We are back with our friend Zach Abraham, chief investment officer at Bulwark Capital
Management, and Zach is always great at kind of giving us the rundown of
what's going on in the markets in the world of finance and helping us kind
of prepare and plan best for our future retirements and just kind of knowing what's
going on. So, Zach, what is up right now? You know?
It's it's uh. We were kind of talking about this off air,
and it's probably more interesting to me than it is to most people what I
do for a living, right but what you're seeing right now is really to
me it's fascinating. Meaning, you know, I think there's a lot of
people out there that realize the market's gone up. When stock markets up sixteen
a half percent or something like that. This year, we've done we've done
some homework on it, and what you're seeing right now legitimately has never occurred
before. Okay, So when I say that, what am I talking about?
In over a six month period of time, you have never seen a
stock market rally of double digits like this in an environment where earnings and profits
or earnings and revenues are going down. So profit and revenue is going down
across the SMP five hundred at the same time interest rates are going up.
So and people are like, well, you know, they're not as fascinated
by that as I. What do you mean, why does that such?
We deal? Well, the interest rate issue particularly is fascinating because when interest
rates go up, it's not that I think stocks shouldn't be going up with
them, But when interest rates go up, stocks are worthless. Right,
So it's called discounting, right, So it's how we value assets. So,
for instance, let's say I can make one and a half percent owning
a ten year US government bond, right, one and a half percent.
It doesn't tell you what's stocks should be worth, but bottom line is at
one and a half percent the ten year US treasury means that stocks should probably
be higher than normal. Okay, because we've got to discount an asset,
right. No asset lives in a vacuum. We're trying to value an asset.
It's always compared to what right we gotta give. We gotta have context,
and discounting is something that we use in the world of finance to try
to give us relative value or to value an asset. Right, And the
most widely used instrument in the world to discount is the ten year US treasury.
Well, when the ten year US Treasury goes from one and a half
to four, I'm not telling you how much stock should go down, but
they shouldn't go up, right, right, because it literally I just think
about it, like, if I'm willing to take x amount of risk when
the ten year treasury is paying one and a half, the bottom line is
is that I should be I should be willing to take substantially less risk when
it's paying four. That makes sense, right, think. So in other
words, let's think of it like this. So let's say we're going to
buy a company. Okay, let's not think about stock, but let's say
we're gonna buy a company, and we as investors get paid by profits.
Right, Revenue doesn't pay us. We've gotta have profit. So let's say
that company, whatever we pay, Let's say we buy it for a billion
dollars and it turns out eighty million dollars a profit a year. That's an
eight percent net return. Right now, owning a company, there's a lot
of risks that come with owning a company, right, So we're sitting there
trying to determine whether this is a good deal or not. So what do
we know. We know that there's all these different risks involved and own a
company. We've got to deal with employees's got to deal with wages and taxes
and the economy and all that other kind of stuff. So we're gonna get
an eight percent net return on our capitol. If I can take zero risk
and get five percent, that may make that eight percent not worth it?
Right? Like it? Because you're like, there's a risk premium in there.
I'm taking zero risk making five. Now I'm sking a lot more capital
to make eight, right me? Where's that break even? And and it's
always a little bit fungible. My point is this, when the ten year
treasury is paying one point five that eight percents a lot more attractive. When
it's paying four, that eight percent is a lot less attractive. Okay,
Now, what's insane is that we've seen the largest and fastest interest rate hike
in history, and what are stocks doing. They're going right up with it,
right, So it's not a thing where we're sitting there going, hey,
we think something bad is going to happen. We think you should be
cut, we think you should be careful lookout for stocks. It's that on
a financial analysis basis, stocks are worth less than they were at the beginning
of the year. Why because interest rates are higher? Period Now, we
don't even need to bring in the economic weakness we're singing in the slowdown and
what it looks like just rolling right into a recession. I'm not I'm not
really having to go there. I'm just saying interest rates and stocks should not
be going up at the same time, specifically when the earnings and profit on
those stocks are dropping too. So why, why, why, why why
is this happening? Why? Okay, so that's a great question. He's
like, let me happen here, right right, This is a this is
a vodka, gatorade? Right, So why do people why why why do
people think men can have babies? You know what? So everything is just
fake, like there's nothing real in our world anymore, everything including the world
of find Yeah, I mean sort of in the market. The one thing
I will say is that I do think that there are some reasons why this
is happening. A I think we have to remember that, first of all,
in every stock market crash or in every recessionary market fall, you have
what we call bear market rallies, so meaning everybody thinks there's always moments where
you have false stalls and everybody's like, oh, the worst is over.
You gotta get back in. Market rallies retraces a big piece of what it
lost. It builds false hope, right, it sucks everybody back in and
then rolls over again. That's a feature of every single recessionary market of all
time. Okay, this one is especially poignant though, or this one's especial.
