Stephanie Pomboy: Exhausted Consumers Are "Spent Up & Lent Up", So Economy Will Slow

you're clearly seeing signs that the consumer is spent up and lent up we got the consumer confidence numbers last week and they surprised everyone being weaker expectations were particularly weak and within that and importantly I think and you and I have talked at length about this Adam um the labor assessment deteriorated dramatically wow so what you're seeing is consumers are clearly drawing down their saving running up credit card balances As We Know already to support just the basic [Music] lifestyle welcome to thoughtful money I'm its founder and your host Adam tager It Feels Like A Tale of Two economies right now if you ask an economist chances are you'll hear that the US is doing great growing faster than its G7 peers with low unemployment and a stock market back near all-time Highs but if you ask the average man on the street you'll likely hear a very different story one of hardship where wages aren't keeping up with the massive Spike and cost of living where companies are reducing hours freezing hiring or actively laying workers off and households are increasingly forced to turn to expensive credit cards to fund living Essentials which of these is more accurate and are things likely to get better or worse from here for an expert view we're lucky today to talk with Stephanie pomboy economic and marketing analyst and proprietor of macrom maven.com Stephanie thanks so much for joining us today thanks for having me Adam always great to be with you always great to be with you and uh I we actually got to spend time together in the flesh a few months ago when I briefly zoomed into to where you live for a uh another event there and uh I got to say I getting to spend time with you and will Hina in person such a joy and I hope she does Grace the camera today at some point well she's still talking about it she's like where's Adam come back again ah she is such a love um and and I was surprised to learn how young she was I mean she's still very much a puppy what what a great just a such a cute dog um anyways lots of questions here for you Steph lots to talk about um if we can let's just kick it off with my usual starter what's your current assessment of the global economy and financial markets well I guess uh my assessment at the risk of sounding like a broken record is pretty much the same as the last time you and I huddled together here um and that is that I am convinced still that uh the fastest interest rate hikes in our economic history uh are going to have real consequence on the economy and the financial sector um and we are seeing that play out but so far it's been sort of poo pooed or or generally dismissed as is temporary and problems that will be resolved as soon as the FED Cuts rates um never mind that that seems to be getting pushed farther and farther out into the future um so I you know I continue to believe that we are going to see a real slowdown in economic activity and we will see problems around servicing debt at these substantially higher interest rates both on the part of consumers and corporations um meanwhile all the consternation around Debt Service seems to be singularly focused on the federal government uh which I think is the one group that you really don't need to worry about because they have access to a printing press in the form of the Federal Reserve and the power of taxation that does not apply to Consumers and corporations so they're kind of um you know uh Flying Without a safety net unlike the government so you know I continue to be focused on debt service issues in the consumer corporate space and um the knock-on consequences for the creditors um who have extended that credit to them um and you know a broad slowing an economic activity so I mean boy it all sounds pretty uh gloomy and unfortunately um I that is sort of my central thesis is that we've going to have a substantial slowdown uh and we're seeing sign of that emerging already okay um so I as longtime viewers of this know I am very much on team lag effect that's what I hear you saying here which is uh there's we're going to feel a lag effect from these high rates and the longer they stay higher which is kind of Pal's you know latest guidance here um the more entrenched that lag effect should be when it arrives um now that being said um I can understand emotionally at least the viewer that says hey come on guys you you you kept talking about the shoe that's going to drop forever and it hasn't yet and uh I know you said you're seeing some of the signs so we're going to talk about those in just a second um and one of them you might point to is well I mean GDP growth for q1 was only 1.6% I mean that's that's a market slowdown right um but I just looked at GDP now they just uh upgraded it today for Q2 uh to 4.2% now GDP now bounces all around and let's see where it ends but but certainly 4.2% if it were to come in at that would be pretty serious growth for the second quarter um so uh we'll get into the details here but at a high level what would you say to the person that says all right Stephanie you know GDP growth looking like it's going to be 4.2% unemployment still below 4% stocks near all-time highs like what's the reason to worry yeah well um that's several things within that first Q GDP report if I can go back to that um most of the growth of that 1.6% increase that we saw in growth 1.2 percentage points or so was related to consumer spending on housing health care and insurance so that is not a sign of strength in my view this is it consumers running out and taking vacations and buying second homes and uh new car or anything like that um quite the contrary they're spending every dollar they have and then some just to keep up with the basic necessities um to give you some specific numbers uh total real consumer spending in the first quarter was up97 billion for the first quarter in real terms 74 billion of that was non-discretionary stuff like I just outlined housing Healthcare and insurance real incomes in the same quarter were up 44 billion so you had incomes of 44 billion spending of 97 billion wow and so what you're seeing is consumers are clearly drawing down their saving running up credit card balances as we know already to support just the basic lifestyle uh again they're not running out to take uh elaborate vacations um and another sign that's maybe more timely that I would point to and I think is really important that hasn't received received hardly any attention that I can see um in the financial sphere is um restaurant activity you know we heard for a long time while consumer spending on Goods was slowing that we didn't need to worry about the slow down in Goods consumption because what was happening was consumers were now shifting their consumption from Goods to Services you know they loaded up on all the dads and whatever they wanted during covid when they had to sit at home and now they were prioritizing spending on services like experiences including particularly eating out and restaurants um in January of this year the restaurant uh National Restaurant Association has a monthly performance index that they report and in January that index hit its lowest level since restaurants were shuttered for business during Co so I you know I made note of that cuz was shockingly weak and thought well maybe it's that people spent so much money on their Christmas presents or whatever that they're now just in January hunkering down um and we'll see that rebound well in February the index posted you know if it went like this to the lowest level since Co it barely barely picked up off the mat and then in March rolled back over again so there's something going on here and it's it's a sea change in the consumer spending um this is probably one of the easiest and simplest discretionary spending Windows is what's happening on the restaurant front so I'm continuing to focus on that but you're clearly seeing signs that the consumer is spent up and lent up we got the consumer confidence numbers last week and they surprised everyone being weaker expectations were particularly weak and within that and importantly I think and you and I have talked at length about this Adam um the labor assessment deteriorated dramatically so we did get a bad payroll employment report on Friday or at least weeker than expected um and that was news to Wall Street that we were finally seeing some slow down in job growth but consumers have been downgrading their assessment of the labor market for a while um so that's critical because the argument for what's been sustaining consumption has been this tight labor market um and you know there's a lot we could say about the tight labor market which again seems like a a real misnomer because what's happening is you've seen a collapse in full-time job creation full-time jobs are actually down year onye they're declining one and a half% year onye while part-time jobs are exploding and this is why you have this huge increase in multiple job holders because I think what happened is companies had so much trouble hiring people back after covid that when they finally were able to get to a full staff um and then business started to slow they said well we're not going to lay people off like that we'll just cut their hours because it was so hard to get Bob and Susan and whatever so we're not going to let them go we'll just pair back their hours and they chipped and chipped and chipped and chipped away at hours to the point that Bob and Susan had to go out and take out second jobs so you now see this increase in you know part-time versus full-time jobs and the multiple job holders at a record all while as I mentioned earlier the real income growth is still lagging behind basic non-discretionary outlays so I could not push back hard enough on this notion that the consumer is strong you know people look at these headline like retail sales numbers and say look they're spending but you've got to take out the inflation in retail sales and what you find is that when you take out inflation real act real unit sales have gone nowhere for over two years now um and then you have to look at how they're funding this expenditure and it's by drawing down saving and running up credit card debt so these are unsustainable Dynamics um and the reason why it's critical of course is that the consumer is the engine of the economy is also the engine of corporate profits and you that kind of has the knock on consequence consumers are now struggling it's going to blow back to corporations because they are now trying to serve as debt that's double what it was a year ago they're able to do that because profit growth has been robust but as that profit growth Withers they're not going to have the wherewithal to continue servicing rapidly inflating debt so I think we've got you know a lot of um Force is coming together here and you know you use that perfect storm analogy um and ironically they