There’s A HUGE Difference Between Stocks & Bonds Right Now | Lance Roberts & Adam Taggart

Lance Roberts 0:00
The difference between the stock market in the bond market is that the stock market is overvalued but oversold, the bond market is grossly oversold and deeply undervalued.

Adam Taggart 0:14
Welcome to Wealthion and Wealthion founder Adam Taggart welcoming you back at the end of the week for another weekly market recap with my indomitable friend, Portfolio Manager, Lance Roberts and Lance What a week it has been pretty decent down week in the market so far. Big news, big news, but disappointing news from the Federal Reserve. All of a sudden investors have got the jitters. A lot going on here. But let’s start with the action. So down week.

Lance Roberts 0:41
Yeah, it was and again, this is pretty much you know, again, you know, lots of headlines like, oh, my gosh, our markets are down. And, you know, look, it’s it’s kind of playing long, right with seasonal trends. And if we kind of go back and look at years of the market, whether it’s pre election years as we’re in now, or just a normal kind of seasonal weakness, the markets are kind of doing exactly what you would expect lots of sloppy, you know, trading thinking the last couple of weeks in September, you know, but so again, it’s nothing really, you know, shocking or surprising, you know, there’s not been a big surge in volume hasn’t been any real signs of panic or capitulation on any front. So again, it’s nothing to really get, you know, overly concerned about, it’s just kind of really that correctional process that we talked about in June and July, that we talked about, we’d have a 5% correction up. We’re sitting right on that. We had that correction back in August. And we touched yesterday, that bottom from August. So we had nice little bounce that last couple of weeks of August 1 week of September. Everybody got it all bullish again, and now we just kind of retested that bottom. So if the market holds here, it’s actually a nice little good double bottom that we’re putting in markets are up a little bit on Friday. We’ll see if they can hold on to it. But I really wouldn’t worry too much about what’s going on markets are oversold on both our MACD sell signal is oversold, Relative Strength Index is oversold Williams percent are is oversold money flows are oversold. So again, just you know, we did a lot of kind of reading out of the market over the last couple of days. So you know, again, probably a decent little entry point.

Adam Taggart 2:15
All right. I want to talk about the oversold nature of stocks as you think I also think bonds are oversold at this point. Oh yeah, bonds

Lance Roberts 2:24
are drastically over so bonds. The difference between the stock market in the bond market is that the stock market is overvalued but oversold, the bond market is grossly oversold and deeply undervalued. So you know from a from a betting perspective, I’d be buying bonds and which is why I added 30% of my bond portfolio yesterday. Yeah. All right.

Adam Taggart 2:45
Not gonna let you slide that one bias, we’re going to talk about that in depth.

Lance Roberts 2:49
That’s my first that’s my personal account, not my client accounts.

Adam Taggart 2:52
So yep, we’re still going to talk about it, though. Don’t worry. But before we get there. Okay, so right now, it’s been interesting. You know, there’s a fair amount of hand wringing going on right now, where we’re bears are coming out and saying, all right, you know, we’re proceeding the market struggle here. We just heard Powell come out. And we’re going to talk about that literally in just a second. But, you know, I think that there’s amongst a certain crowd, at least, maybe a growing sense of okay, yeah, this is it, the rally of 2023 is over, things are beginning to roll roll over here, lag effects, recession coming, etc. But I want to, I want to contrast that with your comments about things being oversold. And even though the stock market, as you said, is overvalued. In the short term, it may be oversold, and it could still power higher going into the end of the year, you actually have a piece about that I want to ask you about in just a second. But real quick, I don’t think we should go any further without talking about the Fed presser this week, what Powell said what your interpretations of that are, how the market is currently interpreting it, and then we’ll go into those other topics. So Powell came out. For anyone that was sleeping under a rock since Wednesday. He basically, you know, it didn’t it didn’t surprise anybody in the sense that he said All right now we’re keeping rates where they are. But he did reveal that the Fed dot plot so far still anticipates another rate hike at some point in 2023. That’s going to have to happen relatively soon, just because we’re we’re running out of a year here. He also was directly asked. So your base case, you said your base case was a soft landing, you know, earlier at a previous press conference, is that still your default assumption? And Powell went, Oh, no, no, it’s not. And you know, he’s never going to say I expect a hard landing recession. But in sort of all the Fed speak that followed when he sort of, you know, was maneuvering around that question. It was very much fed speak, saying you should prepare for something a lot harder than The soft landing. There’s some other things to react to from there. But But quickly, I want to start with this. What struck you the most from that conversation?

Lance Roberts 5:08
Actually nothing. And the market’s reaction is really kind of stupid if you think about it, because the fan if you actually read the statement, so every meeting when the Federal Reserve has their FOMC minutes are meeting sorry, they published their actual statement. And then what we what everybody does is they take it, and then they read line out what changed in the statement from the last meeting. And so every meeting, it’s just the same statement that they put out every single meeting. And then they change a word that like, for instance, they change, modest job growth to solid job growth, there were very few revisions in the statement, I think there were three and total of just minor word changes, they didn’t even erase whole sentences, this time, it was just a minor word change, just kind of upgrade the economic outlook. And that should be expected based on the recent economic data, which has been a lot stronger than expected. Again, the Feds operating on lagging data, lagging data has been strong. So they changed their wording a little bit. And so, you know, that shouldn’t surprise you at all. And the fact that in again, if you actually think for a moment, the Fed is sitting around going, Okay, everybody gives me your honest assessment. So they have 90 members that vote and so all 90 members come out and say, Oh, I think we should raise rates five more times, or whatever the number is, if you think that’s what’s really going on, you’ve got to be fooling yourself, because they’re all on the same page. And this is why whenever they go out speak in public, they all say the same thing. And when you review the minutes meetings, whatever the change is, they almost vote unanimously. Even though five of them had descended previously said, Oh, we should hike rates, you know, five more times. The reason that they do that. And if you think about this for a moment, let’s rewind the tape to Wednesday for a moment market sitting here, wringing our hands over Oh, my gosh, what’s the Fed gonna say the Fed comes out on Thursday and says, Yep, we’re done hiking rates, you know, it’s all good. We achieved our position. And so we’re done hiking rates, the market would be up 5% That day, which is exactly not what the Fed wants, because stronger asset growth leads to increase consumer confidence, which leads to more spending, which creates inflation. And that’s exactly what they’re trying to propel that happening. So leaving the rate hike out there saying, oh, yeah, we might hike rates one more time, let me tell you right now, the Feds done, they’re not going to hike rates anymore. They left that rate hike out there, because a gives them an option. But more importantly, it takes it keeps the markets from overreacting and running asset prices up through the roof. And so this is you should have expected them to leave. In fact, we even said this earlier this week, don’t expect any changes expect one rate hike to be hanging out there. You know, that’s that’s where we’re going to wind up. And it’s exactly what kind of came across the market reaction was was more of a not a sentiment change, but that we had a whole big stack of options in the market. And if you look at where the selling was, it was all a tech stocks, we have a tremendous amount of put options out on all different kinds of call options and put options out on all different types of stocks primarily in the tech sector. And so they had to unwind all those positions very quickly, which is why you had the big sell off yesterday. And it only one and a half percent. It wasn’t like we had a 3% sell off, we haven’t had one and a half percent sell off in over 100 days in the market. That’s an extremely long time to have such low volatility in the market. So again, the reaction, no big deal. The statement is exactly as you should expect. And outside of that, and we’ll talk about fed projections in the moment. The last thing you should ever rely on is anything the Fed says about where economic growth is going to be. They upgraded their economic forecast, he may have danced around a little segment of you no say well, don’t you know, we’re not, you know, our base case isn’t really a soft landing. But he didn’t make any assessment about a recession or a deep recession. They’re actually upgrading their economic forecasts, even Janet Yellen has come out said we’re not going to have a recession. So never believe anything she says. But she’s always wrong. But the Fed is never right about their economic forecasts and basing any of your actions on what the Fed says or projects out again, they’re trying to manipulate the markets. They’re trying to manipulate market participants, what they really think and what they produce as a statement are two entirely different things.

Adam Taggart 9:33
I totally agree. And I’m gonna put up some fed projections in a minute just so we can kind of, you know, tear into him. But I just want to you made a real declarative statement. I just want to put it out there on the record, if indeed, you’re heard, you’re right. And of course, this is just an opinion. Obviously, you’re a very data driven guy, you’ll go where the data goes, but your your assessment of the probabilities is that the Fed is done hiking rates.

Lance Roberts 9:59
They’re done. hiking rates. They’re not gonna hike rates anymore. Okay, great. Let’s just Let’s just assume that those, but let’s so forget, forget that statement for a second. Let’s just back it up. They’ve left room out there for one more rate hike, right? Yep. Next meeting they hike rates, what’s the first thing the market is going to do? As soon as they hike rates? No puke? No, they’re gonna they’re gonna go rally off to the moon. Because now because it’s

Adam Taggart 10:25
done. Sorry, you’re right.

Lance Roberts 10:28
The feds gone hiking rates. So this is what so the Fed is going to leave that one rate hike hanging out there. And they’re not going to hike rates and more because they need that threat of a rate hike to keep markets.

