2024 To Be The Year Of The Economic Reckoning? | Lance Roberts & Adam Taggart

Lance Roberts 0:00
high valuations mean low forward returns and an eventual bear market. But we haven’t had that yet. Right? We had a correction in 2022. But we haven’t had a mean reverting event of any consequence. So not going to happen this time, right? Well, no, it just means it hasn’t happened yet doesn’t mean that it’s taken anything off the table. And this is going to be one of the Feds biggest problems as they go forward, because they’re getting lulled into this sense of, of, you know, economic certainty, that, Oh, we’re going to avoid this recession, take a look at the Feds latest projections. Through 2026. They have no prediction of a negative economic growth environment at any point over the next five years. It’s going to be it’s gonna be 2% ish, right? Not going to be too hot, not gonna be too cold as Goldilocks and three bears. It’s gonna be just right. And no recession whatsoever, even in our own forecasts, no forecast recession. Maybe there’ll be right. However, I do want to share this one chart with you because this is the this whole 9095 Soft Landing analysis has a big flaw to it.

Adam Taggart 1:09
Welcome to Wealthion I’m Wealthion founder Adam Taggart welcoming you back at the end of yet another week here for a weekly market recap featuring my extremely sagacious friend, Portfolio Manager Lance Roberts. Hey, Lance, how you doing?

Lance Roberts 1:23
I’m doing great. Apparently, you’ve been playing with your small, small dinosaur again lately. So

Adam Taggart 1:29
yeah, well, we gotta keep people on their toes here at the beginning. sagacious, great word for you, because you’re a smart guy. And we’re going to need that sagacity today to go through all that’s been happening. I’m gonna let folks in on on how we make the sausage here. Lance, you and I just talked for 40 minutes before I realized I did not have the record button on and folks, I hate to say it was really, really good. So you’re gonna, you’re gonna get the the expurgated cliffnotes. Here, folks, just the highlights of what we’ve talked about so far, then hopefully, we’ll get to the new stuff. We haven’t yet talked about Lance. But thank you for not just walking off in a huff with me doing this. Okay, lots going on. We talked a ton about the new payroll numbers, we’re just going to have to hit the highlights here. Basically, the new payrolls numbers came out Friday morning, blew everybody away, way higher than than the forecast more than twice what the consensus estimate was. We came in at 336,000 jobs. Rather than go through all the data, the sub data that I mentioned earlier, Lance, I just get to the punchline, which is, this is a real head scratcher data. For most analysts, we’ve been seeing consumer spending, its growth weaken, we’ve seen a lot of strikes going on. None of that seems reflected in the strength of these numbers. They even went back and revised July and August upwards. Here. If we look at some of the other data reports that are being put out there like by ADP and whatnot, those seem to tell a very different story than what the US government BLS, the BLS numbers stay. So I know we spent a good like 20 minutes railing against the weaknesses of the government job numbers here. What are the key takeaways you want the viewers to have here? What’s going on with jobs?

Lance Roberts 3:16
Yeah, I mean, if you take you know the the headline numbers always the headline number. The bottom line is, if you look below the headline, and numbers aren’t nearly what they seem to be. If you take a look at again, let’s just think about this logically, for the moment, if you were hiring 335 or 350,000 people in a month, wages would be going up, right wages declined on an average rate. So that doesn’t really make sense. You’re seeing multiple part time job holders increase full time employment is still lower than it was in 2019. So that makes no sense either. So again, you have to really take a lot of this data with a grain of salt. This is a random sampling survey. There’s a lot of manipulation to the numbers. But also remember that we are in a seasonal period of hiring where we hire a lot of temporary workers for the holiday shopping season and Halloween if you didn’t know this is one of the second is the second largest consumer spending holiday of the year next to Christmas. It’s even bigger than Thanksgiving. You think about you know all the 12 foot skeletons the Blackcats my wife’s been decorating all week so you know

Adam Taggart 4:26
back to school yeah all

Lance Roberts 4:28
think about think just about all the candy I mean, you know, you know if you if you’re you know, you buy a bag of candy, the handout to all the kids that come by and six other bags, you’re in your closet for later. Receipts are a big, big winner this time of year. So but that just goes to show you kind of what’s going on and so you got a lot of the seasonal data that’s behind the scenes that doesn’t really suggest that the employment number is nearly as strong as it looks and look the markets are going to see through that pretty quickly. And initial knee jerk reaction was a jump in yields and sell off in stocks. Because this means the Feds higher for longer the market is going to figure out the date is not nearly as strong as it is, look, the Feds not going to tell you they’re done hiking rates because they can’t, if the Fed told you they were done hiking rates, stocks would surge bond yields would fall. And basically, it would loosen monetary monetary accommodation, which is exactly the opposite of what the Fed wants. Because surging asset prices makes consumers more confident they spend more money in the economy because their their 401 k’s are going up. And that pushes on inflation. So that’s not what the Fed wants. So the Feds never going to tell you they’re done. They’re just going to stop talking about the need to hike rates any further. And then we’ll just kind of figure it out from there. But they’re done hiking rates at this point. So the markets are going to figure that out in the next month or so. And you know, and stocks will start to rally on expectations that we’ll get back into that analysis that the feds don’t hiking rates. And the next thing is Fed rate cuts sometime next year. And that’s good for stocks. It’s completely backwards. But that’s what the markets want.

Adam Taggart 6:05
Yeah. So when we spoke when the recording was off, you’d put on your conspiracy theory hat for a second and said that’s potentially might be going on here too. Is the Fed is whispering in the ear of the BLS saying, hey, look, I need really strong jobs numbers because I need the air cover to stay higher for longer. Right. And then I put on my conspiracy hat and, you know, said in potentially whispering in the BLS as other year, is the administration saying, Hey, we got to get reelected a year. So we need Rosie job numbers too. Right? Not necessarily saying that that’s going on where they’re like, gotta feel there’s some pressure on both sides, you know, applying here to the BLS for this. But who knows, right? I mean, in that we had a nice long discussion about like, can we even, should we even really be looking at this this data anymore that the BLS data just seems to be so far afield? From what a lot of the much more close to a source data sources that we look at when they talk about jobs? And, you know, we basically said, Well, look, we, we don’t have a whole lot else to look at. So it’s, we got to look at something, but but it’s the imperfect indicator, we’ll put it that way.

Lance Roberts 7:21
Yeah, it is. And again, it’s, it’s if you’re gonna go shopping for cars, you got to look at something, right? I mean, you can’t go shopping and into the lot and try to figure out what you want to buy. So you know, it’s the

Adam Taggart 7:32
third interrupt, because I want you to address this in your answer. But how would you feel if the pilot of your plane was like, You know what, this altimeter is really wonky, but I gotta look at something right. Competence and inspiring.

Lance Roberts 7:44
I know, it’s right. And but but again, this is the issue we have, you know, we have to have something to look at in order to gauge you know, kind of what earnings are going to be and what, you know, kind of what the forecast is, for the markets and for the Fed, you know, they’re trying to drive a ship by looking in the rearview mirror, and taking a look at faulty data, and then trying to make a decision about interest rates and monetary policy about something’s gonna happen in the future. And this is why they’re always so wrong in their outlook for economic growth, and for inflation and those types of things. And this is why they’re always, you know, too late to the party to start hiking rates, or too late to the party to start cutting rates and the damage is already done. But you know, if you’re gonna, if you’re, if you’re driving your car, looking out the back window, you’re always gonna wreck into something and that’s what the Fed is gonna wind up doing again, but, you know, even the Feds got to have something to look at to make it now you think with 400 PhDs, they can come up with something better to look at, than just, you know, government data. But again, I guess, you know, I’m not sure how smart foreigner PhDs are, I guess, I don’t know.

