Latest / The Financial Exchange Show / Why are bonds slumping around the globe?

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Why are bonds slumping around the globe? · The Financial Exchange Show

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Face is the Financial Exchange with Mike Armstrong and Mark Fandetti.
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Speaker 2: Good morning, Happy Tuesday, and welcome back to the financial exchanges.
1:19
Market seem intent on breaking their six week winning streak
1:23
here with the Dow, SMP, and Nasdaq all in negative territory.
1:26
To start off the show this morning, we've got earnings
1:29
news General Motors, GE, Verizon, Philip Morris all reporting earnings
1:35
before the bell today. Tomorrow after the bell, we'll be
1:37
hearing from Tesla sorry, T Mobile, IBM after the bell,
1:43
Coca Cola, and Thermo Fisher before the open tomorrow, and
1:48
then continuing down Honeywell, Union Pacific, SMP Global all reporting
1:52
earnings on Thursday, among ups, among others. We've got cheesecake
1:57
news in the stack today, but we're going to start
2:00
things off. Rather than cheesecake, which I do wish we
2:03
could start every show with cheesecake, We're gonna start off
2:06
with bonds instead. There's been a thank god, well not
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a cheesecake.
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Speaker 3: F Oh you're making me hungry?
2:13
Speaker 2: Oh okay, at ten oh seven, that's not a good thing.
2:16
We got a lot of show to get through before lunch.
2:19
Talk to us about interest rates, because the Fed has
2:23
made it pretty clear that they are on a rate
2:24
cutting path. And yet yesterday we saw the ten year
2:28
yield back over four point two percent, first time that's
2:31
occurred since July of this year. So you don't have
2:33
to go back years, but you have seen a pretty
2:36
big swing back in the other direction when it comes
2:39
to interest rates on market driven bonds. And I want
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to get your take, because there's some of this that's just, hey,
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this is a growth economy. There's some of it that, hey,
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this is politics speaking right now, the Trump trade. There's
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some of it that's just, hey, this thought it was
2:56
gonna be a recession and we're not there. And so
2:58
this is logical, but probably a big shift from where
3:01
people thought it was going to go when they heard
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the Fed was cutting rates by fifty basis points.
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Speaker 3: And I'm glad you phrased the question that way. What's
3:07
going on with interest rates? Because they're not a monolith,
3:11
so to speak. There are as we all know, there
3:13
are rates on mortgages and cars, and what you get
3:17
on your money and what you get from others when
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you lend your money out. It depends to whom you're
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lending in for how long. The benchmark for all interest
3:26
rates really globally is the treasury you curve, And since
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the FED lowered its short term target rate, which is
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the only thing it has some semblance of control over
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the very short end if you like, of the treasury
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you curve as you would expect because the Fed can
3:41
throw its weight around on the short end of the curve.
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Short term rates have indeed come down. Longer term rates, though,
3:46
have gone up. Yeah, So I think you're asking exactly
3:49
the right question what's going on? And the only honest
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answer is, well, nobody really knows, but we have to
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speculate what drives long term interest rates. Well, you need
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to be compensated if you're loaning money to somebody for
4:01
the time that you're going to part company with your money,
4:04
and the risk that they don't return your money, and
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the risk that inflation turns out differently than everybody currently
4:10
thinks over that time period.
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Speaker 2: So let's start with treasuries then, because generally considered to
4:14
be the risk free borrower, the world's benchmark, the world's
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benchmark would be the United States government generally considered to
4:20
be the risk free borrower. So you take that piece
4:22
out right. You generally remember risk when loaning money hit
4:26
States government. You say, no credit risk. You do have
4:29
other risks though, so inflation inflation risk time? What could
4:33
I be doing with my money elsewhere? And perhaps that
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inflation expectation is once again picking up?
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Speaker 3: Could be you mentioned the so called Trump trade, which,
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as I understand it means that means something a little
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different than it did in twenty sixteen. You may recall
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when Donald Trump won in twenty sixteen, it did take
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markets by surprise. Initially, bonds yields went down by a
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lot for about three hours that night, and then over
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the following couple month months they went up pretty much relentlessly.
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The reason is that the belief was that his economic
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policies are going to be stimulative, and indeed they were.
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Growth was okay in the last year of Obama's term,
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but it picked up a little bit in the first
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couple years of Trump's term. Why he cut taxes, right,
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that's putting money in people's pockets. They spent that month.
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Now we doubled the deficit before COVID was the cost
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of that. But it was stimulative, there's no denying it.
