1
00:00:05,799 --> 00:00:09,560
On the Right podcast where bi Weekly, we talked to our good, good

2
00:00:09,560 --> 00:00:14,279
friend Zach Abraham from Bullwark Capital Management
and we're very very excited to talk to

3
00:00:14,320 --> 00:00:18,719
him about a couple of things today, namely the first one being this impending

4
00:00:18,879 --> 00:00:23,559
government shutdown, which I have said
on our show, I've just kind of

5
00:00:23,559 --> 00:00:27,640
stopped caring about it, and I
don't know, I know, Daisy kind

6
00:00:27,640 --> 00:00:30,039
of feels the same. I mean
it world well, I mean, it

7
00:00:30,039 --> 00:00:32,640
would be great if we could just
shut it down and not pay them.

8
00:00:32,880 --> 00:00:35,439
That would be fantastic. That The
only thing that bothers me is if we

9
00:00:35,479 --> 00:00:38,039
shut it down, we still have
to pay these jah who's but you know,

10
00:00:38,159 --> 00:00:42,560
that's not the utopia that I would
like. So, yeah, the

11
00:00:42,600 --> 00:00:46,119
politicians get paid, not the people
that actually, right, exactly exactly,

12
00:00:46,159 --> 00:00:48,960
that's I would like. That was
That's a good correction, Zach, Like,

13
00:00:49,000 --> 00:00:52,359
I would like that the politicians don't
get paid because what do they do

14
00:00:52,399 --> 00:00:56,240
any what exactly do you do here? Yeah? Yeah, yeah, I

15
00:00:56,479 --> 00:01:00,759
so just really quick, I the
budgets there were excuse me, the debt

16
00:01:00,840 --> 00:01:03,599
ceiling talk, right, the government
shutdown talk, all of that to me

17
00:01:03,719 --> 00:01:08,079
goes in the same category because it's
just kabuki theater by nature, right,

18
00:01:08,079 --> 00:01:12,200
it's just political theater. They will
not continue to do that, and it'll

19
00:01:12,239 --> 00:01:15,439
be short lived and it doesn't matter. Okay, okay, right, so

20
00:01:15,519 --> 00:01:18,719
we're right, So we don't really
have to work about it, all right,

21
00:01:19,079 --> 00:01:21,799
So we'll talk about something that matters. Let's talk about something that matters.

22
00:01:22,000 --> 00:01:25,519
Yeah, like what is going on
with the real estate market? What

23
00:01:25,680 --> 00:01:27,840
is happening? I know, lots
and lots of people are confused and worried

24
00:01:27,879 --> 00:01:33,640
and concerned and tell us give us
the real journey. Yeah, so we

25
00:01:33,719 --> 00:01:37,280
pay attention to it really closely because
real estate is still a very big part

26
00:01:37,280 --> 00:01:41,879
of the economy. The part about
it that interests us the most right now

27
00:01:42,120 --> 00:01:45,959
is that when you look at one
of the things that we watch on a

28
00:01:46,000 --> 00:01:49,640
regular basis is something that we call
l eis okay, leading economic indicators,

29
00:01:51,200 --> 00:01:55,359
and it you know, they can
be leading a certain way that nothing has

30
00:01:55,400 --> 00:01:59,280
one hundred percent accuracy, but you
put enough film together and it gives you

31
00:01:59,319 --> 00:02:05,439
a really good idea of the trajectory
of an economy. And really pretty much

32
00:02:05,480 --> 00:02:10,000
every leading economic indicator has broken down
and is pointing straight at recessionary levels.