are all kind of hitting precisely as Wall Street has um persuaded itself that the no Landing thesis is the right thesis everything's fine in fact the economy is so good that the FED may not be able to cut rates anytime soon um but it's fine because where we won't get low rates we'll have strong growth and and strong earnings so suffice to say I my view is not consensus all right um as a great run through um a few things just to mention that that corroborate a lot of your statements um one uh I talked about this the other day with uh with Lance Roberts I pulled up some charts of corporate profits both absolute corporate profits and corporate profit margins and was really interesting is is they're doing just fine um and so the question that I I talked with Lance about was like did basically Corporate America just push the entire cost of uh the inflation that's been generated postco onto the consumer and it's kind of hard not to make that that argument right and that's that only works for a certain amount of time right until you kind of kill the goose that lays the golden egg and what you're saying is is consumers are getting more and more pinched that they're now at the point where they're having to cut back and that actually will start impacting corporate revenues and thus corporate profits and you're hearing that from companies you know you heard obviously two high-profile ones last week Starbucks and McDonald's both noting that their consumers are starting to say Hey you know we can't absorb these higher prices anymore but you're right I mean all of it went to margins because they just passed everything along one thing I would say though um in that profit number this is again um another really important distinction that I don't think people make and that is everyone's very aware of the gap between the Hales and the have notss in the consumer spere and the idea that the top 1% is doing great in the bottom is really struggling um very few appreciate the degree to which the skew is every bit as wide every bit is profound in the corporate space those S&P earnings numbers if you go through and look at the share of the earnings contribution made by the top 10 companies I mean basically we're talking about in the corporate sector a handful of companies that are driving all of the price performance but also all of the earnings growth and the rest aren't doing very well at all so I got these numbers from S&P sorry to go off on this whole thing Adam but it's a great Point keep going um the top in the last quarter the top 10 companies alone accounted for over onethird of total S&P earnings the top 100 companies were 75% so have a 100 companies in the United States that are basically generating all of the profit growth um the bottom 100 companies are losing money and that's of the largest 500 companies in the country if you broaden the lens to include the thousands of small and midsize businesses that don't make the cut for the top 500 the situation is much worse and I can give you some stats on that because I look at that nerdy government accounting of corporate profits that comes out with the GDP report um and it shows over the last two years one quarter the increase in profits that the S&P numbers reflect so again it's a story about the halves the very few companies um that are doing well they have cash they can service their debts they are driving price performance and they have earnings and everybody else is sort of like your average Joe sixpack consumer who's just struggling to sustain their Enterprises so I talk about this a fair amount but you're doing a great job of of emphasizing its importance which is this is really a story of mean versus the median right where if you look at the averages things look pretty good if you look at average consumer household balances if you look at average corporate you know profit margins or debt balances or whatever um it it doesn't the average doesn't signal trouble but it's because you have these colossally massively affluent individuals or massively profitable companies that are huge you know at the very tail end and they're pulling everything up they're pulling it average way up so if you look at where the median is which is the 50th percentile in each it's in real danger territory um and to your point like it it's it's really you know you get your top couple of percent and it's really everybody below the top couple percent is is in danger territory right but but the average person certainly the average reporter doesn't think of it that way yeah and the and the average actually doesn't really reflect anybody anymore I mean you're either at the top or you're at the bottom the average is sort of a useless number in that regard I mean um how many companies are making average earnings growth uh you know I could go through those S&P numbers but I would guess very few of um but you know to your point this is why I come back to drawing these distinctions because we look at these averages and people for example they dismiss this concern I have about the corporate credit issues as they try to service de at higher rates and point to all the cash on corporate balance sheets well the top 10 companies in the S&P 500 hold more cash than the bottom 400 you know I mean it's just the skew on the balance sheet thing is even more profound than the earnings so you have 10 companies with all the cash and everyone else is like sifting the soci Cs for you know any spare change so the wherewithal the capacity of companies to handle any increase in debt service is far lower than people appreciate which is why we've had the highest corporate bankruptcies since the global financial crisis so these things are happening this is why I'm frustrated is you know it's not that the higher rates haven't hit they have but they haven't hit the top companies in the S&P 500 that people focus on um but they will you know we're seeing the small and midsize companies are the ones that are really struggling and it's eventually going to feed up the chain if I'm right about the outlook for earnings which will greatly you know diminish the capacity to service debt at these higher rates even by higher you know higher quality companies so so let me ask you this then so again going back to the average and the median um you know it when you talk about the the the top you know the top 10 companies having more cash than the bottom 490 right and we're just again we're just talking about the S&P 500 in that case right um employees are much more equally distributed right so in other words the top the top 10 companies don't have almost all the employees right so when we have the the bottom 90 plus percent you know suffering they're going to have to start laying off workers so that's where I think the rubber May really meet the road in the story is as that bottom 90% gets to the point where it's been keeping Sue and Bob along for as long as it could it cut their hours as much as it could but it now says sorry guys I've been holding off you know forever but I got to let you go um that is when consumer spending could really get compromised and the course then that could translate into that vicious Loop of lower consumer spending more layoffs Etc how worried are you about that absolutely actually H and I this will be a flashback from like a year ago I remember we talked about that idea of going from labor hoarding to labor shedding or companies you know they hung on they hung on they hung on and hoped that eventually the recovery would come um and then finally decide you know we just can't hold on any longer and they do have to just start chopping heads so I agree with you 100 100% on that score and maybe we're starting to see that a little bit um as reflected in as I mentioned earlier that that weaker payroll report but also um the consumer confidence you know the consumers are the ones who really are aware of what's happening with their own job security and you know as they look for jobs or um have friends who are out there looking so their assessment has really been downgraded also last week we got the ism uh surveys for both uh services and Manufacturing and what was interesting is that the employment component for both of them declined um but the services one really declined sharply which was again comports with what I talked about with the restaurant you know uh traffic and sales data which suggests consumers are pulling back and and you know the service sector is going to broadly start to slow um which is kind of the last shoe to drop and away here um so that that drop in the ism employment for services was a pretty sharp and a significant move so we'll see we we could be you know at a turning point on that score okay um and a few more things just to add on to to points you've been making one is you you talked about in addition to the fall off in restaurant sales you know we're seeing other consumer spending companies like Starbucks and McDonald's say hey we're seeing a Slowdown too we also saw enticing foods and they specifically called out that it was consumers cutting back on their spending and and I think Tyson food's a little bit different because you know that's just America's protein right this is people going to this the grocery store you know it's you're going to cut your eating out bill first but you know you're going to still you still have to put food on the table and it's basically saying that enough households are having to cut back on their purchases of you know chicken and beef and stuff like that that that it's really beginning to impact Tyson um so I just talked to your good friend David Rosenberg um I interviewed him earlier this week um he had a couple really interesting things to say one totally agrees with your point that consumers are are you know highly lebed continuing to have to put more lifestyle expenses on the credit card [Music] uh a lot of key stats he mentioned but one that stuck in my mind was that delinquency rates on credit cards are are now back to 2011 highs so 201 you're getting dangerously close to how bad things were during the great financial crisis right um so um he also talked about to your your um skepticism of the quote unquote tight labor market and talked a lot about that with varing guests on this channel that it doesn't seem to be as as solid as the FED seems to keep telling us um you know David said look um the fed's making a big mistake because it is looking at uh uh it's looking at data that is not only lagging um but um seems to be flawed and one of the key data points he looked at uh in in the labor market was he he went back and and did his analysis looking at the and forgive me let me just make sure I get it right the qcew the quarterly census oflo and wages which unlike the BLS surveys um which just talk to a relatively small number of households this has 12 million inputs so it's much more data driven uh and he said that by his math it is that that the current payroll numbers that get put out are overstated