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When the road ahead is uncertain, there’s no wiser choice than to listen to those with experience – who have seen enough market cycles to judge what’s most likely to happen next.

Today we’re fortunate to welcome financial advisor Ted Oakley, managing partner & founder of Oxbow Advisors.

Ted has over 40 years experience helping clients, mostly high net worth families, protect and build wealth through good times and bad.

Here in mid 2023, we’ll ask him if the current powerful bull rally means the coast is clear for investors to pile back into the markets again, or if the bear market that attacked last year is simply drawing as much capital into the markets as it can before it strikes again. And we’ll find out how he’s currently positioning his clients assets for what he sees lying ahead.


Ted Oakley 0:00
I think I think what’s happening is that people are. It’s like one of those things where there’s hanging on by their fingernails thinking, Well, I know the Fed will come in, I know the Fed will come in. And that’s been the mantra. Now, let’s face it since 2009. Sure, but they don’t think they’re coming in. That’s the point A and so, if they don’t come in, you’re going to have a lot of people that have to really scramble to stay alive, and probably not stay alive when it’s all said and done in terms of these companies.

Adam Taggart 0:35
Welcome to Wealthion. I’m Wealthion founder, Adam Taggart. When the road ahead is uncertain, there’s no wiser choice than to listen to those with experience, who have seen enough market cycles to judge what’s most likely to happen next. Today, we’re fortunate to welcome financial advisor Ted Oakley, managing partner and founder of Oxbow advisors back to the program. Ted has over 40 years experience helping clients mostly high net worth families, protect and build wealth through both good times and bad here in mid 2023, will ask him if the current powerful bull rally means the coast is clear for investors to pile back into the markets again, or if the bear market that attacked last year is simply drawing as much capital into the markets as it can before it strikes again. And we’ll find out how he’s currently positioning his clients assets for what he sees lying ahead, dead. It’s wonderful to see you again. Thanks so much for joining us.

Ted Oakley 1:33
Thank you, Adam.

Adam Taggart 1:35
All right, Ted, always a pleasure to have you on the program. You’re one of my favorite people to interview. Let’s get right to it. Let’s get there through the question. I like to ask everybody at the start of these discussions. What’s your current assessment of the global economy and financial markets?

Ted Oakley 1:50
Well, Adam, you’re aware of this, but I most of the markets in the world are, you know, deteriorating right now, except maybe Japan. But if you look at you know, like the footsie was down, you know, 4%, as best we don’t, you can just go around any of the indexes in their in their raising rates into what’s probably a slowing economy. So the world situation, and I don’t think the US can dodge that either. I don’t really think we’re in position, we will follow him or that and we will deteriorate I think over time. So. And we already have so we’ll see how it goes. But generally the world is in general headed toward global, more global recession. And I think that’s where we are.

Adam Taggart 2:37
All right. So in the day that you and I are talking, Ted, I think three world Central Bank’s raised rates. The BOJ, Australia, Switzerland, I think, from getting the country’s right, a few by 50 basis points. So, so let’s talk about interest rates just for a second here. So you mentioned that sort of markets are deteriorating because of slower economic growth, right? Obviously, higher interest rates are likely to slow growth even further from here. And we’ve got many central banks continuing to raise rates, still, the Fed just paused or maybe better yet skipped last week, but is saying, hey, we need to, we see that we still need to raise rates later this year. So don’t expect us to be done. How high? Do you see rates going from here? Are we you know, this is kind of right, right near the tail end of this or could just go on longer than markets are currently forecasting?

Ted Oakley 3:38
Well, Adam, I would guess that we’re toward the tail end of it at least, even if we come back, you know, it doesn’t happen very often that the that these central banks stop raising, and then come back and raise again, that’s a very, very unusual happening. But it sounds like at least listening to the man yesterday, Powell that he certainly has that in his sights. But I can’t imagine that if you got we’re eight and a quarter prime. Now let’s say we go to in five and a quarter Fed Funds. Let’s say we go to eight and a half prime or say eight and three quarters prime, and then you’ll be borrowing as a business borrow or maybe a prime plus one, you’ll be a nine and three quarters. And it’s that’s going to put a really squeeze on on a lot of things and including all the debt that’s coming due over the next 24 months. So I don’t know how far it goes. But I’d have to think you’re certainly in the last inning or two.

Adam Taggart 4:34
Okay, so two questions kind of spill out of that. That probably the first real big one is can the economy sustain that, you know, we had an economy that was habituated, some might say actually dependent on close desert policy for the better part of a decade. Cost of capital is now shot through the roof. Is this something the economy can withstand? I

Ted Oakley 5:01
don’t think so I think you have to, you’ll go into if you’re not already in a recession, that will get worse. And eventually, if you have, you’ll get the amount of commercial real estate that’s rolling in the next 24 months. You look at what people haven’t paid for mortgages just go down the line, what business are having to pay to borrow? You know, and you’re really changing the whole landscape multifamily, everything’s changing because of high rates. And, and I just don’t think you can sustain that. And really, you know, the wealthy are enjoying high interest rates on their cash money. The other 80% are down here just scrambling because of inflation. So, you know, I don’t think it can sustain it. No.

