Market Outlook: A global bond rout signals a regime change as US 10Y/30Y yields surge, threatening equity valuations and broader risk assets.
Fixed Income Strategy: The guest advocates avoiding long-duration bonds and favoring short to intermediate inflation-linked securities to mitigate duration and purchasing power risk.
Inflation Drivers: PPI is re-accelerating, with upstream inputs like sulfuric acid, packaging, and trucking costs rising, setting up further CPI pressure.
Commodities Opportunity: A structural upcycle is forming, with sulfur-related constraints and higher energy and fertilizer costs boosting the case for commodity exposure.
Sector Implications: Materials (notably fertilizers and mining inputs) and Energy stand to benefit from sustained cost-push inflation and heavier industrial demand.
Global Rates & Carry: Japan and UK yields are breaking out, disrupting carry trades and elevating the risk of fiscal/monetary strains across Western economies.
Housing Headwinds: Higher rates, insurance spikes, and maintenance costs are eroding rental economics, underscoring the shift away from prior low-rate tailwinds.
Investment Approach: Emphasis on adaptive, active management over passive allocations; no specific tickers were pitched, with focus on themes and sectors instead.
Transcript
Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. Until the punch bowl's taken away, which we're probably going to start doing that within the bond market, they're not going to rein in this fiscal foolishness. So, we're going to demand higher yields and higher return on our money to help protect us against that loss of purchasing power, which is going to be dramatic the longer you go out on the curve. Welcome everyone to this episode of Finance U. I am your host Chris Martinson. Back here again with Paul Ker of Kiker Wealth Management. Paul, good to see you back this week. >> Good to see you again as well, Chris. >> All right. Hey, you know where I want to start today, Paul? Um, how about this? Have you been watching bonds? >> Oh, very closely. Very, very closely. >> Yeah. And so you and I have been watching this for a little while. We've been talking about say the Japanese bonds. We've been talking about where they've been going. But this has now finally caught the larger popular imagination and attention. And we know that because um just yesterday in the Wall Street Journal, they finally caught on to this and they said they caught on quick. The global bond route is accelerating. Here's what to sound very good. Global bond route. We're gonna have to talk about this because this is actually a really big deal. So they say here, quote, "A weeksl long sell off in government bonds has intensified in recent days, threatening to drive up borrowing costs across the globe and knocking some momentum out of what had been a furious stock rally. With bond prices sliding, the yield on the 10-year US Treasury note, a key benchmark for everything, including mortgage rates and other borrowing costs, reached as high as 4.687% Tuesday, highest level intraday since January 2025. But the yield on the 30-year climbed to a new 18-year high near 5.2%. Uh we're going to have to talk about this um Paul because this this is a this is a pretty big deal. So, and we'll get to some more data in just a second, but it's not just the US. This is kind of a western phenomenon, including throwing Japan in the west. bond markets are sliding, which means um yields are going up, which means prices are going down, which means that the buyers of bonds are not buying as much as selling anymore. And so people don't want to hold bonds. Now, Wall Street Journal very helpfully says, "Oh, it's it's possibly related to uncertainty around the war." I'm like, "No, it's possibly related to massive inflation." I got the data, but um what are you seeing? >> No, I'm with you. I mean, look, here's the thing. Why in the world if the government's going to keep spending fiscally foolishly, they're going to, you know, just bar us into oblivion all this data center debt and everything that's going in there. If if if they're basically going to bail us out in every circumstance going forward, why in the world do you want to tie your money up in 20 30 year treasuries, especially in the context of history and the rates that were coming out of the 1970s inflation that we had? And I'm concerned this one's going to be even worse. Mhm. >> So, you know, the bond investors being the smartest ones in the room seem to have finally come to the conclusion, hey, you know, this this is a path that we're headed down and until the punch bowl's taken away, which we're probably going to start doing that within the bond market, they're not going to re in this fiscal foolishness. So, we're going to demand higher yields and higher return on our money to help protect us against that loss of purchasing power, which is going to be dramatic the longer you go out on the curve. >> Yeah. And we'll get back to the 70s double hump inflation, which is a theme we've been on for for months here. And I think now it's pretty obvious that's what's going to happen. >> Back in the 70s, they called bonds, US Treasury bonds, certificates of confiscation, right? Which sort of meant like, hey, if I'm holding a a even a 10% bond, but inflation is 14%, my money is being confiscated by inflation, which again is actually an act of monetary and fiscal policy. Inflation is not some mysterious omen from nature that nobody understands where it comes from, right? It's a well, it's a policy. So when the government policy is to run high inflation but then try and issue its bonds at less than the rate of inflation, well sometimes you get that that buyer strike, which I think we're at the beginning stages of here. >> It appears that way. I mean, look, the the the eastern countries, China's been reducing their exposure to to US bonds. Russia had done it quite some time ago. The argument has to do with protection against sanctions. I think they just saw the handwriting on the wall and the weakness of our leaders at this point and the unwillingness to to go through the pain that's inevitably still coming. And now US investors that have been drinking the Kool-Aid are starting to realize, hey, you know, we're in trouble here if we don't make some changes. >> Well, absolutely. So, here's some of the data. This is a chart of the US 10-year yield. You can see here, this is uh it's kind of tricky to read on a small screen, I bet. This is 2026. So this would be January. This is February. Here's March right at the start of the war. It kicks off. It hit a low here of about 3.95%. Immediately vaulted up to 4.4. Lot of fighting around that 44 level. Then vaulted up here to about 6 4.65. It's falling back a little bit today, but you can clearly see the trend here is uh that's the 10-year. And then the 30-year. Um, Bull Theory here on X had a had a pretty interesting observation saying that the last time the US 30-year bond yield was this high, the stock market peaked 3 months later. Uh, so there could be a connection there. And uh, highest level since July 2007, but this time US has 39 trillion in debt. Part of the reason, which they didn't really go into in depth in the Wall Street Journal article, is that CPI is at 3.8%, 8% PPI at 6%. Uh I presented some of that data last week. I got some more here. We got to talk about this. Inflation is back on the rise obviously and so bonds selling off. Um. >> Mhm. >> Must must be tricky from your position though because I I know you run lots of different scenarios for people in their retirement and you talk specifically about, hey, hate to do this, hate to be that guy, but we're going to have to sort of run your retirement plans under various different inflation scenarios and sort of gut check um you know, how do they perform? >> Absolutely. I mean, people are finally starting to understand why now we've been running 5 a.5% compounded inflation and, you know, three and a half, you know, people are like, "Well, I'm not worried about five and a half." Now, your followers and listeners are actually more concerned about that. But but the consistent gasp that I get on the other side of, oh my goodness, because you you break it down and show this is in your retirement, you're going to spend three and a half million. you need total three and a half million of income or whatever it's six million whatever that number is depending upon the person but if you do it at five and a half it's twice that number and people are like oh my goodness and you know and of course I make the comment kind of leading a little bit that if the average individual really understood this over a long-term period of time we would have a mass revolt against our government leaders in in the policies that they have instituted because people are going hey my asset prices are going up that's Great. But they don't understand that what's following is going to be an absolute erosion of their purchasing power in retirement. And the picture that they have in the future, if this continues, if they're unprepared for it, it's going to be completely different than than the advertisements that they have. And oh, you're just going to have a great retirement. You're going to be all smiles and sunshine rainbows the whole time. Inflation is a terrible evil. And and and in addition to that, like the long-term picture that I want to share here is if you go back and look at the trend that we had in in 30-year treasuries. The chart that I'm sharing is the 30-year Treasury going back to 1977. So, we had that spike, right? That double hump inflation that came through and we peaked up here. I got to move a few things around around 15% on the Treasury and then it started working its way down. you have this nice established negative trend that's in place, right? So, every time you get close to it, you fail and rates go lower and they go lower and then all of a sudden in 2022, you break that trend. And that wasn't just a little breach. I mean, this is a a regime change that we're in right now. >> Now, technically, you can't see it, but we are above, and this is a monthly chart. We'll have to finish at it. But we're above this resistance line that goes all the way back to 2003. So that's a 24 approximately year resistance zone where it tried to peak above and then it collapsed down a little bit further in 2008. And you know, and we're in a completely different situation than we were in 2003, 2004, right? Home prices were not in a bubble. That happened in 2006,7 and 8. uh you you went through a stock market that had a decline from 2000 2003. The NASDAQ bubble burst, but here we are now and the government's still continuing to print with no print fiscally foolishly spend and try to to stimulate the economy. When we've got inflationary pressures that are continuing to build, we break out of this range, it's going to be very similar. we solidly break out of here, it's going to be very similar to the breakout that we showed in gold what, two, three years ago. It was a major break of resistance. And I I believe that's coming. I mean, it it's just the weight of the information tells us that's where we are. But look, look how big of a trend this is in place. This is a completely new regime. But the markets are assuming that we're going to get this type of asset inflation going forward because they don't realize how big of an impact lower rates have been on people's ability to borrow money and lever up. >> Well, and on that point, you know, Paul, I it's um I kind of had to school a boomer because we I was in this public discussion nearby in town and and they were like, you know, they own all some properties, a lot of rentals in town. They're like, "I don't understand