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Speaker 4Welcome to Thoughtful Money. I'm Thoughtful Money. Founder and your host, Adam Taggart. Very happy to be welcoming the macro maven herself, Stephanie Pomboy, back to the channel for her monthly macro update for all of us. Thoughtful Money aficionados. Steph, thanks so much for joining us.
Speaker 3Thank you for having me. I'm trying to think of something upbeat that I can talk to you about.
Speaker 4I know, I know. As we're recording this, markets are off. Not nearly as much as they were off last week, last Thursday, but a lot to talk about. It's the first time you've been on since the midterm elections. And we just have a lot of things that we could chat about. But let's start with today's news, which is the hot CPI data that came in. It came in at, what was it, 0.4% month over month, which was higher than the 0.3% expectation. And it's been higher than previous data points in the data set here. Folks are starting to get real worried that inflation is picking back up again. We had a Fed speaker come out today. Yeah, it was Waller, who basically, before the CPI print came out and said, I'm in favor of a 25% rate hike unless it comes in at 3%. And then it came in at, or sorry, at 0.3%. And then it came in at 0.4%. So obviously everybody's freaking out that, oh my God, the Fed is probably going to hike 50% maybe at the next, the next Fed meeting. We've seen the rate hike odds jump to like 99% for a quarter basis point hike in, a quarter point hike in December. And then the odds for rate hikes going up next year in early 2027 are now jumping. And of course, you're seeing stocks sell off on this. You're seeing the precious metals get kneecapped and you're seeing Bitcoin really get kicked in the crotch here. So a lot of sell-offs on, you know, rate sensitive assets. So what's your general take here on the CPI? Is this showing that we're heading into further inflation or is this looking in the rear view mirror? Because concurrently we're seeing oil prices come down pretty hard this week.
Speaker 3Yeah. Well, I think that clearly it is rear view mirror. The one positive about this report is due to the government shutdown, we don't have a year on year comparison. So we're going to have a year on year comparison to last October, because I would assume that that headline number would probably scare people even more. But I do think that you're right. We've seen a sharp decline in oil prices post-election on the idea that this Iran situation is going to get wrapped up and therefore oil prices are going to come back to pretty much where they were before, if not lower. And, you know, I think what you saw, before this morning's CPI number within the bond market is that that reduced inflation expectation tied to the oil decline was pretty much the entire reason why the long-term yield curve was going down. So now you're seeing it start to get pushed back in there a little bit more inflation expectation. But, you know, what I always come back to on the inflation thing is this is consumer prices that we're measuring. You know, I'm a broken record on this front, but if you go through the detail on the consumer, this notion that the consumer is strong is one that I still will emphatically push back on. And, you know, we can go into some detail on that. But based on what I see in terms of mounting consumer stress and the share of the spending that's going to all the things that they have no choice but to buy, I believe that the ability for companies to pass along higher prices is already challenged and is going to get more and more challenged as the shift in policy post-election is less supportive of economic activity and therefore more detrimental to employment and real wages. And that will further the pressure on consumers. And essentially, what you've already seen, and we'll get the number on, did we get it tomorrow or Thursday? On Friday, we get the PPI. We've already seen, if you look at how fast the PPI, the producer price inflation is going up, it is now outstripping the CPI by the largest amount since COVID. So that implies, some real pricing of margin pressure for companies that right now, of course, no one sees because the AI boom and all this circular financing and paper earnings associated therewith are inflating these headline earnings numbers. But I think when you look at the consumer-facing companies, their position is different and not nearly as strong. And obviously, you see that reflected in the PPI. The share of bankruptcy filings that are consumer discretionary companies, et cetera. So again, I'm a broken record, but long story short, I think that this hysteria today about the CPI being stronger and the Fed having to tighten will probably flip entirely the other way in reasonably short order as it becomes clear that the results of the election are not growth positive and therefore are not going to be fanning the Fed. And I think that's what's going to happen if flames of inflation
Speaker 4in any meaningful form or fashion. - Okay. And so, don't put words in your mouth, but my guess is that your future inflation outlook is that things will start to disinflate as we get further into 2027 here, largely in some ways because the cure for high prices is high prices. You're saying consumers are getting to the point where they just really can't absorb any more price increases. And so they're going to be, you know, tightening their belts. So first off, is that fair? -
Speaker 3Yeah. The big caveat though, is we're coming into the holiday season and the end of the year. So I think that I don't see that playing out necessarily in the next couple of weeks. I think consumers, you know, we remember from trading places where you've got to get Timmy the GI Joe with the Kung-Fu grip, you know, for Christmas. So I think to the extent that the consumers are already relying on buy now, pay later and running up credit cards and increasingly home equity lines of credit to fund expenditures, that will probably continue through the end of the year to get through the holiday season. And then, you know, we'll get into 2027 and things will tighten up pretty sharply. And I think that's when these expectations for further rate hikes will start to be challenged in the market. -
Speaker 4Okay. And I don't know if you had a chance to really dig into today's CPI number yet, but there are, you know, a couple of things here that caught my eye. What's driving this month's number were increases in shelter, food and energy. Energy, no big surprise that, you know, oil prices have been high, gas prices have been high. But as you said, you know, very recently now, we're starting to see that come down. In fact, gas just broke below, the average cost of a gallon of gas nationwide just broke below $4. So, you know, that's, you know, a lot of money that's coming out of the bank. And so, you know, we're starting to see that come down. And so, we're starting to see that come down. And that accounted for over 30% of the monthly gain in CPI this month. I had thought that Shelter was kind of disinflating, that rents were kind were disinflating. Do you have any, any idea why we would see such a jump in shelter costs right
Speaker 3now? Well, I think that energy does feed into that too, because you have housing utilities. So you'd have to look at that, that component and it is now, believe it or not, I can't even believe we're halfway through November already. So you might be starting to see some, some impact of that. And then didn't we have a spate of very cold weather back in October? I feel like we had some, we had some freak storms. But anyway, that's just speculation. I would guess there's also within that shelter component, insurance and other non-structural related costs associated with, with housing. So, you know, also I would just say that like the CPI in general, these numbers are very lagging. So you'll see things, for example, if you're trying to conflate home prices with, and rents with the shelter component, you're going to have to give it a long fuse before changes in rents and price, home price actually come through and are reflected in the data. I mean, I remember looking at the overlay of the existing home price, for example, with the shelter component. And I seem to recall it being at least a year, mostly more like 18 months before the numbers actually.
