In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill shares the most compelling insights from our expert guests.
Michael Kao explains why he’s skeptical of a Fed rate cut and why inflation could reignite. Caitlin Long discusses how crypto could challenge traditional finance amidst excessive U.S. government regulation. Jared Dillian and Warren Pies explore the psychological impact of inflation and the future of gold. Psy shares his journey to financial independence and the importance of understanding good versus bad debt.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com/free
Don’t miss Wealthion’s LIVE coverage of the FOMC’s interest rate decision. Next Wednesday, September 18, at 2 pm ET.
Andrew Brill 0:00
Welcome to wealthions, weekly market recap. I’m your host, Andrew brill, as we await the FOMC decision on interest rates, we receive more economic data to help us try to figure out how much of a rate cut the Fed will give us, and mark your calendar for September 18 at 2pm when we will bring you live coverage of the Fed’s rate decision right here on the wealthion network. Now let’s get to hear what our experts had to say this week. Michael cow explained to us that he’s skeptical of a rate cut and doesn’t think the Fed should start cutting rates just yet. He also talked about supply and demand inelasticity, and that a rate cut could not only spur inflation to rise once again, but it will further the divide between the lower and upper income levels.
Andrew Brill 0:51
I like to start out, Michael by asking everybody what their overall feeling is on the economy at this particular point in time.
Michael Kao 0:59
I think the the economy we have is a is a confusing, bifurcated economy and and, you know, I’ve written at length about this over the last year, really. And I think part of the confusion there, there’s a hope there, there seems to be one school of thought that the Fed is too late, and we’re about to go into a hard landing if he doesn’t relent. I’m in the really opposite school of thought, where I think, and I wrote a piece about about this, which I’m sure we’ll talk about, but I call Jay Powell Q so animus Powell, because he’s so worried about even a small slowdown, let alone a mild recession. And I think that it’s probably the contrarian viewpoint, but I think that this September pivot is premature. I think he’s actually too early. And you know, why are there smart people on both sides that are that that have opposite points of view? So I think that the macro confusion right now comes from this, this I call, I’ve been calling it a vodka Red Bull economy for a long time, right? And ever since the Fed started raising rates in March of 2022 it’s already been two and some years, you know, I would have thought that by I originally thought by the end of December, by the end of 2023 the Fed’s dual mandates would actually come into conflict, and that we would start to see, we would see unemployment above four and a half percent and and a material swelling of the economy. That has not happened in the aggregate. You’re definitely seeing pockets of weakness, but you have not seen the aggregate slowing, at least to the extent that I think we need to see in order to really get inflation tamped down. And again, this has to do with, you know, last year, I wrote a piece called The Four Horsemen of US economic resilience. And you know real quickly. Number horseman number one was that there are certain demographic and structural factors behind stickiness in certain parts of certain subcategories of inflation, especially shelter and labor, fiscal horse horseman number two is the big fiscal boost that we’ve had, and that is the vodka Red Bull economy that I’m talking about, right? If the if Jay Powell has been administering the monetary depressant Well, Janet Yellen, plus all of the spending bills combined, where we’re talking 2.2 trillion between the three Biden bills Since 2021 that has, that has really, really countered the that, that has provided the Red Bull stimulant, that’s countered the vodka depressant, and it’s created major distortions in the economy and all this macro confusion. Because, you know, when I when I talk about it’s not, it’s not as simple as a pure K shaped recovery, right? Most people are familiar with that idea that, you know, the wealth are getting wealthier and the poor are getting poorer through inflation. But it’s actually even a little bit more nuanced than that, because, and I’ve written about this in a number of my past pieces, but within the US you have, I’ll broadly call it the haves versus have nots and and, and then you can split it between the consumer and the corporate. On the consumer side of things, you have obviously Rich versus poor. Sure, but you also have leveraged versus unleveraged, right? So there, there are people who have, most people have locked in their their their mortgages, that maybe there are some few that have not. And then on the corporate side of things, there’s also this bifurcation between big versus small, and then there’s this bifurcation between levered and unlevered. And so the the percentage of floating rate borrowers here in the US is only about 25% in terms of overall corporate debt, but the rest of the world is much, much higher. And so you’re seeing pretty big bifurcations in in financial performance, between the cat the cat, you know, the the cash flush companies, the bigger ones generally, and then the the smaller cap, floating rate borrowers. And in fact, my horseman number three of us economic resilience was relative rate insensitivity on an aggregate basis, but, but again, because of the these bifurcations between the haves and have nots, you’re seeing certain pockets really struggle, CRE, especially office. CRE, really, really struggling. Smaller, smaller borrowers that rely on sofr based debt, right? Obviously really struggling, but then it’s not creating enough of an aggregate problem. The last horse, just to round it out, the last Horseman of US economic resilience is relative energy independence. And you know, even though oil prices have moderated quite a bit, which I’ve been think, I’ve been saying that they should and they would, but, but, you know, overall, I think this OPEC policy, of of these premature cuts, I’ve also written about this at length, saying that this was, this is going to backfire on themselves because they their OPEC chose to basically support prices. Saudi Arabia in particular, chose to support oil prices at a time when the Fed is still trying to tame inflation, right? And if you think about the problems facing both the Fed and OPEC, they both have relatively blunt tools. The OPEX tool is blunt in that they can only withdraw supply, and Saudi Arabia withdrew 3 million barrels per day to support oil prices. But guess what? Supporting oil prices is demand restrictive, but it also has the perverse effect of making keeping the Fed more vigilant on inflation. The Fed’s tool is also blunt in that, you know, I just talked about all these bifurcations, it’s not as if the Fed can actually through monetary policy, at least use a surgical knife and just alleviate the conditions for the have nots while not creating aggregate inflation, they’ve got one blunt tool, which is the Fed funds rate. And so my view is that if they especially with this fiscal tailwind still going strong, at least up until now, the monetary depressant has kept that crazy vodka Red Bull cocktail from going completely awry, right? But now, if you start taking down that monetary depressant, I think we are going to see a resurgence of inflation. I think there’s a high likelihood of that by and you know, the Fed is going to have to have, is going to have a hard choice by by the second half of 2025 I
Andrew Brill 9:00
think in your article, you had said exactly that, that you thought, and contrary to popular opinion and and the market, who’s loving these cuts, you think he’s way too early. You think that inflation could actually rear its ugly head a lot sooner than we think, if he continue, if he lowers rates.
