Could deflation soon become the bigger concern for investors if the Fed indeed reaches — and then possibly drops below — it’s 2% inflation target?
It’s possible. Especially if the economy falls into recession, which still seems the odds-on likely outcome despite the market’s current confidence we’ll somehow avoid one.
John Llodra, senior partner at New Harbor Financial, explains how to prudently position your portfolio if indeed deflation wins out from here.
John Llodra 0:00
So classically in an outright deflationary environment, one of the best places to be is in long term, government bonds, treasury bonds, right? Even zero coupon bonds as as being the longest duration kind of bond you can buy.
Adam Taggart 0:20
Welcome to Wealthion and Wealthion founder Adam Taggart here at the end of the week with one of the lead partners from new harbor financial, John Llodra. New harbor financial is one of the endorsed financial advisory firms by Wealthion. Regular viewers are very familiar with John, he joins me every week along with his partner, Mike Preston, who’s actually traveling today. So John is gonna go So John, thanks so much for joining.
John Llodra 0:42
Hey, thank you for having me. Again, Adam. Always great to be with you every week and always no shortage of things to cover and talk about
Adam Taggart 0:49
No, in this week, we’re going to talk about the recently released inflation data. So CPI, headline inflation came down pretty materially came down or came in at 3.0%. It’s actually even a little bit lower than what expectations were. Now, I don’t think this was a huge shock to people, I think we did expect inflation was going to come down pretty dramatically on a year over year basis. So you know, in one sense, you can look at this and say, Hey, good, Anya Jerome Powell, you know, you’re making progress here. fighting inflation. 3% is now getting within spitting distance of the Feds target of 2%. But the Feds work really may not be done yet. And maybe we can a just talk about your reaction to that the data, but then we can also talk about the base effects and how inflation may CPI at least may actually tick up over the coming months here.
John Llodra 1:51
Yeah, um, so the this week’s report did come out, it was very highly anticipated, as every every CPI poll report has been because it really gets to the question of the the Feds rate hiking campaign that started a little over a year ago, and how much further they will likely hike rates to try to keep inflation in tracked something that they originally felt was going to be transitory and then became very interest. So, there, there was plenty of guesses out there and estimates of where things would come in. But frankly, the market or the leanings were it was going to come in soft, softer than expected. And that’s exactly what happened. Not dramatically. So but but soft enough that it was below expectations. So for example, the month over month, Core CPI came in at point 2% month over month increase, annualized closer to 3%. Right, which is a dramatic reduction from where we were a year ago. And when this time last year, headline inflation was at 9.1%. Year over year. So there’s been a dramatic drop in in that. But that very thing is is why we think the the readings going forward are not likely to decelerate at the same pace not in fact, I like to share a chart, a Bank of America chart was put out that basically looks at you know scenarios of of future inflation paths over the next year or so. And it really gets to this concept of base effects. So let me let me share my screen here just to kind of get in living color. Can you see that? That slide? Okay, yep. Yeah, so basically, you see here a year ago, we were at naught point 1%. Last month, we were for, as of this week, we know what the June reading was. And it was point three 3% with a point 2% month over month. But basically the gist of this chart is that in last month over month, CPI stays at less than point 2%, which is what this month reading was, we’re essentially going to see a an increase in inflation readings, just simply by virtue of the fact that the base effects the base comparison numbers that we’re starting to compare year over year are far lower than they were when 9.1% was the base base number. So depending on on on the path of, you know, month over month growth here, you can see we can have anywhere from two and a half percent to 6%. If that picks back up. So, by no means I don’t I don’t think it’d be way premature. And the Feds been pretty, pretty communicative about this, that there’s still a lot of work likely to be done, especially if you get into some of the more the, you know, entrenched, sticky parts of CPI, that that really is what the Feds more concerned about. Those are still a pretty, you know, high level since in some some cases those levels have been seen since the 80s. still work to be done. And you know, the next chart basically I think we’ll get to that this is this is what the inflation profile looked like in the 70s. This is the boogeyman that the Fed is trying to avoid, you know, we had three separate and increasingly concerning bouts with inflation got up to about 14%. I think in the early 80s. That’s the boogeyman that the Fed is trying to, to not revisit, because that was devastating to consumers to the economy, and ultimately, the stock market, the 1982 Gen eight racial low and the stock market was brought stocks to less than a quarter of their valuations today. So that’s, that’s obviously something that the Fed wants to try to avoid repeating. And therefore, you know, we think, you know, basically, the, the, the fight is still very much alive in terms of by no means is it likely the Fed will start reducing rates, and it’s still quite on the table, whether they’ll raise rates in the upcoming meetings, July being the most, most near one. And that’s kind of the big takeaway, you know, happy to talk about some of the market reaction, but, you know, pause there and just kind of carry the conversation from there.
