In continuing “higher for longer”, the gravitational force weighing on the economy from current elevated interest rates will compound, resulting in “weaker for longer” economic growth. Powell knows this and re-emphasized (once again) that the full force — i.e., the lag effect — of the Fed’s hiking & tightening regime has not yet manifested. Key takeaway: conditions are going to get harder from here, especially through next year.
The Fed is expecting the labor market weaken and unemployment to rise. I agree with this forecast, though the Fed’s projected 2024 unemployment rate of 4.1% seems far too rosy, IMO. We are already at 3.8% in October 2023 and, as mentioned, the lag effect has yet to substantially materialize. Consumer spending will likely slow, corp profits will likely be further pinched, layoffs will likely rise — and if a recession hits (which I think is likely but the Fed is trying to downplay), then the employment situation gets a lot worse.
Interestingly, when asked directly, Powell downplayed expectations of a “soft landing”. He said it still “possible”, but his Fed-speak strongly suggested that he thinks the firmness of the Fed’s policies will result in a harder-landing.
Transcript
Adam Taggart 0:00
But as you said, John, they actually asked him point blank. What type of landing do you expect? Chair Powell? And you know, everyone’s talking about the soft landing you still thinking soft landings, the default scenario he basically said no. And he’s never going to say I am likely causing a recession right now, the Federal never admit to actually causing a recession, but that the Fed speak that followed in pals answer was basically him saying, Hey, folks, I think you better prepare for something materially harder than a soft landing here, right. Welcome to Wealthion. I’m Wealthion founder, Adam Taggart, welcome you here for a bit of a special report. We interviewed Darius Dale yesterday, we normally run part two of that interview today. But Jerome Powell Fed Chair gave a press conference yesterday, markets today certainly didn’t really seem to like what he had to say. So wanted to do a special real time reaction to the recent fed presser. So I’m bringing in our endorsed financial partners, new harbor financial, I’m joined here by lead senior partners, John Lowe, Dre, Mike Preston, guys, thanks so much for joining us here, you know, a fair amount of to react to, from what Powell had to say, like to go through that with you guys. And then we’ll talk about what the markets are doing in response. John, why don’t we start with you? What were some of the key things that you took away from what you heard Powell say,
John Llodra 1:30
Okay, well, thank you, Adam, great to be with you again. And always things to talk about on fed week, pretty much for the last decade, at least. But you know, just a couple of takeaways. And it’s just News News news headlines, probably old news by now. But the Fed decided to stand pat, at the current five and a quarter to five and a half target range for the federal funds rate. So no change. The still left on the table, the possibility, perhaps likelihood of one more quarter point rate increase later this year, maybe at the December meeting or November. And a couple other key takeaways talked about a slowing or cooling slightly in the labor market, which has been really strong, you know, kind of hold out, if you will, in some of the recessionary kind of indicators. We’ve long said and you’ve repeated many times in this program, Adam, that that’s a classic lagging indicator. So usually when the labor market starts to break, it’s already kind of in the early innings of of a recession. So that’s that’s not one that we really take as as you know, a sign that everything’s rosy and good. Interestingly, that pretty pretty hawkish tilt to to this, this, this this press release, or this this press conference, the expectations is higher for longer, basically, hey, we’re not we’re not any anywhere close to thinking about lowering rates anytime soon. They did they did project, a terminal rate for the Federal Reserve federal funds rate of I think two and a half percent, I believe, 20, late 2025 rows 26. I might have the timing on that wrong. They may well get there. But we think it’s probably the result of a panic, reactionary move to a market meltdown than a thoughtful, organized, planned path lower. And it’ll just be a repeat of last several episodes of bubble collapses, where the Fed had to clean up the mess they made by once again lowering rates to in a reactionary way. Interestingly, the commentary on the job market they they communicate an expectation that maybe the unemployment rate will rise modestly from high 3%. I think where it is right now 3.8 or something like that, to 4.1%, which seems massively hopeful to us that that would not at all be kind of consistent with with prior episodes of recessions and periods of overvaluation like we’ve had here. So I think a lot of jawboning a lot of wishful communication, but the general takeaway is higher for longer kind of federal rate, federal federal funds rate policy, which probably in our minds means that there’s going to be a prolonged kind of challenge for the markets in the economy because of the lag effects is that still have yet to work through and Chairman Powell, in fact, did acknowledge that much of the tightening they have done has really not factored into the economy yet. So we’re in complete agreement with him on that front. So those are some of the big takeaways and I’m sure we’ll get into some of the market reaction So far to that.