Adam Taggart 10:39
So it’s a Jedi mind trick is what you’re saying. Right? Okay, okay. It’s not the rate hike you’re looking for. It’s still coming. And they’re always gonna keep the market guessing. Got it? Got it. Got it. Okay. All right. Well, to to to the Feds projections and to where rates should be. Powell did share this dot plot, right, which which shows here in 2023. There they think there’s like the estimate, there’s likely one work, hike to be made, you’re betting it’s not going to happen. This is the Jedi mind trick. Right? Now Palace, say and then you know, we think that we’re going to start slowly bringing rates down and 2024, they’ll still be around 5% Fed funds rate. And that’ll gently glide over the next several years down to two and a half percent. As you said, the Fed is never right. So you shouldn’t bet much at all, if anything on what the Fed is telling you to project because they’ve got really one of the worst track records in history of projecting a flip coin would literally be right a lot more often than they are.

Lance Roberts 11:39
Yeah. And actually, I could actually prove that point. If you want to see a chart real

Adam Taggart 11:43
quick. Yeah, real quick. Right. Before we get to that, though, I just want to underscore, you know, what Powell is guiding us to versus what I think you and I and many other folks on this interview on this channel, think, which is, I think many of us have a doubt that the feds gonna bring the Fed funds rate down to two and a half percent, we are just much more confident on the under of that bet it’s not going to be by 2026 or beyond, it’s probably going to be at some point next year, as quote unquote, something breaks and the Fed has to scramble in rescue mode, right? So this sense of like, Oh, we’re gonna bring this down over the next three to four years ever so gently, is probably one of the least likely outcomes going forward. I want to get your reaction to that.

Lance Roberts 12:28
No, is that it’s absolutely right. You know, look, and you know, as I was saying, you know, right now, the markets doing exactly what you think they would do, I would expect probably a potential rally in the year end, the economic data is probably going to still be fairly sustainable. At this point. We’re about to hit earnings season, you got stock buybacks opening back up. Once you get into 2024, though all bets are off. And again, I think that lag effect is going to catch up starting probably second quarter, third quarter, where the economy really starts hitting the brakes. And more importantly, as we talked about previously, that spread between GDP and GDI. I think the Fed may be well surprised here. And again, you know, the end of the year rally is you know, I give it 60% chance, right? So I mean, it’s not 100% Because I think any any moment now we’re going to get revision to economic data, which is going to be pretty negative and start to see some of that that GDI will never catch up to GDP, GDP always catches down to GDI. So that simple math of when that occurs, is the question Is it next month, month after is the first quarter of next year but whenever the economic revisions occur, it’ll be a pretty it’ll start to show there’s a pretty sharp slowdown occurring in the economy. Okay.

Adam Taggart 13:45
I just recorded an interview this week with Darius Dale, part one aired before this video. Part two is going to err early next week. Probably going to reference this several times in this conversation last So just a heads up. But I Darius who I’m going to you’re very data driven guy, I’m going to say I think Darius lives in a sea of even more data than you It’s ridiculous how much data that guy goes through in a conversation. But he he sees sort of the landscape very similarly to you. So he does think that there’s a preponderance of preponderance, the the greater probability of stocks running from here running higher still. We’ll get more into that in just a moment. But he also thinks that all these recession indicators suggest that we are still going to have a recession, right? It hasn’t been avoided. Maybe it was pushed back a little bit. But he’s got high confidence in his models that a recession could arrive at some point between basically started November, or on the long end April of next year. And looking at the current data. He is pushing it out to the further end of that curve and saying I think it’s probably going to be closer to April. Right. But so anyways, I just want to say you just want to see a very similar landscape as you, I’ve seen the

Lance Roberts 15:07
same look, I haven’t seen, you know, all of the economic composites and everything else that we run suggests the same thing. I’m pushing it out a little bit further, I think it’s second quarter, maybe third quarter. And the only reason is, is because when you start getting into recession, as I start to show up, you’re gonna start getting, you know, things will start to crack, right, and the Feds gonna come in and try to bail something out, like a regional like they did with regional banks. And that may just kind of drag that out a little bit further. So, you know, always try to give a little bit of buffer. Yeah, I could absolutely no recession could actually, you know, show up, you know, much sooner than expected. But I was trying to give a little bit of buffer all the time.

Adam Taggart 15:44
Right. And Darius would say the same thing is like, like it could happen in November. I mean, it could happen in a week. I mean, there’s a lot of bad reasons we could come up with but the preponderance of the data he’s suggesting they’re seeing suggests it’s probably on the further end of that curve. But again, in his mind, by q2 Next year, sounds like you’re somewhat similar. Alright, so one of the things that the Fed mentioned, and by the way, you had mentioned the chart that you wanted to bring up earlier. So I don’t want to I don’t want to skip over that if you wanted to show that chart. Yeah, no,

Lance Roberts 16:13
it’s just it’s just you’re you’re talking about fed projections. And actually this weekend’s newsletter on the website, real investment. advice.com is actually talking about fed projections are useless. And the reason is, is that, again, these are more marketing things, anything else, but there’s only one group, that’s probably worse than making forecasts and the Federal Reserve notes, Wall Street analysts. But what but so back in 2007, the Federal Reserve started talking about their economic forecast, and you can go back to their old meetings, and you can see in their notes where they had their their forecasts for GDP, inflation, economic unemployment. And starting in 2011, under Bernanke, they started publishing that table that you see where it gives you the range of estimates for, you know, this year, next year, in the year after in the long run. And so what I started doing is I started tracking that going back to January of 2011. And I’ve been tracking every one of those ever since. And what you find out is, is that they’re always higher at the start, and they decline. And as you get closer to the end of the cycle, you get closer to where economic growth is going to actually be so just an example. In last year, they were predicting 2023 economic growth to be 3%. Now we’re down to 2%. And we’re likely going to be lower than that, by the time we actually wind up this year. But again, you know, this is this is the problem with all of these forecasts, and is that they’re all very just kind of statement. And this I took it I just kind of graphed their projections of economic growth versus what actually happened. And it’s just they’re off all the time. And they’re never accurate. So again, it’s just I think you have to take on anything the Fed says you take with a grain of salt, because of two things, one, their messaging, their messaging the markets, they’re messaging, the financial system to keep things kind of under control, they want to keep the markets from doing crazy stuff at the wrong time. And the other is, is that they’re just they’re looking at a lot of economic lagging data, and they’re making all their policy decisions on data that is going to be revised, it’s going to be changed, it’s not going to be what they think it is. And these projections, again, we’ve talked about the uselessness of projections anyway. But when you start trying to project something, one year, two years, three years in advance, you there is no way that you’re gonna be able to factor in all the possible evolutions of impacts that occur from economics and politics, to financial markets, everything else.

Adam Taggart 18:40
Okay. We’ve had that discussion this channel a lot before about, you know, the shorter the shorter your horizon, the more confidence you have in the projections. But once you get out even in your, you know, you’ve said that a couple of days or weeks generally almost become useless. And, of course, that when you have a source that is error prone, as a Street analyst, or worse, the Fed, then you can throw it all out the window. By the way, Darius did also show some data as well showing that from his perspective, going forward estimates from Wall Street analysts are dangerously optimistic at this point in time and almost certainly going to have to be brought down. As we get closer to getting into 2024. You’re nodding as I’m saying this. So So when other just to just to put up one other fed projection that we can perhaps tear to shreds briefly, if for no other reason than just for our own shot in Freud was their their projections for the unemployment rate. So basically, they’re projecting that the unemployment rate will rise. Right. And interestingly, you know, Powell has been trying to a certain extent to get it to rise since mid 2022. Right? I mean, this has begun this this whole hiking and tightening campaign. He’s has talked a lot about trying to cool off the jobs market and the huge gap between openings and applicants and all that stuff. So he’s literally been trying to call the jobs market now for the better part of a year and a half with with not a lot of success, at least as measured by the official numbers until quite recently. I mean, unemployment now is risen to 3.8. Right? He says, it’s gonna go up to about 4.1, it’s gonna really hang out there maybe for about a year, and it’s gonna slowly start coming down. And I don’t know about you, Lance. But, you know, if we have the type of landing that I think is more likely to not next year, if we’re able to contain unemployment at just, you know, point 3% higher than where we are right now. I think it’ll be a miracle. Right? So, you know, just like I would take the under on the Feds federal funds rate number next year, I will take the over on this number all day long. I’m curious to hear what you think.

