Peak Prosperity - Finance U: Beware The Rate Cuts!

Episode Date: September 6, 2024

Currencies, Oil, gold, stocks and bonds. Everything is in flux at the moment and markets have the feel of being ‘toppy.’ Things could get really bumpy over the next few months.

Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. Oh, we're going to get this re-acceleration and the Goldilocks. Well, what in the world is going to happen when the election uncertainty is behind us and we're that low on inventory globally? We could have a meteoric rise in oil prices. The following is the audio version of a video

released at peakprosperity.com. Visit peakprosperity.com to watch the video and to find other insightful content, such as articles, discussion forums, and exclusive subscriber-only content. It was nice to spend some time in person last week at Limitless. That was enjoyable. Yeah. So if anybody watched the last episode, Paul and I were sitting in chairs, and we were at Limitless, and that was earlier on in our experience there. Super positive experience. And, you know, I have this other life besides finance and economics, as you know, Paul. A lot of people came up, shook my hand, said thank you for the Trump assassination stuff.

I had other people come up and say thank you for the covid investigation someday somebody's going to come up and say thank you for your financial reporting too because um it's all important and it all connects so it does it was enjoyable to watch watch you walk and try to get across the room because people were talking to you they were talking to us and sharing their stories about just how big a difference you've made in their life and all of those categories so it was it was fun to watch it is and of course you're making huge differences in people's lives too and so that was you know from our i was so glad we had the time because we had a couple of breakfast uh extended like felt very european two-hour breakfast right but a lot of conversation going on. And, and I think the summary for me was that both of us, we just want to be in service, you know, just want to help

people and, um, feeling like people are going to need some help here. And so very glad to get aligned around that. Yeah, that was great. The breakfasts were wonderful sharing testimonies and conversation and, and just how exciting it is to be working with like-minded people that, that first make a difference in the lives of others and everything else will take care of itself and have fun doing it. And I believe that you're right. All of the warnings that you're giving people, just like you were back in 2007, 2008, from a financial standpoint, there's going to be people thanking you before this is over as well. And hopefully us as well in the approach that we take. Indeed, I think there will.

I'm getting a little nervous around the markets as usual. You know, listen, I've been skittish for a while, maybe a decade, because I just know that all of this constant intervention in Fed printing, it's just leading us further and further away from a gentle soft landing right and so the imbalances get larger and things are weird let me start with just one one area of weirdness um one second i think i put this so so twitter there are people uh who are who are following along with me, or just on their own. They've come to the same conclusion. So how about this one?

Somebody put up this meme, you know, the most interesting guy in the world meme says, I don't know a smash West Texas intermediate crude futures, but what I do, I do it with low liquidity and pre-market. So the oil markets, Paul, have been bizarre for a long time i've suspected they've become somebody's political play thing smashing the futures for anybody doesn't know would be a way that you could use paper claims to just sort of dump paper onto the market and make it appear like oil's going down in price and when it actually is the more physical way of course was what what the Biden administration, it wasn't him himself, it was whoever's around him, using the Strategic Petroleum Reserve,

the SPR, to dump physical crude into the market to drive the price down. That's direct, it's overt, it's a matter of record. So we know they're doing the overt thing. This person is suggesting, like I do, that they're also doing the covert thing. And you want to see where this has has gotten us i think this is going to get us in trouble this is how i operate so eric nuttle who i follow he does a great job just dog on a bone tracking oil and all things energy related notes here that the oil price is hitting its lowest level year to date and today it just got smashed under 70 it's at 69 and change as we're talking down another buck today. So this was yesterday. And he's saying oil price hitting its lowest level year to date. And it's lower today.

While global oil inventories hit their lowest levels as far back as the Kepler data set goes. Amazing. So here is global oil inventories lower than they have been at any point in time in the data series. And normally supply and demand and part of supply is inventories. When inventories get low, that's sort of price constructive. Apparently, we're to believe that oil markets like to sell off and sell off hard all at once during times of low liquidity and pre-market. It happened again today. It's been happening over and over again. Let me see if I can pull this up because this is just astonishing to me. Energy, get rid of that. Bring in in oil here and here you can see it over you know

many days and get rid of that um it's just been coming down but the last the last couple days here is just getting squished here and just gets squished so here it is getting squished uh you know pre-market um it's just how it works it's just how it is that's the world we live in so what what's the narrative so what's the narrative that that's going to bring about that's going to uh to matter between now and the election right i mean inflation drive gas prices down and they're going to be able to get on the campaign trail and say look your gas prices are lower this year than last year they're desperate to be able to sell that idea. So they will do whatever they need to do. And so they would smash global oil prices if necessary. And some will say, oh, it's too big a market for that.