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Bond rates went up by a lot. What will the
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Trump trade be. What's the motivation for the Trump trade
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this time? Will his policies be inflationary again, possibly cutting
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taxes in a three percent or so growth economy, stimulating
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demand when demand probably doesn't need to be stimulated, could
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probably be inflationary. The tariffs, if he follows through, nobody
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knows whether or not to take him seriously. Maybe it's
5:44
just him being coy.
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Speaker 2: But if he.
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Speaker 3: Follows through, tariffs are taxes, they will push prices up.
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Whether or not those price the rate of price increased
5:54
persist depends on what the FED does. Fed's going to
5:57
be faced with a challenge similar to the challenge it
5:59
faced when supply chains gnulled up during COVID. Do we
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accommodate this tariff shock or do we push against it
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to prevent expectations from going up. It's going to put
6:09
the FED in another pickle, and then he's going to
6:11
be brow beating the FED all day long, which he
6:13
loves to do, beating up on Jay Powell or whomever.
6:16
Speaker 2: So I guess blame it where you want in terms
6:19
of the interest increase in interest rates, whether it is
6:22
a play on the Trump trade, which you know to
6:24
be fair national polls possible, Yeah, I mean sure. I
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mean national polls have narrowed by a good one and
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a half percentage points towards Trump over the last thirty days.
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Speaker 3: I'm just I'm assuming for purpose of this conversation that
6:36
he wins. Not necessarily what I believe, but what the
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heck do I know? But let's for fun assume he wins.
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It's easier to Yeah.
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Speaker 2: So could it be part Trump trade? Sure, yeah, it
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could be part Trump trade. The general expectation is that, well,
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let me put it this way, there's a higher expectation
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of Trump and the Republicans sweeping the House, Senate and
6:55
White House, then there would be at the stage of
6:57
Kamala Harris sweeping the House, Senate in White House. There's
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you know, maybe equal probability if you look at the
7:05
polling of Harris winning with a split Congress, but Harris
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winning with full control seems the least likely of scenarios
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according to some experts, which which I am not. And
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so could it be part of the Trump trade? Yeah?
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Speaker 1: Uh.
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Speaker 2: There's also plenty else going on too, though, right, I mean,
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since the Federal Reserve did that mega fifty basis point
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cut the data has been pretty darn good, right, Like,
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I don't think we necessarily need to attribute all of
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this to the quote Trump trade, assuming that he will come.
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Speaker 3: You never attribute anything to one cause.
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Speaker 2: Yo, the unemployment rate has dropped, the inflation rates have flatlined,
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the jobless claims have flatlined. You have not seen big
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upteakes and data that would indicate real concern about the
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state of the economy. And so, regardless of where it's
7:54
coming from, rates on that ten year Treasury which is
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the benchmark from everything from auto loan rates to mortgages,
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has moved up. And so taking a look now, according
8:04
to Mortgage News Daily, we got as low let me
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take a peek here in this recent cycle. Back in September,
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we were as low as six point one two percent
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on that thirty year fixed rate mortgage. As of yesterday,
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according to that same source, we're up at six point
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eight two it's the average new issue thirty year mortgage
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that's being tossed around there right now, and so that's
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a fairly significant upswing. It's still below where we were
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when is this. This is April of last year, so
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you know, potentially still decent news for the US housing market.
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Because April of last year you had things at seven
8:38
point four percent, so you know we're still well below that,
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but hey, rates are on the move there. Average auto
8:45
loan rates if you're the very highest credit quality, so
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seven eighty to eight fifty average interest right for a
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used car up at seven point three percent new car
8:54
five in a quarter. If you're the very lowest, maybe
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we shouldn't choose the two extremes. If you're middle of
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the road nine point eight percent on a new car,
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fourteen percent on a used one. And if you are
9:06
that's a credit six hundred and sixty sixty. This is
9:08
according to bank Rate, by the way. And then finally
9:10
the very lowest credit quality, you're looking at twenty two
9:13
percent on a used car and sixteen.
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Speaker 3: I mean, I got most economists who've looked at this.
9:17
I'm not a fiscal policy economist, okay, but they do.
9:20
They publish plenty of research. They want to get the
9:23
word out and it's not political. Let me preface this
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by saying it's not political. I know that's not going
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to make anybody think it isn't. Anybody who's looked at
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the Trump plan says it's the most inflationary deficit busting
9:34
thing to ever be proposed at the national level, and
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if you think about its elements, it is now that
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may not matter. Maybe tariffs are a good national security
9:44
tool to implement at this point. Maybe the risk presented
9:47
by China the national security risk Trump's no pun the
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economic pain that's going to be incurred if we raise
9:55
tariffs and then China in other countries he's talking about
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Europe and elsewhere. I don't get the rationale for that,
10:00
but I'll just stick to China. So maybe the national
10:02
security rationale makes it worth it. But this is a
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highly inflationary tack to take. The supply cuts to the
10:10
labor force that will happen if we deport large numbers
10:12
of people. That is also contractionary and inflationary. So there
10:17
is a big lump of inflation coming down the pipeline
10:22
here if he follows through even modestly on some of
10:26
what he's proposing. And it makes perfect sense to me
10:29
anyway that yields are going up. Now I'm attributing the
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entire rise in yields to inflation expectations, which is actually
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not the case. Some of it is really yields too.