Michael Kao 9:20
Yeah, and, and, you know, one, one of the key points that I made in my, you know, the return of PP, fulanos, pal, right? One of the key points that I made, I think, that I really haven’t seen other people mentioned, is that we have a, we haven’t seen a confluence of supply inelasticities in decades. We haven’t seen it like this, right? And I’ll name them real quick, right? Oil, we’ve got artificial supply inelasticity because of the aforementioned cuts by Saudi Arabia, right? And that can be solved, by the way. But I’ll talk about that later. The second thing is we’ve got supply and elasticity in freight rates driven by geopolitical risk in the Middle East. Third is that there is this much bigger secular near shoring trend, again, driven because of great power competition with China, and that’s caused supply inelasticity in certain areas of manufacturing. Janet Yellen has been playing games with the QRA and restricting issuance of longer dated treasuries. So there’s a supply inelasticity in Treasury bonds that’s also stimulative and there’s a structural undersupply in housing that is another supply in elasticity, and then labor. So labor is probably the most controversial point because of especially given all of the recent revisions. But I believe that, you know, when I talked about my horseman, number one, you know, the demographic and structural issues. I think when you look at the demographic pyramid, you know these, these charts that you know, people like to do, to show, show the age categories, I think it’s really interesting that the US and most of the countries of the West that won World War Two all followed very similar birth waves. You had this big baby boom generation, and then you had a relative, very smaller generation that followed, I’m that generation that’s Gen X. Well, it just so happens that that Gen X category of workers are in that. Call it 45 to 59 year old bucket. And I think that that’s really the most highly tenured part of the workforce. And when you when you actually dig into the unemployment numbers, and you see where the wage gains and the wage stickiness is coming from, it’s that category. So I think there is a demographic element that’s keeping the labor supply relatively inelastic where it counts for the macro economy. And then, by the way, just to round out that demographic point and how it relates to housing, there’s also a it, there’s a bulge at the 30 to 39 year old bucket of people right now. That’s, I guess, that would be, that would be considered, you know, millennials, right, that are in primary household formation age. So with, with, with respect to housing, you have a structural under supply that’s creating a supply in elasticity, but you’ve also got relatively inelastic demand with respect to that cohort, right? So, so all of these things combined now, now I always like to say that the sword of inelastic supply cuts both ways. So when you have a when you have an inelastic supply curve, what it means is that supply curve is relatively steep, so that even a a even higher demand, sorry, a relatively modest amount, modest increase in demand. Right represented by a right shifting of the demand curve can can create a a relatively disproportionate price response, and it cuts both ways. If you have a if you have a demand shift down, you could have a relatively sharp, you know, drop in prices. But what I fear now is that the return of tussan and his Powell right is going to withdraw that monetary depressant that just leaves this, this fiscal tailwind blowing hard, and it’s going to shift that aggregate demand curve to the right again. And this is, and by the way, this is, this is when, when people say the Fed is too late, too late, too late. I always ask the question, too late for what? Exactly, because, you know it’s, we’ve, we’ve been in your over decades of, over the last several decades of zero interest rate policy in QE, it’s as if the we can no longer tolerate any business cycles. What is wrong with a recession? A recession is what actually cleanses. Cleanses out, you know, inefficiencies and corporate rot to begin with, right? So and, and and we need, frankly, we need a recession to cleanse out a lot of these issues. Inflation is the biggest issue, right? Because everybody focuses on price change of of CPI, but forgetting that, you know the CPI itself. Is the first derivative of price. Everybody’s focused on that second derivative, but the you know, the the average consumer consumes absolute price levels, and when you look at the cumulative compounding of inflation just over the last couple of years, it’s an enormous aggregate price jump like 30% I
Andrew Brill 15:25
know you’re a subscriber to Merton’s model, where you look at debt versus assets and stuff like that. When Powell came out in Jackson Hole and said, Yeah, I think it’s time to cut the market went crazy. Everybody happy, the s, p and the small caps. It seemed like everybody ran out and borrowed money, figuring, you know what, we’ll borrow money now we’ll refinance because we’ll be able to as rates come down. That worries you, doesn’t it?
