Title: Stephanie Pomboy: Rising Bond Yields Are EVERYONE'S Problem
Show: Thoughtful Money w/ Adam Taggart
Guest: Stephanie Pomboy, founder of MacroMavens
Date: 2026-08-05
URL: https://youtu.be/219X0wE8BWM
Length: 1:04:09
Note: Auto-transcript, cleaned remove-only — fillers (um/uh/you know), verbal tics, stutters and false starts removed; wording, numbers, names, hedges and every (mm:ss) cue otherwise verbatim. Garbled names left as heard ("Bessant" = Scott Bessent; "been washed" unresolved). The first ~8 minutes are personal chit-chat (knee injury, Glacier National Park) — kept here, not analyzed.
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(00:00) The bottom line is the higher for longer interest rate environment. I think it's very much here to stay, especially if you're bullish on AI and this whole CapEx boom, because that's going to feed this crowding out phenomenon that's putting upward pressure on Treasury yields, which happens to be the benchmark against which everybody is tied.
(00:25) So, you're talking about higher for longer for everybody. >> [music] >> Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host Adam Taggart. Refresh from vacation and very excited to pick things back up with this monthly update from our great friend, the Macro Maven herself, Stephanie Pomboy.
(00:46) Hi Steph, how you doing? >> I'm great. How are you? >> Good. All right. Well, Steph, look, I just got back from vacation. You are now out west. You make your western sojourn every summer when the temperatures just get too crazy in your home state of Florida. >> Yeah. >> And before I left, everybody was on pins and needles about you because you basically arrived in the west to do a lot of hiking and enjoy yourself and very quickly managed to somehow break your knee in half.
(01:18) >> Yeah. >> [laughter] >> Well, how are you? How's the recuperation coming? Are you doing okay? >> Yeah, I'm doing good. Mentally I'm done. I'm prepared to go hike again. My knee has other ideas, so that's the real hurdle that I'm dealing with, but I guess that's also something that comes with age.
(01:38) You expect your body to be able to do things that it might not necessarily be able to do anymore. So, it's an adjustment, but I'm doing great and Willamina had her ACL repair last week and she's already bouncing around like she didn't have any surgery. So, we're both fine. Thank you for asking. >> Oh, I'm glad to hear you're okay.
(01:58) I feel terrible that but both you and Wilhelmina have had injuries to deal with. Are you in pain or are you okay? >> I'm okay. It's not a day at the spa, but it's not the end of the world either. And >> The painkillers mix pretty well with the margaritas? >> [laughter] >> Oh, man.
(02:18) Yeah, I don't dare at altitude I can barely drink half a margarita. I wouldn't even contemplate mixing a painkiller with that cuz I'd be flat out on a floor somewhere. But no, everything is great and we're cruising along and while it put a real crimp in my hiking, this is just such a wonderful place to be that it's hard to be down about it when you walk outside and you can take in the beautiful scenery and breathe the fresh air and so, I'm good.
(02:44) >> All right, good. >> Well, I got a taste of the beautiful, >> Yeah. >> experience just having been in Glacier National Park for the past week. For those that missed me saying that before I left, great time celebrated both my 25th wedding anniversary, which is why we booked the trip in the first place.
(03:03) We booked it last year and then we kind of moved it because we had to move states. And then this happened to coincide with my birthday and so that was fun. >> also your 25th? >> Yeah, yeah, also the 25th, exactly. If only. If only. If only it was even half 25th is only even half my age. >> Uh >> And now it's close to our 26th anniversary, so we kind of celebrated both while we were out there.
(03:27) And Glacier, absolutely beautiful. I don't know if you've ever been there, Steph. It's stunning. I've spent time at a few national parks, Yosemite in California, which is gorgeous, the Tetons, Jackson Hole. I've been out in Vail near you in the past. And those are all very beautiful.
(03:47) I will say and someone I'm sure will correct me in the comments, but that Glacier I think has more kind of like hero vistas than any place I'd ever been. Like Yosemite, that valley view when you come in, you see Half Dome and El Capitan, that's gorgeous. But that's kind of the hero shot for Yosemite.
(04:05) Like everywhere you look, basically, at Glacier has kind of a view like that. >> Your pictures were amazing. Like I said to you, they almost look fake. And I actually was chatting with a friend yesterday, ironically enough, who grew up in Montana, and she was saying that Glacier is the most beautiful. Like she likes it better than Yellowstone.
(04:22) Like just like you said, felt that was hands down the national park that you wanted to go to if you were in that area. So. >> Well, thanks. And folks, I promise we're going to get to the economy just a second. But yeah, I will say and what was amazing is a lot of places there looked straight out of Switzerland.
(04:41) I've been to Switzerland very briefly. And I will just say, folks, if you're dreaming about going to Europe to get the alpine experience or whatnot, but you live in America, you can pretty much get the same experience by staying local if you go to Glacier. It really was amazing.
(04:58) We did have some hazy days, especially at first, from all the smoke coming, I think, both from Canada and from the fires in Oregon and Washington. I hope you're not getting too much of that. >> No, actually, we got some rain and that cleared that out a lot, but the wildfires were really bad this year. On your sales pitch for staying in the United States and going to the national parks instead of going to Switzerland, the benefit of staying here, too, is you get to keep your ranch dressing and TSA won't confiscate it,
(05:24) you know? >> [laughter] >> Know that you can go to any restaurant and have your ranch dressing. So. >> Have >> [laughter] >> as much ranch as you want. That's so funny. We actually joked about that on the trip. And folks, again, I promise I'll get to the macro and the markets in a second, but I got to tell one little funny story.
(05:42) So we did one of these sort of organized hiking biking trips. So it was us and it was three other couples who all were amazing. We actually were became fast friends and we're already planning kind of another trip together. >> That's awesome. >> But with the first day we got picked up and they're driving us into the park.
