Portfolio manager Lance Roberts & Wealthion founder Adam Taggart recap the major developments of the week, including:
- Is this latest rally truly a new bull market? Or is it a bull trap?
- Have AI stocks peaked? Or just pausing before making new highs?
- Could the inflation-predicting prowess of the inverted yield curves not apply this time?
- Is inflation due to increase in the next few months?
- Importance of Powell’s latest guidance
- Continued weakness in the consumer & housing markets
- The trades Lance’s firm made this week
Adam Taggart 0:04
Welcome to Wealthion I’m Wealthion founder Adam Taggart welcoming you back for another weekly market recap here at the end of the week with my good friend Portfolio Manager, Lance Roberts. How you doing, Lance?
Lance Roberts 0:16
I’m not I was better before you started, I got downgraded from great to good friend this week.
Adam Taggart 0:21
So not gonna say you got demoted. I think that you can’t be the great friend every other week or else the Great. Fire just loses its punch. I got. And I thought of going up from there. But I mean, where do you go from great. I mean, are are spectacularly fantastic. Guess friends.
Lance Roberts 0:38
Yeah, we’re getting there. We’re getting there. as
Adam Taggart 0:43
Look, we’re pushing up against the July 4 holidays here for appreciate anybody who’s watching this because I’m sure we’re competing with you know, pool parties and burgers and stuff like that. We’ll try to be concise, which is definitely something we’re not good at. But we’ll see what we can do this week. Alright, let’s quickly looking at the markets. The market was up slightly this week, you know, not a barnburner. But but you know, up. You have said in past weeks, that the longer this market sort of treads sideways sort of hangs out in a trading pattern here that that’s bullish, right, because that’s, that lets the data and moving averages catch up to where prices are and then that can form a base that that future price appreciation. Preacher appreciation can be built off of. Is that still correct? In your opinion
Lance Roberts 1:29
Absolutely. So you know, we had talked about, I guess a couple of weeks ago, that we were due for a correction, the market had gotten three standard deviation. Again, don’t just you know, just set aside all the technical mumbo jumbo for a second, just hear what I’m saying. We just said that the market was getting very overbought, we were due for a correction. And we had a decent correction we actually sold off back to the 20 day moving average, we hit that basically on Monday, Tuesday of this week, rallied nicely off of that. So Tuesday, Wednesday, Thursday, the markets bounced off that 20 day moving average net, we’re still below the previous highs. But it is not uncommon that when you’re going through a corrective phase, whatever it is that your first test of support, which in this case is the 20 day moving average, the market will try to find that and hold that and particularly in this market that’s very bullish ly biased right now. investor sentiment is very aggressively bullish at the moment. So not surprising to see buyers step in. Also to this was into the quarter rebalancing for a lot of pension funds, mutual funds, hedge funds, so markets were really just kind of all over the place this week. I mean, you know, Tech was up one day down one day energy was up one day down one day, and it just, you know, markets are just really kind of all over the place this whole week, because just portfolios were having to be rebalanced, take, take profits out of one area, you know, buy, buy stocks in another area and get portfolios back in a line with benchmarks. So, you know, two things that really kind of stood out for the week and kind of in total was Thursday’s action more than anything else? bonds to a pretty good clip on Thursday, and our bonds have been actually rallying pretty nicely here over the last week or so. We’d see money flows going into bonds. And then on Thursday, they got clipped pretty well on, you know, kind of a wake up moment as Jerome Powell and this is nothing new from wait very, that the Fed is not done hiking rates. The boy that cried wolf, they were not done it rates market diag Well, whatever. And markets have been rallying well, on Thursday, he was speaking in Spain pretty much reiterated that the feds got to hike rates more and then at the same right after that we got the GDP report for the first quarter that had a massive revision to it and jumped GDP growth from 1.3 to 2%. For the first quarter, most of that was a big surge and consumer spending, but also a very big adjustment to net exports, which I don’t know where that came from. It’s just they have a big massive mathematical revision of net exports. But both of those combined together really kind of stepped the market back saying Oh, yeah, the market the economy’s way too strong here. If the Fed doesn’t knock it down here a bit we’re gonna get a resurgence of inflation. So bonds took it on the chin on Friday, I started on Thursday. And again, but it began even that part of that is this end of the quarter rebalancing. So I wouldn’t put a whole lot of stock into what happened this week. I think more importantly is going to be what happens really kind of after we get into the first part of July get past the holiday traders come back to the market next week. You know, we’ll see what goes on from there.
Adam Taggart 4:45
Okay. And I’m curious you know, you’ve long you know, told us that okay, at the end of a quarter there’s all this scrambled a window dress and particularly a quarter like we’ve had, right where there have been some stocks that have really taken off you know, every every fund manager wants to show that they’re owning those stocks, you know, that the end of the quarter when they have to report their holdings, right? Do you ever normally see sort of like a retracement or an easing off at the beginning of the next quarter after that mad dash,
Lance Roberts 5:14
sometimes, but also to, you know, as we get into the new quarter, right, so all the fund managers that weren’t in the certain stocks that were going up a lot, they put them on right at the end of the quarter, to get them on their books, but they may have put on small positions. But then as soon as the quarter starts, they add a whole bunch to it, because they got the rest of the quarter to allow that position to work on their own their portfolio. So generally, what you’ll see is some selling going into the end of the quarter, that’s the rebalancing part, and then you’ll see, you know, overweighting sectors or whatever they’re going to do as they come back into the new quarter. And again, as we get into next week, not only is it the beginning of new quarter, it’s also the beginning of second quarter earnings. So now all of a sudden, we’ve got a lot of bets being placed on companies like Nvidia and AMD and others that their earnings because of AI are going to be absolutely stellar. So there’s gonna be a kind of I wouldn’t be surprised to see a pretty decent scramble that pushes semiconductor stocks and probably the market as a whole up to new highs for this year in the month of July wouldn’t wouldn’t surprise
Adam Taggart 6:15
me at all. Semiconductor stocks to new highs in July or
Lance Roberts 6:21
not, not all time highs, but just highs for this year. In other words, you know, semiconductors hit a recent high they sold off and it wouldn’t surprise me to see him go back to that previous high. Okay, you know, in the next month. Okay,
Adam Taggart 6:32
I just wanted to make sure you weren’t calling for the markets to hit a new all time high next month. You’re not
Lance Roberts 6:37
Yeah, no, no, no, just just just a higher level than we were last month. Right? Yeah.
Adam Taggart 6:42
Got it. Yeah. It’s so interesting. What a difference half a year makes right. I mean, coming into this year, we were coming off of one of the worst years ever for stocks and bonds collectively, right? And now that like the s&p is up like 15 plus percent, the first half of this year, the NASDAQ has had like its best start to the year and how many decades?
Lance Roberts 7:04
Ever, ever, ever for the NASDAQ? Yeah, yeah. Okay. So, in news about that is statistically speaking, when the market is up 10% or more in the first half of the year, it generally finishes the year, broadly positive, and generally tacks on another seven to 10% by the end of the year. So, you know, you’re potentially talking about a market that could be up 20% plus by the end of this year, and that’s gonna be hard. That’s very hard for people to fathom. By the time we get to the end of the year, if that happens,
Adam Taggart 7:37
yeah. Well, you know, if that happens, and of course, you did a very good job at the beginning of this year, telling people that yeah, things look pretty dire. But things are probably pretty oversold. And you know, don’t discount where stocks the fact that stocks could recover here more than people are expecting right now. And that has been the case, pretty much month after month after month. This year. Although I think now we flipped to another people are beginning to expect the market to be higher next month, we’ve we’ve flipped from pessimism to optimism. Now,
Lance Roberts 8:09
ya know that and that was that was the point I was gonna bring up is that the one big difference? You know, so back in October, when we were talking about, you know, this market could do something you really don’t expect it to do. And that was writing an article, you know, everybody was expecting Fang stocks were dead right and wrote the article. Are Fang stocks dead question mark. And the point that article was No, probably not. Because once you start seeing disinflation show up in the economy, which is what we’re seeing now, money is gonna move, sit and move back into cyclical stocks that are longer duration assets. And that’s exactly what happened. So it’s, you know, that part, you, you know, was clear that was going to happen. But part of that thesis was that extreme, negative, bearish sentiment of investors, we had the lowest bearish sentiment of both professional and investors since 2008. And you know, from the from the sentiment perspective, it was like we had just gone through a financial crisis in the markets. And so you had such negative sentiment that there was a lot of fuel there for a rally now, professional investor sentiment is getting very, very bullish, we are getting back up to levels that have historically kind of marked the top of rallies, at least in the short term. And you should expect we’ve had we’ve had basically a very low volatility market this year, we haven’t had a 3% correction in a very long stretch. Since October, we haven’t had a 3% correction in the markets, that’s unusual to go that long without a 3% correction. So you should expect sometime in the summer, potentially, a three to five to seven, even a 10% correction completely normal, within a rip and bull market to have that type of a correction that’ll be a good buying opportunity. But because we have so much bullish sentiment that kind of really sets that that corrective action up because kind of everybody’s on one side of the boat. So as soon as somebody holds their hand up and says I’m going to sell here, you potentially get kind of our herd effect that creates a short term correction. Again, that’ll be a buying opportunity. But you know, they’ll give you a much better risk reward basis to enter the market than where we are right now.
