Transcript for:
Weekly Economic Discussion and Investment Insights

Look, I don't think this correction is over. Don't get me wrong. I think this correction can last. It'll be kind of fits and starts.

But, you know, I think we could see this correction last well into October. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart, welcoming you back here at the end of another week, a relatively boring week.

I'm here with my eponymous... friend Lance Roberts. Lance, how you doing, buddy? Yeah, this week was like a Seinfeld episode, you know, a show about nothing.

Yeah, yeah. So I guess we got nothing to talk about, huh? Right.

Really dull day. Dull week. Actually, quite the opposite.

And I went with eponymous as your adjective this week, Lance, because I know we're going to talk about the SOM rule, which is eponymously named after Claudia SOM, who I actually interviewed two days ago. when the SOM rule had not yet been triggered. That's part of today's big news is it just got triggered, which I'm sure we'll talk about.

But why don't we start with, obviously, the development that has everybody's attention on the day here that we're filming, Lance, which is the payroll numbers, which came out substantially lower than was expected than estimates. I think they came in at 114,000, I think, expectations. were 175,000 payrolls. That was about a three sigma miss, which really feels very shocking because we've had these five and six sigma beats for so long that to have a big miss is a real shocker.

The June numbers were revised downwards as well from 206,000 to 179,000, showing that the market's even weaker than just this most recent month's worth of data. And now that makes five out of the past six months that have been revised downward. So Lance, we have talked an awful lot in the past about how the reality of the jobs market has probably been weaker than what the data has been showing.

And I can say this because I've been pretty transparent about this. You know, I've been expecting at some point, we're going to wake up one day and, you know, the data is going to start to not be able to... continue to put lipstick on this pig.

And people are going to say, whoa, wait a second. The economy had been the real bulwark between us and recession. Sorry, the employment market had been the bulwark between us and recession. We thought it was stronger than it is. Now we're getting real worried.

Today might be the day that that realization is dawning on folks. So anyways, what's your reaction to all this? Well, so first of all, let's keep things in context just a bit.

We did create 114,000 jobs. So it wasn't a negative payroll number, right? So, you know, We have to give some credence to that, that this wasn't a negative 114,000 job loss, which would be a very different matter.

But to your point, nonetheless, it's been very interesting because all year it's been. In fact, I joked this morning on Twitter before the employment number came out. I said, today's estimate is 175,000.

But don't worry, the mathematicians at BLS will somehow spin this into a 300,000 job game. Well, after the number came out, I go, well, I guess they couldn't do that either. And that's kind of my point.

It's hard to interject, but time will tell. But it feels like they've been putting increasing amount of lipstick on this pig. And at some point, you can't just not see the pig anymore. It's okay. No matter how much lipstick you put on this thing, we can all see it's a pig, right?

And you're right. It is a positive print. And we need to keep that in mind. And this is real early. We're going to see where trends go from here.

But there's also been an awful lot of discussion, even in the financial mainstream, that these payroll numbers have been pretty dramatically exaggerated. I think to the tune of like basically, you know, 750,000 in 2023 and perhaps even more so this year. So there's a lot of questioning about, OK, how many of those 114,000 jobs are really real? Right.

Well, look, and we can go through. So it was interesting. I wrote this report.

report on the SOM rule about two weeks ago. And I had some other reports to get out. So this one kind of got pushed back.

And so I had to make a guess as to whether or not the SOM rule was actually triggered today. So I guessed that it would be. So I got that.

It was a 50-50 bet. So wow, congratulations. Yeah. So it just I got lucky, right?

That's all that was. But it was interesting because then you interviewed the Claudia She, who is SOM, who is actually the economist who created this indicator. But my article, and we can run through it real quick, but the article really isn't as much about the Sodom rule. And, you know, that's obviously the headline.

And we do note the SOB rule has been triggered. But we go through all the other indicators of employment that are suggesting that things are a whole lot weaker. You know, temporary hires are declining. Full-time employment as a percentage of the population is declining. Full-time employment, your rate of change is negative.

And those all tell you that the economy is a lot weaker than what headlines have been suggesting. And this is not something that just cropped up this past week. This has been trend. that you and I have talked about all year. And we keep getting these employment reports coming out, they're stronger than expected.

And then we tear down into the data. And it's like, oh, well, it's all part time hires, it's all foreign born workers, you know, it's this, it's that's the other thing. And so that model, right, right.

So this is all just playing catch up, you know, kind of to where we are right now. But you know, this, this, this works right into what you and I have been discussing really ever since the beginning of the year, which is When the Fed cuts rates, it is not good for the stock market. It's not good for earnings. It's not good for the economy because they're cutting rates to offset their growth.

And look, the Federal Reserve number going into their meeting this week. So they knew what this employment number was going to be. And that's why, you know, they've really kind of leaned into this idea. Not overtly so, right?

They didn't excuse me. They didn't come out and say we're cutting rates in September. But they laid the groundwork for that first rate cut coming in December. Now, interestingly enough, CME Futures now have, as of this morning, I checked it early this morning, it may have crept up since then, but we were near a 70% chance of a possibility of a 50 basis point rate cut in September.

And expectations are now for three rate cuts this year. So we went from three rate cuts this time last year to six rate cuts. to no rate cuts, back to three rate cuts in 12 months.

So this is the market trying to evolve to figure all this stuff out. But importantly, what this employment data is telling us is what we already knew, is that employment growth is weakening, which means the economy is weakening, which is why inflation is falling and why bond yields are declining as well, because yields are a function of inflation and economic growth. and importantly, wages.

And that was also one of the other big surprises this morning in that employment report was both a drop in the weekly work hours, not only a rise in the unemployment rate to 4.3%, but also a drop in wage growth. Okay, so lots to dig into here. And first, we should just define for folks what the SOM rule is, because the video that I recorded with Claudia SOM has not come out yet.

It's actually going to come out the day after this one. airs, Lance. I'm sorry.

My apologies. I thought it came out on Friday. My bad. Yep. Nope.

Nope. Just the way things were flighted this week, busy week. And it's also just fate, right? I had to delay the video a little bit. And of course, this just happened to be the time where the sombrero gets triggered.

Well, like I said, same thing with my report. I had this thing written two weeks ago. So, you know. Yeah. But for folks that don't understand what the SOM rule is, it's basically an early indicator that the economy has entered recession.

And it is a three-month moving average of the unemployment. It takes a three-month moving average of the unemployment rate, and it compares it to the lowest value in the last 12 months for the unemployment rate. And if you get to a point where the three-month moving average is 50 basis points or more higher.

than the lowest number in the last 12 months, that is triggering the SOM rule. And it basically says, hey, the economy has just entered recession. Right.

And while you were talking, I just pulled up the chart of the SOM rule versus the unemployment rate. And you can see that now, interestingly enough, you know, this is the whole thing about rate cuts as well. This goes into a lot of other economic data or other indicators as well. And we'll talk about the yield curve, because the 10 year, two year yield curve.

as of this morning, and I don't think it's changed since this morning before the market opened, but that 10 year, two year yield curve is now un-inverted. So, you know, what we've talked about before is that these are historically good recessionary indicators. Does that mean we're in a recession right now?

No. What that means is, is that in the next 12, you know, nine to 12 months, we'll see what happens with the economic data and the National Bureau of Economic Research may come out and say, oh yeah. the recession started in, you know, August of 2024. I'm not saying it did, but we won't know, you know, so then this is always the trick with these indicators is when you look at these indicators, like this chart we're showing right now. He said, well, yeah, obviously, whenever the SOM rule ticks up, it's a recession. But you didn't know that until nine to 12 months later.

Right. We knew it was ticking up. We knew unemployment was rising, but the economy wasn't technically in a recession yet. You know, that takes time. There's this whole lag effect that we've talked about previously still working its way through the system.

So, you know, you know, this is an important change. As we say, you know, we've been kind of waiting for these indicators for a while. The leading, this is a six-month rate of change of the leading economic index. It's been improving, but it's still very negative.

Historically, when these are negative, you have a recession. And you'll also notice that when the recession is actually indicated, that is reversing. So the leading indicators are improving by the time the recession is actually indicated, which is happening now.

This is the recession warning line. I haven't updated this yet because, again, it just happened this morning, but that's actually gone positive. This is the 10-year, two-year.

sorry, this is a 10-year, three-month, a 10-year, two-year actually uninverted today. So that normally, these recessionary warnings when the yield curve, it's not the yield curve inversion. We've had lots of conversations about people kind of, oh, the yield curve is inverted. That means you have a recession.

No, it's when it uninverts that you have the recession. That's your warning sign. But that uninversion is about nine to 12 months before it'll actually be dated.

So again, so the point is, is that we're certainly seeing these issues occur. But, you know, we're not there. This is full time employment rate of change.

So let me just interject because because I think you correct me if you think differently, but I think the key takeaway from this video, this discussion is that until new evidence contradicts it, it is now game on recession. I would be really careful with that. You know, there's going to be a lot of people coming out.

Oh, yeah. Recession's here. Definitely.

there is still a tremendous, I mean, an overwhelming amount of liquidity still floating through the system, both from what the government is spending as well as monetary, M2 is a percentage of GDP growth. So there's still $500 billion of the Inflation Reduction Act that is still yet to be spent. So again, just be careful saying, oh yeah, we're definitely in a recession, so you better start hunkering down. There's certainly some indicators of that.

And historically, it does suggest much slower rates of economic growth. But we're also still growing at a fairly robust rate. We're still growing at about 3% GDP growth on average. So you've got to bring that's got to go from 3% to negative before you're in a recession.

So that could take, you know, nine months, another nine months, 12 months. Will we see an eventual recession? Most likely.

Will it be a deep recession like a financial crisis type event where markets are down 50%? Probably not. Will we see a recession that's more normal, kind of a garden variety recession, half a percent to maybe negative one or one and a half percent negative growth? Probably.

But that may not be until sometime next year. And, you know, that's going to frustrate a lot of people. Okay. But the reason why I say this, and I agree with everything you said, is I grew up in New England.

We had hurricanes, right? And there's a point at which you see enough data, right, on the meteorological outlook where you say, OK, you know what, I got to start taking precautionary measures. We don't know if the hurricane is going to totally veer in our direction or not. But now we have enough data and probability to say, you know what, we should start closing the shutters.

We should start collecting the lawn furniture and bringing it in. Like, you know, there's just there's there's an event horizon where you say, I need to start taking steps for this. So. So, you know, kind of my note to folks here is this is the time to start saying, OK, you know what? The indicators are now beginning to show it looks like we're early on and entering recession.

I need to really think about, OK, how safe is my income? Is there stuff I should be doing just to prepare in case my company gets in trouble? If I'm playing the market really aggressive and playing really aggressively long, maybe I want to dial back, you know, my level of speculation and just take a little bit more of this, you know.

less, a little bit more of a conservative approach. It's not necessarily getting the bunker time yet, but it's like making sure like, Hey, does the bunker have food in it and stuff like that? Like I'm not necessarily going there yet, but if I do, I want to make sure it's prepared. Yeah, no, it's, it's fair. I mean, and the hurricane analogy is really great because I grew up on the Gulf coast and, you know, just not too far off of Freeport.