Speaker 4Before they start to correlate. Yeah. And, and I think a reason for that is, is that shelter is largely computed as a, an owner's equivalent rent. So it looks at rents and, and home prices have been, you know, they're artificially distorted to the upside right now, given the fact that the only people who can really afford to transact right now are the rich people. And therefore that's keeping that up. But rents have been, have been disinflating. And actually, I think they've been deflating, which is sort of why I was surprised to see this bump. Now, maybe it's a one month blip, who knows? And I'm happy to dig deeper with, you know, some other housing analysts who might watch this a little bit more closely. But the reason I bring this up is because it's entered the discussion a lot this year that kind of, no matter what happens with other things, if shelter continues disinflating or even deflating as rents come down, that's going to weigh disproportionately on the CPI because it's such a big component of the calculation. But again, that's, it's going, the other, it's going, it's going up in this month's episode. And so I'm just curious if that's a.
Speaker 3I would note, and I think I mentioned this to you before I was at this conference a few years ago. And one of the people they had speak was a guy who, I don't know, he must be a real masochist whose entire business was to dissect the CPI and then to forecast that number. And so he was familiar with how they calculate every single little component, every subset of the CPI. And he said on the rent side that there's a disproportionate weighting, like a massively disproportionate weighting for some big urban centers like Manhattan and Boston. And so where I, I think nationwide, you've seen rents deflate. I don't think that you're seeing that in Manhattan or any major urban centers that I'm aware of. So that could be another, another factor. Again, I think it really comes back to you can't place too much stock in these monthly statistics, whether they be the inflation statistics or the payroll statistics, you really have to look at a trend over a period of time to see what's happening there and look at it in the context of a whole bunch of private sector data to see if you're finding confirmation or not, because the way they measure this stuff is highly massaged. I'll dig more into
Speaker 4this whole shelter component, folks. All right. So the affordability has been, you know, front and center for a good long while, but, but certainly this year, and especially as we got closer to the midterms, it really kind of became a thing that the election pivoted on. So a couple of questions for you about that. One is on the CPI, or sorry, on consumer spending, which has still hung in there, right? And you just talked about how you wouldn't surprise you if it continues to for the next couple of months as everybody rushes to buy the GI Joe with the Kung Fu grip for the holidays. But you had a quote, and I'm trying to remember where I saw it, but it was, it was something like, it's not that people, um, it's not that spending is remaining robust because people want to spend it's because they have to spend, it's just how much kind of what they need costs. So even though the spending is hanging in there, it's more just because the price of their essentials is going up and they obviously need the essentials. Um, it's not people rushing out there to buy a bunch of luxuries.
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Speaker 3Right. No, that's absolutely true. Um, I was just going to go look for this, uh, table I had done breaking down some of the. So in the last, you know, we got September PCE, the actual consumer spending report a couple of weeks ago. And within that, obviously gasoline was a huge increase. The, in the month of September, consumer spending nominal total dollars spent was 113 billion, 46 billion of that. So almost half of it was gasoline and energy goods. Another 20 billion was transportation. So that's gasoline. That's a commute, yeah. Third one. That is housing and utilities, which was 18. So, and then you get down, you know, the next thing below that is food and then healthcare. Um, long story short, if you add up all the things people have no choice, but to spend on, uh, I calculated that 96% of the consumer spending in the month of September was non-discretionary stuff. So of the 113 billion they spent in the month, 4 billion was by choice and everything else. And then just to go into. to add further, there is a component of spending called recreation services. Um, and that posted the largest decline. I think it, the third largest decline in the history that goes back to, you know, 1960 of that series on a percent basis, not on a dollar basis, because that wouldn't be meaningful at all, but on a, on a percent basis. So, um, it just underscores this, this, um, idea that consumers, people look at the headline spending and they say it's solid and they're making two mistakes. Number one, the headline spending numbers aren't deflated by the prices. So it's not telling you anything about the number of units people are buying. It's just telling you how much you're spending each month. So what we've seen, and I don't need to tell you or anyone in your audience that when you go to the grocery store, now you buy five items and your bill is a hundred dollars. And it used to be, you know, five years ago, you bought those same five items and your bill was $50. So, um, you know, God forbid you're increasing the number of units you're buying, but right now just buying the same number of units, um, is getting you a much higher bill. So first you've got to adjust for the pricing when you see, which is
Speaker 4crazy because it makes it look good. Oh, consumer
Speaker 3consumer spending is going up, but it's
Speaker 4actually the opposite, which is this guy's getting squeezed more and more by prices.