Adam Taggart 8:54
What’s crazy suspect. Yeah, again, back to your rant in the 40 minute version that I didn’t record where you said, we’ve got really simple ways in the modern era to look at real time jobs data, right to get a statistically significant sample and just look at what is literally happening in the jobs market and go back to my pilot analogy. Yeah, it’s sort of like alright, your automakers walk wonky, so why don’t you just look out the window? Right that’s way better than looking at a broken a broken indicator. For some reason we are not doing

Lance Roberts 9:28
Yeah, exactly. I mean, think about all these payroll companies we have you know, ADP and paychecks that are doing real time processing of hiring and firing. You know, there’s no better real time data but you know, we we get an ADP report, but even ADP kind of fudges with their data is like, just tell us what the data is. We’ll figure it out from there. You don’t need to do all these other adjustments back there. Just Hey, we hired 50,000 people this month, we fired 22,000 And we furloughed 10,000 We can work with that, you know, we don’t need all this other stuff, but even the ADP report, nobody pays attention to it. It’s a secondary indicator to BLS, which is a survey of 60,000 people. So it’s even less than what ADP has to work with. But we don’t even pay much visually. Oh, yeah. ADP report is 89,000. What’s the BLS gonna say? Because that’s what the Fed pays attention to. And, you know, it’s a shame because we have other these other real time economic indicators that are probably giving us much the National Federation of Independent Business surveys, small businesses, their hiring indicator is slowing down, their wages are falling. You know, their sentiment, optimism is declining pretty rapidly sales are deteriorating for these companies. They make up 50% of your employment in the country. So we don’t pay attention to the NFIB, I write reports on the NFIB report when they come out, because nobody pays attention to them. But it has a correlation to small cap and mid cap stocks, you should pay attention to it. Because they have a pulse on what’s happening in the actual economy. That bottom chunk of the economy where the majority of people live, they have a good pulse of that and we just don’t pay attention to it.

Adam Taggart 11:09
All right. Well, look, I think he just maybe give the best reason for why we have to still look at the BLS data is because it’s what the Fed uses. The, you know, 800 pound gorilla that Godzilla and a dunce cap, I think I use that term last week, you know, we might not read, we might not understand the decisions it makes, we might not respect the decisions it makes. But we have to respect the impact that it has on the world and the destruction that it can leave behind when it makes bad decisions. So we got to look at the data, I guess that it’s looking at. Alright, so speaking of additional government data, the inflation as measured by CPI, those new numbers will be coming out next week, next Thursday on the 12th, I believe, so when we meet again here for this video, Lance won’t we’ll have that data. If you could just prognosticate here, what do you think is going to happen with inflation is the next reading going to be higher or lower or flat,

Lance Roberts 12:08
it could be a little bit higher, because you know, we had energy prices creeping up and remember, so when we talk about CPI, this is a misnomer that a lot of people have about inflation. And you know, currently, you know, we’re all, you know, complaining about $4 a gallon of gasoline if you live in Texas. Now, I know where you live in California, it’s a lot higher, but you know, like, oh, man, I’ll be glad when this inflation goes away, because my gas will get cheaper. No, it’s not. And the reason this is this is the big misconception, the Fed does not want deflation, right? They don’t want negative pricing in the economy, prices falling in the economy or deflation is a psychological cycle that is very difficult to break. Once you start getting deflationary pressures and prices are falling consumers, which make up 80% 70% of the economy on consumption. They go well, I’ll just wait because prices are getting cheaper. So I’ll just wait as as a car price is coming down or whatever it is, I’ll just wait to buy it because it’s getting cheaper. And that causes prices to get even cheaper because nobody’s buying it. It’s always supply versus demand. Right. So what the Fed wants is they want inflation around 2%. So that means if, if gasoline was $1 a gallon On January, the first they want it to be $1 to January 1 of next year, they want it 2% Higher. So again, your prices aren’t going to go down, they’re going to go up at a slower pace. And that’s what the Fed is looking to do is bring that down. Now again, a lot of this economic data that feeds into inflation runs in a lag, homeowners equivalent rent makes up over 30% of the index energy. And a lot of people were looking at energy lately going oh, inflation is about to go surging off the moon, because oil prices are going to $150 a barrel. And I think you and I last week, we’re talking about energy prices saying hey, look, they’re super overbought, you’re gonna have a correction. And we’ve had a very nice correction now in oil prices. That’s just because of economic demand, gasoline demand is falling sharply. And that’s another good indicator that suggest by the way, that this employment number isn’t nearly as strong as people expect, because it was strong. Gasoline prices of gasoline demand wouldn’t be plunging off the cliff in a single month. So again, there’s a lot of things behind the scenes, but that decline and gasoline isn’t going to show up until a couple of months from now and CPI because it runs on a lag. And oil prices have nothing specifically directly to do with a CPI inflation calculation. So when you’re looking at the CPI calculation energy makes up 7% of CPI, but that’s gasoline. That’s home heating costs, home cooling cost utilities. There’s no input there for oil prices. It’s all the byproduct of oil prices. So yes, there’s indirect effect of higher oil prices. But what happens to the prices of the byproduct is what’s more important. So that big drop in gasoline is going to be a deflationary impact, or I should say the correct term disinflationary impact of CPI in a couple of months. So long, long answer to get to the point that we might see a little bit higher CPI will hotter CPI at this next read, but I would expect that to go back to it’s more kind of 2.2% trend, you know, in November and December.

Adam Taggart 15:34
Okay. All right. So Lance, we’re finally catching up to kind of near where we were when we realized that I didn’t have the record button on. But I want to, I want to ask the same question I asked you earlier, which is, okay, let’s zoom way back for a minute. Okay. So 2019, end of 2018. If I had talked to my network of contacts, just people I know, and told them, Hey, everybody, your cost of living in your key essentials, right, your food, your fuel, your shelter, your healthcare, you know, whatever the things that really matter. Forget about luxuries for a second, that’s all going to go up by like 35% or more over the next couple of years. Right? Because what are we what you’re saying, and we talked about this again, when, when the recording was off? The Fed is playing for disinflation, meaning it wants to bring inflation, the inflation rate down to its 2%. Target, it is not playing for deflation, meaning lower prices ahead, right. So it’s just trying to get to a more stable baseline for price stability, right prices, meaning these big increases that we’ve seen over the past couple of years are not going to be rolled back, right for folks that are sitting there hoping, oh, okay, well, hopefully we’ll, once all the dust settles, you know, things will become affordable. Again, that’s not the Feds plan, right? And so, if indeed, we are just now at a higher cost of living, like I said, back in 2019, if I had asked my network of contacts that I don’t know very many, who would have said, Oh, right, I’ll be fine, then. I know a ton. Who would have said, then it’s game over for me, like, I don’t have the ability to absorb that into my current lifestyle. Right. So help me just understand this, right, we’ve had that with a parent apparently seems to be permanent, substantial leap in cost of living? How can we absorb that over time without just some sort of mathematical adjustment? Like, we just have to spend like, like the economic spendings gonna have to drop because people just don’t have, you know, the wherewithal that they did back at the end of 2019. That back then we could have talked about surveys where 60% of households couldn’t come up with 400 bucks in an emergency, right? I mean, a lot of people were really tight back then. So when does the reckoning of this happen? Or will there not be one?

Lance Roberts 18:08
Well, you know, this is the soft landing, no landing scenario conversation. And that’s something I do want to talk about here real quick as well, because I think it’s an important factor. But again, you have to go back and ask that same question. So yeah, let’s let’s go back and ask Bob and 2019. Say, Hey, Bob, I know you’re living paycheck to paycheck, pretty much right now, you don’t have $40 in the bank. But over the next, you know, year or so your costs are gonna go up 35%. And he’s gonna go, Well, I can’t afford that. It’s like, okay, well, what if I give you a whole bunch of money to help you out? He’s like, Okay, well, that’s fine, I can do that. And that’s what we did, right? We raised the cost, but we gave people money. Well, a lot of those benefits are just now starting to roll off the road kind of roll off. You know, we just started people back on student loan payments, as of the end of December, we still had extended child tax credits and other stuff in the system that was helping people out. You know, we had all the checks sent directly to households before that, that increase savings and reduce some debt. You know, people did actually pay off some credit card debt with some of those stimulus checks, which was good, but they’ve been ramping the credit card debt back up. So that’s been giving them some runway to sustain this higher cost of living, but we’re getting towards the end of that runway. But here’s the interesting thing. Right? So in 2019, so in 2022, last year, you know, we had the inverted yield curve, and everybody’s like, Oh, well, we’re gonna have a recession. You know, you and I were having these conversations. Everybody was coming on your channel. Oh, recessions coming definitely gonna have a recession. And we didn’t get one. Right. And and we had this inverted yield curve, and well, apparently it’s wrong this time that we’ve got an inverted yield curve, and now everybody’s talking about the soft landing in 1995. Right, we’re gonna have a soft landing since we didn’t have a recession already. Obviously, we’re having a soft landing. The Fed has done it. They have engineer a soft landing scenario. But the question you’ve really got to ask yourself is is one Have a and and this is this is the big conundrum. And this is where we always tend to get things wrong because we assume that just because something hasn’t happened yet that well, high valuations mean low forward returns and an eventual bear market. But we haven’t had that yet. Right? We had a correction and 2022. But we haven’t had a mean reverting event of any consequence. So not going to happen this time, right? Well, no, it just means it hasn’t happened yet doesn’t mean that it’s taking anything off the table. And this is going to be one of the Feds biggest problems as they go forward. Because they’re getting lulled into this sense of, of, you know, economic certainty, that, Oh, we’re going to avoid this recession, take a look at the Feds latest projections, through 2026, they have no prediction of a negative economic growth environment at any point over the next five years, it’s going to be it’s gonna be 2% ish, right? Not going to be too hot, not gonna be too cold is Goldilocks and three bears, it’s gonna be just right. And no recession whatsoever. Even in our own forecast, no forecast recession, maybe there’ll be right. However, I do want to show share this one chart with you, because this is the this whole 9095 Soft Landing analysis has a big flaw to it. And and so let me share my screen here. And I want to show you this chart. So actually, let me jump forward one chart. So I want to this chart right here will explain the previous chart a little better. And I’ll go back to that one. So we often talk about inverted yield curves. And you know, most of the time we focus on the 10 year versus the two year we say okay, here’s the 10 year two year and, and you know, that’s what matters, because every time we’ve had that, that’s always signaled a recession. And that’s a true statement. By the way,

Adam Taggart 21:47
just just hit the zoom a little bit more, we got a lot of boomers that watch this, they really appreciate the bigger charts.