Adam Taggart 5:47
Okay. Somebody points, I want to dive into that see the right order here. So one of the things that I’ve said often on this channel, and I’d like to get your opinion on it is perhaps one of the most underappreciated forces in play right now is the lag effect. Where of monetary policy, right that that there’s some period of time between when the Fed pulls a monetary level and when you see its full force expressed in the economy. And I’ve seen estimates slung around anywhere from like eight months on the low end to like two plus years on the high end. How important do you think the lag effect is going to play out here? You know, are we sort of in a wily coyote moment where he’s off the cliff, but still hovering in midair, and then we’re just waiting for the lag effect of gravity to pull them down? Or you look at the markets, they’re not worried? They’re sort of saying, We there’s really not going to be much of a lag effects? What type of role do you think the lag effects going to play here?

Ted Oakley 6:49
Well, I’ll take the economy first. I think what happens with people right now, there’s a lot of debt coming due this, you know, in the next 18 months by the month, it’s coming due, I think a lot of people are in a hope and prayer mode that something changes between now and then I don’t think that’ll be the case. So that’s going to impact a lot of things, because that flows downhill to employment and various things. If you look at jobless claims, continuing claims are higher, you know, you’re looking at ours work lower, we’re starting to see a lot of weakness on a lot of areas, and it’s just continue to go that way. I don’t think I don’t think the economy will will get through that. That’s, that’s a different situation now in the market. To me, it’s a pipe dream, right, right now, because I think it’s a camouflage market. Because really, the market itself, if you pull out those top eight stocks, you know, we may be up 2%, one and a half 2% for the year, maybe. But if you look at everything, and I love this idea about a new bull market, I keep saying to people and this was through yesterday, I said look, you have to go 11% Up to hit the high, we were at January, one of 22 on the s&p and you have to go 17% To hit the NASDAQ high. So there’s talk about a new bull market, it depends in a bull market from where, you know, if every time you have a 20% or 30% Move, and I have two slides there, particularly one on the NASDAQ, which will show in that 2000 203 period, you had a couple of 30% moves, you had a couple of 25% moves, and a couple of 20% moves all the way down and it caught people every time much like it is right now. Okay, a look at the s&p in that same period into two moves or three moves three moves actually 20% And you know, you can claim me on a new bull market then but who’s getting who? I mean, you know, you’re you’re you’re out your assets are down. I kind of laughed at Berkshire, Berkshire Hathaway people, they’re always up there, banging around. And if you look at Berkshire is down 9% From January to 22. I mean, that’s where we are in the marketplace right now. You know, we’re not in a period where people and they’re caught up in these top eight stocks and a lot of gambling going on there. But that changes to I mean, I remember distinctly in 9899 people were quitting their jobs becoming day traders, a lot of people were, and I would talk to somebody and they said, Well, you know, making so much money day trading, I’ll just quit. Well, guess what, three years later, nobody’s around. They’re all back looking for a job again, then that’ll be the same with these one day options and that sort of thing. There’s no There’s no free lunch. And so I suspect, okay, that will look back and say, and I lost a lot of money doing that.

Adam Taggart 9:44
Alright, so we’ll get into the depths of sort of your market outlook and a little bit here, but it sounds like what you’re saying is is the optimism some would even say sort of euphoria that’s going on in the market right now. Sounds like you’re saying that’s misplaced?

Ted Oakley 9:59
Well Well, I think it is. But I’d have to say to you, Adam, that the average person doesn’t really understand the averages. They don’t you know, if you talk about the s&p, they think the markets up. But if they look at most of their stocks are not up, you know, the from where they were at the high and neither is s&p for that matter. So they don’t really the average person doesn’t really understand, you know, cap size as far as market cap size of what really runs these averages. And if they sat down and look at it, they would think, Oh, I got that, okay. We only have eight stocks that are pushing the numbers here. Now, if you want to play in those eight stocks, that’s fine. But they’re all in our opinion, maybe not Apple quite as much, but they’re all really overpriced as far as we’re concerned.

Adam Taggart 10:45
Yeah. And I’ve been talking about that a lot with with many the experts on this channel recently. So we don’t have to go so much into it. But you look at a stock like Nvidia, which I don’t know its price to 3540 times sales right now. Well, you’ve had a long career. I mean, have you ever seen a company priced anywhere like that in general, but when that’s actually grown into that valuation?

Ted Oakley 11:10
Oh, yeah. Yeah, I’ve seen that. I’ve seen had a number of times, actually. But it’s interesting. You can always watch though, in the like, I think I believe I’m correct on this that a director just sold $50 million worth of stock. Maybe in the last, just recently, maybe the last day or two, when you started seeing that. They know how high it is? I’ll put it that way. All right. All right.

Adam Taggart 11:33
We’ll look back back to interest rates for a second. So obviously, the thing that’s driving interest rates, and what does make this period in the economy different than what we’ve experienced for a couple of decades, is inflation. Right, inflation’s out of the barn, the central banks are doing the best they can to tame it, get it back under control. I just had Jim Bianco on the program yesterday. And I just love to get your reaction to his thoughts where he actually thinks that the inflation readings are going to start marching upwards this summer, just largely due to the math of the base effects, right that we had. You know, like in June, when we get the June CPI data, it’ll be comparing the June monthly CPI from last year, which was like one and a half percent or something like that to something much smaller now. But then in July of a year ago, it was zero, right? So we’re going to start having very unfavorable monthly comparisons for a while and the numbers will start creeping back up, which I’m sure the central banks are kind of already planning for, but just the optical nature of that is going to be it’s going to put a lot of pressure on them. And they probably will need to keep rising from here. So I’m curious to hear your thoughts on that, whether you agree or not. And also just how much of an issue do you see inflation being going forward? Do you think it’ll be stickier than the markets are expecting? Because it does seem now that the emerging narrative is okay, inflation’s you know, under control, it’s coming down, and it’ll it won’t be a problem, you know, by the end of the year, do you think that’ll be the case or not?

