In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill shares the most compelling moments from our expert guests this week. Marc Faber thinks the market is in a bubble and due for a sizable correction, while Jordi Visser delves into Fed policy and a slowly defaulting US. Jonathan Wellum provides insights into what he perceives is the real inflation picture, plus, Dylan Smith discusses his outlook for the next Fed meeting in September.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com
This episode is sponsored by BetterHelp. Give online therapy a try at https://www.betterhelp.com/Wealthion and get on your way to being your best self
Andrew Brill 0:00
Hello and welcome to wealthion’s weekly market recap. I’m your host. Andrew brill. Market continues to march to new highs, and Nvidia posted good earnings and took a dip. Let’s hear what our experts had to say this week.
Dr doom, Mark Faber joined wealthion This week, and thinks the market is in a bubble and due for a sizable correction. He was also skeptical of the Fed’s inflation numbers, speculating on whether or not it’s correct. Mark touched on the global economy and the demand for commodities and the upcoming election and consequences for the economy with each.
James Connor 0:41
why don’t we dive into that in a little more detail? And this is why I always enjoy speaking to you, because of your contrarian approach. And as you just alluded to, that there is so much money in the US and in the US financial markets right now, and I want to get your opinion on that. And before we discuss the financial markets, I first want to discuss the US economy, and we saw a very strong q2 GDP number came out at 2.8% much higher than was was expected, much higher than q1 which was only 1.6% but what’s your take on this q2 numbers the US economy heating up again? Or is it as strong as we think it is, or maybe weaker was this number a fake number.
Marc Faber 1:23
I mean, what fascinates me about the investment industry and the financial markets is that financial people in general, the economist who work for Wall Street firms and so forth, with very few exceptions, they rely on statistics that are published by the government. Now I have sources that would indicate that inflation, and this is not just one source and one kind of mysterious economist in the background, but numerous sources indicate that inflation over the last 3040, years has been much higher than what the government is saying it has been. And so if you take nominal GDP figures, and you say the GDP grew at 3% or 2.5% and inflation was three or 4% instead of what the government is calculating at one and a half or 2% then suddenly, in real terms, GDP is down. And I can tell you that the majority of Americans say the median household in America is struggling. We have this from all sorts of companies that sell retail goods to people and services that consumers are not as strong as they used to be. They’re struggling even to pay their grocery bills. Over 70% of US households depend on paycheck to paycheck to check to pay their bills. If someone tells me the economy is strong, then he believes in nonsense. The economy is not strong. And if you measure the GDP, is a meaningless figure. What matters is the standard of living of people. Are they better off than 10 years ago, or are they worse off? And I can tell you, in the whole of Europe and the United States, the typical household is not as well and earns less than his parents used to earn in real terms, inflation adjusted.
James Connor 3:44
you mentioned earlier that you’re expecting a big pullback in the US financial markets. I think you said 50% what? What would be the catalyst to take it down?
Marc Faber 3:56
If I knew the catalyst, you would know it as well, and everybody else would know it. We never know precisely in advance what the catalyst could be, but I can tell you, if I look at all the potential wars that we have, I look at, say, nobody in the world, and even experts in real estate, expected commercial buildings to collapse in the US by 50% nobody expected that. And it happened. And I know many people who are involved in real estate, the billionaires they own properties like incredible quantities, but it happened, and you never know why. And I’m not saying the US market will go down by 50% in nominal terms, but I think it will go down at least by 50. Percent in real terms, inflation adjusted, that I am quite sure about minimum. When the Japanese market was 50% of the world’s stock market capitalization in 89 I placed many bets, including in put options, that the market in Japan would drop by 50% I was I was much too conservative. It dropped by 70%.
James Connor 5:30
so you talked about the election, and what might happen if Paris becomes elected or Trump becomes elected. And so I want to do a deeper dive here. And in my view, regardless of who wins, it’s going to be bad because they Harris wants to spend more money. She’s just going to continue on with what Biden’s done, engage in massive fiscal spending like Trump wants to cut taxes, so therefore you’re not going to have revenues coming in, and he’s hoping that’s going to stimulate the economy. But whatever strategy you take, you’re still going to have an excessive amount of debt, and you’re not going to be servicing the debt. Why do you think if Harris becomes president, why do you think that would be worse for the economy?
