On the Right podcast where bi Weekly, we talked to our good, good
friend Zach Abraham from Bullwark Capital Management and we're very very excited to talk to
him about a couple of things today, namely the first one being this impending
government shutdown, which I have said on our show, I've just kind of
stopped caring about it, and I don't know, I know, Daisy kind
of feels the same. I mean it world well, I mean, it
would be great if we could just shut it down and not pay them.
That would be fantastic. That The only thing that bothers me is if we
shut it down, we still have to pay these jah who's but you know,
that's not the utopia that I would like. So, yeah, the
politicians get paid, not the people that actually, right, exactly exactly,
that's I would like. That was That's a good correction, Zach, Like,
I would like that the politicians don't get paid because what do they do
any what exactly do you do here? Yeah? Yeah, yeah, I
so just really quick, I the budgets there were excuse me, the debt
ceiling talk, right, the government shutdown talk, all of that to me
goes in the same category because it's just kabuki theater by nature, right,
it's just political theater. They will not continue to do that, and it'll
be short lived and it doesn't matter. Okay, okay, right, so
we're right, So we don't really have to work about it, all right,
So we'll talk about something that matters. Let's talk about something that matters.
Yeah, like what is going on with the real estate market? What
is happening? I know, lots and lots of people are confused and worried
and concerned and tell us give us the real journey. Yeah, so we
pay attention to it really closely because real estate is still a very big part
of the economy. The part about it that interests us the most right now
is that when you look at one of the things that we watch on a
regular basis is something that we call l eis okay, leading economic indicators,
and it you know, they can be leading a certain way that nothing has
one hundred percent accuracy, but you put enough film together and it gives you
a really good idea of the trajectory of an economy. And really pretty much
every leading economic indicator has broken down and is pointing straight at recessionary levels.
Not there yet, but certainly pointing there and heading that way at a decent
clip. The one leg of the stool that's still in place that everybody keeps
resting their hat on is the labor market. And when you watch unemployment start
to move higher, that's usually the last part, right, that's the last
thing that rolls over going into a recession, and housing construction jobs or construction
jobs in general, are the leading edge of those job losses. So when
you start to see construction jobs roll over, you're like, okay, we're
getting really close. Right, So for all those reasons, we keep a
very good eye on housing, and pretty much nationwide volumes of home sales have
dropped by I think we're like a twenty seven year low. We're twenty seven
year low on mortgages. Maybe housing is not quite maybe actual home sales aren't
quite that much, but you know, we're forty five to fifty percent off
of our normal housing volumes, right, So huge reduction, bigger reduction than
we saw on the financial crisis in terms of homes being sold. Well,
there's an old adage in the investment world which is price follows volume, all
right. It's true of any market, meaning when volume or the amount of
things trading drops significantly on a market and price hasn't dropped yet. Wait,
because it's going to okay, because bottom line, right, what is it
telling you. It's telling you that you have less demand. Right, So
keeping an eye on housing, you get all these reports everything's going down.
We monitor several different markets. Our estimates are that nationwide you're probably down twelve
to fifteen percent from the absolute COVID peak. But to put in context,
we're still well above where we were in January one of twenty, so this
isn't some disaster. But then you hear the real estate new housing strength and
price strength, and oh, median home prices have actually risen over the last
four years. And I couldn't help but laughing when I was reading an article
that was saying this the other day. So we actually dug into it.
First of all, we need to understand that median and average are two different
things. Right, Average we take a bunch of things together, we add
them up, and then we divide them by the numbers. So the number
of things we're counting has a very large part in what an average is.
Right, So with median, it doesn't work that way. If we want
to know what the median price of a house is. Let's say we've got
a hundred homes that have sold in a zip code, right, we organize
the hundred homes from least expensive to most expensive, and number fifty is the
median home price. Okay, So what do we know about this real estate?
