Transcription
Right now, people aren't looking at residential real estate. They're not looking at the prices because everybody is focused on the S&P 500, the NASDAQ 100, the Dow. So, everybody is just focused on the stock market without seeing this other very important asset class called residential real estate is starting to deflate.
I guess you could say, yeah, it led the stock market and the economy by at least a year back in 2007. And you know, as Bob Frell famously said that exponentially rapidly rising markets go further than you think, but they don't correct by going sideways. And I don't think the stock markets figure this out yet. And everybody believes they can be Chuck Prince back in the summer of 2007 and keep on dancing to the music until the party stops. But he made that famous quotation. Well, that the music stopped exactly 3 months later.
But this is a very important development. It's not getting enough press and it's not about the volumes. It's not about construction jobs and it's not about home sales. You know, it's it's interesting. Pending home sales, we just got the number, is actually lower today. This is a leading indicator for housing demand. It's lower today than it was at the deepest negative level in the Great Recession. The demand is weak and it's going to be weakening, but we also know that there's more homes being put up for sale.
So, you know, when you see the stock market going up, it's obviously that you're just getting tremendous bidders outnumbering the sellers. And at the margin, that's what drives the stock market higher. More buyers and sellers at the latest price point. The exact opposite right now is happening in the housing market. And that is going to have a very important impact on consumer confidence. Considering it's happening at a time where the unemployment rate is drifting higher, the hiring rate is going down. The only reason why you're not seeing non-farm payrolls decline just yet is because companies are still hoarding labor. So, the firing rate has been low, but the hiring rate has been falling like a stone.
As I'm drawing these curves in the housing market, we are now in the early stages of a residential real estate deflation. As I said before, and maybe it'll be different this time, but I don't share that view. I think that that is going to have a very big impact on confidence and spending and mortgage defaults and nobody's talking about the more important price which is a source of deflation which is what's happening right now in the housing market and it's just the first chapters of this book and it's going to have a cascading impact and that's why interest rates are going to have to come down more forcefully.
Well, you know, I'm not really into forecasting financial crisis and no cycles are exactly the same. We do have an offset and I must have mentioned it three or four times which is the AI spending boom and only time will tell as to whether or not this is going to be the same degree of overcapacity in data centers and semiconductors that we had with fiber optics and cable and telecom. You know, back in the late 90s, we ultimately had the mother of all over capacity from a tech bubble, but it certainly propelled the economy in 98 and 99. And then, you know, everything came home to roost in 2000 all the way to 2002. The question is where are we right now? But we do have and you saw it in the GDP data. Tremendous growth and it's ongoing. Maybe next year it'll stop. We'll see. I mean, who knows? But the vitality in the economy, you talk about the big beautiful bill. Please. Most of that stimulus was just keeping the status quo on the 2017 tax cuts in the personal sector. You're not spinning the dial because of no tax on tips or overtime or social security. Those are bells and whistles that add basis points and that's it to GDP growth.
The big story is that like I said fortuitous that we have this AI boom, but just remember that the AI boom is also creating a lot of anxiety in terms of job insecurity. One in five Americans now fear job loss. You got the plurality of people in that University of Michigan survey. It only goes back seven decades. The worry over rising unemployment in the next year has hit levels that have only in the past happened in outright recessions. So we have a situation right now where AI cuts both ways. It's providing this boom in investment in the business sector, but it's also creating anxiety in the household sector. Now the effect on GDP is immediate because the spending is the spending. But the anxiety level in the consumer sector is going to play out over a longer period of time. But you're seeing it already.
Gold is a hedge against uncertainty. And so you could argue, well, we've just seen peak trade and tariff uncertainty and that's come off the boil. But now we have uncertainty related to the independence of the central bank. I mean, the question is, will the next Fed chairperson and the makeup of the Fed just be yes men or yes women to the president? I'm getting questions if that's going to happen. We don't know what's going to happen, but you know, gold's an inflation hedge, obviously, and there's this view that, you know, taking away the Fed's independence at the margin would be an inflationary development. It also means that if Trump gets the Fed it wants, they're going to cut rates dramatically. And so, you know, you're seeing some of that being built into the long end of the yield curve, which has lagged the other parts of the yield curve. You're seeing that term premium, which reflects uncertainty, keeping long-term Treasury yields elevated. And that's why gold's been doing well recently is because of that expectation that the Fed is at risk of cutting rates maybe too aggressively.