by 800,000 to a million yeah I thought a million was the number on that yeah yeah and and that's that's a big chunk yeah you know that's a real material number so he basically said look those numbers the revisions are going to come they might not come for a couple more months but when they do he said look the Fed was uh you know initially scrambling the raise rates uh it's going to be once it realizes how um much weaker the labor market is than it thinks and it's kept rates this High it is going to be scrambling to cut rates uh at some point soon or some point you know as soon as the it realizes the mistake and obviously if you look at history almost every every one of the past recessions we've had basically was preceded by the FED hiking rates aggressively plateauing and then realizing oops we went too high we've held it here for too long the recession starts and it just starts scrambling cutting to the recession so his prediction there is is really nothing more than just the cycle repeating status quo status quo lather rinse repeat as they say I mean this is the bed but yeah I totally agree with that you know one of the things that contributes to this um overstatement of employment is the birth death plug factor I think that's really the thing that gets implicated in leading to either under estimates as we're starting to recover or overestimates as the economy is starting to slow because the birth death plug factor for those who aren't nerds like me um is basically an imputation that the BLS adds to every monthly payroll report to try to guesstimate how many jobs were created by new businesses that haven't yet you know set up payrolls or you know gone through that whole that aren't yet captured in their whole payroll processing um you know methodology so the way they estimate that is they take last year's business creation and use that number so they'll say oh in February 2023 new businesses created 120,000 new jobs and then they'll shade it you know slightly up or down but basically it'll be 100 you know plus or minus uh thousand jobs that they just magically add to the payroll number um so what happens is that turning points in the economy they're imputing let's say right now they're imputing job creation that isn't taking place and that's inflating the payroll numbers and then eventually a year later when they get the actual data they go back and revise it and say oh or bad you know turns out those jobs are never created so that's why you get these yawning um gaps between what the payroll numbers are reporting and what is actually going on at the turning points it's exactly when you need the data to be accurate is when it's least reliable um at these major turning points so you and I love analogies to me you know everyone's always classically and I think correctly largely said the the fed you know the way the FED sets policy is is like driving by looking in the rarie mirror this is like looking in the rear your mirror that's shattered right so it's just giving you all sorts of you know you know confiscated or or erroneous uh uh you know data um that's so lagging right I always have refer to them as monetary Meo because I am old enough to remember Mr meoo from the cartoons he would like stumble into these construction sites and he was so myopic he couldn't see anything that was going on in front of them or around them and you know it always was a catastrophe so that's sort of the FED I mean they just can't see the nose in front of their face all right well look on that theme um I'd like to get your your reaction here um to yesterday's recent comments by Stanley dren Miller um you know highly respected uh investing mind um uh he he had some Choice words I'm going to read through them as quickly as I can and I'll let you um respond to them um basically they misdiagnosed covid and thought the economy was going into a depression the treasury is still acting like we're in a depression theyve spent and spent and spent and my new fear now is that spending and the resulting interest rates on the debt that's been created are going to crowd out some of the Innovation that otherwise would have taken place everybody seems to get it but Yellen who just keeps spending and spending I think it's dumb politically because it's causing inflation and it doesn't take a genius to figure out that the average American is getting hurt by the inflation um quick comment I a little bit more to read but anyways let me take a pause for a second quick comments on that no I totally agree with it but it's hard uh not to imagine this is all political uh you know if there weren't an election in November I don't know if we'd necessarily see these policies I mean maybe but I I can't disagree with anything that he just laid out there at all it's totally okay so then he goes then he goes on to talking about the presidents and and the presidential candidates right he says with Biden I'm more worried about stagflation with all the government spending with all the tricks that yellen's been using to manipulate the yield curve with the way that the FED seems to have reignited Financial conditions I think think the inflationary outcome could be there but I also fear regulation and everything else preventing productivity um I mean I guess you agree with much of what he said there but do you do you agree with him that it would continue to be inflationary or do you think that all the cracks and the infrastructure that you've been talking about the economic infrastructure are going to pull things down uh into disinflation and maybe even deflation at some point well I look at inflation in a sort of more nuanced way um my sense and I got this wrong which is why corporate profits were so strong my sense when we saw the huge increase in inflation through uh input costs Commodities and the supply chain issues was that companies would have a hard time passing all of that increase along they try to pass some of it along but I thought they wouldn't be able to pass all of it along and it would pressure margins because you know the inflation in inputs was so substantial but you know to my or surprise they were able to pass on a substantial amount of those prices and the reason why obviously was that the consumers they were passing them on to went to their mailbox every month and got a new check from the government so and they were you know they were doing fine during this whole crazy stimulus period the fiscal stimulus is no longer taking the form of checks to the mailbox there's no direct support to Consumers although there is still support coming through state and local um stimulus that is eventually trickling out to Consumers so it is helping sustain some of that but I continue to believe that we're at a point as we saw with Starbucks McDonald's Tyson that you talked about where consumers oh here she comes here she comes the Superstar H here she is um where consumers are now hitting their limits on how much price increases they will take so what I worry about I totally share Stan's concern about inflation but I see that as a margin story because I think the inflation will remain trapped in the pipeline at the input level and corporations will struggle to pass that along as they have here to for to Consumers so I do think there will be plenty of inflation impulse but it will all come out of profit margins okay um I should have noted too that uh dren Miller basically couched all these remarks under the title that he gives the current administration's economic policies and F now just just so it doesn't look like we're just beating on on the Biden side um uh on the other side he didn't have much nice to say about Trump uh and he noted that inflation was likely to be even higher under a trump presidency uh particularly if he interferes with the fed's independence and raises tariffs both of which he has pledged so you know people are saying it's sort of a preemptive f for for Trump as well if if he gets in there um uh let me ask you this um so I've mentioned this once or twice before in the program I'd love to get your thoughts I have this thesis um or hypothesis that um both presidential candidates have an incentive to let the economy and the markets uh undergo a correction after the election so um I think it'd be hard for anyone to really doubt that the current Administration is not taking Extraordinary Measures to try to prop things up as much as possible and you're nodding as I'm saying this yeah I think they know that like look you know this is for all the marbles we're trying to get reelected here we got to do whatever it takes kitchen sink all that but we can't do this forever and so if we win in November then let's let the froth get out of here like let let's let's let's set ourselves up for Success at at the tail end of this presidency yeah maybe year one's going to be rough as as this stuff clears out but we'll recover in year two we'll finish strong year three and year four right well if Trump Point wins obviously the Biden Administration is going to absolutely stop doing whatever they're doing um so it'll probably start correcting anyways but then Trump has this golden opportunity to say yeah let it all crash right I get to blame Biden for that for my first two years it sets the bar a lot lower for me and then I have a much lower bar to step over when I you know finish strong in years three and four and say wow look look how much I recovered you know from my predecessor's mess from here what do you think about this no I mean I totally agree with that I don't know how long you know if it were Trump I think he'd probably love to see the markets and the economy crash in November December January and then you know start to put in his policies and watch the economy immediately gain some traction I think that would be his bird thing um but you know a blood liing between November and and February would probably be something that he would be fully on board with um or even you know March April May whatever those first six months um so I you know I think that is a very powerful thesis on both sides absolutely um you know to your point though uh there's what do they say about the best laid plans of mice and men um you know the current Administration as you said is working very hard obviously to keep the economy supported and they very cleverly set forth stimulus that would be hitting nap between now and November in anticipation of that you know we have this the chips sack the infrastructure spending Etc all that's still in train and hitting over these next several months so they do have that going um but the real flying the ointment for them that they have not been able to control and I think is really what's impacting consumer sentiment and spending and whatnot is Energy prices you know you know they tried this whole green initiative and it blew up in their faces because not surprisingly you know fossil fuel prices all went up substantially um and now we have this situation in the Middle East