So I've been through multiple hurricanes going all the way back to hurricane Carla in the, in the sixties. So, you know, It's always interesting, you know, when you live on the Gulf Coast and somebody talks about the hurricane, everybody's like, OK, let's get the lawn chairs out and start making some margaritas. Right.

It's it's you know, it's such a common event on the Gulf Coast. This is like people don't panic like they do in other in other places. But, you know, this is so use that analogy. This is a hurricane that's forming and it's not even in the Gulf yet. It's, you know, we pay attention to it, but it's still out in the Caribbean.

And it is always the case when, and of course, you know, we just went to Hurricane Beryl here just a few weeks ago. But when a hurricane comes into the Gulf, there's the Gulf Stream, which runs, you know, from Mexico up the Texas coastline around Louisiana and over into Florida. Well, that Gulf Stream is warmer water. And so.

This is why when hurricanes come in, when they hit that Gulf Stream, they tend to hook north. And that's why we'll see hurricanes come in. It's like, oh, yeah, it's going to hit Corpus Christi, Houston, and then it hooks up and goes into Louisiana.

Right. So and so we avoid that here. So, again, you know, using that hurricane analogy, that's all we have right now is that we've got a hurricane sitting out there somewhere. It's got to get into the Gulf Coast.

There's going to be plenty more evidence. When we start getting negative employment growth. that's the time to really start saying, okay, it's now in the Gulf and we can get a pretty good trajectory of where it's going to land and start making those assessments and start doing this now. But it's way too early to get overly defensive because markets are very, very oversold right now. I would not be surprised that next week, all it's going to take is ISM services to come in stronger than expected, which that's 80% of the economy.

ISM manufacturing, which kind of... of triggered the sell off this week is only 20% of the economy. So if we have a strong ISM services next week, or another strong employment, you know, economic indicator or reversal in employment, because we're getting ready to go back to school. So we're going to start hiring a bunch of people go back to work.

So you know, August employment number comes in stronger than expected. All of a sudden, the markets are going to unwind all these trades, this negativity, because we're getting too oversold right now. And you're going to get a fairly decent rally in the market. So Don't, this is not right now. It's too late.

If you know, we hedged our portfolios two weeks ago, we raised cash, we sold off our mega cap stocks. You know, we did all that two weeks ago. It's too late to do that now. You've got to wade your way through this, look for a buying opportunity to put some capital to work if you need to.

But you want to wait for a rally to start taking any type of, you know, proactive risk reduction strategy. You know, it's too late. You can't buy bonds here. They're too overbought.

Those are going to correct. Stocks are too oversold. Those are going to correct.

So you're going to have an unwinding of this whole negativity trade in the next week or two. OK, and we're going to talk about that. We'll talk about, you know, sort of what's happened over the past week.

It's been an interesting week in and of itself. And then, of course, today with the unemployment numbers, markets are selling off pretty hard. And I totally agree with what you're saying, Lance, which is, you know.

if indeed we are entering recession and like I said, game on, but we're still in, you know, inning one or whatever. Right. It's not like everything's going to move down in a straight line, particularly the financial markets. And so you can, you know, if you're trying to trade this, right, like this may not be the time right now to pile into a bunch of shorts, right.

Or puts right now to your point, because, you know, there's probably going to be many different innings here where. you know, the market ping pongs back around. So you got to be careful. Now, that being said, as you were talking, I just got an email from Lance Hunt.

And it's titled all of critical label labor measures except payroll employment indicator recession has started. And he goes through a bunch of them here, average workweek, household employment, full time employment, overtime, U3 and U6 employment rates all indicate the economy is in recession. However, payrolls, as you said earlier, you know, still positive. So they're getting there yet. So I just wanted I just mentioned that to say, hey, a lot of very smart people that, you know, are experts in this stuff are saying, hey, you know, we're really beginning to see that.

Yeah, there's a hurricane out there now. Now it's just a matter of how strong it's going to be, when exactly it's going to arrive, how much damage it's going to do. And to your point, this will probably most likely play out over quarters, not the next couple of days.

Yeah, absolutely. And that's really what I'm trying to get to, because I know you're going to title this thing, you know, recession, warning, you know, whatever. You're going to have some, you know, end of the world headline for this video.

But, you know, that's what we don't want is to people to overreact to this. All of a sudden they dump all their stocks at these levels and that may work out fine, you know, for the next week or so. But then there's going to be a fairly strong rally that's going to get sucked back in.

And, you know, this is something that may take. 12 to 18 months before it actually plays out. Because again, there's still so much liquidity in the markets. And look, we've had these recession calls before from all these same experts, right? All in 2022, recession coming, didn't happen because of all that liquidity.

And there's still, so I'm just, I'm not saying we're not going to have a recession. I'm not saying that at all. But we're not going to have a financial crisis. But, you know, we could have a recession.

It'll be mild. And that has very those have very different implications for market returns and outcomes. Yeah.

And I totally agree with your main point. Don't overreact. Just one thing to note, an economist who did not follow recession back in 2023 was Claudia So because the So rule was not triggered.

So, okay, well, look, I want us to walk through the latest technicals and all that stuff. But quickly before we do, Lance, let me just ask a general question because I'm going somewhere with this, which is, if indeed we go into recession from here, right, do you expect there to be a material, not saying huge crash, but a material repricing in the market from current levels? Yeah.

You know, not be surprising to see the market have a 20, 30 percent drawdown. OK, so it wouldn't be surprising at all. So with that with that openness to the fact that that could happen from here, you're saying right now, don't overreact.

This is not necessarily time to just fully move to cash and totally get out of the pool. What will you be looking at as a capital manager yourself as time goes on here to say, OK, I'm now beginning to see indicators that. yeah, now is the time for real defense. Well, that's why we have a lot of things that we watch on a regular basis.

And one thing that we want to pay attention to is the indicators that often lead these corrections in the markets. And this is why we run a variety of indicators. I'll share one with you as an example. And imagining credit yield spreads is going to be part of your answer. Yeah, yeah.

And it sure is. But this is basically a money flow indicator that we track. And what you're looking for is you're looking for big sell signals to occur in weekly indicators. And sorry, I apologize. This is the wrong one.

That was a comparison. So this is the indicator. And what you'll see is that we're nowhere near a sell signal right now on this top indicator.

What these indicators tend to do is by using these weekly indicators, they tend to keep you in the markets when markets are rising. It doesn't mean you can't have corrections. Like we had this correction back in April that we talked about. Remember, we said, hey, we're going to have a 5% to 10% correction. And then we had a 5% correction.

So, and again, since June, you and I have been talking about, hey, the markets are going to have a 5% to 10% correction. Well, welcome. We're having a 5% correction now. So. you know here you know this is just the normal process and so what these weekly indicators tend to do is keep you engaged in the markets when markets are in a bullish trend which they are now when we eventually get a sell signal um like we got in june uh july of last year then that's a good indicator to heavily reduce risk avoid that downturn which we did we did a lot of selling we did some shorting in our uh in our high net worth models we bought puts on the S&P.

We did a lot of different things. And then we closed those all out in October. And I wrote that article about why we would have a strong year-end rally because of buybacks, money flows, sentiment, et cetera. Sentiment is still way too bullish right now. Allocations are still way too bullish right now.

So we've got to reverse all this. And when those get to be very negative, that'll be your next buying opportunity for the markets. That could be a week from now.

That could be three months from now. We'll see. Okay.

Okay. All right. Right now, there's nothing that says you need to be out of the markets in cash.

There's actually probably going to turn out to be a pretty decent buying opportunity in the next one to two months. Okay. And we'll talk about that a little bit in terms of kind of what you're going to look for in the near term to say, hey, this is time to start redeploying money again. But here on the money flow indicators, you're definitely going to wait to see a strong sell signal in there. before you really start to worry.

We talked about credit spreads. Two weeks ago, you mentioned that they were just beginning to widen. Has any progress been made in that given this week's action?

On the very, so that, so that credit spread was on the very junkiest of junk, right? So that was triple C junk versus double B junk. High yield junk bonds are super overpriced, right?

And so you're going to have a big correction. potentially in that whole junk bond market. But on the very junky side, yes, those yields are rising. But if we look at spreads between investment grade bonds, say BB, which is just slight junk to AA rated or BBB to AAA rated, there's no credit risk in the markets right now.

Okay. Even with this week's pretty big dramatic decline in yields? Yeah, not yet. So, I mean, if there's, and I haven't checked today, just since this morning, of course, bonds are having a heyday today. But, you know, there's not, even if those ticked up a bit, there's still no risk in the markets right now, at least from a perceived basis right now.

Okay. We're going to go through the technicals of the S&P in just a second. But before you pull that chart up. Maybe let's talk for a moment about Powell's recent press conference.

So the Fed met this week, the FOMC met this week. They decided to leave rates unchanged. They're not making any changes to their balance sheet runoff plan.

And I agree with you that Powell, I think, strongly suggested, as one has to do in Fed speak, that folks should prepare for a potential rate cut in September. What was interesting to me about this particular press conference is I felt the questions from the media were much more skeptical than they normally were. There was a lot of like, yeah, I know what you're saying, that the economy looks strong, pal, but how about this data point?

And, you know, lots of questions about really nervousness about the economic data. Like, you know, hey, even the headline data. Yeah, it looks OK. Unemployment rates not too bad yet. But what about this data point?

What about these data points? It's like, wow, these people have been like listening to our videos. And Powell most likely had access to the data that then, you know, was responsible for today's payroll miss and some real trigger. But he really took like a lot of pain to say like, hey, look, the economic data, yes, it's coming. The labor market data, yes, it's coming down, but it's normalizing.

Like, I don't see anything to be worried about. I'm really not worried by what we see yet. If we get worried, you know, we'll be prepared to act. But he really did send a calming message on the trajectory of the labor data, which honestly kind of stands in contrast to today's print. Like, I'm kind of surprised if he had access to this data that he was a.

trying to be as calming as he was knowing that the market was going to get shocked in 48 hours. Well, but that's his job, right? You know, you've always got to remember that the Fed has a very interesting role in the fact they can never tell you the truth. Because I mean, can you imagine what would happen to the market if Jerome Powell ever came out one day and said, yep, economy's going into a recession.

Yeah, he can't say that because it would become a self-fulfilling prophecy. I totally get it. But he could have just said nothing. Yeah, he could.

I thought, you know, I actually fell asleep about halfway through the press conference because they kept asking the same question over and over. It was like a kid going to mom, mom, can I have ice cream? No.

Can I have ice cream? No. Can I have ice cream?

But it was interesting because they normally just swallow what he says and moves on. But they, yeah. And I took that as a sign that like.

Like, hey, yeah, we're more on the alt side of the financial media. So we're the ones poking and prodding. And the financial media has really kind of been asleep at the wheel.

