Welcome to another edition of the Checks on the Right podcast, where we bring
in our friend Zach Abraham, who is the chief investment officer at Bulwark Capital
Management to help us break down what's happening in the financial world economic world that
we are in. And earlier this week, Zach, we played a clip
on our regular live stream of Charles Paine which was very depressing because it was
basically him just saying things are looking really shitty out there, you guys,
it's bad, And it's just totally counter narrative to everything that Democrats are saying
right now. They're like bidomics, Yeah, everything's rosy. What is going
on? What is the real deal? So I think that you just we
got a lot of cross currents going on, and I think it's really confusing.
And I think one of the biggest things that's confusing people is it's been
almost forty years since our last bout with inflation, right, and people see
these growth numbers and they're like, Wow, the economy is cranking. The
reason they're the reason that's the thought if I see a five and a half
percent GDP for a quarter, the reason that looks really good is we have
what we call nominal growth versus real growth, right, And it really makes
sense. If the economy is growing at five and a half percent but you
have six percent inflation, you're not growing, right, You're shrinking right.
Well, for so long, five percent growth was with a two to two
and a half percent inflation backdrop. Okay, So now you've got them posting
five and a half. The Atlanta Fed, which has been pretty accurate in
the last thirty days, have dropped their GDP estimate from five point nine to
four point nine. That's a big move south. Okay. We're showing inflation
raging between four to five Okay, So what does that tell you? It
tells you there's no growth. Okay. Now, in a zero percent interest
rate environment, that's not as much of a problem because the tab isn't running,
right, everybody can refinance at record low rates. Money is free essentially,
especially for banks to borrow and shadow banks and all these different things.
But you're looking at corporate debt. We saw a couple of corporate debt refinancings
happen, just to quite a few. There's going to be a day lugevum
next year. That's another thing nobody's working into their earnings forecast. If the
average S and P five hundred company has to take a couple billion dollars pile
of debt and refinance it at five to six as opposed to two and a
half to three, okay, gets getting sucked right out of earnings, right.
So it's everybody is trading, in my opinion, based off of the
last fifteen years, meaning it's like zero percent interest rates, but they're not
paying attention to the pernicious nature of interest rates and how they continue to chew
away at things as time goes on. Right, Like, if you think
about the last fifteen years, we had several economic scares, right, but
you're at zero percent interest rates. So the minute something bad happened defended,
just start buying US government treasuries or mortgage back securities. Again, liquidity starts
getting pumped into the system and rising tide lifts all boats. Right. Well,
the opposite is happening now, and everybody is behaving as if it's the
same. So what we're seeing right now is a rapid deterioration and consumer spending.
Now, when I say rapid, I mean coming from a lofty level
down to close to flat SKay zero now everybody goes, well, it's not
regressing, and I'm like, well, remember, consumers spending is inflation.
It's reflecting inflation. So if consumer spending stays flat but inflation rises five percent,
you're gonna look like now, there's certain metrics that pull out inflation.
But bottom line is, if consumer spending is flat and inflation is running at
five percent, you are going backwards, and you're going backwards in a meaningful
way. Right, here's the other queue. If it was as good as
everybody's saying, why so many earnings misses and downward revisions, Why did US
Airlines come out and guide for lower and lower their own profitability targets? Why
did Delta come out and do the exact same thing. What do we constantly
here? The consumers strong, The service industry is strong, right, we
actually traditionally we see things like value or excuse me, flight travel, and
the services sector kind of be the last to roll over. Well, you're
listening to restaurants coming out and saying they're missing the foot traffics down. Airlines
are coming saying that it's dropping. Right, And here's the issue. The
issue is is you have a market that is priced as if rates are at
zero, okay, and the FETE is still buying treasuries and stimmies are still
in everybody's pockets, right, stimulus, it's not the case. So we're
looking at an economy where you're going, Okay, you guys are pricing this
market as if consumer spending is just going to keep rising. It's not.
