In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill highlights key insights from our expert guests:
Tavi Costa discusses the Fed’s aggressive rate cuts and the mounting recession signals in the yield curve. Daniel Lacalle reveals the “hidden recession” already affecting major global economies and how dedollarization would devastate the US economy. Dennis Lockhart offers insider Fed perspectives and shares his long-term investment strategies. Plus, Brandy Maben provides essential financial planning tips to safeguard your wealth in uncertain times.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com/free
This interview is sponsored by BetterHelp. Give online therapy a try and get on your way to being your best self at https://www.betterhelp.com/Wealthion
Andrew Brill 0:00
As summer turns to fall and we come to the end of the third quarter of 2024 the economy continues to send mixed signals. Welcome to wealthion’s weekly market recap. I’m your host, Andrew brill. Let’s see what our experts had to say this week. Davi Costa of Crescent capital joined wealthion This week, and he felt the Fed made an aggressive move with a 50 point rate cut. He did intimate the Fed didn’t have a lot of options, because they need to keep spending money to create growth. Dabi also pointed the yield curve showing signs of a recession, and feels the fragility of the economy could lead to one on the horizon.
James Connor 0:42
The Fed cut 50 basis points, as everyone knows, and thank God, because we’ve been talking about this for a year now. So they finally did it. And in December, we were expecting six interest rate cuts, and here we are in September, and we’ve only had one. But you said recently in your commentary that you think this was a very aggressive policy change by the Fed. What do you mean by that? Oh,
Tavi Costa 1:04
it’s a lot of unpack there, but the aggressiveness of the Fed policy shift, I think, has a lot to do. I mean, you can’t really justify that on the data. In my view, there’s not much of a tremendous weakness in the macro data to potentially drive that. I mean, potentially, you can say that the labor markets are starting to show some cracks, but I think there’s a lot of noise in that, in that view as well, just because of immigration and other things. But the real, I think the real change here, in my view, has to do with the interest rate payments that are clearly surging and starting to eat into fiscal spending. And as we see that occurring, I think that’s going to be forcing more and more monetary policy to be driven by that, not in a really constraining monetary policy, to actually having to suppress the cost of debt to allow the government to spend more money. And so to me, that’s, that’s what it comes down to. So I’m actually, I think, on the back of that view, you start, you start developing other ideas, you know, especially the the weakness in the fragility of the US dollar, not only versus hard assets, but starting to sort of spread that weakness towards other fiat currencies. You know, the Australian dollar, the Canadian dollar, even the Japanese yen recently, and the euro. That a lot of which, I think it’s completely out of consensus type of view, where most of the of market participants actually have a more bullish view on the dollar, so versus other fiat currencies. And so to me, that’s that’s a big takeaway. The Fed is showing their cards of how constrained they are, how trapped they potentially are, and that’s that’s going to have a ramifications in FX markets as well. So
James Connor 2:54
let’s talk about inflation now. Jamie diamond spoke recently, and he said he thinks inflation is still an issue, and there’s going to be more inflation on the horizon because of government spending. And he also expressed concerns with the possibility of stagflation, that is a slowing economy with higher inflation. Do you think the Fed is making a policy error by cutting rates too early?
