Investors Are "Pretty Drunk Right Now" On Gains Despite Risks | Ted Oakley

Summary

• Market Outlook: Ted Oakley highlights the current state of the market as highly speculative with stock valuations at all-time highs, suggesting a potential correction or bear market in the near future.
• Valuation Concerns: Oakley emphasizes that current stock valuations are unsustainable long-term, with metrics like price-to-book and CAPE ratios indicating overvaluation, reminiscent of past market bubbles.
• Leverage and Risk: The podcast discusses the dangers of high margin debt and leverage in the market, which could exacerbate a downturn if a sell-off occurs, as investors may be forced to liquidate positions.
• Investment Strategy: Oakley advises maintaining liquidity and optionality, suggesting that investors should not be fully invested at current high valuations and should be prepared for potential market corrections.
• Inflation Expectations: The discussion predicts higher secular inflation over the next decade, driven by fiscal policies and global economic conditions, which could impact bond yields and investment strategies.
• Sector Insights: Oakley sees potential in hard assets like gold and energy, noting that while gold has performed well, energy stocks offer attractive dividends and could benefit from future economic conditions.
• Housing Market Risks: Concerns are raised about the housing market's potential for a correction due to high prices and stagnant sales, which could impact consumer wealth and spending.
• Investment Advice: For those with significant gains or liquidity, Oakley recommends a cautious approach, emphasizing the importance of managing risk and maintaining a balanced portfolio to weather potential market downturns.

Transcript

You have to remember it's been a long time since we had basically it's been uh you know 17 going on 17 years almost since the last what I call generational bare market. So somewhere you know in this next year or two you're probably going to get to that point and then you know the game changes again. But right now u everybody's pretty drunk on where they are. So you you can't sober them up right now. Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. Stock valuations are pretty much at their highest ever by many metrics. So much so that a recent guest on this channel called them pornographically overvalued. And these lofty valuations come at a time when the macro data reveals the economy is slowing down. How long can this dichotomy last before either stocks must repric downwards or the economy picks up? For seasoned expertise, we've got the good fortune to welcome back to the program high netw worth financial advisor Ted Oakley, managing partner and founder at Oxbow Advisors. Ted, thanks so much for joining us today. You bet, Adam. Good to see you again. Great to see you, Ted. Um, look, a lot has happened since the last time we talked. I think we talked right where we were kind of coming out of the uh the April uh lows, the chaos of uh liberation day. We're a lot further along now and of course the markets uh totally different from where they were back then. Uh they have roared back uh now to all-time high price levels. Um but also all-time high valuation levels. Um so let's kick it off here, Ted. Uh, are these valuation levels sustainable? Um, or uh are they crazy? Well, they they could be sustainable for a while, but it's not a long-term phenomenon. And so, I think what happens when you get to this stage of the market, and this has been going on for a number of years now. You know, you just keep getting more and more and more speculative. And when nothing bad happens, it gives you uh gives you the ability to say, "Well, I'm gonna get more speculative." And that's really where we are. But if you look at the numbers, I mean, if you look at the numbers they have for the S&P next year earnings wise, it's like 16% and we're still selling out at 24 25 times forward. Uh 28 plus, you know, trailing 12 months. I mean, you could you you you could have people play this market like that on a speculative basis, but if you're buying a company and you're buying something that's going to be a really great producing asset, you can't pay that kind of money for it because in the long run it won't work. So yeah, you could keep them going for a while, but um you have to remember it's been a long time since we had basically it's been uh you know 17 going on 17 years almost since the last what I call generational bare market. So somewhere you know in this next year or two you're probably going to get to that point and then you know the game changes again. But right now, u everybody's pretty drunk on where they are. So you you can't sober them up right now. All right. And that's that's kind of where I'm going. So let me put up a couple charts that you prepared. Um the first is a chart of just US stock valuations. And this is sort of a composite valuation metric. Um brings trailing pees, cape ratios, all sorts of things in here. Um but basically looking back over the past 125 years um this is the highest this index has ever been and that's eclipsing the height right before the 1929 crash before uh the market rollover in the 19 the mid60s uh and then obviously right before the dot crash as well. How much of a warning sign is this to you and how worried does it make you about where the market could go from here? Well, again, there's things in there if you look at price to book, price to sales, um, you know, cape ratio, normal pees, um, like the toben Q is in there, which is what does it cost to replace, you know, uh, if the pricing is so much higher than replacement cost, then obviously you're overpaying for it. So, all of those things together, market cap to GDP, every one of those is at a very high level. So let's just say you're a person don't know you don't you don't know anything and so you say I'm just going to statistically say what it's in my best interest. Well statistically you're in that top 2% or 1% of time when it's too expensive. So do you want to bet the farm to say oh you know I think this is going to be great for the next five years. I don't think so. uh but it would be it un unquestionably would be uh an unusual time if that happened and I don't think it will happen. Okay. Now uh you know the the age-old wisdom in the markets is buy low sell high. Um it looks very much like this is a buy high environment. M maybe buy at the the highest it's ever been type environment. Um, so I'm I'm going somewhere with these questions, but let me let me pull up another chart here just to sort of again set the table. Um, you've got another chart you put together. Um, S&P 500 price to book ratio. Uh, again here we're at pretty much the the highest ever. Um, when you know essentially what happens when markets get overvalued is they're pulling tomorrow's value into today, right? Um and that just means when you get to tomorrow there's less value left over because it was already pulled in uh in advance. Um you know we are according to this chart um you know substantially more than uh a standard deviation probably even two above the norm here. Histo what does history generally tell us like how reflexive is the reversion of the mean once you get this deviated? Well, what happens is they, you know, it's just a it's just a situation with numbers. When you look at what goes on with that, um, it will eventually come back to to the norm. And one of the things when you get when you're when you're paying such a high price uh over the real assets that you're buying, then you just you don't have any room for error is what it amounts to. And uh and it I think that's what people forget about today. See, most people today are just buying the S&P 500 or buying some ETF or some one of the high-flying seven top mag seven mag eight stocks. And so they're not really thinking about valuations or anything at all. They're just thinking about I'm going to buy this. Okay. Um and I I would say generally most of them don't know what's in what they're buying. They just know I got to buy it. And that's when you get into scary territory because that also means on the flip side of that once you start to get selling they won't know what to do with that either because they don't know why they got into it in the first place. So uh that's that's what you look at on that. But um you know we obviously haven't been there and and and everybody is in the same mode which is