It appears Congress has reached a resolution on the debt ceiling standoff and the Fiscal Responsibility Act of 2023 is now headed to President Biden’s desk for signing into law. But could there be elements of this deal that actually increase the odds of a recession happening soon?
When indeed the debt ceiling is raised, the US Treasury will be forced to replenish the Treasury General Account by selling somewhere around $1 trillion in bonds. This will vacuum up liquidity from the system.
In similar fashion, the FRA will re-start payment of student loans for the first time in over 2 years for 45 million households. These repayments will take a bite out of consumer spending when real retail sales are already declining.
Will these factors overwhelm the relief the raising of the debt ceiling is expected to provide? And if so, are markets not yet pricing this in?
Adam Taggart 0:04
Welcome to Wealthion and Wealthion founder Adam Taggart welcoming you here on a Friday. It’s a important day because we have news on the debt ceiling drama, it looks like that might be getting resolved here. We’ll talk about that in just a second. But I’m here with financial advisors, John Llodra and Mike Preston, the lead partners at New Harbor Financial, one of the financial advisory firms endorsed by Wealthion. You see them here with me on this channel every week, we’re gonna react to the just phenomenal string of presenters that we had this week on the channel. We had John Rubino, we had David Rosenberg, we had Lakshman Achuthan. Really just phenomenal interviews with those folks. We’ll get John and Mike’s input on those discussions in just a second. But John and Mike Hey, guys, thanks so much for joining me here. Let’s talk for a moment about this debt ceiling deal that looks to be in process here. There is an agreement, it’s called the Fiscal Responsibility Act, we won’t go through all the details right now, because they’re still sort of swirling. But this does seem to have passed the house now making its way to the Democrat controlled Senate where the odds of it passing seem to be pretty decent at this point. So, you know, markets hate uncertainty, they, you know, started getting a bit nervous that this, you know, these debates about the debt ceiling were protracted and we’re getting resolved. You know, everybody was beginning to sweat about the X date, which is when the Treasury was gonna have the money to fund its extraordinary measures. It looks like we may dodged that bullet of hitting the X date. If this agreement actually passes through Congress, markets taking this as a good sign, they’re up to date pretty much across the board. So anyways, you know, market breathing, a really big sigh of relief. I want to just talk about a couple of the potential repercussions of this deal. Yes, you know, it avoids all the total calamities of what a true debt default by the government forced by not being able to raise the debt ceiling. But we weren’t ever really worried about that happening. I don’t think anybody really believed that the US, Congress would willingly throw us into that type of turmoil. And so like I said, everyone’s sort of, you know, breathing a sigh of relief markets are starting to party again. But there’s some repercussions from this deal that I’m wondering if the markets are maybe overlooking at the moment. And I mentioned two of them. One is that the because the government hasn’t been able to raise debt, to fund its operations, which is sort of business as usual. And that’s because we’ve hit the debt ceiling, Janet Yellen, the Secretary of the Treasury, has been drawing down the funds in the treasury general account, to pay the bills and keep, you know, government operating. That’s not an insubstantial amount of money. It’s hundreds of billions of dollars. And once the debt ceiling deal is actually agreed to and the debt ceiling is lifted, which is now looking quite likely, she is going to be forced by mandate to refill the Treasury general account. And the estimates I’ve heard on what that’s going to require is something like, you know, seven to 800 billion to 1.2 trillion, or maybe even more, she’s going to have to be issuing treasury bonds, to refill that that general account. And so that is going to be sucking all of that capital, out of the markets in, you know, where it could be put either into the economy or other substitutes. Instead, it’s going to be getting vacuumed up here by the TGA. So that is net depressive, of liquidity. Secondly, it seems that part of the agreement of this Fiscal Responsibility Act is that student loan, the student loan repayment forbearance program is going to end and those loans, there’s over a trillion and loans are going to go back into repayment. And that is really going to impact consumer spending for affected households. And it’s it’s milk, I think, 10s of millions of affected households. It those people have not been having to make any payments on their debt now for I never know how long I think it’s two years, maybe even more now, as a result of all the COVID, you know, emergency measures that were passed, most of that money has been getting spent rather than saved for when these loans go back into repayment. And so that’s simply going to be cutting into the budgets of many households out there. Also, it’s there’s discussion right now, I know Joe Manchin has been pushing back over the past day or two about this is President Biden has the loan forgiveness program that he’s been trying to push through. I think that’s going to forgive up to about $20,000 for for most households that would qualify. That’s part of it. Supreme Court right now, but Congress is looking to actually rescind that as well and declare that it just I don’t know, if they’re saying it’s unconstitutional, what grounds are using, but they’re basically saying, Look, you know, that’s actually penalizing the people who, for went going to college because it was too expensive but the people who went to college and then paying off their loans, so they’re saying, hey, look, it’s not really a debt relief program, it’s just more of a tax shift program. It’s more of a tax on the people who actually, you know, like I said, pay their loans or, or for went college. And so they’re trying to actually get that forbearance program or that that sorry, that forgiveness program struck down and negated. So TBD. But but if they do that just adds even further contraction on consumer spending, if those people realize they’re not going to get that $20,000 loan forgiveness program. So, John, we’ll come to you but curious about your reaction to this. Could the market be sort of overlooking the net negative liquidity impact of some of the provisions that are in this agreement?