Tavi Costa 3:17
A policy error would would basically assume that they have a lot of options on the table. Like I said, if you’re you know, let’s think about this for a minute. You know, since the global financial crisis, and I’ll give you some context before I answer that question, since the global financial crisis, what has been one of the biggest beneficiaries that cause us markets to outperform any other place in the world. And I would argue, yeah, technology has been a big one, but but even potentially, even more important than that has been the fiscal exceptionalism we’ve seen in the US. You know, this allowance of the us being able to spend more than other economies. You know, in fact, if you look at the average of fiscal spending in the US, all the way back to the global financial crisis, we approach close to 8% and annually. And you know, the second one would be Japan. Japan is at about 5% but Japan, majority of that spending is not pro growth, right? That that spending goes to entitlements and all those things. And believe it or not, in the US, that 8% a large percentage of that actually goes to pro growth policies, which creates growth economically versus other places in the world. And hence why you tend to see that premium on valuations versus other places in the world. Again, this is just my view of an analysis on the fiscal spending side, when you have interest payments now becoming 70% of the deficit. Right now, it becomes a problem. And the question really is, how do you adjust that? Do you lower fiscal spending, or, you know, to adjust the issue? Or do you actually adjust this, the interest rate aspect, and suppress the cost of debt to. Allow the fiscal spending to be, you know, to continue to be larger. Because if we don’t see that, then it’s going to start that interest payment is going to start eating into the deficit. And by definition, if you don’t increase the spending, then your, your actual spending that is pro growth is going to be shrink. And so this is, this is actually a critical problem. And so going back to your question now, I don’t think the Fed has a lot of options. I think this obsession, I’ve been saying this for some time now, this obsession that every market participant and analyst and strategist and portfolio managers have over inflation and labor markets are not as useful in this market right now, given the fact that we depend so much on fiscal spending that if interest payments are really eating into that pro growth spending, then we have to adjust that regardless of where inflation is, regardless of where labor markets is. And so this is why I am laser focused on that, because that suppression of cost to allow the government to spend more, you know, has a lot of ramifications in other asset classes. So no the the steepener or the steepening of the yield curve could be a, you know, a another, another mechanism or another way of unleashing these, these policies that could be, you know, potentially as well, very another, another idea here in the macro side. And so there’s all sorts of things outside of the dollar weakness, emerging markets could do very well on that front, the reemergence of inflation. All these things to me, are real, you know, potential changes in the macro landscape.
James Connor 6:41
So what’s the yield curve telling us right now about the economy? Or, more specifically, if the economy is in a recession or not,
Tavi Costa 6:48
it’s not positive. It’s not a positive signal. It’s a very negative signal. And a lot of people trying to justify the yield curve steepening after being deeply inverted, I think that’s that’s very misleading and and I would, you know, when you when you’re an investor, you don’t know what you know what, how things will play out. So what you do is, you kind of have a checklist of things that you pay attention to. And so this is one of them that I would put at the very top as a recession signal. You know, if you’re not paying attention to that, I’m not sure what you’re doing. So that’s that’s a very critical one, especially given how valuations are. You know, you can look at valuations on the cape ratio, and now you know, on top of that, being in a such an overvalued equity market, and you also have steepening of the yield curve from very deeply inverted levels, and one of the longest inversions we’ve seen in history, which I think only adds to the case that we’re going to see an even, you know, more abrupt an inversion process. It all really adds to that case in a big way. And no, don’t forget what we’re seeing in terms of the 50 basis points of a cut and the interest rates, although I have a view on interest payments and all that, you know, when was the last time we’ve seen this, you know, a 50 basis points cut, I mean, in the last 30 years or so, or since the 1990s all these, you know, 50 basis point cuts actually happen. You know, either preceded or coincided with recessions and so that’s that’s also, you know, a real a real problem, because there has been a lot of discussions in the macro community if this is sort of a mid cycle, you know, soft lending, or something along those lines, like we saw in the mid 90s. The mid 90s, actually, we did see that. But the mid 90s, the interest rate cut that we saw from the Fed was only 25 basis points. Was never 50 basis points. So this is definitely a change, and I think it plays more negatively in this. I also would point out to other things that could potentially be more negative for the economy have to do with with the consumer. You know, if you look at the one example that anybody can can look into, and that I think it’s a very interesting perspective, is looking at the auto market. You know, when you have a car loan, look at the divergence between two interest rates, the five year yield, by the by by the US government, which is basically a risk free rate by five years. And secondly, look at the car loan rate, or in other words, how much a lender in the carts in the outer space is offering in terms of interest rates out there. And what you’re going to find is that we’ve seen the five year yield fall recently, but if you’re actually trying to purchase a car, those lenders are still charging you a much higher interest rate. Why is that? Why is that not following which historically tends to follow? Do you know the only times that divergence happens is in recessions, and that’s because, from a lender’s perspective, they are seeing that the consumer is not as as positive or as. Healthy, and therefore they keep their interest rates and slightly higher. So I pay real close attention to this, these signs, because I think that they tell you a lot about the health of the of the consumer. So if the lender is not willing to take the risk to lower their interest rate to match the falling five year yield on the risk free rate, then that means that their perspective about the consumer has changed, and so that’s something I pay very, very close attention to. Yeah,
