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Portfolio manager Lance Roberts & Wealthion founder Adam Taggart recap the major developments of the week, including:

  • Is the market now in a melt-up?
  • Did we dodge a recession?
  • Deconstructing the Fed’s pause/skip
  • How significant is the latest inflation data?
  • Can the economy withstand the current cost of capital?
  • The trades Lance’s firm made this week


Adam Taggart 0:04
Welcome to Wealthion Wealthion founder Adam Taggart welcoming you back for another weekly market recap at the end of the week. And it’s been an interesting week, featuring my great friend and portfolio manager extraordinaire, Lance Roberts aliens. How you doing, buddy?

Lance Roberts 0:19
I’m so impressed. I got an upgrade. Usually I’m just the good friend. So I No, no.

Adam Taggart 0:26
Well, look, it’s been a crazy week, one of which, and maybe we’ll talk about this near the end. But just to put it out there for folks. Because I’ve gotten a lot of kind words from this community. And I want to really extend my gratitude for that rough week for the Taggart family. My mother’s in the process of dying, we had to put her in the hospice a couple of days ago. Sad, but actually some really wonderful parts about the journey that if we get time I’ll elaborate on, but definitely has given me some insights to share with people who may have relatives in the future that go through the healthcare system in the dying process. I’ve had a crash course and the whole thing this week, and there’s some stuff I really wished I knew going in. But anyways, I have not had a chance to follow the markets this week nearly as closely as possible. And so I’m going to be leaving on the extra heart here glance, but I think you’d have to be completely out of the picture not to know that it was a it was a big week in the markets. The rally continues at full steam. Are we are we watching a melt up happened here in the process?

Lance Roberts 1:29
Well, there’s certainly some, you know, some kind of some indications of that, particularly, you know, if you look at the tech sector itself, and that’s kind of one of the big kind of drivers of markets. We’ve talked a lot here recently about, you know, if it’s seven stocks really kind of driving the market has been Nvidia and Apple, Microsoft and Google. And that’s, that’s been a very true statement. You know, last week in particular, we talked about and actually the last two weeks here on the show, as well as in our newsletter, at real investment. Shameless plug. We’ve been talking about second rotation, you don’t I kind of showed you these charts over the last couple of weeks talking about this rotation in the market. And Adam, if you can, let me share here real quick. The, if you take a look, you know, earlier this year, the markets were up 1011 12 13%. This is the red line, that’s the s&p market cap weighted index. And you know, we were talking earlier this year about it’s just seven stocks, that’s what’s driving the market, you know, XO, seven stocks, the markets negative for the year. And that was a very true statement. But you know, we were talking about how the extension to the market had really gotten out there and a lot of those unloved sectors, we’re going to start getting a little bit of love. And that’s that sector rotation we’re talking about, when you get to see that the black line, which is the s&p equal weighted index, has now had a very big move here really since the beginning of June. And that says sector rotation at work. A lot of these value stocks starting to get a little bit of attention here some of those deep out of favor sectors starting to get some attention here. Now does that last that’s that’s the big story. But from a standpoint of market health, breath is getting better and that that is good news. Then now to your question about a melt up. There’s certainly some aspects of that we’ve moved very far very quickly in this market and we’re starting to push levels of deviation that, you know, normally you’re going to get to the point to where you see a correction and we talked recently about Fibonacci Retracement Levels and if we kind of look at the market from the beginning of the January of last year through the bottom of that October low, we’ve done a very large retracement of that not only did we break break out above the 50% retracement, we clipped right through the 61 point and I know this is technical mumbo jumbo don’t worry about don’t get too involved with it. These are mathematical levels that historically kind of tell you a bit about what the market is doing. But we went through a 61.8% retracement level. And normally when you do that, you are in a bull market, you have pretty much ended the bear market, the bear market low was last October. And now markets are really starting to get much more back into a bullish trend. But importantly, we’ve got some very big resistance that’s coming up. And if when we’re about to go into earnings season, so if we don’t see a real improvement in earnings to help support the underlying narrative of the market this year for 10%. Down or retest that kind of breakout level sometime over the next couple of months.

Adam Taggart 4:48
All right, unless you you glitched while you were saying that but I think I heard you say if we don’t see the earnings growth to support this, you would not be surprised to see like a 10% correction is that what we need?

Lance Roberts 5:00
Yeah, five to 10%, you know, kind of look at that 50 day moving average. And that tuner day moving averages kind of key support levels for this rally. And again, if if earnings don’t really kind of match up to, because expectations are really getting out there in terms of profit growth and earnings growth. And despite the fact that, you know, we’ve had just a very strong, aggressive Federal Reserve over the last year, that red line, by the way on this chart, that’s where the market is currently trading, that is above now we basically have retraced back, every Fed rate hike going back to March of last year. So all those rate hikes, the markets have now just completely recovered all those rate hikes in the market. So the markets are saying, basically, at this point, those rate hikes don’t matter, the economy’s strong enough to withstand it, it’s all going to be fine earnings are gonna continue to grow here, profit margins are gonna continue to grow here. I think that’s a very hard reach for the markets at this point. So again, a five to a 10% correction at this point to work off some of the froth was not be surprising at all. As long as we can kind of maintain this upward channel that I’m showing you on the screen right now. You can see that kind of very defined upward channel we’re in as long as we can stay in that channel. We’re good. Now if we break below that, then this whole conversation about a bull market is going to change pretty quickly.

Adam Taggart 6:24
Okay. So two things on that one, just interviewed David Haye. And he very much underscored the dichotomy that you’re talking about here, right, which is, there’s going to be there’s going to need to be a lot of economic health to support a these levels and be a continued movement up here in a bull market. And there still seems to be a really massive divorce between that and the underlying macro fundamentals. And let’s maybe we’ll talk about that a little bit later. And again, there’s the old saying the market can remain irrational longer than you expect. And, you know, we had Ed Yardeni on this week. And we’ll talk about that, too. You know, he’s a lot more sanguine about what the economy could do from here. So, you know, there may be there may be that ketchup, right, and we’ll talk about that in a moment. But also, just to your chart, you don’t have to bring it back up. But it’s been Henrik, the technical analyst was on last time, or last time, he was on talks about the battle for the controls when he called us that the markets have been locked in for a good long while. And they had been right up until very recently. And it was really between 30 840 200. Well, the chart you showed is okay, that battle has now been won by the bulls. We’ve had the breakout. Now it’s a matter of you know, how long it can last? How far can run? Just let folks know that on a current schedule. I’m scheduled to interview spin early next week. So any surprises to my schedule pending? And there may be some you’re gonna hear from spin very soon, folks about what what’s next now that the battle for control is over. All right. So you’ve got some charts up here, Lance? I’m just going to shut up and let you talk to me. Yes,

Lance Roberts 8:07
no, no. And really, I just pulled up a chart to kind of go along with what you were saying. And this is kind of reiterates your point. We were talking again, look, you know, analyst right now. Right. They’re they’re they’re forecasting earnings going out into the future. And they’re saying that between now and the end of next year, we’re going to be an all time new high on earnings. Now, there’s nothing wrong with that, except analysts are always overly exuberant. But in order to have that earnings growth, you’ve got to have fairly consistently strong earnings growth, because that’s where earnings come from, right. So it’s what you and I buy in, you know, at the gas station to grocery store, that’s where earnings come from, right or buying a new Apple iPhone or a VR headset or whatever. That’s where the earnings come from. So if we don’t have economic growth, we don’t have earnings. Because we don’t have as much consumption. That’s why you have negative economic growth. So if there is still the risk of an economic slowdown and much weaker economic growth, then markets are way overpriced right now for those potential underlying earnings. And so earnings are going to have to come down theoretically, if we don’t start seeing earnings really gains. I’m sorry, the economy gained some traction here. I just want to show you this one chart too, though, because talking about this potential for a market correction, the VIX, the volatility index, and yes, before you jump off on the zero DTE train, and I understand that right now, there’s a there’s a big problem with the VIX because of the zero day to expiration options, which, by the way is going on today. We have quadruple witching on Friday, on Friday here. So the point though, is is that the VIX itself is trading at extremely low levels. There’s no fear of a correction the market put volume is extremely decimated. I mean, everybody hates puts right now people can’t buy enough calls. And so you’re definitely getting to a point of kind of short term exuberance in the markets. And historically going back when ever you’ve had such a low reading on the VIX combined with put a and Paul love, that’s typically been, you know, near at least a short term top in the markets and you’re going back to this idea of having at least a short term correction. So if you’re looking to get money into the market, if you’re looking to add some exposure here, you know, don’t do it today, I think you’re gonna have a better opportunity in the next couple of months, when you get this type of just a correctional process within the markets. And that would be a healthy thing, by the way, the markets need to go up and come down before they can go up again, that’s just a healthy process of the markets. Now something else happens and we start actually seeing the onset of a recession or, you know, another type of you know, basic, maybe a pickup in the financial issues with the banks, etc, then that’s a different story. And we’ll have that conversation when we get there.