I feel like they're kind of waking up now. Yeah. No, there's some evidence that you cannot ignore anymore, right? And the bond market has been picking up on this for the last four months. And it's been interesting.

There's been all these still comments coming out. you know, inflation is going to go screeching off to the moon again and interest rates are going to go soaring and bonds are going to be in a bear market forever and they're never coming back. And very quietly over the last four months, bond yields have been continuing to decline and broke 4% today, which is a very important level because that's where shorts are going to start covering. And there's a big short position in bonds right now. And there was even an interesting paper, I don't know if you read that paper, about how the Treasury is trying to bail out the banks.

which was complete nonsense, Norio Rubini behind that paper. But, you know, there's all this talk and yet bonds very quietly in the background doing exactly what they're supposed to do, which is hedge risk. And, you know, a good example today, our portfolio is down about half a basis point.

The market's down almost two and a half. And that's a big chunk of that is due to risk reduction, the equities and our bond position, which is paying off very nicely today. All right.

So I do want to give you. props here. One, as you've been saying on this channel for a couple of months, hey, it's looking increasingly like we're going to have a 5% to 10% correction. Pulling the numbers right before we hopped on here, S&P from their mid-July highs, not that long ago, S&P down 6%, NASDAQ down 11%.

Russell's down 6%, although it's still up 4% from the pre-rotation that started mid-month, but it's down 6% from its high. So yeah, bang, bang on. You've called it.

If things level out here, you've called it amazingly. Look, I don't think this correction's over. Don't get me wrong. I think this correction can last.

It'll be kind of fits and starts. But I think we could see this correction last well into October. Uh, so play that out for me. So it's, it's the beginning of August here.

If you think the correction could last into October and we're already down six to 11%, depending upon the index you look at, what does that look like to you? Is it a slow grind down from here? Yeah.

I think, I think we're, we're probably going to play out exactly what we saw last August, September, October, right. Which is this, um, you know, remember last year, the market peaked at the end of July. So this is going to play out maybe a little bit shorter, you know, potentially kind of slide the dates around a little bit. But there's some things that back, there's some things that support this idea, right?

So first of all, we have a very contentious election coming up, right? I don't care who wins the election between President Trump and Kamala Harris, somebody's going to deny it, you know, that the election was cooked or rigged or whatever, right? So We're going to have all kinds of post-election dramatics of people contesting the election. If the Democrats win, Republicans are going to declare there was cheating.

If the Republicans win, the Democrats will declare that the Republicans cheated. So we're going to have all this election contention going on after the election. So I think there's a real possibility. And look, and you just go back and look at historical presidential election years, and particularly when the incumbent is not running.

you have a decent correction going into the election because markets tend to de-risk that event, right? They don't know who's going to get elected. They don't know what the policies are going to be.

And that's very much the case right now. We don't know who's going to win the election. Polls, depending on what poll you look at, they're all over the place. Yeah, I'm sorry to interject, but they have tightened a lot in the past week. And a ton of money has flown into the, you know, Kamala's funds here.

So, you know. A lot of people were saying two weeks ago, look, this is Trump's race to lose. I think it's a lot closer now. And of course, we're going to have all sorts of curveballs as we get closer to the election.

But it's going to be a lot of uncertainty, I think. Betting on uncertainty is a good thing. Yeah, I'm sure of that. If you like, it doesn't matter whether you like Kamala Harris or not.

There's one undoubted thing about her. She's a much more viable candidate than President Biden was, right? I mean, she can speak. She can read a teleprompter.

She knows she doesn't make... she makes verbal gaffes, but you know, not nearly to the same degree. So, you know, love or hate her doesn't really matter. The reason polls are tightening up is that now there is a choice, right?

So, you know, before President Biden dropped out, there were a lot of Democrats that say, I can't vote for Biden again, so I'll have to vote for Trump. Or I'll just stay home. Yeah, exactly. Or I'll just stay home.

And so now all of a sudden, the people that were kind of on the fence now have a viable anti-Trump vote, right? It's like, I don't. really like Kamala Harris at all, but I'm going to vote for her because I'm just not going to vote for Trump, right?

Love him, hate him, whatever. So that's what's going on. And so again, not surprising polls have tightened up, but that election uncertainty, and again, this is not just, this isn't me just saying that this year, right? This is what happens in every election year where the incumbent president does not run.

And there's been like seven or eight instances of this. Historically, the markets tend to correct. between, you know, five and 10% going into the election.

So, you know, so having that statistic, and then looking at where we are economically heading into the election and looking at how overbought the markets were egregiously overbought going into this correction, right? So if you kind of look back where this sell signal is, you know, in this, we were at a very, very high level markets on a relative strength basis were very, very overbought. So this whole correction, is a reversal of just these overbought conditions.

This is very similar to what we saw last July. So we take that analysis that going into the election, we have de-risking, you have this overbought condition, the market that's getting worked off. And you'll notice that, you know, when we started this correction last year in particular, you know, we were at a point where the markets were very, very overbought on a relative strength basis. MACD was very elevated. We worked off a big chunk of that overbought condition in that first wave of the sell-off, very much like we are now.

So you'll see that little red box on the right-hand side over here. We worked off a big bunch of that overbought condition on this first wave of the downturn. Then we rallied.

That lasted for a few weeks. And this is why I'm saying, be careful, you know, telling people like, oh, my gosh, the recession is starting. We don't want to scare people into making a bad investment mistake.

Right. This is not the time to sell. It's too late to sell right now. You now need to be patient.

Wait for a rally. You're going to get one. We're sitting right on the 100 day moving average right now. That's been good key support for the market going back into April.

We did violate it last time. Right. So again.

there's a real risk here we're going to violate the 100-day moving average head down to the 200 that's very possible but you're going to get a rally first and then we're going to grind around for a while decline again get another rally decline again ultimately establish a low and when this occurs well again we'll be very oversold the MACD will be very deviated to the downside like we were back of last year just like we are now and sentiment most importantly bullish sentiment will be very So allocations will be very, very bearish as well. Right now, they're very bullish on household and professional allocations. So those need to come down a lot.

So it's going to take a couple of months to work through that. So again, I think you're going to get this rally decline, rally decline situation in the next couple of months. It'll be maddening.

By the time we get to the bottom of this, there's going to be a lot of people going, screw it. I just don't want to be in the markets anymore. That'll be your opportunity to start buying stuff with both hands.

Okay. And we will have you on this program. week after week going on from here, letting us know as you're reading the tea leaves here. Okay.

So I was just checking the prices as you were talking there, Lance, and the momentum is continuing to the downside from when we started here. You're bringing up TLT. I guess let me pause and let me have you talk about bonds for a moment because that's one of the things I know the audience wants me to discuss with you.

I do also want to get your thoughts after we talk about this on oil and gold, which have had big price moves today, too. Yep, absolutely. So, look, bonds have been there's some actually some very bullish things that are going on with bonds right now.

And it's certainly worth paying attention to. But, you know, for a long time, we've been trapped and there's been a very, very nice bottoming process that's been going on in bond prices. Now, this is bond prices.

This is not yield. Right. So yields.

work to the inverse of bond prices. So if yields are going down, bond prices are going up and vice versa. But we have now broken out of a very long downtrend in bonds. But bonds right now are extremely overbought. So we've had a big move where more than two standard deviations from the 50-day moving average.

But finally, we have now cleared well above all those moving averages. And a lot of those moving averages are now starting to have bullish crossovers. So things have improved markedly over the last couple of weeks, but it's too late to buy bonds now.

You're going to have to wait. And we'll add to our bond position, most likely. We're looking for a pullback to basically some level of support of this breakout. So where bonds broke out and particularly these highs and for TLT, that's right around 94, 95. If I get a pullback to that level, I'm going to be a much more interested buyer to add exposure to my bonds.

But. Don't go jump into the bond market today. Like I said, all we need is a strong ISM services report next week or some, I don't know exactly what data is coming out next week for sure. I haven't looked at my calendar, but a little bit hotter than expected CPI print, maybe a little bit stronger employment report in August, whatever it is, there'll be something that sparks a sell-off in bonds and bond prices will pull back and you'll get a better entry point. So again, just like stocks.

You don't panic sell sell-offs. And same thing with bonds. You don't buy-You don't panic buy breakouts.

Don't panic buy to try to get in because then you're gonna start sending me emails like, well, I bought bonds and now I'm losing money. Well, yeah. But these things all work within price dynamics and big deviations from moving averages will reverse. Okay. So it sounds like what you're looking for here.

So to everybody who's questioning, you're feeling good about- your long-term bond trade that you've been in. It's moving in the direction that you thought it would. We've had this price breakout from this very protracted wedge.

And you're saying that's good, but what you're looking for next to kind of confirm this trend change is that there will be a retracement back to what was initially a ceiling line for TLT. And then hopefully that acts as a floor. And then once it... once it bounces off of that, then it's kind of, Hey, that's a really good entry point in time to add more if you're looking to get in. Yep.

So you said you want to talk about golden oil. I'm also want to just, I do want to, if you don't mind, I'd like to run through a few different markets with us when we talk about small cap, mid cap, the mega caps as well because there's stuff that's going on kind of across the board. That's fine. There's just one thing that I want to share on gold.

If you don't mind, let me turn off your screen share for a second and let me pull this up. Let me just find the gold chart. Gold was up big today, as you might expect when folks are getting nervous. um safety trade also higher expectation of more rate cuts than than expected as you were saying earlier hold on where are you getting that data from because gold's down over a percent right now that's why i'm pulling this chart up oh okay sorry i i i was i was so gold was up big today to an all-time high right it was it was here you know 25 so over above over 2500 which is first ever for gold um and then it has in the past couple of minutes started to crater. And I'll have you talk about the general price action with your chart there.

But I wanted to know, and we haven't had a chance to be following the markets while we've been talking here, so I know you don't really have any real background on this, but long-term precious metals holders, and I'm not saying this is the case. But they say, you know what, this is a freaking heavily manipulated asset. And when you see something like this, right, where, you know, it's just a code, it basically, you know, falls off a cliff in a matter of minutes.

What does that make you think? Well, no. OK, so so first of all, gold is a very heavily manipulated market. All commodities are right.

So let's just go to the basics of, you know, there's a big disconnect between people that buy gold. And, you know, on a thesis that it's a currency, which it's not, it's a thesis of it's going to protect me from inflation. It doesn't a lot of times.

It's a commodity that trades based on supply and demand imbalances in the NYMEX traders pit. Right. So remember the price of any commodity, whether it's gold or oil or platinum or wheat or cotton, cocoa, whatever it is. It's basically a bunch of NYMEX traders sitting around going, there's this event that's going on, and I think that's going to drive prices higher.

So I'm going to buy futures on that, and that drives the price up. Then, of course, some other event happens, and then they start selling all those futures. And so then the price goes down rather dramatically. And that's what you're kind of seeing today is that the thesis is changing. And if we start getting into a very weak economic environment and the Fed's cutting rates, what does that mean?