James Connor 10:26
interesting points, and I gotta say, I want to digress right now, because I always, I just bought a new car recently, and I always hate going and buying a new car because I feel like I’m getting screwed over by the dealer. Yeah, but you mentioned you were talking about the Fed, they cut 50 basis points, and you were quite surprised by that. Do you think that they see something on the horizon, a potential problem? Maybe just showed up here in the last month, and that’s why they were so aggressive. Or do you think maybe they just said, Okay, let’s cut 50 points, and let’s wait until January before we do it again. Look,
Tavi Costa 11:00
I’ve been calling for and then this has been my mistake as as a strategist, as a portfolio manager, as a as an investor myself, I’ve been very concerned about US equity markets for some time now. No, that’s full disclosure. On that view, been very bullish commodities, very bullish hard assets, very bullish emerging markets and other things that have worked as well. And so to me, this is, it’s a tough one. I am. I do think there are, you know, when I look at my checklist, I see a lot of issues. Now, when I try to look at the economy from the fads lenses, meaning inflation or labor markets. You know, I think inflation there, there has been some progress on that front that justifies the rate cuts, but not massively. If anything, you know, look at what’s happening today. You know? I mean the Fed, if the Fed is is just saying that. You know, we’re we want inflation, the inflation the inflation war. I mean, look at what commodities are doing right now. You know, they’re surging in prices. And so does that mean we killed inflation? Probably not, and that’s because it’s structurally the commodities trade or the or the inflation problem is still here with us. We still have de globalization trends intensifying. We still have the under investment in the commodities industries. And all these things are going to still, you know, cause the commodity space to be constrained on the supply front. And every, you know, every, every, now and then we’ll see commodities actually rotating on the upside. And so all these things, to me, is the concern. So I don’t think the picture, to answer your question, I don’t think the picture has really shifted from the economy front, and I still see the economy very fragile, and maybe the Fed is seeing something worse than the markets are seen and investors are seen. I think that’s a possibility, sure, but if anything, I do think that what’s happening is the the you know, especially coming from senators now writing letters to the Fed to cut interest rates, you know, to, you know, basically forcing the Fed’s hand to actually act on a political front and start cutting interest rates so it doesn’t kill the economy. So to me, it really goes back to the fiscal spending side. I think that the fiscal spending is such an important aspect of this economy. And I imagine the economy has so many issues and so many, you know, and some other aspects that are still positive. But think about if we just take it away all the fiscal spending. Now, where would we be? You know, we’re now spending in terms of the deficit close to over 7% if you add, you know, the trade balance aspect, we’re running a 10% twin deficit, meaning trade balance is negative and the fiscal is also very negative. No, it’s okay. I mean, if you’re, if you’re reserve currency, you want to run a twin deficit, but not 10% you know, if you’re running 10% all the time, of course that’s going to have an impact, a very negative impact, in your currency. And so this is why, again, it goes back to that dollar idea. And so, yeah, I’m, I’m definitely concerned about, the economy. It’s just, it’s such a difficult view to have in markets, because it’s just been delaying for so long all these signals that have been lining up for a recession, and it hasn’t happened. But I don’t, I, you know, I don’t think that the fact that it hasn’t, we haven’t seen one really, really changed the probability of one, of one happening. In fact, I think it only adds to the
Andrew Brill 14:42
case. This show is sponsored by BetterHelp. It’s finally happened, and was only four years in the making. The Fed has cut rates by 50 basis points. Yes, it was a little surprising, but maybe they see bumps in the economic road going forward, and maybe there are bumps in your personal economic road that are way. On you, or maybe there are other things that are on your mind, keeping you from thinking about all the good things in your life. It happens to all of us. We walk around with the weight of the world on our shoulders. Look at others thinking their lives are perfect with no worries or cares in the world. Everyone has worries and things they think about all the time. You can’t let those things get in the way of the fun things you want to do and explore, or the things you’re curious about and want to tackle. It’s why I speak to someone. It helps to ease some of the negative thoughts and gain a new perspective on some of the things that are floating around in my head. And believe me, there’s plenty if you need to talk to a professional or thinking about giving therapy a try. Give better help a try. It’s easy, online, convenient and flexible. To fit your schedule, just fill out the questionnaire. Get matched to a licensed therapist anytime. Rediscover your curiosity with better help, visit betterhelp.com/wealthion. To get 10% off your first month that’s better help. H, E, l, p.com/wealthion, world renowned economist Daniel lakaye joined us this week and explained how the private sector is in recession disguised as no recession due to government spending boosting the GDP. He said, We need to keep an eye on inflation, debt and devaluing of the dollar, which could prove devastating. Daniel fears the debt will only cause more serious problems if there isn’t some fiscal restraint. What is your take on the current economy?
