Expect A Mass Die-Off Of Public Companies Later This Year | Ted Oakley

but my guess is there will be more companies public companies go out of business this year then I've seen maybe ever but in a long long long time welcome to welltheon I'm wealthy I'm founder Adam Taggart when the road ahead is uncertain there's no wiser Choice than to listen to those with experience who have seen enough market Cycles to judge what's most likely to happen next today we're fortunate to welcome financial advisor Ted Oakley managing partner and founder of Oxbow advisors Ted has over 40 years experience helping clients mostly High net worth families protect and build wealth through good times and bad and here at the start of 2023 we'll ask him if the bear Market is over or if it's simply sharpening its claws waiting to strike again and we'll find out how he's currently positioning his clients assets for the coming year Ted it's wonderful to see you again thanks so much for joining us thanks Adam Ted um it's always a great pleasure to interview you um folks uh constantly asking me to bring you back on the program uh your wisdom experience and just ways to explain things in a very matter-of-fact way that the average person can understand is really appreciated by this audience I have a lot of questions for you largely based upon the recent uh q1 update that you put out for your clients but before we start walking through that if I can just maybe kick things off here with a high level question I'd like to ask you every time you come on what is your current assessment of the global economy in financial markets well Adam I think what's going to happen here is we there's a few there's a few things getting ready to fall that hadn't Fallen before which were earnings uh and I think that's going to have a Major Impact I think people are not factoring in the weakness that's coming from these companies in earnings wise and I think that's going to have to be priced in at some point in time so we look for the market to go to new lows uh I don't know what that number is necessarily but it's certainly not I don't think it's where it is now and we've had this uh you know all year long we've had this obsession with trying to catch the low in the market and the high in the rates that we could front run everybody but they don't work that way that's not the way things really shake out in the long run in a bear market and so we'll see how it plays out but for us right now we just think that's where we're headed over the next few quarters okay um so some more additional shoes to drop but but more importantly the question I'd put in the intro sounds like you think the bear is is just sitting on the side right now sharpening his claws uh coming back and we'll bring the market to new lows at some point in 2023. I do one one of the things I've noticed is that by and large investors haven't gotten scared enough it's interesting to us they've lost money but they've been I don't know if they've been talked into it by Wall Street that hey everything's okay so just just stay with everything or what it is but typically you'll have to get enough damage in those portfolios to where they finally say Hey look I'm out I'm at least out a part of it and that we haven't seen that yet it's been an interesting turn for us this year all right and and you've got a chart in your update that we'll get to in a bit that shows that people are still pretty pretty all in the market and positioned long that they even if they're talking uh a more cautious game they're not putting their money where their mouth is yet they're still investing like it's a bull market um all right well look um like I said you you put together recently a great update for your investors um I want to share some of the highlights of that if possible for folks so watching this video here um uh let's see um it's interesting in that in that presentation I don't think I heard you mention the word pivot once and of course that seems to be what so much of the market is glued to right now is is is there an indication the fed's gonna do a massive pivot sooner than later and and we'll be able to ride you know a Resurgence and asset prices because people are equating pivot with with immediate higher prices and everything which which may or may not be the case in reality even if one does happen um but you did say that you think 2023 will likely uh or maybe we've already even seen the peak for both interest rates and CPI and on the day you and I are talking here they just released the December CPI numbers which are showing that we do seem to be now in a pretty identifiable disinflationary Trend um so I'll let you talk about that um is that truly the case you think we've seen a peak in both well what we were referring to on rates was not the short-term rates not less two years and less but but the long-term rate really because if you look back the rate the long-term rates I'm talking about 20 to 30. they peaked a while back uh you know and they come off since then not to say they couldn't go back but we don't think they will and we're talking about long-term rates when I say that we think the rates are big and we think you know inflation I don't know was nine points back in June July and obviously that's rolled over but people have to remember that all of that takes place while the economy is tanking right so as you go lower and those numbers get worse and that means you're headed more and more into a recession and then that I think that's what they fail to understand on all of this and from for us we just think that perhaps they're getting this wrong and that maybe this time uh Jay Powell is in a mode where he's saying hey look I wanted to get rid of this thing where the Federal Reserve is always the one driving the bus here and so we don't want to just run liquidity in and support the stock market may be wrong on that but he seems to be going that direction if in fact that's the case then yes your rights the long-term rates can stay there or come down and and and you can have a CPI coming down as well I do disagree with people that think that the short-term rates are based on the bonds because uh if you want to see those two-year rates keep going up watch him just keep raising those rates and the bonds won't go against that you know they'll buy the treasury so we'll see how a plan pans out but we're talking about that's what we're looking at right now on top of that okay um and a good clarification so short-term rates probably will actually go up a little bit more uh from here simply if Palace to be believed that he's going to stick to his plan um and I'll ask this question even though it wasn't so much in your presentation you know Palace said I want to get up to around five percent and then I want to hold it there for a good while to assess the impact of all the rate hikes we've done so far as they you know with their delay begin to really hit the economy um we have recently had Jamie dimon saying there's a 50 chance the FED might need to go higher than five percent maybe up to six and we had the trial balloon that James Bullard floated last week saying I don't know we might need to go up to seven um but it sounds like you're saying and correct these words if they're wrong yes that may play out a bit over maybe q1 half one of this year rates going a bit higher still from here um but in the short term but you don't really necessarily see a clear trigger for why long-term rates should rise back up to the highs they were at you know a few months back well it doesn't look like it it looks like the inversion of that curve is just going to get larger or you might even go to one percent or something where the short rates are one percent higher than the long it could very well be that way and I I do think I don't think people need to understand that if you look at the FED funds rate I don't think they I don't think they stopped that until that at least squares up with inflation so it's four and a