But they got firepower. And so I think they could and would do that for political purposes. The problem is that under $70 a barrel, there's a lot of oil projects that aren't going to get prosecuted, not going to get done, leads to future problems, real supply difficulties. That would be the narrative that's on the back end of this. That's right. Instant gratification for today and major pain for consumers down the road. Because with prices that low, you know as well as I know, companies can't spend all the money for regulation and reinvest and, and drilling and bringing on more supply.

And here we are, supposedly the economy's great. Fed's going to cut rates, you know, listen to the narrative in the media and the data doesn't necessarily show that, but you know, Oh,

we're going to get this reacceleration in the Goldilocks. Well, what in the world is going to happen when the election uncertainty is behind us and we're that low on inventories globally? We could have a meteoric rise in oil prices, and that's not outside the realm of possibility, I don't think. Do you? Nope. Nope. Totally within the realm. And by the way, I think it was Zero Hedge put it, well, I put this on top of it. Let me find this one of the chart, but Zero Hedge was pointing out how the inflation structure right now is tracking the 70s perfectly. And this might take me a second to find here. Where did I put that one?

It's in my other bookmarks folder. So this is pretty astonishing, I think, how close is tracking. And nope, that's just standard inflation. And by the way, the inflation stuff is just crazy making to me right now how silly this administration is and its spokespeople. You know, I saw something, if I remember correctly, we've had the period of disinflation where it's softening some, but we're not into deflation yet, and the next tracking in the 1970s is a pretty substantial surge around the corner, correct?

Yeah. Yep. Oh, wow. This is Zero Hedge pointing out here that we have here in blue, this is current inflation. And in red is the experience from the 70s. Now, you know, we had the 70s. We had that oil shock come in through here. This equivalent part of the 70s. I say we're just one energy shock away from repeating the 70s. I think we're going to get that energy shock because of those shenanigans we just talked about um we the oil shock of the 70s was a political a geopolitical statement this next one's going to be a geological statement just because we didn't drill for it we forgot um that's amazing yeah pretty close tracking though huh that's really close tracking that That really is. And I think the zero hedge comment was, oh yeah, a Fed, great time, cut rates, you know,

just like very sarcastic, like picking your moments. Well, and this time, like you highlight there, three times the debt, only with three times the debt. And when that secondary surge of inflation occurred, if I remember correctly, that would have been in – no, that would have come after 73. That first surge came in 73, where the markets reacted dramatically to that continued surge in inflation, which is my concern. I don't think the market's going to like it when it comes back. And that brings to mind – so talking about inflation and tracking like that, So let's look at this one. So zero hedge put out another credit card debt. Is it a record high personal savings rate is a record low. Okay. So yeah, look at that. You know, the narrative has been, you know, Oh, consumer spending gray. You look at inflation, adjusted numbers. Um,

maybe people are just continuing to spend like crazy, but I don't think people are going to willingly drop their savings rate that low and credit card debt that high unless they're forced to for some reason, whether it's the inflationary pressures that they're receiving or a slowing economy. So that's one. There's another. I think it's Finn Hendrick puts it out right here. You know, he states that consumers sure seem not to be buying that all the economy is great and AI is awesome. Happy talk. Typically, bull markets see confidence rising in consumers. Not this time. So you've got these markets that are just attaching from what the consumer is feeling right here. So can you imagine what's going to happen if those inflationary pressures return in mass again with the savings rate that low? There's one more here that I want to show about savings rate,

just to put it in perspective. Going back to the 1960, all the way forward, Americans are only saving 2.9% of their income on average. And the only other period of time that it was worse was around the housing bubble, 2006-2008 housing bubble crisis and the crash that occurred there. This is a tough time on the consumer. And for the government to be playing political games for short term, their short term benefit at the expense of the populace from a long term. From what's going to occur from a long term is is criminal. Well, it is. It isn't. And this period of inflation has been even just as punishing as that early 1970s inflation. The problem is, is that we're not seeing the commensurate wage inflation that goes along with it. Wage inflation has been kind of anemic. And we both know that inflation is actually undercounted badly.

Insurance costs, real estate, property taxes, et cetera. None of that's counted properly. And the rest of it is undercounted and misweighted. For all those reasons, of course people are piling on the credit card debt now the thing that caught me you know that they had this whole movement that came out of china's called lying flat and and it was just a way of saying why are we killing ourselves to work and so people would just sort of like not put their best into their life um in their jobs i can equivalently i think that when things are this insane

and you just can't make it, nobody cares, and your local property taxes are just getting goosed out the wazoo and your insurance is going up and nobody's looking into that and you get these empty campaign slogans. I think those credit card purchases, somebody, I was reading something, said those are YOLOs. Those are people you only live once and they have no intention of paying them back. Like, might as well just run it up.