why the kids, they just, you know, you just buy a house, you fix it up, and it makes you money." I'm like, they had that tailwind, that long downward slope. That was a great time to do exactly that strategy, but that's not the world we're in anymore. And so, so it's just really hard to change your mindset when it's all been raised and schooled and conditioned for a certain environment, right? So, everything, houses, stocks, all keyed off of the fact that yields were going down the whole time. That made those other two assets go up. Well, now uh those those yields have reversed. Housing is already starting to take it in a variety of communities. We're seeing a lot of places where obviously they housing got super unaffordable, but it it's also really starting to to suffer. Stocks are the last last man standing in this, but remember old Wall Street saying stocks are for show, but bonds are for dough. >> For do >> Yep. The show might the show might be winding up here if if bond yields keep doing what they're doing. That's why I wanted to lead off with this. This is the most important thing happening in the financial space right now is all this creaking and popping and and bursting of the bond yields. >> And Chris, going back to housing and talking about what the boomers experienced in the early 80s, their purchasing power, they had more purchasing power with the income that they earned. I wish I knew where I had some data to bring that up right now, but that we'll save that for a little bit later. But here's an example. I mean, back in the early 1990s, I remember my uncle would sit down. he's buying rental properties and his thing was was I'll build one a year and then I'll buy one a year. So that's what he did for a certain period of time working forward. So his formula was because it was a completely different environment back then. If you can buy a property and it'll pay for it, the rent will pay for it in seven years, right? Then borrow some money, put it to work. But you know, when he originally started buying, you're borrowing money at 12 and 14%. and then it gets down to 6 or 7% and you can refinance. And he was the type of person that would just pour all that extra cash flow back into paying it off. But the rule of thumb was if you can buy a property and it'll pay for itself from the rent in seven years, you're good, you know, because you've got vacancies, you've got repairs, you got people that are going to mess things up. Then it got up to 10 or it got up to 12 years and 12 years was his threshold. I mean, I can't tell you how many people come in. the only reason that they're going to buy rental properties is because that's what their parents did and it worked. That's what their uncles did and it worked. And and the argument from that whole generation is, hey, I've never bought a bought a piece of property that didn't work out if I held it long enough. But the problem is I had somebody just two weeks ago is like, hey, I think I got a really good deal. The uh these people are willing to sell it for 15% less than what the asking price is. So, we looked at rentals. We looked at insurance. We looked at their to total cost, the leverage carrying. You're talking about 25 to 30 years before it'll cash flow to pay that note off. And I looked at the client and I'm like I'm like, okay, so let's just talk get rid of your preconceived ideas, right? What happens if you have 20% vacancy? Okay, let's just say if it's 10%. Let's say if it's 5%. You know, 30-year roofs last 15 years now. They don't make anything as good as what they used to. Any pressuret treated porches are going to have to be replaced in about seven or eight years because we've got these built, you know, supposedly good for the environment. I grew up handling pressuret treated lumber and I don't know anybody that got in trouble from it, but that stuff used to last 30 years and and the mathematics are you're talking about 354 years before you get, you know, a real return on your money and you just don't have that long. So, we're in a completely different environment and if rates continue to go up, there's no bailing out, right? You're stuck. If you get in a bind, you can't refinance, get a lower rate, wrap up that foolish credit card debt in the house and still be okay because rates are going to go up and you're stuck. It's a completely different environment. And I've been hearing some horror stories particularly from Georgia because y'all have a really crazy insurance commission or something. >> But insurance is is now doubling on people house insurance. So So you look at all those input costs, right? What's it going to cost to maintain this property? I'm going to have to insure it. all these costs are just going up and if you ever did any of this on a variable rate mortgage, right? Oops. You know, so I could see this really turning against a lot of people uh pretty badly if you don't like No, I've So I mean, think of the headache, too, right? Owning a house, right? And you're renting it. Somebody's got to feel that call at 2 in the morning when the hot water goes out, right? Or whatever. Like it's just it's everybody who's in it tells me it's full contact sport. you know, best only live a couple miles from all your rentals because you'll be driving a lot, right? Okay, that's that's the deal. Or you're going to spend another 10-15% of the rental fee on a management company and, you know, hope for the best. All right. There are a lot of other ways you can earn a return where you're going to basically, you know, your money's going to double over 25, 30 years, right? Effectively, >> that don't require that much work. >> That's right. That's right. Yeah. >> That's right. And you're right, the best way to explain it is it is a full contact sport. So, um, you know, and and not only do you have to deal with the maintenance, you have to deal with the psychology. So, I had a client one time went in and bought a a a lower-end rental neighborhood and he shows up and, you know, to collect rent first of the month and this young lady comes up, she's got a black eye, holding a screaming baby, right? and in horrible situation, but he in good conscious could not. She's like, "My my husband beat me and ran and I don't have the rent." So, he lets her go that month. Well, the next month out of the 10 houses that had two other of the same stories and he was like, "I can't do this. I'm out." Right? And then, you know, he didn't have anybody that could show up and and do that rent. So, there's all kinds of things that people have to deal with. They think that it's going to be easy and it's not. It's a lot of work. And the problem of where we are right now is is it's priced to perfection. You're you're technically in a bubble based on on people's ability to purchase and their their spending power. I mean, look, what's what are the statistics? The large majority of homes are purchased or individuals over the age of 55, right? So, the younger generation isn't able to get in there and purchase. It's just a terrible situation across the board. And look, I'd buy a property all day long if I could buy it in the current rent would pay for that property in seven years. That mathematics is worth the challenge over the long term and the work that goes into it, but your margin for error is so minimal. I mean, if you're talking 25, 30 years on that rent to be able to pay for the purchase of that property. You might get good cash flow on it, but you're not going to make the type of return that you expected. And here's another example you talk about in Georgia how insurance is. So, I've had two clients that have called in in the past month that have had to take uh lumpsums out. Luckily, I had planned for it. They didn't realize that I had, but their insurance companies refu refusing to renew their insurance because their roofs are in the 22 to 24 year range and they're 40-year roofs and they'll probably last another seven or eight years, but they're like, "No, we're not going to re renew it unless you replace that roof." >> What? So, yeah, I didn't even know they could do that. But this is what the clients are telling me, right? So, I've still got to call my insurance agent and ask if that's possible, but that's the power that these insurance companies have. They're like, "Look, you put a new roof on that because if you got an older roof and you have a hell storm, it's going to damage easier than a newer roof. So, they're trying to protect themselves at your expense." And that's something that can come out of the blue. So, >> wow. >> Um, you know, that's the things that we are starting to see. And that's my frustration because Georgia used to have a great insurance commissioner. Unfortunately, ended his career with a couple of DUIs, but the legacy that he left in place for a while was phenomenally for the benefit of the consumer. But just like everything else in the halls of power, corporate capture has taken them over and now they're maximizing profit for private equity and for their corporate interests. and they just see us as a bunch of cattle that they can pass on their poor investments to and give every excuse in the world for the politicians who are dumb as a box of rocks as far as their their depth of thinking and these little bitty headlines leads them believe oh yeah you got to do that you got to raise rates right so it's just a terrible environment for the consumer right now and it's going to have to swing in the other direction at some point >> it's bad and by the way that's not reflected in our so-called CPI it they just capture that. In fact, according to the CPI, health insurance has gone down by 0.5% over the last 6 years. Like it's actually gone down. >> All right. So, so speaking of shocking things that show up quickly on your doorstep, um very quickly, this is Japan's bond markets uh breaking here. The 30-year bond yield, absolute all-time high, never been higher. Even during the 2008 crisis, the 30-year yield was twice lower. So, this is pretty astonishing. And so their 30-year, you know, cranking out here at um 4 point looks like 4 point I don't know, can barely read that 4.25 maybe something like that. Um so Paul, the the carry trade we talked about it used to be that people would borrow in Japan at cheap rates and then carry excuse me carry that money elsewhere and earn a higher rate. But this is going to change that that flow of capital to and fro from from Japan. And it's across their entire term structure here. This is a uh 10, 20, 30, 40year bonds. All of them go spiking up since 2021. This isn't just a wartime, you know, thing. This is this is a structural shift. Again, these things have been trending down for years. Like you said, they broke out. This is sort of a a little preage, a little little preview into what I think you're going to see in the US if our breakout follows the Japanese breakout higher for longer. And that's going to upset all kinds of things out there. By the way, just to complete it, look at the yields in the UK. These people are in deep trouble. Um I I think the UK is is in uh um going to have a pretty pretty nasty fiscal crisis here coming up. So the nowhere to run, nowhere to hide. I didn't show you, but the rest of Europe is also, you know, spiking. This is this is this is a collective global at least Western sovereign debt problem that we're facing right now. um which will rapidly lead to fiscal crises and potentially monetary crises if it isn't checked. But what could check this? What what would cause violent upward charts like this and this to reverse? >> Well, really the only thing that can can put that in check is if we have a violent equity market selloff. I mean really that's the only thing. The bond market breaks out to