But, you know, outside of that, it's all technicals when it comes to any type of commodity, gold, oil, whatever it is. It's all technically driven because all these commodities are traded heavily by computer algos these days. So when things get really overbought, you're going to have a correction. When they get to previous levels of resistance, you're going to have a correction.

If you can have the screen share back, I'll show you. Absolutely. So, yeah. So over the last few months in particular, we've had this kind of rising trend line, which has been good.

I mean, gold's been been performing very, very well over the course of this year in particular. It's done well. You know, it did very poorly in 2022 when we had inflation rising sharply and markets selling off.

Gold didn't perform well at all. uh 2023 same thing gold actually declined as inflation was raging 2024 has been a vastly different story so you've had a very very good um return in gold this year it's been performing well it's been one of the better asset classes um but we've been stuck in this trading range and technically every time the market gets to the top of this trading range it sells off and the reason for that is is because of the deviation to the moving averages And what gold is going to work on is either try to stay consolidated here and allow the moving averages to catch up, which so far has been doing a good job of that, or it's ultimately going to correct back towards this 200-day moving average, which right now, I'm looking at IAU as a proxy for gold prices. But that would trade back to around $41, $42 a share on that particular index.

Which would be about an 11%, 12% correction from today's numbers. And that wouldn't be surprising at all. Gold is decent, you know, fair.

It's not as overbought as it was because it's been doing this kind of consolidation now for the last couple of months in particular. So it's been working off. We were very, very overbought back in May. And since then, we've been slowly kind of working off that overbought condition. But that's also a bad thing because this.

trend of gold prices have been higher, but you have a negative divergence in relative strength, as well as in the MACD. Typically, when you get that, ultimately, gold gives way to that negative divergence and you get lower prices in gold for whatever reason. But again, there'll be some rationale assigned to it. Again, the media headlines have come out like gold's doing this because of the yen or central banks or whatever. But it's just mostly technicals that drive commodity prices in general because they're simply traded futures.

That's that's all it is. OK. And again, I'm asking you to realize I'm asking you to comment on this when it's happening in real time.

So if there was some big news that we just haven't been aware of, you don't have availability of that to you. But it sounds like you're just saying, hey, look, if that's not the case, it's just mostly purely technical. Yeah. And gold is a great trading vehicle because, look, there's no fundamentals to gold. There's no dividend yield to gold, right?

So you simply trade gold for the price. And, you know, there's like we own gold in our all weather model for one of our portfolios that we run. And basically, we increase and reduce exposure based on the technicals. And we had, you know, we added gold previously and we keep kind of rebalancing it back to target every time it rallies these overbought conditions because it's such a good technical trading vehicle because it's so it's so driven by algorithms and computers.

And this is why people say it's all it's manipulated. And in a way, it is because all these computers are buying and selling gold futures and it has nothing to do with. all the theses that people have that don't really have any relation to reality but it's like oh it's a currency no it's not but people want to assign that and they think well gold's going to keep going up because the dollar's declining and there's there's that's not really the case gold is going to move based on the technical trading that occurs on the nine max because it's all commodities and futures driven okay all right so where do you want to go next oil small caps we'll do oil and get it over and So, you know, and, you know, kind of what's going on as well with just like kind of in gold prices, but oil prices also driven by what's happening on the NYMEX as well. Again, you know, there are there are institutions that take physical delivery of oil and gold and other stuff. Most of this is basically hedging product they have, particularly in the oil industry.

So if I'm producing oil, as an example, I'll go buy puts. on oil prices to hedge my production or I'll buy calls to hedge my production, whatever it is, because I want to lock in. If I think oil prices are going to decline and I'm making $80 a barrel, I'll go sell futures and put a futures hedge on my production so that I can, no matter what happens to oil over the next six months, I can sell my oil at $80 a barrel, even if it's selling at 40 at the time that I make the execution.

So most of what happens in the oil market as well as gold and others, is people hedging exposure of what they have in physical assets. And so when you have economic weakness, obviously, what happens? Well, if you have economic weakness, people have less demand, especially if employment's falling, which means they don't drive as much, whatever it is, they don't consume as much energy. And that leads to less demand for oil prices.

So unsurprisingly, oil prices declining fairly sharply this morning on this week. realization. Again, it's not just this morning.

This has been going on really since the beginning of July because we've seen repeated pieces of economic evidence over the last month that all says that the economy is slowing down more than headlines suggest. ISM manufacturing, employment, other services index, the regional Fed manufacturing surveys, the National Small Business Federation index are all showing. weakness, not only in consumption, but also CapEx hiring, everything else.

So again, if that demand is coming out of the economy, then people are going to start, you know, selling positions of what they own, they're going to start, you know, liquidating inventory, whatever it is, because they're going to expect low in the future. So you're seeing that reflected into the futures right now. Okay. And if, you know, some rule triggered today, if we do have quarters ahead of us as the economy you know slouches into recession does that make you think that you know the oil price has further to fall here across the rest of the year yeah yeah but not it's not going to go straight down i mean uh again you're getting pretty deviated to the downside you're getting oversold again get a decent employment report get some headline out of israel iran whatever it is and you're gonna get a pretty you know you can get a pretty strong rally in oil from here simply because people are getting too short right you know they've sold too much They've shorted too much, whatever it is.

And this is with all commodities in general, is that something will happen, some headline, some media event, whatever it is, that's going to cause people to shift their positions and we can get a decent rally in oil prices. But I think the trend in oil prices is going to be back towards $70 a barrel over the course of the next six, eight, 12 months if the economy continues to slow down and we don't have some type of economic resurgence along the way. Okay.

And, you know, with gold, the mining companies are looked at as a levered play on gold. Gold goes up by a bit. In theory, the mining companies should go up by a lot more.

Yeah, that'd work. Is the relationship the same? It sounds like you don't think it works with miners, but is the relationship the same with oil, with oil producers or not as much? Because a lot of these oil producers are involved in, you know.

the natural gas market. I mean, they have in many cases greater portfolio diversification. Well, there is a very high correlation between energy prices and oil prices because it's exactly what you would expect.

So the orange is the orange line is the price of oil and the underlying candlestick is basically XLE. So not surprisingly, when oil prices rise, energy stocks rise in price and vice versa. And just for folks that don't know, XLE is the ETF for the energy sector. And basically, you look at XLE, the top 10 holdings, Rexon Mobile, Chevron, those companies, mostly your big refiners. But again, it's not surprising.

And this correlation goes back 30 years. The main input- into their profitability is oil prices, right? So if oil prices are higher, they make more money.

If oil prices are lower, they make less money. That impacts their earnings. So unsurprisingly, there's a very high correlation between energy stocks and underlying energy prices. Okay, and that's, I mean, I guess to be expected.

I guess sort of my question was like, if oil goes up by a unit, it's not like the producers necessarily go up by two units because they're this big levered play. Yeah, it's really not. It's almost a one to one. OK, yeah.

But it also depends on the company, right? So if oil prices are rising, then companies that are the direct drillers, so companies say like Diamondback Energy, it will go up more than the underlying refiner like ExxonMobil. But it's also because it's a smaller company.

they have less shares outstanding. There's a lot of dynamics going to that. But to your point, you know, there are companies that will that almost and they're not really levered, but they perform better because they have smaller number of shares outstanding. So it takes fewer shares for people to buy it.

So there's excitement around drillers. All of a sudden, drillers tend to do really, really well because they are far smaller companies. The impact to their earnings is a lot larger. than it is for a company like ExxonMobil. You know, you kind of think about it this way.

You know, you've got like a canoe, you know, and you can turn that around pretty quickly, but it's really hard to turn a cruise ship. So, you know, cruise ships, ExxonMobil and Schlumberger or Diamondback Drilling or a gold miner, as an example, are like canoes relative to these big companies. Got it.

Okay. All right. Anything else on oil before we get to small caps? I think you said where you wanted to go next, right? Yeah, yeah, yeah.

Well, so, you know, small caps have obviously been one of the the interesting trades as of late. There's been a big rotation of that. Oops, I got to pull off the comparison real quick. But so small caps have been have had just a great run over the last month. Again, extremely overbought here.

So if you if you were fortunate enough to get into the, you know, into the small cap trade, definitely take some profits out of it. Huge problems. I think I've talked about this before with you, but there's big problems with small cap companies. They don't have earnings growth in a lot of cases.

We did we did go through this. I remember the conversation now. But, you know, 40 percent, you know, when you start looking at the companies, 40 percent of the Russell when people say, well, small caps are cheap.

You know, look at this chart of small cap value. A lot of those companies don't have any earnings. So they just strip those out to get the value.

Right. And that's a little bit deceptive. But. these things are very, very overbought.

So whenever you get this overbought and typically have a sell signal like you have now, you typically have fairly decent, sharp corrections. And that's kind of what's going on. IWM is trading all the way back down to the 20-day very sharp drop over the last couple of days. But they are very economically sensitive.

So if Your assessment is right. We're about to go into this big recession. You definitely don't want to be long small caps because those are going to be the worst place to be because they are the most directly impacted by slower economic growth and slower activity as it relates to their earnings.

The place you want to be is in companies that can still grow earnings, and that's companies like Apple, Microsoft, etc. Those companies actually are still sporting actual earnings growth despite a slower economic environment. Okay.

A couple of questions here. One, yes, last week you had said that, if I remember correctly, you wouldn't characterize what was going on in small caps as a rotation. You were seeing it more as a technical response to the unwind of the carry trade and a few other things going on. Therefore, you thought it was unsustainable and would be short-lived. And we're definitely seeing the price of the small cap index get hammered, especially today.

Right. Like I said, it's still up a little bit before it had this big spike, but not that much. I think I said four percent at the beginning of this this video. I think it's less than that now, given how far further it's come down since we've been talking here.

OK, so, yeah. And then you just sort of reiterated if you think you're going into recession, probably not the best place to be. But what companies do you want to own?

And that just brings me to the mega cap stocks. And again, I'm not pounding tables. I'm not.

recommending you go buy Apple, Microsoft, and Amazon. However, these companies still generate earnings. Microsoft just reported earnings had 29% growth in their cloud-based business alone. The rest of their business beat revenues and estimates across the board.

Amazon reported they're getting hit hard today, but the earnings that are growing are still growing strongly for that company. Companies like AMD just reported double-digit revenue growth. Those are companies that are growing earnings, even in a slower economic environment.

And these stocks are getting decently oversold. We're sitting right here on critical support at the 100-day. Could those go lower? Absolutely. But they're getting decently oversold.

And so one thing about the mega caps you have to remember is there's three factors behind them. And again, they have nothing to do with outlooks on the world at the moment. But first of all, they are 35% of the S&P 500 index. So when the S&P index rallies. they're going to rally with the index because every time somebody sticks money into an S&P, 35 cents of every dollar goes into those companies.