(06:00) So, it's like a two plus hour drive to get into the park. So, we're talking to each other getting to know each other, right? Sort of you can tell everyone's kind of sizing everybody up, right? And one guy had been a writer for the Tonight Show for 20 years. >> Oh. >> Very accomplished, very funny guy. And another guy clearly a successful retired finance guy.
(06:24) And they get to me and I say I'm a YouTuber and they're like, "Oh, huh. Okay." That sounds nice. And I can tell they're not really sure what to do with that. We pull into the park just like a rest stop. It's like a little tiny vista with a public restroom there. And they're like, "Hey, get out of the car for 5 minutes.
(06:46) Everyone take a bathroom break. Get your first glimpse of the park and then we'll resume going on." And we're stepping out of the van and this guy is getting out of a car next to us and he turns around and goes, "Are you him? Are you Are you you hacking?" >> [laughter] >> And I tell you Steph, I could not have planned this any better.
(07:06) I could not have paid somebody to do that. And all of a sudden everybody else in the trip is like, "Oh my god, we thought you were some total nobody." >> Yeah. >> Clearly you're a huge celebrity now, right? And of course I'm spending the rest of the time trying to tell them, "Guys, really this was a total fluke. It's never like this.
(07:20) " >> Right. >> But of course it was the absolute like best way I could >> That's amazing. >> beginning. So, it was so funny. >> So good. I love it. >> I have been the gentleman who saw me in the parking lot. Man, thank you. You set me up for life with these folks. >> Check the check is in the mail. >> The check is in the mail.
(07:37) All right, folks. Well, now we'll roll up our sleeves and get to the meat of things. Although do take a second if you can and if you haven't already just mention to Steph in the is send your well wishes to Steph in the comments. >> Oh, thank you. >> And to William and too. Okay Steph. So, it was a crazy month, July.
(07:57) So, while I was out there not thinking at all about the markets, I think it was the let's see here, it was the worst month for the NASDAQ in 25 years. We had the highest or is the worst July for the NASDAQ in 25 years. It was the worst or that the highest bond spike in July since 2005. >> Mhm.
(08:19) >> And it was the highest oil price spike in July in over 30 years, right? So, we got a lot going on right now and what's interesting right now is I think everybody's looking at the markets and saying okay, we're seeing some signs of worry as bond yields continue moving up pretty quickly here.
(08:40) At the same time, while the stock market's been a little volatile, the day you and I are talking here, Steph, it's pretty much back to record highs. So, is it time for worry or is it time for euphoria? >> It's crazy to watch the market ping-pong back and forth on the headlines that we reached a deal with Iran.
(09:01) No, we're going to bomb them to hell. Now we've reached a deal, it's coming imminently. And no, you would think that at some point people's inclination would be to just stand aside and wait for a final deal to actually get put to bed because how long I think we've been on the eve of a deal since March? I don't know.
(09:25) I mean, it seems like it's every week. >> a good while. And sorry to interrupt, but let me ask you this. You said maybe people should wait. Is it even people anymore at this point in time or is it just algos parsing every headline? >> That's a better question to ask someone like Mike Green than me, but I would guess that it has a lot to do with a lot of those algorithmic trades.
(09:49) But the other thing that's happened that's sort of maybe helps explain it a little bit is the profit period and the earnings numbers that are coming out are barn burning numbers. And so, whereas one could have been concerned going into this year about the prospect of a kind of been washed Fed tightening liquidity and that being a headwind for the market on top of the situation with higher oil prices and interest rates, the profit side of that has served to provide a pretty good offset to that argument for
(10:24) the bulls. But, as I'm sure you and I will get into, if you peel the onion a little bit, you don't even have to peel it very far, you discover that this profit bonanza isn't all it's cracked up to be either. So, your audience will not be surprised to hear that I feel like the markets are sort of being rather insouciant, shall we say, about a lot of these risks out there and are glomming onto profit numbers that aren't all that they appear on the surface. At the same
(11:02) time kind of brushing off these really powerful headwinds of higher rates and higher oil prices. And I know oil prices are what they're we're down to $76 today, so they've definitely come down materially, but again, we don't have a signed agreement and there's nothing to say that a week from now we won't have oil prices back over $85 a barrel.
(11:26) I mean, it just seems like this is we just keep turning around back and forth between 75 and 85 and ultimately as you and I have talked about I think the direction of travel for oil and commodity prices more broadly long term is higher. So, this is a headwind that isn't going away contrary to popular perception and then the interest rate thing another topic we can get into and should, that doesn't appear like that's going to be alleviated anytime soon.
(11:59) So there like you said, there's a whole lot to discuss in the last month and it does appear like the stock market is ever as disinclined to really weigh those headwinds in any significant fashion. >> All right. Well, as you said, Jeff I am shocked, shocked that you feel that way. >> [laughter] >> All right. So three main things to tackle there.
(12:25) One, stock market whatever you want to call it, potential hubris there. Two, the direction of oil and three, the direction of bond yields. These are all three really big things. I guess why don't we just tackle them in that order unless you have a preference otherwise.
(12:46) So regular viewers of the channel likely saw my video with Fred Hickey two weeks ago or so about a week before I left. And Fred did a really good job of deconstructing the current headline earnings and what he believes the true adjusted earnings are >> Mhm. >> for a lot of the hyperscalers and other companies in the AI space.
(13:09) And basically revealed that yes, they are making these profits right now, but a lot of these profits are either one time. So, like in the case of Google a big chunk of its latest earnings came from booking gains in its stake in Anthropic, right? So, if you believe Anthropic might be overvalued, well, then, Google's earnings are then overvalued by default, and that's a one-time benefit.
(13:39) It's not going to be recurring. And then secondly, Fred is pointing out the tremendous depreciation wave that lies ahead for all these AI investments, data centers, etc. And right now, he's like, you're kind of booking pure profit, and those depreciation expenses aren't really hitting yet.