33
00:02:10,479 --> 00:02:15,439
Not there yet, but certainly pointing
there and heading that way at a decent

34
00:02:15,439 --> 00:02:20,120
clip. The one leg of the
stool that's still in place that everybody keeps

35
00:02:20,159 --> 00:02:25,520
resting their hat on is the labor
market. And when you watch unemployment start

36
00:02:25,560 --> 00:02:30,360
to move higher, that's usually the
last part, right, that's the last

37
00:02:30,400 --> 00:02:35,759
thing that rolls over going into a
recession, and housing construction jobs or construction

38
00:02:35,840 --> 00:02:38,560
jobs in general, are the leading
edge of those job losses. So when

39
00:02:38,599 --> 00:02:43,360
you start to see construction jobs roll
over, you're like, okay, we're

40
00:02:43,360 --> 00:02:46,240
getting really close. Right, So
for all those reasons, we keep a

41
00:02:46,319 --> 00:02:53,159
very good eye on housing, and
pretty much nationwide volumes of home sales have

42
00:02:53,400 --> 00:02:58,240
dropped by I think we're like a
twenty seven year low. We're twenty seven

43
00:02:58,280 --> 00:03:01,400
year low on mortgages. Maybe housing
is not quite maybe actual home sales aren't

44
00:03:01,439 --> 00:03:06,439
quite that much, but you know, we're forty five to fifty percent off

45
00:03:06,479 --> 00:03:10,719
of our normal housing volumes, right, So huge reduction, bigger reduction than

46
00:03:10,719 --> 00:03:15,360
we saw on the financial crisis in
terms of homes being sold. Well,

47
00:03:15,360 --> 00:03:20,919
there's an old adage in the investment
world which is price follows volume, all

48
00:03:20,960 --> 00:03:25,120
right. It's true of any market, meaning when volume or the amount of

49
00:03:25,159 --> 00:03:31,120
things trading drops significantly on a market
and price hasn't dropped yet. Wait,

50
00:03:31,479 --> 00:03:35,280
because it's going to okay, because
bottom line, right, what is it

51
00:03:35,319 --> 00:03:38,919
telling you. It's telling you that
you have less demand. Right, So

52
00:03:39,400 --> 00:03:43,639
keeping an eye on housing, you
get all these reports everything's going down.

53
00:03:43,680 --> 00:03:47,599
We monitor several different markets. Our
estimates are that nationwide you're probably down twelve

54
00:03:47,639 --> 00:03:53,599
to fifteen percent from the absolute COVID
peak. But to put in context,

55
00:03:53,639 --> 00:03:57,199
we're still well above where we were
in January one of twenty, so this

56
00:03:57,280 --> 00:04:01,199
isn't some disaster. But then you
hear the real estate new housing strength and

57
00:04:01,360 --> 00:04:05,919
price strength, and oh, median
home prices have actually risen over the last

58
00:04:05,960 --> 00:04:11,960
four years. And I couldn't help
but laughing when I was reading an article

59
00:04:11,960 --> 00:04:15,439
that was saying this the other day. So we actually dug into it.

60
00:04:15,479 --> 00:04:18,800
First of all, we need to
understand that median and average are two different

61
00:04:18,800 --> 00:04:23,600
things. Right, Average we take
a bunch of things together, we add

62
00:04:23,639 --> 00:04:26,120
them up, and then we divide
them by the numbers. So the number

63
00:04:26,199 --> 00:04:30,480
of things we're counting has a very
large part in what an average is.

64
00:04:30,839 --> 00:04:33,560
Right, So with median, it
doesn't work that way. If we want

65
00:04:33,560 --> 00:04:36,079
to know what the median price of
a house is. Let's say we've got

66
00:04:36,120 --> 00:04:40,839
a hundred homes that have sold in
a zip code, right, we organize

67
00:04:40,879 --> 00:04:45,639
the hundred homes from least expensive to
most expensive, and number fifty is the

68
00:04:45,639 --> 00:04:49,399
median home price. Okay, So
what do we know about this real estate?