the point Luke Gman's most recent tree rings came out with a kind of a good explanation. and he's like, "Our base case is they're just going to print, right? But it but at least until we have a market fit, they're not going to openly do so." Because what's going to happen is if if the equity market gets the wind taken out of its cells at some point here in the next 12 to 24 months, that's going to shake these investors who think that it's different this time and have fully convinced themselves. And that's going to force some rebalancing within these these um mechanical models that's going to, you know, pull some funds back over into the bond market because it's just supply and demand. I mean, you look at the numbers right now. People are selling value stocks. They're selling everything to chase these these top leaders of momentum in the markets. They're levering themselves to the hilt across the board. And when the bond market, you know, the smarter investors in the room say, "Look, I'm just not gonna deploy capital there. the risk is too high. I think that's when you have a market calamity, which my concern on the other side of it, because I' I' I'm still of the belief that at least at some point we get some deflationary pressures before they have, you know, before they openly just print like crazy. And then on the other side of that, you see the markets take off and the inflationary holocaust comes. But that big sell-off allows these big institutions that are caught on the wrong side of these bond yields right now to liquidate their positions to the average investor who went from euphoric over the markets to absolutely scared to death and lowering the risk back into those bonds at kind of the worst time on the other side. That's that's just kind of my working theory of how this is going to pan out. 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I'm Dr. Chris Martinson, proud to work with Peak Financial Investing and my support reflects my professional views. I encourage you to take control of your financial future by making informed decisions. The other reason for all of this, of course, is is simply that inflation is is really pretty bad. Um, and so the PPI inflation, the last reading we had in uh is about a 6% reading. It's actually a lot worse than that on an annualized basis. I got the data here in just a second, but it's clearly been sneaking up. And this, by the way, has been sneaking up since long before the war. The war obviously has put some rocket fuel on this, but you can see it bottomed out here at below 1% back in mid 2023. It's sort of been bouncing along, but the trend is clearly up until this happens. And again, this actually starts really kicks off in in January. Uh the war is actually this tick right here. So, it had already it was already it already had some tailwinds to it, right? It was floating upwards for a variety of reasons. And then um we're recording this on the 20th of May, but Muhammad Elaran on the 13th recording the low most recent uh PPI reading is a huge jump in the US producer price index inflation powered by an eyepopping 1.4% rise in April. So Paul, if we annualize that out, it's not just 12* 1.4, it's 1.4 compounded 12 times. Um that's like seven 14 17% just in top of my head. Somewhere in that zone. I can't do the math that quickly. Nearly triple the.5% consensus. So, what were those economists smoking? Um, I guess they weren't watching the war. I don't know what they were up to, right? And then, of course, he says here on May 15th, uh, bond yields taking a hit, too, because hotter than expected Japanese PPI. And then in the UK, their April PPI came also in at 1.4% versus.9% um, previous estimated 1%. So P P P P P P P P P P P P P P P P P P P P PI producer price index is running hotter than expected globally. And by the way, if you want to know where CPI is going to be, all you have to do is take PPI today and in 2 months that's where it's going to be typically for lots of reasons. So inflation is running hot. Should not be a surprise because we've all been watching this war unfold. Sulfur, this weird element from the periodic table, turns out to be really important. And it was ignored even by myself. Uh, you know, and I'm a big commodities guy cuz it was just this ignorable. It was like 700 a ton, thousand a ton, something like that. It was just a byproduct of oil refining from sour crude. >> So, where's the sulfur going? Because that's not actually been on my radar. What's it used for? And is it shortages out of the Middle East war that's causing it? >> Yeah. Yeah. So, about half the world sulfur is now offline, but most importantly, it's sulfuric acid. And sulfuric acid is used for everything in mining, all kinds of mining processes. is it's used in making computer chips, right? It's used in it's used it's basically the input for an innumerable number of of industrial supplies. So as this goes up, this is the equivalent as when oil goes up because it's an input feed stock at very early in the supply chain. So gosh, it's going to cost me this much more to mine copper. I guess I'm going to have to charge this much more for copper. It cost me this much more to produce any of these various um products that I produce. I have to sort of pad that into the downstream cost and off they go. But that's pretty astonishing. A 7xer >> commodities are just now breaking out. They've not even started gaining momentum yet. So this is just the early stages of big trend change. >> Early that's a big that that's you you spin the wheel on the oil tank or and it uh you know a month later it's the nose starts to swing about. Look at this packaged foods. So this is input cost for packaged foods. This comes out of Financial Times. The Daily Shot posted this on X spot price average cost inflation for packaged food and beverage companies 7.9% in that month. >> Wow. And look at the prices of foods and anything that's packaged from that standpoint and how much they're up already with those smaller numbers. And this is just another cost push surge that's going to be building into the pipeline higher prices. >> So sulfur packaging. Uh-oh. Do you ever have to truck things to get them to to market? So truckloads, spot rates continue to surge. Now 361 a mile on the daily chart within 6 cents per mile of breaking an all-time record set back here in 2021-22 when we had the the highest inflation, the Biden inflation topping out about almost 9%. Right. So we're back to that. So Oh, okay. So sulfur packaging, trucking, Paul, we're talking very very basic at the head of the Nile early input costs that are going to just start feeding downstream. And the bearded bearded Miguel here says this is only the the inflation the BLS conceds, which we all know is bogus because they they massage the numbers to keep them as low as possible. So this is only the inflation the BLS concedes and we all know it's higher. And for 10 years it has now increased at 335 basis points 3.35% perom the most since Q1 1998 that so this is 10year annualized. So so it's giving you a good long read. So this goes all the way back to 1998 but look it's just been just like screaming. So this 1998 was long-term capital management. That's where the Fed really began its printathon program. Problem print problem print problem print. So, that's where we are and that's astonishing to me. Um, that's a very long-term long-term thing. Prediction, it's about to vault a lot higher. Charlie Ble pointing out that price increases since the start of the Iran war, which was just obviously February 28th, March 1st, depending on your time zone. Let's call it March 1st. You know, fertilizer 20%, ura form of fertilizer 28%, crude oil 50%, diesel 51, um, etc. So, these are really high double- digit increases. And every single one of these things is an input feed cost at the head of the production chain. >> That's where that's going. >> That's a big >> That's why you don't want to own any of the certificates of confiscation. That's why smart money is walking away from the bonds as quickly as they can. And they, you know, there's only so fast you can do that without dumping the market, right? But >> that's right. That's right. And look, you know, there's so little money going into inflation protected bonds right now. Like we it's clear sometimes we're a little slow on that on that trend change, right? when you see it come. But we've recently repositioned our fixed income portfolios relatively dramatically to have short and intermediate term inflation protected securities because now you've got this trend established and you have some clear layout that this is going to be there for a while and and uh so you know stay you know I'm not a believer that you go way out on that yield curve because there's just way too much risk on it right now. So, the best way to explain it, I think this statistic is still true. At least it used to be true about 10 years ago. There were actually more lawsuits against investment advisors, stock brokers, and whatever over bonds than there were stocks because most people really don't understand how they work. But if you've got a short if you got a shorter term maturity, let's say it's two years, think of a really short seesaw on the playground, right? So, it m moves minimally. If you go out 30 years, then that's a dramatic move. You know, just in 2% interest rates, I can't remember the numbers now, but it's dramatically lower on the low side. And yeah, you're going to have that steady income over that period of time, but what happens if you're locked in at 30 years at 5%. And 5 years from now, rates are 15 or 17%. And your principal is 50% lower. So, if you're in a position where you're forced to sell it, you're you're um screwed. I'm just going to say it. I'm sorry. I was trying to find another term. It just didn't come to mind. And so, but you're stuck. I mean, you've just you've missed that opportunity uh to to be shorter in duration and have some flexibility to protect yourself against inflation to where at least you can take advantage of that if we get there and then assess the situation and maybe lock those rates in for longer. So, I'm not a big believer that you should be out on the yield curve right now, specifically maybe for a trade which is not looking very good right now. and specifically not from a long-term modern portfolio theory. I'm going to take 30% of my portfolio and put it in 20 30year bonds because the weight of the evidence tells you right now that's going to be a massive loss on your portfolio and you're giving up a huge amount of income in the future when inflation looks to be really high when you're going to need that inflation adjusted income the most. We've talked about this chart before, but it's been updated um to to uh just finish this up. The informationist, that's James Levish Lavish. Uh he's he does some good work. So, we've we've had we put out this chart before. I think the first instantiation of it was Torsten Slocks um from Apollo. But when we did it before, Paul, the green line was here. >> Now, look at this with the most recent PPI reading uh through April. Right. We are now perfectly. So what we're looking at people here is a chart that goes it it has two things across the bottom axis. One, it goes from 1966 to 1982. That's the dark blue line. And you can see we went through a hump of inflation, a second hump, a big third hump. So inflation, this is the lesson. It comes in waves like this. And these waves take years to to burn. Like they thought it was over here by 1976, 1978. Oh, we've we've we've beaten the the the hydra. Um but it grew another head. And so from 1978 to 1980, it took 2 years for that to begin to to go up and then peak and come down again. And by the way, that that