10-1-26 From TINA to TIGA: Diversification Pays Again

0:00And now for something completely different. Forget everything you've been told by others before. There is a niche. Niche? Niche? Niche? Niche? It's a niche. I don't know. It's a niche. The niche. It's a special area. There we go. Get ready for the real deal. Most important question, Lance. Yes. Pineapple's on pizza or no? The full story. Me personally, I just, if I'm going to eat a pizza, it's going to be a pizza. I'm not going to order pineapples on a pizza, but I'm also not going to chastise somebody who's doing it. I really don't care. Do what you want to do. The whole lampshelada. So when you eat chili, beans or no beans. No, it's money, news and information you can use to grow financially healthy, wealthy, and wise. Your Excel word example. It's a great example, right? Because there's Google sheets, which does word that, well, loaded. OK. OK, OK, boomer. Now, welcome in. The real deal. The real investment show with Lance Roberts.

1:00Presented by RIA Advisors. And good morning and welcome to the second best day of the week. That's right. It's Thursday. That means Michael E. Woods joining us this morning. We're talking a little bit about Tina and Tyga this morning. Because you know, when there's bulls and bears and Tyga's, there's something else going on. I'm not sure what it is. You know we need to put never wore pants. I'm just saying that. Anyway. Neither did Donald Duck. This is Donald Duck. Didn't either? I forgot about that. Kinky. Yeah. It's something. But anyway, so we get into that this morning. Kind of news this morning. It's pretty light. Yesterday was some interesting economic data. Yesterday was the revisions to the personal consumption index, which is personal consumption expectations, index, PCE. And that showed personal PCE inflation actually is running about 1.6% overall.

2:03Big downward revisions and things like investment management fees, also in computers and software, et cetera. Those got revised down a bit. There were some downward revisions and legal services that brought some of these other factors down that had been weighed. So it was just basically a revision to the methodology. And that did lower the rate of PCE over the last couple of months. So the question is now, is did the Fed make a mistake by hiking rates before that revision came out? Because again, now, the sudden the data suggests that the PCE index, which is the index they pay a lot of attention to in terms of inflation, wasn't showing a strong of inflation as was previously expected. So did they jump the gun a bit? We had talked about on the show that maybe they would not hike rates at the last meeting, and they would wait for that revision to come out to make a better decision. But it is what it is. They hiked rates. We'll see what they do in the next meeting. They may be on hold now for a while. It just depends on what happens.

3:04A lot of it has tied to oil prices as well. If oil prices stabilize or start to come down, then that'll also change things. And that's the thing to remember also about inflation. If oil prices stay at $100 a barrel for a year, just stays at $100 a barrel. Inflation zero, because it's not going up. So inflation is always a function of the change in price, not the actual price level itself. And this is often something that we mistake as individuals and investors. Is we look at, we talk about the price of eggs is $6, or the price of gasoline is this, or the price of bread is that. Prices are not inflation. That's just the price. The inflation is the rate of change in that price. And so if the price doesn't change, even though it's relatively high, and I'm used to paying $1 for a loaf of bread, now it's $3 for a loaf of bread. If it's $3 for a loaf of bread over the course of the year, there is no inflation. So it's always important to remember that we're not talking about prices when we talk about inflation.

4:04We're talking about the rate of change in prices over a period. So just something to kind of keep in mind is as we discuss a lot of these things. But in the near term, nonetheless, inflation is getting fed by a much stronger economy. And that's we also saw yesterday was the revision to the second quarter GDP, which was revised up, rather sharply. Personal consumption spendatures are now wanting well above their 10-year average. And this is, that's about 70% of GDP calculation. That's the consumer. That's the consumer out there buying, spending, and selling, et cetera. But business investment is also running well above its 10-year average. That's all the cat-bex coming to the economy. So between those two components, you're getting rather robust GDP growth. And it's right now expected. We're going to be printing close to almost 5%. And the third quarter, so economic growth is doing well. All that activity is feeding in to the economy that's lifting prices,

