Title: Bonds To Reverse Soon As Yields Approach 'Line In The Sand'? | Michael Lebowitz Show: Thoughtful Money with Adam Taggart (YouTube channel "Adam Taggart | Thoughtful Money®") Guest: Michael Lebowitz — partner / portfolio manager, RIA Advisors / Real Investment Advice (with Lance Roberts) Date: 2026-09-10 (publish date, Pacific) URL: https://youtu.be/8H3gxLqY67U Length: 56:22 (3382 s) Note: YouTube auto-transcript pasted by Stephen. Fillers (um/uh/you know/like) and stutters removed; auto-caption name garbles corrected (Liowitz = Lebowitz, Tagert = Taggart, RA/RAIA/RAA = RIA, Walsh/WSH/Wars = Warsh, Bessant = Bessent, Hammock = Hammack, straight of horm = Strait of Hormuz, Jolts = JOLTS, Cape = CAPE); wording otherwise verbatim. The ~04:18-09:46 stretch is an aside on using Claude to build slides and on Stanford economist Chad Jones.
00:00 I'm not dumb. I realize that it's the narratives that are the short-term driver of bond yields. Bond yields can go higher from here. I do think that 10-year bond yields at 5%. Is potentially a line in the sand for both the economy, the stock market, and definitely the Treasury, and possibly the Fed.
00:24 We're pretty close to 5% at this point. In the short run, that may be our maximum upside in yield. And I think if the economy falters, the stock market falters, that could induce rates to start heading down, yields to start heading lower. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart, welcoming you here to a discussion with Michael Lebowitz from Real Investment Advice.
00:54 Michael, thanks so much for joining us today. >> My pleasure. There's a lot going on. So, it's probably appropriate. >> It's appropriate. And there's just a lot that's been going on with bond yields. And so, I've had a lot of people saying, "Hey, can you get Mike back on just to kind of tell us what's going on with bonds since he's a big bond expert?" So, Michael, bond yields are, they've continued to just grind higher and higher to yields that we haven't seen what in like two decades or so on the 10 and 30-year US
01:27 treasuries. So, I know that at RIA, you and your partner in crime there, Lance Roberts, are at a point of view that bond yields will be coming down over the next couple years for a bunch of secular reasons. But I think the question from the peanut gallery is are you still holding to that outlook? Are you starting to sweat at all given what's been happening over the past couple months? What is the deal with bond yields? >> So, Lance and I probably sound like a broken record here. We've been
01:58 saying this for a while and they were coming down and then Iran kicked in. Tariffs kicked in. So kind of one of our themes is that there's bond fundamentals and there's bond narratives. And at the end of the day, historically, fundamentals drive yields. There's a very very high correlation. I've shown charts with you before just showing the very high correlation really between inflation and inflation expectation in bond yields.
02:32 But in the meantime, a narrative and a narrative can be true or false, but a narrative can take over and drive a market. And we see it in the stock market all the time. There's a narrative behind the memory chip companies, behind the AI companies, behind meme stocks, behind gold and silver, behind crypto, behind, we've seen one after another.
02:56 And those narratives at times can divorce a price from its fundamentals. Right? AMC and GameStop are two great examples where the price shot through the moon. The fundamentals of the two companies were not that good and ultimately price or in our case yield comes back to fundamentals. And what we see today is a divergence between fundamentals and narratives.
03:28 And it just seems like it's just one story, one narrative, one thing hitting the bond market after another. And I think it's just because the bond market is susceptible. It's going higher in yield, lower in price. And I think just everyone's scared and just thinking yields are going to go to the moon.
03:50 But if you kind of, and this is appropriate that we're talking too because the Fed meets a week from tomorrow, a week from today. And it'll be interesting to see what they say because let's just think about the fundamentals and actually do you mind if I share a screen? I >> put this on a nice pretty table.
04:18 So you can kind of follow along here. >> Yeah, nice and pretty. >> It's beautiful, right? My assistant Claude did a great job taking my comments and making it look nice. >> Yeah. And sorry, this is a bit of an aside, but Lance has been talking about how you guys have really been leaning into AI there over at RIA.
04:42 So many acronyms, it's hard to keep them all straight. But you're finding it to be very useful even just in putting together presentations, right? Not just necessarily sourcing data, but actually how you present it. Correct. >> Yeah. I mean, it's really like an assistant.
05:01 So, yesterday you texted me and said, "Hey, can you come on?" I'm like, "Yeah, absolutely." And I was thinking, "Okay, what am I going to talk about?" And I came up with this PowerPoint that you see right now. And I said, "Okay, AI, here's what I want. I want a PowerPoint. I want you to put out these things and these things.
05:20 Maybe put it in a nice order so it's easy to follow and kind of use this sort of template we've been doing stuff in and it spits out something and first of all, it just looks a whole lot better than anything I can do just visually. Then you just go through and you say, "Okay, that's wrong. Don't put that in there. Put this in there.