Adam Taggart 5:01
All right, and Mike, I’ll come to you in a second is going to show a couple of visuals related to what John said. So first, John, you and I, we took the same things away from this. Powell basically said, Yep, I’m gonna go hire for even longer, right. And I think that hire for longer pretty much translates into weaker for longer in terms of the the economic growth situation, the longer that interest rates stay at these elevated levels, the more time the gravity of those higher interest rates has to act in pulling economic growth down. And Powell as he’s been very consistent about, you know, it was just as consistent in this last press conference about how we have not seen it, the full manifestation of the Feds activities that it’s done to date both in the the hiking regime that it’s it’s been pursuing, as well as the in parallel tightening regime with quantitative tightening reducing its balance sheet. So he’s been waving a flag that he’s continuing to still wave saying, Hey, folks, we really haven’t seen yet the main impacts from all the work that we’ve done so far. So I just take that as saying, you know, expect conditions to get even harder from here than folks had been expecting going into 2024. You talked about the Feds saying that, hey, we think we’re I think they basically said I’ll bring up the top clock here in just a second that they shared. But the the the Federal Open Markets Committee, their expectation is that they’re probably going to do one more rate hike in 2023. Powell isn’t isn’t absolutely committing to it, nor is he keeping his hands on when he thinks the timing is going to be. But if you look at the current estimates of the group, they are still actually forecasting, Fed funds rate in the five and a half to 5.75% range right now for this year, meaning that they would need to hike by another quarter point to hit that, then they come down a little bit in 2024. And you’ll see here by this dot plot, you know, they only get down to about two and a half percent by 2026. And afterwards, I like you think that this is extremely optimistic, it unrealistically gentle glide path that they’re projecting here, I think it’s much more likely that the Fed is forced to cut rates much more aggressively next year, likely due to the sort of something breaks scenario, you know, under this, this gravitational force of these high rates, something systemically important is going to break and or recession arises. And the Fed is going to have to step in, and it’s time on a rescue roll and have to bring that rates down much more aggressively than this time. We’ll see. We’ll keep trapping this. Yep.
John Llodra 7:58
Yeah. Like I’d like to share shark because speaking to the, you know, the Fed pivot kind of track record, if you will. And I think this this plays out with my comments just a moment ago, they may well get to two and a half percent or lower, who knows where they end up, but but it likely would be because of a reactionary thing. So just like the share chart here, yes. Alright, so this is just a chart, it’s only going back to the late 90s. And it shows the federal funds, lower limit on the federal funds target rate, you can see right now, it’s a five and a quarter and they stayed at that level yesterday. And in the lower pane is the s&p 500 is denoted with vertical dashed lines here basically the the points in recent history this century anyways, where the Fed has has paused after a pretty notable hiking campaign, to only then start to reduce rates and couple things you’ll you’ll see from this chart, first of all, the gray areas are recessions, you had the tech bubble recession here, you get the housing bubble recession, very brief ever so brief recession here around the COVID spike in early March of 2020. But we’ll notice here is very shortly after a pause, the Fed almost always drops rates and drops them very quickly. And it’s usually in reaction to a market starting to turn over or a economy in recession. Okay. And in fact, this chart doesn’t do his justice on the s&p 500 I should have put this on a log chart to to show the truth. This is an over 50% Drop in the market here. It looks like a pretty benign dropped here. This is an over 60% Drop in the market in the housing bubble, about a 30 I think 5% drop here in the COVID episode and in March 2020. Bottom line though, is even despite so when people talk about the Fed coming to the rescue, lowering rates and everything’s going to be peaches and cream again that usually has very little soothing effect on market and freefall. In fact, you know, the market continues oftentimes to fall in an accelerated fashion, despite the Fed, pulling out all the stops to lower rates. So I do think at some point, they will be forced to to drive rates lower, but it’s probably because they’re panicking. And I’ll just pull up this chart here. This is a picture of of inflation in the in the late 60s, early 70s, where you had three increasingly problematic spikes in inflation. And I think the Fed is rightfully worried about that episode happening again, if they if they become too accommodative to stimulative again, too quickly, after a decade of the most stimulative accommodative accommodative policy in history, they run the risk of some real problems. So long, long road ahead here, and I think markets will will be a battleground in figuring figuring this out.
