It is time for us to get all the good scoop on what is happening
with the economy right now, because there's a lot going on with the economy
that has nothing to do with all the stuff that we've been hearing about the
Deat ceiling for the past several weeks, but everything else. And there's no
better person for us to talk to about those things than Zach Abraham, who
is the chief investment officer at Bulwark Capital Management. Zach, once again,
it's great to have you here. Tell us what is going on in the
world of economic Yeah, well, you mentioned the deat ceiling. We're gonna
have some resolution to that probably here in the next week or so. Kind
of, like I said, a lot of it's going to be just kind
of kabuki theater. I think people on both sides know that, you know,
regardless of the rhetoric, it has to happen. So but an interesting
thing is going to happen after that. One of the things that we track
here, and I'm going to try to avoid getting into the weeds on this,
but one of the interesting things about markets is that since we went to
zero percent interest rates after O eight O nine, we track a lot of
different indicators, and the indicator that if you put up the market, a
chart of the market over the like the last fifteen years, and you can
track, you can overlay all of these things over the top of that chart
to try to see what corresponds best, Like what what is impacting it?
Right? We have a downmove? What what what made that downmove happen?
What made the upmove happen? And the number one correlation you see over the
last fifteen years, more so than ever before, is liquidity. Okay,
so, when money is pumping into the system, the stock market goes up
regardless of economic conditions. When money starts coming out of the system, the
inverse happens. And the chart over the last fifteen years is striking because you
see it has more to do with liquidity than it does earnings, profits,
revenue. The thing that it corresponds the best too is liquidity, and it
actually makes sense. And a zero percent interest rate, world markets effectively become
liquidity gauges, meaning you know, I've always equated to zero percent interest rates.
Now we're not at zero percent infest rates right now, but the market
is still behaving as if we are. Okay, so and it just yeah,
it kind of takes a little while for things to change, right,
for people to take you for markets to accept changes, you know, and
fully bake them in. But what you've seen and everybody's like, oh,
we've got a great rally happen here in the markets, and it must be
a rebound in New Bowl market. Well, what happened was after Silicon Valley
Bank, the FED raising rates, doing everything they were doing, qt quantitative
tightening, selling assets off their balance sheets, all of those actions suck liquidity
out of the markets. Well, in an effort to stop the banking crisis,
the FED introduced a lending facility and they bought about three or four hundred
billion dollars worth of bonds off bank balance sheets, and that is an injection
of liquidity back into the system. As soon as they did that, this
rally took off, right, and people are sitting there going why are these
stocks? You know, like Apple stock is up thirty five percent after posting
two consecutive quarters of five and six percent declines in revenue, thirteen percent declines
in profit, and even their margins are constricting. Why would that push the
stock thirty five percent up? Right? That's crazy? Well, liquidity went
up. And the interesting thing about the debt ceiling is as soon as the
debt ceiling gets passed, the Treasury is now able to issue more debt.
Right. Oh no, Well, when they issue more debt, buyers have
to step in and buy that, and that begins the liquidity drain out of
the market again. Right, So that's where liquidity will start pulling back.
So we are watching liquidity like a hawk. It is dwindling. It is
in many measures, it's dropping at a rate that we've never seen before.
Like M two the money supply, you're seeing a pullback in the money supply
that we've never seen in history. Right, It's like a tide, it
is. It really, it very much is kind of freaking it is.
It's kind of crazy, and it's intentional too, right, because that's what
the FETE is trying to do in order to bring down inflation. So we're
just sitting there saying, look, we think it's pretty simple at this point.
The fundamentals as we speak right now are not there to support stock prices
where they are or most asset prices. The reason they've been able to do
this is just because there's been a flood of liquidity. As that liquidity or
that tide goes out, as Daisy put it, right, we expect,
you know, stuff to start hitting the fan again. So where I think
a lot of people are going to be like, oh, the debt ceiling,
we got it behind us, We're good to go. I think it's
going to be the opposite, right, because that's they're going to start issuing
the debt that starts sucking liquidity out of the markets. So we'll see.