Ted Oakley 13:10
Well, I do think it will stay sticky. And I say this, because you’d be looking at the Fed, they look at personal consumption expenditures, which are still at, I don’t know, just right out six are under six. You can’t if you keep having those numbers out there. And they, the I don’t think they all rely on year to year because that that will mean as much as what’s happening right now in the front month or two. And so my I suspect that that will keep them at least at a minimum from lowering rates. And so I think people have to get ready for that.

Adam Taggart 13:46
Okay. And you’re looking at core PCE, which the Fed does, I think that’s sort of its core metric that really, that’s been super sticky, too. So you see, you mentioned earlier that that you said sort of the bottom 80% are of consumers are really beginning to get squeezed here, right? Because cost of living has skyrocketed. And even even though we’re in disinflation mode right now, that just means inflation is growing at a lower pace, right, it’s still going up. Right, and they’re not benefiting with this rise in the financial markets nearly as much as the wealthy are right. So we have consumers getting squeezed, which obviously crimps consumer spending, which is, you know, 70 plus percent of what makes up GDP. And it’s going to have to translate into lower earnings from lower consumer spending at the same time. We’ve got slower economic growth that you talked about, we still have higher input costs, wages have been going up. So corporate margins should be getting compressed here too. So if we do go into recession, which I think from your opening comments, it sounds like you first see it See? How bad of a recession Do you think we could be dealing with here? Maybe measuring it versus Oh, eight or a one or some of the ones that are in recent memory?

Ted Oakley 15:09
Well, if you know, I know there’s a lot of talk at him about, we’re not going to have a recession or, you know, where is it, but if you look at a few indicators that really are, I wouldn’t say they’re there, they’re out there, they have been foolproof. But if you look at the leading indicators now down almost 14 months in a row, look at gross domestic domestic income down, if you look at the yield curve, inversion, 100 basis points now, and you put all those together. And I personally can’t see that that will not cause more weakness in the economy, you know, whether you get two quarters down three quarters down, I don’t know, but you get something. And I think people are really kidding themselves right now to say, hey, it’s business as usual right now? Well, it’s not okay. We got, again, we got an eight and a quarter prime, five and a quarter Fed funds, we had a quarter, you know, two years ago. So it’s not the same thing. And people have to start looking around at these index, some of these indicators are really good. And people are saying, Oh, they don’t count this time. Well, it’s not over. So how do you know? And so that’s where I think we are, and it’s fooled a lot of people into thinking, they’ll be okay. And that’s typical of a drawn out market, really, when you have a bubble as big as we had over that two year period 23 through 21. I mean, there was so much money put out there, it takes a long time to squeeze it all out. And that’s what’s happening now.

Adam Taggart 16:41
All right, we’ve been talking a lot about the role of liquidity in the system, the sort of the pig in the Python analogy, right, that there’s just the pig was so huge, that it takes an awfully long time to pass through the Python and that people get into the danger zone of saying, Well, this, this bad outcome that you predicted hasn’t happened yet. So ergo, it’s not going to happen, right? And you’re giving the wisdom of someone who’s been through a lot of cycles, saying, hey, yeah, maybe it takes a lot longer than you can realize. But it eventually happens.

Ted Oakley 17:12
When it does, if you you know, I’m just saying that the weight of the evidence is toward recession, now, there would have to be some event or some change to where things would really changed for us think about it, right? What would have to change, right now the Fed would have to stop raising start lowering, they’re probably never go back to the zero bound again. So that’s out the window. And so there’s so many things that won’t be like it was before. So I think, though, you have, again, you have 12, or 13 years worth of people that are used to that, and they think that’s what’s going to save me, but I don’t think it saves them this time.

Adam Taggart 17:53
Okay. And, you know, it just sort of seems to be the theme here, where there’s so many disconnects right now between the narrative either in the media or in the stock market and the underlying fundamental data, right? And it’s a question of what’s what’s really going to win out and in time will tell, but you just told us that, okay, the markets are probably a little bit too far ahead of themselves. And when I look at earnings forecasts, you know, s&p earnings are continuing to get raised now going out into 2024, there doesn’t really seem to be much concern or worry, on behalf of analysts right now, about a prospects of recession going on. So I’m gonna guess that you think we may eventually have that earnings recession that’s been forecasted, and that analysts are being a little bit too overly optimistic here. But But don’t let me put words in your mouth?

Ted Oakley 18:45
Well, I’ll start with this. If you look at the for q1 of 23, if you look at what companies were projecting, and what happened 60% of his companies missed it. Okay. Now the analyst or they get paid to be bullish. So you know, there they want, they’re not going to say, hey, you need to really batten down the hatches here, because that’s not what they get paid for. So we don’t really use what they do. But you have, you know, you have $53, in the s&p earnings in the first quarter, and I’m not, you know, just say you had 53 for fourth quarter, I don’t see how you’re going to get a four or 5% Move or 6% move in earnings with the headwind that you have toward these corporations, which is higher interest rates, you know, they’re having to pay more for employment. And a lot of their businesses are down you watch, you’ll want to listen to these companies. So you know, these companies will all come on and talk about they’ll fade the earnings talk a lot talk about AI or something like that, but, but I still think that will happen to them. We’re still using 200 and 205. At a minimum. It could be below that though. So we’ll see how it flies.