Secondly, they're the ones growing earnings. If you take a look at the deviation between the earnings growth and large caps, in general large caps, not just the mega caps, but large cap companies versus small and mid, small and mid companies, they actually have declining earnings growth, not only for this year, but looking out for the next two years, 2025, 2026, those estimates are declining for small and mid caps. Not nearly the case.

for large cap companies. And lastly, of course, if I'm a portfolio manager and I'm managing hundreds of millions or billions of dollars, I've got to allocate large sums of capital at one time. I can't do that in small and mid cap companies because if I try to buy a small cap company, I own the whole company. I have to buy large caps.

Those are safety. They have high liquidity. So large cap managers are going to have to allocate to large cap stocks going forward. That dynamic isn't going to change. So as you start to go through a slowdown, Yes, we're going to see earnings revision.

A lot of these companies are getting oversold right now. You'll have a decent rally here. But, you know, again, you know, you have to start being very selective about where you allocate capital in the financial markets over the next, you know, six, eight, 12 months. But more importantly, over the next three could just be really volatile and a lot of chopping around.

OK, so everything you said makes sense to me. But here's here's the question that my mind is stuck on. And I know we.

bounced around variations of this in the past. But the question really is sort of like, well, get all that, but when do valuations matter, right? So like you're saying these are the companies that are still growing earnings, right?

Yep. But the earnings expectations for this sector have been, you know, incredibly rosy, right? And yes, these companies are oversold on a technical basis.

in the short term. But if you look at them in regards to their price to sales, their PEs, et cetera. And here's where I'm going with this. So I think I might've talked about this with you. I talked about it with somebody relatively recently.

So you normally only really get big change in the market when sentiment shifts, when the narrative that's in people's minds shift. And our investors'minds shift. And we just had a big narrative shift on the political level. Right.

Where, you know, two months ago, you know, the Democratic Party felt like, you know, it had a winning candidate and everything was fine. And any, you know, any questioning of Biden's faculties was deep fakes and cheap fakes and, you know, right wing propaganda and all that stuff. Right.

Yep. And then we and then we had the debate. And then then all of a sudden what was not common knowledge became common knowledge.

Right. The sentiment shifted. Even from the Democratic supporters from, hey, you know, no, our candidate's fine to, hey, we got to replace this guy.

Right. And my question is, is is is that kind of like a potential snowball rolling down the hill that could start an avalanche meeting? It then raises the questions in people's minds.

What else have we been told is fine that may not be fine? And I think maybe we're going through that right now with the labor market, right? Where I think, you know, most people just sort of accepted the headline numbers, didn't worry too much about it. Now, all of a sudden, I think there's a lot of sense of like, whoa, maybe this is a lot worse than we thought.

And when we get to AI, which is driving a lot of, has driven a lot of evaluation in these big, you know, growth companies that you just mentioned, is, you know, that's a potential shoe to drop here on sentiment, not saying it's going to. But increasingly, you know, where the question is getting asked more and more is, God, we're spending a ton of money on this AI. Are we going to get the return, you know, the return on investment that we were hoping to get from it? And so kind of where just where I'm going with all this is, is if we start entering this era of greater doubt, does that potentially increase the odds of valuation actually mattering at some point?

Or these. you know, nosebleed level valuation, high growth stocks? Well, yeah.

But again, you know, the important thing to remember about valuations is that valuations do not matter in the short term, right? You've been very clear about that. They don't matter until they do.

And they're not going to matter in the way that, you know, a lot of people want to make them try to matter. And even when you interviewed John Hutsman, he told you the same thing. But this is a chart of valuations versus the market going back 100 years. And so you look at valuations where they are currently and you go, wow, you know, it's clearly that, you know, stocks are overvalued and there's going to be this big correction. There's, you know, there's certainly a case for that, right?

Um, but what you need is some type of recognition of that. So you've got to, you've got to make the case for the market. The market's got to come to this realization that, oh yeah, I can no longer support.

35 times valuations. And that's because of some event, right? So AI dies a gruesome death, whatever it is, all of a sudden companies can't grow. We get into a really deep economic recession. All of a sudden that valuation problem becomes reality.

And this is really what's going to come down to ultimately is that, you know, in the next year, two years, three years, we're going to come to this realization that the economy is not growing at five or 6%. It's growing at sub 2%. So sub 2% growth means earnings are going to slow down. So these rather rosy estimates for earnings growth going over the next three years, those are going to have to come down.

As those come down, prices have to revert to accommodate lower valuations. Because again, prices increase based on expectations for earnings growth. If you have earnings growth declining, prices are going to decline. And those two work.

But in the short term, it's a terrible measure. You should never use valuations of any sort to measure short term portfolio allocations. If anybody ever tells you is like, oh, we manage our portfolio based on valuations. Don't do that. And just to be super clear, I'm totally agreeing with you.

I'm just asking this question on the day the SOM rule was triggered. Right. Which is something that can change sentiment.

Right. Yeah. No, no sentiments changing. But this is minor.

Right. This isn't you know, we've got to go back and look at what caused major. major transitional shifts in valuation.

Go back to the dot-com crash. The dot-com crash of the realization, and this occurred with Enron, when Enron blew up, everybody actually started looking at the fundamentals. They started looking at balance sheets and going, oh my gosh, there is no balance sheet.

There is no income. There is no revenue. It's all phony, right? And so we saw company after company after company fall to that.

realization and that sharply reduced valuation. Second time we had big valuation reduction, financial crisis, right? All of a sudden. Or what? You mean you can't give people a subprime, you can't give people a house that they can't afford and then expect them to pay for it?

They're going to default? Oh, my gosh. Nobody saw that coming.

Sorry to interject, but I want to answer this and the rest of your answer, which is I totally agree with you. And those were trigger events, which I agree. Anything that catches the market by surprise, like an Enron or a Lehman, right?

Then that changes everything overnight, right? We're not there yet. We haven't had that.

Now, if NVIDIA somehow craps the bed overnight, if they come out with their earnings and their guidance is horrible, that could be an event like this. But I want to connect two things. So one is I've got to think at the boardroom level, now that the SOM event is triggered, someone just has to at least start asking the question, hey, wait, how much are we spending next quarter to invest in AI on top of what we've already done? If we're going into a recession, do we really want to commit that much right now? I think the odds of that question getting asked are higher.

And then there was an article I was going to put up on the screen. I won't, but it's on CNN. And it was why the stock market is suddenly freaking out.

And the premise there, and this was written before today. The premise there was, hey, people are getting, you know, Wall Street is getting more concerned that. the labor market specifically, is deteriorating and the Fed is acting too slow and is going to be behind the curve, which, by the way, it always is, as you say many times.

And so these are just, again, they're not trigger events, but they're things that make people say, oh, shit, you know, if, if, if, um, uh, you know, it's looking increasing, like we're going into recession and we're worried that the Fed is now behind the curve. That's not a like, let me just keep throwing capital expenditure into the space environment. Yeah.

So first of all, companies don't operate based on the SOM rule. OK, no, I agree. But I'm sure they take it into consideration in the totality of the data.

Actually, no, they don't. And let me tell you why. Because most people don't even know about it. I bet, you know, other than you and me who, you know, have picked up on the SOM rule lately and are talking about it just because I needed something interesting to write about and you needed a good interview.

I bet if you walked into 10 boardrooms and say, tell me about the SOM rule, they have no idea what you're talking about. And more importantly, they don't even know it's been triggered. Look, companies, and you should know this better than anybody else, because you and I run businesses, right? I don't run my business based on economic data.

I run my business. on whether or not I have customer demand or not. And if my customer demand is increasing, and thank goodness, bear markets are great for my business because people realize they actually need a financial advisor during a bear market.

So when you have corrections, I get very busy. And so I have to start looking at, do I need to hire more people? Now that goes totally opposite of what you would expect would be occurring, right?

I should be going, oh my gosh, we're about that. The stock market says in a recession is coming, I better start cutting staff. I don't have that problem.

Companies respond to basically is there demand for whatever their business or product is. And if there's demand for that business, they're going to be hiring employees. So again, when we look across the majority of the businesses in the world, yes, they are impacted by economic recessions.

And so when demand starts to fall, the first thing they do, and we're seeing this now, is they cut temporary hires. And we're seeing temporary hires are falling right now. But I'm not going to terminate my full-time employment. Good full-time employees are very hard to come by.

And this is something we've talked about before, but a lot of these job openings are companies that have job openings out there not to hire people. So, for instance, I've always got three job openings available. Always.

We're not hiring for any of those jobs right now. But I will use that job opening to poach a really good person from another company. So if somebody is unhappy at another company, I'll hire them away. Why?

Why won't I hire somebody that's out of work looking for a job? They're out of work for a reason. I want the guy that went through a downturn in 2020, in 2022, when the market went down 20 percent.

They're still employed. That's the guy I want. Right. And so when we get into economic slowdown, companies are going to hire, but they're going to hire from other companies and they're going to poach those good employees. So.

Full-time employment is going to take a while. We're seeing it come down. But to get into a really aggressive downturn in full-time employment, that's a little bit further off because companies are going to want to labor for it as much as they can.

because they don't want to lose those employees because you can't get them back once you fire them, right? They're going to go get a job somewhere else or they're not coming back to you because you fired them. So again, you know, you got to be a little bit cautious with saying these economic events means that these companies are going to do this.

If you actually take a look at CEO confidence, it's been rising over the last several months. And when it comes into AI as a particular, companies are still spending hand over fist right now, building out AI data centers, Tesla. Enron Musk just recently asked his board to invest $5 billion into AIX, or XAI, whatever he's called it. But he's built out one of the largest GPU 100 farms in the country.

And he's spending a lot of money developing that artificial intelligence. We're very, very early in that development cycle. It is way too early to be telling for, you know, again, media needs a reason when there's a decline in something.

Everybody goes, oh, well, the reason is this. There's no evidence that there's a slowdown in AI. There's no evidence that there's not a monetary product in AI, right? So whether it's search or whatever it is, we'll find out. But it's way too early in that cycle to be making those kind of calls and saying, oh, a company's about to start cutting back on CapEx.

Maybe they will, but there's no evidence of that just yet. And especially when a company like Microsoft is growing their data center revenue at 29% annually, there's no reason for them to cut back on CapEx spending. Okay. And to be super clear, I'm not saying this is something that is changing minds right now, and this is going down in real time and that we're seeing evidence of people cutting it.

I'm saying that unless, from the experts I listen to, you know, unless we start seeing really dramatic, you know, increases in revenue attributable to AI and whatnot, at some point, companies are going to start saying, wait a minute, you know, are we going to keep spending at this rate? I think that a recession, if we indeed enter one, makes it easier to ask that question, right? Yeah. But again, you're way far off of being in a recession.

Right. As you're saying, it's probably going to take quarters here, right? Yeah.

So again, this is just one of the shoes that I see could really change the game on the big growth stock story. And I don't mean to say it's coming imminently. And I just mentioned it because you were basically saying, hey, these are the companies that probably are going to do. you know, well, given what we're going into.

And they probably will, unless, and that's why I'm bringing up this whole thing, is unless the narrative shifts on AI. Well, again, not all large companies are AI. That's true. That's only a very small handful of companies. That make up a tremendous amount of market cap and a big chunk of the major indices, which is why I care.