05:43 Reorder it this way, that way." It's really like having an assistant. I go get another cup of coffee. Claude's busy working on a new PowerPoint. I come back. Claude presents me. You just iterate with it. And you get to a point where it can present your work in a much, for lack of a better word, prettier, more easy to follow way.
06:11 So I find it incredibly valuable not just for research but presentation matters. >> That's so cool. This is going to be of interest to nobody, but I just think back to my early days as a junior level bottom rung of the ladder investment banking analyst on Wall Street. And my first year or two there, there was a graphics department.
06:33 So if you wanted a slide like this, you had to bring it to a department of specialists who would work in a graphics program. I think ours was called Harvard Graphics. And so if you'd said, look, you spelled debt wrong. I need you to fix that typo or I want this box moved over a little bit.
06:52 You would have to write that on a piece of paper, give it to a person, wait for them to get to it in their queue, then do the work, then hand it to, I mean, it just took forever. And I remember we begged and begged to finally get the software ourselves. So, we would then build it ourselves using the software, which was a lot faster, but still took a fair amount of time.
07:10 It wasn't our highest best use. Now, you can just tell Claude, "Yeah, I want a table here. I want these to be the main things. Just make it look pretty and voila. Sounds like it's only about a cup of coffee's worth of time. >> Yeah. I mean, especially once it kicks out the first one when you say, "Hey, you spelled this wrong or this is in the wrong place.
07:30 " Then it comes out pretty quickly. And you can even ask for ideas, like let's say you see the three boxes on the left. Is there some other fundamental I'm forgetting? And it'll spit out some ideas. Oh, yeah. I forgot about that one. Let's add that fourth box. >> Wow. >> So, it's literally like an assistant but without the griping.
07:52 And >> so, not to wallow in my own pity, but I'm having flashbacks to where it would sometimes literally take me an all-nighter to get a couple slides like this done through that old graphics department way back when where now you can obviously get it done in a matter of a minute or two. >> Well, honestly, Adam, if you gave me this and said, can you just replicate it? So, I may go into PowerPoint and just copy everything.
08:18 It would probably take me two hours to get all the boxes aligned and the colors and the fonts and the sizing and all that stuff. So, I mean, it's really valuable. >> Wow. >> And I think it makes the presentation a lot more valuable. I mean, you've seen my other PowerPoints. In hindsight, they're horrendous.
08:38 I'm kind of embarrassed now at the stuff I've been sharing with your followers. It's awful. I apologize everyone. >> At the end of the day, it's the content of the data that matters most. But the presentation does help. And sorry for the tangent here, folks. But it is, I think, instructive just to see how AI is being used in ways big and small by the companies that are there on the bleeding edge trying to figure out how to work with it.
09:03 >> Right. So anyway, is this worth the premium that AI stocks are getting because things look nice on PowerPoint? I don't know, but it's still something. >> That's a huge topic for another day. I'm actually writing an article on this guy Chad Jones, Stanford guy like you, actually, graduate business school.
09:26 Fascinating on how he looks at AI and how it will impact the future. So, actually, if you could get him to do an interview, that would be great. >> Right now, Chad Jones. Okay. Well, my brother-in-law went to Stanford after me. He was Chad Smith, but I guess I got to go track down Chad Jones instead. >> Yeah.
09:46 Or just get any Chad to talk to >> any Chad. Maybe there's Chad Johnson out there I can track down. >> There you go. >> All right. Back. >> Okay. So, basically what I'm showing you here are the fundamentals and the narratives. And again, narratives are stories that the market creates to, and it's not just markets, it's everything, to kind of explain what's happening.
10:13 Why are yields rising? So, if we just focus on the fundamentals, inflation's running hot, right? Well, yes and no. Core CPI is 2.5%. We know energy prices have shot up and the prices of some other goods have gone up because of the Iran war. We hopefully know this is transitory. Fingers crossed, but it will end soon.
10:38 The price of oil, it may not end, but the Strait of Hormuz will hopefully eventually open or we'll successfully bypass it over time. Price of oil will come down. So if you strip out oil and food, if we use the trimmed mean PCE, which is what Warsh has said he prefers, where you just take out the outliers, you got 2.3% and breakeven inflation expectations are 2.5%.
11:06 All three of those are where they were before the Iran war started. So again, if we strip out some things and we can debate all day whether that's right or wrong, inflation is grounded where it was before Iran started. >> Okay? So basically the bond market is looking through the war, looking past >> well the bond market is not, the bond market's worried about inflation.
11:28 We'll get to that on the narrative side, but inflation itself does not warrant rates being where they are right now. >> Okay? >> Right. So, who is setting the breakevens then? >> That's the difference between nominal bonds and TIPS, >> right? >> So, isn't that the bond market speaking through that? >> The bond, yeah.
11:53 The bond market is saying inflation expectations are basically what they were before Iran started, 2.4%. >> Yeah. Okay. >> And they tend to run higher than actual inflation over time. >> Mhm. But it's not a narrative. That's money being put to work in the market. >> Yes. >> Employment, we had a great employment report last Friday, but we've seen massive revisions.