Like, this is almost like a final Hail Mary desperation. What the hell? You know, give it a go. Yeah. I could see that. That no savings, credit card debt, just racking it up. It's kind of like, you know, last call at the bar you know give it a go and maybe thinking not inappropriately right that they'll get bailed out that somehow this will be

forgiven well they just walk away or they walk away from it and vindictively so i mean if you're a california citizen right now and you're trying to purchase a home and illegals are given $150,000 loans, you don't have to pay back unless you sell the home and you're not getting that as an American citizen. Well, that would lead some to take advantage of the bankruptcy laws that we have, run that credit card debt up and just walk away from it. I mean, after all, so here recently I've had two individuals that I've kind of counseled their children and had conversations with about, and this will be the third time that they're going into bankruptcy. You know, run credit card debt up over the past, what, 25 years, run credit card debt up, file bankruptcy, you know, keep whatever they get to keep. And then the credit card companies typically within 12, 24 months on the other side of there throwing credit cards at them again. So, you know, it does make sense that there are a lot of people out there out of desperation.

I mean, depression rates are high. Suicide rates are high. This American dream is not what individuals are believing it is. So they can't bankrupt on their student debt, but they can on their credit card debt. That's a plausible theory, very plausible theory. Makes sense. But of course, things are really crazy, you know, and that was interesting at, you know, Limitless, a lot of entrepreneurs, by definition, they're pretty resilient folks, right? They're used to adversity. You you know i've been in a room with with entrepreneurs where somebody asked the question how many of you gone bankrupt and like

half the hands go up and they just and they're successful now so they just they they roll with it but you know i was i was detecting two things one a lot of them were kind of impatient it's been like three years of kind of waiting for things to get better. So I'm worried some of them may just sort of decide I'm impatient, you know, can't, can't sit on my hands anymore, dive back in. And then another group of them, the second group is, is kind of like thinking, ah, no, I got to pull back. This is something's off. I don't know what's wrong with this story, but something's wrong with this story. You know, there are two things in all my years of 26 years of going to conferences and continuing education events and being around professionals, especially entrepreneurs are inherently your most optimistic individuals. You know, you're warning people about what's coming,

but you're one of the most optimistic people that I know. And I'm optimistic, but I still want to warn people because I believe in warning people and even preparing ourselves puts us in a position to take advantage of that opportunity to stand the test of time. But there are two things that amaze me. Consistently in conversations that I had around and even in some of the speakers that were there, openly questioning, can we believe the data that's out there now? And, and, and, you know, that's a common theme. It's not just at the edges. This is openly discussed and in a room of entrepreneurs who have to rely upon the data and they're saying, you know,

what do you do when you can't trust the data and consistently in the conversations are around while I'm having to double check, I'm having to triple check, I'm finding independent sources to try but most of especially all the algorithms out there built off of the government data and they're blindly trusting it the second thing is is open discussion about the chaos and the stark options that we have in the election coming up. That's the first time ever that I've really seen that in mass discussion like that from the stage. So that was encouraging to me because you're in a room of individuals who, if they don't face reality, they and their families suffer for it and they're searching for knowledge, they're't face reality, they and their families suffer for it. And they're, they're

searching for knowledge. They're searching for truth. And they have the courage to question, uh, because they're looking for the wise path to walk through. I mean, it was, it was a great event to be a part of. And, uh, and I'm really glad I was there, but those are the two things that struck me the most is it is there was cautious optimism and a lot of frustration uh i think that's fair i think that's fair and i i do like to caution people um i was just reading a headline in finance yahoo finance the other day and basically households are about as fully invested as they've been in a long time. Yep. Right? That means fully invested in stocks. And that's kind of Wolf of Wall Street style.

Markets can't actually go down until somebody's holding the bag. Wall Street calls it the dumb money, right? They're all pre-positioning. Who knows how they're actually positioned? But I thought this is context I wanted everybody to be aware of is this um so what happened here is uh this is uh at brett b-r-e-t-t underscore e-t-h said uh you can't see it because it's under my my my window here he says we are 15 days away from the first fed rate cut of this cycle using that that time frame, I, now you can follow along, overlaid the following past rate cut cycles of 81, 1990, 2000, and 2007. These four cutting cycles matched the same data

that we're seeing currently. Unemployment rate curving up, the 10-2s inversion, etc. And the sentiment from the bulls is that rate cuts are suitable for the market and they'll make things go up. True in the long run. However, this is our current in black here running through. But when he took those other four cycles there, what happened was the max upside was temporarily was plus seven percent, but it went down. You can see all of them like it's not over till the fed lady sings right as they say right it's not over like once the fed starts cutting that actually marks the end of the cycle not the beginning of the next bull cycle typically well at least if you lay these last four cutting cycles down on the piece of paper this is what you see this is what you see

yeah along that theme we're supposed to get a rate cut announcement on september the 18th of this month correct i believe i found this quite interesting in the mad king's article so september the 18th of 2007 the headline was markets soar after fed cuts key rate by half a point. Traders on the floor of New York Stock Exchange on Tuesday, September the 18th of 2007. And so that's quite interesting that here we are coming into September. I think the markets reached their high in November, and we're down 50-something percent within 12 months later, and we got into the worst part of the crisis. So who knows if that's the case, but the reality is, you know, is this time different? And,