Speaker 3Yeah, exactly. So it's flattered by the inflation, both the retail, sales numbers and the consumer spending numbers that we look at every month. Um, and then of course you've got to drill into what they're ever, what they're actually spending the money on. And then the final one, which I keep beating everyone over the head with is how are they funding that expenditure? Um, and what you've seen in, you know, recent years is obviously once the COVID stimulus money ran out, people went back to running up their credit cards. First, they were paying down their credit card balances with the COVID stimulus money. Then they ran up their credit cards. Now they're relying on home equity lines of credit because that's a great way as home prices have gone up to tap some equity, but preserve your low mortgage rates. So you could just withdraw equity from there. Um, and then of course, buy now pay later where everyone knows the anecdotes about people, you know, buying their hamburger on layaway. So, um, these are not indications of a strong, healthy consumer. And of course, you know, it's all masked by the beauty of averages where the Elon Musk of the world buy a couple new, you know, private jets, and it makes consumer spending in the app look really, you know, uh, nothing against buying private jets, but it's just not uh it's distorting the picture of the consumer's
Speaker 4health so steph what is your confidence that are your what do you think the probability is is that buy now pay later will morph or metastasize into buy now default later
Speaker 3i mean i feel like it already has hasn't it in many cases and it's just you know uh this constant kick the can down the road scenario i guess at some point um but at some point
Speaker 4these companies if it does turn if there's just mass defaults right people who bought stuff on buy now pay later just can't pay anymore that's going to ripple through those providers we're going to start seeing them
Speaker 3croak yeah but i guess right now i mean i'd have to dig into it but it feels to me like it's the classic ponzi scheme where if you can get enough new customers every month to sign up you know you can make up all these other people aren't paying their uh you know monthly installments so but but it but
Speaker 4it does sound to the spirit of my question you think there's a there's a reckoning coming up where the can't can't be kicked anymore by these companies the
Speaker 3ponzi ends i definitely think so and i think without getting political i think that the conclusion after the election that gridlock is good because you know now while washington can do no harm is a gross uh misapprehension about this situation that we're in now because while washington dc may be handcuffed there are state governors all across the country who have very anti-business agendas or at least at a minimum anti-fossil fuel agendas um and you know campaigned a lot on going back to more of the the green new deal and all kinds of social supports etc um that'll be paid for with higher taxes so i think that you know don't fixate so much on washington when the power is now at the state level and it's being wielded by people who i would say in a non-political sense are just dispassionately anti-big business um and that's probably on net not going to be positive for economic growth um so that's you know i i think that that will just further pressure household pocketbooks because the employment situation is not going to be as great and we didn't talk about data centers and ai and and any pushback on the growth associated with that which seems to be pretty almost bipartisan at this point all right so
Speaker 4i want to talk with you about that um um very quickly before we get to there so we had this blue wave affordability was seemed to have been the really big driver um for the democrats winning as much as they did um on the federal side is there any reason to expect that the people who ran um and won were elected on a hey addressed affordability are they really going to be able to do anything and the reason why i ask that is yes they've got both houses of congress but trump has the veto pen he has already created the red hat that says veto on it um so is it how realistic is is it to expect any new policies to drive a change in affordability versus just whatever is in place today basically persisting and whatever impact
Speaker 3it's going to have well you're kind of asking me to act like a political analyst which i'm not but that doesn't uh restrain me from offering my opinion which is worth absolutely nothing but i'll give it to you anyway thank you i
Speaker 4placed a lot of weight on it still don't
Speaker 3worry that's disclaimer made um you know what you've seen already in the what has it been 72 hours or whatever week basically since that uh election is a lot of breaking of ranks within the republican party and some i some sense of republicans feeling like if they distance themselves from the president maybe they can preserve their own re-election when that comes next and we know that's the only thing they care about at the end of the day if you like and that's right that's very
Speaker 4common in politics right right yeah yeah i
Speaker 3mean that's job number one is make sure you get re-elected uh affordability that's much farther down on the list let's be realistic so the question then becomes how many of these republicans are actually um willing to engage with the democrats to pass some of this stuff if they think that it might be a good idea to get re-elected and i think that's might save their asses pardon me um going forward so that's just my question is
Speaker 4is does that even matter if the president says it's well i'm sitting here in the oval office i'm not going to let that policy come to life then
Speaker 3he can veto it then it goes back right and if they have a super majority right i guess you're
Speaker 4right if they if they do have that much yeah
Speaker 3yeah that's the that's the risk is that you have enough weak-kneed republicans who feel like they need to protect their own political careers who just throw in the towel on the things that they had originally campaigned on and now kind of lurch to the left along with the democrats um so that that would be the risk i see but frankly i think it's more likely that we just have complete gridlock in washington and uh you know nothing really happens there of any uh real impact on in terms of policy and i'm much more concerned about what happens at the state level um and and just generally the ability for states to put up lots of regulation even if it takes them a long time to do things like pass tax increases and that kind of stuff to pay for all their whatever programs they want to implement uh regulation is something that you can do very easily and think about how much regulation trump has removed at the federal level right and then be re-erected essentially at the state level so and i think the ai data center thing is sort of a a very clear example of that interesting to see how that plays out
Speaker 4well so let's dig into that um so the i agree with you actually i think the really interesting economic ramifications from this past election are much more likely to be at the state level versus the federal level for the state level so i think that's a very clear example of that and i think that's a very clear example of that and i think that's a very clear example of that and i think that's a very clear example of if not anti data center platform a you know i'm i'm gonna i'm gonna tackle these guys i'm gonna slow their role you know um and to the extent that they would would be successful with this in the future that will have very strong market and economic implications right because it's the markets are basically been the ai party for the past you know two and a half years or so and if if if that party gets you know pulled back because oh gosh looks like the rollout's going to be about 20 30 less than we thought in terms of its pace we got to ratchet down our asset prices that'll have a lot of implications a lot of negative wealth effects but also it's just so much of the economic growth in our gdp right now is from this spending and if the spending even if the money wants to be spent if it's not going to be allowed to be spent because of constraining regulations and things like that that's going to have all sorts of impacts you know sort of as you hinted earlier jobs and taxes and all sorts of things so um how and i think this was sort of the narrative for why markets puked last thursday you know democrats won on this you know largely anti-ai platform on on the um at the local level at the state level um and people started waking up to this so you know did did the markets just reprice this now everything's fairly priced and we're going to move along or do you think this is a shoe or a series of shoes that's going to be dropping over the next couple years
Speaker 3well i thought it was not reflected in the market activity after because of the decline in the bond yields that you know long-dated bond yields but when you do as i mentioned at the top a little dissection of that what you find is that most of that was driven by the drop in oil prices and i would i think that's a good point i think that's a good point i think that's a good point i think that's a good point i think that's a good point i think that's a good point i think that's a good point whatever was left over which is probably like let's say it was two-thirds inflation one-third real yield that real yield was probably a reflection of this hope that the deficit doesn't get any bigger because we're now going to have grid locks so no one can do any harm um and there again i think uh it's a real underestimation because if the state local policies in any way slow economic activity that immediately blows back to the federal debt deficit in the form of increased social welfare supports and lower tax revenue as the economy slows so the deficit at the federal level will be hugely impacted by any policies that come out of the state and local uh governments so i i do think that uh there was an overly sanguine interpretation about how washington gridlock is good you know that was that mantra was going around it's a little too glib uh and i think that's a good point i think that's a good point i think that's a good point i think that's a good point i think that's a good point and it will likely prove to and it will likely prove to and it will likely prove to be completely
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Speaker 4so sounds like, you know, we've got some potential risks here to AI just, you know, simply on the, the, the rollout of data centers that may or may not, you know, be impacted by these, these new governors coming in. Okay. So you've mentioned bond yields a couple of times here. You know, bond yields have, have come down over the past month or so. the point where the question has been asked, is the peak of yields in? And I'd love to get your thoughts on that. And I'd also love to get your thoughts on credit spreads, because even though we've had a bit of an easing in yields, like for the 10-year treasury and whatnot, we have started to see credit spreads, especially on the lower rated debt, continue to widen. And that's always been something that you have said. That's what's going to start alerting me that things are starting to get, you know, kind of wonky. And for years, credit spreads had just been tighter than a drum. So it's a different environment that it's been for the past several years. How material is that, you know, increasing of the credit spreads right now, do you think?