69
00:04:50,160 --> 00:04:55,879
This real estate meltdown if you will, or issue that is really not

70
00:04:56,120 --> 00:05:00,839
normal in terms of history. The
one thing we know that is not normal,

71
00:05:00,040 --> 00:05:03,879
it is a matter of fact,
opposite of normal is that the lower

72
00:05:03,959 --> 00:05:10,319
end. So let's say houses under
seven hundred thousand, the volumes in that

73
00:05:10,439 --> 00:05:15,279
range have dried up substantially more than
homes above that which makes perfect sense,

74
00:05:15,399 --> 00:05:18,959
right, People that are shopping for
homes above that level, A much larger

75
00:05:19,000 --> 00:05:23,959
percentage of those folks will pay with
cash. They don't need to access credit,

76
00:05:24,279 --> 00:05:29,480
right. A very small percentage of
people under seven hundred thousand need or

77
00:05:29,560 --> 00:05:32,480
can pay with cash. Right.
So it's the inverse. Usually the higher

78
00:05:32,560 --> 00:05:36,439
end gets hit the hardest by far. And you know that was true in

79
00:05:36,480 --> 00:05:40,439
the Great Recession. It's been true
of every recession. Well, this is

80
00:05:40,519 --> 00:05:44,199
inverse, okay. So let's say, and these are close to norms,

81
00:05:44,240 --> 00:05:46,879
you can kind of look at it
several different ways, but let's make that

82
00:05:46,959 --> 00:05:50,800
seven hundred and fifty thousand dollars level. Let's make that that demarcation right because,

83
00:05:50,839 --> 00:05:57,800
and the reason I picked out is
eighty percent of mortgages the jumbo mortgage

84
00:05:57,920 --> 00:06:01,160
market right now starts at seven hundred
six thousand dollars. Okay, So everything

85
00:06:01,160 --> 00:06:05,240
below that is not considered a jumbo
mortgage, and jumbo mortgage mortgages make up

86
00:06:05,240 --> 00:06:10,600
about twenty percent of mortgages issue.
Okay, So let's let's say that that

87
00:06:10,680 --> 00:06:14,240
number is relatively close, which it
is in terms of home prices, that

88
00:06:14,279 --> 00:06:16,920
you know the homes that selling that
price, so right now, though,

89
00:06:16,959 --> 00:06:21,160
you have volumes getting killed on the
lower side, So we think that mix

90
00:06:21,319 --> 00:06:25,600
right now, and when when I
say we think, we know it's somewhere

91
00:06:25,600 --> 00:06:28,439
in the sprains, just by crunching
the math and looking at the data,

92
00:06:28,519 --> 00:06:34,439
that mix is now somewhere between let's
say fifty fifty and maybe even forty sixty.

93
00:06:34,519 --> 00:06:39,240
So forty percent of volumes being sold
below seven hundred and twenty six thousand,

94
00:06:39,680 --> 00:06:44,279
sixty percent above, a complete break
from historical norms. Okay, Well,

95
00:06:44,639 --> 00:06:47,759
when you have such a swing like
that in the types of homes that

96
00:06:47,800 --> 00:06:53,879
you're looking at, you can easily
have a scenario. And this is what

97
00:06:53,920 --> 00:06:58,920
we're dealing with right now, where
all home prices are down fifteen to twenty

98
00:06:58,959 --> 00:07:04,279
percent, but because the mix is
no longer eighty twenty in the sample pool,

99
00:07:04,480 --> 00:07:09,319
right, it's fifty fifty, the
median home price is actually higher.

100
00:07:10,439 --> 00:07:13,079
Right. Does that make sense to
you, guys? So? Like?

101
00:07:13,720 --> 00:07:16,000
Right? Because like, so,
let's say houses don't even change in price.

102
00:07:16,519 --> 00:07:21,680
If half of the homes we list
are below seven fifty and half or

103
00:07:21,720 --> 00:07:26,879
above seven fifty, the median price, by definition is going to be higher

104
00:07:27,120 --> 00:07:30,560
than if we sample eighty percent of
homes number seven fifty. Right. So

105
00:07:31,319 --> 00:07:36,800
it's what we call a fallacy of
composition, meaning the reason it's showing a

106
00:07:36,920 --> 00:07:42,839
gain is actually illustrating the problem in
the real estate market. And it's not

107
00:07:42,959 --> 00:07:46,879
good news that we backed that up
by looking at major markets in Seattle,

108
00:07:46,000 --> 00:07:50,759
San Francisco, La Phoenix, certain
cities in Texas, looking up and down

109
00:07:50,759 --> 00:07:57,439
the East Coast. Universally, you're
right around twelve to fifteen, some a