Lance Roberts 21:52
Is that big enough? That’s good. I’m a boomer too, so I was kind of squinting at it. So there. But this this chart was back to 1970 1977. And we track in our office 10. Different these aren’t now these are just the yield curves we pick. These are the ones that we feel are most economically important because it kind of hits different levels of borrowing at different stages. And so importantly, as we talked about before, the Fed controls the short end. So whatever happens on two years or less, that’s all fed control. On the long end of the curve, the five year, the 10 year, the 20 year, that’s all economics, that’s inflation, that’s economic growth, that’s wages and that savings. So that’s all economics on that far end. So on the short end of the curve, that’s your credit card debt, that’s your variable loan rates are adjustable mortgages, you know, all those things that are tied to really short term rates on the long end, or your mortgage is longer auto loans, and you know, those type of things, that’s all controlled by longer. And so these different yield curves, and we track 10 of them, because they affect different areas of the credit markets across the economic cycle. Again, what’s an inverted yield curve, all that means is you’ve got one yield, that’s very short, that is out of balance with a one that’s have a longer duration. So as an example, the two year interest rate is higher than the 10 year interest rate. And that shouldn’t be the case, because what that says is that if you’re borrowing money for two years, you’re paying more in interest and borrowing money for 10 years, that doesn’t make sense, because of just the time, I’ve got a loan out for 10 years, I should be paid more for that than just loaning money for two years, just for time, not mentioning the inflation and economic impacts and opportunity costs and all the other things. So it’s not. So what that says is, is that in the economy, nobody wants to lend long term, they’re willing to give you some money short term, but they’re not wanting to really loan you money long term. And so there’s this economic imbalance that’s going on. And that’s what’s happening. So these 10 yield curves tell us a lot about the economy. And what you’ll notice is, and people will say, well, the only yield curve that matters is the 10 year and the three month of the 10 year and the two year, what you’ll notice is is that when all 10 of these yield curves, or at least the vast majority of them, say 7080 90 100% of them are inverted, you’ve always had a recession. But it’s not the inversion. If you’ll notice on this chart, when the inversions occur, you don’t have a recession, it’s when they uninvited that is the recognition of the recession, recession, in other words, everything that was being done, I don’t want to live long, and I want to alone short end, all of a sudden it breaks and everything goes in the other direction. And that’s because of the onset of the recession. So it’s when these Unint versions occur on a rapid basis that the recession is recognizable. Now, let me let me now so I needed to give you that basis, and I apologize a little long, but that explains this chart. So this chart, the blue lines are the percentage Have you have those 10 yield curves? How many of them are inverted? Okay. And what we want to know is in right now, if you take a look at this chart, 90% of the yield curves are inverted. Whenever you’ve had more than 50%, inverted, you’ve always had a recession. So let’s go back in time for just a moment. And let’s look at 2006 2007 2008. So in 2005, we were getting inverted yield curves, but we didn’t have more than 50% and burden. So people were talking about, oh, we have an inverted yield curve, but we don’t have a recession. So it’s a Goldilocks economy. Ben Bernanke, right. subprimes contained the Goldilocks economy, everything is fine. Then we went to 6070 80% inversions in 2007. And then in 2008, they started to and invert, and you had the recession, go back to 2000. Right. In in 1998, we saw a bit of an inversion occurring, but we never got to 50% inversion Well, I got to 40%. And then the then we uninvented the yield curve. And then in 1999, Alan Greenspan started hiking rates, he was afraid of this inflation Boogie monster, that inflation was about to rear its head and destroy the economy. So we started hiking rates, we inverted 100% of the yield curves over that short period, heading into 2000. And then ultimately had the recession and 2001. But I want you to take a look beyond a little bit back. So everybody’s talking now about 1995 1995, the Fed was hiking rates, but we didn’t have a recession. And we have the soft landing in the economy. But if you take a look at the chart, we never even had a hint of a recession of an inverted yield curve. In 1995 1996 1997, we had no inversion of any of the yield curves. During that period, the economy was doing fine. Yes, the Fed was hike rates, we had long term capital management blow up, we had Asian contagion, we had the Russian debt default, we had a lot of other impacts from the Fed hiking rates, but there was a quote unquote, soft landing, because none of the yield curves were inverted. We have, we have 90% of yield curves, as of today, inverted, and people are saying, Oh, we’re gonna have a soft landing, this is not 1995. From an economic standpoint, much less the amount of debt that we have in the system. But there’s a vastly different economic backdrop of the yield curve inversions today versus 1995. And again, previously, any period prior to this when you’ve had more than 50%, you see, back in 1998, we were burning it 1990, we had 60%, inverted 99. And while we have a recession, all through history, anytime you’ve had more than 50%, inverted, you’ve had a recession. So expecting this time to be different is probably a pretty far stretch for both the Fed and for the kind of mainstream media people in general.

Adam Taggart 28:04
Okay. Really good, detailed answer to my question. I’m going to I’m going to ask it one, one slightly different way. And then we’re going to we’re going to move on to all the other questions that I got here. So you just made a really good case for why you gotta have a really strong argument that it’s different this time for us not to have a recession coming. Right. And, I mean, showing my cards Yes, I think that’s the the likely probability here is that there’s, there’s a recession coming, it’s probably going to be even worse than if we had let it happen at the beginning of this year. Because every time you kick the can, and you just try to extend and pretend you’re building up that that the damaging force of the kinetic energy of the eventual correction. But that’s, you know, business cycle, you go from boom to bust. Right. I’m more. So to get back to the question of like, we just dialed up the cost of living on America by an employee this number out of my my year, so I don’t know if it’s the right number, but I think it’s in the right ballpark. 35% In three years, you know, more for certain things have made, let’s say an average 35%. Yeah, that might send us into a recession. But but that’s not a cyclical thing, right. It unless there’s some growth miracle at some point in time, that that suddenly increases wages by 35% in three years. Right. To me that feels like a permanent weight on, you know, on the economy on the populace. Am I thinking about this wrong or?

Lance Roberts 29:40
No, that’s absolutely right. So the whole premise of the soft landing, right, is that the economy can sustain higher rates are going higher inflation, and keep chugging along. And so you don’t have this recession. You’ve got increasing wages and increasing employment and consumption is still going and all those type of things that’s going to be it. Could that happen? Absolutely. The question you got to ask yourself, though, is what is going to be the driver for stronger economic growth, again, economic growth is 70% driven by consumption. So without more stimulus without more checks to households without zero student debt payments, without extended Child Tax Credits without extended unemployment benefits without all the other supports that we owe, and without another inflation Reduction Act, we can’t forget that that was a lot of spending. So without that, what is going to be the next driver for more economic growth to offset the impact of higher rates and higher inflation on the economy? And and I don’t have the answer to that, because I guess the government can come to bite administration tomorrow, or the next administration got election next year. So whoever gets elected, you know, in 2024, they come and say, first order of business, 5 trillion into the economy direct checks to Baxter households, that’s going to that that would offset a recession. Right. So we created a bunch of inflation again. So So again, you can’t you know, this is always the problem with predicting the future, is that we have to base you know, our predictions of the future based on some logical evidence of what’s going on. And, and historically, this has happened when, when the economy has been this way. But certainly things can can be different this time. You know, one of one of the interesting conundrums this time around has been that interest expense for corporations has not really risen along with the rising interest rates. And that was because all these big mega companies were financing debt at zero rates, and they haven’t had to do new