hey we're probably never going to get a selloff again or recession again. Well, so you you've invested over enough decades that you've seen, you know, a lot of variants of this movie play out before, right? And um Darius Dale coins a phrase that I think I've talked about with you in the past, which is that the uh that the the party gets at its most wild before the cops right before the cops show up, right? And a couple other charts that you just sent uh over. One here is of stock margin debt. Um, which basically, you know, stock margin is is people buying borrowing to buy stocks, right? Right. And again, we're at an all-time high there. Uh, you know, at least uh uh an absolute high in terms of the amount of of margin debt. Um, and I'll put up another chart here, too. Um, leverage of uh leverage versus money supply. um which is sort of a similar indicator here, which is that people are getting more and more comfortable kind of leaning into uh the speculation that's going on and using debt to fund it, right? And so to me, that's the the market equivalent of the guy putting the lampshade on his head and and dancing, you know, on the table, right? Thinking he's having a great time. Um so um you know are you indeed seeing signs of that sort of like throw caution to the wind type of indicators that you typically see maybe before the right before the sirens can start margin debt is one of them. That's why I sent it to you because when people get so confident they'll borrow any amount of money just keep on making money. We'll borrow more money and make more money. Uh but that's one you know that's over one trillion now. That's a lot of money borrowed against the stock market and they think nothing will go wrong. But you have to remember in one year, one single year between December 21 and December 22, margin debt, that's when you had that down market, it declined 50%. In other words, they had to sell them because they got in trouble. And all this does is adds fuel to the fire, if you ever get some selling because they have to sell then. And so you have when everybody's borrowed up, uh, and believe me, Wall Street's not going to help you out there. They're going to sell you out if, uh, if you start coming down. But it's the same way in all leverage products. If you look at private credit, private equity, um, and people, uh, if they get a chance to leverage now, they leverage and they they means nothing to them to leverage. But that's one of the problems in the system. We have too much leverage. And when you have too much leverage, when things get really bad, then you really find out who's who's going to play ball and who's not. Okay. So, I think I've set the table now where we've got these record high valuation levels. Um, we've got a lot of warning signs like way too much leverage in the system as you just talked about. Um, and and there's a risk of just mean reversion with just those conditions alone. But now we're looking at the the economic data and we're seeing that the economy is slowing. So we we get to the question I mentioned in my introduction here, which is seems like we're sort of on a collision course here where, you know, either if the economy slows far enough, the the market's going to have to say, you know what, we've been we've been too euphoric here, we've got to repric downwards. Um or the economy could, you know, start showing signs of greater life and then earnings could catch up to valuations. Um, one, do you have a do do you have a proclivity one way or the other in terms of how you think this will resolve? Well, I think it would in the short run somewhere in here in the next 3 months or so. Uh, even if you're going higher, I think it's going to throw the market for a loop because all of a sudden, you know, we obviously worldwide is slowing down, right? I mean, real growth worldwide is slow and the bond market's telling you, hey, look, it's not there. Okay. Uh, and I think what what happens though is that it's it has everybody really sort of upside down this thing because they keep thinking everything's okay. But if you start coming in now and everybody says, "Oh, you know what? We can't make those margins. We can't make that." It even on a short-term basis, you'll get a correction of some number that that says, "Hey, this is not working right." And my guess is it goes that way. you get a you get some selling and everybody jumps to a conclusion that's not going to happen. And people don't realize if you keep on lowering rates, you keep on lowering rates, there's something in that that's telling you that hey, things are not so good now. That's why we're lower that's why we're lowering the rates right now. So, they'll forget about it, but that's when the market starts to come off, too. Okay. So, so you you think gravity is likely to win here. Um, and I think you answered more or less what my follow-up question was going to be, which is, I mean, it's unknowable, but of course the big question is, okay, well, when, Ted, when is all this going to matter? Do I still have enough time to jump into the party and have fun and be real long, or is this a time to really start to be a bit of a contrarian and say, "Hey, look, gravity may win out here. I want to position myself so that I'm not hurt too much if and when it does actually exert itself." Well, I think to answer your question, if somebody had brand new money today, okay, I just came into a lot of money at a liquidity event or whatever, I know we couldn't certainly tell them that you need to be fully invested right now because we just don't think that's where you ought to be. And we can prove it up by showing valuations of all the companies we follow that none of them, you know, we don't have that many that hit the list. And so obviously we're saying that to people and I I think the other thing they'll do is with rates coming down they're going to start to chase these yields and we feel like that inflation is not gone away and that the rest of this decade and uh foreseeable it's going to be a hard asset thing. And so you you're going to be in a situation where they'll chase these yields and now a year from now they'll regret it because then they'll get hit again on the bonds. Uh you know they will have gone out and bought this long paper probably won't work and uh they all of those things fit together right here. But I believe that what would happen is at least at the minimum you get some sort of reset for people to say hey the earnings are not going to be there like we thought. I mean, think about S&P up 16%. These are estimates for next year. I mean, I don't think we would ever get that, but um we'll see. I mean, we'll see, you know, but they can. But once you start having a change in a situation, I think that's where people have to reset and that's where we are now. Okay. Um All right. So, again, like a great interviewee, you're anticipating the questions I was going to ask you. So, yeah. So um to the person who has uh dry capital right now and again your firm oxbow um it's you know uh your your main business is working with people basically who've had liquidity events right you know entrepreneurs who have sold their company for you know tens of millions of dollars or whatever um or people that have had you know some inheritance or something like that. Um, and right now sounds like you're saying, "Hey, patience is your friend, right? No, no need to kind of, you know, deploy a lot of that capital at today's high valuations, wait for something a bit better." What what would you say to people who are sitting on some really big gains, right? Who have have really benefited from this year's the past three years, you know, activity in the markets and are sitting on some really big gains here and maybe feeling pretty good about it. But, you know, is this the time to start realizing some of those gains and taking some off the table? That's a good question, Adam, because I think most people don't address that today. If you look at even for us, you look at stocks we've owned a long time. I'm talking about 15 years like Microsoft and Apple, things like that. We still have some of those stocks. uh we don't buy them for new accounts necessarily, but what happens is we cut them all the time and we've gone back in this year and said, "Hey, you know, all our portfolio managers, you know, we've had meetings about this and said, look, you're not going to want to do this, all right, but you're going to have to