Adam Taggart 10:58
Those are, those are great charts, John. Yeah, and, you know, interesting, seeing that sort of roller coaster inflation chart, just because of inflation, as measured by CPI is, is starting to creep back up again, that’s gonna make tau and the team at the Fed feel a little bit nervous. I know, they were probably expecting it because of base effects and stuff like that. But in parallel with that, with a substantial rise in oil prices here, you know, they’ve got to be a little bit worried that, hey, you know, we’re trying to tame this beast. And yet, it’s still, you know, picking itself off the mat here, when we really want it to be knocked out at this point in time. We’ve talked in the past, I won’t spend too much discussion about it here. But we also have this really, almost kind of Keats Keystone Cops esque policy mismatch between what the Fed is trying to pursue in the monetary side, which is really pumping, pushing hard on the brakes of the economy. And then of the fiscal side, we’ve still got a lot of stimulus getting pumped into the system by the the relatively quite high deficit spending that’s going on right now. Which is kind of like, you know, stepping on the gas from a fiscal side, right. So we’ve got this, this, you know, policies and the fiscal monetary sides are at odds with each other. They’re certainly not coordinated right now. And that’s got to be frustrating to the Fed, too. Can you do me a favor? Can you pull up the chart one more time, again, of the Feds final rates and the recessions? Because I think it very visually makes the point that I was making earlier, where you’re waiting for it to come up here, okay. But you can see with each period where the Fed hiked rates, and then paused, that’s that gravitational effect that I’m talking about, where when rates go up, and they stay high, it’s just increasing the weight on the economy, and it’s slowing economic growth, it’s putting on the brakes, like I talked about, and what history has shows, is it relatively crude tool? So what the Fed does, is it it hikes rates to slow the economy. At some point, it says, I don’t know, you know, hopefully, we’ve done enough. And then it waits. And then it realizes, Oh, gosh, we’ve done more than we thought we intended to do. And then the market starts dropping because the market senses that, okay, there’s a recession coming, the economy starts falling into a recession, because of that gravitational force for the time it’s been pulling the economy down. And then the Fed has to backpedal really quickly. And in each one of these scenarios, you’ll see it took a while for the Fed to hike, if then hung out for a while. But the cutting in rates is pretty precipitous, right. And I think that we’d be in unless there’s evidence of something truly being different this time, which I don’t think, you know, we really can can see right now, it would be folly to assume that the Fed is not going to repeat a similar cycle, and instead is going to have this magical multi year gentle glide path down to two and a half percent. So time will tell. And we’ll be watching this closely. But certainly, history is very clearly shown by that chart you just pulled up there. John really encourages us to expect a much more violent return to cutting when, you know, that gravitational force, you know, knocks the economy off the rails, which which, you know, who knows a lot of debate going on right now, but could be already sort of in process. Mike, I’m coming to you, I promise. But I got one more chart I want to put up here. And this is the chart of the unemployment rate, which is you said, John, I kind of laughed when Powell put this up during his press conference. So this is the Feds expectation of the unemployment rate. And it shows it rising to 4.1% and 2024. Basically staying there for a year then slightly coming down again. We’ve had the unemployment rates already increased over the past couple of months from something like 3.4 so to 3.8 Right. So we’re not that far from it already. And if we enter 2024, and it’s, you know, a lot of debate going on whether we’re gonna have a hard landing or a soft landing or no landing, but as you said, John, they actually asked him point blank, what type of landing? Do you expect? Chair Powell? And, you know, everyone’s talking about the soft landing, you still thinking soft landings, the default scenario, he basically said, No. And he’s never going to say I am likely causing a recession right now, the Federal never admit to actually causing a recession, but that the Fed speak that followed in Paul’s answer was basically him saying, Hey, folks, I think you better prepare for something materially harder than a soft landing here, right. And if that does happen, we’re already seeing the unemployment rate creep up under today’s conditions. I tweeted that chart out after Powell talked about it and said, you know, Fed is predicting a unemployment rate of 4.1%. On the average for next year, I said, I will take the over on that bet all day long. And, you know, Fed has got a terrible track record of predicting, you know, inflation, unemployment, predicting market turns predicting whether recessions are going to happen or not predicting what’s going to happen in the housing market. I don’t think this is any different from it’s a long string of, of war predictions that it’s made in the past. And like I said to you, John, I just think it’s being excessively rosy in the guidance that it’s giving us at least Data Wise, both with the unemployment rate, but also with where the Fed funds rate is going to be. And honestly likely about recession on its I think it’s much higher than the Fed is letting on, even though Powell was being a little bit more generous in opening the kimono with us than then most past fed shares. So anyways, Mike, let me hand it to you here. We’ll talk in a second about how the markets reacting to all this. But anything else you want to add to what you took away from the feds press conference?