Adam Taggart 6:02
Sure, we’ll get to the market reaction in a second. But, you know, when you showed that chart of the increasing peaks in CPI, that is the Fed chair who presided over the majority of those periods was a guy named Arthur burns. And when you hear that Jerome Powell doesn’t want to go down in history as another Arthur burns, that’s exactly what he’s trying to avoid. Right, he’s trying to avoid this resurgence of inflation, which is why he continues to talk tough has set the market expectations, he’s going to continue his resume hiking again here. So you mentioned that, you know, so very important that we all keep the base effects in mind, right? I think the vast majority of people are just watching the trajectory and saying, Great, the inflation fights over and inflation is just gonna get lower from here. The math of the base effect says, Hey, not so fast. So, you know, curious, proactive, data driven folks, like the folks who watch this channel, have a little bit of advantage, knowing what’s likely to be coming here, which is going to be a surprise for the majority of CPI most likely is going to tick back up from here. And you know, key components of it are remaining sticky. Like you said, John, services really haven’t come down that much. Services is still pretty sticky. What is interesting to note is that the rent component of CPI which which is the biggest component in there, is looking like it peaked a few months back, it’s it’s just beginning to come off. Now. We’ve talked for a long time about how that’s a lagging indicator. But if that starts catching up to what we’re seeing more in the real time data, with rents, and what’s happening in the housing market, and a little bit, John will will talk about the video that we just released on this channel the other day with housing analyst Nick Gerli. That actually could, you know, materially start beginning to bring CPI down. So there’s a couple of, there’s going to be some crosscurrents going on here, which is really going to be interesting to see. There’s one chart that I want to show real quickly, John, so let me try to see if I can share my screen here. Are you able to see this chart? Yeah, sure. Can. Yeah. Okay. So this is a chart of m two, which is the red line here, which is money supply, it’s this is the change in money supply. And as you can see, it skyrocketed dramatically during the the pandemic, as we had all the extraordinary stimulus programs released, but it’s now declined quite aggressively, the change in m two is now negative. And if we could extend this chart back, you know, 50 plus years, this may be the only negative reading we would see. In m two, it’s not a it’s not a metric that goes negative or has gone negative, much in its existence. So with the shows, though, is that all of the inflation indicators, CPI, PPE, PCE, they’re pretty tightly correlated with that changes in those indices are tightly correlated with change in M changes in m two, and they m two leads the others by about 16 months. Right? So if you look at this chart, and you say, Okay, well, if that correlation is going to continue going forward, then this actually makes a pretty, you know, direct case for, you know, inflation being tamed and about a year and a half, and actually, perhaps, being in deflation, no longer being in disinflation, but outright deflation in about a year and a half. So, we’ll see what’s going to happen from here, but you know, we have a number of people on this channel, you know, people like Lacey hunt people like Stephanie pump boy, who have been warning that yes, it’s important that the Fed get inflation under control, but that really the bigger issue here is going to be inflation, that’s what was kind of in the driver’s seat before the pandemic hit, it’s, it’s going to shift back to being in the driver’s seat once inflation gets below a certain level. So like you said, John, we may have some crosscurrents over the next couple of months or quarter or two as base effects and, you know, other sort of sticky elements fight with declining rents and some of the things that are going on. But it looks like the overarching trajectory here, particularly as shown by that chart, you know, very well may be shifting towards deflation, in a way that many folks aren’t expecting right now. Yeah,
John Llodra 10:33
that absolutely is a possible scenario. We’ve talked a lot about the lag effects on many of these these macroeconomic factors in the economy, the interest rates and things like that. And, you know, there are there have been progression of indicators that signal a, you know, a more likely period of recession. You know, employment has been one of the brightest spots, you know, against that case, but even there, we’re starting to see some tiring. I will note, I think, in today’s report, there was a tick up in some of the the wages I didn’t get in deep enough to explore, you know, what was segment that was in but that’s, you know, the Fed has talked about needing to cool the labor market. And that’s certainly one thing that’s that’s not cooled off. I will note that there’s been a pretty dramatic slowdown in the consumer behavior. Redfin, for example, just reported, I think, the first decline in retail sales, going back to 2008, I think, if you if you exclude the period of COVID, and 2020. So that’s, that’s pretty dramatic, it’s not often that you see a decline like that it’s showing a consumer that is pulling in their horns. You look at consumer debt, and things like revolving debt for student loans and in cars that has definitely been trailing off here as interest rates and, you know, pressures on the consumer have taken their whole that’s coincident also with a, with a pretty drip, dramatic spin down and surplus savings coming out of the COVID stimulus and whatnot. So see a lot of factors do lean towards a possible economic slowdown joining in this and maybe exacerbating the the the the rate of deceleration, but probably get again to the chart, you just you just share it. We’re probably talking about several months out before that, that that battle can be claimed victory, because of the lag effects.
Adam Taggart 12:40
Yeah, no, I agree. And I think it’s going to be really interesting to be monitoring this. And again, for the viewers here to keep in mind, as think of this theme is crosscurrents here, right, you’re gonna have some of these inflationary ones still coming in while the deflationary ones are or maybe beginning to surge. And then over time, you know, one of those two will will will went out, but it’s probably going to be, you know, both an interesting time, but maybe a fairly deceptive time where a lot of people might take the wrong conclusion from the signals. So we want to make sure that you’re keeping your set of eyes on the prize here and where the puck is going. You mentioned a couple of things, I just want to dig into real briefly, one, because CPI has now come down as low as it is, that has finally broken an important streak around wages. Wages actually had their first month of year over year, positive growth in 27 months. So we’ve been talking, you know, for a long time on this program over two years, that consumers have been falling further and further behind. Because even though nominally wages have been going up, post pandemic, it hasn’t been keeping up with inflation. And so real wages have actually been negative. This is the first month that they’re actually slightly getting ahead on wages. We’ll see if that trend continues. We hope it does, because the consumer does need some real help here. As you mentioned there, John, two articles that came out this week. One was more sort of anecdotal, but it was showing me was data driven. It was showing that attendance at major theme parks like Disney are down pretty substantially, you know, some photos of Disney here in the tightest summer where it should be at its most packed, and kind of looks like a ghost town. Right. Yeah, absolutely.