Adam Taggart 10:09
Right. And what’s interesting, and I’m working my way here to a piece that you wrote this week. But as you know, bull markets climb a wall of worry, right? Well, what happens when the worry goes away? Same thing about the most telegraphed recession, you know, in history that you’ve long mentioned, the fact that, hey, since everyone’s expecting it, it may not materialize. And why law? Here we are, you know, far into halfway through 2023 Right now, and it hasn’t materialized yet. At least not that super visibly. Now we’re getting all this talk about not even soft, reset landing, but maybe no landing, like maybe we avoided all this right? Maybe that then opens up, you know, the potential for recession to hit because folks are finally giving up the expectation of it, right. Um,
Lance Roberts 10:56
alright. So like, I was just saying, you know, just psychology is a very interesting thing about the market. And that’s really, you know, as investors, we’ve got to be part psychologist, and, you know, remember, the whole market is just a bunch of people buying and selling, that’s all it is. So, you know, more than anything else, it’s just understanding the psychology of what happens between buyers and sellers within a Live Marketplace. And that’s, that’s the fascinating part about this, right? So if you really, you know, just kind of examine what people are doing. You know, it’s, it’s just interesting to watch how their psychology works, you know, all the pain that everybody had last year, the fear, it’s all gone. Now, we’re all happy. And you know, that we got to buy stocks take as much risk as we can get. And it’s interesting, because you were having conversation with clients, your, you know, your, your clients that, you know, came over last year, and they’re like, I don’t want to be in the markets. And I’m super concerned, you all want to be in precious metals and, and bonds and cash, that’s all I want. I don’t want any extra exposure, the world is going to end the dollar is going to collapse. And now those same individuals are going I don’t understand why we’re don’t have a whole lot more equity exposure. And you know, the markets up 15% We’re only up you know, six 7% this year? Well, it’s because 15% of that’s driven by seven stocks. The other 493 are up about 5% this year. So, you know,
Adam Taggart 12:16
there’s those seven stocks, because you said we’re stocks folks didn’t want to touch us October. Yeah,
Lance Roberts 12:21
absolutely. But it’s interesting now, and my point is about psychology is that all of these people that were super negative last year, are trying to figure out how to get more exposure to the markets now. And so it’s an interesting conversation with, Hey, you told us to be super conservative. And now they want to be super aggressive. So it’s just a very, but this is that psychology that I’m talking about? everybody forgot about, you know, everything last year. And now it’s sunshine and roses. And we’ve got to be back on the on the train. So it’s just again, that’s the psychology of the market and how it works.
Adam Taggart 12:54
Well. And that’s one of the things I find so interesting about this this time right now for the retail investor, right? Is we went from Oh, no. Right, then the last year to FOMO. Again, now, right? In a really quick period of time. And the really like, tough question, you got to ask yourself right now, if you’ve been if you feel you’re too defensively positioned, or you’re sitting on the sidelines, or whatever, and you want to jump back in now is how much do you really trust? The market from here? Right. And that’s a great segue into this piece you wrote, which was basically, are we looking at a bull trap? Right now? Or the Red Bull trap or bear market? Those are the same thing?
Lance Roberts 13:40
I think, no. Yeah. Bull trap is basically sucking investors in and the bear market continues. The question is, are we in a bull trap? Or are we back into a bull market and
Adam Taggart 13:49
back into a bull market bull trap for a bull market? Yeah, exactly. So you really have to answer that question, you know, to a high degree of confidence for you to decide what to do here. I mean, I guess whether you’re going to jump back in or whether you going to stay in if you’re already in, right, you got to really answer that question. So what data do you look at when you’re making that assessment? Right? When you’re when you, as a capital manager are trying to say, look, is this something that really has legs? Or is this something I’ve got to be really, you know, suspicious about? Well, you know, so
Lance Roberts 14:21
the thing about it, so part part of the part of the question is Psychology. Okay. And again, so going back to what we just said a second ago, what is the sentiment of the market and again, when last year we had several bull market rallies that failed, and they were bull traps clearly. A good example of that when we had a 20% rally that began kind of began late May went into June and July. We had a 20% rally, the market retrace 50% of its decline. That’s a Fibonacci retracement. But historically this was all it now I’m just gonna quote to you the headlines that were coming out in the media markets up 20% It’s a new bull market market. We’re trace is 50% of its declined historically, that means markets go higher from here. The bull market is back that was you can go look back at media headlines for June, July last year, and you’re gonna find a lot of those headlines Walmart new bull market. It wasn’t a new bull market. We knew it wasn’t a bull market, then we knew that that was a bull trap. Why? Because of several technical factors as well as psychological factors. First of all, everybody was still extremely negative, there was no turn into bullish sentiment at that point as the market was rallying. In other words, people weren’t going Okay, time to be bullish again. Right. And so that there was that lack of money flow of psychology coming back into the markets, people wanting to get exposure that wasn’t occurring. So that tells you that people were still being very defensive, very negative, they were keeping capital on the sidelines. The second thing was, is that the 50, day moving average was crossed below the 200 day moving average, this is what we call it, a bearish cross, or to get more, you know, vocal about it is the death cross, right. And, you know, this is that, and all that means is that you have prices trading below a major resistance that 200 day moving average, that’s a very important resistance level for stocks. That’s the average price over 200 days. So when you’re below that, you know, kind of think about, you know, somebody’s holding your head underwater, right? And they’ve got their head, their hand on top your head and pushing it down into the water. Well, it’s hard to get back above the water. And that’s what that resistance level is for stocks. And so the market was rallying, yes, we were up 20%. But we were running right into that heavy resistance at the 200 day moving average. There was also several other factors out there that you know, from momentum, as well as breadth of the market and a variety of others, also suggesting that investors and professional investors were not coming back into the market. So very likely that rally then was a bear market rally. And of course it was and we wound up testing new lows in October. At that point, we had extremely negative sentiment. And that’s where you and I started talking about, you know, extremely negative sentiment setup for a rally those type of things. Now, fast forward to today, we have the market up 20%. Right, we’ve retraced more than 50% of the decline, just as we did back then. So what’s the why is this time a bull market versus last time being a bull trap. The reason this is a new bull market is because the market is trading above the 50 day moving average and is trading above the 200 day moving average. So now, that hand that was holding you underneath the water is now hands holding you above the water keeping you supported giving you a lift, you know, so to speak to go higher. Also the 50 day moving average is now crossed back above the 200 day moving average, this is what’s called a golden cross. Because these moving averages are price trends over time, it says that near term prices are now trending a lot more positively, and longer term prices. And if we lose 200 day moving average, it’s now starting to slow positively as well. Those are all indications now that the bull market is now back. So this is the difference between today. And what we saw back last year is that in during a bull trap, you sell rally. So as you get a rally to the 20 day moving average, you sell that rally and raise cash. Now you buy dips between the 50 and the 20 day moving average. So any dip in the market that gets you to the 50 or the average, you’ll want to buy that because that’s because we’re the market trend is now positive, and we want to participate in that rally. How do you know if something goes terribly wrong. And let’s just assume for a moment, this is a big giant bull trap. And in the next six months or a year, something happens economically, financially, whatever it is, well, if we break the 20 day moving average, and we start to roll the 5050 day moving average back over again. In other words, we start set up that same repeat of technicals that we saw at the beginning of January 2020, you’ll know that you’re heading back into a bear market. But right now, we’re in a bull market, so your actions have to change from being defensive to being offensive.
Adam Taggart 19:18
All right, very well said. I did my best to put up charts from your article as you were speaking there to Lance. So basically, this is an I hate to say it this way. It’s a terrible analogy, but it’s just the one that springs to mind. It’s the chuck Prince quote about like dancing while the music’s playing or you’re like, look, it’s a bull market. And we need to treat it as such until the data basically proves to us it is no longer one.
Lance Roberts 19:46
Yeah, and that’s why if you if you read the article, if you go to the website, it’s right on the front page of our insights blog on our website. It’s called bull Trapper bull market. At the bottom of that I’ve posted a graphic that you can Basically clip and save to your desktop or whatever you want. But it’s our 15 trading rules to manage risk in the portfolio. But it tells you these 15 rules if you’ll follow these, and this, this will allow you to participate in trade a bullish market while it exists, but it’ll also help you manage the risk of you know, potentially when things and things will change. Will we have another bear market? Absolutely. Could it happen six months from now? Possibly? Could it happen next year? Absolutely right, we could certainly have a bull market that reverts back into a bear market that happens all the time. So just because it’s a bull market now doesn’t mean that I’m saying, Oh, you’re it’s a bull market. So 20 years from now call me back. And we’ll talk about the next bear market. That’s not what I’m saying. What I’m saying is that this market is going to be higher, most likely, 1218 months from now, this market will be higher than it is today. Does it mean though, it’s not going to give you some corrections along the way where you can enter this market more safely on a risk reward basis and manage your money for a better return.
Adam Taggart 21:04
Okay, I’m glad you mentioned that. That list of 15 rules there. Just to clarify for folks, I don’t think they’re their bull market only rules, they just seem to me to be good rules for investing. I actually need a viewer for us to go through those. If we have time. In this conversation. I’d like to if we have time near the end. But it’s okay with you, Lance, what I’ll do is I’ll post them. I’ll put a link below here where folks can can download exactly that PDF of those rules. That’ll be at wealthion.com/lamps. Rules. All one word, folks. There’ll be a link there links to the full article as well. And folks should definitely go to real investment advice.com to read that article and all the other ones you have there too. Yeah, cuz I need to try to get my website Come on. Yeah, no, but I think that rules, like you said, I think that’s something that everybody should just print out and put on the wall, you know, wherever they do their trading. You’ve encapsulated, you know, decades of experience into a really well, understandable list. Yeah,
Lance Roberts 22:02
but let me be clear about these rules. These are not my rules entirely. They’ve been rewarded in my voice, right. But these, if you go look at any of the great traders throughout history, Paul Tudor Jones, Warren Buffett, you know, Jesse Livermore, named Seth Klarman, you know, pick your favorite trader, all of them at some point or another have published a list of their rules, right? You know, Peter Lynch, etc. And what you’ll find is that, not surprisingly, that all of them have the same rules. They’re worded differently, but they all are the same rules. Like for instance, you know, never never dollar cost averaging the losers. That’s just a very basic tenet. No good investor actually does that even though people tell you to do it all the time, dollar cost average? Nobody does that, you know, Seth, you know, a lot of advisors say, Oh, you just need to go buy an index fund and dollar cost average into it over the long term. That’s okay. It’ll work, right. It’s not a terrible strategy if you don’t want to pay any attention to your money, and you’ll get the index return over time. But there is not one portfolio manager on the planet ever from Ray Dalio to Warren Buffett to anybody else that has never dollar cost average anything. They’re buying big chunks of companies at deep value and those type of things. So all these rules are basically I’ve studied all these guys right? Over my shoulder, my now 37 years, right? So, you know, I’ve studied all these guys. And what I did is these 15 Rules are basically a compilation of all of their roles, and just kind of rewarded for ease of reading, write, shorten down and those type of things. But these are what every great trader investor or portfolio manager, etc. This is how they manage risk, and you know, the things that you do, and that you don’t do over time, that wind up costing you capital by making bad mistakes. So, you know, use the experience, you know, they have all look, every trader loses money. Every investor makes a bad investment. If anybody ever tells you, they’ve never lost money, they are absolutely lying to you, because you cannot invest in the market and not lose money. But why not? Instead of trying to figure it out yourself? Why not go to the experience of these guys who have made all the mistakes, and take their rules and apply that to your own discipline. So you just don’t repeat the same mistakes over again, because the mistakes that everybody makes, you’re always the same. The markets or markets or markets and buying and selling stocks are always the same. So the mistakes that people make the cost of money is the same mistake that everybody else in the market has made at one point or another, I still make mistakes. And when I make mistakes, I go back to my rules and I go What did I do wrong out there is line 13 You know, do more of what works and less of what doesn’t, right? It’s a really good rule to follow that, you know, we all make mistakes. We’re going to continue to make mistakes. We always allow our emotions to get in the face of what we’re doing. And these rules just help you stop doing that as much.