Marc Faber 6:14
Yes, we have to wait and see. But from what I read so far, and I mean the the idea to introduce price controls in the year 2024 is absurd. It is absurd because it’s been tried so many times, and each time the results have been disastrous. You can go on YouTube and just click in the search engine. Milton Friedman, there are. There is an interview of three minutes. Every investor should just listen to this Three Minutes interview. He won’t waste his time for three minutes, and he explains exactly why it doesn’t work. But Kamala Harris, she is clueless. Clueless. That is the danger of her being president. But I always say, whatever you have in the world today in terms of quality, whether it’s just in Trudeau or in New Zealand, the kicked Ralph at this Jacinta before and in Germany, baerbock, Scholz habeck, are all completely ignorant and at the same time arrogant people. That is the danger, their arrogance, their interventionist intentions. The market functions based the capitalistic system functions based when it is left alone, and not when politicians who never worked the day in their lives, they never worked in a business, have no clue what hardship the small businessman goes through and has to fight against the Government for everything because the government officials, they don’t care whether the small businessman survives or not, and the politicians, they don’t care about the small businessman. They care about the rich donors. That is the fact at the Wall Street economies, they will never tell you this, because they are all afraid to lose their jobs. That is the problem. People have become enslaved by the system. They all need their jobs. They are afraid to lose it. They are not free agents anymore, and half of them are paid by the Federal Reserve or bribed by some other organization, so they don’t tell you the truth.
James Connor 9:06
We talked a lot about the US economy, and I think we both agree, the US economy is definitely slowing down. I want to ask you about the global economy, and in our previous discussions, we talked about what’s happening in China. And when I look at some of these commodities, like oil, for example, it’s stuck in this very tight range, 70 to $80 a barrel. Copper was at five bucks. It’s now closer to $4 both of these commodities are considered barometers of the economy, and because of their falling performance, do you think the global economy is also getting weaker.
Marc Faber 9:42
I have to say you have very good questions, because, again, it’s not simple to answer. If you look at the demand side of the real economy, it is poor. So based on the real economy. Army in the world which hasn’t recovered back to the 2018 level. I have looked just now because I’m writing a report that I have to write tonight, unfortunately. But what I want to say is, if you look at the statistics of Asian economies, none of them has recovered to the 2018 2019 level. But so the demand side is weak. Also China is weak. The demand in China and this 50% of demand for commodities in the world, approximately, but the financial markets are in the sky. So what you have a negative impact from the real economy on commodity prices, but a positive impact from the money printing that is still going on, no matter what the Fed tells you, you could have interest rates at 20% and money, money wouldn’t be tight. The absolute level of interest rate does tell you nothing about whether money is tight or not. In Turkey, they had 100% interest rates and money was loose. In Argentina, the same so we have to be very careful. We have two conflicting forces. The global demand is pushing commodity prices to its downside, but the money printing and the forthcoming money printing, I tell you, the Fed has no other option but to print. They must. They don’t want to destroy the asset markets so that will be supportive of some commodities. We have some commodities. They’re up strongly, covid, 37% plus this year.
Andrew Brill 11:50
Jordi Visser joined speak up with Anthony Scaramucci and spoke about the Fed taxes, Medicare, Medicaid and the health of the United States. Jordy also touched on devaluing the dollar and how the US is slowly defaulting.
Anthony Scaramucci 12:07
I want you to be the Chairman of the Federal Reserve for me, and it’s a private meeting. It’s just you and me. It’s not for public consumption, Mr. Chairman, did you guys screw up? Did you are you cutting rates too late? Did you wait to raise rates and now you waited too long to cut rates? Or are we okay?
Jordi Visser 12:28
You know what? I’m sure you’ve heard this answer before, but I do it with with everything in my life, which is, I’m not going to sit there and say that they’re making a mistake or they’re not making a mistake. I’m an investor. I’m playing by the rules. They’re going to cut rates, so that means that we’re in a different regime. And I’ll just take you through what the Fed has done since covid, and I use that as a marking point, because I I know we’re going to end up talking about AI. I know we’re going to end up talking about crypto. A lot of things changed in March of 2020, and the Fed came in, they cut rates to zero. That didn’t initially work, but then it came out that they would basically buy all credit. And at that point, you should have, at that point, gone in and bought the market. The Fed was saying they were going to put backstop, but during the entire time of 2020, people were still fighting this and believing we were going into a recession, there were more bears than bulls the entire time. In 2020 in 2021 they kept telling people that inflation was transitory, and that was, you know, follow what they’re doing and just don’t get involved in terms of guessing whether it’s right or wrong. In 2022 they came out and said they want the stock market to go down. They want unemployment rate to go higher, and we’re going to kill inflation. Don’t fight the Fed. SVB blows up in 23 they come in and they basically say they’re not going to allow banks, the whole banking system, to go under. And that was kind of a place where people should get involved in the markets. And then we had the Fed pivot in 2023 in in the end of 23 and that ended up being a time to get involved in the markets, and now they’re saying there’s a cut. And I think the way the markets are responding and what’s happening makes sense. I don’t think this is an all lights on for the US stock market. I do think a regime shift is going to lead to different things. So rather than talk about whether it’s the right thing or wrong thing, I think they’re giving you something to say that we are willing to admit that we’re out of Goldilocks. Goldilocks, for me, is defined as a point where we don’t know whether the next thing is going to be a rate hike or a rate cut, and there’s really no change in opinions to where now we are, and now they’re saying we’re going to cut rates if people want to bet on recession. I think that’s a mistake. But I think there’s areas of the markets and areas places where, in a world where the economy’s slowing and rates are being cut, like housing, like autos, where you’re going to start to see some investors feel more comfortable in those areas that have been hurt by rates defensives, I think those are going to start to outperform.