5:07supplying demand. So that's creating some of this inflation. Then, of course, you throw on top of that oil prices. That's also feeding into inflation, which is also lifting interest rates. So all that is all kind of working hand in hand. But these things are prices remaining elevated because there's a lot of activity in the economy that, as we talked about yesterday, that's the thing that the Fed is trying to attack directly by hiking interest rates is to slow that demand in the economy. It was interesting back in the late 1990s, late 1998, 1999, Alan Greenspan, then-Fan Chairman, started hiking rates because he was worried about an overheating economy. That's kind of what's going on right now. The question is, do we get an economy that's running too hot? That causes inflation to spread across the entire economy to a larger degree that really outstrips the growth of wages and other things that puts an impact on the economy. The Fed doesn't want that to occur. They're hiking rates to try to slow that rate of growth.

6:08The problem for that is they're kind of fighting a problem at the moment, which is you've got this combination of higher oil prices, but all the spending that's happening in the economy, a retail spending yesterday, personal spending, was 0.9% at the headline, 0.6% on an inflation adjusted basis. That's exceptionally strong. And that follows up the previous month, which was also very strong as well. So we've had two months in a row of really strong personal spending in the economy. Slap on top of that, the cap expanding coming in from AI and development, and everything else. That's just all feeding into this data. That's keeping, and that's really got the Fed on its kind of back foot right now, trying to deal with that. We'll see what happens and how they continue to do it. But it is creating some investment opportunities in an area that most people hate the most right now. That's bonds. Here's what you need to know before the bell this morning. So I was doing a little bit of work yesterday. The interest rates ticked up just a bit yesterday. We're running right now at about 5.3% on the teenager treasury.

7:13I don't have the 5.29 right now on the teenager treasury. So 5.3% on the teenager treasury. So it's a little bit of work yesterday just looking at the technicals. And again, we know with any investment, whether it's stocks or bonds or gold or whatever it is, technicals can tell you when the market has gotten two off sides in one direction or the other. But remember, as prices go and attracts buyers or sellers, depending on which way the price is going, into a certain asset. You'll remember last year we're talking a little bit about gold prices. Gold prices were going completely vertical. And that was just because speculation was piling in. As prices went up, it dragged more speculation in, created all the narratives around it, that dragged more buyers into gold. And it worked really well until eventually that narrative breaks. Well, that's also when you take a look at technicals and you get really deviated from long-term means, just the underlying trend of the market itself, everything reverts back in price eventually. So I was looking at bond yesterday saying, where are we now in terms of an opportunity potentially

8:20for a trade? Now, we're not talking about a long-term hold here in bonds. Now, we're talking specifically about a trading opportunity in bonds at the moment. So this is a chart of TLT going back 20 years for TLT. Sorry, this is interest rates, TNX, which is the 10-year interest rate going back 20 years. This is a weekly chart. So this chart moves pretty slowly over time. But it's a weekly chart. One thing that you'll want to notice is currently right now, we are well into three standard deviations on a weekly basis of the one-year moving average. So this is a one-year moving average of interest rates on a weekly basis. And we're three standard deviations above that. So again, this is a long-term chart. This is slow to move. It's not going to happen tomorrow. But this is just kind of looking at longer-term trends. One thing you'll notice is that this type of deviation does not happen very often historically and when we go back in time.

9:21So here we are right now. We're three standard deviations above the 52 week moving average. Last time that happened was back in 2023, late, late 2023. We also saw it back in 2022. Previous to that, we've had a couple of other instances, but not very often. So over this very long period, so this is going back to 2017. Sorry, so this is a 10-year chart going back to 2017. There's only been about four instances where interest rates were this deviated from the one-year moving average. And every one of those led to a short-term retracement in yields, which gave you another words that was a buying opportunity to buy longer duration bonds because you can't typically sustain this type of deviation from the long-term mean for very long. It does not mean, right? This does not mean that interest rates can't continue to go higher in the future. They can. Not saying that at all. We're just talking about specifically for a trading opportunity that might be a few weeks to a couple of months, maybe a quarter, that you're going to eventually get some type