half right now inflation six six one whatever it was today you know you you're still out of balance right now so uh one either one comes down a lot or the other one goes up more than they think we'll we'll have to see okay and you said that you think that um as a number of other folks that I've interviewed here um it's been interesting over the course of the year a lot of the experts I interviewed on this channel really didn't think the Fed was going to be able to get as far as it's been able to get so far with with uh hiking interest rates um but uh you and several others now think that that Pal's real main focus here is I don't want to be another Arthur Burns right I don't want to have us go through the the peer do went through in the 70s where they they raised rates inflation began coming down so they brought rates down and then they got another Resurgence of inflation so pal then again don't let me put words in your mouth here but it sounds like you think Powell is going to do what's necessary policy wise until he really has confidence that that inflation is is Stamped Out well you know what happened during that period is right in the middle of the 70s when you got that 73 when you got that big push on inflation and of course they raised the rates and and so it busted it busted things back into the 73-74 recession it was a bad recession so they came again with it you know loosened up too much they didn't let it you know ferret itself out and so what that did but then that pushed it to a new High Arthur Burns is out you know Paul volcker's in and then he has to really bite the bullet and I'm thinking that Jay pal is trying not to have to get into that situation all right so um my guess is you would you would say to the the people just salivating for a pivot um you know you've got maybe more confidence in Pal's backbone than they do um and then another thing I'd love for you to comment on is is if something were to force a pivot let's say something really bad broke and it just bad enough that it forced Powell to to really have to reverse policy sooner than he wanted to I don't think that's going to be a bullish moment for stocks that's going to be a crisis in the markets right you're exactly right what happens on those in people I think people that don't know a lot of history about the markets don't understand this but if he came within the next few months just a couple of months and started lowering them he was not going to lower the rates first he'll keep them flat but he when they start lowering that means they're fearful of things that are already happening badly okay and then the markets react just like you're saying they react poorly see all of that's ahead we don't we haven't stopped going up yet and that means we haven't flattened out yet and we certainly haven't started going down so I have no idea why Wall Street is so consumed with this I mean they're consumed daily with it and I I think they've really gotten it all wrong all right um and it wouldn't be the first time right um so going through your continuing through your macro Outlook um so you said yeah so sort of expect interest rates to Peak um certainly in the long term but probably still in the short term as well short-term rates at some point in 2023 inflation probably has peaked for watching it come down now um You said that the the economic news you believe is only going to degrade as we go further into the first half of the Year here one of the things that you mentioned we'll put up this chart here uh the ism purchasing managers charts uh have gone into negative territory which shows that um you know we're now in contraction uh in the manufacturing space in terms of spending um but is all this true that you just sort of consider you look ahead and just see this continued sort of just grinding down of of growth and opportunity in the in the economy well I think so and and actually just since we put that out you know the services came out inside Services came out well and they went into negative territory and I think most people don't realize that this Adam but wholesale drives the market not so much if you look at what drives the the market typically in the ism it's wholesale and what that tells you is that the whole that the people that are producing manufacturing Etc they're saying hey you know business is slower we're not buying as much so that's where we're headed and I think I think it may it may be the third or fourth quarter I don't know but my guess is that sometime in in the first one to three quarters that you start to really see that take effect okay and I don't think you addressed this in your update but but in regards to that where wholesale really drives is you know is is the dog and the rest is the tail what's your forecast for layoffs right as companies get increasingly squeezed um in the economy contracts further from here are you concerned that we could see wide scale layoffs that that sort we've seen in past substantial recessions you know that's that's Adam that's probably one of the hardest things to figure this time because we dropped a lot of people out of the group now I do think they're going to have layout I mean it's going to continue and it's going to get tougher the thing about it is and I know if you look at most small businesses and they had and the good employees they have they will ride with those longer than normal because they know they can't rehire somebody as good as that person you know I'm involved in in three or four businesses and the thing about them is you try to keep your good people even if it costs you more money than you normally would spend and so that's a really hard thing though to uh figure it's hard to figure out actually how many of those would do that we think a number would but it the unemployment will go up I think unemployment has to go up or he keeps the you know the pedal to the metal here I think that's one of the things he looks at okay um all right well look uh you uh mentioned sort of what served you you at Oxbow well last year was assuming a defensive position pretty early in the year um and kudos to you for that because it was not a good year it was a for the markets it was one of the worst ever for both stocks and bonds combined so defense really paid off uh it sounds like we'll get into the specifics of your allocation later on but it sounds like you are maintaining that defensive posture coming into to 2023 here um uh you mentioned that uh last year uh the commodity side of your portfolio did quite well um specifically natural gas oil and gold um I think you've kept on the natural gas and the gold but you've sold off some of your oil position I think can you just very briefly explain why well the the reason we and it was probably came across a little bit differently in that uh what we sold was the the the the big oils you know if you look at uh Devon or Chevron and um those kinds of things what we kept were oil royalties if you look at you know what we kept sentio Permian based those kinds of things Texas Pacific if you own the oil royalty and you're wrong on the oil you'll still be right on the royalty you see and we get cash flow better cash flow on the royalties than we get on the big oil and we really felt like oil was coming down and it has come down and so uh but we're still getting good we're still getting good payments on the royalty side so that was uh not to make people think we don't think you know we want some energy on the natural gas side we kept the pipelines we we did not keep um any of the straight gas companies because the pipelines are different in that they get paid on three puts so we'll pay we'll make that cash flow no matter you know we're obviously at a very low price right now and mcf basically on on natural gas but they still get paid and we still get paid so that's how we that's how we set that up for those two things okay and I'm just curious since we're on the topic um trying to map oil s investment Outlook to a slowing