Michael Kao 15:54
Completely? Yeah, it’s, it completely worries me. That’s, that’s exactly it. I mean, it’s, it’s that, back to that shelter inflation part of it, and that’s, and that’s just one of so many different, you know, supply in elasticities again, you know, I’ll say something that I said in my in my palette post, I said that, you know, we haven’t seen, it’s not just one, it’s, I think, like eight different supply inelasticities That I enumerated, and it’s the confluence of all of the above. And given that the fact, given that the Fed has only a blunt tool, and we have no signs of aggregate stress, right, what he’s going to do is that he’s going to alleviate a small amount of stress in certain have not pockets, but then juice the aggregate demand curve, and I think create a second inflation wave. To me, this is Team transitory Redux
Andrew Brill 17:04
in the lower income class is hurting a lot because of inflation. You think that that’s going to get, that’s, it’s just going to, it’s going to widen the divide and really divide, it absolutely
Michael Kao 17:17
is, because there. Okay, so inflation, I also said this a lot inflation is the most regressive tax there is. And not only is it, is it regressive in that it hurts the poorest, you know, decile of the of the income distribution, but it also hurts 100% of the population. So I get that it sounds a little bit callous to say that we need a recession. We need unemployment to go to four and a half to 5% but look when, even if unemployment is at 5% it means that 95% of people are still employed. But when you if you do something that juices inflation back up it. It affects 100% of the people. There was a there were somebody made a comment that I responded to, maybe, I think, last week about credit card delinquencies on the rise, showing how you know the beleaguered, you know, cash strapped consumer really needs relief from the Fed. And I said, this is all wrong. It’s all wrong because number one, okay, first of all, credit card delinquencies are not in a signal of aggregate credit stress. It’s it who, who actually pays interest on their credit cards. It’s only the people that are most cash strapped that are living hand to mouth, where they basically where all of their income is eaten up by food, transportation, rent. That’s inflation. It’s inflation that’s causing the upsurge and credit card delinquencies. So that’s the biggest irony of that like to draw a conclusion again, this is, this is why the the confu, the the MA, the bifurcation between the haves and the have nots is creating these like distortions that’s making, I what I fear the policy makers to to enact poor policy choices, because it’s not, it’s, you know, juicing inflation back up worsens that situation. It does not better that situation. How
Andrew Brill 19:42
are our viewers protecting themselves for what’s to come? This
Michael Kao 19:45
is one of the hardest things, because this is a really difficult macro backdrop and and I can tell you that, okay, so you know for myself, right? I I’m, I’m, I’m probably there. Different than a lot of people in the Twittersphere that tend to be, you know, trading that were their primary risk assets or trading. I’m really a now a family office investor, and six years retired from active management. I trade for fun, but in my trading account, even I have, I have essentially a very concentrated book. I have a one part of my book is what I call a macro cap structure ARB, where I’m long some clo equity closed end funds that are yielding almost 20% and I know this management team very well, very high quality manager. I’ve also written at length in the past about why I think clo structures, at least broadly syndicated loan. Clo structures are very, very resilient. So I like being long that to generate positive carry, but against it, right? I will have puts, okay, you know, off and on in various sectors. Like, for instance, all year long, I’ve been shorting every geopolitical spike in oil by buying puts on the xOP. That’s been the right trade. I don’t have that on right now. I have on. I use my positive carry to also buy to short, for instance, the hyg index, which is like on, which is the high yield aggregate, which is on all time tights. So I have this sort of spread arbitrage trade that I have on and then, and then, I also have some idiosyncratic event driven debts that, you know, they theoretically, ultimately, they’re not reliant on the greater fool to take me out right, even though they every trade ultimately has hidden, hidden stock market data to it. But ultimately, this, this bet, is going to be dependent on some esoteric restructuring events in Puerto Rico to play out, for instance, but then, but then, that’s just like a relatively small even though that portfolio is very, very concentrated. The rest of my asset allocation is, you know, I’ve, I’ve invested across in a lot of different assets, asset classes from some interesting, uh, hedge funds that provide working capital financing on a secured basis, on a secured equity and debt basis, I have some other funds that are sort of multi sleeve funds that invest in every anything from things like, you know, aging bourbon barrels to, you know, to rural car washes. So, so I’m, what I’m after is, I’m trying to build a a very diversified exposure to what I call orthogonal asset classes, asset classes that are just orthogonal to stock market, beta, right, uncorrelated assets. And I also like to have a I’ve been partial to assets that are, that are current, pay to generate passive, a large amount of passive income. So that’s, that’s how I’m positioning.
Andrew Brill 23:30
So if someone had a lot of cash, those are the places you would tell them to stick it right now.
Michael Kao 23:37
Again, it depends on, you know, what, what, what people are after. I don’t, I don’t like to have what I what is, what, what is. Relatively absent in my overall asset allocation are what I call greater fool beta trades. If that makes any sense, I don’t like to have, I don’t have any passive equity. I don’t have, you know, I tend to not follow the flavor du jour, like, you know when, when, yeah, exactly, I don’t, I don’t, I don’t, I’m, I’m, I’m, I’m old enough to know that the flavor du jour doesn’t necessarily pan out. I think, like, you know, for over the last I’m in this investment group where we, we collectively vet deals together. And, you know, for a while, all the deals that we were seeing were AI build out related, you know, venture type deals. And that’s, that’s not I’ve seen, I’ve seen that that play out before. In in 2000 So
Andrew Brill 25:02
Caitlyn long, CEO of custodial bank, joined Anthony Scaramucci on speak up. Talked about her eureka moment that got her into cryptocurrency. Caitlyn also discussed with Anthony how the pursuit of power in government leads the corruption with currency, and how crypto solves that by cutting out the middleman. She also spoke about excessive regulation, and how with it, almost everything becomes illegal.