10:26of pullback. The last time we had this type of deviation again was back in late 2023 and rates fell to about 3.8%. Over that period going into about halfway into 2024. So that was about a six-month trade in bonds. And then bonds just traveled sideways for a long time and then we've had this recent spike. Those are a bit shorter. We had one back in kind of late 2022. Yields fell fairly sharply, fairly quickly, lasted about a month and a half. So again, this isn't a long-term outlook. This is a trading opportunity. So if you're looking for an opportunity to trade bonds, particularly pick up a little bit of yield here temporarily, pick up a little bit of capital gain. It's a trading opportunity. It's not a recommendation. I'm not suggesting you do that. I'm just pointing out the fact of two things here. One, from an investment standpoint, there's a trading opportunity which means that investors right now are off sides on bonds. They've sold so many bonds at this point. They're off sides. Prices have gotten deviated above long-term means.

11:29Which means there'll be a reversal. There's a very large short position sitting here in Treasury bonds right now, particularly against the ETFs. They short the ETF, TLT, when they're positioning their portfolios. There's a very large short position sitting against TLT, which means if we get a reversal, there's going to be short covering as well, which is going to fuel that drop in rates. Again, this isn't a long-term projection. This is something over a couple of months, maybe. But in other words, there's a couple of opportunities here. If you already are long-duration bonds and you're looking to either add to them or basically get out of a position, I wouldn't do it here. If you're worried about where interest rates are right now, I wouldn't worry about it. You're going to get some type of pullback. You can work yourself out of a bond position at a better price in the future. Outside of that is just the fact that when you have these types of deviations, something happens in the markets that creates the reversal. You're going to get a drop in oil prices. Something's going to happen economically. There'll be some type of headline event that all of a sudden brings in concerns about

12:31a disinflationary impact that brings these yields back down to more normality. This is something the Fed will also want, something the Treasury will also want. The yields are getting a bit out of hand here technically in terms of just a price movement itself. It's been a very sharp spike that does have impacts to the economy that is certainly going to be a concern to the Fed and the Treasury as well. Just something to consider, something to think about. That's what you need to know before the bell this morning. We'll come back, pick up with Michael Leibwitz right after the break. Don't go away. Catch the best of the real investment show any time, anywhere from iTunes. Download podcasts of the real investment show from iTunes.com. Oh, red, that's a clear. I plummish that candy coffee. Whatever am I going to do.

13:31Don't you wear it in a dollar, we'll watch it again on our YouTube channel. Why red? I never. The real investment show YouTube channel has all of our past presentations from candy coffee and lunch and learn. The special topic discussions and all of our live show recordings preserved for you. Subscribe now to the real investment show YouTube channel or look for the link on our website at realinvestmentavice.com. You're listening to the real investment show. I might stop working. I'm ready. My headset's not working here. Here we go. Well, back to the show this morning. Good morning. It is, of course, Thursday.

14:31Means Michael Leibwitz is here. Good morning, Mike. How are you? Don't wear a last good. You have to. Well, it's Thursday and my wife was out of town for less. She came home last night. So, you know, it's all good. Everything's great. She's going to be at home today. She said she's baking. She's going to take the day off from work. She's been traveling. So she's going to bake bread and all kinds of stuff. So I'm going to eat well tonight. That's all I know. Yeah, exactly. So it's good when she comes home. All right. Well, let's get into it this morning. Let's talk about Tina versus Tyga. We coined that phrase last week. There is no alternative Tina versus Tiga. There is a good alternative now. And you know, we spoke about it last weekend. It prompted me to write a bigger article on the whole topic, which just came out yesterday morning. And the point of it was that from the pretty much the post financial crisis to the pandemic,

15:33bond yields were kept extremely low. The 10 year-hid almost half a percent. It was just very little income and very little potential for price appreciation from bonds. So and at the same time, equity valuations had fallen off. So they were, I wouldn't say cheap cheap, but they were fair to moderate. So there was no alternative. If you wanted return, you really had it being the stock market. The, you know, it's funny. Everyone's calling the death of the 6040 today. Then was the time to call the death of the 6040 because there was so little yield in bonds. They were just, they were at that time almost more of a hedge against stocks. If stocks were to really fall out of bed, we're going to get another crisis, economic downturn, whatever it may be. And then we get to the kind of the post pandemic error and yields have risen. And now they're, you know, pretty much over 5% for almost all treasuries.