peaked there at about 14% inflation. That's why you mentioned we had almost 17% yielding on on the 10-year at that point in time, right? So >> yes. >> So that's why because you know what? You're going to have to give me 17% because inflation's rising on it's 14%. I need some I need some headroom on that that story. So that I think at a minimum looking at this right here. Um since we're clocking in at about 6% now, long rates are going to have to go up and they're going to have to go up a lot. And if this if we follow and by the way it's echoing if not rhyming perfectly. Um who knows how high we go. My personal prediction is as we go higher than in the 1980 hump because this is an energy shock. That's different. That's going to work its way through the system. We could easily see, in my estimation, 15, 18, 20% inflation in the future. >> Mhm. >> It's going to shock everybody. But if you are positioned wrongly in bonds, they will be absolute certificates of confiscation for the capital loss reason you mentioned and also just the um you getting paid 5% in a 15% inflationary world is a confiscatory moment. >> And look, let's say the governments of the world, those that are saying everybody's going to start rearming again. Like you've got the the warfare has changed, okay? So you're going to have to start rearming. You've got the data center uh spend out that's going all of this is a huge consumption within commodities and in the background governments run these huge deficits. If they're just continuing to print money and yield curve control and all that, I believe that it could be far worse. Corporate profits are at an all-time high. A lot of that has to do with financialization. A lot of that has to do with those commodity prices going down for a long period of time. But that regime has changed. So I do not believe that equities, traditional your traditional equities that have have rewarded people so heavily over the past 10 years. I think emerging markets, commodities and some of the right places will provide huge opportunity. But for the average person that's caught up in modern portfolio theory, well, it's okay if my bonds are going to go down. Stocks are going to make up for it. But if you go back to 1973 when that inflation surged, stocks went down 47% and got to a price to earnings ratio of 10. And I can show the chart now, but we've talked about it before. If we get down to a price range ratio of 10, assuming earnings stay the same, that's a 60 to 70% decline in the market. So, how horrible is this going to be, especially initially? You know, the assumption is government's just going to print money to to get us out of it, but that's going to further exacerbate the inflationary pressures. What's going to happen if people's bonds have been cratered? They're stuck at a lower income and their equities go back to normal valuations because it squeezes the profits of the corporations because if AI is successful like they say it is, heck, nobody's going to have a job to be able to earn money anyway. So, it's going to be a pretty tough environment. Well, to to widen the lens a bit, this was so predictable and I actually talked about this all the way back in 2008 because uh in the crash course because what this is, Paul, fundamentally, it's it's um it's fraudulent accounting. It's this idea that you can constantly expand your debt faster than your income or your GDP and you can just do that forever. And I think we're out of forever. So what it means is that when you have a debt bubble, a credit cycle bubble, they happen. They happen, but this is the biggest one ever. And it's infected all of these western markets we're talking about and a lot of Eastern ones too. But so when those things break, Paul, it's mathematically impossible for everybody to come out whole. Mhm. >> Not everybody can't all sell their bonds, you know, and or their stocks. >> And so the point of these things, I I I heard it said before, the point of a bubble, and that's what we have, a credit bubble, right? And as many decades in the making, the point of a bubble is to take as much money from as many people as possible. >> Like if it had a point, right? If if it had a will, its will is to impoverish the maximum number of people, right? >> Yeah. >> So what do you need to do to get there? Well, you need everybody fully invested. They have to believe in the story. They have to be, you know, both feet in the pool. They have to just Yeah. All of that. So, at any rate, you know, I think the point of this section for me, Paul, is just to warn people, keep your eyes on the bonds, but be just be clear on what they're telling you. They're telling you that there's been a regime change and we're going to have to think carefully about how we respond to that. >> And the one thing that I want to say the listeners out there, look, this is pretty scary stuff. If you're getting ready to retire and you're out there looking at this, the point is is not to terrify people. The point is to share honest and truthful information with you because if you have the courage to follow the truth wherever it will take you, then you're going to see the inevitable risks that are on the horizon. The good thing about where we are right now is if you are willing to walk the path less traveled, you know the risks that you need to carry, you can prepare yourself and navigate this well. Nobody's going to come through it unscathed. Okay. But there there are so many asset classes out there that are so ridiculously undervalued right now that they're going to do well out the other, you know, in the in this regime change environment. It's just not going to be the the types of investments that benefited as greatly in the opposite of this trend that are going to benefit as greatly on the other side. So it's so there is opportunity for those that are out there. The thing that that that I try to warn people about this is is passive has its strength and it has its weaknesses. Okay, passive is probably not going to do as well through this through this shift is what people think it has, you know, going to do just by looking in the rearview mirror and projecting that in the future. A tactical adaptive approach is going to be important, right? Do I just go out and ladder all the way out to 30 years across the board? If you have enough money to where you can uh withstand all of that and you can draw such a low income off of your investments, sure, you're fine. Okay? You're going to lose some soldiers and some other soldiers are going to be okay, but you're not going to get into a situation where you run out of money before you run out of life. Like the minimum level of success in retirement is the only check that bounces is to the funeral home, right? Because they can't dig you up and take it from you. So, so there is incredible opportunity for those who are adaptive, have the discipline to control their emotions and walk that path less travel. Because I think what this market's doing right now, Chris, is you've had people that are permables. The only thing that they're going to see is is positive outcome. You have your perma bears. I think your perma bears are on the lower side. And a lot of people will say, "Oh, you're warning us about it. You know, you're a perma bear." No, I'm not a permanent bear. I'm just And you aren't either. You see opportunity. You're warning people about the risks that are out there to try to be a watchman so that they can better be prepared and look at the alternatives. But then you got the people that have been riding the fence. And this market right now and and and I believe when you hit peak bubble is it it attempts to force everyone to make a decision. It pulls people off that sideline, right? and you tend to get lopsided in the bullish outcome. And that's just a part of the cycle we go through. Like you read the Bible front to back, you know, it's like, man, wow, they do good, they get blessed, they they do bad, they crash. Another way of saying that is good men create good times. Good times create weak men. They become complacent. They forget the discipline and the fundamentals and the things that you need to do to be successful long term. And then hard times inevitably come. And that's another reason why a lot of times money doesn't make it past the third generation, maybe to the fourth, because they've had different environments they come through. And you get to that third or fourth generation, and their identity becomes the money that they have, not the byproduct of the discipline and the work and the and the the path less traveled to accumulate those resources. This is just a part of the cycles we go through and we happen to be living in a period of time where we're going to have this regime change, fourth turning, whatever you want to call it. I believe we're we're we're in the midst of that right now. And it's going to be a challenging environment for a time and when peak pessimism comes around is the time where equity valuations are going to be low and probably the maximum opportunity. >> Good. All right. Well, with that, Paul, we are uh done for today. So, if anybody out there listening wants to talk to Paul or his amazing team, please go to peakfinancialinvesting.com, fill out a simple form, few questions in there and some disclosures and uh click send or submit and then somebody from Paul's office will be in touch with you within 48 business hours to schedule what will be the first of three calls. You get a hey, an introductory call, then a planning call, and then finally, if you get there, a recommendations call. And if all of that sort of sorts itself out and it makes sense to work together, then you could go down that part of the road with Paul. Everybody who's gone down that process, though, independent of whether or not they end up working with Paul and his team, says it's been a highly valuable process. So, I would encourage you to take advantage of that today while you can. >> And thank you for that. Like I it it's so refreshing because what I'm able to show people especially when we go through the planning process is where you are and the the feedback I get consistently even with the people I'm like hey guys it's not appropriate for us to work together but but have you gotten some benefit out of this and they're like absolutely my emotions I'm not as scared as I was before or well you kind of confirmed that that you know I'd been told that I was in good shape and I'm not quite as good a shape as what I was been but I know what I need to do. There's a lot of peace of mind of knowing where you are, what the risks are to your success, and the things that you can do to maximize your probabilities in an unknown future. So, to me, that's that's just such a blessing. It never gets old. Somebody asked me, they're like, "Do you ever get tired of running these plans?" I'm like, "No, because every single person's situation is different. Their goals are different. Their desires are different. Their assets are different. And I'm able to to take that to help educate people on, hey, these are the things that you need to shore up. These are the things that you're in good shape on. And then if we go to a recommendation, obviously we give recommendations on that. So it's such an honor for myself, uh, John Alexander, Dylan Smith, and Alex Snellgrove now is doing that as well. So um, you know, no obligation. Hope you guys can tell we're not high pressure. If if we can help you and all that is is the plan, then everything else will take care of itself. >> Well, thank you for doing that, Paul, and thanks for your time again today. >> You're welcome. Good to see you, Chris. >> All right. Bye, everybody. We'll be back next week with another episode of Finance You.