that's just exacerbating things on top of what's going on with Russia and the Ukraine and all the geopolitical chess moves around the energy market so um I think that's a real problem for them and it doesn't look like the efforts that they are you know bringing to bear on keeping those prices lower which I hear are substantial efforts on their part um mostly involving jawboning domestic producers behind the scenes um clearly aren't doing enough because the energy prices really AR where are we $80 you know we're we're pretty much stuck at 80 um and that's with you have to imagine a tremendous amount of pressure um being brought to bear to bring that price down so I'm not sure that they but the long story short I'm not sure they'll be able to sustain this illusion of strength until November but uh you know anticipating things falling apart a long time ago so what do I know right so that that was one of my questions for you which is do you think uh all the efforts to keep things patched together until uh the election will will succeed sounds sounds like you're giving it you know mixed probability but let me let me get your reaction to this idea uh I think it's more than an idea but um uh I'm sure you've seen this article um I just the video book earlier this week Stephanie which will come out the day after you and I are talking here is with Melody Wright about this topic which is um uh Meredith Whitney wrote a piece in the financial times recently a couple days ago basically saying hey here's a way to basically inject a trillion dollars into cons consumer household wallets by September and maybe up to two Mill two trillion by the end of the year and that's um I guess Freddy Mack just applied to be able to enter the home equity Market um and uh I had a long conversation with Melody folks if you're interested in getting the details of that I highly recommend you watch it Melody has a lot of choice words for this but it it it's it smells like one of those um this it smells like one of those ideas that you know an Administration facing a t title action with love right oh my gosh even if I can't get the funds deployed in time um and it seems like this would be a relatively swiftly deployed program for as proposed now unclear whether they're really going to get that money in consumer households before the election but if they can Greenlight it and just say it's coming obviously the message has a lot of value to them um what do you think is is this going to be the next part of the the stimulus uh parade here it's just so absolutely terrifying I mean the whole thought of it just sends chills down my spine and Recollections of the housing bubble bust you know in 20056 um do we not learn from our mistakes uh I mean it would be hard to argue that real estate prices aren't you know at extremely extended levels right now especially um relative to home affordability Etc um so facilitating people taking cash out of their homes at these prices uh just so that they can support Su spending just oh my God don't even get me started it's just so terrifying I I can only hope that um cooler heads prevail and that they don't go down this Avenue but um nothing about the motivations right now suggested that's really likely I mean if they think they can get some money out of it I'm sure that will be that will be the next rabbit to be pulled out of the hat with all of the dire consequences that will inevitably PID be paid down the road yeah um it's unclear to me whether it would require I forgot to ask Melody this question whether this would require require Congressional approval or not if it did I would think it might have a tougher time passing just because the divided Congress the Republicans would would want to thwart anything that that they think could help uh the current Administration but if not you know I I don't see what would prevent this because it just seems like an idea my own personal perspective that's that's bad enough and uh and self-serving enough for you know DC to just love it's just stupid enough for them to do it you know what do they say an animal house this situation requires something stupid to be done on somebody's part we're just the guys to do it you exactly what's going to happen uh all right well look we we'll keep our eye on that folks and and we'll you know update on it if and when it it it becomes a reality um all right so uh than Adam now I'm not GNA sleep tonight thinking about that one that's I know I I mean and Melody you know she she's been a mortgage analist for decades and she she very much has the scars from 2008 and basically you know working with many many mortgage holders who were getting foreclosed on losing their homes you know she just said it was just it was just horrible um it's you really see the evils of bad policy and she's like you know we're already seeing stresses uh in the housing market uh amongst the the lower classes the lower over leverage classes and she's like this this would just put absolute rocket fuel on that but anyways folks that's a topic you want to learn more about go watch that video with Melody um so back real quick to Dr and Miller's um screen you know he was he was railing a lot on the treasury um which has been responsible for a lot of the the deficit spending that's been going on um now uh you have told me before that um you know obviously you're not a huge fan of the FED um don't think that they're blameless here by any stretch it's not just the treasury's issue here um but it seems like you are actually paying more attention these days to what the FED plans to do with the balance sheet side of things versus the rate side of things correct yeah well I mean this has all been a function of the untenable fiscal Dynamics my my focus on the fed's balance sheet because you know it's just basic math you have you're issuing 2.3 trillion of Treasury Securities a year and we used to have all of that well we weren't issuing 2.3 trillion a year but let's put a pin in that for now um we used to have all of our treasury issuance uh handily uh absorbed by our foreign creditors namely foreign central banks who would recycle their dollars back into our treasury market the dollars they receiv received um from Trading with us Etc this was the vendor financing quid pro quo uh that Jim Grant so articulately described many many years ago um and that worked beautifully for everybody involved for a long time um but things have changed uh and especially in a world where China is is increasingly an engine of global growth um so the need to vendor Finance us consumers is diminishing in terms of our share of global trade um but also we've done some things that have uh sort of diminished the value of holding your currency reserves in dollars and treasuries in particular namely um by freezing Russia's assets for their invasion of the Ukraine that was sort of shot across the bow to any um of our you know let's say Frenemies out there in the globe that they might not want to hold their Assets in dollars lest the US unilaterally decide to freeze their assets for whatever reason someday um we then double down on this weaponization of of the dollar in the latest um funding bill for Aid to the Ukraine and Israel where they decided that they were going to come confiscate those froan Russ Russian assets to fund the war for the Ukraine and Israel so it wasn't just that we were freezing them and then if Russia and the Ukraine came to some peace settlement we would unfreeze it and they could have their assets back we now have um you know usurped all of that we've confiscated those assets and we're using them you know as a means to finance the war in the Ukraine and and Israel so um this just doubles down on this weaponization of the dollar um and people are moving uh the US dollar share of Global Forex reserves hit its lowest level in 29 years last quarter so they're voting with their feet um and right now people don't pay attention to it or care because they look on their Bloomberg screen and the dxy index is you know still up substantially on the year and everyone's talking about the almighty dollar and and look at the Yen which is imploding versus the dollar you know um so the problem is if anything the dollar is too good um but they're missing what's really happening in the real money world not the paper trading on Wall Street um and the Dollar's role in in the world is rapidly diminishing which is a long way of saying you know the sorry I got on this tangent but that we need we no longer have the global uh Central Bank support for our treasury market um and so someone's got to fill that void and the FED had been filling that void with QE for many years where it was basically picking up all of the slack that vendor financing slack was being picked up by the FED then they turned to QT and I then the moment they did that I was like well they're not going to be able to do this very long because you know our fiscal uh deficits aren't shrinking even if they just stayed stagnant at a trillion a year and foreign purchases went down the FED needs to fill that void still instead it was compounding the problem by selling 720 billion treasuries effectively selling you know they were adding to that much to supply each here so for me it was always a matter of time before they stopped QT um and eventually they're going to have to reup QE because there's just no there's no way to bridge the supply demand Gap in the treasury market other than uh the FED stepping in I mean the only other way they could do it and it would take a lot longer to do would be to legislate that public pensions or or something had to hold x% of their Assets in us treasuries and mandate that you know you create a natural buyer um in that market but between now and then the FED has to do the job and that's why you know I took a victory La last week when they announced a much more aggressive taper than people had imagined um and I think it's all on the way to re-expanding the balance sheet soon okay um so uh a couple of things um uh you know some others uh who I interviewed you know suspected something like this was coming too because you you've had shielding the feds QT have been um you know a lot of other parties that have been keeping parties and vehicles that have been keeping net liquidity flows positive right and a huge part of that's been the fiscal spending which we've already talked about but things like the draining of the reverse repo program right which is going to hit zero at some point here relatively quickly I think part of this is the Fed realizing hey once that buffer is gone the QT that we're doing is really going to start biting in full force and we need to start moderating that too um but anyway change the structure of the issuance you know 86% of our issuance is t- bills I mean who finances two trillion dollar deficits with t- bills right you know which are what are they 50 basis points higher than you would pay on the long on the longer end of the curve