Anthony Scaramucci 14:53
Okay, so before we get into the crypto and the AI and some the traditional markets, we’re still. Our Fed meeting you and me. And you know, I’m worried, Mr. Chairman, perhaps you’re not worried, but I’m worried about the deficit. I sort of feel like we’re out of control. We’re doing one to $2 trillion a year. We’re, I mean, we’re spending money hand over fist. We we went from George Washington, George W Bush, 7,000,000,000,003 presidents, 28, trillion. And I don’t care if it’s Joe Biden, Vice President Harris, Donald Trump, it looks like it’s one to 2 trillion for the next couple of years. And so should I be worried? Or you’re the Fed chair. Put my mind at ease. We can just print money QE infinity, and there’s nothing to worry about.
Speaker 1 15:48
So rather than the same word, I do think this is the number one deciding factor of the next let’s say, 10 years, offset by the AI and crypto side. In fact, I think AI and crypto are needed because of this situation. So the debt’s been rising for a long time, like you said, and you can go back and look for federal outlays as a percentage of GDP, we’re at levels now. You know, above 20% only times we’ve been higher terms of overall expenditures, was back during World War Two and during covid. So we not only have expenditures now, but Medicare, Medicaid, I think their forecasts double over the next decade in terms of the expenditure side, you mentioned, the interest rate side, that is over a trillion dollars bigger than defense spending. This is not a problem that the US government is going to be able to to get out of so what does that mean for for stocks and for for the economy as a whole? Well, that probably means rates are going to stay higher than they otherwise should. So even though right now we’re talking about cutting rates, my belief is these expenditures and this fiscal dominance is going to lead to inflation staying sticky. And if inflation stays sticky, it’s going to be hard for companies to compete in this environment. A lot of the things I’ve written about are that people should expect more bankruptcies. They should expect delinquencies for the lower half of the income in the country which we’ve seen, and that makes it feel like a recession. And I think the way that will impact stocks, because as of right now, there’s been a lot of enthusiasm from Ai. It’s not going to feel like a good economy. Productivity and efficiency gains are not good. And I think with the government forcing rates to stay at higher levels than they otherwise would be, and with almost 50% of the economy now, either directly or indirectly from government spending, people just have to adjust what they can invest in, and I think a lot of the economy will not be able to benefit from that. Most of the companies or most of the areas that are going to benefit from the government spending are going to be the fact that we have a large obesity problem in the US. We have a large healthcare problem. We have a demographic issue which shows up in the Medicare and Medicaid. And so the money is going to be spent there, but it’s very, very hard to make money on the health care side, because, as we both know, if you have to pick two parts of the economy that have not improved since the iPhone came out, in terms of productivity and efficiency, it would be basically dealing anything with the government and going to a doctor or hospital. Those are the two areas, and that is almost 50% of GDP now, and it’s going to stay at those levels for a long time.
Anthony Scaramucci 18:22
Let me add a panelist. Okay, my guest speaker coming into the conversation is a crypto enthusiast, and so they believe that this sort of hyper debt cycle that we’re in is going to be long term destabilizing, and a result of which we’re going to choose things that are no longer controlled by central banks, so sort of like the central banking community and fiat currencies in general, there’s been drunk driving. So we need to take the keys away from the central bankers and give them to something that’s more decentralized. Do you believe that? Or you think that’s a bunch of malarkey to use a Joe Biden term, or do you think it’s some something in the middle?