Adam Taggart 19:57
Okay, so you’re sounds like you’re saying, yeah, so you guys at Oxbow are more skeptical about the earnings future, given the macro concerns you mentioned? And it’s it’s, you know, one of the reasons why the data is so useful in this case is it tells us what is versus what the folks running a narrative want us to think about the future. And I know a data point that you have from a chart that you sent me was that corporate bankruptcy filings are up pretty dramatically this year, I think they’re the highest they’ve been in over a decade, I think, almost since 2010. or so. And we’re only, you know, we’re not even halfway through the year yet.

Ted Oakley 20:39
We, you know, I just think that’s going to continue, I’ve said all along, that all these companies that were there weren’t making any money or had don’t have no revenues, they were just, they were always banking on getting people to loan money to them at one or 2%. And you know, that that’s not, that’s not there, and it’s not going to be there. So a lot of those companies will end up filing bankruptcy, I don’t think we’re finished with that, that part of it.

Adam Taggart 21:03
Okay, so more of these shoes to drop in, as we’ve been talking about the lag effect, and when companies have to start rolling over their debts and whatnot, we’re gonna see more of this. And I’ll say, like, I’ve been shocked that we haven’t seen more collateral damage yet in the kind of the zombie Corporation cohort of the corporate fleet. But that may be well, due to the fact that they, you know, raised capital when it was cheaper, and they’re kind of living off the fumes of that. And then to your point, when they have to go back and, and refinance, that’s maybe where we’re gonna really start seeing a bunch of them get wiped out.

Ted Oakley 21:39
Well, you have a chart there, called, you know, that from JP Morgan, that it talks about, you know, 41% of the Russell 2000 companies are unprofitable. That’s a lot. I mean, that’s 800 companies, by the way. So think about that. And that’s, you know, that’s your lower 2000 Got your upper 1000 When you do the Russell 3000. But I think I think what’s happening is that people are, it’s like one of those things where there’s hanging on by their fingernails thinking, Well, I know the Fed will come in, I know the Fed will come in. And that’s been the mantra. Now, let’s face it, since 2009, sure, but they don’t think they’re coming in. That’s the point. And so if they don’t come in, you’re going to have a lot of people that have to really scramble to stay alive, and probably not stay alive, when it’s all said and done in terms of these companies.

Adam Taggart 22:37
So interesting, because, you know, the market just thrived on everything that the Fed said, up until this latest era. And now, despite Jay pals, Jerome Powell is best efforts to tell the market, I’m not coming to rescue, I’m going to be higher for longer, and the market is just shrugging it off as hard as it can.

Ted Oakley 23:00
Well, and you mentioned this before about the Arthur Burns Effect. But it really is that I mean, the guys understands that if you come in now, and you lower and you go right back, like you work as a speculative fever still out there. So if you were to come in and lower rates, they would all start, you know, jumping on all these different areas where they are, but I don’t think he’s just, I’m just taking him at what I really think has to happen for him. And that is that he will not be lowering rates anytime soon. Unless something really catastrophic happens. Right, unless,

Adam Taggart 23:32
unless something breaks. So sort of staying on this theme of can the economy, you know, persist under these current conditions, especially if rates continue to go up from here. We have seen, you know, a fairly notable cracking in the system with the banking issues that we had, right, three of the four largest bank failures happened earlier this year. You know, the Fed is basically sort of said, hey, we’ll step in and do whatever needs to be done to keep, you know, things working. probably will. But I’m just curious, what are your thoughts on the banking system? Integrity right now? Do you think the Fed will be able to kind of hold it all together through whatever tightening cycle, you know, needs to happen? Or are you concerned that maybe it’s worse than it’s being led on?

Ted Oakley 24:22
Well, I’d have to say, because I’m involved in a community bank myself, I would have to say that it’s a good community bank, but I would say that a lot of the community banks probably have more debt in commercial real estate than they would like to have right now. And that that’s really just now coming home to them. The other side is I got a lot of money lent into the multifamily business. And what’s happening is those players that they’re lent to can’t turn those buildings and pay those loans off like they used to be able to really quickly so they’re going to have to the banks will have to hold the capital, so they can take care of Those customers, not any new customers. And I think that’s where most of the banks are right now, obviously, you know, they’ve held a posits better than I thought, actually, but but people have made a good bit of money out right now. So the banking business will be, it’ll be tough, I think the next year or two.

Adam Taggart 25:18
Yeah, just on commercial real estate for a moment. You are correct. It’s one of the few debt classes that the smaller banks hold a larger share of the outstanding debt than than most other industries, its commercial real estate. And that is very vulnerable right now, for reasons we don’t have to elaborate on because folks have heard us talk about it on this channel a fair amount. How sizable of a shoe is that to drop here? I mean, do you think we’ll see? Will it unleash a new wave of failures amongst these banks, as those those properties start either defaulting or just continuing to struggle?

Ted Oakley 25:59
I think so. And perhaps some of the insurance companies for this reason, if you look at the office complexes, even in their really strong areas, I’ll take Dallas and Austin, for example. And if you look, you know, there’s, there’s a number of cranes up, you know, probably 1214 cranes. Well, those office buildings are building at a maximum of 25% taken down from a lease standpoint, I mean, 75% is not least, and if you look at these cities, and they’re all similar, okay. By the time you get to the end of 23, you’ll probably have five or six or seven times as many as much in the way of footage for lease than you would have had five years ago. When that happens, this is really what happens on the sublease. The sublease comes in and says, you know, I’ve got 15 floors here, I’m not I won’t I don’t have make enough money or I don’t I can’t take the lease. We’re going to sublease it and guess what happens to the rate. If, if the rate at one place was x, they’re going to do it at 50% of x or 60% of x, see what that does to the market all of a sudden, and all of a sudden, those buildings are a lot less valuable than they were before. And I think that’s where we are in commercial real estate.