yeah no totally totally and um so uh I I just wanted to know in addition to foreign buyers no longer buying our our treasuries or foreign central banks no longer buying our treasuries um you know what they are buying and I know you know the answer this which is gold right so just saw a note this morning that in q1 just came out that world Central Bank uh their gold purchases set a new record right so you know that is definitely sending a strong signal in and of itself there right that they are actively preferring gold to dollars um and just to you mentioned pensions and and I say this I don't even think I say this tongue and cheek crazily I think if the government forced Pension funds to have to hold a certain amount of us treasuries I'm going to say that would be a good thing for Pension funds because those hold so much crap right now and you and I have talked a lot in the past we don't have a lot of time right now to really get into the whole pension issue um although I'd love to get your thoughts in general just sort of on a on a risk level where you have it right now with Defcon level are you at um but pensions hold so much crap in their balance sheets this would probably be a step towards better soleny for them if they were forced to do this I mean I hate the thought of a government-mandated action like this but it actually probably might be a net positive for Pension funds what do you think well I I agree that it would be a positive in terms of improving the quality of their asset mix um and if I were you know CIO of cpers I'd probably breathe a heavy sigh of relief that I was being forced to do this um the problem is though um if you have an 8% return Target uh it's you know your if you take your actual discounted rate to four let's say on a treasury you mushroom your long-term liability so it's going to make the uh the shortfall look even bigger but at least it'll be a more responsible model to eventually get there I mean it it's assets that aren't going to go to 10 cents or five cents on the lot of the crap they hold yeah exactly so I mean I was going to say the point is kind of moood because when those purportedly 8% um you know private credit vehicles that they have on 10 to one leverage blow up you know the the shortfall is going to explode anyway so um you know doing it on an um Actuarial basis instead of on an actual realized loss basis might be an improvement but um all right well look we're getting tight on time so like I said I think we're going to have to push a real any real deep discussion on pensions into a future conversation but that's people's eyes are probably GL glazing over when you say Pion no Know believe it or not I get people pcking me relatively frequently about hey when are you going to have Stephanie back on to talk about pensions um so I'm just curious any any new news on the pension front uh since we last talked or or is it just still at the same level of heightened concern well I mean every day you get another headline about another pension fund that's decided that they need to increase their allocation to the magical land of alternative assets or private credit which is of course now you know the new hot thing that everyone has to be involved in um not to mention leverage so you know it's just it goes from bad to worse I guess is basically what I'm seeing what what what percentage are you going to put on a prediction that um some material percent of of Pension funds in the US are going to need to be built out by the government in the future oh wow what percent odds do I put on that or what percent of them would need to be bailed no no no what percent odds like do you see it as a 100% inevitability that this is going to have to happen at some point in the future I I would say it's pretty close to 100% I mean they're already what five trillion underfunded and asset prices are pretty much near all-time highs uh so yeah I I think we've got a lot of um painful Time ahead of us as God forbid there's a reversion to the mean in in uh the stock market or credit uh that's going to be ugly well so this this is maybe something we can talk about again in a future uh discussion but is just the the coming era of of bailouts as I hate to say it I mean this this idea we just talked about with you know Freddy Mack getting into the the the home equity Market I mean you you can you can just write the future headline of you know all the bailouts that are going to come when when those loans get uh go default same thing in the pension world as you just mentioned um we're going to have likely the same thing in Corporate America um where you know when the dead issues that you were talking about for them start hitting um we're going to have States I think eventually at some point that are going to need bailouts um it's really going to be bailouts Galore for the institutions and of course who ends up paying the price at the end of the day it's just the average person and the pension thing I I fear that a lot not just because I think it'll be a big cab but I think that's going to be one that's going to create a lot of social Strife because as taxes continue to go up on an increasingly injured populace you're going to have neighbor versus neighbor which is wait a minute Why is my why am I paying taxes for your pension when I'm not getting any help in my retirement yeah the student loan thing is kind of a window into that and we haven't really seen as much I mean we had that uh one guy who confronted Elizabeth Warren I don't know if you saw that clip ever um where she was talking about how we have to forgive these student loans and you know he confronted her after and said you know I worked so hard to pay off my kids you know college and now you're going to turn around and someone else that why did I bust my ass you know and that that kind of thing um you you have to imagine there's a lot of that and you know I'll just throw this in there I know there's not enough time to talk about it but one thing that you know I've been thinking a lot about and it's just so uh Sinister a notion that I'm you know I I reluctantly force myself to to follow it and look for signs of it and see if it's actually getting traction and that is this idea that this whole student loan Gambit has seed the seeds of a moral hazard on Main Street you know we had this fed put that's created massive moral hazard on Wall Street where people just take irresponsible risks including financial institutions and non-bank financial institutions confident that if anything goes wrong the FED will bail them out you know come rushing in with the fire hoses well we now have kind of a fiscal put as it were for Main Street possibly I mean this is what I'm thinking about and looking for signs of whereby people look around and maybe they don't have student loans that are being forgiven but they figure hey if they're forgiving these people these fancy rich people who got you know art history degrees from Berkeley uh they're forgiving their debts well why shouldn't they forgive my credit card debt you know as I'm trying to put food on the table for my kids and whatnot um and I wonder you know to what extent that is isn't part of what's driving the huge increase in delinquencies in credit card debt where people are just running up these balances and having to zero intention of ever repaying them because they feel like Someday My bailout is going to come too well and we opened the door we we took the genie out of the bottle with direct fiscal stimulus to households you know during the pandemic so that precedent has been set so there is an expectation of look when I got in trouble last time you helped me so why not now and why not make it bigger right so um when I interviewed um got so many things that I wish we had more time to talk about when I interviewed Thomas hunig um you know former Kansas City um fed CEO and and then former voting member of the fomc um he was incredibly worried about the the precedent that was set by that director household stimulus um and and say that it's definitely now going to be a part of the Playbook going forward whether we like it or not uh whether even policy makers like it or not um okay so um God so many other things I want to talk about with you um on on that topic of of the um the moral hazard uh and also just sort of um the potential enablement of of people who overextend themselves to uh still kind of limp along um by support programs like disability right now and how badly that's getting abused um and and other types of sort of social programs I just recorded an interview that hasn't launched yet with Nicholas eart the guy who wrote men without work and uh it's the you know he his research is the the growing cohort of Americans uh and and sadly it's fast large and fast growing now who are are literally just taking themselves out of the workforce for no good reason you know they're demoralized or they just don't think that uh I I had a job and actually I wasn't making enough to it's just better off if I just don't work and I I collect on some of these other program and maybe I have some private family that's helping me as well and and they literally are just spending their days basically in front of screens um and there's a huge social um morass that anj came up with that he really liked was the the downstairs uh what is it yeah uh the downstairs basements BEC the new Opium Den where we we're just addicted to our um uh both pain medications and digital devices and it's it's I think it's now like he said it's like S I think it's 10 million Americans now between the ages of 25 and 54 fit in this class where they're they're men and now increasingly growing cohort of women unmarried not engageing their communities that are becoming kind of this Lost Generation here so all these things are going to come back to bite us all right well look in wrapping up here key question I haven't asked you yet what's your Market Outlook for the rest of this year what do you expect from the market and what assets do you favor and perhaps are there any that you particularly disfavor given your outlook well just broadly um I am really steering away from paper Assets in general and hunker down and hard assets so my portfolio consists of um gold primarily um some real estate and to the extent I have anything else it would be cash uh and you know I would be dabbling in the long end of the treasury curve because I feel like we're going to hit an inflection in growth and as I said earlier I think it's a matter of time before the FED ends up re up in QE in which case you know you kind of have quasi yield curve control here um so that would be my my sort of positioning obviously I wouldn't touch uh corporate credit with a 10- foot pole and I would not draw a distinction between high yield and investment grade because investment grade is basically um the same as high yield these days you know uh 50 over I think it's 55% of what's called investment grade is Triple B or lower which