John Llodra 6:04
Yeah, thank you, Adam. So I think I can firstly confess to not having followed every breaking news item through this political drama that’s played out over the last several weeks. But the two points you highlight there are, are very substantial. And I don’t think it’s possible to overstate really how impactful they might be in terms of the liquidity situation. The fact of the matter is, with the Treasury depleting its its general account over the last several weeks, that is a stimulative, taken by itself as stimulative measures that counteract some of the quantitative tightening measures that have been undertaken. But now the reassurance of treasuries to refill and suck cash out of the marketplace is absolutely a liquidity tightening event. And it can be, you know, as you already I think, touched upon, and on the order of a trillion dollars or more of of funds needing to get sucked up to replenish that that account. The college debt situation, the repayment schedule getting turned back on, that’s huge. We already know how big a, an issue student debt is, for so many young people and young families and whatnot. Amy Nixon, who you’ve had on your program regarding real estate, she’s spoken pretty pointedly about that impact, the impact of that in terms of making the housing market even that much less affordable. And really, you know, probably another shoe to drop in the housing market. But absolutely, we think this, this could be a very, very significant thing, especially when overlaid on some of the other notable deceleration in the economy and tightening of belts that Your guest this week, I spoke very, very specifically about, you know, credit card debt has gone up spending is starting to get constrained. These things all happening at once, somewhat coincidentally, we think could be a pretty, pretty profound thing. In the short term, the markets seem to be today, short term as in today seem to be cheerleading a bit some of the removal of the uncertainty, but you’re seeing both things like gold and equities rally. So there’s the safety, trade, rallying, as well as the, you know, kind of the bullish trade. So I think, you know, this noise today, I think is going to settle down and the markets are going to start to contend with pretty obvious economic slowdown and inflationary slowdown that’s showing up in some of the data. And we’re going to go back to having the markets trying trying to have to reconcile, we’re still nosebleed valuations for broadly speaking, the stock market, and a what, you know, we agree with your guests looks like increasingly more of a hard type landing recessionary type picture than a soft or no landing. So those are my big picture thoughts.
Adam Taggart 9:02
Okay. And, John, I know you’ve pulled some charts here for this discussion. Maybe we can talk about two of them. One, you have a leading economic indicators chart, which I’ll let you walk through. But you know, this is the theme of the week with with the previous guests that were on the program was sort of this massive disconnect between the relative optimism of the markets right now. And what we could maybe even refer to now, the mania that’s going on in AI stocks currently, versus whether the underlying fundamental data is telling us here. And so this is a fundamental data chart, a very important one. Can you just quickly walk through this?
John Llodra 9:44
This is a long term chart of the LSI leading economic indicators pulled together by the Conference Board. And by the way, both David Rosenberg and Lachman, I mean, they’re rock stars. I mean, in this kind of data analysis, they’re very well known locksmiths for or ECR I think it is. Maybe you cry, he calls it equity. But yeah, I mean, they’ve had a tremendous track record at calling turning points in the cycle. And we know from your speakers today, the track record of most analysts, including the government, in pinpointing, and, you know, calling recessions is horrible, right, they’re usually after the fact, you know, declaring them rather than, at the time when it can be helpful to folks. So, you know, they talk, they both talk pretty pointedly about the obvious slowdown in many economic indicators. And this chart shows a very, very steep drop off in the leading economic indicators 13 months straight. And you can see it every prior point in history where we’ve had a reading, like, like we have now but also the pace of deceleration that we’ve seen over the last 13 months. You know, we had a big recession here, and oh, eight, we had a big recession here in the tech bubble, go back to the early 90s. You know, you name it, this has been a classically very robust indicator in terms of, you know, hard on recession in the car. And so will it be different this time? A lot of that going around? In every aspect of markets right now, this time is different. And we think we think this data should be paid very close attention to.