This real estate meltdown if you will, or issue that is really not
normal in terms of history. The one thing we know that is not normal,
it is a matter of fact, opposite of normal is that the lower
end. So let's say houses under seven hundred thousand, the volumes in that
range have dried up substantially more than homes above that which makes perfect sense,
right, People that are shopping for homes above that level, A much larger
percentage of those folks will pay with cash. They don't need to access credit,
right. A very small percentage of people under seven hundred thousand need or
can pay with cash. Right. So it's the inverse. Usually the higher
end gets hit the hardest by far. And you know that was true in
the Great Recession. It's been true of every recession. Well, this is
inverse, okay. So let's say, and these are close to norms,
you can kind of look at it several different ways, but let's make that
seven hundred and fifty thousand dollars level. Let's make that that demarcation right because,
and the reason I picked out is eighty percent of mortgages the jumbo mortgage
market right now starts at seven hundred six thousand dollars. Okay, So everything
below that is not considered a jumbo mortgage, and jumbo mortgage mortgages make up
about twenty percent of mortgages issue. Okay, So let's let's say that that
number is relatively close, which it is in terms of home prices, that
you know the homes that selling that price, so right now, though,
you have volumes getting killed on the lower side, So we think that mix
right now, and when when I say we think, we know it's somewhere
in the sprains, just by crunching the math and looking at the data,
that mix is now somewhere between let's say fifty fifty and maybe even forty sixty.
So forty percent of volumes being sold below seven hundred and twenty six thousand,
sixty percent above, a complete break from historical norms. Okay, Well,
when you have such a swing like that in the types of homes that
you're looking at, you can easily have a scenario. And this is what
we're dealing with right now, where all home prices are down fifteen to twenty
percent, but because the mix is no longer eighty twenty in the sample pool,
right, it's fifty fifty, the median home price is actually higher.
Right. Does that make sense to you, guys? So? Like?
Right? Because like, so, let's say houses don't even change in price.
If half of the homes we list are below seven fifty and half or
above seven fifty, the median price, by definition is going to be higher
than if we sample eighty percent of homes number seven fifty. Right. So
it's what we call a fallacy of composition, meaning the reason it's showing a
gain is actually illustrating the problem in the real estate market. And it's not
good news that we backed that up by looking at major markets in Seattle,
San Francisco, La Phoenix, certain cities in Texas, looking up and down
the East Coast. Universally, you're right around twelve to fifteen, some a
little less, some a little more, and we've just hit a peak in
mortgages, so we'd expect housing activity to continue to decelerate as long as mortgages
rise. But this myth out there that housing is holding up, it's not
and it won't as long as rates are anywhere close to this loven. So
do you I mean, what do you think is going? Like? Does
the shut down impact rates? Does it have anything to do with it?
Do you expect rates to change over the next I don't know, one to
two years? Does it all depend on the election? Like? What should
people be thinking? You know, like every economic forecast. You know,
we can be wrong. We just admit it. A lot of people don't.
But but what look, I think the easiest way to look at this
and to keep this in mind. And by the way, guys, we
see this being played back in the economy right now. We just got banking
information out now, don't quote me, it's from my analysts, and I
don't have the notes right in front of me, but it's either it's either
year over year or month over month. Debit card transactions from banks are down
six percent. That was the recent data that came out, which corresponds to
about a two percent pullback and consumer spending, so excess savings rates are back
below where they were prior to COVID. Okay, so we think all these
slowdowns are happening right now. Well, Traditionally, what happens when the FED
wants to take on inflation or the fear of higher inflation, Historically speaking,
they almost always go too high, they break something right, and then they
realize the issue too late. Kind of think back to eight o nine,
right, we had guys in the financial industry screaming, hey, shoot,
you're about ready to blow up the entire world, and the Fed's like,
well, we're worried about inflation, right, and then they pivot late and
usually cut too much. So I don't see any reason why that won't be
the case. I think that you're going to see. I think the recession
will be visible. We're looking at the timing right now. It could be
a little sticky, but we're looking. I think we're gonna see recession visible
by Q one or Q two next year. As soon as that happens,
the Federal start cutting rates, and rates will be down. I will be
shocked if money market accounts FED funds rate are not down one hundred and well
maybe not the FED, Yeah, FED funds rate. I will be shocked
if mortgages. Mortgage rates are down two and a half to three and a
half percent by this This would be great for you, This would be great
for us. That would be great for me. Yes, Well, here's
the trick, right, And this is one of the things we talk to
our clients all about risk management. If you don't get hammered in a downturn,
right, if we can, if we can conserve cash in a downturn,
then downturns are actually opportunities. We're not happy that other people are struggling,
but we always we try to encourage our clients to think opposite. Right.
