Here in Part 2 of our interview with Michael Howell of Crossborder Capital, Michael explains which assets he thinks will perform well now that the Liquidity Cycle has turned positive. Tech, discretionary stocks, gold & commodities top his list.
Michael Howell 0:00
I would say that if we’re in a period of expanding liquidity you want to be moving more in cyclicals visibly defensives. And I think things like technology should continue to do extremely well in this environment. Again, if you believe in longer term monetary inflation risks, which we do, then you’ve got to have exposure to commodity shares. So I think the barbell strategy of holding technology and commodities would make a lot of sense in the sort of environment we see upcoming.
Adam Taggart 0:34
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Thanks for joining us for part two of our interview with liquidity and market expert Michael Howell. If you haven’t yet watched part one of this discussion with Michael in which he explains why the financial system is at a liquidity inflection point that he expects will send asset prices higher over the coming year, head over to our channel at youtube.com/wealthion. And watch it there. First, it sets the context for the investment themes we discuss in this video. And Michael also kindly shares his thoughts for a portfolio structure that he thinks will perform well in the investing climate he sees ahead. So get ready to take good notes. Okay, let’s get started watching part two of our interview with Michael Howell. If this is the time, and again, don’t put words in your mouth, but if this is the time to be greedy when other others are fearful, and to start reentering the market, when you know, folks are still worried about where things are going. And hopefully that means you’re getting better values today than you’ll get tomorrow. How do you think this is best played? You mentioned a couple of assets like precious metals and cryptos. And in the high tech, high growth tech stocks, they move first. So they’ve already started to respond. Is it still good to ride those guys? Or have they played out here is it time to be focused on other parts of the assets.
Michael Howell 2:02
This is this chart here you can see is basically or hopefully see is looking at what we call monetary hedges and the global liquidity cycle. So it’s pretty much like the previous chart that you were looking at, which was global liquidity. But this one is basically looking at what’s happening to the values of crypto and gold together as a universe in orange and the global liquidity cycle here in black. And it’s showing that actually monetary inflation hedges move very closely with the global liquidity cycle, which is why, you know, we can be more confident that liquidity is picking up because you’re seeing this companion increase in those asset classes. If you’re going to get further gains in global liquidity, what you’re likely to see is further gains in in these assets like crypto and gold, that’s for sure. The next thing I think to look at is the impact that liquidity has on the Treasury yield curve. Now this chart shows you our index of global liquidity for the US in orange. And the yield curve has been advanced here by nine months. And what this is basically trying to illustrate is that as soon as liquidity expands, so you can inflection upwards in the slope of the yield curve. So that is something which is beginning to unfold right now. So you could look forward and say if we’re going to get further liquidity increases, the yield curve should be steepening. So if you’re investing in bond arbitrage strategies, you’re likely to make decent money in this environment. So those are two asset classes. I would say that if we’re in a period of expanding liquidity, you want to be moving more in cyclicals visibly defensives. And I think things like technology should continue to do extremely well in this environment. Again, if you believe in longer term monetary inflation risks, which we do, then you’ve got to have exposure to commodity shares. So I think a barbell strategy of holding technology and commodities would make a lot of sense in the sort of environment we see upcoming.
Adam Taggart 4:15
All right, that’s super interesting. So barbell tech, one side commodities on the other. For commodities, do you have any, any point of view on owning the commodities themselves versus owning the producers, which tend to be a bit more leveraged plays on the commodities?
Michael Howell 4:32
I’m not especially I mean, you know, we’re not experts on commodities, per se. So I think it’s very difficult for us to sort of, to say that I mean, you know, broadly, I’m thinking here of generally commodity prices, so things like copper or gold or whatever. But, you know, as you rightly say, I mean, commodity companies are leveraged in it.
Adam Taggart 4:55
Okay. And if you can help just just, you know, I Find that folks watching bond math is always a little bit tricky and non intuitive to certain folks. So you showed the chart there about expecting the yield curve to steepen. What impact would you mentioned, for those that are doing a bond arbitrage? There may be an opportunity to get some gains there what specifically what what strategy for bonds do you think would play out in the type of future that you see coming?
Michael Howell 5:26
Well, I think if you if you’re going to get a steeper yield curve, what that what that would be basically saying is that yields longer and moving upwards at a faster rate than the yields at the shorter end, I mean, the relative speed of movement. So in other words, the yield curve is beginning to steepen. Because that longer end is going up faster. So you want to be shorter of that of that area, and longer the short, have more exposure at the shorter end, in that regard. So in other words, what that’s really saying is, another way of looking at it in probably more straightforward terms, is you want to go long, short, dated instruments. So in other words, short rates will be coming down significantly, which means the prices of their instruments will be going up faster.
Adam Taggart 6:13
Got it? It does make sense. And it one of the reasons why I just wanted to dig into that is we’ve had some experts on the program right now say that they think that the the bond market is actually quite attractive right now. Because they expect some sort of some sort of event some sort of breakage in the system that’s going to make capital flight into and they’re talking mostly sovereigns here, the Treasury bond market, the longer end of the curve. And so you know, there are some people saying this is a really good time to start going out long duration on on the bond curve. And what I hear you saying is, is that’s not what your models are saying your models are basically saying the opposite. Yeah, exactly.