Adam Taggart 31:46
borrowings. Now, that’s a ticking time bomb, as we’ve talked about, yeah, well, next year,

Lance Roberts 31:50
in 2024, we got a huge debt wall for small and mid cap companies, they’re gonna have to refinance. But that’s not the apples and the Microsoft’s of the world, they’re fine. They’ve got a ton of capital and sitting in treasuries and money markets, that they don’t need loans. So they don’t need to borrow at these higher rates. So but that that lower net interest expense is allowing corporations to gin out higher profitability than we would have expected otherwise, at this point in the game. So again, there’s things that can certainly offset the bearish case in the short term. And but I think we have to be aware of that bearish case, because there’s there is certainly a case to be made for that more bearish outlook as we get further into 2024. Is that the right year? I mean, is it 2025? Could it go up further than we expect? Yeah, that’s, that’s absolutely possible that this drags on a little bit longer than we expect. But I think at some point, that bit more of a bearish forecast, you know, starts to have real quote unquote, teeth. In the market environment,

Adam Taggart 32:52
okay. All right. But my last point on this is just, you know, I think we’ve made it permanent, we put a permanent burden on on the economy by raising cost of living for, for consumers to where they are, so whatever growth was gonna be, right. You know, there’s, there’s a heavier weight now, on the consumer spending side of the equation that can get addressed by all the mouse click money and magic that you just talked about. But all of that comes at a cost to so it’s just, that’s my big concern here. Now, your point, I mean, yes, we can go into recession, in, you know, probably likely to happen. One thing, though, so I interviewed Ed Yardeni, who does a really good job, I will say, of, you know, countering, delivering a counter argument for a lot of the bare issues here. Now he’s he’s got a lot of the same macro concerns. So it’s not like he’s a total Pollyanna. But one thing I want to mention that he brought up that I think is important for us bears, too, are for bears to keep in mind here, which is, with this higher cost of capital that’s come with with higher debt yields and whatnot, right, and all the other concerns that we have around that. Since you gotta remember that like the trillion dollars that government’s going to spend this year in debt service, right? It’s like, yeah, there’s a good chunk of those that debt that those debt payments, that are going back to investors, of the people that have taken their money out of banks and put it in money market funds and treasuries. And so there’s actually a lot of investors that are getting a really nice cash flow right now. That is enabling them to continue to spend and consume. So that’s something that can keep this going longer. It’s really kind of a form of stimulus. Right. Yeah.

Lance Roberts 34:39
Let me let me counter that argument. Real quick.

Adam Taggart 34:42
Let me just mention one point in case you want to address it in your answer, which is, there is a lot of unfairness in that though. In other words, you know, that’s not a stimulus that’s going to equally to all Americans, it’s going to those households that have their own financial assets, right. So now granted, those those people spend more on a per capita basis. So again, it can keep the economy more supported. But it is it is not fair at all and exacerbates the wealth gap that you and I have railed about for so often. So anyways, go ahead.

Lance Roberts 35:11
No, that was my point is that, you know, it’s that’s, you know, yes, there’s a lot of households that have treasuries that are clipping into higher interest coupons. But that’s about 10% of the economy. The other 90% are living paycheck to paycheck, they don’t have money invested in bonds, they don’t have money in savings. And again, we take a look at the economy being broken down, you know, 70% of its consumption, you know, 10% of the population is not making up 70% of the consumption. So, you know, it’s, you know, it’s they they do consume at a higher level. So,

Adam Taggart 35:44
they spent they spend above their weight, though, right? I think the top 20% It’s just like, 40% of the consumer spending or something like that. Yeah,

Lance Roberts 35:50
it’s it’s definitely up there. But, you know, that doesn’t completely offset the drag, that you see from the bottom 80% of consumers. It’s also like, you know, a lot of people talk about GDP, which has a component of business investment. In the GDP calculations, and well, businesses are spending more money. So that’s gonna help the economy grow, but not if 70% of the of the GDP report is consumption, if that’s slowing down, that little 15% is not going to make up the slack. Right. So it’s always important to you, and I’m glad you made the point, which is you got to understand that that’s not equal in the economy. And that anchor of that bottom 80% does matter.

Adam Taggart 36:31
It does matter. I guess my only point there is just I think we look a lot at the anchor of oh, gosh, you know, a higher cost of living higher interest rates, that’s killing the consumer. But it is rewarding a part of the consumer piece as well, that that lightens the load a little bit, right. In other words, it’s just it’s another factor that can push things off a little bit further than then folks might imagine just by looking at the cost of debt alone. So and I’m talking fast, because I got a lot of points I want to make here. But so Edie, like you, Lance, probably even more so than you believes that stocks are more than likely going to rally into year end. I think he’s got a 4600 target on the s&p right now. When I was interviewing him, I did mention a number of the other people that have a similar forecast that I’ve talked to on this channel so far. So Darius Dale, I think he’s got a 4600. forecast for the end of the year as well spent Henrick thinks more than likely stocks are going to end the year higher. I know you do. I had Thomas Thornton, on the channel earlier this week has a similar outlook. Again, folks, nobody knows what’s going to happen here. But, you know, earlier this week, and late last week, as folks were really beginning to freak out about the higher bond yields, you know, seeing a lot of people who are saying, Okay, this is it, this is where it all rolls over here, right. And I just want to make sure that if folks are making that bearish outlook, their primary thesis, it’s fine. But just make sure that you’re, you’re positioning your portfolio, such that if you’re wrong, and these other people are right, and stocks actually, you know, pick themselves up and end up finishing, they’re pretty strong. You’re not going to take losses so severe that it really impairs your your future ability to grow your portfolio.

Lance Roberts 38:21
No, I think that’s an important point. Because after last week’s interview with you, I got a bunch of people you posted on Twitter, which feeds into my channel and so I see the comments coming from it. And so a lot of people like Lance’s Lance’s Uber bullish and, you know, when he’ll be bullish when stocks when the index is at 2400, I’m like, You don’t listen at all do you as to what I’m saying? I’m not bullish or bearish. I’m just simply what the markets are telling me right now my target for the end of the year is 4500. We’ve got a downside target of 4000. Right now, if we break 4200, we’re going to start reducing risk in the portfolio. So sorry, 4100, we’ll start reducing risk in the portfolio. You know, that’s just portfolio management. So there’s a point that, you know, we’ve been using this decline in the market over the last month or so to add exposure based on our thesis for a year end rally, because markets are deeply oversold sentiments gotten very negative. Now, you’ve got a very high put call ratio, which suggests that people are just, you know, completely on the wrong side of the chart, and they’re too bearish.

Adam Taggart 39:26
So while you’re doing your litany, do you mind pulling up the chart of the s&p that you pull up every week just so we can map to where we are right now? Yep.

Lance Roberts 39:37
So now you wrote my completely broke my train of thought, but give me a second. I’m

Adam Taggart 39:42
sorry. But you were basically saying look, you know, markets sold the short term I just just lots of reasons to say you know, there’s a lot of there’s a lot of negative sentiment.

Lance Roberts 39:52
Just teasing you. You’re like my wife always interrupting me right in the middle of a good thought. I don’t know I don’t, I don’t get good thoughts that often. So you know, give me give it to me, Well, I

Adam Taggart 40:04
got it on your internet wife I like, exactly.