and what I'm more concerned about is as Ayn Rand stated, you can avoid reality, but you cannot avoid the consequences of avoiding reality. And, and the reality is we have too much debt. And when we really think about this, so cutting rates is supposedly good for borrowers. It's good for the U.S. government. How good is that going to be for these retirees

who got used to living on 1%, 2% CDs, and now they're flush with all this extra capital, which has blunted the impact of inflation for the large majority of these retirees, But if interest rates go back to effectively zero, if they can pull that off, then all of a sudden now you've got your major spenders over the past 24 or 36 months are going to be squeezed relatively dramatically, and inflation was probably going to continue to re-accelerate. And how in the world can people be cheering on these open borders? You know, let's take it at their word that these are corporations and the democratic elite deciding to bring wages down, right? Well, how much are people going to

appreciate it if they bring all these people in to bring wages down, which have been stagnant anyway, but yet they set up an interest rate environment that re-accelerates inflation. So, you know, to an extent, you know, I would expect the markets to touch fresh highs upon the cut, just an educated guess. And then I would expect that the next move is probably going to be somewhere between 28% down in the markets, you know, over the next 12 to 24 months, just a guess. And if we get back to historical valuations, I mean, John Hussman does a phenomenal job, as well as others arguing that we could see a 50% to 60% decline in the markets.

But we just don't know how much firepower, what the government's willing to do at this point to kick this can down the road again, or are they going to let us actually feel the pain, let the debt collapse occur, let the zombie companies go out of business, and then open up opportunities for the entrepreneurs to step in there and give us a better cycle on the other side well you know it's it's all

political decisions now at this point in time they've got this whole of society framework that's essential to them which is why it's blah blah that's why we slam oil and you know commodities at this stage paul i mean i'm still, I'm this realist guy. I like reality. And you mentioned the Ayn Rand quote, right? You can't avoid the consequences of ignoring reality. Reality is commodities. And we're just, it's been abusive to the commodity producers for so long that it's a very easy thing to step over.

Goldman Sachs talks about it. JP Morgan, they have commodity tests. And they're like, wow, for somebody to open a new copper mine, copper would have to be about $35,000 a ton right now, given all the rising input costs, the regulatory burdens, the permitting, the this and the that. Well, copper is at like 9,000 a ton. So we're not opening any new mines. Eventually, that's going to become a big problem, right? And, you know, if we were doing this correctly, you know, Gary Gensler's there in charge of this CFTC would be saying, hey, maybe we shouldn't be having, you know, Bob and Ed's, you know, big world of private equity and hedge funding, you know, dumping, you know, massive amounts of copper futures on the market at two in the morning.

Right. Maybe we shouldn't do that. Right. Somebody would be looking at the larger picture, but they're not. So so it's just we get what we get. And unfortunately, that's going to be problematic at some point. But we'll see. No, but it also it also raises something. I've showed this several times before, just the distortion of this environment we're in. I'd like to just reference this again. The major market index is going back to 2008. Just how unusual this period of time has been. So the graph that I'm showing here is the S&P 500 only game in town since January 1st, 2008. And then you look at commodities here. The Goldman Sachs Commodities Index is 14.8% below what it was 16 years ago.

Well, imagine being a producer. I mean, you produce corn, you produce copper, you produce whatever. Yeah. And where are you going to deploy that capital, right? You're going to, you know, you get excess capital. Where are you going to put it to work? You know, you're going to be chasing the S&P 500 too, just to get along. I mean, the interesting thing is, is, you know, they're well run because they've got

to be lean and mean at this point. But you look at emerging markets and you look at developed markets even. Of course, developed markets have some other issues, but outside the U.S., that's been the only game in town. We have artificially benefited from the momentum that is in place there. Now, you know, we had something similar happen in the 90s, but this is 2000 to 2007, and there are reversions to the mean that occur. So when we get a type of environment like this where commodities, if they are the leading, let's say, for the next seven years, they're up 213 percent. How much more is that going to exacerbate the inflationary pressures that are out there? So, you know, it's just it's just I don't know when this cracks.

And I know that our strategy will adapt to take advantage of it on the other side. And I do look forward to that day because that's going to be, you know, that's one of those areas where you wait for some time before you get a chance to overweight and really aggressively move into a category and you have the weight of the information behind you. But, you know, everybody's chasing this. They're chasing the shiny thing right now. And this is where we see the real opportunity in the long run. And those undervalued sectors that are just important to the global growth and more so really. With this narrative structure, you know,

stocks have been all about it, but I'm convinced that the narrative has been driving a lot of sentiment a lot of behavior right so so the narrative says we hate oil companies right even though everybody uses it and like it's just it's a thing so there's astonishingly attractive values in some of those companies by traditional measures things like price earnings ratios and dividend yields and things like that. So I'll let people look into that if they're interested. Interesting sector. But the sector of AI has been this dominant thing, right? We're going to do this. And you and I have talked about it. I'm this guy. I'm like, cool, cool idea. I think I like chat GPT, kind of interesting. What is the trillion dollar idea behind it, though? Like, what does it do? Like, what is it? Right.