We want to be fearful when everybody else is greedy, and then we
want to wait until everybody else needs to sell things and we get to buy
them a discounts. I think the same is going to be true of rates.
How low will they go? It's hard to say, but the easy
way to think about this, guys, is that when you spend fifteen years
stacking up the world's largest pile of debt in history at the world's lowest interest
rates in history, and then you jack those rates five hundred and fifty percent
and eighteen months, things are gonna isn't it crazy. They're like, if
you look at house prices back in like I don't know, the seventies and
eighties house price houses were affordable. Like I think it's like what in nineteen
seventy four a house costs. I don't Yeah, I mean it's like house
costs what like two years of somebody's salary, average salary. You know,
it's like that's what a cost in the seventies. Somebody could freaking afford a
house, Like if you I'm not saying you could pay it off in two
years, but I mean it was like you looked at it and you thought,
Okay, this is reasonable. I can pay this off in like I
can pay it off in six years if I wanted to, if I actually
just managed my money well now. And but the interest rate was like what
fourteen percent or something. I don't even know. I'm probably I'm ball parking
there, and that was a I was. It was. It was double
digits. And then they dropped the interest rates over the years, and it's
like it became this thing where like interest rates are so low and then the
house prices are so freaking high, and it's just yeah, well yeah,
this is why, this is why we have the term financial repression. It's
why a lot of people rightfully so refer to record low interest rates and extreme
monetary policy is what we call it in economic terms, right, It's why
a lot of really well respected people and a lot of really smart people say
that, Look, when you do that with interest rates, it's actually a
wealth transfer from the port of the rig. Yeah, and why is that?
Because who owns all the assets? Rich people? You drive asset prices
way up due to low interest rates, right, and you those people have
to purchase those assets, and eventually inflation shows up, rates go up,
and those people are up a quick without it, right. And so that's
the you pay a price for what we've done for the last fifteen years.
Despite the FED thinking there won't be one, there will be and more things
are going to break. And we got an early salvo this year in March.
You know, think about what's going on in markets, and think about
how glowingly everybody talks about the economy right now. You were literally weeks away
from a national bank run on regional banks back in March. Okay, that's
not because everything's good. That's not because everything's healthy. It is crazy to
me the level of disconnect that people, politicians, everybody has to what's on
the economic horizon. Like I've said to you guys, oh nine, no,
it's it's not an issue like that, but we're clearly going into recession,
and it will be the first recession in the history of our country where
lower interest rates or cutting interest rates really doesn't help, because we had interest
rates is zero for fifteen years. Yeah. Well, and this is why
people really need to make sure that they're tuning in to our discussion every couple
of weeks, because you just proved it, like people are reporters are reporting
just like these stats without any of the context, and the kind text is
really important. We know we can always count on you to give it,
and so we very very much appreciate it. How can people learn more about
you and Bullwark Capital Management? Yeah, I well, thank you for your
kind words, first of all, but I think the easiest way to do
it is you can just google us Know your Risk Radio. We have a
radio show that airs once a week and then I've told you guys this before,
but we're actually I think that we're in an incredibly unique historic spot and
so we've actually started doing a twelve to fifteen minute segment every single day documenting
what happened that day in markets, in the economy. And that's called our
Daily Dots. It's all part of our Know Your Risk radio podcast. You
can find it on iTunes, Spotify, right anywhere there's a podcast site.
You can find us on there, or you can just go to Bulwark Capital
Management dot com. We're not tough to me, is it? How long
is it? Zach? How long is the Daily Dot? Just curious?
Is it like a quite a kind of like a quick like punch list of
everything that's going on. Yeah, we try to keep it between twelve to
fifteen. Anytime the comes out and speaks, we tend to rage on the
stage, so you should a little bit. Twelve to fifteen is okay.
I'd love this. Is this fantastic? People be excited about that. Thank
you, Thank you,