Rates may come down in some trading function. The longer term is there because
of repricing of risk. And if the fete wants to do it, he'll
kill a dollar and maybe they'll sacrifice the dollar they bring. If they charge
down these rates, inflation will be back because it takes a while to kill
it. And if inflation comes back, what are they going to do?
And if they drive them down, the dollar will go down and they don't
want that. You're listening to carry Lets's Financial Survival Network where you get valuable
information you just can't find anywhere else to thrive in today's trying times. You
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I'm your host, Harry Lutz. Well, we've got Gordon too Long
on with us now. Gordon, we've been talking about collateral, the quality
of collateral, or what the banks will take, what the federal take,
and why you should care about it basically, and we're having this banking crisis,
banking collapse. U. Some of my guests say that the banking system
as we know it is going extinct. This is an extinction event or the
system. What is your take on it. I would lean towards what they're
what they're saying. I'm not maybe it quite as negative that, but this
is an unusual situation that we're in and it keeps cascading, and it's like
shocks and shock waves that are that are coming at us. So we're still
in the early stages. Off you and you would call two thousand and eight
when we first when when bear Stearns hit. We went on for close to
a year with little failures all of the lending operation before finally Lehman collapsed and
AIG was collapsed and we but it just kept getting worse and worse and then
suddenly collapse. It's like uh uh famous writer in a prin Key West,
he said, you know, going bankruptcy. Bankruptcy was was slow at first
and then sudden at last, or suddenly and first then quickly and then quick
that and and that's kind of what I sense. We're it's going the same
thing. We got these serious shocks that are hitting um that are like a
waterfall, and they but they keep expanding, they keep growing, you know
right now, they're they're in the banks, they're in the lenders that are
supporting out there that are not banks but still lenders. We're seeing it in
the credit and the commercial real estate market. Um, and now it's moving
into other areas like the zombies the bonds, not the sovereign debt, which
is not a discussion we'll get into, but the zombies we're seeing. A
small business has got a problem, and I see just here in the last
week shipping and packaging company. They're starting to feel it. So it just
keeps, it's broadening, and it's getting it's getting worse. So there's some
major concerns here. And the FED reducing the interest rates, which everybody thinks
is the panacea, I don't. I don't see it as being the panacea,
as actually could see it accelerating the problems. Initially there may be you
know, a lot of excitement, but then it starts to break down.
Her not to go on. But the problem we're facing is we have a
systemic, long term structural problem that we failed to address. We kind of
nibbled at OFTO two thousand and eight. We've been we've excess leverage and have
easy credit. We know the story, I mean all your listeners eat know
the story. But we've changed. I call it the Great Moderation others due
to that. We had forty fifty years where we had globalization that reduced costs,
so you know, labor arbitrage. We had financialization which took interest rates
down, made so made interest rates cheap to finance products zero bound. And
then we had mercantilism you remember that with Japan and serving with China, where
they take all their profits money, send it back to America buyer bonds,
drive our interest rates down, drive the value of the dollar up, and
they win and we become a seventy percent So all consumption kind of all that
is now changed, and it hasn't ended, but it's slowed. And that
shift that we're going into brings with it a whole series of new things,
and that for example, stagnation I can talk about it, but there's a
change in risk premiums, risk cremiums that are in the process of changing of
a repricing risk of risk premiums associated with the bonds, primarily the bonds you're
seeing it, but also it's going to come in intiquities and with those changing
because we've had that. COVID was a destabilizing event. Ukraine was a destabilizing
event, but from not from the Ukraine stuffook from the sanctions that we're opposed.
And then we've had the most craziest period in history of a policy,
this goal public monetary policy that frankly just is bizarre. And so then that's
what's created the shock of shock waves COVID, Then we had the supply shock,
that we had the inflation shock, then we had a credit shock.
Now we're in the middle of a banking shock. I think the liquidity one
is just only beginning. And then after that and the one that terrifies me,
as we just said at the beginning, a collateral shock, almost a
reverse wealth effect. Your comments, you am, I you're with me on
this. So the question is, like all these countries around the world,
all these industry they borrowed in dollars expecting the dollar to lose its value.
The exact opposite happened. That's led to massive insolvencies in China, all over
the place, and it seems to just be getting worse. It is and
it will get worse. You know. The dollars. If you travel in
the world and say, the dollar is so overvalued relative to what you can
get when you travel, so it seems like you can't buy anything with it
here in the States. But it's so overvalued. That does not mean the
bottom is going to follow. I've been writing about dedollarization, etc. But
that does not mean it's imminent. A matter of fact, I can see
some serious strengthening of the dollar only because the problems in Europe are as bad
or worse in our specifically in their banking industry, their pension system. The
issues in Japan are only getting going. I don't mean to get negative,
and China is just not coming out of this lockdowns the way we were everybody
was anticipating. So it's irrelative. The dollar looks still look like a currently
a safe havens longer term, that's a whole different story on the dollar.