You know, and I got into these arguments a lot with people who were explaining the blockchain a decade ago saying, oh, you don't understand. It's going to transform all these industries. Like, OK, that's cool. Right. If you could take like if you bought a house and you had to pay a title insurance because somebody somewhere had to go into dusty records and make sure the title was what they said it was if you put all that on the blockchain i'm like okay that's a cool idea right now we just know what the title is sounds good but where is it like where's that killer app like i'm still waiting a decade later like so i'm waiting for that killer app for ai it may be

one of those things where we just constantly wait but in in the meantime, let's talk about the clash of the narratives. So I just come across this today, and it turns out in Wyoming, there's a giant Wyoming carbon capture project pulls the plug because they couldn't get clean power. What is this? What is this story? September 3rd, right?

This is what it was supposed to look like. Artist rendition. They're going to do this big, giant, you know, you know um thing and so carbon capture inc said they wanted to build one of the world's largest direct air carbon dioxide storage projects but they're pulling the plug why well we've been seeing growing competition for clean power amongst industries that are emerging much faster than anybody would have ever predicted it turns out it's intense competition from data centers the data centers are grabbing it all up they couldn't find uh enough power in the system to fund their carbon capture which was the old narrative that everybody was in love with.

And so this whole company spins up, they're going to do this thing, and they just fell victim to the next shiny thing. Keys dangly, right? Which was AI. So, I mean, are we going to wake up someday, Paul, and see this headline, which is like, you know, Cincinnati and Brownout to preserve data centers?

I mean, the data center, it's like this, oh my gosh, these data centers i mean the data center it's like this oh my gosh these data centers are being slapped in so fast nobody's asking you know how much carbon are they burning right john kerry isn't wagging his finger at the data centers explaining how they ought to take more cold showers you know while he jets off to his next appointment right we're not seeing any of that and it's just amazing to me to watch these narratives flip-flop around but what i can't find is i can't find somebody who can sit down with me and explain how either of those two narratives how they pay off for society in the long run no it doesn't i mean the one thing the

one thing that concerns me about the data calculation is it sure can do a whole lot of monitoring when you've got that much computer computing power put together in place that makes sense that's the only that's the only thing that makes sense to me because basically my daughter was talking last night i mean chat gpt and some of these others the ais at least as far as we're now don't don't get me wrong there are efficiencies out there but it's a supercharged internet search right and and it's got calculating and computing and cool images and things of that nature. But, you know, the blockchain could solve our voting issues. If we put our voter registration on the blockchain, you wouldn't have to pay. These are great ideas that I had a lot of hope for that nobody's implementing. But, you know in our health records on the blockchain. Why is it that we're not utilizing that? If it's, if it's got that calculation, I mean,

you could solve voter fraud problems by putting our identification on the blockchain, social security, you could never have identity theft if we, we had everything on the blockchain. And I understand the fears behind it because it's all in one location, but the reality is you can eliminate all of those scourges to society and the questions that we have there if we utilize that. But it's not being done. Like you said, we've moved on to the next shiny thing, these artificial intelligence centers and ridiculous amounts of money being spent there. And is there going to be a return on capital? Or are we going to look back and say, hey, this is just a tremendous amount of speculation and we've thrown all this money in there that's used for our monitoring and control

of the systems and freedoms that we have in the future? That's my biggest concern right now, because I haven't seen a viable application. Don't get me wrong, there's applications, but a societal changing application. Yeah, but the level at which I don't have the chart in front of me right now, but I've presented it here before, that the data centers are on this exponential power consumption curve right now. And they consume globally more than whole nations. Like Italy consumes less electricity than data centers right now. They're very very very hungry devices they really are yeah and it's just interesting that we have the one narrative which is like

we need we have to save the world and you know we can't have carbon going out and then we have this other thing which is just like nobody's asking questions we just need more data centers it's just bizarre to me how those narratives don't don't sort of stack up i think that from an investing standpoint though this creates inefficiencies and creates crevices right i actually enjoy it when i think somebody's got the story wrong right because that gives me an opportunity if i have the same story as everybody else you just got to cross your fingers and hope that's right but that's right right. You know, if you're, you know, alpha, as they say, comes from, from getting something where somebody else has gotten it wrong. Um, that's right. Hopefully. I mean, there's a time where, where the trend is right, you know, but you're not