take some of that off the table and pay the tax because you're, if you think about it, uh where could you go in a in a nasty down market. Let's say that potential is 50%. I don't know that is, but it could be okay because it has been numerous times. Then it it's okay to sell some stock and pay the tax on it. The other side of that is I tell people, okay, let's just say, you know, 10% of your portfolio is one of the big mag seven stocks. And my point to them is look, okay, if I take 20 or 25% of that position out and you pay tax on it, okay, I'm not paying the tax. I understand that. But if you sell it and we get a cash out of it and let's just say uh that that was a completely wrong trade. All right, that over the course of the next two or three years, you still have you're working on 80 cent dollars on this stuff. It still goes up in price if that's what happens. But it may be the reverse. So you give yourself leeway both ways is what I'm trying to say. And you don't have to I've seen this too many times, Adam. You get into a bare market and people will look back and say, gosh, I had a chance five years ago to sell that stock at X, right? And now I'm down a half on it. I'm uh I'm still up on what I paid for it, but gosh, I left a lot of money on the table. And then I want to go back to him and say, "Yeah, you should have paid the tax. All right. Obviously, folks, this is the value that a good financial adviser brings is the discipline to do this, especially when the party is raging and all your emotions just say just, "Hey, just go fully long all the time." Um, all right. Um, I do want to come back before we finish up here about um kind of what your your more detailed advice would be to somebody who is sitting on a lot of cash right now. Um, but we'll get there in a moment. Um so you you said one of the things that you see that will be different about the future is inflation. Um that you expect that we will have secularly higher inflation uh ahead of us past next decade or so than we've had in the past or at least sort of precoid. Um, and you've got a chart here I'll bring up um, which sort of shows the difference of uh, what the market was like before kind of the Greenspan initiated era. Um, and then now where we had, you know, ton of inflation leading up to Vulkar having to come in and crush it. Uh, we then had what's called the great moderation era where we had really low inflation or at least low reported inflation. Um, but now in the postcoid era, you're calling it sort of inflation again here. Um, I'd love to hear your your main reasons why for that. Um, but let me ask you this, Ted. Um while uh I think your argument is going to be compelling um I know you're talking about the next decade or so if the economy is slowing here over the next 6 months to 12 months could we actually have disinflation maybe a little bit of deflation win out in the short term before the secular trend of the the remainder of the decade kicks in. I don't know that you would have deflation, but you could have less inflation if you want to call it that. You know, because what happens is uh let's just say right now we we're thinking that over the course of the next, you know, five to 10 years, your average inflation is going to be between three and five on average. And and let so let's just say on the short run it comes in at two or two or something like that. I think people will read into that and think, "Oh, that's great because we won't have it again." Just about the time because if you look, there's virtually no way if you look at the way our country is handling the money and you look at the indebtedness of all these other countries and a lot of situations that are going on hard assets. I don't see a way where you can't you can't have inflation because I think that's one of the few ways to get out of all of this. But the other side of it is is that uh I think people are sort of devoid or light on hard assets. So u you know they're still in financial assets but so they may feel good from the short term and answer your question you could get a little bit of that but I think if you look back a year and a half or two years from now that wouldn't have been the thing to do. thing to do. Yeah. And I guess I guess what I'm asking is is if we're looking back, you know, in 10 years, we could say, Ted, you were right. Inflation was higher for the, you know, the decade than before. But let's say the economy slows so much that we drop into recession for some period next year. Could that actually pull the inflation down to a point where, you know, we're at zero, maybe even a little bit negative for a short period of time? For the short run, it could, but it could also be like the 70s when you, you know, starting in ' 66, you had a couple of periods there. 70, you know, but the worst one was the sec, the second or third one was obviously 7374, but that was where you were going into recession, but the the prices didn't come down. So, trueation. Yeah. Yeah. You went into that is because prices were going up. And um I think people don't realize, but that that's something that could happen here just because of the way we set this up internationally now with tariffs and these basically cold wars against these major suppliers of major countries that you know now you're in a position where you're not controlling your own destiny because if the US thinks that they can uh basically head it off and get to into a fist fight with China, Russia and India and those are three big big economies then I think they're fooling themselves and what'll happen is uh you'll end up with all kinds of deals on the side and trade this with that that way but it'll end up with higher prices and it maybe you have a recession because of that and the prices stay high so you have to keep that in mind doesn't necessarily have to go the other way Okay. So the the simple mindset of slowing economy means disinflation may not may may not uh apply here could but may not. Well that's what that's what I think because if you if if you generally look at you just take the you know core PC core CPI and look at that relative even the you know the 10-year bond and the spread on that it's actually it's right where it should be. Um, and and then I think people kind of confuse themselves because they say, "Okay, the Fed's going to come in and lower rates by half a point." Well, that means Fed funds go from four and a half to four. Um, you know, the prime goes from 7 and a half to seven. Does that move the needle? I doubt on the 10-year. Yeah. On where companies really borrow from. Yeah. Yeah. I doubt it. So, so okay, that's where I was going next with this, which is obviously uh higher secular inflation for the next decade plus more or less should correlate with higher bond yields u for the next decade plus because bond yields to a large extent are a function of inflation expectations, right? Um a do you feel that same way? I I sort of think you do, but correct me if I'm wrong. But B kind of to my other question too is what I'm trying to help people sort of think with both sides of their brain which is that okay yeah bond yields could be higher going forward but could we potentially be entering a period in the near term where economy is slowing who knows maybe recession happens at some point next year um and or there's a downward market repricing as as we talked about earlier as as everybody realizes hey the earnings aren't going to grow as much as we thought they were because the economy is slowing. Um where there may be a bit of a safety trade, right, where you know people will start buying the treasuries again as a safe haven and that could potentially push yields down materially for the near term. I think that could happen. Uh but what would happen is and this is you just watch the average investor, they'll chase that yield. They'll think, oh gosh, because I'll give you an example now. We're down to the point where the only thing that will give you 4% is a 90-day Treasury. Yep. Everything else is below that now. Now for us, what we have done it is we've done this in the past two or three years is we've continually owned three and four year paper that's now coming in to be two-year paper. But uh we've always tried to lock in for the next 24 to 36 months because there's a period here where the rates come down like you're talking about the the average investor will chase that yield but then they'll look up as that's what I was saying