Lance Roberts 40:07
So um, so here’s the chart of the s&p again, you know, take a look at the top chart indicator, that’s our relative strength index, that those little red dots are when the markets are oversold. And, you know, if we go back in time, whatever the market has been this oversold on a relative basis, you always get at least a reflexive rally in the market. So the reason I’ve got 4500, kind of pegged, it’s going to be about kind of in this range. 4400 4500 is about where you know, we’re going to run into resistance at the 50. And the 100. day moving average, we get through that, and which is very likely, if we’re getting a strong rally put together 4600 is basically pushing not the highs for the year. So the highs for the year, certainly within the realm of reality. I’m a little bit more along the line that we’re going to this kind of downtrend that we’re starting to form here, we had a low a higher high in July, a lower high and you know, and so if you kind of draw a little line here about 4500 is where the next lower high would be. So if we are putting in a series of lower highs, and that’s why that’s my initial target of 4500. That’s about where I expect the market to kind of peter out a little bit. And again, it’ll depend on you know, if we’re, by the time we get there, we’re back to overbought conditions. Again, if you take a look at this top indicator, as well, whenever you’re above 70, or close to it, that’s basically been a peak in the market. So that’s a good time to take money off the table. And this is why I’m not bullish or bearish. We know we were talking about you and I, back in June and July, hey, we’re gonna have a three to five to 10% correction, the markets, we’re reducing risks, we took some money off the table, we’re hedging the portfolio, blah, blah, blah. That’s what we talked about back then. So now we’ve had this correction and I told you when this correction came, what was going to happen all the bears were going to come out saying see it was a it was it was a it was a bear market rally now it’s over and they’re coming out right I just got an article posted this week. You know, from another visor came out says the bear market rally is over right the bull the bear markets back maybe. But again, if we take a look at our MACD indicator at the bottom, which is our Buy Sell indicator, it’s very getting very close here to triggering a buy signal. The markets having a very nice rally on Friday. Based off that employment number bounced right off the 200 day moving average, which was a perfect retracement from that high. So we had a 38.2. That’s a Fibonacci retracement, don’t worry about its technical mumbo jumbo. But basically we had a perfect retracement of an initial Fibonacci retracement scale that sets that that technical price move now back for that rally. So again, we get a rally here in stocks. If we start to see some weaker economic data, that’s going to boost the rally even more, because that means the Fed is going to be closer to you know cutting rates than hiking rates. So there’s a lot of backdrop here that suggests that we could see a fairly decent rally into your end now, again, Don’t come at me and say, Oh, you’re Uber bullish. I’m not I was just talking about when we get into next year, it’s game over at that guy that was a game over because never game over. But it’s a different game going into next year. Because once we get into next year, we are going to have to deal with slower economic growth, the potential for an economic recession the last half of next year, over overly high valuations and earnings estimates relative to what reality is going to turn out to be. So estimates are going to have to come down, that’s going to weigh on prices now doesn’t mean the markets are going to collapse. And we’re going to have a 50% decline. But it does suggest that we could have, you know, another kind of tough year next year, treading water back and forth. And really kind of having difficulty finding some footing for the markets. Again, just a sloppy or not necessarily an end of the world type event. And I do want to show you one other thing here. Just very quickly, because

Adam Taggart 44:01
you can ask a question before you two questions for you hop off this chart.

Lance Roberts 44:05
No at least you didn’t interrupt me that time. Yeah, go ahead.

Adam Taggart 44:08
Okay. All right. So first off, I just want to I want to emphasize why we do this. Right. Well, we keep bringing this chart up here. Well, you just left the chart I was going to comment on buddy.

Lance Roberts 44:21
Oh, I’m sorry. I go back, hold

Adam Taggart 44:22
on. Okay. But, you know, to your point, like we were we were talking to that chart back at the end of July, right when it was very overextended are looking very overextended and saying, hey, you know, you were saying, look, it looks like we’re gonna have anywhere from a three to 10% correction. Right. And that that is how it played out. Right. And so, you know, looking at the technicals are not the entire story by any stretch, but they do give us you know, some good indicators to be able to sort of develop some probabilities of what’s likely to happen, you know, in the relatively near future. Um, hopefully you’re bringing the chart up here because I’m gonna speak

Lance Roberts 45:02
to I’m trying to and now I’m having technical difficulties. So give me just a second okay,

Adam Taggart 45:08
no worries. But But basically, you know, speak from memory here. We have the your RSI indicators and your, your MACD indicators, you know which which were plunging over the past couple of weeks. And you were saying lucky, they look like they’re getting close to a period where they’re going to be so oversold that we would expect them to, you know, to reverse basically, yeah, so Exactly. So now we’ve actually seen what appears to be appears to be the reversal. And both of those, right, so highlighted in the little pink circle for both of those right. Also, as we got closer and closer to the red line in the main chart there, which is the 200 day moving average. You said look, that’s for what we know right now that’s support. And you know, if it gets down there, it’s likely to bounce off that support line. Again, exactly what’s happened here. So we’re just we’re seeing all the indicators that we would expect to see from hitting an oversold maximum, to beginning to revert back to something that’s less oversold. Right. And the jump we saw in the markets today. Yes, maybe it was triggered by the news of the jobs report. But also, you could just sort of say the system was waiting for a trigger, because it was everything was was in line, right? Sounds like you’re just saying Yes, Adam, but feel free to comment on any of that. My other question for you is, okay, let’s say instead of the expected reversion here, it was to reverse and puncture through the 200 day moving average, how would that change your outlook?

Lance Roberts 46:41
Well, then I would change this from from bullish to more bearish near term, we would have to reduce exposure to portfolio say, hey, you know, these positions we added on over the last couple of weeks, hey, we were wrong, that happens, we’re going to sell those positions, raise some cash, probably add to our bond portfolio at that point, because of markets are going to be declining sharply money is going to flow into treasuries for yield. And, you know, you’d be looking at somewhere around probably 3800 to 4000, for your next kind of short term bottom in the markets. You know, I doubt we get down to, you know, 30, you know, kind of the October lows, that’s probably not going to happen right now, the data doesn’t really support that. But you know, that’s certainly not out of the cards for next year if we start to see a recession pickup.

Adam Taggart 47:27
Okay. All right. So so, as I say, folks, this is why we do this, right? This helps us to track where we are, it helps us have a sense of where things may go next. But it also helps us sort of see key turning points in market sentiment. So to your point, Lance, if we punctured below the 200 day moving average, there’s a lot of people who are watching the same data, who would have to say, oh, geez, I was wrong, right. And now all of a sudden, this thing I was had some confidence was a floor. Geez, maybe that’s a ceiling now. And we gotta we gotta reassess, you know, where this could go. And then, like you said, you know, maybe everyone starts looking at 1300 So anyways, we’ll keep tracking this going forward, folks. All right, sorry. Your

Lance Roberts 48:10
let me just say one thing and again, this is this is really key to what you’re kind of talking about. See, the problem with most investors is is they get into a bias mode. And they’re like, Okay, stock prices are going up so they can only go up from here and so that was that so let’s look at this chart one more time. So if we look back and 2021 and heading into 2022 it was clear stocks could only go up but even along the way of stocks going up there will regular corrections along the way because stocks can’t just go inexhaustibly higher they have to have some relationship to kind of economic realities etc. So when everybody gets on one side of the boat everybody’s long stocks then all it has to happen in the markets and remember all the markets are is a market right you got buyers and you got sellers well if everybody has bought right there’s nobody left to buy anything. So if one guy says hey I want to sell then all of a sudden you all these other people go oh I gotta sell to and so that you get these these what we call buying and selling stampedes. And I’ll let me if I zoom in here, let me zoom in a little bit so it’s a little clearer to see but you’ll notice that during any period we get into and this is the kind of the correction we had last year but even during that that bear market everybody’s like oh stocks are just gonna go down from here. Fantastic tradable rallies to work off of and that’s because you get this selling stampede and these selling stampedes tend to last anywhere from 15 to about 21 trading days give or take some are longer, some are shorter. And then you get the inverse of that which is what we call a buying stampede and everybody for 15 to 21 days are going to buy stocks because now it’s like okay, well there’s this new narrative and it’s gonna go and then that narrative fades and we get and we just we just ebb and flow from Are these buying stampedes to the selling stampedes? And that’s what the relative strength index at the top of the chart tells you. And it’s a really simple indicator. And when you’re at 70, this is where guarantee right when you’re at 70, this is where everybody’s going, Oh, I gotta be long stocks, right? And I’m getting phone calls that why aren’t we long i stocks, right? You know, whatever it is that this is where everybody wants to buy at the bottom down here. This is where everybody wants to sell. The first rule of investing is is to buy when nobody else wants to buy something, sell something when everybody wants to buy it. And right now think about what everybody doesn’t want to own. That’s the stuff you should be buying. Think about everything that everybody wants to own, that’s probably the stuff you should be selling. And that’s generally the way it works more often than not, it’s a great rule to follow.

Adam Taggart 50:45
All right, great. So this whole discussion on this chart, interrupted your flow to another chart that you wanted to go to. So I want to make sure you get to speak to those, I just

Lance Roberts 50:53
I just wanted to put some context around the rally this year. And again, you know, markets are up, you know, 11 12% year to date. But again, I just want to remind you that this has been this has been a very tough year for every Portfolio Manager, it’s been a tough year. For us, it’s been a tough year for everybody. And that’s because if you run any type of portfolio that all this is more long biased, and we’re more long biased not we do hedge we do short from time to time as a hedge. But primarily, we’re long term managers. So we’re mostly long bias most of the time. We do hedge risk with other instruments, of course, but again, this has been a tough year for markets in general. And if we take a look at this chart, in particular from the first of this year, let me just back up here real quick, and say January of this year. So the top chart, the red line is the s&p 500 equal weighted index right now year to date, that index is up 12.47%. The bottom line, the black line is the equal weight index, which is negative 2% year to date. So that massive gap in performance is basically those tops, seven mega cap stocks with the top 10 Mega caps that absorb all the passive inflows that’s Apple, Microsoft, Google and Vidya Tesla Mehta those stocks, that’s what’s performed this year, that’s what’s holding the overall index up you EEG and even in this the ecoin index, so same stocks are in there, they just have an equal weight. So you can see that the float the impact of those top 10 market cap weighted stocks have created all of the returns this year in the market versus that a forerunner 93 stocks in the index. So for anybody if you’re looking at don’t look at the s&p this year to judge your performance in your portfolio, look at the equal weight index as a much better predictor of what your portfolio is probably doing this year.