Adam Taggart 10:54
Okay, I’m just gonna put up a chart here super quickly, to underscore your point about the options buying. We’ve just seen the highest level of s&p Call buying ever. Yeah. So to your point, people are definitely on a bullish train right now. And it’s amazing to say that, given how aggressive call buying was everywhere in the market, you know, two years ago, when there was all this liquidity sloshing around and everybody was, you know, into meme stocks and all the super speculative instruments back then. And yet, you know, we don’t we don’t have that speculative pan speculative fervor, you know, across every asset class, but still, we’re hitting new records right now. So that really does tell you something. And also, you know, I’ve been, I’ve been getting a lot of people pinging me and saying, Hey, is this David Hunter’s you know, call that he’s made for years now. Right, of s&p melt up to 6000. Right. I mean, I personally don’t think that we’re gonna get there anytime soon. Of course, it could be wrong. But but all of a sudden, you know, people are starting to think really big like that right now, which I take as a sign of okay, yeah. You’re ever the mania is probably getting exuberance is getting ahead of reality here. But but curious what you think.

Lance Roberts 12:12
No, no, we’re not going well. Okay. s&p 6000. Will the s&p get to 6000? Yes, yes. Yes, absolutely. Could be, you know, five years from now, 10 years from now. But yeah, we’ll definitely get there. That’s just a function of economic growth and inflation, those types of things. A melt up to 6000. Could that occur? Yeah, it could, if valuations weren’t already at 30 times earnings, you know, and so the problem, the problem that we have is, is that we had a correction last year, not a bear market, because in a bear market, you revert valuations, and we never reverted valuations, and we never broke the long term uptrend of the markets. In fact, this is a subject that I wrote about on Friday, in particular, but this is an article we wrote about on Friday talking about the different corrections and bear markets. And this is important, because we never corrected valuations. And you know, as you were talking about Adam, you know, in 2021, we were talking about mean stocks, and you know, GameStop, AMCs, etc, we were talking about specs and IPOs. And we and we had Paul love and put hate back in 2021, very similar setup to what we have now, the only difference now is, is that everybody’s chasing anything artificial intelligence related. So we and again, that’s not just that, I mean, if you also look at the most fundamentally weak companies, those are the ones having the biggest gains in the markets. If you look at the most shorted stocks, those are the ones having the biggest gains in the markets, you know. So we’ve gone back to that very speculative fervor that we saw back in 2021. Why? Because we taught everybody back in 2021, how do you make money in the market? You speculate on calls, I’ve been getting a ton of emails from people going, I want to trade options, how do I trade options, and I’m like, if you just want to lose money, send it to me, I’ll just take it from you. It’ll be but you know, this is the this is the environment that we go back into. And so this will eventually end the question is what will cause it? And, you know, we could look at for instance, in video, one of the reasons that NVIDIA just went skyrocketing after their earnings was it because that they beat earnings or actual revenue and profit declined from the previous year. The reason that it went screaming off because they said, Hey, our earnings grow by 50%, next quarter, because of AI, and because of the chips and etc. So and we’ve written a couple of articles about this is that you know, there’s a problem with this thesis because they have to assume they’re the only player in the market. Well, just last week, AMD came out said, hey, guess what, we have a new GPU. The problem with a market like we have is that it’s going to attract competition. At some point, Adam is going to go out and figure out how to build a G If there’s enough demand, and there’s enough money being made in it, Adams gonna go out figure out how to build a GPU to come into the market and be cheaper than everybody else.

Adam Taggart 15:08
Do you think that a an AI stands for? lancy? Exactly, it’s

Lance Roberts 15:11
the it’s the atom intelligent. But the point is, is that when it comes down to market dynamics, people don’t necessarily have to buy the best. Maybe Nvidia does have the very best GPU, but a $250,000 a unit, there’s gonna be a lot of companies that go you know, what, if I can get one for $100,000 It’s not as good as invidious. But it’s gets me to where I want to be, I’m going to buy that because I’ll get to and it’s still cheaper. Greg and and, and because of just the ability to spend capex, right, there’s not that many companies that can go out and buy 500 GPUs at a time at a quarter million dollars apiece to you know, build an AI project. So the so the market demand is going to dragging competition at cheaper costs, lowering profit margins. And this becomes problematic for Nvidia. In the future. We saw this happen with the cloud, we’ve talked about this before. cloud cloud profitability has dropped sharply, because competition is causing costs to come down prices to come down to get business. That’s just the way the market works. So when you take a look at a company like Nvidia trading at 40 times price to sales, that becomes really problematic for that company to generate that. So the point is, is that eventually reality is going to come back to the market. But this fantasy, as you said earlier, you know, markets remain a logical laundry, marine solvent. That’s where we are. And this can go a lot further than you think. Go if you don’t believe me go back and look at a chart 1999. And what the NASDAQ did These things can go a lot longer than you think before they break. So the point here is that look, I’m not bullish. I am not bearish. I am just the market is doing this right now. We have to participate to make money for our clients. And so we’re on this side of the fence right now, because we want to make money. When the time comes, I will get dramatically more bearish and conservative and portfolios. But we’re not there yet. And if you’re trying to short the market, now, you’re going to lose a lot of money most likely before this thing finally breaks.

Adam Taggart 17:13
Yeah, it’s a good warning. We’ve talked about that harder to make money on the short side, because timing becomes so important. So I mentioned I interviewed Dr. Danny, it’s interesting, you know, he is optimistic. He’s got a good argument for it. You know, I would i By the way, I told

Lance Roberts 17:29
you he was going to be no, no, I

Adam Taggart 17:31
you did. But what I appreciated about that is I thought it was a good measure discussion. You know, there were a lot of people who listened to probably are more in the bearish camp, and they didn’t necessarily agree with everything you said. But he made a good, rational argument for why he sees what he sees. But even he who is you could call him you know, a bull is looking at the market action right now and saying, you know, I thought the market was going to do well this year. But he says I’m concerned it’s going too far too fast. And even he is kind of hoping that there’s a little bit of steam coming out of this because you’ve said many times, you know, he said melt UPS tend to be followed by meltdowns. And this could be the market just literally getting too far ahead of itself here, which you know, then injures the people that get in too late. So even he’s a little bit cautious right now. All right. Lots of talking about,

Lance Roberts 18:26
by the way, by the way, I have huge risk. Just I don’t want to walk away from what my comment was the second one, I said he was going to be bullish. I have huge I have massive respect for Ed Yardeni. He’s a very smart guy. He’s just always bullish. He’s a perennial bull. And he’s always optimistic. And there’s nothing wrong with that at all. Don’t Don’t mistake that. But, you know, I just have like, he’s a very smart guy. He’s been around the markets a bajillion years. And you know, he knows what he’s talking about. So definitely, definitely give weight. If you disagree with his whole premise, you should at least consider what he’s saying. Because he’s right more often than

Adam Taggart 19:02
he’s wrong. Yeah, you should, you should know your reasons why and like, you know, we’ve talked a lot about this as the purpose of this channel is not to be pushing one particular market view, it’s to try to bring on intelligent people really understand their positions, and then you as the intelligent viewer trying to parse which makes the most sense to you, in particular, what is funny, though, and I do take this as sort of, again, an emotional sign of where we are right now is, you know, as the markets have gone up this year, especially as the the action has turned from sort of a bottoming to, you know, a take off here. There’s been a lot of people coming out and taking potshots and saying, oh, all these bowls you had on the channel were wrong and nobody called this and and look I mean, I think anybody called you know, for an AI driven melt up coming into 2022 or three so that’s that’s on everybody. But you know, this sort of comments like, Oh, this is a bearish only channel and as I’ve said many times, it’s not it just I happen to bring on data driven people. I don’t even know what their positions are, most of the time when it comes Mind and they just aren’t concerned, given all the data that we all talk about here. But now that I’ve had a couple of people who are more on the bullish side recently, you know, we had to add we had Michael Howell, we had Dan, tap, Yarrow, a few others. You know, all of a sudden people are like, oh, yeah, well, now you’re bringing the bull’s eye. Well, that’s, you know, too, too little too late. And then it’s probably the sign of a top because you’re gonna bolt on right now. It’s like, there’s just no pleasing anybody in this market right now.

Lance Roberts 20:28
No, no, you’re not ever going to please everybody on YouTube. And that’s absolutely for sure. You know, I find it interesting, too, because I think I’ve been, you know, fairly balanced over the weekend,

Adam Taggart 20:39
super balanced. I was gonna say, that’s why we have this show on every week is because you do a really good job of saying, I’m going to hold both ideas in my mind, and we’re going to bat it around for an hour and a half.

