A (3:18)

You bet, you bet.

B (3:20)

So let's start out higher level here with you because, and I'm really interested to see sort of how you approach this, which is, you know, given your experience with declines like this in your entire career, like what advice would you give investors? And it's not specific to the tariffs. It's like these types of things that disrupt markets as much as they have and they don't come along a lot. But you know, what would be your general advice to investors on how to get through, through them?

A (3:49)

Well, I've always told my wife and my kids who have little portfolios, but I've always told them when it goes down, just don't look until it goes back up. That's because it's not, not all that bad of us because, because oftentimes when you get into these emotional periods, you end up making some bad decisions. And it's true on the top of markets too, I think. You know, when you're, when everyone logs in every day to count how much they went up, that that should tell you something that probably it's, it's a little high. I would, I guess I don't see to me so far in this one, I don't see it's a lot different than a lot of just normal corrections that we've had and for normal reasons almost. And I know one part of it is the tariffs. But I actually got bearish and defensive in mid December. And when I started writing that piece, I said what was bothering me at that time was the old investment adage of buy on the cannons and selling the tropics and so as we headed towards year end last year, I could just hear most of last year we spent with nothing but cannons. We had two world global geopolitical conflicts going on that keep getting worse. We had a war for the White House that was a constant battle all year long. We had a Fed that refused to fees and just kept tightening and raising interest rates even though inflation was long past over that cycle. And I think too. So there was a lot of cannons that sort of kept me in if you will, a lot of things people are still worried about. But then what happened? Well, the, the wars, they have both of them. You know, there was a lot of truces or pauses going on, people saying we're going to get these taken care of. And it felt like that was going to happen as they're winding down. The war for the White House of course ended. That was over. The Fed actually started easing for the first time in the entire bull market in mid September. And so we came into, into the new year with, with a new Fed, a new President and it all felt with all the promises like a new era we were entering into. And all I could hear was trumpets and the cannons sort of died away. And so to me that was one of the first things that got me to think about what's going on. It just felt like I heard too many trumpets wailing. And then secondly, and probably most importantly was what causes almost all pullbacks in my view was economic policies turned restrictive and contractionary. And you go back the 10 year yield went from 360 in September up to 480 by mid mid January. The dollar hit by mid January real terms reached just a couple percentage points shy of its all time record high in 19 March of 1985. And it had risen about 10% just over the last 12 months in January. That is that you could argue we had the almost one of the most restrictive US dollar policies ever since it's floated in the early 1970s. We had money growth and still do by the way. We have monetary M2 money supply growth which is less than the rate of nominal GDP growth and it's insufficient pace to maintain the growth rate of the economy. That's why the economy's been slowing almost every year for the last three or four years because monetary growth just isn't sufficient. That wasn't a problem when you had real GDP of 5 slowing to 4 or 4 to 3. But now we're at 2 and a half and we're going to slow to 2 or less. And every time that M2 mold growth has been below the nominal GDP growth rate. The next year, real GDP growth slows. And since 1960, it slowed on average by a full percentage point. And then we had a little uptick in inflation modeling. Prices went up the last part of last year. That's why the Fed quit, ultimately quit easing. So you think about the tightening, higher rates, higher dollar, lack of sufficient money growth and an uptick in inflation. What's that going to do with the lag? It's going to slow things down. And so I felt like we were going to head to a period where real GDP growth in 2025 was going to hit to 2% or less, the stall speed, the unemployment rate probably ticks up and we're going to have a recession scare. Now, I would say, I haven't talked about tariffs yet, but I would say that's mostly kind of what's kind of played out. You got to remember that the s and P500 in mid March was down 10 and a half percent from its high. So we fell at least by closing levels, what, to 17 and a half percent the other day. So the President's presser caused it to drop another seven, seven and a half percent or something. But the reality is more than half of this correction was done long before the presser even came on. The came on the scene. I would argue that the real underwriting catalyst was tightening policy leading to a slowdown in resurrecting recession fears. If you think about it, since the Fed started easing in last September, that was about the first time that imminent recession fears for a little while dissipated people. I guess not now we're okay. Fed made it in time. We're okay. Up to that point, there was chronic recession fears because of the inverted curve and other reasons. And my point about that is that it almost stands justice about the time we forget about recession is when then we have a real chance of getting one. And so I would say to me, those are some of the factors. Now, the tariff was certainly a piling on. And to me, a tariff is not inflation by any stretch of the imagination. I think that's a silly premise put forth by the Federal Reserve, but we'll come back to that. It's a very. It's a tariff by any other name is a tax. And if, if, if President Trump was perceived to come out and say, I'm going to