Michael Howell 7:04
Right. You don’t I mean, I didn’t think there’s any point in owning long into the bond market, particularly I mean, this, we keep saying this is the stage of the cycle, where long dated debt does not perform particularly well. doesn’t perform badly, let’s be clear about that, you get moderate returns out of out of fixed income, long, dated fixed income around the stage of the cycle, the best stage of the cycle for fixed income, longer dated, is much later in the cycle than where we are now. This is the stage where you start to get the yield curve beginning to steepen. But you want to make you’re gonna make more money at short, dated, you won’t make a lot of money, but you’ll you’ll make more out of buying short dated instruments, expecting their rates to come down, the long end won’t move much. And the reason the long term won’t move much is that this is going to get terribly wonkish territory, because term premia are hugely negative right now in the system. And that’s what a lot of these optimists are that bonds are not really figuring, figuring, why is it the term, you look at short term premium, the risk premium, that you’re holding a bond for interest rate risk over the lifetime of the bond, okay? So it’s unexpected movements. Now, that term premia is skewed significantly, by an excess demand for collateral by some of the big financial institutions. And they have to own this debt for balance sheet reasons. And it’s made things like Basel three, or solvency two people would have heard of, these are requirements that the banks and the insurance companies need and longer dated US Treasuries ticked that box, so they tend to buy them. Now there’s a shortage in the system of that of that good collateral, okay. And that’s what’s driving term premia down excess demand for that in the system. So what you’ve got now is a huge, huge anomaly, which gets very little commentary. And that is that term premier in the US are not only negative, but they’re at their lowest, almost at their lowest ever level in 60 years of data. Right? Wow. That sticks out like a sore thumb. And that I think, term premiere can only go up from here not down all the odds are that’s true. I think my my camera is playing tricks. I was
Adam Taggart 9:29
just about to mention that.
Michael Howell 9:31
I don’t know what’s happening. But anyway,
Adam Taggart 9:33
maybe that’s better. All right. That is better. I think we got it. I was just about the year it was just all of a sudden you’re on the part of the screen and it was losing its focus on you, but it’s the quality of what you were saying was so riveting, nobody’s gonna
Okay, let me know when you’re ready for one last question on this. No, it’s fine. You go for it. Okay. Um, All right. Well, look, one last question for you here on on bonds, Michael, which is, and several of the recent experts on this channel, I have asked the question, do you believe the peak in bond yields is in is behind us at this point? And increasingly? The number of experts that I’ve talked to recently have said yes, they they, they would not be surprised if the peak in bonds was behind us. I’m intuiting, for what you’ve been saying that you might have a different answer to that. But I, again, I don’t want to put words in your mouth. So what do you think?
Michael Howell 10:36
Well, I think I think it’s possible. I mean, I’m not. I would be more hesitant at that. I think the you know, the issue is, is that a bond that if you take the 10 year bond yield, it consists of two moving parts. One is the term premium, which is abnormally low. And the other is a rate expectation, which is abnormally high from recently over recent experience. And I would be absolutely confident that that right expectation term comes down. But I would be hesitant about saying it comes down dramatically, because I don’t think the Federal Reserve will want to slash rates in the way that people are suggesting. Because if you slash rates, you’re back in the old problem of incentivizing debt again. And that’s what we want to avoid, you want to avoid debt, at all costs, taking on more debt. On the other side of the ledger, the term premia is at rock bottom levels, and I think can only go up. So my view for the bond market this year is is in a trading range. It’s a wash in other words, so I think that you’re gonna get reasonable returns out of bonds, moderate returns, but that is pretty much the carry in the, you know, on the coupon, you’re gonna get identity, you’re gonna get much more money, you’re gonna have much capital gain out of it, you might get a bit, but I don’t think much.
Adam Taggart 11:52
Okay, so it does sound like you see more opportunity, both in the equity markets and on the commodity side of things. In terms of sort of magnitude of what you expect, you know, given the turn we’re making here. When would you sort of expect to see like the s&p hit new highs? Is that something you’d see this year, given the type of move you’re looking at? Or what take longer than that?
Michael Howell 12:18
I think we I think we could do it this year, for sure. Yeah. Well, we’re not what are we now I’m trying to think what the math is, is we’re probably 8% below the peak. Where we
Adam Taggart 12:28
were like, 41 something right now the peak was wide around 46. This year, so Yeah,
Mike Preston 12:34
about that. Yeah. Okay.
Adam Taggart 12:37
So again, you you are, I believe, more sanguine than most of the guests that have been on this program recently. And it’s been fascinating to understand why. So again, you the message I’m getting from you is don’t be overly fearful here. This is probably a time to sort of start dollar cost averaging in as you’re taking advantage of what you believe to be better values today than we’ll see at the end of the year. And that, you know, increasing your long exposure, maybe in a barbell style, like you’re mentioning, you know, should should pay dividends as the year progresses, and those tailwinds become even stronger.
Michael Howell 13:14
Yeah, I think it depends on people’s time horizon. I mean, clearly, if you’re investing for three months, don’t do that sort of thing you can invest in for three years or longer. Absolutely. Yeah. Makes a lot of sense, I think.
Adam Taggart 13:25
Okay, great. And last thing I just want you to kind of confirm with you is you’re pretty you’re pretty optimistic about the next couple of years, you mentioned that these tailwinds based upon the cycle should last somewhere to 2025.