talking about, but by the time you get 80, 90% of the people that are out there following the same trend, everybody's on the same side of the boat, but you go back to the legendary investors, the patient legendary investors. And that's one of the boat. But you go back to the legendary investors, the patient legendary investors, and that's one of the things I like about Buffett. Many other strategies that are out there, they're raising cash into this environment. They're taking advantage of these highs. They're avoiding sectors

that are showing some weakness right now. And Buffett's raising cash. We've raised a little bit in the portfolio here, not put me on the same line of Buffett. He's a legend. He's been in, I mean, gosh, 40 years now, 30, 40, 45 years. But they're following strategies. They're not following their emotions. They're following data and they're adapting their strategies to the changing data in the environment that we're in. But through all historical measures, we're in a mania right now. We're in a speculative mania. I'm really concerned about retirees being as aggressively invested as they are. And this is

just what happens. That's one of the reasons why I don't believe in that cookie cutter approach. When somebody comes in, we base their allocation off of their retirement plan analysis. And hey, this is how much risk you need to carry. Or this is the maximum amount of risk that you should carry to be successful, because you don't, you can choose to carry more risk, right? But what happens is in 2008, when the market's down 57%, you give somebody a questionnaire about how they feel about investing, they're inherently going to test more conservative than what they're going to do during a period of time where they cynically state, well, what does it matter? The Fed's going to bail everybody out anyway. They can't let this thing go down. So I'm seeing, especially with

peers and others, they've got clients that are just like, hey, I want to be 100% equities. Well, you're 78 years old and you might not necessarily need to do that. Or you're 60 and your margin for error for retiring at 65 is thin and people are just desperately trying to carry this extra risk. But this is what happens at the end of these manias. This is what happens right before you move from the greed and boom cycle to the fear and bust cycle. And I believe that's a lot closer than what most people will allow themselves to believe. Well, you know, what's interesting too is just how tight this is going to get for, well, let me just put it on the table. I feel bad for people living in California. So sorry if you live there, right? Because you mentioned the $150,000

for illegal migrants, not immigrants, totally different concept. Immigration is a careful process of many steps, right? But yeah, $150,000 so that illegal migrants can compete with domestic people using their tax dollars to compete for the same homes these people can't afford. But with that, California and its infinite wisdom, it just organized itself around the next big fad, which is it feasts heavily on capital gain. So if the markets are going up, California's finances are relatively in good shape. But if they can't tap that capital gain side of the equation, if markets dare to go down, California gets in a lot of trouble and then all kinds of services get cut and taxes go up and politicians, instead of thinking, how do we rein our spending in, think of more creative ways to, you know, take from Paul to give to Peter and all that, right?

I think this next downturn is going to be really punishing to California in particular because of how they've very unwisely attached their sled to Fed printing. Yes. Well, and I'm going through municipal bonds with a fine-tooth comb right now and looking at the risk of the states. Because if we do get into another credit crisis because of this foolishness and reality comes home to roost, either it's a bankruptcy cycle, which occurs because we have a deflationary event, or on the other side, we start to have a deflationary event, the government prints so much money that inflation takes off again, which is my highest probability thesis. And then all of a sudden, your longer term bonds are crushed, just like Silicon Valley Bank is.

And you've got these people who thought these bonds were going to be safe and don't necessarily understand the risk that's associated with them. And they get upside down and they miss dramatic opportunity for the next 10, 15, 20 years. So I see a tremendous amount of risk in the municipal bond space and in states like California, Illinois, and others. Those are the two that come to mind the most. Well, that'll be interesting. And by the way, you and I both met a gentleman at Limitless. I'm working hard to get him on the program and we'll be talking about this. Something going on in the local real estate market. Little teaser there for people. Yeah, you're going to want to see this because it's it looks like if he's right, really comprehensive fraud going on that could impact municipal finances, which could impact

bonds, I guess, if you use the transitive one, two, three rule. So look forward to that. And as well, if you ever if you want to talk with Paul and or his team, you know, just go to Peak Financial Investing. We've got a simple form. You fill it out. No obligation. One of his people would be very happy to talk to you and have been doing a lot of that. And it was fun watching you, Paul, watching people come up who've also, you know, been working with with you all and finding that and just seeing that connection get made. And it's you know, it's just people deserve to work with somebody who sees the world the way they do and understands the world the way they do and isn't just a rah-rah for msnbc or worse has a has a sell side desk a buy side desk on the other side of the story they got to move some product and all that just

you know good independent folks uh of high quality are so important in this story. And it's getting treacherous. I think it's getting treacherous. I really do. Well, it's enjoyable, you know, and what amazed me about a lot of those conversations is, is the ones that we've talked to and communicated to that I had a conversation to chat with, but others that I got introduced to that were, you know, just asking questions and, and shocked that here I am a financial professional on the investment recommendation side, investment advisor, that was having these conversations with them, things that they had been belittled for asking questions in the past.