raise taxes on all of global output across the world, no one would be saying that that's going to have inflationary fallout. Everyone would say that that's a restrictive contractionary force pushing us in the direction of recession. And so that this is another contractionary force on top of what was already there, adding to slowdown fears in a bigger way. And so what the reason I bring this up is, to me, what, what I was concerned about last December was policy tightening that had already occurred irrespective of tariffs. And I saw the trumpets blaring louder than the cannons, which tells me there was complacency building in a, in a manner. And we also had high valuations and all that other stuff. Okay, so a lot of those things you think about, that's pretty normal stuff to get a pullback, which is kind of what we got. And we've got a couple of added ingredients here, but you always have added ingredients in every one of these that are kind of unique and new. What gives me the most, I guess, confidence about this is a couple things. We can go back on the tariffs, but to me, the experience of the world, and particularly the United States, and particularly in the modern era with tariffs on a broad scale is minuscule, really minuscule. We had one tariff period in our histories, Smoot, Harley, and that was enacted in the middle of 1930, when the economy was already in a recession or even a depression. By then, we didn't know it. I don't think it was Smooth Hartley that caused it. We don't even know if it would make it worse because I think that all would have happened even without that. But that's what everyone faces their judgment on about this is, oh, man, this is a disastrous depression or event because we, we have never done anything. We just don't do this in the world. The only other time we had any increase in tariffs was in the mid-50s to mid-60s, from about 5 to about 8% rate. And during that period, the economy was great through the whole thing. What Trump is talking about so far is around 20%, somewhat similar to what we had 1930. But we have no precedent to know if you do this when you're not already in the depression, whether that is necessarily a death blow. We don't know that we. It isn't, but I'm not so sure it's necessarily as bad as people think. It's certainly a tightening policy, but we already had some of that in place. Second thing, and then I'll quit here on opening is I'm amazed and have been for years here at how strong financially the private sector of this economy is. And it is for one reason, really fear that has really been elevated and never gone away. I would Say it started with the great financial crisis of 0809 and the tremendous bankruptcies that occurred and housing loss and so forth and bank problems. And then it's been exacerbated by going through a, a domestic death count pandemic event. And Also then by 2022 and then ongoing since then, we have had the confidence levels as measured for the consumer sector kind of persistently go down and never come back up. We're still the current consumer confidence superset is lower than about 90, 97% of the time right now since they've been keeping that back to 1960, even though we've been in a five year uninterrupted economic recovery in a three year bull market. My point about that is because there's been so much pessimism, there's been a lot of cautiousness. And so what have we been doing since 08 or 07? Household debt to debt to income ratios have been coming down steadily. They're now as low as they've been in decades and the debt service ratios are almost at a record low since we've been keeping the data back to 1980. Households are in the best balance sheet shape they've been in decades and they're loaded with excess buying power, excess dry powder liquidity. $7 trillion in household mutual mutual funds sitting on the sidelines. That's about one and a half times the amount of mutual funds, a cap money market mutual funds that existed at the worst of the 08 crisis. It's about one and a quarter times the worst of the pandemic. They're sitting on a lot of dry powder. Then lastly, they're pessimistic, which means they're cautious. And everyone's been expecting a recession for so long. It's hard to get a recession when your players are all financially healthy, have oodles of excess liquidity and they're all been cautious. And so I think it's going to be difficult to recess this economy for that reason. Everyone is in such good financial shape, it's hard to bring this thing down. And so to the extent that this event, this is not like 2000 when we had this run up in the stock market that was predicated on companies. The only attribute they had was.com in their name. They had no earnings or sales, didn't matter. This is not like that. This is not like 0809 when we had many, many millions of homeowners that had bought way out over their skis and banks that were bad loaned up to their gills. This is Nothing close to that. We're almost the opposite of those two things from the standpoint of durability of the private sector economy. That to me gives me a lot of confidence, emotion can take this thing anywhere and that's going on. And there's some real bite to this because I think economy is going to slow and earnings are going to slow and those are real events which typically leads to corrections or even bears. But I do think that there's quite a bit of staying power in the private sector which gives support and then I've liked what I've seen so far in terms of since we've really had this collapse now, there's a lot of good things that have been going on. I think that will lead to revival at some point. I, I just last Justin last comment. I, I had the best times, I mean in history, not just me say, but the best time in history to be a buyer not as a trader necessarily, but as an investor or when yourself and everyone around you is emotionally spent and excited and over the top with gloom and dew. That is, that's always been a good time, not necessarily for next week, next month, next few months, but it's awful good probability for a year out or more a great time to buy.