Mike Preston 17:00
Not really, Adam, I think you guys covered the Fed pretty well. You know, it seems like we were all forced to talk about the Fed, probably more than we would like to the Fed has created an environment where it’s only what the Fed does, that really matters. It’s kind of a ludicrous, in a way, but I think you guys covered it pretty well. I think that both you and John are absolutely right. I think that that dot plot is very optimistic, I wouldn’t be surprised to see a very sudden market move downward in the s&p at some point soon, and probably next year or later this next the later this year. And then of course, a reversion to to easing very quickly. The chart that John put up there shows that it won’t matter, at least historically, it doesn’t matter, the market will do what it wants to do. And with the market sitting here at all time high record valuations. Still, there’s significant risk to downside surprises. So I guess I’d like to just talk a little bit about the market reaction because the market is what really matters, what the market is actually doing. And just share some charts, just some basic chant candlestick charts and go through them. So I’m bringing that up. Now you should be able to see in a minute, the monthly chart of the s&p. So this is the big picture, the monthly chart of the s&p 500. This goes back 20 years, you can see here, what we’ve been living through and what what I think that we can easily call the largest bubble of our lives, the largest bubble that will ever live through. And it could likely be the kind of the termination or culmination of this money printing experiment that we’ve all been living through since 2009. But I’m starting with the monthly just to give you the big picture. So here we are at around 4362. As of today, interestingly, roughly the same place we were about a year ago. And one reason I find that interesting is back in March of 22, is when the Fed started raising rates. So we’re about a year and a half past there. And you talked about the lag effect earlier, Adam there absolutely is a lag effect. With rates going up, they should be moving into or impacting the real economy. We haven’t seen a lot of that yet in financial prices, so the s&p fell, but then for a lot of different reasons this year, including increased liquidity. The market has been on a 45 degree bounce from October of last year. But really, it’s only brought us back to where we were when the Fed started raising rates in March of 22. And by the way, we’re still not above the high of 4818. That happened, I think, January 4 of 22. I think that’s likely the high for this market and that this whole thing is a counter trend bear market rally. We can’t be sure we never know for sure. Which is why the you know, the positions that we have are well hedged. So in terms of the weekly chart, let’s take a look at that. It’s been a very controlled consolidation over the last Last year, and as I said, a 45 degree bounce from October a few weeks ago, we have become concerned, even with all of our concerns about record overvaluation and downside risk, that this giant kind of cup and handle formation was, was forming. And some of our shorter term indicators reversed into the positive, particularly in the NASDAQ. And so because of it, we made an adjustment to a short hedge that we have in place, we replaced it with an at the money put, which, which essentially allows us to put a stop limit on the risk associated with that hedge. We did that back here. If we had one or two more good solid weeks, we would have broken out from a pretty neat consolidation level. And so we were watching that carefully. We made that change with the hedge. And as it turns, as it turns out, we’re actually breaking down at the moment to a pretty critical level, nothing is actually confirmed yet, let me move to the daily chart. On the daily chart of the s&p, you can see a head and shoulders formation, forming here, left shoulder head, and somewhat of a double right shoulder. And so I’ve drawn a line in here to show where that trend line likely is, interestingly, we’re bouncing off that trendline. And we are between the 50 and 200, day moving average on an exponential moving average, the simple is relatively the simple moving average is pretty close to this. So we were close to breaking out, we were concerned about that we made some adjustments. Nothing, nothing happened in that case. And now we’re closer to breaking down. But it’s not really confirmed until we see a further move down through this neck line. But this is this is somewhat of a crash scenario. I mean, if we break and move down harder, pretty quickly, this can happen, we could be down to 4200 very quickly in a matter of a few days. And then from there, the risk is much lower. And so we’re strongly concerned, we’re very concerned about the s&p, we are very lightly net exposed. And we have lots of cash essentially, about 50% cash equivalents right now, with very, very little market risk. And let me just go to the five minute for one second. You’ll see here the Fed meeting yesterday initially negative than it took out the previous high and then it’s been straight down from there. I think that and that’s on bonds, but the same thing on T on S, s&p, it was negative then bounced, and then it’s been straight down from the Fed meeting. So I want to go to TLT. Because bonds also had a big reaction, as I just showed there. Here’s a daily chart of TLT. It’s been a pretty vicious down move. And what I think is likely a Capitular Ettore move here, after the Fed. I mean, we talked about the dot plot a little while earlier, the Feds probably going to get down to you know, two to 3% target rate probably a lot sooner than the market thinks, you know, those rates going down will push bond prices up. And, you know, by some estimates, the Fed has $2 trillion of losses on their, on their books with these. With these falling bond prices. In my mind, it’s only a matter of time, before something happens, including things like potentially yield curve control, where they by the long end of the curve, and an s&p market drop with speed and velocity should cause money to come into long term bonds. Now, I’d be remiss in saying that we’ve got some very strong hedges on our TLT position as well, essentially, half of our position is off the table because we have puts in place at 98. The other half, we were pretty religiously selling calls against it and we’re pulling in income. That position is still down, obviously. But we’re we’re working like crazy to try to manage it and hedge it properly. Those are the two lines here that we have our 98 puts are right here. So if I can just show a monthly chart, go back to that because I want to compare that to where the Fed started hiking rates in March of 22. That was back here at 131 35 on TLT. So you can see bonds have been hammered over the period of time since the Fed started raising rates, and yet stocks have hardly moved. So that’s the question who’s lying in who’s correct? I think the s&p is lying. I think the s&p is in is being teed up for a big drop here. And I think that long term violent bonds will bounce. It’s been some it’s been difficult to hold on to that position, but we’re doing the best we can with option hedges. And I think that ultimately, long term bonds bounce probably come back up to here. are, you know, 110 120 or even higher on TLT, as the Fed does have to revert to easing much sooner than expected. So lastly, I think that I would just say one or two things about gold. And then I’ll then I’ll stop still one of the best looking charts out there is gold. This is the 20 year monthly chart, giant consolidation. And over the last five months, it’s been really frustrating for gold investors, but it’s forming this little handle like consolidation. The big question mark here, like it was with the s&p is, where’s it going to go next, I believe we’re going to break out we’re going to pierce this triple top and move into the 20 $2,500 range. And that’s probably going to happen next year. I’d like to say later this year, but I don’t know when this is going to break out to the upside, but the projection would be to around 2500 short term on the daily chart, gold really hasn’t moved too much since the Fed decision. It’s been all about stocks gapping down in bonds gapping down since the Fed decision, but I would bet on bonds at this point a lot more than a bet on stocks. I’ll pause there.