Anthony Scaramucci 25:30
I have to ask you this question. I ask a lot of people. I was with Michael Saylor earlier in the week, we both spoke at a conference together. Michael’s writing the forward to my new book, and I asked him about his eureka moment. What was your eureka moment? You know, where did the rock hit you? The Apple hitting you on the head? Saying, Okay, this is transformative. This piece of technology. Other people are going to think it’s worthless, but this piece of technology is going to be worth trillions of dollars. Well,
Caitlin Long 25:58
it started it’s two things, actually. It started with after the 2008 financial crisis, I got very curious about the inner workings of the financial system, because the mainstream explanation for what happened back then just didn’t make sense. It’s blamed on the subprime mortgage market. But I figured out that that was the symptom, not the root cause. The root cause was interest rates had been held too low by the Fed and Geithner back then the treasury secretary said that, but then on Charlie Rose, but then two weeks later on, Meet the Press. I think it was he said that he was trying to urge the Fed to cut interest rates even more. And that just was a contradiction. So that got me going down alternative schools of economic thought, and that’s where I first started to see Bitcoin talked about in 2012 but I was also working on the first ever very large pension settlement transaction between General Motors and Prudential in 2012 and you know from your business, the back office of of the financial system is a mess. It’s just a jumble of of just in the tech world, they call it tech debt. It’s really operational debt. Why do we have all these layers of intermediaries? Why do they have to settle in sequence? If something goes in this so called swift black hole, an international payment, it gets lost and you can’t track it for days. It’s a mess. And so I pretty quickly figured out that the mainstream application of this technology was to cut through all that cruft and simplify. Lynn Alden likes to say that all of the mess in the financial system is ultimately caused by one simple problem, which is that the data leg of transactions moves at the speed of light, but money was gold, it was physical, and so it was limited by the moving the speed of matter. And we’ve basically abstracted that very time difference away with all these layers of netting and settlement that settle in sequence to try to solve that very problem. But this technology cuts through all that so that the money leg can settle at the same speed of light that the data lake can settle on every single transaction, and we will get there during our lifetimes. It’s
Anthony Scaramucci 28:03
the old versus the new, though, right? I mean we look at it. I mean Democrats and Republicans. And, you know, I’m for a bipartisan commitment to crypto and bipartisan regulation, and obviously, and I and I’m a fair person, so I applaud President Trump now, Candidate Trump siding with the crypto enthusiasts and siding with the blockchain and Bitcoin and but what I don’t want to have happen is it becomes this polarizing partisan issue. I want it to be holistic and bipartisan, and we know that the younger Democrats are for it. Rocon is for it. Gillibrand is for it. Even Schumer has spoken out about trying to get legislation passed. What?
Andrew Brill 28:44
What?
Anthony Scaramucci 28:45
What are we missing? What? What are we missing? See, for me, I’m going to say this to you. I think Elizabeth Warren is one of the most powerful people in Washington. You say she’s never passed, never passed a law. She’s ineffective as a US senator representing her state, but she has figured out a way to get her accolade acolytes and minions into the White House, into treasury, into the Fed, into the SEC correct, the result of which her agenda is being prosecuted through the administrative state. What’s your reaction to that?
Caitlin Long 29:15
It’s 100% true, and I didn’t know that until custodia was unlawfully denied by the Fed, and it was a very public denial in january 2023 for your listeners, the most important piece is that we started to have insiders come forward as early as that weekend to tell us this was all Elizabeth Warren, who orchestrated the whole thing, and that she was pulling the puppet strings at The White House and at the Fed and at the SEC and the FDIC and the OCC so these federal regulators, and it took me a while to figure out what was really going on, but I think it’s now not even a secret. It’s openly acknowledged that she had a deal with Biden, that she dropped out of the race in 2020 I can’t prove this, but it’s. Is again, now openly known. She dropped out of the race in 2020 and endorsed him if she got control over financial services and economic policy, including all of the political appointments. There are enormous separation of powers. Problems with this. To your point, history is going to vilify her and vilify Biden for what they agreed to here, it was never disclosed to the public. Had people known that she was going to be the acting president of the United States in this area, in these areas, they would not probably have voted for him. It was a close election, but the press didn’t do its job, and they and, you know, apparently she and Biden kept that secret, and he is an old school politician where he apparently keeps his word, and multiple people have confirmed, including insider Democrats, that that was a one term deal. So even if Biden had been reelected, that she she was not going to be able to keep that power. And here’s to looking forward now, the Harris campaign is not honoring that. It’s been really interesting to talk to both sides, as I’m doing, I don’t make endorsements, and I try to help the including the Harris folks who’ve been talking to me, they are actively working on her campaign. The Pro crypto group is crypto for Harris and women for crypto who are talking to her campaign, trying to get her to to just get these warrants out, but she’s if she wins the election, Anthony, she’s going to have a tough job, because the Warren has put her accolades deep in these in these departments, and there’s going to have to be not just a house cleaning of the political appointees, but the senior staff levels. And I just saw an article this morning that there’s been an allegation of Gary Gensler having a political litmus test for for job seekers at the SEC and I absolutely believe it. I think that’s been across all of the financial services agencies. So whoever wins, even if it is Harris, she’s not in alignment with Warren, she’s got, she’s got to do some serious house cleaning, because it’s going to take at least a year for whoever wins to get all this, get all these people out and get the policy changed. It’s gone pervasively. I won’t even share some of the details that I know of just how deep it’s gone into these agencies. It’s nuts. Well, you
Anthony Scaramucci 32:16
