1
00:00:05,200 --> 00:00:09,759
It is time for us to get
all the good scoop on what is happening

2
00:00:09,759 --> 00:00:13,199
with the economy right now, because
there's a lot going on with the economy

3
00:00:13,279 --> 00:00:15,839
that has nothing to do with all
the stuff that we've been hearing about the

4
00:00:15,880 --> 00:00:20,079
Deat ceiling for the past several weeks, but everything else. And there's no

5
00:00:20,120 --> 00:00:23,920
better person for us to talk to
about those things than Zach Abraham, who

6
00:00:24,000 --> 00:00:28,239
is the chief investment officer at Bulwark
Capital Management. Zach, once again,

7
00:00:28,320 --> 00:00:32,359
it's great to have you here.
Tell us what is going on in the

8
00:00:32,399 --> 00:00:36,799
world of economic Yeah, well,
you mentioned the deat ceiling. We're gonna

9
00:00:36,920 --> 00:00:43,119
have some resolution to that probably here
in the next week or so. Kind

10
00:00:43,119 --> 00:00:45,159
of, like I said, a
lot of it's going to be just kind

11
00:00:45,200 --> 00:00:48,600
of kabuki theater. I think people
on both sides know that, you know,

12
00:00:48,799 --> 00:00:52,560
regardless of the rhetoric, it has
to happen. So but an interesting

13
00:00:52,600 --> 00:00:55,920
thing is going to happen after that. One of the things that we track

14
00:00:56,039 --> 00:01:00,280
here, and I'm going to try
to avoid getting into the weeds on this,

15
00:01:00,520 --> 00:01:04,280
but one of the interesting things about
markets is that since we went to

16
00:01:04,400 --> 00:01:10,239
zero percent interest rates after O eight
O nine, we track a lot of

17
00:01:10,280 --> 00:01:15,480
different indicators, and the indicator that
if you put up the market, a

18
00:01:15,560 --> 00:01:19,359
chart of the market over the like
the last fifteen years, and you can

19
00:01:19,480 --> 00:01:23,200
track, you can overlay all of
these things over the top of that chart

20
00:01:23,239 --> 00:01:26,280
to try to see what corresponds best, Like what what is impacting it?

21
00:01:26,359 --> 00:01:30,040
Right? We have a downmove?
What what what made that downmove happen?

22
00:01:30,120 --> 00:01:34,840
What made the upmove happen? And
the number one correlation you see over the

23
00:01:34,920 --> 00:01:42,519
last fifteen years, more so than
ever before, is liquidity. Okay,

24
00:01:42,560 --> 00:01:47,799
so, when money is pumping into
the system, the stock market goes up

25
00:01:48,000 --> 00:01:53,239
regardless of economic conditions. When money
starts coming out of the system, the

26
00:01:53,280 --> 00:01:57,480
inverse happens. And the chart over
the last fifteen years is striking because you

27
00:01:57,519 --> 00:02:02,159
see it has more to do with
liquidity than it does earnings, profits,

28
00:02:02,319 --> 00:02:07,319
revenue. The thing that it corresponds
the best too is liquidity, and it

29
00:02:07,439 --> 00:02:15,280
actually makes sense. And a zero
percent interest rate, world markets effectively become

30
00:02:15,400 --> 00:02:21,280
liquidity gauges, meaning you know,
I've always equated to zero percent interest rates.

31
00:02:21,319 --> 00:02:23,039
Now we're not at zero percent infest
rates right now, but the market

32
00:02:23,080 --> 00:02:28,319
is still behaving as if we are. Okay, so and it just yeah,

33
00:02:28,319 --> 00:02:30,560
it kind of takes a little while
for things to change, right,

34
00:02:30,599 --> 00:02:35,280
for people to take you for markets
to accept changes, you know, and

35
00:02:36,000 --> 00:02:39,479
fully bake them in. But what
you've seen and everybody's like, oh,

36
00:02:39,560 --> 00:02:43,280
we've got a great rally happen here
in the markets, and it must be

37
00:02:43,319 --> 00:02:47,240
a rebound in New Bowl market.
Well, what happened was after Silicon Valley