So let's let's bring this to the Big MAC index, all right, Yeah,
they're a good example. There are two indexes that I like to follow.
Number one is the cost of a Thanksgiving meal, because I find that
to be a much better indication or indicator of food inflation than anything the government
releases, and because it's a consistent basket. It's not like one Thanksgiving the
price of cranberries goes up so they substitute blueberries. It's the same basket every
single year. There's no substitution. And the Big Mac Index, which basically
measures the relative cost of a big Mac in dollars country by country. Interestingly
enough, the latest one as of January twenty twenty three, the most expensive
big Mac was in Switzerland for seven dollars and twenty six cents, and the
cheapest big Mac was in Venezuela or a dollar seventy six. So if you
could kind of arbitrage Big Max, you could really make a tidy profit here,
couldn't you, Gordon, Yeah, well, just substitute Big Max for
other things. And there's there is a lot of that going on. Yeah,
arbitrage. Yeah, and it is being arbitrage, make no doubt about
it. You know, at the end of the game, at the end
of the day. You know, things like equities are like the tail and
the dog. The money. The money is first in the credit and the
second in the dollar in the bombs, and and that's a that's a game
of arbitrage between countries right now. Just we're getting a little off track.
But that's that's what I see it. But we have inflation is still with
us. You know, we keep saying, well, it's down, it's
falling. CPI is coming down, cores, not CPI is coming down.
Well just a minute, Okay, it was eight percent and six percent.
Now we're you know, down, getting into the five percent era. Whoa
on core? Oh, whoa, just a minute. It doesn't mean inflace
showing away. It's just another five percent on top of five percent. And
so pete the consumer in America in a seventy percent consumption economy, it's it
just can't can't keep absorbing this. They just can't. And now carry what
I saw on the conference calls. The corporations can't pass it on. They
pushed, they've tried. They can't pass it on because people are substituting.
They're they're they're moving away from brands. I mean you know this, well,
they're they're moving away from brands. They're going to know names, they're
they're they're they're stopping. I mean, look at Tyson Foods. They're the
biggest supplier of protein, of meat, and they got serious financial problems.
The costs that they have to cut. They have to get their costs down
because their costs are going up. But they can't. They can't raise the
price. But the they're not losing share, just the product isn't moving,
So that says people can't afford meat. That's an example of it. But
you know, you made a really good point carry about the numbers, the
government numbers versus the big mac The government numbers have always been this leading,
especially in inflation. You know, substitution. You mentioned we have imputation,
we have hedonics, we have substance. There's so many games and they keep
going on. But I have never seen since January, and Frankly, the
Secretary of Labor resigned. He was the former Boston mayor. He was only
there briefly. I gotta believe he just wasn't going along with it. But
we the BLS, the numbers that they keep putting out make no sense.
If you spend any time looking at the labor numbers, unemployment, employment rates,
labor rates that are coming out, they're just I mean, it's not
just me Goldman screaming about it, Morgan, all the major players are saying
this. They don't still make any sense. But they're buying. They're using
these numbers to buy time, and that's that's a whole discussion to sell.
But I you're better to use a big mach I agree with you. So
how high our interest rate's gonna go, where they're going to dip for a
little bit because it's safe to go outside or what? You know? Curry
that that that is the question right now. And you know, and I'm
a year ago I decided personally, we came to the conclusion at three and
a half percent on the long bond or the Daniere was was where we were
going to be, and we're going to be there for we didn't know how
long, but we're going to stabilize in there. And so we we've been
playing a game. And actually, and I accredited this to Googen, I'm
Scott Mitritt, who subsequently died not a lot after um. He was very
strong in that three and a half percent and he and he pretty well convinced
me in our study that this is where we needed to be. So we've
been trading. If it gets up to three point six five, we're out,
or rather we're in. If it gets down to three point to three
five fifteen percent bandwidth we get in. So we've been finding ourselves that has
been really, really effective. So they answer your question, where's it going?
We think the risk premiums on bonds are only going to go up.
We think that it's going to take us up to four. We think we're
going to have to get into the four percent range because right now that Fed
funds rate with the core come that the PCPI is down just a little hair
below now the Fed Funds rate, but it's that core, and I don't
know how much more time they can. They need more time to buy it
to get inflation to fall down. They won't. I think we've stopped with
rates going up, but I think the premiums will push it up now.
