Lance Roberts

Lance Roberts is the Chief Investment Strategist for RIA Advisors and Lead Editor of the Real Investment Report, a weekly subscriber-based newsletter to over 100,000 people nationwide. 

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While stocks are in a pull-back and still like quite overvalued relative to bonds, bonds are looking historically undervalued here. Lance Roberts feels strongly enough about this that Wealthion is making this an official alert.

Portfolio manager Lance Roberts & Wealthion’s host Adam Taggart discuss those developments in this week’s Market Recap, along with:

  1. Is the pullback in stocks more likely to abate or accelerate?
  2. What did we learn from the release of this week’s Fed minutes
  3. Why do bonds look so undervalued at current levels? Does the long-duration/TLT trade still make sense?
  4. The banking system still looks vulnerable
  5. How worried should we be about China’s latest woes?
  6. Lance’s trades for the week


Adam Taggart 0:04
Welcome to Wealthion. I’m Wealthion founder Adam Taggart welcoming you back here at the end of the week for another weekly market recap, featuring my soft spoken and shy friend Lance Roberts, who always has trouble telling us what he thinks he just can’t get the words out.

Lance Roberts 0:20
Exactly. That’s the way it’s gonna be this week to.

Adam Taggart 0:23
Actually it’s not I’m sure because there’s a lot going on this week last. So a lot to get through here. So let’s start with the markets. Last week, I made the inappropriate comment that the market had Edie that had had exuberance, dysfunction, we kept having these, these daily rallies that would start in the morning, and then they just kind of like flop around and placidly at the end of the day. Now, it’s kind of just fallen into full boat, full blown impotence in the market, if you will. But we seem to be going, according to the script that you’ve been saying we should see for the past couple of months or so of like Lucky, stocks got really ahead of themselves, they were getting overvalued, you expected some sort of pullback, you said three to 10%, we’ve now passed the 3% stage and know exactly what percentage we’re on now. But we’re heading in the direction towards 10. And as you predicted, we’re beginning to see the first sort of headlines, media sound bites out there of like, wow, you know, maybe this was a bull trap. And you know, a number of people today are saying, hey, maybe this is the big rollover, and all of a sudden, people are starting to pontificate of how far the s&p could fall if the bottom drops out. So we’re beginning to see that bearish negativity that you said we would start to see, are you changing your thesis at all? Or do you feel pretty confident here that this is you know, what you expected? And you think, you know, it’ll, it’ll play out and s&p will start rising again, as we head into the second half of the year?

Lance Roberts 1:58
Well, I think what let’s start with a share screen here, as we talked about before, I mean, it’s, it’s always interesting, because, you know, we go to these extremes, right? When markets are going up, it’s like, oh, my gosh, nothing can stop this market. And as we were talking about, it’s like today look, as a function of time, you’re gonna have a correction is completely normal. And then of course, and as I said, as soon as we start to have the correction, everybody’s gonna go, Oh, my God, now, it’s never gonna stop selling off. It’s just, you know, it’s interest rates, and it’s the Fed or whatever it is, there’s always a reason why things, you know, that things are doing something. And it’s never just the fundamental fact that markets ebb and flow over time. But as investors and as the media and as everybody else, we’re always have to have a reason for it, right? We’ve got to, we’ve got to assign something to that, Oh, that explains why this is happening. And sometimes really, they have nothing to do with each other. It’s just a an environment that allows something to occur. And we’ve talked about this before is that when markets are going up, everybody’s bullish, so nobody wants to sell anything, because well, I might miss on further upside. And then eventually, something happens. And it’s like, okay, well, I’ll sell now. And as soon as somebody raises their hand over here and says, Okay, I want to be a seller, then everybody else jumps over there to be sellers. And that’s how markets work. And so again, it’s not always just a function of oh, there’s this reason, and now everything has changed. It’s just a function of markets going through their normal kind of cycle process. And so this was what we talked about in July is that look, markets were very overbought, we’re gonna get a sell signal. And when we do the markets, we have this three to five to 10% correction. And that’ll be a good buying opportunity, we’ll get markets back to oversold, we’ll have a good entry point. And so I’m showing you a chart right now, this is the market versus the 20, the and the the 50. Day, and sorry, the 20, the 100, and a tuner day moving average. So we violated the 20 day moving average, which was the, that’s the blue line. And that was kind of that clear, kind of bullish support line over the last couple of months. And we cut through that we went right through the 50 day moving average. And so now we’re approaching that 100 day moving average. And that’s really, really good support for the market kind of historically, the 200 day being really good support for the market, because that’s the average price over 100 days, the over the last 100 days, the market has traded either above or below that price. So it should provide just from a technical price support point that’s going to be a point to where investors step in and go, Okay, I need to put some money back to work here. Markets have had a big declines and things have gone on sale. So I’m gonna put some money back to work. And so we’re probably and again, markets now very oversold. And you know, this is probably the point, decent step back in and we’ll kind of the next leg of whatever this is going to be so we might get a rally back to the 20 day that fails. And then maybe we try another retest of the 100 Or maybe we can go the 200 over the next couple of months or Maybe we find the bottom here and kind of, you know, kind of just gyrate around a bit that through the month of September, and then we’re gonna move into the last couple of months of the year, October, November, December. And there’s a lot going to be a lot of performance chasing this year, a lot of portfolio managers are well behind the curve, they’ve got to get caught up here. And, and so they’re going to be really kind of focused on getting allocations and equity to work. Because at the end of the year, when they report performance, they better have all those right positions on their portfolio, they better on the apples and videos, the Amazons, whatever it is, they better have that on their books, and their performance needs to be fairly close to the market. Otherwise, they they they suffer career risk. So there’s going to be a big push by investors in the year to get capital put to work, barring something out of the unexpected happening. So in other words, the Fed comes out does something completely unexpected slashes rates by 100 basis points, you know, recession shows up just markedly out of nowhere. And we’ll talk about GDP growth is what the Atlanta Fed is saying now, but, you know, there’s certainly something that can happen that Nobody’s expecting, that can certainly change that outcome. But right now, there’s nothing technically wrong with the market. In fact, this this pullback is extremely healthy. It’s an opportunity to put capital work, and I wouldn’t ignore it.

Adam Taggart 6:19
Okay, great. So just want to underscore, you are not sweating here that, you know, the thesis that you’ve been putting out for the past couple of months, is in danger. Now, obviously, we’re going to keep watching this chart every week. And if it, you know, starts going down to the 200 day moving average, and maybe breaks through that. Yeah, then maybe, maybe you might, but right now, this is what you expected. I’m summarizing correctly. Yes. Okay, so we’re gonna get to your specific trades a bit in this discussion. But are you actively adding positions now now that we’re sort of down on this trajectory? Or are you just waiting to see further how this plays out?

Lance Roberts 7:01
No, actually, no, you know, we’ve been kind of continuing during this whole decline, continuing to rebalance the portfolio, restructure things kind of look at, you know, kind of where things are, you know, going to be over the rest of this year. You know, and so though we’re, we’re actually actually have been putting capital to work. And we’re gonna continue to do that we’ve still got a little bit of capital left sitting in cash, probably over the next, you know, week to two to next month, we’ll get that might we’ll get the last of that capital put to work. And so we’ll probably be fully fairly allocated equity to bond wise heading into the end of the year.

Adam Taggart 7:41
Okay. All right. So your advice to bears which I’m putting these words in your mouth, so feel free to, to amend them any way you like, but is, is you’re not seeing a reason here to start reading the sky is falling bell or, you know, time to get all your bearish shorts on the market because the suckers going down.

Lance Roberts 8:04
Correct? Yeah, I know that it’s a fair. There’s nothing out there. And again, so we need to shift back and talk about some economics here real quick. But there’s nothing on the horizon right now that suggests anything’s wrong.

Adam Taggart 8:18
Yeah, and again, we’re gonna get to the GDP. Now numbers in just a second. Before we hop off this chart, though. You’ve mentioned these in the past. But if you could just very quickly for viewers, just define what MACD and stochastics charts are here. That’s the chart at the top that chart at the bottom, because these are some of the indicators that help you determine that the market is getting oversold, correct?