12:21 So, trust it all you want. I'm not sure what, I know one month does not make a trend, especially given the revisions we've had. And ADP is not confirming it. JOLTS does not really confirm it. So, you got to be a little careful. And what we kind of, if you just average out recent trends, we're growing at about a third of the rate that we should be growing.
12:50 So, real wages are flat, maybe even negative. And economic growth has been kind of weak. And if you strip out AI, it's probably been flat to negative. So the fundamentals driving the bond market don't warrant rising yields, but there are all these things out there, some true, some false, that are really what's driving it.
13:17 Oil prices are high. We know that. And is that reigniting other inflation, deficits, right? We see a story about high deficits every day. The greater your deficits, the more debt you have to issue and that's a problem for the bond market absorbing all of this debt. On top of that, you have AI debt there.
13:43 A lot of these big hyperscalers have started going beyond their free cash flow and are now hitting the debt markets and the equity markets for capital. >> In the crowding out, right, when we talk about crowding out. Yeah. And then in that same realm, we've seen memory chip prices spike over the last six months or so.
14:07 That's inflationary because we saw Apple raise their prices. So that's having an impact. The yen, well, how does the Bank of Japan intervene? According to some, they sell yen or they sell dollars, which means they have to sell their bond holdings. Now, that's a debatable one because the Treasury does a repo, the Fed does a repo program with them.
14:35 So, they may not be selling US Treasury bonds. But either way, it's a story. This is the cocktail party inflation problem. Inflation is outrageous. People will tell you, right? The price of this and the price of that is so high. Kids can't afford to pay rent out of college and this and that.
14:59 It's not, from the Fed perspective, from an economist perspective, it's not the price level that matters. It's how is that price changing here and going forward. And we've talked about this a lot. If the price of eggs goes from $3 a dozen to $6 a dozen and then stays at six for a year, there is no inflation in eggs despite the fact it's twice as much as it was a year or two ago.
15:30 But we continually hear, I think people think inflation is higher than it really is. And again, we're not comparing absolute levels. We're looking at growth rates. In the short run, I think it's hurting the bond market that Warsh is not giving guidance. I think the market feels like it's kind of rudderless a little bit without the Fed walking the market on its leash.
15:59 According to some, the credit downgrades deserve higher yields. So you take those narratives there. There's some truth to all of them, but they can all be debated and that's what's driving yields higher, but at the same time, the fundamentals that really in the long run set yields are telling you yields are already too high.
16:25 Now, you also need to think about the market has tightened rates, right? Where, think about auto loans, credit card loans, mortgages, corporate loans. They're all tied to anywhere from the three-year to the 10-year rates. They've gone up significantly, 50 to 75 basis points. So, there has been a lot of tightening in the economy, and that can take anywhere from 3 to nine months to start showing up.
16:59 So I think the bond market has become overly stuck in narratives whether some truth, no truth, partial truth, a lot of truth and stopped looking at the fundamentals. So I think when I look at bond yields I realize and I'm not dumb. I realize that it's the narratives that are the short-term driver of bond yields.
17:29 Bond yields can go higher from here. I do think that five-year, I'm sorry, 10-year bond yields at 5%. Is potentially a line in the sand for both the economy, the stock market, and possibly the, definitely the Treasury and possibly the Fed. Don't hold me to it, but we're pretty close to 5% at this point.
17:57 So, in the short run, that may be our maximum upside in yield. And I think if the economy falters, the stock market falters, and that, we'll see what the Fed does next week, that could induce rates to start heading down, yields to start heading lower. But with the narratives out there, I don't anticipate that if there's nothing severely bad going on with the economy that that would happen quickly.
18:27 It would take an event to push yields down quickly. >> Yeah. Okay. So, can I just restate that real quick? Where it sounds like you think look, left alone, given enough time, yields are going to come down for all the fundamental reasons. If they don't, they continue rising up to 5%, you think that's when the central planners are going to get involved? They're just saying, "Look, we can't let this stand. It's too high.
18:48 We got to come in and intervene to get those down." And the only other thing that could bring them down in the interim would be some sort of event like a shock that sends the economy into a deep slowdown or something like that. I don't want to use the word recession necessarily, but something maybe a little bit more fast-acting than that.
19:12 Let me edit that a little bit. I think the market may step in at 5% before central planners. So, insurance companies, endowments, the largest institutional money managers will likely be willing to chomp at 5% to take it in because from an asset liability perspective, that is big. That is very helpful. Pension funds.
19:42 I think the stock market could show troubling signs as we get to five, as yields keep going up. So a lot of money has gone from bonds to stocks. Why not make 20% a year instead of flat to losing money in bonds? So if stocks start heading lower some of that money say you know what I want the safety of bonds and if I can earn 5% or close to 5% that's a no-brainer.
20:15 So I think the market over the central planners but I do think at some point, and Bessent has already come in and increased their buybacks. I think the Fed is a little less likely because Warsh has been so adamant that QE is a bad thing. But nothing would surprise me at some point whether it's five or five and a quarter.