Having said that, you know, when the set FED starts to signal and
starts to come in the bond, you know the yield will drop and prices
will go up. But but sure a little bit longer after that, you
know, it depends how they do it. Think we still think we'll see
four percent for a protracted period on the ten year and a shorter termed a
whole different game. Right now we're two years. This morning was trading over
four percent as usual did I answer the question there for you or I think
so? So it could stove up. The rates are not coming. Rates
may come down in some trading function. The longer term is there because of
repricing of risk. And if the fete wants to do it, it'll kill
a dollar, and maybe they'll sacrifice the dollar they bring. If they charged
down these rates, inflation will be back because it takes a while to kill
it. And if inflation comes back, what are they going to do?
And if they drive them down, the dollar will go down, and they
don't want that because the issue is right now the debt. That's not the
debt ceiling, it's the absolute value of the debt. So the interest rates,
they want them down, but they also you know, it's it's a
dollar value of it. They can't kill a dollar. It's the golden boose.
Yeah, So so they're op bacts gold by the way, so they're
opting to destroy the economy, the global economy, rather than the dollar more
or less, because they are just it is destroying them. They're they're trying
to get as far as far along as they possibly can. They're the damage
is as I just said, with cascading and these these shockwaves is going on.
They just they just got to be able to get conflation under somewhat under
control. And they know that they're going to damage the economy. They they've
already they know that, but they don't want to. If unemployment starts shooting
up, Andy, it will Congress will be screaming beyond belief and demanding it.
So they'll have to confitul them. So they're buying a little bit of
time. They got to kill the village to save it. Yeah, more
or less, that's what they have to do. Well, they've known that
right from the get go. Yeah, that they were going to have to
take us into a recession. I guess the point I'm trying to make is
they're hoping it will be a decent recession, not a hard landing. And
I would have went along with that as a possibility maybe four months ago,
in spite of the hall of negative I see if China had come back stronger.
But China is just not. It's not China. Their their imports are
way way down. It they just don't have the demand. There's no global
there's not enough global demand. Look at Wales down. The commodities are down.
The demand isn't there, and it's slowing up dramatically. I just read
the empire Um empire fed numbers here a few months ago. It's like,
whoa, what's going on here? Was it? Dude? There's a complete
collapse now that's manufacturing. No, let's face it, in the United States
is not really the leader in manufacturing anymore. We have clearly we have a
presence, but it's it's still it is reflective a slowing economy. I see
it up here in the Northeast. There's just no question things are slowing.
Sure, yeah, you can tell a little not so much here in Florida,
although there's a little bit more inventory in the real estate market. But
but the houses are selling because people are still fleeing, uh your neck of
the woods to come here. Oh, yes, very much so. And
even up here, by the way, the housing is still moving. I
see listings and the houses within days are gone, maybe weeks, but they're
if they're not staying on the market that long, they're moving, even at
the higher rates. And I've new construction still going, so that's not that's
not an indicator where the credits coming from. They're still building is still quite
evident. But I do see, you know, I've seen rams on residential
apartment rents which were through the roof. They are starting to weaken because I
think up here they overbuilt yea. So it's there are so many mixed signals
out there right now, and I think we have to carry get up to
a higher plane and see. And it's like you don't see an iceberg move,
but it moves. And so we're just gradually just keep moving and moving
and moving it and things keep getting more difficult. And because the economy,
because the market, which is but the only thing that looks good, has
been holding up. We think things are fine, but if you take the
market out, everything is serious problems. So if the markets suddenly drop,
you know, down to maybe thirty two hundred thirty six hundred on the s
and p all of a sudden, we have a whole different view of things.
And you know, and as you well know too, with the you
know, we've got eight stocks holding up the market, eat stocks literally literally.
And then why that's the other Why are they holding it up? Why
are people flooding it in, you know, fear of missing out. We
can you know, we all understand it. But I learned on the conference
calls, they're all pushing, they're all going to artificial intelligence. They really
believe it's the big productivity hit that they can get because they got to figure
out how to solve their margins. Yeah, and I sensed on the conference
call that the analysts are all buying into it, especially when IBM came out.
You probably saw their headlines. They're going to get rid of They're not
They're going to get rid of six thousand people by avoidance of hiring the artificial
intelligence. That's what they think, Gordon, Let's say, Oh, it
just that's what they think they're going to table And that's the perception and others
from Amazon through from the analysts and therefore these eight companies. A big part
of it is this this Belwie is giving people enough confidence and you know,
fear of missing out are in the market. If something punctures at Balloon,
there's no breath in the market. There's just no breath. Have we been
here before? Remember the fifty fifties, I remember what it was like in
two thousand. I guess I'm getting here and I've been through this so many
times before. When the market gets this narial with just the generals get to
be fewer and fewer of them out there. Suddenly one of the one of
the general's fails and everything comes down. Hey that's what I'm looking at.