B (17:36)

So there was a lot there and I think we'll definitely spend some time unpacking some of your thoughts on the tariffs.

A (17:42)

Yep.

B (17:43)

And their possible impact or maybe why they may not impact things as much as people think. But I, I wanted to ask you, did you see yesterday when I don't know if you happened to see on CNBC when they announced that someone thought Kevin Hassett said there was going to be a 90 day delay on the tariffs and the, and the S and P spiked like it was like a thousand point turn in like a minute. And then you know, they, they were trying to verify that and they couldn't verify so the market ended up going back down. And I'm just wondering like both on the declines and on the recoveries and I can't help if I'm like anchoring to like what happened during COVID and that you know, 30 day waterfall decline and then the bottom and then turning out of that on a rocket ship but do you think there's any evidence to show that like declines are happening faster and also recoveries are happening faster or what would you say to that?

A (18:43)

I don't know if I agree with that Justin, so much. It could be I haven't studied it. It might be. I, I get the point you're making it's legitimate point and I'm just answering this on gut, but I don't know. I've seen a lot of other periods like that. Maybe not, you know, people make a lot because there was only other four of the periods where we had 10% decline over two days. Right. And, and I get that. But we've had a lot of periods like what we experienced over those two days, whether it was quite the magnitude or not. There's been a lot of them just in my time going back a little, you know, 40 years. I certainly experienced some of those where they were really dramatic. The worst one of course was 1987. But I just think, you know, we, we, we, we blow the vix up over 50 and you're going to get just tremendously wild swings and we're going to have that for a little while. And that kind of happens after any, any one of these complete dives in the stock market. That certainly was the case in 08 09, late 08 into 09. It was certainly the case after 87, sort of the case after 2020. You know, there was quite a bit of that even after dot com, even though it didn't stream on any one day. And I, I don't know if I really see that that's irregular or uncommon. If you go back further, you certainly see some tremendously prior to World War II, there was tremendous volatility that were very comparable to this almost more frequently then than what we have in more the modern era. Dramatic moves. I, I just think that, you know, I, I get your point is some, I, I can even understand why that might be the case with, with the, the, the pace at which news travels today. We're all on our phones or we're all tied in and every tick is so important. You know, when I started the business 40 years ago, I didn't even know what the market was doing until I went to lunch and saw in the local banks, you know, digital clock, what the Dow was doing for the day. I mean we would just study annuals and look over information and not know until midday. So today it's every tick and we watch those tick Bloomberg machines and the like. I think that you can make an argument that that's exacerbating, exacerbating volatility, but just living through it. I don't know, I don't know if I really see that because I still think that there's been plenty of episodes that I've even lived through much like we had last week. Maybe not exactly that magnitude but, but I will say that I, I almost look, if you want to end the crisis, it seems to me that's what you kind of really need is that kind of fear and panning that you get people to rise to that level. And if you do, that generally is a good sign of you're closer to the end than be getting over.

C (21:44)

What do you think going back to the tariffs, what do you think about the economic arguments for the tariffs? I mean it seems like I'm, I'm on Twitter and I know you are pretty regularly as well. It seems like most economists are not very in favor of the tariffs. But you know, the arguments in favor have been, you know, around reshoring or around we're going to generate revenue to reduce income taxes or you know, global trade is unfair to our disadvantage. And these are helping. Like how do you think about those economic arguments?

A (22:05)

I'm not an advocate of tariffs. I think they're, they're much like other taxes or interventions into the free marketplace. They lead to deadweight losses of activity in the economy. This, this is no different than a tax use of taxation or regulation. They all have the downside of creating deadweight losses. And I, personally I, I, I don't understand bringing stuff back to the United States because I think there's a lot of things we used to do in this country that we will no longer do. And the reason we won't do that anymore because we no longer have a relative competitive advantage. There's a, in trade, there's a thing called relative converted advantage. And every economy, even the worst economy in the world, has a relative competitive advantage in something. Not necessarily an absolute advantage, but relative advantage, which means they're better suited to produce that. Relative to other economies we have moved away from, from being a low skilled labor heavy economy. Other economies have come on the scene that are low skilled labor heavy. And there's many things that they can do on a relative competitive advantage basis a lot better than the United States can do. It's not that we couldn't do it better, but in order to do it we'd have to take higher skilled labor and apply it to these, these low skill processes and we give up greater value of what we, we sacrifice to do that, that we gain by producing the low skilled job. So to me, I, I don't think we'll ever bring them back because they have a, they, they now have a, a relative pure advantage based on their resource makeup, which is different than our resource makeup. And, and we really can't compete on a relative competitive advantage basis, nor should we. It'd be a failure if we did take it back. So if, if that's what Trump is after, I think that's deadly wrong. Now I, I think that any tariff in the world creates inefficiencies, and you could argue unfairness. And so I, I totally get the argument that why should they have any tariffs on our goods? I, this, let's just all compete. We all have relative comparable advantages. Let's do what we're best at and go at it. And I do get that. And if we can create a situation to lower all tariffs of the world, that'd be a good thing. That'd be a good thing. And there's there, I think he makes some decent points about, you know, we'd probably sell some Ford automobiles in Japan if there was no tariffs. And, and likewise. But to me, there's a much better way to, to get at this if you want. If, if his whole idea is to make us more competitive by, you know, raising tariffs on foreign goods, I would argue that a much better way to do this is drop the value of the US Dollar. I wrote a piece about this just recently. A few months, just a couple months ago or a month ago, I can't remember. But my, my little feeling is the dollar, in real terms, as I mentioned, is close to almost record highs going back to 1970. Since it floated, it's, it's got really close in January to its highs that it reached in March of 1985. And it's up 50% over the last decade. 50% over the last decade, which would be equivalent to putting, increasing, in essence, the dollar when it goes up 5% is like putting a 5% tariff on every US product that there is, every US product and service. It instantly makes foreign products 5% cheaper to domestic consumers, and it instantly makes all US products 5% more expensive to foreign buyers. That is the ultimate tariff destruction of US competitiveness. And we've allowed this to go up 50% in the last decade to one of its highest levels ever in our history. And we're wondering why we have a trade depth. I mean, to me, if you want to make us more competitive, drop the value of the US Dollar. If the dollar comes down. I know that that goes against people's idea that somehow a strong dollar means a strong America and a good America and the right thing, but I don't think it has anything to do with it. It's like an interest rate. It's no different than that. If we have the highest interest rates in the world. No one would be saying that that makes us successful, but somehow we do that with the value of the dollar. I think the fact the dollar's been so high and blown a hole in our trade deficits for quite a while is primarily because we have held the rate structure in this country so disturbingly high relative to many, many things you can look at, including foreign rates. And when you do that, you drive up the value of the US Currency. So I think that would be a much better way to attack this situation, would be to cheapen the value of the dollar if we really want to increase our, our competitiveness. I, I wholeheartedly agree, Jack did tariffs or contractionary economic policy? As I say, it's hard to judge, I think, for anybody just how contraction they are as opposed to, let's say, raising taxes out of the federal budget deficit or something. I just don't know if we have enough data to figure that one out on a broad, on a broad scale. But it's certainly a contractionary force. And you know, if, if, if we effectively took tariffs to infinity all across the globe, it wouldn't mean that there would be no economic activity. That's not what it would mean at all. Every, there'd still be economic activity. It's just we totally isolated within our own borders. It'd just be what you could generate among yourselves each economy. That would be a huge loss in global activity and for every economy, but it wouldn't mean that it'd go to zero, you know, over that situation. So it, it is different. I mean, if you raise rates enough in the United States by itself, that could do, it won't take it to zero, but it could do a lot of damage on the domestic economy. Whereas if I, if I disallow any foreigners to buy from us, that's going to hurt us. No doubt about that. But there's still a lot of activity that goes on outside of that. I, I just, as far as raising revenues, I think it's a horrific way to use it might be among the worst ways to do it. I, if, in fact, I guess my own cynical way, if this is what Trump has chosen, then I would argue that it was. It's because he found this loophole to go around any checks and balances. And I'm just amazed we can implement this type of tariff program in this country without having to go through any of the normal checks and balances set up by our founding fathers, that is the legislative process, or even maybe the, the United nations, because it's a Global tax. We. We didn't have to go through anybody. You could just have this one guy in the White House decide to do this, and he did it. And it might be that, you know, he also wants to raise revenue and he can't. He can't pass anything through Congress, so he could just do it this way. But I. It's a. It's a horribly inefficient. And not only that, but probably, you know, very regressive and a lot of other problems with this type of taxation for revenue generation.