20:40 >> No, I do think that when the tide turns, you get narratives go the other way too. And again, those narratives may not be true either, but narratives can push yields lower. But it's like a stock that's divorced from its fundamentals. Ultimately, it will catch up to fundamentals, but it can happen quickly or it can just grind for a while.
21:05 >> All right. So, I know you've got some extra slides here, so I don't want to slow you to go through them if you want to, but a big question that this raises is, well, then, are you starting to see opportunity here in the bond market? Right. Given what you've told me, you've got a lot of reasons why you think yields should likely go down from here.
21:25 So, do you want to start taking an unloved asset, bond duration, and investing in that because that would perform the best if you're correct. >> So, I don't know if you saw this graph, and there have been a lot of other graphs like this. It's just 10-year annualized returns for bonds. So look at what happens at the low points when the last 10 years were pathetic returns, right? You got the 1950s, you got whatever happened in 1861, but the returns shoot up afterwards. This is almost the opposite
22:09 of the CAPE chart. We know that equity returns are tied to valuations. When valuations are high, long-term returns tend to be low and vice versa. >> Right? >> So, right now, CAPE is sitting at like 41, implying that returns for the next 10 years are going to be zero. This is almost telling you to some degree the other thing, that the prior 10-year returns have been so bad that we should expect something decently better if not much better.
22:43 So you have this juxtiposition of equities that have done really well. They're at the top almost poised to head lower while bonds are putting in a horrendous performance. Now, keep in mind the one reason that this is worse than other experiences is because they kept rates so low, so low, >> right? Low for so long.
23:05 >> And so, while prices went up and they've gone up more in other instances, I mean, prices have gone down in the last, especially 22, 23 in that period. They've gone down more in other periods, but there was no yield, no coupon to offset it. We had a little bit of that in the 50s but at that time coupons were two and a half not one and a half. So I think yes there's opportunities, some potentially good opportunities but for the patient, for those that are willing to wait and
23:45 timing I don't know because again it's one thing after another that just weighs on the bond market >> right >> but here, sorry to interject, is the difference this time is you're getting paid to wait. You're getting paid near 5%. If you're sitting out in some of these longer duration, in some cases, maybe even over 5%.
24:04 >> So, it's not like it was years ago where there wasn't much there. You're actually getting some meat on the bone now. So, even if it takes a year or two, yeah, maybe the stock market puts in another double digit year, but you're not getting nothing. And you've got the potential safety of, >> if the CAPE ratio proves to start mean reverting or whatever, you're sitting here in safety and actually then hopefully should ride the resizing as capital comes back into
24:33 bonds. A >> and you have essentially a free option. Let's say you buy a 5-year bond today at 5% for argument's sake, right? And you're comfortable. You know what? Worst case, I just hold it for five years. I get my money back and I've earned 5% every year for the last five years.
24:54 But let's just say bond yields fall rapidly, stocks fall, so stocks are down 30%, bond yields are 2.5%. You have that free option to sell the bond, take your price profit, and now buy stocks on sale. >> So, it doesn't mean yields can't go higher. And certainly this market feels horrible, right? And it can get worse.
25:24 I'm not saying 5% is the limit, but I certainly feel like, at the same time, while it feels horrible, that's usually when the best opportunities are. Yeah. And you are kind of saying that there's both a central planner and a market put around 5% in your opinion. And I think the market put's probably more powerful, >> okay? >> And it's probably already creeping in.
25:52 If you're an insurance company, a pension fund, >> and you can lock in, you may say, you know what, I don't need to wait for 5%. Let's buy a little bit here. Let's buy a little bit more higher up. Let's ladder into it. >> And a lot of corporate yields are already over 5% because they're at a spread to Treasuries. So you can easily get 5% in good corporate names, >> right? >> An additional risk, but so it's already there for some investors.
26:23 >> All right. So you're painting a pretty compelling argument here, I'll say. Michael, how is this actually translating into action at RIA? Are you guys actually acting on this yet or are you still waiting to see certain signs or a certain yield before you start shifting? >> So again, we're starting with a good bond position.
26:46 So we're not starting with an empty slate. >> I mean you got lots of portfolios but you've got the main 60/40 that's >> right >> and it's got >> right now there is about 10% cash in there >> and there's a 20-year bond and there's shorter term bonds and mortgages actually. I want to see technical signs that the tide is turning, I want to see narratives starting to change.
27:17 I want to see what the Fed is going to do, not just here, but in the next few months. And I think we still need more data. We got CPI this Friday, PPI Thursday. That's, if potentially they're 0.1, 0.2, I think 0.2 is expected. That's three months in a row of relatively benign inflation. We're starting to make a trend, but oil prices are back in the low, low mid 90s.
27:53 There are still things pushing up, but at the same time, they're pushing down on some prices. So >> I'm curious, are you looking at things like that and almost kind of rooting like, yeah, come on, push yields higher right now for these not fundamentally driven reasons and let us buy bonds more attractively so that when we ride the right sizing, we'll have more opportunity to gain.