Speaker 1 19:06
Well, I the re so I’ll start by saying I think it’s something in the middle. And I’ll try to use an analogy, because the one thing about crypto enthusiasts, and this is where I’m going to be spending most of my time, is I’ve always considered myself a decent storyteller by using facts, meaning trends, actual dollars. One thing you and I have both had experience with with hedge funds in our careers and on Wall Street is there’s data for everything. And so if you want to find a good investment, you’re looking for revenues that are growing year over year. You’re looking for earnings that are growing. Well, the crypto market at this point, has a lot of facts, finally behind it. And I think Stan Druckenmiller put it well back in October. This may have even been at a conference you were hosting. I have no idea, but he basically made the point that he’s not invested at least in 2023 in crypto. But he, frankly should be. And I. Think the reason he said that, and it was very interesting, is something that hit me back in 2020, in the directly in the eyes at some point when you’re a cynic in markets and you believe that, you know, everything is kind of like a Ponzi scheme, like the question is being asked at some point, if you’re talking about now, 16 years since the Bitcoin paper, and we’re near or at all time highs, we’ve had user growth that continues and will reach a billion users by the end of next year, going at a slower pace than we have the last two years in growth. At some point, something big is going on, and the analogy I was going to give is, rather than get into this is going to happen fast, and people are leaving the capitalist economy. That’s not going to happen. If you’ve read the quotes from Warren Buffett and the late Charlie Munger, that is the norm for older people. They believe this is a Ponzi scheme. They would never put money in it. The capitalist system has been based on the central bank and the government preventing us from going into a depression. And so crypto is gaining assets every year. Most of that growth, as you know, is actually coming from emerging markets. So when you look at us, you know what’s happening in the US. I think every part of the US, concentration in the globe, whether it’s dollars as a percentage of reserves, continues decline. Declines every year. It’s just above 50% we will probably break the 50% level next year or the year after. According to the IMF, you’ve had de dollarization that’s going on. MSCI World right now is 72% the United States of America companies, we’re not 72% of GDP. So that number is based on our dominance in technology. Well, AI is going to lead to a lot of decentralization, and that’s one of the benefits of crypto. But the other thing that fits into the crypto side is this debt problem. I just think, with the user growth happening in emerging markets, with emerging markets needing to have banking, needing to have defi, they’re skipping a lot of the things that we went through that the money will just continue to go slowly. And rather than think of this as a collapse or something that happens overnight, the US government is defaulting every day by debasing assets in the US relative to crypto. And so since 2020, the last four years, crypto is up, I think 120% using Bitcoin, the S, p5, 100 has produced 50% since the end of 2020. Bonds are down. Most other stocks are down. Around the globe, you’ve had no movement in MSCI World x the US since 2007 I think we’re just seeing an asset debasement that’s happening in slow motion
Anthony Scaramucci 22:36
The US dollar, though, true inflation, the US dollars down 25% in that period of time.
Speaker 1 22:42
Yeah, and that’s I think people that are owning this stuff forget are getting they’re getting hurt, but it’s better for it to happen slowly over time. And this is Michael saylor’s argument, which I happen to agree with completely.
Andrew Brill 22:55
This show is sponsored by better help in these volatile economic times, there may be a lot more on your mind than just what to have for dinner. I’m sure looking at social media and seeing everyone with giant smiles pretending that they don’t have a care in the world doesn’t really help either. Well, I have a secret for you. They worry about the same things you do. As adults, we take on a lot more of the everyday burden of things and get away from the curiosity that as kids, we use to explore and learn. It’s what made us who we are today. But some of us have lost that curiosity and the desire to forge ahead. I know I did at one point. It’s why I turned to therapy to get back on the right track and turn back down the right road to happiness and success. 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 and get matched to a licensed therapist anytime. Rediscover your curiosity with better help, visit betterhelp.com/wealthion. Today to get 10% off your first month. That’s better help, H, E, l, P.com/wealthion,
Jonathan Wellum of our partner, Ria rocklinc, joined wealthion and spoke about the inflation drivers were facing. He analyzed the 10 year bond yield and long term markets, along with the Fed’s next move being from Canada. Jonathan also touched on the Canadian economy and politics and the unemployment rate north of the border compared to the United States.