Inflation’s Back And It Brought Friends
Summary
Transcript
Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. Until the punch bowl's taken away, which we're probably going to start doing that within the bond market, they're not going to rein in this fiscal foolishness. So, we're going to demand higher yields and higher return on our money to help protect us against that loss of purchasing power, which is going to be dramatic the longer you go out on the curve. Welcome everyone to this episode of Finance U. I am your host Chris Martinson. Back here again with Paul Ker of Kiker Wealth Management. Paul, good to see you back this week. >> Good to see you again as well, Chris. >> All right. Hey, you know where I want to start today, Paul? Um, how about this? Have you been watching bonds? >> Oh, very closely. Very, very closely. >> Yeah. And so you and I have been watching this for a little while. We've been talking about say the Japanese bonds. We've been talking about where they've been going. But this has now finally caught the larger popular imagination and attention. And we know that because um just yesterday in the Wall Street Journal, they finally caught on to this and they said they caught on quick. The global bond route is accelerating. Here's what to sound very good. Global bond route. We're gonna have to talk about this because this is actually a really big deal. So they say here, quote, "A weeksl long sell off in government bonds has intensified in recent days, threatening to drive up borrowing costs across the globe and knocking some momentum out of what had been a furious stock rally. With bond prices sliding, the yield on the 10-year US Treasury note, a key benchmark for everything, including mortgage rates and other borrowing costs, reached as high as 4.687% Tuesday, highest level intraday since January 2025. But the yield on the 30-year climbed to a new 18-year high near 5.2%. Uh we're going to have to talk about this um Paul because this this is a this is a pretty big deal. So, and we'll get to some more data in just a second, but it's not just the US. This is kind of a western phenomenon, including throwing Japan in the west. bond markets are sliding, which means um yields are going up, which means prices are going down, which means that the buyers of bonds are not buying as much as selling anymore. And so people don't want to hold bonds. Now, Wall Street Journal very helpfully says, "Oh, it's it's possibly related to uncertainty around the war." I'm like, "No, it's possibly related to massive inflation." I got the data, but um what are you seeing? >> No, I'm with you. I mean, look, here's the thing. Why in the world if the government's going to keep spending fiscally foolishly, they're going to, you know, just bar us into oblivion all this data center debt and everything that's going in there. If if if they're basically going to bail us out in every circumstance going forward, why in the world do you want to tie your money up in 20 30 year treasuries, especially in the context of history and the rates that were coming out of the 1970s inflation that we had? And I'm concerned this one's going to be even worse. Mhm. >> So, you know, the bond investors being the smartest ones in the room seem to have finally come to the conclusion, hey, you know, this this is a path that we're headed down and until the punch bowl's taken away, which we're probably going to start doing that within the bond market, they're not going to re in this fiscal foolishness. So, we're going to demand higher yields and higher return on our money to help protect us against that loss of purchasing power, which is going to be dramatic the longer you go out on the curve. >> Yeah. And we'll get back to the 70s double hump inflation, which is a theme we've been on for for months here. And I think now it's pretty obvious that's what's going to happen. >> Back in the 70s, they called bonds, US Treasury bonds, certificates of confiscation, right? Which sort of meant like, hey, if I'm holding a a even a 10% bond, but inflation is 14%, my money is being confiscated by inflation, which again is actually an act of monetary and fiscal policy. Inflation is not some mysterious omen from nature that nobody understands where it comes from, right? It's a well, it's a policy. So when the government policy is to run high inflation but then try and issue its bonds at less than the rate of inflation, well sometimes you get that that buyer strike, which I think we're at the beginning stages of here. >> It appears that way. I mean, look, the the the eastern countries, China's been reducing their exposure to to US bonds. Russia had done it quite some time ago. The argument has to do with protection against sanctions. I think they just saw the handwriting on the wall and the weakness of our leaders at this point and the unwillingness to to go through the pain that's inevitably still coming. And now US investors that have been drinking the Kool-Aid are starting to realize, hey, you know, we're in trouble here if we don't make some changes. >> Well, absolutely. So, here's some of the data. This is a chart of the US 10-year yield. You can see here, this is uh it's kind of tricky to read on a small screen, I bet. This is 2026. So this would be January. This is February. Here's March right at the start of the war. It kicks off. It hit a low here of about 3.95%. Immediately vaulted up to 4.4. Lot of fighting around that 44 level. Then vaulted up here to about 6 4.65. It's falling back a little bit today, but you can clearly see the trend here is uh that's the 10-year. And then the 30-year. Um, Bull Theory here on X had a had a pretty interesting observation saying that the last time the US 30-year bond yield was this high, the stock market peaked 3 months later. Uh, so there could be a connection there. And uh, highest level since July 2007, but this time US has 39 trillion in debt. Part of the reason, which they didn't really go into in depth in the Wall Street Journal article, is that CPI is at 3.8%, 8% PPI at 6%. Uh I presented some of that data last week. I got some more here. We got to talk about this. Inflation is back on the rise obviously and so bonds selling off. Um. >> Mhm. >> Must must be tricky from your position though because I I know you run lots of different scenarios for people in their retirement and you talk specifically about, hey, hate to do this, hate to be that guy, but we're going to have to sort of run your retirement plans under various different inflation scenarios and sort of gut check um you know, how do they perform? >> Absolutely. I mean, people are finally starting to understand why now we've been running 5 a.5% compounded inflation and, you know, three and a half, you know, people are like, "Well, I'm not worried about five and a half." Now, your followers and listeners are actually more concerned about that. But but the consistent gasp that I get on the other side of, oh my goodness, because you you break it down and show this is in your retirement, you're going to spend three and a half million. you need total three and a half million of income or whatever it's six million whatever that number is depending upon the person but if you do it at five and a half it's twice that number and people are like oh my goodness and you know and of course I make the comment kind of leading a little bit that if the average individual really understood this over a long-term period of time we would have a mass revolt against our government leaders in in the policies that they have instituted because people are going hey my asset prices are going up that's Great. But they don't understand that what's following is going to be an absolute erosion of their purchasing power in retirement. And the picture that they have in the future, if this continues, if they're unprepared for it, it's going to be completely different than than the advertisements that they have. And oh, you're just going to have a great retirement. You're going to be all smiles and sunshine rainbows the whole time. Inflation is a terrible evil. And and and in addition to that, like the long-term picture that I want to share here is if you go back and look at the trend that we had in in 30-year treasuries. The chart that I'm sharing is the 30-year Treasury going back to 1977. So, we had that spike, right? That double hump inflation that came through and we peaked up here. I got to move a few things around around 15% on the Treasury and then it started working its way down. you have this nice established negative trend that's in place, right? So, every time you get close to it, you fail and rates go lower and they go lower and then all of a sudden in 2022, you break that trend. And that wasn't just a little breach. I mean, this is a a regime change that we're in right now. >> Now, technically, you can't see it, but we are above, and this is a monthly chart. We'll have to finish at it. But we're above this resistance line that goes all the way back to 2003. So that's a 24 approximately year resistance zone where it tried to peak above and then it collapsed down a little bit further in 2008. And you know, and we're in a completely different situation than we were in 2003, 2004, right? Home prices were not in a bubble. That happened in 2006,7 and 8. uh you you went through a stock market that had a decline from 2000 2003. The NASDAQ bubble burst, but here we are now and the government's still continuing to print with no print fiscally foolishly spend and try to to stimulate the economy. When we've got inflationary pressures that are continuing to build, we break out of this range, it's going to be very similar. we solidly break out of here, it's going to be very similar to the breakout that we showed in gold what, two, three years ago. It was a major break of resistance. And I I believe that's coming. I mean, it it's just the weight of the information tells us that's where we are. But look, look how big of a trend this is in place. This is a completely new regime. But the markets are assuming that we're going to get this type of asset inflation going forward because they don't realize how big of an impact lower rates have been on people's ability to borrow money and lever up. >> Well, and on that point, you know, Paul, I it's um I kind of had to school a boomer because we I was in this public discussion nearby in town and and they were like, you know, they own all some properties, a lot of rentals in town. They're like, "I don't understand why the kids, they just, you know, you just buy a house, you fix it up, and it makes you money." I'm like, they had that tailwind, that long downward slope. That was a great time to do exactly that strategy, but that's not the world we're in anymore. And so, so it's just really hard to change your mindset when it's all been raised and schooled and conditioned for a certain environment, right? So, everything, houses, stocks, all keyed off of the fact that yields were going down the whole time. That made those other two assets go up. Well, now uh those those yields have reversed. Housing is already starting to take it in a variety of communities. We're seeing a lot of places where obviously they housing got super unaffordable, but it it's also really starting to to suffer. Stocks are the last last man standing in this, but remember old Wall Street saying stocks are for show, but bonds are for dough. >> For do >> Yep. The show might