Michael Howell 13:38
Well, I mean, let’s be clear, I’m not necessarily optimistic on the economy’s because I think we’re we’re suffering this Japan ification, which means that you’ve got, you know, challenges on productivity growth, you’ve got demographic, demographic aging and deteriorating labor force. So, you know, this is not back to the boom, boom years that we saw in the 60s or in the 90s, or whatever, you know, it’s a different it’s a different paradigm. So we may be seeing sluggish Japan like growth, but for the asset markets, very different question. And I think that if you’ve got central banks that are pumping in liquidity, and you’ve got investors that are probably going to, probably, rightly going to avoid bonds because of the inflation risk. I think equities will pick up a bit. And I think you’d go back, go back to the results season that we just come through in the US, I would have said that’s actually broadly pretty encouraging. I mean, corporations can make money through this period. There’s a lot of uncertainty, but they seem to be generally quite upbeat. I think that’s quite a good heads up.
Adam Taggart 14:38
All right, great. Well, one of the things I’ve been saying a lot of his channel is is, you know, a lot of our guests have been relatively pessimistic about the prospects for the economy. And I would say most of them for the markets in terms of their outlook for this year. I and many of them have said we can’t wait till we get to the point in the cycle where we can start telling you more bullish story. I’ll say you’re one of the earlier bulls You’re to come on, but you’ve given us a lot of, you know, very compelling reasons why. Let’s hope that your Outlook indeed proves out here. And this channel is all about helping people build wealth. And you’re, you’re basically pointing a direction to say, hey, this, this looks like a way that we can do this over the next couple of years. So anyways, Michael, let’s wrap it up here. Thank you so much for giving us so much of your time for staying late, in your offices in London to have this conversation with us. For folks that have really enjoyed this conversation. Maybe this is the first time they’ve, they’ve heard of you, or maybe the first time they’ve been able to listen to you at length like this. For those folks that are interested in following you and your work, where should they go?
Michael Howell 15:38
We’ve got a website, which is cross border capital.com. And we’ve got a Twitter feed, cross border cap across board account. And if you want to, if you get sleepless nights, and you want to read a book about all this, it’s called capital Wars is available on Amazon, published by Macmillan Palgrave.
Adam Taggart 15:58
Fantastic, Michael, when we edit this, I’ll put up the URL to your website, your Twitter handle, we’ll put a image of your book on the screen when you’re mentioning it there so folks know exactly where to go. This has been a really interesting discussion, Michael, again, I really appreciate you taking so much time to walk us through all this in detail. And for giving so much of your time again, late in your day, I really hope you come back on the channel at some point in the future. If you’re open, maybe in a quarter, we’ll give you a chance to come on and kind of give an update as to where things are based upon what you share with us today. Okay, look forward to end. Thanks.
Well, all right. Well, now is the part of the program where we bring in the lead partners from new harbor financial, one of the financial advisory firms endorsed by Wealthion, to do a little postgame review of what Michael told us, and then talk about what the markets have been up to over the past week. There’s also some pretty big developments going on guys. We’re going to have, right unfortunately, right after we finished recording here, the Fed is going to announce its decision here in first week in May, on whether or not it’s going to hike rates once again. And then of course, Powell will come out and give a press conference. We’ll deconstruct that for folks next week. But as usual, I’m joined here by John John Llodra and Mike Preston. Guys. Thanks for joining Mike, why don’t we start with you? What did you think about Michael’s interview there? You know, a little bit of a different tune than many of our recent past experts, he definitely is a little bit more optimistic with his whole, you know, liquidity model here thinking that we might have just started a multi year bull run.
Mike Preston 17:33
Hi, Adam. Thanks for having us back. Like usual, I enjoyed Michael’s talk. Michael is with cross border capital in London, I believe. And Michael is very bullish. And it’s nice that you have some different perspectives on this program, both people that are cautious about the markets but but also ones that see some bullish slant and his arguments. Michael’s argument is about liquidity. He says a liquidity bottomed in October of 22, really kind of on the heels of the Bank of England, England reversing and its tightening. And that was because of the guilt crisis. So they basically reversed course and started the liquidity program again, and then says that other central banks have followed suit after that. And there is some truth that of adding we’ve seen, we’ve seen the s&p really bottomed in October, and it’s been on a pretty relentless Upswing since then. However, the bigger picture that we really didn’t focus on or that I didn’t hear too much. In his talk that we really are worried about is the macro environment of supreme overvaluation. Markets are very overvalued. In fact, they’re they’re more overvalued than they were the tops of the very tippy tops of other times in the market that were very severely overvalued, like 1929 and the very peak of the tech bubble so we can’t forget that he he offers some other very good arguments too, that could cause more liquidity come into the market. So like for instance, oil looking at oil right now it’s having another big down day was down yesterday is down again today, trading at around $68 a barrel. I mean, it was it was right around $100 Not too long ago, you know, and so it’s been a pretty steep downtrend, if that continues, that could cause some liquidity. But the big picture with the with the markets is this the s&p is up 7% year to date, but it’s down 14% from its all time high. The NASDAQ has been the leader, up 20% or so year to date down 23% from its all time high. These markets talk sometime in November of 21 through January of 22, in our opinion, and they’re still early on in a very, very, in my opinion, slow moving bear market and the risks of certainly to the downside. We believe that he is bullish, not just on equities, but on commodities, real assets. We’ve been long term believers in gold and silver In the mining companies, in fact, we think that commodities will do very well over the entire next 10 years, maybe more, and so we’d be looking to add exposure to commodities on any weakness. Frankly, right now we’re looking at the oil sector. I mentioned oil just a minute ago trading at around 68. If we see the bottom fall out of the s&p like we think can happen, and we still think the s&p could have been elevated drop down to about 3200 or so we’d be looking to opportunistically buy in the oil sector, we could see prices 10 to 20%. Below current price is pretty, pretty rapidly. And that would be a good time for hedge entry, in our opinion. So I will pause there for just a moment, there’s much more in the talk that we can that we can comment