Adam Taggart 52:51
All right, great. We’ve talked about this. And of course, the big question is, is what’s going to happen with flows in the Magnificent Seven going forward? If they continue to gobble up all capital inflows and capital inflows are positive? And they should do fine. But if they don’t, not only will they get hit? They’ll take everything down with them.

Lance Roberts 53:09
Right? Well, the question is, is why are they going to get hit? What would cause that and you know, last year, thanks, stocks took a hit through October. And I wrote this the article in November on November the fourth of 2022, saying our Fang stocks dead and I made the case why they aren’t because of stock buybacks because of passive inflows. And that’s not going to change, you know, passive inflows have now largely outstripped active inflows into money. And so the more money we keep pouring into ETFs, and regardless of whether you’re buying, buying the past three years buying an sp index and holding it, or if you’re just trading ETFs, rather than trading stocks, it’s all the same. All that money flows into those stocks. And there’s really nothing that suggests that’s going to change anytime soon. And so that’s going to make these markets a lot more difficult to navigate, because a lot of the fundamentals that used to drive markets aren’t driving markets anymore. And that’s that’s a real challenge for people like us, that are fundamental investors,

Adam Taggart 54:06
because you’re fighting the giant mindless robot of passive capital flows. Yeah, absolutely. Which is one of those things that are just my worry there, right, as the market just habituates around that, and just says, well, all that really matters is what the giant mindless robots doing. And then everybody jumps on that bandwagon, and then it stops working, and takes everything down with it. Oh, yeah.

Lance Roberts 54:27
And that could be that could absolutely be the case. Again, I You just got to kind of you’ve got to kind of make the argument of what’s going to cause you know, everybody to sell their app their, you know, their their technology sector ETF or sell their shares of Apple, Google Microsoft, you know, what’s going to cause that? I mean, you got to have these companies coming in to start, you know, really talking about a downturn in earnings. And and,

Adam Taggart 54:50
I mean, we can talk about shrinking revenues. I mean, that that applies to Apple. trees don’t grow to the moon right. At some point these companies do become worth the entire GDP. And then there’s no more to grow beyond that, right?

Lance Roberts 55:04
Absolutely. That’s, that’s a fair statement. And I don’t have the answer for yatom of what’s going to cause that massive shift in mindset. Because, again, it’s a Wall Street product. That’s what Wall Street promotes Blackrock is a huge promoter of their ETFs. It’s a massive inflow for their company. So you know, this push to get more and more people just to invest in ETFs. And again, now, you know, 401 k plans, we’ve got all these fiduciary responsibilities with 401 K plans do the US Department of Labor guidelines where we have to provide the lowest cost product into 401k plans doesn’t matter whether they perform or not, it’s just they’ve got to have the lowest costs. And so that’s ETS, now, they have a lower cost than mutual funds. So we’re just pushing more and more people in forcing them not pushing them, we’re forcing them into buying ETFs versus, you know, other other asset classes. And that’s just going to make this potential rotation out of ETFs. Even more difficult to fathom.

Adam Taggart 56:03
All right. Well, look, we haven’t even talked about bonds yet. I want to get there. But very quickly, I want to get your thoughts on on something that I think is pretty important here, which is right now in bond land, right, we’re seeing the yield curves starting to an invert. Right. And they’re an inverting by a bear steepening. Right. So as you said earlier, Lance, you know, yield curve inversion is when the short end of the curve, yields are higher than the long end of the curve yields, right. And this is what the Feds been controlling with its super aggressive rate hike campaign. Now, I think most people expected that the curve was going to invert because the Fed was going to pivot and start lowering yields, and those would come back down to be, you know, lower, lower than the long end yields. Instead, what we’re seeing is what’s called a bear steepening, which is the yields on the longer end of the curve are coming up to match the high short end. Right. And there’s, there’s a lot of damage that that that can do, right steepening of the further end of the curve has, I think, Alpacka tlo, when he was on last week, said that that has like 10 times more impact on economic growth than monkeying around with the short end of the curve. But I want to talk for a second about the impact that this is having on the banking system. So, you know, banks lend short, sorry, they borrow short and lend long, right? So their existing portfolio of loans that they’ve made by lending long, were done back in an era where it was like, you know, rates were like, 3%. Right. So that’s what their income coming in is coming from. When they borrow short now. They’re borrowing at, you know, north of five. Right? So that’s hurting their business model right. Now, at the same time, they’re their reserve assets, which, you know, were largely made up of safe assets like treasuries, the higher yields go, the more impaired, their current book balances are, right, so banks are just in this increasing vise as long as rates keep going up here. And where’s the stat ahead here? Unearned losses. Now, what banks look like they’re on track to hit a record? 700 billion. Right. So I guess the question is, is as long as it’s higher, for longer keeps going on, and let’s let’s let’s assume for a moment that, you know, the Jamie Dimon warning warnings, you know, maybe come to pass where we start seeing, you know, Fed funds rate above 6% Or maybe even higher, like, how worried do we need to be about another big breakage in the banking system right now? Because everyone seems to sort of forgotten about it. Yeah, there was some worry, you know, back at the beginning of the year, but but now everything seems fine. Right? Is it really fine? Or are we kind of dancing around the rim of the volcano here?

Lance Roberts 58:56
At Well, I don’t know if we’re dancing around remember volcanoes not be overly dramatic, but we certainly haven’t resolved the banking crisis. You know, right after the the regional bank prices we bought two we bought small trading positions and two little regional banks, PNC and truest financial. We actually sold through his financial today, and actually bought more of our bond position today on that trade, simply because we’re worried about these higher rates on earnings. So when these when these when these banks report earnings, they’re going to show much bigger capital losses because of these higher rates. Now they’re getting the they still have the support of the bank term funding program. That’s that’s keeping them out of failure. But these capital losses are shortly going to weigh on their overall earnings outlook and forecast and so technically, true us hasn’t been performing as well as we’ve liked. So we took that risk, I’ll say but we still like the company very much has almost an 8% yield on it. We’re going to come back to it. You know once it kind of stabilizes a bit and finds a bottom. But PNC rolling onto right now, it’s been performing much better. But again, yeah, there’s a real worry in the banking sector again, that in fact, PNC is the only financial we own and other than visa right now, because going into earnings season, we’re very aware of that potential risks in their in their balance sheet. But you know, the higher bond yields are going to weigh on, you know, every company, and they’re going to weigh on the economy and everything else. So again, we’re, we’re fast approaching that point to where we see a potential financial event of some sort. And again, whenever you’ve had rates as high as they are now, either the Fed or on the 10 year treasury, you’ve always had some type of financial event, some type of economic event or recession, every single time. And again, that was even in 1995, the Fed was hike rates, you had the Russian debt default, you had a long term capital management blow up, and then we had the recession, so in the.com, crash, so there is no escaping that you’re eventually going to have an event that now again, that doesn’t mean, go get your Patriot food supply today and hunker down in your bunker. That’s not what that means. It just means that we’re going to have some trouble in the economy, because of higher rates. Does that mean lower asset prices? Yeah, but that’s gonna be a buying opportunity, not a selling opportunity. So it’s always important to keep your psychological perspective. Correct.

Adam Taggart 1:01:22
All right. So first off, you’re making my, you know, perennial lag effect warning here, which I’m glad you are, I’m still waving that flag, right lag effect matters, it’s going to come into play. But I want to I want to stick on this question about the banks for a moment. And the reason why is because my thesis, that’s the that’s number one on the Feds priority list. Right? There’s a lot of damage that I think the Fed could let the economy and the markets take here. Because it’s playing for credibility, this is this is the alpaca TLO theory, right, which is the Feds playing for its credibility here. And until and unless it gets inflation under it to its 2% target, it’s going to stay higher for longer, even if the market starts selling off here and the economy starts struggling until the world comes to the Fed on bended knee and says, Please, we know you’re trying to get your 2% inflation target, but we’re just begging you, please intervene. And that’ll give the fed the political air cover to come into play and fix things. But my addition to that is, but if the banking system starts faltering, that’s when the Fed says alright, screw everything else, we got to save the banks. And that’s because the Fed is a confederation of banks, and it exists for the benefit of the banking system.