Daniel Lacalle 16:36
Well, we’re living the big disparity between the headline economy and what people live on a day to day basis. And this is very typical now inflationary periods, the headline GDP looks certainly robust. Employment Outlook relatively stable, pretty good. All of those headline figures, aggregated figures look decent. However, because GDP is relatively easy to bloat with debt and public spending and employment as well with public work and immigration, what happens is that the the more disaggregated figures show a completely different picture. What is the picture that we see? Consumer confidence is extremely low. The businesses that are focused on activity in the in the country are actually struggling. Small and Medium Enterprises, families are suffering the pinch of inflation and higher taxes. So what I would say is that we live in a, in a, I always say a private sector recession that disguises a real recession with very elevated levels of government spending and a type of government spending that does not generate Any kind of GDP growth. We have seen how the level of public debt goes through the roof, the level of deficit spending continues to be very elevated, and that the the difficulties of families and small businesses to make ends meet and get to the end of a month are quite significant. So I would say the state of the economy is a, is a, is a private sector recession disguised in a no recession period.
Andrew Brill 18:29
So they’re still going to have to print money, because they lower the rate by a half a percent, but we have a lot of debt to service, yeah, so they’re going to still be printing money, and maybe the rate will be lower, but now they got to print more money to get more bonds on the market to service a trillion dollars a year. Yeah.
Daniel Lacalle 18:51
And this is the and what you just mentioned, that figure that you just mentioned, the the interest expense of the United States economy, is particularly staggering, because you have to remember that the United States is the world reserve currency, the US dollar, and that the US Treasury is supposed to be the lowest risk asset in the in the global economy. So the fact that the government is already spending in the budget more than a trillion dollars more than it’s going to surpass the expense and defense, which is already phenomenal. No, that is already showing you that the fallacy repeated over and over by King James that say that debt doesn’t matter as long as interest expenses are low. Well, you have low interest rates in Japan, and the government has to spend almost 25% of the budget on interest expenses. So that is a that is one of the warning signs now when people say that governments have unlimited ability to issue more debt and. To print money. There are a number of warning signs that are telling you they knew that all of that is false. Number one the interest expense figure that you just mentioned. Number two is inflation, obviously, and that is a big, a big problem for everybody. And number three is the loss of confidence in the US dollar and as the world reserve currency. So those three elements, those three things, should be something to pay attention to. So
Andrew Brill 20:27
you mentioned the loss of confidence in the dollar. Lowering interest rates is going to continue to make that happen now absolutely you mentioned that we could be in danger of the dollar not being the dominant currency, which would be a huge blow for the United States, wouldn’t it?
Daniel Lacalle 20:46
It would be devastating, devastating governments think, well, the deficit doesn’t matter, because we can always finance it with higher debt, and higher debt is always financed because there is a global demand for US dollars, and that has never gone to end. No, and saying that it’s never going to end is a very, very dangerous way of thinking, because it’s basically just like saying, you know, I’m driving 200 miles an hour down the road. I have not killed myself. Let’s accelerate. No, the loss of the confidence in a currency happens very fast. The United Kingdom probably did not imagine that it would lose its world reserve status. The British Pound, so many global currencies have lost world reserve status. No, those things happen. And there are warning signs that indicate that governments and central banks should not be as complacent as to say there is no risk and it’s never going to happen. As I said, the first one is inflation. No, you think that you can print all the money that you want and is never going to generate inflation. Well, you’ve had 20% accumulated inflation in the United States in the last four years, in the in a period of growth, and in a period in which the United States became the largest oil producer in the world, over Saudi Arabia and Russia. No so that should be disinflationary. And the technology giants are North American, which is also disinflationary. Technology is disinflationary. So to think that the United States has had a 20% accumulated inflation in these four years, which means that the essential goods and services have risen by 30% that shelter has risen by 40 that insurance has risen also by 35% all these figures are phenomenal in terms of the indication of what type of destruction of the purchase and power of the currency we have lived. And that is the beginning of loss of purchasing power, the beginning of loss of confidence. And it’s a loss of confidence when you see that the national debt has risen to 35 trillion and the holding of central banks and foreign investors of treasuries as reserves has actually virtually unchanged from where it was five years ago. So people are not buying people abroad or outside of the United States are not buying more treasuries. You know, a lot of people, a lot of these Neo Keynesians say that deficit spending and public debt are reserves for the private sector? That is completely untrue, as this actually shows no is that it stops me in a reserve when you see that both the purchasing power of the currency and the and the level of debt of the of the of the government simply become unsustainable. How