Adam Taggart 26:13
Okay. All right. So this is where things start to get really interesting. And thanks for thanks for confirming for viewers that you guys are not losing confidence in your your treasury trade and your your TLT trade
Mike Preston 26:27
note, we’re working like crazy, but not not losing confidence in it.
Adam Taggart 26:31
Okay, so number of folks that I’ve interviewed on this channel recently, Darius being one of them. Lance Roberts, being another one and spend Henrik, you know, all of them say, hey, look, you know, this is all prior to yesterday’s fed presser, by the way, but really, you know, Powell didn’t even raise rates, right. He just was more hawkish in his outlook. But they basically, they all, I think, share your guys’s general opinion that a recession lies ahead in 2024 At some point, and the Feds gonna be forced to pivot and whatnot. Right. But they’re, they’ve been looking at the market activity and saying, hey, you know, there’s still been room for stocks to run. And that certainly has been what’s happened so far this year. And they’re all pretty much saying to people who are really bearish about what may likely happen in the coming in the coming future, saying, you know, that very well may happen, but but you could still have a pretty big run up in stocks beforehand. Lance has basically said, look, the market has traded much more on technicals this year versus fundamentals, and the technicals have still been been pretty bullish. We haven’t broken through, you know, too many technical warning barriers yet. Now, the past couple days, have brought the the s&p down below the 50 day moving average. So it’s punctured through one of them. But there’s, there’s, you know, it hasn’t broken through key support yet. Right. So he’s basically saying he’s not going to change what he’s doing until he sees those support levels break. Spent says pretty much exactly the same thing, just with a ton more charts. I think you guys watched his video from last week. He basically said, Look, I hate to say this, but you know, I’m very bullish, fundamentally. But I got bearish, fundamentally, but I gotta be bullish on the technicals until at some point, they change. And he brought up that that chart of the past 20 years average of the s&p, it’s just a seasonality chart. And he says, Look, I normally don’t trade off of this. But he said the markets been following the script all year. And if that continues, it shows that we should expect stocks to kind of run up through the end of the year, pretty much from here on out. And again, spend a saying, look, there’s no guarantee it’s going to, but this is just the trajectory it’s been following. So as long as this correlation holds, we have to hold ourselves open to the fact that this may happen. Darius has a very similar point of view. And one of the things that he mentioned is he showed how stocks tend to actually outperform in years prior to a recession. So you know, sort of they party hard, and they sort of slam into the recession. And then they have those big corrections that John was showing earlier on. And what he said is you get of that outperforming year, over 50% of that return comes in the last three months before the recession. So it’s like the party just gets wilder and wilder until the cops arise, right? cops arrive. So you know, he’s he again, he’s saying look, who knows that this is exactly what’s going to happen. But you know, if we indeed think that there was a recession coming at some point next year, Darius pegs it at around the beginning of q2 next year, that he’s saying it’s folks that just just be aware there’s there’s potential showed that stocks could actually run pretty hard up until, you know, the beginning of next year. Right not saying it’s necessarily going to happen. They’re obviously selling off right now in the short term based on what Powell said. But like I said, this is where it gets interesting, right? Whereas a capital manager and an investor, you get to try to pick what you’re gonna play for, you know, Do do you think, you know, do you think stocks are falling off right now? Is this the start of it, you know, and Mike, you showed some charts and said, Hey, maybe this could be the beginning of something. And certainly, we can come up with a zillion arguments why that fundamentally shouldn’t be the case. Or the electorate more sort of the technical side of things, what history has said and other situations like this and say, Hey, I don’t know, maybe I gotta put some, some give some mindset to the fact that stocks may continue to run up from here? And if so, what do you want to do? Do you want to try to play that? Or do you just want to sort of sit on the sidelines, and see, and then when it becomes a little bit clearer, make your decision, right. But this is where it gets interesting. And same thing on bonds. You know, Darius thinks that, that bonds will do well when the recession hits and the Fed pivots, but he thinks that they are more than in his estimation, where they’re likely, as if stocks do surged for the next couple months here, whatever that bonds could go further down. And he actually pegs the his tenure target right now, I think was 4.75%. So you know, we’re getting close to that we’re getting close to four and a half percent on today. But he thinks he could tack another quarter point on to that now, we’ll see what happens. But again, like I said, this is where it’s beginning to get really interesting, where you can get smart people looking at the same data and making different predictions on it. And you, as an investor or capital manager have to determine how you want to serve that. John, you’re nodding a lot, as I’m saying this would love to get your reaction.