economy um do you have a strong sense of where you think oil prices are going to head in 2023 because the economy is slowing down well your your week worldwide with accepting maybe a few countries that are starting to come out but the people forget about this and I totally agree with them on the supply look demand look on oil long term but short term you know oil is coming off for a reason and everybody asked me this question all the time why do you think it's coming down I said well that's easy they're front running a soft economy because you don't use as much oil and that's that's where it is it doesn't mean that the supply is not still reasonably tight and things are going on but if you're not buying it the price is going to go down and so that's as you go into these weak Economic Times you look for oil to you know to come off that's all we're doing and it's probably one of those things where we're out of it for maybe a year or so uh and we'll be back I'm talking about the big oil now yeah and I want to remind our viewers that your firm Oxbow advisors is based in Us in Texas um in other words you have a very close proximity uh to the oil economy of Texas I'm assuming a number of your clients uh work in the industry so in other words you're pretty close to the heartbeat of what happens in the oil Market you're not just kind of reading the papers and and guessing you're actually talking to people who have a lot of first-hand knowledge of what's going on in that market and you've you've invested in it for decades and have a really good sense of how the trends work well I do I will tell you uh though oil and gas people that are in the industry are not they're they're sort of I use them as a contrarian group because they're parentally optimistic yeah I mean when the price is really high they think it's going it has to go higher and when it gets really really low they think it has to go lower I'll tell you just a quick funny story and this was back in the that was there was this back in uh I must have been 98 or 99 I mean it was one of those periods there where Oil went below ten dollars okay and so a couple of times I talked to producers and I said um I said how much does it cost you per barrel to lift that you know and they gave me a number and I can't remember exactly what it was but it was 50 more than the price of a barrel was in the open market and so This Is How They think and so they I said well why don't you just go buy it and they said well because it might go lower and so do you see what I mean I mean that's that you got to think about that and so that's that's how they they they're they're they're they're they're they're a group that uh they they they can't take the deep lows or the high highs it's tough on them all right um well I look forward to Ted you know when you see the um uh you know the Winds of Change blowing uh that's going to make you want to get back into the Big Oil Majors please have you come back on the uh the channel here we can have you explain why um all right well in kind of rounding out your macro Outlook um you said that uh you know not only are um we're seeing signs like the ism numbers that the economy is slowing uh but we are seeing that Goods prices are coming down um and and again today's uh uh latest CPI numbers uh do bear that out um uh and that uh it's it's funny even though right now in in today's numbers again um one of the biggest contributors on the upside to to the CPI is is housing still that's very lagging data and if we look at a lot of the other more real-time data it's very clear that the national housing market is beginning to roll over here um I assume you you have that same Outlook um and so I want to ask you how substantial do you think this this housing correction could be once it gets fully underway you know it's a bifurcated Market because Adam what's happening is uh it I suspect in in the big picture when it's all said and done I would suspect that housing prices generally would come off fifteen twenty percent that's just a I'm just throwing it out because that's what I would expect and the primary reason is because if you look at where people are locked in to existing home you know most of those mortgages are below four percent and a lot of them are at three and some are two and a half and so when it starts up this Mobility thing they're going to have to lower the price to move that house if they have to move to another city right or let's say they have a couple children now and they've got to you know expand all of that works into a problem because you have all this group over here with really really low pricing that has to be working in a market with really high pricing and the two don't fit together and that's why I think uh people are are talking that way you know uh and now we've seen it too in luxury homes uh you know uh Finn we I brought this out on a call this the the quarterly call we had but one of the things that Redfin came out and said hey year to year luxury homes down 38 percent as far as you know and so that are selling and that's that's what we're noticing too we used to everybody used to tell us oh they've got cash or buying for cash won't hurt that market well didn't happen that way because I'm seeing more and more even my own clientele who have housing that's anywhere from three to Fifteen million they can't sell them yeah some of them don't even get a look nobody walks in so we're in the midst of that right now and they're just gonna you know we have to deal with it as we go through this this period well let me Target this a little bit further Ted because one of the pushbacks I hear from folks um on the topic of the Market's going to decline substantially or not as they say hey people have these really cheap mortgages they're just not going to move right and so they're just going to wait this out but what people forget or what I what I think they're forgetting is that housing is priced at the margin and that means you only need one or two houses in a neighborhood to sell to reprice all the homes in the neighborhood right and there's always going to be some percentage of sales in any Market just because people die people get divorced people lose their jobs people have to move for other personal reasons right so there's always going to be some transaction volume there that is going to be doing the marginal price resetting so I'm just curious do you do you share that opinion that people are maybe not paying enough attention to that dynamic I think that's totally true because the other thing they miss is that you've gone through a couple of years of extremely high uh home home taxes and so now taxes are so high and see that goes on top of the payment right people are not realizing that you know it's if you look at it today and I've got a number on this because I pulled it before but if you buy a new home today uh the average person in the United States would have to spend over 45 percent of their income just on the on the home and so that's not that won't work it just won't work I mean you can't make that work long term so something has to happen and I think it slows down the industry um you know real estate industry has always been and believe me take let me tell you this I love real estate I think it's one of the great Investments by the way but uh and I've owned it and we own it and we different things but here's the problem people are um they're more enamored with real estate than anything else most people think that very little can happen to real estate well I've been through periods where a lot of things happen to real estate and I'll just throw this out these letters RTC if you'll remember that that was a period where you could buy everything on the cheap cheap really cheap okay and then they come and go they're not as much as a stock market but they have their periods and I think we're coming into one okay yeah I would almost say and you don't have to share this opinion but like right now if you're talking