Lance Roberts 20:59
Well, the you know, the kind of two things one is there is I don’t, I’m not gonna say it’s different this time. But there is there is an interesting situation with employment that’s occurring. Right now, let me see if I can find this chart real quick. While I’m, while I’m rambling. But remember that we just shut down the economy back in 2020. Right. So we just literally just fired everybody that we could fire at that point just said, Hey, you know what, we don’t have a job for you to go home. Now, normally, what happens during an economic expansion is that you create jobs, right? So we create a budget, you know, the economy is expanding. So everybody’s spending more money. And as they spend more money, then we create more jobs, because that’s more demand, we got to produce more products. And so that puts that gives more people money to spend, which they spend more money, and so forth, and so on. Right? So you have these, so during an expansion within the economy, you are creating more and more jobs. And so let me share this chart with you to kind of explain this a little bit better. And all I’m doing is I’m just making a potential case, why unemployment may be a little different this time, is there’s no guarantee. But this is full time employees relative to the working age population. Now, the reason this is important, is because I can work three part time jobs, right. But I don’t necessarily have health care benefits, I don’t have a 401 K plan, I don’t have you know, all the other stuff. And generally part time jobs, pay lower wages and a full time job, right salary, salaried positions. So if I’m going to sustain the standard of living, I’ve got my house, I’ve got my wife, I’ve got two kids. And, you know, I’ve probably got to have a full time job to make that work. And to make the economy work, I really need full time employment. So if we go back in history, and kind of look at periods where we’ve had economic expansions, you see that, you know, after a recession, full time, employment falls, as you would expect, right. So this is where you normally get these kind of big jumps in the unemployment rate. And then after the recession is over the we then be creating new jobs, the economy heats up, it’s doing great, we keep creating more full time jobs and, and really through the 80s. And the 90s, we were creating more and more full time jobs. In fact, we hit a peak, and, you know, just prior to the.com, crash, and 53% of the population had full time jobs. You know, following the.com, crash, we, you know, started doing a whole lot of this financial engineering stuff. And so, from 2003, four through 2008, we got back to 52 and a half percent full time employment. And then we had the financial crisis and kind of devastated the economy. So following that big downdraft, we then had a fairly decent economic recovery. And so from 2009, through 2020, we had rally that all the way back full time employment relative to the working age population got back to 50%. Now, here’s the here’s my point about all this, these were an outside the financial crisis, right? You can’t really call that a normal thing because Lehman failed and the housing problem and all that, but economically, it was kind of a normalized recession, kind of what you would expect to have. We lost a lot of jobs during that recession. And then we gain most of them back in the next expansion. Now, here’s the interesting thing. Now, I’m getting us all to this point of just what we just went through. So in 2019, the world is doing fine, apparently. And we’re all good. And apparently nobody saw the recession coming even though in 2019, there were recessionary indicators going off everywhere the recession was coming. We didn’t have a trigger for it yet. And so we got back to 50% employment full time employees relative to the working age population back to 50%. Then we said, Hey, Everybody go home, you’re fired. You’re done. We’re shutting down the economy go home. Now, since then, you hear a lot of economic commentators in the media talking about you know, the current administration that is higher is created more new jobs than any other president ever in history 12 million new jobs. That’s not exactly a true statement. All we did was put those people back to work. And so here’s my point, Adam, is that in the next recession, unless it’s gonna be a shutdown of the economy, because of the next COVID, you know, strain or whatever, if it’s a normal recession, we might not see this big surge in unemployment, because yes, companies hire back a lot of employees, but they didn’t hire back all those employees plus add a whole bunch of new ones. So they’re kind of running lean and mean, so to speak. And we’ve seen layoffs over the last year, you know, you’re not, you’ve talked about it quite a bit on the tech sector, where they did actually hire a bunch of unnecessary people. We’ve seen a lot of layoffs there. But in kind of the broad swath of the economy, we didn’t create a bunch of new jobs, you’ll see in the latest jobs report, we’re only a 50.22% of full time employees relative to the working age population versus 50.6, prior to 2020. So what that argues for, and again, I’m not saying that you won’t have a big surge in unemployment, but you know, it’s going to be maybe more challenging because we never, we didn’t really over hire, so to speak, we didn’t create a bunch of new jobs that we didn’t have before. All we did was put people back to work.

Adam Taggart 26:17
Okay? That’s not too dissimilar from a theory that Mike Shedlock has, and Mike and I actually have a sort of a side bet on this, which I hope he wins, because I’m taking the over on the unemployment right next year. So for society, I hope Mike’s right. You know, he basically says, Look, we haven’t we have an aging workforce. Right. And so, you know, you heard that that comment about 10,000 Baby Boomers hit retirement age every day. And so you can kind of extrapolate there’s about 10,000 baby boomers that are taking themselves out of the game every day. So, you know, in in, during the pandemic, when we did all this stuff, not only were people continuing to hit a point where they could retire, but also we goosed financial markets like crazy, we’ll have a stimulus, right, so a lot of people hit their retirement goals sooner. So they were able to eject sooner, which is probably one of the reasons why we’ve had difficulty getting back to exactly where we were pre pandemic employment wise. So, you know, Mike’s argument is sort of a leaky bucket argument, right, which is, as people lose their jobs, you also have boomers that are kind of retiring. And so those people who are losing their jobs will get rehired right away, because there’s this constant stream of vacancies by the retiring boomers going on. And that might happen, you know, we’ll see my comments or my my, you know, opinion is colored by the fact, you know, from the lag effects that we talked about so much, right, which is just that we have interest rates, that I believe to be sort of an unsustainably high level for the economy here. Powell just gave us the good again, the higher for longer hire or for longer speed. And so that the longer we’re higher, for longer, the more the the force of gravity is pulling down and economic growth, which is going to pull down everything from consumer spending to corporate profits. So, you know, if there’s just fewer jobs, if companies are having to downs like they might be running lean right now, but if they are forced to run leaner by the lag effect, that’s just going to have to be reflected eventually in the unemployment rate. And that’s, that’s sort of what I’m thinking about. And that doesn’t even necessarily mean we have to have a recession. But if we have a recession, and that gets even worse, yeah. Know,

Lance Roberts 28:38
what the My point is, is that it? Look, I agree with you. My point is, is that, you know, for people that are calling, oh, we’re gonna have we’re gonna have an unemployment rate, like we saw in the during the financial crisis of, you know, 1011 12% I don’t think you’re gonna see that maybe you agree to maybe see five 6% unemployment, right. I think four I think 4% a bit ridiculous. But because you’re almost there, right? If any kind of slowdown, you’re gonna be at five or 6%. But that would be kind of look, 5% unemployment is kind of, you know, this 3.3 3.2% unemployment is a ridiculous number. Because first of all, if only 50% of the people at full, full time, you know, work. Do you really you know, when you say that the economy is at 3% unemployment, right? That means that 97% of people are working. All you got to do is go look at you know, how many people are working part time jobs, three part time jobs, not working at all trying to find jobs know that more than 3% of the population is unemployed, so Right, right. The whole measure of unemployment is completely nonsense, but you know, the fact you’ve only got 50% of your population working full time tells you all you really need to know about how strong the economy actually is.

Adam Taggart 29:50
Yep, yeah. And discussion for another day. We’ve touched on it in the past, but the unemployment rate doesn’t count. working age adults who are quote unquote, not in the labor force, which are basically it’s a cohort that the government has basically given up on ever being employed in the future. And that’s over 100 million people.

Lance Roberts 30:10
If you ask them if they would like a full time job with benefits, that there’s probably a big chunk about 100 million it was a Yeah,

Adam Taggart 30:17
exactly. Yeah. Yeah. So it’s, as you said, is the unemployment rate is a highly bastardized number. All right. Well, look, one of the things that Darius talked about was, you gave a bunch of reasons why he thinks stocks could could still surprise to the upside going forward. But he made two observations, which I thought were interesting. And I think your data would agree with this, but you told me if not, one is that he said stocks tend to outperform in the years prior to a recession. So the year right before recession, stocks tend to outperform, I think is, I think his data said on average, the market performed about 16%, in the year before a recession. And then he said, over 50% of that return, so I think it was 9% of the 16%. So like 55, or whatever percent of the total gain, you said happened in the last three months before recession hits. So I sort of made this analogy of like, the party gets, like really raging like the strippers and the cocaine come out, you know, right before the police arrive. Right. And you’re not easy. I’m saying all this. And so, you know, if let’s assume we’re right, for a moment that a recession hits by April of next year, than we would expect sort of, you know, January to March to maybe be a bit of a face Ripper period of time for the markets. I mean, not guaranteeing this, but I’m just sharing the data that there has said,

Lance Roberts 31:44
yeah, no, no, he’s right. Think about it this way, too. And again, this is why the Federal Reserve is being so cautious about what they say, to the markets and why you should basically throw it out the window because they can’t say we’re done hiking rates, because you would have this market up five, 6%, tomorrow. And again, so as I said earlier, higher asset prices lead to consumer confidence makes everybody feel better as they go spend more money, not what the Fed wants. They’re trying to cool things off of it.

Adam Taggart 32:13
Right? Hey, sorry, interrupt, but I want you to address this in your answer. Let’s say the Fed does keep saying this, Hey, there’s another hike coming in 2023. But we get to January 1, with no rate hike, does the market then say, Oh, I guess there was no rate hike, and then it goes off to the races because

Lance Roberts 32:29
that’s that’s where I was headed. Is that you know, so what’s going to happen here over the course of the next month or so. So first of all, let’s talk about why September, almost over October could still be a little bit sloppy, just season that seasonal trends, those type of things. So you know, there’s no guarantee this market is going to start advancing in October, November, December, your odds are much better. Three weeks,

Adam Taggart 32:53
started or up to get again, but just because what you just said in that sentence was basically the title of one of your articles this week, October weakness before year end run, right.