Fifty stocks Xerox, where are they now? Yip? Exactly? Go through
them and hey, where's a Kodak? Right, yes, where's Kodak?
Now? I haven't heard much about them lately, have you? Well,
actually we did, but it was basically some scam thing, right, I
haven't haven't heard anything out. My former boss, George Fisher left us at
Motorola to take it over. He had these great designs of what he was
going to do with digital, digital technology and getting out of the yellow box
business. I haven't seen a yellow box in years. It's all digital.
But Kodaks never did it right. They owned it, remember when they own
Oh god, yeah they have them market and yeah rocks about an all but
franchise. Well, look at IBM, and IBM owned the market. I
worked at IBM, you know, and then in the seventies we owned the
market. Now they're fighting for their life and it wasn't for buy backs and
borrowing money to pay dividends. There's nothing, I believe, there's no value
in the stock. No, it's it's just a melk cash cow game that's
going on institutions. Mind, I don't mean to be that negative. I
mean it's great company, great ploys, is bad strategy more. Yeah,
they were shortsighted they could stop their profit per share of profit by buy backs.
Well, it was here, it was, it was, It was
a having been. It was a tough game we were making. The margins
were so good on mainframe, why would you come out and start selling smaller
products. So we enibbled in the pcason but there's no margins and it's all
volume. So you play a game, you keep dragging it out, but
other guys come in and take the business. We didn't believe that. Senior
people did not believe there was money in the in the in the software business.
So this little guy, Bill Gates suddenly owns the operating system in the
PC. Restless history Microscott, Microsoft's market kapit is compared to IBM one,
yeah, double trimple four times. Yeah, and look at and look at
Google, you know, and Apple and all of them, you know.
Well, being a kind of negative fun on this movement to artificial intelligence.
But the movement where potential that we see there. I see two is stunning.
It's not going to be as fast, it's going to be a little
different. And I actually when you you were the first one at actually with
chat GDP a GPT that you were playing around with it. I remember the
last time we talked, we had five hundred million people bring down BATA.
There's one point six billion using it now. Is it riddle full of problem?
Without question? But you know that's what happens to pioneers. I get
arrows in the baggage. But when this app market, the people that developed
the apps for the bones and they depablet, they start to take that technology
and the next generation and target it and clean it up. It's I just
put out a video called the the End of the Cubicle Class. Yeah,
I saw that. I enjoyed that too, And I may be over exaggerating
it, but there's just so many I mean, you're a lawyer, just
think of what you can do in you know, it's just putting briefs together,
doing the just pulling it out of the database, putting that GMPT,
write the thing just about exactly. I had an I had a recommendation letter
I needed to write for somebody, and I said, you know, I'm
a total nitpicker over how I do this stuff. And I said, well,
let's try to shut GPT. See how it will actually write a recommendation
letter. And it was about eighty five percent as good as what I can
write, which in this case was enough, and it saved me a half
hour of editing, basically perfect. It's better to be able to pay somebody
to prove something than writing it from scratch when it's just donkey work anyway,
right, you know, there was an article in Kenya that is like the
number one the epicenter of cheats for hire for like, yeah, you know,
papers, term papers, college, the thesis and all that. I
don't know that people really do their master's thesis with them, but they do
papers. And they were bemoaning the fact that chat GPT had cut their earnings
by two thirds for these professional cheaters, and Kenya as to them, what
does it mean, right, it's an income source. They don't care about
the academic dishonesty. You know, they've got to eat. And I don't
blame them, but but you know that's an unintended consequence here, Gordon Kerry,
I did a lot of work on productivity and as you know, the
productivity and not only America but in the development is in free fall, has
been here for a year and a half. It's a major issue. And
the squeeze that are on the corporations right now that's centered from inflation, also
going to be about money being tighter to get it on, not whole on
highly leveraged balance sheets. Not having invested in the future is going to force
them to chase As I said, this artificial intelligence and derivatives from it in
a massive way. And if Goldman Sachs who said they thought there was going
to be upwards of three hundred million people that were going to lose their jobs,
don't believe that. But you know, twenty five thirty forty million people
over the next three four years, high paying jobs. That's the issue.
They're not hourly workers. They're they're they're they're they're higher middle income workers and
higher the skill That is going to be incredibly a big hit to an economy
that's going into stagulation. That's that's the problem there, But it's it's coming.
So picking the winners in this in this arena, which is always difficult.