Adam Taggart 20:42
on. All right. And John, I’ll come to you here in a sec. Yeah, and in addition to the interview here, with Michael, there’s some topical things going on, I want to make sure we touch on too. But it is really interesting. You know, when I first started hearing, Michael, talk about liquidity, the challenge I had, in my mind, which I’m gonna guess maybe other listeners did, too, was wow. You know, it really seems like from everything we’re reading about, that liquidity is getting tighter, right now. And of course, you know, I asked Michael near the end how he defines liquidity. And not everybody is measuring it with the same yardstick. But, you know, we are on the tail end now of the better part of a year. In fact, a little over a year of the Fed and the other world central banks, really out there trying to destroy demand, right? to tame inflation. And to destroy demand, you’re deliberately trying to slow the economy. And we’re seeing lots of signs, lots of indicators that we’ve talked about many times in the past on this program, that are now at recession levels. And yet a recession has yet to arrive. And we’ve talked a lot about the significance of the lag effect when it comes to monetary policy, you know, that it can take about a year, from the pulling of a lever monetary policy wise until you see that fully reflected in the economy. And, you know, we’re about a year from those first rate hikes last year, and we have a whole, you know, 475 basis points, you know, that we got to feel the full lag effect of overtime here. And that’s going to be hitting again, and again and again over the next couple of quarters, which again, I sort of think is, you know, something that depresses the economy. And so I guess the big question I have is, I mean, it’s hard to argue with his data, right? He’s got that that chart of liquidity changes in liquidity, and he overlays that with sort of that sine wave of what happens with asset prices. And, you know, the correlation is incredibly tight. So you know, we can’t ignore it. Right. You know, if as he measures liquidity, we have hit an inflection point, and things are going back up, you know, we’ve got to have an eye out that, okay, that really, maybe could goose prices for the next 60 months from here, I think he said, But my question, I’ll come to you with this, John, and I’m still sort of batting around in my brain is what sort of wins out if you have increasing liquidity, the way in which Michael measures it, but you have a contracting economy. And if we get you know, Michael Kantrowitz is final, ie the employment Domino, and there’s hope framework, if that does tip over, and it kind of becomes game on recession wise, what wins out when it comes to asset prices? Right? There’s there’s liquidity push them higher, no matter what, or as Mike is saying, Look, valuations are really distorted to the upside. And if we go into a full blown recession, they’re going to have to come down no matter what liquidity is doing. I’m curious if you had an opinion on it.
John Llodra 23:42
Yeah, thank you, Adam. And great to be with you again, and great to hear a fresh new perspective. From your guest. Yeah, so So anybody would be forgiven to to, certainly given the last decade to make a direct linkage between contraction and expansion of liquidity and asset prices. I mean, we’ve been trained almost Pavlovian to to see it and expect asset prices to respond that way. I think there’s some some real context that gets lost though. And looking, for example, at just the last decade, where we’ve had monetary policies to play with liquidity like never before. And to understand that liquidity isn’t always going to be looking for asset assets to find a homerun, you know, when when base reserves were forced out to 0% interest rate, folks desperately wanted to find a better home from them and they would chase yield to do that. We now have a situation where at least presently, base reserves in the form of short term money funds, T bills and money market accounts, things like that are actually commanding a paying a very quite attractive rate of interest from a short term standpoint. You know, so there isn’t that same compulsion I think that perhaps existed in the In the wake of the housing crisis that you know, fresh liquidity and immediately finds a home and, and asset prices, you know, people and I’m gonna kind of relate back to the quote from from Darius Dale in last week’s video, you know, basically the the notion that people there’s a difference between bearish and there’s there’s a gap between being bearish and being scared. And I think we’re seeing some some fear starting to creep into the markets about the banking stresses, which quite clearly, and we’ll talk about this I’m sure, in more detail. This notion that it’s it’s behind us, I think, is very naive. And we’ve we’ve even heard some folks like former Fed officials come out and say, We think there’s a lot more going on here than than perhaps we were expecting. So there’s a fear factor and we start to think of liquidity as as collateral. And, you know, there’s a, there’s a rush to collateral, whether it’s because of the banking issues, and, you know, there’s this big storm cloud that has all the markings of have yet to come and be a real problem in the commercial real estate market. But that that that shoe has really not yet dropped, it’s almost seemingly out there. And people know that it’s a problem likely will be a problem. But so I would challenge the the knee jerk reaction that that even if we are seeing more liquidity coming into the system, that it doesn’t mean that liquidity is an inferior place to be, you know, sometimes when you’re holding 0% Cash, it’s an inferior place to be compared to other things. When you’re holding cash that’s yielding 5%. It’s not an inferior place, place to be, especially when there’s this fear and legitimate fear about the need for safe collateral and, and, you know, implosions of things like commercial real estate. And then I’ve just pointed to two realities. I mean, you look at the tech bubble collapse of 2000, and the housing bubble collapse. Prior to quantitative easing, the Fed’s policy to make conditions tight or looser was to drop the interest rate. Right. But in both of those instances, their rapid drop of the short term interest rates did nothing to stem a massive sell off over a short number of months in the stock market. So I think it’s really, we got to be very careful to especially in the overvalued stock markets assume that it’s just quite that easy. And I, you know, we very much believe that valuations do matter, and and we’re likely to see liquidity not be this quick, you know, south and back to the races, impetus that we’ve been trained to think is, is destiny over the last decade.