the show might be winding up here if if bond yields keep doing what they're doing. That's why I wanted to lead off with this. This is the most important thing happening in the financial space right now is all this creaking and popping and and bursting of the bond yields. >> And Chris, going back to housing and talking about what the boomers experienced in the early 80s, their purchasing power, they had more purchasing power with the income that they earned. I wish I knew where I had some data to bring that up right now, but that we'll save that for a little bit later. But here's an example. I mean, back in the early 1990s, I remember my uncle would sit down. he's buying rental properties and his thing was was I'll build one a year and then I'll buy one a year. So that's what he did for a certain period of time working forward. So his formula was because it was a completely different environment back then. If you can buy a property and it'll pay for it, the rent will pay for it in seven years, right? Then borrow some money, put it to work. But you know, when he originally started buying, you're borrowing money at 12 and 14%. and then it gets down to 6 or 7% and you can refinance. And he was the type of person that would just pour all that extra cash flow back into paying it off. But the rule of thumb was if you can buy a property and it'll pay for itself from the rent in seven years, you're good, you know, because you've got vacancies, you've got repairs, you got people that are going to mess things up. Then it got up to 10 or it got up to 12 years and 12 years was his threshold. I mean, I can't tell you how many people come in. the only reason that they're going to buy rental properties is because that's what their parents did and it worked. That's what their uncles did and it worked. And and the argument from that whole generation is, hey, I've never bought a bought a piece of property that didn't work out if I held it long enough. But the problem is I had somebody just two weeks ago is like, hey, I think I got a really good deal. The uh these people are willing to sell it for 15% less than what the asking price is. So, we looked at rentals. We looked at insurance. We looked at their to total cost, the leverage carrying. You're talking about 25 to 30 years before it'll cash flow to pay that note off. And I looked at the client and I'm like I'm like, okay, so let's just talk get rid of your preconceived ideas, right? What happens if you have 20% vacancy? Okay, let's just say if it's 10%. Let's say if it's 5%. You know, 30-year roofs last 15 years now. They don't make anything as good as what they used to. Any pressuret treated porches are going to have to be replaced in about seven or eight years because we've got these built, you know, supposedly good for the environment. I grew up handling pressuret treated lumber and I don't know anybody that got in trouble from it, but that stuff used to last 30 years and and the mathematics are you're talking about 354 years before you get, you know, a real return on your money and you just don't have that long. So, we're in a completely different environment and if rates continue to go up, there's no bailing out, right? You're stuck. If you get in a bind, you can't refinance, get a lower rate, wrap up that foolish credit card debt in the house and still be okay because rates are going to go up and you're stuck. It's a completely different environment. And I've been hearing some horror stories particularly from Georgia because y'all have a really crazy insurance commission or something. >> But insurance is is now doubling on people house insurance. So So you look at all those input costs, right? What's it going to cost to maintain this property? I'm going to have to insure it. all these costs are just going up and if you ever did any of this on a variable rate mortgage, right? Oops. You know, so I could see this really turning against a lot of people uh pretty badly if you don't like No, I've So I mean, think of the headache, too, right? Owning a house, right? And you're renting it. Somebody's got to feel that call at 2 in the morning when the hot water goes out, right? Or whatever. Like it's just it's everybody who's in it tells me it's full contact sport. you know, best only live a couple miles from all your rentals because you'll be driving a lot, right? Okay, that's that's the deal. Or you're going to spend another 10-15% of the rental fee on a management company and, you know, hope for the best. All right. There are a lot of other ways you can earn a return where you're going to basically, you know, your money's going to double over 25, 30 years, right? Effectively, >> that don't require that much work. >> That's right. That's right. Yeah. >> That's right. And you're right, the best way to explain it is it is a full contact sport. So, um, you know, and and not only do you have to deal with the maintenance, you have to deal with the psychology. So, I had a client one time went in and bought a a a lower-end rental neighborhood and he shows up and, you know, to collect rent first of the month and this young lady comes up, she's got a black eye, holding a screaming baby, right? and in horrible situation, but he in good conscious could not. She's like, "My my husband beat me and ran and I don't have the rent." So, he lets her go that month. Well, the next month out of the 10 houses that had two other of the same stories and he was like, "I can't do this. I'm out." Right? And then, you know, he didn't have anybody that could show up and and do that rent. So, there's all kinds of things that people have to deal with. They think that it's going to be easy and it's not. It's a lot of work. And the problem of where we are right now is is it's priced to perfection. You're you're technically in a bubble based on on people's ability to purchase and their their spending power. I mean, look, what's what are the statistics? The large majority of homes are purchased or individuals over the age of 55, right? So, the younger generation isn't able to get in there and purchase. It's just a terrible situation across the board. And look, I'd buy a property all day long if I could buy it in the current rent would pay for that property in seven years. That mathematics is worth the challenge over the long term and the work that goes into it, but your margin for error is so minimal. I mean, if you're talking 25, 30 years on that rent to be able to pay for the purchase of that property. You might get good cash flow on it, but you're not going to make the type of return that you expected. And here's another example you talk about in Georgia how insurance is. So, I've had two clients that have called in in the past month that have had to take uh lumpsums out. Luckily, I had planned for it. They didn't realize that I had, but their insurance companies refu refusing to renew their insurance because their roofs are in the 22 to 24 year range and they're 40-year roofs and they'll probably last another seven or eight years, but they're like, "No, we're not going to re renew it unless you replace that roof." >> What? So, yeah, I didn't even know they could do that. But this is what the clients are telling me, right? So, I've still got to call my insurance agent and ask if that's possible, but that's the power that these insurance companies have. They're like, "Look, you put a new roof on that because if you got an older roof and you have a hell storm, it's going to damage easier than a newer roof. So, they're trying to protect themselves at your expense." And that's something that can come out of the blue. So, >> wow. >> Um, you know, that's the things that we are starting to see. And that's my frustration because Georgia used to have a great insurance commissioner. Unfortunately, ended his career with a couple of DUIs, but the legacy that he left in place for a while was phenomenally for the benefit of the consumer. But just like everything else in the halls of power, corporate capture has taken them over and now they're maximizing profit for private equity and for their corporate interests. and they just see us as a bunch of cattle that they can pass on their poor investments to and give every excuse in the world for the politicians who are dumb as a box of rocks as far as their their depth of thinking and these little bitty headlines leads them believe oh yeah you got to do that you got to raise rates right so it's just a terrible environment for the consumer right now and it's going to have to swing in the other direction at some point >> it's bad and by the way that's not reflected in our so-called CPI it they just capture that. In fact, according to the CPI, health insurance has gone down by 0.5% over the last 6 years. Like it's actually gone down. >> All right. So, so speaking of shocking things that show up quickly on your doorstep, um very quickly, this is Japan's bond markets uh breaking here. The 30-year bond yield, absolute all-time high, never been higher. Even during the 2008 crisis, the 30-year yield was twice lower. So, this is pretty astonishing. And so their 30-year, you know, cranking out here at um 4 point looks like 4 point I don't know, can barely read that 4.25 maybe something like that. Um so Paul, the the carry trade we talked about it used to be that people would borrow in Japan at cheap rates and then carry excuse me carry that money elsewhere and earn a higher rate. But this is going to change that that flow of capital to and fro from from Japan. And it's across their entire term structure here. This is a uh 10, 20, 30, 40year bonds. All of them go spiking up since 2021. This isn't just a wartime, you know, thing. This is this is a structural shift. Again, these things have been trending down for years. Like you said, they broke out. This is sort of a a little preage, a little little preview into what I think you're going to see in the US if our breakout follows the Japanese breakout higher for longer. And that's going to upset all kinds of things out there. By the way, just to complete it, look at the yields in the UK. These people are in deep trouble. Um I I think the UK is is in uh um going to have a pretty pretty nasty fiscal crisis here coming up. So the nowhere to run, nowhere to hide. I didn't show you, but the rest of Europe is also, you know, spiking. This is this is this is a collective global at least Western sovereign debt problem that we're facing right now. um which will rapidly lead to fiscal crises and potentially monetary crises if it isn't checked. But what could check this? What what would cause violent upward charts like this and this to reverse? >> Well, really the only thing that can can put that in check is if we have a violent equity market selloff. I mean really that's the only thing. The bond market breaks out to the point Luke Gman's most recent tree rings came out with a kind of a good explanation. and he's like, "Our base case is they're just going to print, right? But it but at least until we have a market fit, they're not going to openly do so." Because what's going to happen is if if the equity market gets the wind taken out of its cells at some point here in the next 12 to 24 months, that's going to shake these investors who think that it's different this time and have fully convinced themselves. And that's going to force some rebalancing within these these um mechanical models that's going to, you know, pull some funds back over into the bond market because it's just supply and demand. I mean, you look at the numbers right now. People are selling value stocks. They're selling everything to chase these these top leaders of momentum in the markets. They're levering themselves to the hilt across the board. And when the bond market, you know, the smarter investors in the room say, "Look, I'm just not gonna deploy capital there. the risk is too high. I think that's when you have a market calamity, which my concern on the other side of it, because I' I' I'm still of the belief that at least at some point we get some deflationary pressures before they have, you know, before they openly just print like crazy. And then on the other side of that, you see the markets take off and the inflationary holocaust comes. But that big sell-off allows these big institutions that are caught on the wrong side of these bond yields right now to liquidate their positions to the average investor who went from euphoric over the markets to absolutely scared to death and lowering the risk back into those bonds at kind of the worst time on the other side. That's that's just kind of my working theory of how this is going to pan out. 