know, I listen, I’m I worry about it. I’m aghast by it. I’m going to say something here that is going to get me in trouble with some people. But, you know, I think John Deaton can beat her. And what I worry about is that if vice president Harris ascends to the presidency and Deaton beats her, she’s going to end up with a agency. She’ll end up at the SEC, she’ll end up at the Fed, God forbid, you know, or she’ll end up as Treasury secretary. Imagine that. How bad would that be? So, so, you know, it’s just one of these really weird things in politics now, where instead of focus on what’s right or wrong, some people are focused on control and America. America is at its best when it thinks like Wyoming, okay? And what? How does Wyoming think? Free, freedom, libertarianism, have your own plot of land, do your own thing on your own plot of land. Let’s obviously we don’t want to hurt each other, right? As long as they’re not hurting each other, we should be able to do whatever we want. So I have a smaller bit smallish business and asset management. Skybridge is a couple billion dollars, but it’s not, it’s not Blackrock or Blackstone, but even even myself, Okay, I am protected. Because if I had to start skybridge today, I’d have to have nine attorneys. They would be the first nine people that I hired to go through the regulatory rigmarole. That has happened since 20 years ago, when I started the firm with three people in a room. And so when you have to have your first nine employees in any business being lawyers and regulatory processors, you can’t get the innovation. You just can’t get it. You know, there was a very famous article written by George McGovern, you and I, unfortunately are old enough to remember George McGovern so our younger listeners, he was from the Dakotas. He was a senator. He was quite liberal. He ran unsuccessfully against Richard Nixon in 1972 as a presidential candidate, but he was a strident regulator. He went and left the Congress and he built a bread and breakfast up in New England, and he got destroyed. And he wrote an op ed in the Wall Street Journal, and he said, You know what? I got destroyed by these regulations, all these regulations that I put in place I thought were helping people and protecting people, were actually destroying entrepreneurship in the United States, and here I am, as a legislator and a policy wonk getting these things wrong. When I converted over to the free marketplace, I converted over the private sector, I realized how impairing this was. What What message would you have given? What I just said? What message. Would you have for regulators about Bitcoin, the blockchain, custodia, bank, etc,
Caitlin Long 35:06
the regulation should be enabling, and it should be designed to prevent the basic crimes like fraud. That’s it at a high level, that’s it don’t be too prescriptive. Elon Musk said something a couple weeks ago that was really profound. If you have too much regulation, eventually everything becomes illegal, and that’s essentially where we are in the banking world right now. So the the because everything’s so prescriptive, I mean, holy cow, the Wyoming. Wyoming is great. They did a they created an enabling regulatory structure that is designed to allow act to innovate, but within guardrails including consumer protection and preventing fraud. So where should the government money go? I think it should be massively increasing law enforcement to go after the crimes that are already on the books, like fraud, like money laundering, right, those kinds of things. It’s there’s not enough money for enforcement of those kinds of crimes. But we’ve, we’ve spent trillions on these armies of regulators who are the who are really operating the government, right? We don’t know who the president United States is at the moment, right? But why does, Why do things keep going? Because there’s just all these, you know, just army of, I think something like 15% of the United States workforce works for the federal government, and they just, they just keep going. But the point is that they’ve been given power to abuse it started with Operation choke point 1.0 that started against during the Obama administration. They thought the payday lenders were abusing poor people. They probably were. But the instead of going to Congress and getting the law changed, they used bank regulation behind the scenes. It was insidious, and the bank regulators at the time were lying about it and saying we weren’t doing this. Well, it turns out that they did. They were doing it, and they did expand it to 30 different politically disfavored industries. This is dystopian. It’s It’s Orwellian that bank regulators, behind closed doors, can pressure banks to say, Hey, you gotta you got a nice bank there, as Tyler Winklevoss put it, sure would be a shame if you were banking the firearms industry or the abortion industry, or you name whatever politically hot button industry it is, 30 different industries got caught up in that. There was litigation. They got it came out that the bank regulators were lying and they were actually doing this behind closed doors. Well, there was a settlement with the FDIC back in, I think, 2018 and they said they said they wouldn’t do it again, but Anthony, you and I both know they’re back at it. It’s just that they’re doing it to the digital asset industry, which wasn’t included in the FDIC settlement back then. So here we are. It’s our it is Orwellian. You’ve got to tear down that regulatory state. I am sympathetic to those who really, truly on both sides of the political party, by the way, political aisle who really, truly see that there’s something very, very wrong and it has to be fundamentally restructured.
Andrew Brill 38:06
This week marked our first conversation without a host. Jared dillian sat down with Warren pies to discuss the Federal Reserve’s upcoming rate cuts. They had an interesting discussion about the difference between normalization and recession. They also pointed out the discrepancy between home construction numbers and construction jobs. They also touched on the psychological impact of inflation and the technicalities behind gold trades.
Jared Dillian 38:36
You know, we have had economic weakness, so the PMIs have been negative for like, a year, right? So all the PMIs, all the surveys, have just been terrible for a long time, and hasn’t really been a good signal. The labor market has been weakening. You know, honestly, the last payroll print was not terrible. You know, missed by 23,000 jobs. The unemployment went down. Unemployment rate went down, the average hourly earnings went up. Like it was kind of a mixed payroll report. I wouldn’t characterize it as catastrophic. What I think we’re seeing in the labor market is normalization, right? So what happened was, during the pandemic, we pumped all the stimulus into the economy and we created all these labor shortages. You know, you went to a restaurant and it was half closed because they couldn’t find people to work. Had all these labor shortages. Four years later, you’re finally starting to see the labor market normalize into something like what it was before the pandemic, right? That’s really all this is, and people are misinterpreting this data to mean, okay, payrolls are getting worse, therefore we’re going into a recession. It’s just normalization. That’s all it is. So, you know, you talk about the 10s at three and a half. I you know, I think they’re at three seven right now, or something like that. I think that is grossly mispriced, right? Grossly mispriced. And if you look ahead past the election, to whoever gets elected, whether it’s Trump or Harris, it’s going to be inflationary, like no matter who gets elected, it’s going to be inflationary, for sure. So, yeah, I mean, I actually, you know, I haven’t really been looking at 10s. I’ve been looking at 30s. And if you look at 30s, at three, nine or 4% that That, to me, seems, seems grossly mispriced. It is ridiculous. I stare at the screen and it mocks me every day. So when you mentioned is construction jobs. What if the construction jobs data is bad? What if it’s giving you a false signal? Okay, so if you take a chart of home construction, actually, let me do it this way. Home construction is going like this, and construction jobs are going like this. Like, what if the data is bad, because 10 million people came across the border and they’re being hired in the construction industry, and they’re being they’re not being reported, they’re being paid off the books, right? Like, when I look at those two charts at home construction and construction jobs, it’s the only explanation that I can find, because there’s a massive divergence there. And so if you’re looking at construction employment as a leading indicator of the economy, and you say, okay, construction employment is flatlined or going down, like I I just think there’s a possibility that the data isn’t good. You know that it’s unreliable, so,