John Llodra 14:27
And, you know, wages that’s great for workers, of course, right? Well, hopefully that that trend continues or at least doesn’t degrade again. But what’s good for workers is almost categorically bad for corporate America and so far as profit margins, and that’s one of the big anomalies that’s been present in the stock market for quite quite a number of years now actually. Just record elevated profit margins, no small part funded by a busy transfer of, of fiscal stimulus on the government side into the pocket of corporations and consumers who then put it into the pockets of corporations. So that, you know, we hear we are very rich relative valuations in the stock market. And at a time where corporate profit margins have have rarely, if ever been is sustained ly wide as they are, and and almost certainly one of the most reliably mean reverting series in economics, those profit margins will will narrow. And that, obviously can only add to the headwinds of further rises of a very elegant stock market brought
Adam Taggart 15:34
in Just on that point to help folks understand, so even though inflation rate is coming down, you know, it prices are still increasing just at a slower rate. Right. So the input costs that corporations are having to deal with, yes, the increase in those input costs is slowing, but they’re still rising. Right. So you combine that with the the largely shutting off of the fiscal stimulus spigot that was going directly to households, right, that pig in the Python that we talked about, that pig, the remaining pig in the Python is getting less and less and less, yes, there is some fiscal stimulus going on, but it’s really concentrated, right, it’s confidence concentrated in infrastructure spending right now in construction. So, you know, corporations are seeing, you know, still rises in their inputs. And now, if the rising wage costs are biting in, you know, that does just continue to decrease corporate profits, as you were talking about and Yeah, well, you know, probably not find too many people who are going to shed a tear for corporations that are going to have to start having to live in a world of not record profits. But what’s interesting is we could be cheering, this this rise in real wages, but potentially it could pre stage increased layoffs, as corporations are increasingly forced to tighten their belt. I don’t know, we’ll see what happens from here. But that’s just something to keep an eye on. One of the things I want to mention, too, in the data was another article that talked about how consumers are actually spending less year over year on food and consumer staples. And what’s important about this is it’s less on a unit volume basis, right? When you look at it $1 volume basis, it’s still kind of deceptive, because prices have been going up so much over the past couple years. But if you just look at actual units, you know, the number of things that consumers are actually buying, it’s going down, and it’s another sign that the consumer household is getting increasingly pinched. So again, you know, headlines are still focused on inflation. But, you know, we’re seeing signs here that is the consumer struggles, you know, this is a consumer driven economy. 70% of GDP is consumer spending. You know, we go back to that empty chart, maybe we’re beginning to see sort of early signs of where things are going and in the reason why I want to just sort of stick on this deflationary theme for a moment, John, and I do want to talk in a minute about how the markets responding to this, these lower inflation readings. I want to just ask you the general question like if deflation with it looks eventually like deflation is indeed going to win out. How does one invest for a future of deflation? Yeah, well, deflation
John Llodra 18:13
or you know, obviously, deflation is one thing but even just deceleration of inflation or disinflation, right. Right. So those are two different things. So classically, and an outright deflationary environment, one of the best places to be is in long term, government bonds, treasury bonds, right? Even zero coupon bonds as as being the longest duration kind of bond you can buy. And the reason for that is, is you know, economic activity collapses, prices collapse, and yields ultimately collapse. And that that’s, that’s classically one of the best best place to be in in a classic deflationary environment. I think we’re, we’re way too early to call that as the scenario du jour here. But in a decelerating inflation, you know, where inflation is still there, but decelerating or moderating some of the areas that will likely do well, or frankly, some of the areas that have been challenged in recent recent months, things like commodities, precious metals, and precious metal mining stocks, emerging markets. You know, not only are they far better valued in demographically situated than developed markets like the US, but, you know, the Dow denominated local currencies, not the US dollar, one of the big early reactions to the CPI numbers this week was was a real collapse in the dollar. The dollar broke down through through some really heavy support levels and is trading you know, little over 100 100 100 on the DX y index. That’s a pretty big move down in a single day. You know, this is from highs back in. I guess it was October of last year, September. I October last year of almost 115. So that that the dollar has pulled back pretty dramatically over the last several months. But this initial reaction to the CPI print is notable and that’s caused things like precious metals to Scrooge shoot higher, I think the you know, move in gold mining stocks was was, you know, at least time of the initial reaction was was four times as high on the upside is as for example, the s&p 500. So stocks across the board generally ret rallied, but some of these emerging market stocks moved, you know, quite a bit more noticeably to the upside, because of, you know, some of these D D decelerations. In potential inflation and, you know, not a pivot by the Fed, but just a slowdown or or eventual light at the end of the tunnel of of likely further further near term increases. Anyways, that’s That’s enough to I think, and we’re seeing it early in the reaction to put a put a bid under some of these areas that have struggled as long as inflation is that persistently problematic, and it’s caused the Fed to time after time come out with more hawkish kind of commentary and actions.
Adam Taggart 21:04
Okay. And is it sort of safe to assume here too, that the market, which has been so pivot oriented for, you know, past year? Is it is it? Is it too simplistic just to think that the investment mindset right now is is lower inflation, means the Fed going to stop hiking soon, and it just means the date of a Fed policy reversal at some point in time, is now sooner than we were thinking it was a month ago?
John Llodra 21:34
Yeah, it’s really too early, I think, to say, um, you know, I think it’s obviously, put a little bit more of a dovish tilt on the table here. But to those charts I shared early on, it’d be way premature. If history is any guide to declare, you know, the inflation boogeyman as being slain, again, just due to data constructs and the base effects, but also some of these persistently, persistently sticky things. And, you know, one month doesn’t create a trend and certainly not in these kind of very complex economic machinations that have very complex factors that drive them.
Adam Taggart 22:10
Yeah, agree. Great reminder, I asked that question. Because, again, I want to re emphasize this period of crosscurrents that we’re likely going to kind of hit into here, where the market has just been seeming to want to declare victory at every point it can that okay, now is when the Feds gonna pivot. Right? And I’m sure part of today’s the Fed is that markets just taking that data and saying, okay, great, this is a pivot friendly development, right, but it might get disappointed as CPI starts ticking up again, as you be warned us with those charts.
John Llodra 22:38
Yeah, we’ll see. We’ll see what the talking has the Fed fed heads I think there’s several on the calendar for speaking engagements. You know that I think the jawboning will be interesting to watch and the market reaction to that.