110
00:07:57,480 --> 00:08:01,600
little less, some a little more, and we've just hit a peak in

111
00:08:01,639 --> 00:08:05,240
mortgages, so we'd expect housing activity
to continue to decelerate as long as mortgages

112
00:08:05,319 --> 00:08:09,199
rise. But this myth out there
that housing is holding up, it's not

113
00:08:09,639 --> 00:08:13,600
and it won't as long as rates
are anywhere close to this loven. So

114
00:08:13,839 --> 00:08:16,000
do you I mean, what do
you think is going? Like? Does

115
00:08:16,040 --> 00:08:20,560
the shut down impact rates? Does
it have anything to do with it?

116
00:08:20,839 --> 00:08:24,240
Do you expect rates to change over
the next I don't know, one to

117
00:08:24,279 --> 00:08:28,839
two years? Does it all depend
on the election? Like? What should

118
00:08:28,839 --> 00:08:31,919
people be thinking? You know,
like every economic forecast. You know,

119
00:08:33,360 --> 00:08:37,679
we can be wrong. We just
admit it. A lot of people don't.

120
00:08:37,919 --> 00:08:41,679
But but what look, I think
the easiest way to look at this

121
00:08:41,720 --> 00:08:45,080
and to keep this in mind.
And by the way, guys, we

122
00:08:45,200 --> 00:08:48,240
see this being played back in the
economy right now. We just got banking

123
00:08:48,279 --> 00:08:52,279
information out now, don't quote me, it's from my analysts, and I

124
00:08:52,279 --> 00:08:54,559
don't have the notes right in front
of me, but it's either it's either

125
00:08:54,759 --> 00:09:00,679
year over year or month over month. Debit card transactions from banks are down

126
00:09:00,679 --> 00:09:03,960
six percent. That was the recent
data that came out, which corresponds to

127
00:09:03,039 --> 00:09:09,039
about a two percent pullback and consumer
spending, so excess savings rates are back

128
00:09:09,159 --> 00:09:13,960
below where they were prior to COVID. Okay, so we think all these

129
00:09:13,000 --> 00:09:18,159
slowdowns are happening right now. Well, Traditionally, what happens when the FED

130
00:09:18,399 --> 00:09:22,000
wants to take on inflation or the
fear of higher inflation, Historically speaking,

131
00:09:22,279 --> 00:09:28,879
they almost always go too high,
they break something right, and then they

132
00:09:28,960 --> 00:09:31,919
realize the issue too late. Kind
of think back to eight o nine,

133
00:09:31,039 --> 00:09:35,120
right, we had guys in the
financial industry screaming, hey, shoot,

134
00:09:35,279 --> 00:09:37,679
you're about ready to blow up the
entire world, and the Fed's like,

135
00:09:37,679 --> 00:09:41,480
well, we're worried about inflation,
right, and then they pivot late and

136
00:09:41,159 --> 00:09:45,759
usually cut too much. So I
don't see any reason why that won't be

137
00:09:45,799 --> 00:09:48,000
the case. I think that you're
going to see. I think the recession

138
00:09:48,039 --> 00:09:52,559
will be visible. We're looking at
the timing right now. It could be

139
00:09:52,600 --> 00:09:54,799
a little sticky, but we're looking. I think we're gonna see recession visible

140
00:09:54,840 --> 00:09:58,440
by Q one or Q two next
year. As soon as that happens,

141
00:09:58,480 --> 00:10:03,039
the Federal start cutting rates, and
rates will be down. I will be

142
00:10:03,120 --> 00:10:11,039
shocked if money market accounts FED funds
rate are not down one hundred and well

143
00:10:11,039 --> 00:10:13,320
maybe not the FED, Yeah,
FED funds rate. I will be shocked

144
00:10:13,320 --> 00:10:18,919
if mortgages. Mortgage rates are down
two and a half to three and a

145
00:10:18,960 --> 00:10:20,559
half percent by this This would be
great for you, This would be great

146
00:10:20,600 --> 00:10:24,440
for us. That would be great
for me. Yes, Well, here's

147
00:10:24,480 --> 00:10:26,679
the trick, right, And this
is one of the things we talk to

148
00:10:26,759 --> 00:10:31,279
our clients all about risk management.
If you don't get hammered in a downturn,

149
00:10:31,960 --> 00:10:35,399
right, if we can, if
we can conserve cash in a downturn,

150
00:10:35,840 --> 00:10:41,320
then downturns are actually opportunities. We're
not happy that other people are struggling,

151
00:10:41,720 --> 00:10:43,840
but we always we try to encourage
our clients to think opposite. Right.