Andrew Brill 24:03
do we get out of this cycle? Obviously, the one way to come up with a, I want to say, a more true GDP, is for the government to stop spending so much money. Someone told me that the app, the tax dollar that the country brings in is already spoken for because of mandatory spending. So anything that government spends after this is debt spending. So how do we get out of this vicious cycle? It’s either collect more taxes and we’re already collecting record taxes, or just spend less money. You
Daniel Lacalle 24:38
have to spend less money, and you have to have more growth driven policies. The problem is when you when the government spends more and at the same time, puts brakes on the private sector and puts and increases taxes, puts more burdens on businesses, puts more. Burdens on Business, Growth, on investment you need to have there. You’re absolutely right. Mandatory spending is the problem in the United States, and you cannot tax it to bring down the deficit, let alone to to completely reduce the deficit to zero and start bringing down debt. So you need pro growth policies. You need You need both things. On one hand, you need a you need, clearly, to conduct a very thorough analysis of government spending and start cutting. Because the problem is that the numbers are so huge that people say, ah, and what are you going to cut? Well, there’s from there’s a tremendous 1000s, hundreds of 1000s of items in which you could cut $10,000 here, $20,000 there, $100,000 here. You know, little by little, the trick of very elevated government spending is to say, ah, we cannot cut in Medicare. We cannot cut in defense, we cannot cut in pensions. Therefore, you cannot cut in anything. Hold on a second. Let’s look at the numbers. And let’s look at them the way that you look at them in your business, the way that I look at them in my business, little by little, and see what are the small items that we can cut, and that’s part of the of the solution. But it’s not the only solution. The other solution is to have pro growth policies that drive the United States to grow, not the GDP bloated by government spending and debt, but the private sector GDP that we were mentioning, mentioning before, drive it to 345, percent growth. Which it can? I mean, it’s got the most phenomenal companies, the most innovative companies in the world, the the most creative entrepreneurs. It’s got the small businesses that are doing the everything that they can just let the private economy breathe. It’s not worth to even discuss that the economy is doing badly when you increase GDP by 1.5 trillion and you increase debt by two and a half trillion. It’s ridiculous, no, so it’s it’s basically pro growth policies that are focused 100% on making it easier for small family, small businesses and families to thrive, and for large companies to invest more in the United States, for foreigners to invest More in the United States, and so that that and that will come if they put the main objective on the private sector, instead of thinking that they can solve it through entitlement spending, via higher debt. I
Andrew Brill 27:56
want to ask you about commodities. They’ve been kind of suppressed for so long, and I know copper is starting to come back. Where are commodities at this point,
Daniel Lacalle 28:11
commodities have been weak, because in a so called growth economy, the manufacturing sector is truly depressed, truly depressed in strong contraction, also because rate hikes are not good for commodities. It’s more expensive to law, to buy commodities is more expensive to store them. It’s more expensive to finance margin calls. It’s more expensive to finance loan positions. Therefore, commodities may bounce with a 50 basis point rate cut if you get more money going to relatively scarce assets. The problem then is that we may get a reversal, which is what you said before. Remember what we’re mentioning, you may get a reversal of the disinflation process. What the Fed does not because the Fed and European Central Bank, or the Bank of Japan or the Bank of England, they don’t pay attention to monetary aggregates. Do you think that inflation is declining because of some magic thing, supply chain disruptions and the Ukraine war, etc. Instead of thinking, you know, money supply up and money velocity up is inflation up and money supply down, money velocity down is inflation down. So if the rate cut starts to feed through two more government spending and more money going to commodities to protect the money from the purchasing power loss, then. And you may get a reversal in the disinflation process. I think that it’s probable that we can see some sort of sort of recovery in commodities from three factors, no number one, China was in a money velocity down, money supply down, period, and is now mentioning a very large stimulus package, which means money velocity up, money supply up. Okay, and the and this is the largest importer of commodities in the world. Number two is the rate cuts, not that it’s cheaper to finance margin calls and long positions. And number three is the fact that throughout this period, a lot of the investments in in the commodity spectrum have been cut to the bone the level of disinvestment and the level of under investment, sorry, in the commodity spectrum is staggering, no. So those things tend to start sometimes create a bounce, and that could lead to an impact on the on on a headline inflation that is very dependent, obviously, on energy prices.