Adam Taggart 22:49
Okay, well, next time. Next time, you and Mike are back on the channel, you can decode all those those fed utterances for us. Let’s let’s talk about gold just for a second. Because you just mentioned some very short term developments that are going on following the announcement of this new CPI data. There’s also been some, yeah, I would say some more, you know, cyclical, positive developments for gold. One just just came out that I was reading about in the Financial Times the other day, is that we’ve just had record volume buying by sovereign nations, in central banks. In terms of buying bullion. We’ve just saw, I think, the highest buying I think, in 11 years, I think we’re actually now at a at a record level here. So, you know, clearly, the central banks and countries are, there’s something that spring that right, and it’s either a belief that it’s, you know, a superior store of value, and it’s something that nations need to be holding for national sovereignty and, you know, monetary soundness reasons, or perhaps something else. And what’s interesting is they are largely doing this by just buying bullion, right? They’re buying physical bullion, they’re not buying ETFs they’re not buying derivatives, they’re buying the actual hard physical stuff and storing it in tied to that is how they’re storing it. An increasing number of these countries are actually repatriating their gold. So like the, the stores in England, the bullion stores there in England are actually seeing drawdowns as a lot of countries around the world particularly in in Europe are saying, Hey, I actually want to be storing my gold now not with you, but inside our own borders. So a we’d love to get any sort of general feedback you have on that but you know, is sort of like When you always get a look at what they do versus what they say, you know, countries are quick central bankers are quick to tell you that that gold, you know, is a relic of the past. And that something is very interesting. You know, on the other hand, you know, they’re buying it at record amounts, like I just said, and also sort of like, you know, what’s good for the goose is good for the gander, like, hey, if nations are doing this, probably something that the average individual might want to consider having a little bit of personal exposure to as well. So let me get your thoughts on those developments.
John Llodra 25:28
Yeah, absolutely. You know, the fact that central banks have for decades and centuries even probably look to bullion as a as a reserve pillar in their in their own stocks of reserves is says everything and in the record amount of buying and add the actions to repatriate it into one’s own control, if you will, rather than relying on the friendliness of international relations to be there. When, when when if the callback of the boolean is desired, that speaks volumes. Think about the last decade and what what has happened. Basically, like no time ever before, probably, there was coordinated action on the part of the central banks of the world to basically engage in quantitative easing and driving interest rates, lower monetizing debt, this and that. And now that’s kind of being reversed through rate increases. And as coordinated as that all was over the last decade, across developed countries. We’re not seeing the same kind of coordination. Now. There’s almost like every every man in country for oneself now, so So yeah, there’s and this is looking at there’s there’s trillions, you know, way more debt in the system, multiples of debt to GDP across almost every country is way higher than it was prior or post, immediately, the great financial crisis. Remember that much of this debt was issued at rock bottom interest rates at one point 20 or 30 trillion of global sovereign debt was issued at negative interest rates. And here we are without that situation, and in this that’s got to come due, it can’t just evaporate, right, it’s got to be repaid or deflated, or inflated away or whatever. And that’s, you know, that speaks to real stress in the system that we I think the the actions of the central central bank speak to exactly what their concern is that there could be massive defaults or massive inflation, just to carry that debt load. And just like it’s a sound thing for for central banks, we absolutely think it’s a sound thing for individuals. And we kind of think that golden in two ways as an insurance policy, and that’s where the physical bullion piece comes in, you know, we were in favor of folks having a, you know, a modest, but, you know, a materially amount of, of physical bullion as as kind of an insurance policy against some of these calamities in the monetary and financial system that could rear their heads. And then secondarily, of course, we see it as an investment. That’s why we, for example, we’d like to go money stocks as investments there, you know, just forget what they do for a moment, their cash flow profiles are very strong, their margins are very strong. The fundamentals from a supply demand perspective, are very supportive, that tailwind for and they’re really undervalued relative to where even gold prices are today. So absolutely, we think it’s a sound thing for, you know, five to 10% of one’s total financial worth, we think it’s very prudent think about having some some physical metals, preferably out of the system, vaulted locally, or safely somewhere else, or somewhere out of the system, that’s just like the central banks within quote unquote, within reach outside of someone else’s control. So yeah, I think really interesting, you know, trends there, and it’s not just a mirage, it’s really happening. And, you know, I think individuals should take a cue on it.
Adam Taggart 29:08
All right. Well, very well summarized there, John, I do want to make a quick correction to so we’ve had an 11 year high in demand for gold, global demand for gold, that is being driven by record, high central bank buying, so that’s how those numbers shake out there. Alright, so you know, there’s owning the physical bullion itself. And then there’s, well, there’s, there’s there’s a whole host of other ways to hold gold. And actually, folks if you’re, if you’re not entirely certain when to be buying physical gold versus perhaps an ETF, which is more sort of trades like a stock but it’s tied to the price of gold versus owning miners, and figuring out what type of miners to hold. If you’re not familiar with all of that we have a very Easy primer that walks through all that for folks, if you want to get your hands on that, just go to wealthion.com/how to buy, you can download it there for free. You know, sort of at a very simple level, if you want to own gold for the security and safety of it, and in sort of the crisis insurance, you definitely want to be on the other side of the spectrum where you’re buying the physical asset itself. That’s something that a good financial adviser like John and his team there at new harbor can direct you towards. But certainly one that we’ve had a lot of familiarity with on this program, and full disclosure Wealthion shares investors with this company, the hard assets Alliance is a place where you can buy gold in physical form, have it stored in your name. And then you can have it stored in a Brinks vault or equivalent type of Vault, anywhere you like around the world, you can you can diversify your currency risk by having your gold stored in Zurich or Singapore, other locations around the world. Or if you want to be like a lot of increasing nations this right now and have it stored within your own home country. They also offer a number of different bank number different storage solutions within the US. But if you’re interested in learning about that solution, just go to wealthion.com/h. A, I think there’s a free storage offer that they’re offering through folks that come in through that URL, too. So go check that out if that’s of interest to you. But if you’re interested in basically like let’s say you’ve got your your your foundational position in physical bullion, and you’re looking to get exposure to okay, you know, I think the price of precious metals is going to go higher for many of the reasons that John just just elaborated there. The precious metals, mining stocks, can be a very good way to play that because they are quote unquote, leveraged to the price of gold. John, do you just want to take 30 seconds for the folks that are familiar with that to explain the opportunity that you guys see right now in the precious metals mining space? Yeah, it’s quite simple.