Adam Taggart 25:02
You’re still going to do it, but maybe just not. All right. But yes, so you’ve been standing on the shoulders of giants. You’ve condensed the wisdom of the experts. Maybe put it into your own homespun, Texas drawl.
Lance Roberts 25:18
A lot of y’all are there. Yeah. Right.
Adam Taggart 25:23
Okay, great. Well, reminder, folks. wealthion.com/slash Lance rules, we’ll have a link to that down below the video too, if you want to go there and get it. Alright, so let’s see here. I want to get to another piece that your colleague Michael Liebowitz released this week, but quick before I do I just want to go back to AI for a second. Because we’ve talked about that a lot in past weeks. We get to talk about it too much to this show. I don’t want to talk too much on it. But but a few things I want to mention one is the stocks have paused we’ll put it here like the the major invidious the Microsoft’s etc. They’re down a little bit, not a lot, but they’re down a little bit. And so, I guess one question is, which we don’t know the answer to yet. But is this like a pause that refreshes? Or is the have we seen PKI? Mania? You know, and you’re shaking your head? I would say we don’t know, I think you’re probably a bit more confident the animal spirits have further run. But
Lance Roberts 26:23
yeah, it’s just you know, this is the So here, again, you know, the way markets work, right. And again, I know nothing for certain. So just, you know, whatever I say just take everything I say with a grain of salt, because I don’t know any more than anybody else. I just what I just try to apply to things is, you know, I’ve got a long history of dealing with this stuff over time. And I’ve seen these type of things occur before. But when you had that initial run higher, so in video was on a Taylor, she’s using video as an example. AMD is the same way. When the stocks take off on this tear, there’s a whole bunch of people that go well, I missed it. And if that thing ever pulls back, I’m gonna buy it right so that first kind of pause pullback you’re gonna get is gonna get bought by all the people that feel like they missed it. And even it’s a entry point. Yeah, for all Yeah, it’s just a psychological thing, right? It’s like, but stocks up 169% This year, it trades 40 times price to sales and ridiculously expensive. But people are going to assume that if it went up 169% This year, so far, it’s gonna go up another 169% The rest of this year, right? It’s just, you know, people’s psychology about markets is the one something starts going it’s just going to go that way forever. That’s not the way stocks work. But the point is, is that there’s there’s a lot of people sitting out here that want to buy that AI trade, and they’re just in again, you know, the stocks have dipped minorly and every time in video comes down, you know, 510 points, you see buyers show up and start trying to buy this thing. So you know, they’re both on sell AMD and Nvidia, both right now are on sell signals, as suggest that probably that these stocks are going to chop around here a bit. But when they go back on bicycles, I would expect them to be at new highs for the year, you know, probably by the end of the summer, you know, and hopefully we’ll get a little bit more of a correction along the way, we’re probably going to add dry AMD, we bought AMD a lot earlier this year, we’re probably going to add to that position in our portfolio on this pullback. Just because we want more weight in we bought a very small position, we want to bring that weight up. There’s some other stocks that we’ve been kind of, you know, buying into as things are improving. So that’s just going to be kind of our process. But in video we own last year, it was up 100% We sold it there thinking we were really smart. Apparently we weren’t. So you know, now we gotta wait for an opportunity to try to buy it back.
Adam Taggart 28:45
Yeah. So this is where I really got to get better at bringing some behavioral economists here onto the program. Because this this psychology part is really important. And folks that aren’t aware that the field of behavioral economics, which is a relatively new field, actually, its goal is to sort of munge together the quantitative side of of economics and the human nature side of just humans making investing decisions. And actually, I’ve got one guy, Dan Ariely, who’s a very well known paper economist, who has basically said, yeah, oh, come on, I just need to follow up with them to lock that down. So this is a good reminder of meeting to try to lock down and I also should get Peter Atwater back on too because he’s all about sentiment. So you know, if, if psychology is in the driver’s seat right now, with the AI stocks, which I think we can make a good argument that it could very well be because they seem to be in a bubble and you’ve shown that chart earlier of comparing the rise of AI stocks to other price bubbles we’ve seen and it sure looks like one I mean earlier stages than most, but but still has that same look and feel. I’ll see if I can find the classic bubble chart here that shows all the different phases on the way up, and then the phases on the way down. We can’t say for certain that that’s what’s going to happen this time around. But if psychology is in the driver’s seat, this is the, the shape we would expect to see when this thing fully plays out.
Lance Roberts 30:17
Now, that’s going to happen, right? I mean, again, you know, Nvidia cannot cannot, I don’t care how much they sell, they cannot justify 40 times price to sales, right? trees don’t grow to the moon, right? So so at some point, they’re going to disappoint the questions is when I mean, but the stock could be 500% higher from year before they disappoint. That’s the problem with bubble markets, which is all rationality gets priced out of stocks. Valuations fundamentals simply don’t matter during a mania phase. And we’re in that phase. But but eventually fundamentals are going to matter for these companies. You know, I find something really fascinating. You will remember two years ago, everybody was chasing Facebook stock meta, because they were going into the metaverse, right? Oh, it’s a metaverse. Everything’s gonna be metaverse. What was the last time you heard about the metaverse, right? It’s all about artificial intelligence. Now Metaverse is dead. That’s, that’s so which I think is gonna be a real problem potentially for Facebook. Meta, sorry, I’m old. So I still refer to everything as Facebook. But you know, it’s gonna be a problem for men because they’re dumping a ton of money into this metaverse. And now apples come to market with this new $3,700 VR headset, that they’re probably going to take a big chunk of that market away from meta so meta has been running up on this whole idea. It’s been running with this AI bubble. But I think Matt has got a real problem down the road of just the fact that the metaverse probably never had the legs that artificial intelligence does on its own just looking at the two separate levels. And I think that money migration to AI may be a problem for meta and its current and kind of its business model. Going forward. We’ll see. I don’t know anything for certain but it is interesting. You know, that whole that whole thought train of everybody subnet is the medicine metaverse. We’re all gonna be in the metaverse. We’re all gonna be you know, Spider Man and metaverse. I haven’t heard anything about that in a while. It’s all about AI and chat GBT and what it’s going to do for the labor markets and our jobs and all that. So we’ll see.
Adam Taggart 32:18
Yeah, we’ll see. And it’s interesting you raise a couple of things there. One is what we talked about this last week, and it was Jim Bianco, who brought all this up was that you know, oftentimes are always say oftentimes, but but history has lots of examples where the market sussed out the potential of a new technology, and did the math and said, Wow, this is this could unlock, you know, a tremendous amount of incremental new value. And they pulled that value into the share price today. And then it took a decade or two, for that value to actually be realized in the companies. And so you had a lot of stocks that were kind of dead stocks walking for a decade or more, where it took that long to, for the underlying earnings and everything in the company to finally rise the share price back up to where it justified the price that people were getting in at at time zero, right. So that may be something that’s happening here. The other thing I wanted to mention on this topic was just if you don’t feel like you really have a deep understanding or a good enough understanding of what AI is, and I would say a prudent investor today should at least have a working understanding of what it is for the potential that it has to disrupt and transform a number of sectors of the economy. You don’t have to be an expert in it. You don’t have to be a techno wonk. But you should have just sort of a general understanding of you know, the advantages and some of the potential pitfalls this new technology offers. I did an interview earlier this week with Dylan Patel, really just trying to provide a layman’s understanding of what we’re all talking about when we’re talking about AI. If you haven’t watched that, highly rec, I’ll put up a link to it here. But I highly recommend that you go watch that after this video here. One of the things you mentioned, which I didn’t know because I hadn’t really been following AI super closely before that conversation was that Facebook has its own AI engine, something called llama. So they’re not they’re not not in the AI game, you know, in doing mentioned that I’m not going to try to murder the differentiations he made by the different companies that are out there right now. But right now, Microsoft’s got chat GPT that’s doing that in partnership with open AI. Google’s got barred, but now Facebook’s got its own solutions that it’s working on. One of the things I find was kind of interesting about this, and again, folks go watch the discussion with Dylan for the real skinny, but is that we call it artificial intelligence. But the type of AI we’re talking about right now particularly generative AI Which is like what chat GPT is. It’s not intelligent. You know, there’s there’s not. It’s not smart, it doesn’t know what it’s doing. It’s basically just executing instructions that it’s been told to follow. What makes it different from previous incarnations is it’s a brute force approach. But it’s a brute force approach at a scale that we just really couldn’t have comprehended before. And Dylan had this really interesting comparison. Again, I’m not going to get it right. But it was like imagine, imagine a sheet of paper like this. And I think you said it has like 20 neurons on it. If you could stack these pieces of paper on top of each other with these neurons, the first version of chat GPT was like a stack like that, going from New York to Chicago. The next iteration was going to the moon and back, right. That’s how that’s how big the leap was in technology. So the current one that we’re all using, is going back into the moon and back 22 times, right. And he said, there’s actually a fourth one that’s already sort of in the works. It just hasn’t been publicly released. That’s going to be an even, you know, commensurate magnitude of increase. And of course, this will continue to, to grow like that. So it the power here gets bigger and bigger. And there’s lots of opportunities here to disrupt. But it’s not. It’s not like, Oh, this is going to be necessarily yet Skynet. That’s going to be figuring out how to actually be smarter than humans and building its own robots and taking over the planet. Maybe at some point, it will. And he, he did open the door to say, look, I there are nights, I don’t go to sleep very easily. But But right now, the current incarnations of AI that we’re dealing with, it’s not a true intelligence.