earlier a year from now or 18 months from now and they'll be sorry they did because the long bond then will go the other way right and I I I think that the trade here is going to throw people off because they'll they'll they'll look at it and say Gosh, these bonds did really well. I mean, you could have a 15 point move in them or something if you have a long bond you have coming down and they'll feel good about that. The problem is they give it all back because as you inflate and you have that kind of thing going on and look at the our treasury, everything that goes into that, we just don't feel like you can own the long bonds. I to me that's we've owned them over the years, don't get me wrong. We've traded them. We've done well them time to time. But now is not that time. And we just feel like if people just if they can just say, "Okay, I'm willing to accept a little lower interest here for another year or 15 months and then it'll start to go back the other way." They'll be all right. But if they get greedy and say, "Hey, I I got to chase a yield and lock it in because it's going way down and I'll never get this yield again." That's the wrong thing in our opinion. Okay. All right. Um which begs a question. If you if you um have enjoyed this era of T-Bill and chill, especially if you're an older investor and you like income, right, you've finally been able to build a relatively safe income generating portfolio. As that trade goes away, right, as the Fed starts cutting here, um and you know, you you you think long bonds don't go in there for the reasons you just mentioned, where does the income investor go? Does it become more dividend driven? more stock. Yeah, I think they a good question. I think they have to accept less income. However, in their other investments, you know, a lot of stocks now are yielding four, five, six, and again, you only pay 20% tax on that dividend. So, you you have to think about other things. Now, that doesn't mean you don't keep your cash stash, so to speak, but maybe now instead of earning four and a half like we have the last couple years, you know, you're getting three or two and three quarters. And you might have to get that for a while. You might have to get that for a while. But I think you just have to accept it until you can see the light here because um you know we're in a situation to where there's a reason they're coming down and they may get real aggressive and bring it way down. Um but for us what we've done and I would recommend people to look at it too if you haven't done it already is just you know push like for us we own 24 30-month paper we own 18month we own 12 month so we have a lock in on a lot of the bonds enough to get us past the valley we think into next year to where the rates will kick again and then we'll be there. We don't try to trade that market or anything. I think generally you're going to find us to always be less than 48 or 60 months, especially in this atmosphere, but I I think the average investor has to be careful. They'll try to chase those yields down and it won't work for them in the long run. Okay. Well, I know at Oxbow you run a couple portfolios that are focused on generating income. Um, and I know in them, you know, you have some preferred instruments and some other um some other assets. Um, is there the potent is the silver lining to a substantial market correction here from these stretched all-time highs? Um, the fact that you might be able to get better yields on some of these other instruments, you know, these these these more equity related instruments. Oh yeah, no question about that. I mean, if you get selling in the marketplace, your dividend yields are automatically going to go up. Going to go up. Yeah. So, uh, from that standpoint, you know, you get the best of both worlds. You get a cheaper price and a better dividend. And I think that's what people don't realize. You have a you have a different tax rate on that than you do on on on income from bonds. Um, okay. Great. Great. Um, well, look, uh, I want to get to a couple specific asset classes, but real quick, I want to go through two other sort of macro, uh, sectors. Um, one is housing. Um, you know, we talk a lot about stocks, uh, but stocks are much less, uh, widely owned, um, than housing, at least in America. And what I mean by that is the vast majority of financial assets are held by the top 10% of households, but a much wider percentage of households own their home. So what what go what happens with home prices really matters from a wealth effect for the general consumer. And you know increasingly um you know we know a lot of the same people Ted Danielle D. Martino Booth Melody Wright um who are following the housing market and saying hey it's it's not looking good. Um and Melody actually has a a quite um I would say pessimistic view of the next couple years of the housing market. So what what kind of role do you expect the housing market to play on the general financial markets because of a potential inverse wealth effect? Well, you know, on the housing market, I keep saying this and I don't know if anybody agrees with me, but it's not the interest rate, it's the price. Mhm. Because with the higher price and if you look at it, uh it's interesting the last three years they've raised the prices on new homes and at the same time the inventory's gone up. In other words, we're going to raise the prices and we know we'll sell them no matter what. But what you have to factor in there is taxes and insurance on that higher price. So you're there's no way that just an interest rate play on it is going to change that situation. And then the other side is that people are in a state of denial. You know, I see it all over the country. Uh they think, "Okay, my property was worth X four years ago, and uh I know it's still worth at least that. So, I'm not going to sell it for any less than that." All right. And so, they're having to sit there with it. Uh and existing home sales are virtually nothing. I'm talking about the worst in 30 30 40 years. I mean, it's frozen market. Yeah. Yeah. So, it's just stuck. And somewhere in here, and I think this will happen, all of a sudden, you'll have people start ratcheting down, say, "I got to sell this property, so I'm going to lower the price." Well, when that starts and you get into a buyer market where everybody's selling, then you get a correction in the housing market, which nobody thinks that can happen, but it can happen. I've seen it more than one time. And when it happens, it throws a lot of people off. And I'm just curious, what what repercussions would you expect that to have on the the financial asset markets as people start realizing, oh my gosh, my home's worth a lot less than I thought it was and those those losses start getting realized as people are forced to sell their homes for all the reasons that people have to sell. Yeah, I'll take the baby boomers for start and then go to the younger people. But baby boomers, they're two what they're feeling really great about right now are their uh pension plans or 401ks and their home equity like you know I bought this house right eight years ago or 10 whatever it is or 40 some of them are sitting on amazing gain you know you you you did that but so what so now all of a sudden it starts dwindling away from you and maybe the market does the same thing and and see that that'll impact a lot of people where they they really they may say, "Hey, I I need to I need to get out of this." Um I and and then if you look on the other side, I think if you look at cost of rent now, uh it's so much cheaper than owning that it it's you're going to have to get some sort of correction there to get this thing going. And I I I but I think all of that will have an impact. Yeah. in terms of the way people feel about it because they'll look up and think, well, you know what? I thought I couldn't lose any money in real estate. I've heard that term. I've had people tell me that numerous times. Can't lose any money in real estate. So, um, you we have we have something somewhat similar going on in the consumer debt portfolio right now, too, where a lot of people who thought, "Oh, I'm not going to ever have to pay back my student loans, you know, suddenly realize that they had to." And we're seeing spiking delinquencies there. And um and and we're seeing that start to impact other forms of consumer debt, right, as as people are forced to pay back those student