Speaker 3Well, I think a lot of it, you know, you have a two-edged, I hate to do this, but when credit spreads were going down, everyone was focused. on that saying, look, there's no stress in the credit markets. And I kept pointing to the nominal yield saying, you know, nominal yields are going up. So the fact that they're not going up as fast as the 10-year treasury is sort of irrelevant if your borrowing costs are going up. Now you're in a situation where both are going down. And the junk rated borrowers that you're talking about, their borrowing costs aren't going down as fast, but they are going down. So in the immediate, there may be a chance that they're going to go down. But if they're going down, they're going to maybe some sense of, well, you know, junk yields are actually down fractionally from where they were. So maybe we don't have to panic about that. I think where it really starts to become a factor is obviously, number one, any issues around this AI trade and, you know, this NVIDIA situation and anything that, you know, should devolve around that will be interesting to watch and could be meaningful. But also, any issues around this AI trade and, you know, this NVIDIA situation and any economic slowdown, if it becomes clear that we are actually going to see some slowdown in activity related to sort of increased or more aggressive regulation at the state and local level, whether it's related to these specific companies or not, will definitely begin to reverberate through the credit markets. Because at that point, you're talking about an environment where the revenue growth that the corporations need to keep up with the rise in cost of debt service and so on and so forth. So I think that's going to be one of those issues that we're going to have to look at. I think that's going to be one of those issues that we're going to have to look at. You know, profits were up 50 some odd percent in the first quarter and 30 some odd in the second, you know, these numbers have been gangbusters. So they have, you know, covered a lot of these sins. So if you got to a point where the earnings growth was slowing, at the same time, you're not getting relief on the interest rate, but that's when I would worry about it. But these yields are crazy. I'm looking at a junk yield here over 8%. Where those companies are refinancing paper that was carrying a 4%, you know, coupon before. So that's, that's a substantial increase.
Speaker 4But you have a smaller slash riskier company that its debt service cost has doubled.
Speaker 3Correct. Yeah. And they better have one hell of a growing business to be able to manage that kind of increase in debt service, or a very friendly banker. So I don't, you know, this is why I think you've seen it's been fascinating to watch the hot potato back and forth between the banking sector and the private markets, where you had, you know, these originally banks were the ones making CNI loans, etc. And then they became too expensive. And the private markets came in and said, Hey, we'll lend to you a lot cheaper, and then back to the banks, you know, so they keep going back and forth. And we'll see who gets left with their hands on the ball. But I long story short, I wouldn't touch any of this stuff in a 10 foot pole. You know, it's just a question of when it blows up. And I on the risk free rate side, which was part of your question. Yeah, I don't think the peak in rates is it I mean, I, I did say, you know, if we were going to have this risk off trade, which I think we're, you know, starting to get into it's really devolved into a full blown, you know, if you had a bear market for equities, let's say that the 10 year could get bid mostly because you'd have that speculative short that's massive covered in some, some manner, I think I've been shocked. I watch it every Friday, I look at the market and I'm like, I don't know what to do. I don't know what to do. They basically are just as short as they were before. They have not been persuaded that this market, you know, that the 10 year yield is a place to be. Now, who knows, maybe they, they're dead wrong. But it's just interesting. There's been no capitulation by speculators, the entire decline in the 10 year is being driven by this exodus of retail money from, you know, the equities into, uh, treasuries and maybe some foreign, you know, some foreign buying, but it's not our, not the bond vigilantes per se.
Speaker 4Okay. Um, and that's really interesting. And that's also very validative of question. I've been asking a lot recently, which is, you know, should we be expecting credit to be pulling money, uh, the credit markets to be pulling money from the equity markets, given that there is now an alternative for people. And you're one of several people that I've recently had in the channel who have said, yeah, and it's actually happening in real time.
Speaker 3Um, you know, from my, from my purposes, uh, not today, but I generally prefer the front end of the yield curve because I think, you know, you're waiting until you feel
Speaker 4like the peaks in or it's all clear, right?