James Connor 24:32
And so you bring up a very good point there, because there’s this ongoing debate whether or not inflation has been subdued. What are your thoughts on that? Do you think the Fed is making a policy error by cutting in September,
Jonathan Wellum 24:44
when we look at the inflation numbers, I mean, you look at the government numbers, you can look at other individuals who are probably a little bit more accurate in terms of adjusting, not making the adjustments that the Fed does. You’ve got shadow statistics and so forth. And. Other individuals that I think point to inflation actually being quite a bit higher than the Fed numbers and the numbers that they look on. I mean, you’ve got guests that have talked about the head onyx and how they make these adjustments. There’s a lot of politics, there’s a lot of interesting adjustments that go into the inflation numbers. The reality is, if you go to the store and you’re buying food, it’s up a lot more than what they say, if you’re buying insurance, it’s up a lot more than what they say, my some of my insurance costs on a couple of my cars, which I have no claims, no No speeding tickets, but because of thefts of certain cars and trucks, are up almost 100% if you’re looking at energy costs, certainly in Canada, but also in the United States, energy costs are a lot higher. We’re up higher because of taxes and carbon taxes that our government’s put on. And so all of the essentials. And of course, interest rates have gone up. And so housing costs have gone up. Rental costs have gone up substantially also. So when you look at that, I would suggest that inflation is running quite a bit higher. And so I’m cynical of the government numbers. And so whether they should be cutting rates or not, I think is a good question. I think because of the debt out there and the inability to fund all of this, and the pressure on the consumer, which we’re seeing, and a lot of the you know, the basic discretionary businesses and retail businesses and restaurants and so forth, they think, you know, probably cutting rates will be is a good idea from the Fed’s perspective. Otherwise we could see a lot more pain, and they’re not prepared to really clean up the mess. So I think you know, from their perspective, they’re going to, they’re going to drop rates from our from our perspective, I’d rather the rate stayed higher for a little longer and we actually made proper adjustments to our financial balance sheets and our spending habits, but I’m not sure that’s going to happen anytime soon.
James Connor 26:44
So the next Fed meeting is September the 18th, and there’s this ongoing debate right now whether or not it’s going to be 25 points or 50. What do you think?
Jonathan Wellum 26:54
Well, again, we’re not experts on guessing what the Fed’s going to do, but I would, I would think it’s probably 25 I don’t really think that the evidence out there to Job 50 is there, and so I think that they’re going to do it, as Powell suggested, carefully and slowly. So I don’t think he’ll do a 50. But I mean, it’s not out of the question. If they mean, you could argue, some people will argue that they might do the 50, and then they’ll back off until after the election. They don’t want to get involved in any more cuts before the election. I’m not as I don’t see the Fed as being as pure as that. I think that. I think they’ll, they’ll, they’ll do what they think is necessary, and they’ll cut it back. And whether that intervenes with politics or not. So I don’t think that that matters to them, really.
James Connor 27:37
the yield on the 10 year, it’s dropping like a rockets. It’s gone from 4.6% in June down to 3.8% now how do we play this? How should investors allocate capital toward this falling interest rate environment?
Jonathan Wellum 27:52
Yeah, the way we’re looking at it. And again, the interest rate, I think, is falling simply because we are seeing a softer economy, and the expectations will be that rates are going to come down on the short end, and the whole curve will come down. We saw the adjustment to the employment numbers in the US, which was staggeringly high. Number is unbelievable. So, you know, there’s a lot more softness going on than has been advertised in a lot of the Government published numbers. And so I think the market is looking at that and saying, yeah, the longer term, you know, the longer term rates have to come down. Way we’re looking at that is not as much playing the bond market. We do have, you know, about 30% of our assets in bonds. We don’t tend to sort of play on the yield curve. And guess this, that and the other thing, we tend to lock in returns and make it very you know, keep it simple. For a lot of our clients, we make our money on the equity side. So what we’re looking at are companies that would have gotten hit hard by the rapid rise in rates now, their rates are coming down. Funding costs are coming down. Capital costs. Cost of capital is coming down. And so some of the infrastructure companies and some of the companies that have long term liabilities that they’ll be able to continue to reprice now at lower rates, and the cost of capital is coming down. That’s where we’re putting a little bit more money and adding to some of our positions. Where we find we’ve got great companies. We like the companies, they’re doing well, there’s growing, but they’ve been hit in the market because interest rates have come up a lot, and so we think that could reverse. So for example, we own a number of the Brookfield companies, and we think some of those companies are actually quite cheap, Brookfield renewable, Brookfield infrastructure, not to mention Brookfield Corp itself. But some of the ones that are paying the high dividends, they’ve come down a lot from their highs, and those could see some nice increases in stock price as they continue to grow. The underlying businesses organically anyway, and I think dividend yields will continue. Dividend yields and dividend pays will continue to rise.
James Connor 29:47
Okay, so we talked about the US. We talked about Panama. Now I want to ask you about Canada. We both reside in the city of Toronto, so I want to get your views on the Canadian economy, and I’m going to throw out a few quick facts for our viewers. So. That Canada’s GDP per capita has been in decline for five years now, while at the same time, the US has been growing relatively strong, the Canadian labor productivity has been in decline for nine years, which also equals the same time the Trudeau Government has been in power. What are your views on the Canadian economy, and where do you see it going here in the coming year?