about a residential house and look of course any particular geography is unique and location location location all that stuff you can still find some good values in some little pockets but in general in today's housing market again for the consumer I think this has got to be almost one of the worst moments in time to buy a house because prices haven't really be corrected yet from their all-time highs and but mortgage rates are more than double where they were you know a year and a half ago right so you're kind of almost getting the worst of Both Worlds the the highest price and the highest financing costs you know and that is so true and I think people forget about this but these municipalities and state and counties have been on a free ride okay and 21 and 22 and so I'll give an example I own property in Wyoming they never go up very much on tax they double the taxes in 20 and go and 22 double them 100 percent and so what happens is you these these cities and counties and States all of a sudden they're on a free ride here now that's another thing when you go to sell that home they look at okay I've got this interest rate I got to pay this price and on top of that I have to pay this much in tax right those all of those things factor into a slower Market in our opinion okay so I imagine you would say patients um you're probably going to say this about the the financial markets too but in terms of the housing market for those folks who are looking to buy real estate my guess is you would say patience is your friend in 2023. it is I remember uh you know a year ago or longer I would tell people and it was red hot everywhere especially here in Austin but everywhere else that I we we go all over the country so it was red hot and I would just tell people hey just wait on it you know things don't stay that way forever and they'll break down on you sooner sooner or later uh you know and everybody was like well we can't do this can't do that now it's starting to happen and but it's probably just probably just starting I think people in reality they really don't believe it that's one things I'm finding about about the real estate market too yeah well it sounds like you know many things uh people go through the five stages of grief right and the first one I think is denial right it takes you a while before you really are willing to accept it's happening right yeah I I know in Austin actually I was interviewing housing analysts nick jurly uh last month and he brought up the the most recent housing sales and then housing price data and housing sales you know have have cratered they're down like 40 to 50 percent and most major metros from the prior year but but housing price declines were already beginning to pick up and leading the pack was Austin Texas and it was a 15 decline just from May to November that was the data set that we were looking at I'm sure it's even worse now so your advice for people you know in Austin who are asking you to say hey maybe maybe wait a little bit has already turned about to be very prescient advice I'm also really curious too the last time I was I was in Austin actually I was visiting you on that trip that um I was staying in a place where out one window I could see a building that was just being finished that Google was building and then another building that was still under construction that Facebook was building these were pretty big buildings in downtown Austin and since then those companies have both announced either hiring freezes or or you know substantial staff cuts um is anything happening with those bills they're just going to sit vacant for a while or what's going on there because you've been at sort of the hot the tip of the Spear of the speculative you know fervor in big tech there in Austin well I I don't know about Google but I do know about Facebook because it's public knowledge now uh the 23 floors they had in the new building here I believe it's 23. uh they are not going to build out right now so they could either uh they could either elect to sublease it or they could do nothing until they decide what to do but either way you know it's it's creating you know empty offices and I don't have this number because I haven't done all the work on this but I believe right now that downtown Austin probably has more square foot for lease than they've ever had and of course they have two very very large buildings coming out of the ground as well so and we've got a number of buildings coming out so there's a lot of space around if somebody wants some wow and you know that gets exacerbated by the whole work from home you know movement that started uh from the pandemic but also as you said we're here at the start of the year you believe at least for the next half of the year but maybe potentially even further we're going to see continued economic weakness maybe further layoffs as we mentioned earlier so it just doesn't bode very well for a lot of vacant commercial Office Space that's true all right well look um uh let's move on to you you did a section on bonds you did a section on stocks so on bonds um you very rightly as I've been saying a lot on this channel uh that higher interest rates have been killing borrowers right uh both on the consumer side and on the corporate side and because of that um it sounds like you sort of expect to see a certain Reckoning you know certain die-off amongst the weaker more over leveraged players um in in the corporate system I see nodding as I'm saying this but um how how substantial do you think that could that get well I will say this about a lot of the corporations they were smart enough at least to take those really small you know short rates uh some more uh the rates when they were really low and kicked that paper out a long way the problem is we had so many of those companies that were just living on a string on basically floating rate debt that's the killer because as we roll over here if that floating rate debt was at a two or some of them were actually a one and a half or something like that they're going to a seven so or higher so all of a sudden that's what you get into um it's been hard to get a number on that because there's a lot of mezzanine debt that it's hard to get it hard to get a number on it you can see what's on balance sheets and different things in companies but the public companies but there's a lot of debt out there on private equity on private companies real all various things that's really floating and that to me is where the problem's coming in all right you know I've heard people say look if if we do indeed get a recession this year you know it's not going to be as systemically bad as 2008 was because you know we don't have the crazy housing loans that were being made right and and uh and there was enough housing debt and enough portfolios out there that it created this big contagion effect and that's true but we have all debt re-rating at these substantially higher rates so it is kind of a universal injury to everybody that uses credit which is the you know just about everybody in the in the economy these days you have a great chart here that that just underscores how much bond yields have jumped uh in the past um one year right now um you know when you look at it from bond yields we can look at it as an attractive uh from an attractive perspective as an investor but but it also reflects the the huge jump that just interest rates in debt have taken on and so the cost of capital has gotten so much higher for Corporate America um so maybe I'll put that chart up here and Ted you can talk to it any way that you like but um I just kind of liken this in some ways to uh you know throwing somebody into the Arctic Ocean right it's you can die from the shock because you're you're getting chilled so quickly I mean we're we're kind of having a debt or we're in danger of having a debt shock to the system here correct from how quickly and how high rates have changed that is true and it's in a lot of different