That's craziness, right. You look at what's happened to interest rates and taking
away the stimulus. And then also, guys, think about how many durable
goods. So durable goods are something that we buy in the economy that lasts
for a refrigerator, washing machine, right, stuff like that. Okay,
well, do you think people are going to continue to buy those things at
the paces they have over the last two and a half to three years.
Of course not. You don't need three laundry or washing machines, right,
you don't need three backyard remodels. So part of it, and this gets
into the definition of economics when we talk about stimulus. Okay, stimulus doesn't
create new economic activity. What it does is it sucks future economic activity into
the present. Right, Meaning if you pass a new stimulus deal or a
new tax break to buy a new car. I'm going to buy a new
car this year, but I'm not going to keep buying new cars every year.
Right. So at the same time, you're watching this commercial real estate
and look, the commercial office space is getting smoked no matter what anybody says,
Okay, we'll continue to say the same. In residential housing, I'm
listening to these people going residential housing isn't down, and I'm like, dude,
quit looking at the official numbers. Volumes of house sales are down fifty
percent. Okay, what does that mean? The only houses that are being
sold are people that can afford to sell them, meaning they're not worried about
getting into another high interest rate loan. Right, and it's people who can
pay cash. What did we just describe the wealthy? Okay? So the
wealthy people or the people who aren't constrained fiscally, those are the sales you're
seeing. So when you start looking at what prices these things need to be
priced at in order to actually sell, it's significantly lower. And we can
see that in markets like Houston, or we can see that in markets several
and feet up in Texas. We can see it in Phoenix, we can
see it in the Seattle area. You can see it in the Bay Area
and everybody's like, oh, Housings hanging in there, and you're like,
Housings down fifteen to twenty percent, depending on where you're at in the country.
Right, it's just not selling and everybody's just got their fingers in their
ears, going la la la la. You know, you know, tell
me something good. Right, the other part of it, and I'll kind
of get into the anecdotal side of it. There's a saying in this industry
that when you're managing money the correct way, in a discipline manner, and
you're not just chasing at the height of every cycle, you should lose some
of your clients. Okay, now we've lost very few, but so far
this year we've lost more clients. We've probably bled. This is a heck
of a market employ right, telling people that we've lost clients. But the
reason we've lost clients is we're up a couple percent. We're positioned very securely.
One of the reasons, guys, that we were positioned securely is last
year, when markets were down twenty to thirty five and the average retirement portfolio
was down twenty five to twenty seven, our average client was down six and
a half to seven, right, So our attitude was, Hey, we're
going to keep playing it safe. If the market wants to come back and
catch us, so be it. This isn't the environment where we want to
be really aggressive, right. Well, the number one reason you lose clients
in this industry is the market's going up and you're not, and the clients
don't have the Usually they don't have the ability to sit back and go wait
a second, when I factor in how I did last year and this year,
I'm still ahead of the game, right, That's not the way they
look at it. And so anecdotally, you see people. I was having
a conversation with a client the other day and I said, do you understand
the things I'm telling you economically? And he goes, yeah, absolutely,
and he goes Zach, but at the end of the day, those stocks
are still going up, and I go, well, for now, right,
for now they are, and he's going to expect you to like know
exactly when they're gonna stop doing what they're doing. Oh yeah, one.
And that's why you know, in investing, you know, there's you know,
it kind of reminds me of the Bible, right there's a season for
everything. There's a time to be aggressive. There's a time to be when
we can sit back and own these ridiculously cheap companies that are producing things like
natural gas, oil and copper, things that the world desperately needs and isn't
short supply of. They're paying us six to eight percent dividends to own it.