28:21 >> Yes and no. I mean, we own bonds already, so it's like if you buy a stock and you buy more, you're not rooting for it to go down. >> Yeah. Okay. >> As much as maybe you do want to buy it at a cheaper price, >> you also want a confirmation that the trend has reversed.
28:42 And obviously, there's none of that right now, >> right? That's a very important point. And I'm curious, let's say you get to that level. Well Adam I think I'd rather be at a point where we buy it, let's just hypothetically say the 10-year at 4.50 versus 5%, but a lot more confidence that we're at 4.50 going to 2.50 versus catching a falling knife at 5% or 5 >> makes total sense and I'm glad you mentioned that because folks that's a lot of the discipline that a good financial adviser brings into the equation. It's all about the
29:16 risk-reward ratio and when you see evidence, even if you didn't top tick it, but you've got much higher confidence that risk is lower, that's really when you want to act. So, I'm curious. We're talking about buying bonds here, Michael.
29:38 Let's assume you see that sort of scenario where like, hey, we think we've seen confirmation that the reversal is in and we've bled a lot of the risk out of where we think this trade is headed. Will you just be buying bonds or will you be doing anything like using call options or a levered bond fund or anything like that that might be a smaller but more speculative position than just the underlying bonds themselves? >> Sure. Yes.
30:06 I don't know the answer to that. That's like asking me what kind of stocks I'm going to be buying in March, right? I don't know how the market will play out. We could be in an environment where short-term yields drop like a rock, but this inflation narrative persists and just holds up the long end of the curve or this lack of confidence in the Fed or the Treasury or the deficits that keeps the long end pinned.
30:33 Then we may just want to be in three and five-year sectors. We may want to be in corporate bonds. We may want to buy options. There's a whole host of potentials that will sway that decision when the time comes. >> But you're not limiting yourself to the bonds-only sandbox. >> No, no, no. >> Okay. All right.
30:52 I keep asking all these other questions, but you got a few more slides here. Do we want to pound through those? >> Yep. So we got a Fed meeting. Actually, this will be the last slide. The other two just kind of get to those fundamental factors that basically show that the growth trends for employment and inflation are actually weakening.
31:11 So Warsh has been relatively dovish until he spoke at Jackson Hole two weeks ago, week ago, whenever that was. And it seemed like he made a hawkish pivot. So the question is why? This comes after we've had two months of CPI that was minus .4 and plus .1 or .2, that inflation has slowed down and the labor market was, when he gave the speech, very weak, minus 23,000 jobs for that month, the most recent data.
31:49 So why did he turn around and paint a more hawkish picture and in particular he made a, if you look at the transcript it's about a paragraph where he just goes through details on why he's concerned about inflation and I have part of that quoted in beige at the top: 54% of goods showed price increases above 3% and he's going on with some kind of specific statistics.
32:22 And this is where it gets very confusing because at his Senate testimony, at one of his first speeches as Fed chair, so he's not just BSing to the Senate to get the seat, but he actually said it after he was the Fed chair that what he really likes to look at is these trimmed means. Basically, you cut the biggest gainers in price and the biggest losers in price.
32:52 And yeah, he called it rough swag, the headline numbers, the headline PCE, headline CPI. And when you look at the Dallas Fed trimmed mean, it's 2.28%. It's been there for four or five months. So it's not core in the sense that the CPI, PPI core, PCE core is less food and energy.
33:18 It's that middle group of goods, what are they, and services, what are they doing in price. Median PCE is 2.7%, core CPI is 2.5%. So it's odd that he kind of took this basket of about 200 goods and he's trying to make generalizations. The other, I'm going to skip around, but he talks about the components that are rising greater than 3%.
33:51 Well, all these goods are weighted. So why do we care if hypothetically the price of orange juice was up 10%. But all these other goods weren't, right. Its weighting is so small. We care about the big ticket items, not these one-off items. And the number of items is less consequential than the weighting of the items.
34:16 It's kind of like the S&P 500, right? We care a lot more about what Nvidia does or Apple does or Microsoft than that 499th company. They have so little weight in the index versus 8% for Nvidia. There's also a lot of Fed research that shows a lot of this recent impulse is due to tariffs and that impulse is waning.
34:45 So it's just curious that he comes out with this hawkish view at a time when Bessent is coming into the bond market with bigger buybacks, right? >> And we're kind of approaching 5%. So what I think he's doing is trying to talk a tougher talk >> and put more credibility towards the Fed's inflation fighting prowess. And the question is though, is this just talk, carrying a big stick, or is he gonna hike rates next Wednesday? So, the reaction to this speech was twofold.
35:33 Short-term rates went up, long-term rates kind of flat, kind of stable. So, the yield curve has flattened. That's telling me the market kind of buys into this, that he cares about inflation. Because very short-term rates are driven by Fed funds. The further you go out the curve, the more it's about expected inflation and inflation.