And so I do enjoy those conversations because it's things that people want to know. And they're risks they're concerned about, and they want to know how to deal with them. They want to know how real they are. They want to know plan B if something happens. And because I've been concerned about these risks for so long, I mean, I've got hundreds of plans, you know, that we've mapped out or battle plans to an extent that you can pull off the shelf that we put thought into. And the whole purpose is if this, this, and this happens, then we've already thought about where to go. So if we can be two steps ahead of the herd, right, if fire breaks out in the building, that's the difference. You know, you don't have to hit perfection. If a grizzly bear comes into the camp, you just got

to outrun the slowest person and terrible analogy. it's with our friends. We always go on our fishing trip. We've got a buddy of ours that, that, well, with my neck pinched, like it is, I might not be able to outrun him, but, um, you know, but that's the reality. That's, that's what we have to do as investors. And, and when you're prepared mentally that way, you know, the harder you work, the luckier you are, the more thought you put into things, the luckier you are. So there'll be times where you're fortunate enough to make the step at the right time. But the purpose isn't to time the top or time the bottom. That's a fool's errand.

It can't be done consistently. But to capture the big trends and to miss the big trends and sometimes just to park your money as safe as you can and do nothing. You know, that's a long-term strategy that can be repeatable, and that's what we bring to the table for people. Well, it was interesting at this conference, too, was watching how many people, now it's an interest rate sensitive crowd in some not insignificant measure, right? A lot of real estate people there, but still watching the amount of horsepower and talks and discussions that went into just trying to guess, you know, where interest rates are going to be, where are they going to go. It's an important thing.

It's just bizarre to me that people have to spend that much time sort of trying to divine the tea leaves. You know, Milton Friedman said that, honestly, the whole Fed could be replaced with a laptop computer. Like, you don't need these people making their mysterious decisions about things. That's right. You just figure out does the economy need more or less M2 and that's it. You just make sure it has plenty of monetary equivalence in the system for what it needs at that point in time. And let the interest rates sort themselves out.

Let the markets decide. So I think that's the big dividing line is people who believe in the collective wisdom of individuals, of groups of people, that the markets should sort themselves out. Free markets, freedom of speech, just bad ideas and bad investments will weed themselves out. And then people who don't think that way, who think the opposite of those, that it all needs to be controlled, it needs to be monitored, it needs to be regulated,

and decisions have to be made that you have to entrust to experts to decide what the right rate or price of money or rate of interest is. That's the dividing line there. And boy, I fall way over on the Anne Randian free market side of things. I'm on the free market.

I'm way on the free market because the reality is it's just a level of pride and hubris on their part to say we are educated, so therefore we know more than you. So, yeah, I mean, I know individuals that had to leave the eighth grade. They never graduated the eighth grade because a tragedy happened in their family and they had to go to work. And what they have built over their lifetime is absolutely unbelievable. And they're just as smart as the individual with the, with the PhD just in a different way. Right? So,

so it's just arrogance that the free market is the way to go in the free market ideas. And if you have a foolish business, then you should suffer the consequences of that. If you have a wise business, you should suffer the benefits of that and reap the rewards of that. So reap the rewards both ways is a better way to say it. But I'm with you, free markets. I wish we would get back to free markets, the central planning, these czars, these all of this stuff, you know, that pride comes before the fall. And we've got a lot of pride running around right now. Yeah, hubris, right? Hubris. I mean, we have tons of data

that suggests the Fed doesn't know what the right price for money is, right? You know, they'll put it up a little too high, they run it down to zero. Every one of those is a pricing error, right? The truth is there is no one price for money. It probably ought to be a little more expensive for me than you or vice versa. It ought to be that that bank should have to raise its interest rates a little to attract more because it's flighty mcknight's you know bank over there doing risky stuff you know putting out a loan to value portfolio on its local mortgages you know this like 70 30 all wrong right um you know it there should be information in that and they've tried to they've stripped all the information out like there's some

centrally correct number you know that applies to applies to California, in Illinois, in Texas, and New Hampshire. It's just, it's, it's a bizarre idea. It really is. It's, I think it's a broken idea. We're about to discover that, I think. I think we are too. I think we are too. Yeah, well, I'm looking at my sector map here. There's, you know, things yeah a little weak it's okay um yesterday was a big down day in the scheme of things um but these how about this um i love this bank of japan governor ueda reiterates that the bank of japan will hike rates if outlook realized what he means is as long as the markets don't go down. Yeah.

Yeah. If we we want to be able to hike rates and not have the markets go down and we'll do that if outlook realized. That's what he's talking about there. Now, what's weird about that is. When they hike rates, markets go down. That's just how it is. And so they're just basically saying we're stuck. We don't know what to do. I do believe that uh that japan is in deep trouble here and and i think they're they're

going to have uh issues going forward because their money system and their markets aren't aren't actually in alignment with what their population needs which is declining and aging it's in a lower consumptive environment and they just keep putting more debt to keep everything sort of propped up. And I would love, Paul, to get one of these people down in a chair for an interview and say, what's the plan? What's your exit strategy? What will success look like? When do you stop pouring more and more debt on fewer older people? Is, is there a magic line? Like, I don't think they've ever defined, like, what's success look like?