38
00:02:47,319 --> 00:02:53,400
Bank, the FED raising rates,
doing everything they were doing, qt quantitative

39
00:02:53,439 --> 00:02:58,360
tightening, selling assets off their balance
sheets, all of those actions suck liquidity

40
00:02:58,400 --> 00:03:02,120
out of the markets. Well,
in an effort to stop the banking crisis,

41
00:03:02,199 --> 00:03:08,120
the FED introduced a lending facility and
they bought about three or four hundred

42
00:03:08,120 --> 00:03:13,919
billion dollars worth of bonds off bank
balance sheets, and that is an injection

43
00:03:13,960 --> 00:03:17,400
of liquidity back into the system.
As soon as they did that, this

44
00:03:17,560 --> 00:03:23,159
rally took off, right, and
people are sitting there going why are these

45
00:03:23,159 --> 00:03:27,240
stocks? You know, like Apple
stock is up thirty five percent after posting

46
00:03:27,599 --> 00:03:31,840
two consecutive quarters of five and six
percent declines in revenue, thirteen percent declines

47
00:03:31,879 --> 00:03:36,599
in profit, and even their margins
are constricting. Why would that push the

48
00:03:36,639 --> 00:03:40,400
stock thirty five percent up? Right? That's crazy? Well, liquidity went

49
00:03:40,479 --> 00:03:46,159
up. And the interesting thing about
the debt ceiling is as soon as the

50
00:03:46,280 --> 00:03:52,280
debt ceiling gets passed, the Treasury
is now able to issue more debt.

51
00:03:53,120 --> 00:03:58,560
Right. Oh no, Well,
when they issue more debt, buyers have

52
00:03:58,599 --> 00:04:02,439
to step in and buy that,
and that begins the liquidity drain out of

53
00:04:02,479 --> 00:04:08,479
the market again. Right, So
that's where liquidity will start pulling back.

54
00:04:08,960 --> 00:04:13,680
So we are watching liquidity like a
hawk. It is dwindling. It is

55
00:04:13,759 --> 00:04:16,639
in many measures, it's dropping at
a rate that we've never seen before.

56
00:04:17,800 --> 00:04:21,959
Like M two the money supply,
you're seeing a pullback in the money supply

57
00:04:23,040 --> 00:04:26,560
that we've never seen in history.
Right, It's like a tide, it

58
00:04:26,680 --> 00:04:29,759
is. It really, it very
much is kind of freaking it is.

59
00:04:29,839 --> 00:04:33,560
It's kind of crazy, and it's
intentional too, right, because that's what

60
00:04:33,600 --> 00:04:38,680
the FETE is trying to do in
order to bring down inflation. So we're

61
00:04:38,680 --> 00:04:42,120
just sitting there saying, look,
we think it's pretty simple at this point.

62
00:04:42,160 --> 00:04:47,680
The fundamentals as we speak right now
are not there to support stock prices

63
00:04:47,720 --> 00:04:53,160
where they are or most asset prices. The reason they've been able to do

64
00:04:53,199 --> 00:04:56,480
this is just because there's been a
flood of liquidity. As that liquidity or

65
00:04:56,519 --> 00:05:00,759
that tide goes out, as Daisy
put it, right, we expect,

66
00:05:00,839 --> 00:05:03,319
you know, stuff to start hitting
the fan again. So where I think

67
00:05:03,319 --> 00:05:05,959
a lot of people are going to
be like, oh, the debt ceiling,

68
00:05:06,000 --> 00:05:10,399
we got it behind us, We're
good to go. I think it's

69
00:05:10,399 --> 00:05:13,199
going to be the opposite, right, because that's they're going to start issuing

70
00:05:13,199 --> 00:05:16,279
the debt that starts sucking liquidity out
of the markets. So we'll see.