Speaker 3Yeah. Well, I feel like the rally in the 10 year, you know, maybe we go to four 50, maybe, but I think the path going forward long-term for long rates is higher and I don't need to get cute trying to trade, you know, the next, 30, 40 basis points in a move where, you know, three years from now, we're going to be looking at 10 year yields substantially higher. I do think that this notion that the fed's going to have to get aggressive and tighten because inflation's out of control and growth is so strong is laughable and that that's going to be what gets priced at the bond market. So I think the front end again, not today and not ahead of the PPI on Friday, but once we get through this week and a cooler heads and people realize we're looking at stale data, maybe that's an opportunity.
Speaker 4Okay. So let's just revisit your outlook. So, you know, I'm guessing from our previous conversations and from what you just said, you know, the 40 year bond bull market's over. We're in a secular era now of rising interest rates that will largely be accompanied by rising inflation or persistent inflation. And in continued, you know, fiscal profligacy and all that stuff that, you know, makes you worried about purchasing power of fiat currency and why you won gold and all that stuff. But I presume you also imagine it will be punctuated by periods where rates may get driven down pretty substantially by central planner intervention in response to some sort of crisis. Okay. You're nodding vigorously as I'm saying this. Okay. So, so. Yeah. While you could see the 10-year continue going higher over time, five, six plus percent over some long-term timeframe, it wouldn't surprise you to see it get knocked down to three something or whatever during times of market duress or system duress, correct?
Speaker 3Well, I think that, you know, I've long said that the focus should really be on the Fed's and what they're going to do with the Fed funds, right? Nevermind that pulling that lever has had precious little impact. The last several times they've done it either up or down.
Speaker 4And yet the balance sheet continues to creep upwards too, right, in this environment?
Speaker 3Right. Well, that's the thing is I feel like, you know, right now, Besson and Morse have a little bit of the wind at their backs, not in an economic favorable way, but with the 10-year now back below 5%. And so the urgency to really work on the yield curve control and whatnot isn't so great. I think that, you know, my view has always been that it's just a matter of time before non-QE, QE becomes just outright QE. And it's not just focused on T-bills, but really all across the maturity spectrum. And in that regard, I thought it was interesting. And finally, I mean, I've been dogging the few press people I know to ask Kevin Morse's question. But finally, in the post-FOMC presser lust. Last week or whatever, the last meeting, boy, time flies. It was probably three weeks ago, and it feels like yesterday. Some journalist from Korea, I have to note, asked him what the plan was for the balance sheet. Because he had, everyone knows, been a outspoken advocate of running down the balance sheet and doing away with QE. And has long said that QE was strictly for emergency. I have a quote taped above my desk, which you can't see here, that says, Nothing is more expensive than free money. And Kevin Morse said that. So, I mean, QE is free money. And so he's railed against this his entire career and made a name for himself as an anti-balance sheet kind of guy. And here he is running $40 billion of non-QE QE a month. And finally, at the third press conference, some reporter from, Korea decides to ask him why he's doing this.
Speaker 4Who'll never get invited back, probably.
Speaker 3No soup for you. But, so, the answer that he gave, you know, he's so glib in these things. He's maybe even better than Alan Greenspan at saying stuff without ever really saying a thing, you know. So, his answer was essentially, well, we have a task force. Okay. Okay. Okay. Okay. Okay. And they're working on their report and they're going to present it sometime at the end of the first quarter. And we'll have some comments after we get to review that after. So, basically, nothing's happening anytime soon. And by the time, you know, they give that, the whole universe will have turned around 37 times and it'll be a totally different world. And who knows what will come of it. But I have long thought that they will go back to QE in March. And I think that's going to be a monster fashion. And, yeah. But the thing is, then, then I think that's when it becomes more of a currency. This story is entirely about the currency because that becomes the valve for these, you know, meddling monetary.
Speaker 4That's the true cost of the rescuers as you give up all this purchasing power. Right. Just to the spirit of the question, you think that bond yields, sort of cost of money, will be rising. And so, you know, I think that's going to be a huge, huge, huge, huge, huge, huge, huge, huge, huge, huge, huge.
Speaker 3But I guess what the subtle point I'm trying to make, which I'm not articulating well, is I wouldn't buy it. I wouldn't try to trade those because you're going to lose it all in the nominal dollars that you're transacting. And so you want to have hard asset protection for that. It's not like in an environment where they're doing QE, you want to buy the 10-year. You want to buy precious metals and other hard assets. You don't want to be buying the 10-year because, you know, the purchasing power of the dollar is going to be eviscerated in that.
Speaker 4Correct. And the reason I'm digging into this is, one, just so folks understand your outlook, but also there may be a role there for credit, but it's short-duration credit so that you're benefiting from the rising. You're benefiting from the rising yields, but you're not going out on duration because duration is kind of your enemy in that sort of rising interest rate environment.
Speaker 3Correct? Correct. Yeah. No, you're absolutely right. I mean, I think a way to say it is that I think that we're in a secular bear market for bonds that will have within it some vicious cyclical rallies, as you have in all secular bull and bond, you know, bear markets. You have these cyclical ebbs and flows, and these cyclical ebbs and flows will be determined either by. Risk on or off in the markets, like we saw the last week, or by meddling monetary policymakers. So either one, like you said, you're probably better off at the front end of the yield curve than sticking your neck out.
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Speaker 4Yeah, okay. And I've interviewed several people recently who are, I don't want to say ringing a loud warning bell for, maybe both of what you just talked about, which is both market dyspepsia and central banker rescue policies in 2027. Although the one guy who I think is, is Jim Carson, who I just hit on, and he actually thinks there's going to be an event. Likely Q1, more likely, he thinks, an early Q1. That will, it will be enough of a, of a, short, you know, swift plunge in the market that he thinks that the Fed will actually have to intervene. We'll see if that's going to happen or not. But obviously, that's a playbook that would not surprise you at all.
Speaker 3And that's why I was saying, you know, I wouldn't wager on the rest of this year. But I think once we get into the first quarter, you know, there's a good chance. I think back, and I think we talked about this in our last conversation, to 2018 with the, you know, Howell being called to the White House. Every day, when Trump berating him to lower rates, and he didn't, and it, to me, this is very reminiscent of what we're going through today, where, you know, Trump isn't berating Kevin Warsh, but he's basically been berating the Fed to cut rates, and they went ahead and raised them anyway. And then finally, the markets broke, and that's what forced the Fed's hand. So I totally see that same scenario that Mr. Carson outlined. So. We're definitely on the same page for that.