Adam Taggart 27:37
Well, what well, So, John, you touched upon a couple of things there that I want to talk about here, you know, one part of liquidity is, you know, banks providing loans out there, right, you know, to spur economic activities. We have tightening lending standards across the banking sector right now. They were tightening coming into this year to begin with, but then of course, we had the bank failures. We just had a brand new one last week, first republic bank, finally, bit the dust. And so I think we’ve had three of the four largest bank failures in US history in the past two months. So understandably, banks are even more conservative with their lending right now. Jerome Powell has actually talked about this, he said that that acts as additional rate hikes on top of what the Fed is doing. And you know, big questions about, you know, what the ripple effects are going to be and how much tighter is that going to be? But certainly what it’s doing is it’s it’s reducing liquidity getting out into the real economy. You mentioned that some former Fed officials were, you know, of late recent raising warnings we just had today. former Fed President Kaplan said that the bank pain is just getting started. And he’s really urging Powell to pause and don’t even hike rates. At this point in time. We’re going to find out what what pow in the gut folks, the Fed decided to do and bet an hour or two, like I said, But, you know, you’ve got the high ranking former officials at the Fed who are now really, you know, getting worried, right. But the other complicating factor, which I think you gave a quick nod to is, you know, you have you have money that’s now flowing out of the banking system, in addition to the tightening lending standards, because deposit holders can get better returns on their cash by putting it into brokerage and a money market account there or buying T bills. And we’ve been talking about this, you know, for a number of weeks, months now on this program. It’s just kind of like Gresham’s Law, right, money’s just going to where it’s better treated. So it’s fleeing, you know, there’s deposits or fleeing the banking system. And of course, that just makes the smaller players even more vulnerable. So I guess maybe I’ll just go back to you real quick here, John. But like, you know, we have this consequence right now, that just seems to be continuing to sort of tighten the screws on liquidity, at least inside the banking system here. And again, I’m not trying to contradict what Michael was saying. And again, he sort of has his own way of calculating it. But it’s, it’s hard for me to see in the short term, that that’s not going to drive more of the action than then whatever new liquidity is coming in. And as Michael, from his expectations, he said, it takes about three to nine months from the liquidity cycle leads the stock market by three to nine months or leads asset, asset prices three to nine months, you get your, your on the three month and you get your most interest rate sensitive assets, like precious metals, and Kryptos, like you said, but by nine months, you get, you know, the general market, and we are getting close, you know, we’re on are probably two months away from nine months from the October lows. So it’s going to be really interesting, I guess, we should find out pretty quickly whether Michael has liquidity, you know, wins out or some of those those, you know, liquidity crunch factors that I just mentioned, play out here, but I’m curious, this whole, you know, continued weakness in the banking system, and more and more capital fleeing for the higher rates of T bills and money market funds. How materially Do you think it is right now? Do you think that trend is going to continue for the at least immediate future here?
John Lodra 31:47
I think it’s huge, because it speaks to a psychological shift that we’re seeing in clients and prospects that we talked to, but you also see in the markets, you know, so much of this kind of linkage of liquidity to asset prices, is a psychological component. Right? I mean, you know, the last decade, the psychology was, I’m being punished by holding money in liquid reserves. So I gotta go chase other things, right, that that psychology has shifted, we’ve seen it tangibly in the folks we talked to, and, and I think the market at large is, is is is seeing that and, you know, we’re still an uncertain picture on the job front, we think the ADP report came out with a beat to the upside here on new jobs, but same time, we’re seeing job openings, I think the lowest and since like 2001, I think, if I’m not mistaken. So there and this goes back to Kantrowitz, HK framework, and there are some elements that are starting to look like that that EA piece of the hope pneumonic is starting to, you know, the employment market is starting to look like it could be, you know, kind of tempering, you know, kind of playing out the cycle there, which which we think would lead to more of a recessionary type thing and not a liquidity driven asset. Advance.
Adam Taggart 33:08
Yeah, there’s a lot more to dig into that jobs data, which maybe next week, we can we can do here, John, there’s a lot of new data coming out that was contained in those both the jolts and ADP reports. One of the ones off the top my head is that the quit rate is, has been coming down fairly substantially. And I think that’s an important one to look at, because that’s very sentiment driven, right. And when you talk about the difference between being bearish and being scared or whatever, right. quits are a great indicator of sentiment, right? If people are feeling confident that, hey, I can get another job anytime I want, you know, quit rate obviously goes up. And it’s been, you know, near record highs, if not record highs for much of the past couple years. That’s beginning to fast cool, which I think is you know, important indicator that all of a sudden the consumer, sorry, the worker is feeling increasingly less confident. And I think once we start hearing from employers, you know, the the narrative is still Hey, it’s really hard to find good. You know, it’s really hard to find good workers, it’s hard to fill our open positions, once we hear that tune start to change. Like, oh, you know, actually, we’re finally being able to fill our positions or hey, it’s not nearly as hard to get a good worker as it was. That I think is really the game on to say, okay, that that last domino that ye in the hope framework is probably going to shift. Alright, my coming back to you here. I guess we should talk just for a second about the Fed meeting, even though you know, we’re not going to know the winds folks are watching this video. They’re going to know what the result was. And like I said, we’ll dive deeply into it next week, folks. But even with with Kaplan, they’re urging Powell to pause. I’ll put my hat in the ring and I’ve said this multiple times to test them Two weeks or so, I think we get one more hike, I think we get a 25 basis point hike here, I think that’s probably going to be the last hike that the Fed makes. I think it CPI has been coming down, it’s seeing the progress that it needs on inflation. It’s seeing all sorts of cracks in the system, you know, the banking was being a really, you know, key one of those. So I think I think it’s beginning to worry that, hey, if we keep being too aggressive here, we could really create some systemic instability here. Also, with those additional bank tightening lenders, like I said, that the Fed is thinking is looking at this as Okay, the banks are starting to do some of our workforce as well. So my sense is that we most likely switch to pause after this one, I’m not sure that Powell is going to say he’s going to pause today. And sure he’s going to announce it. But my guess is, he’ll probably say, You know what, given all these factors are going to be very data driven. And we’re going to take a wait and see approach. And, you know, I’ll let you know with the next Fed meeting what we decide to do. But but just to stick my neck out, I’ll say this is probably the last one we see for a good long while. And I think Powell will will then start his Alright, I’m going to pause for the end of the year campaign, of course, what debate, I think for a long time, whether he’ll be able to do that. But I think that’s what starts here. Curious to get a sense of what you think.