Lance Roberts 20:50
Well, you know, and my point about that is I think I’ve, you know, I’ve tried really hard, you know, here on this channel, particular, but it just in general, writing articles and newsletters and stuff, things, trying to keep a really balanced approach. Hey, here’s the bad news. Here’s the good news. Here’s what’s going on. But it’s interesting now, like on my Twitter, so if you follow me on Twitter at Lance Roberts, you know, that is funny, because now I’m getting all these people going, Oh, well, Lance is turned bullish. So that means the top of the market is here is like, No, I’ve been for a while, because markets have been doing better. But it’s interesting, you know, there’s, there’s always that group of people that are going to try to knock you down for one reason or the other. And that’s the problem with too much social media too much, too much of everything at this point, you know, these very small voices have a big weight on you that they shouldn’t have. And this is why it’s so important. And again, this is why I go back to talking about you know, when I’m managing money, if I showed you my office right now, there’s no TV on, there’s no news channel on if you take, you know, I I do read a lot of articles every day. But I don’t have a live trading screen in front of me every moment of every second of every day, I have access to all that data. So when I need it, it’s there. But I turn all that stuff off during the day, unless I specifically need something like we’re looking at position we’re going to buy or sell or whatever, I turn it off, because it will drive you to make bad decisions because of that emotional impact. And it’s the same thing with social media, you know, you don’t remember all the good things that people say, the one thing you’ll take away with you when I’m not talking about a financial social media is on your personal social, and financial, you know, your personal social media, you know, all these people say, Adam, you know, I love you, you’re great, whatever, you’re awesome, you think you’re a great guy. And there’s one guy that says, Oh, you’re an asshole. And that’s the only thing you take away from the whole day, you can have 500 positive comments, one guy that calls you an asshole, and you take that home with you, right, and it just destroys your whole day. Because this one person doesn’t like you for and he’s probably just having a miserable day and just needed to take it out on you. But that’s that’s the issue. If you want to be a better investor guy to turn that stuff off. And instead is I’m not saying don’t watch this channel. I’m not saying that at all. I’m not saying don’t look, I’m not saying don’t watch the news. I’m not I’m not saying that. Just turn it off when you’re working your financial side of your business. Focus on that. What drives it? What causes stocks to go up and down? What is going on with economic data? Look at the facts. Forget all the emotional stuff. And then you’ll do a lot better job managing money long term.

Adam Taggart 23:32
Totally agree. We’ve talked about this before on the channel. For me, I just sort of mentioned this because I think it’s a sign of sentiment extremes. So you remember back in October, right? I mean, we had you were saying I’m just gonna look folks, you know,

Lance Roberts 23:46
the key get any worse? Yeah, yeah. I

Adam Taggart 23:48
mean, you were saying like, look, you know, people are talking about the dollar is going to die tomorrow. And we’re going to have the next great depression and 2023. And it was very sort of like End of Times type thing. And you were trying to tell people hey, look, yes, there’s, there’s, you know, some storm clouds out there. But it’s, it’s, it’s probably not as dire as folks are expecting. And look, you know, that then, again, sentiment extremes generally, kind of, it’s like what you say all the time, when everybody’s on one side of the boat, probably something else is going to happen. Right. And it seems to me that we’re now kind of at the sentiment extreme on the other end now. And it’s just one more data point where maybe something different than what now they’re now expecting is is going to happen. All right. Well, look on this topic of sentiment, though. You’ve written two articles this week that are pretty related. One is the hey, you know, we’re we’re now in a new bull market here in the short term, we’ve had the breakout, you title that piece, it’s different this time. So I’d love to just sort of have you underscore for folks what the key element of that piece was and then also if you want to blend in some of your earlier article where you were talking about how fun was back you know sentiments extreme If there’s anything else we haven’t talked about on that end, let’s wrap that into.

Lance Roberts 25:03
Sure. Okay, so first, let me I’m gonna, let me share a screen here real quick. I’m trying to figure out the best way to share this, maybe I’ll just drop into the article itself. And we’ll just kind of start there. Just give me one second to pull that article up. The reason that, you know, we’re talking about things being a little bit different this time. And again, when we go now, what we’re talking about specifically, is last week, the market eclipsed a 20% return from the October lows, so the markets were up 20% From the lows.

Now, immediately, the media jumped on this and says, Oh, the bull market, the bear markets over the bull markets back because we’re up 20% From the lows, the 20% number is entirely arbitrary. That was something that goes back in the history. And there’s a problem with that number today, because markets are so deviated from long term means and long term bullish trends, that these 20% corrections which used to, you know, back in 19, you know, the 1970s, the 1980s 19 and 1990s, we had a 20% correction, you were breaking bullish trends, you had a negative price dynamic in the market. But we haven’t had that, really, since 2009, because markets have gotten so far ahead of where they should be on a bullish trajectory. And so having said that, here, let me go to a share screen here real quick. So if we take a look, a couple of things that are going on in particular, so first of all, and this is I said, is that, you know, what was interesting, and I apologize, this chart a little bit small, it’s not mine. But as soon as this 20% Number happened with this huge jump in the number of articles written saying, Hey, this is a new bull market. So this chart is the market from January 1 of 2022. Through the end of the year, in that red box is that 20% rally that everybody said, Hey, this is a new bull market and we wrote them we said, Hey, be careful with that. Because we’re still in a negative trend of the market and the market ran right into the 200 day moving average, and failed. So even though we had a 50% retracement, that was another article that everybody wrote was like, Oh, the markets had a 50% retracement of its decline. That’s always a bull market markets are always higher after that. And it wasn’t. And it was just because this time, we got deviated well below that tuner day moving average, we had to rally back to that 200 day moving average. Still in the downtrend, we were still in a negative trend of the markets and the markets had more work to do at that point. And so this was why that wasn’t a bull market. Now, this is the important thing. I want to focus on this for just a moment. Because this is critical to the story of what’s happening in the markets today. We’re not it last year was not a bear market. 2020 was not a bear market. But Lance the markets were down 35% and 2020. That’s a bear market. We were down more than 20. No, it wasn’t why wasn’t it? It wasn’t because we never broke that bullish trend from the 2009 lows. We corrected to it numerous times, we came back to that bullish trend. But prices never got into a negative trend of the market like we saw in 2001. And two, we broke that uptrend. We had a negative trend in markets in 2007 and eight we broke the uptrend from 2003. We have a negative trend in prices since 2009. That has not occurred. In fact, the correction last year didn’t even get close to that we are so deviated with that $5 trillion worth of stimulus that the markets will never able to correct back to that level. So either we’re eventually going to retest that bullish uptrend line at some point in the future don’t know when, but we certainly haven’t done it. So for right now. 2022 was not a bear market. It was a correction. Here’s the important point about this. Lance, who cares? We were down 20% It’s a bear market call it a bear market. It was a bear market everybody was negative. There’s a difference between a bull market and a correction. A correction and you’ll look at if you look at this chart in front of you you’ll see this to be a fact is that corrections are short term in nature. They come down they test some level of support. The prices of the market remained in a positive trend and most importantly, prices recovered all time highs very quickly. This is what happened in 2020. We had the big correction but in in five months we were at all time highs. Again that’s a correction. bear markets conversely have very similar features. One is a big reversion and valuations you have evaluate You shouldn’t reversion in the markets, they’re more protracted affairs and they take a long time to get back to new highs 2007 2008. Big version evaluations took about five years to get back to new highs. Same thing back in 2001. And two, so we have a big reversion valuation kind of took forever to read. And we didn’t actually get to new highs, we barely tap new highs before 2007 2008. But these are long, protracted affair. So there’s so right now we’re in a correction. And if this market surges to all time highs by the end of this year or next year, early next year, this is going to be the a very definition of a correction. And so this is this is where we are why is it different this time?

Adam Taggart 30:44
Hey, sorry, can I can you go back to that chart just for a sec?

Lance Roberts 30:47
Yes, please. Oh, well, more.

Adam Taggart 30:55
So looking at this very protracted bull market that we have had and are currently still in, according to this chart. Let’s, let’s look from 2011 to 2020. Would you say that’s been so prolonged? Primarily because of all of the stimulus that was going on during that time?

Lance Roberts 31:19
Absolutely. No, this has nothing to do with fun. Don’t Don’t mistake what I’m saying. This has nothing to do with fundamentals this year. I

Adam Taggart 31:26
know you’re just talking about what is but but looking at this people are like, Why is this you know, most recent runs so much longer than the rest? And I would posit sounds like he would agree well, that’s because we had sort of, you know, permanent permanent stimulus being injected for the decade following the global financial crisis. And then it deviates so extraordinarily, after 2020, because we just put so much more stimulus into the system, right? So

Lance Roberts 31:50
just just just importantly, look back at the bull markets of 2003, or 2008, and 1995 to 2000. You can see those deviations from the bullish trend, they weren’t that great. So if you had a 20% correction, you were popping negative prices, you know, but you can see here is that it really in 2009 1011 12 1314, that was kind of you know, 2010 11 and 12. And 13 was a very normal kind of bull market coming out of 2008. It really went haywire starting in about 13, when, in 2013, when Ben Bernanke launched the trillion dollars worth of QE to avoid the fiscal cliff after the whole debt ceiling trauma and 2011. When that money came in, everybody was expecting this fiscal cliff was going to really just collapse the economy, but it didn’t. And all sudden, you had this massive amount of stimulus. And the market got really deviated from that long term bullish trend. And then we kept going, we kept doing more and more and more, and you keep seeing that each one of these rallies keeps getting further and further deviated from that long term bullish trend, which is why in 2020, when you had that 35% correction, it just went back to the bullish trend. That’s all that happened. We just reverted that excess. And then we hit it with Fiat and instead of leaving things alone, we got to throw $5 trillion of liquidity and a trillion dollars a month of QE into the mix. And that deviation now is so huge, it’s going to take a it would take a 50% decline from that peak and total to get back to just a bullish trend. In other words, I wrote an article called This is a 50% decline, but only be a correction. That’s what it would have taken from the 2020 to p to test that trendline was a 50% drawdown and that would still have only been a correction in a bull market. That’s hard to conceive of how distorted these markets are because of liquidity.