loans. and they are being forced because it's the one kind of debt that you can't get out of and if you're not paying it the government will just garnish your wages, right? Um so we're starting to see people sort of steal from Peter to pay Paul, right? We're seeing delinquencies on auto loans and credit card loans and even mortgages start to creep up here. So um that's a potential additional kind of shoe to drop here along with the housing market. And I think what why all this really matters or why I'm spending a lot of time thinking about it is you we talk about the economy weakening here where we're starting to see the weakness I think in the way that's spooking the Fed is in the jobs market. Right? They're starting to realize you know what the data that we were navigating by wasn't as good as we thought it was. And Ted, you and I and many others have talked about how we didn't trust the data much at all the past couple years. Um, but the Fed has now gone from saying, "Hey, this is a normalizing jobs market where everything's great to whoa, wait a minute, this is cooling off a lot faster than we wanted to." Um, as goes the employment market, so goes the economy. And um uh as their issues dropping like people having less discretionary income to spend because all of a sudden they're they're strapped trying to pay you know their loans now or they're feeling um less wealthy because their house is all of a sudden starting to really lose value in a way they didn't think it would. Right? You said nobody thinks housing can go down. um they start, you know, tightening their purse strings that starts crimping corporate profits and then corporations have to lay people off and then people see their neighbor get laid off and they tighten their belts even more and it creates kind of a vicious cycle. Um how concerned are you of of sort of a downward, you know, uh cascade like that happening given today's current market conditions? Well, I'll just give you one stat and that is if you look at job growth, okay? Any time in the past, and I may be off on this a little bit, but not much. Any time in the past 50 years, that year on year, year to year, job growth has been less than one goes less than 1%. You're already in a recession. Now, are we in a recession? If you look around, people would say no. But that job situation is the one that you ought to should watch in here because um you know we we obviously the the whole thing with immigration all that's having an impact but uh but right now that's unquestionably slowing and and yes you'll get to the point to where I mean I I I personally know three or four tech sort of white collar jobs that are out of work. they've let them go in the last three or four months and for whatever reasons and they're in their you they're 50 years old plus uh and they can't they can't get a job. So it starts like that and then it keeps on going to where people look up and say I can't I can't get a job and but by that time it's in the price it's in the market but eventually somewhere. Yeah it's your point about you know asking somebody if we're in a recession I I actually think the answer is it depends who you ask. I know from having read a lot of comments here a lot of people are saying hey I personally am in one right now. Um, and uh, yeah, I think for all the reasons I mentioned, I could definitely see it potentially, you know, expanding to more and more of the the population that feels like they're in a recession if we start sort of spiraling down like this. So, you know, who who knows what'll happen. We'll keep our eyes on it, but um, obviously the the the momentum is to the downside, which is why you got to be careful about this. Yeah. Um, all right. Two, um, two asset classes I'd love to get your your thoughts on. Um, I know that Oxbow has, um, uh, from our earlier conversations, uh, Ted, uh, thought that gold had pretty good prospects ahead of it. And congratulations, it has. It's had a great year. Um, as has silver, as has the precious metals mining stocks. And I guess a key question to ask right now is, um, how much more does this have to run? you know, is this is is this uh a bull market that has started and you want to ride, you know, the the bull while it's running? Um or has it moved so far so fast? Uh because we have had some amazing gains, especially in some of the minors. Um is it time to start harvesting some of these gains, rebalancing, you know, taking some stuff off the table? Well, you know, I don't I don't I you have to look at it this way and that is if you own the mining stocks uh or the gold bullion itself. All right, you can you you and unquestionably you could come along and all of a sudden get some selling. I don't think it's the end of the run though because the United States is giving us the perfect setup for the reason on goal the next five years and that is runaway debt, no control over anything at all. And and nowhere to cut. I mean, no bringing in the deficit spending. Yeah. We have no capacity to cut anything. And everybody overseas sees that. That's why they're buying gold uh and not buying Sorry to interrupt, but they're also in the same boat. None of them have much of a better Yeah. same thing. And so they they're going a hard asset route. Now, I would say this and because in a stock market selloff, gold and and the miners will come down, too. They just do. In a stock market selloff, there's only one thing that really doesn't go down, and that's the 90-day Treasury. Mhm. But outside of that, you know, you you they'll go to where anywhere they have profits and take them when you get into a nasty selloff. So, it's not that they couldn't get some selling, but it'll probably be like 08 and 09 where you come down and you get a sell-off. Yeah. But by the time you get to midyear 09 or late ' 09, we're back at a new high. And that's And then you had two super years there off of that. uh going forward. So yeah, you could get it. I think as an investor when you own gold, the bullion itself, you just need to own it and say, well, you know, if it comes off 15 or 20%, I'm not going to sell it because I bought it for the gold itself. Now, if you want to trade the miners, that's a little different situation. Um but they're very very uh profitable right now. And so, and I think they'll generally remain so, but um nobody owns them. If I if I showed you the ownership of gold miners today, it's nothing. So, does that mean that uh I mean, one of the promises of the the mining space, right, is that when it did catch fire, um the profits would be so good that the larger Wall Street universe would have to start paying attention. And if not that much capital moves in from the rest of Wall Street because it's such a tiny market like you're saying have a real explosive version on price. So it sounds like you're saying the gains that we've seen so far have still been pretty much amongst the investors that play in the mining sector and that the potential um multiplying factor of of other capital coming in from the rest of Wall Street. That that hasn't that phase hasn't really happened in earnest yet. Totally, Adam. That's exactly right. Because what happens is um people really don't believe, you know, they haven't believed in gold and gold miners. I mean, there's some firms out there that have, but they don't stop and realize that gold and gold miners have been the biggest return this year, but yet it gets no press. like you you're not going to see Bloomberg or CNBC have a lead story about hey wait you should have bought gold miners or you should have bought gold itself. Uh and that's really sort of like what you want to see when you own it. You don't want you know because once they decide everybody decides they want to own that uh it's such a small percentage of the over market when they push that money in they'll drive those prices much higher than where they are now. Even even if you've had a setback, they'll still do it. All right. So, what are you doing at Oxbow right now with your gold and your mining holdings? Are you just holding on to what you have? Are you doing any hedging? Are you doing any rebalancing right now? No. Uh, no. No, we we haven't done that now. Uh, you're riding your horses. Yeah, we we've just kept the same companies. That's not to say we wouldn't. We've had we've had a couple of companies that it's really I mean really done very very well. Um but as long as you're in a period where they're this profitable