Mike Preston 36:23
Yeah, obviously, everyone in the world likes to guess at what the Feds gonna do. And the Fed doesn’t really want the market to be surprised, I don’t think it’s pretty pretty common consensus that the Fed will raise rates, maybe point two 5% or 25 basis points. Today, that’s probably what they’re going to do, I wouldn’t expect Powell to say, I’m not going to do any more, I don’t think he wants to give that kind of certainty to the market. I think he wants to keep some tools in reserve. But to my opinion, I really don’t think that there’s a risk of Powell creating a disruption in markets by saying something or by hiking too little or too much. I think the disruption in the markets is there. And it has been there for years. It’s really a it’s a result of 10 years of quantitative easing more than 10 years now. So I mean, the reserves that are in the system are just massive, you know, they’re just massive, this the Fed’s balance sheet, up around 9 trillion or so starting maybe just under 1,000,000,000,010 years ago. bank reserves are I think around 3 trillion right now, which we’re paying, the Fed is paying 5% interest on excess reserves, I think that’s quick math, about 150 billion a year that they’re paying member banks on excess reserves, they’re earning only about two and a half percent or so on average on securities in their portfolio, they’re probably losing, if they were to mark the market, you know, seven, I’m just I’m guessing here 75 billion 100 billion a year, and not to mention the mark to market losses on the bonds in their portfolio. So to say that they are going to cause an accident, if they go a quarter point too much or too little, in my opinion kind of misses the point, the accident is already there, it’s already baked in the cake. The reason why we’re seeing these bank failures, and there’s probably more to come is because the system is a wash and liquidity, there’s a lot of liquidity, there’s too much liquidity. And maybe Michael’s right, and that there’s going to be even more. And he talks about the central banks bailing out governments in the future. Maybe they will, maybe they can bail out some small governments, but who’s going to bail out the United States government, if that happens. Now, I don’t want to sound like I’m all doom and gloom here. Because, frankly, I agree with him that the US dollar is likely to stay strong for several years, maybe more. We were already a US dollar denominated system, that’s not likely to change anytime soon. Maybe that changes five or 10 years down the road. But in the next couple of years, the dollar probably stay stronger. And a lot of your guests have talked about that, particularly Brent Johnson. And just that was just a few weeks ago talked about the dollar milkshake theory, and how he thinks the dollar index could go much higher. I’ve heard him in the past, say maybe 150. He thinks it could go to I don’t know about that. But it’s right around 102. Right now, I would not be surprised to see the dollar hit new highs 121 30, particularly during an economic crisis. So that’s likely to happen. But that’s a lot of faith to put in the central banks that they’re going to be able to bail out this problem that they’re gonna be able to bail out governments the problem is too much liquidity, not too little liquidity. And all of these banks, many of these banks went out and locked in long term rates, they wanted to get some certainty on their balance sheet, short term rates shot up. And then there’s a mismatch in liabilities. It’s a big problem. So the big picture macro pictures were hideously overvalued in the stock market still the technical the technical picture is not great. The charts look like they’re in a downtrend have been for 15 months, we get some kind of surprise to the downside, I think it’s an elevated drop down to 3200 or so. And again, all of that really doesn’t doesn’t hinge on what Powell says today at two o’clock Eastern, you know, or what the releases. So we’ll see just a couple of things I’d like to say in closing as well, gold is looking fantastic is trading at around 2030. Right now a Giant Cup and handle formation, the miners are looking good. GDX is trading right around 35. And I think if gold clears 2100 with some conviction that goes right to 2500. So we’ll see. But that’s what the technical picture looks like. And we don’t know what the Feds gonna say or won’t say to make that happen. I can’t, I can’t even begin to guess. But the technical picture looks strong. And maybe the gold market has figured out that we’re nearing the endgame of all of this, I don’t know. So in as far as the s&p goes, one more thing that I wrote down here that I wanted to mention, it’s extremely heavily weighted Apple is presently 8% of that index, roughly trades at a price to earnings ratio of 28 or so on forward to estimated earnings, which are richly valued estimates, vary Rosie estimates. It’s a good company. But she’s it’s almost a $3 trillion company trading at 20 times estimates and it’s 8% of the s&p. So the s&p has actually been pretty resilient because the NASDAQ as I mentioned earlier is up 20%. The s&p is up 8%. So it’s really sticky to the upside. If you look at the Russell 2000, which is mid to small cap stocks, it’s technically a lot weaker. So the s&p is being held up by the strength of the NASDAQ and particularly by the strength in apple that can work both ways Apple has some kind of surprised at the downside, it could accelerate the entire market down. So technical picture isn’t great. The fundamentals in terms of valuations aren’t great. And the Fed has done a really good job of greasing the skids on this on this exit plan. But I really think it’s baked in the cake and that the accident is baked in the cage. It has been for a long time. Nobody knows what the pin is going to be. But But I would expect it to be known during the latter half of this year. All right,
Adam Taggart 42:15
I do want to talk about one potential pin real quick. Just want to give a quick commercial to folks, you talked about the technical picture, Mike, right after I finished up with you guys. I’m going to be interviewing technical analyst Milton Berg. And that video will follow come out the day after this one airs. So for folks that are looking for, you know, an updated outlook on what the whole science of technical analysis is telling us, we’ll have a very fresh update on that there with Milton. But in terms of a potential trigger here, we have the debt ceiling. Right. So news came out this week that the Treasury just announced that it may have exhausted the the funding for it the extraordinary measures that it’s currently using right now, by as soon as June 1, right. That’s what’s called the X date. Right? So that’s not very far away, that’s less than a month away now at this point in time. And once you hit the X date, that’s when the government actually does have to start, you know, the belt tightening, right, that’s when they start, furloughing employees, you know, delaying payments out to contractors, shutting down national parks, you know, that type of stuff. And so, you know, we sort