152
00:10:43,879 --> 00:10:46,840
We want to be fearful when everybody
else is greedy, and then we

153
00:10:46,879 --> 00:10:52,159
want to wait until everybody else needs
to sell things and we get to buy

154
00:10:52,200 --> 00:10:54,840
them a discounts. I think the
same is going to be true of rates.

155
00:10:54,080 --> 00:10:58,159
How low will they go? It's
hard to say, but the easy

156
00:10:58,200 --> 00:11:01,840
way to think about this, guys, is that when you spend fifteen years

157
00:11:01,879 --> 00:11:07,000
stacking up the world's largest pile of
debt in history at the world's lowest interest

158
00:11:07,080 --> 00:11:11,320
rates in history, and then you
jack those rates five hundred and fifty percent

159
00:11:11,360 --> 00:11:15,759
and eighteen months, things are gonna
isn't it crazy. They're like, if

160
00:11:15,799 --> 00:11:18,039
you look at house prices back in
like I don't know, the seventies and

161
00:11:18,080 --> 00:11:24,519
eighties house price houses were affordable.
Like I think it's like what in nineteen

162
00:11:24,720 --> 00:11:31,879
seventy four a house costs. I
don't Yeah, I mean it's like house

163
00:11:31,919 --> 00:11:35,440
costs what like two years of somebody's
salary, average salary. You know,

164
00:11:35,799 --> 00:11:39,879
it's like that's what a cost in
the seventies. Somebody could freaking afford a

165
00:11:39,919 --> 00:11:41,039
house, Like if you I'm not
saying you could pay it off in two

166
00:11:41,120 --> 00:11:43,639
years, but I mean it was
like you looked at it and you thought,

167
00:11:43,639 --> 00:11:46,200
Okay, this is reasonable. I
can pay this off in like I

168
00:11:46,240 --> 00:11:48,919
can pay it off in six years
if I wanted to, if I actually

169
00:11:50,039 --> 00:11:54,600
just managed my money well now.
And but the interest rate was like what

170
00:11:54,840 --> 00:11:58,480
fourteen percent or something. I don't
even know. I'm probably I'm ball parking

171
00:11:58,519 --> 00:12:00,919
there, and that was a I
was. It was. It was double

172
00:12:00,960 --> 00:12:05,080
digits. And then they dropped the
interest rates over the years, and it's

173
00:12:05,120 --> 00:12:07,480
like it became this thing where like
interest rates are so low and then the

174
00:12:07,519 --> 00:12:11,600
house prices are so freaking high,
and it's just yeah, well yeah,

175
00:12:11,639 --> 00:12:16,039
this is why, this is why
we have the term financial repression. It's

176
00:12:16,039 --> 00:12:20,399
why a lot of people rightfully so
refer to record low interest rates and extreme

177
00:12:20,440 --> 00:12:26,440
monetary policy is what we call it
in economic terms, right, It's why

178
00:12:26,559 --> 00:12:30,200
a lot of really well respected people
and a lot of really smart people say

179
00:12:30,200 --> 00:12:33,200
that, Look, when you do
that with interest rates, it's actually a

180
00:12:33,240 --> 00:12:37,279
wealth transfer from the port of the
rig. Yeah, and why is that?

181
00:12:37,600 --> 00:12:41,720
Because who owns all the assets?
Rich people? You drive asset prices

182
00:12:41,759 --> 00:12:46,879
way up due to low interest rates, right, and you those people have

183
00:12:46,000 --> 00:12:50,879
to purchase those assets, and eventually
inflation shows up, rates go up,

184
00:12:50,879 --> 00:12:54,799
and those people are up a quick
without it, right. And so that's

185
00:12:54,879 --> 00:12:58,159
the you pay a price for what
we've done for the last fifteen years.