Lance Roberts 36:46
No, it’s not. In fact, I wrote an article on this. It’s, you know, there was out last week, which is basically titled AI may face some challenges. And in that article, I would suggest you put a link, you know, to that article, you know, here for our conversation as well. Because in that in that article is a link to Roger McNamee, who’s probably one of the premier silicon investors and technology, Silicon Valley investors and technology, and had a great interview with him on CNBC talking about AI. And precisely to your point, he said, Look, all this thing does is there’s this knowledge base sitting out here on the internet. So all that’s happening right now is that the artificial intelligence saying okay, here’s the question, let me go over here. Let me examine this database of knowledge that’s sitting out there in the internet, and then I’ll give you an answer. Well, the problem is, is a vast, there’s a huge pile of junk on the internet, false information, bad information, you know, just you know, complete lies, fabrications, etc. You know, there’s he said, everything on the internet is not necessarily true. So, but it’s grabbing that knowledge. So the problem is, is that you’ve got as he didn’t to quote him, he’s got you’ve got bs coming in, which means you get BS coming out of it as well. And so it’s not artificial intelligence, if you’ve got to fact check the artificial intelligence. And that’s his. That’s his kind of a thesis is that this is very early. This is basically if you think about the lifecycle of anything, we’re still in embryo phase where we haven’t even started forming gills yet. So this has got a long ways to go before artificial intelligence becomes a real thing where you have robots basically thinking for themselves and doing this right Skynet, so to speak. But they are attaching flame throwers to robots which is very troubling. So if you’re worried about Skynet, I mean we are moving in that direction.
Adam Taggart 38:38
There’s also a video clip out there in China where the Chinese military is delivering robot dogs with machine guns via drone so they’re literally dropping it into a hotspot and then the dog just wakes up and he swivels his machine I mean it does look like something out of black mirror.
Lance Roberts 38:52
Yeah. In that again that article covers and again that that interview with Roger McNamee is well worth listening to, if you’re interested if you’re interested in AI. You know, everybody just jumped onto this bandwagon AI has been around for a decade. This is nothing new. You if you have an Apple phone you’ve got Siri that’s artificial intelligence, right? If you’ve got you know, an Android phone you got Bixby that’s artificial intelligence. So that’s we’ve had artificial intelligence the market was dying for something to grab onto the market was just needing something positive to grab onto because for 18 months has been nothing but negative news bank failures and recession recession was that everything’s a recession of dollars going to crash and you know, the world’s coming to an end It’s just horrible. We got this current administration absolutely sucks. So we got inflation, man, the market just needed something positive to grab onto. So when it found AI, even though ARS AI has been around for a decade, it was like that’s it and man money needed a place to go and so money chased AI, but it doesn’t mean that this is really here. Yeah, it’s just just a very fledgling investment. We’re chasing you know, I
Adam Taggart 39:59
I agree. And look, I’m not I’m not an AI evangelist by any stretch. But yeah, we’ve had AI and incarnations of it for decades, really, to your point. But I think there has been a sea change transformation here in terms of its utility, and I don’t want to underplay my layman’s understanding of of the impact this is going to have now, is it going to cure cancer tomorrow? You know, no, probably.
Lance Roberts 40:31
Not it’s the healthcare companies have anything to do with it a
Adam Taggart 40:34
whole different topic. But, but I think I do think like I said, I think every prudent investor needs to develop an understanding of the basics of how this technology works, and what to expect in terms of the impact it’s going to have on the economy, because I think it is going to be substantial. And they’re going to be elements that are going to hit relatively soon, there are going to be some other ones that are going to be years decades down the road for sure. But as I said earlier, to the pace of the improvements here, the progress here are honestly probably happening at a pace that our human brains can’t fully fathom, right?
Lance Roberts 41:13
Absolutely, absolutely. Look, it’s in chat, GPS, just the first thing and this is why the markets are jumping on and all of a sudden, again, we’ve had this forever. But now all of a sudden, there’s this product chat GBT and people going Wow, well, I can have it write a book for me. And I can ever write points. And I can have it write a resume, and I can have it do all these things. And this is the first utility of artificial intelligence that people are gonna really kind of latch on to. And trust me, open up, tick tock, and see how many things you get on AI of people telling you how to make a million dollars now with AI is just all over the place. But the important thing is, is that, look, this is going to impact your life, right? Just like the internet changed our lives, just like the telephone changed our lives, just like mobile phones changed our lives, this is going to change your life. Doesn’t this, just like the internet, there were vast promises of wealth and riches that were promised to be made by the Internet back in the late 90s. That just did not come to fruition because of competition, cost reductions, those type of things. But it doesn’t mean it didn’t change our lives. Can you imagine, you know, my kids can’t fathom a period of time where you didn’t have debt. Right. So when my wife and I talked to our kids about growing up with no, you know, a house phone, that was a landline, and there was no internet, you had to actually read a book to go to school, that’s they can’t fathom that. It’s just, it’s just too disconnected from them. And our next generation of kids and the kids after that, they’re gonna they’re not able to fathom a time when you didn’t have aI helping you do it just about everything. Look, we’re right now building an AI program, to put into simple visor to help you pick stocks better. So you know, everything that you’re going to be doing is going to have aI involved with it somewhere down the road. Right, which
Adam Taggart 42:51
is why I’m saying, you know, folks that start developing an understanding of it now, because sort of trying to just ignore it would be the equivalent of like, trying to ignore the internet when it came along, right. The other thing too, just to beat this horse fully dead is the path, the pace of adoption is getting faster and faster. And every one of these technological cycles, right, and I’ll put up a chart here, I saw recently, it’s comparing chat GPT adoption to other digital platforms. But it shows that, you know, Chad GPT hit a million users faster than any other digital technology had previously. Right. And I think that’s sort of the process that we’re, we’re going in here and look, you know, talking to Dylan, again, he is more or less an evangelist, a true AI evangelist. He puts its impact somewhere, I think he said, between the development of the internet on the low end and the development of the internal combustion engine on the high end, he said there’s going to be that kind of impact on the economy. But even he said, Look, stocks are just crazy price right? Now. They’ve gotten way ahead of themselves, right? So it’s that delta between when the actual value is delivered, versus the hype of the moment, right. Real quick to before we move on this, you’re making me think I should probably try to reach out to Roger McNamee. Not because I know him, but the woman, my wife’s very good friend who introduced my wife and I, her husband, when when she made that introduction was actually working for Roger McNamee at integral Capital Partners. Back then. Her husband now has his own fund. But he might be able to get Roger to come on in and have a conversation with him about AI bring you into that if you want to.
Lance Roberts 44:31
I would love to Yeah, that’d be fantastic. Okay,
Adam Taggart 44:34
okay. Awesome. All right. Well look enough about AI. Let’s get back to your partner Michael Liebowitz is post here on interest rates. And real quick, I just want to get there through something you mentioned earlier, which was the talk that Powell just had over in Europe with several other European central planners. So in Christine Lagarde was on that panel. I think a few other central bankers were. But Powell did, as you said, he reiterated that, hey, we’re going to need to keep tightening here. And he said that he doesn’t see us core inflation getting to 2% this year, or next. Right. So that’s him, I think really trying to quell the enthusiasm that the market keeps, you know, trying to reach out with here and saying, like, Guys, you just don’t get it. I am kind of be, I’m going to be more hawkish for a lot longer than you guys are currently pricing in. Right. So that gets us to
Lance Roberts 45:34
rural pick up before we jump off that point, because this is, this is an important point that, you know, and we’ve talked about this before, but this is this is a point worth reiterating, before we talk about yield curves, because they play a part and parcel with each other. The Federal Reserve is hiking interest rates to slow the economy. And by slowing the economy, how do you slow the economy by hiking rates, right? You make things too costly in terms of either financing, or expenditures or cost that people can track their spending? That’s 70% of consumption. Right? So Ken’s sorry, 70% of GDP is consumption. So if I’m going to slow the economy, I need to have a negative impact on consumers. Well, the problem with the market and this is a problem for the Fed. The problem with the market rallying like a banshee this year, is that people are going, Oh, wow, I have more money, right? My 401 K is up my stock portfolios up, I you know, I bought, you know, I’m buying call options on AC DC company, and I’m making 1,000% a day, you know, whatever. So there’s all this extra money. So they’re going out into the economy and spending money that’s keeping economic growth elevated, that’s also going to keep prices elevated, that’s going to keep inflation from falling as much. And and here’s the important thing, Ben Bernanke back in 2010, said, when he was launching quantitative easing, part two. So we’ve done quantitative easing, one coming out of 2009, he stopped it, the market sold off about 20%. That summer, Ben Bernanke comes in, and hey, we’re gonna do QE two, the reason we’re doing it I’m paraphrasing now, is that higher asset prices will boost consumer confidence, which will lead to stronger economic growth. And that’s absolutely right. That’s that wealth effect that we talked about quite often from the markets. If I can lift asset prices, I make people feel wealthier. So they’ll go spend money in the economy. The problem for the Fed is that’s easing monetary conditions, it’s actually working, the market is working against the Fed, and the Fed is going, Hey, guys, I’ve got to keep tightening rates. Because if you keep doing this, you’re going to increase economic growth. And if there’s data supporting this, right now, you’re going to increase economic growth that’s going to cause inflation, to start to rise again, and we can’t, that’s the thing we can’t tolerate is having a resurgence of inflation. But the market is driving exactly that if you take a look at consumer confidence, and I run a composite index, and this was in last week’s newsletter on our website at real investment. advice.com. Talking about consumer confidence, consumer confidence is rising. And when consumer there’s a high correlation between consumer confidence changes in economic growth. And what it’s saying right now is this serve this, this increase in consumer confidence is going to keep economic growth. And when we should start seeing a lot of these economic data points like the LSI, and others bottom and start to turn up here in the next quarter be if consumer confidence keeps going up, because of their actions in the economy. And this is, again, this is exactly the opposite of what the Fed wants. So this is what the Fed in a really bad position to where they’re going to have to not only rates, but they may have to wind up hiking rates more than two times if the market better.