35:59 So that's kind of the initial take from the market. I think he runs the risk of a big policy mistake if they hike, especially if they hike multiple times, especially since the market has effectively, like we talked about earlier, has effectively hiked with higher auto rates, mortgage rates, corporate borrowing rates, etc. Mhm.
36:22 >> So, that's why I think whatever happens next Wednesday will, and it may not be immediate, the impact, but I think it will have an impact over the next few months for bond yields. >> But again, if he comes out and they do nothing, the market may say he's being weak on inflation, and that may be what gets 10-year yields to 5%. Mhm.
36:49 So last time I talked to him, which was a couple weeks ago, maybe getting on a month, although he'll be on here later this week, folks, Darius Dale, his default expectation was that Warsh was going to do a hike, quarter point, maybe even another quarter point hike at some point this fall.
37:12 Really just to sort of establish his bona fides as a hawk, and I'm serious about inflation, but really trying to set things up to start being able to cut going into 2027. So, this is more of just kind of like a flex, right? I'm curious if you have a default here, what would your default be? >> It's a flex, but if he actually raises the rates, he's actually pulling out the gun and threatening, right? Versus just showing his gun, his muscles.
37:42 I don't disagree with Darius that he may do that. And I think if he does it, he'll be cutting rates in '27 as well. What really bothers me is it's really in reaction to a supply shock. Right before we went into Iran, no one thought the Fed was going to be raising rates. Now they're raising rates.
38:06 The employment market has gotten decidedly weaker since Iran. And again, if you strip out all the food, energy, and some of the outliers, there's really no signs that inflation is picking up. It's still above 2%. And the Fed needs to get it down to 2%. And that's Beth Hammack's case, who's been one of the more hawkish members.
38:32 And I agree, they need to get it down to two, but be careful how you get it down to two. >> I personally don't think he's going to raise rates this September. I think there's, and this is hard to gauge, a lot of political pressure. I mean, Trump was ready to fire Powell for not cutting rates. What's he going to do when the guy he put, well, he put Powell in, too.
38:58 But what's he going to do when his new guy raises rates a month before a midterm election? >> Mhm. >> So, there's some political aspect that I just don't have a good feel for how that plays out that we also need to consider. But the market is saying there's a two-thirds chance they raise rates. So, >> okay, >> we have to assume they will.
39:20 And I think the market reaction to that could be muted. I think long rates could fall, long yields could fall a little and short rates will kind of base their movement on what the market implies about what are they doing next. So if they think that they're going to raise again and again, the market has to start pricing that in fully.
39:45 And as it prices that in fully, I think longer yields can actually come down, so the curve will continue to flatten. But I'm not sold. I'm not sold. I think he's trying, I don't know. Look, I don't know, but I think he's trying to talk the talk. >> Yeah. Okay. >> And hopefully not have to walk the walk.
40:06 >> So, even though he said, "Look, I'm going to try to communicate a lot less." He's still going to jawbone as much as he's able to and potentially hike reluctantly if he feels he has to. But you feel like if he hikes now, he'll be cutting next year. >> I agree with Darius. Yeah, I think that's most likely.
40:26 >> Okay. You mentioned the midterms real briefly. I don't think I saw that on your narratives list, but is that playing a role here as well? Just the uncertainty of where Congress might be going. >> I mean, I think that one can work both ways. It looks like the Democrats are going to take the House.
40:44 Senate is still leaning Republican, but there are some chances the Democrats could take the Senate as well. So, I think a split Congress, Senate and House potentially being different from the president, could limit some spending. So that may cut both ways, but dysfunctional is not good either.
41:11 So, I haven't heard, it probably would have been one to put down. I just haven't heard it as an excuse for higher bond yields. >> Okay. >> But it's definitely a big consideration and it probably will be a narrative at some point. >> Okay. All right. Well, look, I appreciate you coming on.
41:32 Like I said, I kind of reached out to you and just said, "Hey, Michael, can you drop what you're doing and come on here to talk about bond yields given all the questions that we've had about it?" Is there anything else really material to your bond outlook that I haven't thought to ask you about yet? >> Not really.
41:49 I mean, you kind of got the bulk of it, is these narratives. What's the Fed going to do over the next, not necessarily next week's meeting, but the next few meetings? Mhm. >> How does inflation play out? We're going to get CPI Friday, we'll get another round of employment, then more inflation.
42:11 Are the trends, is the employment trend getting better, that maybe argues for a rate increase, or was it just a fluky number that will get revised lower? So we're kind of flying by the seat of our pants right now, understanding there's this divergence and understanding why there's the divergence and just trying to gauge how the Fed, how the market will either perpetuate that trend or reverse that trend.
42:41 >> Okay. And I don't want to set an unrealistic expectation here. So, caveat this any way you like, but again, there's sort of a central thesis under what I hear you saying, which is that you and Lance still think that secular lower bond yields lie ahead over the next couple years.