C (29:48)

I think that last point you made is not getting enough coverage and is a really important point, which is, should one person be able to make this kind of decision? I mean, you've got a lot of people in favor of these or against these, but I mean, the way the US Is meant to be built is with checks and balances. And we basically have a situation where, whether you agree or disagree, one person is making all these decisions in these press conferences, and it has a huge, huge impact on the world.

A (30:10)

I think it's a bad. It's a trend that's been happening across the country for quite a while. I would argue it's getting worse and worse. And I would argue it started with Obama with executive orders. Okay, the use of those. And now basically all Trump has done in his entire office is executive orders. Hasn't even gone to the. I'm amazed by how there's been a blackout in the Congress, really, since Trump took office. Really no news. No. No need to even know what they're doing. There's a thing called. I think with this specific thing, what I understand I could be wrong about this, Jack. I'm not a political expert, but I think it's because you call them tariffs and not taxes that it goes around the congressional mandates to go through Congress. But presidents have also used, which was a big battle in the last thing, emergency premises to be able to do things after declaring the state of emergency. We used that in Minnesota here by Governor Waltz, used it dramatically in the aftermath of the pandemic for quite some time to do a lot of stuff without having to go to the legislative process. I don't like what's happening with executive orders or with emergency powers or with. Worse than. All of this to me, is using the courts as a substitute for legislation. That is a disgrace and a misuse of what this was set up for in the first place. But that's kind of what we're falling into. You know, if we do have a challenge against this, it will go to the courts, it'll probably be something that will have to go to the Supreme Court and determine whether a tax is a tariff or a tariff is a tax, for example. But it, there's a reason in the brilliance of our founding fathers, they created one of the most frustrating, irritating systems ever to run a country. And they did it on purpose because they really didn't want much to be done. I think they set up this comical process. We got 450 people over here, 100 people over here with one person over here. And if you guys all agree on something, you let me know, that's good. But otherwise we're just going to let the private sector manage this sucker. And what we've done, that I think worked pretty well, except it's just so ridiculously frustrating and we can't ever get anything done. And there's truth in that. But I think that's what our founding fathers thought was best. And now we've got players that are totally in running that process to do things, but lends itself to a dictatorship is what it does. And I don't think it's a healthy development.

C (33:01)

How do you think about forecasting in a world like this? This, it would seem like, I mean, we know inflation and GDP and things like that are very hard to forecast no matter what. But as a forecaster, when you've got a situation where there could be a press conference and things have completely changed and then there could be another press conference and things have changed the other way, like, how do you think about, like forecasts in an environment like this that's so volatile and it's not something you can use data to try to figure out.

A (33:22)

I still do it the same old way approach.

B (33:33)

The wind's blowing.