Lance Roberts 33:03
And there’s three reasons for that, which all kind of line up with where Darius is, and I agree with him. What he’s saying is that, you know, from just kind of a fundamental standpoint, you know, earnings are about to come in, we have, you know, I’ve got a chart in that article, how much we’ve lowered on the estimates for the third quarter, since last year. So the bar for companies to beat estimates is very, very low. So we’re gonna have another season where we have 75% of companies beating earnings estimates in a row. So that’s going to be that’ll help give a little lift to stocks, right? Oh, man, the other things aren’t as bad as we thought they’re beating investments. Well, they were $1. Now they were 10 cents, they made 11 cents, you know, so if you actually look at it that way, is doesn’t sound that great, right. But the markets and all they’re beating estimates, it’s all great revenues are good. So that’s gonna give a little bit of lift to stocks, too, is that once we get past earnings season, which will be a really the bulk of earnings season, you know, the s&p 500 are pretty much have most of their earnings out of the way by the end of October, which opens up the whole blackout period for companies to start buying back shares. And there’s roughly about $5 billion a day and share buybacks that need to be done by the end of the year. So that’s going to provide another lift to the markets going into year end. And then and then kind of lastly is just you you’re going to get to this part, and this is the part that really kind of aligns with with Darius is all this concern and angst about the Fed is gonna start getting forgotten as, as we kind of start to as markets start going up, they’re going to the market will start doubting the fed a little bit, they’ll sort of think, Oh, I think the Feds actually done let’s you know, I think the rate I think the next thing is gonna happen is a rate cut, and markets are gonna start taking off. But at that point, that’s when the economic data catches up. And if something eventually kind of breaks or cracks within the markets from these, you know, these kind of abnormally high interest rates, and all of a sudden, nobody’s gonna start backpedaling and the estimates are way too high for 2024, those are going to have to come down. Stocks are way overvalued relative where they should be in this interest rate environment. So valuations are going to come down. And the only way to get valuations down when earnings are declining is to bring down prices faster. So that’s why when you get the next year, that risk of a recessionary kind of sell off in the market becomes much more prevalent.

Adam Taggart 35:21
Okay. And look, I know, it’s frustrating folks that have been watching this channel for, it’s since its start, right, two and a half years ago, and I’ve seen a lot of people come on this channel, and talk about, you know, all of the very compelling data that suggests that current economic growth isn’t sustainable, that current market valuations aren’t sustainable. And then, you know, especially a blade, since I’ve had a number of people on who are, you know, saying, hey, but higher prices, in a lot of these assets are probably more likely in the short term, you know, it can be kind of crazy making to say, wait a minute, you know, you’re saying one thing with one side of your mouth and another thing to another side of your mouth. And I just want to underscore this, you know, we tried to do this, but I just want to really underscore it, which is, you, just as you go to war with the army, you have not the army, wish you had, you have to invest in the markets, you have not the markets that you wish you have. And the old saying of the market can remain irrational, long, much longer than you can remain solvent. It really is sort of a longtime truism. And so you’ve, you’ve got to put your main thesis in place, and develop some positioning for your main thesis. But then you have to ask yourself, Okay, hopefully, I’m right in that thesis at some point in time, but what is happening right now along the ground, and you got to make sure that you don’t get destroyed in the period before your thesis may prove out to be right here. And, you know, what we hear from long term experienced Market Technicians, and analysts and capital managers, like Lance and many other folks that I’ve interviewed recently, is, look, you know, in till we see violation of certain trend lines in the market, we have to play it as if the uptrend is still in play. And look, there’s nothing wrong with sitting on the sidelines, you know, if you just decide, you don’t want to do that, that’s fine, you just have to make the conscious decision that, alright, I’m going to miss out on gains because of that. And if the market takes off, I might miss out on a lot of gains. And that’s actually fine, if you’re comfortable with the risk, reward adjustment that you’re making at that point in time. But if you are saying, you know, I’m going to put all my chips on a super on any one event happening, but let’s say the bearer side, and then the markets have a runaway like, like Lance is saying here. I mean, when you’ll be frustrated, you’re you’ll be missing it. But if you’ve taken positions that suffer as the market goes up, like a short position or whatnot, you know, you could get killed before you’re right. So anyway, Spencer, I want to let you upon on this, because I know you get people emailing you this all the time.

Lance Roberts 38:02
Yeah, it really the bottom line is, is that you’ve got to really kind of kind of come to this realization, I get a lot of emails from people, and they’re like, I want to figure out how I can just get the upside and no downside. That’s not investing, it doesn’t work, you’ve got to be willing to accept the downside. If you’re gonna take some upside. You can Minh, you can minimize that downside risk, right? You can, you can limit the losses, but you can eliminate

Adam Taggart 38:25
it. And to do that you have to compromise on your expected upside to

Lance Roberts 38:29
exactly yeah, you give up a little bit where look, I mean, you get your point. Now, for the first time ever, at least in the last 20 years, you can actually sit on the sidelines and earn money, you get 5% the money market right now. So there’s

Adam Taggart 38:42
a real return, but you haven’t done forever? Exactly, I

Lance Roberts 38:46
should get 5% sitting in cash. And so you can still make money in this market. But what’s always you know, it’s always going to get investors is this is that they’re gonna do that, right? So I’m just gonna, like, I don’t, I don’t, I don’t like this market. It’s crazy. I’m just gonna put my money in cash 5%. And then this was this was last year also. Right? So we talked about all these people who are buying short term treasury bills and all this stuff, because they didn’t like the crazy market. And then the market runs up 17% And now they’re all selling their T bills to jump into the stock market right as it begins to crack now we’re all crazy again, so I don’t want that risk. So now I’m gonna go back into T bills just at the time that the stock market is going to take off again, but this isn’t new, right? This is investor psychology going back to the markets over the last 100 years investors always buy high they wind up selling low. And the reason is because of psychology and it’s like oh, I’m missing out I gotta get in but time they figured out they need to get in the markets already run up. And now you’re at risk of a correction. So the market corrects is like okay, well, I gotta get out now and they’re always back and forth between what the markets doing and this is why, you know, good investors good long term investors. The Warren Buffett’s the Peter Lynch’s, they understand the risks and when markets are Going through a down period, they reduce their risks. But they’re maintaining their long biases on valuations and fundamentals, those type of things which are going to play out over time. And so if you manage your portfolio properly, you can create growth long term, the problem that we’ve that we’ve done to investors, and particularly since 2000, when the internet and telephone financial television and CNBC is that we turned everybody into speculators, you know, everybody looks at have my portfolio do from January 1 to now doesn’t matter. Right. But that’s all we look at. And then we have to make decisions based on that, that has nothing to do with your time horizon, or where you’re trying to get to or what you’re trying to invest for. But we’re also short term now, we’re just gambling in a casino. And that’s and then, as is always the case, the house always wins.

Adam Taggart 40:47
Yeah, and one point on this than I wouldn’t want to move on to bonds is because of that, what people do is they say, okay, end of the year, how did my portfolio do this year versus, you know, my hopes for it, right? And if they’re disappointed, right, let’s say they haven’t, whether they’re doing it themselves, or they have an advisor, if they’re disappointed, they say, okay, look, well, who did better? Okay, well, I’m gonna go follow that person next, right. And there’s nothing necessary. There’s nothing wrong about trying to follow somebody who you think is better than you. But if you’re just basing it on who outperformed this year, you actually are putting yourself in a position to get chewed up by reversion to the mean, right? Where you’re looking at the guy who had the outperform year, right, so you jump on his bandwagon, and then just math being what it is, he’s gonna revert to the mean, at some point, maybe actually, the next year, right. So you’re sort of chasing these gains that are actually historic gains that are setting you up for a higher probability of future underperformance. And I’ve just seen, I’ve seen so many people chase that and wonder why is this not working for me? And they don’t realize that there’s actually a lot of mathematics that’s playing against them.

Lance Roberts 41:55
Yeah, that’s, that’s very true. You know, and it’s interesting, because I’ve talked about this before, is that if you take a look at Kalin as a good example of this, they, they produce these kind of annual rates of return for various stocks. And in go look at this kind of, they call it their Periodic Table of returns, and they’ll break down each year, large cap, mid cap, small cap, International Gold, commodities, whatever, and then they rank them top performing the bottom performing, it’s a great table to look at. Because if you’re thinking about, Oh, I’m gonna go put my money with this guy, if he did really well, last year, go look at this table before you do it. Because what it’ll tell you is, is it whatever is performing in one year is probably going to be the worst performer the next year. And that that reversion to your point happens very regularly, you might get, you know, emerging markets being a top performer for one or two years. And it goes right to the bottom of performance, the next year, whatever was terrible last year, is on the top of the list this year. So what was terrible last year, and what’s been terrible this year bonds. So if if reversion to the mean and historics play out to norm, you can probably bet bonds can be your best performing asset class next year.