Adam Taggart 11:26
Yeah, John, on this chart. So your David Rosenberg was saying, hey, look, I get it, everyone. We’ve been talking about this recession for a long time. folks are wondering, you know, where is it, and it seems to be taking forever, he says, I actually think it’s here. We just don’t see all the visible signs of it yet. And, you know, as you said, John, you look at these readings, this is a great example, when you look at this, this key indicator that has nailed every recession that we’ve had, and we’ve never seen readings like where we are right now without having been in a recession. And as we all know, you know, it takes a while before the recession to become the clear in the data. And so the the government organizations that that basically, you know, tell us when a recession started and ended, they’re not able to peg that started the recession, usually until a couple quarters, once the data has really, you know, though the dust is settled. Yeah, so we very well may see that a future version of that chart, where the month we’re in right now is in the red shade of a recession, it just hasn’t been calculated.
John Llodra 12:36
Yeah. And one of the things that David pointed out is, what he believes is they’re just looking at the wrong data. So for example, he talked about producer prices, they’ve collapsed, they’ve gone from 11%, down to 2%, you know, on that data metric, you know, the inflation is, is collapsed. Right, right. He finds fault with and legitimately So, the Feds insistence and looking at CPI and variations of that were a huge part of that those data series are arbitrary revisions that are constructs of bureaucracy and, and and data mining, rather than perhaps a true read on and
Adam Taggart 13:17
many of the inputs are super lagging as well.
John Llodra 13:20
Exactly. I love this quote. He said, You know, you would think that you’re calm people’s kids ugly, when you when you mentioned the recession word. People are so just charged up about no recession, soft landing, that it becomes an insult when, you know, the unnatural part of the business cycle is is legitimately talked about. So great comments from him. And yeah, it’s probably the fact that time and time again, the recession callers in the government and otherwise, are just looking at the wrong things, you know, that they’re selectively looking at things that maybe paint a different picture than some of these more on the ground kind of data readings that he called up.
Adam Taggart 14:03
Yeah. And that that can be deceptive. And it can be dangerous, right? It can be deceptive if you’re trying to paint a rosier picture than what’s really going on to try to, you know, keep public confidence or win votes or whatever. But it can be really dangerous when policy is being set on the wrong data. And one of the things I’ve talked about both with David and with Lachman is you’ve got a fed that is in a big tightening mode right now. Right. And it’s completely focused on slaying inflation, which is understandable. But in both cases, David and Larchmont are saying look, you know, like looking at the trajectories looking at the underlying like it’s the situation has taken care of itself and will over time, whereas with the Fed might be doing is pouring gasoline on a fire that that should be going out here. Not that it’s going to stoke inflation, but it could make the coming recession more prolonged, protracted and painful. than it would otherwise need to be. Right. So that’s that’s the danger here. Mike, I’m coming to you in just a minute. But But real quick, John, I want to stick with you for one second, because you have another chart that I think is really important, which is a lot of people will say, yeah, yeah, I hear I hear your warnings about recession, but the markets, right. They say, hey, the markets, you know, they’re the most efficient pricing mechanism out there. And they’re up this year, and they’re raging right now. And so the warriors must be wrong, because the markets know best. And we can have that debate. But but one of the key issues, it’s one of the flags that you’ve been waiting, which is, look, but you gotta look at market breath, right? Yes, the markets are up this year. Yes, some stocks are performing unbelievably well, like in video. But it’s it’s a narrower and narrower percentage of the market that’s participating in an uptrend. And if you actually look at the majority of the market, that majority of the stocks in the market indices, they tell a very different story. Yeah, and
John Llodra 16:00
there are lots of ways to look at this, this thing called graph, and we look at many different ways of looking at it. But Mike and I came across this this chart that was put out by Bloomberg, and we thought this was particularly illustrative, what this shows and it goes back, you know, obviously to the early 90s, it shows the lag or the return underperformance of the s&p 500 equal weighted index, as compared to the most often quoted on the nightly news and whatnot, s&p 500, which is a capitalization weighted index, which the result of that is some of these very large mega cap companies, many of them are the tech companies, the trillion dollar plus club, those, those stocks have an inordinately large influence on the moves in that index. And if you simply compare the same 500 stocks in the s&p 500, but give them equal weight, you get a chart that looks like this, that index, that equal weighted index is underperforming the cap weighted index year to date, by 10 percentage points, the worst underperformance lagging, you know, in this in this long time series, and that is a very I think illustrative example of of how narrow this market leadership is. And and you know, it’s not healthy, then you look in 2020, that same thing happened. Look in the Oh 809 period, during the housing bust, look at the tech bubble, the narrow breath, especially when it’s concentrated in some high flying meanie type stocks, which is certainly what we’re seeing with the AI and, and the tech play. It’s not at all a healthy situation. And yeah, the nightly news and the headlines are cheering markets going up. But it’s, broadly speaking, they’re not the equal weight and the Russell 2000. At some of these broader metrics. They’re flat, barely up slightly down, I forget where we are today. But point being is we’re nowhere near as as up in the markets as some of these calculated in this indices. But have you believe a thanks,
Adam Taggart 18:07
I think this charts really important, as you said, the narrowing or extreme narrowing pre stages, or at least it has pre staged the biggest market corrections that we’ve seen over the past several decades. And we’ve never seen the market this narrow in this data set, which goes back to the early 90s. Right? So it’s over 30 years worth of data. It’s this is just one of those things that’s flashing a really bright warning sign to say, hey, you know, when we’ve seen these situations before, we know what happens next. And we’ve never seen an extreme this strong in recent memory. So again, just one of those things to sort of temper people’s enthusiasm right now about the the, you know, great year that the markets are beginning to have here, right? Or at least the key stocks in the markets and the major indices themselves. Alright, Mike, coming to you here. I know you took a lot of notes on the interviews from this week. What else would you add?