Adam Taggart 27:14
Okay. All right. So you’re you’re expecting another reckoning to ripple through the banking system there. And I mean, the sad part about all this is that just seems that no matter what type of crisis we have, that regards the banking system, the outcome always sort of seems to be the too big to fail, banks get even bigger. The smaller banks suffer.

Ted Oakley 27:38
Well, we have too many banks, I mean, III, look, we have 4350 or 4400. Banks, and then us well, the most banks have anybody else. I mean, I think Canada has maybe 35, and you look at overseas, those countries will have at bank, you know, they don’t have many banks, we have all these banks, we probably are over banked by at least 25 30%. More than likely, maybe more. But, you know, there’s a time everybody wanted in the banking business. And so the banking business is tough, and it’s competitive right now.

Adam Taggart 28:10
All right, well, look, last part on this employment or on this economic topic is employment. It has been held up as the bulwark between us and recession. And we’ve heard so many times about the strong jobs market. And even though there are some signs that well, one that the data the the government supplied data is a little specious, and certainly had a lot of debates in this channel about how much we can trust it. You know, unemployment is still much closer to record lows than it is to any any worry, levels yet. But we are beginning to see increasing signs of stress in the employment system. And you mentioned continuing claims, the day we’re talking initial claims are up yet again, on the week. So you know, neither of those, again, is at a level that is setting off warning bells yet, but the trajectory isn’t good. We clearly bottomed at the end of last summer. And you know, we’re seeing more and more people out of work and the layoffs are continuing. We’ve also seen a declination in the leverage, sorry, in the labor leverage ratio. So you were talking about people who were quitting to become day traders and things like that right quits or down a lot of the the metrics that show that you know, that the the employee has more, more leverage have been diminishing, right. And this kind of goes back to a prediction I made back during the craziness of the great resignation as it was called that. I feared it was going to turn into the great on retirement party in the great May I please have my job back sir. Movement and I think we’re kind of in the early stages of that. So anyways, long winded way of asking, what’s your current assessment of where things are gonna go with employment from here? You know, do you see us kind of muddling through? Or do you see a risk of if we fall into recession, beginning to see pretty substantial layoffs, like we’ve tended to see at some of the past recessions that we’ve had recently.

Ted Oakley 30:23
Well, I think Adam had ties in to Powell, though, too, that if you don’t get higher unemployment, you don’t bust the back of inflation, because people keep on spending. But if you look at the three things we look at, which is continuing, not new claims, but continuing because those are the people that still don’t have a job. And then we look at hours work, which is been declining, okay. And you look, you’d look at job postings, they’re declining, okay, at the same time, and then we see a lot of white collar, or at least upper management type, upper sales type people being laid off, you know, that’s starting to increase so. So it’s, it’s there. And the thing that throws a lot of people I think, is that I’ve said this before, you running a business out here, and if you’ve, if you’ve got, you know, 200 employees, and heretofore you had a hard time hiring people, it’s not the case now, people can hire people now. And so what’s happening is you’re taking your good employees, you’re just cutting their hours down, because you didn’t want to cut them loose, hard to find those employees coming back. So it’s, we’re just in that stage where they’re, they’re trying as hard as they can to get over the hump. I don’t think they will. I think if you go ahead and continue with slower economic times, that unemployment has to go up. And I believe that’s what we’re seeing now. Just yesterday, I had a big summit comm contractor, client of ours said, hey, just for what it’s worth, we, a year ago, we couldn’t hire anybody, we couldn’t find anybody to work. And now our business is down 20%. And we’ve got people all over the place wanting to go to work for us. Well, that I’m hearing stories like that. And that’s, that’s a little different.

Adam Taggart 32:09
Alright, interesting, the worm is turning. And it is interesting to me, Becky talked about Jerome Powell. He’s been saying since a year ago, that basically, hey, the Feds got this dual mandate, but inflation so out of control that essentially I’m going to sacrifice jobs in the near term to get inflation under control. And the official jobs data hasn’t budged that much, which I think gives him you know, free rein to keep tightening. Because there’s not a problem in the jobs market yet. At least from the the official data standpoint. That’s, that’s really interesting anecdotal evidence to hear. Alright, so now I want to kind of go over to the consumer side of the story here. And maybe we do it through the lens of housing. Interest rates have gone up tremendously, like we’ve said, which means that mortgage rates have gone up substantially more than double than where they were a year and a half ago. And what’s interesting as well, the housing market is indeed starting to cool off nationally, we’ve not seen that much of a correction in home prices sure, in select markets, but but nothing on par, in my opinion, of what you would have expected to see just from the big jump in mortgage rates alone. So again, is this somewhat of a lagged issue here? Do you think Ted like did well, I guess, where do you expect things to go in the housing space from here? Well, Adam,

Ted Oakley 33:27
I think it’s a mobility issue. And if the stock, you know, the stock market, if you don’t have sellers, the prices don’t go down. And it’s very similar in the real estate market residential, if you don’t have sellers, you can’t knock the price down. And so they’re in this really unusual place where it’s stuck. And that is, that’s meaning they can’t do a lot of new things because of the 7% 30 year mortgage. But on the other hand, they don’t have a lot of sales coming out of existing. And so the builders have a little spot here where they can still do some business, because they can create some supply if they can find somebody to buy a mortgage. So they’re buying down points and different doing different things. But that’s why the builders have been able to go ahead and sell some things because you don’t have any supply on the non builders. So as soon as things change, okay, and when you use this example, if you go into really slower economic times, there have been a number of families where you have to earner families barely making the payment. Okay? And I’ll just give you one statistic, if you look today, you know, the average person out of the state makes 40 $4,600 a month family, their mortgage is 23 to 2400 a month, okay? You lose one of those, you one of those, and all of a sudden here comes a supply, okay? And maybe they can’t buy another home and move into an apartment or something like that, but that’s where we are. We’re stuck right now. But if you have slower economic times, then That’s the trigger that kicks, you know, they kicked it off. And then you have supply. And that’s when the builders will come off too, by the way.