Adam Taggart 33:45
Okay, great point totally following you here on that and the only point I wanted to make which which I think will tie into what you’re going to talk about is what is different now versus back to the start of that run in 2011 is the policy side of things at least the monetary policy side of things right? So we now all of a sudden have removed the I don’t know the the hot air from the blue whatever you want to say the thing that has been keeping us aloft for the past decade plus we’ve now removed and we’re way up at these heights right so the agenda

Lance Roberts 34:23
but this problem you haven’t removed it central bank balance sheets are expanding again right so all that liquidity is in yes the Feds hiked rates market is going okay great your hike rates but you’re gonna cut them and that’s even what what said he said this meeting and everybody of the market immediately sold off and then when Jerome Powell got into the presser he completely avoided the word skip and completely avoided two more rate hikes pretty much as just kind of setting it was like Ah, yeah, we might hike rates. But then he said he said Yeah, at some point, so become appropriate. had to cut rates? Well, that’s all the market heard. And immediately the markets went running back up. So the markets are addicted to this, this this stimulus that Oh, cut rates, that means higher stock prices. And yeah, fundamentals haven’t mattered and 10 years. So this is all what in the market now.

Adam Taggart 35:18
Right? And look, all I was gonna say is it all depends on what the future brings right now. Because we have Yes, central bank balance sheets to a certain extent are increasing, but we are still doing Qt, we’re not pumping in, you know, the, yeah, 10s of billions we were doing every month and buying mortgage backed securities and treasuries and all that stuff. So it’s a different world right now. So put my

Lance Roberts 35:41
like, well, we’ll be careful about that, though. See, you’re forgetting about the 1.7 trillion in the inflation Reduction Act?

Adam Taggart 35:49
I’m not because that’s that’s a bullet coming up pretty soon here, too. But well, so anyways, and again, I’m not trying to force a conclusion here. So correct me if I’m wrong, but all I’m saying is, is it’s gonna require a ton of continued liquidity, net liquid positive liquidity to keep things up here. And we have we have things that are changing on the ground that haven’t been changing in a decade right now. They could reverse the Fed could go back to printing and QE and all that stuff. Right. But it almost may have to, if we want to expect this number to continue to its upward trajectory, this big of a divergence from that bullish baseline.

Lance Roberts 36:24
Absolutely correct. And so this is the same chart I just showed you a second ago. It’s a log scale, though. So it kind of makes the pitstop look as large. Be careful with log scales, a lot of people say, Well, you, if you don’t put that chart, a log scale, it doesn’t matter on a log scale does is take away the impact of large numbers. And it’s a mathematical kind of, but so you know, everybody goes, you know, in the markets, they go, Well, if you put that in a log scale, it doesn’t look as dramatic, you’re missing the point, right? And the deviations are what matter and these deviations are so large, yes, I can, I can hide the impact of large numbers by using a log scale. And that’s fine. There’s certainly times that using a log scale is appropriate. But it’s not always appropriate. So just be careful with people telling you it has to be one skill, sometimes it doesn’t need to be. But anyway, back to this chart. This is the 200 week moving average and the 40 week moving average. Again, just as I showed you a second ago, we never broke that 200 week moving average. And that’s just a moving trend and prices. So begin drawing lines on the chart, this is just the two week moving average. And we’ve never broken that we’re back above the 40 week moving average that has been and if you kind of look back over time, whenever we’ve been kind of trending higher, we’ve been above the 40 week moving average. That’s where we are now. So again, just kind of another reiteration of where we are again. So I showed you that that first chart where we had the 20% rally back in 2022, that wasn’t a new bull market. This 20% rally has taken a lot longer to get there than it did back in 2022. But we are above 20%. Now, from those lows. The difference this time is just twofold. Two things to pay attention to the reason that the markets trending better now. And the reason that we’re we want to be buying dips now versus selling rallies is because of really just two technical issues. One, the 50 Day has now crossed above the 200 day moving average that suggests that prices are trending higher, that’s all moving averages, it just says where price is going up or down? Well 50 day moving averages are trending higher, that typically tends to be bullish support for markets short term. Also, we’re now trading well above the 200 day moving average, in fact, a little bit too far. Right now, the deviation on the NASDAQ is 20%. Above the 200 day, we’re about 10% above the 200 day on the s&p, those deviations can’t last very long. So you are going to get a correction. But as long as we stay in this kind of bullish pattern of rising prices, we’re above moving averages, the the overall environment remains positive. You want to be buying dips, again, that’s going to change eventually. And look this to your point, Adam, the liquidity or lack of liquidity going forward is going to become problematic. But that could be next year. It could be next month, right when it shows up. But when it shows up will change. Right now though. We’ve got to make money with the markets. We want to invest. We want to grow our capital. We want to do it safely. But we want to take advantage of opportunity when the market gives us that opportunity. And we’re getting there look bullish

Adam Taggart 39:40
real quick. Let’s get back to that chart just for one sec. So is it fair to say so, you know, beginning of this year, you know, you were telling people hey, look, we’ve been increasingly defensively positioned as 2022 has been going on. Things look bad in the moment, but we think you know, there’s opera tunity here and you were warning everybody not to be, you know, overly bearish, super, super bearish. And you started to say, okay, look, we’re starting to, we’re starting to, you know, enter the dance floor. Right, you know, and and now over the past couple of months you’ve been, you’ve been adding more, I mean, prudently, you haven’t gone whole hog. So far, so far, is it suffice it to say that you are, you are now dancing, but you’re starting to begin to just move a little bit closer to the exit?

Lance Roberts 40:32
Well, it was what we never done, fortunately, and I’m paying the price for this right now. And, you know, it, you know, earlier this year, we were buying, you know, stocks that were fundamentally valued and those type of things more on the defensive side of the of the economy, we thought the economy and the markets would do better. We didn’t anticipate the AI Chase, that was something that kind of blossom, we own those stocks. The problem is I don’t own enough of them. They’re they’re small relative, they’re small relative to what their total sizing should be in our portfolio. So I own them, I just don’t own enough of them. And so what’s happened, you know, this year, as we were talking about that deviation between the s&p 500 market cap and equal weight, our portfolio was more equal weighted. So our performance relative to the market cap weighted index is lagging because we don’t have seven stocks making up the entirety of our portfolio that’s beginning to change now over the last two weeks, our performance has picked up markedly because of things we’ve been adding. In the portfolio. We added AMD we added regional banks, PNC and truest financial, those have done well.

Adam Taggart 41:41
I imagine some of the rotations helping to write that.

Lance Roberts 41:45
Well, you know, that’s exactly the point, Stanley Black and Decker, which is the value companies had a huge rain over the last couple of weeks, it’s doing great. So there’s, you know, we’re starting to see that rotation with the market. So those ads we’ve been making have now been paying off. While we’re waiting to add to those technology positions, they were just too expensive to deviated, I couldn’t justify buying more apple or as we bought AMD, like three months ago, we’re at 30% on it, so I can’t justify adding to it here, I need that thing to pull back some to build that position size. So I’m hoping that we get a correction. Because a our defensive position will protect us against any type of short term correction, but then give us an opportunity to add some of those cyclical exposures to the portfolio to balance the portfolio better for the environment that we’re in. So we’re but yeah, so we’re on the dance floor. But unfortunately, we’re really close to the edge of the dance floor. We never made it to the middle, unfortunately.

Adam Taggart 42:41
Okay, great description. And again, just to your point of given where things are feeling a little richly valued right now. Or even though you’re not near the center of the dance floor yet, are you taking a step or two back closer to the exit yet? Or are you just going to stay where you are. And just put more in, if there’s a correction,

Lance Roberts 43:00
we’re pretty, we’re still pretty underweight equities, we’re only running about 45% equity out of potential of 60 to 70. So I don’t need to do a whole lot in terms of becoming more defensive. We are, we are taking some action, I’ll explain it here in a sec. But I don’t need to take all I don’t need to go sell a bunch of stuff, because the stuff we own is pretty defensive in nature. So I don’t need to raise a bunch of cash. However, what we have been doing is starting to shift more of our duration in our bond portfolio as a protective measure. So if we get a correction, we should see yields come down. And, you know, we talked about before how the two year Treasury is a very close leading indicator of the Fed. And the two year Treasury rate has been starting to fall here over the last week or so. So we’re starting to see potentially that first kind of curl over in yields on the two year Treasury that tends to lead the fed by about six to nine months. And so we should so if the two year Treasury continues to pull back here, because inflation is falling, which you know, we just printed a 4% inflation rate earlier this week, that that suggests that yields are going to come down. So we’re starting to shift our cash positions that we were using in one to three month t bills now and one to two, one to three year T bills and our one two threes are moving to five to sevens and are set five to sevens are moving to 10 to 20. So we’re starting to shift that barbell out more to capture yields as they start to decline with inflation and slower economic growth later this year.

Adam Taggart 44:32
Alright, so take note of that, folks, because that’s one of the things that we’ve been tracking with Lance, really for almost the course of a year now is last term is going to start getting out in duration. Yeah.

Lance Roberts 44:42
Yeah, we

were talking. We were talking about inflation peaking last year, actually, this month.

Milton Berg 44:48
Even a year ago,

Adam Taggart 44:53
this month, we were talking about you and I were talking about inflation peaking in June of last year. Yeah, yeah, we weren’t really mine started peeking in July but we were we call it I mean, I remember we caught flack for it at the time that we were delayed by a month but when you look back at the stock chart it’s pretty good call I think yeah, yeah, yeah. And you’re never gonna get perfect but we were close. Yeah, we were definitely good enough I think at least horseshoes and hand grenades even close. Alright so I interrupted you you were going to talk about sentiment area.