Lance Roberts 1:02:43
Well, and but also to don’t forget the banking system, the credit system is the lifeblood of the economy. So no. And, you know, he’s absolutely right in the statement that, look the markets down 7% from the peak, right? Come on, right 7%, everybody’s like freaking out, like we’re going into a bear market or something. We’re having a correction, something we talked about back in June, three to five to 10%, where it’s seven, it’s not the end of the world. And it’s something the Fed actually likes, right. They love this negative sentiment, because again, that’s helping feed into this narrative of slowing down consumer spending, bringing down inflation, we just saw a big drop in gasoline prices, not saying that’s correlated, but you know, that’s what they want to see. They want their sit back going, Yeah, this is good. This is exactly what we want higher for longer. It’s kind of keeping the market under control, not getting out of hand here because again, as we said before, what they don’t want is a raging stock market because that boosts consumer confidence that fuels inflation, so they’re okay with this. They’re not okay with 20 25%. You know, back in 2018, the Feds hiking rates were nowhere near neutral in September. By December, we’re down 20%. Trump’s all over Jerome Powell. Remember, we all believe that Jerome Powell was this different animal but as soon as he’s like, Oh, well, maybe we aren’t close to the neutral rate after all. By June, we cut rates to zero by September, we’re doing a massive repo program that we didn’t know at the time. But we were bailing out Citadel ahead and other hedge funds. At that point, we didn’t know until the end of the year, we have an alarm bells ringing across the board in September and October, and in March, we’re in a recession. So you know, it takes time these inversions of the yield curve generally occur two years in advance of recession. We’re about 18 months into this one. So again, you know, it’s probably coming it’s probably next year and the Fed just trying to buy as much time as they can. They don’t care about little corrections in the market. That’s fine. They need to buy as much time as they can without a bank blowing up.

Adam Taggart 1:04:45
Yep. Okay. Without a bank loan. Okay. And that’s my whole point. So I guess just before we leave this topic, how can What’s your level of concern right now, let’s say on a scale of one to 1010, being super concerned about the integrity of the bank, the system under the current yield regime. Oh,

Lance Roberts 1:05:03
it’s it’s, you know, it’s always interesting, right? Credit Suisse, which just got bought out by UBS because they were failing just past all of their fed stress test. So, quality of the Fed stress test, you know, JP Morgan, Bank of America, Wells Fargo, they’re fine. Right? Tons of capital there, okay? A window panic on that. The regional banks and pretty very small regional banks are where the risk are right now, because of their commercial real estate exposure. And that’s not that’s not getting any better. So, you know, if you want to go back in history go okay, well, what type of financial crisis are we going to have in the banking market? I would say, and again, totally different environment than we had 1989. With the SNL crisis, there was a bunch of shenanigans going on with that. But, you know, you could see a financial problem within the small and regional banks. Again, another reason we took TFC off the board for right now, just to hedge that risk. But that’s where I think you’re gonna see the risk pop up, it won’t, you know, won’t be JP Morgan on the ropes, it’s going to be multiple regional banks on the ropes that create a bigger problem, because it’ll be too many for JP Morgan to eat them all up.

Adam Taggart 1:06:14
Okay, got it. Alright, gotta move on from this still a super interesting topic. I do want to let folks know that I mentioned it was a week ago, two weeks ago that I was in talks with one of the co founders of long term capital management. It did happen to land him. Victor Haqqani. I’ll be interviewing him next week. So keep your eye out for that interview. Sure to be very interesting. All right. So now, last big topic lamps, bonds. So I guess just tell us what we need to know about what’s going on in bonds right now. Specifically, you wrote a recent piece, fun flows versus bond yields, kind of like, which matters more here. So what were your conclusions?

Lance Roberts 1:06:55
Well, this basically, you know, you’ve got so two things that drive, you know, bond yields, and again, we kind of get, you know, kind of sidelined with kind of all the headlines out there and everything else. But ultimately, you’ve got two things that drive bonds, right, you have flows into bonds. And then you have the yield itself, which can be driven by different factors accordingly, and one things that we’re noting is, is that, you know, despite you’ve got record flows going into bonds, right, now, you have such a massive shorting of bonds by these, you know, the CTAs, these computerized algorithms, etc, they’re shorting these bonds so heavily, this driving yields up, and they’re gonna keep shorting these bonds, as long as prices are going down, and yields are going up. But that is a massive fuel for a reversal in bond yields and bond prices when that when that turns because when something happens, and whatever causes that turn, as soon as those CTAs start racking up enough losses on a reversal, they’re going to start covering all those shorts, which is a massive amount of buying, that has to come in to buy that to buy that debt that’s sitting out there. So they’ve got to find people willing to sell them the debt at that point, but nobody’s going to want to sell them the debt. So that’s going to drive yields lower, faster, and prices higher, trying to find buyers willing to let go of 5% coupon bonds, they’re just not going to want to do that in this environment, I don’t want to sell it. So there’s a real conundrum coming up between this massive short position. And, and again, you take a look at fund flows into TLT. They’re hitting records right now. So a lot of investors are catching on to the idea of what’s going on here. And they’re getting ahead of this curve, that when this thing turns and you’re ready to be patient, but when this thing turns, it’s gonna be pretty explosive. And that’s why today, so I want to be really, really clear about what I’m about to say. So we run a model, that’s a Live account that it’s an actual live account on simple visor that we run, and it’s an exact model of what we do for our clients. And so whenever we do in that model on supervisory is what we’re doing for our clients with the exception of today. And the reason today is different is because recently, we sold our TLT position and read for all of our clients and bought a 10 year, sorry, a 20 year treasury bond and this place. Well, because simple visor doesn’t have access to daily pricing on specific Treasury issues. I used I did a swap of TLT to ed to ed V, which is the Vanguard extended duration bond ETF, so I actually have an ETF and the simple visor model that is unlike what I have with client accounts that own actual long Treasury itself. Today, we’re doing a trading position in ADV this morning at the open. I increased our EDD position in that portfolio this morning for a trade so I’m willing Looking for a short term reflexive bounce in yields over the next couple of months, maybe into December, then I’ll sell that new position and bring it back down to the same way as our clients. But if that’s hard to do with actual treasury bonds, so I’m only doing it in the supervisory model. So I just want to be really clear, this is a one off trade that I’m doing not doing for clients, but doing on a simple visor trading platform, because I think there’s the deviation of price from the 200. day moving average is the largest on record that cannot last for very long, you’re gonna get a reversion and price back to the tuner day moving average, at some point, it can take a while, and I say can take a couple of months. And so we’re adding to this trading position in the short term again, then the other side of that is we sold TFT, TFC truist financial reduce our equity risks, we also added a bit to our utility sector, we own Duke Energy, we add to that position earlier in the week, because we’re already starting to see flows back into utilities on the expectation that yields are gonna start to come down as well. So we’re starting to see some evidence that we’re getting to the point of that curve, we’re about to start seeing a reversion in yields.

Adam Taggart 1:11:11
Okay, I’m super important. If you can, while I’m talking, if you can pull up a chart of TLT on your system, that’s easy to do. And I just I just want to clarify. So a thanks for clarifying for everybody that what you’re doing, we kind of gotten your trades part of the discussion here. So it sounds like you just shared all your trades. But if there were more trades, you did this. That’s it. That’s it. Okay. But I just want to make sure in Thanks for clarifying. You know, how simple Baiser is somewhat deviating a little bit from what you’re doing for actual clients for the reporting reasons that you talked about? You made one comment, which I want to make sure I understand because I think maybe it was a misspeak, you said you were buying the EDB because you were expecting a bounce in yields. I don’t think you’re expecting that. That’s in price. Yeah. You expected. Yeah. Okay, good. Just wanted to make sure folks didn’t get confused by that. No, no, I

Lance Roberts 1:12:05
appreciate that. You know, when you’re trying to talk off the top of your head, sometimes it’s easy to miss speak on something. So yeah. But yeah, here’s the here’s a chart of TLT for you.