Lance Roberts 8:40
Absolutely. We have the we keep technical look, there’s a lot of people that get super into technical analysis. And there’s so many ways to, you know, do technical analysis, everybody has their own way. This is just the way that we do it. We keep it very simplistic. We use a couple of moving averages to determine the trend of the market. The MACD indicator at the top is basically just our buy sell signals, they they provide good signals over time. Are they always absolutely 100% Correct? No. But more often than not, particularly when coming from either high or low levels. They provide really good signals to increase or decrease exposure. And then on the bottom, we just have basically what’s an overbought oversold indicator. So you know, over the short term, things get really overbought. In other words, you have all you know, everybody was going to buy as bought. And then when markets sell off everybody that’s going to sell as sold. And so what those kind of what that indicator tells you is if I can get, you know, kind of, you know, markets holding support and the markets oversold, that’s probably a reasonable risk reward opportunity to put some money to work in the markets. And so it’s just a function. We keep things very simple. We don’t really kind of go crazy with stuff and in terms of trying to predict things, but you know what, oops, I didn’t mean to do that. Um, so you know, what’s important though is is that as we kind of look at things, is to try to understand where maximums and minimums are. And so if you kind of look at the MACD is at the top, this is just the difference between a 50 Sorry, 1212 day and a 26, day moving average, that’s all it is. And so when those crossover each other, either from the low turning up or from the top turning down, that tells you that prices are either rising or falling. And so we’re looking for, you know, confirmation that we’re now getting prices moving in kind of one general direction, like right now we’re on a sell signal suggesting the prices are trending lower. And so markets are moving down. And you know, and we’re bout back to the range of you kind of look at the bottom of where these this kind of oscillation is and think about the MACD as an oscillator. So it’s just something that just kind of oscillates up and down. So at the top, I want to be a seller at the bottom, I want to be a buyer. So we’re bout back to the bottom of a normal loss oscillation range in a bullish cycle. Now I want to I want to be really clear about that. Because if we if we pull back, and we look at where we were last year, that oscillation gets a lot deeper during a bear market. In other words, you get these bear markets, kind of these bearish market corrections that are a lot deeper. So the MACD can travel a lot further to the downside, but when you’re in a bullish types, kind of setup, where we are now with our way, but if you look at where we are at the moment, you know, we’re kind of in this bullish trend in the market. So these oscillations are more shallow. So we’re getting down to the bottom of that normal oscillation in a bullish cycle, which suggests that my buying opportunity is likely nearby versus what I would be waiting for a deeper correction if we were still in a corrective mode like we were last year.

Adam Taggart 11:53
Got it? Okay. All right. Well, you know, we’ll keep our eye on this as we revisit this chart week after week going forward. Alright, let’s, I do want to get to the the GDP now forecast that we’ve been sort of mentioning here, but real quick, let’s get there via the Fed, because we had some, you know, additional data this week, where the, the minutes from the feds July meeting were released to the public this week. And we learned a couple of things. That the the Open Market Committee, you know, feels like they’re making good progress on taming inflation. And they are right, they’ve gotten the headline CPI down from nine something to three something right. But they still see it as a threat. And they do think that more hikes may be needed here has been a lot of back and forth, you know, about whether to continue hiking or not. But very, very notably, nobody’s talking about cutting. And actually Neel Kashkari, who’s kind of a famous dove on the Fed, has come out and said, We are nowhere near cutting rates, folks. So there, they are continuing kind of the higher for longer stories still. But one of the things that I that I tend to take away from the inflation fight right now, and I’d like to get your thoughts on it is, I think the Pareto rule is kind of coming into play here, you know, at 20, they got the easy 80% of inflation down. And the question is, is is the next is the remaining 20%? You know, getting getting headline CPI back down to two or even lower? Is that remaining 20% going to take kind of 80% of the effort here, right? It’s the sticky stuff that that that’s hard to get out of the system here. Let me get your reaction to that. Get a few other questions on this too, then?

Lance Roberts 13:38
Yeah, well, first of all, you’re reading way too much into the Fed minutes. And you got to remember, but what I mean by that, and what I mean by that is this is that, you know, if you and I had a meeting, right, so you and I are going to have this closed door meeting. We have a secretary there. And she’s like, you know, sorry about that. She’s like taking notes. And she’s, you know, we have a cinematographer. And she’s like taking down every word that we’re talking about, and then republish those, then that would be a really good look at what you and I were thinking behind closed doors, right. But that’s not what happens with the fence. The Fed has the has this meeting, and then they carefully craft these minutes to put out a message that they want for the markets to read, they know the markets are going to look at this and parse every little word of it. And what the Fed needs right now is they don’t need higher stock prices, right? That feeds into consumer confidence, which we’ve already seen is ticking up here. Consumer confidence is improving inflation expectations are falling by the consumer. That’s not what the Fed wants, because that means the consumer goes out and spends money then as they go on, spend money that creates economic demand, which creates inflation. So and this is this is Ben Bernanke 101 Back in 2010, where he says the reason we’re doing QE is to boost asset prices to boost consumption to boost economic growth. That’s not what the Fed wants here. So they’re going to carefully craft this opinion that says don’t tell the markets we’re getting ready to cut rates because that means that they’re going to run stock prices up. And that’s just going to put more pressure on easing financial conditions, which is exactly what we’re trying to not do is ease financial conditions. We want financial conditions to tighten. And and so we’ve got to really kind of look past what the minute say and say, what’s the Fed gonna do? Look, we’ve already said for a long time the Fed tonight we’re close to cutting rates, why? Markets are going up, economic growth is fine. Why would I cut rates? Right? There’s no reason employment low and unemployment slow. So there’s no reason to cut rates. I’m not gonna go waste my ammo. Today cutting rates when there’s no reason to cut rates, why am I going to cut rates? Well, unemployment jumps up, the economy starts to slow down, the consumer begins to contract, I need to make sure we don’t wind up and deflation. So the Fed doesn’t care about disinflation, nine to three that’s disinflation, we still got positive inflation. That’s okay. Economically, that’s good. 3% inflation, economic growth to two and a half 3%. That’s exactly what you would expect to happen with inflation, those two should correlate and somewhere right around there, that’s where interest rates need to be. So everything is actually not in a bad position economically at the moment, everything’s working fine. So why would I cut rates here? Now once we begin to get closer to that 2% mark, or you go below 2%? And you start getting to a threat of deflation, that’s where the Feds gonna go, okay. Now, we got to cut rates. We can’t we don’t, that’s good. The hardest thing is, it’s easy to bring inflation down. It’s really hard to combat deflation, because that’s a psychological entrenchment. When you get into deflation, consumers go I’m not buying anything, because prices are just going to keep going lower. Just like everybody last year was going prices are only gonna go higher. So the big fear for the Fed is going to be deflation. That’s where they’re going to cut rates.

Adam Taggart 16:54
Yeah, I mean, I get it. But I mean, Powell has said many times, and I believe Him where He said like, Look, if I’m if I’m going to be in danger of under tightening or over tightening, I’m gonna go into overtime. Yes, I know how to stimulate a sluggish economy. Exactly.

Lance Roberts 17:10
Exactly that. Right. Yeah. That’s exactly my point is that, you know, I’m not worried about about doing things if I overtighten that’s fine, because I can cut rates to zero tomorrow.

Adam Taggart 17:20
Right. Right. Right. Okay. So maybe we’re saying the same thing here. Exactly. Everybody’s basically saying like that, you know, the Feds probably not going to hike from here. If you look at the CME FedWatch tool, I think it’s got like a, like a 13% probability of a Fed hike from here. So, you know, markets aren’t really expecting it. All I’m saying is is for the reasons we’re talking about. I don’t know if they’re out of bullets yet. I mean, I think the Fed in you and I have talked about maybe they should, maybe they should wait for the lag effect, you know, all that type of stuff. But I think given their proclivities would not surprise me at all for the Fed to tighten again, maybe even more than one still everyone thinks if they tighten again, it’s going to be the very last one may be but I’m not sure that that’s something we should be taking necessarily to the bank. Now, what’s interesting is you were talking about why should the Fed tighten? Because? Or why should the Fed cut? I agree, they’re not going to cut anytime soon. But why should they cut with the conditions that you just mentioned? Now, let’s go to the GDP now. Number, right. I mean, the GDP now forecast, which we know will come down, it always does. But it’s 5.8%. Right now.

