Transcription
The problem with the big beautiful bill and the problem with what we're seeing was Trump comes in, he says he's a fiscal hawk. He brings in Doge. Doge says they're going to cut $2 trillion of wasteful spending. Now, nobody believed $2 trillion. But what we're finding from the House bill is, and Elon has now left Doge and gone back to Tesla, and what we're finding from this bill is that there ain't going to be hardly any cuts of wasteful spending from the government. You can't tell me this government spending that $7 trillion a year. We're still sending retirement forms down in a mine in Pennsylvania that we can't find any places that we could cut more than a couple of billion dollars here or there. And then on top of that, we're not going to touch Medicare, we're not going to touch social security, we're not going to touch disability or any of those other third rail things. I think the market's looking around and going between Doge and Trump and the Republican Congress, here's our best bet to try and rein in government spending. And we're not reigning any of it in. And it's not going to get any better as we go forward from here. We're not going to elect another Congress that's going to do a better job than this Congress. Most likely, we're probably going to turn the House back to Democrats and it's going to be even harder to, you know, rein in in government spending in the future.
The budget of the United States federal government is $7 trillion a year. We raise about five of that in taxes. So the other two we borrow. What we're looking at here is maybe that two becomes 2 and a half over the next couple of years. That's a lot of demand on the capital markets that the federal government is looking at doing. It wants to suck 2 to 2 trillion dollars a year out of capital markets into bonds. There's an old saying in the bond market. I've often used it. There are no bad bonds. There's only bad prices. Can the bond market get that $2.5 trillion? Yes. It will take interest rates up so high that it'll make it such an attractive deal to put your money in government bonds. You'll willingly take it out of the stock market or anywhere else you have it to put it in the government bonds. Oh, I'm not going to do that at 5 or 6%. You know, don't say that because we'll just keep going till we find that level where you're going to wind up putting your money into the bond market. Now, that's not going to happen, I mean, immediately in the short, but over time, this huge deficit is going to continue to push on yields going up and up. And why I started with the inflation argument is we're not at that extreme level now. We're at pretty normal levels. So, I think that those rates are going to keep going higher from here. We had this unusual period between 2010 and 2022 of zero interest rates and money printing. Sydney Homer and Richard Salah wrote a book called a history of interest rates. 5,000-year history of interest rates. There are records of interest rates back to 3000 BC in Babylonia. Yes, there are. And they wrote a 700-page book about it. Nowhere in that book is there anything about zero interest rates, negative interest rates, money printing. That was a new thing we invented between 2010 and 2022. Not to be repeated again. And the problem we have is everybody thinks that was normal. Not recognizing that was one of the most abnormal, especially in Europe with negative interest rates, in Japan with negative interest rates, was one of the most abnormal periods in 5,000-year history of interest rates. And we keep wondering when is the Fed going to cut to zero and start money printing it? When are we going to see negative interest rates, you know, all over the place again? You know, that's why everybody's still bullish on interest rates because they think that that period was normal. Not that that was the abnormal period in the recent history that the current period is actually fairly close to normal.
It is competition is really what the issue here is. And what I mean by competition is I've been using this argument that we're in the 4-5-6 markets. And what I mean by that is over the next several years that cash will return you somewhere around 4%. A money market fund or a T-bill. Well, investment grade bonds right now are averaging about a 4.90 yield. That's all treasuries, corporates that are investment grade, mortgages that are investment grade, agencies that are investment grade. It's about $30 trillion worth of bonds. They're averaging about 4.90. Let's call that five. Given the high valuations that we have in stocks with rising interest rates, what should you expect stocks to return us over the next several years? Probably about 6%. So, I've called this the 4-5-6 markets. Now, if I'm right and the inflation rate's around 3-ish, that is not a terrible type of investing environment. You know, there's a real return in all of those assets, but two things. It's not the 20% that everybody's gotten comfortable with that we saw in '23 and '24 in the stock market. And other investment categories like cash and bonds are competitive with stocks. There is an alternative, the opposite of TINA, because what a money market fund will give you is four with no risk, a $1 NAV every day. A bond fund will give you a little bit more, but last year was a bad year for the bond market. It returned positive 1%. And that was a bad year for the bond market. This year, we're talking about the bond market struggling and everybody hates bonds. They're up one and a half percent. They're up more than the stock market is on a total return basis. But that's the thing about the bond market is it'll give you a little bit more than cash with a little bit more risk, but not a lot of downside. The stock market can give you 6%, but the problem there is it might be 20% one year, minus 10% the next year, and they kind of average out to a positive around six. So that's really where I think we are with asset classes is there is an alternative for the stock market right now, and it is in the other alternatives you would look to cash and bonds.
Last thought for you. I'm talking about 6% like at the index level, right? It doesn't mean that there won't be opportunities. Whether you want to look for those opportunities in growth like AI or healthcare, you know, typically the growthy type of areas or if you want to look for those in some kind of other thematic kind of idea like maybe energy or industrials or consumer cyclicals or whatever you think might be a good financials have been beat up. Maybe they respond. Maybe in those you can get better than a 6% return. But if you're demanding 10, 12, 15% from the asset class, I don't think you're going to get that from the asset class anymore. You're going to have to take a thematic risk. Buy stocks, buy a theme, and hope that you've got the right theme in order to get those kind of bigger gains. So, in other words, what I'm trying to argue here is active management might be making a return. You know, we're going to go back to the days of the stock picker again, something that we've gotten away from in all these years because the asset classes have gone up so much and all these index funds with zero fees have been dominating the investment landscape. The last couple of years, you know, diversification meant losing money, right? You just wanted to be pressing the bet on the stock market and we were screaming, TINA, there is no alternative. We were basically saying diversification is a waste of time, but now we're kind of going back to that.