A (33:34)

That's right. You know, I, I think, I don't know myself, Jack. I think the truth is that I, I, I still come back and the truth is that I not sure all of these events really change that much overnight. I mean, I, I just don't think it's the case. I think, you know, long before he gave a presser, there was some idea that Trump was going to raise tariffs. And, you know, that was out there. And I think that what I was, what I was saying earlier too was there was to me, what's, what's driven a lot of what we have done here was the tightening of policy that went on long before we even came into Trump's term or started this year. I think that's the really callous. If we didn't have that, if we had the opposite coming into this could be a totally different reaction to this from, from everything. And I, I, I know it seems like, like I, I, it's kind of like the Fed meetings to me. I, I'm not sure we gain a darn thing from the Fed pressures that we didn't know prior to them even meeting. But we spent two or three days of this absolute volatility swinging all over the place. And then a week later it's just like we're back to where we were. And so you can say that, oh my gosh, you know, how do you, how do you manage money through what the Fed may say or do or whatever. But the reality is it creates a trader's haven and I absolutely agree with that. But I don't know how much impact they really have, you know, over the course in terms of the investment climate as far as day in and day out. Comments going on now, it matters that he enacted tariffs. I'm not saying that doesn't matter. It does matter. But that, that didn't necessarily happen all that one day it would, it was becoming, it was coming for some time. It came within the construct of a market that was already in a correction prior to the announcement, you know, so that all added to the emotion of it, I think, in a way, I don't know if that's changed much either. I mean, you can go back and there's a lot of dates, you know, even with Volcker back in the day. So big, big moments, you know, or some announcement was made, or go back to, go back to Watergate or whatever. A lot of things have happened. Missile crisis, there's a lot of things that happen through time that are very similar. I don't think it changes a central thing. What I would keep an eye on is not really what our policy, not really what our leaders are saying so much. I'd keep an eye on what, what's actually going on with policies and whether those are tilting themselves towards contraction or stimulus and accommodative positions, that to me has been the most consistent, useful indicator that in a healthy understanding and dose of humility and realizing that we're all forecasting something that's pretty unforecastable, so you better be ready to be wrong a lot as well.

C (36:36)

You, you alluded to confidence earlier and that was one of the big takeaways from our first interview with you is this idea that confidence hadn't really come up despite this major bull market and that that was a reason back then for you to be optimistic that you Know when confidence does come up, that's really a positive. Do you think this derails confidence now all this craziness is going on?

A (36:52)

No, I think it's hold it down. I think it's going to help hold it down longer. And I think to me, the way I look at this right now is we've got a, a cyclical corrections going on. Maybe it officially be a bear market. I never understood that distinction anyway, 20%, but, but whatever it is, it's, it's a cyclical turmoil, let's call it that. And I think that when we get through this, we're going to have probably several more years out of the secular bull market. And I think the reasons for that, one of them is just what you lay out. I'll tell you what, the, the whoever in this country, or maybe it isn't a certain individual as it is process, but whoever can physically improve the confidence of the players in this country. It's going to be, there's a tremendous amount of dividends that will be paid from that. Not only politically, not only people's well being, but in the stock market. It will be huge. And I think the fact that you have confidence and pessimism maximized or confidence low, pessimism maximized today is a huge asset for the future. It's a huge reason not to get too bearish today because there's a lot of possibilities to improve that as we go forward. In addition to that, the fact that balance sheets in liquidity are so pronounced, that's a huge bullish tilt to it going forward that can be used effectively to drive things growth in the economy as well as growth in the stock market going forward. So I, I, I think we've delayed all that. And it may be, maybe it's not so much that it's unfortunately delayed, maybe it's just, it's, it was time to refresh things. You know, I haven't got you, but I mean we did, we, we've already done some really good things with this correction. You know, we've brought down valuations, we brought down concentration, we've surged panic, which means you've took everyone and they got now a bunch of buying power on the sidelines waiting for the beatings to stop. And we're, and we're, we're starting to bring the policy cavalry, we're reversing interest rates, we're reversing the dollar. You know, we're bringing the policy cavalry to, to recycle. And maybe, maybe it was simply, it doesn't really matter what it was that created this, it was just time to have a correction. We haven't had a correction since the fall of 2023. And you know, maybe it was just time for that. And that kind of sets up another couple year leg in the bull after we get through this.

C (39:44)

You talked about the Fed being too tight. And one of the things people have been looking for here is the Fed to come to the rescue. And I just want to put this tweet you wrote because I thought it was interesting. I didn't know this. The S&P 500 has declined about 9.3% in just two days as shown since 1965. This has only happened seven previous times. In every instance, the Federal Reserve instantly eased the Fed's funds rate. If they don't eat soon, it'll be truly unprecedented. So why do you think that is? I mean, why do you think they haven't done anything yet? And do you still think they're too tight?