43:06 First off, I'll take a beat. True. >> Yes. Now, there's a little complication to that and that's AI, right? How does AI impact the economy? Does it create explosive growth? Does it create disinflation? And I think the answer is yes, it creates growth and yes, it creates disinflation. But when? Right now, some of it is more inflationary, higher memory chips like we talked about.
43:32 >> Mhm. >> This data center building is massive. It's a good chunk of the economy, economic growth. So when do the benefits of AI start seeping into the inflation levels and growth levels? That's difficult to know, that again, that Chad Jones interview is outstanding for more insight on that.
43:56 >> Okay. Well I will reach out to him as you suggested. But right now your default over the next couple years is you expect bond yields to be trending downwards not upwards. I've got that correct? Right. >> Yeah. More towards the real growth rate. >> Okay, so for the fairly substantial percentage of viewers of this video who are 50 and older and are approaching retirement or maybe retired and income and safety become a higher priority.
44:26 Is this a period to be watching what's happening in bonds and fixed income instruments? Because there might be an attractive accumulation opportunity here. So that if your default expectation plays out the way you think it will, these people will not only be locking in kind of higher yields, but they'll be able to also enjoy the price appreciation of the underlying fixed income instruments as well.
44:57 Again, I don't want to oversell this, but is this a period of time where they should be kind of following this with a little bit more intent? I think they should be watching it. But I always, as an investor, you should be watching all asset classes and you should be diversified.
45:12 But I think this makes sense as part of your portfolio. Does it make sense as a larger part of your portfolio than it did yesterday? Maybe that's for you to decide. But this is one of those kind of trades, too, where, and look, we've been wrong for the last couple years. Right for a while, now recently wrong because of Iran.
45:32 But you just have to have a little patience. And I think if it makes the stress easier of holding bonds, buy a five or seven-year bond and just buy the actual bond. Tell yourself you're holding it to maturity. Worst case, you're going to make 5% for five or seven years or whatever it is. If things go differently, maybe you'll sell them, take a profit, and reinvest into some other asset, stocks or whatever else.
45:58 So, I think you have to have with bonds a more patient outlook than stocks. >> I don't disagree at all. And again, the thing I'm trying just to sort of shine a light on here is, again assuming your perspective proves to be correct, there's an opportunity here to potentially lock in higher yields that'll be relatively more attractive over the next couple years, plus get the price appreciation.
46:26 At the same time, you mentioned CAPE ratios and stocks up in the 40s. If there is a correction in stocks, no guarantee there will be, but there may be an opportunity here to look at your portfolio today and say, well, maybe I'm actually a little bit too exposed to stocks. I've had a lot of gains or whatever.
46:46 I've talked a lot recently on this channel with multiple different analysts, including Lance, where we just see kind of record levels of percent equity exposure in all cohorts of investors, and it seems to go up the older the investor cohort is, which is crazy because they should be de-risking.
47:07 So I guess if I can boil all this down, I think this is the time if you haven't done it recently to sit down and look at your overall portfolio exposure and say, look, am I too exposed to equities because of gains or just my reaching for risk or whatever. And given my age, maybe I might want to take some gains off the table here and start thinking about increasing some of my bond exposure because of the reasons that we just talked about here.
47:35 This isn't a blanket. It's certainly not personal financial advice, but I think that this is a worthwhile conversation that people should be having either with themselves if they're a DIY investor or with a professional financial adviser like you. >> And I also, for old geezers like me and you in our 50s, I'm older than you actually, but >> we're kind of thinking >> but whatever.
47:56 >> We're kind of thinking about our retirement, right? And we have some time, whatever it is, five more years, 10 more years, what rate of return, this becomes pretty important to us. What rate of return do I need to meet my goals post-retirement or in retirement? And let's just pick a number.
48:19 Say it's 5%, right? Well, I can make 5% on a 30-year bond, on a 10-year corporate bond, on a five-year corporate bond. Maybe I lock in. My goal is to make 5% or more. My goal isn't to beat the S&P. The S&P is an >> important benchmark, but that's not my wealth benchmark. My wealth benchmark in this example is 5%.
48:46 So, think about the things you can do to basically lock in your goals. And potentially adding fixed income just secures that a little bit more versus other assets. >> Yeah, I totally agree and I try to hammer that point home a lot. I'm glad you brought it up, which is if your probability is high of reaching your goal at a safe pace with a safe instrument, why get tempted to screw up your odds for success.
49:17 Just lock in what's sure and safe and you'll have confidence that you're going to hit that goal by the time you need to and then just live your life, right? And sleep well at night. So, anyways, highly recommend folks do that. I would also say, and I'd love your thoughts on this, I would say folks, if what we're saying is sort of resonating with you, you're like, "Yeah, I should probably maybe think about doing that.
49:37 " I would say do so sooner rather than later, only because we're recording this right after Labor Day, Michael. Right. And so, I think people just always forget how fast the end of the year comes once you're past Labor Day. So, they think, "Okay, yeah, I'm coming back from Labor Day.
49:54 I'll try to look into this before New Year's." And then you pick your head up and you're like, "Oh my god, Thanksgiving just passed. I only have a couple weeks left. I've got to get my RMDs in. Everybody's screaming at me. I got to get my holiday travel done." Work's trying to get all the end of the year stuff done.