Adam Taggart 43:11
Great. And you know, for bonds, and we’ve talked about this, they are on track to have their third consecutive down year, which I think Lance has never happened, you know, since since we started tracking them back in the 1700s, or whatever, right? So never so probability is Whoa, you know, flipping a coin, you know, likely to getting four heads in a row is pretty loud. You know? Pardon me mean, it can’t happen. But it’s but it’s quite low. But but but that’s just odds in the probability of statistics. Let’s actually talk about fundamentals here. So your partner, Michael Leibowitz, wrote a piece this week, basically asking, Hey, is it different? This time for bonds? You know, are basically asking the question, hey, you know, the bonds have been underperforming. You know, is there a reason why folks should be jumping out of bonds here? He basically says no. And the punchline of his piece, is that he said that yields are two to two and a half percent too high, versus where he calculates what a fair value is. And I mean, that’s a pretty big statement, right? I mean, that’s basically saying that the tenure has to basically come down by about 50%. Right?

Lance Roberts 44:30
And then that’s right. And that’s just to beat normalized term premium. If you get into a recession, it’s going to zero. And just the reason is, is ultimately is that, as we’ve showed you about a million times, you know, interest rates are a function of economic growth, inflation and wages. And so what happens if you have a recession, economic growth slows, inflation slows wages fall, which interest rates have to adjust for that because you have to remember and we talked about this before what people forget When they look at bonds is that bonds are loans. And it’s me loaning money to somebody else. And we tend to look at bonds as this equity investment, right, I’m gonna buy it. So it goes up and down or price and I can make some money. But that’s not the way to look at how the bond market works. The bond market is loaning money to somebody else, and I’m loaning it to him for a term. So I’m going to loan money to Adam for 10 years, well, I’ve got to factor some things in there. If I’m going to ask Adam for a 4% yield on my money. I’m assuming that for the next 10 years, because I’m still paying me 4% Every year, I’m assuming for the next 10 years that inflation will be less than 4%, economic growth will be less than 4%, which is my opportunity cost of another investment, that might make me more money. And I’m assuming that inflation will be less than 4%. Because my 4% has to compensate for inflation. So it’s, it’s completely logical that interest rates are a reflection of the three things that drive the economy, because if the economy is going to grow at six or 7%, and what’s his, you know, kind of the thesis of a lot of these people expecting higher interest rates are only gonna go up from here, we’re gonna go back, this is gonna be repeated the 70s. In fact, this is today’s article on the website right now at real investment. advice.com is called bet 70. Show. And this is the thesis going back to you know, that the markets gonna replay out what happened in the 1970s. And I’ll show you some I can show you some charts from that article here in a second. But the premise to get back to 867 8% economic growth and to have inflation and interest rates running at 678 9%. You just don’t have the economic makeup for it. And you don’t have the ability to generate 6% rates of economic growth in an economy that’s got 33 trillion in government debt.

Adam Taggart 46:48
Right. And if economic growth stays sort of where it is right now, but yields go up to six plus percent. I mean, this economy just becomes like a melting Inferno. I don’t know if there’s such a thing as a melting Inferno. Right. But I mean, it just it just becomes a dumpster fire. I mean, it’s it just cannot sustain that type of cost of debt, correct? Well, that’s right. And again, because without tremendous economic growth, right, right, yeah. Um, you know,

Lance Roberts 47:19
and again, it’s just because it’s a function of how the economy works. And interest rates are directly functional. Let me share this one chart from we from the article, because I think it really kind of brings home the point here, you know, everybody’s saying, Oh, well, you know, inflation is gonna go up from here and economic growth is gonna grow, and it’s all gonna be fine stock market is gonna go up, and you know, the Fed is gonna have the soft landing scenario. And love people want to channel Arthur burns back in the 70s. But this is this is a chart of the 1970s 60s and 70s for the market. And what’s important to understand about this chart, so the red is the Fed funds rate, that’s the effective rate of Fed funds. The blue line is inflation, the black line is the stock market. And so every time that you saw inflation go up, the Fed was hiking interest rates, and they would hike rates to the point that it broke the back of inflation. But it wasn’t just the 70. See, we only focus on the 70. See, everybody forgets to look back at early 70s. The even in the 60s, the Federal Reserve was fighting this same type of rising trend in inflation. Why was why was inflation rising? In the 60s in the 70s? Well, we have to go back to the 40s to understand that. So in the 1940s, we’re fighting World War Two, the women are all working in the factories, because all the men are overseas fighting. And so we’ve got a limit on everything right? You have to get the old term government cheese, right. So there’s a limit on everything you can get because everything’s going to the war effort. So we’re producing left and right, everything for the war, sending it overseas to soldiers. Well, the war ends, and the soldiers now come home. Well, what’s the first thing they do when they come back home, they go to the factories, the women go home, they build houses, they start having babies and raising families, and they start producing stuff, and we’re manufacturing everything why Japan was hit by two nuclear bombs. There is no Japan manufacturing at this point. Europe is ravaged by, you know, years of the war. So there is no production going on anywhere else in the world. The rest of the world is rebuilding from the war. We’re doing all the work to rebuild those countries. So we’re just producing economic growth and 678 9%. Wages are running at 678 9%. And when you have economic growth and wages rising during this period, what’s inflation and interest rates going to do? They’re going to go up why? Because I have more demand more people want to buy stuff. So if more people want to buy stuff, then they got money because wages are going up. That That means that as a business I can charge There’s more money. So prices go up, the more prices go up, the more people are buying stuff because they’re fine, the economy’s doing well. So they’re still consuming, I keep raising my prices, I’m hiring more people to work giving them more jobs. Remember, we have to produce first in order to consume. So this cycle is going on. And so all through the 60s and 70s, we’re just producing a massive amount of stuff. 80% of the economy is manufacturing 20% of services. But even during that period, every time the Fed hikes rates, you had a bear market or recession or market crash, some type of event that was going on during that entire period. So when you have these, these, these periods, where you had a recession and a bear market interest in interest rates, inflation would decline, and then the economy would get back on its feet again, and here we go through the cycle, we don’t have that today, we are at present services, which have a near negative multiplier effect in the economy, you’ve got back then also, at this period of time, household debt to net worth was about 60% of their net worth, that’s 160% today, so you don’t have the ability to generate the economic capacity and to be able to, you know, back in the in the 90s, we were taking out mortgage loans at 10% to buy houses, that was okay, because we were making enough money, we could afford the interest payment. Now you talk about a 10% mortgage, and you’re just gonna have total devastation. You know, in the overall housing market, people just can’t sustain it. Let me jump forward here a couple of a chart. So this is my point about wages and inflation, look at wages and inflation, from 1965 to 1980. Look at that nice rising trend. And that’s organic, natural growing wages and inflation. So as wages were growing, you had these bouts of inflation, exactly as you would expect. Beginning in 1980, when we started financialized, everything, we haven’t seen wage growth ever since the only reason we had wage growth in 2020. And 2020 was because of all the stimulus that we sent to households, everybody had to go hire a bunch of people, there was nobody to hire at that point. And so we were having to overpay for the jobs. Now, that’s all going to reverse. And we’ve already seen Walmart come out saying, Hey, we’re cutting salaries, that’s going to happen in mass across the board, wages are going to continue to decline back to norms. But this is the economic composite now. So this is an economic composite of GDP wages and rates. As I said before, there’s a very high correlation between that economic composite and what inflation is doing. And so if you’re having an economy that’s slowing down, wages and rates will follow, and as such, inflation will follow that and there’s an 85% historic correlation between that economic composite inflation, so you can almost bet your bottom dollar with 85% confidence that over the next year or so inflation is gonna be close to 2% or less, because economic growth is going to be less probably than 2%. This is this is debt versus the economy. As I was saying a second ago, this chart I was trying to get to. But you can see that personal income per capita in the 60s and 70s was well above household debt per capita. That’s not been the case since 1980. In the US, it’s only getting worse here.

Adam Taggart 53:16
Wow. Yeah.

Lance Roberts 53:17
So again, the ability is important. What this this is my favorite chart, this is what I call my consumer spending gap. There’s no term in England, you know, as you’re stepping across into the subway, it says Mind the Gap, right? So find the gap. What this chart shows you is is that you have the point to where income and savings, so I’m earning money. And I’m saving money because I’m making more than I’m spending. And the black line is debt. So as long as I’m making more money and have savings, then I’m okay, right. And I can take on a little bit of debt. That’s our write down, beginning, right, in 2009. When the financial crisis happened, all of a sudden, I’m spending everything I’m making, I’ve spent everything in savings, and I’m having to supplement the difference between what I need to spend in order to sustain my standard of living with debt. And right now it takes on average about $6,600 per person per year just to sustain their standard of living. So how do you square that with substantially higher interest rates? Right.