Lance Roberts 18:36
Look, and this is a bit unusual, right? We’re a month and a half into the quarter. Normally, by this time, the fact that GDP now is getting cut. It’s not getting cut, it keeps going

Adam Taggart 18:45
up. It’s still rising. Yeah, I’m showing a chart of it while we’re talking here, Lance, so people can see directly. Yeah, so it is it that is a bit of barren. So I want to tie this back to something I’ve been talking about in this channel a lot. And I can’t remember if I’ve talked about it with you directly or not. But we have this really interesting battle going on policy wise right now, right, where we’ve got the Fed out there shaming the brakes harder, right? It’s its most aggressive rate hike campaign in history. It’s doing cutie at the same time, the banking system is piling on by tightening credit lending standards. And so both of those things are really pushing hard on the the economic brakes, trying to slow the economy while for the Fed to bring demand down, bring inflation down, right. Banks are just doing it because they don’t want to. They’re worried and they don’t want to have bad loans on their balance sheets. But on the fiscal policy side of things, as I said on this channel before, like we’ve got a war time deficit going on right now. Right we’ve got would be historically apparently aggressive deficit spending here, which is essentially he’s jamming on the gas pedal. And that presumably boosts the economy that will boost the economy, presumably that’s maybe what we’re seeing now in this q3 GDP number is this really shockingly high real GDP forecast? Now, of course, the danger there. Right? Is that that supports inflation, right? That’s just one of the risks of big fiscal intervention like that, is that you? It’s adds to the inflationary pressures. So in many ways, you know, I think the Fed is like, looking over at the, to the administration and being like, dudes, what do you do with like, I’ve spent the past year and a half, trying to get inflation under control, and what the hell are you guys doing over here? So what’s your take on all this? I mean, is this is this kind of, you know, a battle royale from from the power players policy wise? And is this just, you know, a disunited strategy that could end up in something pretty chaotic. Good as well.

Lance Roberts 20:52
So it’s funny you say that, because I just wrote an article about this today.

Adam Taggart 20:57
Shocked, Shocked.

Lance Roberts 20:59
Shocked, I tell you, Yes. On the website today, real investment Recession, is it coming? Or is it not? That’s the big question of last year, everybody expected recession. We said it was the most anticipated recession ever. And we had all this monetary liquidity to be dumped in it was creating inflation. And you know, this year, the question is now as well as a recession coming or not, we obviously have all these these indicators that suggest a recession is coming. And yet, it’s not here yet. And it’s been very frustrating. In fact, now we’ve got 5.8% economic growth for the third quarter, we’ve got inflation ticking up, you know, a little bit here from the year over year, kind of mathematical effects that are going on. But again, this has really been the whole conundrum. And specifically, to your point, you know, we take a look at, you know, the the the impact of monetary supply. As you know, there’s just so much of this money that’s still in the economy, that’s, you know, this empty was a percentage of GDP, which started accelerating back in 2008. So you kind of take a look. And, you know, here’s the financial crisis. And this is where we started doing, you know, ham Park tarp, you know, all this other stuff, then you can see the spike in monetary supply during the pandemic. So, you know, the recent influx of monetary liquidity is not new. It’s just just magnitudes larger than what we had seen over the previous 13 years. And remember, the previous 13 years, we didn’t really have any inflation to speak of, it wasn’t causing a lot of inflation, because it was all very, it was all kind of driven behind the scenes, it was mostly just the government doing some things. You know, the difference was that this time, we said, hey, here’s a new idea, listen checks directly to households, well, they’re spinning it in the economy. So we got this massive surge, you can see that spike in GDP, that was a function of just all that liquidity hitting the market. So we kind of get that out. So inflation is gonna come down over time, just as monetary this monetary stimulus fades away. But, you know, it’s not just and again, we’ve said this before, is that it’s not just those stimulus checks, because if it was just that, we wouldn’t, we’d already be probably a lot further down this path of disinflation, and deflationary pressures and probably much slower economic growth. The problem, though, is again, you know, we take a look at what the Federal Reserve is doing, again, this deficit starting to expand, where if you can kind of draw an exponential growth trend line and strip out that spending we had and during the COVID pandemic, we’ve got a record deficit right now. And

Adam Taggart 23:34
sorry to interrupt you, sir. But the Fed is doing but this was really sorry, this the government ministration is doing it. So Exactly.

Lance Roberts 23:40
And that’s coming from that, that $1.7 trillion in fiscal stimulus that really came through through that inflation Reduction Act, a lot of that, as is now showing up. There was a recent article last week from Bloomberg, talking about the tale of two cities in North Carolina one’s building this 500 billion million dollar kind of AI technology plant, but it’s going to create all these high end jobs and the other the other cities is developing Purina building a dog, dog and cat food plant that’s going to hire a bunch of people. But that’s all direct contributions from this onshoring idea, this inflation Reduction Act, all that money that was sitting there, this now going out, you can see federal spending as a function. This is quarter over quarter changes. We’re clipping over 9% growth in federal spending every quarter now. So that’s going to show up in the economy. So that’s keeping this economic growth elevated. Now, there’s nothing on the other side of this $1.7 trillion. So again, as the stimulus money is running out, now, this federal this 1.7 inflation Reduction Act that’s going to run out there’s no other bills out there right now that are being tossed around that are going to increase more spending. So this kind of Cliff you’re everybody’s looking for. It’s probably still out there, but it’s probably going to be somewhere late 24, maybe even early 25 could be sooner depending on what happens with student loan payments. But again, that’s we’ve got to get that money extracted out of that system in order for this kind of recession to pick up. So again, you know, the important thing, your point and the Feds point and everything else is that that money, there’s so much money in the economy right now. It’s pushing that lag effect of everything the Fed has done out probably an extra 12 months than what it would have been normally.

Adam Taggart 25:32
All right. So I’m going to I’m going to stop here sharing just to share my screen itself. So this this, this is why I flagged this, I think last week, we talked about the explainer video that I released about a week ago about this concept of stealth liquidity, which really is what this this deficit spending is providing to the system right now. So everybody who, including ourselves early this year, we have been scratching our head saying Where the heck is this recession that seems so obvious, it is getting pushed out by this this wall liquidity as you’ve just said, doesn’t mean it’s getting removed, right that we’ve dodged the bullet, it just means the bullet is it speed towards us has slowed, but it’s still likely going to hit us at some point. So I want to share my screen real quick here to share a chart that Lisa Abramowitz shared. And so this shows you essentially that on the consumer stimulus side of things, that the consumer pig is largely through the Python at this point in time. And I think the I think that the National Bureau of Economic Research here says that the excess savings, which is all the green here, that was accumulated during the pandemic, is being spent, as you can see here in the red and that it should be fully spent by the end of September, right by the end of this quarter. Then your partner Michael Liebowitz responded to this with a chart of his own. Here basically saying, Hey, by his calculations, it’s actually already been spent. So I think he’s using slightly different data sources, but they say basically the same thing, which is pig through the Python on the consumer side. And you know, we’ve been talking a lot about this pig to the Python. So you would you would initially say, oh, okay, well, then we can expect, you know, the recession to start arriving, or the force of gravity to start really weighing on the economy because that those accumulated savings aren’t being spent anymore. But as we’re saying, hey, not so fast, because now on the administrative side, there’s trillions getting shoved into the system. So back to my analogy that we’ve been tracking the pig through the Python, what we’re now beginning to realize is yes, there was a pig passing through. But the administration now has a funnel shoved into the mouth of the Python in his cramming additional pork chops. And

Lance Roberts 28:01
well, and also to theirs, it again, I haven’t done this analysis. Lately, I’ve done it previously off to go dig up my chart and maybe update it. But it’s not uncommon in 2007, these in the fourth quarter of December 2007. We had positive economic growth, and actually growth uptick. And there was a lot of positive signs about the economy in December of 2007. A year later, in December 2008, all that data was revised negative. So again, you know, a lot of this data that we’re looking at today is going to get revised negative in the next year or two or whenever or three years, because they do annual and try annual revisions. But you know, we’ll likely see a very different picture emerge from all this, but you know, the here in the now, the moment, you know, the economic data is very positive, there’s nothing and again, we have a lot of negative economic indicators, right. I mean, LSI was still negative last month, you know, but we’re seeing Philly Fed improve here a bit. And that’s not surprising. We just wrote an article about market cycles and economic cycles, and when they get very oversold, and you know, you’re gonna get a bounce in the data. And that’s not gonna be surprising. And that’s kind of what’s going on here. But, you know, again, there’s this again, I haven’t heard anything lately about student loan payments, in terms of any passages of new, you know, bills or executive actions, etc, out of out of the administration, and maybe I’m wrong. But as far as I know, a lot of a student loan repayments are still set to restart. And

Adam Taggart 29:35
yeah, I haven’t seen any news. I think right now. It is still on track to start at the start. I think they go back into accumulating interest at the end of this month. And then the first payments have to be made by the beginning of October.