Speaker 4Okay. All right. I'm going to get to just your latest thoughts on the precious metals in just a second. But, you know, one of the things, I think we've talked about this before, but we're starting to see kind of back to the struggling consumer, not just folks relying on buy now, pay later. And I think you also said home equity loans, which are harder to take out now, just because they're a lot more expensive. You know. They're a lot more expensive than they were back in the Zerp era, but that we're seeing people pulling money out of brokerage accounts to pay their current living expenses. Right. So they're basically stealing from their future to just get by today. How big of a warning sign for you is that, that we're at that stage here where people are now finally, you know, they're raiding the future kitty?
Speaker 3Well, I think it should be viewed as a meaningful warning sign because it also. disincentivize this notion that it's just the low end of the consumer that's really under stress. You know, the low end consumer hardly has a bank account. He sure as hell doesn't have a brokerage account. So when, you know, JP Morgan comes out with a study, it says their customers are taking money out of their brokerage accounts. This isn't, you know, people who are necessarily living paycheck to paycheck in the way you think about low income consumers. This is a little higher up the income spectrum and therefore should absolutely be a shot across the bow about, you know, how real that affordability issue is for a lot of people. And I think, you know, this, it turns out, was the only thing that mattered for the election. I'd been doing this chart of just really simple, adding the mortgage rate to the gasoline price. And I just called it the misery index. The mortgage rate was 7.2 or 7.4, wherever it got up to. And gasoline prices, you know, five, you were over 12. It actually got higher than during Biden, during the COVID inflation, which makes sense. You know, when you think about it, prices never came down. It's not like after 2022, suddenly prices came down. They've just gone up at a slower and slower rate. So this affordability issue has been really painful and in your face for not just low-end consumers, but everybody experiences it. I mean, I don't have, it's not a crisis for me, but I've noticed when I go to the grocery store now that, you know, I'm trying to estimate when I get to the register how much it costs. And I round up a lot aggressively and I'm still too low by the time they, you know, run it up. And then I'm looking at the receipt like. How the hell did it spend, you know, cost that much? And you're just blown away by how much prices have gone up. And that was the issue. And I think that, you know, it just wasn't taken seriously enough by the powers that be. But this is not going away, I guess, is the long story short is you're seeing these signs of stress. And the only thing that's going to get it, get them relief is either wage growth. That is. So substantial that it overtakes all of that. And we haven't seen that yet.
Speaker 4Right. And that's the goal of the administration. Run it hot. Get that going. But we haven't we haven't seen the cavalry ride to the rescue yet.
Speaker 3Yeah. Yeah. Or alternatively, get real disinflation in goods and services. But that's only going to happen if you have a massive economic slowdown. And nobody wants that.
Speaker 4And that's that's only good for you if you keep your job.
Speaker 3Exactly. Then you're back in that circle of, well, what are my wages? I'm unemployed. I have no. Wages. So it's.
Speaker 4Yeah. So, Steph, this makes me think of the system being really vulnerable to a bear market and assets. And the reason why I say that is, is to your earlier point about the very rich or at least, let's say that the affluent, the quite affluent. Top 10 percent, 15 percent of households, they're really keeping the average spending up. Right. And they can continue to afford to do that. Because asset prices have, you know, more or less been on a one way ride, you know, for a long time. We had we had a rough year in 2022. But really, I mean, since then, you know, before that were a bunch of years of the market doing great. And then since then, the market's been up double digits every year. Right. Close to 20 for the past four years. Right. 20 percent per year for the past four years. So for them. Yeah, I can keep spending at this because, you know, my video. Just keeps going up. Right. So if there is a material, you know, if we do enter a bear market, which we will enter at some point in time, I'm not calling for one for 2027, folks. I'm just saying it will eventually happen. Then you're going to have that negative wealth effect at the top and you're going to see a good chunk of retail spending get wiped off the table as those folks, you know, they're still going to spend. I mean, they're not going to be destitute, but they're going to spend probably materially less than they're spending right now. So to me, I think. I think that's a really underestimated vulnerability right here where people don't realize how much of of kind of what's going on right now in terms of the numbers are propped up by that top cohort. You're nodding a bit as I'm saying this. So I think are we like minded here?