(14:02) And if you really want to look at the long-term earnings prospects for these companies, you really got to factor that depreciation. And so, when he basically adjusts for those two things, can't remember the exact numbers, but I think he said you go from like a PE ratio that looks good, maybe even a little bit low in the teens for some of these companies, and it's or low 20s, or if you adjust it the way that he adjusts it, he's like, it's more like 65, right? So, anyways, that was Fred's point of
(14:31) view. Do you look at it similarly, or do you have other concerns that I didn't list there? >> No, well, there is one other concern, which I'll get to in a moment, but the main point was, I think this valuation side that you mentioned at the top. Take Amazon for example. They I think their initial investment into Anthropic was 8 billion.
(14:53) And the latest valuation I saw of Amazon's position there was now something north of 75 billion. So, from 8 to 75 billion. And they have to book those mark-to-market gains as other earnings other income. So, it gets factored into the earnings numbers, even though it's not actually money that they earned.
(15:18) It's paper gains that they won't realize until they actually sell. So, you've had this massive, I think in the first quarter for Amazon, their reported earnings were something like, let's say, 30 billion, of which 16 billion was the appreciation in their Anthropic stake. So, you're talking about half of the purported growth in their earnings came from this mark-to-market bookkeeping item that has nothing to do with their ability to pay salaries, fund capital expenditure, and service interest on their debt, which is the
(15:57) other side that maybe Fred didn't get it, maybe he did get into it, but I would say that's another headwind. Because these hyperscalers are also issuing debt like crazy, and that debt increasing is becoming increasingly expensive because the spreads on this hyperscaler borrowing are starting to widen out around concerns about overinvestment, et cetera.
(16:21) So, you are seeing interest costs go up, free cash flow has actually gone negative for a lot of these companies, if not all of them. >> Which was like unimaginable 2 years ago, but yeah. >> Yeah. Exactly. Where these were the cash cows, they were awash in cash, and they were the ones that were kind of creating this false perception that the S&P 500 companies were in great shape because they were so skewing the cash position that it made it look like S&P 500 companies were flush with cash. It turned out it was
(16:57) actually only like 12 companies, all of whom are now free cash flow negative. [laughter] That's another story that hasn't garnered a lot of attention. So, a number of things, but I think this investment income story is really material. Someone did a study on the first quarter earnings and suggested I think first quarter S&P earnings were something around 20% growth year-on-year and his analysis showed that 12% of that was just this mark-to-market accounting.
(17:34) So, you're looking at earnings growth that's really half roughly what it appears to be on the surface. So, >> Let me just ask you on this, Steph. So, this is the what happens when times are going well, right? And these frontier companies are receiving these crazy valuations. You don't have to believe this if you're listening, but just to grant for a moment that we are in a bubble, which a lot of people are saying in the AI space.
(18:05) I mean, Fred, one of them, number of people I've interviewed recently. If the bubble bursts, Steph, the Amazons, Google's of the world, their earnings are going to get hit operationally from that, but then they're going to have to, right, book massive losses, right? So, you have that potential really painful situation ahead should indeed valuations cool off or for these frontier models.
(18:31) >> These are the pesky details that we're not supposed to think about or talk about. >> [laughter] >> Like you said, it's all fun on the way up. It's just like leverage, everybody loves it on the way up and it's horrible on the way down. And we're going to see that probably.
(18:49) But it is interesting because what you're seeing in the credit markets is a real increasing discernment around the hyperscalers in terms of widening spreads, increased cost of insuring against default the credit default swap market. And yet in the equity market, you're seeing it, but it's not yet a broad concern for the market generally.
(19:16) This is still, as you said, we're about to hit new records today. So, it hasn't really become it, call it an existential threat for the stock market in any way, shape, or form. >> Yeah, yes, potentially. >> Yeah, that's it, exactly. >> So, I just love your thoughts on this. So, I'm sure I've talked with you in the past about this cuz I've mentioned it many times.
(19:37) There to me there appear to be a there's a whole litany of challenges to the AI CAPEX build-out schedule that analysts currently have projected in their Excel models. And I have said the analysts basically just assume as long as the capital is there, we're going to be able to build out a zillion data centers over the next couple years.
(20:04) And I and other guests have raised a whole bunch of issues largely based in the real world that could constrain that growth rate. And this could be everything from available permitted land, water capacitors, memory chips, public support, whatever. I've mentioned this many times, so I won't continue to beat that drum.
(20:24) But I've said, I think those are probably likely to be real constraints even if the capital is there. You're raising a point now where people are beginning to say, "Yeah, but the capital might not be there. These companies are becoming increasingly dependent on credit to do this build-out, and the credit is becoming more expensive.
(20:44) And the more expensive credit becomes, the less credit these companies can afford to take out." So, how big of a rising risk do you think this is? >> Well, I think it's a big risk, and I think the first place that it's manifest is in the Treasury sector. Because right now the corporate borrowers are ironically crowding out the federal government.
(21:06) We used to always worry about the reverse, but we've got a treasury that needs to roll $10 trillion in debt this year because we've issued, we have 6.7 trillion in T-bills that automatically have to be rolled every 12 months. Plus, we have an additional 2.3 trillion or 3.3 trillion in bonds and notes this year.
(21:29) So, we're did the federal government has 10 trillion in borrowing needs. And then coming into this year, the corporate sector needed to roll 1.2 trillion of its own existing paper, not to mention what municipalities and agencies, etc. needed to tap the markets for. Then comes now the hyperscalers having depleted their free cash flow and they're now stepping up and saying, "We need to borrow more.
(21:55) " So, I went and looked at SIFMA which produces these quarterly data on bond market issuance across every sector. And what you find is that the private sector has borrowed this far this year the same amount as the federal government, which is just mind-boggling when you think about the amount of paper the federal government has to roll that we now have a private sector that is actually giving it a run for the money.
(22:25) So, there is a massive There's just this deluge of paper being issued. And then on top of it, and this doesn't get a lot of attention, companies have stopped buying back shares. They are now net issuers of stock. This is another huge negative for the stock market because for years in the years leading up to COVID and thereafter, buybacks were a huge source of support for the stock market in addition to hyper-aggressive monetary policy.