Lance Roberts 29:48
Yeah. Now, I did get an email from a guy that says his student loan debt was just discharged. So I haven’t again, I haven’t hit VM it’s just an email I got so he just went student loan debt was discharged. I don’t know how much it was for, there is some there is some out there for like $40 million, or something like that that was related to a college that was taking a lot of student loan payments and then default. tuition. I know. I know that’s an edge case right now is probably, yeah. And so I know that’s out there. But I’m talking about on the big bulk of the 44 million people out there that have student loans. I haven’t seen the change, maybe maybe I missed the headline, maybe something happened. But, you know, that’s the that’s, you know, when you combine that, with, you know, the already kind of depleted savings and rising credit card balances, you know, I think we could see a very, you know, kind of a surprise, maybe in the first second quarter of next year is much lower economic growth than we expected. And, you know, we’ll see how that translates into to unemployment.

Adam Taggart 30:54
Yeah, it’s gonna be interesting, it’s gonna be, I think, a real battle here between what I think is going to be increasing weakness and consumer spending, versus, you know, all this deficit spending that’s going more, you know, into the corporate side of the world right now.

Lance Roberts 31:08
We see that and retail retail spending just kicked off 1%. That’s Bob. So yeah.

Adam Taggart 31:16
But you know, back to school and all that stuff. So anyway, yeah.

Lance Roberts 31:19
On Prime Day, so I on Amazon.

Adam Taggart 31:22
So, just just on that since you mentioned the student loans, um, I was interviewed yesterday had to pull some stats, there was a survey that just came out at CNBC reported on, which says that 56% of student loan borrowers are saying that when they their loans go into repayment, they’re going to be forced to make a decision between paying the loan or buying groceries. Yeah. That’s pretty extreme. The number that really though, got my attention was that 45% I mean, almost half, are saying that my loans are gonna, I expect my loan to become delinquent when it goes into repayment, like, I’m just not able to pay the thing, right, that’s almost half we’re talking 40 million borrowers, we’re talking, you know, almost $2 trillion. Don’t put all your faith in the single survey. But I mean, those, it’s hard not to expect this kind of economic, you know, blow that you’re expecting the consumer spending to take with loans going into repayment, with people saying things like that?

Lance Roberts 32:23
Yeah, well, I saw some really, really poor analysis on this last week by one of the major institutions. And it’s always it’s always not surprising, you’re always always trying to figure out the positive spin at us. And so the analysis was, is like, okay, yeah, the average payment for 44 million people is like, you know, $300 a month. But if you spread that out across everybody in the economy, it’s only like, 40 bucks a month that, you know, it goes away. And the reason that’s really bad analysis is this, is that what that assumes is, is that everybody else, so so let’s just say we’ve got two people in the economy. So this person’s got a student loan payment, that’s $300. So he says, Okay, I’m gonna pay my student loan payment that takes $300 out of the system, what the what this analysis did was, is shift that entire liability on to everybody else. So this assumes that if this guy cuts $300, the other person is going to spend $300, more than they did last month, they’re going to pick up the slack. Yeah. So that’s really, really bad analysis, trying to nullify the impact of the student loan repayments. The bottom line of this is that if things occur as the mass suggest, and again, there’s, you know, again, you just brought up a good point, what if half the borrowers just say, Screw it, I’m just not going to pay the payments, I’ll just go into default. Right? And they keep spending all their money in the economy. Well, that’s that that’s going to nullify the the impact of what I’m about say. But if we assume that those 44 million people have to pay their month, pay their payments every month, that’s $12 billion. That comes out of discretionary spending. That’s just math. So you can’t just extract well billion from the economy that’s growing, and say, Oh, that’s a minimal impact. And that’s not going to have

Adam Taggart 34:14
any impact when sorry, that’s, that’s a billion a month you’re talking

Lance Roberts 34:18
a month. And that’s 70. So remember, our economy GDP is 70%. personal consumption of the PCE number 40% of that is retail sales. So it is not a negligible impact to the economic outcome, and particularly to companies like Amazon, or, you know, UPS or FedEx or anybody else’s depends on discretionary spending, to fuel revenues.

Adam Taggart 34:44
Well, it’ll be interesting. I mean, we’ll obviously watch this really closely, but it’ll be interesting lengths to your point about you know, how many people don’t pay or go into delinquency because as you’ve seen, I’m sure you know, tick tock is full of videos of people saying Hey, if we just all band together and don’t pay, they can’t come after all of us, right. So it’d be interesting to see if that catches fire at all. I personally, I think that the people that adopt that strategy you’re gonna find out very quickly, probably wasn’t the best choice for them. But we’ll say,

Lance Roberts 35:14
Well, you know, again, this goes back to one of the one of the problems with student loan debt is that it is the only debt that I am aware of that is not dischargeable through bankruptcy. Right. Right, right. So a lot of people, a lot of people gonna go, I’m just not gonna pay my debt, then they ruin their credit, then they got to file for bankruptcy, and then they’re still stuck with the student loan debt,

Adam Taggart 35:36
which has been accruing the whole time they’ve been growing.

Lance Roberts 35:39
Yeah, so now you’ve really ruined yourself, you know, for God’s sake, if you’re not going to pay a debt, don’t pay your credit card debt, the credit card companies write that stuff off, don’t pay the student loan debt. That’s much more important, financially speaking.

Adam Taggart 35:53
Yep. All right. So just to round out this part about the Fed. This just File this under kind of trivia, but um, I did see a headline yesterday that former Vice President Trump was about Powell and basically said, hey, if I get reelected, I’m not reappointed the guy. And then, in his reason why, as you said, He’s always late in his policy actions. And obviously, that’s a very common slam on the Fed is it’s a slow follower, their track record of past couple years, I think, would definitely support that. But anyways, criticized him for being always late. And then said, just to the cameras, you know, I’m not a fan of Jay Powell. So just interesting. Of course, Trump’s the guy that put Powell in the in the office there. Who knows what’s going to happen, you know, the election, it feels like it’s forever away. I’m sure it’s gonna be here before we know it. But clearly, the leading Republican candidate, not a fan?

Lance Roberts 36:57
Well, again, you know, the, you know, this is all a bunch of horse pucky. So, you know, the reason is, is that remember, when Jay Powell was nominated for Fed chair, everybody was like, Oh, my gosh, this is great. He’s so different than every Fed chair. He wasn’t any different. He did exactly what every every time somebody got in trouble. But hey, let’s bail him out. Right. And so he was absolutely no different than any other fed personally. They’re all political animals, they serve at the pleasure of the President. So whatever the President says, do they, they’re gonna go along with it. So yeah, he’s gonna nominate something. So if Trump got elected, or doesn’t matter who it is, whoever gets elected president at some point, somebody’s going to announce somebody different for that position. And guess what? It’s going to be exactly the same type

Adam Taggart 37:45
of person. Meet the new boss, same as the old boss. Yeah, I just want to sort of point out the irony that the guy who put them in place might be the guy can remove him from office, right? If If Trump stays in the race and wins and a lot of F’s there. All right, I want to move on to another topic now, which is sort of staying on the topic of valuations and where we think things are going. A lot of focus on bonds right now. So I want to talk about bonds with you. There was an interview came out this week with former bond King, that title has been passed on to several people since he held it but former bond King Bill Gross. And Bill Gross basically said, Hey, I’m actually bearish on bonds right now. And I’m bearish on stocks. And

Lance Roberts 38:33
he’s also bearish on bonds in 2013. Anyway, go ahead.

Adam Taggart 38:36
Okay, well, anyways, so I’m going to tell you why he said he was bearish, and I’m gonna let you react, especially because you have a piece out this week that’s very germane to this. So he said, Look, I don’t like bonds, largely because he thinks that rates will, or yields will go higher from here largely driven by this deficit spending that you and I have been talking about. He said he thinks fair value on the 10 year Treasury is four and a half percent, which is higher than where it is right now. It’s not that much higher. Right. So the bond the bond issue isn’t that big of a deal. But he’s he’s basically saying I still expect yields to rise a bit prices to come down a bit. Then stocks Who said I’m really bearish on stocks, because I think they’re way too overvalued relative to bonds. If you look at the equity risk premium, right now, it’s at like a 15 plus year low. And basically, what that just means is you’re getting compensated, the lowest you’ve been in 15 years for taking on the risks of owning equities, when instead you could be getting a much safer yield in bonds, right? So, you know, telling people like, Hey, I’m not really telling anyone to go rush out and buy stuff right now. Let me get your reaction to that. But also then let’s talk about your piece today, which is bonds are undervalued and you actually make a really good case in there that hey, now’s actually a good time to be.