But so like, so that tide will go out, it'll give people like
a false sense of security, yeah, and then then the crap will really
hit the fat Yeah. Yeah. And if you think about it, it
makes sense because you look over the last fifteen years, right you guys,
remember like government's intervened directly into economies or markets, you know, like once
every ten years, maybe once every fifteen years. Yeah, now it's like
every other week, right, And so they've trained markets. It's like a
Pavlovian response. They've trained it. When liquidity goes up, buy everything.
When liquidity goes down, run And now with interest rates where they're at the
biggest contraction in M two, the debt ceiling behind us, you're about to
see a record debt issuance coming out of the treasury. All of these you
guys mentioned student loans, student loans coming back on tap. Everywhere you look
in the economy, all you see are liquidity drains, right, So then
you go over and you start looking at the economic data. Not only are
central bank straining liquidity, but the economic data is still the trend is very
much down. It is opposite of the market so far. And we've seen
this happen before. We people forget, but two thousand and eight bear Stearns
fit. It's funny. I don't know if we've talked about this before,
but go back to two thousand and eight. This is a different economic backdrop.
But March sixteenth of two thousand and eight is when bear Stearns failed.
Everybody panicked, and then about a month after that happened, the markets start
rallying again. Everybody's like, oh, we're in good shape, right,
Silicon Valley failed on March tenth. Okay, so you know, about six
days apart, market got hit. Then we start rallying, and again there's
just so many similarities. Again, the economic situation is different, the market
reactions and the market behavior are very similar. We'll see what the outcome is.
But you know, we're talking about jobs data off the air. Um,
We've been saying for a long time. Look, the labor market is
still quote unquote strong, but we just think it's way overstated. Well,
funny enough, jobs data came out and there now you got to go.
You're not going to see a headline on CNBC. You know, Rachel Maddow
isn't going to be preaching this from the from the rooftops, but you'll see
it in the bullet points. They they said, Okay, yeah, job
growth is good. By the way, we overstated jobs by five hundred thousand
in the court Q four of last year. Right, well our bad.
Yeah anyway, And isn't it right? And isn't it weird that that that
their their miscalculations always tend to benefit, right, the administration. Right,
it's never never accidentally didn't credit five hundred thousand jobs counting. So when you
look at you know, the other narrative to look at is, oh,
it's the jobs, it's the jobs. Well, first of all, jobs
are always the last thing to give out in a recession. It's always the
last thing to roll over. And it's pretty simple business owners don't cut people
in anticipation of business slowdowns, right, because if they don't slow down,
then they don't want to lose the employee, especially in a tight labor market,
So it's always the last thing to roll over. But one of the
ways that you can kind of, in our opinion, tell that the jobs
market isn't nearly as strong as people are saying, is you look at hours
worked and you look at overtime hours, right, Meaning if if I see
a really job strong jobs number and I see overtime hours increasing, I can
believe that job's number. If your show telling me that you've got a historically
tight jobs market in overtime hours are going down, I don't believe your job
numbers, right, because what do employers do, especially in a period of
time like right now, when labor costs have gone up in the labor and
the labor markets really tight, They're going to offer existing employees over time before
they bring on somebody else. Right. So you're seeing overtime hours going down,
you're seeing work weekly hours going down. They revise that five hundred thousand
out of the jobs numbers. So in our opinion, if you're looking at
the data and the fundamentals of the economy. They're telling a completely different story
than the markets are at this point. So what what should people be doing?
I mean, how does this effect like what's the Fed going to do
next? Or what what? What are you anticipates going to happen with interest
rates? How should people be buckling up to get through? Yes? And
by people, Miriam's talking about herself because I can see her freaking out as
you're speaking. I could see, like I'm watching her face and she's like
literally freaking yet the whole time you're talking. Yeah, when am I going
to be able to get eggs for like a normal price? When is gas
going to be cheaper? When it's all of this going to be better?
Yeah? Yeah, And people freak out about all this stuff. It's not
even just that, but like we're all freaking out about, you know,
retirement and like paying our kids way through college and just and you're right,
just to everyday things. People are freaking out out there. Yeah. Yeah.