71
00:05:16,480 --> 00:05:20,319
But so like, so that tide
will go out, it'll give people like

72
00:05:20,360 --> 00:05:25,680
a false sense of security, yeah, and then then the crap will really

73
00:05:25,720 --> 00:05:29,439
hit the fat Yeah. Yeah.
And if you think about it, it

74
00:05:29,480 --> 00:05:32,879
makes sense because you look over the
last fifteen years, right you guys,

75
00:05:32,959 --> 00:05:39,959
remember like government's intervened directly into economies
or markets, you know, like once

76
00:05:40,040 --> 00:05:43,800
every ten years, maybe once every
fifteen years. Yeah, now it's like

77
00:05:43,920 --> 00:05:47,160
every other week, right, And
so they've trained markets. It's like a

78
00:05:47,240 --> 00:05:51,920
Pavlovian response. They've trained it.
When liquidity goes up, buy everything.

79
00:05:53,199 --> 00:05:58,199
When liquidity goes down, run And
now with interest rates where they're at the

80
00:05:58,199 --> 00:06:00,920
biggest contraction in M two, the
debt ceiling behind us, you're about to

81
00:06:00,920 --> 00:06:05,120
see a record debt issuance coming out
of the treasury. All of these you

82
00:06:05,160 --> 00:06:11,120
guys mentioned student loans, student loans
coming back on tap. Everywhere you look

83
00:06:11,120 --> 00:06:15,920
in the economy, all you see
are liquidity drains, right, So then

84
00:06:15,040 --> 00:06:19,120
you go over and you start looking
at the economic data. Not only are

85
00:06:19,199 --> 00:06:25,759
central bank straining liquidity, but the
economic data is still the trend is very

86
00:06:25,839 --> 00:06:29,800
much down. It is opposite of
the market so far. And we've seen

87
00:06:29,800 --> 00:06:32,879
this happen before. We people forget, but two thousand and eight bear Stearns

88
00:06:32,920 --> 00:06:35,160
fit. It's funny. I don't
know if we've talked about this before,

89
00:06:35,199 --> 00:06:40,079
but go back to two thousand and
eight. This is a different economic backdrop.

90
00:06:40,160 --> 00:06:44,360
But March sixteenth of two thousand and
eight is when bear Stearns failed.

91
00:06:44,759 --> 00:06:47,800
Everybody panicked, and then about a
month after that happened, the markets start

92
00:06:47,920 --> 00:06:50,360
rallying again. Everybody's like, oh, we're in good shape, right,

93
00:06:50,639 --> 00:06:56,439
Silicon Valley failed on March tenth.
Okay, so you know, about six

94
00:06:56,519 --> 00:07:00,879
days apart, market got hit.
Then we start rallying, and again there's

95
00:07:00,920 --> 00:07:05,079
just so many similarities. Again,
the economic situation is different, the market

96
00:07:05,160 --> 00:07:10,399
reactions and the market behavior are very
similar. We'll see what the outcome is.

97
00:07:10,720 --> 00:07:14,240
But you know, we're talking about
jobs data off the air. Um,

98
00:07:14,279 --> 00:07:16,439
We've been saying for a long time. Look, the labor market is

99
00:07:16,439 --> 00:07:20,079
still quote unquote strong, but we
just think it's way overstated. Well,

100
00:07:20,160 --> 00:07:25,800
funny enough, jobs data came out
and there now you got to go.

101
00:07:26,279 --> 00:07:30,480
You're not going to see a headline
on CNBC. You know, Rachel Maddow

102
00:07:30,600 --> 00:07:33,160
isn't going to be preaching this from
the from the rooftops, but you'll see

103
00:07:33,160 --> 00:07:36,959
it in the bullet points. They
they said, Okay, yeah, job

104
00:07:38,000 --> 00:07:43,160
growth is good. By the way, we overstated jobs by five hundred thousand

105
00:07:43,399 --> 00:07:46,560
in the court Q four of last
year. Right, well our bad.