Mike Preston 19:07
Yeah, a number of things. I mean, all three interviews were great. I enjoyed them immensely. And a common thread through all of them, is that, you know, we’re in for some hard times. I’m just looking at my notes here John Rubino said he expects an official recession by the end of this year. Laxman says we’re in a cyclical downturn and have been for over one year. And he and he shares a lot of great data about that. And David Rosenberg said the business cycle is not dead. Don’t think that the business cycle is dead, that he thinks we’re in for a hard landing in the second half of the year. David also said don’t do what everyone else does. In this business. Everybody’s getting bullish again. The NASDAQ seems unstoppable up over 30% this year, s&p Almost 10% This year, don’t follow the herd. There’s a lot of reasons to be very concerned. You John Rubino and you talked about what the heck is taking so long. And we get that from our clients all the time. We agree with you we see the data. How long can this go on? How many times can the Fed pull a rabbit out of the hat, something new to surprise the markets and continue to rescue it. The truth is, no one really knows how long it can go on. But it can’t go on forever. History tells us that. And you know, John says, Well, it happened, this is how life goes. You know, he said in 1998, he was, I guess it was on the street.com. And he was talking about how we force our in into that bubble. In it went on for another two years, two years is not really a long period of time, but it can feel like a long period of time, particularly when you’re going against the hurt. This bubble is bigger, it’s bigger than the tech bubble in every way. It’s the it’s the largest bubble ever, or at least in recorded history. It’s certainly in this country, and in most of our in all of our lifetimes. And so it’s been going on a long time, you really, for the last 15 years, post 2008, each attempt at the market that tried to correct has been met with more and more stimulus. And of course, COVID created the biggest blow off top I think really will level will ever see. There were only a few years past that in this market, probably tops back in January of 22. So we’re just about 1415 months into it here. So we’ve got to be patient. But that’s the hardest thing. John talks about how the world is in a terrible mess that we’ve had a printing press since the 1970s. And every major economic power around the world now has been printing with wild abandon for at least the last 15 years. And so there’s this mountain of debt that has to continue to be serviced. Only way to keep it meeting service is to make sure that asset prices go don’t go down. And so that’s why we’re in a in a dangerous place. John just talked about the market breadth, the market breadth has been horrible. When you get the last few leaders charging up the hill. And really literally nothing else is following it is a warning sign. Now there’s always a chance that everything else could catch up. And that could cause one more big, one more big bull run one more blow off top. But we have to look at what’s in front of us right now. And the data in front of us right now is screaming warnings. Because of that the breath is bad. A number of the economic indicators are bad, particularly what David Rosenberg talked about, he talked about the PPI numbers going down. But we what he talked about was GDP plus real GDP, real GDP plus real gross domestic income, it’s been negative for two quarters, he thinks that’s a better indicator to follow, that signals that we’re in a recession already, at least according to his indicators. So it’s, it’s difficult to guess how long this massive pig through the Python will last. I know that John talked about that is just being probably one of the biggest eggs the Python has ever eaten, you know, $7 trillion was printed in the United States Post COVID. And they were only a couple of years past that. So it’s taken longer than we all expected. But the data doesn’t lie. And if this market is like, like he usually is it’ll try to fool the most amount of people. So we’ll we try to be tactical on the long side in a very hedged way. Some of the short term indicators in the market look good. Other than the breath, we are solidly above a number of moving averages, simple kind of measures like that, but also looks like we might have a second successful close above 4200 on the s&p. But that’s not getting us bullish short term, we’re just acknowledging that the charts are constructive short term. But if you look at things like the bullish percents, which I think John shared last week on a video, the bullish percents are a measure of the broadness of the rally, just another way of expressing that chart that was just shared. There is not enough participation in this market to really feel like you want to take a tactical position, if we start to see improvement in those things. We will we’ll take a tactical position of maybe 10% or 15%, even with a hedge. We just don’t see that now. So we’re still very, very defensive. And I think that most of in fact, all of these three guests, in one way or another, were talking about that being the right way to be defensive. So I’ll take a pause there, and there’s much more that we can talk about.