Adam Taggart 54:31
Right, write you down and sorry, just just helped me and maybe a few other viewers fully understand this. So is it basically saying that there’s a period here which means essentially, people are going into debt annually to find their their current lifestyle,

Lance Roberts 54:51
right. So you take your you take your the current living standard, right the and you can calculate that. So we know about what the average cost of Living for a household of four is in the US. So we take a look at disposable personal income, because that’s what they have after they pay taxes and say, Okay now between their disposable personal incomes and what they potentially have in savings, so we add the savings rate in because they have some money sitting in the bank from the stimulus, right. And there’s an there’s a very interesting little little note here, I’ll throw in a second. But so you take a look at that and take a look at the difference between what is causing them to live and how much they’re having to fuel. That standard of living with debt. And that’s why you see this debt really, since 2009, begin to really just kind of accelerate higher because it’s taking more and more deaths sustain that gap between their disposable personal income and savings and their cost of living continues to expand. And so that’s a promise that’s you see that little spike in 2020, where just for a moment, there was actually a positive tick, and they didn’t need to take on debt. And you can see if you look at oops, sorry, let me back up. That means touch my screen. So you can see in 2020, where you have that little spike above the zero line. Yep, debt actually declined for a moment. So for a moment, right, all that stimulus money that we sent to households, they were able to make ends meet and not take on credit card debt. And we actually saw like credit cards get paid off a little bit, which was awesome. But then, as we wrote about, and there was a bunch of articles about how the Biden supports, we’re going to reduce poverty in the economy and all this. I said, yeah, we’ll do that for one year. And then it’s over. And that was that year. So for one year, you had this moment where all of a sudden, people could make ends meet, because they have free money from the government that was MMT on steroids, right there. And then right after that, it was it was not only back in the hole, but drastically worse. And you can see that there was a very sharp decline in the differential between incomes and the gap that they used to fill, following that stimulus, because everybody had kind of overspent and over kind of, you know, over consumed. And so now all that is playing now ketchup back, and they’re having to play this big catch up, and it’s just pushing them further into further debt faster and faster as we go.

Adam Taggart 57:17
Okay, so two things here. Now, obviously, this situation worsens, as interest rates on revolving consumer credit go higher and higher. And right now, they’re pretty much at record highs, right? Not only are the debt balances at record highs, but the interest that’s being charged to record highs. So they’re sort of falling into this hole at an accelerating rate. Not good. Right. So my question is, is, is there a way to sort of calculate like, what’s the terminal limit to this, right? I mean, you can’t just borrow ad infinitum, right? At some point, you run out of ability to borrow, either your creditors cut your offer, or you just can’t afford to borrow anymore, because you’re not gonna be able to make your existing debt payments. So how close are we to that Terminus? Do? Thank

Lance Roberts 58:01
you? There’s no way to know. And the reason is, is consumers are very creative about where they get money. You know, we talked about $1.7 trillion worth of student loan debt. There is more than a little bit of that debt that was taken on and use for other stuff other than school.

Adam Taggart 58:21
We know for sure, some healthy percentage of it was used for for other other uses, and as originally intended,

Lance Roberts 58:28
correct. And then seeing that didn’t happen. Prior to 2000. When Obama took over President Obama took over the student loan program. That stuff didn’t happen previously, that because you had to go to a private lender, it had to be used for college, there were very strict rules. When the government took it over, colleges went off free money from the government. Yeah, I’m raising my prices. And I was like, Oh, I can take out a student loan and go on a trip to Cabo. Yeah, I’ll do that. Because they didn’t think about the consequences of all this. So my point, though, is that consumers are very creative. You know, right after 2009, we saw a massive spike in disability, the financial crisis for somehow turned into a whole bunch of disability claims, not really, it’s pretty easy to kind of fudge disability and to get them to claim money for it. So we saw a big spike in disability claims. So a big uses of, you know, student loan payments, access to other types of of lending credit over the last couple of years in particular, you know, what have we seen a lot of, we’ve seen a lot of these, you know, payday loans and these other companies that are willing to, you know, fund loans to individuals, just, you know, go online, say, hey, once the money apply here, and it’s kind of private lending, so So consumers

Adam Taggart 59:38
are paid, which it pays your NGO or whatever, you know, online, oh, you can buy this thing from Amazon and it’ll take you 10 easy payments over the next two years. Right.

Lance Roberts 59:48
Yeah. So my point, though, is is that you know, it’s like, where’s that terminal limit? The problem is, is we don’t know where that terminal limit is because of two factors one, consumers keep taking on more debt. because they’re financially, they don’t know better than I don’t say they’re financially responsible, they just don’t know better, because nobody ever talks about the evils of debt. And if more people are they think they have no choice, or they think they have no choice. So we can’t really blame them for that. Who can we actually blame for this is the product market because when there’s demand in any market, Wall Street, private individuals, private companies, etc, they’re going to come up with new ideas, like all these Pay As You Go loans, and these these private companies that are issuing out, you know, private loans, these were all created just last few years to meet dead dead demand, I couldn’t get approval at the bank, the bank terming down, I got crappy credit, that’s okay, we’ll loan you money. And so they kind of crowdsource a whole bunch of people and Adam chips in five bucks, and I chip in five bucks, and we loan Joe over here $100 of you know, $5 donations from everybody, we hope he pays it back. It’s someday, you know, but you know that, but the markets very creative about coming up with new ways to give more people money. So you know, that point, yeah, that terminal point where the whole thing just falls apart? I don’t know. It hasn’t happened in Japan yet. And they’re, they’re still going. So, you know, I don’t have a point is,

Adam Taggart 1:01:12
but hang with me on this. Okay. So knowing exactly where it is, is hard to pinpoint, right. But it’ll likely last longer than you and I could think it ever could, because of the creativity of humans and the product market and whatnot. But I just want to I want to hang on this for a minute, though. But you do believe there is a terminal point here. And then let me ask the question differently. Is there a credible scenario where this reverses, and we dig ourselves out of this? Or do we just keep descending, being as creative as we can be, but at some point there is, you know, a reckoning line where it just okay, the game is out?

Lance Roberts 1:01:53
The answer is that the game will be up at some point. And the markets will tell us when that game is here, that we will never do it. By choice. And, you know, this is the problem with Social Security and Medicare and Medicaid, this is the same problem that we have with government spending, you know, it’s so easy to issue debt and spend money that we don’t have. And that’s much better than the alternative of telling people No, because if I tell people, no, they can’t have money, then I don’t get elected. So you know, that’s, that’s no fun. So, you know, at some point, and this is, again, we’ve been looking at Japan for 30 years, kind of wait for this point to show up, and it hasn’t yet. But there is a point somewhere along the way. I mean, Argentina defaulted Russia, you know, Russia defaulted. I mean, there is a point to where it breaks, just nobody knows where that point is.

Adam Taggart 1:02:43
Yep. So again, just hang with me here for a second, the rationale behind all this, which really is this question, and I know, I’m asking you to really guesstimate right? When that reckoning hits, what does that world look like, when these consumers who are using this to fund their lifestyle, this isn’t necessarily to go, you know, to Disney five times a year with your kids, eventually, this gets down to just eating and keeping a roof over your head, when they can no longer the average consumer can no longer borrow to do that. What does that world look like?

Lance Roberts 1:03:16
It’s a depression, the Great Depression, you’re still so this chart I’ve got up here is the average economic growth by cycle going back to 1790. So go back to Washington or an agricultural cycle, we have a big bunch of spending going into, you know, World War Two. And then we went through a debt reversion following that we had to pay off that debt coming back from World War Two. But that was the Great Depression. The last time you had a debt reversion of even a small magnitude was the financial crisis. And I need to tell you about that. So you know, if you ever have a debt reversion of, you know, the the actual total debt as a percentage of GDP, and I’m talking about total debt, now when so when you look at my chart, it’s 475%. Debt to GDP, that’s consumer debt, household debt, corporate debt, government debt, that’s every, that’s all the debt. So to get to the point that you have a reversion of debt you’re going and again, you can take a look at when as that debts been rising, economic growth just keeps slowing. So you know, eventually we’ll be you know, we’ll be in a depression airy state. And when we get there, you’ll have a big debt reversion at that point, and then you’ll start maybe sorting things out on the other side.

Adam Taggart 1:04:28
Is okay, I don’t want to get too dark here and whatnot. But but that I mean, what you just said.

Lance Roberts 1:04:37
But that’s not this isn’t in our lifetime, though, you and I will be dead. So.

Adam Taggart 1:04:41
So that’s where I’m going. And I just want to note on this chart, right? There’s a website out there. In fact, I interviewed one of the guys who built it, probably a year and a half ago or so in this channel. It’s called What the f happened in 1971. And it’s just this collection of all these charts. Studies show how both on a kind of a monetary and financial and economic trajectory. We just started breaking all of the historical averages following 1971. Of course, one of their main points is that’s the year that Nixon took the the US off the gold standard. And that’s when politicians were freed of the constraints of a hard back monetary system. And you can just see in this chart I can see or I was born in 1971 on this chart, and that’s right, when everything just starts shooting on, it’s not even a 45 degree angle, right. That’s like a 6570.

Lance Roberts 1:05:36
I’ll get my protractor out. I’ll tell you real quick.