Andrew Brill 31:18
Anthony Scaramucci, welcome former FOMC member Dennis Lockhart to speak up. They discussed the normalization of rates, which sparked the debate as to what exactly is normal and are we finding a healthy middle ground? Mr. Lockhart didn’t feel the Fed panicked when issuing the 50 point cut, but did hint that if the debt spending continues, there will be a reckoning. He also explains where he’s putting his money these days for long term gains.
Anthony Scaramucci 31:49
Is it fair to say the I want to make a statement? You tell me if I’m being fair or if I’ve got the right analysis, we are normalizing interest rates. It took us about 15 years to normalize them, but we are normalized. We’re off of zero. We will be off of zero when the Fed is done cutting rates, unless you tell me differently, and the process of quantitative tightening will bring down the Fed’s balance sheet to something that looks more manageable and less crisis oriented, is,
Dennis Lockhart 32:23
I think that both statements are correct, yes, okay,
Anthony Scaramucci 32:27
okay, yeah, so that, so that’s good for the economy, then, right, sir, is that? Don’t you think?
Dennis Lockhart 32:31
Yeah, I think so, you know, what is a normal level of interest rates? I suppose we could debate, depends a little bit on how old you are. You know, my first mortgage was seven and a half percent, and that was, I believe, in 1978 so what was abnormal was zero. That clearly was abnormal, and so
Anthony Scaramucci 32:55
was so was 16 back in 1980 That’s right, but you
Dennis Lockhart 33:01
could probably argue that five and a quarter for the or five and a quarter to five and a half, the most recent setting for last week, was not abnormal. I mean, it could be called normal. But each economy evolves, and the economy changes in its character, and we are in a process of defining what is normal to the state of the economy going forward with all of the different influences on that economy that exist in 2024 and 2025 not what it was in the past.
Anthony Scaramucci 33:41
This seems like healthy it’s an equipoise between where a reasonable cost of capital is, but also where a reasonable interest rate is. For the nation’s savers, you know, it’s hard for savers when the rates are at zero, it may force them to take more risk than they want to, but the rates where they are now, it seems like we’re back at a good equipoise. Is that a fair thing?
Dennis Lockhart 34:04
That’s a good way to put it. I’m going to have to to include equipoise in my vocabulary going forward, but it’s a good term for your finding, finding a healthy middle ground, a healthy balance, in the setting of the policy rate. And of course, the policy rate then kind of dictates the floor from which the yield curve should rise, and that should create a an interest rate environment that balances the needs of the economy and is the best for the overall Main Street real economy, where most people live.
Anthony Scaramucci 34:46
I have a big mouth, and I talked a lot of people on Wall Street. And so let me give you two schools ready? There’s one school. Oh, that’s fantastic. A 50 basis point cut. They’re getting ahead of the curve. It’s going to stave off of recession, and this is a great thing for the economy, and the Fed’s going to look great in the next six to 12 months. There’s another more histrionic view that is terrible. What a bad sign the Fed is actually way behind the curve, and they think we’re going into a recession, otherwise, there’s no way they would cut 50 basis points. Who? Which one of those views is more accurate?
Dennis Lockhart 35:27
The former, the first one, first one I, I don’t know. I don’t see the signs of going into a recession. We always worry about a recession, and particularly the street always worries about a recession. We’ve been talking about the imminent recession for the last three years. It has not developed. So I just, I’m not sure in the current data and the current evidence about the economy, how you could draw a conclusion that it’s coming soon, not to say you won’t have a recession sooner or later, almost inevitably, you will, but not, I don’t see it now, so I don’t interpret this 50 basis point move as having any hint of panic or any hint of, let’s just say, really intense makeup or catch up. I view it as I think Austin Goolsby of the Chicago fed called a demarcation from a phase of monetary policy in which they were fighting inflation to one in which they’re now more in a mode of trying to preserve a good thing and trying to, You know, not lose ground, particularly in the employment markets, or at least not significant ground. So I view it as a an optimistic 50 basis points, not a panicky 50 basis points. We
Anthony Scaramucci 37:15
have enormous fiscal spending, if you look at the US spending, you know, we’re creating one to $2 trillion of deficit spending a year. Monumental in dangerous, in my opinion. But maybe, I don’t know, maybe it’s okay. Maybe Dick Cheney’s right, deficits don’t matter, sir, I I don’t know. I’m going to ask you that question. We’re sitting here looking at a federal budget that could be 7 trillion. It’s going to take in four and a half to 6 trillion, but it’s going to be another at least one to possibly $2 trillion of deficit spending. We have an election coming. Neither presidential candidate will even discuss or touch this. Are we super cycling into a debt crisis? And if we’re not, tell us why we’re not. And, you know, tell me maybe I’m wrong. Maybe deficits don’t matter. They I feel like they do, and I feel like they hurt middle and lower income people, because there is some level of monetization that takes place when you have this high level of inflation that we’ve printed recently that just hurts the disposable income of poor and middle income people. So, so what do I have wrong?