(22:57) But, the buybacks of over a for a dollars a year, there was a time where the corporate sector was the biggest purchaser of equities. And now, you've gotten to the point where retail investors have really become more aggressive. But generally speaking, these buybacks have been a massive tailwind for the stock market that is now silently going away and no one's really paying attention to that.
(23:21) So, we have this environment where we've got massive credit issuance. We've never seen numbers like this before. I think it's safe to say. And then you've got equity issuance on top of that. So, we're just pump, just demands for capital are enormous out there. And the question is, is the supply of capital infinite? Where is all this money going to come from? And maybe more to the point, if I'm an investor, I have an abundance of choices now.
(23:52) I can afford to be discerning. I don't have to buy a Treasury. I could, if I thought Google was a better-quality credit than the federal government, lend money to them because there's now that opportunity. >> Or equal credit, but they're giving you a higher yield. Yeah. >> Exactly.
(24:14) So, and so there are abundance of investment options for people out there. And what you're seeing is the long end of the Treasury curve really pay the price for that. We've seen a huge backup. Obviously, the 30-year has backed up dramatically. The 10-year is well. And then I don't know if we want to get into this cuz it's a little bit off on a tangent, but the Bank of Japan intervening hasn't helped because they're trying to support the yen.
(24:43) And the way you support the yen is by selling dollars, which is most usually done by selling some of their Treasury holdings, which is putting further upward pressure on the Treasury complex. So, all in all, I think that the bottom line is the higher for longer interest rate environment, I think is very much here to stay, especially if you're bullish on AI and this whole CapEx boom, because that's going to feed this crowding out phenomenon that's putting upward pressure on Treasury yields, which happens to be the benchmark
(25:17) against which everybody is tied. So, you're talking about higher for longer for everybody, even if spreads compress a little bit farther from here, which is they're already about as tight as they can get, but even if they compress farther, still talking about nominal yields that are going to be the highest in many years for these companies.
(25:38) >> Okay. Boy, you packed a lot of great >> I'm sorry. >> No, no, no, no, no, it was great. And I'm so glad you mentioned the Bank of Japan. I absolutely should have flagged that earlier for us to discuss. So, but the punchline, you're saying, look, it's higher for longer is here to stay, and the things that you just mentioned, the fact that there's this tremendous surge in corporate issuance of credit, particularly in an area that Wall Street's excited about, and that the nation believes it needs to
(26:14) have for national security issues, right? So you've got that, you've got and so that's pushing borrowing costs up for everybody, but particularly the US government. We've got the potential for continuing rising oil prices, which you think is more likely than not. That again creates inflationary pressures, generally drives yields up as well.
(26:41) And we have basically the existential fight that Japan is in that is forcing it to sell its Treasuries, which again pushes bond yields up on the long end of the curve for Treasuries. All those three things are things that the Fed really doesn't have a lot of control over. >> Yeah. >> So, I guess how different is this a position that the US finds itself in where, if it's a credit crisis here in the US, the Fed can step in as the lender of last resort and kind of try to push oil into the gears?
(27:17) When it's these things that the Fed doesn't really have a direct control of, does the Fed have much, if any, opportunity here to try to affect the administration's short- and long-term goals of getting borrowing costs down for the government? >> Yeah, no, it's a real struggle. And the way that you would think they would accomplishment is the exact opposite of [clears throat] what Kevin Warsh really sort of campaigned on.
(27:43) Yes, which was >> Reduce the balance sheet and maybe raise rates. >> Yeah, so this is exactly the opposite program. And I've said for a long time, forget about the Fed funds rate. All this fixation on the Fed funds rate is irrelevant cuz we've seen already the last several times they've moved it, the long end of the yield curve it's gone in the opposite direction.
(28:04) So, their control over the long end of the yield curve is highly questionable to begin with, but it's the balance sheet that ultimately comes into play when you're talking about providing support for markets that have reached this kind of extreme in terms of valuation and in terms of the amount of leverage out there.
(28:24) I mean, there's just the you balance sheet capacity is the only thing you have and it would have to be a substantial increase in the type of scenario, I think that you and I would envision where you actually had a credit crisis similar to, let's say, 2008-9. So, this is why I've always struggled with Kevin Warsh's plan because it seemed to ignore what was the elephant in the room, which is who's going to be the buyer of last resort for Treasuries? I mean, I guess the ideal scenario would actually be if we had a credit crisis I that wasn't,
(29:04) a super large crisis like we had in 2008-9, but enough to get some risk appetite diminished to get people to start running into Treasuries instead of into corporate debt, but then you see corporate spreads blow out and then you're talking about going back to the kind of economic environment we have lived in for years, which is where the government is the marginal producer and, we're basically sending handouts to the private sector via the government to kind of support growth rather than, frankly,
(29:42) I'd love to see CapEx booming and hopefully employment will follow and that's the organic stuff that we should be having drive the economy, but we're now in a territory that seems like it's kind of reached bubble unsustainable levels. So Sorry, that's very muddled, but the bottom line is I think for the Fed in answer to your question doesn't have a lot of opportunities to affect outcomes outside of the balance sheet and that's the one thing they've said that they are going to resist doing. Meanwhile, they've said
(30:18) that and in the background the balance sheet is expanding. >> expanding, yeah. >> Yeah, it's up over 200 billion since they started non-QE QE back in December, so >> Right. Now, that's not necessarily Warsh's fault, but it is continuing under his >> Right, right. He hasn't done anything so far. >> Yeah. >> It's like Bessant, Bessant came he campaigned on the idea that we can't rely on T-bill issuance and then he got, sat down at his desk the first day and sharpened his pencil and realized there was no way to
(30:50) get around relying on T-bill issuance. So, you keep this that program >> until long-term rates come down, but you've walked us up to this point of saying there are all these reasons to continue to expect rates to stay high and probably go higher. >> Yeah, and so far the reasons I've outlined have been the cyclical reasons.