186
00:12:58,159 --> 00:13:03,279
Despite the FED thinking there won't be
one, there will be and more things

187
00:13:03,279 --> 00:13:05,360
are going to break. And we
got an early salvo this year in March.

188
00:13:07,480 --> 00:13:09,960
You know, think about what's going
on in markets, and think about

189
00:13:09,960 --> 00:13:13,840
how glowingly everybody talks about the economy
right now. You were literally weeks away

190
00:13:13,919 --> 00:13:18,519
from a national bank run on regional
banks back in March. Okay, that's

191
00:13:18,600 --> 00:13:22,720
not because everything's good. That's not
because everything's healthy. It is crazy to

192
00:13:22,759 --> 00:13:28,000
me the level of disconnect that people, politicians, everybody has to what's on

193
00:13:28,039 --> 00:13:31,360
the economic horizon. Like I've said
to you guys, oh nine, no,

194
00:13:31,519 --> 00:13:35,120
it's it's not an issue like that, but we're clearly going into recession,

195
00:13:35,320 --> 00:13:39,399
and it will be the first recession
in the history of our country where

196
00:13:39,440 --> 00:13:43,559
lower interest rates or cutting interest rates
really doesn't help, because we had interest

197
00:13:43,639 --> 00:13:46,600
rates is zero for fifteen years.
Yeah. Well, and this is why

198
00:13:46,799 --> 00:13:50,559
people really need to make sure that
they're tuning in to our discussion every couple

199
00:13:50,559 --> 00:13:56,159
of weeks, because you just proved
it, like people are reporters are reporting

200
00:13:56,240 --> 00:14:00,440
just like these stats without any of
the context, and the kind text is

201
00:14:00,480 --> 00:14:03,360
really important. We know we can
always count on you to give it,

202
00:14:03,440 --> 00:14:07,519
and so we very very much appreciate
it. How can people learn more about

203
00:14:07,519 --> 00:14:11,799
you and Bullwark Capital Management? Yeah, I well, thank you for your

204
00:14:11,879 --> 00:14:13,240
kind words, first of all,
but I think the easiest way to do

205
00:14:13,279 --> 00:14:16,080
it is you can just google us
Know your Risk Radio. We have a

206
00:14:16,159 --> 00:14:18,840
radio show that airs once a week
and then I've told you guys this before,

207
00:14:18,840 --> 00:14:24,159
but we're actually I think that we're
in an incredibly unique historic spot and

208
00:14:24,200 --> 00:14:28,919
so we've actually started doing a twelve
to fifteen minute segment every single day documenting

209
00:14:28,960 --> 00:14:31,080
what happened that day in markets,
in the economy. And that's called our

210
00:14:31,120 --> 00:14:35,360
Daily Dots. It's all part of
our Know Your Risk radio podcast. You

211
00:14:35,360 --> 00:14:39,960
can find it on iTunes, Spotify, right anywhere there's a podcast site.

212
00:14:39,000 --> 00:14:41,360
You can find us on there,
or you can just go to Bulwark Capital

213
00:14:41,440 --> 00:14:43,799
Management dot com. We're not tough
to me, is it? How long

214
00:14:43,879 --> 00:14:46,519
is it? Zach? How long
is the Daily Dot? Just curious?

215
00:14:46,600 --> 00:14:50,600
Is it like a quite a kind
of like a quick like punch list of

216
00:14:50,639 --> 00:14:52,960
everything that's going on. Yeah,
we try to keep it between twelve to

217
00:14:54,000 --> 00:14:56,720
fifteen. Anytime the comes out and
speaks, we tend to rage on the

218
00:14:56,759 --> 00:15:01,639
stage, so you should a little
bit. Twelve to fifteen is okay.

219
00:15:01,639 --> 00:15:03,480
I'd love this. Is this fantastic? People be excited about that. Thank

220
00:15:03,519 --> 00:15:05,960
you, Thank you,