Adam Taggart 1:05:38
No, but but it’s just it’s just bananas. But yeah, so I mean, to your point, I mean, I’ll ask one last question on this, and then we’ll move on. But as you we don’t know, when this is, when does your gut tell you that that kind of Great Depression Scale, reckoning would happen? You know, boomers are probably dead, or x are still around? Is this something that millennials and z’s or people who have millennial and Z children, you know, need to prepare them to say, look, like it or not, this is probably going to happen on your watch. Is that what do you think?

Lance Roberts 1:06:11
It’s me? Again,

Adam Taggart 1:06:14
don’t know, but you’re pontificating here? Yes.

Lance Roberts 1:06:17
I would guess its tail antigenics. And mostly, sorry, not genetics, there’ll be dead, mostly telling the millennials and Gen Z, Gen. Gen Z is probably gonna wind up with the brunt of this.

Adam Taggart 1:06:30
Okay. It’s probably not going to be a party. Right up until then, right? I assume that things, you know, it was

Lance Roberts 1:06:36
1927, it was a party to 29.

Adam Taggart 1:06:40
So do you think it’ll be a blow off like that? Or do you think it’d be more of a grind before the bottom falls out when it gets real bad?

Lance Roberts 1:06:46
No, it’s normally boom and bust. I mean, there’s, you know, even in the 60s, in the 70s, the market was grinding higher, even though we kind of had these rolling bear markets, nobody remembers that. But we had these, you know, kind of the market run up and you sell off 20% in the market run up, you sell off 20%, and then 90 subject for the bottom fell out, right? And it’s always kind of that similarity. It’s almost like this, we wake up one morning, and it’s like, Oh, crap, what just happened? And then the whole world kind of falls, you know, same thing with the financial crisis, there’s this, there’s something that breaks, and whatever that is that that ultimately breaks, whether it’s a financial institution or something, but something happens. That triggers a massive aha moment in the market and everybody panics. And that’s, that’s what that’s why it’s always kind of a party until the very end, the cops show up.

Adam Taggart 1:07:39
Okay, all right. All right. Well, let’s try to move on to something a little bit less depressing. I’m not sure if I would call any this optimistic. I’m about to walk through. But hopefully, it’s less depressing than, you know, global. Long standing depression.

Lance Roberts 1:07:56
There, I was just telling you, it wasn’t the 70s. Yeah.

Adam Taggart 1:07:59
Oh, hey, sir. Before I move on, pull up the charts that you had again before? Would you think it actually was it this chart? Is it it’s from the article you were Justin? Okay.

Lance Roberts 1:08:17
What was it looked like? What’s the title of the chart?

Adam Taggart 1:08:20
I can’t remember. But I think it might have been the chart you were just showing there. But the last one about the day. Okay. Not about that. But it had it had the inflation rate and the s&p and Fed funds rate on it. Yeah. Okay, in the point I want to make about this chart is, it seems like we can pinpoint on this chart, sort of where we are at the cycle, compared to past historical cycles. And if you agree with me, then maybe one of the advantage is that we have right now as investors is you don’t always have a high degree of confidence of of where you are in the cycle. But I think we can kind of feel like we have one. So you There we go. Thanks. Just one right here. We’ll knock that one down. There we go. All right. I think this is a do me a favor. Just Just punch through the charts again, real quick. All right, there we are. keycare. There. Keep going.

Lance Roberts 1:09:21
Keep going. lation. full time employment.

Adam Taggart 1:09:24
You go in. posit. Keep going. I think it was the first one that you might have been the first one keep going. Yeah, I think it was the first one. Okay. Go back to that one. All right. So you can see here that every time inflation starts taking off, but go back. Yeah, sorry. Basically, what you can see here is Yeah, every time the Fed is is forced to hike rates, and then pause right now And in most cases along the status series to contain rising inflation. It rises, it pauses during that pause, it’s probably asking itself, okay, we think we did enough. We’re not sure if we did too much yet. And then all of a sudden the recession starts hitting and the Fed says, Oh, dear God, we did way too much. We got to cut rates quick, right. And for one reason, this is why you and I are kind of laughing about that gentle glide path that Powell just showed in his last presser, because that totally goes against what history shows, right hits, they pause, and then they have their Oh, crap moment. And then they hustled to bring it down, right. But that’s basically commensurate with recessions and bear markets. Right? Every time we kind of get up to that plateau, and then quote, unquote, something breaks or whatever. We it’s followed by a bear market, and likely, in many cases, a recession. So we’re now we’ve now gone through the most aggressive rate hike, you know, campaign in history in terms of how high they’ve hiked in such a short period of time. We’re now by your estimation, we’re now at the plateau. Right? No more rate hikes, right? So we kind of know where we are in the story. We’re not that far from the bear market and the recession. Right. And so, yes, the market could party for a few more months, as we talked about earlier. But we may have more confidence than we normally get to get in the markets about what’s coming next. Given how often this has arrived in history, what do you think?

Lance Roberts 1:11:27
I think he’s right. And as we said, last year, to that lash, to everybody was expecting recession, we said, Fine, I’m gonna have one because everybody expects one. Now, nobody expects a recession, everybody expects a soft landing, a no recession scenario, which really sets the market up psychologically, for something to happen, that thing causes everything to kind of cascade over and then you can have this kind of panic selling right now consumers are, are doing okay, right, their confidence levels been coming back up lately. And they’re like, Oh, I guess I guess everything’s okay. And then something happens. And then all of a sudden, they just shut down spending all at once. And that’s what creates that recession. So the fact that we now have more and more people on the camp of no recession, soft landing site actually increases the potential for a recession to occur.

Adam Taggart 1:12:17
All right, yeah. And you know, it’s funny, because you were warning, you’re making the other side of that argument heading into this year, right, which is that everybody’s expecting a recession and your admission, that sure looks like we’re going to have one. But you were saying my spider senses are saying we’re not going to have one in 2023, or at least the first half, because so many people are expecting it turned out to be absolutely the right assessment. All right here, so I’m just going to share, I want to get to your trades in just a minute, both your personal and your professional ones. You know, I’m going to share that, you know, I’m increasingly being swayed by the arguments. And folks like Lance and Darius and a few others, saying that the markets may surprise to the upside, you know, in the next quarter or two. That said, in my own personal portfolio, I am I am much more positioned for the disappointment, right, I don’t feel like I can, I don’t have enough confidence that I can pick up enough nickels in front of a steamroller before that disappointment hits. And I would much personally how I’m wired, I’d much rather miss out on some gains in the short term, but be well positioned, if indeed, recession hits, the disappointment happens, markets then start rolling over, and I will personally be fine giving up that opportunity cost if the markets do indeed run and I don’t participate as much as they otherwise would, I think every person needs to make their own individual assessment of that, and Lance, you as a capital manager, you have a little bit more pressure to be playing the game while it’s still played. And I know you keep your eye super close on a lot of these technical averages and indices knowing that if they start getting violated, you’re gonna really start taking a lot more chips off the table, you’ve got your own early warning detection systems there. But I just want, I want to let people know that like, this is a really interesting period, we’re getting into one because smart people are looking at the same data and coming to different conclusions. Right, some are saying, hey, the markets could really run the rest of this year, as we’ve talked about, others are saying, I don’t know, you know, I think the jig may be up here, right? Really interesting time here, because some folks are going to be proven very right. Some folks are going to be proven quite wrong. Darius thinks that stocks are gonna do quite well, he thinks bonds are going to do poorly, up until the recession. Right. And I think you and Michael, you know, may have a slightly different view on that. But you certainly think they’re going to do very well at some point near enough that you are increasing your exposure to it, right? So it’s gonna be really interesting to see how these smart people who look at the same info differently, how their positioning, you know, plays out coming forward from here, my point that I’m trying to underscore with All this though is this is really one of those times where you as an investor, have to start like choosing a side here, right? Where you’re like, Okay, how much risk do I want to take on and what certain asset groups, given what’s going on here versus folks maybe wired, like me might say, this may be a time, I just want to, as Lance said, sit in the safety of those high 5% rates. And, you know, be you know, don’t be too angry if the market runs away, but be real happy, you know, if, if, if the market starts rolling over here, and you’ve kept yourself safe on the sidelines. So I know you wrestle with this every single day Lance, both as a capital manager, but also getting concerned calls from clients about what should I do and having to talk them into what decisions right for them? So what do you have to say on this?