A (40:11)

I do. I do think they're too tight. I think they'll be forced to ease because I think economy is going to slow down. I think earnings are going to start. That will be the next thing to happen is you'll see earnings warnings and reduction by companies, you know, of their outlooks and things. I think it's going to bring in the Fed here. You know, to me it only takes at this point, we're at 4.2% unemployment. It only takes a slight uptick in unemployment for the Fed having to capitulate. Basically why is an interesting question. One is the era of post pandemic has been a complete unprecedented era for the Federal Reserve. And so in some sense they're being very consistent in being totally unprecedented in what they're doing. It's fun. But if inflation took off from a half a percent in mid-2020, right after the pandemic collapse, it went from a half a percent to 9.1% by June of 2022. The Fed did not even start raising the funds rate off 0 until early 2022. Can't remember the exact date, like March or April. By the time inflation peaked at 9.1%, the funds rate was still 1%. Okay. Basically no tightening at all. There has never been another instance, at least in post war history where you've had a surge in inflation by that magnitude without the Fed responding at all. Essentially that was totally unpresten. Then inflation broke from 9.1% in June of 22nd and it went down below 3%. Okay. And the Fed tightened the whole way Down. That's also equally unprecedented when the inflation rate breaks almost every time. The Fed would ease. In the past this Fed tightened, okay, so they, they tight, they, they were easing when they should have tightened, then they tightened when they should have eased. And now they refuse to ease when the market is in obvious stress ultimately going to come. What are the reasons today? I'm unsure. I mean they express some things. They have a panic about inflation. They fall out of tariffs. Hey, I think that's absurd. I don't, as I say, tariffs are nothing but a contraction or event. It's like raising taxes. And here we got this body saying they're worried about inflation. Well, number one, the current inflation rate right now is 2.8% at CPI. If you go back historically, that's not far above average of what we've run throughout our post war era period. It's only high to them because they got this artificial 2% rule where suddenly 2% has become the gospel inflation rate. I don't understand even where that came from. I can't find where that came from. The 2% is the, like the, the beautiful thing to have anything different from that, you gotta, you gotta fight it. I think that we've got inflation pretty well under control and the Fed should look at what's happening right now with a crumbling financial market and every market within the financial market is screaming, not inflation, they're screaming deflation. Bond yields are collapsing. The, the break even rates, the embedded inflation rate in bond yields are collapsing. Credit spreads are blowing out. Okay. The stock market is collapsing. Not because of inflation concerns, because of recession concerns. The commodity market is S and P. Goldman Sachs commodity price index is down 12% down again today from as high as in January. 12%. Crude oil just dropped below 60 today on the futures. Okay. They're not worried about inflation in the commodity markets. The dollar during 2021, 22 when inflation was rising, the dollar rose dramatically. Dollar's coming straight down right now. Every market, the bond market, stock market, the commodity market, the dollar market are screaming deflation risk. And here we have the Federal Reserve saying I'm worried about inflation. I do not understand it except to say that they've been doing sort of unprecedented moves for, for some time and I, I guess it's got to get worse. The other thing I object to a little bit is they say we got to wait for more reports before we can move. The problem with that is, is economic reports are a chronic look in the rear view mirror at what is going along whenever we get a report today in the economy, it's already a month or more old. Okay. And if you're going to manage things by looking through the rear view mirror, that's, that's becomes a problem for policy officials as a leading entity. I would argue that one of the most leading indicators of economics performance, not a perfect one by any stretch of the imaginative, is the markets. Okay. They, yeah. Are they emotional? Do they move too far each way? Absolutely. Is their emotion wrapped up in it, in bad forecast as a result? Yes. But is there anything better forecasting what's coming than the markets and maybe past policy, which is partly markets? I don't think so. And so for the Federal Reserve, who's in charge of managing the economy to keep it out of recession without inflation, to say that I'm not going to listen to the financial markets at all, I think they're stupid. I think is stupid to have that as your approach. I think they should be listening more to that and they should be responding. And I think ultimately they'll probably have to because it'll get bad enough in the economy.

C (46:18)

Just one more for me before I hand it back to Justin. I want to ask you about one of the things that surprised a lot of investors is this idea that, you know, in the first Trump administration they were very focused on the stock market. Now they seem to have primarily focused on the 10 year and all the benefits of getting that down. What do you think about that strategy, about that idea of focusing on the ten year?

A (46:35)