Adam Taggart 24:46
Okay. Yeah. So definitely, they’re all saying from their perspective, this is a time for defense patient, they believe will will be one of the greatest assets that investors can deploy right now. Um, But I was going to ask you about this. So I’m glad you mentioned that, Mike. So, you know, you said sort of technically in the short term, you are seeing bullish trends. I heard you correctly, you said not enough to make you guys think that that the risk return, or the risk reward, trade off merits stepping in with some tactical positions to say, hey, you know, of course, the market doesn’t necessarily care what we think it might party here long enough and hard enough that we can make some money here in the near term. Doesn’t sound like you are hearing strong enough siren song to do that, at this point in time, I just want to make sure that’s clear, is it?
Mike Preston 25:39
Yeah, that’s there’s no strong siren song. And I guess there probably never would be. That’s what makes a market. But at least as far as our system and our dashboard is, there’s short term technical indicators that look positive, for instance, a close above 4200 on the s&p today would be the second one in the last week, we’re solidly above the downtrend line that goes back to the January 22 high that downtrend line was tested, and we got a bounce over the last few weeks. But the internals of the market are still very bad, we have to see the internals of the market improve. And it’s true that when the when and if the the internals of the market improve, we might well be higher than here. But we’re willing to pay that price, we’re willing to miss a little bit of opportunity to wait for all signals to be flashing green right now, just a few of them are, are flashing yellow or yellowish green. We’re not seeing a lineup of technical indicators that say, Yes, this is a broad base rally, we had a successful retest, a lot of sectors are participating, we’re not seeing that at all. The breadth is bad, just a handful of sectors are participating here. It’s really just tech technology. Gold is one of the better looking charts. industrials actually look fairly, fairly decent here. But there’s a whole swath of sectors that are completely left out of this. And so that’s not a healthy market. We’re not in the business of, of making a lot of short term trading gains we’d like to, but there’s just a lot of risk that comes along with that. We would prefer to wait for the right setup and take, you know, take a bite into the market at times that, that we’re seeing more signals on green, we’re seeing more positive signals. So no, we’re not doing that. And as of today, as we record on June 1, we’re still only about 5%. net long. The stock market if you don’t include gold stocks, and if you do include them, it’s more like 15%. But even those positions are hedged at present. So we’re very, very light in stocks. And I know that that matches all of these speakers. I know that David said, I think that he was at the lowest equity exposure in his career less than 20%. And so that’s really where we are to, if we do break above 4200 4300, and we start to see breadth and widen out and get better and some of our other technical indicators look good, we will start to increase with hedge positions likely because you can’t forget about the backdrop of extreme valuations. And the fact that as far as we’re concerned, we’re still in in a downtrend with a market that popped back in January of 22. So anything that we do here has to be measured, calculated and hedged.