John Llodra 32:06
From from a fundamental valuation standpoint, they rarely been this compelling as a multiple over the price of metal, but also their profiles of just their corporate balance sheets and financial profiles, you know, an industry that traditionally has been very sloppy to be to be candid, you know, the gold mining industry is notoriously over many decades, had periods of over building, just reckless, you know, raising debt and investing in non productive mines and things like that, they’ve been forced to clean up their act over the last decade or so half a decade anyways. So their debt profiles are actually quite, quite manageable. In fact, if you look at a broad swath of corporate America, they almost are a poster child for for, you know, cleaning up their act, their free cash flow margins are quite attractive, you know, good quality mining stocks. So they have a an all in average cost of production and high hundreds to low, low 1000s. And here we are with gold that as we speak right now, 1960, there’s plenty of of, you know, margin there, even to allow for, you know, input costs fluctuations on for example, energy costs on the inside, but, you know, even at current prices, they’re, they’re attractive and could see multiple expansion. But if, if the price of gold does rise, and we think, you know, a breakout to, you know, above 2000 to 2500 is almost a, you know, a base case scenario, in our opinion. Typically what happens, because many of the costs associated with with a gold mining operation are fixed, you know, just the simple maintenance of a plant a mind, each dollar of increase in the price of gold will flow disproportionately to the bottom line in terms of profit margin. So when we talk about gold mining stocks being a levered way to play an increase in the price of gold, but we’re not talking about leverage in the sense of like, financial leverage, like loading on debt, which is a bad thing, when prices are a little dodgy. We’re talking about operating leverage, which is a construct of basic corporate finance, you know, companies that have high operating leverage means, you know, top line of revenue, for example, because of the price of commodity increasing that they sell, flow is very, very, in a magnified way to the bottom line and the profit margins and justifiable multiples be paid for those are, can can rise many fold times the price of the commodity increase.
Adam Taggart 34:39
Okay. All right. So is it is it safe to say there’s sort of two things going on here, there’s first kind of like an ugly duckling effect, where the industry, you know, decade ago, not very well run at all developed a deservedly negative reputation in terms of a place where, you know, capital wasn’t You did very well. Companies were poorly run that type of thing. So it’s been forced to clean up its act. And now all of a sudden, it’s no longer this ugly duckling. These companies are now good looking swans. And then the second trend is, the world is waking up to the fact that swans are really great. And so you’ve got these, you know, companies that are very well capitalized, kicking off lots of great cash flow, right at a time where the world is beginning to say, You know what, I think gold is actually a really important asset that we should be holding more of than we’ve held in the past. So they’re kind of in the right state at the right time.
John Llodra 35:36
Yeah, all that Adam. And frankly, the sentiments been been really bad. In gold, you know, a lot of the factors that we talked about, that seem to be maybe up until today’s CPI, print some head, stiff headwinds, maybe now starting to, you know, turn into some tailwinds or at least not headwinds, you know, rising real interest rates, if the Fed is in fact getting towards the end of their rate campaign, forget about even a pivot downwards, but just the lack of further, you know, the real interest rates have shot up pretty dramatically, you know, the interest rate after inflation. And that is traditionally a very negative for gold rising real interest rates, it has been a been a negative short term factor for gold, we could see that absolutely become a tailwind rather than a headwind, the dollar decline, you know, kind of weakness, I’m not talking about dollar collapse, I’m just talking about a retreat in the dollar relative to other currencies. And certainly, if the Fed is going to slow down or pause their their rate campaigns, I think we should see more dollar retreat here, again, not a collapse, but a retreat relative to where it’s been. So yeah, all these things and just shift in sentiment, we think could be a dramatic, you know, boost higher for
Adam Taggart 36:53
this space. Okay. And just to fully connected that for folks. dollar weakness tends to be correlated with positive performance for gold. All right. So last topic I want to talk to you about here is, we had this recent interview on this channel this week with housing analyst Nick Gerli. Who, you know, Nick always brings a ton of data, which is why I really enjoyed talking to him. And, you know, his conclusion remains that the housing market has a correction ahead of it. I think you said probably on the order of magnitude of around 15, maybe 20%. nationwide. By the time this is all over, and in certain markets, maybe as much as a 35% drop. And, you know, we talked about why this correction has been taking so long in terms of prices to come down. But clearly, housing values seem to have peaked. And, you know, nationally, the price decline so far has been very mild, like around 1%. So far, which of course, is causing a lot of people to question, hey, is this even really going to happen? But if you look at certain markets, especially the ones that were the hottest, you know, over the past five plus years, the Austin’s, the Boise’s, etc. Those are down double digits, even right now, price decline wise, with with the momentum, still heading downward from here. So, you know, I’d love to get your thoughts on on your reaction to that that video for two reasons. John, one, you know, just in general, from a macro standpoint, if Nick is correct, and we do end up having a housing price trajectory, like he thinks we’re going to have, what’s that going to do to the economy? And what are the knock on effects of that are going to be? And then secondly, you know, you as a financial advisor, you deal with people all the time and their money. And for a lot of people, their home is one of their biggest assets. And for many people, it’s their biggest asset. So curious if you’ve got any perspective to add around that too, just in terms of either concerns, worries, you’re already beginning to hear from your customers or just things that you would advise the average person keep in mind around housing, if we are going through a housing price correction. Yeah, Adam,
John Llodra 39:03