of talked about this a little bit in the past, right, I don’t know anybody that doesn’t think that the ceiling isn’t going to eventually get raised. It just seems like the repercussions of that would be far too nuclear. But it doesn’t mean that we’re not going to have a lot of drama between now and then. A lot of political theater. And, you know, the Republicans are talking a pretty, you know, mean game in terms of concessions that they want. They just passed a plan last week that apparently, you know, we read the articles is declared dead on arrival, when when it gets to the Senate in terms of what the Republicans are asking for. And of course, the Democrats have controlled the Senate so they can shoot that down. So it doesn’t seem like the sides are very close together right now is what I’m saying. And so the question right now is sort of how much will the Republicans hold the debt ceiling? hostage, you know, over the next month, plus on this, right, it’s happened in the past, right? The government has technically shut down, you know, over an impasse on the debt ceiling. Prior I’m trying remember when that happened the last 10 years ago or something like that. So I’m curious to see if you guys have any thoughts That’s about that. But But I definitely can see potential that and I just read an article about it this morning, which is that the Republicans may stick to their guns long enough that the market, you know, starts getting really worried. And they’ll use a market drop, and in the fears and concerns around that, as a forcing function to force the Democrats to come to the table with them, and at least, you know, eke out some concessions of what they want. I think they know, they’re not going to get everything that they’re asking for, but they might use that, that market pain as a lever to get the Democrats to agree to some concessions. John, just curious if you have any thoughts about this?
John Lodra 45:40
Oh, boy, that’s a that’s a realm of crazy that, that I don’t have any expertise, more than the next guy or gal? You know, I think we know that politicians will go to great lengths to play chicken for political points. I think at the end of the day, if they’re going to do what they always do, they will create some drama, and they’ll come to some, some agreement where each side claims victory on the other, you know, getting the other one to concede on things. And, you know, it’s basically political theater. But yeah, I think there very well could be financial market reverberation or reverbs. Going through in relation to that. And in fact, it’s political one on one to create, create a crises to get your way. Right. So So I have little doubt that that is going to be political theater, that’s going to be frustrating for us all to watch. And the markets will probably be frustrated with it, too.
Adam Taggart 46:44
Yeah, to me, it just seems like you know, we’ve got so many other things that are kind of keeping the market on its heels right now. or I shouldn’t say keeping an eye out to us because the market is higher than it was when it started the year. But there are so many potential D stabilizers out there, we’ve talked about a number of them today, that they have sort of this one in the mix just just isn’t helpful, right? It just, it just increases the probability that something might end up, you know, going in a direction that nobody intended. And then that might be kind of hard to stop to stop. Right. So anyways, not, we don’t know, we’ll be tracking it closely on this program for folks. But it is another risk factor that we kind of don’t need right now. And it’s one that does have some probability that there’s, you know, there’s a political incentive, maybe to create a little bit of market instability here. Right. So now we’ll see if they actually play that card or not. All right, well, look, as we, as we begin to wrap up here. I did just want to know, John, and Mike, I don’t know if you guys had a chance to watch the video that we released yesterday with Dr. art laffer, who’s an economist, who has been an economic adviser to administrations since the early 70s. I think he started with Ford. He then was an economic adviser to Reagan, he is advised, I think almost every president since in some way, shape or form. Really fascinating conversation. Folks, if you haven’t watched that, I’ll put up a link to it here. It’s getting really great reviews. It’s a really interesting, it’s an engaging, he’s a really engaging speaker, and a fascinating guy. But it’s he’s got some some, I think, really interesting and thought stimulating policies that we discussed. But again, I really value hearing their perspective of somebody who, you know, is in the mix, and has been working with a lot of the people that have shaped economic policy and national policy over the past several decades. The punchline is that he’s not very optimistic right now, given the current policies that we’re pursuing. And he doesn’t see a lot of room for optimism unless we make some pretty drastic policy changes, which he’s got some great ideas for. Not entirely sure, we’re actually going to do that, though, wouldn’t wouldn’t hold our breaths. I did just want to note though, at the end of the conversation, he did kindly make some of his recent publications available to Wealthion viewers. And so if you want to go read those, just go to wealthion.com/laffer. And you can download them for free there. Alright, guys, we’re looking at wrapping up here. Just want to reiterate that you guys did a great job this week, as we do every week of kind of painting the picture for why this is a challenging time for regular investors to try to navigate all this stuff on their own. And therefore that’s why we encourage people to work with a professional financial advisor who takes into account all the macro issues that Michael and I talked about, and that you guys and I have been talking about here. Folks, if you’ve got a good one who’s doing that for you, great, you should stick with them. But if you don’t, or if you’d like a second opinion from winter does, maybe even John and Mike and their team, they’re at new harbor financial, just go to wealthion.com Fill out the short form there. And you can have a free consultation with these advisors. It doesn’t cost you anything There’s no commitment to work with them, they just sit down with you, they evaluate your current, unique personal financial situation, give you their best advice on what they think you should do, you can go off and do it yourself. You can give those notes to your existing adviser, or you can keep talking to these guys, if you like. It’s just a public service they offer. Alright guys with that. John, I’ll let you have the last word this week. I know you’re talking to lots of people day in day out there, you said give it a little hint earlier that that maybe sentiment is shifting a little bit and people are or maybe becoming a little bit more concerned. But I don’t want to put words in your mouth. But what’s your parting bit of advice to the viewers here based upon your conversations with the folks that are reaching out to you every day?