Warren Pies 41:43
I mean, it’s possible, and it’s probably happening, you know? I mean, but I think that’s probably been the case through all of history, is that there’s just a lot of off the books, construction labor. I mean, you know whether you’re whether it’s Mexican labor or now more like South American labor coming through Mexico. I think that’s part of the market. It’s in the market. And you just have to, I personally think you just have to work with the ingredients you’re given, you know. And to me, that’s, that’s, it’s possible, but we haven’t really seen it before. It’s worked. It’s, it’s worked in every other cycle. I’d be hard pressed to imagine that it’s skewing the data entirely. The thing I’m my, my read on it is actually that payrolls are stronger than they should be given housing given construction activity. So like units under construction for multifamily and single family are now falling. Multifamily falling for like a year and a half single family is now rolling over. Our model says that the residential construction industry needs about 900,000 employees, given this kind of workload, and we’re still at 950,000 employees. So our model is saying, hey, there should be revisions to this data downward, or layoffs imminently, and that would get us right into that recession neighborhood. So that’s why I’m on this. I’m nervous about it. That’s what’s making me nervous, is looking at this backlog of projects that’s starting to bleed lower and saying, Hey, I mean, can this support this many workers? And my feeling is that if mortgages get down sub 6% which looks like they’re going to builders, then can buy down mortgages to sub 5% I think that’s enough to keep the plate spinning it for a bit longer. And I also think if you look at our model, we were saying for years that they’re basically not enough workers to support the workload. So back just two years ago, our model said, Look, we’re the industry is short 80,000 employees. So we’ve gone 130,000 job swing there. And I think that those days, it’s been a tight construction labor market for many years, maybe last 10 years, been extremely tight. And I think that the employers remember that, and they’re going to be slow to let those Let good laborers go, the ones that show up on your books, for sure. You know, forget the the off the books, guys. But um, so that, to me, is the underlying issue that I see is that we’re seeing starting to see units under construction come down, and I really do think we need to see activity pick up to support the amount of workers on the payrolls. One thing
Jared Dillian 44:32
I will say about inflation is that I I spend a lot of time thinking about the psychological component. Okay, so we still have an inflationary psychology, like people believe that inflation is high, and there’s a whole discussion about that, because people confuse the level of price with the inflation rate, right? So people’s GO TO THE. Grocery store, and it costs 300 bucks to buy groceries. So they think that inflation is high when it’s not. So when you have an inflationary psychology, it causes people to act in such a way that perpetuates inflation, right? So they buy more, they buy more often, they buy early, they buy large quantities. And I still think we haven’t broken the inflationary psychology in the way that Volcker and the recession of 82 did. Right? The Fed did a lot. The Fed raised Powell raise rates faster and higher than Volcker. Right? The Fed was very aggressive. They were late, but they were very aggressive. I don’t think it was enough to break the well, in 1982 we had negative 6% GDP. We had a terrible recession, right? And that was enough to do it. And we never, we never really got that. I mean, 2022 was a tough year, like stocks and bonds were both down 20% but we never really got that deep recession to break that psychology. So I think it’s coming back. I think inflation is coming back.
Warren Pies 46:07
Do you have a timeline on what you’re when you’re expecting that to start showing up in the data?
Jared Dillian 46:13
Probably middle of next year.
Warren Pies 46:16
Yeah. And do you expect that to be more of like core inflation or commodity based inflation, or maybe both, both,
Jared Dillian 46:26
yeah, gold. So I’ve, you know, I’ve been long gold since 2005 it’s, it’s been the biggest position in my portfolio for 20 years. And a couple months ago, when it got up to about 2450 I cut about two thirds of the position. I was 2500 was a big round number. I was a little nervous around there. And just in terms of looking at the short term price action, every time gold gets to 2530 it gets rejected. Every single day. Gets up to there and it gets rejected. So the way I’m looking at this and gold, as you know, trades very technical right? There’s really, like, the fundamentals matter far less in gold. I mean, the supply and demand. Who gives a crap? You know, it just doesn’t matter. It’s really about technicals. So the way I look at this is that if we break through 2530 decisively, I’m going to reinitiate that position in gold, and I’m going to ride it higher, right? So what are your thoughts? Yeah,
Warren Pies 47:32
I’m with you. We thought that gold was going to get to $2,500 an ounce this year. That was like our our call, our official call back last December, so that was a nice move we’ve had. But, like you said, so like, we’ve tried to model gold in, I say modeling gold is like nailing a jellyfish to the wall. It’s just, you know, they it’s hard to find a consistent driver, so we lean real heavily on technicals. So I think you’re, you’re right on in, one of the things I’ve noticed with gold is that it has this tendency in to and this is on a lot of different time frames. I noticed this to do what you’re describing, where it stalls out and in basis for a long time. And you and we saw that really post pandemic, we’re like 1680, to about 1950 or so, for years, just this wide range, and then you break out. And once, once gold breaks out, especially on these more multi year time frames, it has a tendency just kind of go parabolic, and you don’t want to even put up, you don’t you just want to let the thing run, is the way I look at it. And so I think that’s where we’re at. I think we’ve moved into a secular bull market for gold. I think that the basing period that we went through post pandemic is over. And you know, you know, I gold is kind of the the reciprocal of trust in institutions and trust in institutions is in a secular bear market, and so therefore I think gold will be in a secular bull market, for all the reasons we just laid out that we have, you know, basically structural deficits that we’ve never seen at this stage of the business cycle. So that’s a form of debasement, whether it shows up in the official CPI data or not, it’s debasement, and gold wins. And then the Fed starts cutting rates. In the face of that, you see the dollar starting to go down. Everyone in the world needs the dollar to weaken really. I mean, it’s, it’s, it’s bound to happen. And I think that, like, trunk will basically come around and say it. But everybody, even probably Harris, wants the dollar to weaken somewhat. So, you know, I think gold is the most logical beneficiary of that
Andrew Brill 49:41
man who went from $110,000 in debt to financial independence, Psy joined us and spoke about the importance of financial literacy. He also explained how to save for retirement while also paying off debt. And what is good debt versus bad? So. Explain to us again how you got into this and where you were in life, and how this made such an impact on you.