(31:08) There is the secular reasons which relate to this deglobalization which I do think continues a pace and that deglobalization generally envisions a world that is multipolar and isn't as reliant on the dollar or by extension US Treasuries. So, just as the fall of the Berlin Wall and the onset of globalization thereafter pushed rates steadily lower from 1980 till basically just a few years ago, so will deglobalization I think beget the reverse where rates were slowly just ever so, each year move higher
(31:49) and higher. >> up. Yeah, and you mentioned the reason that the world will [clears throat] continue to attempt to become less dependent on the dollar meaning less buying of US Treasuries or maybe even outright selling of US Treasuries and that's what's going on right now in both China and Japan. >> Mhm.
(32:06) >> But also a deglobalized world is that that's an inflationary trend. Right? As you reshore industries that could be cheaper if offshored to another country, but you're saying look, for national security reasons we want to have it locally. Well, local labor's more expensive and that's inflationary and that then pushes rates up over time.
(32:27) >> Yep, and it has another facet to it which gets kind of wonky, but it's just big picture and that is if you have an environment where inflation is going up in the economy, you have higher cost of goods and labor and capital, it is what we're talking about. >> In general, there's less money left over to flow into financial assets.
(32:52) If you picture a tub that's being filled up with water every day and the economy is consuming a very small portion of that. All the other water that flows in is free to flow into assets. >> Right. >> And in an environment where you had steadily declining inflation and interest rates, the economy needed less and less money to go.
(33:15) It was costing less to move every dollar of output. And so the stock market and the bond market and okay, we had these great bull markets in financial assets. If we get into a period where inflation and interest rates steadily move higher, the economy is going to suck more and more of that marginal liquidity in to run, which is going to siphon therefore money that otherwise would have flowed to financial assets.
(33:44) So, I think there long-term implications for investors, too, which suggests that the days of easy money are easy wins where you could just throw a dart at a dartboard and make money in a stock are probably behind us once we get through this kind of bubble blow-off, which is what I think it is. I'm sure you've talked to a lot of people who probably echo that sentiment.
(34:09) And then, the long-term trajectory will be one where we get back to the business of actually analyzing the fundamentals of companies and seeing who can perform best in these environments where cost of capital and goods and labor is higher than it has been for the last several decades.
(34:28) >> I'm sorry, you used a word I'm not familiar with. Funda- what? >> [laughter] >> We got yeah. I don't know if they teach that anymore. >> I know. There are probably a lot of people listening who are rooting, cheering on what you just said, Stephanie. It was great. Bring it on, let's get back to the way that things used to be.
(34:48) >> And get out of this era of easy money. And while I would probably put myself on the cheerleading squad, I might as well admit that the path to that will not be fun for pretty much everybody. >> Yeah. >> But to pull an investment theme out of this, and this is no surprise for anybody who's followed you for a long time, >> [clears throat] >> as the economy continues to steal more of the marginal dollar liquidity, >> Yeah.
(35:17) >> as provided that the economy doesn't slow too much, the economic demand for inputs will continue, right? So, on a relative basis, the assets that should perform well in this future are the hard assets, are the inputs, the commodities, the things that the economy needs to drive. And so, we've all seen Tavi Costa's charts of the commodity complex versus the S&P.
(35:47) And I think it's still kind of bouncing around kind of secular lows. >> Yeah. >> But you should expect that to start reversing, right? You that on a relative basis, commodities will start outperforming versus financial assets in this new world that you see coming, correct? >> Absolutely. Yeah, and the other point I would make is the one we talked about at the top, and that is you've got this massive supply of paper.
(36:11) We're just issuing stocks and bonds hand over fist, whether it be the private sector or the government. And so, having hard assets that just can't be manufactured out of thin air strikes me as an investment with a very appealing attribute to it, it is limited in supply and increasingly so, whereas when you look at financial assets broadly, the paper printing is hitting hyper scale kind of levels.
(36:45) >> So, that's the secular trend that you see ahead. Now, if you throw in there some cyclical things like recession, I just released a video with Michael Pento where he's focused on the current two trillion deficit that we have right now and he says when we go into recession next, yeah, that's going to be like a six trillion deficit, right? So, you're going to see a lot of fiscal spending in that case and you're also going to see, highly likely, tell me if you disagree with this,
(37:22) rescue efforts by the central planners, right? They're going to have to and worse might be forced to expand that balance sheet, right? And so, those are things that along with the secular trend that should cause commodities and hard assets to outperform paper ones. Those are cyclical factors that will kind of add a lot of turbo juice to that, right? Because of course it's the more money that gets pushed into the system by the central planners, well, that's just more dollars chasing the same amount of hard assets, correct?
(37:54) >> Yeah. And the main concern I have around all of that and the size of the deficit in the next recession relates to the pension underfunding situation and I know we've talked a lot about it, and we've talked to Ed Siedle about it and the numbers are mind-boggling when you think about the fact that we're running, I think public and private pensions last I checked, were underfunded to the tune of like four trillion, which is a lot better than they were a few years
(38:24) ago. I think the number was 6 trillion. So, we've now managed to whittle it down to just 4 trillion dollars in underfunding at a time when, as we've talked about, the markets are hitting all-time record highs or close to it. So, that's fairly terrifying when you think about the implications for, God forbid, we have a run-of-the-mill correction, bear market in stocks, what that would do to these pension portfolios before you contemplate the enormous exposure they've built up to alternative assets.
(39:01) >> Right. >> >> Which may not be worth anywhere near what they're currently valued at. >> Exactly. The private equity, private credit, all of these things that they were sold on, obviously we're seeing marks in some of those that are 50 cents on the dollar or even less. So, to me, this is where the bailout comes, because we bailed out the banks in 2008 to an enormous public outcry saying this was just egregious.