areas Adam if you look at a lot of the leverage out there whether it be on a private business private Equity a lot of real estate I mean you know a lot of multi-family not that's that's been brought out the last five years okay and if you look at their structures they'll typically have you know maybe 15 20 Equity maybe 20 fixed maybe 60 floating and it was great for them for about five years but now they're going to roll all that over same way with all of these companies that are leveraged and when they roll it's going to really change the cash flow number and that is the problem because then if you've got a lower cash flow number you have to take a lower price and I don't think people are thinking about that I think they're sort of trying to uh glass over that and but if you look if you look at it though that's what has to happen when you have lower cash flow and that's what's coming from the higher rates all right so when you have this concern I'm just worried curious like what sort of Defcon level do you place on it I mean how how big of a concern is this for you well my I would guess okay this is a Ted Oakley yes but my guess is there will be more companies public companies go out of business this year then I've seen maybe ever but in a long long long time because number one their leverage number two so many of those public companies didn't have didn't even have any revenue and if they did it was minuscule so those companies go away and if you look at you just go look at we don't own bonfons in particular but we really own straight bonds but if you go look at a bond a lot of bond funds they'll Jam a lot of triple bot I mean a lot of Triple B in there because it's investment grade A lot of that paper probably is going to be um then put down to Double B single maybe lower and that way it's downgraded when it gets downgraded all of a sudden they have to kick those bonds out of whatever fund that was and so that's a problem you're going to have too because you won't have you won't have the buyers and so that all of that's still coming I think and so that's why we've mentioned to people don't underestimate how safe you need to be because you can be in a lot of bonds that are not safe at all uh that's a great point to underscore and you know more people are waking up to bonds I would say this year um we've certainly had more conversations about bonds over the past four months than I've probably had in my life um and there's lots of good reasons for that and I I know I believe Ted you know your your firm is is pretty um Bond friendly right now given the environment but it very much depends on what type of bonds uh we're talking about here and I'll give you a chance when we talk about your portfolio allocation to talk about the specific type of bonds that you're going into here um so uh I do an underscore though that that um I believe and again correct me if if I'm not stating this properly but um you know bonds are they are looking quite attractive uh in a number of cases here and especially when you look at the bond yields we have today as compared to the dividend yields of the stock market you know the past decade there were sort of the Mantra of there is no alternative right Tina um well now bonds are beginning to offer an attractive alternative because you can basically get a similar or maybe even sometimes Superior uh yield or cash flow with a ton more safety than a lot of today's equities offer you correct that's true and one of the things that people I think they make an error in this respect and that they most people really in particularly individuals don't they don't know what is in a bond fund they don't know what's in it and they don't have any idea of duration or the quality or anything like that they just somebody just tells them you need to own bonds okay but think about this if you have a period like we think over the next 10 years where it will not be like the last 12. and you really don't know exactly what's going to happen with inflation interest rates and all of that it could go back to two it could go to six you know who knows what I'm trying to say is if if I were advising most individuals I would have to say why don't you just think about it like this why don't you think about keeping that treasury look first time ever that savings is back and you can do you know you can do something from a 470 on the shortest end to five years out you know still at a four and all of a sudden you're creating a really great cash flow with very little Risk by the way yeah they're not say there's not any and then give yourself a chance to look at it the next two or three or four years to see how's this thing panning out why do people have to go out and try to guess what the bed's going to do and we're going to buy those long bonds and take a bet I just don't think it makes sense all right well you know and that is the name of the game in terms of wealth building over time Ted right is it's it's you know try to avoid taking the the unnecessary risks that set you back if your thesis goes against you and and you know try to have a an attractive but um you know risk balance way just to keep growing as consistently as you can over time so I love that reminder and on the point of bonds um folks if you're watching if you if you're taking to Heart what Ted's saying um and if you're like most people uh very well you may never have bought a bond directly yourself I hear a lot of times from people you know who watch these videos who just say I'm kind of interested in this topic but I just don't know much about it I want to remind folks that we did a really good uh kind of primer on understanding bonds and how they work two months ago with Mike Leibowitz from real investment advisors uh gosh it's about an hour presentation with another hour hour and a half of him answering questions from the audience so if you want to go watch that totally for free just go to wealthyon.com bonds a free very useful resource for you there um all right well look um regarding bonds and interest rates um sort of switching over into stocks now but um you have a chart here showing um interest rates and and stock prices and basically saying you know the stock market has had a 40-year Tailwind that it's been able to enjoy right it's just had this this secular trend of lower and lower interest rates that fueled a lot of the capital flowing into the equity markets made you know credit money really cheap for companies to borrow buy invest buy back their shares with et cetera and you can see what happened with stock prices as a result but now your chart shows that that secular decline may be over um and uh you know we we could a reasonable person could expect that relationship to continue but it's now just going to be inverted where you know if interest rates uh are higher going forward uh than they have been in the past couple of decades uh that we would expect Equity prices not to be as well supported um so can you just opine a little bit more about what you expect there well I think people forget or at least they don't uh give credit where credits do and that is with a declining interest rate environment over this whole 40 year that's a long time a 40-year period then you know it's it's been hard not to make things work I mean anything uh real estate private Equity Private Business anything you invested in stocks bonds everything had that going for them because the cost of capital kept going down and down and down and so let's say that you go into a period and and this happens in our business where you have you have a change something changes and you go into a time uh where all of a sudden let's say uh we're going to stay around three or four percent inflation for the next 10 years maybe we go to two or maybe we go back to six and back to three all of a sudden though it's not that one and a half two that was just stuck there for 10 years you have to get in a position where you're starting to look at things now and what's