Lance Roberts 39:57
And you just made the case for buying bonds, right? You just said stocks are grossly overvalued bonds are undervalued. This is what Bill Gross said. But by the way, by the way, Bill Gross has been wrong on bonds forever.

Adam Taggart 40:09
But to be clear, though, Bill Gross didn’t say bonds are undervalued. He just said stocks are way overvalued relative to bonds.

Lance Roberts 40:15
No, no, no, that’s he said it right? When you say stocks are overvalued relative to bonds, you’re saying that saying stocks overvalued bonds are undervalued? You can’t say both are overvalued. Right. Well, but

Adam Taggart 40:27
but both could both could decline in both could be poised to decline in absolute terms, right?

Lance Roberts 40:33
Sure. In the short term, right, you gotta go four and a quarter, four and a half, right? That’s quarter point, you’re gonna get a minor depression on bond prices, but you’re near the bottom. Right. And that’s because they’re undervalued.

Adam Taggart 40:44
What? Sorry? We’re cutting hairs here. Oh, I want to say is I’m not sure Gross was saying that right, where he I think he’s saying basically, stocks are a lot more overvalued than bonds are. So relative to bonds, stocks are really overvalued. But I think you are making the case, which I want you to be able to make after you finish reacting to gross of why bonds are actually undervalued right now, and you see better days ahead.

Lance Roberts 41:04
And actually, just by the way, I’m tagging on to that. That article there. I’ve got another piece coming out next week that goes further into this about the deficit spending and all that. But this weekend’s newsletter, which will be out tomorrow is basically just going over why I doubled my again, you I talked about this last week and show that position in long bonds, and wrote I’m writing an entire piece this weekend explaining further my positioning on why I’m increasing my bond portfolio and the bond. The reason is simply is that bonds are extremely undervalued relative to their place in history relative to stocks. stocks versus bonds on a relative basis are the most distorted ever in history. So you know, there’s just a case here, again, when you look at the valuation that you’re paying to own stocks, right now, there is a very big game that says, Look, this doesn’t mean that stocks are going to decline by 50%. I’m not saying that at all, what I am saying is, is that your return over the next 18 to 36 months, could be vastly different between those two asset classes. In other words, there’s about a 50% increase potential in bonds over the next 18 to 36 months. Now listen to me, people I’m not talking about next week, right? 18 To 36 months, we’re talking about one and a half to three years, your upside is 50%. In bonds, your upside for stocks is probably somewhere closer to three to 4%. And that’s just a function of where we are both economically as well as financially and interest rate wise and inflation rise when the economy when you’re overpaying as much as you are now for stocks you’re for about your foreign return structures gonna be fairly low, could be a lot worse. But again, when the Fed starts cutting rates, which they will, when you get to a recession that you’ve been wanting, which you probably will at some point, or you just get a really good economic slowdown, or the Fed just stops hiking rates, those are historically are really good time for rates do start coming back down, because money will flow into bonds as a function of value safety and protection. And so that’s going to be the case ultimately, going forward. But the distortion between stocks and bonds is so great right now that your forward return, over one and a half to three years is going to is going to outperform stocks over that same holding period.

Adam Taggart 43:20
All right. So I think it’s important that I say this for you to react to what I hear from all that is that Lance Roberts likes bonds. Now, he prefers bonds to stocks, not that you’re not going to own stocks in your portfolio going forward. stocks. Yeah, but you are you are, you’re saying you’re rubbing your hands together and saying I’m now beginning to see the setup, a setup that we don’t get to see very often in markets where one asset class when major asset class has potentially far better prospects ahead of it than the other.

Lance Roberts 43:53
But again, you know, this, but this is where everybody, this is where the mistakes are made, right? Every time there’s an uptick in bond bond yields, okay, from one day to the next, bond yields are going to tick up or down because of just the market dynamics. So you got you got a buyer you got to sell or whatever is going on. So ticks rates are going to take up or down. Some news driven headline may cause bond yields to tick up or down for that particular day. And then again, I get I get a flood of emails is like, Oh, well, interest rates went up an eighth of a point over the last week, does this change your whole view on bonds? No. It actually makes it better, the cheaper they get, the better the return is going to be. So I would actually love yields to go to 5%. That’d be awesome. You’re going to completely crap out the rest of the economy of 5%. But bonds will be super cheap at that point. So you know, it doesn’t change the dynamics. I’ve been beating this horse since last year. You know, you don’t get these type of opportunities. These are you know, it’s interesting. If you have a 50% drawdown in stocks, everybody goes Oh, that’s a generational opportunity to buy stocks. I want to own stocks because stocks are cheap. Do you get a generational buying opportunity bonds bonds, everybody’s like, Oh, I don’t want to own bonds, because they’re just gonna go lower. That’s the exact psychology you want. Every time you have a big bear market in stocks, you remember this Adam, in 2008, during that financial crisis, it was like almost, the market is going to zero, there is just going to keep going down forever. This is it’s all over folks. And that, again, we were saying Bart in February of 2009. Time to buy stocks, right? Here’s a reason do you want to own stocks over the next decade. And that was a great buying opportunity. But again, as investors, we always do, psychologically, exactly the opposite of what we should do, because we think that once prices are moving in one direction, they’re just going to continue to go in that direction, forever. And that’s never the case, you’ve got a setup in bonds that you are not going to Once this occurs, and you begin to get the retraction in yields. It’s not going to be opportunity you’re gonna see for the next one, two years again,

Adam Taggart 45:59
okay, so good. I want to really put that underline into this, that you see this as a rare window of opportunity. The market is presenting us for this year, obviously, folks will track it very closely going forward from here,

Lance Roberts 46:11
a good bet not next week, it’s going to be 18 to 36 months, folks, it’s

Adam Taggart 46:15
good take. So this is something to you know, maybe dollar cost average your way in here. Expect, you know, volatility rates could go higher from here, right. Well, I’ll ask you about we’ll talk about this in a minute. But I just saw an article this morning, where Lauren Sheehan, who’s the chief economist for the National Association of Realtors, you can tell when the NAR, which is like the most perennially optimistic, you know, institution around housing prices, you can tell they’re getting nervous when the chief economist starts really publicly freaking out about mortgage rates going up to 8%. So he’s waving that flag now, I mean, Jesus, that really, I mean that that’s gonna hurt a lot of people that is definitely gonna have knock on effects in the housing market. My point though is, is that yields could go higher from here for some period of time. So it’ll Lance’s point, don’t interpret his comments as bias stock up on today, because tomorrow, literally tomorrow, yields are going to start coming down. So I know people are wondering, Lance, I want you to address this if you can, alright, so as Lance saying, buy bonds directly, or is he saying goodbye like a bond? ETF? We’ve talked about TLT a lot in this program. There are a lot of people just just being real honest, you know, who heard us talking about TLT, at the end of last year, in I think, you know, who said, Hey, I bought some and man, it really isn’t performing all that well, right now. So they’re definitely feeling some wounds. I’m guessing you’re gonna tell those people just have patience?

Lance Roberts 47:50
Well, you know, this is this is exactly the point of investing, right. And, you know, we all say that we’re long term investors. And then so I buy a position and it’s not working right now. So Oh, my gosh, you know, whatever, you know, but you got it. But if you’re investing long term, if you’re looking for long term opportunity, that something is going to make you money over time, it makes you a lot of money, potentially, I mean, you know, when Warren Buffett buys a company, if it doesn’t work, right, I mean, Occidental Petroleum hasn’t worked great. Since Warren Buffett bought it, you don’t see dumping his whole position of the company, right? You know, I bought this company, and, you know, geez, I bought it last month, and they just didn’t really turn it around. So I’m just gonna sell the whole company. Now. You know, he buys the company says, I’m gonna own this for 100 years, right? That’s my view for this. And, and this is because of buying fundamental cheap, and it’s going to be good. So if your whole view is to buy something, immediately make money on it. Don’t listen to me, because I’m a long term investor, I’m not day trading these positions. But you know, relative to what what you’re doing now. I mean, we’re, we’re having this conversation internally, right now we’re thinking about selling TLT. Right? But you got to hear the other half of the story. See, I don’t want you to run out and go oh, he’s gonna sell TLT he’s, he’s he’s given up on his right now. We’re going to extend duration even further, because the longer my duration is, the better my return is going forward. So if I can take 10 to 20 years and turn that into 20 or 30 years, then my return when rates go down, is even that much greater. So there’s we’re having a really serious internal discussion right now about how to effectively restructure the pot portfolio. There’s only have so much money, right? So we’ve, we can’t just magically create more money in people’s portfolios and go we’ll just add another position. So we’re talking about restructuring the bond section of the portfolio who extend that duration even further, because of where we are on rates right now potentially what comes out of that now, part of that will be for some people that will be buying individual treasuries. No problem with that if you want to buy individual treasuries that’s, that’s awesome. Because even if only wrong and my whole thesis completely is gonna up and you know, at some point in the future, you know your money back anytime you just clip 5% on your money, nothing wrong with that, you know, but it will also be using ETFs to work the differentials in, you know, some of the duration matching that we’re trying to get to. So, how we restructured this ultimately will be the question, but that’s an exercise that we’re starting to explore in much more detail next week.