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In fact, most of it is real yields going up,
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and we can get into that distinction later if you
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think it's useful. But it's not surprising that rates would
10:45
go up as his odds go up.
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Speaker 2: Let's take a quick break. I want to come back
10:48
and talk about some of those expectations around things like
10:52
inflation and growth, because there's a pretty decent piece from
10:56
James McIntosh in the Journal today about those simple economic
11:00
foundational understandings of how the economy works and how they've
11:04
broken down over the last five years. I want to
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get your take on that next here on the Financial Exchange.
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Speaker 2: There's a piece in the Wall Street Journal today, Mark
12:15
that I want to discuss the title of the article
12:18
simple economic explanations keep breaking down. Here's why. So they
12:22
run through a few of these. One would be that
12:25
government spending is going to lead to not only inflation,
12:29
but perhaps lasting inflation. And you know, massive expansion of
12:35
government spending will do that, crowd out other spending and
12:38
result in inflation. Second one that, hey, raising interest rates
12:43
dramatically over a short period of time runs the risk
12:46
of getting you into a recession. Let's kind of dive
12:52
into those two because the author seems to be I
12:56
don't know, pooh poohing or debating whether or not that's
12:58
held true. And so I think it is important to
13:01
contextualize and think about. So the government massively expanded deficits
13:07
in twenty twenty and continued those pretty dramatically over the
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years that followed, and we did get some of the
13:17
worst inflation we've seen in four or five four decades
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in twenty twenty two. Most economists that I think I
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read and were out there pointed out that, hey, this
13:29
might last for a long period of time because of
13:32
just how much money is sitting on cash balance sheets,
13:34
and to the surprise of many, it didn't, in spite
13:37
of the fact that government's deficits still remained at tremendously
13:40
elevated levels. Am I'm miscategorizing anything there?
13:43
Speaker 3: No, And I don't know of any economist who would
13:46
characterize it the way Macintosh does. He's a good writer,
13:49
but he's not an economist. What an economist would say
13:51
is is that if spending increases beyond the economy's productive capacity,
13:58
so if supply, if demand exceeds supply, basically, then there
14:02
will be upward all else equal, always an important qualifier. Sure,
14:07
it could put upward pressure on prices if the FED
14:09
does not push against that, if the FED does not
14:12
raise raids to constrain demand, inflation expectations. Could I'm just
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walking you through what the traditional models predict, So I'm
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kind of going through it in my head step by step,
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and these every one of these steps is all lse equal.
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So no economists would say categorically an increase in government
14:27
spending will increase inflation. That is what an economist would
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criticize as partial equilibrium thinking. That is a fancy way
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of saying in your head, you're holding everything else constant,
14:37
which you cannot do. You have to look at what's
14:39
going on bigger picture. So if demand is deficient like
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it was in two thousand and eight, two thousand and nine,
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there's a lot of stimulus poured into the economy, no inflation,
14:48
no inflation. If demand is deficient like it was in
14:52
nineteen thirty two, nineteen thirty three, they started at that
14:54
point pouring a lot of stimulus into the nineteen thirty
14:56
three thirty four pouring a lot of stimulus into the economy.
14:59
We were offering from outright deflation, like a twenty five
15:03
percent decrease in the price level. Can you imagine that?
15:06
You might think it's a great thing. My money goes
15:08
a lot farther. No, you don't not if you don't
15:10
have a job. Yeah, and then people start hoarding because
15:12
they think things are gonna get cheaper. You're in a
15:14
deflationary spiral. So the short answer is it depends. I
15:17
take issue with his characterization of what economists thinker don't think,
15:21
because they come in all different shapes and sizes. It's
15:24
like asking what people think, and economists, generally they try
15:27
to describe. You'll never hear them be categorical. They'll say
15:31
they have they found if you read, if you actually reads,
15:35
and it's tough to do because it's very mathy and
15:37
you have to know statistics. You need years of training
15:39
just to read a paper. So a lot of people
15:41
are turned off by it, and they adopt simple paradigms.
15:44
But if you read contemporary work by an economics person,
15:47
they'll say we found no effect, or we found some
15:50
evidence of an effect, and then they'll list all the
15:52
problems with their research. So contrary to popular depictions of economists,
15:59
they don't. And I'll just speak for my little area.