Lance Roberts 45:21
Hey, I just and just and again, you know we talked about last year in May and October of last year we wrote articles about how extremely pessimistic the market was. This is a chart of just a of the individual retail sentiment. You just see that just recently we’ve had this huge jump in bullish sentiment. We’re not back yet, but definitely starting to get a lot more bullish. If we look at it. We have reran another chart. Now this is a net bullet. So this is the spread between bulls and bears on both retail and institutions. And you can see that starting to finally come out of that extreme bearishness as well. Now that’s actually bullish short term because that rising bullishness means that all those people sitting on the sidelines are now having to capitulate and finally buy into the market. So that’s one thing has really been kind of helping this market hold up here recently. But once we start getting up above two to 2.25. On this particular index, it runs between basically zero and three normally. But once you get above three, you’re really getting extreme bullishness. But we’re starting to get at that level, we’re getting pretty bullish on the market. So again, there’s probably some more to go here short term. But we are getting closer to a level that suggests we’re going to have a correction. And again, as I was just mentioning, you take a look at deviations from the 200 day moving average the s&p is getting, it’s not there yet. But it’s getting pretty deviated from that 20 day moving average. And that typically, you know, gets you pretty close to aligning with the short term peak in the market. Again, don’t associate a peak in the market with grab a massive correction of 30%. That’s not what I’m saying at all, five to 10% corrections are normal in any given year. So a five to 10% correction this summer, is going to be is completely expected completely warranted. And that would put the market in a much better position if you want to add some exposure here, NASDAQ is about 20% above its long term, 200 day moving average, that’s also starting to get pretty extreme here. So again, I think this isn’t a good time to add a lot of exposure, I wouldn’t Chase markets here, I think you’d be patient, it’s gonna be painful to be patient. And here’s gonna be the funny thing about it. If you want to buy something, let’s say this pick a stock, I want to buy this stock at 100. But it’s really overbought, it’s three standard deviations, overbought, it’s it’s RSI is off the chart, etc. And you don’t buy it, but I’m gonna wait for a pullback, right and then the then the stock goes from 100 to 150. Now in this happens from sometimes it goes 250 You’re like, well, Man, I miss it, I should have bought it at 100 I missed the whole thing. But then it’s going to correct back to 100. And you’ll have the opportunity to buy it back and 100 and you’re gonna go walk in it bought it at 100 back then and made the 50 bucks and you wouldn’t have sold it. But you know, that’s a different story. Yeah, exactly. But when it pulls back to that same level you were at previously, it’s a better value on a risk reward basis, because you’ve rung out that overbought condition. So you may wind up buying the index or buying a stock higher than it is today at some point. But it will be at a better risk reward basis. So don’t get too tied up with the price, understand the risk reward an opportunity that when you’re investing capital, what’s the risk I’m taking, if you buy in video today, you’re taking a lot of risks with your capital, you can buy and video at the same price six months from now, and there’ll be a lot better opportunity. I know that doesn’t seem to make sense. No, it does.

Adam Taggart 48:48
It’s a great point. And I’ve seen some comments from folks recently saying, Hey, can you explain the difference between overbought and over over button and under bought and, or whatever overvalued and undervalued. And, and that’s a great example where you can buy the same stock at the same price at different times. But your risk return ratio can be very different given whether it’s got overbought readings or under bought readings, right. In fact, you could make the argument better to buy a stock at 110 versus at 100. If it’s extremely overbought at 100, but is coming off of a sell off at 110.

Lance Roberts 49:30
Right, right. Yeah, no, that’s absolutely right. And then this people,

the mistakes that investors make, is they get too tied up in one metric or another right. And it’s like and particularly when you’re looking at price. I don’t want to pay $100 for a stock. It’s too expensive. Sometimes $100 stock can be cheap, and it’s just don’t get tied up the price doesn’t tell you anything. What the price tells you that’s important is When that price is deviated from underlying trends or underlying moving averages, those type of things, that’s where prices important, fundamentals are most important. So, you know, always start on a fundamental basis. And by buying something that’s fundamentally cheap or overvalued, again, you know, I’m going to I will buy in video at some point here, if it pulls back and gives me an opportunity, I will not own it for the next 10 years, because it’s fundamentally grossly overvalued, it cannot support its valuation, I will buy it for a trade. I own other stocks, Stanley Black and Decker is a long term trade, I will probably own Stanley Black and Decker for one of yours because it’s trades at a point three, seven times price to sales. You know, there are stocks out there that are fundamentally cheap that you want to own long term, they will pay dividends, they will grow for you there will be boring as hell, they’re not going to keep up with the market. That’s okay. Part of your portfolio can be there just for the dividends just for the growth. The speculative side of your portfolio is where you take those trading opportunities to make some extra money.

Adam Taggart 51:03
All right, all right. Yeah, really well said. And folks, again, just a reminder, this is why we have this segment here so that you can really crawl on the brain of a professional and highly experienced capital manager and see how they think about this stuff.

Lance Roberts 51:15
I don’t know if you really want to get my brain but okay.

Adam Taggart 51:18
Well, we get to disinfect it first before. Exactly, exactly. All right, look, well, we gave some very quick lip service to some important things that happened this week. I think it’s just worth talking about them real quick. First, we had maybe I’ll flip these to the latest inflation numbers came out. The headline CPI, which is the one that we hear about in the news all the time, that declined from 4.9% to 4.0%. The core CPI came down a little bit to 5.3%. That’s proving much more sticky, though. And the reason why we talk about core is because that’s really the the inflation metric from the BLS that the that the Fed looks at in terms of determining policy, it looks at that much more closely than it does the headline CPI. So you know, on one end headline CPI says yep, you know, disinflation is continuing Feds making decent progress here. Core says it’s probably not making progress as fast as it wants to. And we’re going to talk about what Powell said this week in just a second, but it’s definitely a sign the Fed can’t, you know, declare victory. It’s not near a victory declaration point at this point. So still needs to be in the hawkish camp. So Lance, anything you want to add to this? No,

Lance Roberts 52:39
that’s, you know, that the problem with this inflation data is that we’ve got 28 different measures of inflation. So we’ve got trim mean, we’ve got core, we’ve got super core, we got no core, which is what I mean, you know, there’s everybody looks at each one and goes, Oh, this means this. And this means that this means the other thing, and you know what the Fed the penalty looks at this, they don’t pay attention to that. And look, the Fed pays attention to everything. But, you know, the problem is, is that inflation is also just a mathematical calculation. And just because inflation is falling does not mean the cost of living is getting any cheaper. You know, if I paid $4 for a gallon of milk in January, and I pay $4, for a gallon of milk, the next January inflation is zero, still paying $4 for a gallon of milk, but inflation is zero. And most of what’s happening with inflation right now is that, you know, we’re looking at compare it this last month, right? Inflation was up point once everybody’s like, Oh, way they live Oh, 8.1. Inflation. We’re comparing to 1.2% rates of inflation last year, right? So yeah, inflation is going to fall sharply. And this is where you and I, we were talking about this all in 2022, we said, hey, the peak of inflation is likely and it’s going to fall, it’s going to fall sharply because of these year over year compare comparisons. And we’re now in the heat of those comparisons where we have really big numbers to compare to. So that inflation rate is going to fall back to 2%. Very quickly. It doesn’t mean the cost of living has got any cheaper at all, for the average American. In fact, a lot of cases, prices are still rising, take a look at what’s happening with corporate profit margins, those actually ticked up last quarter a bit as companies are able to still pass through higher cost to individuals, and that’s helping protect their profit margin bottom line, but that means that consumers are still paying more for stuff. Right. And this is if you take a look at retail sales last last week. Retail sales were up point three, until you factor out the fact that that point three increase was also the point three increase in inflation, which means that everybody’s just buying the same amount of stuff, just paying point 3% More for

Adam Taggart 54:49
Right, right. Right. And it’s underscore for folks, even though we cheer disinflation because it means the inflation rate is coming down. Prices are still rising in a disinflationary environment. It’s only when you get to deflation, that’s when price declines or net happening. Alright, you’re touching on sort of several things. I want to get through it real quick, though, let’s talk about the Fed meeting this week too, because we got an update on the Fed. We’ve had a pause. At I didn’t get to watch the press conference, I heard a lot of, you know, don’t call it a skip is sort of what I heard. I was trying to say to folks, but what are your key takeaways from this? And let me give you my not having watched the materials is I think you and I, for a long time have thought a pause would be intelligent on the Feds part here, when did you said inflation is going to come down? Math is going to help inflation come down. The lag effect of the rate hikes if the Feds been making are going to help bring inflation down. And we’re going to talk about lag effects in a little bit. But it’s very unclear at this point in time, how much of the lag effect is still coming through the pipeline. And we can make a pretty good argument that the majority of it still is. And so it’s probably better because things are trending in the direction that the Fed wants for the Fed to wait, just take a wait and see. Approach. Right. And I think that of course, because we have the additional bank tightening of bank lending standards that have happened since the banking system hiccups that we’ve had, and that acts as additional rate hikes. So it seems I think, the prudent thing to do here, but but I think Powell did what I would have encouraged him to do, which is to keep the door open that like, look, we’re just pausing for a month, and we could very well resumed next month, we’re just gonna look at the data and see is that pretty much how it went down?