is just you know the bottom slug of the investment grade which is high yield with lipstick yeah exactly I mean you know it's basically one downgrade away from from being high yield so why take the the yield hit when you can just buy junk instead and basically own the same thing um so I I wouldn't touch any of that and obviously I'm not really bullish on the uh quality of the consumer credit either um and you know if I had to be if I were a long only Equity manager and I was looking for things to buy obviously I'd be involved in things that were um you know like energy for example uh maybe Emerging Markets to in certain areas um but I'd be very defensive right now um because I think the fed's kind of in a box I don't think they can cut rates because of the sticky inflation situation um but on the other hand there are a lot of signs that the economy is really losing steam which is why I think they'll end up having to do something through the back door namely the balance sheet um so they can maintain this illusion of monetary Integrity without touching the the FED funds rate but at the same time managed to Stave off any kind of um issues in the banking system which is one thing we haven't talked about yet but those issues are still very much with us I'm sure when you talk to Tom hanik he probably talked about the banking system and his concerns there because that was one thing he was talking a lot about with the with QT and the impact there um and we've seen you know their their unrealized losses are still around 500 billion uh at a time when you're seeing delinquencies go up on obviously commercial real estate Consumer loans Etc um and then last week we got a just staggering decline in deposits which you know if you start to see a repeat of the Regional Bank Run that we saw last March that slights out obviously because then they have to realize those unrealized losses on those Securities on their books um so I'm watching the deposit situation really closely it you know took a no stop and actually we saw the contraction in deposit since 911 um on a onewe basis which was shocking to me and it's not tax related because this data is all seasonally adjusted wow and it just it popped back a little bit last week but still nowhere near a level anyone would characterize as normal so I'm keeping a very close eye on that for any signs that you know we're going to start to see some more uh deposit outflow but it would stand a reason you know what happened with svb is their corporate customers were all these zombie companies and they were burning through cash so rapidly that it was draining their deposit base and they just stood by and let the deposit base trade without doing anything about it grossly misant but if you're starting to see issues with the consumer where they're drawing down saving to the point that they're starting to deplete their deposits as well you can see a broader decline in Commercial Bank deposits that does have bigger you know consequence because now they actually have to start selling those underwater Securities and then you got real problems so wow keeping an eye on that all right yeah well okay if we end on in case you thought the banks were fine well on Happ you know and real quick yeah Tom Dr hanig did we I did ask him because he was a former director of FDIC uh and I asked him one being the best five being the worst what's your current assessment of banking system risk he said four he said I'm I'm pretty darn concerned um all right so um uh couple quick closing questions for you the first very importantly for folks that have really enjoyed this conversation with you and would like to follow you in your work Stephanie where should they go you mean the three people haven't thrown themselves out the window yet I think they're headed were in the oven so they couldn't hear the entire conversation good let's hope um so you can find me at macrom maven.com um or you can follow me on Twitter at sboy although I don't tweet a whole lot I'll go through like periods of frenzy tweeting and then nothing for a couple weeks so maybe you'll get lucky and catch me in some Twitter frenzy but those are really the best places and of course here because I'm always happy to get to talk to you Adam well Stephanie we'd love to have you on as often as you can come and I got to tell you I mean the longer it goes without you on this program the more aggressive the comments the I start getting about hey get her back on um all right well look um folks uh Stephanie um definitely go check her out at macrom maven.com and Stephanie when I edit this I'll put the links up on the screen so folks know where to go also put them in the description below folks um but uh Stephanie has very kindly uh agreed to be a contributor to the new macro pass service for my premium substack folks so uh premium sub stackers you can Rejoice for that um and uh she has also agreed to return as a presenter for tal money's fall conference and the date for that has just been set so you guys are the first one to hear about it uh it's going to be Saturday October 19th mark your calendars uh more details on that will be forthcoming over the next bunch of months we got plenty of time uh but I wanted to make sure that we could secure Stephanie if she was available thankfully she is uh and again for those of you that are really interested in participating I wanted you to mark that calendar um all right Steph um just always so fun and such a joy uh this was no exception thanks so much for coming on and for bringing Willam in too oh well thank you it's a pleasure to be with you always and I and she says hello so all right Steph look forward to seeing you on the channel again soon thank you take care all right well now is the time on the program we bring in the lead Partners from new Harbor Financial one of the endorsed Financial advisory firms by thoughtful money to give their reaction to this great conversation that we just had with Stephanie as as well as give us their update on what's been happening in the markets over the past week I'm joined as usual by lead Partners John lra and Mike Preston guys great to see you thanks for joining me for yet another week uh let's see um Mike let's start with you um what were some of your key takeaways from the discussion with Stephanie hey Adam great to be here thanks um Steph had so much facts packed into this you know this hour that that you and she just talked I've got a a page and a half full of notes I'd like to just hit some some high points i' I learned some things like I do every time I watched one of your interviews and this was no exception U you know Steph talked about uh her Outlook you asked her what her Outlook was on the market she said the fastest interest R rate hikes in history are going to matter eventually I look back at a chart of the FED funds rate it's been over two years in March of 2022 the um you know the FED started to raise rates and so it's been a long time the bond market has plummeted uh since that since those rate hikes started in fact the bond market Market had a larger Peak to trough draw down than the S&P 500 did during the 2008 bare Market um but the stock market hasn't really paid attention the stock market hasn't cared rates are now at 5.25 or so on the one-year Treasury and we heard for so long that rates are zero there is no alternative or Tina and I see that you're bringing up the FED funds right there you know and so that's that's a massive massive jump there in a very short period of time and there's always if you look at this chart the uh the gray area there's always been some kind of recession after that right so it hasn't happened yet this has been quite a lag you talk a lot about the lag effect Adam and we're seeing it in in real time here so that was like the the the thrust of the beginning of her talk there's so much more I'd like to just hit a couple highlights I don't know if you had something you wanted to say there NOP just wanted to visualize your comments there about the the federal funds rate so a few things I learned that I didn't know for instance the restaurants data in January 2024 the uh the sales in restaurants hit the lowest since covid I didn't know that Stephanie talked a lot about consumers being tapped out and that consumers are running up credit cards just to keep Pace she even speculated that maybe there's some preemptive running up of credit cards and that consumers may think that there's going to be some kind of fiscal bailout much like there's been a bailout of the uh the student loans who knows I I do know that we've had had had bailout after bailout for a lot of years and a lot of people are still upset that there's been no consequences for the bailouts that happened during the housing uh crisis and crash of 2008 2009 I think it even started before then Allen Greenspan started to encourage homeowners to take money out on home equity loans basically the home ATM if you will and then the whole thing with Cash for Clunkers happened a few years after that then the housing crisis crash and it's been bailout after bailout since then so the corporations have record profit margins and and Steph talked about how corporations can't service debt with slowing profit margins since she speculated that the profit margins would slow on the input side she speculated that inflation basically affects raw materials and inputs labor more than it affects the output or in other words they can't raise prices to keep track of inflation so on the front end they're getting hurt and I I just have a quick chart I'd like to share here as well this is the chart of corporate profit margins after tax going back 70 years so other than the World War II time period which had around a 9% corporate profit margins corporate profit margins have been between 6 and 8% for most of the last 70 years so this has been a real constant it wasn't until the late 90s that this started to take off this whole effect with Allen Greenspan encouraging people to take uh money out of their houses it's B and and by the way that exacerbated in my opinion the tech bubble which caused a massive blowoff top in the stock market we had this big crash here during the housing crisis but that was that was rescued pretty quickly long story short it seems like we're at this new normal between 9 and 12% the and I guess a message that we want to put out there is that this is not a new normal the only reason the corporate profit margins are up here at 11 to 12% of GDP is because of deficit spending by the government deficit spending that is not sustainable forever and yet here we are we have come to believe that the Federal Reserve can bail everything out and what the FED can't do with fiscal policy can be done through uh through through monetary policy and the FED can be done through fiscal policy this there is an end to all of this and it's gone on a lot longer than we think but corporate profit margins are are are going to be under pressure for a lot