And I think one of the things we talk to our clients about all
the time is we freak out when we don't have a plan right right,
And one of the things that we talk about at our firm is that with
every investment you have to do, you have to embrace a risk. You're
either embracing the risk of underperformance as it relates to other investments, or you're
embracing the risk of catastrophic loss. Okay. I look at this as kind
of markets are like seasons. There's times where I want to embrace the risk
of catastrophic loss because the upside is so compelling, right, Meaning I'm buying
a stock at two times earnings that has no debt on the balance sheet and
is growing revenue at twenty percent a year, and it's like take and candy
from a baby. Right. It's like, if I buy this company and
hold it for any period of time, I'm guaranteed to win. Okay,
that's when I want to embrace the cost. When we're looking at this market
right now, in my opinion, it's the opposite, meaning you have this
SMP trading at twenty five times earnings. Okay, just to give you guys
an idea of what that means. Everybody throws these words out they're complicated,
but honestly, it's just looking at the average company and saying, okay,
you make a million dollars a year profit. How much am I willing to
pay for that company that makes a million dollars a year profit? Right now?
The markets saying we'll pay twenty five million dollars for a company making a
million dollars a year. Okay, wow, it's been higher than that.
But that is fifty percent above the long term average valuation on the market when
interest rates are at zero percent. That valuation kind of makes sense because if
I go buy bonds, I'm not getting paid anything, right, But if
you show me a way to make a risk free three percent on my or
excuse me, five percent money was short term treasuries versus buying stocks at twenty
five times earnings in a slowing economy. You know, maybe maybe we don't
have some big economic catastrophe and catastrophe in front of us, But why if
we're watching, we all know the economy is weakening. Why are we willing
to pay fifty percent above the long term average on valuation? So in these
in these situations, we pull back our exposure. We own a big chunk
of short term and medium term US government bonds or paying US five percent interest.
People are like, they're afraid of US government bonds. Don't be and
buy them. Not because you believe in the US government, because you believe
in every government less okay, because people forget investments are a relative game,
right, It's it's people goes a good or bad investment, You go,
we'll compare to what, right, And so the cleanest dirty shirt gets picked.
And that's kind of why US government bonds are going to do good.
It's not an attestation of the strength or solve and see of the US government.
It's just a story about how bad everybody else is, right, Yeah,
And then we own some and then we own some dividend paying you know
type energy stocks because they're still dirt cheap and we want protection from inflation.
And then it's just diversification bringing that risk level down. And then we're like
shoppers. Right, we're just waiting for that Nordstrom half yearly sale. Right,
We're just saying, hey, we got the half yearly sale six months
down the road. Here, We're gonna wait till then. We're gonna sit
here and collect our coupons and our interest and wait till then. Now,
could we be wrong? Sure, you can always be wrong in this game,
right, But if us being wrong means our clients make five to seven
percent in the markets up eleven. I'm not happy about that, but that's
not about outcome, right, However, it's a lot, right, it's
not a loss. We're still moving ahead. However, if our outlook is
right and our clients make three to five percent in the markets down thirty,
now we didn't lose. And on top of that, we've got five percent
more to go buy stocks that are down thirty percent, right, and we
didn't take a hit. So right now, I would just tell people,
you know, you will see it in the culture right now. I think
part of it is, you know, just cultural in general. Part of
it's we've gone too long without a recession. Part of it's that people have
been making too much money and everybody right now, the predominant sentiment, probably
not with listeners to your show and not our clients, but the predominant sentiment
out there is worried about missing out on future gains. I just don't think
this is a time or that should be your concern. Well, that is
good advice, and it's just a taste of the kind of advice that you
can hear if you check out Zach Abraham at Know Your Risk Radio Dot com.
Where else can people find out more about Bullward Capital Management and you yeah,
so Bullward Capital Management dot com. Like you said, you can just
google Know Your Risk radio podcast. I do an hourly show, and then
we do usually two or three times a month, we do hourly interviews or
hour long interviews, kind of the Joe Rogan style, right long form interviews
with other money managers, other economists of that nature, and then they can
almost follow me on Twitter at KYR Radio. Mantics for that always. Investment
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Investments involved risk and are not guaranteed, and past performance is no guarantee
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