Adam Taggart 50:24
All right. Do you have I’m just curious for folks that are interested you sure you picked up a couple of folks attention here? If you were to sell TLT to get into an ETF that’s even longer duration? Are there any tickers out there? These aren’t you’re not recommending this, this is just people to go look at?

Lance Roberts 50:41
Yeah, no, we’re probably gonna look at something like the Vanguard long duration ETF, which is Edward David. Victor ETV, okay. And again, but there’s, there’s several on the list that we’re analyzing we, for us, because of the size of our firm and how much we have to trade in a day to fill client portfolios, we’ve got to have something with a good bit of trading volume to it. So we’re several that we’re kind of looking for EDB right now is kind of running the running the lead because of it’s because it’s Vanguard, and it’s a very large company and probably stable, so it allows us to get into and out of it without moving price too much deep float and all that stuff. Yeah, exactly. Well, I’m just pissed off at BlackRock, so I don’t want to own any more their ETFs in the future.

Adam Taggart 51:23
Okay, all right. Yeah. Okay, so we just want to really clarify for folks, I think we’ve been talking mostly here we’re saying bonds. We’re talking US government bonds here.

Lance Roberts 51:37
Talking, not talking corporates, we’re talking about government. Yes.

Adam Taggart 51:41
But let’s talk about corporates for a second, do you see a similar opportunity in the corporate world? And of course, you have to take company risk, you know, into account there, but let’s look at companies like Apple or Microsoft, who just you know, have very good risk profiles. And you expect to see similar performance here.

Lance Roberts 52:01
Yeah. And again, there’s, there’s some great companies out there, I like corporate bonds, we own corporate bonds, we own some Fannie Home Loan bonds. We own some other types of structures as well. But, you know, in the yield pickup, between taking on the corporate risks, and having a risk free asset as a treasury bond is really not there. You’re you’re really not getting paid enough. Differential, you know, enough, there’s

Adam Taggart 52:28
not enough risk premium II yeah,

Lance Roberts 52:30
there’s really not to pick up a corporate bond spreads haven’t really blown out. Now that’ll happen. When we have a recession, you’ll get a spread blowout, which at that point will probably you know, we’ll we’ll sell our treasuries at that point, when yields come down, we’ll sell our treasuries entirely, because there’ll be no more there’ll be no more gain in it. Right. So so at that point, there’s really no reason on treasuries at that point. But corporate bonds will have been blown out in terms of yield. So we’ll be actually able to buy some higher yielding corporates because the prices have fallen because of concerns about bankruptcy or default, or whatever it is. And so there’ll be a shift in the portfolio from treasuries to corporates, convertibles, those types of things when you get to that type of environment.

Adam Taggart 53:15
Alright, so let’s, let’s actually just talk about that for a second. Because I interviewed Michael guy ed a few days ago on the channel, and he talked about how he was actually looking forward to the day where he was going to buy high yield debt. Because he was going to wait for the spreads to blow out and he said, generally, there’s kind of a throw out the baby with the bathwater. You know, when people get real fearful, and those credit spreads explode and they overcorrect. Right. And so then you can come in and you can actually, you know, buy a high yield debt fund or ETF, right. And then you can ride the Rio equilibration, as the market begins to realize, okay, we probably got a little bit carried away there. Maybe the world’s not ending quite the way that we thought. And then the spreads begin to contract again, and the price obviously goes up.

Lance Roberts 53:59
Right? Yeah, no, no, it again, that’s going to be the case, you know, back in 2008 is a good example of that, you know, there was just tremendous amount of opportunities that companies were just everybody thought everybody was going bankrupt. And so there were a lot of bonds that were trading at 6070 cents on the dollar that had no bankruptcy risk whatsoever. And we made a lot of money trading those corporate bonds back then. So yeah, you know, when we get into that kind of recessionary blow off, there’ll be a lot of companies out there trading discounts. We’ll be looking for broken convertible bonds that you know, are going to provide some great capital appreciation opportunity. But again, that’s it but again, you don’t want to have treasuries in that environment, because the yields will be below 1%. So again, there’s no capital gain to be made on treasuries. So it’d be sell all the sell all the treasury bonds and looked at by corporates,

Adam Taggart 54:50
right unless you just want to get four and a half 5% on your money, you know, yeah, but

Lance Roberts 54:56
I can buy a good one. I can buy Exxon Mobil trading at 80 cents on Dollar and pick up six.

Adam Taggart 55:01
Yeah. And that you’re right. Okay, great. Well, look, folks, we will be tracking that for everybody as the future unfolds here. But very interesting point. And again, I just want to underline for everybody, I think it’s official, Lance’s saying bonds is where he thinks it’s at. And that’s where he’s placing a lot of, you know, his firm’s focus going forward, we’ll keep you updated as

Lance Roberts 55:21
and please, please do not follow their do not follow what I do. Because, you know, it’ll just save you a lot of grief in the meantime, as

Adam Taggart 55:31
well. But no, I mean, seriously. You know, if you want to follow any of the advisors that we have on the program, here, the best way to do that is to talk to them potentially, to decide if you want to work with them. Feel free to use anything we’re talking about here as inspiration for, you know, decisions you may make. But again, folks, this is an educational program, we are not giving personal financial advice here. So just don’t blindly copycat a sound bite you hear on this program, or anywhere on the internet, obviously, right.

Lance Roberts 56:00
And again, just just last point on this and let it go. You gotta have the right timeframe view, you know, don’t buy bonds today, if your view is to try to make money next week, that’s just not the way this is gonna work, you got to give this you got to enter, you got to enter this environment going. I’m in this for two to three years, because this is all based on economics and inflation. And the economy has to slow down a lot more in order to get the environment right for yields to fall back towards basically sub 2%. We’ll get there. That’s just a function of time. But you need that’s the key words got to

Adam Taggart 56:35
have time. Yeah. Is it fair to say the type of dynamic that you see is likely is to play out here, it’s one where you’re going to have to kind of have your position built in advance to really take advantage of it. In other words, it’s not going to be something where there’s a warning gun that goes off and that someone on the sidelines could say, oh, that’s the signal. Now to get in bonds, you kind of have to already have your position built beforehand, because it’s going to happen relatively quickly. Yeah, absolutely. You know, there,

Lance Roberts 57:01
you’ll have an opportunity to say, you know, now’s the time to get the bonds and you’ll start hearing on TV, oh, bonds are doing great, blah, blah, blah, and Bill Gross will come out. And you’ll finally say, oh, yeah, it’s time to buy bonds. And the problem with that is, is you know, you’ll, you’ll have gone from four and a quarter to three on interest rates, and then everybody will become very obvious that we’re now back in a bull market in bonds, but now you’ve already given up half your return. Yields will probably start going down at two, you’ll still be able to make some good money. Right? But you know, you’re gonna give up half your game by the time you realize it’s time to buy.