Adam Taggart 1:12:15
Okay. And I just want to Yeah, okay, this is what I thought it was going to be. So you can see the extremity of the recent sell off right, way below the 200 day moving average, folks that have been owning TLT. And watching this have been feeling like their faces have been melting off. I totally get it. But you look at the certainly at the RSI, right, we’re kind of out of the range, they’re down on the extremely oversold level. And we’re definitely at quite low oversold readings on the MACD up there above. So, you know, going back to the discussion we had about the s&p, you talk about these things as sort of like rubber bands, right? When you get to the extreme end of the range. It’s like the rubber band getting tighter and tighter and tighter. So you’re basically saying you just expect even just from a technical standpoint alone, some sort of extreme snapback.

Lance Roberts 1:13:09
Yeah, well, again, here’s here’s, you know, last October, we were at 9111, on TLT, very similar oversold condition on the RSI and TLT went from 91 to basically about 110 over the course of the next couple of months. So, you know, that’s about a 20% advance in TLT over a very short period of time. And you know, that kind of of, you know, pickup certainly don’t mind adding, again, you know, we go back in history, whenever you’ve had these deep deviations from the 20 day moving average, you always have a reversal. So again, just, you know, it’s worth, you know, taking a look, here’s another, you know, situation where this was in March of 2021. Very deeply oversold relative to the index, and to turn a moving average. And of course, you know, very, very strong advance following that. So again, just, you know, we’ve got that same technical. So this is strictly technical trade. This has nothing to do with fundamentals or economics or anything else. It’s just a price deviation technical trade, that I think it will play out over the next three to five months.

Adam Taggart 1:14:14
Okay, great. Thanks for pulling that up. We did just go through your trades. So that’s ticked off for the list. So I’m going to start wrapping it up here. Lance, Noah, thank you again, for giving us so much time. After the 40 minutes that we talked where I realized we didn’t have the recorder on total rookie mistake. Fortunately, I think it’s the first time I’ve done that to you. In the year and a half. We’ve been doing this but it’ll be the last real quick before we go. Just your 60 seconds because I know you wrote a piece about this. Looks like we talked about, you know what could happen with the government shutdown last week? Looks like that’s been averted. Interestingly, it looks like the, you know, Kevin McCarthy, the speaker that kind of came to that agreement has now lost his job as a result. After that, but what implications of the the avoidance of the government shutdown if indeed you expected to be? Well, I mean,

Lance Roberts 1:15:09
look, the bottom line is these government shutdowns are not bad. And we talked about recessions, they’re like a forest. Right? Look, forest fires are terrible, right? You have not California, they’re terrible events. But they’re not bad, actually, you know, for the forest. Because, you know, when you don’t have good forest management, you have a lot of, of leaves and brush to get built up, you know, on the ground, it helps it constricts growth. So a forest fire clears all that out and fertilizes the soil with the ash and you get a whole bunch of new growth. It’s a terrible event, but it leads to a better economic outcome, a better outcome for the force. And same thing for government shutdowns to the same thing for economic recessions. We shouldn’t be so opposed to them. They’re terrible things. But we shouldn’t be opposed to them. The problem with these continuing resolutions, and we haven’t had one, we haven’t had a budget since President Obama took office, we’ve been doing these continuing resolutions. And the reason that we have this explosion in debt is because we’re compounding the rate of spending and 8% every single year. So when we do a continuing resolution, it says, Okay, what was the spending last year, okay, that’s the spending this year plus 8%. And so we get this as my death just exploding through the roof and spending, we now spend 113% of our revenue just to cover mandatory spending, which is Social Security, welfare, and interest on the debt, everything else that wants to get paid for Defense, Department of Education, parks, and recreation, all that that’s all debt issue. So it’s just we don’t have any revenue to cover any of that. So we’ve got to get back into the point of saying, We’ve got to have the budget, we’ve got to stop these continuing resolutions. And if it requires a government shutdown, that last three months, four months, five months, whatever it is, it’s gonna be, it’ll be a drag on economic growth, people are gonna be out of a job, I’m sorry. But at least you start getting back to some type of normal functioning in Washington where people have to debate over spending bill, create the funding for it, justify it, and then put that money to work.

Adam Taggart 1:17:07
Okay, all right, half, I’ll leave it there. Okay, some data on weakening consumer, I’m going to punt to next week, except just to share this headline, it just came out and Bloomberg, nearly half of all young adults live with mom and dad, the share with people in the US ages 18 to 29, who were living with family is now at the same level as it was back in the 1940s. That’s not your household. And interesting that so much in mind. But, you know, keep talking about strong, resilient consumer, all that type of stuff. Definitely seeing lots of lots of signs that the consumer is weakening at all ends of the spectrum. The other thing I wanted to talk about that again, will punt to a future discussion is I was at Vid Summit. This week, just got back from it. Actually, Vid Summit is the annual gathering of YouTube content creators. Really fascinating experience. I just did a surgical kind of day in day out, it’s a multi day event. But just the two quick things I’ll flag here for folks. One is, I went there last year for the first time, and I was totally unknown, right? I didn’t know anybody there. Nobody knew me. This time around, I was stopped. And enough. I’m not saying I ever developed ball by any stretch. But I would say there was probably at least a half dozen, two dozen people over the time I was there that came up and said, Hey, I really love what you’re doing at Wealthion, big fan of Wealthion. So just want to let folks know that Wealthion is it’s on the map. With these guys. It’s not the biggest city by any stretch. But it actually is on the radar of the YouTube content creator community and the folks that operate in that ecosystem. And I attribute that to all the great guests we have on this channel, your weekly commitment to this laughs everybody else who’s watching here. It, it was really it was a great feeling to know that, you know, what we’re doing here is beginning to get recognized. And you know, there’s some of these people in this community, not the ones coming up to me, but you know, some of these people in this community. I mean, they’ve got hundreds of millions of followers. And the fact that that anybody in this ecosystem kind of has recognized what we’re doing and follows it. Really pretty impressive. The second thing I wanted to mention, this is just just a poll, so folks, let me know in the comments what you think. But I was talking with a guy there who his company does a lot of things for YouTube creators, but one of the things they do is they, their specialty is you know, finding the the meteoric stars, right, the channel that’s going from, you know, 50,000 views to 50 million right subscribers. And when they find somebody like that, by the way, folks, that’s not me right now. Wealthion But when they find somebody like that, They’ll go up to them and say, Look, you know, we can invest in your channel, and help you grow and catalyze your growth. And so they’re sort of like a, an angel firm, a VC firm, a private equity firm, that is basically identifying, you know, tomorrow’s next massive YouTube star, and, you know, helping that person achieve that outcome, but also getting a, you know, getting equity in their operation. And it was we were talking and I learned more about his model, I said, Gosh, you know, I’ve got a bunch of investors on this channel, who are always looking for alternative forms of investment. Would you guys ever, you know, do you ever need additional capital for these things? And he said, Absolutely, we syndicate every deal. So anyways, folks, if there’s any interest amongst any of you, in maybe having me bring these guys on to tell you kind of what they do and explain their model to you, I could do that. But I don’t want to do it unless you guys are interested in it. So if you are, let me know in the comment section below. And if there’s enough interest, I’ll bring those guys on. All right, really important announcement here for folks, which is that Wealthion fall conference is coming up just two weeks away. If you’re watching this today, this video releases on Saturday, you only have 24 hours before the early bird price discount expires at midnight on Sunday. So if you haven’t registered, and you’ve been meaning to go register now to lock in that lowest price discount of 29% for the early birds, of course, if you’re an alumnus, check your email because you get a code for me, that gives you an additional 15% discount off of that, if you’re watching this video on Sunday, you only have a couple hours left. So get going. And to do that just go to wealthion.com/conference. It’s got all the details there. And that’s where you register and lock in those prices. And just as a quick reminder to if you can’t watch the event fully live or live at all, on Saturday, October 21. Don’t worry, everybody who registers are getting replay videos of the whole thing. And as we do every week, remind everybody that you know, there’s a whole lot of uncertainty ahead as Lance and I’ve been talking about this whole discussion. So we recommend that you navigate it under the help of a good financial advisor, who understands all the macro issues that Lance and I’ve talked about here. If you’ve got to get one he’s doing that for your great stick with them. But if you don’t consider having a free consultation with one that does maybe even Lance himself and his team, they’re at raa. To do that. Just go to wealthion.com Fill out the short form there doesn’t cost you anything. No commitment to work with these guys. Just a free public service that they offer. Lance. Thanks, buddy. It’s been wonderful, folks. If if the best part of your weekends, no matter what else happens is listening to this conversation a week after week after week. 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Lance Roberts 1:22:57
Look, I have no idea what’s going to happen next, but we’ll talk about next Friday.

Adam Taggart 1:23:00
All right, thanks so much, buddy. Again, thanks for soldiering through the stupid not having the record button on everybody else. Thanks so much for watching.