John Llodra 31:49
Yeah. So so all this investing really is about probabilities, I hope hope none of the viewers take from us or maybe even your other commentators that it’s a binary type of view that we have. It’s all about probabilities. So for example, yes, we have had a long, longer duration Treasury position for recent months over the last year or so. But it’s only been at most 15% allocation. Absolutely have not been of the mind that long term bonds were a hand over fist, steel of the century, they’re getting more attractive, but our position only was about 15%. Fat, we’ve been leaning much more heavily on the short end of the curve, short term treasury bills, three month kind of thing. In recent weeks, we’ve extended that out to six and kind of 12 month type of thing. And my talked about us having over a little over 50% cash when he says that what we really have is short term treasury bills. The last couple of tranches we did. Were yielding annual yields just just shy of five and a half percent. They’ve actually spiked up a little bit since then. So it’s all about proper positioning. Just a quick comment on the election cycle, cyclicality data that you know gets thrown out quite a bit. Yeah, there is cyclicality there that is somewhat regular. But the problem with those kinds of things is they in averaging out and coming up with those average cycles, you lose a lot of texture and nuance that that you only have to have one hour to make those averages and those cycles be rather irrelevant. I may be doing math wrong, but I think 87 was a year that preceded a an election year. And in October 87, you had the crash of 87. Not saying that doesn’t actually what we see this October. But those those rules of thumbs or cyclicality averages, you can lose a lot of context and 87 saw a over 20% Drop in the market in one day after a pretty bloody week the week before. And that was from valuation levels that were less than half on a Shiller P E basis than we’re at now. So gotta be very careful about using some of those things. And in terms of the bigger picture of interest rates, you know, 10 year treasuries did and I’ll just share a longer term chart for perspective here. Let’s see here. This is a long term chart of 10 year treasury yields. So we’re just today we got just shy of four and a half percent. I think we’re probably near the end in this spike higher, maybe we challenged the 5% that we saw back in prior to the housing bubble. But even still, if you take TLT for example, it’s got a duration of about 17 years if we if we add about a half a percent move higher in the tenure yield simple math that we’re talking maybe about an eight to 10% decline and something like TLT so it’s not like there’s this major or further bond collapse likely to happen doesn’t mean we can’t see further weakness. Tlt is just above 90 right now. And I do want to change I think maybe we see high 80s, maybe mid 80s. But our position is Mike already said it’s about half of what it was about seven and a half percent position. And we’re renewing hedges on that. So we don’t have any any concerns about that with the position size and our strategy. But what we do have is lots of dried powder is very safe in the form of treasury bonds, treasury bills, I’m sorry, that we can in a moment sell and deploy into other things like stocks or bonds at better prices.
Adam Taggart 35:38
Right. If I can just note here, if you go back right before the recession of 2008, we’re Yeah, the previous kind of high there. I think the federal debt was around $10 trillion. Yeah. What’s it now John, it’s like over 33 trillion.
John Llodra 35:56
It’s a whole different ballgame, courtesy of the money printer over the last decade. Absolute right.