Adam Taggart 28:35
Okay. It’s interesting so I talked with Lachman about this which is you know, we again people like to is a counter to the more bearish outlook especially looking at the fundamentals you know, people will say yeah, but markets right. And you know, watchman reiterated a point I’ve heard you guys made a lot make a lot over the past quarters, which is hey, we’ve had some of the most vigorous rallies in cyclical bear markets, right and that that that is the role of the bear market right is to low you back into complacency that you say oh, okay, bottoms in now I’m going to you know, deploy my capital and ride the next wave and then of course, the bear comes back out and takes the market down an awful lot further, right. Is that going to happen this time? We don’t know. That’s why I like to you know, ask you guys what you’re seeing on the other side of the story and Mike, you just talked about how you’re seeing some bullish signs but not enough to make you feel confident deploying additional capital here. You know, the bulls that I’ve had on this channel recently folks like Michael how and Dan tap the arrow. They basically a big reason for their bullishness is they think that the liquidity cycle has shifted from contracting to expanding. Not everybody shares that opinion and it’s it’s it’s a hard measure to really track people have different ways of measuring it. That’s one of the reasons So if that were true, I would feel a lot more bullish going forward, I just have not seen a clear enough calculation yet to make me feel really confident about that. And that’s why I was digging into, you know, on the debt ceiling discussion, the impact of some of the big provisions in it, because, as I said, those seem to be net negative for liquidity, right. And, guys, if you feel differently on your estimation of that, let me know, the other sort of row side of the equation for avoiding recession and markets being able to continue power from here is if we avoid an earnings recession, right, if companies are able to, you know, power higher and in keep the employees they have, and you know, micro Kantrowitz is hope framework, right, that that last EA has been the bulwark here, the other three dominoes have fallen, the E is still strong, we just actually got updated jobs numbers this morning, which more or less in line with expectations, you know, things are still down near historically low levels of unemployment here. And so a lot of people are saying, Well, look, you know, the economy, the the employment markets holding steady. And there’s this narrative coming out, which may be true, right, which is that one of the things that’s going to prevent, too bad bleeding in the in the employment market is that, you know, we have all these older workers that are retiring, we had the sort of wave of early retirements during COVID. And you have these, these very skilled workers who are now exiting the marketplace, and there’s just not enough skilled workers to replace them. Right? So you have to oftentimes hire two people, you know, for the job you lost, because they’re still kind of learning how to do it and whatnot. Right? So that that that might be a reason for this. I personally don’t think it’s a great reason. I don’t think it’s net positive for the the economy if you have two people doing a job worse than one person did it beforehand. And I asked Lakshman if he in his cycles, tracking track productivity, and if you guys remember, but he kind of looked down and shook his head, and he said, you said, That is horrible. You know, when you look at the the productivity charts, you know, they’ve just been plummeting. And it shows that, you know, no matter how many employees we’re keeping on here, we’re just not producing as much per capita. So that kind of, you know, their sticks pit those stick pins and liquidity argument, those ticks pit stick pins in the employment argument. You guys are nodding a lot. As I’m saying this. John, I’ll come to you and let you chime in. But I guess sort of a leading question for you is, in this market right now, where stocks are up, largely driven by very few stocks, and you have stocks like Nvidia, which are trading at the last my last check, I think it was trading at 35 times sales, net earnings would be a super high P E ratio, that’s a price to sales ratio. And I believe the stock is materially higher from when I last saw that, that 35x price to sales ratio. So that ratio is probably even worse now. You know, like, is there an argument to be made that this is sustainable and really can grow from here? Or does this look like? Yeah, you know, we’ve already we’ve already exceeded fantasy pricing. I don’t know what better than fantasy is. But certainly that seems to be within videos price for right now. Very hard not to see some sort of price rationalization in these leading stocks, which serve not all of them, but several of which are getting distorted, you know, as badly as embedded in video. Yeah.
John Llodra 33:51
And this is it’s eye popping what’s going on? And David Rosenberg talked a bit about this. It’s almost if people weren’t alive. In the height of the tech bubble, many investors today weren’t right, many younger investors. But back then, or this was called the Internet bubble, not the tech bubble. The talk of the day was the internet is going to so fundamentally change the way the world conducts business and pleasure and all this stuff, that these old metrics that we used to look at no longer mattered fact that how many mouse clicks is going to be the best indicator of the potential for a stock. The same thing is going on right now with AI. You can see it almost every day. Commentators talking about how this is going to disrupt industry in so many different ways. Yes, it will. But we would contend that that’s way more than priced in and a stock like the video. I’m seeing charts of you know, comparing the number of days or weeks or months for a on different applications to reach 100 million downloads or users and compare it, for example, chat GBT compared to like, Facebook or Instagram. And it’s like, the quickest. That’s this this times version of mouse clicks, how many? How many downloads as if that is a, a birthright to profitability because people download your app, right? Same kind of stuff was going on right here. Whatever activity, the video is priced at as price to sales right now, you do the math, you know, it’s it’s way over 10. I forget where it is now, but, you know, consider every dollar of revenue having to go to shareholders for the foreseeable future without paying salaries. I mean, these things are priced absurdly. And, you know, we’re at this point where it’s interesting, because much of the conversation with your guests this week had to do with the