and I you know I can show the numbers of the multiples on these companies as well. they're very low. Then uh and people forget about this, but if you get in a move in an asset class and it gets doing really really well, you forget sometimes that it could go much higher than that. And so you sell it after you make, you know, X gain. Um but we'll know more. Uh I'll tell you how we'll know more is when you get your first selling and then you come back up. We'll know more. we'll know more who's who's really the buyer there and we'll know more on the profitability too but the profitability is there you know I think those companies over time over the next five years will go much higher okay um and another hard asset uh category energy um energy has kind of been in the doldrums especially oil um it's a you know it's an essential commodity the world still runs on oil as much as you know some folks would love to hope otherwise. Um, and it's a cyclical industry. I mean, it goes through booms and busts. Um, and so I'm I'm very interested to get your take, Ted, because you your firm's located in Texas. Uh, you're you guys can feel the pulse of the oil industry there. Um, when do you when do you determine, okay, it's time to start getting into positions in this space? um in preparation of a bottoming out of the cycle and then riding the next upcycle. Well, you know, for us uh when oil went from 130 to say 70 7172, you know, we've added uh energy positions. Now, there's another reason we've added them though, Adam. They have great dividends. I mean, you look at the average dividend on our energy is probably five to five, five and a half, maybe six. A lot of them are seven or eight. And what happens is we don't buy a full position. You know, we'll start to own some because here's the thing. Oil right now to us is telling you that the the world economy is slowing. Wouldn't be 62, you know, and then remember the break even price on lifting oil from the ground is probably 60 in the 63 64 from probably right around there. Yeah, exactly. So once you go to 45 or 50 and you very well could with the slowing of the economy that means two things they won't drill it up and number two um people will lose faith in the energies not realizing that they need to take that period and either add to what they already have which is what we would do or start a new position because these companies the free cash flow on these companies is some of the best there is in the entire entire stock world and I I mean really good numbers 8 n 10 11 some of them are 12 14% free cash flow left over after everything and uh that's the way you want to own a company you'd own a private company like that u but but you may have to wait a while and if it falls down to 45 or 50 which it it could I don't think it go a lot lower than that because of where the where break even is but if it did uh you know for us we just I would we would buy a little more of it. Okay. Is it fair to say I don't want to mischaracterize, but is it fair to say that if you don't have a lot of exposure to the the oil industry right now that this is um one of the better entry points that you've seen across your career? It is. It's a good entry point because we look at we look at free cash flow numbers and look on the other side just the income side. For example, one of our strategies we own the gas pipelines. Well, every all of those top four gas pipelines we own. If you look at the average cash yield on that, it's about right at 8%. And uh most of that's paid on a K1. So, you're deferring most of the tax on it. Oh, that's great to hear. Yeah. No. So, it a lot of people they they always say, "Well, I don't want a K1." Well, if you own real estate, you get a K1. So, why worry about it if you own a gas pipeline? Um, and so I I I think what you have to do is is put get your foot in the water, you know, a little bit and own some pick some things out with great cash flow, G dividends, and uh be sure that you know that if I have to add to it, I could do that. Uh, and don't be afraid to do it. Okay. Yeah. And it sounds like I mean it's a great time to be sort of dollar cost averaging into this industry and you almost kind of hope it goes down before it goes up so you can get better values. Well, you could conceivably in the next five years. I mean it it wouldn't be if somebody told me that you're going to go to a new high in oil. The old high was 130. You go 150 200. I wouldn't necessarily argue that point with them the next five to seven years. You could do that. Yeah. And certainly there are folks out there um you know Rick Rule highly successful natural resource investor I don't know what his forecast is for the price of oil over that time frame but he has said that hey even if demand stays flat which it won't it will go up but he said even if it stays flat in the not too distant future we're going to be seeing some pretty structural shortages because of um uh diminished capex over the past decade or two. So, we have sort of sins of the past that are going to catch up with us anyways that are going to be pushing prices higher. Well, and the other thing that you have to keep in mind is something could go ary in the Mid East. Now, we're not talking about that right now, and I wouldn't buy it because of that, but that could happen. And that would be like 74 when you had the oil embargo and you had a recession, you had all that happen at the same time, right? um you know, I don't know that you're going to get into some sort of war where you blow up a lot of energy, but you could. And uh you know, and you have to always remember that that that that's part of it as well. But there's some good companies out there for sure. And let me ask you this. Um I I haven't looked at the data for a while, but um I I seem to believe that I have been hearing and reading some data suggesting that the um the shale the US shell patch may be the production may be peaking. Um is that true? Are you hearing any worries of in could that be an additional contributing factor if we actually started uh not producing as much from the shale? And I know there's plenty of other um it's not like we're going to run out. There's plenty of other deposits we can go after. They're just more expensive. So um you know, is there any talk of that is driving prices up uh over the next decade that you're hearing from your oil contact? Yeah, I think you hear that about that. And uh I'm not I'm not a geoysicist or or geologist, so I can't I can't get into any detail to back any of that up other than I talked to a lot of people in the industry. Uh and they seem to bear that out that, you know, it gets harder and harder to find. Uh your horizontals are getting longer and longer, you know, on the drill. Uh, and and so, you know, but I will say this to you, and I've seen this before in the past, you let the price get real expensive and they find it some way or another, right? And I think they would do it again. Yeah. Um, no, I do too. But it it um, you know, again, it's cyclical, right? And that's one of the main reasons why I wanted to talk about this with you because we're clearly at the down cycle where nobody's interested. And that's maybe a great opportunity to get interested, right, as a contrarian. Exactly. Yeah. Okay. Um well, Ted, look, this has been fantastic as always. Um I've got two last questions for you I'd like to ask you before we wrap up. Um one is a very high level. Um I had a a great conversation the other day, I think just yesterday actually. um at least the video released yesterday with Stephanie Pomboy and um we were talking about the you know reshoring of American manufacturing and you know one of the things she said was we just have to be aware that when as we do that which she believes is a good thing for us to do in general but um because we we pushed off so much of our manufacturing to the rest of the world we kind of pushed the business cycle onto the rest of the world and we didn't have as much exposure to it um over the you know since the era of globalization started compared to beforehand. Meaning if you look at charts of recessions we've actually had relatively few since the globalization era compared to what we had had before. And so you know one of her warnings was just hey we just we need to be aware that as we start to reshore that we'll be returning the business cycle more to America and things might become more volatile economically as a result of