106
00:07:46,639 --> 00:07:51,720
Yeah anyway, And isn't it right? And isn't it weird that that that

107
00:07:51,920 --> 00:07:59,000
their their miscalculations always tend to benefit, right, the administration. Right,

108
00:07:59,040 --> 00:08:05,639
it's never never accidentally didn't credit five
hundred thousand jobs counting. So when you

109
00:08:05,680 --> 00:08:09,639
look at you know, the other
narrative to look at is, oh,

110
00:08:09,639 --> 00:08:11,759
it's the jobs, it's the jobs. Well, first of all, jobs

111
00:08:11,759 --> 00:08:15,000
are always the last thing to give
out in a recession. It's always the

112
00:08:15,079 --> 00:08:18,639
last thing to roll over. And
it's pretty simple business owners don't cut people

113
00:08:18,639 --> 00:08:22,360
in anticipation of business slowdowns, right, because if they don't slow down,

114
00:08:22,399 --> 00:08:24,120
then they don't want to lose the
employee, especially in a tight labor market,

115
00:08:24,399 --> 00:08:28,279
So it's always the last thing to
roll over. But one of the

116
00:08:28,360 --> 00:08:31,480
ways that you can kind of,
in our opinion, tell that the jobs

117
00:08:31,519 --> 00:08:35,159
market isn't nearly as strong as people
are saying, is you look at hours

118
00:08:35,200 --> 00:08:39,200
worked and you look at overtime hours, right, Meaning if if I see

119
00:08:39,200 --> 00:08:45,480
a really job strong jobs number and
I see overtime hours increasing, I can

120
00:08:45,559 --> 00:08:48,559
believe that job's number. If your
show telling me that you've got a historically

121
00:08:48,600 --> 00:08:54,039
tight jobs market in overtime hours are
going down, I don't believe your job

122
00:08:54,120 --> 00:08:58,240
numbers, right, because what do
employers do, especially in a period of

123
00:08:58,279 --> 00:09:03,000
time like right now, when labor
costs have gone up in the labor and

124
00:09:03,039 --> 00:09:07,399
the labor markets really tight, They're
going to offer existing employees over time before

125
00:09:07,399 --> 00:09:11,039
they bring on somebody else. Right. So you're seeing overtime hours going down,

126
00:09:11,080 --> 00:09:16,679
you're seeing work weekly hours going down. They revise that five hundred thousand

127
00:09:16,720 --> 00:09:20,480
out of the jobs numbers. So
in our opinion, if you're looking at

128
00:09:20,480 --> 00:09:24,360
the data and the fundamentals of the
economy. They're telling a completely different story

129
00:09:24,399 --> 00:09:28,720
than the markets are at this point. So what what should people be doing?

130
00:09:28,879 --> 00:09:31,960
I mean, how does this effect
like what's the Fed going to do

131
00:09:31,039 --> 00:09:35,200
next? Or what what? What
are you anticipates going to happen with interest

132
00:09:35,279 --> 00:09:39,440
rates? How should people be buckling
up to get through? Yes? And

133
00:09:39,519 --> 00:09:43,039
by people, Miriam's talking about herself
because I can see her freaking out as

134
00:09:43,039 --> 00:09:48,720
you're speaking. I could see,
like I'm watching her face and she's like

135
00:09:48,919 --> 00:09:54,200
literally freaking yet the whole time you're
talking. Yeah, when am I going

136
00:09:54,240 --> 00:09:58,600
to be able to get eggs for
like a normal price? When is gas

137
00:09:58,600 --> 00:10:01,480
going to be cheaper? When it's
all of this going to be better?

138
00:10:01,679 --> 00:10:03,759
Yeah? Yeah, And people freak
out about all this stuff. It's not

139
00:10:03,759 --> 00:10:07,200
even just that, but like we're
all freaking out about, you know,

140
00:10:07,320 --> 00:10:11,600
retirement and like paying our kids way
through college and just and you're right,

141
00:10:11,679 --> 00:10:15,200
just to everyday things. People are
freaking out out there. Yeah. Yeah.

142
00:10:15,320 --> 00:10:18,399
And I think one of the things
we talk to our clients about all

143
00:10:18,440 --> 00:10:22,200
the time is we freak out when
we don't have a plan right right,

144
00:10:22,480 --> 00:10:26,279
And one of the things that we
talk about at our firm is that with

145
00:10:26,360 --> 00:10:31,559
every investment you have to do,
you have to embrace a risk. You're

146
00:10:31,600 --> 00:10:37,799
either embracing the risk of underperformance as
it relates to other investments, or you're

147
00:10:37,799 --> 00:10:41,720
embracing the risk of catastrophic loss.
Okay. I look at this as kind