No, no, no, absolutely. But again, there's no evidence of any slowdown in that development right now. look, Bitcoin's been around for over a decade, and there's still no real viable use for it, right? Remember when Bitcoin first came out?

By the way, bear disclosure on Bitcoin. But when it first came out, it was, you know, we're going to be doing real estate transactions with Bitcoin. We're going to be, you know, doing all of our banking with Bitcoin because it's the ledger and all this. And that's still yet to come to fruition. It doesn't mean it won't, right?

But as of right now... there's not a big viable use for Bitcoin. There's a lot of hope for it. And again, the premise of it is very strong.

But when will we get there? When will I be able to buy a house with Bitcoin? A mortgage company tried it for about six months, and the price was so volatile that it was messing up the whole housing transaction. So they had to stop. Enron Musk tried it with cars, and it's too volatile, right?

So you've got to get that volatility way down. in Bitcoin before it becomes a viable use. It's the same thing with AI.

It's going to take a decade probably before a real viable use for AI comes to fruition, right? We're still very early and still trying to develop what AI actually is. And so there's going to be a lot of capital expenditures and research and new companies coming online over the next decade that are going to be creating all new kinds of opportunities with artificial intelligence and where we're heading. And then on top of that... One of the reasons we just recently added to our position in 1OK is because all the power demand that's going to be required by AI.

So that brings in utility companies and power generators and all the other things that go along with generating power to support all of this AI development. So, again, it's just so early. We're in the first inning of the AI game.

But again, when markets decline or if you're looking for a reason to. try to promote a crash is coming for some reason or another, then, you know, that that's great headline. Oh, you know, it's this, this guy said this, look, people say crap all the time in the financial markets to try to support their book, right? It's called talking their book.

But The bottom line here is that large cap companies are the only companies right now that can grow earnings. And at the end of the day, earnings growth is all that matters to the price of the market. Okay.

Totally agree with that. Two things, then we'll move on from this topic. One is, so you guys bought into 1OK. I think I mentioned that like a week or two ago.

We've owned it for quite some time. We like the dividend on it. Fundamentally, it's a good quality company.

But part of the premise that we bought it originally for was... the demand for natural gas to generate electricity in the future. So we've been slowly building a position in that. It's done nothing since we've owned it.

We're flat. We've been collecting a 4% yield on it, but it hasn't done a whole lot. But our thesis is that down the road, that demand for natural gas to produce electricity will help benefit that. But that's a small play within our power generation structure that's in our dividend equity model, because that's where we own, you know.

AEP and Duke and others, which are actually the companies that will generate the infrastructure to build out the power supplies for AI. Okay. And just last point on the large cap, and I'm not trying to refute your basic premise there, which is it's the big solid companies that are the ones that are likely to do better on a relative basis, especially if we go into a recession from here. I just want to pick up on your Bitcoin analogy, because I think it paints the point I'm trying to make, which is that...

Bitcoin has had some gut wrenching price corrections. Yeah. Yeah.

And so I'm just saying is if you're if you're in the big cap AI stocks, realize that they could be vulnerable to that type of price correction in here if the short term narrative. Right. So I just to your point, you don't want people to be too conservative.

I don't want people to be too confident that, oh, I'll just buy the Magnificent Seven. I'm going to be just fine. Yeah.

No, no. Look, look, this is why, you know, when we're here on the show, I don't want. You know, what I'm trying to navigate here is managing risk in the portfolio, right?

We sold down all of our big mega cap stocks on the 13th of July, right? Before this whole big correction took off. Why did we do that?

Because they were super overbought, right? I mean, they were just grossly extended and had been running off to the moon. You know, but interestingly enough, you know, NVIDIA has had a decent correction, you know, from its peak.

And it's still up, you know, in our portfolio, it's still up over 100% for the year. I mean, you know, so you can have these big corrections along the way, and they can be gut-wrenching. And by the way, if you're still, if you look at your puts on a video, I'd probably close them out. But, you know, these big corrections can occur, but those typically tend to be buying opportunities and not selling opportunities. And again, I'm not saying that's the case right now at all, and that we could have more correction to go.

And again, as I said earlier in the show, you know, I think this correctional grind is going to continue for the next month or two. I think, and again, I could be entirely wrong. No, next week we can take right back off and go to new highs. That's entirely possible, right? Something can come out and just change the game.

Fed comes out next week and says, guess what? We're restarting QE. Market's going to take off running.

But, you know, barring that, I think we could see a kind of a replay of what we saw last year. where it's this kind of this continual grind lower that just basically we're going to be here on the show every week for the next four or five, six weeks. People are going to be getting consistently more bearish. That's a good thing.

Right. If we can get people really bearish on the market, that's the time to start stepping in and buying stuff that nobody else wants. And that's my job. Right.

My job is to find those opportunities and try to buy stuff that nobody else wants and sell stuff that everybody does. Right. And that's that's the wall of worry that a bull market likes to climb.

And, you know, I hope folks watching this know that Lance and I have the back and forth here because it's an honest intellectual discussion. But Lance is doing exactly what I want him to do on this program. He is playing exactly the role that I've asked him to play here. So and by the way, you know, Adam, I told you before, I'm as bearish as you are personally.

Right. I mean, you know, in my in my inner soul. Right.

I'm very bearish. But. I can't allow that natural psychology.

And everybody's bearish, right? The reason that you've got such a large audience is because people have a natural tendency to be bearish. And that's why everybody wants to watch a train wreck or a car crash or whatever it is, right?

And you watch the 10 o'clock news, right? What's the first thing that comes to your mind? It's not Jimmy who just won his hometown. baseball game for his whole team. His first thing he's up is six people got murdered today, for whatever reason.

That's because that's how we are as humans. And we tend to gravitate towards those accidents. So naturally, as a person or as a human, we tend to be overly conservative. And that's the big challenge for investors is to set that aside and just look at the market for what it is and go against those. personal psychology issues that we have and buy stuff when it's like, man, this feels terrible.

I don't want to be buying this, but you got to do it. So totally agree. Telling stuff when it's all at all time highs is difficult, too. Yep.

I agree with everything you said. Just to compliment it. I am not as bearish as I think you think I am and maybe other people think I am.

Now, it's not that I don't have a bearish. viewpoint, especially given where things are right now in the economy and the market. So I think valuations in general are way too high.

I think the economy has got a lot of challenges ahead of it. So I'm definitely owning the fact that if I had to pick a side of the line, I'd pick the bearish side. First off, it's not my job to influence people on this channel. My job is to let the guest tell their story. But what I try to do, especially in our back and forth, Lance, is people...

They have the proclivities that you were talking about, but the vast majority of people don't have the financial education and experience that you've had. When it comes to investing, most people are amateurs. Most people do simple things.

They want it to be easy. A lot of people don't want it. They've got jobs and lives. They don't want to have to be an expert in portfolio management.

And so they're just looking for like, oh, what's a good stock to buy? Okay, I'll buy that. I'll add it.

And then I'll just kind of cross my fingers and I'll forget about it and go on with life. So what I'm trying to do is encourage people to prioritize risk management. And that's a lot of the reasons why I raised these what ifs is because I want people to be thinking, okay, well, if that does happen, am I vulnerable to it?

Right? So I'm sort of trying to you know, we're both trying to help introduce better angels than the ones that often sit on our shoulders as humans, right? Exactly. No, and look, and look, I appreciate, you know, I appreciate you and what you do here on the channel.

And again, you know, I try to bring a little bit of balance to, you know, outlooks. And again, you do a great job. It's okay.

I just, you know, it's interesting, you know, because I see so many, and look, I don't want people to think that, you know, you know, I'm like the greatest manager ever. And I never buy losing stocks because I do. I mean, I can go through my litany of investing mistakes over time, but through the course of my life, you know, talk about, you know, people don't have my education. My education comes from almost all nearing 40 years of investing capital in one form or another, whether it was venture capital or whether it was personal capital, whatever it was.

And I've had some. horrible mistakes along the way. And I've, you know, I've, I've learned from, you know, my, my knowledge doesn't come from studying books.

It comes from making vastly bad mistakes. School of hard knocks, fighting in the real world. Yeah, exactly. And so you learn, you say, hey, well, I'm not going to do that again. And part of that was, is look, I spent and you go, you go back coming out of 2009, or actually in 2009, in February, I wrote this article, you know, eight reasons for a bull market.

And, you know, that was coming out of the financial crisis, but it still took me way too long to get invested back into the markets because I was so concerned that the financial crisis was not over yet. And so part of me had to learn about how to manage capital in a different manner because we were kind of in this new environment with QE and everything else. And, you know, going entirely to cash is something you can't do any longer because of these artificial interventions that we. kind of get out of nowhere.

And again, as I said, you know, this market really starts to tank. Don't be surprised if quantitative easing shows back up and quantitative tightening, you know, goes away because that's become the new playbook and that changes this game. And so you're sitting there looking like, well, this data says this, this, and this, and this means that the markets are going to go down by 40%. And then the Fed says, and guess what? Here's some QE for you.

And the market takes off running. You're like, well, that can't be the case. And, you know, but that's the way it's been for over a decade. And that's not going to change most likely in the future.

So we've got to navigate, we talked about this, you got to trade the markets you got. And going back to our evaluation discussion, I don't think we finished that. Evaluations are a problem, but they're not a problem until there's a realization there's a problem. And that can often not occur. And generally it takes some type of event.

of some sort like the dot-com crash or like you know financial crisis that all of a sudden causes everybody all at once to go these valuations are not justified when you have a correction outside of that valuation corrections tend to happen over very long periods so you know we may be looking at returns over the next decade of you know five to six percent Hutsman's lost decade. Yeah. Right. Yeah.

And all of a sudden it's like, man, these returns in the market suck because I used to get 12 every year and I can look, I can't tell you how many people I've coming into my office right now going, they bring me a little financial plan. They got from another advisor and go, my financial advisor says I'm good because I'm making, I'm going to make 12% a year on my money. No, you're not. Evaluations are going to tell you you're making four or five and, and that's going to be vastly different for people that.

have never been through a low return environment, but those are, that's going to happen, right? That's just a function of time, but it might be three years from now. It might be five years from now, you know?

Okay. You're actually getting into exactly where I want to wrap up this discussion. This week's rant is really about what we've learned from our mistakes.

I got a lot of positive feedback on how we concluded last week's video, Lance, where folks, you know, really liked us sort of sharing. the sort of the formula for success, for long-term success. And at the very end, we said, hey, it might be instructive to also share what we've learned not to do in life. And folks are really interested in that. So you've already done a bit of that.

Real quick, just to conclude, and we're going to get to your trades before we get to this ending topic. But that's why I was asking the question about valuations. If you remember, I positioned it in the sense of There are things out there that are that look like they could be changing sentiment. So does that leave the environment more vulnerable to some sort of black swan that that serves as the event to shift people's mindsets?

And, you know, I would think you would say, yeah, probably. But we're not going to know until there's a triggering event that happens. We can't predict that. So I totally get it.