Jonathan Wellum 30:23
Yeah, these statistics are really, really distressing. They’re very concerning, and they’re, as we’ve talked about before, completely tied to policies, political policies, economic policies, being driven by governments. This is not because we have a bad private sector or an inefficient private sector, or we don’t have incredible individuals in a labor force that can get the job done and grow the economy in all sectors, but we have a government that’s really put a stranglehold on certain industries in particular and in fact, I would argue, probably all industries, because we’ve got over taxation. We’ve got our energy costs skyrocketing because of carbon taxes. We’ve got regulation and oversight into all of the industries, which is way beyond what it should be. So it slows things down, and in particular our resource sector. I mean, everybody knows Canada is a incredibly rich and powerful company when it comes to resources, and that’s right across the board. I mean, we’re very much endowed with tremendous resources, and that’s the sector that our federal government really does not like, and it’s making it very difficult to operate in that sector, and that’s a sector that requires tremendous amount of capital and long term thinking. And so if you’ve got a government that’s really making it difficult, why are people going to commit money not knowing what’s going to happen the next couple of years when there’s that uncertainty? So, so Canada get, Canada gets inordinately hammered by bad policies, because so much of our economy is a resource sector, which requires long term capital to get invested. So our oil sector a gold sector, our, you know, fertilizer areas, and, you know, potash, nitrogen, I mean Nickel, Copper. I mean this goes on and on and on in terms of resources, agriculture and so forth. Man, I came across an interesting number. There was just an article published in the Ottawa Citizen talking about the expansion of the federal government in Canada. And we’ve also seen this in the US. So even if there’s us, there’s obviously us, listeners here on this, on this podcast. But the reality is, under Biden Harris, we’ve also seen a lot of the employment numbers down there being government employment, government additions. But in Canada, since Trudeau took over, in 2015 the total employment in Canada is up by 15% but the total employment of the federal government alone is up by 80% so you know, you look at those numbers, and you can break it down by all the different industry sectors that the federal government is exposed to, and what you find, basically, is that the federal bureaucracy is growing at four or five times the rate of the private sector. And so of course you can’t grow your economy. Of course, you’re not going to grow your GDP at the rate necessary. On top of that, the last factor I would mention is just massive, massive immigration into Canada the last couple of years. So you’ve added 3% plus to our base every year. So over a million, million and a quarter people on a base of 40 million people that that is, you know, you just can’t absorb that. And so you’ve got people coming in and various level of skills. Some are highly skilled. Some have virtually no skills. And so that’s a real tax on the infrastructure of the country. And so there’s no way you’re going to grow GDP per capita with that kind of expansion in immigration. So those are the issues facing Canada is basically a socialism, if you will, a country becoming increasingly socialistic and less capitalistic. I certainly would warn the folks in the US Be very careful in the upcoming election how you vote, because you also are faced with two stark contrasts, and, and, and I would suggest one is going to take in one direction and one direction and one in the other direction. I think you can figure out without me telling you exactly what’s going to happen there. So be very careful. You can’t expand government indefinitely without crushing the private sector and the one that’s where the wealth is created.
James Connor 34:12
just want to clarify one point you said. I just want to make sure I heard you correctly. But total employment Since 2015 is up 15% in Canada, whereas within the federal government, it’s up 80%
Jonathan Wellum 34:26
that’s right, that’s correct. That’s according to Matthew Lau in the latest article the Ottawa Citizen and he was looking at the government numbers.
James Connor 34:34
Jonathan, you mentioned the unemployment rate in Canada, it has been ticking higher. It’s ticking higher in the US too. It’s gone from 4.1 up to 4.3% last month. But in Canada, it’s at 6.4% and that’s up from 5.5% a year ago. What are your thoughts on this unemployment number? Does it keep climbing?
Jonathan Wellum 34:53
I think it’s indicative of two things. Number one, which is not which is not rocket science, that’s just a slowing economy. And so. We’ve got people just trying to pare back on jobs in order to maintain profitability in the in the private sector. So that’s, that’s one of the things that I think will continue if we continue under, under this current situation with over taxation and and the government sort of, you know, strength, putting a strength Hold on a lot of the industries. So that’s, that’s a risk that we run, increasing unemployment. The other area, it would be just the massive amount of immigration we’ve had come into our country, and so just assimilating all these people and putting them to work is very difficult. That’s created, in some cases, Canadians who have been born here, and they’re having a tougher time getting some of the jobs. Also, that’s also put some of the unemployment. The unemployment levels up. So if you talk to people, they’re trying to get jobs in the service sector and the hospitality sector. It’s very difficult. In many cases. A lot of the new immigrants to Canada are grabbing quite a few of those jobs also. So again, it’s about assimilation. Can you can you incorporate that many people into your economy and put them to work that quickly? And the answer in economy like Canada, which is not growing very quickly and is really driven by a lot of growth in the public sector, no. And so I would suggest that that those numbers will continue to trend up, unless we unless we change course dramatically.