148
00:10:41,759 --> 00:10:46,080
of markets are like seasons. There's
times where I want to embrace the risk

149
00:10:46,120 --> 00:10:52,960
of catastrophic loss because the upside is
so compelling, right, Meaning I'm buying

150
00:10:52,960 --> 00:10:56,399
a stock at two times earnings that
has no debt on the balance sheet and

151
00:10:56,480 --> 00:11:00,399
is growing revenue at twenty percent a
year, and it's like take and candy

152
00:11:00,440 --> 00:11:01,960
from a baby. Right. It's
like, if I buy this company and

153
00:11:03,039 --> 00:11:05,639
hold it for any period of time, I'm guaranteed to win. Okay,

154
00:11:05,679 --> 00:11:09,399
that's when I want to embrace the
cost. When we're looking at this market

155
00:11:09,519 --> 00:11:13,279
right now, in my opinion,
it's the opposite, meaning you have this

156
00:11:13,559 --> 00:11:18,240
SMP trading at twenty five times earnings. Okay, just to give you guys

157
00:11:18,240 --> 00:11:20,720
an idea of what that means.
Everybody throws these words out they're complicated,

158
00:11:20,960 --> 00:11:24,480
but honestly, it's just looking at
the average company and saying, okay,

159
00:11:24,720 --> 00:11:28,960
you make a million dollars a year
profit. How much am I willing to

160
00:11:30,000 --> 00:11:33,679
pay for that company that makes a
million dollars a year profit? Right now?

161
00:11:33,720 --> 00:11:37,320
The markets saying we'll pay twenty five
million dollars for a company making a

162
00:11:37,360 --> 00:11:41,039
million dollars a year. Okay,
wow, it's been higher than that.

163
00:11:41,159 --> 00:11:46,960
But that is fifty percent above the
long term average valuation on the market when

164
00:11:46,000 --> 00:11:50,600
interest rates are at zero percent.
That valuation kind of makes sense because if

165
00:11:50,639 --> 00:11:54,240
I go buy bonds, I'm not
getting paid anything, right, But if

166
00:11:54,240 --> 00:11:58,720
you show me a way to make
a risk free three percent on my or

167
00:11:58,759 --> 00:12:03,720
excuse me, five percent money was
short term treasuries versus buying stocks at twenty

168
00:12:03,720 --> 00:12:09,480
five times earnings in a slowing economy. You know, maybe maybe we don't

169
00:12:09,519 --> 00:12:13,360
have some big economic catastrophe and catastrophe
in front of us, But why if

170
00:12:13,399 --> 00:12:18,440
we're watching, we all know the
economy is weakening. Why are we willing

171
00:12:18,480 --> 00:12:22,840
to pay fifty percent above the long
term average on valuation? So in these

172
00:12:22,080 --> 00:12:26,559
in these situations, we pull back
our exposure. We own a big chunk

173
00:12:26,559 --> 00:12:31,080
of short term and medium term US
government bonds or paying US five percent interest.

174
00:12:31,440 --> 00:12:35,919
People are like, they're afraid of
US government bonds. Don't be and

175
00:12:35,440 --> 00:12:39,799
buy them. Not because you believe
in the US government, because you believe

176
00:12:39,840 --> 00:12:45,159
in every government less okay, because
people forget investments are a relative game,

177
00:12:45,440 --> 00:12:46,879
right, It's it's people goes a
good or bad investment, You go,

178
00:12:46,919 --> 00:12:52,960
we'll compare to what, right,
And so the cleanest dirty shirt gets picked.

179
00:12:52,320 --> 00:12:56,200
And that's kind of why US government
bonds are going to do good.

180
00:12:56,200 --> 00:13:01,159
It's not an attestation of the strength
or solve and see of the US government.

181
00:13:01,159 --> 00:13:03,720
It's just a story about how bad
everybody else is, right, Yeah,

182
00:13:03,759 --> 00:13:07,919
And then we own some and then
we own some dividend paying you know

183
00:13:07,960 --> 00:13:11,960
type energy stocks because they're still dirt
cheap and we want protection from inflation.