Now, at the same time, this has played into a much weaker dollar. And the dollar is at risk right now breaking down. We're talking about a very significant event here where what was the cyclical correction in the US dollar like the DXY being down 8% this year. Again, I don't think people realize being down 8% for something traditionally so stable as the US dollar on a risk-reward basis. That's like the S&P being down 35%. But it could become a more fundamental bare market in the US dollar. And of course, gold is priced in US dollars. So you have this perfect world for gold uncertainty, trading and trade and tariffs now for the Fed. You got Fed policy uncertainty. You've got the prospect of much lower interest rates. You got the prospect of ever weakening US dollar. That is fertile ground for gold. So am I surprised? I could tell you that after the run that it had and then the past couple of months it was just range trading like it never really corrected. Normally after a big run that gold had you'd correct. We didn't correct. We just basically consolidated and now it's taking another leg higher. And my view is that what's the price target for gold is basically who knows? It's very it's just situational. When the situation changes the view will change.
So I adhere to Bob Ferrell's 10 market rules to remember and rule number one is about something very simple yet elegant to call mean reversion. So that's the other thing you got to consider is that these central banks are not buying silver. Now the two are correlated and I call silver at $40 an ounce, you know, poor man's gold. But I like gold because of the fact that I think that we are in a secular shift where global central banks with deep pockets are in the early to mid-stages of diversifying their foreign exchange reserves in favor of bullion. And if we're going to take it a year at a time, I don't see this stopping in the next 12 months.
I'm not getting a sense when I'm taking a look at the global money supply that we're seeing a big money supply boom going on here. I mean, that was basically a lot of that was to fight CO. I'm not seeing any big monetary policy thrust. The central banks have been cutting interest rates. That's something a little bit different than that monetization. They've been cutting interest rates because especially in Europe, you could argue in the UK, even in Canada, the economies have weakened. And you know, the only place on the planet where inflation has been a concern has been in the United States.
Let me just make this point that a primary source of global deflation has been China. China continues to deflate. They're still stuck with tremendous excess capacity, especially in manufacturing. You look at their producer price numbers. They've been deflating for over 40 months. Consumer prices are basically flat, if not negative. And they're exporting their deflation around the world. That's another reason why, you know, I'm still bullish on bonds. I can't say that I own 30 years and I understand why there's a big risk premium. Nobody wants that much duration. I can understand that. But do I like the 10-year note where it is 420? Yeah, I do because I think the Fed's going to go down to 2%. And I think that if that happens, the tenure note goes down to 33 and a half in a bull steepener environment.
I'm very happy to report, by the way, I got a BBB. It's called the bond bullion barbell and I've been plugging it for a long time. Very simple. You can actually get equity-like returns without taking on equity risk. And the blended return in the bond billion barbell through the first 8 months of this year is plus 18.5%. It's outperformed the beloved and balooded S&P 500 by 700 basis points so far this year. The miners are inherently tied at the hip to the gold price and they have a lot more optionality. I'm not going to say to have a 25 25 30 30 30 30 but I would have a mix of those gold certificates you talked about the mining stocks I also like silver you know in our model portfolio we have the silver miners and the gold miners in there silver's got more industrial applications I mean for a lot of this rally in silver it's done phenomenally well was closing this big performance gap between gold and silver you know that's not fundamental that's more you know technical or playing a mean reversion trade What I'm saying is that I am concerned about the state of the global economy that we're hanging on by a thread in the United States which is still the engine of the global economy because of all the spending that's related to AI data centers software so on and so forth. I am concerned about the economy. I don't know how much silver goes into the generation of AI data centers, but it is a precious metal and silver is also an industrial metal and I think the economy is going to be pretty weak for the coming year. So silver just happens to have more cyclical properties than gold has. So that's point number one.
Point number two, which is much more longerlasting, is that the central banks are buying, they're adding to their gold reserves. They're adding to their silver reserves. I think that in the next year, next three, next 5 years, I expect that gold will outperform silver. I believe in diversification. I like precious metals in general. That's not the only commodities that I like. I also like uranium, which is putting in a very nice base. You know, there's things out there beyond the NASDAQ 100 that look very interesting.