Adam Taggart 48:54
Yep, no, I agree. So I really appreciate you underscoring that. And again, we’ve talked about forever, but you know, that then, that then raises the question even more prominently of, okay, well, what is the lag effect? You know, if we still have the preponderance of the impact of the lag effect from everything that’s already been done, but the Fed is deciding in the near term, I gotta be even more extreme. Right? You’re not saying it’s going to happen, but you definitely increase the risk of the Fed, doubling down into tightening just as the lag effect starts hitting, and then we find out Dear Jesus, we really overtightened you know, when we when we look back over the scope of history, who knows, we’ll see that has yet to be written but certainly as you and I talked about, seeing, having those concerns, right, looking at the market and saying, Guys, you’re you’re undoing everything I’m trying to do here, then seeing GDP get revised in q1 is substantial as it was, of course, the Fed is like, okay, that’s not good, right from what we’re trying to do. As you and I have said from the base effect math alone, CPI is likely to start going up Over the summer, right, that’s going to just look optically bad. And just add fuel to the fire already on the same issue. And so yeah, I mean, it I understand in the weirdest thing is is that Powell keeps saying, because of all this stuff market, I am going to be the responsible strict adult in the room and the market is just saying, I don’t care. Either don’t believe you or it doesn’t matter.
Lance Roberts 50:27
I think I think it’s more of a I don’t believe well, actually, it’s not I don’t believe you. The market is running on this basis, which is, hey, I get it, you’re hiking rates, but you’re going to be cutting rates. And since you’re going to cut rates, I want to be in there before you cut rates, because once you cut rates, that means the markets are really going to take off. So all these investors are piling into the market expecting rate cuts. But here’s my question to you, Adam. And you can ask this question to any of the other panelists that you have on here. Why would the Fed cut rates, if economic growth is 2%? Inflation is falling or at least flat? You know, it’s not going up dramatically. But maybe it’s not coming down to 2%? If the consumer is doing fine, right? And interest rates aren’t causing, you know, bank failures or anything else, then why would I cut rates, there’s, you know, I would just leave rates where if I was the Fed, I just press the brakes. And
Adam Taggart 51:16
that’s what the Fed is saying it’s gonna do. It’s saying we don’t have any rate cuts, enter.
Lance Roberts 51:20
The markets are going no, I don’t believe you, you’re going to be cutting rates like next month.
Adam Taggart 51:25
And so what’s so interesting about that is is first off the mark, this has been a game of chicken for getting close to a year now. And the Fed has won every game so far, right? The market has had to say okay, yep, I guess you’re not going to cut this early. Okay. And yet, stock prices have been marching higher all along, right, which is crazy making in and of itself. But you know, every recession, usually where the Fed has, you know, typically tightened going into the recession, then the recession hits, then the Fed starts cutting, there’s usually a couple quarters of cutting, as the market continues to go down before it finds its bottom. So I find it a little crazy making that the market is saying, Oh, I’m pricing in your cuts, because as soon as you cut it’s happy days again, it’s like no, no history shows us it’s not.
Lance Roberts 52:12
Well, you know, there is an interesting there is, you know, I’m not saying this time is different. But there is a difference this time, which is normally
Adam Taggart 52:21
so glad you’re not saying I’m not
Lance Roberts 52:25
I’m saying is I’m not saying this time is going to be different than the past. But there is a difference going into this, which is that previously when the Fed was hiking rates, the market was going up during the rate hikes, because there was a lot of momentum behind the market, the economy was very strong, and the Feds going, Hey, I’m hiking rates because the economy is too strong. It’s overheating, and the markets are gonna don’t believe you. Earnings are growing. So I’m gonna I’m investing in stocks. So as interest rates are going up the market is going up with with the market, and then the Fed breaks something, right, and they stop hiking rates. And then the market realizes, Oh, crap, you broke something, oh, there’s a recession coming in. And now earnings are falling and prices fall during the rate cuts. The difference this time is that the market declined as the Fed was hiking rates. Now, interestingly enough, the market has recovered every bit of loss. From the first rate hike back in March of last year, the we’ve been seems like we’ve been talking about this forever. It’s just March of last year, the Fed hiked rates for the first time for a quarter basis point. And we’re now back to that level, we’ve priced out or priced in every every rate hike since last year. So the markets are going, Hey, this, this is all over earnings of bottoms. Right? We’ve had an earnings decline last year. And what the market is betting on now is that earnings have now declined a bottom. They’re going to start improving going into this year and next year. And, you know, the question is, if we’re going to have a recession now, if we do have a recession, the economy slows more than earnings should decline. So this pricing issue is going to have to get priced. The market wants to reprice for lower earnings, if we get into a recessionary spat. But again, we haven’t we haven’t been where everybody’s been expecting recession we haven’t gotten there yet, doesn’t mean we won’t. But because of all that liquidity that we slammed into the market, it’s has basically screwed up everything temporarily. So all these indicators are off. And this lag effect is taking longer to show up and then anybody kind of banked on. So we’ll see what happens. But, you know, the one of the things that we’ve got to work on is how much did that preview that last year’s 20% decline take care of and the overall decline? So is there a 10% downside to go? Or is there another 20 or 30? I don’t have the answer for that.
Adam Taggart 54:46
Yeah, I don’t either. And it’s good for you to raise. I have personally have a hard time with the sort of like, well, the market pre crashed or pre corrected and we don’t have to worry, because we are at such ridiculous valuation extremes at the end of 22 Anyone, right? That was, we could have made an argument in 2019, that the market was way too far overvalued, but then we had all the crazy stimulus of the pandemic. So it’s, it’s, it’s, it begs the question of well, what happened to just letting all the crazy steam of all the pandemic, you know, stimulus out of the system? So, anyways, that’s why I have trouble saying, Oh, we reached some sort of fair value in advance here. But who knows, I could be wrong.
Lance Roberts 55:30
Yeah, I don’t like, like I said, I don’t have the answer, either. I don’t know how this works out. You know, and this is that now this is the time having said that, this is the time to now start talking about Michael’s article, because, you know, this lag effect is, like I said, taking much longer to show up in the economy. And so because it’s taking long longer to show up, everybody’s going well, I guess it’s not going to come. But we’ve had in the radios I’ve seen, we’ve had this inverted yield curve. Now, for the last, you know, 1214 15 months. It’s not the yield curve, inversion that tells you a recession is coming. It’s when it uninvent hurts, that tells you the recession is coming. And right now of the 10 economically sensitive indicators that we track, in terms of yield curves, 100% of them are inverted, you have never not had a recession with 100% of those 10 yield curves inverted. But it’s not the inversion, that is the recessionary signal, it is the onion version. So what will cause them to an invert, that will be a very steep drop in that two year treasury note versus the 10 year bill. And that will be because of a very sharp, sudden slowdown in economic growth hasn’t happened yet, because all liquidity, but maybe it’s 2024, maybe it’s 2025. But the unversioned will occur, and that will likely be a function of a reset of interest rates much lower in the overall breadth of the bond market.
Adam Taggart 56:59
So you’re right. And again, that’s one of the reasons why we have you on the program every week. And so as you see any change in those indicators, oh, you know, when just under averted? You know, you can give our folks really early warning on this. Yeah, Michael mentioned is I think you’re getting to here, which is that one of the reasons why it may very well be different this time is we had so much stimulus put out there so much pig, but in the Python to use our common vernacular, that it has been acting as this buffer, right, that is sort of slowed down the arrival of what we might otherwise expect. And it has been distorting things, you know, as that much liquidity is passing through the system, he had one chart in there that I thought was really interesting, which was a chart of, of expectation beats on non farm payrolls. And he said that that is, you know, it’s, it’s, it’s an estimate by the market, right. And so generally, the markets either going to beat the markets estimate, or it’s going to disappoint versus the market estimate. And it, it should have about a 5050 track record, right of that, which it has in the data set, except for the last 14 months, which have all been beats. And he says it’s kind of the equivalent of coming up heads 14 times in a row with a coin, right. And that’s just a good example of how that much liquidity can really distort the system, it can keep the good times going for a lot longer than people might otherwise expect. I do want to put one asterisks next to that, just because you and I have had so many discussions about how much we can really trust that payroll data. So that might be playing a little bit of a role here. But still, you just look at that chart, and very clearly it shows you that something is very different about right now.
Lance Roberts 58:41
Well, I mean, you know, the 14 beats in a row is a record by miles of any other periods in history of beats consecutive beats of estimates. So, you know, either everybody, sandbagging the numbers, or just nobody believes anything anymore, I’m not sure which is happening. So
Adam Taggart 59:00
Well, my first point, you know, there’s just so much money passing through the system, that the jobs market is held up way better than anybody thought it could. Right.
Lance Roberts 59:08
And again, you know, it’s also the quality of the jobs, right, where most of the jobs still being created, right up jobs, jobs, unfortunately, you know, a big jump, a big chunk of the job creation is held by foreign born citizens versus native born citizens, that’s not really great for our economy, either. So, you know, there’s a lot of funky things going on, because of the shutdown of the economy, the restarting of it and all this liquidity. You know, there’s certainly, you know, but that’s going to work itself out over time. The question is, is how long does it take for that to actually start to work itself out? And I don’t know the answer to
Adam Taggart 59:42
that. All right. Um, one other thing that Michael talked about in the argument in his article, and you know, by the way, he basically says looking at yield curves, predict recessions. And yield curves are basically looking at the yield on credit. And one of the The reasons why credit is even more important today than perhaps it has been in any other cycle is we just have so damn much of it now, right. And so there was a stat there that really caught my attention, which is that we’ve now got so much debt out there. And so much of it has been priced at a low yield up until now said each 1% increase in interest rates result in interest expenses rising 2.76% of GDP, that compares to just 0.75% in 2000. So there’s a full 200 basis points of GDP that we basically lose every time interest rates go up by a percent.