first of all, Nick Gerli is talk with he was fabulous. I really enjoy his his data supported perspectives and man really, really, really spot on I think in terms of the pulse of the real estate market. It is a huge issue for our clients for the economy. And it goes far wider than the stock markets and bond markets and commodity markets that we invest in manage client assets. And every day, you could say the housing market touches a much broader slice of the population than than broader financial markets. Because it does everybody needs a place to live and afford places. I’ve got two sons in their early to mid 20s ones out of college ones about to graduate and rents are have been really high but they’re they’re glad to see some moderation like like, like Nick talked about. But you know, that’s on their mind. So what’s on their minds in the minds of many of our clients, we that’s probably one of the most frequent non investment things non financial market things, we talk to clients about the whole real estate thing, we got folks that are in the face of life where maybe they want to downsize or, or relocate to a different state and retirement, whether to, you know, get a lower cost of living or weather related or whatever. It’s huge. And I think Nick hit the nail on the head in terms of describing the real estate housing market as frozen, right? It has has been frozen in the sense that so many people that might otherwise want to sell haven’t, because they don’t want to, you know, trade one home for an equally overvalued home elsewhere and, you know, step into a much higher mortgage rate than they currently have. Or maybe you don’t have a mortgage, but they have to finance for other reasons, and they want to do at the current rates. But just the amount of activity Nick, nailed it the amount of activity and purchasing but also listing is that really dramatically dramatic lows, he I think he said lows that were on par with the 2008 and everything and housing and frankly, any financial market happens at the margins, the marginal buyer and seller that that sets the clearing price. Right. And, you know, with with artifort and I think the you know, the the talk about what the homebuilders have done homebuilding stocks have been remarkably strong, because it’s been the only place, you know, to see action in real estate really. And they’ve, they’ve gone to some pretty extraordinary efforts to attract business, you know, lowering prices, I think 15% On average, which is, I think, as you already pointed out, we’re next sees almost as a proxy, what the broad housing market would have to see in reductions to kind of to get in the game, so to speak. But also baiting with, you know, effectively buying down more mortgages for new buyers. These are all things that speak to a housing market that is frozen and broken, but that invariably, either by choice or force, the the fascinating data that he called out about them, you know, the Airbnb situation, I have firsthand experience with people in my circle. And I’ve seen that, you know, rentals are down activities down. You know, certainly, you know, when you do the math on on buying a place with a certain pro forma cash flow coming in, even at low interest rates suddenly looks like a not a not a great investment. And I think like, like Nick diskspace, there’ll be either by choice or by force, some uptick in in selling activity, probably later this year, I think he’s calling for, you know, towards the end of this year, just likely uptick. And, you know, one of the key things there the drop in rents, historically, rents and prices do eventually track each other. Right now, they’re dislocated, I think he said 2500 A month 27 to 2800 a month, you know, effective all in purchase costs right now, including mortgage taxes, insurance, upkeep and things like that, versus about 1850 for per month in rent, that still that that chasm, there still has to reconcile itself. And it’s probably more likely that the housing costs will have to catch up downward towards where rents are and as we’ve already talked about, Nick pointed out rents are on the decline. So it’s a it’s a fascinating, you know, construct or creature that has been created the triumvirate of bubbles, the real estate market, the stock market, and in the bond market, the last decades has been engineered by artificially low interest rates. And yeah, I think we’re in the early innings of that being reconciled.
Adam Taggart 43:56
All right, well, it’s interesting, right? So bond market bubble has burst, right with with yields haven’t gone up as high as they have. Housing market bubble looks like it’s in the process of bursting. stock market bubble look like it was bursting trying to re inflate right now. You know, I guess, TBD on on what’s going to happen there. I know you guys at new harbor are putting more of your chips on the fact that that it’s going to fail to reinflate and it will have tougher times ahead, but but we’ll see what happens there. I’m curious on to the list of things that you just mentioned. You know, one of the one of the things that’s different this time that Nick and I talked about a bit was that institutional ownership is so much higher now than it’s ever been before in the residential real estate market. And just like we’re likely to see a bunch of selling of Airbnb units as everybody who piled into the past two years to get rich quick is now realizing they’re getting poor quick, you know, as their their listings are cashflow drains as opposed to cash flow gainers? How concerned are you about the vulnerability of that side of the market where you get a, you get a player that owns 1000s of units, right, maybe 10s of 1000s of units, and just says, Hey, you know, like, we’re losing an unacceptably large amount of money here, we just got to start chopping off limbs, and you just start seeing massive waves of inventory Come on, as they just say, I gotta get rid of XYZ, I’m sure in the short term, they’re going to try to sell to another institution. So none of those things actually kind of hit the market. But when you get to a point where nobody’s really a buyer, if we get to that point, and you’ve got to still just start cutting off limbs to save yourself as an institutional investor, either could really disrupt the market, how worried are you about that? It could be a big factor. You know, these
John Llodra 45:52
are obviously shrewd institutional investors that are going to try not to take a path on these, but in a day, private investment vehicles follow flows, right. Many private equity groups are seen more challenging fundraising environment, a cost of capital is gone up. You know, a lot of the companies and portfolios are levered, and therefore the profit margins have have been been trimmed.
Adam Taggart 46:19
And I’m so I’m sorry to interrupt. I don’t have the chart. But I did see a chart recently that, you know, in recent quarters, private equity capital calls have substantially exceeded private equity. payouts. Yeah. Yeah. I
John Llodra 46:34
think I shared that chart when we’re there. In our weekly talk last week. Maybe that was you? Exactly. Okay. Great. Yeah, absolutely. And, you know, that, that, that creates a scarcity, where private fund managers need to free up liquidity somehow. And, and, and they, they will sell across the board, not because they necessarily want to, but because they have to, and it might be that, hey, the gap is still good in real estate, but let’s start picking, you know, maybe private credit starts to gain more more attention as as yields blow out, and we get some more credit distress. As as debt maturity start to come do. The private investment industry will pivot, you’ll then move capital to where the best opportunities are. And if it’s selling real estate at relatively, still lofty height to go plow that money into dislocated private credit place. Absolutely, there’ll be things like that happening. So yeah, I think I think it’s a it’s definitely a factor, it’s these are buying hold, you know, fall in love with houses kind of investors, it’s like, you know, where’s the best opportunity? And where can we deploy for the next incremental best, best move, and, you know, maybe the, maybe the play has already happened in housing, it probably already has given what we just talked about with Nick there.