184
00:13:13,039 --> 00:13:18,320
And then it's just diversification bringing that
risk level down. And then we're like

185
00:13:18,360 --> 00:13:22,399
shoppers. Right, we're just waiting
for that Nordstrom half yearly sale. Right,

186
00:13:22,399 --> 00:13:24,559
We're just saying, hey, we
got the half yearly sale six months

187
00:13:24,559 --> 00:13:28,240
down the road. Here, We're
gonna wait till then. We're gonna sit

188
00:13:28,279 --> 00:13:31,480
here and collect our coupons and our
interest and wait till then. Now,

189
00:13:31,840 --> 00:13:35,039
could we be wrong? Sure,
you can always be wrong in this game,

190
00:13:35,159 --> 00:13:37,759
right, But if us being wrong
means our clients make five to seven

191
00:13:37,799 --> 00:13:41,279
percent in the markets up eleven.
I'm not happy about that, but that's

192
00:13:41,279 --> 00:13:45,960
not about outcome, right, However, it's a lot, right, it's

193
00:13:46,000 --> 00:13:48,799
not a loss. We're still moving
ahead. However, if our outlook is

194
00:13:48,879 --> 00:13:52,639
right and our clients make three to
five percent in the markets down thirty,

195
00:13:54,840 --> 00:13:58,240
now we didn't lose. And on
top of that, we've got five percent

196
00:13:58,320 --> 00:14:01,879
more to go buy stocks that are
down thirty percent, right, and we

197
00:14:01,919 --> 00:14:05,200
didn't take a hit. So right
now, I would just tell people,

198
00:14:05,320 --> 00:14:07,399
you know, you will see it
in the culture right now. I think

199
00:14:07,399 --> 00:14:09,080
part of it is, you know, just cultural in general. Part of

200
00:14:09,080 --> 00:14:13,559
it's we've gone too long without a
recession. Part of it's that people have

201
00:14:13,600 --> 00:14:18,000
been making too much money and everybody
right now, the predominant sentiment, probably

202
00:14:18,039 --> 00:14:20,240
not with listeners to your show and
not our clients, but the predominant sentiment

203
00:14:20,279 --> 00:14:24,399
out there is worried about missing out
on future gains. I just don't think

204
00:14:24,440 --> 00:14:28,639
this is a time or that should
be your concern. Well, that is

205
00:14:28,000 --> 00:14:31,480
good advice, and it's just a
taste of the kind of advice that you

206
00:14:31,519 --> 00:14:37,240
can hear if you check out Zach
Abraham at Know Your Risk Radio Dot com.

207
00:14:37,919 --> 00:14:43,039
Where else can people find out more
about Bullward Capital Management and you yeah,

208
00:14:43,039 --> 00:14:46,799
so Bullward Capital Management dot com.
Like you said, you can just

209
00:14:46,879 --> 00:14:48,960
google Know Your Risk radio podcast.
I do an hourly show, and then

210
00:14:48,960 --> 00:14:54,080
we do usually two or three times
a month, we do hourly interviews or

211
00:14:54,080 --> 00:14:56,279
hour long interviews, kind of the
Joe Rogan style, right long form interviews

212
00:14:56,840 --> 00:15:01,879
with other money managers, other economists
of that nature, and then they can

213
00:15:01,879 --> 00:15:11,240
almost follow me on Twitter at KYR
Radio. Mantics for that always. Investment

214
00:15:11,279 --> 00:15:15,639
advisory services offered through Trek Financial LLC, n SEC registered investment advisor. Information

215
00:15:15,679 --> 00:15:18,159
presentatives for educational purposes only. It
should not be considered specific investment advice,

216
00:15:18,200 --> 00:15:22,279
does not taken to consideration your specific
situation, and does not intend to make

217
00:15:22,279 --> 00:15:24,879
an offer or solicitation for the sale
or purchase of any securities or investment strategies.

218
00:15:24,919 --> 00:15:28,080
Investments involved risk and are not guaranteed, and past performance is no guarantee

219
00:15:28,080 --> 00:15:31,480
of future results. For specific tax
advice on strategy consulted with a qualified tax

220
00:15:31,480 --> 00:15:33,840
professional before implementing any strategy discussed herein