Lance Roberts 56:38
Yeah, exactly. And, again, when you take a look at really what Powell said, he said, you know, basically we are going to do that he taught he specifically talked about the lag effect of monetary policy, and they do want to give us some time to come through. And we have seen that lag effect, right. You know, we talked about last week, how GDP has fallen from 12% nominal growth down to about one and a half percent nominal growth. So that lag effect is clearly shown up, we, you know, everybody’s equating the lag effect to a recession. But all it means is, and we talked about, you know, being on the peak of a mountain having to go to sea level to get down to the valley right now, we’re heading down that mountain. And so we that lag effect is working, it’s working its way through the system. The question is, is whether or not we’ve completed that effect in the markets now markets are saying absolutely, again, we the markets have now rallied back to before the Fed has even started hiking rates. So the market is saying all those Fed rate hikes. That’s done, right. Lag is done. And you know, the economy is going to bottom here and things are gonna start to improve. That’s what the market saying.

Adam Taggart 57:40
This is the theme of getting to in a little bit, but just a preview here is we now have a massive showdown over that bet. Right? Yeah, exactly. We have Powell and lots of data saying it was a crap ton of lag effect coming still folks. And the markets are saying, Man, we don’t think it’s good. We think it’s gonna be nothing burger.

Lance Roberts 57:58
Yeah, exactly. I mean, look at look at housing, I mean, housing prices ticked up, used car prices ticked up, you know, you’re you’re starting, you’re starting, and this is one of the big fears by the Fed, by the way, is that inflation comes down and then researches right. That’s, that’s one of their huge fears. And that’s one of the reasons they said, Yeah, we’re gonna wait and see. But believe me, if we start to see use car prices, and home prices, tick back up and start see rental rates tick back up. If that starts to occur, the Feds gonna start hiking rates again. So you know, there, they are very worried. You know, Jerome Powell has been studying that 1970 playbook. And that’s the thing he’s really most scared about

Adam Taggart 58:36
it totally. And we’ve talked about this a bit. But yes, that is Powell, we think is playing for legacy here, he does not want that to happen. He’ll err on the side of over tightening, because he figures we can fix that, because we can just pump a crap ton of stimulus back in real quick, I just want to note it because it’s interesting. Where you I had lucky Lopez on the channel a couple of weeks ago talking about, you know, this forecast for the car market. And one of the reasons why, you know, people might point to use car prices are going back up, or that’s a sign of economic strength or whatever, right consumer strength economic strength, it very well may not be, it may be that there are just no affordable new cars on the market, right, new car prices are going to come down. But if you want to buy a car for under $25,000, there’s only like 1000 or 2000 cars in the entire country, new cars that fit that, that price tag. So if you want a cheap car, which people are increasingly downshifting to because they’re getting pinched, you have to flood into the new use car market, right? So used car market is seeing this, what may be a short lived surge of prices, because people are basically leaving the new car market for the used car market. So I just mentioned that because it’s interesting, but it just shows you these crosscurrents that we could be increasingly experiencing at this time right now where you might interpret it one way, but the reality actually might be the opposite. Kind of like looking at job growth and saying, Wow, look at all the job growth we’ve had And you realize it’s all in part time jobs. We’re not creating any full time jobs, everyone’s having to get a second side gig just to stay afloat, right?

Lance Roberts 1:00:05
No, I saw a funny tweet this past week it was it said, Toyota is issuing a recall on all 1993 Toyota Corolla was because it’s damn time to buy a new car. Your boy, there’s a lot of people that are still driving old cars because they can’t afford to buy a new car to your point. So you know, it’s look, it’s a prop pricing is a problem. And you know, the more inflation goes up, the longer it sustains these higher prices, it’s gonna be more problematic for the consumer. And so the thing about you know, car prices is going to be we’re talking about this earlier, reference to you know, what’s happening with overall prices, a gallon of milk, right, inflation is coming down, prices are going to remain sticky this is going to be the problem for consumers is that once corporations have pricing power, they’re going to be really reticent to drop those prices, unless they really get into an inventory bind at some point, and inventories aren’t, we don’t have that big inventory bolts that we had back in 2022. We’ve worked through a lot of that. So the problem now for consumers is gonna be Yes, inflation is going to come down, but prices aren’t going to come down. We’re not going back to 250 a gallon for gasoline, we’re not going to go back to 98 cents for a dozen eggs, you know, that’s that we’re going to look back on that history and go wow, I remember when, because the price remained sticky. And this is going to be a problem if wages don’t keep, you know, keeping up so to speak, with the actual cost of living and the cost of living is rising fairly sharply right now.

Adam Taggart 1:01:37
Yeah, so totally agree. I mean, there’s just, I’m going to get to this in a bit because I still have to try to become a bull, I still have a really hard time getting my brain around how consumers are going to show up to that party.

Lance Roberts 1:01:49
The water is so much warmer over here.

Adam Taggart 1:01:51
Yeah, no. And that, look, I’d love to be there, I just I’m trying to think in the pool really take as many people as as it says, can fit in it. Because there’s a lot of huge chunk of America, I know that are struggling right now for the reasons you’re talking about. And just to give an example of that, so in this huge car situation we’re talking about, you know, what’s happening is people that need a car, I can’t buy a new car, they’re just too darn expensive. I gotta buy a used car. Well, now you’re competing in the used car market with a bunch more people. So prices are going up, right, as we’ve talked about the loan rates on both the lending standards, and the loan rates on used cars are going up pretty dramatically now. So you’re paying a lot more in financing charges for this used car. And you have people I mean, remember, I put that meme up a few weeks back at a woman who bought the like 9098 Ford Escort. And basically given her loan, and she’s going to she’s going to pay like 25 grand for this car, that’s probably worth like five grand, right. But the point is, you know, people are having to pay an awful lot for these old clunkers that are probably only going to you’re gonna die and I’m probably in a year or two. Right. So like, people are getting pushed into getting trapped into bad loans on assets that don’t have an intrinsic value that matches the cost of the car anymore. So with hits like that, that keep coming. I just have a hard time, you know, really jumping into bullish point. Okay, so

Lance Roberts 1:03:14
super important point. But one thing you also have to remember is the size of these markets relative to the overall economy, or market as a function of economic growth is very small. Housing is not that big of an impact, as like it used to be housing used to be like 20% of GDP growth now, now it’s like three to 5% it’s come down a lot. It’s just because of the size of the economy, we have so much stuff in the economy now. The drives economic growth, defense spending, and all these other things. That, you know, it’s, you know, when you carve out this one issue as a used car prices are gonna cause an economic recession, it’s certainly not going to help economic growth, but by itself, it’s too small component. No, I

Adam Taggart 1:03:56
totally agree. It’s, it’s the story we’re painting here that we’re you’re talking about the cost of eggs, the just the cost of living is great, right? Okay. And then your car cost is going up and you’re buying a clunker that’s going to need to be repaired more or die on you. And then student loans are going back into repayment, right? It’s just like Bang Bang via credit card debts of an all time high interest rate right now, right? It’s just like, I would call it the death of 1000 paper cuts but these don’t feel as minor as paper cuts and a lot of people but there’s still 1000 of them. Right? Absolutely. So but but hey, you know, we things are still train still rolling. You know, your optimism is increasing the you Michigan consumer confidence just took an uptick here, kind of matching your bullish sentiment right and so maybe the bottom for that as in at least for the time being. So one of the questions I had for you is okay, let’s just stand back for a second and kind of look at recession odds here. And I had two really interesting back to back interviews this week and talk to your Denny who is more more bullish as we talked about and you He thinks that we’re in a. So interestingly, he thinks we might be in a recession. But he thinks it’s a rolling recession, which is where kind of the economic, the slow growth is like a baton that gets handed from industry to industry. So that as one weekend, others are doing well. And then as you know, another one starts coming down and one starts recovering. So you basically remain relatively level, through the process, you don’t have all sectors conspiring to really bring the economy into a trough, the way that we have in the more pronounced recessions. So that was sort of Ed’s point of view, don’t say you have to agree with it. He also mentioned two things that one of what you just gave I mentioned to you a little while ago, but he said, Hey, look, there’s still a lot of stimulus coming into the system. Yeah, we’ve turned off the monetary stimulus, mostly. But we have a lot of spending that’s now beginning to hit, especially in the US and infrastructure from the inflation Reduction Act, right. And he talked about all the construction spending that’s going on, and that there’s like they’re having problems now. Finding shovel ready projects for the money. So the money is kind of piling up, like the more money would be coming into the system if there was just more opportunities to spend it right now. Right. So that is making a difference here. I need he thought that was bullish for the economy. No surprise. The other thing he talked about was, you know, we talked a lot about the monetary stimulus and the fiscal side of stimulus, he added a third leg to this note stimulus stool, which is, remember correctly, I think it’s 75 million baby boomers have 73 trillion in household net worth, right. And he’s like those, those people, you know, yeah, it’s not totally evenly distributed amongst all seniors, but their plan is to spend it as much as they can, while they’re alive, they’re going to travel, they’re going to eat out, they’re gonna do all this stuff that they’ve been sort of saving to do. Right. So he said, that’s just a way that yes, some of its gonna get transferred, some good chunk will get transferred when they die. But a lot of it’s going to get spent over the next decade or two. And that’s, that’s why we’re seeing strong wage growth and hospitality industries. And we’re where we’re seeing all the revenge travel and all that stuff right now. So that’s kind of a bullish side of like, hey, we may not really experience the type of recession that a lot of people on this channel, myself included, have been saying could happen right. Now, I’ll tell you the other side, and then I’ll let you run, which is, then I had David Haye, who basically said, I mean, I kind of get that, but and I’m oversimplifying his his argument, but he’s like, put lag effect. Like, you know, we’ve got this, this horrible data, that’s, you know, macro data that you and I talk about all the time. And he’s like, we haven’t seen yet the impact of all of the policy tightening, that that’s happened in the increase of cost of capital. And, you know, basically, everything that you and I have said, is highly likely going to be slamming into this economy. But people in the market itself are kind of writing off at this point, like, hey, it hasn’t shown yet. It’s probably not going to be an issue. So I’m curious, when you smash those two things together, what do you come up with?