Adam Taggart 47:50
All right, and, you know, just to show my cards a little bit here, you know, my worry both on the residential, or sorry, on the, the regular seller side, the person actually lives in the house. But also in the investor side of things, there is a first mover advantage here, right? If you begin to really lose faith in the trajectory of the housing market, right now, sellers are really trying to just hang together in solidarity and say, Alright, let’s nobody sell. And hopefully, we can just ride this thing out until mortgage rates come down, and then we kind of, you know, we’re through the worst of it. But if people think that day is too far out in the future, it benefits the individual to bolt from the herd early and say, Okay, I’ll look, I’ll sell and I’ll get 95% of the current market value, right. And I’m not going to be stuck chasing this down like the rest of you guys. Right. So at some point, if the, if there’s no additional new reasons for optimism in the housing market, you’re gonna start seeing people both on the sell side, and that could be the trigger that really starts the next. Yeah,
John Llodra 48:55
absolutely. And the first mover thing is real. You know, Nick, teased out some stats there, you know, it doesn’t take much in terms of just an incremental increase in the amount of listings to completely overwhelm the the inventory shortage that’s often talked about, right. So
Adam Taggart 49:12
he said if we get just half a million new inventory, which is from remembering I think that’s 0.5% of the current total housing stock that’s not much at all. And he said all the all the inventory, you know, crunch that we’ve been hearing about, yeah, and
John Llodra 49:31
then we see the natural forces of supply and demand and that can change pretty quick and
Adam Taggart 49:37
yeah, and it started interrupting him but he had this this like candidate set of these other ones that could end up selling early and that was over 30 million, right? Yeah, only need a half million of that to disrupt everything.
John Llodra 49:47
Yeah, and a common thing we tell our clients because ultimately it’s gotta get practical right back to you know, clients lives here for us. You know, those that that are looking to sell and have the the ability to be flexible? Well to think about renting, we think it’s a great time to think about that option unit tease that out as well, you know, especially right now, when we’re seeing rents soften, I mean, you could probably do some pretty good negotiating and rents right now, into that into that trend, you know, average price decrease so far is only about 1%, National decrease, obviously, some areas that have been in terms of house prices, you know, absolutely, we think it’s a great time to think about selling a home, buying some time renting with the very likely scenario that you’d be able to purchase at a lower price, and probably even at better financing costs. Because we do think ultimately, if recession takes hold, and some of this model moderation and inflation takes hold, you can see mortgage rates come down again, there, they got above 7%, we think they’re probably not going back down below 3% anytime soon, but geez, doesn’t take a whole lot to make things a lot more affordable than right now. On the purchase. Yeah.
Adam Taggart 50:59
And I wonder, and I’m not going to ask you to predict this necessarily. But there is the chance that you could almost get the best of both worlds, before this housing correction is fully played out, right, where you get a material decrease in the cost of a house. And then at some point, the Fed does reverse policy, and drops interest rates, and you’re basically able to lock in, you know, a much better value of a house and then eventually get a cheaper mortgage for it. And you know, those things might not be coincident, you might have to buy at the lower value, and then refinance when mortgage rates come down. But you could come out of this if you play your cards, right. And we’re a little bit lucky with getting the best of both worlds. And I just want to raise that because right now, you know, people have been getting a bad deal for so long in terms of affordability. But right now, it’s basically the worst ever, you get the worst of both worlds, right? You get prices near record highs, and you get super expensive mortgage rates right now. The silver lining here is yeah, there’s a lot of people that might feel a lot of pain, if the housing market does correct the way that Nick thinks it could. But that may open a time where you can get a much better value in house. Yep.
John Llodra 52:12
And flexibility is key, you know, to be able to, to exercise the option to act when when you can. So if you have the ability to sell now or soon, and rent and keep your options open for when that time if and when that time comes. That is that’s, you know, we think almost an unquantifiable value in terms of being able to to play those scenarios.
Adam Taggart 52:33
Okay, well, look, you know, I know that as a financial adviser, you have a lot of clients. I mean it all life stages, but But you know, many of them are later in life. They’re wrestling with questions about like, Okay, well, when do I downsize? Or if I’ve got multiple properties? When does it make sense to sell them, whether they keep holding them or whatnot? It’s unfair for me to ask you sort of for like a one size fits all bit of advice for these folks. But as a financial advisor, these are the type of questions that you help people think through, right, that they contact you and say, Look, this is my personal situation, around housing specifically, these are the decisions I’m wrestling with. Can you help give me some advice on this taking into account kind of my entire financial situation? Right? What are my goals? What am I trying to achieve here? What’s my risk tolerance? What does the market look like? You’re not exempt saying this, but I just want people to understand that you actually rely on a good financial adviser for a lot of other topics. Besides Hey, what like stock or bond should I be buying next?
John Llodra 53:31
Yeah, we work through the end, it is a very personalized discussion is it is hard to you know, other than the broad dynamic that probably pretty good time to be selling in most areas of the country, and probably good time, if you have the flexibility to buy some time by renting especially into a declining rent market that we’re starting to see. But we do we get down right down to the brass tacks with many of our clients, who will we’ll look at modeling different scenarios for them and spreadsheets. And, you know, just to kind of put it into what does it mean from a cash flow standpoint? You know, we can absolutely do that. And we oftentimes do have those conversations. And there’s always when it comes to housing, there’s always going to be a qualitative emotional aspect. You know, at the end of the day, a house is a place to take refuge and create memories. It’s not a home in the sense that it’s never more important than the people’s souls in the home. But it you know, it doesn’t always have to be, you know, optimal from an investment standpoint, but there’s still plenty of room to make wise choices in terms of timing and decisions in that regard. All right, great.