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I'm Dr. Chris Martinson, proud to work with Peak Financial Investing and my support reflects my professional views. I encourage you to take control of your financial future by making informed decisions. The other reason for all of this, of course, is is simply that inflation is is really pretty bad. Um, and so the PPI inflation, the last reading we had in uh is about a 6% reading. It's actually a lot worse than that on an annualized basis. I got the data here in just a second, but it's clearly been sneaking up. And this, by the way, has been sneaking up since long before the war. The war obviously has put some rocket fuel on this, but you can see it bottomed out here at below 1% back in mid 2023. It's sort of been bouncing along, but the trend is clearly up until this happens. And again, this actually starts really kicks off in in January. Uh the war is actually this tick right here. So, it had already it was already it already had some tailwinds to it, right? It was floating upwards for a variety of reasons. And then um we're recording this on the 20th of May, but Muhammad Elaran on the 13th recording the low most recent uh PPI reading is a huge jump in the US producer price index inflation powered by an eyepopping 1.4% rise in April. So Paul, if we annualize that out, it's not just 12* 1.4, it's 1.4 compounded 12 times. Um that's like seven 14 17% just in top of my head. Somewhere in that zone. I can't do the math that quickly. Nearly triple the.5% consensus. So, what were those economists smoking? Um, I guess they weren't watching the war. I don't know what they were up to, right? And then, of course, he says here on May 15th, uh, bond yields taking a hit, too, because hotter than expected Japanese PPI. And then in the UK, their April PPI came also in at 1.4% versus.9% um, previous estimated 1%. So P P P P P P P P P P P P P P P P P P P P PI producer price index is running hotter than expected globally. And by the way, if you want to know where CPI is going to be, all you have to do is take PPI today and in 2 months that's where it's going to be typically for lots of reasons. So inflation is running hot. Should not be a surprise because we've all been watching this war unfold. Sulfur, this weird element from the periodic table, turns out to be really important. And it was ignored even by myself. Uh, you know, and I'm a big commodities guy cuz it was just this ignorable. It was like 700 a ton, thousand a ton, something like that. It was just a byproduct of oil refining from sour crude. >> So, where's the sulfur going? Because that's not actually been on my radar. What's it used for? And is it shortages out of the Middle East war that's causing it? >> Yeah. Yeah. So, about half the world sulfur is now offline, but most importantly, it's sulfuric acid. And sulfuric acid is used for everything in mining, all kinds of mining processes. is it's used in making computer chips, right? It's used in it's used it's basically the input for an innumerable number of of industrial supplies. So as this goes up, this is the equivalent as when oil goes up because it's an input feed stock at very early in the supply chain. So gosh, it's going to cost me this much more to mine copper. I guess I'm going to have to charge this much more for copper. It cost me this much more to produce any of these various um products that I produce. I have to sort of pad that into the downstream cost and off they go. But that's pretty astonishing. A 7xer >> commodities are just now breaking out. They've not even started gaining momentum yet. So this is just the early stages of big trend change. >> Early that's a big that that's you you spin the wheel on the oil tank or and it uh you know a month later it's the nose starts to swing about. Look at this packaged foods. So this is input cost for packaged foods. This comes out of Financial Times. The Daily Shot posted this on X spot price average cost inflation for packaged food and beverage companies 7.9% in that month. >> Wow. And look at the prices of foods and anything that's packaged from that standpoint and how much they're up already with those smaller numbers. And this is just another cost push surge that's going to be building into the pipeline higher prices. >> So sulfur packaging. Uh-oh. Do you ever have to truck things to get them to to market? So truckloads, spot rates continue to surge. Now 361 a mile on the daily chart within 6 cents per mile of breaking an all-time record set back here in 2021-22 when we had the the highest inflation, the Biden inflation topping out about almost 9%. Right. So we're back to that. So Oh, okay. So sulfur packaging, trucking, Paul, we're talking very very basic at the head of the Nile early input costs that are going to just start feeding downstream. And the bearded bearded Miguel here says this is only the the inflation the BLS conceds, which we all know is bogus because they they massage the numbers to keep them as low as possible. So this is only the inflation the BLS concedes and we all know it's higher. And for 10 years it has now increased at 335 basis points 3.35% perom the most since Q1 1998 that so this is 10year annualized. So so it's giving you a good long read. So this goes all the way back to 1998 but look it's just been just like screaming. So this 1998 was long-term capital management. That's where the Fed really began its printathon program. Problem print problem print problem print. So, that's where we are and that's astonishing to me. Um, that's a very long-term long-term thing. Prediction, it's about to vault a lot higher. Charlie Ble pointing out that price increases since the start of the Iran war, which was just obviously February 28th, March 1st, depending on your time zone. Let's call it March 1st. You know, fertilizer 20%, ura form of fertilizer 28%, crude oil 50%, diesel 51, um, etc. So, these are really high double- digit increases. And every single one of these things is an input feed cost at the head of the production chain. >> That's where that's going. >> That's a big >> That's why you don't want to own any of the certificates of confiscation. That's why smart money is walking away from the bonds as quickly as they can. And they, you know, there's only so fast you can do that without dumping the market, right? But >> that's right. That's right. And look, you know, there's so little money going into inflation protected bonds right now. Like we it's clear sometimes we're a little slow on that on that trend change, right? when you see it come. But we've recently repositioned our fixed income portfolios relatively dramatically to have short and intermediate term inflation protected securities because now you've got this trend established and you have some clear layout that this is going to be there for a while and and uh so you know stay you know I'm not a believer that you go way out on that yield curve because there's just way too much risk on it right now. So, the best way to explain it, I think this statistic is still true. At least it used to be true about 10 years ago. There were actually more lawsuits against investment advisors, stock brokers, and whatever over bonds than there were stocks because most people really don't understand how they work. But if you've got a short if you got a shorter term maturity, let's say it's two years, think of a really short seesaw on the playground, right? So, it m moves minimally. If you go out 30 years, then that's a dramatic move. You know, just in 2% interest rates, I can't remember the numbers now, but it's dramatically lower on the low side. And yeah, you're going to have that steady income over that period of time, but what happens if you're locked in at 30 years at 5%. And 5 years from now, rates are 15 or 17%. And your principal is 50% lower. So, if you're in a position where you're forced to sell it, you're you're um screwed. I'm just going to say it. I'm sorry. I was trying to find another term. It just didn't come to mind. And so, but you're stuck. I mean, you've just you've missed that opportunity uh to to be shorter in duration and have some flexibility to protect yourself against inflation to where at least you can take advantage of that if we get there and then assess the situation and maybe lock those rates in for longer. So, I'm not a big believer that you should be out on the yield curve right now, specifically maybe for a trade which is not looking very good right now. and specifically not from a long-term modern portfolio theory. I'm going to take 30% of my portfolio and put it in 20 30year bonds because the weight of the evidence tells you right now that's going to be a massive loss on your portfolio and you're giving up a huge amount of income in the future when inflation looks to be really high when you're going to need that inflation adjusted income the most. We've talked about this chart before, but it's been updated um to to uh just finish this up. The informationist, that's James Levish Lavish. Uh he's he does some good work. So, we've we've had we put out this chart before. I think the first instantiation of it was Torsten Slocks um from Apollo. But when we did it before, Paul, the green line was here. >> Now, look at this with the most recent PPI reading uh through April. Right. We are now perfectly. So what we're looking at people here is a chart that goes it it has two things across the bottom axis. One, it goes from 1966 to 1982. That's the dark blue line. And you can see we went through a hump of inflation, a second hump, a big third hump. So inflation, this is the lesson. It comes in waves like this. And these waves take years to to burn. Like they thought it was over here by 1976, 1978. Oh, we've we've we've beaten the the the hydra. Um but it grew another head. And so from 1978 to 1980, it took 2 years for that to begin to to go up and then peak and come down again. And by the way, that that peaked there at about 14% inflation. That's why you mentioned we had almost 17% yielding on on the 10-year at that point in time, right? So >> yes. >> So that's why because you know what? You're going to have to give me 17% because inflation's rising on it's 14%. I need some I need some headroom on that that story. So