that inflation rate going to have what's impact on my investments over a 10-year period let's just say it averages three and a half well that's going to impact me 40 probably in the end and they forget about that and I've seen this before I'll give you an example people were so hung up on high interest rates from basically 1970 to 1982 that when they flipped the lid in August of 82 and rates started down it took people three or four years to realize that hey there's a change going on here and they stayed with the old system what they were doing and they met and they it took a long time for them to realize that hey it's not like it was okay and so that's that's sort of where I think we could be today all right and I think that that really underscores the value that a firm like yours brings your customers here Ted um which is the active management approach takes on a much more Superior importance in in the environment that you think we're heading into here right so you know with that that Tailwind at your back um with with the FED being willing to intervene at any given moment uh to you know protect investors from any bruises that the market might be trying to give them um anybody could make money all Boats were Rising you could basically throw a dart and and do fine in this new environment it's not going to be that way um in fact it's going to be sort of inverted in terms of the trends so you're really going to have to do your the gumshoe detective work of finding you know the diamonds within each sector that are well run well capitalized have good growth prospects and and really being able to sift the wheat from the chaff is is what's going to determine much more importantly who does well going forward um so I just want to underscore you know I always say in this program folks should work with a professional financial advisor who understands all these macro issues but I think that's even more important given the type of environment that we're headed into well it is for a couple of reasons number one if you look going back to 09 until now you know these bear markets were five or six weeks long so if I've been in the business less than say 14 years that's what I saw until 22 and then I had to deal with well gosh this thing's gone down all year and I it's interesting because we one of the probably the when we we you know we have new money come into the firm and one of the things that we get told more than anything else really is you know I have all these exchange traded funds et cetera Etc but nobody's ever done anything they just look at it and I think that's a lot of what's going on on Wall Street today they're just looking at it and thinking you know it'll be okay don't worry about it and that's normally not the case and ever so we'll we'll we'll we'll see how Pam pans out in the long run but we've talked in the past Ted about this Dynamic where you everybody's professional muscles are developed for the environment that they've you know built their careers in and because we're at a secular shift we may very well have the exact wrong musculature in our professionals than we need for what's going forward right and to your point like a lot of a lot of Wall Street I know this because I I interact with a lot of capital managers and financial advisors the the way the model has mutated into over the past you know 10 20 years of this hyper supported Market is the skill set of most of these guys is marketing it's getting the capital in the door like I said you can just have the monkey throwing darts in the back room in terms of the allocation right so these guys are very good at knowing how to bring capital in but they haven't really focused all that much on the management of it you know you're basically saying going forward it's the management that's going to be really critical well and I would tell you to say this to you because I've seen these ups and downs over you know 45 years and what happens is in the industry but I will say for sure since in the last 13 or 14 years and I would compare it by the way to the residential real estate brokers I think these two industries were on such a move that just kept going going going easily that you get all sorts of people in the business both businesses and they don't really know much about what they're doing they just show up well when times go bad you got to know you have to know something you know and I think that's where we are now I think we we I think our our industry by the way has too many people in it and what it will do during these periods is you shake them out and I've seen it before you know you you go your numbers go down and I suspect that will happen in a residential real estate too I completely agree and and I mentioned my interview with Nick jerly he I think right now is predicting about 30 percent of Realtors will not renew their licenses during this downturn that it's going to shake out about a third of the market and I to me that feels about right similarly in terms of the financial advisory space too and Ted that's why I really appreciate being able to bring on guys like you uh and of course wealthians endorsed advisors who come on this channel every week so that people can at least get a view of of the type of advisor that I think is going to you know be coincident with success going forward and so they can get a sense of what to look for in the type of advisor because you're a good model in my opinion you know there's another thing in there Adam I think people don't realize and that is if if you look at the the fees that have been charged generally okay on top of of mutual fund fees or exchange traded fees then they'll put a management fee on top of that if you look at that over the last 12 or 14 years um I I remember uh greatly in a meeting when I was a younger guy and uh and the person looked across the other guy that was breaking the presentation says you know it looks like to me the last three years you made more money than I have and I think some of that will go on I think they'll look and say you know I'm paying a lot of money here and I'm really exactly where I was five years ago as for what I owned it has been you know nothing's changed and I see a lot of that coming to fruition here yeah and one of the ways the reasons I love to have you on on this program Ted is is you have the the view of experience where you know so much of what everyone's wrestling with today it's a rhyme of a theme we've seen earlier on in history right which oh sure gives you confidence in terms of what to project and so that your last comment there is a riff on the old joke that I think was made back in like the 30s of um the the broker showing that um his friend his yacht uh in the marina and his friend asking okay but where are your clients Yachts right basically hey I still have the book okay where are the customer shots I still have that book all right yeah so again this is again just just a rhyme on that theme um all right well look um heading over into stocks now um uh you uh you know we we talked about how we just talked about how uh you know if there was a secular shift in in interest rates and in um bond yields and inflation that that may be a sign that gravy train for for stocks generally is ending you also have put up a chart about M2 money supply showing as well that in in your data set which goes back to 1960 uh every single year of the data set money supply as measured by M2 increased except for this last period um so in terms of like things being different this time this definitely seems to be a big one well uh and I have to say uh Adam and you know our friend Lacey hunt I've ran that by Lacey because he's such a historian I said Lacey am I right on this and he came back and said you're yes uh you can use it you're right because we pull it off Federal Reserve but the thing about that is is people this is what people don't realize when you're pulling money out of the system and it and you're going into a really tight money period all