Speaker 3Well, I would go way. I would take it even further and maybe I go off the deep end here, but I would say basically. The entire economy is resting on the stock market when you think about AI. You know, at first they were borrowing, then they were running through key, you know, free cash flow. Now they're issuing equity. So, you know, they need this vehicle to keep moving and moving forward rapidly to fund all of that expenditure. And with this, you know, anthropic circular financing thing, they need those gains to keep coming through so they can keep their earnings going and keep shareholders happy. And, you know. The wheels have to stay on the bus here. Yeah. So that's the corporate sector. You talked about the you outlined the consumer situation beautifully. State and local governments, their pensions are underfunded still over three trillion, between three and four trillion underfunded. And that's where the market. And that's where the market at all time high is here. Yeah. So you talk about a bear market, all of a sudden state and local funding. They are immediately forced to cut all their spending, raise taxes and start funding those pensions because they're already having to make contributions to, you know, keep those in any kind of solvency. So that's going to be a huge disaster. And I think I regaled your audience with this statistic before. But in 2000, after the financial crisis in 2008, nine, we had a total destruction of the public pension system. Not surprisingly, that, you know, was taken down with the stock market. It took the state and local sector of the economy four years before it started, before it stopped being a drag on GDP. Wow. Four years. They were cutting spending so much that it was a drag on total GDP growth. That was in 2008. I mean, the the magnitude of the bubble, if I could call it that, and I will today is so much bigger and the leverage behind it is so much bigger. So that's the state and local government. But then you get to the federal government, which will suffer the blowback from the state and local government because they're going to be left the PBGC and all these other, you know, to bail out whenever they can of the pension funds. But then they won't be getting their revenue. And so not just revenue from taxes because the economy is slowing, but they don't get their capital gains tax receipts, which have been voluminous. So it's the the entire economy would suffer so much in just a typical bear. Bear. In ways that I don't think people have really contemplated at all. And that's why I think, you know, it's inevitable that the Fed then has to re-expand its balance sheet. I mean, it did. It started QE after the global financial crisis. And again, you know, we're looking at much more leverage and and much lower quality debt. You know, it's not just that the debt is higher. It's much lower quality than it was back then. I think. I think in the lead up to the crisis in 2007, a third of the investment grade companies were triple B rated. And today, 56 percent of the investment grade is triple B rated. And then, of course, now you've got, you know, levered loans, which you didn't have. And you've got private credit and all this other stuff that presumably since it's unrated, you know, who knows what the quality is of this. So I do think I mean, I hate to sound like, you know, I'm forecasting the end of the world. But, you know, you can't just we can't pay glib lip service to the prospect of a bear market as if, oh, yeah, well, that'll be healthy. You know, people like to say, oh, it'll be healthy because then we'll cleanse the excesses and we'll be able to get back in there and it'll be wonderful. It's going to be brutal in a way that we haven't experienced.
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Speaker 4So if you're if you're a bear, if you're a bear investor, you know, looking to kind of deploy your. Right capital when there's blood in the streets to a certain extent, you're saying that you'll probably have a phenomenal opportunity, but be careful what you wish for. That's a world that's going to be not fun to live in for pretty much everybody while it's going on.
Speaker 3Yeah, I definitely think, you know, it's hard to to root for the opportunity to be able to actually pick up stocks at reasonable valuations because the the backdrop against which that happens will be extremely unpleasant. And, you know, you have talked a lot to your credit about the social consequences of something like that, the risks around it. And I think that's not to be discounted at all. I mean, I hate to get dark like that, but that's a very real possibility.
Speaker 4OK, well, let's cross our fingers and hope that that reckoning doesn't come any time soon. But I think we we realize it is more like a sort of Damocles where you just don't know when the thread is going to snap and it could be soon. So, you know, a have some positioning today, folks, just in case if it does happen sooner than later, you're not completely surprised by it. and I'm going to get to gold in just a second in your allocation update, Steph. Real quick, just two things. I don't want to get distracted by this, but I haven't even brought up, we've been talking about some of the risks of AI. I didn't even bring up the whole Jensen Huang affair thing that's going on with the Chinese spy. Do you have any quick soundbite on that other than just crazy and we'll see what happens?
Speaker 3Well, my favorite was the Babylon Bee this morning that had a picture of Eric Swalwell saying, oh my God, I didn't know that the Chinese spy was seeing other people. That's my two cents on it. No, I don't, you know, we live in a really scary time with this espionage. I mean, I assume that he genuinely had no idea. Why would he?
Speaker 4That's what he's saying. Who knows? The crazy thing, though, is just, sorry to jump in and editorialize, but, you know, one, there's, it just shows how many risk factors there are here that we just don't generally appreciate, right? So NVIDIA, probably most important company in this ecosystem. I think it's still the largest company by market cap. Now, all of a sudden, may undergo an investigation. Did it compromise American interests with China? There's all that angle. Will Jensen keep. Will Jensen keep his job as CEO? If he got ousted as CEO tomorrow, it probably would have a negative, pretty negative market impact on this. But then there's also the thing about, what if he gets divorced? And then his wife ends up with, I think it's like. 80 billion or something. Yeah. And what if she starts selling that, right? I mean, there's just all these things we haven't thought of. And, you know, we look to these guys, Jensen Wang, Sam Altman, Dario, whatever, however you pronounce his last name. Right. And, you know, it's like, okay, you are the guys who are going to build this AI ecosystem, but also make sure that it doesn't kill us. You're going to make sure that it doesn't do all sorts of unethical things. And you guys are human. And you're so human that you can be compromised by a Chinese spy, right? Right. You know, we're asked to place our trust in these people. And the big question is, you know, I mean, at the end of the day, we kind of have to place our trust in somebody. But, you know, these people are human. It just opens. There's so many more doors of risk than we generally appreciate.
Speaker 3Yeah. And I think I was just thinking Peter Atwater would have a field day with this because it really is just the ultimate hubris. You know, when you saw that girl ask Jensen Wang to sign her bra or whatever it was, you know, he entered a different level where, of course, he was probably thinking, well, now I can have any woman I want, you know. And they get, you know, into that, into that league where it just, he's not thinking about the business and the possibility that someone is actually trying to gather information from. He's just so excited about the fact that now he's this, you know, cult hero.
Speaker 4This superstar. And to be honest, it's probably not the starlets. They're probably the least of it. It's more like, you know, the heads of state that are whining and dining him, right? You know? Yeah. So anyways, it just shows there's so many more risks here than we generally take into account on a day-to-day basis. Yeah. And folks, that's why black swans exist. All right. So at the intro here, I talked about how the new CPI data is kind of hammering the precious metals today. Not to be unexpected on a day where the market thinks that the risk of, or the odds of more rate hikes has now leapt. I take it, though, that's not impacting in any way, shape, or form your current allocation to them. If it is, obviously let us know. Are you still pretty much in the, precious metals, short-term treasury, you know, keeping some dry capital there, earning a little bit of return and, you know, nibbling on some other energy and hard asset plays?
Speaker 3Yeah, I am. And I guess, you know, it's brutal to watch. I have real indigestion today because I thought we had really turned the corner. And my reading of the election results was that it's just hugely bullish for the precious metals.