economic cycles. And that certainly does play in very heavily to stock market and market cycles, but they become disjointed pretty dramatically. David Rosenberg, for example, pointed out, you know, in some ways we can debate whether it’s going to be a hard or soft landing, but it still doesn’t necessarily mean the markets are immune from any point in to, for example, the recession in 2001, it was about as as mild as they come. Yet, the stock market still sold off over 50%. The NASDAQ sold off over 80%. Point being is there’s no way market valuations where they are today are pricing in anything like a meaningful recession, nevermind a hard landing. So in some ways, much of this debate about hard soft, how deep how long, almost ignores the fact that the markets have a justifiable reason to drop pretty dramatically, even in a soft landing. I would just want to comment quickly on the you know, many folks are pointing to the robustness of the job market. And to your point that’s maybe a contrarian thing that one could look at. And you challenge Lachman on on that. David talked very, very pointedly about the plummeting in hours worked, you know, people are hanging on to employees, because they’re fearful about in the next cycle, getting them back. But it’s undeniable hours worked as has been steadily declining. That’s probably a precursor to layoffs, and things like that. And certainly, productivity is continuing to read, you know, pretty soft like it has been, I think Lockman said it was it averaged even still a pretty, pretty weak 2% prior to the great financial crisis has been averaging 1%, private productivity post GFC that’s a dramatic drop, and it’s very been very sluggish. But um, you know, the job markets, probably not as robust as it appears. Even look at things like the jolts, reading a lot, a lot of these things are survey based, and the participation in these surveys has been really poor. Since COVID. So so the gets to this thread, again, that depending on what data you’re looking at, you get two different dramatic takeaways. And and you cannot deny that, you know, and you mentioned to Adam, tax receipts on employment earnings are down hours work, they’re down. So yeah, that doesn’t maybe comport with some of the other job indicators that are pretty robust. But some of the data flaws we think, can explain a lot of that,
Adam Taggart 38:21
right. And just to put a coat on that, you know, people point to the number of jobs worked going up. As okay, there’s jobs growth, but the data is really showing that that’s not new, full time jobs that’s happening on the part time market. So it’s actually people having to take on multiple jobs just to stay afloat, which is not a sign of a strong consumer. Right. All right. Well, look, guys, we’re going to have to begin to wrap things up here. Mike, I want to hand it back to you. Anything else you want to add to the discussion that we haven’t already, but also, you know, we’ve got regular people that watch this channel that are just trying to figure out how to navigate their way through here. You guys are talking to people day in day out? Your phones ring, you know, hourly, with people that are looking for guidance. I’m curious, since you guys have such a good finger on the pulse of the the individual investor here and their concerns and their aspirations here. Do you have any sort of parting advice for folks as we as we begin to wind down here, based on what you guys are hearing at the new harbor offices these days?
Mike Preston 39:30
I’d say just stay patient. It’s hard for us as well to stay patient sometimes, because the some of the data is so obvious and has been so obvious for so long. And particularly when you see behavior like in the handful of tech stocks, like I remember seeing in the internet bubble I was in this business in 1999 lived through it and in history repeats again in such a short period of time. And you might even argue that it’s been a long prolonged bubble the entire Your time my entire career the last 25 years or so, but be patient. David Rosenberg says, It seems like you’re waiting, waiting, waiting and nothing’s happening. And, you know, I know John said that he’s he feels this way to John Rubino, you know, why hasn’t it happened yet? I would say that that’s probably the most common common conversation we have for clients. And with potential clients these days. It just doesn’t feel right. The data is horrible. I know that it’s not. It’s not real when things like Nvidia traded 180 times earnings and 35 times sales. But remember, we’re a couple of years past now, when things got really crazy. You know, two years ago, we had 2021, Bitcoin went up to 70,000. Mean stocks went through the roof like GameStop. And, and AMC, and, and we had we had digital, I can’t even remember what they were what they call them, but but digital pieces of art, selling for ridiculous prices. I mean, that seemed like the nfts Yeah. And here we are a couple years later in the bubble just keeps shifting and phase shifting and phase shift and different color, different shape. And I can only say that, it must be because we’re in the largest bubble of our lives, maybe the largest bubble of all time. So that becomes scary when you think about how that might resolve in the end. And of course, the next question always is, well, when is it going to end? How is it going to end I’m getting sick of waiting for it. It’s kind of that’s kind of like the common theme out there right now. To tell you what our conversations are, like, be patient like John Rubino said, life isn’t like that. Life isn’t like that. I’ve learned that I’ve gotten older and wiser. And I’ve learned that life is not like that. It doesn’t happen on your schedule. But ultimately, history is not kind to this set of data. Staying that same way forever without some type of reaction. I know that everyone wants to hope that we have a soft landing or no landing. But I’m in the camp with these three gentlemen that you interviewed this week, that it’s almost certainly going to be a hard landing. And it’s probably going to be a lot harder than we, we think we know from math and from models that markets have to be a lot lower than here to get the expected returns that we all want and need, the market would have to fall 50%. From here, for instance, just to give us an expected return of six to 10% over the following decades. So it seems like this game is all about keeping the bubble aloft forever, permanently high plateau won’t stay there. I know it won’t, I don’t know the exact timing, but I would, I would caution people to be patient, there is an alternative, sit in 5%, treasury bills, get some gold and silver. And talk to us if you’d like we’d be happy to help and happy to just chat with you and help you through that.