Andrew Brill 36:13
Dylan Smith of Rosenberg research joined us this week and pondered the question of how much of a rate cut should the Fed consider at their next meeting. He also touched on the planning, the timing of your portfolio and the future of the AI theme. So is the Fed late? I don’t think they’re. They’re not early, but are they late, or they you think they’re right on time?
Dylan Smith 36:36
They’re probably a little late, in our view. And the reason we say that is because it was fairly clear that the labor market was heading in this direction at least six months ago. And instead of taking a fairly anticipatory attitude to this, you know, trying to get it ahead of the curve and say, you know, we’re not there yet, but we can see the situation coming where inflation is settling down and and labor markets are going to start to ease. So what we’re going to do is take on some excess policy restrictiveness in the knowledge that lags along this. You know, we’re still tighter than than we were three years ago, four years ago, and so now is the time to start trimming. I think a couple of things have spooked them on that front. The first is, you know, they were late in the other direction on the inflation issue. And so, you know, the classic quote that central banks are always fighting us, you know, the previous battle probably does apply here. The other thing is that, you know, in December, I think it was late November, early December, Paul made a fairly double shift. We had a very dovish Beige Book, and Paul made some comments in that press conference that were more on the diverse direction and definitely wasn’t his intention. But markets went from two to six cuts priced in really early financial conditions eased significantly and almost did the cut for them, and that spooked them. And at the same time, there were some wobbles in the inflation, in the disinflation process, and that all meant that they basically got scared and said, We’re just looking at current data. We’re just looking at current data. You know, blinkers on for the future. We’ll get to that in Jackson Hole. So, you know, I think that’s made them a little late, and probably raised the risk that they that they end up tipping the economy into into something of a mild recession, versus being able to avoid it earlier on.
Andrew Brill 38:34
How much of a rate cut do you think is necessary? And then I’ll, I’ll follow that up by saying, I, you know, I did listen to your Rosenberg round up in there, there’s about eight cuts, as you said, built in. But wouldn’t that depend on the size of the cuts?
Dylan Smith 38:50
Yeah, so that’s, that’s eight standard, quote, unquote standard, 25 basis points, point cuts within the next year. So, you know, almost when I’m eating pace, not quite, how much is appropriate to cut? Well, I think you can get a lot of focus on what’s happening at the next meeting. Cut or not, or this is important for September, because the first cut signals that there’s more cuts to come. Generally, it means that we’re in the easing cycle, unless they do a huge amount of effort to talk their way out of that which we don’t see coming. So the two questions that Margaret should be asking are how much cutting is required in this cycle in total, and how fast they’re going to do it. So question one is fairly easy to answer. They need to at least get to neutral, and they probably need to go a little bit lower based on to counteract some of the lag effects of the happening. And the fact that, once you project that far forward, inflation is below 2% right? So you’re looking at something like a 2% target rate, maybe a little higher, maybe, you know, 25 basis points higher or lower doesn’t really make much of a difference. The fact is, you’re coming from, you know, from five and a half down below two and a half. Right, way more than priced in. How fast should they do it? Well, not all in one meeting, because everyone will panic. But there’s no point doing it too slowly, right? If you’re restrictive, you’re restrictive. And if the economy’s saying, you know, neutral is probably appropriate to slightly easy, you know, you might as well set it on a path to get there before it’s too slow to do it. So we would say, within the next year, that should be happening, and that’s a little more than markets are priced in. Their markets are only about halfway there right now. We would say the thing we do have some sympathy with is, you know, when you start making larger than 25 basis point cuts, you can cause overreactions in markets. You can cause a little bit of panic by looking a little out of control. That’s something that Fed would generally want to avoid, which is why, personally, I think they will do a 25 basis point cut, but they can do a lot by signaling. Look, we want to ease a lot. We want to get down to a certain level, or we see this level as appropriate, and we don’t see any reason why we would stay much tighter than that for much longer. That for much longer. And the markets will do the rest of the work for you. In terms of general financial conditions. You don’t need to do those big, chunky cuts, but the size of the cut will depend on what markets are doing. If we do see another big pullback from markets that brings larger cuts onto the agenda, if we see the expecting unemployment rate, that brings faster, bigger cuts into the agenda. So the labor market’s going to be very, very important. And you know what’s happening generally in equity markets is going to be important too.