16:38And you can add another 30, 20, 30 basis points for very good corporate bonds. And even more if you want to extend out the credit ladder. So you know, you look at the current environment and valuations are extended, which means that forward returns are probably going to be less the more you pay for something the less return you should expect. At the same time, you can sit in risk-free bonds at over 5%. So you know, I kind of wrote this article to say, this isn't a pound the table, sell all your stocks by bonds. This is a diversification has benefits articles. And it's time to start thinking about maybe you should go from shifting a little bit more into bonds a little bit out of stocks, not a wholesale trade, but just think about diversification and how you're getting paid to diversify. And we can, you know, one thing we've talked about before is that you can use Cape to

17:40imply what the returns are going to be over the next 10 years. And that it works for the 10 years, but it's a very poor, it's an awful timing tool. But it does give you a good idea of what returns are going to be. And if you looked at it during a post-financial crisis, your expected return was anywhere from 4 to 6 on a real basis, anywhere from 4 to 6%, sometimes a little bit less. But pretty good return. If you look at what those actual returns turned out to be between like 2011 and 2015, because that's the only 10 year data we have right now, they were double digits. So again, Tina paid off. There was no alternative stocks being in stocks was the way to go. Today we look at it. And if you look at implied returns, they are roughly 3% versus about 5% plus, you know, that you can get in safe bonds and a little bit more in other types of bonds.

18:41So it's a stark difference in the two environments. And then the other way to think about it is, well, what's the opposite of PE that you're earning, Shield, earnings over price? What yield does that produce? And if you're looking at the forward, forward PE, it gets you to about 5 and a quarter. And that's about the same yield as a treasury. So from a kind of more fundamental income perspective, you're not getting paid any kind of premium to take risk. Now that's all dependent on forward growth. And you know, we can debate that one for hours. But these are just kind of some statistics to think about. And I think it just, it should lead to the broader conversation, not necessarily action, but broader conversation of what role do bonds play in a portfolio, especially when they can kick off the type of yields that we're seeing today? Yeah. It's really a point, Mike, because here's a chart of equity risk premium.

19:41This is what you're just talking about in particular in the US. So this is global equity risk premium. So this is emerging markets. It's developed markets Japan, Canada, US, Australia. The US has the lowest equity risk premium right now, basically on record going all the way back to 2000. So I mean, you've, you've got to go back to the dot com bubble right at 2000 to get a equity risk premium at this level. But equity risk premiums are low, you know, kind of really all across the world. And you know, you take a look at, you have to go into emerging markets in Japan to get equity risk premium somewhere around 5 and a half percent. And again, a 10 year treasury is getting you very close to that right now. So you're so to your point, you're not really getting paid to take on a lot of excess risk. Right. And I think what it comes down to is purely from an equity perspective, you're, you're really making a bet on how AI will change the economic growth rate, the earnings growth path. And you know, we can, that's something that no one really knows.

20:46We think it should be good. We think it should be favorable and maybe in that environment that it's worth accepting a lower earnings yield today for that growth tomorrow. It's kind of like the peg ratio that we've talked about before. Right. That, you know, but we don't know that. And that's the risk. That's the risk premium or the risk discount now. You know, again, considering yields here and abroad have risen sharply that if you, you know, you can pick up bonds that basically a zero risk differential between stocks. That's a good deal. Again, add them to the portfolio. It doesn't mean that yields are going to start falling or staying the same the day you buy bonds. Because right now the bond market is certainly it's a bad market right now. Narratives are trumping reality, right? You talked about PCE in the opening. Right. PCE is a little elevated. CPI is a little elevated. But a lot of that is out of the Fed's control.