John Lodra 50:40
Yeah, we are seeing an uptick in that. And it’s because people are starting to look through the you know, the realities of what this what their savings mean to their lives. And they I think they’re reminding themselves that they’re not in this for the next month or three months. They’re in for the next, you know, 20 3040 years and they’ve worked really hard and, you know, they they are concerned about the security for the long term. And we think rightly so, especially given what we talked about with valuations. I can’t resist the temptation, Adam to date. You myself and Mike here with a little reference, a pop culture reference to art laffer and I was racking my brains are called there being a movie in the 80s that that referenced the Laffer, the Laffer curve, and it came back to me it was a Ferris Bueller’s Day Off. And Ben Stein was the teacher, the monotone teacher, you know, Bueller, Bueller? And I couldn’t I couldn’t resist the urge to link art laffer back to that movie. And it just speaks to his his, you know, has been a notorious economist for a long time and are going back to it that far.
Adam Taggart 51:50
Yeah, great reference. I got a lot of those. In fact, if we can find the clip. I’ll play it here real quick.
Video Clip 51:55
today. We have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve? Anyone know what this says? It says that at this point on the revenue curve,
Adam Taggart 52:12
but yeah, deadpan Ben Stein, who is an economist himself, not just an actor, an economist. Yeah, Bueller, Bueller, then the answer was a member. Voodoo economics.
John Lodra 52:26
Great way to end voodoo economics. All right. Well, folks,
Adam Taggart 52:30
thanks so much. If you enjoyed this interview with Michael How would like to see him returned as well as other great guests like him. And if you enjoy these wrap ups with John and Mike, as much as I do, please support this channel by hitting the like button, then clicking on the red subscribe button below. Well, there’s that little bell icon right next to it and make sure to look down even if you’ve been a viewer for a long time, look down and make sure that bell icon is clicked that you know if it is that’s when you get an alert every time Wealthion publishes a new video, so you don’t have to miss an interview. But I’ve been hearing from folks that they not everybody’s getting the alerts the way that they thought they would, and some are finding that YouTube for whatever reason, has turned it off. So just make sure that it’s turned on there so you get alerted of everything that you want to watch here. With that being said, John, and Mike, guys, thanks so much for joining me for yet another week. Like I said, we’re gonna have a lot to talk about next week, once we know the outcome of the Fed announcement that’s about to be announced here. But a great discussion. Look forward to chatting with you guys then everybody else. Thanks so much for watching. Thank you, Adam. See you soon. See you next week, Adam. If you’d like to schedule a consultation with one of the financial advisors at new harbor financial simply go to wealthion.com. These consultations are completely free, and there are no strings attached. The good folks at new harbor was simply answer any questions you have about your investment goals or your portfolio and give you their best advice given their latest market outlook. They’re willing to do this because they care about protecting people’s wealth. And because Wealthion has connected them with so many thoughtful investors just like you over the past decade. We started doing this because so many people have approached us in frustration looking for a solution because they’re feeling out of alignment, or downright ridiculed by the standard financial advisors who have been managing their money. You know, the type, the kind that just pushes all of your money into the market. scoffs at the idea of owning gold. And when you bring up concerns about the market sky high valuations, they say don’t worry, the market will always take care of you. For many of the reasons discussed in today’s video, we think this is one of the most challenging and treacherous times in history for investing. We strongly believe that today’s investors are best served working in partnership with a conscientious professional financial advisor who understands the risks in play. Now we’re agnostic which professional advisor you work with, as long as they’re good. If you’re already working with one that’s fantastic. Stick with them. But if you don’t, or are having trouble finding one you respect or trust, then consider talking to John and Mike and the team at new harbor. For those about to ask yes, there’s a business relationship between Wealthion and new harbor, which we’ve put in place to make sure everything is handled according to SEC regulations. All the details on this are clearly provided on the wealthion.com website. Also, it’s important to note that new harbor is able to work with US citizens, green card holders, and those with existing assets in the USA, but for regulatory reasons, they aren’t able to take on non US clients. All right, with all that said, if you’d like some insight and guidance and how to protect your wealth during this unprecedented time in the markets, go to wealthion.com to schedule your free consultation with the good folks at you harbor. Thanks for watching.
Transcribed by https://otter.ai