of different reasons and that's not a good thing for the stock market because the only thing that can bail out high valuations is an explosion in growth Andor profitability I just don't see how it happens from here yeah hey Mike let me just interject real quick the other thing that is that was the other big change that I think is responsible for that jump besides deficit spending has been historically low interest rates that also coincided with that same era and that's one of the reasons why I keep beating this lag of effect drum is because we now no longer have historically low interest rates and that is going to weigh on those profits as well absolutely I have a a whole lot more that I could recap for Steph's talk I'm only halfway through my page perhaps I should uh take a pause and and let John have a chance but uh wonderful talk and I'll come back with some more stuff a little bit later okay all right John handing the Baton to you um any key reactions you want to build on what what uh Mike said and also I believe you've got some uh some charts here to share with us about some of the things that have been happening recently in the economic news yeah great thank you Adam always enjoy Stephanie and willam's appearances with you I always learn a lot like Mike says hey Mike I wonder if you could bring that chart up on the profit margins again because I wanted to make another point on that that that's a really and before you do John I just want to reiterate my point I made earlier with Stephanie um which is uh you know profit margins are still elevated right and and you look at that and so you know I think Stephanie agreed with my my question which is it really does seem that Corporate America has sidestepped the inflation uh that we've experienced since uh covid with all the you know stimulus and supply chain breakages and all that stuff and they passed pretty much 100% of it onto the consumer um we can argue whether that's fair or unfair I tend to think it's much more in the unfair category um but uh it's hard not to feel a little bit of righteous anger at that yep absolutely absolutely so um this this chart so I want one thing I like to point out in this chart so Mike rightly points out that profit margins have been unnaturally high for a real long time what wait what makes this even more kind of Insidious however is that you not only have record Rich margins but you also have record high valuation multiples uh so you have kind of a double jeopardy if you will to to steal a a line from Jeremy grantham's a recent markety commentary um and bare markets usually end and we're not in a bare market right now but we think one is is certainly uh in in the future and maybe sooner than than we can imagine bare markets TR traditionally end not only when corporate profit margins are are narrow and below average but multiples are also below average so for example if you look at this chart in 1982 at that low back there the The Cape the Schiller Cape to you know cyc cyclically adjusted PE ratio was something like six or seven I think there so valuations got tremendously low as well right now we're in the mid-30s I think on the cape even in ' 09 when the market kind of got you might say unnaturally saved by some Strokes of a pen by by um all the rescue programs the cape got down to I think 16 50% below where it is right now so we have the the double doozy of very rich margins which will mean revert at some point and we're starting to see see some of these cost pressures probably um cut into that but also we'll probably see a pendulum swing so going from literally one of the most overvalued uh valuations of all time to to undervalued at some point at the at the resolution of this this Market cycle that we think is you know going to be quite a bit down from here so so just to restate what you said there John make sure everybody follows along um stock prices are it's pretty simple math equation um there's the stock price and that's made up of the earnings times a multiple right and you're saying that earnings are abnormally high right now because of these these heightened profit margins and the multiple that that those earnings get tied times by multiplied by is also abnormally High by historical standards so if the earnings go down stock prices go down from math if the multiple goes down stock prices go down because of the math but if both of those goes down stock prices go down much more again simply just because of math which is what they always do in bare markets so we're at Double extremes on both margins and valuations at true bare Market bottoms both of those are extremes at the other end of the spectrum so you get this massive magnifying repricing if you will and that's uh some great recent commentary by uh U Jeremy Grantham as I mentioned and and just this week John husman put out his monthly commentary he touches upon this in in in at length so really encourage folks to to read that you know Adam I wanted to kind of a pick up pick up on Stephanie's rightful observations about the kind of the the kind of the strength of the consumer starting to look like it's running into some some um some some air pockets here and I want to kind of share a couple of uh charts that came across my uh my feed this morning so let me just share share a screen here um so this is a chart that LA and Sounders from Schwab put out today and it basically speaks to um you know kind of the declining in in consumer confidence but the absolute skyrocketing of of credit card and and revolving debt um that is pretty much an anomaly for this history so that's and and you start you see here that the debt has actually started to kind of moderate in terms of it year-over-year year growth uh even though in in in some senses there's been some improvement in the consumer sentiment that speaks to me of a of a consumer that is running out of Runway here they're they're running out of capacity to borrow they're running out of uh free cash flow to service that debt and that's really troubling and then another chart that kind of plays into the same thing this is kind of a chart of the cumulative pandemic area era savings you know all the stimulus and um payouts and things like that uh according to this data here and Jesse Felder one of your uh friends and and often guests um does a proper hat tip here to sober look the daily shot um you know basically those those savings have now been exhausted um so so I think um you and and many of your guests and we we would agree thinks that the the the can has been kicked quite a bit down the road because of these stimulus programs that were financed with tremendous amounts of deficit spending um and um we think that that's that's kind of um you know run out of steam and and likely to start to to show up in in kind of the real real economy all right so so just to talk about that second chart you had there from Jesse Felder so uh David Rosenberg made a very similar comment in my interview with him from a few days ago um it sounds like they are ringing the bell and saying the pig is officially out of the Python it has passed through um so there's a lot of deforming and Distortion that's been going on because of that massive bullus of stimulus that's gone through and there still is existing stimulus out there that's still creating some of those deformations and distortions but but in terms of the the massive pile of of excessive consumer savings that were built up that pig has now been passed by our python friend it appears we're in that in that phase of the cycle okay all right um so um obviously John uh you take data points like that together I assume that makes you um you know concerned about the future of of consumer-driven economic growth uh in the quarters ahead yeah we are and you know ultimately it comes down to what the stock market and and the stock market can be at odds with the economy it has been in in in many ways in in the last several months um and right now we still see um technical you know even despite this this hugely overvalued backdrop that really has us concerned that's why we're only about 40% in equities right now of which we have a a big chunk of that hedged um the short-term technical you know readings on the markets are are still strong um we saw a the S&P you know for example took out his 50-day moving average but it uh very quickly retested that and seems like it's you know kind of holding above there we look at you know kind of the percentage of stocks that are above their own uh 50-day moving average that that's kind of gotten back on a bull signal so so as of right now we're you know kind of patiently and stubbornly more bullish than the fundamentals would um warrant in our opinion but uh we think the the market is showing a you know a desire to kind of continue to drip higher here and but we'll we'll respond accordingly to our dashboard okay so um just want to put myself in the mind of The View were watching this channel the average viewer so um for the person who says um man I've just been sitting in dry Capital here um but uh I I you know I just listen to what Stephanie said I listen to what you guys just said uh I I I I think that the shoes are going to start dropping from here um so whether it's someone who's just been sitting already in in you know a bunch of cash or t bills or whatever you know doing the t- bill and chill thing or um the person who says Hey I've kind of been managing my own money up until now but I I don't feel confident enough to really navigate to what might be coming um if either of those people were to call you and just say hey um you know what can you do to help you know create a a portfolio strategy for me and maybe manage it for me just what would that discussion how how would that discussion go what are kind of the questions you would ask what are some of the things that you would look to do with those funds given the current market conditions yeah Adam we would talk to them about their personal situation a lot of times we talk to people that are just like that in t Bill and chill by the way I like that uh that that I haven't heard you say that before I like that it's a George gamon Line I can't I can't claim credit for it I wish I could I thought maybe you created it I like it but if they're in t bills and hanging out for a lot of times we're telling people just to keep doing what they're doing it depends upon their goals it depends upon what they want to do you how much do they want to try to be active in the late phase of this cycle how much do they want to not worry about it anymore and delegate you know for for people that want to delegate and they're in line with how we see things I think it makes a lot of sense to to work with us to hire us and delegate to us because I believe our process and I believe that I believe in our process and I believe we can be trusted to guard the downside very well to not get emotional and get sucked into the the bubble in a big way we we certainly are involved