Lance Roberts 1:00:47
And look in one of the things that we talked about this last week, you know, one of the things has been adding a lot of money to the system to keep the economy floating is that nobody’s been having to pay student loan debt. But that’s about to restart. So that’s another drag. So they have higher interest rates. And household debt is is remarkably higher than it was were in the 1980s. And so to Michael’s point, you know, the whole if you strip out the debt, right, so if you take a look at economic growth, ex debt, we would have had negative economic growth for the last 25 years. Right. So you know, in other words, if you if the function of debt and that consistently lower interest rate that allowed us to take on more and more debt is a vast contributor to what’s been keeping economic growth going, although, as we talked about before, debt leads to lower rates of economic growth, because of that withdrawal of money from productive investment into debt service. So this is why we continue to chug along at 2%. But had it not been for those steady increases in debt, government, household, corporate, etc, we wouldn’t have had any real economic growth at all. But again, that’s just kind of where it is. But now, with interest rates going up, this is going to make debt service higher, which is going to detract more money from economic growth in the future. So far, it’s been okay because everybody has been able to tap on to, you know, the stimulus or extra benefits are not paying a student loan, not paying a mortgage, not paying rent, we have rent, moratoriums, mortgage moratorium is all nine yards. So a lot of people have had extra money at their at their disposal, it’s now virtually going away. So we may see a little bit of ketchup here over the next six months to a year. Well, all right. So
Adam Taggart 1:02:29
a couple of things. One, I’m really looking forward to talking to Lacey hunt again, and just a quick plug. He’ll be keynoting Wealthion. fall conference in October. But he’s also going to come on the program in July. And, you know, Lacey is a master of economic data, and from his previous presentations, has shown how the economic growth we get from taking on debt has been declining over the past number of decades. And of course, you get to a point where you don’t get any growth for the debt you take on and debt just becomes an anchor, right. And I can’t remember where the, the ratio was the last time I saw his chart, I just remember, it wasn’t very good. But this dramatic increase in interest rates that we’ve seen, I think just compromises that number, you know, dramatically more, right. And just to just to kind of put a point on this is, you know, it’s you know, there’s like businesses, if you’re, if you’re a business and you’re going to take out a loan, you go to a bank, and that bank gives you a loan based on the prime rate, right, you’re gonna get prime plus whatever, right? The prime rate is eight and a quarter right now. So if you get a really generous loan of like prime plus one, you’re still at over 9%. I mean, that is a way different world than we lived in just a year and a half ago, right.
Lance Roberts 1:03:58
And currencies go fairly sharp up taking bankruptcies, I think that’ll continue. Next year, we’re gonna get into a big kind of debt wall that is going to require refinancing for smaller mid cap companies. And there’s a lot of companies that simply they’ve been surviving on cheap debt, and all of a sudden, they have to refinance debt at 789 percent. That’s gonna be a very different world for them in terms of cash flows, and, you know, liquidity and those type of things. So, you know, there’s there’s still a lot of risk from higher interest rates as we go in further into this year and into next year. And again, that’s that lag effect. We just haven’t gotten to the point that those refinancing have had to occur at a much higher rate and companies balk at it. But we’re also known that lending standards are tightening up which is limiting people from getting access to credit because they simply don’t qualify.
Adam Taggart 1:04:48
And does this make you think this is kind of what it makes me think but I’d love to hear if you think differently is that if we do go into harder Economic Times ahead from here, it’s going to be kind of like a Hemingway inverted exponential curve, right? Where it’s, it was slowly and then all at once, right where like, as more and more companies start hitting this maturity wall was, that’s how Michael Green referred to it earlier this week. And he was saying he, he sees 2024. And 2025 is having a massive maturity wall for a lot of companies that are existing right now on the debt that they raised before the interest rates started getting high. So you know, just just as we go along the time curve, we’re just going to have a higher and higher percentage of the economy that slams into this maturity wall and has to refinance at these higher rates, and then just, you know, that just becomes an exponentially increasing depressive force on economic growth.
Lance Roberts 1:05:44
And that’s, that’s, so let’s step all this back for a moment, right? So you know, we’re talking about a bull market. And now we’re talking about all this really negative stuff. So people are going Lance, I don’t understand what’s going on. You’re saying it’s a bull market, and then you’re talking about all this negative stuff. So why don’t want to be in the market, when it’s all going to crash. You know, the thing about markets is, is that market and this is what’s been happening over the last year markets price in all of us. So the stuff that we’re talking about right now, the market knows about, this isn’t stuff that the market really hasn’t factored in too much. I think the one thing that maybe the market hasn’t factored in too much is this restart of student loan payments, there’s not been a lot of talk about it, and a lot of headlines about it. So I don’t think anybody’s really kind of factored into earnings potential. You know, just how big of a hit it may be when people start paying, you know, $300 more a month in student loan debt versus buying stuff, we’ll see, I could be entirely wrong, it may be priced into markets. But you know, what, we’ll get the market and this and this is the thing. So what would cause the next bear market, or the next or forgetting a bear market? Just say another 10% downturn in the market? So let’s just kind of give the answer
Adam Taggart 1:06:49
because I think I’ve talked to you enough to know, when it’s going to be what the market is not thinking about right
Lance Roberts 1:06:54
now. There’ll be an exogenous il V and unexpected exogenous event. And so that’s, that’s the thing, it’s got to be something the market has not thought about yet. It won’t be a debt wall. Right? What it could be, though, is all of a sudden, a massive rush of bankruptcies of companies made, you know, maybe the market is expecting the debt wall, but we’re gonna resolve it somehow. And all of a sudden, you have a massive surge in bankruptcies that maybe maybe that’s it or, you know, potentially, you know, you have, you know, we just had bank stress test out this week, right, the Fed says, every one of our banks pass the stress, even Credit Suisse, which failed Pass, pass their stress test. You know, and you know, the stress tests are completely bullshit. Sorry, bogus. Because every time there’s a problem, we have to we just had to bail out banks, right? We just had to bail out Credit Suisse and you know, force a merger with Credit Suisse, we just had to provide a credit line for banks, you know, through the Federal Reserve, so they could get access to loans against collateral because they’re gonna go out of business. They did, but they’re all fine. By the way, right? Now, they’re all a student’s, yeah, they’ve all passed their stress test. It’s complete crap, but it’s all to make you feel better, right. So this is the whole goal of the stress test. Everybody knows what’s going on with the banks. They’re not well capitalized, they if they were, we wouldn’t be having problems. They’re not well capitalized. It’s a bunch of hooey. But we have the stress test to make you feel better. So you’ll Well, my bank is on list and it’s well capitalized. It’s not. It’s just a function of time until something breaks in the system, and even JP Morgan is going to wind up in trouble at some point and need another bailout. I don’t know what’s gonna cause that. But that’s the event you’re looking for. It’ll be some type of credit related event in the markets that the markets not planning on. It hasn’t been pricing in all of a sudden pops up overnight. And the market goes, Oh, crap. I’ve now got to reprice everything, right. All my expectations for earnings were here. They’re now here. I’ve got to reprice the market for that. That’s what causes these big declines in the markets. And that’s the unfortunately, we will never know what that is. Because if we start talking about it, the markets pricing it right, we increase the odds of getting president. All right, it’s just well, that’s just the way the markets work markets are seeing all this, they’re gonna get worse and worse, that risk is pretty low. So I’m gonna bypass that one. This is pretty high. So we’ll have a little bit of a sell off here. And we’ll price that in. But that’s just how the markets work.
Adam Taggart 1:09:23
Yep. So it’s funny you cut, you hit a few other my bullets here. Just on this point, I just want to note, and I’m very deliberately not putting a political spin on any of this. But just in the past week, well, we got enough comments about your opining on the climate last time, right? Get over it. But, but do you really just in the past week, right, we had a coup attempt in Russia, right? We had it We had former President Trump, you know, basically, tapes come out that that seemed to be quite undermining of his legal defense right now. And then we’ve had sort of similarly on the Biden side, we’ve had additional data come out that is putting he and his son in more compromising hot water than they’ve been in so far on, you know, dealings that they’ve done in the past with with state agencies. And again, I’m really trying not to put a political spin on any of this, but I’m just saying, like, those are probably at least gray swans, right? And so like, we’re in this environment where we could wake up in the morning and find, you know, a headline that is pretty game changing. And we’re seeing some, you know, near examples of that right now. So love your thoughts on that, but also to did the market like, dodged a bullet here, like, in other words, if this coup in Russia hadn’t been wrapped up in 48 hours? Could the markets have had a very different week this week? Yeah, potentially,
Lance Roberts 1:11:02
you know, because, again, that’s something that certainly the market isn’t expecting. I love the fact that, you know, I saw your tweet, I was like, yeah, that happened right after I’ve just finished up vaping. With Lance, we’ll talk about it next week. And then later, it was over, right. Like to talk about it. But yeah, you’ll look, that’s gonna be the thing that again, undermines the markets. It’s, you know, all this stuff, whether you’re, whether it’s climate change, or whether it’s the president, you know, they’re all that is in the headlines already. I mean, we’ve been talking about Biden and Hunter and all that crap for a year and a half, we’ve been talking about, like, they’ve been trying to find something to, you know, to get Trump on, so he won’t run for president.
Adam Taggart 1:11:43
But my point is one of those might land right we might players off the table, Putin, Trump, Biden, whoever they could
Lance Roberts 1:11:49
be in. But again, that’s been in the headlines for so long, it goes like yeah, no, not surprised. See, it’s got to be something where you wake up tomorrow morning, and all of a sudden, there is a game changing event that changes the economic potential in the country, right?
Adam Taggart 1:12:12
Because it’s going to be the credit markets that drive this change at the end, right.
Lance Roberts 1:12:15
So if Biden was in, let’s just say, you wake up tomorrow, Biden’s impeached, right? That’s not gonna affect the credit market surveys will look at and go well, not surprised. Or Trump, you know, is convicted and sentenced to 10 years in prison. Okay, the Sanders runs for president now. So okay, got it. See those don’t change economic dynamics, you’re gonna make one group of people really happy one way or the other, whichever, you know, whichever outcome it is, but that’s not going to change the consumption or spending behaviors of individuals, and it’s not going to change the credit market. In other words, where banks, the thing you’re looking for is the event that occurs where banks go, I’m not lending any money to anybody until that problem is solved. And when you stop the lifeblood of the system, which is the credit market, that’s when everybody has to reprice, because once you stop credit, all of a sudden, as a business, I can’t borrow money to create more revenue to create myself to market, whatever I’m on and do. So earnings are going to come down because of that. And that means that the reprice, whatever the price of the market is to this new earnings level. So that’s why a lot of these political things, and I tell you this all the time, we are on the shows like everybody’s worried about, oh, if the dollar is going to do this, or, you know, yeah, we made the dollar rise in the next 100 years, maybe, possibly. But that is such a long term event that’s gonna have nothing to do with the markets right now. What you’re looking for is some of it you wake up to in the morning, that changes the game for the credit and the economic environment that we live in today. And that’s gonna be something that you and I are not talking about. I have no idea what it’s going to be.
Adam Taggart 1:13:48
Okay. I hope we don’t have to find out and anytime soon, but you never know.