I think one of the reasons this one's bigger is due to the fact
that this has been the longest bull market cycle in US history. Right,
We've gone fifteen years without a recession. Effectively, we've gone fifteen years without
the market not having we had one down year, right in the last fifteen
years, and the market was down six percent in that one year. It
was twenty eighteen. Okay, so you've got entire you've got you've got pur
portfolio managers who are seasoned veterans now who have never seen a down market.
And whatever they've seen for fifteen years, they saw by the dip right by
the dippentech, especially by the by the dipping tech at any cost, don't
pay attention to fundamentals, don't pay attention to earnings. Is by the dippingentech.
And when you build that muscle up for fifteen years, you know,
I think it's a lot longer time. We just say it flippingly fifty years.
Yeah, that's twenty percent of the average lifespan, right, So I
think that that's one of the biggest reasons, just the muscle memory that's been
built up over the last fifteen years, it's a big part to play in
it. The other part is this, we live in a different economy,
in a different society now post eight o nine. Meaning if you look at
the economy, and I'm not trying to be hyperbolic, I'm just if you
look at the economic backdrop, and if you told me that there was going
to be no FED intervention, right, so the central banks FED could no
longer intervene, you could be looking at a depression, you could, right,
the debt levels have gotten that lot. There's so many things so out
of whack in the economy that you could potentially Now it's not going to happen
because the FED will just print money and paper over it like they've been doing
fifteen years. Right, So that's another thing, and that's kind of one
of the things we're looking at. Maybe this isn't the stock market rallying with
higher interest rates. I mean, that's what's happening. Maybe it's the stock
market looking through the recession going we know the Fed's going to have to print
again. So I don't think that's the case. I think this is just
a classic bear market rally fueled by a lot of people thinking the Fed's going
to bail them out, and so we should. So we should be looking
at a depression, but we're not because the Feds are going to be bailing
everybody out. Yeah. Well, I'm just saying if you look at the
dead loads and factor in the interest rates, and you look at that,
if you let this economy run and it had it had to deal with itself,
you could be looking at depression in it scenarios. Okay, well,
and you can do a certain So so here's a quick little, a quick
little way to look at this. A colleague of mine is very well respected,
did a study and went through and broke it down, and you if
you had if interest rates stayed where they were right now, there's not a
lot of refinancing a corporate death this year. But if interest rates stayed where
they were last now right now, and you just let things go forward,
and the FED didn't intervene and didn't buy down rates, and these guys had
to go to market with the debt that they have and refinance at today's rates.
Right now, someone like more than eighty five percent of American companies would
be insolvent. That's bad. Wow, all of the banks would be insolvent.
Oh my gosh. So and so I don't think people really understand like
how far off track we are, right, That's why I say we don't
live in a free economy anymore. Right, this is it. This is
a planned, organized communist style economy. And whether whether or not that's what
it is. Zach, Well, I've got good news, right, I'm
the bers No, No, here is the upside. Okay, yes,
we're not gonna see depression. It's not gonna happen. Why because if they
have to either send ten thousand old checks to everybody like we've already seen them
do it, right, that we have to pay that's coming now? You
sound like an adult, right, We don't. We don't pay for Shame
on me. Yeah, shame on, you come on, we live in
the imaginary time. So what what has to happen to write the ship?
And is it even possible? No, it's not possible or not at this
point. The numbers have gotten Yeah, the numbers have gotten too large.
So yeah, because John Carey's talking in quadrillions that the numbers have gotten away
too Yeah, I know. And I can't even like around that number.
Nobody I don't even understand. And that's one of the problems, right,
that's one of the problems when we start talking even about billions, right,
let alone you get two trillions. No, nobody hasn't we say the word
but if you stack a true what is it? I want to say,
if you stack a trillion dollars on top of themselves? Again, do not
quote me, but I want to say, it's like thirty two thousand miles.
Yeah, it's insane, right, Just stack the dollar bills like they
thirty two thousand miles and maybe it's sixty I don't know. It's some insane
number, right, or some insane distance. And you're looking at a country.
Now there's what are we thirty three thirty four trillion dollars in debt then
yeah, and then that debt is a little bit different than regular debt.
And and I sound like I'm splitting hairs here, but it's also the corporate
debt when you look at the amount of money, not this government zone,
but the corporation zone and individual zone. If you had to, if everybody
like you see yet, are you guys suplited with what's happening in corporate office
space right now? Because they can't they can't rent it out because everybody's working
at home, and then they have to refy it. Remember, corporate office
space is financed typically on five year terms, right, So basically every year,
twenty percent of the inventory is coming up for refine. Right, So
when they refly, after they refi at these rates at all of it's insolvent
when they factor in the lower rent rates and all that other kind of stuff.