Johann “Psy” Ko 50:07
Yeah. So I started this with a lot of debt. I had a not just an aha moment, but it was one of those I’ve had it moment, and that’s when I just started saying, I need to do better. And my daughter was one, not even one at the time, and I accumulated over $110,000 in debt from the last conversation that we had and how I got on a plan to really pay it down as quickly as I could, because I was reading all kinds of all kinds of books about how to invest, how to save money. But when I looked at my net worth statement, it was negative 60,000 and I had over $110,000 in debt. I’m like, There’s no way I could do this. So the more books I read, more videos I read I watched, and that’s when I realized I need to get out of debt first. And that was, you know, a few years after the global recession, so unemployment rate was still high. I was on active duty in there, in the Air Force. I didn’t tell my superiors about my debt problem, and I was just kind of like, all right, I need to figure this out on my own, because I’ve had it, and I needed to have a I never budgeted before that, and I went through a divorce, you know, with everything just coming, just crashing down on me, that’s when I realized, all right, I need to do something about it. And then after I paid off my debt, I still didn’t tell anybody about it, because I was still somewhat ashamed for what I went through. And then I started saving money. I started to read more books about some of the investment vehicles, the characteristics that come with them. That’s when I realized, wow, financial independence movement is a real thing, and I didn’t do anything for like, two years during my Debt Free Journey, and that’s all I did, was reading, staying home, not going out. When I paid off my debt, I was ready to go. I was ready to start saving money. And while I was still living frugally, and when I started saving more money, I started to realize, all right, I need to enjoy my life a little bit. And I took my daughter on a cruise, pay with cash, not taking out debt for it. And that was probably one of the best moments I had. And when people start asking me how I did it, you know, how are you able to go on a cruise like that? That’s when I realized, wow, you know, there’s a lot of misery misinformation out there. There’s a lot of financial education that we don’t necessarily have or was available at the time. Social media is definitely thriving now, and you can act, you know, have access to a lot of information. So I created this channel and the financial coaching, financial consultation to just kind of get people in the right direction, so that they can also get out of debt and start saving for their financial independence.
Andrew Brill 53:01
So where does someone start? You obviously recognize that there was a we No one gets better unless they recognize they have a problem. But where do you start? Obviously, there’s a stigma, there’s an embarrassment. You didn’t want to tell your friends, your superiors, your family, and once you get over that, where do you start?
Johann “Psy” Ko 53:19
Yeah, so it’s really you have to start with financial literacy. A lot of people just assume that 401, K is just a scam because you heard it from someone, or you think that budgeting is just a waste of time and inflation is causing all the problems, because that’s all you read on the news. All you watch on the news is inflation. Is inflation that? But when you look at your own budget, that’s where you have to start, is look within yourself. So what are you truly spending on, right? So when I talk to my clients and and my clients show me their their budgeting, the first thing I ask them is, what do you think you are with your finances right now? They’re like, well, it’s not so great, and I could probably do better. And then when I look at their finances, and then you say, Well, did you know that you were spending like 1500 bucks a month on entertainment, restaurants, liquor, all that stuff. And they’re like, Well, we had no idea. Okay, so this is where you need to start tracking what you’re truly spending on, because you’re trying to figure out how much you want to save and invest. But when you’re spending this much money on discretionary items, and then you have no room to save and no room to pay down your student loan debt or anything else. That’s where the problem really is. But the other root cause, I think the root cause is a real issue, is your behavior. So when it comes to behavior or spending, it does take a while for you to adjust to it. I didn’t go from, you know, one day to the next and say, All right, I’m gonna stop spending all all my money, right? So it took me a while to get used to that, not just being frugal, but being intent, like just intentional spending. What am I spending this money for? I’m intentionally spending this money for longevity. It
Andrew Brill 54:57
is i Is it ever too late and I’ll. Explain. We got a we got a message from a viewer who said that, you know, she left the working world when she had kids, and was out of the working world for a while, and she ended up going through a divorce. She used some of her retirement savings to purchase a car, but she’s so far behind the eight ball, and now she’s, you know, in her 40s and trying to start over. Is it ever too late, or is it possible for people to climb out no matter what the situation is,
Johann “Psy” Ko 55:29
it’s never too late. It doesn’t matter what age you are. It’s never too late to start. And that’s the first step. Is to recognize. You have to recognize what is going on with your financial situation. And for the she took out some retirement money to purchase a vehicle, to try to get started with her investment journey, or retirement journey, whatever her financial goals are. Now is the time to kind of look at, look at everything that you have and just say, alright, this is not working, so I need to find a new plan. That’s really the biggest thing is a lot of people just want to keep want to keep doing their own things, and things are not working out. They need to move away from it. And then talk to somebody, or talk to, you know, talk to a peer, talk to your family, your coworkers, and just say, hey, what do you think it is? What have you been doing? You know, just strike up that conversation to say, What have you been doing that’s been, you know, that’s been working out for you. So if that current plan of yours is not working for you, then you need to start something else. Now, when I say take control of your finances, and I mean that take control of your finances, every dollar needs to be tracked, going out, coming in. If you think that you’re not making enough money, you need to look at your career. If you’re overspending your discretionary spending, that’s that’s where you need to look at too. And if you look at your essential expenses, non discretionary items, and you, you can, you’re, you’re doing all you can with all the inflation that’s going up, eggs and car insurance premiums and all that. Then you need to start exploring, what else can you do to cut your expenses? But you can only cut your expenses so much, so at that point, that’s where you need to go. And look at your income and say, What can I do to increase my income? So when I was still active duty in the Air Force, I took a bunch of professional certificate courses, and I worked on my schooling and so that I could get higher in the private sector. And I did that to increase my income. I remember my income in on active duty, it was like less than $50,000 less than 60,000 and when I got out, my income increased. But before getting out or before moving on to something else, and at any time of your life’s journey, you need to invest in yourself 100% and then you need to be undeniable when it comes to hiring. And that is a just remember that be undeniable. Why should that person hire you? And looking at your resume, this person is undeniable. I need to hire her, and she’s going to start climbing, climbing up the ladder, or whatever it might be. So that will be a good starting point. It’s
Andrew Brill 58:09
the fire movement, financial independence. And retire early if you want to do that, but it’s really saved for retirement. Does are they mutually exclusive. Or can you try to achieve financial independence while also saving for retirement?