Lance Roberts 1:15:43
Well, I mean, the the one, the one aspect he left out and all that is again, that’s not a that’s not a hit. Okay, thanks. That’s, that’s just there’s an important aspect of this is that you have to include in that timeframe, right, so there’s many people running around saying, oh, yeah, stocks are gonna do great for this period, or, you know, bonds are gonna do terrible, well, whatever, right? I just you, but you have to have a timeframe attached to that. So for instance, my view on bonds is and again, so personally, you know, I was on the show, like a month ago, when interest rates are two months ago, when interest rates spiked up, I doubled my bond position, I increased it again, on Thursday, and I’m going to keep everytime rates pop up to where they are, I’m just going to keep adding to my bond position, but my timeframe is 18 to 36 months to be paid for that investment. So again, I’m not worried about what interest rates do between now and then the year I care less, what I’m looking for is 18 to 36 months out where I’m going to get paid. And I had this conversation actually with a client yesterday. And I was like, Have you ever built a house before? And he’s like, Yeah, I’ve built the house. And I said, Okay, so you bought the piece of land? He’s like, Yeah, so you know what the value of your land was? Right? So it’s yeah, it says, So then you started building the house? What was the value of your house when you started building it? And he goes, Well, nothing. I didn’t have a house yet, like, exactly. So it took you how long to build your house took me 18 months? Well, when you got your house built, what was the value of your house, then? Well, I know what the value of my house was there because I built it. And then 36 months out from that, what was the value of the house was higher, because the market was going up in value. The point is that when you’re making an investment, you can’t look out what you know, if you’re day trading, that’s fine. So if I’m going to buy Apple today, and I’m going to bet on an earnings announcement, and you know, they announced earnings, and it goes up five bucks tomorrow, I sell it and make money. That’s great. you’re day trading, that’s awesome. If you’re investing it’s about timeframes and time horizons, and where are you willing to put capital to work over the next 18 to 36 months, because that’s the window you should be looking at for an investment to work out because of its relationship to economic growth, inflation, interest rates, all these other types of things. That includes stocks, as well as bonds versus commodities, versus anything else. So timeframes vary

Adam Taggart 1:18:01
important. Yeah. And that’s actually not a bad practice just to recommend to people, especially if they’re a DIY investor, right, which is like anytime that you take on a new position, like write down in a log, my horizon for this is X. I’m investing now because I’m expecting some something to happen over x timeframe, right. And that way, you don’t get shaken out if next month. It’s down. 7%. Right. All right.

Lance Roberts 1:18:27
So you good example. So I was a couple of months ago, I forgot I was on here. I said yeah, I just doubled my bond position. We were I think we were 4.3 4.35 on the 10 year Treasury at the time. And so I doubled my my TLT position in my portfolio. This is my personal account is not to do with my clients. This is me personally. Since then, I’ve gotten emails like every day, interest rates ticked up a little bit or ticked down. Somebody’s emailed me, well, what do you think now, as it changed? No, email me an 18 to 36 months and I’ll tell you, right, if I’m if I’ve got a long term horizon, what happens from one day to the next doesn’t change my outlook. And if I get an opportunity to buy something cheaper, where I have such a an outlook, on based on fundamental valuations, economics, all these type of things that I’m going to keep buying, right if I if I can buy something at a discount, that is that is a paying me income while I hold it, because I get the interest income off the bonds, but I have a valuation metric that goes back to 1787 that gives me a very high confidence rate that I’m going to be paid on this investment. Why would I not do it, you know, that you don’t invest in, you know, in public, a private company, and then trying to sell your shares tomorrow, right? You invest in a private company. This is gonna take 10 years to build this company, the YPO and it’ll be great. You know, but that takes a long time to build that value. So you got to have the right outlook to match your investment if you’re day trading day trade, match your performance. January the first and how you are today. And that’s great, right? That’s, that’s all you’re doing. If you’re day trading, if you’re investing, move your timeframes out what we know, where am I over? Where, where was I of the last five years? Where am I now? Where am I gonna be in the next five years, five year, risings are much better. If you’re an investor, then you worry about what happened from January the first and now.

Adam Taggart 1:20:21
Okay, now, now, that all makes sense. And obviously, you want to be reevaluating your investment to make sure that the thesis hasn’t changed along the way. Just one underscore for folks, this is your chance to clarify it, your thesis has not changed. In fact, that sounds like it’s it’s still solid enough that you are still putting substantial new money at play in here. And by the way, when you said that You increased your bond holdings by 30%, or whatever in your personal portfolio. A we’re talking about US Treasuries, correct? And B, if you’re talking about longer treasuries here,

Lance Roberts 1:20:53
no, in this case, it’s I’m actually just using TLT. Right, so I’m buying the ETF TLT, which is the iShares 20 year ETF.

Adam Taggart 1:21:04
So it’s 20 year US Treasuries that are made by the GPF. Right, right.

Lance Roberts 1:21:07
50, roughly 1516 year duration. So so in this particular account where I’m doing this, it’s just using TLT. So again, I always want to be careful that I’m doing something in when I’m doing something personally, I have to be a little bit careful about when I’m doing things versus what I’m doing for clients, because I don’t want to get accused of front running clients or doing something like that. So if we’re buying individual, since we’re buying individual treasuries for our clients, I’m buying TLT to keep myself out of that potential legal hassles.

Adam Taggart 1:21:41
Got it? Got it, okay. And that’s right, you do have some of these other higher standards that you’re held to than the average person. And you’re also very good about telling us when you’re doing something personally versus professionally. And again, that’s one of the reasons why we have this weekly recap glances for you to keep people updated as to what you’re doing and how you’re thinking. Very clear, you’re still your main thesis on bonds unchanged, and to the point where you are continuing to put not only more your clients money in it, but more your own money, too. All right. Well, we’re, we’re near the end of the time here. And I know you’ve got a birthday in the family Lance to go celebrate today. So we’re gonna let you head off. Real quick as we start to wrap up here, beyond the personal trade, that you just shared with us, what professional trades have been made in the portfolio over the past week, if any?

Lance Roberts 1:22:29
So no, we made a few. And we’ve been talking about this for a while, you know, we were kind of waiting for this weakness to occur in the market. And we’re using that to really kind of rebalance and consolidate and, you know, reduce some risk in the portfolio and add exposures to where we want thinking where we’re going to be kind of for this year and rally when so we’re moving our weightings more and more towards kind of a benchmark weighting in the index. So this this week was really we just again, we took a couple of positions out of the portfolio, we sold in our homes and Albemarle they were real small positions in the portfolio, we would put them in as kind of a tester to see if they were going to work they weren’t performing as well as we had hoped. So we just took those out, raise that cash, we trimmed off our energy positions a bit, they’ve had a huge run with oil prices. They were they’re all very overbought, including oil prices. So we trimmed our position in Exxon Mobil, for example. We also added to our communication sector where we were underweight so we added to our to Comcast, and our ETF portfolio bought the ETF on communication. So again, it’s all very small stuff, it’s, you know, half a percent here, 1% there, it’s all just kind of nipping and tucking in a portfolio to kind of get it ready for what we expect to be this kind of year in push. And then once we get this year and push behind us, then we’ll start to evaluate next year and probably start considering reducing equity risks, you know, fairly substantial.

Adam Taggart 1:23:59
Okay. And again, folks, we have this weekly market recap. So as Lance starts really considering some decisions like that, as we get into next year, he’ll be sharing them with us here on this channel. All right. Well, I’m just to wrap up. A quick reminder for folks, that Wealthion online fall conference happening in October, Saturday, October 21. Tickets for that are still on sale at the early bird price, I got to find out the deadline where the price raises, it’s coming up. So if you’re interested in the conference, go to wealthion.com/conference. It’s got all the information there but it’ll let you buy at that earlybird discount, which is 29% off the full ticket price. And if you’re an alum of a previous conference, you check your email, you’ll have a code there for me giving you an additional 15% off of that 25 29% discount. So faculty remains the best we’ve ever had. Jeff Clark just signed on to do A bonus video of the top precious metals mining companies that he thinks have the best profile going forward. So that’s a bit of new news. And just a reminder, because I’ve been getting this question a lot. And I know I need to say this more. If you can’t watch live on Saturday, October 1, don’t worry, everybody who registers for the event will get replay videos of the entire event, both the presentations themselves, as well as all the interactive live q&a sessions, and then just wrapping up, as we do every week. But I think Lance did a great job of underscoring the need for it this week, if you’re a regular person trying to navigate these markets, and what’s coming from here, it’s tough for the professionals. But for regular people who have regular lives, regular jobs, regular families to take care of, it can be highly overwhelming, which is why we highly recommend that you navigate this environment under the guidance of a good professional financial adviser. But certainly one that takes into account all of the macro issues that Lance and I talked about today, and that the guests who appear on this channel regularly and I talk about, if you’ve got a good one, he’s doing that for your great stick with them. But if you don’t consider scheduling a free consultation with one of the financial advisory firms that Wealthion endorses. To do that just fill out the short form@wealthion.com only takes a couple of seconds. These consultations are free. There’s no commitment to work with these guys. It’s just a free public service that folks like Lance and his team offer to help as many people as possible position as prudently as possible in advance of the potentialities that Lance and I talked about in this video. If if you get your favorite hour and a half of the week by watching this weekly market recap with AI with Lance and I every week, please ensure it continues by hitting the like button and then clicking on the red subscribe button below as well as that little bell icon right next to it Lance I give you the last word buddy

Lance Roberts 1:26:51
I wish I had something positive to say go on to next week but I just really have no idea you know at this moment but again, get ready to wrap up September earnings season right around the corner. So what let’s

Adam Taggart 1:27:01
talk about All right, and folks look if you still haven’t gotten your fulfil of macro, if you haven’t watched it yet, go watch that video of Darius Dale, I’ll put it up here at the end of this video. Great conversation that builds on a lot of the things that Lance and I talked about here. But with that, Lance, thanks. Another great week with you, buddy. Look forward to next week everyone else. Thanks so much for watching.