Dennis Lockhart 38:26
Not much, if anything. Of course, deficits matter. I’ll start with which would what Powell has been saying repeatedly and and interestingly, Powell’s background very strong in fiscal matters. That’s how he got the attention of of the Republican Party in the first place. I was after he left Carlisle, he joined the Bipartisan Policy Center, and the made a couple presentations on the Hill about what was then viewed as the unsustainability of the deficit spending. Now it has grown dramatically, but Jay Powell says it’s unsustainable. That doesn’t mean that the reckoning is tomorrow, but it’s unsustainable. I have said publicly, although when I was at the Fed, we don’t talk about it much, that I viewed it as a serious problem, and that I expected there would be a reckoning. But I cannot describe for you exactly how that reckoning would take place. I don’t think it’s going to be or look like an Argentine debt crisis. It might more look like Japan with its very high debt to GDP ratio, getting into a stagnant period that lasts. A decade, you know, you could make an argument that Japan’s reckoning was on and off again, deflation, no growth. That doesn’t seem to be the problem in the United States, we have some somewhat similar demographic issues, although we can address them by immigration. Japan can’t so easily do so. So I can’t tell you if the reckoning will be next year or 20 years from now, the fact that the dollar is the world’s reserve currency, and there really isn’t any alternative to the dollar gives us some flexibility that what I would call a normal country doesn’t face, and that may
Anthony Scaramucci 40:55
our debts denominated in our home currency.
Dennis Lockhart 40:58
So that may forestall, that could forestall a serious correction or a serious adjustment requirement because of the deficit spending and the level of the debt, what I think is very concerning, which has gotten attention in the last year or so, is the growth of the interest component of the federal budget, and therefore the federal deficit, which is now higher, I believe, than the defense budget, that’s correct. And the defense budget is the largest, so called discretionary component of the budget. So you know, that’s very worrisome, at least the first order effects of paying interest. If you’re paying interest to yourself, it’s a little more circular. United States is paying interest partly to itself and partly to foreign investors,
Anthony Scaramucci 42:00
no no question, but I, but I mean, it’s going to last longer than we had expected. I think, you know, I always thought we had a little bit of a problem, and then we keep printing or keep making money or monetizing our debt. It seems like we can keep going. Before I turn it over to the audience,
Dennis Lockhart 42:16
what? Let me just say, Anthony, one thing. Yeah, please. Quantitative tightening is demonetizing, yeah,
Anthony Scaramucci 42:26
okay, so let’s explain that to people, because you have a lot of young listeners. So first,
Dennis Lockhart 42:30
monetization, monetization of the debt is a sin in central banking circles, right? So what happened was monetization by another name. We called it quantitative easing. It was meant to provide stimulus, but it did that by buying treasuries in a period of deficit finance, right? So you know, to be frank, it looked looks like a duck and quacks like a duck. It’s monetization, even if it was not intentionally monetization, right? Understand, so when you start to shrink the balance sheet and and run down the number of treasury treasuries you’re buying, the amount of treasures you’re buying, the central bank is gradually getting out of the monetization business, and therefore turning it over to private markets to finance the deficit. And I think it’s important to make that point.