Adam Taggart 54:37
Well, thanks so much, folks. If you are wrestling with decisions around real estate or just general decisions around the macro environment that John and I have been talking about here. Again, I always recommend you work under the guidance of a professional financial advisor to determine your path forward. If you’ve got a good one who’s building a personalized portfolio plan for you take into account all the macro issues that John and I talked about. hear great, you’re very fortunate stick with them. But if you don’t, or you’d like a second opinion, maybe even from John and his team there at new harbor financial, 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. And again, these consultations totally free, no commitment to work with the advisors. They’re just offering just a public service to help as many people as possible position prudently for what’s coming ahead and for what their life goals are. Well, John, look, we’re going to be taking next week off. Because I’m going to be back east going to my mother’s memorial service and also visiting family actually out in your neck of the woods, there’s a slight chance that we might be able to cross paths in person, which would be great if we can, little anecdote story, though. So I’ll be visiting my father who doesn’t live too far from where you are, and kind of a little sailing touristy town. And so we’re staying in an Airbnb there. And I was kind of wincing as I went to book the Airbnb the other day, because I’m booking it like, basically less than a week before I need it in the height of summer. And it just thought I was gonna get raked across the coals. And I was really surprised at how affordable the pricing was, and the unit that were renting, being rented by a super host, right? So they’re the most popular people to rent from. And Airbnb does a thing where it says, Okay, this unit usually goes for X price, and they draw a line through it and say, but right now it’s going for, you know, this low price, you’re getting a great deal. I mean, it was like hundreds and hundreds of dollars a night, less than what it normally was during this time. So I just sort of took that as a, as a kind of surprising early indicator that wow, like the Airbnb market in this place has really softened. So anyways, data point one can’t draw too much from that. But I thought I’d share that with you. Look, I’ll let you let you walk folks out here. What parting words of advice would you have for folks until we see him two weeks from now,
John Llodra 57:01
I’d like to encourage folks to take a look at your lead Adam to take some time to unplug and get away from the day to day, hopefully a vacation or even just a timeout. And I hope for you, you have a proper celebration of your mom’s life and safe travels and enjoyable travels. But you know, the things will keep on moving here. We’ll keep on doing our job. We’ll miss the recording a video with you next weekend. But, you know, obviously, you’ve got much higher priorities that deserve your attention. So
Adam Taggart 57:35
well, it’s very kind of you, John. Thanks. And just for viewers here, we’re not going to leave you high and dry. I’ve been recording this week to bring you content next week. A lot of its going to be surfacing some of the most important interviews that we’ve done on Wealthion Over the past year that are just as timely if not more. So, given today’s circumstances. So there will be content on this channel next week while I’ll be traveling folks, so don’t feel like I’m leaving you in the lurch. And then I’ve got some great folks. For that we’ll be releasing interviews with right as I get back, just a tease a couple Lacey hunt will be doing another interview with Lacey hunt for the public. behavioral economist Dan Ariely. I’ve been talking about getting a behavioral economist on this channel for quarters now, finally landed a big one. So that’s going to be a fascinating discussion. And then Steph Pomeroy has asked if she and Jim Rickards could come on and have a conversation kind of about everything. But one of the questions he’s interested in hearing his thoughts about is this new bricks, potential new BRICS currency that’s being rumored that it’s going to get announced officially next month. So stay tuned, folks, we’ve got some great material coming up ahead of here. Alright, everyone, thanks for sticking with John and I for this full video. If you will appreciate these recaps with our financial advisors every week, and everything else that we’re doing on this channel, please help support us by hitting the like button and clicking on the red subscribe button below, as well as that little bell icon right next to it. Always a pleasure, John, hope to see you in person next week. If not look forward to seeing it two weeks from now.
John Llodra 59:10
That’d be great and safe travels and we’ll see you soon.
Adam Taggart 59:13
All right, everyone else. Thanks so much for watching. If you’d like to schedule a consultation with one of the financial advisors at new harbor financial simply go to wealthion.com. These consultations are completely free and there are no strings attached. The good folks at new harbor was simply answer any questions you have about your investment goals or your portfolio and give you their best advice given their latest market outlook. They’re willing to do this because they care about protecting people’s wealth. And because Wealthion has connected them with so many thoughtful investors just like you over the past decade. We started doing this because so many people have approached us in frustration looking for a solution because they’re feeling out of alignment, or downright ridiculed by the standard financial advisors who have been managing their money You know the type, the kind that just pushes all of your money into the market scoffs at the idea of owning gold. When you bring up concerns about the market sky high valuations, they say don’t worry, the market will always take care of you. For many of the reasons discussed in today’s video, we think this is one of the most challenging and treacherous times in history for investing. We strongly believe that today’s investors are best served working in partnership with a conscientious professional financial advisor who understands the risks and play. Now we’re agnostic, which professional advisor you work with, as long as they’re good. If you’re already working with one, that’s fantastic, stick with them. But if you don’t, or are having trouble finding one you respect or trust, then consider talking to John and Mike and the team at new harbor. For those about to ask yes, there’s a business relationship between Wealthion and new harbor, which we’ve put in place to make sure everything is handled according to SEC regulations. All the details on this are clearly provided on the wealthion.com website. Also, it’s important to note that new harbor is able to work with US citizens, green card holders, and those with existing assets in the USA, but for regulatory reasons, they aren’t able to take on non US clients. All right, with all that said, if you’d like some insight and guidance on how to protect your wealth during this unprecedented time in the markets, go to wealthion.com to schedule your free consultation with the good folks at new harbor. Thanks for watching.