When do you stop that behavior? Because they're just caught in their own trap of their own making. Right. And I don't think they have an exit plan. I don't think they could answer that question. What does success look like here? That's a good question. That would be an interview that would be worth having instead of short sound bites on the news to make us feel good.

Another thing that we need to take into consideration is if they're holding rates and they potentially raise some and we're cutting rates, that squeezes that yen carry trade. Just by the U.S. having to cut rates if they have to stay stable could blow up the carry trade on its own. Now, there's enough people that have been warned with what took place on the 1st of August that there should be hedging in place. I believe it'll exacerbate a downturn, but I don't know that it's necessarily a black swan at this point because if somebody gets caught off guard by the yen carry trade unwinding, then that was just foolishness, quite frankly, at this point, because there's all kinds of evidence that were there. So, you know, but he's telling us there, the problem's not gone away, right? And you're

pointing that out very eloquently. So they could stay the same and U.S. rates come down fast enough and that could unwind that carry trade and pull this excess liquidity out of the system where this where and and and the emotional cycles that we go through that greed leads to that boom and then they speculate ever more clearly because everybody knows that everybody knows that the fed's going to cut rates and that's going to save the day and again that was a common theme that i heard out there oh if you know the fed just cuts rates that's going to solve the day. And again, that was a common theme that I heard out there. Oh, if, you know, the Fed just cuts rates, that's going to solve the problem. But we got structural issues in housing right now that's going to take more than just, just cut rates to solve. Yeah. And, and, uh, I made this point, I was on with Michael Guyot on

his program yesterday and cause he asked me about, you know is what's my outlook for rates i said look you know pre-bernanke pre-2009 cutting rates i could answer this question very definitively because the fed didn't have a magic dial that it could turn right what it had was this ability to either push cash out into the market or pull cash back and when it pushed cash out into the market right and it would do that by reaching into a big bank, one of its primary dealers, taking some sort of an asset, typically a treasury bond, takes that, puts cash back into place. Now the bank is sitting there going, wow, I got a lot of cash. Banks hate sitting on cash. So they seek to lend that out typically to each other. And the

rate the Fed is targeting is the Fed funds overnight rate. so that's the overnight right that banks are charging each other just to lend money to each other for one night right and then that they take an average of that and that's the rate fine so in the old days when the fed raised rates it was taking cash out of the market and when it lowered rates it was pushing cash back in it was fundamentally a liquidity event that also had an interest rate component this is how they knew if they did enough or too little that's what it was fast forward they don't do that anymore now they turn a dial it's called interest on excess reserves so the fed goes aha we're lowering rates and they'll dial it down let's say they went from five four to five and they lower it what just happened nothing there's no extra cash in the market

there's so so all that we have to wait now i think my metaphor for this is like this was a sloppy transmission in the old days now it's a really sloppy transmission the gears are nubs right you you lower it and you sit back and you go there and now you have to wait for people who have a marginal decision we're going from five four to five suddenly they want to borrow more money for something and then that becomes part of the you know the overall transmission thing people who are expecting when the fed lowers rates is going to automatically mean there's more cash to find its way into the markets are going to be disappointed because that's not what it is that's right it's totally different landscape.

It's a little wonkish, but I think it's an important dynamic for people to understand, which is why my long answer is I don't care about what the Fed does with interest rates. What I'm watching for is when are they going to start QE, quantitative easing? When are they going to put more cash back in the market? Now, that's a different adventure, a different story. That's something we could talk about. I think interest rates are just a red herring. It's a nothing burger to me at this point. It's interesting, but maybe for a day or two in markets, maybe a week.

But it doesn't change anything. No, well explained. That is, and you're right. The quantitative easing, that's, what's really going to juice things again. And, and, and inflation to start getting out of control. And, and quite frankly, you know, I'm reading an article right now. I'll finish up this afternoon about how the feds basically just not the fed. The treasury has been effectively trying to bring quantitative easing into the market by focusing on short treasuries because they're liquid. They can be laying out a lot easier. Not educated enough on it yet to completely cover

it, but that has had some effect on these markets since the Silicon Valley bank crisis. But you're right. That's the real kicker of where lower rates is going to help government debt and some of the debt that's out there, but I don't think it's going to change things immediately. With that, Paul, thanks so much for your time today. Listen, if you want to take advantage of Paul's amazing insights, his amazing team, please go to peakfinancialinvesting.com. Fill out a simple form. This is if you have a portfolio, you understand that you need to talk with somebody who understands and sees the world the way you do. And you do. That's where you go to do it.

Peakfinancialinvesting.com. Hope you enjoyed this conversation. And we'll be back next week with more Financial University information. Bye for now. Thank you.