The companies have zero debt, and they're trading it two to three times
earnings. Right, and then I can own a chunk at two year treasuries
that have virtually zero risk, paying me a guaranteed five percent if if the
worst the worst thing that happens to our clients this year is they make six
to seven percent, I'm okay with that, right. But what people need
to understand is that if you're being cautious right now, you're not missing out
on a run. Okay, what you're doing is sitting there going. I
don't think it is wise to pay ever more expensive prices for companies whose fundamentals
are deteriorating right underneath them, right, And it's not that we're predicting it,
it's happening. You see earnings down, revenues down, you see you
know a company like Apple, whose growth is at the lowest point we've seen
in twenty years, you know, launching a new phone that's two hundred dollars
more. That's the exact same as the last phone they put out, which
I own and is not a very great phone quite honestly, you know,
it's just this cycle has run its course and people are used to for fifteen
years, things have gone up. And the sad thing about it is,
guys, is that usually the least experienced retail and this is what happens in
every cycle, the most inexperienced people get the most aggressive at precisely the wrong
time. Here's another anecdotal piece of information. Retail investors right now our position
more aggressively than they have ever been in history. So if this is like
other times in the past when retail gets the most excited, think of nineteen
ninety nine and two thousand, that's the time you should be running from the
hills because those are the people that are not looking at the fundamentals. Those
are the people that are trying to bid Tesla up. As Tesla cuts the
price of its cars by twenty percent, therefore erasing its margin and its profit.
You know what we do and we talked about this little off air what
we're doing right now, and our attitude is really simple. We think that
we live in crazy times, okay. We think that guarding against the big
downside move is the biggest threat here and if we're wrong, you guys.
One of the reasons we do it, honestly, is just for moral clarity
and the ability to sleep at night. If our clients leave us because we
made them five to seven percent when the markets of fifteen to twenty, I
can sleep at night, right. I don't want that to be the case.
I'm really competitive. We've beaten the market the last two to three years
in a row. I love doing that. At the end of the day,
our job is to finance the rest of their lives, not to make
the most in an insane market we can make in a twelve month period of
time. You know, it's a good philosophy. I mean, that's a
really good philosophy to live by when it comes to this. I mean,
especially when you know, I mean, I think a lot of people that
are leaving, they probably look over their shoulder and they're like, well,
dang, maybe I should have stayed. Yeah, Well, we we already
had a couple of those this year. We had we had a couple of
those this year that left for whatever reasons over the last two years and got
destroyed last year. And it's you know, it's yeah, it's not a
fun conversation to have. You know, they came back with twenty percent less
money. But you know, through that experience, they become better clients because
they understand sometimes we will protect against risks that don't happen, that's just the
name of the game. But if the worst case scenario is we make a
little less, you know, we can live with that. This isn't about
We're not at a craps table. We're not at a roulette table, right
We're trying to finance the rest of your life. And what's crazy is we
live in an environment right now where everybody just thinks, oh, buy it,
it's going up. Well, it's going up because a bunch of people
that aren't informed are bidding up the price irrespective of the underlying fundamentals. That's
a losing game. It always has been, and you know it will be
this time. Yeah. Well, the way that we talk about you to
our audience is that you know, we talk about the fact that you actively
manage risk and that you are helping people who are close to nearing or in
retirement avoid losing big giant chunks of money. So what can people expect when
they reach out to you, like, what's your process? How how can
we tell them that you're going to best help them? Yeah? Well so,
and we do things very differently than everybody else. So first of all,
when we sit down, you know, I'll give a couple of people
to if you ever interview somebody like me or somebody that works at another financial
firm, and when you meet with them in the first meeting and they show
up with investment suggestions, run okay because they don't know you and they don't
know what you're after. And if they already came with something to sell you
or a preconceived idea of what you should have, it just means that they
have a system and they're plugging you into it. Right. What we do
is we sit down and look at somebody's entire life and sit there and go,
Okay, what does social security look like? When do you think you're
going to retire? How much do you all in your house? Joan and
the other rental properties. All of those things need to be considered before we
can make a portfolio recommendation. Right, We'll have people that come in that
are virtually the same age, that have the exact same amount of net worth,
and they'll be invested completely different based on what the rest of their life
looks like. Right, And so it really comes first and foremost. We
need to assess what are your goals for retirement? Right? What kind of
income do we need to generate to complete those goals or to accomplish those goals?