21:48I mean, this is the part that's, that's really kind of crazy that the, the, the draw, some of the drivers of this recent bout of higher inflation are not things the Fed could control. So the things they can control are doing are fine, but they're not necessarily nearly as inflationary. And that's what they're trying to take a swing at. That's what makes this environment a little concerning. Yeah. And again, this is, you know, as, as you're just kind of looking at your portfolio, the one thing to also, you know, to remember is that if you're buying bonds, your portfolio where we're particularly talking about your buying the actual bond. We're not talking about buying bond ETFs. Those are two very different things. Like he, bond ETF never matures. And the one thing that's most important about owning an actual bond is that regardless of what happens in the price in the near term, it can go up or down. It matures at face value. So you always get your money back at the end of it, plus your interest. And that has a very big impact to your portfolio over time in terms of your long term investing

22:49outlook. Because if those bond, if you're, if you're buying some bonds, you buy a one year or five year or seven year and a 10 year. So those bonds are maturing on a, on a, on a basis at some point within that 10 year window of your portfolio. There's a portion of your portfolio that regardless of what happens in the near term is spinning off interest income. Now you're getting 5% for that. So if 50% of your portfolios and, you know, a ladder portfolio of bonds paying 5% on average, which you can get a five year right now at 5% you get a 10% at 5.3. So I mean, you're pretty much close to five. That's 2.5%. If you're needing a 6% annual return rate, you've already put in 2.5% just from the interest income, right? So now your stock and dividend portfolio doesn't have to work nearly as hard to generate that 6% rate of return that you need for your, for your living requirements and retirement, which means you can take lower volatility risk, you can take less capital risk with your portfolio by doing that. The problem is is we get too distracted by what's going on with rates and what's happening

23:49in our portfolio today and all that, all that's happening in your portfolio today when you own bonds, we talked a little bit about this yesterday is that it's just the bonds are just repricing for what the yield is in the markets. If somebody else wanted to buy a bond today, why would they buy your bond if you wanted to sell it if they get a higher yield on a different coupon? So your, your price has to change a bit to make those yields equivalent. So all that's happening on a daily basis when yields move in one direction or the other, is just the bond market telling you this is what this bond is worth today to have a yield equal to what the rest of the market is. It doesn't say anything about the fact that your principal is still 100% there and that it will mature at face value and you'll get all your money back. That's the, and that's the part that is investors we tend to overlook. We get so wrapped up in the performance on a day-to-day basis. We forget about the reasons that we own bonds typically in a portfolio. Again, as you said, Mike, now all of a sudden, if you're a retiree, think about it this way. Back in 2020, if you had a million dollars and you wanted to buy bonds with it and a million

24:53dollars just to create an income stream for you to live on for the rest of your life, you were going to get about $50,000, sorry, yeah, about $5,000 a year because the yields had gotten down to half a percent of the tenure treasury. Now you're talking about being able to get, you know, on a million dollars, get $50,000 a year for an income on a 5% coupon. It was a very different world today to retire on a million dollars than it was just in 2020, right? Right. No, the math has completely changed and I was actually on with a client yesterday and I used the word annuity to describe bonds and that's not really a fair description, but in a way it is because it's a, if you're going to at least in your head, I can hold this bond to maturity. You got this nice stream of cash flows at five to five and a half percent, but unlike an annuity, you're not taking really any credit risk and I know there are probably some people poo pooing that, but they are risk free and you have full liquidity.

