Transcription
The foundation of this economy is built on sand. And when it fractures, it's going to plummet. And to put the metrics back between market capitalization and GDP or home price to income, these bubbles have to correct by 50%. I'd like to short those bubbles, not ride them down. I always look at things from an investment perspective because I manage money for a living. So I look at the second derivative of inflation and growth. So right now we're at a stasis which is sector 3 where we're seeing the rate of inflation on a second order basis not really changing that much. This is around 2 1/2 3%. And we see growth sort of stabilize too. We're not crashing into a recession nor neither are we booming. That's a very investable bucket. So you know some people accuse me of being a perma bear which I am not. I'm permanently bullish on my ability to make money in bull markets and bare markets. And there have been many bare markets since I started managing money.
There have been many periods of time in the US economy that we've had many years of disasters. 1929 took 25 years for the stock market to recover. You have 2000 50% decline. You have 2008 50% decline. The S&P 500. So the market right now is the most expensive it has ever been in history. We have a triumvirate of bubbles as I like to say. There's a credit bubble, there is a real estate bubble, and there is an equity bubble of epic proportions. And if you want to just blindly hold the market here, you know, buy and hold yourself to oblivion. It's an existential crisis for your retirement. I'm not going to do that with my clients.
So, right now, we are not short, net short the market. We have only one small short. We have a short in the long end of the bond market. I just don't believe there's any room for treasury yields to go down and prices to go higher on the long end of the yield curve. And, you know, we're invested. We're enjoying this bull market. It's lasted for a couple of years and we'll continue to do it.
Well, first of all, just because the Fed uses the tools that it has, which is a very blunt instrument, to reduce interest rates and print money. Just because they have done that in the past, doesn't mean we didn't have carnage. So, if you remember back in the summer of 2007, the Fed began to cut interest rates. They took them all the way down to 0% by the end of December 2008. Did that save the stock market? The answer is no. The market plunged. The S&P lost over 50% of its value and home prices dropped by over 30% nationally. I fully expect the Fed to cut interest rates to zero and for them to monetize trillions of dollars in bad bank debt and government debt. I fully expect it to happen. The question is, will it automatically save the market from going down? The answer is no. It hasn't happened in the past. It didn't save the NASDAQ from losing 83% when it crashed in March of 2000. That didn't save it either.
But I think what could make it even worse this time is because for the first time in history, and this wasn't the case in the '70s, it wasn't really the case in 2000. It wasn't the case in 2008. For the first time, we have an insolvent nation. So, the problem is debt and the problem is inflation.
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So, inflation has been above the Fed's 2% target for five freaking years. And now they're actually expanding the Fed's balance sheet. The balance sheet of the Federal Reserve went from $800 billion in 2008 to $9 trillion around COVID time and it went back down to 6.5 trillion. That's still way north of 4.5 trillion. So they weren't able to get it back down to where it was pre-COVID [music] and now it's rising again. It's back up close to $6.7 trillion. So if the problem this time around we have is an insolvent nation with $2 trillion deficits, a trillion dollar in interest payments, almost $40 trillion in national debt, and we have a problem with inflation. Those two conditions were not present in the '70s and the 2000 2008 crisis. They were not there. We had inflation in the '70s, but we weren't an insolvent nation. The debt to GDP was like around 50%. and now it's 123 125%. So if they start printing money to monetize debt, I think it takes a lot longer to fix the problem of, you know, reflating markets and it may actually exacerbate the problem by sending long-term rates even higher because you're starting from a point of inflation. You're not starting from a point of deflation.
But the most important takeaway from that is yes, they will do it again. And if it took 5 years for the economy to recover from the 2008 crash, I don't want to lose 50% of my money and my client's [music] money and wait 5 years for it to recover. And I think there's a very credible chance that it'll take much longer than 5 years. Again, remember it took 25 years to get out of the Great Depression for stocks to recover because of that insolvency and inflation problem.
You should always have 5% of your net worth in gold that's in your possession or at least you can get to it without a third party being involved. So outside of the government, outside of financial institutions, 5% of your net worth. That's my base recommendation. And then you toggle your ownership of what I call liquid paper gold between 0 and 20% depending on the macroeconomic condition. So gold does best when real interest rates are falling. So you think about the times when we're entering into a recession, the Fed's panicking, you know, cutting the Fed funds rate, so nominal rates are falling, real interest rates begin to rise, and you own gold because, you know, the competition is not gold doesn't produce any income. Nominal interest rates are zero. Your alternatives of owning stocks or real estate aren't really competing any longer because they're crashing. So you buy gold. So right now, as I said, since we're in sector 3, which is a stasis, so it's not something you want to massively overweight right now. None of the precious metals complex at this moment because the economy is not rolling over. The economy has been in a very bad recession for years, for 80%. It's the top 20% of wage earners that are keeping the economy afloat in aggregate. But you see underneath the economy, it's it's a Fed mess. You know, defaults and delinquencies are surging. Fannie and Freddie are in trouble. FHA secure defaults are rising, credit card defaults are rising. So you have commercial real estate problems, you got massive problems with home prices here, unaffordable. So the economy is working ostensibly, it's a thin veil. But when the overall economy when you lose the top 20% and that'll be a consequence of falling stock [music] and real estate prices, then we have a real serious problem and and that's when you want to really overweight gold.