And then how do we sit back and how do we accomplish those goals
taking as little risk as possible, Again, especially in this environment, right,
there's going to be a time to get aggressive. It's not when the
stock market is trading at the second highest valuation it's been out in fifty years,
okay, and at the end of the longest bull market in history.
So it's assessing how do we get there, how do we accomplish those goals
looking outside the box, not just relying on bonds and stocks. Maybe we
need a real estate investment trust mixed in there. Maybe we need some short
term treasuries paying Maybe the answer is to have a zero risk portfolio. Right
now, for you, you know, it really depends on where you're at,
and then building a portfolio that you know that represents that and then the
next part of it For us, and I tell people this all the time.
What most firms do is they take your money and they put it and
manage money programs. Okay, if we did that with our clients, I
would be able to get rid of my two analysts, my other portfolio manager,
and are two full time traders. Okay, that would save me about
one point two million dollars a year. People ask me, well, why
would you spend that extra one point two million dollars a year? And I
go, why do you think? Right? If I could, you know,
that's not a bad deal. Right. If I do it like everybody
else, I immediately make one point two million dollars a year more. You
know, I'm I'm I'm not a crazy wealthy guy. One point two mill
is still a lot of money, right. Yeah. The reason we do
it is because we took an oath to do what was best for our clients.
And you know, sometimes it will work. But but bottom line is
we have an incredibly complex, changing environment and we need to be able to
pivot at the drop of a hat with all this craziness. And that's that's
the way I mean. I wish we didn't. I wish I believed that
doing it their way was the best, because, like I said, I
would have a lot more money. But that's part of us being a fiduciary
too, you know what I mean, where we are truly on the same
side as the meaning, if your account goes down forty percent, my paycheck
does too. Right. And and I think that cook should eat their own
cooking and they should have skin in the game. And when you're set up
like that, it really is a partnership, right, We're both we're both
eating the same cooking, and our tails are both on the line, and
you know, we're going to protect their money like it's you know, like
it's our own. So how can people get in touch with you and learn
more? Yeah, so a couple easy ways. First of all, uh,
you know, you can go to the go to our website Bullward Capital
Management dot com. You can find our weekly radio show and Know your Risk
Radio dot com. We're on every podcast service out there, Apple I to
all that stuff. You just you know, just search Know your Risk Radio.
We also do a daily thing called the daily dots. So every year,
every day after the market closes, we do a twelve to fifteen minute
summary of what important happened that day, important earnings, announcements, fed you
know, fed minutes, all that kind of stuff. Pretty easy to find.
And then in the next week or two we have a virtual road show
coming up. It costs nothing. It's about a forty five minute presentation that
shows you our process, shows you what we do differently and how it works
and how we can lower risk, lower your fees and increase your upside.
And we're just showing you how it's worked, right, Not making prognostications,
is showing, hey, the proofs in the pudding. Here's how we do
things. And then if they're interested further after that, they can set up
a call with me or one of our other advisors and really get an in
depth and then we'll make a portfolio portfolio suggestion for them and then there's no
twisting arms. Right, If you want to be a client, you want
to join us, great, if you don't, hopefully leave more informed,
but yeah, the virtual road show coming up in the next week or two
is probably the easiest way. It's free. Only have one hundred and twenty
five spots. They usually fill up pretty quick, but I think that's the
easiest way to get a good, you know, three hundred and sixty degree
understanding of what we do and how we do it. That's awesome. Yes,
thank you so much, Zach. You're always on top of everything and
you break things down so easily for people to understand that. We appreciate it.
Oh, thank you, ladies. Always fun to be here.