Adam Taggart 35:09
All right, that’s really interesting. You connected a couple of dots there, one, you know, people scratching their head saying, wait a minute, the housing markets cooling down. And, you know, mortgage rates are through the roof and mortgage applications are low and sales volumes dropped. But the homebuilders are at, like all time highs in terms of stock prices. But you know, what you’re saying is? Well, that’s because they’re the guys that can actually move inventory in this frozen market right now. Right, they’re bringing new supply online, they’re able to undercut existing home prices, because they’re offering all sorts of discounts points, etc, stuff like that. So they’re able to, to goose their revenues, at least in the near term in this market here. The other thing you did a good job of addressing is, as I’ve heard people say, Oh, the real estate markets not going to correct because you have all these people that are sitting on their 3% mortgages, and they’re just going to wait it out, right. And I’ve always had a problem with that. Because, one, there’s always going to be some organic number of sales that happen, people die, people get divorced, they lose their jobs, whatever. But just stuff that happens naturally, no matter what’s going on in the economy. And that trickle will eventually set the new price discovery, yes, it might take a lot longer, but it’s still there. But then you’re saying, you know, if we have an important domino like employment begin to fall, well, then that becomes a big trigger that makes a lot of people have to become forced sellers into this market, and then that can create the avalanche. One thing I’d love to get your thoughts on is I’ve always said or I’ve often said recently, that of the let’s assume that the sellers are trying to hold together in solidarity right now, right? Let’s, let’s all try to hold this, wait this out, let’s not sell let’s try to not introduce new comps to the market. The problem with that is, is there is a first mover advantage to selling in that environment. If you get nervous enough, you’ll say look, alright, I’ll bring my price down a little bit, and they’ll still get 90 to 95% of what I can get, you know what I could have gotten yesterday. And I’ll be one of the first guys to get that. And then the guy who waits is going to have to chase the price down. Right. And we have a lot of in today’s market, I believe. And I’d love your thoughts on this. We have a lot of investors. You know, a lot of big institutional investors have gotten into the real estate market. And there’s just a lot of boomers that have second homes. There’s the whole Airbnb craze of folks that have extra homes. So you know, they don’t have the pressure of having to sell the home they live in, right? If times get a little tight for them, they can say, well, I just dump that property and get rid of the headache, right? So do you worry that if there is some sort of trigger, like all of a sudden unemployment really kicks up or something else happens? That everybody realizes Oh, my gosh, there is that first mover advantage and they start bolting for the doors all at once?

Ted Oakley 37:48
Well, I’ll say this, Adam, they certainly could. I mean, I’ll say this on the homebuilders, what they did is they lowered the footage, so they could keep the price the same. And you know, they weren’t some things were on the first time homebuyers that work. On the other side, though, the people I saw, I saw a lot of people over a three year period, what I call over house themselves, they bought more house than they would have ever bought with a four and a half or 5% mortgage. So they have this, they’ve got a huge dollar amount in this in this house. Okay. The problem is, if again, if one of those and they’re leveraged up, so if one of those loses a job or something changes in you, and then the person that’s in a job, and we don’t get bonus for two years or something like that, then all of a sudden, they get squeezed and they have to do something now if I were a young family today, and I was leveraged in a house and when and everything else, I would sell that house today. All right. I tried to unleveraged right now, because once things go poor, and you really get what you’re talking about, you trigger it up and start getting. It’s too late, then, you know, and so that’s what I say. I will say one thing to luxury sales down 44%. I mean, we have numbers of people that we have do business with 5678 $10 million homes that they’re trying to sell no bids.

Adam Taggart 39:18
Now, and you know, get a 20% decline in market value on an $11 million home it’s a lot of money you’re losing.

Ted Oakley 39:27
That’s true, but it’s in a lot of those are probably overpriced anyway. I mean, I have one of those myself. So I’m not not an Austin but it glomming but I, I know, I know, I know what it is. I’ve been there 25 years, but but, but it’s true.

Adam Taggart 39:44
Alright, so just to kind of round out housing. Well, what’s the sort of magnitude of the price correction that you think is likely in this space? And you don’t have to throw out a percentage necessarily, but just Some small, medium or are quite large.

Ted Oakley 40:05
Well, to set that up, I will say that I don’t think you will ever see a housing market do what this housing market did from 2016 to 2021. I don’t think you’ll ever see it again in your lifetime. That was brought on by nothing but super, super low interest rates, and then stupid interest rates after that, and so that, if you look at housing increases, in all the 1950s was about 1.3%. If you take it up to 1965, it’s about 1.4%. Because house was a home and you didn’t look at it as an investment. So now what’s happened and I can show you these numbers. But if you look at earnings, relative to what they have, what their what their what they’ve got in a house, there’s that spread that price of that home has gone up so high. And it did it two and oh five and oh six, but he came all the way back to the mean, I think it will do that this time, too. And so residential real estate, it would not surprise me for residential real estate to come off in the end 15 or 20%.