Anthony Scaramucci 43:32
So when you think about a portfolio, because you’re a macro person, are you bullish on stocks? Are you bullish on bonds? Are you bullish on neither? Or what do you recommend to people? How should they think about their investing? Depends
Dennis Lockhart 43:44
on time frame and depends on the need for for income. It depends a lot on, you know, how you’re thinking about your portfolio, whether you’re trading in a lot or, I’ll tell you what I’m doing. This is very open kimono. I have a nice portfolio all in equities. I don’t think I’m going to have to invade the corpus of that money. So it’s basically there for my grandchildren and my my daughter and my grandchild, I am in a process of transitioning from individual stocks to ETFs, and the ETFs are low cost, in other Words, six basis points or less, and I’m hoping that as I make or conclude this transition, I’ll be almost 100% invested in equities for the long term, and I won’t touch it, and then someday I’ll die and my my. Inheritors will have a nice portfolio. I believe in the argument over the longer term, it’s better to be invested in equities in the US economy than debt, and I don’t need the income from this portfolio. So I’m prepared to be heavily in equities, but I am, I am moving toward the ETF products. Randy
Andrew Brill 45:26
Maben of our partner, Ria windrock, joined wealthion to talk about how to protect yourself when the unexpected happens. She explains how getting ahead of financial planning is very beneficial. How important is planning? I mean, we, you know, go through life, and I know me, I never had a will until recently, and I have four kids that are now I don’t have to worry about because they’re all kind of on their own. But how important is planning for the future? Planning
Brandy Maben 45:58
is crucial. And if your family is going through any sort of heartache or trauma, all of the planning you put into place at the beginning of an onboarding process with the financial advisor or your firm can really help a lot of headaches in the end, as well as save you a lot of money if things aren’t planned out correctly.
Andrew Brill 46:20
Can you share with us what an advisor does when you encounter a life event, say a death in the family or something like that?
Brandy Maben 46:28
Yeah, these are obviously not our most fun topics we have to experience with our clients. So today is a little bit more of a gloomy conversation with you. But after going through covid and seeing all the deaths through that and divorce rates going up with the aftermath of what happened. It’s just such a relevant topic in our industry. So we’ve basically made roadmaps ready for our clients in these circumstances. We made sure they’re ready for complex financial tasks, and obviously we provide an emotional and practical support system and team behind our clients that are going through this. What
Andrew Brill 47:09
are the financial considerations we have to look out for? Look at when something like this happens. There’s a lot,
Brandy Maben 47:16
but four main ones to put at the top of the list, bank accounts. A lot of people forget that individuals, through death, have their own personal accounts, and to make sure those aren’t subject to any credit or risk threats, fraudulent activity, also managing joint accounts and assets, such as brokerage accounts, taxable assets that are held away in investments, and then, sadly, paying off those immediate debts and expenses. Those are never fun things to take care of as as family members, but hopefully there’s life insurance and those bank accounts have enough liquidity in them to cover those. And then, of course, the funeral and burial costs, if those weren’t taken care of by the deceased prior to these conversations, we’re hoping there are enough funds and means to cover those in this in these conversations, initially,
Andrew Brill 48:11
no brandy. Most of our viewers are into markets and making money and all this stuff. But what is the importance explain to us the importance of estate planning and the documents and forms that we should have when we’re obviously trying to make money grow our wealth, right? Isn’t that? What everybody’s trying to do here is grow our wealth. We all worry about how to do that, but we never take a step back and say, Okay, now I have this wealth. How do I plan on this wealth in my estate?
Brandy Maben 48:44
Of course, yeah, the growth is the fun part, right? Putting our money in account, talking about all the investments we can provide. However, if you don’t do these steps, those can be cut. All the growth can be cut to the government or go through probate tax and make sure that none of your family is left with all of that hard earned money and investment strategies you put forward. So we discuss Wills, trust, power of attorney, durable power of attorney, of your finances, ensuring beneficiaries on not only life insurance is up to date, but your retirement accounts are all updated, and making sure that there’s strategies in the end that help you and your family best tactfully attack these situations. So an example is, if you have a terminally ill partner, say you both have your individual trust, so you and your wife have separate trusts, and unfortunately, you come down with a terminal ill cancer, your wife can then put all her assets in your trust and get up as a step up in basis when you pass. So those strategies we try to plan on. Not only at the very beginning of our planning process, but when the time comes, we’re it’s always top of mind to protect that growth and wealth. Thank you
Andrew Brill 50:09
for watching this week’s recap. If you need help planning your financial future, head over to wealthion.com/free for a free no obligation financial review, and please follow us on social media. All the links are right below in the description. If you haven’t done so already, please make sure to like and subscribe to our channel, and don’t forget to turn on notifications to the channel so you never miss a video. Thanks again for watching if you like this content and are looking for more ways to keep growing your investments, watch this video next until next time, stay informed, be empowered and may your investments flourish. You.