that. Again, not necessarily a bad thing, but just something to be aware of. But her her larger point was we've come from this long period, I mean, really pretty much everybody who's watching here, all or most of our adult lived lives of kind of a Goldilocks era where um we had low cost of capital, declining labor prices, um and low input costs. Um, going forward, it's going to kind of look like the script is going to be flipped where we're going to have increasing cost of capital, we're going to have increasing labor costs, and we're going to have increasing input costs. How big of a game changer is all that in your mind? If you agree with that, well, it's a big change. Number one, you can't reshore very quickly. That's the number one thing. If you start thinking about this, what if you start reshoring and then you have a change, political change at the top, you know, in 28 and then all of a sudden it goes, you see, you can throw things off like that real real quickly. But, um, yeah, I I I I think the other side of it is that no matter how we reshore, I don't think competitively we can compete with India and China on that pricing. uh and we're kidding ourselves to think we can. Yeah, it's great to have a lot of things made here, but if you look at the cost of production and our overhead cost here, you look at legal uh insurance, all the things that go into running a business here, well, they don't have that. Okay? And so, I think people forget about that and they just want to say, well, you know, we're the US and you know, we'll make it happen. Well, we're not the driving force anymore. We're one of them, but we're not the only driving force. And I think that's the problem with the reshore is that um we don't have much of it here. So, you got a long way to go if you're going to impact it. Yeah, I totally agree with that. Um but the trend obviously is still higher input costs here for or sorry, higher labor costs here for us. When you combine that to higher cost of capital and then just higher, you know, general inputs of of commodities and whatnot, as you expect, hard assets for a variety of reasons will probably have a good run here if you're an investor or a bad run from here if you're somebody that just has to deal with cost of living. Um, h how how different do you think the investing environment is going to be in the next couple of decades because of those three that sort of trifecta of things changing? And maybe I'm making too much of it. I don't know. Yeah. Well, I don't think you are. I mean, I think uh you've got a whole set of investors today that have to go through another generational bare market at some point. I don't know when that is, but it'll happen. And they get they get like all of us have during investing periods. They they that's how they get trial by fire. And uh that'll happen number one. And then number two, um this always happens in investing over long periods of time. People will say, "Well, I thought I had it down. I I thought I knew exactly what to do here to make money. It's worked great for the last six or seven or eight years, and now all of a sudden they changed the rules. They changed the game. Uh you can't make it work anymore the way you thought you could. And that's that to me is the kind of period you'll go into because we're still kind of brain dead on this last 15 years. And it's not going to look like that the next 15 years. Okay. All right. Well, look, uh, your point there about a generational bare market. I was interviewing I think it was Jam Carson who was reflecting on um, you know that well basically there are periods of time where the market um, you know, has goes nowhere. It's kind of a lost decade, right? um or a lost period of time in the market. And then there are periods of time where the market makes great gains, right? And if you kind of chop up the market cycles, you know, over the past, I don't know, 200 years or 150 years on that, um there's actually more, it's close, but there's more like lost periods in the market than there are periods of making the great gains. Um so a really important thing is to know, you know, when you're which which part of the cycle you're in. so you can invest accordingly for it. But um you know, you and I have talked in the past about bare markets and kind of what their signatures are and what happens during them and all that type of stuff. Um and I think we've gotten to a point right now, you were talking about earlier, uh Ted, where people are just exuberances in the driver's seat. People aren't really worried about anything. Um, and they don't realize that actually half to the majority of time the market's not making much money in the over time and so they just don't think that these bare markets can come back when in fact they kind of are the norm. Yeah, they that's true. uh they get again it it has to do with recent experience and see the Federal Reserve and the fiscal policy and for the last 15 years has ruined the investment landscape because they've made money so cheap, so easy, so everything that nobody could lose. And that's unfortunate because then everybody has to learn the true lessons of money management which is you don't need to always be fully in. Yeah. And and in addition to making things so cheap um capital so cheap, they also really did encourage moral hazard, right? A sense of like if you take risks, don't worry because we'll step in and we'll backs stop everything. Exactly. I mean, that's the thought process now is that, you know, if we get selling, don't worry about it because they'll come in and and back it up. But some of these days, they may come in and try to back it up, but you keep on going down, right? You know, you can have that, too. Yeah. So, there's that risk. There's the tail risk. I don't think it's very likely that they just don't step in at all. I mean, that hard to imagine it probably wouldn't happen, but that technically could. But even if the Fed does step in, you know, people think, well, don't worry, the Fed will step in. I'll be fine. Well, you're going to take a lot of lumps before the Fed steps in. And not everybody who takes those lumps is going to, you know, benefit equally from the Fed's rescue efforts. So, there's no guarantee that your losses are going to come back just based on what the Fed does. That's right. I mean, that's true. You don't you can't always depend on the Fed. I mean, the Fed is the one they've messed up so many things, caused so many market problems that if you're depending on the Fed, you're really wasting your time. Uh you got to be really looking at the companies you own and and and I always tell everybody, you're on your own. So, you know, don't depend on the Fed. All right. So, so wrapping up here, last big question for you, Ted, is again your firm really specializes in, you know, higher net worth individuals and families, especially those who have gone through or about to go through a big liquidity event. We are in a market that does seem like if you're sitting on a big uh pile of dry powder, it's not one that you necessarily need to rush in and and and get long and everything for all the reasons that you and I have already discussed. What sort of parting counsel would you have to those folks? And again, whether it's a business they've sold, whether it's maybe an inheritance they've come in, um, or to our earlier point too, I mean, you might have had a windfall just by sitting on stocks that have done great over the past couple years and and that in a sense you're in the same boat where you're like, look, do I keep them in these companies or maybe do I redeploy things here given how stretched valuations are? What if if they were to contact you, like what would you how would you start helping them think of what to do? Well, I would tell them first of all, you need to give yourself some optionality. In other words, uh if you're fully invested and things go bad, you know, you don't have any options at that point because you didn't you didn't give yourself any optionality and you need to always be investing so that nothing can really hurt you too badly. In other words, you have the right balance of equity, fixed income, real estate, whatever, but have that balance so that um and and and liquidity cash so that you can you can really weather most storms. And I think people forget about having balance, but you really I wrote a book about that, but you really have to have balance, I think, and to get through