of a sudden that's underneath you can't see that but that's where you get into trouble because now you go get along or you go get some sort of financing and people are like hey you know what we're out we're out of the market you know and so that's the sort of thing that starts to happen like Wells Fargo yesterday getting out of the uh getting out of the housing mortgage Market in a big big way all of a sudden you start to have these people pull out and I think people don't realize what happens and If the Fed stays on the same rate they've been running at by the time you get to April or May you're going to be back at a point where they have really pulled a lot of money out of the system and when that happens you know loans will dry up and and again all of it fits together for the economy but that's what we see with that yeah well to borrow your opening statement here um that there are a number of shoes that are sort of preparing to drop this year I feel like we're identifying a number of them and yet another one that you put up was um profit margins right which is they're still near all-time highs as I believe it was Jeremy Grantham said profit margins are one of the most mean reverting data sets in all of finance and for a lot of the reasons you've already discussed about your concerns about the economy slowing it it just seems like you know we've tossed the ball up in the air and it's hovering there at its apex and and science just tells us it has to start coming down so how big a deal do you think uh reversion to the mean in earnings is going to be this year well I think I think that's the one thing that Wall Street misses now I've been watching him I think I used uh in the letter that the you know average on the street was 231 dollars for uh s p on the street consensus for us we think it's less than 200 somewhere and some along that way what happens is I think people forget about this but look at all the inputs to public companies over the last 10 years their financing kept going down and down down as far as the cost you know globalization helped them quite a bit well that's going away now everybody's everybody's saying hey I'm pulling back into my country now that's going away all of a sudden you know with inflation people on the wage side are saying hey I'm not going to work for that you have to pay me more money if you want me in the loop here so if you put everything and then cost of goods have gone up now obviously are coming down some on a commodity side right now that's true but if these other things stay up okay then you're going to be in a situation where those margins have to come down I cannot see them not coming down more than people expect so if the margin comes down then the profit comes down and then the multiple comes down and that's how we look at that three-way okay yeah and just to to make sure folks understand stocks are generally priced um on two ways you hear about the the price to earnings ratio right so um the price is a function of earnings um so uh usually there's a multiple that's placed on earnings right and we have seen some contraction over 2022 Ted in terms of PE multiples but but you're saying you know there could be still more reason for the multiple to shrink um and when that multiple shrinks it brings the price down assuming earnings are constant but you're saying earnings are actually likely to be lower going forward than are currently expected so even if the multiple Remains the Same stock prices can come down as the earnings expectations shrink so we've got sort of two factors that could be continuing to bring stock prices down next year lower earnings than currently estimated and also people getting worried and bringing that multiple down too correct that's correct and I think what people forget to realize let's just take a 4000 1000 number for the S P 500 and let's say let's say let's say we happen to get it right at 200 not not lower than 200 just 200. you know that's still 20 times okay that's not a cheap Market by any stretch that's not cheap and so a bear Market lows you usually go under the 14 you'll go to you know 11 12 13 times and and so when you start making these adjustments I think that has to get priced in and therein lies the fact that we think you have to you may not get it but you have to be aware that there could be more significant weakness if those numbers keep on falling yeah and I'm not saying you're necessarily calling for this but if we if we if we have a 200 earnings per share on the s p and when we get to a bear Market multiple of a 12 or 13. I mean that's sort of like in the high 2000s right I mean that that that's that's like at least a 30 drop from where we are today yeah and I think even if you said 15 times I mean you're looking at 3 000 on the s p and I I just think people uh are not aware of what the numbers are and they've been sold this Mantra that don't worry about it it's a long-term deal and you'll be fine but I think I've told you this before but I've always had a saying with all the portfolio managers at Oxbow that almost everybody is long-term if you talk to them until they lose money and then their short term it's very true and again that's the value an advisor brings is you know as as people are our emotions um and our sense of of under or overconfidence tend to be our very worst enemies here and having a partner that can really ground you in reality and consistency can be a really big asset um Ted thank you so much for the time you've given us I'm still I'm working my way towards your your portfolio allocation if you've got a few more minutes I'd love to ask you one or two more things about your your investor update is that okay totally okay I I will say Adam you've developed such a great show over the last few years and I know you have a huge following so uh I'll do whatever whatever works for you you're much too kind Ted but thank you um all right well look um there's a chart that you showed that I think really underscores kind of the big risk that we're talking about here um and this is the chart of non-profitable tech from just the beginning of 2020 to now so basically past two years right and it has completely round tripped uh it it grew by more than 400 percent uh but is now off by almost 80 percent and it's pretty much back where it started from two years ago and and that's the math I think that most people just aren't doing there in their heads and of course this is an extreme example but you know as recently as as a a little over a year ago you know folks thought that that was index was going to increase by another 400 they just could not conceive that it could drop let alone even Flatline but of course it's it's given up all those gains that it had since just the beginning of 2020. well it has and I you know I pull that off Bloomberg all the time uh just so I can sort of look at it and see where it is and it you know it obviously is back to where it was but it looks like now though it's going to go lower you know that it's actually going to go under where it was in 2020 and that being the case but there's so many companies I've never I never saw in my time in the business so many companies that were trading that didn't make any money and I used to look you know a year and a half ago or so I used to look at this art fund that sort of thing and I'd say well in my opinion that's going to be like the munder net net fund now for those that haven't been around a long time it was the hottest thing going in 98 99 2000 and then over the course of a three-year period they lost it all 100 almost went out of business and so when you own all these companies yeah you know you can say what they are but remember in investing I don't care what investment it is could be any kind of investment not just stocks and bonds it's cash flow you got to have cash flow and so those come all those companies have no cash flow and on top of that they're burning all the cash they do have and so that's that's what they're up