Yeah, exactly. And I would also throw in real quick that not only, you know, buy the dip, the Fed bails this out, but the younger cohorts being saw in social media and online, right? Who are the influencers? People that are sipping champagne and private planes going, I did it with crypto. I did it with meme stocks. I did it with whatever speculative idea. They don't say you can't do, but they imply why aren't you like me in this plane? So that's been kind of their motivation. And then that's why so many of them still cling to this idea from the 2010 to 2022 period. Yeah. But the Fed's job is to make me rich, right? Every time the market goes down, they'll just print money and throw it at it and force the market up so I can't lose in this game. And that's really what we're going to have to deal with. Now, you're right, that's going to be a problem for the markets. But I'll go back to the old Ben Graham line. In the short term, the market is a voting machine. In the long term, it's a weighing machine. So, we're talking about a lot of the voting that's going to go on, and it can create problems and issues in the short term. But in the long term, if the markets are weighing machines, that's where I come back to. I still think you'll get a 6% return with a lot of excitement out of these markets. You just won't like the excitement. Maybe you'll be happy with five in bonds with less volatility or four to no volatility. Look what we're seeing right now. 25% last year and here we are almost for this year already. The total return in the stock market is effectively zero right now. So, I think that that's really the environment we're in. And it also comes back to the other thing I'll point out about markets too. The high valuation in the market. Is it bad to buy a highly valued market like the US stock market? No. It's just you're betting on a lot of things are going to go right. But if you've got a president who's identified that globalization has been bad. We've got big deficits. We've got to do this. We've got to do these. We've got to try and reorient and restructure the monetary order starting with tariffs and jerking tariffs around all over the place. There's a reason to think that that's not a good environment to buy highly, you know, richly valued companies in that environment. That's one of the reasons why I think the European stock market's doing so well because I think a lot of investors are saying, why buy a 22 P/E in the US when I can buy a 10 P/E in Europe? I only need a few things to go right in Europe to make money. I need a lot of things to go right in the US to make money. And I was getting a lot of things going right until we got to this environment where we're trying to restructure everything. So, I'll take the 10 P/E. And that's why I think we're starting to see that shift. But you're right, this is going to be a volatile period. It doesn't mean it's going to be a disastrous period. It will look disastrous like early April did for a while, but then it recovers, but at the end of the day, you look around and you go, "But I'm not really making any money. I just recovered some of the losses." It's all about expectations, right? Four, five, six. Those are decent expectations. Those are not terrible markets. And I think that we need to start thinking about how to structure yourselves in the four, five or six. How much risk do you want to take? If you want to take, you know, risk, you can go beyond the six and look at the themes. You know, there is fortunately happening in the ETF market is a new class of active managers are now listing ETFs. Kathy Wood being kind of the OG in that space, right? So that you can go and you could say, I don't know where I should be investing to make these, you know, excess returns, but there are professional managers that now have ETFs. You could buy the ETF. That's a way to look for that. If you're thinking about it on the other side of the equation, I don't want to be like that person with 72 and wind up getting wiped out right before I'm forced to take my drawdown, then you might want to start looking at allocating more towards bonds and cash. Because one of the things about rates going up is there's another chart going around that the rolling 10-year return on bonds is like the worst it's been in 100 years. Yeah, that's true. Because of what happened between 2020 and 2023 to get rates from zero to 5% meant that bond investors took enormous pain. That pain's over. Now bond yields have a big coupon, 5%. That is going to cushion you a lot in environments of rising rates. You're, like I said, a bad year in bonds might be 1 or 2% gain. A good year in bonds might be 8 or 10% gain, averaging about five. So maybe that's somewhere that you can go is into the bond market. Cash can return you around four. Money market fund or T-bills can return you around four. But the great thing about cash is there's no price volatility in that. You know, $1 NAV every day in your money market fund is what you're looking at, too.
Lastly, I'll point out a thing about bear markets. I've often called the bear market time, not price, because doesn't the market always come back? That's kind of the DGEN mentality of the 35-year-old that's playing in leveraged ETFs and stuff like that. Doesn't the market always come back and make new highs? The answer is it has. But how long does it take? Now, in 2020, it took 5 months. Here we are now. We're in the fifth month now. We're sort of kind of close to the all-time high. But in 2000, it took 13 years. In 1966, it took 18 years. So really the question is will the market come back? Yeah. But if you're 70 years old and you're wondering, yeah, the market come back. What if I told you it took 13 years? You know, well, I don't want to wait till 83 to get back to the same net worth that I'm at today. But if you're 35 years old and I told you it took 13 years, you'd probably say, great, I could dollar cost average for the next 11 years at a much lower price, ready for the next 20-year run. So, you've got to kind of put it into that kind of mentality that a bear market is time, not price. I'm not so much worried about how low the market's going to go as to how long is it going to take before it starts to make new all-time highs. And I'm of the opinion that this environment, it's going to take a while. Now, we might marginally make a new all-time high by 1% or something like that. But to get a real serious move up, we have to resolve some of these issues like tariffs, like the deficit, like a lot of other things because without it, we're going to have such a big draw on financial markets. You got to fund the bond market first. Those markets are going to have a hard time moving forward. So, I'm not worried they're going to get crushed. I'm just worried that if you're expecting 20% because that's what you've always got, you're not going to get it. So, it's really about expectations is what it's about.
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