Adam Taggart 36:01
And this is when I talk about that gravitational effect. It’s so much stronger. Now. Even though we’re at the we’re nearing the same federal funds rate, the effect of that federal funds rate is so much stronger now, just because we have so much more debt in the system. All right. Well, guys, great discussion here. One thing I want to note about something that pal, actually something that pal didn’t say something that he said and he didn’t say he kept talking about the Feds mandate is to pursue price stability, and really have its dual mandate that price stability, one really is the more important one of them. And he said, Look, you know, folks, we get it, we get that there are households that are really impacted when price stability isn’t maintained. And that’s a fancy way of saying that when when the cost of living goes up, inflation causes the cost of living to go up. Regular households get hurt by it. But what’s so interesting is he did not acknowledge any role that the Fed played in contributing to the spike in inflation. Right? It just, it just basically talks about it like it’s this act of God that kind of came out of nowhere. So he doesn’t doesn’t address the Feds own culpability in it. And you know, all right, should we really expect him to do that? Probably not. Just because, you know, it’s admitting fault, and no major government entity is going to willingly do that. But what he also didn’t do is apologize in any way for this, right? There’s no sense of like, hey, average American, I’m really sorry that you’re suffering for the, the shockwaves and the repercussions of bad decisions that we made in the past. Right, again, maybe not something that he’s going to say, but it does just sort of, you know, it’s infuriating for folks, I know, I speak for you guys, but I believe you’re like me, where, you know, the Fed is sort of trying to paint itself here as golly gee, doing its best to rescue. You know, all of us from this, this, you know, unfortunate inflation that sort of, you know, magically come out of nowhere, when, of course, it’s a direct effect from policies that the Fed and the federal government have been jointly pursuing. I see both you guys nodding on this. I’ll let you guys make any commentary you want on that? Let me just note it based on consumer households. We are finally beginning to see some real data. I know, we’ve been tracking lots of data points all year, that have been suggesting that consumer households are increasingly, you know, beginning to strain under the high cost of living. But now, a lot of institutional research houses are coming out with increasing warnings about the weakening consumer household, JP Morgan just came out with a report where they basically warned about seeing increased weakness in the consumer because of a longer term impact of inflation and higher for longer rates. This is pretty much the lag effect that we’ve been warning about student debt going back into repayment, and consumer personal savings depletion. We talked about, you know, the pig in the Python, it seems like from a personal savings side of things, the pig is pretty much fully out of the Python at this point in time and consumers have gone from surplus to deficit. And that’s obviously been very supportive by the huge increase that we’ve seen in consumer revolving debt balances, where people are increasingly funding more and more in their lifestyle, you know, on the plastic credit card. In addition to JP Morgan, Goldman Sachs, it just came out, basically said something quite similar. But they said that the things that they’re watching are is the focus on higher oil prices and how that is crimping consumer budgets. As the student debt resumption, like we talked about, and then credit card data is showing that there’s software spending on consumers following the back to school period. So we got a little bit of a juice to the economy because of back to school. But the spending after that has been weaker than seasonally normally suggests. So these are signs that the consumer is increasingly tapping out here. Right. So we’ll keep watching all of this. But yeah, pal, you know, you should be mindful of the impact of the price and stability on consumer households, because real people suffer from this. And the data is showing that they are increasingly starting to suffer, you know, noticeably from here. And of course, as consumer spending goes down our GDP is 70% consumer spending. That, you know, basically, is some of that increase in gravity that I’m talking about, that’s going to be slowing economic growth. And if that then causes corporate budgets to pinch enough that they have to start laying people off, then we get in that vicious cycle. And we talked about how we think the 4.1% unemployment projection by the Fed is unrealistic. I mean, that number just completely goes out the window, if we get a true recession with with substantive layoffs accompanying So, guys, I’ll hand the baton to give any parting bits of advice here, Mike, why don’t we start with you?
Mike Preston 41:26
Yeah, it’s maddening, isn’t it, the Fed talks about price to stability yet they’ve caused, I think the largest bubble will ever see. I was reading a piece that Charles Hugh Smith wrote the other day, and he estimates that $55 trillion in excess wealth, wealth in quotation marks, has been has been created since the 2009 financial crisis in this country alone due to the excess money printing, and most of that greater than 90% of that went to 10% of the people. And in most of that, you know, to the top 1%. So that hasn’t been fair, that’s causing some social, I think some societal problems are certainly will going forward. And, you know, the Fed says they want price stability, but a lot of people can’t afford homes. These days, you know, I saw a different chart that showed what a $1,000 mortgage payment could purchase in terms of a house and it was something like 270,000 has gone down down to like 150,000 or so I wish I had that shot at my fingertips. But suffice it to say the amount of house that you could buy with $1,000 mortgage payment is nearly been cut and, you know, been cut in half. And yet housing still remains a law. That’s pretty much a Marvel how long this bubble goes on and on and on, both in the s&p and in anded housing, that is the financial markets and and housing. It won’t go on forever. We’ve We’ve trusted these people, they have, I think, taking it too far. You know, they say they want price stability, and yet we don’t really have it. You know, they said they want a 2% inflation for years. And that’s what we were at, while we were at 0% interest rates, and all of a sudden inflation went from near zero to 9%. And now it’s trending back into the force. But honestly, there is no plan B here. It’s always been for the last 15 years more and more stimulus. And it will be that way. Again, I think soon when this market falls, it’ll be more stimulus this time. I don’t think the market will react positively. And I think it could be worse than a lot of people think and I think it could stay down a lot longer than people think more of an L shape move than a V shaped move. So let’s see what what what happens. But those are my thoughts as we wrap up.