(39:33) If we have pensions going bankrupt in 2027 or eight or whatever the time is, I think the appetite to not bail out day laborers is going to be pretty low. >> And that's not even assuming a Democrat socialist administration, right? That's under just a regular business as usual, we get one of these very socialist/communist leaning people in there, presumably they just say, "Yeah, we make everybody whole.
(40:10) " >> Yeah. Yep. And we'll have Elon Musk pay for it or whoever. But, >> [laughter] >> it's yeah, it's terrifying to think about, but I would totally agree, long story short, with Mike Pento's point that that deficit number in the next recession is going to be enormous, and more importantly, so will the Fed's balance sheet because where is that money going to come from? And it's going to come from the printing press.
(40:38) So, I would think that you could easily see the Fed's balance sheet at well over 15 trillion. >> Does it get to 20 trillion? I mean, these numbers sound ridiculous right now, but they won't sound ridiculous >> if we get into that kind of scenario. >> Mhm. [clears throat] So, folks, note that Stephanie said that in this future she sees ahead, active investing, old-school investing of having to go and actually look through the financial documents of a company and try to determine if that company's going to
(41:11) outperform the other ones in its sector and whether it's fairly valued or undervalued, that's highly likely going to I was going to say come back into vogue, but I think just that probably just be necessary to perform well going forward. And so, Stephanie, it's not all just about commodities.
(41:30) She's, you can have any company in any sector be a good value on those benchmarks. But, Steph, I think this has been maybe one of the better conversations we've had that really helps the audience understand why you keep returning to commodities in hard assets. Yeah, cuz when you look at it through that lens of yours, you're like, well, of course, if that's the way that you think the future's likely to head, of course you want to have a very healthy exposure to these things in your portfolio. And I just want to underscore
(41:59) for folks, too, Stephanie is not saying everything that she just mentioned is going to happen in the next quarter. >> Thank you. >> She's talking over the course of years, decade plus. So, don't necessarily sell everything you have to buy up tomorrow about just buy up commodities and have a 100% commodity portfolio tomorrow, but I think you can really understand why Stephanie has been such a consistent advocate >> it bear. You can say it.
(42:27) >> Yeah, [laughter] well >> I will commodity bull paper asset bear. >> Okay, and I think Stephanie your correct me if I'm wrong, but your strategy cuz you're not a day trader. Your strategy is look I want to have a portfolio that I don't have to monkey around with all that much, but I can sleep well at night with and I would rather be early to this than late.
(42:51) >> Yeah, absolutely and I feel like and you and I have talked about this a bunch that you can still be positioning this CapEx boom and be in protected hard assets by having exposure to energy and that entire sector. Upon which that AI CapEx depends. So >> I mean as you said if you're an AI bull, you kind of have to be a bull for energy and copper and the things that are going to build these networks out.
(43:23) >> Yeah. So I think you don't have to feel like you're missing the boat on the AI boom by huddling down in hard assets. It's not just Spam and ammo. You can actually >> [laughter] >> have some exposure to the AI boom and be protecting yourself. So >> How much of your portfolio is in Spam futures? >> [laughter] >> Oh man.
(43:49) >> I Hormel should have me on the board. I think. >> [laughter] >> They should if anyone's listening from Hormel. I really not to have Stephanie on your board. I want to just pull out a question I've asked you in the past. It's a tangential, but it still sticks in my mind. >> You're not going to ask me my stance on abortion again, are you? >> Oh my god, no.
(44:12) [laughter] No, not at all. We're going to get into religion. >> Okay. Oh, okay, good. >> Yeah, no, no, no. So, back to the bailout of pensions, which I agree with you, it kind of all roads seem to point that there's going to be a pension bailout at some point in time when things get really rocky. But you and I have talked about this.
(44:31) So humans are evolutionarily wired for fairness. And I've put up a video in past video past videos I've done of this experiment with these capuchin monkeys which show that when you treat one differently than the other, the monkey that doesn't feel like it's being fairly treated, he just goes banana he just goes crazy.
(44:55) Bananas, forgive the pun. It's something that's in the mammal at least a mammal part of the animal kingdom. So, it's very wired to us, which is one of the reasons why people are still so angry about the bailouts that corporate America got during COVID. They're so bitter about the PPP loan abuse that businesses got but regular people didn't get.
(45:19) If there's a pension bailout, there was bitterness with the proposed student loan bailouts where people were like, "Hey, look, I paid my student loans or I didn't go to college because I did the math and you went and got a ton of debt and got a basket weaving degree and now you're getting that's forgiven.
(45:39) That feels super unfair, right?" >> Yeah. >> I think it's going to be nothing compared to the guy who's worked in the private industry his whole life and sees his neighbor who had a government job and it had been collecting a fat pension that was all of a sudden looking rocky and then gets made whole by taxpayer money, says, "Wait a second, why are you getting made whole at my expense and I'm getting nothing out of this?" What type of social blowback do you expect if indeed that happens? >> Yeah, no, I think it's a good point.
(46:08) And I would expect there would be social blowback. But I don't know if it will preclude policy makers from doing it anyway. >> Anyways, I don't disagree, but it's something when it's you and I both angry against the banks, it feels worse I think the average person when it's like, "No, you're just like me, but you're getting favored and I'm not, right?" Yeah.
(46:31) >> Yeah. No, I agreed. It is tricky, although I guess maybe one saving grace of this whole thing is that the private pensions are also exposed to all the alternative assets that are going to blow up. They just don't have a funding shortfall that's as egregious as the public pensions. Most of that portion >> But when you say private pension, do you mean like the 70-year-old who's still got his pension from GE? >> GE or something. Yeah, so exactly.
(47:01) >> fairly small percentage. >> It is, but it's still like so they might say >> But you're not talking about the guy with the regular IRA or 401K, right? >> No, no, no. But those kind of those old GE pension kind of, GM and those guys will probably feel some of that pain, too. But no, it's a very good point and obviously it will create a lot of animosity, I would guess.