Um you know, there's a there's a new there's another Google, there's
another Amazon, there's another Microsoft in that crowd. Yeah, Well, interestingly,
enough is watching a video of two pilots discussing AI. Can it replace
a pilot? And the thing is like, but they say, AI does?
Is? It guesses? And the quality of the guess is like you
ask it a question and then it follows it with words. It's about eighty
percent correct, but you come up with some ridiculous results that are inaccurate and
untrue. And the thing is, it's not self aware. It doesn't know
that it's making the mistakes. It doesn't even know what it's doing. My
brother once said, you know, you could teach a monkey to play Beethoven
on an organ, but it's never going to know that it's playing Beethoven.
And I think AI at its current phase is very useful, don't get me
wrong. Especially the ability to analyze huge amounts of data, almost unimaginable amounts,
at a rapid clip, and then come up with an answer to a
question. There's definitely an application for it. It's way better than what we
have now. But phil it becomes self aware, it's going to be it's
going to have its limits. It's not replacing pilots. Maybe it can augment
or mostly supplant drivers and cars. I mean, I love my Tesla so
called full full self driving beta. It's not there yet. I mean,
it makes a lot of mistakes. When it first came out, I said
it was the equivalent to a sixteen year old who just got their license.
It had the confidence of a sixteen year old who just got her license,
but not the actual judgment. You know. And it's gotten a lot better,
I'll say that, But you can't trust the thing. And you can't
trust these things either at the current point. Not that you won't be able
to later. Well, it's it's always exactly. It's always like that.
My days at IBM, Mike was convinced we did beta sites by selling the
equipment and putting it out there and in fixing the problems when the customers site.
Um there was the mainframe rare was there were so many problems you just
could You couldn't believe it, but you had to saw You saw them after
the fact, and then you got better and better and better at it.
Yeah, and that's that's what comes with new technology. So I'm not trying
to in no way. I'm saying there's going to be changed with it,
and there's going to be some real winners in it. Uh, and it
is going to make its mark. But it's not a panacea tomorrow, next,
next, twenty four forty eight months. But I do see in it
though, Kerry Is, I've been watched looking at patents and and I don't
know if you've been well, the number of patents that are being produced in
America. It's just we're not doing it. They're just plummeted. They're coming
in China, they're coming in India, they're coming in all other countries right
across the board. Not just in technology. We're not investing in newer technologies.
Now AI who's going to be the leader in it, will say wow,
Google, and we'll need some players. They'll be some American player.
This the bigger players could come out of will come out of other countries.
And so where is the investment for America? And this could end up being
a believed for us where it gives us some productivity advantages. But our company,
our company is going to survive. It's it's it's like it's like batteries.
It's like batteries. On the av We're gonna go to electoral bolt.
What was making to make all the money on evs in China? They own
the lithium mines, they own the cobalt lines. They got a lock on
it. So always just said, well we'll bv be hydrogen. They got
a lock on that. So you know, where's our leadership that That's the
thing that I spent a lot of time at trying to figure out where a
sustaining competitive advantage is. And it's getting narrower and narrower. And I see
it again because I said on patents, I see it on these spacks.
You know, you know they ad the legitimate I used to be in private
equity and you know we you know, take a company public is a very
complex process through the financing bro We don't do that anymore because Sarbanes oxy we
get around it with spacks. I'm seeing unicorns, but they're not producing,
they don't sustain, and then they're getting taken off shore. How many IPOs
are we doing anymore? So that's worrying me in a big way too right
now of really trying to sustain our economy. And the goals goes back to
we're talking about the beginning. I'm a really positive guy here today. All
right, You're a breath of fresh air. That's because I spend so much
time in the credit our case. You gotta stop looking at though, gotta
stop looking well exactly that. I think you've given us a lot to chew
over here. Just tell us where we find your work. How we subscribe
to you? Yeah, thank you very much, Kerry. Yeah. I
exclusively put over all our research up at Matta mattasii dot com. That's m
Apa SII dot com. Videos, newsletters, and we do them more as
part of our research process, and they're there. There is part they're free.
There is a subscription business for other unique pieces. But I can encourage
everybody to join us. The only thing we ask is feedback on it because
we learn a lot from from Frankly, the people that are reading our work.
All right, well that's what we'd like to hear. I've got a
questions recording myself k l at krylods dot com. Write your comments on the
YouTube channel below. Subscribe to our newsletter at Financial Survival Network dot com.
Gordon, always a pleasure, Thanks for coming on back to you again,
Karrie. Thank you Bye, thanks for listening to Carrie Lets's Financial Survival Network,
your solution to today's trying times. For the latest, go to Financial
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