Johann “Psy” Ko 58:27
Yeah, so what I focus on every single time is I talk about fire, but what you should really focus on is the five portion of the fire, so financial independence portion of it so that you have the possibility to retire early. And some people don’t want to retire early. I don’t want to retire early right now because I’m enjoying my business. I’m enjoying this, you know, this conversation. I’m enjoying talking to people and helping people get out of debt. And you may have the same goal too. You may be someone who wants to, you know, keep working as a maybe a on a part time job as a barista. Because, do you want to stay active? Some people want, you know, like, when I’m in my 60s, 70s, later on, you know, I want to hold a stop sign for the kids on the, you know, on the road and make sure that they don’t get hit by the bus or something like that. That’s, those are the things that that I do tell people like, alright, five and read. People do focus more when they’re in their late 40s and 50s, on the retire early portion? Is it a possibility? Because retire early? That is a almost a subjective term. But you know when, when it comes to retirement planning, people say, well, 62 will be a good age to start planning, because that’s when you get your social security at the earliest, at the earliest, right now and But what people don’t realize is that the 401 K has a rule of 55 where you can start taking money out of 401 k at the age of 55 so that’s another rule that people don’t realize that that exists, but if you quit at 54 then you lose that rule of 55 you can get fired, you can get laid off, and you. Will take that money out of the 401, k, if you’re a police officer, a firefighter, doing something like in the public safety field, you can, you know, you’re probably have some something called 450 7b plan. And there’s no age limit on when you can take that money out of it. And if you retire at 50, you can start taking money out of the 457, those kind of things. So I guess my goal is, when I talk about financial independence, I talk about the retirement planning, because so that when people understand the rules and say, rules, regulations and tax free, tax deferred after tax and all that, when they understand what those do, then they have a better understanding of how to plan for it. Is it right to do traditional 401, K, as opposed to Roth? 401, K, you know, I’m not going to say Yes, Andrew, you should do all Roth. You know, it wouldn’t be fair for me to say that, because I don’t know anything about your financial situation. So it really depends on where you are and what your goals are and what you’re trying to achieve out of it. Can
Andrew Brill 1:01:00
you explain good debt versus bad debt? Because I’m sure you’ve experienced the bad versus the good. I got a mortgage. Is that good? I’ve look, I’ve spoken to people that never have a mortgage. But is mortgage good debt? And I know the credit cards is really bad debt.
Johann “Psy” Ko 1:01:19
Yeah, yeah. So I guess in the simple term, you can call this good and that bad. But when I look at debt, I need to see if this is going to benefit my financial planning. This is debt going to help me invest more and increase my net worth. So when it comes to mortgage debt, yeah, I believe it is good debt. As long as I’m I have a timeline on when I want to pay it off by. So if I have a 30 year fixed mortgage, I want to just keep paying down the minimum, and I don’t put anything extra towards it when I’m in my 20s, 30s or 40s, because I want to invest that extra that I would put towards my mortgage into my investments, because that’s going to grow a lot more. Now, if I’m in my 50s, and I look at my mortgage set and I say, Well, I got 15 years left, and I’m going to be 65 by the time I retire. I say, I want to retire at 57 instead of 65 then I’m going to have a plan to pay it down by 57 because when I truly retire, no longer doing any of this, having a conversation with Andrew, you, then I want to be completely debt free because that. Then I don’t want to have any risks in my my overall net worth. I don’t want to have any line items on my liabilities. That’s just me, because I am. That’s how I look at when it comes to debt. Debt is a tool that can build. So if you start a business and you need to take out a business loan, say, $20,000 to get you started on to have a business, because you have a great idea, your revenue is going to go up, and you’re going to hire some people to help you, then that could be a good debt, but it can become a bad debt, as if you bid more than you can chew. So if you took out a $50,000 business loan and your business just goes bankrupt, it didn’t take you anywhere, then it becomes a bad debt, then you’re gonna have to pay back. And when it comes to credit card spending, we have a lot of credit credit card spending issue right now, and I was just actually reading the news before we got on the call. I think it was like we just reached $1.14 trillion in credit card debt, and it’s just, it’s the one of the fastest pace ever. And a lot of people would say, well, it’s inflation. Take a look at your spending. Is it really inflation, or is it because you’re spending on something that you don’t need? And those are the things. And I was reading that, you know, I think it was like Gen X has the highest average credit card balance with $9,300 right now. So bad debt is something that you just don’t get anything out of. When you argue and say that you have a credit card reward program for 3% cash back, but you’re carrying it, carrying a balance every month that charges you 25% that’s you’re not doing anything in that personal loan. What did you use it for? Did you use it to grow something? If not, that’s a bad debt. Car loan, I would say it’s probably the second worst type of loan out there. Is a car loan, because it’s a you take out a loan at, let’s say, 8% interest rate, and that’s depreciating in value by 15% annually depending on the type of car you buy. So that’s something that I’m like, Man, that is, I would never take out a car loan ever again. So
Andrew Brill 1:04:28
thank you for watching this week’s recap. Don’t forget to head over to wealthion.com and hit the find an advisor button for a free, no obligation portfolio review, and please follow us on social media for the latest news and information to help you invest wisely. If you haven’t done so already, please make sure to like and subscribe to the channel, and don’t forget to hit the notification bell so that you never miss a video. Thanks again for watching. If you like this content and are looking for more ways to keep growing your investments, watch this video next until next time. Stay Informed. Be empowered and may your investments flourish. You.