25:56You can sell it whenever you want. You can't get, it's really hard to get out of an annuity and it'll cost you to get out of an annuity. And then the other thing is you have some optionality. So let's say you own the bond and we go into a recession, the stock market drops 30% bond yields fall or even bond yields just stay the same. You can sell those bonds. You can buy stocks that are now on sale. So it's, it's value to a portfolio is as a set of cash flows, but also a placeholder that you know, and again, if your goal is 6% and you can get five, five and a half percent and even more from some very high grade corporate bonds nearing close to 6%, it's just, it's something worth considering in any portfolio, no matter how risky you are, how conservative you are. And so, and also to just tell you to talk about the stock market in particular, you know, there's, you know, some things going on in the markets right now that's, you know, there's

27:00a lot of people rooting for a basically either a stock market crash or particularly they're rooting for a technology crash, right? It's just, oh, you know, stocks are overvalued. They're, they're, you know, they're going to crash and technology is just eating up everything and it's kind of true. This first chart is tech earnings. And I want you to notice something in particular about this chart. So this is technology earnings relative to non tech stocks. And the earnings growth rate for technology and non tech stocks really through 2020 were about even. And then really since 2020 and the, and particularly since the advent of chat GPT, earnings for technology companies have now grown. They're 380% above non tech companies. So if you, if you look at the market right now and back out technology earnings, the market is very overvalued from that standpoint, right? But it's, it's right now what's holding up the entire market is what's happening with this massive flow of earnings growth into technology.

28:01I mean, I need to move the next chart down. This is, this is a function of how much has technology contributed to the overall S&P 500 earnings growth over the last few years. And you can see that technology is always made up a, a portion of overall earnings as it should. But typically it's not been a, a vast majority of overall S&P 5 earnings until 2021, 2022. And then ever since then technology has become a much larger contributor. In fact, right now it's 76% of the earnings growth of the entire S&P 500 is coming from technology related stocks. So you know, a lot of people have been scratching their heads like, well, how is the market holding up in the face of higher interest rates? Two reasons for that we've talked about here on the show is that first of all interest, a lot of these companies, and particularly technology companies were refinancing a lot of debt back when rates were very low in 2020, 2021.

29:02So their interest cost coverage is very low. In fact, the interest cost coverage for a lot of these companies is at the highest level on record. They have just plenty of cash right now in earnings to cover their interest costs. So interest is not a problem for them today. Now it may be in the future if they have to start financing a lot of refinancing a lot of debt in the future at much higher rates. That's going to certainly impact earnings, etc. But the second thing is that they are just literally printing money in terms of earnings. And there's a lot of people out there who are like, the earnings aren't real and all this type of stuff. Maybe, maybe not. You can argue that all day long, but what they're actually printing on paper and what comes out in their financial statements are a very large growth in earnings. And that's why technology, despite normally, so technologies normally consider it a long duration asset, which interest rates should impact a long duration asset. These stocks should be correcting to a large degree because of this rise in interest rates. That's what the math tells you.

30:04But what's happening though is that technology is doing so well right now in terms of earnings growth and earnings expectations that and then the underlying fundamentals, like I said, extremely high interest cost coverage, etc. That right now interest rates at 5% aren't a problem for those assets yet. Now at 6, 7, 8, 9, 10, 11, 12% interest rates. Maybe it's a problem. We'll see what happens. But again, that's why a lot of people have been scratching their head going, I don't understand why my text stocks are holding up. It's all going to crash here momentarily because of interest rates. And that may not be the case because of the underlying fundamentals, Mike. Right. If you've been watching the market, the NASDAQ's doing the best. Now doing the worst, the RSP, which is the equal weighted index is doing poorly, utilities, real estate, many of the other sectors are underperforming. It's the technology stocks that are kind of leading the way because they're the least interest rate sensitive.

31:06Now, it's important to note that a lot of those companies, Microsoft, Amazon, Oracle, Meta, have been coming to the debt market in pretty big size over the last year. So, you know, because they're cash flows, they're basically spending more than their free cash flow at this point. So, you know, they are a little more sensitive to higher rates. And what that may mean, may mean. And we've seen a little bit as I think it was Google, they may decide to issue shares instead of bonds. And then when bond yields come down, they can buy back those shares and issue debt to buy back the shares and replace the debt, the stock with debt. So, that may be one thing to think about in the future. If a lot of these companies, they need capital, they decide they're going to take it from the equity market, which is, as we talked about, pretty expensive. That's when you want to issue equity versus the bond market, which has pretty high yields right now. But, you know, Lance, there's a whole nother part of all this.