Adam Taggart 43:44
All right, good wrap up thoughts real quick as we land the plane here. First off, want to remind folks that tickets are still available at the early bird price for the Wealthion fall online conference that’s coming up on Saturday, October 21. I haven’t said this as much as I should. But if you can’t watch live on that actual date, don’t worry, everybody who registers for the conference will be sent replay videos of the entire event. All the presentations have a live q&a afterwards. So don’t worry, if you can’t watch the entire thing on the actual day of you’ll get those videos you can watch to your heart’s content. I won’t go through the amazing faculty that we have there. Cuz you can find all that and how to register for the event over at wealthion.com/conference. It is our best faculty lineup ever. And I do just want to note that I just got confirmation from Jeff Clark, that he will be recording as he has for the previous two conferences, a bonus video that goes through his latest precious metals mining stock picks, as we’ve talked about in past videos, guys, that complex is being run much better than it was a year a decade ago and the prospect for the underlying metals. The prospects for the underlying metals in some cases are as strong as they’ve ever Ben, and you gave a quick note of this a few minutes ago, Mike, but the miners are really been lagging. And so this could potentially be an extraordinarily good time to invest in the space. Brian London, who I had in the channel last week said that he thinks that this is kind of a generational opportunity. So very glad to say that Jeff is going to be recording that video going through his top stock picks and explaining sharing the companies explaining what about them attracts his attention, and obviously sharing things like tickers and whatnot that investors can go off and go check. So definitely go register for that conference to lock in the early bird price. And if you’re an alumnus, check your of our previous conferences, check your email inbox, you should have a discount code for me, that will give you an additional 15% discount off of the earlybird 30% discount. If you enjoy these special reports that we do in response to breaking developments in the economy and the financial markets, please vote your support for us to do more of these 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 obviously, as we talked about every week, there is a lot going on. Like I said, it’s getting really interesting. Now we’re smart people are looking at the same data and coming to different conclusions. These can be very difficult times for the average investor to navigate. You know, most folks just are trying to figure out what’s going on. But most importantly, they’re trying to live their lives, they’re trying to focus on their jobs take care of their families, they don’t necessarily have the experience the expertise, or just the time and bandwidth in their lives, to really be glued to the markets and really trying to you know, in real time, tweak their, their strategies in their allocations. So that’s why we highly recommend that you work under the guidance of a good professional financial advisor, especially when that takes into account all of the issues that we’ve been talking about here in this video today. And on this channel in the past weeks. If you’ve got a good one who’s doing that for you’re great stick with them. But if you don’t consider scheduling a free consultation with one of the financial advisors that Wealthion endorses, maybe even John and Mike themselves and their team, they’re at new harbor financial. To do that, just go to wealthion.com Fill out the short form there only takes a couple of seconds doesn’t cost you anything to have these consultations. And there’s no commitment to work with these guys. These advisors just offer it as a free public service to help as many people position as prudently as possible in advance of what might be coming down the road. John, I’m gonna let you have the last word here as we walk folks out.
John Llodra 47:27
Always great to be with you, Adam. Things are moving quickly here. We’re always watching markets, but we also our clients have real lives and much of the conversations we have with them have to do with things that are related, at least some sort of tangentially to their their investment assets. But it’s so much broader. For example, we have the opportunity to have a conversation this week with a group of professionals about end of end of life planning and things like that Mike and I are CFP certified financial planners, as is. Michelle on our team, Justin Griffin practices, this kind of stuff every day as well. So we have the opportunity to kind of have a actionable seminar conversation, if you will, on this topic. And I’m, you know, I’m actually dealing with many of our team members are dealing with these kinds of things personally, being in the sandwich sandwich generation this week, I had some issues with my mom’s health situation. And you know, my mother in law’s got some some terminal diagnosis. So we’re living the stuff as as people. And we know how hard these kinds of things can be for our clients. And we’re here to talk about and counsel them through these kinds of things as well, not just talking markets and price movements. It’s a bigger picture. It’s about life,
Adam Taggart 48:45
that thanks for that reminder, right? It’s not just about what stocks are doing. It’s about all of the aspects of somebody’s life. And well, let me just say, first and foremost, for myself, and from the viewers, John, best wishes to you and the seniors in your family and in handling all this transition as best you guys are all able to thank you very much. All right. Well look as we wrap it up here, guys. Thanks for a great week. Great discussion. Mike, you were talking about housing. I just want to flag for folks. We had an exceptionally good interview last week with housing analyst melody, right. The feedback that video has been tremendous. And I just flag it here because basically melody, her main conclusion there is the the headlines and the data that we’re hearing about the US housing market are actually much worse than what we’re being told. And in many cases, it’s it’s due not necessarily to intentional deception. It’s just that there’s a lot of flawed and faulty data that even the real estate professionals themselves are using to draw conclusions. It’s a great interview. Melody has done real boots on the ground analysis. She’s actually gone and visited a number of the hottest or at least formerly hottest real estate markets in the country that Austin’s the Phoenix is the Las Vegas is the Nashville is the Miami’s. And a lot of her findings are really nothing short of shocking. So folks, if anyone’s interested in learning more about what’s truly going on in the real estate market, at the end of this video, I’ll put up a link to that interview with Melody. Thanks so much, guys. Great week, everyone else. Thanks so much for watching.
Mike Preston 50:25
Thank you, we’ll see you soon.
Adam Taggart 50:27
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