these periods. And that'll help you more than any other thing because you have liquidity and it gives you some optionality. If things get bad, you can own some stuff really cheap. Um, but without without liquidity, uh, you have no optionality. All right, that's a that's a great point. And it's interesting when I when I was just starting out, um, I you worked on Wall Street my first couple years a business school. one of my classmates went into private client wealth and um uh probably something I would have been really interested in the long in the long run but back then wasn't so much on my radar but I I I went to one of the interviews I interviewed with one of the companies that he was interested in just more or less to kind of go along with my friend at the time and it was clear from the interview to the interviewer that I wasn't super serious about this so we just kind of got to chatting and uh and he said hey you know it's key thing to know about this job just in you're interested is um it's not about our clients don't really they're not that u they're not putting that much pressure on us to like dramatically grow their wealth. They just don't want us to lose it, right? They've they've they've worked hard to make this or they've been fortunate enough to come into this and they just don't want it to go away. And I know you and I have talked about this, Ted, that that's a very common um emotional state that especially a lot of entrepreneurs are in who they spent their whole lives, you know, in the trenches working, building, and all of a sudden their purpose for living is kind of gone overnight and what's replaced it is this big pile of money that they don't really know what to do with themselves when they get up in the morning. But they also their skill set is not managing financial assets. It's building things, you know, in a factory or whatever. and they have this strong insecurity of like I might actually really screw this up. So I mean helping them figure out okay like first and foremost having some liquidity just some stuff you can fall back like it's a great process for you your firm has a great process for kind of walking people through how to think about you know getting to a point of of anxiety to a point of real confidence with this stuff we do and you know I tell all the portfolio managers I say look if we lose an account don't lose that account because you've lost them a lot of money now if If you lose an account and they say you're not running gun, not aggressive enough for me, that's one thing, okay? And that's really okay. That's just a difference in philosophy. But I always mention to people, you know, what you want to protect is is is you manage risk because where most people get affected over long periods of time is they don't manage the risk. And so then they have to take years and years and years to make up to get back where they were. And it's only because they didn't manage the risk and it was easy to do uh if they just think about it a little bit and and I think that's the biggest thing uh that we mentioned today to investors. All right. Well, one of the things that's always impressed me about your firm is uh sort of the full service nature of it as well. I mean, you're great capital managers for all the reasons that we've been talking about in this video, but you offer a ton of other services. everything from the planning to really help people see, you know, where their money will likely go in the future under all these different circumstances that you you you consider. Um, but also just connecting them with all sorts of other, you know, advisors when someone's trying to build up their full team, you know, of of financial specialists, not just the portfolio manager, not just the financial adviser, but the tax person or the estate planner or whatever. So, anyways, you guys take a great full full team approach to all this. Um, so, uh, for folks that are interested in potentially, uh, talking to Ted and and his firm Oxbow on, um, you know, really, I think whatever qu you guys are happy to answer whatever questions, uh, Thoughtful Money viewers may have, but for those that, you know, meet your your high net worth minimums, um, folks can sit down, have a full consultation with you, and just get your firm's, you know, direction on what you guys think they should do, and then they can do whatever they want with that. they can go do it themselves. They can talk to their existing adviser or they could potentially talk to you guys about, hey, you know, what would it might look like to work with you. So, if you're somebody watching who has that interest in maybe having that conversation with Oxbow, you can just fill out the very short form at thoughtfulmoney.com/oxpo and you'll be connected with them and they'll reach out and find a time to talk with you. Um, Ted, you you you mentioned briefly um that you had written a book about the whole liquidity part. Um, we did a great webinar a few months ago with your book about second generation wealth, how to raise financially savvy kids. Curious, what's what's your next book going to be about? Uh, probably next year. I mean, we already know what we're working on is uh we're going to talk about the significance of cash flow. I think if you look at any business or any anything's productive asset, it always gets back to cash flow. And it can be free cash flow in the stock or it can be dividends. It could be interest. It could be income from real estate. Uh but I think people are less and less inclined to look at the positive aspects of cash flow because cash flow will outweigh everything else in the long run. And that's what we're going to try to write some about um about uh what what we feel like are some things you need to keep in mind when looking at cash flow. All right. Well, look, when that book comes out, um, a I'd love to get an advanced copy of it, Ted, but, uh, we'll also do a webinar for the thoughtful money audience on it, just like we did for the the second generation wealth. And cash flow is the most important thing. Um, Robert Kiosaki, the guy who wrote the book Rich Dad Poor Dad's bestelling personal finance book of all time, he's kind of a polarizing character, but I know Robert really well, and absolutely, Robert lives and breathes cash flow, you know, almost to the exclusion of almost anything else. Yeah. uh in an investment, you know, if the cash flow numbers aren't where he wants them to be. He's not even going to touch it. Well, and it usually doesn't work. I mean, you look at companies that have no cash flow, you're totally betting on the future. That's it. That's your only bet. Yeah. I mean, it really isn't investing. It's speculating at that point, right? That's what we think. Yeah. Yeah. All right. Um well also folks quick reminder um we are still selling tickets at the low early bird price discount for the thoughtful money fall online conference that's coming up in just a little over a month. Um that's Saturday October 18th. If you uh can't watch live that day, don't worry. Everybody who registers for the conference will be sent replay videos of the full event, all the presentations, all the live Q&A. So if you haven't bought your ticket yet, please get it while we're still offering it this lowest price uh that we're offering. and I want everybody possible to get it at the lowest price possible. Uh so to get your ticket, go to thoughtfulmoney.com/conference. And uh a reminder, if you are a premium subscriber to our thoughtfulmoney substack, look for the code that I've emailed you that'll let you get an additional $50 off of that lowest price for the conference. Um Ted, it's always a pleasure talking to you. Um, folks, please let Ted know how much you enjoyed your time here with him today by hitting that like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, I kind of don't envy you guys at Oxbow, Ted. Uh, it's a tricky market to invest in. Like I said, with the slowing economy, I can definitely see some bumps and curve balls coming up ahead, but I know that your clients uh should be able to have a lot of confidence that you guys are going to be carrying them through it uh with a steady hand on the tiller. Well, we'll certainly try. I have to say that we always try. All right. Well, Ted Luck, you're such a great gentleman. You're one of my favorite people to interview. Thanks so much for joining us today. You bet. All right, everybody else, thanks so much for watching.