Andrew Brill 41:32
With the market as inflated as it is, and people worry about their long term wealth, obviously, long term well, you hold on to it. You don’t worry about it. You just sit with it, it’s going to turn around again. It could come down for a year, maybe two. But if you’re, you’re in it for the long term, doesn’t matter. But you’re, if you’re looking at people from from retire at retirement age, or almost at retirement age, is it time to get some money out of the market, take your profits and maybe put it into something that, yeah, the it’s not going to grow as fast, or the interest rate like in in treasuries, is not as good, but it’s a little bit safer.
Dylan Smith 42:05
Yeah. I mean, I think if you have, if your main goal, and this is sort of evergreen wisdom, if your main goal is income from your portfolio and wealth preservation, you want to curtail your your exposure to to the riskier asset classes, right? So, you know anyone who’s it’s interesting, older Americans and all Canadians too, are at historic levels of proportional investment in equities, right? It used to be the almost default, that you would get out of equities the day you retired. It’s not happening anymore. And so there’s, there’s a build up of risk for the boomers, who are, you know, quite highly exposed, basically to the AI theme. And so, you know, if Warren Buffett, Boomer number one, is taking profits, I think that says something to that generation. It’s time to and there’s kind of a golden opportunity at the moment, because if you move into rates now, you can still lock in pretty high interest rates through various different, different mechanisms, right? So before, before the base rate shifts on down to 2% so 2% you can get very good, you know, just fixed income generation, very low risk. There’s almost a golden window for that opening up. And so that would, that would definitely be our advice. Now, more interesting question, what happens if you’re still in a growth phase you want to build some portfolio wealth, maybe you have some cash to deploy, but you’re looking at valuations and saying, Well, if I go and now I’m going in a bit of a peak potentially, well, there’s cross asset ways to fix that, so just make sure you’re very diversified. You know, follow the old wisdom and rules about not overexposing to the riskier side of the asset class, probably overweight the fixed income complex at the moment, and keep your sector allocation sensible right. You should definitely have some tech exposure. There’s still a potentially massive AI story out there. But don’t go all in on that. Utilities are great. Utilities are benefiting from almost everything out there. So stick to that. There’s some real opportunities in real estate outside the commercial and office space, which we still really don’t like. So trying to find value, trying to wait in a way that you know is resilient to potential downside and to potential corrections.
Andrew Brill 44:25
Is AI still the rage, you know, from all the research that you do and the people you talk to, or is it the tentacles that AI has created, like you said before, because of AI, we’re going to need new power centers. We’re going to need new data centers. Is AI still the rage, or is it the tentacles that it has created that has brought us to where we are?
Dylan Smith 44:48
What’s interesting, I think we’re reaching an important point, because basically the AI theme has been expressed so far as a hardware plate and. A physical plane. So that’s why Nvidia is has done so incredibly well. They’re providing the chips that should power this revolution. Those chips demand power utilities are outperforming it is still an open question, and still, I think deserves to be treated with some skepticism. What the value creation is that comes afterwards, right? So we know what AI can do, but it hasn’t seemed to have developed much since GPT T came out, right? There’s been some efficiency. There’s been some marginal improvements. People have started implementing it, but we haven’t seen the we haven’t seen the Google emoji yet, right? We haven’t seen the company that defines what this thing is and how to how to make it extremely valuable and completely monetized. And we don’t know. It’s just, it’s a fact that we don’t know. No one in 1997 was predicting the existence of Facebook. There was no concept of a social network. We all thought the internet was about other stuff at that point, Amazon was predicted, right? So, so maybe, maybe you can say that the way Microsoft has you use AI is a bit more predictable and a bit more price. But as to whether we’ll see a huge revolution in economic productivity, whether we see, you know, enormous new well being companies emerging maybe, maybe not, but we’re certainly acting like that’s not going to happen. So there is potential for oversupply, for hardware to happen. There is potential for us to be pricing the value in the wrong area. And so yes, the theme is all the rage, but I think we’re starting to see the theme coming into questionable but in terms of how it gets expressed and how it gets played.
Andrew Brill 46:41
Thank you for watching this week’s recap. Don’t forget to head over to wealthion.com and hit the find an advisor button in the upper right hand corner for a free, no obligation portfolio review, and follow us on social media for the latest news and information to help you invest wisely. If you haven’t done so already, please make sure to like and subscribe to our channel and don’t forget to hit the notifications bell to the channel so that you never miss a video. Thanks again for watching if you like this content and are looking for more ways to keep and grow your investments, watch this video next until next time. Stay informed. Be empowered and may your investments flourish.
