes there on X. >> That's right. >> Which uh which one of my followers upgraded to uh sorry a silver eyes and then they upgraded it to silver laser eyes here. Um uh so I'm I'm big fan of the precious metals. Um but uh not everything moves up forever in a straight line. Um they they have had massive moves. Um I think both were up more than 40% so far this year. Miners up triple digits uh on average. Um so you know huge great gains. And what I'm seeing is is there's a lot of people who are saying Michael okay this is it. This is the moment. This is the moment the world gives up on fiat currency and it realizes the whole um folly of of you know our debt structured economy and and uh and and unbacked currencies and stuff like that and this is when true price discoveries coming into the precious metals and they're going to the moon from here right and honestly I I I believe that I believe in those trends and I think they will be tailwinds on the precious metals for a long time to come. I don't necessarily believe that this is the watershed moment. I could be wrong and if I'm wrong, hey, you know, at least I'm holding the stuff, right? Um, so I have been like you encouraging people to think about either position resizing um or just hedging in some shape or form. And there many different ways that can take and uh I can understand especially for people that are holding ounces of of bullion saying, "Look, I don't want to part with that. I I'm I'm just afraid if I if I sell it now at some point down the future it's going to a be a lot more expensive and b if things get crazy might be harder to obtain, right? Um but it might have grown to be a much larger percent of your total portfolio than it was when you started and you know a prudent investor wants to hedge against that risk. So, there are things that you could do, and I I don't I I've done a few of these, and I'm not going to say which ones I've done because I don't want people just to blindly follow me, but but for one example, you could buy an inverse fund on uh the price of precious metals or on the mining complex or you could even buy, you know, options uh in in these inverse funds as well. So you can limit your downside um but give yourself you know some protection in case there is a 10 15 20% correction in this space. >> Yeah I I think that's all right and again the trend could be higher for the next 10 years but there's nothing saying it can't correct 50% within that trend. So again, I I we talked about this earlier for at RAIA and for myself, everything is a trade. Could be a long could end up being a very long-term trade. Like my gold is a long-term buy and hold, but I trim it. I, you know, I am aware of what's going on. And let's just say it gets below, let's say the price just falls apart and it gets below where I want it to be, I'll buy it. So, so it it you know the the key is don't fall in love with any asset and think that it's invincible because there isn't one asset that is uh house prices could never go down. That's what everyone used to always say. Then 2008 happened. They're going down again now in many parts of the country. So, you know, remember it's an asset. It It's not a religion. And treat it like an asset. >> Treat it like an asset. And again, you know, if you if you end up say you use the hedge that I talked about, right? You buy uh a call option on an inverse fund, right? Um maybe for the miners because they're likely to get hit more uh if there's a a downdraft in the metals prices. Um a it'll it should cushion part of your portfolio depending upon how much you you invest in it. Um, and if that if that turns out to to be a winning trade for you, meaning the prices, the metals go down, the miners go down, but but this option does really well, you know, then when the carnage is over, you're sitting on some additional dry powder there that you can reinvest in the metals if you still love that trade. Right. >> Right. But basically the same technical analysis you want to use for stocks and bonds and oil and everything else you should be using for gold as well because it's not immune to gravity >> financial gravity. >> All right. Well, look, Michael, um, thank you so much. This has been great. I think it it scratched exactly the itch I needed it to scratch for folks around bonds. Um, let me just do a quick uh couple of things, folks. Um, first off, um, if you enjoyed having Michael on here, would like to have him come back on again on a more frequent basis, and I generally always get that request when you're on, Michael, please let us know by commenting in the chat here, but also please uh, by clicking the like button uh, and then clicking on the subscribe button below and that little bell icon right next to it if you haven't done that yet. Um, if you want to talk to one of the financial advisors that Thoughtful Money endorses in terms of getting some guidance in terms of how to navigate your um, financial portfolio from here. Um, just fill out the short form at thoughtfulmoney.com. You'll be matched with the right adviser. Perhaps you might want to talk to Michael himself specifically and the team there at RAA. Uh, so just fill out that short form. Uh, it only takes you a couple seconds. These consultations are completely free and um, there's no uh commitments to work with these firms. It's just a service they offer to be as helpful as possible to folks. Um and a quick reminder, too, that the Thoughtful Money uh fall online conference is coming up pretty quick. It's only a couple weeks away now. So, if you haven't bought your ticket yet, go to thoughtfulmoney.com/conference. And go quickly there if you haven't bought your ticket yet because the uh early bird price discounts expiring soon and that is the lowest price we offer. So, I want as many people as possible to get that lowest price. Uh, don't forget too, if you're a premium subscriber to our Substack, uh, I've sent you a code that you can use to get $50 off of the ticket price. And that's $50 off that lowest early bird price that I mentioned earlier. Um, all right, Michael. Um, hope you're doing well as we wrap up here real quick. Um, two things. Uh, one, are you continuing your rucks? Um, Michael and I are both into rucking, which if you're not familiar with that, it's basically a weighted walk. You have a weighted pack you put on your back. But Michael Michael did one recently that really impressed me in terms of the weight in the distance. >> I I am I'm uh this summer was hard because it gets so hot here in DC, so it wasn't that frequent, but now that we're kind of heading back to better temperatures, I you try to get out a couple times a week and uh lug around some weight in theory, make myself uh a little healthier. >> All right. Well, look, it's it's impressive. And by the way, folks, I think you did what? You did a 40 lb uh ruck for for four miles. >> Six 16 miles. >> 16 miles. Yeah, I'm sorry. >> Four four hours. 16. >> That's right. So, it was a 4 hour rock. Yeah. 16 miles. >> My goal is to do it once a year. So, uh until I have to do it in a wheelchair. >> All right. >> Although then it might be easier. But >> no, I like it. And you know, Lance and I do this a lot, but I like to remind folks that money is it's not a final form of wealth, right? It's a means to an end. And uh one of the most important fundamental parts of wealth is health. And I know that that's something that you are a big believer in and and you know these rucks are a big example of that. Um all right. And then just for fun um I just wanted to highlight for folks here um while I was waiting for you to hop on Michael before we, you know, address the technical issues you were having before we started. I was listening to this new YouTube channel. I just want to flag for folks. It's called Fake Music. Um and it's I'm pretty sure it's all AI generated music. Um, it's shockingly good. But what they do is they take, um, you know, classic rock songs, um, and they genre swap them. So, I was just listening to Back in Black as if it was done by a soul band. Um, AC, and it's really, really good. So, I'll send you the link to that after this, Michael. And folks, yeah, if you if you have any interest in listening to that, it's it's worth the two and a half minutes. >> Yeah, I I look forward to checking it out. Thanks. >> All right. All right. Uh All right, Michael. Again, thanks so much for doing this. Look forward to having you back on soon. Uh everybody else, thanks for joining us today in the live stream and we'll see you next time. >> Thank you.