16:01
I don't run around saying this effect is definitive. I
16:04
say I found something it appears to be statistically significant.
16:06
But these are the reasons why I could be wrong,
16:08
and that's what people who do this type of macroeconomic
16:11
analysis do as well. So keep in mind again it's
16:14
always all else equal.
16:15
Speaker 2: I would also say too that like the government spending thing,
16:17
the way he categorizes it is that, you know, deficits
16:21
went up big during COVID and then never came back down. Well,
16:24
that's observably not true. There's still I believe, way too high.
16:27
But the deficit in fiscally year twenty twenty was three
16:30
trillion dollars. By twenty twenty two is one point three
16:33
eight trillion dollars. I mean still massively, I mean still
16:36
probably stimula, simply stimulative, but not on the scale that
16:40
three trillion dollars was. It's less than half of the
16:42
deficit that was in twenty twenty, and so I don't
16:45
think that gets categorized terribly. Well, here's where I'll phrase it.
16:50
Not a trained economist, I studied economics and underread it
16:54
does not make me a tribute.
16:55
Speaker 3: You at least know the lingo, and you know enough
16:57
to be humble.
16:58
Speaker 2: I've been surprised by the pace of disinflation. I've been
17:03
also surprised by the fact that we didn't result in
17:05
a recession in spite of the big increases in interest rates.
17:09
That's just my personal surprise, And I guess the concern
17:14
that I have is the lesson that some politicians out there,
17:19
namely two of them that happened to be running for president,
17:21
seemed to be drawing from the last few years, is
17:23
that massive amounts of deficits don't really matter for the
17:28
state of the long term economy. You've had Donald Trump
17:32
say as much. I basically said in an interview that
17:35
don't worry about the increase in the deficit because the
17:38
growth of the economy will take care of it, when
17:40
that's been observably untrue for the last several decades, and
17:45
I wonder if very recent past experience might not be
17:49
the best indication of what's to come in the future.
17:51
Speaker 3: I think that may have been true when Dick Cheney
17:54
said it twenty years ago deficits don't matter. We were
17:58
in a far different fiscal position than we had more
18:00
room to run. Interest rates were low and going down.
18:03
There was a global savings glut. That's probably not true today.
18:08
Both candidates' plans will increase the deficit and the debt
18:12
Trumps are about twice as bad on that score than Harris's.
18:17
Trump is waiving the problem away. Growth will take care
18:20
of it. He said the same thing in twenty sixteen.
18:22
He promised five percent growth. In twenty sixteen. You can
18:25
google that we got under two percent growth. No fault
18:27
of his, just the economy speed limit is way lower
18:30
than five percent. INNY Mike and everybody listening, it ain't
18:34
going to get any better than it is right now.
18:35
Three percent growth is above the economy speed limit, and
18:39
it's really good as a consequence, And we're running big
18:43
deficits to in part to generate that. The idea that
18:47
a small cut in taxes or a small tweak to
18:49
regulations is going to increase long term GDP growth is absurd.
18:53
No economists thinks that. The economists who work for him
18:56
or are hoping to don't even think that.
19:00
Speaker 2: The piece that I will remain as an open question
19:02
that I genuinely don't know the answer to, and I
19:05
think most commas would agree, is would either of the
19:07
candidate's plans dramatically increase inflation the short term?
19:10
Speaker 3: Trump's would by virtue of the big price hikes YA tariffs,
19:14
unless he doesn't follow through they would if he supports
19:16
ten million people take the model labor supply those two.
19:19
Unless there's some dramatic positive outside shock, absolutely they will.
19:25
Speaker 2: Let's take a quick break when we come back full
19:27
market update as they remain in negative territory here with
19:30
Wall Street Watch, Like us.
19:41
Speaker 1: On Facebook and follow us on Twitter at TFFE show.
19:45
Breaking business news is always first right here on the
19:49
Financial Exchange Radio Network. Time now for Wall Street Watch
19:55
a complete look at what's moving markets so far today
19:58
right here on the Financial Exchange Radio Network.
20:06
Speaker 4: Markets are in negative territory for a second straight session
20:09
this week, as traders are keeping a close sign the
20:11
bond market in addition to a new batch of third
20:14
quarter earnings this morning. Right now, the Dow is off
20:17
by half a percent or two hundred and nine points,
20:20
SMP five hundreds down over a third of a percent
20:23
or twenty one points, and the Nasdaq is dipping two
20:26
points lower. Russell two thousand is off by over half
20:30
a percent, ten year Treasure reeled up by one basis
20:32
point at four point one to nine percent, and crude
20:35
oil is up over one and a half percent, trading
20:38
a seventy one dollars in seventy five cents a barrel.