And that's that's the big that's the big issue. You're absolutely correct. But you need something that brings everybody to focus on that.

all at the same moment. Right. And I guess, and I'm positing here, but my guess is, is that the more doubt that creeps in, the less big the triggering event needs to be.

Correct. Yeah. Okay.

So let's get into our learnings here, but let's do it through your trades. So obviously it's been a very busy week in the markets. Did you guys make any trades? Are you planning on making any trades next week based upon what happened this week? Yeah.

So I think there's so part of our portfolio is we will trade it. Right. And so part of part of part of our portfolio is if you look at it, we've owned positions since, you know, if you go to SimpleVisor as an example, we started those models in January the 1st of 2019. So some of those positions we've held since 2019. Now we've bought and sold parts of them over time.

Right. So. something would run up a lot. We'd sell it down a little bit and then we'd buy some more in a dip and then they'd go back up again.

Costco is a good example of that. Abdi, the Botox company is another good example of that. We've owned those for a very long time.

So we just buy them and sell them on a regular basis. Not the whole position. We just increase and reduce the position size in the portfolio.

There's other parts of the portfolio that we will just... flat out trade. And so for instance, one thing we were talking about doing this week, and I think there's a good setup for this is I'm probably going to go long either something like MGK, which is the mega cap growth ETF, or maybe add into some of my mega cap stocks because they've gotten very oversold. There's been such a dramatic sell off here. And again, I'm not, I'm not guaranteeing I'm doing this.

So don't go try to trade portfolio on this. I'll let you know if we actually wind up doing it. But there's a reasonable expectation that we're going to get a decent bounce because we're so technically oversold.

And so I may take that opportunity to maybe add in to NVIDIA or an Apple. Well, Apple's up today, so it's been doing well. Maybe an Amazon or whatever, just for a technical bounce. And then I'll take that position back off again. So, you know, part of that is, you know, I want to try to create returns when I can for my clients and use the markets to my advantage.

But most of the portfolio, 80, 90% of the portfolio is stuff that is looking at longer term opportunities and growth structures. And again, I'm managing that risk in the portfolio, you know, kind of in that vein. And so, you know, the only trade we made this week was we added to our position in one okay, has a 4% yield on it.

We like that we like the income side of the portfolio. But also, again, as part of that power generation structure that we're trying to build out. So again, We're going to grow that position over time. We're easing our way into it.

And again, with all of our positioning, we always start out small. And then if it works, we'll add into it. And then if it continues to work, we'll add in more to it.

If we buy something and it doesn't work, CVS was a good example of that. I've bought and sold CVS. multiple times, can never get that thing to work.

So I've given it for now, trying to buy a CVS, which means it'll probably work. You know, one thing I figured out is that when I give up on a stock, it tends to take off to the moon. So that's generally a good indicator. But, you know, there's challenges in parts of the market that need to be aware of. You know, one of the things that I get a lot from people is they say, well...

you know, I bought this company because I bought it for the dividend, right? And the problem is that these companies that you buy for a dividend, you can lose a whole lot of money in them. And you'll rationalize that by saying, yeah, but I'm still getting the dividend, right? And so, you know, I bought when I bought the stock, it's paying with 4% yield.

And now the stock's down 50%. I've got an 8% yield on it. Well, that's all fine and dandy until the company cuts the dividend entirely.

Good example. That was Intel today. Intel's down 20%.

You're down almost 50% in your stock since the beginning of the year, and they just cut their dividend. So now you're down 50% on your stock and you have no dividends. So what's your rationale for holding the stock?

Fundamentally, this company has been challenged for a long time. Fundamentals didn't really support buying the stock. We've watched it from time to time, but this is where you've got to be really selective about companies that you own.

And there's nothing wrong with the idea of buying dividend yielding stock. stocks, right? But understand that you also have to understand the fundamentals of those companies.

And the mistake I see a lot of people make, and I've been guilty of this in the past as well, is that I'll buy a stock that I think is fundamentally strong, has a great dividend yield. CVS is a very good example of this. And there's other challenges that the fundamentals don't reflect.

Sometimes value stocks are a value for a reason, and it's called a value trap. And CVS is one of those, at least for now. Now, does that mean CVS is a terrible company? No.

It trades very cheap. Fundamentals are strong, but it's got other challenges right now that I cannot quantify. And until I can, I'm going to leave it alone.

But that's a lesson I kind of had to learn the hard way after three attempts. OK. All right. And that's again, that's a great transition into what I want to talk about here. But real quick.

So you said you're likely going to be making that trade. So I think you did a good job of explaining to folks that as a portfolio manager. just like a football coach, you've got a playbook, right? And you've got that plan for the game, and you're largely going to be following the playbook.

But at times, you are going to allow your quarterback to call audibles because you see something developing on the field that you can take advantage of that you didn't anticipate, right? So that's sort of what this mega cap trade would be, it sounds like. It's more like an audible call.

For folks that don't want to wait until next weekend to see whether indeed you bought it or not. If they subscribe to SimpleVisor, they will learn about that trade when you make it, correct? Right. We send out an email alert and a text alert every time we make a trade. OK, so folks, if you're interested again in like really looking over Lance's shoulders, go sign up for SimpleVisor.

All right. So now to our ending topic here. So I brought up this this concept that actually has served me pretty well in life called negative discovery.

Right. Which is on a learning journey. You want to try to learn what to do right, but it has just as much value oftentimes if you learn what to not do and what to avoid.

And that's where mentors can be great, is they can pass their negative discovery down to you without you having to fall into the exact same pitfalls they did. But of course, nobody's perfect and we all still make our own mistakes. So I thought it might be fun, Lance, if we both gave an example or two of...

negative discovery on investing, things that we have learned over time not to do. And then maybe if we've got time, pick something in our personal lives as well, something that's served us well to learn to stop doing. This is too easy, though. Your challenge is going to be keeping it to just one, my friend. But here's what took me a good long time to realize.

And look, I'm a guy that runs a financial channel that's trying to help people be better wealth builders going forward. So one of my biggest learnings of negative discovery was that I did not for a long time really truly have a good understanding of my strengths and weaknesses as an investor. I was doing what I was told to do, what I thought I was supposed to do, but I wasn't really taking an honest assessment of like, well, what am I good at and what am I not good at?

And When I sat down and really tried to understand what I do, I realized I'm actually pretty good at being a dependable contributor to my investing fund. I'm pretty good at what we talk about, Lance, of saying, okay, of my income that's coming in, I'm good at making sure I save some of it. And I try to really try to save more every month than I did the month before. So I'm really good at continuing to sort of feed the engine, right?

I'm also, I think, a pretty, I've come to learn, I'm a pretty good dot connector where, you know, what's the likely future of big trends that are going on that have a high probability of forcing a repricing in the market at some point in time? The thing that I'm not good at and that almost nobody's good at is the timing of this, right? But I'm pretty good when I say, you know what, I think this is going to matter.

In most cases, it does. Now, it might not matter for many years. And this goes to some of my weaknesses.

Is I got to be careful about the decisions I make off of that? But I'm pretty good at noticing something that is going to matter at some point in the future. I'm also pretty decent at understanding human nature.

And... I'm always amazed at how the market oftentimes does not take that into account. And it's sort of like some of these repricing moments that we're talking about, Lance.

It's when human nature finally wakes up to an issue. That's when it matters, right? And then I'm good at having conviction and patience, meaning if I make a trade, I can be real loyal to it if it's going against me, but I still believe in the underlying fundamentals.

So I can ride it longer, I think, than most people who will get shaken out, right? Now, again, there's a weakness part of that we'll talk about in a second. And I also have a loss prevention bias, which I think is good because I think it keeps me from making like really fatal mistakes.

Again, it can be a limiter at times, but it's generally proven right or useful in preventing me from stretching myself too far where I would have a financial injury I couldn't recover from, right? Now, what I had, those were my strengths and I had to start saying, okay, how do I play to each of those and really focus on those things? And let me, let me understand what's, what's sabotaging me at times and either do less of it or change the formula.

And the two big things that I came up with there is, if I'm being really honest, once I, once I invest in something, I'm, I'm a neglectable gardener. I'm too busy with what I do with my life. I'm too involved in my job and then trying to be involved with my family when I'm not in my job.

To really go back and continue to reevaluate the positions and say, hey, has anything changed with this stock? Is this still a good stock to be in? So I end up holding on to these positions for too long.

Actually, oftentimes so long that I forget why I bought it in the first place. So, you know, Intel is a great example, right, that you just mentioned there, Lance. I'm not in it.

But you just said if you've been holding on to Intel, you know, for the past year, now that they've cut the dividend, you really should be asking yourself, look, this stock is sunk like a stone. It's cut its dividend. Like, what's my rationale for keeping this in my portfolio? If I'm being really honest with myself, I just I just generally don't have the bandwidth to be good at doing that.

And that's one reason why, you know, I had to wake up and say, you know what, I'm going to have to partner with a financial advisor. They and I can sit and I can come up with kind of the big themes that are important to me. But in terms of actually executing them and doing the position sizing and coming back and saying, hey, we bought this stock for this reason, but it's disappointing us for reasons we didn't expect.

I think it's time to sell it. I really had to outsource that to somebody who was much better at it than I. And that has paid huge dividends.

As I said earlier, like my conviction oftentimes can work against me and I can I can get to the point of stubbornness. in a trade where I'll say, look, I'm like you and CBS, right? Like I'm so convinced that this is going to come right. And it just doesn't.

And I need to be better at saying, hey, buddy, it's time to give up the dream. At least for now, you got to break up with a stock. And again, that's where a financial, a good financial professional plays that role for me. So the key conclusions coming out of this is, you know, play to my strengths. Where I'm really good at is playing the conservative long game.

I'm not going to take too many risks. I'll let others try to hit the home runs, but I'm just going to keep putting money in. I'm going to be, you know, I'm going to have my risk management in here and I'm going to win this thing over the long run. And then, like I said, you know, those areas where I'm really weak on the essentials, the gardening, the position sizing, you know, the getting out when these things go right, get somebody else who's better at that than I to be doing that stuff for me.

And that has worked really well. So that's my financial negative discovery journey? What's something you learned?

Well, I mean, you know, a lot of mine are the same way, because again, I'm very conservative as an individual. But I think that, you know, from the investing side of the issue is that, you know, I'm always, you know, you have to understand. you know, again, kind of what you're talking about is what your strengths are, right? And, and what I learned early on was, is that I had to really increase my ability to do financial analysis a whole lot more, really being able to dig into numbers and understand what the implications are and trying to afford, you know, trying to make forward estimates about those returns and, you know, kind of learning how things work.

I made early endeavors into private equity, you know, a long time ago, and it worked out poorly because I didn't know how to evaluate it the right way. And, you know, I had to go through those kind of those learning experience of what did I miss? Why didn't that work out the way I thought it was going to work out?