Adam Taggart 41:12
Okay, is it fair to say? Well, let me just ask this question. So you’re right. I mean, for, for much of US history, the home was was not an investment. Right? If anything, it was sort of a forced savings plan, that more or less appreciated at the rate of inflation, right. And then largely in response to central bank policy, it became this investment vehicle that honestly became a pretty speculative asset in a lot of markets right now all the house flipping and everything that was going on, is that era over for good?

Ted Oakley 41:54
I think it is, I don’t think you’ll ever be in another period where you can basically get even all these people variable mortgages. You know, I know people in you know, in Santa Fe, Oakland, California, and they all had I know, my other friends of mine, they, they had variable mortgages on properties that they were paying, you know, one and a half on, some of them being one in three quarters, something like that. Now, all of a sudden, we’re at seven or seven and a half, and they want to sell them. And I think we’re back in that mode, where let’s just say mortgage rates come down from seven to five, well, that’s a big drop, unquestionably. But it’s a long way from one and a half or two. And we have a lot of mortgages out there, two and a half, and three, I’m talking about fixed mortgages for a long time. So they, they had probably better enjoy that or reminds me really of the 80s When I was first got in that business business during the late 70s and early 80s. There were mortgages still around from the from 60, there were 30 year mortgages that were like nothing. But man, you couldn’t get that in the open market was ever 15%. So you know that there’ll be some that hang around, but in time, you know, it’s going to it, they will come around in time. And I think I think I think it’s the last time you’ll see that their lifetimes, really.

Adam Taggart 43:20
Okay, that’s a good message to get out there. Because I think there’s a lot of people that are just hoping we can muddle through and get back to the salad days again, right, and I hear you saying wouldn’t count on it. There’s also kind of an interesting, there’s an interesting error coming up. And I just love to get your thoughts on this, which is, you know, the boomer cohort, but it’s 75 million boomers or something like that, you know, they’re getting to the age where they’re going to start doing lifestyle downsizing. And before too long, they’re going to be getting to the age where, you know, 10,000 of them are going to be dying every day, just like 10,000 are hitting retirement age every day right now, right? So there’ll be a really prolonged era of, you know, kind of forced sales for a long time coming out of that cohort. So you can kind of see this, this date in the distance where housing is going to have a really prolonged and pronounced downward pressure on it. And it seems that, you know, yeah, maybe you might be able to make a little bit of hay before then. But I’m just trying to think of somebody who’s 30 right now and looking at, you know, right now, it’s the it’s the worst time to buy a house from an affordability standpoint, right. Prices have softened a little bit, but they’re still quite close to all time highs, were mortgage rates are a lot higher than where they’ve been, right. So it’s just a very expensive time to buy a house. Why would you want to lock yourself into a 30 year expensive deal like that when you know, in like 10 or 15 years, there’s going to be this, you know, multi decade downward, you know, for selling on this asset class.

Ted Oakley 44:55
Well, I think you have a point there in that if you if you When I look at boomers and we do business with a lot of them, okay. And it’s interesting, I call it, the muscle car effect, you notice all these boomers later on wanting to go out and buy the multiple cars, why they did the same thing with the Hill, I want one more throw at developing my third house or second house, it’s going to be great or whatever. And I see these boomers over the last seven or eight years, go build a 10 or 12,000 foot, you know, fun house, I’m like, Well, okay, but you know, in 10 years from now, you’re gonna be at your game, get up the stairs. So it’s, you doesn’t make sense to me. But I do think that’s going to be coming on the marketplace. And the second part of it is, you know, as they go into retirement homes, they’re going to sell the house. And that’s, that’s another thing just in normal housing. So if I were a young person looking at that, I think they have to be careful about what they pay what they buy at this point. And if I if I had, if I didn’t know when a home right now, I would probably wait a little while and see how it shakes out the next 12 months, I think there would be better off but but I know families have kids and they want to have a home and understand that the home is a home. It’s not a to me, it’s not an investment. But but that that area you’re talking about that part is it, it will not be like the last 10 years, in my opinion, it’s really changing. And that’s what will change about it.

Adam Taggart 46:27
All right. Okay, so that’s housing. Now we’ll just get to the remaining part of the consumer element, and then we’ll get to your market outlook. Consumers, you mentioned the bottom 80%, I’d sometimes raise it to the bottom 90%. Because your I stat I like to reference a lot is that 89% Or really 90% of all financial wealth is owned by the top 10% of households, right? So the bottom 80 to 90% really taken their lumps these days, right. So they’re not really benefiting in this this recent run up in the markets, yet cost of living continues to go up on them. You know, we’re seeing this manifest in declining real wages, we have that declining leverage, labor labor leverage ratio that I talked about. So they’re, they’re now still losing money on a net basis in terms of their wages, and their bargaining power at work is beginning to diminish, as you just gave us that anecdote with a cement guy. We’re seeing them, you know, not necessarily changed their purchasing behavior too much yet. I mean, we are seeing some evidence of that. But really, what we’re seeing more evidence of is they’re shifting the financing of their their lifestyles to more and more under revolving credit, right, we’ve seen revolving credit balances take off now that the pandemic stimulus is over. And to add insult to injury, the interest rates that they’re paying on that revolving credit are the highest they’ve ever been now. So it’s now very expensive debt, no surprise, we’re seeing the personal savings rate plummet at this point in time, we’re starting to see defaults increase, especially in things like auto loans. So we’re just seeing more and more signs that this consumer is getting more and more overburdened? And I don’t know, I mean, at some point, it would not surprise me to see the consumer really start tapping out here. And maybe that’s what brings the recession in in earnest.