I, I get why they're thinking that because I kind of believe that too. I think our, our rate structure is way too high. I'm, I'll put out something probably in the next few weeks again about that. I written about it before, but if I look at, if you overlay, if you just think about it, Jack, that we had, the bond yield was low and the inflation was low. In 2020, inflation went up to 91, come back down to 2,8. Bond yields went from a half percent up to about 4 and a half and they're still at 4 and a half. Even though the inflation rate went from 9,1 to 2,8. Even though nominal GDP went from 18% down to 5, even though real GDP went from 10% down to 2 and a half. Even though commodity prices went up and have fallen 30% now almost 40% from their highs, bond yields have not come back down. There's several other things too, indicators that tell me that while they went up with it, they didn't come down. And you got to ask the question why is that and I would argue one reason is because who's the, who's the guy or the people that finally raised rates but never brought him back down? And you know, maybe bond yields can only move so far on their own without having the short end stick, you know, pulling it. So I, I kind of concur with that. Now what I don't think is great at all is, you know, I, I don't, I don't appreciate at all President Trump's bully, bully, bully attitude of how he goes about his business every day, day, and that's part of how he runs things. But I think it's despicable for a leader of free world to have that type of approach and personality as we hold out to the world and our, our youth and everything else. I don't care if you're Republican or Democrat. I don't think that's a good way to go about it is what I'm saying. He, I think a lot of his ideas may be okay, but his, how he's, how he's going about it doesn't make a lot of sense. And I think to threaten the Federal Reserve chairman is totally inappropriate. I, I just think that's, that's wrong. Now on the other side of that, if the Federal Reserve, and I'm not convinced they are, but if Powell is refusing to ease out of spite to Trump as opposed to out of what's right for the country, then they're both on the same footing in my view of not really continuing to pay attention on what's most important. You know, and I, I do think the rate structure is too high. It needs to come down. And I'm hoping that it's not a petty war between who's in the White House and who's at the Federal Reserve that that's keeping that from happening. And I, I don't really think it is. I, I just don't believe that's why the Federal Reserve is doing what it's doing. I think it just, you know, is generally concerned yet about tariffs, influence on inflation and they're going to make sure. I, I don't, I think they're wrong in that assessment, but I don't know any more than they do if that's true or not. But I do think that getting the interest rate structure down to better reflect inflation rate that I think is probably with a slowdown in the economy probably going to head to 2% on CPI could get, could certainly a 10 year treasury of threes ish, would be a lot better than 420 or whatever. And it would, I think, do a lot of good things for confidence in the economy as well as just growth in general.

B (50:05)

One of the things with Trump is that for the most part, he kind of does do what he says he's going to do. So I'm wondering, like, with things like deregulation, Doge and reduction in spending, the tax bill that they're going to try to push through, and then immigration, like, how do you. There's a lot there, but, and I guess some are positive, some are negatives. Like, how do you think about all of those things in the balance of what's going on in the economy?

A (50:41)

Not too much right now, Justin, but I mean, some of that, I don't have a problem with getting a handle on who's in our country and, and, you know, slow and shutting down the process of just letting people come in. And so I think the way they've handled that is a bit brusque and aggressive and disrespectful to some degree, but who am I to know how it's best to go about that? But I think, again, the idea is fine, and what they should do is if they're going to do this, gather up people that are not supposed to be here and put them out of the country, that's okay. But at the same time that they do that, they should also, in my view, set up a new system for letting people in, because we need people in this country, we need demographic growth, and that is almost just as important as our security is getting more demographic growth. We ought to just. I don't know why it's so difficult to set up a system of checks and balances on people and deciding the criteria we're going to use to let people in, because I think we need to do that. I hope we get to that point as well. As far as Doge, you know, I, I think there's waste in government, too. There's gotta be. But the process there, again, by how they're going about this, to me makes no sense. I, it doesn't seem like it's, anyone's done any research and looked into it and said, okay, where are the, where are the excesses, the, the waste, what, what areas and, and you know, what people are responsible, what, who aren't. It takes some time to study it and to have a reasonable approach to it rather than just mass cutting. Certainly it hurts confidence by doing it that way, not to let, not least of which the people lose their, their jobs, but they're the pro. But the idea of it makes sense to me as far as, you know, having waste in the government sector. That's the difference is in the private sector, private sectors cut jobs all the time. Every time we get a slowdown, there's somebody's going to hack jobs and a lot of people are going to lose their jobs. Probably a lot of them didn't, didn't really deserve it. That happens a lot of times in the private sector. You know, there's just a hack. We got a hack because we're losing money. There's no such check on the government sector. And I do think it makes sense what he's doing there. But, you know, that's another negative that's coming through is a policy that is going to have impact if it continues the pace it is and the speed by which it goes and you know, tax cuts, if they can get them through, I don't know if they'll be able to, but if they do, that's a, that's a definite policy. That's a stimulant. And you know, right now I'd welcome that just to, to bring some stimulus to the party right now overall. So I, I, I still think, I don't know if Trump follows through and everything he says. I think there's a lot of bluster and less follow through on a lot of this stuff. But, but we'll see. You know, he certainly followed through a lot on his tariffs and you know, some of the rest of them. I may be wrong, but it seems like some of those other things have slowed down a little bit. Doge has slowed, I think a little bit must leaving too. And even immigration seems a little slower. Certainly the efforts to bring peace have slowed down a little bit too in some of these geopolitical conflicts. So we'll see if that, if he follows through and continue to be able to move things along as fast as he has or whether some of those slow down. Yeah.

B (54:16)

What, what are your feelings on the debt level of the country? Like right now I think we're at like roughly 120% debt to GDP. And I think there's studies out there that show, you know, once a developed country, or maybe history would show once a developed country gets to that level of debt, it can become like problematic. So how do you kind of think about that in the context of sort of just where we are?