Speaker 4Yeah. But-- All right, let me interject just so you can include this in your answer. That being said to, you know, today's sadness, do you think the bottom is in, in the near term here with the precious metals? So, yeah, they're getting beaten up today, but do you think we're going to go back to seeing, what was it, you know, 3,800 gold or whatever it hit before it bounced?
Speaker 3Yeah, I don't think so. I think, obviously, we've still got the PPI on Friday, which not as important as the CPI. I think today was the real pain day in terms of hysteria about inflation that's stale. So I wouldn't really expect it to go substantially lower or lower. I think today is probably the worst of it. And then we should really start to pick back up. I think the macro case for gold just got so much stronger. And you continue to see China buying hand over fist. So nothing is-- nothing is changed in terms of the major global de-dollarizers are still back to that handbook. So I do think that's, it looks very good. And it's just frustrating to see it get beaten up like this for what I would view as absolutely no reason, or maybe a misapprehension about what the true outlook for inflation is in the next few months, or more importantly, the outlook for Fed time. And I think that's what's really driving this more than anything.
Speaker 4OK. Do you agree with the predictors that we're getting the quarter rate hike most likely in December?
Speaker 3I think if the data continues as it has, yes, we probably will. But we'll see what the next month brings. I mean, there's still-- there's another-- I wonder, is there another CPI before the next Fed meeting? I have to look at that. There may not be.
Speaker 4Let's see. I don't know off the top of my head. But obviously, they'll have a lot more indicators coming in by then. OK. But they'll largely know it. I mean, they've got early indicators that they watch, right?
Speaker 3They do. And it'll be interesting to see what that payroll report looks like, because this payroll report struck me as a real outlier. But we'll see.
Speaker 4We'll see, yeah. And also, too, I think the big thing will be oil. And as we've talked about, oil over the past week has gone down materially. And I don't think that's too much factored in-- well, it's not factored in at all to the October CPI. So if-- big if, right? But if oil stays here or goes even lower, certainly, if there's news on either war going on here, and there seems to be some traction on both, to try to push a little bit harder towards some sort of resolution, which we can all hope for. But that obviously could change the game, too, right? All of a sudden, there's-- there's some MOU signed with Iran, and oil prices dropped to the high 60s. Yeah, maybe we don't get a rate hike then. But we would need to see all that, I think, before we ratchet down our expectations.
Speaker 3Absolutely. And then we'll get another Michigan survey with the inflation outlook on the part of consumers, which will be interesting. So yeah, there's a lot of data. And then we get income and spending and the PCE deflator along with that. So they'll have plenty of data to look at. I just think maybe they do another 25%. I don't know if they'll do another 25% in December, but I really-- I hate to say it, because I didn't think they should have tightened it in the first place. But this is not going to be a material tightening cycle, in my
Speaker 4view, at all. All right. All right. And just wrapping up here, if you had to pick a word or a phrase to describe your outlook for 2027 from an investor's point of view, what would it be? Buckle up. Buckle up. OK. All right. Well, look, Steph, it's always so wonderful getting the chance to talk with you. Thanks so much for coming back on here. Folks, please join me in thanking Stephanie by hitting the Like button and then clicking on the Subscribe button below, as well as that little bell icon right next to it. Steph, for folks that would like to follow you and your work in between now and your next appearance on this channel, where should they go? And tell them about the offer that you have to retail customers now.
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Speaker 3yeah so i mean i just feel like like i said buckle up it's there's going to be a lot coming at us there has been over the last few months but i think that uh the market gyrations are going to get pretty wild um and it would be helpful for people to have someone at least trying to give them the big picture lowdown of where we're headed so they can be prepared um and i'd love to you know be the person to do that for them so macromavens.com and if you go to how to subscribe and it's all laid out there um and the promo is macro 50 macro 50 and uh please subscribe and uh hopefully it won't be a wild year but i i suspect strongly that it is going to be challenging in many respects all right stephan i
Speaker 4edit this i'll put up the link both to your website and the macro 50 there on the screen so folks know exactly where to go and what to enter is it macro five zero yes yeah okay great yes macro no no no so if you're if you're one of the army of folks uh that that just hammer me repeatedly in between steph's appearances i need more palm boy when stephanie coming back on uh this is a fantastic opportunity that stephanie is making available to you so definitely go there and uh consider buying her excellent research at an amazing price um so uh with that um folks uh in a you know so definitely go rush and do that if you would like to get some help in terms of just sort of thinking through how to take actions in advance of of next year especially if it proves to be a buckle up year like steph is is warning us you start you know if you're reading stuff's um uh analysis and saying okay i want to put some of this into action in my portfolio if you would like to get professional help with that consider talking to one of the professional financial advisors that thoughtful money endorses these are the firms you see with me on this channel regularly to schedule a free no obligation consultation with them just fill out the very short form at thoughtful money.com only takes you a couple of seconds and you will end up getting a bespoke personalized advice from these firms for your specific unique financial situation given your goals given your you know your assets your debts and given your risk tolerance um and again it's all free and there's no obligations involved so again run to thoughtful money.com to set that up steph it's always so fun to catch up i heard wilhelmina snore just a couple of times in there but i trust she's
Speaker 3doing well she is sound asleep uh she didn't find that nearly as entertaining as you and i did i think is
Speaker 4she dreaming of getting turkey leftovers uh in a little bit at
Speaker 3thanksgiving oh wow yeah she definitely will be happy to do that do your dogs eat all that good stuff do they get to participate they
Speaker 4will eat anything and everything i can put anywhere near their mouths
Speaker 3oh man i love it the best all right well
Speaker 4give her give her a scratch from all of us people people are always asking for a wilhelmina update so they'll be glad to hear that she's well and about to
Speaker 3get well fed always all right steph
Speaker 4well we'll see you in a month and uh have a great time in between now and
Speaker 3then you too thanks a lot happy thanksgiving in
Speaker 4the meantime that's right same to you uh same to everybody watching this and beyond that everybody thanks so much for watching Sam's Club is the club for every holiday club
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