20:41
General Motors reported third quarter results ahead of the open,
20:44
beating earnings and revenue forecasts. The automaker said it was
20:48
within striking distance of posting record operating income this year
20:52
adjusted for one time charges. GM also hiked its full
20:57
year outlook, that stock jumping by seven percent. Meanwhile, three
21:01
M shares down by one and a half percent. Despite
21:05
the industrial company beating third quarter earnings in revenue forecasts.
21:08
Three M also raised the lower end of its full
21:12
year outlook. Elsewhere, Cheesecake Factory shares are flat after activist
21:16
investor JCP Investment Management built the stake in the restaurant
21:21
chain and asked the company to consider spinning off three
21:24
of its brands into a separate company. Verizenstock down by
21:28
three percent after the telecommunications giant not just a smaller
21:32
profit and flat revenue in the previous quarter as workforce
21:36
reduction charges dented its bottom line, and shares in ge
21:40
Aerospace down by nine percent despite the company beating earnings
21:44
in their earnings expectations and also lifting its annual outlook.
21:50
I'm Tucker Silvan, that's Wall Street Watch.
21:53
Speaker 2: People are apparently buying cigarettes. Philip Morris is up.
21:56
Speaker 4: Okay, So now you know what that is, I bet
21:59
is the huge sensation of zin. Have you heard about
22:02
the zen is?
22:03
Speaker 2: Are those the pouches? Yeah?
22:06
Speaker 4: Yeah, it's I don't do it, but they're wildly popular
22:10
right now. Okay, that's wall Yeah, like if you're.
22:17
Speaker 2: Dipping, it's not I guess it's not dip, so I don't.
22:21
Speaker 1: Yeah.
22:21
Speaker 2: From the Wall Street Journal, the Great shows signs of easing.
22:27
Uh So, I don't know if stock is still up
22:31
big this morning, but they're apparently seeing some slow down that.
22:34
Speaker 3: Will help these social security deficit get every get more
22:37
people smoking.
22:38
Speaker 2: Yeah, that's true.
22:40
Speaker 3: Up that mortality.
22:41
Speaker 2: Folks today is too right. Yeah, it's tuesdays. Okay, So
22:45
two days from now, Thursday, we're gonna be heading down
22:47
to the Cape. I'll be there there.
22:49
Speaker 3: Mark, You're gonna be there unless not unless you want
22:52
me there.
22:52
Speaker 2: I want you there. A bunch of us are gonna
22:54
be down on the Cape in Hyanas at the Double
22:57
Tree Resort and Suites for a live broadcast of the
23:00
Financial Exchange. I think you probably join. Mark. We'll be
23:04
doing a live broadcast of the show. Like I said,
23:06
from the Double Tree Resort in Suites we'll be hosting
23:08
a seminar with a lunch right after the fact. Joining
23:12
us will be Ed Lambert, the morning show host from
23:14
the WXTK, So you can come down meet Ed, talk
23:17
to the folks at Armstrong, and we'll be doing a
23:19
little back and forth Q and A with listeners there
23:22
after the show as well, just about questions they might
23:25
have about the upcoming election, about policies being mentioned from
23:28
either side. I don't know who's going to win the presidency,
23:31
but you know, we'll talk about the outcomes in one
23:33
case or another, and just more broadly, where markets are
23:37
right now and the tremendous growth that they have seen
23:39
over the last couple of years, what position that puts
23:42
us in looking at the next decade or two when
23:44
it comes to outlook on everything, and what it means
23:47
for you personally. Again, you can join us down at
23:51
the Double Tree Resortant Suites in Hyanas on Thursday, two
23:55
days from now, October twenty fourth, for a live broadcast
23:58
of the show from ten to new followed by lunch
24:00
with the Armstrong Advisory Group. To get more information and
24:03
sign up, go to Armstrong Advisory dot com slash events.
24:08
You can also call us at eight hundred three nine
24:10
three four zero zero one. But time is ending here, folks.
24:14
Two days from now we'll be doing this, So once
24:16
again it's Thursday. It's down in hyanas. You can get
24:19
more information by going to Armstrong Advisory dot com slash events.
24:23
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
24:26
registered investment advisor. Nothing in the ad or in any
24:28
Armstrong guide a specific financial, legal, or tax advice. Consult
24:32
your own financial, tax into state planning advisors before making
24:34
any investment decisions. Armstrong may contact you to offer investment
24:37
advisory services.
24:38
Speaker 2: All right, Mark, we've got our double dose of daily
24:41
stock market optimism, one from Bloomberg, the other from I
24:46
think MarketWatch. I'll give you the two headlines, the stock
24:49
market is soored in twenty twenty four why it isn't
24:51
finished yet? The other one the stock market is ready
24:53
for its melt up as investors ignore growing risks. So
24:59
I think I'm done talking about the fact that look
25:01
at valuations are high. There has you know, higher than
25:04
they've been at any point other than twenty twenty one
25:06
or the late nineties ahead of the dot com bubble.