Adam Taggart 57:37
Got it. Okay. Well, look, last thing I wanted to say on this point is is didn’t know exactly what you were going to say when I started asking these questions. But I read an article this morning. I can’t remember who wrote it. But it was interesting. They said, Okay, the progression has gone from Tina. Right? Well, there were there is no alternative but being in stocks, because bonds yielded nothing to Tara, which is now there, there are reasonable alternatives, right, you now can invest in bonds and get a pretty good return it could safety to now Tala, which is the alternatives look awesome. They’re basically saying the same thing. Alright, so now I want to get into some of the economic storm clouds that are on the horizon here, we’ll just dial through them briefly. But banks, money market inflows in the money markets continue to increase, while bank deposits are continuing to decrease. So we have this sort of, you know, alligator jaws that are continuing to widen, right? That’s not good for the banking system. Usage of the BTF P, the bank term funding program, if I’m remembering that acronym, right, this was the Emergency Banking liquidity vehicle that the Fed set up after the failure of Silicon Valley Bank and a few other banks. That usage is now at record highs. So it’s interesting, I’m gonna put up a chart here, but it shows that the correlation between bank reserves at the Fed and the US equity markets is diverging. You can see from this chart, it’s been very tightly coupled up until recently now there’s a pretty big convergence. Of course, the big question is, is is that going to converge again? Will it reconverge by equities dropping from here. And I just also want to note, I’m gonna put up one other chart and I’ll let you respond, Lance. The last time that yields were here, and accelerating higher as fast as they are right now. That was when we saw the mini banking crisis that happened earlier. It was right before the banking crisis started with the banks started to fail. So are we kind of up in that rarefied territory now where things are starting to could be starting to break in the banking system so everything I just put up there basically suggests the banks maybe are not through the woods yet on you know, Some of the challenges they’re facing. What do you think? No, I

Lance Roberts 1:00:02
think you’re right. And I think that’s, you know, that’s one of the things that we, you know, didn’t really address earlier is that, you know, as the Fed hikes rates as interest rates go up, you know, this, the Feds got, you know, we’re talking about the Feds not going to cut rates anytime soon, there is a reason why the Fed could cut rates a lot sooner than we think, which would also, by the way, be very good for bonds, right. And that’s specifically credit risks. And, you know, if you go back in history, whenever the Fed has hiked rates aggressively, there’s always been some type of crisis event. And again, this goes all the way through history. And I’ve posted charts about this before where I show the Fed rate hikes. And then those always wherever the Fed stops hiking rates, there’s generally a crisis event of some sort, whether it was long term capital management, the Asian contagion, the bond market crash of 1994, recession and 91, you know, crash during the financial crisis. And so every time the Fed hikes rates, there’s always a problem, because they tend to go too far, then the Fed has to cut rates to try to solve that problem. Well, the Feds at that point where another rate hike or two could break more of the banks. If interest rates in the 10 year Treasury keep going up, that could certainly break a lot of banks. This is one of the reasons why I keep saying rates cannot go to five or six or 7%. On the 10 year treasury, there’s just too much debt out there. There’s there’s so much debt that was financed at low rates, that once those rates go up, and that interest service goes up, it begins to really cause problems. But for the banks, it’s about collateral. And this was and so we had to go back to March. Why do we have this little mini banking crisis back in March, it was because the collateral values that they didn’t have, these weren’t bad banks, these weren’t banks that made a bunch of bad loans that were blowing up. They had Treasury sitting on their books, it was the collateral they were lending against, because we use fractional reserve banking, that collateral value fail. And they fell out of tolerance with their tier one capital requirements. And so they said, Hey, gotta lock you up. Because you don’t have enough capital support your books. And this is why the bank term funding program is not giving money to the banks. They’re not, they’re not injecting capital into banks, they’re saying, Okay, will you give us your collateral that is discounted, and we’ll give you a loan at full face value. So it’ll be like, we didn’t have any interest rate hikes. And so that’s what that bank term funding program is doing is giving loans to the banks so they can stay in business continue to function and operate, but if rates keep going up, you’re gonna start having more and more banks wrapped up in declining collateral values, and falling outside the bounds of their tier one capital requirements. And that’s going to cause the Fed to go, Okay, we’re done. We got to cut rates, we’ve got to do this, we’ve got to stop doing Qt and start buying bonds, we’ve got to, you know, grow up to go back into some emergency program. If that bank contagion begins to spread out, but also won’t be good for stocks, again, great for bonds, bad for Sox. But that’s that’s the risk that the Fed is running right now. And again, this is why I don’t think that the Fed is going to hike rates anymore, they could hike one more time, depending on what happens with inflation. But I really think the Fed is probably done here at 555 and a quarter.

Adam Taggart 1:03:19
And you know, it’s interesting, just to sort of repeat what you said, which is, I imagine it gives you even more confidence in your bond trade. Because you’re like, look, yeah, I mean, if in the short term, interest rates are going up, and my bond prices are going against me, I’m not that worried, because I think the higher they go, the more likely it’s going to trigger some really serious crisis that’s going to force the Fed to bring rates down, and therefore, you know, make my positions Shoot the Moon. So in a perverse way, you’re you almost might want to root for higher rates in the short term.

Lance Roberts 1:03:51
Well, and I think it’s important to go back in history, you know, everybody talks about this idea where somehow we’re gonna wind up in this magical fantasy land where rates just go up and stay up at a certain level for decades. It’s never happened, ever, you know, rates go up, and then they come down, and then they may go up again, but then they come down again, and it’s fairly sharp. I mean, they hit a point something breaks rates come down. So again, you know, and we’re not in the 70s, we do not have a 60% of debt to income type ratio for household, or it’s 150. So you know, you don’t have the ability to sustain high rates for very long and you’re well past the breaking. And we’re with surveys and what’s going on with households, you’re passing that point where when money runs out, it’s going to get serious really quick.

Adam Taggart 1:04:40
Okay, so talking about getting serious really quick. And I don’t have much time left here, so I’m going to have to just get your really quick reaction to this. Yep. China, China, all of a sudden, back in the headlines, they’ve got some pretty big shoes dropping over there. The Chinese real estate market biggest asset in the world. All of a sudden, there’s some big players in that ecosystem that are really starting to fail here. Evergrande, which got into the headlines last year, I think at the end of 2021. And everybody was wondering, oh my gosh, could that bring down the Chinese banking system or real estate market? It’s kind of been limping along ever since. But they just declared bankruptcy today in US court. So obviously, that company’s still struggling. The largest property developer in China Country Garden has just gone into default. And one of the largest players in China’s shadow banking system. It’s a bank that’s owned by a big master company called Zhang Jie enterprise group is also apparently in default right now. So all of a sudden, they’re really big dominoes that are starting to fall over there. So as part of this, as I mentioned, the Chinese real estate markets largest asset in the world, China’s high yield real estate index is down a massive 82%, in just over two years that this puts the index back down to 2008. Levels. All while China, just unexpectedly cut interest rates this author here from Bloomberg is asking is China on the brink of a credit event? We don’t know exactly at this point in time, China’s famously opaque but all of a sudden, the news that’s coming out of there is all of a sudden, very kind of scary. And this is a big enough part of the Chinese economy that if it goes down, it is hard to not expect us to have a pretty knock on effect, not just to China’s economy, which is one of the largest in the world, but to the global economy itself. Any quick highlight takeaways. Well, if this continues, we’ll make it a big feature of next week. But

Lance Roberts 1:06:45
yeah, absolutely. But you know, the look, there’s there’s a very big correlation between China’s China liquidity and markets worldwide. So you know, as they, you know, one thing that China is always very good about is, you know, bailing out everything, right, they, they react very quickly, and they either require their corporations or their institutions, pension funds, whatever, they have to immediately start buying assets. So, you know, it’ll be it’ll be interesting to watch how they deal with this. But this is also another good a good position for bonds, because that’s going to force more more money into US bonds out of that currency as concerns over economic weakness. You know, people go, I don’t want my money in the Chinese you want if this is going on, they’re going to go somewhere else, and they’re gonna go the US dollar and, and ultimately, US bonds. That’s why the dollar has been rallying as a way to so yeah, to that point,

Adam Taggart 1:07:34
sorry to interrupt, but but they are now seeing the biggest FX or currency outflows from China in over a year. So exactly what you’re talking about is happening.

Lance Roberts 1:07:42
And the reason that and so I can’t necessarily, you know, if I transfer my what you want to US dollars, I’ve got to store it somewhere. So it gets stored in bonds, because that’s the US dollar kind of storage. So So that’s actually kind of all good for bonds. But no, we’re watching that very closely. Because China liquidity has, has a big knock on effect. So, you know, we talked about how this market could struggle over the next month or so, that’s a function of what’s happening in China that continues to accelerate deteriorate. We may, you know, it may change our outlook for the end of the year. But, you know, this is why predicting anything more than a month or two is impossible. But, you know, right now, this correctional process that we’re going through a could last well into September, because of some of these other liquidity issues that are happening.

Adam Taggart 1:08:30
Okay, great. And I just want to kind of bring all this up. He just said earlier, you know, when you look at a lot of the kind of headline data right now, doesn’t seem like there’s anything wrong, I think is what you said. And that is true, looking at a lot of it headline data, like, you know, 5.8% projected GDP growth next quarter, what what’s your point? Is there just lots of other things out there dominoes that could fall that could change that outlook relatively quickly? This, I think is one of them?