Lance Roberts 1:08:11
Well, so first of all, he’s right. And by the way, there was this really smart guy,

Adam Taggart 1:08:15
but when you say when you say he talking?

Lance Roberts 1:08:19
Ed Yardeni, right, so, um, but there was this really smart guy, and I’m here, let me share my screen. I can’t remember exactly when this was, but it’s really smart guy was on this channel talking with you about a rolling recession. Oh, yeah, it was back. And I’m worried. There we go. Yeah. Back in April of this year, so and listens to our show, basically, we were talking about, you know, this idea of a rolling session Exactly. To his point. And our point was at that time, was that we were going through this kind of just continued, you know, kind of hit to the market. And because things were so evenly spaced out, right, we had the Russia Ukraine war. And so the markets go, Okay, God of War, but that’s good for the markets because defense spending, so we rally back, and then we get to the unprofitable tech and crypto and so meme, stock starts to fall apart, blah, blah, blah. And then we kind of price that in, we start getting some Fed rate hikes, and then we rally back up and then we have this back IPO blow up residential real estate starts to decline. So we priced that in, then we say, okay, that’s done. So then we rally back. And so each time regional bank crisis, so each time we were having this, the market was having enough time to absorb these impacts and say, Okay, I’ve got a price that’s priced into some of these stocks. And remember, you know, just because the broad index wasn’t down 3040 5060 70% There were a lot of stocks. We wrote articles about this. Back in 2022. There were tremendous numbers of stocks that were down 7080 90% from their peak. What was keeping the market elevated was these big names. You’re mega cap companies that were getting all the passive inflows into the market. And so Apple and Microsoft, they were down, but not nearly down as much as the bottom kind of 490 stocks in the index, those top 10 stocks were supporting the market, it kept the market from declining, even though underneath the surface was just sheer devastation. And if you look back at retail portfolios back in 2022, a lot of retail investors were down 3040 50% versus the market because they owned all those non profitable companies. And so there’s been two things that have been going on in the economy a yes, he’s absolutely right edge absolutely right about this rolling recession. It allows the market to absorb these impacts of Fed rate hikes and all this other stuff. And this goes back to the problem with the lag effect. How much is the market already priced in? We’ve already seen big declines in manufacturing indexes, we’ve seen big declines in services, indexes, etc. How much of that lag effect has already occurred? Because we were coming from such elevated levels, we’ve already had the impact. And I’m not saying we’re done. Don’t take, don’t say we’re done. I’m not saying we’re finished. But we’re rolling down that hill towards the valley. But we’ve already used up a lot of that downhill momentum, right. And even though we haven’t gotten to the recession, yet, a lot of that lag effect is getting priced in by the market overall. And so this is why it’s important to to step back and say, just because we have the lag effect, we’re all expecting the super deep recession. But we weren’t starting at 2% growth. If we were at 2% growth, when all this stuff started, then yeah, we would probably be running a negative eight or 9% GDP right now, nobody be going now here’s that recession, right? Everybody’s talking about but because we’re starting at 12%. And going to one, we’re not in recession yet, but a lot of damage has been done to the economy already. And we keep expecting more. But at some point, remember, markets are about time. And the more time the market has to, to basically factor in to prices and outlook and earnings and these types of things, issues, then those issues become non issues. Because the markets aren’t I’m aware of it, I got it, I understand it, I can model for it, I can I can deal with it. What the markets not price for is something that happens tomorrow that Nobody’s expecting. In other words, tomorrow. Wells Fargo goes out of business, the market is not priced for that, right, the market is not price for next month, we have a jump in unemployment that goes to four and a half percent. The market is not priced for that. Those are the things those unexpected events is what will derail the market. But until or unless one of those things occur, this market is going to continue to price in this data because it has time to do it. And that’s the important thing about what Ed was saying about this rolling recession.

Adam Taggart 1:13:10
All right, great explanation. Curious. What do you think about his sort of third leg on the stool here of a big wave of Boomer discretionary spending? Really acting as a support here?

Lance Roberts 1:13:22
Yeah, that’s true.

Adam Taggart 1:13:24
Because we haven’t we haven’t really talked about that head on on this program all that much. But maybe we should?

Lance Roberts 1:13:30
No, no, you should be. But that’s also that’s a double edged sword. Right. So if I’ve got mine, where’s okay, I’m a baby boomer. Right. I’m right at the tail end of it. I’m actually kind of split right between Gen X and baby boomer. But I’ve got a bunch of money sitting in the bank, or in investments or whatever, my money’s gotta be somewhere, right? It’s, you know, if I’m gonna spend this money, if I’ve got this wealth, I’ve got to spend it. So it’s got to be somewhere first, in order for me to spend it fair enough. Absolutely. Because I’m theoretically retired, so I’m not working. So theoretically, as a boomer, I’m retired now. I don’t have any I don’t have any income coming in, except, you know, dividends or rental income, or whatever, my paths and flows, but I’m not working anymore. So now I’m going to be spending my money to pay my mortgage to travel to eat those type of things. So if I’m spending money on those things, which does support the economy,

where’s the money coming from?

Adam Taggart 1:14:23
Yeah, it might, it might be depressive on financial asset prices that folks are selling to get out. I’m talking more economic growth right now. No,

Lance Roberts 1:14:30
no, but what I’m saying is there’s we’ve been it’s important, right? Because we have there’s, there’s there’s there’s not just a positive, right? It’s basically counting if you’ve got a positive you got to have a negative.

Adam Taggart 1:14:42
So I guess what you’re saying is earnings might go up but multiples might go down because of the selling we make now on that out.

Lance Roberts 1:14:48
Exactly. So So again, there’s there’s a negative side to that, but he is correct, right. So boomers will be spending money. But boomers aren’t the ones that are spending money on experiences. Right. Those are the Millennials, that’s what they spend money on. If you take a look at surveys, what do millennials want to buy? They want, they spend their money, they don’t care, big houses, they don’t care about big cars, supposedly, they want experiences. So they spend all their money on these experiences that have their one time and nature have no future return. But they had a lot of fun, right? So they enjoy the money, boomers. And if you take a look, there was a really great graphic, I’m wondering if I can find that role. It was a Wall Street as a New York Times article earlier this week. And I can’t remember where I saw it. But they have a nice, nice graphic on generational wealth. Baby Boomers obviously have just a massive slog of this generational wealth. Millennials have a smaller piece. And if you take a look at where their allocations are, right, where they have their money, about 20% is in equities. A big chunk of it is in is in real estate, right? Their houses or whatever houses they own. Yeah. And then a big chunk is business wealth, right? So this is money that they that they have, or value or wealth that they have in their business, right? So I own a business. So a big chunk of my net worth is the value of my business. But that’s not liquid, right? I can’t sell my business to generate liquidity, right. So we also have to look at these factors from the standpoint of what’s liquid and what’s not. So yes, there may be support from the Baby Boomers to support the economy. But a lot of their wealth is tied up in illiquid assets. So it’s not going to be easily converted into liquidity to drive markets. Now, a lot of that will be inherited wealth, it will go down to millennials into Gen Xers, etc. As you know, generation passes to generation, so forth and so on. It’ll pass down, but a lot of those assets are illiquid. And lastly, where are boomers going to spend the vast majority of their money? This is your investment thesis going forward from here.

Adam Taggart 1:17:00
There are vast majority in the last part of their lives

Lance Roberts 1:17:03
being go right, which is why you want to own a lot of healthcare stocks in your portfolio, even though they’re outperforming right now. That’s where money is going to be in the next 20 years.

Adam Taggart 1:17:12
Yeah, and look, I don’t think we’re gonna get time to get to some of the lessons I’ve been learning over the past week. But but that has been a really big one, which is the amount of health care and the cost of that health care that that happens in the last mile life. So I agree 1,000% With that observation. All right, look, well, as we as we start to wrap up here. Lance, one more question that I’ll ask you about your trades, kind of a high level question. Because you early you said really this market markets future is really all dependent on where earnings go from here. Right. Right now, it’s got a relatively sanguine earnings outlook. And the big question I get asked it, which is, you know, where’s that going to come from? Right? So will it come from just the organic growth that we see plus all this infrastructure spending coming in plus maybe boomers helping out with revenge travel and stuff like that this year? Is that is that going to be enough or just set a really high level is when the economy

Lance Roberts 1:18:17
withstand the current

Adam Taggart 1:18:18
cost of capital? We have? Like if I had told you, I think, two years ago, when it’s we’re going from near zero to five 5% Plus, in the Fed funds rate, you know, what do you think would have happened? The economy? I’m guessing you would have said, well, we’re, we’re gonna have a really tough time. Which do you think is more likely here?