25:08
I think most people Drew know that. If you don't
25:10
know that, you should know that, go look into it.
25:12
Valuations are yeah, you're probably right.
25:14
Speaker 3: We should explain. Is it worth taking a second?
25:16
Speaker 2: Yeah, talk to us about what those valuations I wanted
25:18
you to do.
25:18
Speaker 3: Okay, So we measure price of why I have you
25:22
price of stock, but the price of stocks relative to
25:25
earnings for the same reason you look at, say the
25:28
price of your house relative to square footage. It allows
25:30
you to compare one stock to another and stock to
25:33
itself over time and by any measure of so called valuation.
25:37
The valuation is just to catch all for price to earnings,
25:39
price to vote you've heard some of you heard. Price
25:41
to earnings, price to book, price to saleses are just
25:43
valuation measures. They're all at record or near record highs.
25:47
Now that gives some people the hebgb's because his store
25:50
or the jitters is because historically that has boded bad
25:56
things for future returns.
25:58
Speaker 2: Talk to us about future returns because it doesn't necessarily
26:00
bode bad things for immediate future, which when when you
26:05
look at what things look like over ten years after
26:09
those valuations, Leach peaks, that doesn't look great. But six months,
26:14
one month, I bet there's absolutely no core. I bet
26:16
it's close to a coin flip once you look at
26:19
it on short term basis.
26:20
Speaker 3: Yeah, lousy timing tool. As finance people like to say,
26:24
just because pees are high doesn't mean stocks are destined
26:28
for a fall in the immediate future. But there is
26:31
this eerily and uncomfortably high correlation between between the price
26:35
you pay for something today anything. You buy a house
26:38
at a peak, you buy a bond at a peak,
26:39
any asset, if you buy it when it's relatively expensive
26:43
by definition, you paid too much. By definition, your yield
26:46
is going to be low. That same relationship applies to
26:49
buying stocks when they're relatively expensive.
26:52
Speaker 2: So unless you buy into an argument that valuations have
26:55
somehow structurally changed and are permanently going to be higher
26:58
than they were ever before, which some have argued, and
27:01
I don't you know that's possible that that's true. I
27:03
kind of doubt it, but it's possible.
27:05
Speaker 3: There is evidence that the trend changed in the early
27:08
nineteen nineties. You can show that I've done the work,
27:12
others have done the work there, So I'm pretty confident
27:14
that something changed, maybe because of the burgeoning of retirement accounts,
27:20
they were available in the eighties, but they really took
27:22
off in the mid to late eighties. That may have
27:24
changed the way people thought about the risk of investing inequities.
27:27
They became willing to pay more for a dollar's worth
27:29
of earnings. That pushes up valuations. Others in the nineties
27:32
were attributing it to lower cap gains rates. You may
27:35
remember some of these arguments. Those of you were old enough,
27:37
they may they attributed it to internet based trading. All
27:40
of these things got us more comfortable with buying equities
27:42
and paying more for them. So I think there is
27:45
something to the argument that long term valuations aren't going
27:48
back to where they were in the seventies and early eighties.
27:51
And you don't need to know what these numbers mean.
27:53
But back then it was mid teens. Now it's high twenties.
27:57
Some people think it's got to go back to mid
27:58
teens again. Don't worry about what that number means, just
28:01
focus on the fact that one's a lot higher than
28:03
the other. So I'm in that camp. I think something
28:06
did change, not to say it won't change back, sure,
28:08
but this supports your argument that hey, just because things
28:10
seem pricey doesn't mean that they're set up for an
28:13
immediate fall, It probably makes them a little bit more fragile, though.
28:17
Speaker 2: So knowing that you and I are talking to each
28:19
other and we have no idea who's listening today, you.
28:22
Speaker 3: Know, I don't hopefully somebody.
28:24
Speaker 2: I don't know who's tuning in today, so I don't
28:26
know anything about their investment strategy. But how does one
28:28
go about approaching a market that you know, as we
28:32
just categorize, is what within the top ten percent of
28:34
all time valuation highs? Like, how does one go about
28:37
thinking about this market at this point?
28:39
Speaker 1: I think?
28:40
Speaker 2: Is it any different than any other time?