(47:31) And maybe that will result in some blowback at the election after that. There'll be a swing of the pendulum toward whatever candidates come out against that sort of a bailout. But ultimately, I don't think that we're going to see policy makers just let the pensions take that kind of hit because they're already technically bankrupt, a lot of them.
(47:58) And many of them, obviously this rush into alternative assets, it's one thing, but part of the problem originally and what drove them into that $6 trillion funding hole years ago was this 0% Fed funds rate policy, the zero policy that basically rendered a lot of these pension funds effectively bankrupt.
(48:29) So, a lot of it is a function of really poor policy decisions, to which the solution will be more bad policy decisions. That seems to be the calculus. So. >> Yeah, I kind of feel like I get this vision in my head of Kevin Warsh as kind of like the ruler of this sandcastle that's at the edge of the ocean and there's a big wave coming, right? And it's like he can beat his chest all he wants about how hawkish he wants to be, but the moment that wave arrives, he's just not going to have much to be able to do to fight against what
(49:04) you're talking about and will likely be forced to repeat the sins of the past because the demands of the moment are going to be so immense to just try to keep the system alive for another day. >> Yeah, I would propose that next month when we do this visitation, we have Ash join us and she can give us a therapist's window into what kind of person takes a job where these are the This is what you're facing.
(49:32) And likewise for Scott Bessent, these are smart guys who have to know the challenge, which I would describe as effectively impossible, that they're faced with. How do you reduce borrowing costs at a time when the federal government has $10 trillion in paper it has to roll and it's competing with the private sector and how do you have responsible monetary policy in this situation? >> I go with Darius Dale on this which is he's got these different paths that he says are available
(50:13) and the path the administration seems currently committed to is Darius calls it the run it hot scenario which is we're going to try to grow our way out of these problems. >> Yeah. >> Right? And in theory you can, right? I mean very robust economic growth cures a lot of ills in the near term. The challenge is can they and Darius thinks in the long run they won't be able to and then what plan do you revert to? Well, print and he feels like that's the inevitable outcome here and that's essentially what you're saying.
(50:45) >> Yes. Yeah. No, I think he's absolutely right. That was the thought was that if you grew the economy fast enough, then the deficit would naturally start to shrink and that would organically pull down the long end of the yield curve which in turn would lower borrowing costs across the entire economy and then the Fed would be able to lower interest rates and yada yada.
(51:09) But we're growing pretty fast. We've got CapEx booming and it doesn't appear like the deficit is shrinking at all. Quite the contrary and now we're talking about is it another 75 billion they want? In munitions. Yeah, munitions rebuilding and so these numbers are never going down.
(51:34) I mean if you had any thought that the deficit was actually going to shrink sometime I think that's been pretty much obliterated in the last few months. So anyway, But I agree that was probably the hubristic assumption. >> Assumption. So, just to try to pull us out of this sort of >> muck. >> The Yeah. Pessimistic view of the world.
(52:00) Talking theory here for a moment. I share the overwhelming majority of concerns that Stephanie has laid out for us here. I do feel though, Stephanie, like we could grow out of this. I don't think we could grow out of it at this point without having to take our lumps and having a lot of the malinvestment clear.
(52:26) And I think that would be super painful. I think we'd have to make some really hard choices. But I think, you put benevolent empress Stephanie Pomboy in charge of this, I think there's a way out of it. I think there is a way that we could get through this where we invest in the economy, we continue to grow it.
(52:46) We let the malinvestment clear, the bad debts default. Yeah, probably a couple really rough years there. Not everybody's going to come out of that unscathed by any stretch. But there could be a better future there. And so, that's kind of what keeps me getting up in the morning and like I don't think we're going to pursue that path necessarily.
(53:09) Or I don't think we're going to pursue that path in the way that I or I think empress Stephanie would pursue it. And maybe this journey's going to take the rest of my lifetime if not even longer. But I do have a little bit of that faith that Winston Churchill has about He said Americans, I would think humanity. That we end up doing the right thing.
(53:30) It's just after we've exhausted every other potential >> Other possibility. >> element. Yeah. And [clears throat] it's also part of Neil Howe's fourth turning, right? Which is Yeah, the fourth turning really sucks. And the old order gets dismantled and breaks down and there's a lot of chaos. But, there's a first turning the first turning that's born out of that.
(53:49) There is a new way of doing things. And so I don't want to leave people here with this sense of like just everything's going to hell in a handbasket and that's all there is. And even if I don't think our central planners are going to chart this course as elegantly as I think you would, Stephanie.
(54:09) I think as individuals, we have a lot of agency to say, "Even if the herd is kind of going down this path that's not so great, I can put myself in places where I'm either less vulnerable to that or I'm actually even to take advantage of some of these trends. So, I don't think for the informed active investor, this is a death sentence.
(54:31) I actually think you can do quite well. >> Yeah, now like you said earlier, I mean, I think it's just that it's not going to be as easy. You might actually have to do analysis. It's another word that seems to have slipped out of the lexicon. But, I totally >> I mean, honestly, do you know any retail investors that do a DCF anymore? >> Oh, I'm sure they >> [laughter] >> They don't.
(54:54) >> Yeah, you need Dave Iben to give you a lesson in and how that works and when it doesn't. But I think that I totally agree with you and we've chatted about this before that the way I envision this all playing out, it sounds really dark, but basically, I'm looking for that catharsis where we do finally cleanse all of these bubble excesses that frankly have been built up since 2000.
(55:21) These aren't excesses that were built up just during COVID, but we have through these serial monetary bailouts and this constant reinforcement of the Fed put created financial markets that are so levered and so far distended from the economic fundamentals that they can't even see them from where they are right now that if we got back to some semblance of reasonable valuation, we would be setting the table for a phenomenal next several decades.
(55:56) And I love this idea. The administration has a lot of great ideas in terms of reshoring production, revitalizing our on foreign nations for really critical supplies like pharmaceuticals or munitions or whatever it is that for national security purposes, we should be having complete control over here. I'd love for the US to have a rule where only Americans can own farmland, like we should protect our food supply.