Lance Roberts 1:13:54
It will happen. No, it look, it’s going to happen. And we’re and you and I’ll be sitting here on a Friday going? Well, you know, I hate to say that I didn’t see a comment, but nobody could have seen that comment. Right. It was just it because it’ll be something. And I can’t even fathom what it would be. You know, we nobody fathom that 2008 that the Federal Reserve and banks would force Lehman Brothers into bankruptcy that, you know, the market was just in the slow kind of bear market like we were in last year, just kind of this choppy, little decline, going down. And then one morning was last Saturday morning, we find out Lehman Brothers is now bankrupt, and banks go, well, crap, if they just went bankrupt, I’m not lending money to anybody, because I don’t know who’s going bankrupt next, right? Because he didn’t know anything. The risk was, and that’s where the mark is just completely fell apart at that point. And you had that major decline.
Adam Taggart 1:14:48
And I guess, I guess on this one, this is where you really have to hand to how they handled Credit Suisse. Because that was the two bullet by the way. Yeah, I was gonna say because that That was big enough that if it had just died overnight, right, you would have had a lot of banks saying, I don’t know what my counterparty risk is here, right? Yeah,
Lance Roberts 1:15:08
but Credit Suisse had every potential to be the next Lehman. And that’s why they were such not. That’s why all the central banks were in such a hurry to marry that thing off to UBS and get it out of the way. Because that was that was a real risk that we dodged that bullet on.
Adam Taggart 1:15:24
Okay. All right. Well, I could I could continue peeling on this, but we gotta move on. But this is a good segue into my next question, which is, so one, one way to measure risk building in the credit system, is to look at yield spreads, right? In particularly high yield spreads versus treasuries. And man, those things are showing no worry at all right?
Lance Roberts 1:15:51
Exactly. Yeah. The you know, you’re not getting paid to take risk in bonds. What I mean by that is, is that you’re not really getting paid to a tremendous degree to take a bunch of risk and, you know, low quality junk bonds, where you’re taking off potential bankruptcy risk, you’re really not getting paid for that. You get paid in very good what we call money, good bonds you can get right now you can make 567 percent and good bonds, that you don’t have to worry about the bankruptcy risk on. So you’re but again, there’s, you know, normally if we were getting into an environment where there was real risk of the spreads between bonds and a way to bond from going out, because nobody would be wanting to take risks in the junk side, they’ll be piling into the to the safety side. And that’s just not happening. People aren’t scared of the markets right now. So
Adam Taggart 1:16:45
this is really great point because I was going to ask you about VIX, right? And I had spent Henrik on the program recently, and you know, he follows vix a lot. And and I asked him directly is VIX. Still a useful indicator anymore? And he said, I don’t know. He said, That’s a really good question. It just does not seem to be behaving anymore. The way that it used to it does not seem to be a good tracker of of volatility anymore. And I’m just curious with with with high yield rates, we have a couple of questions for you. But I guess the first one is is is it a good transmissive transmission mechanism right now for risk in the system? Or are things just so complacent that it’s like a false reading at this point?
Lance Roberts 1:17:37
Well, so I’m actually so this weekend’s newsletter, which will be at real investment. vice.com is actually talking about the VIX and this very high level of complacency that we have in the market right now. And so, so first of all, we just take a look at the VIX. You know, we’re all looking at it and me included, right go well, you know, it’s just showing no signs of fear at all. But also, there’s been no volatility in the market. If you look at options markets, everybody’s piling into call options puts are extremely cheap, nobody’s wanting to buy put protection in the market. Markets are going up kind of just grinding higher all year this year. We’ve had, we’ve now been in one of the longer stretches of the markets without a 3% correction. So there’s been no volatility. So very low volatility reading right now is shouldn’t be expected to touch on, there’s certainly a different dynamic to this mark to the volatility market right now in the options market figure because of the zero DT options, zero date expiration options, and we certainly have to, and those aren’t, and those options don’t get measured by the VIX. So there’s a lot of stuff that’s happening, a much larger share of the option market that’s trading in the zero day to expiration options that aren’t captured by the vix index. So maybe the VIX is not as useful as it used to be. But there’s also reasons why it’s saying that we have low volatility right now it’s because we have low volatility volatility. Yeah. So you know, I don’t so I’m not arguing with was Finn at all because I’m in the same camp with him. I don’t know if it’s broken or not. I’m watching it very carefully. It does right now jive with the fact that we have very low volatility and very high investor bullishness. That makes complete sense.
Adam Taggart 1:19:29
I guess but I mean, it has been kind of declining all through this year. Right? Even when folks were more nervous, right. It just it just doesn’t seem to be so anyway. So you will well, I’ll read your your article when it comes out tomorrow. But the back of my question about the high yield space. Is there potential reason to believe like vix that it might be compromised because again, in the VIX case, like you said, there’s zero DTE options that might be stealing some of the signaling power, or is it literally just a It is everything’s fine.
Lance Roberts 1:20:01
No, it’s I don’t think it’s a function of everything is fine in terms of that say. In other words, what I don’t think is happening in the high yield market is everybody’s going to buying high yield, because everything is fine. This is my opinion only. So just take it for that. But after 12 years of Pavlov’s Bell, which is, you know, every time that something happened in the market, Ben Bernanke, or Jay Powell comes out, or Yellen come out and ring the bell and throw money into the market. Investors have just been taught now, classical conditioning, behavioral conditioning, that why not take on as much risk as I can get? Because if something goes wrong, I’m gonna get bailed out. So why would I want a 4% coupon on a ultra safe, risk free treasury, when I get 910 or 11%? On a high yield junk bond, if something goes wrong, just like we saw on March 2020, the Fed is going to bail out high yield bonds right.
Adam Taggart 1:21:02
Now, is that is that is that the spread right now?
Lance Roberts 1:21:05
No, no, no, there’s bonds out there that you can buy, you get down, you get down into the single B, double B’s, there’s some pretty high yields, if you’re scraping, but it’s also really, yeah, there’s also real high potential, they’re gonna go bankrupt. But the point is, is that investors have been taught this. And we are now in look, this is why you have so many retail investors chasing options, because I can leverage up my portfolio a little bit of money, I can make a whole bunch of money in the Options bar works great till it doesn’t, and you’ll lose a bunch of money. But you know, while it’s all working, it all works great. But we’ve just been teaching investors now for the last five years, in particular, just take on as much risk as you can get, because regardless of what happens, the Feds gonna bail you out. If something happens in the market, the Feds gonna jump in cut rates to zero and do QE, everybody knows this. So why not take on as much risk as you can?
Adam Taggart 1:21:56
All right, well, let me ask you this, we’re gonna get your trades in just a second. But when you look at the current situation with the yield curves right now, right when the spreads are so tight, run a relative basis. And you look at all the stuff that we talked about. And yes, we might still be in a new bull market. And that could continue through the rest of the year, or a lot of this macro stuff. We’ve talked about could could could happen. Do you feel any compelling compulsion to try to trade these compressed yields right now? On the on the bond side or the equity side? I’m thinking I’m thinking specifically on the bond side on the high yield? No, no,
Lance Roberts 1:22:34
we’ve been we’ve been we’re not chasing too much like super high yield right now. But no, we’ve been out in the markets buying, you know, corporate bonds, we bought a 6% coupon issued the other day from from Federal Home Loan Bank. So I mean, there’s some good yields out there.
Adam Taggart 1:22:51
Let me ask my question differently. There are ways you can play the yield curve blowing out or at least increasing from where it is. Okay. Yeah. Got it. Yeah. Do you feel any compulsion to say, look, I think yields are so compressed right now that they’ve just got to start expanding even even in a good economy?
Lance Roberts 1:23:07
Yeah. Not yet. You know, we’re watching that very carefully. In fact, just this morning, we were doing some work on mortgage backed securities and mortgage REITs, those type of things preferred stocks, we’ve actually been from been picking on some preferred stocks lately, just simply because if we start to get an inversion of the yield curve, and things start to go back to normal, those areas will start to benefit in particular. So yeah, there’s, there’s it’s a little early right now to be trying to bank on that that outcome, but it’s certainly getting to the position to where there are some opportunities on the debt side of the market to where potentially, we can make some pretty decent money over a fairly short timeframe.
Adam Taggart 1:23:46
Okay, let’s earmark to talk about that more deeply on this program. When you guys start. I’m here.
Lance Roberts 1:23:54
So next week, actually, I’m traveling, so Michael Leibowitz is going to fill in for me with you. So I think that be a good conversation piece moving. Okay,
Adam Taggart 1:24:03
I’ll mark it since he is our reg resident bond, do bond expert. Yep. And he’s going to be speaking at our conference in October too. So
Lance Roberts 1:24:12
yeah, you never asked me to do that. But that’s okay. Ask him. Fine.
Adam Taggart 1:24:15
Yeah. Well, you know, I wanted an expert. So of course, you know. All right. Well, look, I had a good rant here or an interesting one. No time for it, though. No time as well to go in depth through your 15 rules. So I’ll remind folks at the end of this video where they can go to download the list, and we’ll put those both to next week. Real quick. Before we get to your trades. I just want to put two data points out there. One is on the consumer. The latest consumer news I got that I thought was interesting was one. Shares of curios maker General Mills plunged the most in the year after new annual guidance indicated price hikes on ready to eat cereals and meat kits would no longer offset slowing sales as consumers pull back on spending. So we’re really beginning to see that the beginning of this demand destruction, the belt tightening at the the majority and the lower majority end of the consumer spending spectrum. And I just want to compare that with on the high end of the consumer spending spectrum, Rolex watches have hit their lowest price in the past two years. Right. So, you know, two interesting data points, not necessarily, you know, significant of a massive trend. But this continued deterioration of consumer spending that you and I have been expecting. These are just road signs on the way there.