28:41
Speaker 3: It's what you tell your clients every day at Armstrong
28:43
Advisory Group. It's make sure your plan is consistent with
28:46
your time horizon and risk tolerance you need whether or
28:50
not you know it. You have a rate of return target? Said,
28:53
what the heck is a rate of return target? It's
28:55
what you need your money to do for you while
28:57
it's invested. Most people just savings. Not That's why you
29:00
don't put it under a mattress. You need to a at
29:03
least keep up with inflation, and then on top of that,
29:05
you want your money working for you. Some people with
29:08
more ambitious retirement goals, or who can't afford to save
29:10
as much, might need their money working harder over their
29:13
time horizon. Others less ambitious goals able to save more
29:17
might not require as high a require of a work
29:19
so called required rate of return. Sure, so it depends
29:23
on your goals. If your investments are aligned with your
29:27
required rate of return and spoiler alert, the higher your
29:30
required rate of return, the more stocks you need. If
29:33
your time frames align with your asset allocation fancy way
29:36
of saying your mix of investments, you're good, stick with it.
29:38
Don't worry so much about valuations. If you're retiring in
29:41
eighteen months though, and stocks are at an all time high,
29:44
and finance experts are warring about valuation peaks and the
29:48
consequences of them. Historically, you probably rightly would probably rightly
29:52
be asking, she's can I ride out a twenty thirty
29:54
forty percent draw down? So to speak?
29:57
Speaker 2: Inequities perfectly normal and possible for that time.
30:00
Speaker 3: That's goal based. That would be a goal based change,
30:03
not a reaction. Don't react, I guess is how I'd
30:07
sum it up.
30:07
Speaker 2: Is that a fair It is? And by the way,
30:09
plenty of evidence that, like I said, this valuations metric
30:13
is a garbage timing tool. Right. You could make this
30:17
exact same argument and you would have been compelling one
30:21
year ago. Yeah right, I agree, even valuations were really high.
30:26
Speaker 3: A year since nineteen ninety one, Mike.
30:28
Speaker 2: And if you had said, I'm going to use this
30:30
as a timing tool, what did you just miss out
30:32
over the last twelve months on the S and P
30:34
five hundred and thirty six percent not a good timing tool.
30:38
Let's take a quick break. When we come back, uh,
30:42
talk a little bit about Goldman and their views on
30:45
both the long term and then the short term when
30:47
it comes to a potential post election stock bounce. That's
30:50
next on the Financial Exchange.
30:51
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31:58
Speaker 2: A couple pieces from Goldman Sacks over the last week. First,
32:02
they came out with their projections for US equity markets
32:05
over the next decade, where they said they only anticipate
32:09
US equities returning three percent per year over the next
32:13
ten years, which again, anybody that throws out any number there,
32:18
I think is just wasting their own time and just
32:21
trying to make headlines. But I at least can come
32:23
from that.
32:24
Speaker 3: I wonder why they're doing it, though you may wonder
32:26
it's not just for like cocktail party chatter or for trivia.
32:30
You've got pension clients and most of us don't have
32:32
a pension today, but a lot do You still do
32:34
if you're a public sector employees should if you get
32:36
a legacy maybe benefit coming from a big company. They
32:40
pensions every year, have to make an assumption about the
32:42
long term return on their assets. The government makes them
32:44
do that. So they actually need you if you're their
32:47
investment consultant or your investment manager. Goldman does both. They
32:50
need you to tell their actuary, who helps them decide
32:54
how much to contribute or how much tells them how
32:55
much they have to contribute. They actually rely on these
32:59
and they're important to invent esters as a result in
33:00
these companies because you get a sense for what their
33:03
firm's pension liability is. The more you think your assets
33:05
is going to earn unless you have to put aside,
33:07
and the more you've got for reinvested a reinvestment or
33:09
to pay workers or stuff. So there are real world applications.
33:12
Speaker 2: And I think that's a reasonable thing to be doing,
33:14
just generally for a company like Goldman to put out
33:16
a very low expectation for the next decade of equity
33:20
markets returns based on where we are today. I think
33:23
that's a reasonable approach to all this. Scott Rebner from
33:26
Goldman Sachs last week saying that the historical patterns might
33:30
repeat themselves and the S and P five hundred could
33:33
increase another seven percent and end the year around sixty
33:37
two seventy I think is a completely useless tool when
33:41
it comes to forecasting and is not helpful in the least.
33:43
And maybe Scott Rubner has a way to place bets
33:46
on this outcome, maybe he has a degree of certainty
33:49
as to whether or not this is going to happen.
33:51
But I would just ask all of you listening to
33:54
ask yourselves, Hey, do I feel I have any advantage
33:57
over the rest of people to determine what is going
33:59
to happen with markets between November seventh and December thirty first,
34:05
because I see no reliable way to get it.
34:07
Speaker 3: It's interesting there is an election November effect, and for
34:12
what it is worth, it is significant, meaning it's probably
34:15
not due to chance. What it's due to I don't know.