Adam Taggart 42:58
Great, I’m glad you mentioned several things that I’m glad you mentioned the fact that unlike, you know, past years, the past decade plus, where there really was not much of an alternative for capital to seek safety there is now in these, you know, safe, sovereign bonds that are yielding 5% Plus now, right? So you don’t have to take a lot of risk to get, you know, a meaningful return. And so if anybody is doubtful, like that is just a great alternative to to take advantage, at least in the short term until you come up with a better strategy. Also, you know, when you know, all of our speakers, you know, related to people’s frustration of Gosh, when is this going to happen if it’s going to happen? And you know, a lot of people they talk themselves into the well of since it hasn’t happened yet. It feels like it’s never going to happen camp, and then they go and, you know, they start moving out the risk curve, maybe potentially at the exact wrong time. But I under want to underscore what all of our speakers this week did reiterate, which we’ve talked a lot about in this program, which is the lag effect. Right, which is these policy lag effects. You know, you hear all these ranges about how long they take, you know, Rosenberg said that can happen between 12 to 24 months, right. So if that’s the case, you know, we’re just barely beginning to feel the first of the rate hikes that were begun, you know, last year. And so we have the impact of all of those still coming ahead of us. Right. And, you know, the danger might be is yeah, they might be strong enough to throw the economy into recession, they might be strong enough to break the stalemate and employment and really unleashed the gates of layoffs and whatnot. And even if we ship policy, in the short term, we’re not going to see the results of that for a year plus, in the interim, we’re going to be getting hit again and again and again, by the policy changes decisions that have already been made over the past year. Right So you have to be very cognizant of the fact that no matter what you’re betting is going to happen from here, you’ve got to take that lag effect in in mind, because, you know, those impacts are going to hit now we can debate, you know, what the ramifications of them are going to be. But don’t take those out of your equation because they are very real, even though we can’t see them manifest in real time just yet. All right, well, thanks so much, guys. Another great discussion, great end of the week, lots to talk about next week as we get full resolution on the debt ceiling, as well as clear sense into some of these other economic trends that we’ve talked about, folks, if you, you know, are watching this channel and trying to figure out how to navigate all this. You’ve probably heard me say many, many times, we highly recommend that almost everyone here works under the guidance of a professional financial advisor in general, but specifically one who takes into account all the macro issues that John and Mike Mike and I’ve talked about here today, but certainly that are the experts whose interviews we’ve been talking about what they talked about this week, if you have a good advisor who’s doing that, and then creating a personalized portfolio plan for you, and then executing it for you, while keeping you informed, great, you should definitely stick with them. But if you don’t, or if you’d like a second opinion from when it does, perhaps even John and Mike and their team, their new harbor, then schedule a free consultation with the financial advisors endorsed by Wealthion. To go do that just fill out the short firstname.lastname@example.org These consultations are totally free don’t cost you anything. There’s no commitment to work with these guys. They just offer it as a public service to help as many people as possible position prudently before the impact of all these lag effects. And these risks that we’ve been talking about may come to pass. All right, John, and Mike, guys, this has been great, folks, if you enjoy these weekly recaps here with John and Mike, please do us a favor, support this channel by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. And whatever happens in the next week. We’ll have John and Mike back here helping us make sense of it. Guys, thanks so much for joining me here.
John Llodra 47:11
Thank you, Adam. Always a pleasure. And thanks, folks for tuning in.
Mike Preston 47:15
Had a great time, like always, Adam, and we’ll see you next week. Thank you. All right,
Adam Taggart 47:20
and 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. And 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 in 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 them, 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 you harbor. Thanks for watching.
Transcribed by https://otter.ai
Michael R. Preston, CFP®
Mike is a founding principal of New Harbor Financial Group. Prior to forming New Harbor, he was a Financial Advisor with UBS Financial Services (formerly PaineWebber). Mike is a CERTIFIED FINANCIAL PLANNER™ professional.
John C. Llodra, CFP®
John is a founding principal of New Harbor Financial Group and a CERTIFIED FINANCIAL PLANNER™ professional. Prior to forming New Harbor, John worked as a Financial Advisor with UBS Financial Services. Over the first decade of John’s career, he held hands-on and senior roles at a diverse range of companies including UBS Investment Bank, Enron, Navigant Consulting, and Stone & Webster Management Consultants.