Lance Roberts 1:08:57
Well, again, and again, when I say headline Media, I’m talking about what you hear on CNBC everyday. Right? Exactly. You know, all you hear on CNBC is Oh, retail sales were booming, and the consumers great, and the economy is growing at 5.8%. And it’s all awesome. But again, it’s eventually what happens is something pops up that really nobody’s paying attention to could be China could be something else. And all of a sudden, it just derails that whole narrative very quickly, and people go oh, crap, I gotta sell. And then that’s where you get that rush from the buy room to the sell room. And that big crowd has to fit through a very narrow door. And that’s that becomes a problem for the markets

Adam Taggart 1:09:35
in this was something I really was looking forward to having fun talking about with you today that we are going to have to punt just for time reasons, sadly, but I have had a string of of interviews recently that have all kind of coalescing together. And an important one of them was the one with Peter Atwater. He’s behavioral economist. And he talks about the importance of story and he says basically, like, you know, that’s what people react to is story and And when the story that people accept starts to shift, that is when change happens, right? It’s when people finally give up the one story that they’ve been living by and begin to adopt another one. And we’re starting to see kind of a lot of the story shifting that we would expect to see in a fourth turning. And of course, we interviewed Neil Howe, you know, two weeks ago, with about his latest book about how the fourth turning is here, or right smack in the middle of it. And this type of kind of set the status quo that has been leaned on and trusted for so long begins to erode. And all of a sudden, it collapses and needs to be replaced by something else, we’re beginning to see sort of some of the milestones along this way that we would expect I did a video, especially video last weekend, just in response to the the song that came out of nowhere there, Richmond from north, Richmond, Richmond, north of Richmond, from an unknown artist, that media suddenly went to number one on iTunes, and, you know, took the internet by storm. And it really is a working class, lament and pointed accusation against kind of the status quo of our political system. And again, these are, again, just sort of signs of increasing instability, or maybe phase changes and instability that you would expect to see and a fourth turning going to have to just leave it at that. I’ll give you 30 seconds to chime in on that any way you like, but maybe we can really dive into that next week with

Lance Roberts 1:11:32
Yeah, no, I was gonna say, Absolutely. That’s a great topic. I’ve got lots of opinion about the fourth turning. And again, it’s it is where we are, unfortunately, it is what it is. But ya know, that deserves a full show that we can spend an hour hour and a half on.

Adam Taggart 1:11:49
Okay. Man, I had another one, too, that I’ll just quickly mentioned, and then we’ll get to your trades and wrap it up. So my wife, she’s fine. She was in a car fender bender the other day, and there’s just three rate rants to pack into this very short story. Cars totaled? It’s not because they it’s not because the car functionally doesn’t work. It was a Chevy Volt, which I loved. And I like right after we bought it, like a month later, they announced they weren’t going to make any more. So it’s like, oh, it’s a collectible now, and looking forward to having it forever. And but you know, it’s largely an Eevee, right? It’s it’s not a hybrid like a Toyota hybrid, but it actually has two different engines in it. But it’s the drive trains all electric big battery. The cost of fixing the cost of repairs for EVs is just oftentimes, just prohibitively high. So the insurance company just said, it’s fixable. But the cost to fix it’s worth more than the car itself. So here’s a check, right? We’re declaring it totaled. I think that’s a good parable for a lot of what’s going on right now with kind of the green economy where we begin to realize that the the total return of a lot of the investment that’s being pursued isn’t quite as as positive as we thought it was. And I think that’s going to be causing kind of a reevaluation of what’s going on. And we don’t have time to get into this. But you know, I’ll just share with people, I think we should be pursuing alternative sustainable forms of energy, whenever it makes sustainable, energetic and economic sense. I think we’re learning that a lot of the current projects that are being enthusiastically pursued, may not meet one and sometimes potentially, either of those two, again, story for a different day. But the other thing that this thing is caused me to really learn is, yeah, auto prices have just gone insane in the past couple of years. It is it is really, I just don’t know, we’re gonna be okay. But I just don’t know how the regular person is affording any kind of car these days. But the prices that I’m seeing out there, both new and used, it’s freaking ridiculous. I know. You probably have stuff to say about that. But we don’t have time. So real quick, can you give us your trades?

Lance Roberts 1:14:08
Sure. Absolutely. So we’re we just like I said, we’re, you know, we’ve been using this correction in the market, like we talked about back in July. So now that it’s here, we’ve been using this kind of a pullback here over the last week to reposition our portfolio. So for instance, like we own small cap stocks, so we own companies like Stanley Black and Decker, we own a couple of small regional banks that we bought during the march crisis. So we also had a position in IWM. So we sold IWM. And we’re actually switching that into winnaar, which is a homebuilder and Lenore had a decent correction after this past week. So we’re building starting to build a position in that they’re gonna announce earnings later this month. But you know, there’s a shortage of again, as you kind of look at what’s going on. People in the existing home space can’t sell their houses because they can’t afford the mortgage on a new house. So people are being forced to buy new homes and new home builders are offering terrific incentives, you get a four and a half percent loan from a new home builder to buy a house.

Adam Taggart 1:15:09
Right. And I think that’s what people understand is that people are buying new homes because they’re basically giving them lower mortgages.

Lance Roberts 1:15:15
Exactly. And, and so that and so what we’re seeing there again, homebuilders themselves are dramatically under, they’re very cheap, they traded like eight times earnings. So you know, they’re very, they’re very cheap pay a dividend. So we needed to switch a little bit of our portfolio away from interest rate sensitive items. And small cap, mid cap stocks are very sensitive to interest rate changes, and economic changes. So we also consolidated we had two utility companies, we had NextEra, energy and Duke. So we consolidated exterion. To do and then we also bought Cisco Systems as we, which is the networking company because if you’re gonna have AI, you got to have networks. So we bought a small position to start with and Cisco. So again, just we’re just kind of remodeling the portfolio a little bit for kind of getting set up for the end of the year, and kind of what we expect will happen in terms of kind of portfolio and market movement heading into December as we wrap up this year.

Adam Taggart 1:16:12
All right, great. Thanks. Thanks for walking through all that, folks. I’m sorry to be ending this so quickly, we just have some time constraints that we’re bumping up against here, Lance, Lance, I know you gotta go. So if you want to hop while I’m kind of landing the plane here, feel free to do so. Folks, as we wrap up, I do just want to mention a couple of free resources for you one, let’s and I have talked about how his team is going to be we made a lot of interest in doing a webinar on elder care, like basically caring for senior parents, lining all that up along with a commensurate, you know, what estate planning stuff should we be thinking of how do we deal with their healthcare needs and whatnot, end of life issues, all of that your demand was so high that we finally picked the date it is going to be next week. So when we have this in this slot next week, we’re going to have that webinar instead. The Wealthion fall conference is now available for purchase to go learn more about it and buy your tickets at the early bird discount price. Just go to If you’re an alumnus of one of our previous conferences, be sure to check your email because we have a coupon code in there for you to get an additional 10% discount off of the early bird price. And then just as we always do, at the end of every week, folks highly recommend that you work with a professional financial advisor in navigating all of these markets. And all the issues that Lance and I have been talking about here. If you don’t have a good advisor who’s already doing that for you. Consider scheduling a free consultation with one of the ones that Wealthion endorses maybe even Lance and his team there at Ria. To do that, just fill out the short form only takes a couple of seconds, these consultations totally free, no commitment to work with these guys just a free public service they offer. If you enjoy these conversations with a soft spoken and shy and demure guy as Lance and would like to see us continue this. Please vote for that by hitting the like button and then clicking on the red subscribe button, as well as that little bell icon right next to it. Lance, you’re still here, buddy. Thanks so much for being with us. Any parting words for folks?

Lance Roberts 1:18:13
Nope. Just hang tight here. And then again, we’ll pick up week after next. But we’ll definitely get into all these other topics you want to get into what a lot of talking about with the markets between now and then as well. So just you know, be patient. Don’t Don’t be overly excited about what’s happening. We’re working through a correction. And you know, hopefully by the time I come back with you week after next we’ll be talking about market bottom short term. So we’ll see.

Adam Taggart 1:18:36
All right, great. Well, we will see Lance, we’ll see you next week for that everyone else thanks so much for watching.


Lance Roberts

Lance Roberts is the Chief Investment Strategist for RIA Advisors and Lead Editor of the Real Investment Report, a weekly subscriber-based newsletter to over 100,000 people nationwide. 

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