50:08 It just doesn't happen. And you guys as financial advisers, you get crushed under an avalanche of people who are there at the 11th hour trying to get stuff done. Nobody gets their best work done in that environment. So, while you still have some time and a little bit of halo from summer, folks, get your ducks in order now and avoid that end of year scramble.
50:29 >> And one of the things that we do that I love, and I would love to say it's Lance and I doing our magic at portfolio management, but it's not. It's financial plans. And they are pretty complex beasts with a lot of different scenarios. But I've sat on some calls with clients where I go through the whole economic and market spiel and then I get kind of caught listening >> to the financial plan details.
50:55 I want to buy a car every 5 years. Daughter's going to get married hopefully in the next 10 years. We want to go to Europe every other year. And you plot out these scenarios and this really incredible software tells you, well, based on what you have and what you think you're going to spend and inflation and a lot of other factors, you have a 98% chance if you can earn 5% or more of meeting your goals.
51:30 And that to me tells you what you need to then go on your investment to figure out what you want to buy as far as your investments go. So I think having some understanding, whether we do it or some other money manager does it or you do it on your own, that's the north star that investors need instead of looking at the glimmering S&P 500 or NASDAQ or Nvidia or whatever it is and thinking that's going to get me to where I want to be.
52:01 You got to look at the true point. So, I highly encourage people to either do it on their own, get software to do it, hire a money manager to do it. We'd be happy to do it. >> No, but that's Danny and Richard and those guys, right? >> Right. >> Yeah. Yeah. So, I'd chime in on that, but folks have heard me pile in on this point many times, so I'll save them from it, but I'm just a huge fan of financial planning.
52:32 And with my adviser, I bugged him about it so much he finally just gave me the software and said, "Look, you love to geek out on this even more than I do." And I do, I like to go in there and just play around with all different scenarios. But >> we do the same thing. Our clients can access our software and put in maybe we'll buy four cars in the next 10 years instead of two or do whatever they want to do.
52:54 >> Or you just totally doom scroll like, okay, you know what? What if my holdings get cut in half next year, right? Or what if, god forbid, one of us gets hit by a bus or would lose our income or whatever, and you can >> right, >> you can start seeing in a lot of cases either areas where you're really vulnerable and say, okay, well, look, we really got to shore this up, or like, wow, we can take more hits than we realized and it's not a reason to go and be a spendthrift, but it's
53:21 just to say, I don't need to worry as much as maybe that fear that was living rent-free in my head, and now I can kind of kick it out because I've realized even if it materializes, it's not going to hurt me as much as I thought it would. >> Okay. Well, with that said, Michael, thanks so much again for doing this.
53:39 This was super useful. If you don't mind, we'll do this on some sort of regular cadence going forward. Just give people audible calls on what you're seeing in the markets and whatnot. And as you and Lance always say, you follow the fundamentals because over time you have greater confidence the market will eventually go there, but in the interim it can take a lot longer sometimes than you imagine.
54:06 You just have to trade the market you have. So right now the yields are continuing to go higher and we'll see what happens from here. >> That's well said. >> Okay. Folks, please join me in thanking Mike for dropping everything to come on and give us this update. To do that, just hit the like button and then hit the subscribe button below as well as that little bell icon right next to it.
54:25 And if you would like to talk to a financial advisor about all the issues that we talked about here, perhaps you'd even like to talk to Michael and the team there at RIA, whether it's about bonds, whether it's about a financial plan or whatever, just fill out the very short form at thoughtfulmoney.com and whichever firm you're matched with will be in touch with you right away.
54:43 As a reminder, these consultations are totally free. There's no commitments involved. It's just a service they offer to be as helpful as possible. Lastly, the Thoughtful Money fall online conference is coming up fast. It's going to be just a little bit over a month from now on Saturday, October 17th.
54:58 Don't worry if you can't watch live. Everybody who registers will get sent replay videos of the entire conference, I think the exact same night as the conference ends. And it's coming along gangbusters. To get all the details as well as register, just go to thoughtfulmoney.com/conference. And go now if you can because we're still offering the lowest discount we're going to offer, the early bird price discount.
55:24 And a reminder, if you're a premium subscriber to our Substack, you have a code that will get you an additional $50 off of that early bird price discount. So if you don't already subscribe to the newsletter and want to get that discount, just go to thoughtfulmoney.com/newsletter. Michael, thanks so much, buddy. My pleasure. >> Really wish you a good week from here.
55:42 I know we'll have Lance on again this week. So we'll get to hear from your cohort, your partner in crime there soon. But looking forward to having you back on the channel again soon. And in the interim, just keep doing what you're doing. And if something happens where you say, "Hey, Adam, I actually am now making an audible call.
55:56 Let me know and we'll pull you back on here quickly." >> Deal. Sounds good. >> All right. Thanks so much, Mike. Everybody else, thanks so much for watching.