against right now you know you know Ted what's so important about that is as you and I have known each other for enough years now that um I saw how you comported yourself during uh that massive melt up uh in big Tech um I'm in particular thinking about Tesla right which um you know from a cash flow perspective was value that a gargantuan valuation versus its actual cash flows um and then the whole Bitcoin uh crypto uh extreme boom as well and um I really I really have to commend you for you know how you sort of just kept everything in perspective and again I think it's because you have the historical advantage of having seen versions of this movie before to not get caught up in the crazy fomo that just sort of seems to infect the majority of the rest of the financial markets um and I I think having that grounding and that experience is so incredibly valuable because it is really hard for the average investor to resist that siren song especially when so much of the official Wall Street you know in you know establishment is cheering that same thing on and basically selling them the message if you don't get in now you're going to be left behind you don't understand that everything's different this time and so you know it's it's not necessarily sexy to be the guy at the party saying hey everybody I think we're you know we're overstaying our welcome here the comps might be coming soon but it's that kind of prudence that just saves uh you know can be a lifesaver in terms of wealth protection well one of the things I bring out and the piece that you're talking about that with the magic of it all was get rich quick scheme okay you look at all those things they're just same thing okay let me just bring an idea to you it doesn't make any money and we'll throw it out there people will like it and they'll buy it but what happens on and and I put a line in there we're using its magic is because now you see it and now you don't all right and that's really what's happening right now and um I find it really interesting and I I'm not I'm not an anti-crypto person I just think that it's probably limited to just the upper group I think you know I I follow them so I always know how many coins are out there it got up over ten thousand at the high now it's down you know to 8 700 or something but surely most of those are not going to do well in fact they haven't done well already you know they've lost 70 80 90 100 so uh that's how we looked at that but Wall Street picked up on it too when they when they did spax and they bought these companies and they did the funds where they were doing these startups it it all folded together and and I've I've been around too long I know what I know what happens in those things um well look uh we mentioned this earlier I'm going to put up the chart for it now um but you know you said look people are beginning to get nervous right they've they've got the cuts and bruises of 2022 to prove it um but what's interesting is even given the Outlook that you and I've just spent the past hour talking about um they're still positioned as if it's business as usual in the markets right now right people are still pretty much fully invested they're still pretty pretty long um what do you think it's going to take for people to actually start changing their investment Behavior well I have a theory on it really and that is if you look at most investors 1920 and 2021 and you put those numbers together for the average person that was in um ETFs or indexes or whatever they did really well and no no question about it and so what's happened is when you get the first down leg which is let's call it 25 or 30 percent depending on how they're invested in those it hasn't taken away enough of those three years yet to make them really get where they're like you know yeah but I'm still I still made money over there you know this period I'm looking back to where I was at the you know the beginning of January 119. so that's to me that's that's my theory of what's going on that means that in order to really shake them out you're going to have to go to a lower low where all of a sudden they look up and say and now I'm really losing money and when that happens they pull a trigger and that that's what I think will happen to use a relationship analogy um your girlfriend's not coming by anymore she's not answering your calls but you're still not willing to give up hope on the relationship until you actually see her dating another man right that's that's true and then even even then you know don't believe Your Lying Eyes yeah that happens too well look the reason why we brought the conversation at this point is because um Ted you when I've had you on in the past you've talked about how bear markets tend to end right they tend to have a couple of different phases and in the last phase is sort of when people finally decide to believe their Lying Eyes and they just break the relationship they break up with the markets right they say I don't get me out all right I've lost way too much money just I want to sell it all don't even talk to me about stocks or bonds anymore I just want to go nurse my wounds in a corner I don't want to touch these things ever again in my life and I recall you saying that um that they these bear markets tend to end with that last capitulation phase which is where you sort of see like a like a sudden waterfall of like the last 25 percent of the drop happens pretty violently and quickly right at that end as everybody just kind of gives up on the market and given current investor positioning like we just talked about in that chart it doesn't seem like we're anywhere close to that yet so um again I want to take a pause here for a second because I'm going somewhere with this is that still the way you see it which is that it's more likely that we still have kind of increasing downtrend and then a major capitulation event for sure because what what we see now uh and I do this from time to time I'll just be around people that we don't do business with it but just say how's it going out there in the marketplace or whatever I just had one two days ago and she said well I had a million dollars in my 401k she's a vendor for us and she said but now it's down to about it's down to about 800 or 7.95 something like that and I said so you made any changes she said no no it'll he'll come back he'll come back I'm not too worried about it and so I think that's the pretty much the Mantra that's out there so what has to happen is you have to get to a point where they say it now look I'm I'm not going to lose any more money and and uh and that's unfortunately that is the plight of the smaller individual investor they have nobody to really help them say okay you need to get liquid here and then put it in here and they you know it's just they're unfortunately um they don't get good advice and I think that's what's happening right now our interview with Ted will continue over in part two which will be released on this channel tomorrow as soon as we're finished editing it to be notified when it comes out subscribe to this channel if you haven't already by clicking on the Subscribe button below as well as that little bell icon right next to it and be sure to hit the like button too while you're down there and remember we're continuing our practice of publishing my top takeaways from these weekly interviews to get mine from this interview with Ted for free just go to wealthyon.com Adams notes and finally if the challenging macro Outlook Ted is detailed in this interview has you feeling a little vulnerable about the prospects for your wealth then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth keeping in mind the trends and risks that Ted has mentioned here just go to wealthyon.com and we'll help set one up for you okay I'll see you next over in part two of our interview with Ted Oakley

Channel: Wealthion

Views: 565,204

Keywords:

Id: LwAnsQMGBvE

Length: 67min 17sec (4037 seconds)

Published: Thu Jan 19 2023