A (54:45)

I'm not too worried about it. I guess. I, I, when I started this business in the early 80s, shortly after I started, we had the largest peacetime deficits ever under Reagan and everyone told me that, you know, it was the end of the world and that was, that was awful and whatever. And it just seems like that's always been the case with government and government policies, government debt, everything. Government, it's a real hot button for all of us. It's just the emotional hot button and affects all of us and what we think and affects us. And I just think we overplay the debt of the government way more than its actual influence. If I had the ability to tax, raise taxes on everyone else in this country whenever I wanted to, I could run a pretty good debt to income ratio too and still be just fine. A lot of that 120% is owned by the government itself. Other government agencies or the Federal Reserve has a chunk of it that they rebate the interest costs back to the government every year. We certainly have developed countries like Japan and others that have survived well, higher ratios than this. I just think that the real thing that people play up is that we're going to go bankrupt and there'll be a run on the dollar and everyone will go away. And I, I think we're so far from that. If there, I mean I will say that if there was a real problem with government debt in the United States, the one place people would come if that really happened would be the United States for safety. Because you know, it's, it's almost that way. I think the last point I'd make, Justin, is that what we do have is some of the strongest finance, private sector financials we've had in many decades. Like I said, I would take that over government fans every day of the week if I've got a strong private sector. Because let's face it, how does the government survive? Who finances it? Who, who keeps that 120% debt ratio so it doesn't wipe us out? It's not the government, it's the private sector. And as long as that private sector is okay, government's fine. And that's kind of where I look at that. I, I think it's worse if we put it the other way around where we have the private sector financial lack of financial integrity of the government sector. Okay, I don't know.

B (57:18)

All right, let's end on this. So Jim Paulson buys a lottery ticket, wins, wins a million bucks and you have to allocate that million dollars today, that's in cash to assets that you believe are going to be maybe not the very best, but you know, you're taking a two to five year time horizon. Like how Would you divvy that portfolio up? Like what areas look attractive to you and then you know, what areas maybe that are a little bit more consensus that you may or may not avoid? Like how would you, how would you approach that?

A (57:57)

Well, I think I divvy it up equally between the twins, the Vikings and the Timberwolves. Here I go with it. And the twins need it. They need it. They need it. Anyone's got any money, just, just call the twins. Well, you know, that's a really, really tough question. Good question. I guess what I would do now is I would, I'd be, I'd be more fully invested with whatever my parameters are. I'd be more closer to the fully invested edge on the, on the equities right now, even though I do think bond yields are going to come down or bonds are going to go up. I think if they do come down, I think equities are going to do even better than bonds, even though bonds will probably go up too. So I would have diversification. I wouldn't violate my diversification parameters, but I would have a lot of it in equities and be more towards your maximum parameters right now. We've just gone through a 20% drop in that market and a lot of fear banks. Some of the reasons I talked about in there though, what I would do now is I think the volatility is going to be here for a little while and I think because the Fed hasn't responded instantly, it's going to take a while to pull us out of this a little bit. I think it might take some more carnage on earnings, on unemployment, economy to really get full policy support even though we do have some good policy support already in play. Lower commodity prices faster or lower interest rates, lower dollar. I think liquidity's picking up because you and I determine the empty money supply to some degree and as we get scared, we hold more liquid balances and that raises the money supply growth rate. But we do need, I think Federal Reserve support and I'm. The other thing I didn't talk about is fiscal support is coming too because the economy slows, tax receipts automatically go down and welfare expenditures automatically go up. So I'll have. But my point is, is I would take advantage of this volatility when it pulls back to, to reduce some of your defensive winners that have really done well. I mean, just look at what some of these have done. Low S and P, low volume index, the relative of that or staples stocks, utility stocks, even pharma, some of those have really scored big Dividend aristocrats, some of those and move some of those funds back to what you'd say octane. And I would look at some of the cyclicals. There's. I, I think consumer discretionary stocks have just gotten plowed here and I think that'd be a good place to go buying right now. I'd also like the industrials in that, in that mix. Normally, normally I'd say financials, but you know, they had a nice run right prior to this. I'm not sure I'd go heavily there, but I would. With consumer discretionary and industrials, I think I would, I would still buy tech. I think that when I look back at technology, I'm not sure it's going to lead the next period of bull run, but I think it will lead off the lows of this cycle. In other words, when we decide that this crisis is over and we lift strongly for a couple months, I think tech will be, play a role in that. They'll lift hard too. Now after that, you may want to come out of. There might be additional leadership, but off the lows. I think I would, I would do that. I'm, I, I really think that small cap stocks probably have that same in them too. If, if we finally decide the crisis over, we lift small caps. So I tilt a little down the cap. I don't even know if you have to go all the way to small, but just lower your, your cap till a little bit. If we do recover, then there might be some other little tilts you want to do down the road. Let's say if we come off the lows big for six months, I might want to move away from tech and maybe think about large cap value or international a little bit at that point. But right now I do think leadership really off the lows for the first six months. If we come out of this, we'll be concentrated back in the, in the cyclicals and in technology again over that poll. And that's kind of where I'd, I'd sit at the moment. That doesn't mean I have everything there but just a tilt just in that direction.

B (62:19)

It's great, Jim. It's always so awesome.

A (62:21)

Well, expert. Yeah, thanks for having me. I really appreciate it. Thanks for listening to me waddle on here.

C (62:28)

Thank you, Jim.

A (62:29)

You bet. Thanks so much for tuning in to this episode. If you found this discussion interesting and valuable, Please subscribe on YouTube or your favorite podcast platform or leave a review or a comment. We appreciate it.

B (62:40)

No information on this podcast should be.

C (62:42)

Construed as investment advice. Securities discussed in the podcast may be holdings of the participants or their clients.