32:08And it's that yields take a while to impact. And it's not necessarily tech, but it's all the other sectors and it's the consumer. You know, why, you know, why is a consumer still relatively strong? And a lot of that is because what the Fed just did and the recent rise in rates hasn't really impacted yet. It will. It's going to show up in the next credit card statement. If you want to go buy a car in six months, you're going to realize that that auto rates are much higher than they were the last time you bought a car. They just take a while to kind of dampen and get into the economy. So we could be in a period where tech just continues to leave the way. And many of the other sectors are trading, you know, trading really poorly on a relative basis, but just trading poorly compared to the broader markets. And, you know, we've signaled that dispersion recently.

33:09And the question is how much worse can that dispersion get? So we'll say the one thing, Lance, that we've just started seeing a little bit recently is that credit spreads are starting to widen out a little bit. Finally, so this is the spread between corporate bond yields and treasury bond yields. And they have been extremely tight at records, at points over the last couple of years. They're starting to widen out, meaning that the corporate, so it treasury rates are rising, corporate rates are rising even more. And that's going to have an impact. And typically when you see corporate credit spreads blow out, I'm not talking about widening a little bit, but really going up a lot more. That's where you get into Fed action potential crisis, that type of thing. And we're not even close to that right now. I'm not sounding any alarms, but it's just a market worth keeping an eye on. And it is interesting because the triple C and these are companies that are borderline junk, they are junk, their borderline fault.

34:15They're kind of walking that fine line. Their spreads have blown out significantly. Yeah, I was going to ask you that question. Is the move and credit spreads across the board, or is it mostly just tied to the junkiest of the junk type bonds, the triple C's, the double C's, even maybe the triple B's? So it's interesting. It's really tied to the triple C's. We just started seeing a little bit in the double B and the single B. If you look at a graph, if you look at a 20 year graph, you barely see it. But if you look at a very short term graph, you can see that they've been increasing. And you've seen double A increasing a little bit. And that has something to do with this AI debt trade. A lot of those companies are double A rated. So they've been going up a little more. I saw something interesting oracle whose debt is really trading high.

35:18I think that's a eight plus percent yields, which is very high because they're an investment grade company. That's about 300 over give or take 300 over treasuries, whereas typical triple B's are now about 100 over treasuries. So the market is starting to think about that oracle is not any more triple B. It's a double B or maybe single B. And it's starting to price in what that may look like. If oracle were to go to junk. So if it gets demoted from triple B to say double B or B. That would increase the size of the junk market by 10%. That's how big oracle is and how relatively small the junk bond market is. So it's interesting. But it is a factor for oracle. They can't at those kind of rates. It's really hard to justify borrowing in the bond market. And so that will potentially impede what oracle can do.

36:20And they are considered a hyperscaler with Amazon, Meta, Google, etc. And this is something we've talked about before is when one of the things that we watch, the closest is we do watch these credit spreads. And because they are a warning sign for the market. It's not initially. But if you start to see a very sharp spike up in credit spreads, that's typically a really good indicator that the market is under pressure for one reason or the other. And these are kind of early warning indicators. You know, just because they're rising to Mike's point does not mean that you go out panic and sell everything today because the market's about to crash. We can see increases short term for a variety of reasons. And then it cools off a bit and goes back down to where it was. But credit spreads have been extremely tight for very long period of time because the market's been doing so well. But watching those credit spreads is a very good kind of early warning indicator for the markets because if they do start to spike up sharply, you're going to have a downturn in the markets because that spike in credit spreads is going to be due to some type of economic event financial event, credit event, whatever it is that's causing investors to go, I don't want to own junk bonds.