And that's why, like, I just recently wrote an article about called, you know, why am I so lucky relating to private equity? A lot of that goes back to that learning curve, which is that, you know, I was in the wrong pool. Most of it is that, you know, people that I was talking to about private equity were not the good slate of companies that I should be looking at for private equity. So it took me it took, you know.

a long time to understand that that was a weakness that I had to figure out. The other side of it, you know, the other thing that I think is important for people to understand is that you've got to say no, right? And the hardest thing that we do is, is we get so wrapped up in our investing. And this kind of goes to your point about being, you know, taking a more conservative long-term approach is that we get so tied up into what the market's doing short-term is that we just start taking on any amount of risk that we can take.

And sometimes the hardest thing to do is just say, no, I'm not going to do that because, you know, I'm just I'm looking at, you know, this stock just take off to the moon. But, you know, I should understand that I don't have the ability to know when that stock is going to have a correction and when that thing is going to have a major pullback and I wind up losing a lot of money because typically we tend to, you know, as investors, we wind up buying high and selling low because we're chasing. something that somebody else is talking about.

We're not making our own analysis. We're not doing our own research. And this is the biggest challenge.

It's always interesting to me that there's so many people that I talk to that is like, oh, yeah, I invest in the markets. And I think that's great that you do. And you should.

99% of people should just buy an S&P index fund. If you're going to manage your own portfolio, just buy an S&P index fund. And dollar cost averaged into it every month.

It's not a fantastic strategy, but it'll work more often than it's not. Markets go up 73% of the time. You're going to do better.

I run into people consistently and they're trying to be their own portfolio manager. And they've got a basket of 50 stocks or 60 stocks. And they're just buying stocks because of some narrative or something they heard on CNBC or something they heard on the Wall Street Journal, whatever.

Like, oh, this company is great. So you should own it. So they go buy it.

And. They don't understand the fundamentals. They don't understand the technicals. They just bought it for some reason.

And as long as it's working, they feel really good about it, right? Because it's going up in price and it's kind of like going to Vegas, right? It's that feeding of the dopamine effect.

You know, stock prices go up, our portfolio is green, we feel so much better. But when something goes wrong, we're losing money. And all of a sudden now we're in full-blown panic mode because we never did the research.

We don't understand. Why is Intel down 20% today? Well...

a bit of research would have told you why it's 20% down. It was kind of inevitable this was ultimately going to happen with Intel because of just what's been going on with that company for the last couple of years more than anything else. But those are the things that we fall to because we don't recognize what we're actually doing.

And sometimes just saying, no, I'm not going to do that is a very, very valuable tool in preserving wealth and becoming a better investor. Okay, great answers. All right, well, look, let's wrap things up here with something that we learned negative discovery in our lives. I've got two. I've got a lot more than two, but I picked two.

And mine, I got some good negative discovery early in life. My parents got divorced when I was really young. I was two. I don't even remember them together.

It's funny, actually, both my parents passed away relatively recently. We were just at my father's celebration of life, which we've mentioned on this channel. And my brother was going through all these photos and he pulled out what I believe is the only existing photo of my nuclear family, where it's my mother and father, my brother and I. I think there's only one photo that exists in the world. He pulled it up.

So anyways, I was super duper young, but it was not a pleasant divorce. And there was a lot of acrimony. And.

what it, what it, and I saw the fallout over the years that it had on both parties. And, you know, I said to myself from a very early age, all right, look. I don't want to have a marriage like that. And I don't want to put my kids through what we went through as part of that.

And it made me really selective about the marriage decision process, which I think totally served me right. Like I totally picked a great spouse. And I think I did because I had this very high standard bar that, you know, I consciously. raised because I wanted to minimize going through what my folks had gone through. And kind of on a related note, my mother got custody of us.

So we grew up with her and she did not have a financial education. She, I think, felt very financially vulnerable coming out of the divorce. And she She didn't really have a plan for her life and certainly not for her how to build wealth.

So she had a lot of anxiety around it, but really proved to me that that adage, if you fail to make a plan, then you're planning to fail. Failing to plan is to plan to fail. So what that did for her is it just made her extremely reactive to whatever the universe threw her way.

And so her decisions were emotional and uninformed and often. made from a desperate situation, which was a recipe for making a lot of really bad decisions around money for a long time. And I just said, you know what, I do not want to be stuck in that kind of feral survival mode and the financial bad outcomes that it results in.

And so I think that's one of the things that really forced me to become such a planner, especially when it comes around money. and investing. And that was, you know, I think I'm a lot better for it. And I can feel a lot of compassion for my mom and what she went through. And while it sucked to learn that lesson, you know, over the long period of time that it was being taught to me, I do in many ways sort of thank her for that lesson, because it's really put my family on much better footing than if I hadn't learned it.

Yeah. I think that's having been a product of divorce. So so I was married, you know, got divorced, picked a bad partner.

So, you know, that's that's very important. You know, kind of what you're talking about is like, you know, what what makes marriage work, of course, is being very selective about the partner you pick. Right. Right. And sorry, I forgot to mention working hard on it every day afterwards.

Yeah, yeah. And that's that's the thing is like you can't stop working at it. But a couple of things is that. you know, things I learned, you know, through my life is that be very selective about the people you surround yourself with.

You know, when I was young, I've always been very independent, and I've always wanted to be in business for myself. And I never really wanted to work so much for another, you know, another company or whatever it is, I always wanted to own my own thing. And I've built a whole number of businesses through my life. But, and again, I was young. And so I would see people that I thought was successful.

And I would want to, you know, get to know them and emulate them and whatever it is. It's very important to understand that there is a difference between looking successful and being successful. And so very careful about people that you surround yourself with, just because they spend a lot of money, or they dress well, or they drive nice cars doesn't mean they're successful.

You know, early on, I got, you know, I was building health and fitness facilities, and When we were building those, I, you know, I needed to raise capital and I went to, you know, the bank and the bank says, well, you need exit. I need you to go raise some capital from, you know, from potential prospects and from other people, you know, so private investors. And so, you know, I was like, OK, fine. So what I know, I'm 22 years old. I'm going to go start a 15000 square foot fitness facility and borrow a million dollars at the bank, you know, tell me what to do.

And so I would go do it. Right. So. $100,000 worth of memberships for the club proved its viability.

And then I needed to go get some private investors because they need investor capital. And so there was this guy who seemed very successful. He owned a bunch of businesses and said, sure, I'll help you out.

And no problem. And the problem was this guy was a complete crook and completely wound up causing all kinds of problems with the business. And, you know, just individually, I had to wind up selling the whole business because of him.

But You know, be very careful with who you select because it can have a, you know, and we talked about this, you know, last week a little bit, Adam, you know, talking about having partners. you know, it's so critical that who you, and not just in business, but in your life, because if you look around at your group of friends, look at your friends today, like when you stop watching this video, go look at your group of friends that you hang around with. And if they're not people that are succeeding beyond you or, and they're not improving you because that group of friends that you have right now is where you're going to be in five years.

So your group of friends should be people that. are people you want to be in five years because they're going to elevate you to that level. So, you know, the important lesson that I learned over life was to make sure that and it's always interesting because people always ask me, like, you don't have a lot of friends. I don't.

My wife and I have very few friends, but the friends that we do have are people that elevate us and they're constantly pushing us and they're constantly making us want to do better than where we are. And that's the kind of friend, those friends are hard to find and I can count them on less than one hand. So those are, those are the people that you want to be friends with. And if you've got a million friends and they're taking your time to do all kinds of stuff, all they're doing is holding you back. And so make, make good decisions about who you surround yourself with, because that has everything to do with where you'll be in the future.

Uh, very well said. I know we've talked about this before. I can't remember if it's publicly or privately.

I know this is advice we both give to our kids. My wife's a therapist and has long told our kids, you're sort of the average of the five people that you hang out with, right? So you want people that elevate you.

Like you said, my older daughter has recently graduated college and we're in the process now of she's going out in the real world and really trying to find a big job. And I... completely agree with everything on the personal level.

It applies to the professional level as well, right? And one of the things I'm really trying to encourage her to do is to sort of build her coterie of advisors and people who can advise her in this process and be mentors to her. And one of the things that I think I'm beginning to turn on in her, the light bulb I'm trying to turn on in her brain is that it's okay to approach people and ask for this. And if you can actually build, you know, your own sort of personal board of advisors.

Um, it's an incredible catalyst for both career and life, uh, success. But I think most people feel that, that, oh, I'd be bought. I, I, you know, I couldn't ask that person to give some of their time and attention and to care about me because who am I? Right. And the reality is, is that most people are honored to be asking what will help if they can.

Now, obviously you want to make sure it's a two-way street and you're doing what you can, what you can to provide some value back to them in whatever way you can. Or maybe it's. future value.

Hey, once I get to where I'm going to be, I'm definitely going to be paying it forward or whatever. And the worst you can hear from these people is, oh, I really appreciate, I'm honored you asked. I'm sorry, I don't have the bandwidth right now, right?

There's very little downside risk and tremendous amount of upside risk. And so if there's a bit of inspiration I can give to folks listening here as an addition to the very wise advice that Lance gave about your own personal set of friends that you're hanging out with, ask yourself, hey, Do I even have kind of my own personal board of advisors professionally? And if I do, can I up-level it? And if I don't, what can I do to start putting it together?

All right, Lance, you've been nodding as I'm saying this, but I'm looking at the time. We're getting very late here. So thanks for another great week.

Folks, if you would like to be one of the friends that Lance counts on his hands, let him know by hitting the like button and then clicking on the red subscribe button below, as well as that little. bell icon right next to it. I'm going to go back to my hurricane analogy at the very start here, Lance. We've gotten the warning, right?

The hurricane warning has gone on the TV set. Yeah, maybe it's still not entered the Gulf yet, but it's time to start making preparations in your life. If you're a DIY investor, really look at your current positions and ask yourself, okay, if we start entering a recession and this thing plays out the way that Lance think it may, do I need to be making changes today to prepare for that?

If you are not a successful DIY investor and just, you know, you want to make sure you're not collateral damage if the storm indeed does arrive, make sure that you sit down soon with your professional financial advisor and say, OK, you know, we've now got this warning. Let me know how I'm positioned. What are you doing in advance of this?

Make sure that they are taking the appropriate steps. So if you've got a good financial advisor, great. Have that conversation with them. If you don't. Then consider scheduling a consultation with one of the financial advisors that Thoughtful Money endorses, perhaps even Lance and his team there at RIA.

To do that, just go to thoughtfulmoney.com, fill out the form there, only takes you a couple of seconds. All right, Lance, as usual, I'm going to let you have the last word, buddy. Yeah, look, to your point, there's certainly things to be concerned about, but be careful overreacting. You know, it's very difficult to not let your emotional biases kind of drive the train. This is how we're kind of built.

But, you know, right now, just you're better off just being patient. I think we're going to get a bounce in the next week or so, and that'll give you a better opportunity to do some risk management. But we'll talk about this every week we're here.

Great. All right. Combining our two things, don't overreact, but get your plan in place. All right, Lance, buddy.

Great week. Can't wait to see you next week. Everybody else, thanks so much for watching.