in the stock market here but not that much about 40% exposed at the moment or a little little less maybe on a net basis but that pretty quickly goes down when our Hedges kick in on a pretty small uh immaterial drop in the market but that's not no risk right so there's always some deductible but for people that want to delegate that and they believe particularly in gold mining stocks which we think could take off here and give us some positive lift even at these valuation levels in the broad Market I think it makes sense for them to delegate to us and consider our manag model but for a lot of other people that don't want to do that that just want to sit and wait and have the patience to do so or maybe they have other particular needs like maybe they've got a business that needs cash or maybe they simply are waiting for the housing market to correct just a little bit so they can buy a home because a lot of people feel locked out of this housing market and they're really frustrated so a lot of times we're talking to people like that and honestly it's hard to do wrong by just sitting in treasury bills presently with 5.2% yield the one year roughly hey Mike sorry to interrupt but if somebody um you know would like to build a t- bill ladder so not necessarily just buy an ETF for t- bills but actually own the t- bills themselves but but have it be you know a ladder that that keeps renewing um is that something that you guys can help people build absolutely a bond ladder makes a lot of sense we've done it for a whole bunch of different people some people have needs um that are not that great in terms of income and they don't want to take risk in this market and we think there's some opportunity in the bond market particularly the short end is very good return and almost no risk you might even say risk-free with us treasury bills although we're always careful about that term but further out on the curve we think there's some opportunity too now we would take Stephanie's advice and and I wrote down what Stephanie said here's what Stephanie likes hard assets like gold can't agree more real estate I think you've got to be careful there but if you buy correctly and and prudently I think that could still make sense in some areas uh she said dabble in the long Bond absolutely we agree the 10-year treasury is around 45 or so it had gotten as high as five a little 5% or so dropped to 38 it's bounced back to 45 we expect the 10 year to go much lower particularly after we see an asset price drop I can't agree more with Steph and what she thinks is going to happen with yield curve control the 10 year probably goes below 3% in the coming years so I think the long side the long part of the curve has some Merit she also said energy we're long-term Bulls in energy we only have a small you know small single digit percentage in energy but you could consider that on weakness Emerging Markets have the only decent valuations around the world with a Shiller PE in the teens for the most part as compared to the S&P which is solidly in the 30 is actually approaching 40 and um as she also said avoid high yield we agree so yeah sit in treasury bills consider some of that advice from Steph delegate to a company like ours if you really want to do that and disengage you know make sure that you're hiring somebody that can be trusted not to get emotional and you know to get Overexposed and a very dangerous Market all right John coming to you and we're just gonna have to wrap up here soon just TimeWise but um uh we were just on a uh on a at a special event online event last night where you and Mike and some of the thoughtful money advisers were just taking live questions from a private audience and you know generally I sense that there was a lot of unease a lot of you know concern about where things are headed both economically and and where the markets might go despite all the current exuberance in the financial media um so I thought that that was just telling um curious to see if you sort of picked on the same thing and and and what are you hearing from the the people that are reaching out to you these days like what's what's the pulse of the regular investor right now yeah well certainly any given day there's plenty of there are plenty of headlines that that can be very concerning and and uh you know the logical mind would say these these should have an impact on the economy should have an impact on on the markets some of the recent news on employment and stuff like that hasn't been great you know GDP numbers have comeing soft you know but those are just one one data points but um you know it's really important to take a step back and and and plug into your own your own life make sure your position is is is you know reflecting what's what's your life and what your needs are um but um yeah there there is I mean look at April was a was a down month in markets that that was after a pretty uninterrupted move higher uh from October of last year so anytime you get a kind of a abrupt change in course people start to say oh well maybe maybe I should start heading for the exits or this or that um so yeah we have seen an uptick uh of of inquisitive concern about some of the things that have happened in in markets in the economy and um you know we're we're late stage no no no matter how you slice it we already talked about the valuations and the kind of the piging the python kind of slowly Maring working through at this stage of market and economic Cycles the most important thing is is keeping one's emotional Rudder intact and and not getting swayed uh too far in One Direction um we think there is great reason to be biased towards being conservative and defensive if you're going to let your emotions lead you one way lead it lead it that way um you know for for folks that are over overly um overly invested that have ridden a you know a cycle High here um you know but um you know this is why it's important to talk it through talk it through with a friend an advisor uh study up yourself I mean it's it's it's really important to kind of you know survey the landscape and look at many different perspectives of of these issues because it's not all black and white by any stretch all right all right well look we'll have to wrap it up there um obviously folks um uh as I say every week um I highly recommend that that the vast majority of folks watching these videos uh unless you already have a good financial adviser who takes into account all the macro issues that Stephanie and I talked about and all the other guests on this channel and I talk about um unless you already have a good one that that takes those into account and has put together a great strategy for you unless you've got a a great track record of being successful DIY Vestor on your own um highly recommend you work under the guidance of a good professional financial adviser John and Mike just gave you a bunch of additional um things to talk about with with them when you meet with them um if you'd like if you don't have a good advisor uh off hand or don't know of a good one and would like to talk to one of the ones that thoughtful money endorses just go to thoughtful money.com fill out the short form there could schedule an appointment with John and Mike themselves if you want um but uh you know again this channel is about giving you information but not just for information sake so you put that information into action in your in your life uh to make your wealth work for you want to make sure that that as many folks as possible are doing that um also if you go to th money.com that's where you can sign up for our newsletter uh you just go to the the newsletter Link at the the top of the site menu there it's free to sign up for the the newsletter that's where you get all the you know related updates on new content and all the goings on at thoughtful money um but also if you upgrade one of the many benefits you get in addition to my note summaries of all these interviews including this one with Stephanie um is where you get the new macro pass service and uh just mentioned that Stephanie is now going to become a contributor uh the day this is airing the macro pass that just launched this week uh is from Daniel de Martino Booth it's a great report um hopefully you guys who are subscribed are enjoying that and if you were thinking about subscribing that's a good one uh to subscribe for um with that said boys it's been a great week folks if you've enjoyed having Stephanie on the program would like her and Willamina to come back as soon as humanly possible and K9 possible uh vote your support for that by hitting the like button and then clicking on the red subscribe button below as well as that little bell icon right next to it John and Mike thanks so much for hanging with me for yet another week thank you Adam and we look forward to seeing you next week on video but also seeing you next week in person that's right that's right no no I'm sorry I should have asked about this so give folks the quick plug on um on the big event that's happening this coming week so on May 16th we'll be in San Juan Cap Toronto be from 11:00 a.m. to 3:00 p.m. local time and the following day Friday May 16th up in Pao Alto so it's a West Coast road trip for new Harbor We've Got U some special guests not not the least of which is you Adam we look forward to that time with you we've got Yan vanak founder of vanac which is uh pretty well known in the alternative Asset Management space both in gold and uh in crypto um you'll be interviewing him as well we look forward to that and so folks can go to new Harbor financial.com and there's a tab there that says events you can take a look at that and click the link to go ahead and register we've got a lot of interest a lot of folks are going to be there uh we've got a little bit of space left we hope to see you all there and we look forward to it great uh and I'm super looking forward to it guys it's gonna be great to spend time with you guys in person I always look forward to when we get to do that can't wait to talk to Yan um but I'm most excited to actually talk to the people that show up that's where I always get the best ideas on how to evolve uh the offerings here at TH money because real viewers are telling me what they value um and what they'd like to see so folks hope you come especially those that are living in LA and in San Francisco you know paloalto area just stop in the car and come drive down it's it's uh it's going to be a great day um should be pretty easy for you to get there and uh these are always super informative and super fun all right guys um can't wait to see you at the event in just a couple days um thanks so much for hanging with me for yet another week here on the channel everybody else thanks so much for watching

Channel: Adam Taggart | Thoughtful Money

Views: 119,615

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Id: lTider5ahm4

Length: 92min 38sec (5558 seconds)

Published: Sun May 12 2024