(56:31) We should really be investing in this country and focusing our energies here at home to the benefit of the people here and employing people here etc. rather than trying to exploit cheaper labor abroad. And I think that would be tremendous. The process again is expensive and therefore the adjustment isn't going to be easy or painless, but the payoff at the end of the road I think would be well worth it.
(56:59) So I totally agree with you. I mean, I think a lot of things that have been laid out and that we're moving in the direction toward are very positive. It's just that we're doing it from a level of such extreme valuation and such extreme leverage that it's almost impossible to envision us being able to execute on that plan without first having to cleanse those excesses and then move forward.
(57:29) And I think the faster the economy grows, which is great, and the more capex we pursue, the sooner we pull that reckoning forward just because you reach that overheating. You see the Fed now, where they were supposed to come into the year and cut rates. Now everyone thinks they're going to raise rates along into the yield curve is going bananas.
(57:51) Bank of Japan is out of control trying to protect its currency. So there are a lot of destabilizing factors out there. And I think we just need to flush all these excesses out and then we'll really be on a good footing to move forward. Like you said though, it's going to be painful and I don't want to diminish, make it sound like it's just so easy.
(58:13) We just take the stock market down 50% and then we will go on with our lives, it'll be no problem. It's going to be a problem, but, if we can take the right steps and not if we can resist the temptation to just print money like crazy to numb the pain, I think we'll be much better for it. >> I agree. Will we resist the temptation? Probably not in the near to mid-term, but maybe eventually it'll be forced upon us.
(58:45) Especially we have a society that is continuing to lean towards the more state interventionary model, right? That's a whole other different topic, but, you said it very well, Steph. So I'm going to start wrapping it up. Real quick, have you made any major changes to your own personal portfolio since the last time we talked? >> I have not.
(59:07) I'm just hanging on waiting for gold to recover its footing. And still, I had increased some of my exposure to the energy sector, so I've got that. But other than that, I really haven't done anything there. Just status quo. Yeah, I'm not making any material bets in the Treasury market.
(59:30) I think there will come a point when there'll be an opportunity to buy there, but I think you've got to wait to see a little bit more agita. >> But in the short term you do have dry capital just sitting in T-bills, correct? >> A little bit, yeah. >> bit, yeah. Okay. All right. And I ask Stephanie that question every time, folks, not because it's personal financial advice, it definitely is not.
(59:52) But if she makes a big material change to the assets that she likes or dislikes, I want to make sure everybody is aware of that. All right, Stephanie. Well, this is fantastic as always. I'm really excited. I've got to hop off in just a minute here because I'm going to be moderating a panel between Tom Hoenig and Judy Shelton.
(1:00:13) So, >> Oh, amazing. >> topics about the Fed. I can't wait to hear their thoughts on them. Folks, that's going to come out a day or two after this video with Stephanie releases. So, >> Wow. >> if you want to take advantage of that incredible treat to hear from those two brains at the same time, highly recommend you keep your eye out for that video.
(1:00:32) But Steph, this has been wonderful. For folks that would like to follow you and your work in between now and your next appearance on this >> [laughter] >> Where should they go? >> I they can go to macromavens, plural, {dot} com and find out about my research there and you can sign up or you can follow me on Twitter and I promise I'll be a little bit more responsible about tweeting.
(1:00:56) I haven't been on there for a while. >> Yeah, you've got no excuse now that you're sort of laid up a little bit, right? >> I know. I know. I should be doing daily updates on the twin knee operations over here. Yeah, well. >> Well, look, all the best wishes from everybody here, Steph.
(1:01:16) I really hope you feel better soon and heal soon. And I don't know, is it too optimistic to hope that you might be able to do a little hiking before it's time to leave? >> Well, I get my x-rays next week and then the surgeon will tell me what I'm able to do, but he suggested I'd probably be able to get on the mountain the last month I'm here, which would be tremendous.
(1:01:36) So, I'm looking forward to that, but I can't do stairs yet, so that's a little ways off. Yeah, [snorts] I'm not quite at 90°, but I'm getting there and it will be it's going to happen. I'm confident. [laughter] >> Okay. Well, just know that we're all sending our condolences and best wishes for you for a quick healing and if there's anything I or any of the viewers can do to help you guys out, maybe DoorDash you a pizza, maybe DoorDash you a little something to eat
(1:02:05) or something. >> is I the last thing I need is food because I can't exercise, so [laughter] I don't whatever you do, don't send chocolate. >> Okay. Well, I hope you're getting a lot of binge-watching done at least. >> I'm doing a lot of nice walks and taking in the beautiful scenery and getting some healing energy from the mountains, so it's good.
(1:02:26) >> Well, that sounds wonderful. All right. Well, in wrapping up, folks, please express your sympathy for Steph and Wilhelmina and your gratitude for Stephanie giving us so much of her time and wisdom on today's show. Do that, please, by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it.
(1:02:47) And as I mentioned, none of what Stephanie said was personal financial advice, but if you would like to take action in your portfolio based on any of the insights that Stephanie shared or if the future ends up unfolding the way that Stephanie thinks it may, I highly recommend that most people get that support from a good professional financial advisor.
(1:03:06) And if you don't have one already that's providing that for you, well, then consider talking to one of the ones that Thoughtful Money endorses. These are the firms you see with me on this channel week in and week out. To set up one of those free consultations, just fill out the very short form at thoughtfulmoney.com.
(1:03:22) Only takes a couple seconds to fill out the form. Those consultations, as I mentioned, are totally free. There's no commitments involved. It's just a service these firms offer to be as helpful to as many investors like you as possible. Stephanie, it's just always such a pleasure and a joy. Best of luck to you guys.
(1:03:40) Heal fast and I look forward to seeing you on this channel in a month. >> Thanks so much, Adam. It's great to catch up and I hope you have a great month. >> All right, you too. All right. And everybody else, thanks so much for watching.