Lance Roberts 1:25:44
Yeah. And look, I think if if, you know, if student loan repayment start, you know, companies like Nike to so very expensive shoes, I think they could see a real, you know, that, you know, those stocks have had some impact. But I think there’s a lot more to go on some of these consumer, kind of higher end consumer, cyclical stocks, especially some of the high end luxury retailers, etc, where you could potentially see a fairly decent contraction spending, as people opt to buy, you know, from, you know, discounted retailers, etc. So, I still think that shift is coming, and particularly the retail discretionary space, you know, but we’ll see what we’ll
Adam Taggart 1:26:23
see. And this just to give a little peek into where I was gonna go with a rant, so I have to go back east in two weeks, as for my mother’s ceremony, or ceremony of life, and, you know, I’m from a small little town in Connecticut, where I mostly grew up, and it’s where she lived. And, you know, we went on Airbnb and just trying to find a place to stay while we’re there, the prices are insane. And this is not a place in the country, where people spend generally hundreds of dollars a night, you know, for lodging, and I just looked at the prices recently, fortunately, my wife found something a little bit more affordable. But I mean, it’s like, we couldn’t do any better than three or 400 bucks a night. And I’m telling you guys in the tri town area, you know, in the Connecticut River Valley, where I grew up, that’s just bonkers. Just absolute bonkers. And so I’m contrasting that with what we were just talking about, right? Because there’s still, you know, mentioning how I was traveling a week or two ago, and like, the airports are still full, you know, restaurants are still full. And we’re seeing all this data that is showing us in aggregate, that people are really getting pinched, understandably, by this rising cost of living and, you know, 26 months straight of lower real wages and all that stuff. But yet, the visible consumption just still seems to be powering through. And there’s a lot of interesting questions that that raises, which we’ll hold off until we talk about this in more detail. When you come back from your trips. I guess we’re talking two weeks from now. But, but it is interesting that, and I’m hearing this from lots of other people, too, right? It’s like I get the fact that the data is worsening, but geez, I’m still not seeing it in the real world. People are spending like drunken sailors.
Lance Roberts 1:28:10
In the beginning, they have cash flow that they didn’t have before. So that may change.
Adam Taggart 1:28:15
Yeah. All right. last data point is just folks are read.
Lance Roberts 1:28:19
And by the way, speaking of, you know, kind of that topic, with your mom, I did talk to Richard and Danny and they’d be happy to go ahead and do kind of an end of life planning seminar with you. So you just have to basically start kind of fleshing out if you want to do that. And, okay,
Adam Taggart 1:28:37
I think the answer that is yes, given folks is response in the comments from last time around. So I’ll follow up with you before you go to get a date from those guys. And folks, we’ll put a live webinar on the calendar that anyone who’s interested in that, and again, this is for anybody who is either has parents that are aging, and you’re going to have to figure out, you know, what kind of medical care you’re gonna go through when they’re their last chapter of life there. And then, of course, all the end of life issues that come up. And if you’re older, and you just don’t feel like you’ve got a great game plan, or you want to include your family and creating one. That’s why we’re putting all this together. Alright, Les Paul point, and we’ll get to your trades. On the housing market side of things. We just had our second year over year price drop, in the Case Shiller Index, these were the first and second price drops, I think, since 2012. So for a long time, and the magnitude is increasing. So the first price drop was negative 1.1%. Year over year. Now it’s 1.7% year over year, who knows where it goes from here. But if you look at you know, the historical cycles, if we’re entering a down cycle, which it certainly seems like we may be here, we should expect these numbers to get more and more negative over the next couple of months.
Lance Roberts 1:29:51
You know, we were actually talking about that this morning, which there is an interesting issue that may come up when the Fed actually cuts rates right so So far, the housing market really hasn’t corrected as much as everybody thought it was going to. And in some areas it has, right but kind of overall, it’s holding in much better than we just saw new housing sales have a fairly sharp increase. Recently, we’ve seen, you know, home demand picking up National Association of Homebuilders getting more optimistic. And that’s because of a function of this problem where new home sales are coming in, and their supply coming from New Home Builders, but the existing home supply isn’t there. Because as older people were going, I can’t sell my house and capture that gain, I’ve got in it because I gotta go finance a house at six or 7% and my prime, it’s too much. But here’s the interesting dichotomy, the housing crash could actually come when you get the rate cuts, because all of a sudden, you cut rates, demand goes up, and all those baby boomers go, here’s my house, I have opportunity to get out of it and get to a cheaper payment. And so we could see a massive supply of which would be interesting, because normally be just the opposite. But again, we’ve kind of screwed stuff so much up in our economy, because of holding rates at zero for way too long, that we could theoretically see a flood of inventory coming into the market, when rates are cut, and boomers who are you know, getting need to downsize etc, and have been able to they rush to market provide that supply. So it’s gonna be interesting to see what happened. Yeah,
Adam Taggart 1:31:17
that is super interesting. And it isn’t one of the many ways that this time is different. Different, though, just doesn’t necessarily mean better, necessarily. You there’s a question. I will delve into this more deeply when we have more time. But I put it out there the other day, because it really it’s been weighing on my mind a lot of late, which is, like, let’s say you’re a millennial, right? You’re starting your family, you got a young family, and you want to buy a house, and you’re looking at the price of housing right now, which is the most unaffordable it’s ever been for new homebuyers. Right? We’ve got high prices and high mortgage rates right now. And let’s say you were willing to say alright, but you know what, I’m gonna live in this house for decades, I want my family to have a nice place, I’m going to stretch and do everything I can to get in this house. But if you’re looking ahead, and you’re thinking, okay, look, in 10 years time, just like 10,000 Baby Boomers are hitting retirement age every day, still, in 10 years time, that number is going to be 10,000. Baby Boomers are either being forced to downsize by, you know, moving into a nursing home or just having to get a smaller home or dying. Right. And that is going to be lasting for decades. Right. And that’s going to be happening in the in the not too distant future. If I’ve got a 30 year mortgage, if that’s my, my timeline on my house, why would I pay top dollar today for a 30 year mortgage? If I know there’s going to be this big selling wave starting halfway through that 30 year period? Right? I don’t know a good answer to that question. I don’t know. I don’t know the compelling answer that says, Oh, well, here’s why you should do it. Right.
Lance Roberts 1:32:54
So but no, I think that’s gonna be the very interesting thing about this is that, you know, we held interest rates at zero for so long. And it made mortgages, so cheap, and housing prices so expensive, because, again, you know, when we buy houses, we should buy something we can’t afford, right. But we we were able to buy much bigger houses and more expensive houses, because rates are so cheap. We should have done it financially. But it was because it was available and real estate agents are great about, you know, you know, I say my budget is 250. Yeah, but you can buy another house because rates are so cheap. But you know, we’ve created all this distortion because of all this liquidity because of zero interest rates for so very long, that you know, the future out and that’s what I’m saying, Look, I’m totally speculating on what could happen when rates get cut back to zero, maybe the market just takes off run and again, like, you know, scalded ate, but you know, at some point there are a lot of Baby Boomers and Gen Xers that do want to downsize their kids are leaving, my kids are leaving the house, you know, they’re going to college. And my wife, we’re in the process of downsizing now. But, you know, that’s, I think this will become more prevalent in the years to come, especially
Adam Taggart 1:34:04
for folks that want to now they’re going to have to at some point in the not too distant future.
Lance Roberts 1:34:09
Yeah. Right. And that sounds about saying there’s gonna be the downsize partners will be apart from downsize to hospice, which is all part of this, this process that could provide a large supply of inventory in the market at a time that you don’t want it. So we’ll see.
Adam Taggart 1:34:24
Yeah, I just don’t I just if you’re if you’re doing the math as a younger person to buy the house, it really doesn’t work for you. If you believe that that is indeed going to happen on that timeframe. All right. But we’ll have to dig into that at a different future one of these videos. So very quickly. What trades did you make this week if any?
Lance Roberts 1:34:44
No, the reason we didn’t make any this week is because it was ended the quarter rebalancing. We really didn’t know what the market was going to do. There was potential for about 20 to $30 billion worth of selling this week. So you know, we could have had a this week could have been a three to 5% correction week. or it turned out to be just a, you know, kind of a consolidation week and a lot of volatility everywhere. So, you know, we’ve been talking a lot about sector rotation lately, we’ve been kind of banking up on some of those sector rotation, trades, energy, etc, those that rotation occurred. And we’re seeing money flow into those areas, we saw some weaker performance out of technology. So, again, that’s all kind of playing out the game plan now, next week, once we get past the Fourth of July, there’s a couple of positions will blast some trades next week, because there’s some positions that we want to add to to our portfolio.
Adam Taggart 1:35:30
Okay, and should Michael know what those are when I have them on next Friday? Yeah, of course, because by the time you have in mind will have done the trades. Okay. Okay. Great. All right. Well, look, have a great time off next week, Lance, just wrapping up here want to remind everybody, all the reasons that Lance and I talked about what could should might, maybe not, won’t potentially could happen going forward from here. It is a very tricky time for the individual investor to try to navigate all this while they’re also just trying to deal with the demands of their own life, which is why we very frequently on this program, reiterate our main bit of advice to folks, which is, we highly recommend that you work with a good experienced professional financial advisor who can build a customized portfolio plan for you taking into account all of the macro issues that Lance and I talk about here. And you’ll find if you talk to a number of financial advisors out there, especially your garden party ones, most don’t most don’t take this stuff into consideration. They’re really pretty much just momentum chasers, or they’re just guys that are out there to collect your your money, stick it somewhere and then not look at it. So anyways, if you’ve got a good one who is doing the right things, they’re great, you should stick with them, they are very rare. But if you don’t have one, or if you’d like a second dependent from when it does, maybe even Lance and his team, they’re at real investment advice. Then consider scheduling a free consultation with one of the financial advisors that Wealthion endorses. To do that, just go fill out the short firstname.lastname@example.org only takes a couple of seconds, then these consultations that you get coming out of that they’re totally free. They sit down, they ask you, you know all about your particular situation. They tell you what they think you should do. There’s no charge to it. There’s no commitment to work with them. They just do it as a public service to try to help as many people as possible position prudently. Now for some of the things that Lance and I have said maybe coming down the pike here. And if you’ve enjoyed today’s discussion, if you really liked these weekly market recaps, if you’re gonna go into a week of mourning and wearing black because Lance isn’t going to be here next week. And we’re going to have to make do with Mike Liebowitz, who honestly folks is an upgrade, but I’m not going to tell Lance that. Do us a favor support these series by hitting the like button and clicking on the red subscribe button below. as well. There’s that little bell icon right next to it, Lance as usual, you get the party word.
Lance Roberts 1:37:46
Yeah, well, just because you don’t ever invite me to speak at your conference. So people can go to our website as well. And ask questions. Always happy to help you out as well. So just go to real investment. advice.com
Adam Taggart 1:37:57
Awesome. All right. Let’s buddy thanks so much for another great week. Everyone else. Thanks so much for watching and have a wonderful July 4 If you’re one of the folks that lives in the US