Ted Oakley 48:28
Well, I think the one thing you mentioned, there were real wages, real wages have gone down 25 consecutive months in a row. For everybody out there, that’s after inflation. But I think that’s a really negative sign when you get right down, that means that their earnings are really declining. And what they’re having is that they can’t buy as much and that sort of thing. You see substitutions. I talked to a lot of people when I’m out of state on the road, different places that have restaurants or you know, just places you can go into in businesses lower. I have to say it’s probably most cases we think, what restaurant walk in businesses probably down somewhere between 10 and 15%. Nationally, that’s another sign of people not spending as much money. And so that that part of it is going to have an impact. And you know, you hear about this K shaped recovery. And that’s where the upper part of the K or wealthy people because it doesn’t affect them, it keeps on going to the right. And then the bottom, Florida that k is going down. And that’s at 90% you’re talking about. I do think Jay Powell understands this, that inflate the worst part of inflation is it kills the lower to middle class people. Those are the ones that suffer that people will have a lot of money. They’ll still there’ll be fine. Okay. But the people at the lower end and the middle class ends. They really get hurt and times of inflation.

Adam Taggart 49:58
I’m curious sort of how worried Are you about this cycle that we appear to be heading to for this lower cohort?

Ted Oakley 50:07
Well, I think it all comes together over time. And eventually, we’re going to show up one quarter, and everybody’s going to say, Gosh, I saw the signs, I saw things were coming together. But I didn’t really think it would happen. I didn’t think we would ever be say, I didn’t think times really slow down. And so then all of a sudden, when he gets here, it’s a, it’s a real awakening. I mean, they’re like, gosh, it did happen. And that’ll be for everybody. That’ll be for wealthy. And it will be for poor people, everybody had baby like, you know, times are slow. And it’s not the end of the world. I mean, you have recessions in a normal business cycle. It’s just what it is. The Fed, unfortunately, in the last 25 years, has tried to make sure we didn’t have those, which was a joke. And that’s why they’ve really ruined the whole system. But I think we’re back into it now. But we’ll see if they hold steady.

Adam Taggart 50:59
All right, in your right. I mean, we’re supposed to have a boom bust cycle, the bust is supposed to clear out the excesses of the boom. And when you try to delay the bust, you inevitably create it’s happening in the future, just worse magnitude than it would have otherwise happened. So, you know,

Ted Oakley 51:16
if you don’t get rid of the bad players is what happens. You got all these companies that are really not making any money don’t even have any revenue. Well, they shouldn’t be here. Okay. They’re not really an ongoing entity. But yeah, we’ve held them up in Wall Street’s bailed them out and give them a lot more money, all that sort of thing. They need to go away. They don’t do anything for society.

Adam Taggart 51:36
All right. So totally agree. So before we get to your your market outlook for the rest of the year, I just want to ask you, you recently did a really excellent interview with somebody that you and I both respect greatly. Senior Economist Lacey hunt, former senior economist at the Fed, one of the smartest and most accomplished economists still living today. And I’m just curious, is there anything we haven’t talked about yet? That you in Lacey covered that interview that you think are worth the viewers here appreciating?

Ted Oakley 52:09
Well, you know, Lacey and I have tremendous respect for Lacey. And he’s the person that coined that the term odbl or other deposit liabilities, and that continues to shrink. And Lacey Lacey, he was right on money on that. And that’s, that’s what you see, you see that continual money shrinking, money shrinking, and what, and even the Fed even even if the Fed is not doing anything here in June, they’re still they’re still taking money out of the system, you know, they’ve got a big balance sheet they need to get rid of, will they ever get it all the way down? Probably not. But it still has an impact of tightening, because you’re taking money out of the system. And that’s where we are now.

Adam Taggart 52:55
Okay, yeah. And it’s Lacey is doing a really good job of to is continuing to remind people that yes, we still have an inflation dragon that needs to be slain. But there’s a even bigger deflation dragon that we needed to address before this latest inflation round. And that thing hasn’t gone anywhere. I mean, we as soon as we put down the inflation fighting sword, we get to pick up the deflation fighting one. All right, well, look. As you look to the second half of this year, right. We’ve talked a lot about the many reasons why the economy has challenges ahead of it. Market, not really worrying about those right now. All it really cares about is AI and how much money it can throw after anything that mentions AI. What what do you see the rest of this year? You know, might we continue to be able to ride this this optimism? Or may some of these reckoning events that you and I have been talking about forced the market to have to reprice itself?

Ted Oakley 53:57
Well, you know, I see a lot of strategies come on in the networks.

Adam Taggart 54:01
Our interview with Ted will continue over in part two, which will be released on this channel tomorrow, as soon as we’re finished editing it. To be notified when it comes out. Subscribe to this channel, if you haven’t already by clicking on the subscribe button below, as well as that little bell icon right next to it, and be sure to hit the like button to while you’re down there. And finally, if the challenge is Ted is detailed in this interview, have you feeling a little vulnerable about the prospects for your wealth? Then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth, keeping in mind the trends, risks and opportunities, Ted’s mentioned here, just go to and we’ll help set one up for you. Okay, I’ll see you next over in part two of our interview with Ted Oakley


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