Listen, the dollar is no longer the world's reserve currency. It's losing its status very quickly. You have sanctions, you've got confiscations. So, if you're a creditor nation of the United States and usually park your excess, you know, your trade surplus with the United States with dollars and bonds, you no longer trust that. If you're Russia, you're China, your Japan, their own bond market with competing yields now. So, I would own some gold right now. I just wouldn't overweight it. But the trend is for the US dollar to lose its status. It's happening. Gold to replace treasuries as the major central bank holding. And I believe since the business cycle hasn't been repealed, I believe we will be entering into a recession in sometime in the near future and that is when you would really scale up your ownership of gold.
Energy is one of the largest holdings that I have in the portfolio. To me, it was abandoned. If there's any truth to the AI story, and I think there is. I mean, just like there was a truth in the internet story, you know, just because there was overinvestment in the late '90s and 2000 in switches and routers and, you know, fiber optic cable, whatever, it didn't mean that it wasn't a real technology. It just was a massive overinvestment in that area. But the same thing's happening today. But there's a tremendous amount of energy that's used to generate this electricity needed to run these data centers. And the energy sector was left for dead. These are well-run companies with tremendous dividends. And nobody like them. If AI is for real, they're going to need energy and they have huge dividends and nobody owns them. Very small percentage of the S&P 500. It has a lot of room to go. As long as we don't have a recession and as long as it isn't a blow up in the AI investments.
I've been buying a lot of overseas assets, overseas dividends. India is one of my favorite countries right now. It's been left for dead as well. One of the highest growth rates in GDP. So international dividends, international growth, that's a big area that we're in. As I said, I'm short the long end of the bond market. I own some precious metals. We're in energy. We have a little bit into the NASDAQ. So when you're in sector 3, you want to have a balanced and diversified basket of holdings. So we have a lot of short-term short duration bonds going out, you know, short end of the yield curve all the way out seven years because I do think interest rates could be coming down. Not much, but once Kevin Warsh comes in, I think he on the margin lowers interest rates, which is be good for the short end of the yield curve. But I think he also shrinks the balance sheet, which is going to be problematic for the repo market, which would send long-term yields higher.
Look at nominal GDP now. If it's nominal GDP is around 6%. So if you have inflation that's around [music] three a little bit less and growth around three or 4% 6 7% nominal GDP what is the reason why you think yields on the benchmark Treasury could go below four? The only scenario where I see interest rates going lower is in a recession and that's not happening right now. But if we're in a recession, you'd be selling stocks hand over fist.
So [music] if the international buying isn't there and we still have an insolvent nation with $40 trillion in debt, you know, the deficit is going to be most likely in the next decade. The CBO just raised their estimate by about $1.4 trillion for the debt to accumulate more than they had before. So, we're looking at $60 trillion in total debt in the next decade. I mean, who's going to buy it all? And who's going to buy it at 4% flat? I think inflation goes back to 9% and even double digits the way they measure it. And who in the world is going to buy a 4% treasury when inflation is at 10%? Well, only the Federal Reserve would do that, you know. So, I can see a scenario where the Fed caps the long. Let's say like the 10-year benchmark will not trade above 5%. So, the Fed has a vowed to print endless amount of money to buy US debt and keep interest rates at 5%. Well, let me ask you this. Are they also going to buy municipal debt? Are they also going to buy corporate debt? And you should be thinking about it too, and your audience should be thinking about it, too, because this is not normal times.
We've got a massive credit bubble out there. Private credit was something that wasn't even mentioned before the global financial crisis. It was maybe a hundred billion dollars, a couple hundred billion. Now, it's almost $2 trillion. You've got student loan debt. We've got a real problem with debt in this country. And you marry that with the fact that the home price to income ratio has never been higher. Homes are unaffordable. Transaction market is frozen and the market cap to GDP is at 230%. That ratio should be around 80 90%. And that ratio still is good because I don't want to hear people say, well, that ratio doesn't work anymore because US corporations are international. Well, that's true, but foreign corporations have money here. So stocks have to correct violently. We have a trio of bubbles. I suggest your listeners be very, very careful and pay attention to their portfolio. You want to have an active manager, not a passive manager. You can't be with someone who's a buy and holder. Stocks always come back. Well, maybe they do. Maybe it takes 25 years. In Japan, it took 35 years. In China, they're still waiting since 2007. They're still down about 40 50% from their high. So, sometimes it never comes back. Sometimes it takes decades to come back. This kind of environment reminds me a lot of Japan in 1989. It took 35 years for their market to come back. So just be careful.