34:17
I did this after reading the article this morning. For
34:20
what it is worth in presidential So on average stocks
34:24
in November, on average stocks in any month for perspective return,
34:29
about point nine percent. So the average is positive as.
34:31
Speaker 2: You would expect any month point nine, eighty month at
34:34
point nine.
34:34
Speaker 3: So there's your baseline.
34:35
Speaker 1: Yep.
34:35
Speaker 3: If you had it, you didn't know what month you
34:37
were in, and you just said a guess, you guess,
34:39
we'll positive close to a percent. Presidential election years, the
34:42
numbers one point eight percent.
34:44
Speaker 2: In November, yep.
34:45
Speaker 3: So that's every four years in November, thank you. Non
34:47
presidential election years, it's one point six percent, so a
34:50
little higher. That's not that's not significant though. Statistically it's
34:53
too small difference and we don't have enough observation.
34:56
Speaker 2: You mean, the one six versus the one nine is
34:58
not a.
34:58
Speaker 3: Six one six versus one. It is not significant, but
35:01
it's still higher in presidential election years for what it
35:03
is worth.
35:04
Speaker 2: So Novembers on average are better than other months of
35:07
the year. Uh, and Novembers during presidential election years are
35:13
on average slightly better than other novels.
35:15
Speaker 3: The second part of that statement is correct. But what's
35:17
weird is that congressional election only years, So this is
35:21
November and this is the last number I give. I
35:23
promise probably not two point eight percent, and that is
35:27
because it's so big. It does I know it doesn't
35:29
make any sense. But it could be that people are
35:31
just relieved to know the outcome. It could have nothing
35:34
to do with it. It could be holiday shopping, uh, anticipation
35:38
of an increase in retail revenues, or so. I have
35:41
no idea what the effect is due to, but there
35:43
is a little bit something there. Again, I only looked
35:45
at the month of November.
35:46
Speaker 2: So I don't know. I guess my takeaway from that
35:50
is if you're basing your investment theory on something like that, then.
35:54
Speaker 3: But Mike, what serious person does come on some specul
35:58
Oh you have clients that do. No, No, I don't
36:01
want to insult anybody, No.
36:02
Speaker 2: I don't. But you know, my guess would be just
36:05
about everyone on the robin Hood platform.
36:08
Speaker 3: Well, they're they're just they're speculating. If it wasn't there,
36:10
they'd be at plane Ridge or something.
36:13
Speaker 2: Yeah, yeah, yeah, they're just betting. It's gambling. It's it's
36:18
not investing.
36:19
Speaker 3: What's their average balanced bucks and they're wiling away the
36:21
time on that. Alternating between that and TikTok er.
36:25
Speaker 2: I do wonder use them. I do wonder what the
36:27
average balance is, and it ain't hot head account. I
36:29
bet we could. I bet we could look that up
36:31
fairly easily. But nonetheless, let's let's move on General Motors
36:35
reporting earnings and guidance and topping Wall Street expectations really
36:40
across the board. I had two main takeaways from General
36:43
Motors earnings. Neither of us mark drive a GM vehicle
36:46
to my you're still drive a Corse wagon. I have
36:50
never actually owned a General Motors car. I'm trying to think.
36:54
O't afford never a General Motors.
36:55
Speaker 3: I had nothing but GM until I was in my thirties.
36:58
Speaker 2: Nonetheless, they reported that their average transaction reprice remained over
37:03
forty nine thousand dollars for the quarter from July through September.
37:07
They are making money handover fist here in North America.
37:11
Where they are not doing so well remains China, where
37:15
they posted a one hundred and thirty seven million dollars
37:19
loss in China just you know it results of a
37:24
continued restructuring attempt there, as they face far more competition
37:29
from local car manufacturers than they did just a decade ago.
37:32
And I have no idea how that company's ever gonna
37:34
sell cars in China. Tucker, did you have something for me?
37:37
Speaker 1: There?
37:37
Speaker 4: No? Keep calling?
37:38
Speaker 2: Okay. Revenue during the third quarter was up ten and
37:41
a half percent from roughly forty four billion dollars a
37:44
year ago, and net income during the quarter rose slightly
37:48
as well, to three billion dollars. But I just I
37:51
continue to wonder how a company like General Motors can
37:55
have a transaction price over forty nine thousand dollars, because
37:58
I can tell you that for the vast majority of Americans,
38:01
you should not be spending over forty nine thousand dollars
38:03
on your next new car. Let's take a quick break,
38:07
but a lot more to cover in the second hour
38:10
of the show, including Wall Street worrying about renters and
38:15
younger borrowers in particular. We'll cover that next on the
38:17
Financial Exchange