Lance Roberts 1:18:38
Well, look, I the earnings are going to grow, right. Because of the economy, the economy is gonna grow over time period. The problem is, is that earnings are priced so far above us, let me let me back that up. They’re not priced earnings are estimated right now to be so far above what the economy can generate a long term basis, that an economy growing at 2% cannot generate six to 8% earnings growth every year, which is what’s currently expected see? So we’re

Adam Taggart 1:19:13
living in that dichotomy right now. We’re going to figure out how it resolves. But that’s the disconnect. Right? Just just on math. Math

Lance Roberts 1:19:20
says eventually, that earnings have to go back to percentage growth every year on a normalized basis now coming out of a recession, you’re always gonna have big earnings growth, right? Yeah. etc. So earnings come slapping back as the economy gets back underway. You had a low bar to compare to got it. Yeah, exactly. And so but once we get back into the trend of growth, which is where we’re heading to now, that rate has got to come down. So earnings estimates are too elevated, those are going to have to come down dramatically. Earnings Growth is going to be there but it’s not enough to support valuations at 40 times price to sales, you know, 30 times price sales, and there’s a ton of companies You know, Microsoft is trading at 12 times price to sales and can’t support bad things that fast. There’s a lot of cheap companies out there that are trading at less than one times price to sales. Those are the companies I’d be there. They’re not performing right now. They’re not fun. They’re not going to go up 100% a month, but they’re going to generate good growth for you over time, because they are fundamentally cheap.

Adam Taggart 1:20:24
All right, really well said. Okay, so that then brings us to trades you you did share throughout this whole discussion today, a number of the things you’re doing but what are the most material things you did in the past week,

Lance Roberts 1:20:35
the only, the only, excuse me, the only a couple of things we did this past week. Again, we’re, we’re we’re kind of in wait and see mode a little bit with the portfolio. So the one thing I’d said that we did do is we started to shift the duration following the Fed meeting, we’re starting to lengthen the duration in our portfolio, and we have kind of a barbell approach to our duration, we’ve got a good bit on the long end, but the middle bar, we’re starting to stretch out a little bit more. Then on the equity side, you on Wednesday, united we had a we have a good bit of exposure to health care portfolios for the same reasons we just talked about. And we had exposure to insurers in our portfolio at UNH and CVS. On Wednesday, UnitedHealthcare came out and one of their vice president guys said, hey, look, boomers, and this goes back to what we were just talking about. Boomers are

not putting off surgeries,

they are now starting to ramp up and do surgeries, knee replacements, hip replacements, you know, all those things, because a they have money and be there like this, this technology’s gotten to the point that, you know, it’s a pretty easy operation to have them up and running again, literally. And you know, a couple weeks and so more and more people are beginning that have money are beginning to opt for the surgeries. And that of course drives up costs for insurance. And but what it helps is it helps all the people that obviously that are providing the devices, the medical care, those type of things. So we sold you an H on that news, and we bought Stryker medical, which actually provides the hip devices, the knee replacements, all those type of things. And we added to our position and Abbott, which is also in that same space on the medical device side. And we maintained our position in CVS which we love that company longterm point two nine times price to sales 3.6% dividend yield Roeser sales every year and they are vertically integrated right now they own not just the they do have the insurer part because they acquired Aetna, which is getting hurt. But if you are having surgery, you got to do what right after your surgery, the person you got to go do is fill your prescriptions, that CDs and while your CVs then you pick up a whole bunch of crap you don’t really need it’s not going. And, and so that so that vertical integration, that business is very appetizing here, when combined with the medical device side of the market. We also on advi, we didn’t add to that position, but Abby is for the vanity of people, they do all the Botox. So as as the baby boomers get older and want to look younger, Abby has a very good space set in there. So again, that’s the stocks on the healthcare side had been beaten up brutally over the last year. And you know, this is one of those areas that you know, I am hugely bullish on going forward. And you know, we’re overweight healthcare in our portfolio, and opportunistically, we’re gonna keep adding to these positions, because over the next 10 to 20 years, you’re gonna make a lot of money in these sectors. All right, well, thanks for that. Importantly, you got to have that view, right? You can’t get all tied up with, oh, I’m missing the in video rally. And worrying that if you’re truly investing, you buy stuff cheap is going to make you money over time. And I’m getting paid three to four to 5% yield just to sit here and wait. I’ll do that all day long.

Adam Taggart 1:24:06
Great. All right. Well, thanks for sharing the details. And again, you’re also sharing kind of how a long term capital manager thinks, the discipline that you follow. And like I said, you know, given what I’ve been going through with my mom’s journey here, recently, I feel like I’m getting like a, I feel like I’ve been spending time in the future that you’re talking about.

Lance Roberts 1:24:25
Yeah. It’s all. It’s all coming together as money

Adam Taggart 1:24:29
is all coming to get us and look folks will punt on lessons learned, though, I will share just a couple of quick things as we wrap up here. One is again, my extreme gratitude on the very kind words that so many of you have been sending thanks. They mean an awful lot to me and my family. Lance and I have talked a lot in the past about like, what really matters in life, like what really constitutes wealth. And we talked about you know, when you go into Google and see the 100 year old people interviewed and they say it’s about relationships, it’s about your life, having On purpose, and then about health, obviously, I can definitely say from very recent firsthand experience down in the trenches, that’s all that matters at the end here and making memories and the memories that you because at the end, that’s all you have, when you’re waiting for the end is those unfortunately, we’ve had a really great opportunity with my mom to really sort of, you know, sit with her talk with her laugh with her, really, you know, here tell all the great stories, here’s some stories that she hadn’t shared before, folks have been encouraging me to record them and I have been so thank you for that advice. We’ll treasure those recordings after she’s gone. So it’s, it’s, again, it’s just been a really, you know, firsthand remember from life, a reminder from life on what really, truly matters. And it’s investing, you know, mostly in those relationships and just spending, spending your days in a way that when you reflect back on your life, you’re gonna say, Yeah, you know, what I did here was was meaningful to me. Beyond that, tonight, folks, just go, just go hug your loved ones tight. Take that from me. But anyways, folks, you’re gonna see me bounce around from different backgrounds, like you’ve seen a bit this week, I had to fly out. Last week, when we thought we were losing her in the moment. Fortunately, she recovered. And then we had some great times with her. Now she’s actually sleeping and not able to wake up. And I think her conscious days are behind her, I had to then rush back to California, which is where I’m recording now, because my older daughter is graduating from college right now. So I’m sprinting to that after Lance and I finish here, it’s nice to have a celebration of something positive in life. And that was definitely my mother’s guidance, which is go do that. As soon as that’s done, I’m flying back to the east coast. So you’re gonna see me changing lots of different backgrounds here as we do all this. But but thanks in advance for your patience and tolerance on that. Lance, buddy has been great. Just a last reminder for folks. You know, I think Lance and I did a really good job of underscoring how these markets are just going to keep us guessing here. And I know for a lot of people, especially those that look at the fundamental data and are pulling out their hair as what the markets doing right now. It’s just another reason to recruit the guidance of a professional financial advisor who understands the arc of markets, all the issues we’ve talked about here, all the portfolio gardening stuff that Lance has been talking about, if you have a government is doing that for you, building a personal portfolio plan for you, and then executing it for you while keeping you involved. Great, those guys are really rare, you should stick with him. But if you don’t have one, or if you’d like a second opinion from when it does, maybe even Lance and his team there at REI, then consider scheduling a free consultation with the financial advisors endorsed by Wealthion. To do that, just go to Fill out the short form, there only takes a couple of seconds, these consultations are totally free. There’s no commitment to work with these guys. It’s just a public service that they offer, in addition to these wonderful weekly, you know, sharing of their thoughts with our audience here at Wealthion. And if you’d like to see these weekly market recaps with Lance and I continue from here, because we sure love them. Do us a favor, show your support 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 Lance, I’ll let you walk folks out here any parting bits of advice

Lance Roberts 1:28:24
to things I think you know, you were just talking about something that’s very near and dear to my heart, which is there’s two things in life that you know, you can’t fix. And, you know, one of those is broken friendships, broken trust. And you know, that’s why it’s always so important to you know, do what you say you’re going to do follow through. And this is one thing I drive into my kids constantly, I don’t care what else you do in life, the one the only thing that you have as a person is that people can trust you. And so what you say and what you do matters. And the other thing you can’t fix is regret. And the you know, the worst thing that you can do in life is to be on your deathbed with a life full of regret. So, you know, focus on those things that you know you can fix those, those broken relationships, those broken friendships, those things, even if they’re not willing to reciprocate, you reach out and say, Hey, I apologized for whatever it is try to mend that relationship because again, those things will matter. If at the end of your life, you’ll look back and go, I wish I would have and you don’t want to do that. So my prayers are with you, my friend. And you know if you need anything you call me. I’m always here for you. But I’ll definitely be praying for you and your mom.

Adam Taggart 1:29:36
Hey, thanks, buddy. I really do appreciate that. All right, everybody else. We’ll look thanks so much. We’ll see you all next week. Thanks so much for watching.

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