Right. So, literally there are buildings coming up for refinance that are
literally getting sold for fifty sixty seventy percent discounts to what they were previously connanced.
Ow. Wow, it's insane why there's still office buildings going up,
at least in my town. I continue to see the construction and they're building
them. We have enough. What are you doing? Well, it's what
you think sun costs, right, Like, so now a lot of them
have shut down, a lot of building operations have shut down. I've got
a buddy that is like the superintendent for a large home builder, and he's
telling me the biggest thing that's happening right now in home building is other builders
trying to purchase partially finished deals off of other builders. And the reason they've
got to buy them off the other builders is the other builders can't get them
financed, right, So the financing is just locked up. And that's why
when we have this, are we going into recession debate? I'm just like,
come on, like yes, And I can't tell you when it will
officially start. My guess is third or fourth quarter of this year. Like
I think it's happening right now. But it's just a matter of credit contraction,
right when you get a step, when you get into economy that's this
levered debt has to continue to grow for the economy to grow, right if
debt growth stops, right because it's so big, Right when did debt gets
so big that you have to continue to grow the stack in order to keep
forward progress and the debt right now is contracting and we see that, you
know, across the all different walks of life. I mean, you know,
you go talk to anybody trying to buy a house right now, it's
see differently harder to get alone, go talk to you know, people that
own corporate office space. So it's pretty wild. In the sensor, you're
looking at a backdrop. You're like, you know, if we were left
on our own here, this would be flat out a depression and we'll just
print our way through it, you know, because we don't believe in recessions
anymore. So is it possible that next week there might be something like lighter,
like better news. Is it possible that we could have a discussion or
in two weeks rather about I mean, is there anything that we can look
at that's like a light at the end of the tunnel, or just some
kind of hope anything hopeful? I mean, I think artificial intelligence is going
to be a big deal. It's going to make a big difference. But
economically speaking, no, I think unfortunately, you know, as a society,
and I think you guys will see this politically like, as a society,
I feel like we're a bunch of strung out on sugar kids that are
just like, we want more, you know, just keep it going.
I just think now is the time to pay the piper. And I don't
think anybody wants to. I think the Fed wants to push it off.
I think the government wants to push it off. But you're just kind of
looking around. And that's the crazy thing about watching the stock market rally,
Like the stuff that is rallying the hardest are the companies who are losing the
most money. It's unbelievable. It's unbelievable. And you look at some of
these companies like Apple set a new all time high this year on the back
of two consecutive quarters of declining revenues, profits, and margins, and they
set a new all time high compared to when interest rates were at zero eighteen
months ago. So you're sitting there going, I don't their stock isn't more
interest rates have gone up. You have to discount that into the price.
Market disagrees. So yeah, no, it doesn't look good. I mean
nothing looks good, not at these levels. And again I will still say
that, you know, I'm not predicting impending economic doom. Unfortunately, I
don't think we're going to have that, And you go, Unfortunately, why
would you say that, Because the longer we're off of reality, the worst
it gets, right, and we'll just content, Yeah, which is we're
relying on this communist economy, which is like, and so where it ends
is inflation, Like, that's where it will end up, right, This
will not end with a people like think of we in America think of worst
case economic outcomes as things dropping in price. Right. Well, we've gotten
to taste of a little bit in the last eighteen months. Is there's something
worse than that. Right. There's a benefit to deflation and depression, and
that is things drop in price. Right. There's a lot of bad things
that come with it too, right, And so we're all you to,
oh, well, prices up are good. No, the end of every
economy is inflationary, not deflationary. Right, So the way every economy fails
is through currency devaluation, not the other way around. And I think we
have started that long path again. I don't think anything there's a lot of
Virtually every other country in the world isn't a worse place than we are.
But the reality is what it is. When you get one hundred and fifty
percent debt to GDP. You don't come back from that, no country ever
has, so you're, by definition, you're starting the terminal decline. Okay,
So other than that, Missus Lincoln, how was the play right?
Everybody? Well, you know what we can say about you, Zach is
that we always learn a lot, and so at least we know we appreciate
that, even when the news isn't great, we do appreciate it. Zach.
Of course, you are the chief investment officer at Capital Management. Where
else can people find more information about you and how you might be able to
help them through all of this crap? Could you give it to people straight?
You give it to people straight, that's for sure. Nothing else will
give it to you. A stradio, that's right. The best way to
get us is Know your Risk Radio dot com Bullward Capital Management dot com.
We also do a radio show that there's once a week and you can find
that just google Know your Risk Radio podcast or just type it into you know
iTunes or whatever podcasts you have. You'll find us. Know your Risk Radio
will pop right up and yeah, not too hard to find. That's the
US. Thank you so much, appreciate it. Awesome investment advisory services offered
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