that I think at a minimum looking at this right here. Um since we're clocking in at about 6% now, long rates are going to have to go up and they're going to have to go up a lot. And if this if we follow and by the way it's echoing if not rhyming perfectly. Um who knows how high we go. My personal prediction is as we go higher than in the 1980 hump because this is an energy shock. That's different. That's going to work its way through the system. We could easily see, in my estimation, 15, 18, 20% inflation in the future. >> Mhm. >> It's going to shock everybody. But if you are positioned wrongly in bonds, they will be absolute certificates of confiscation for the capital loss reason you mentioned and also just the um you getting paid 5% in a 15% inflationary world is a confiscatory moment. >> And look, let's say the governments of the world, those that are saying everybody's going to start rearming again. Like you've got the the warfare has changed, okay? So you're going to have to start rearming. You've got the data center uh spend out that's going all of this is a huge consumption within commodities and in the background governments run these huge deficits. If they're just continuing to print money and yield curve control and all that, I believe that it could be far worse. Corporate profits are at an all-time high. A lot of that has to do with financialization. A lot of that has to do with those commodity prices going down for a long period of time. But that regime has changed. So I do not believe that equities, traditional your traditional equities that have have rewarded people so heavily over the past 10 years. I think emerging markets, commodities and some of the right places will provide huge opportunity. But for the average person that's caught up in modern portfolio theory, well, it's okay if my bonds are going to go down. Stocks are going to make up for it. But if you go back to 1973 when that inflation surged, stocks went down 47% and got to a price to earnings ratio of 10. And I can show the chart now, but we've talked about it before. If we get down to a price range ratio of 10, assuming earnings stay the same, that's a 60 to 70% decline in the market. So, how horrible is this going to be, especially initially? You know, the assumption is government's just going to print money to to get us out of it, but that's going to further exacerbate the inflationary pressures. What's going to happen if people's bonds have been cratered? They're stuck at a lower income and their equities go back to normal valuations because it squeezes the profits of the corporations because if AI is successful like they say it is, heck, nobody's going to have a job to be able to earn money anyway. So, it's going to be a pretty tough environment. Well, to to widen the lens a bit, this was so predictable and I actually talked about this all the way back in 2008 because uh in the crash course because what this is, Paul, fundamentally, it's it's um it's fraudulent accounting. It's this idea that you can constantly expand your debt faster than your income or your GDP and you can just do that forever. And I think we're out of forever. So what it means is that when you have a debt bubble, a credit cycle bubble, they happen. They happen, but this is the biggest one ever. And it's infected all of these western markets we're talking about and a lot of Eastern ones too. But so when those things break, Paul, it's mathematically impossible for everybody to come out whole. Mhm. >> Not everybody can't all sell their bonds, you know, and or their stocks. >> And so the point of these things, I I I heard it said before, the point of a bubble, and that's what we have, a credit bubble, right? And as many decades in the making, the point of a bubble is to take as much money from as many people as possible. >> Like if it had a point, right? If if it had a will, its will is to impoverish the maximum number of people, right? >> Yeah. >> So what do you need to do to get there? Well, you need everybody fully invested. They have to believe in the story. They have to be, you know, both feet in the pool. They have to just Yeah. All of that. So, at any rate, you know, I think the point of this section for me, Paul, is just to warn people, keep your eyes on the bonds, but be just be clear on what they're telling you. They're telling you that there's been a regime change and we're going to have to think carefully about how we respond to that. >> And the one thing that I want to say the listeners out there, look, this is pretty scary stuff. If you're getting ready to retire and you're out there looking at this, the point is is not to terrify people. The point is to share honest and truthful information with you because if you have the courage to follow the truth wherever it will take you, then you're going to see the inevitable risks that are on the horizon. The good thing about where we are right now is if you are willing to walk the path less traveled, you know the risks that you need to carry, you can prepare yourself and navigate this well. Nobody's going to come through it unscathed. Okay. But there there are so many asset classes out there that are so ridiculously undervalued right now that they're going to do well out the other, you know, in the in this regime change environment. It's just not going to be the the types of investments that benefited as greatly in the opposite of this trend that are going to benefit as greatly on the other side. So it's so there is opportunity for those that are out there. The thing that that that I try to warn people about this is is passive has its strength and it has its weaknesses. Okay, passive is probably not going to do as well through this through this shift is what people think it has, you know, going to do just by looking in the rearview mirror and projecting that in the future. A tactical adaptive approach is going to be important, right? Do I just go out and ladder all the way out to 30 years across the board? If you have enough money to where you can uh withstand all of that and you can draw such a low income off of your investments, sure, you're fine. Okay? You're going to lose some soldiers and some other soldiers are going to be okay, but you're not going to get into a situation where you run out of money before you run out of life. Like the minimum level of success in retirement is the only check that bounces is to the funeral home, right? Because they can't dig you up and take it from you. So, so there is incredible opportunity for those who are adaptive, have the discipline to control their emotions and walk that path less travel. Because I think what this market's doing right now, Chris, is you've had people that are permables. The only thing that they're going to see is is positive outcome. You have your perma bears. I think your perma bears are on the lower side. And a lot of people will say, "Oh, you're warning us about it. You know, you're a perma bear." No, I'm not a permanent bear. I'm just And you aren't either. You see opportunity. You're warning people about the risks that are out there to try to be a watchman so that they can better be prepared and look at the alternatives. But then you got the people that have been riding the fence. And this market right now and and and I believe when you hit peak bubble is it it attempts to force everyone to make a decision. It pulls people off that sideline, right? and you tend to get lopsided in the bullish outcome. And that's just a part of the cycle we go through. Like you read the Bible front to back, you know, it's like, man, wow, they do good, they get blessed, they they do bad, they crash. Another way of saying that is good men create good times. Good times create weak men. They become complacent. They forget the discipline and the fundamentals and the things that you need to do to be successful long term. And then hard times inevitably come. And that's another reason why a lot of times money doesn't make it past the third generation, maybe to the fourth, because they've had different environments they come through. And you get to that third or fourth generation, and their identity becomes the money that they have, not the byproduct of the discipline and the work and the and the the path less traveled to accumulate those resources. This is just a part of the cycles we go through and we happen to be living in a period of time where we're going to have this regime change, fourth turning, whatever you want to call it. I believe we're we're we're in the midst of that right now. And it's going to be a challenging environment for a time and when peak pessimism comes around is the time where equity valuations are going to be low and probably the maximum opportunity. >> Good. All right. Well, with that, Paul, we are uh done for today. So, if anybody out there listening wants to talk to Paul or his amazing team, please go to peakfinancialinvesting.com, fill out a simple form, few questions in there and some disclosures and uh click send or submit and then somebody from Paul's office will be in touch with you within 48 business hours to schedule what will be the first of three calls. You get a hey, an introductory call, then a planning call, and then finally, if you get there, a recommendations call. And if all of that sort of sorts itself out and it makes sense to work together, then you could go down that part of the road with Paul. Everybody who's gone down that process, though, independent of whether or not they end up working with Paul and his team, says it's been a highly valuable process. So, I would encourage you to take advantage of that today while you can. >> And thank you for that. Like I it it's so refreshing because what I'm able to show people especially when we go through the planning process is where you are and the the feedback I get consistently even with the people I'm like hey guys it's not appropriate for us to work together but but have you gotten some benefit out of this and they're like absolutely my emotions I'm not as scared as I was before or well you kind of confirmed that that you know I'd been told that I was in good shape and I'm not quite as good a shape as what I was been but I know what I need to do. There's a lot of peace of mind of knowing where you are, what the risks are to your success, and the things that you can do to maximize your probabilities in an unknown future. So, to me, that's that's just such a blessing. It never gets old. Somebody asked me, they're like, "Do you ever get tired of running these plans?" I'm like, "No, because every single person's situation is different. Their goals are different. Their desires are different. Their assets are different. And I'm able to to take that to help educate people on, hey, these are the things that you need to shore up. These are the things that you're in good shape on. And then if we go to a recommendation, obviously we give recommendations on that. So it's such an honor for myself, uh, John Alexander, Dylan Smith, and Alex Snellgrove now is doing that as well. So um, you know, no obligation. Hope you guys can tell we're not high pressure. If if we can help you and all that is is the plan, then everything else will take care of itself. >> Well, thank you for doing that, Paul, and thanks for your time again today. >> You're welcome. Good to see you, Chris. >> All right. Bye, everybody. We'll be back next week with another episode of Finance You.