37:41Those companies, I've been willing to own triple C rated bonds. He's kind of like Mike said, these bonds are cut from companies that are on the verge of bankruptcy. There's just any day now they're going to say, yeah, I can't pay my debt, right? But you're getting a really high yield to own those bonds. And so that default rates been fairly low at this point. And so that's why the markets have been very gracious. And investors have been willing to buy those bonds to try to capture that yield knowing the risks that they're taking doing that all of a sudden, if something happens in the economy where they look at those bonds ago, there's no way this company is going to survive whatever's happening in the markets. They're dumping those bonds to get out of them. That causes the yields to spike and that's going to be happening during whatever this event is that's deteriorating the markets, the economy, the credit markets in general, whatever. And so that's really good indicators because these are all fundamentally based analysis company investors in these in these bonds are going, I'm willing to own these bonds, but they know the underlying fundamentals of these bonds and when those fundamentals really begin to deteriorate rapidly, they're going to be getting out of these bonds as fast as they can that causes the yields to spike.

38:49And that's going to be relating back to whatever's happening in the market. So again, doesn't mean anything like Mike said this doesn't mean anything today. It's worth keeping a watch on if they do start to spike higher, we're going to start to become much more risk of worse portfolios fair, fair. Yeah, yeah, absolutely. And it is something we do watch every day, but here's the other part of it that is worth considering small business loans are either floating rate, which are going up with Fed funds now, or they are indirectly tied to corporate credit spreads. It isn't just companies on the larger companies on the verge of bankruptcy, triple C companies, these are mom and pop shops, these are, this is what you know where a lot of employees work, it's the smaller companies that don't have public stock or can issue public debt. And having an impact on all those companies and most many of which rely on credit and interest rates. So as and again, when credit spreads are rising in a market where bond where treasury yields are rising, that means corporate bond yields are rising more.

39:58And we've seen in treasuries over the last call it four weeks, five weeks, corporate bonds have risen more than that. And that that pain is in some cases directly hitting the bottom line. In some cases, it will slowly hit the bottom line as debt matures or they need new debt. So this is, you know, potentially, especially if rates keep rising, this is a slow motion train wreck that will happen. So the question is, will rates keep rising, will spreads keep widening. And the longer that continues, that, you know, I think the faster this train wreck starts speeding up, the potential train wreck because small businesses will have to lay off employees to pay for the higher interest larger companies are going to take similar actions, whether it's cutting investment or laying off employees or both. Again, that's why credit spreads and yields in general are really important to watch.

41:00Right. And again, this is, you know, we've talked about a lot in the past and particularly, you know, here on the show is the thing that the market cares about the thing that the S&P cares about. So if you're investing in stocks, the only thing that the market really cares about is forward earnings. And the expectations of what those earnings are going to be in like I showed you before right now estimates right now are very high for 2027, 2028. Lots of anticipation about very strong earnings growth over the next couple of years because of CapEx and AI and all this other stuff that's going on. But if something happens that changes that outlook, in other words, those maybe maybe the markets are expecting and I just rewrote this article, you know, last Monday talking about earnings revisions. Right now the markets are expecting like $420 and earnings by 2028. Well, if they revise that down to 380, all of a sudden the valuation math becomes really problematic because I was valuing the market at 20 times earnings at $480 a share.

42:01Now I'm going to get $380 a share and that's no longer 20 times earnings. If I want 20 times earnings, if I'm willing to pay 20 times earnings on $380, I've got to reprice the market substantially lower. That's why these forward earnings are so very important to pay attention to and if these credit spreads start to break out to the upside that to your exactly to your point, my companies are going to start laying off employees and doing other stuff, taking actions. That's going to lower those expectations for forward earnings that causes the repricing in the market to get valuations in line with what the new expectations are. That's the thing we've got to be careful of and pay attention to. Right. Right. This kind of, you know, as you were talking, I was kind of thinking of Maslow's hierarchy of needs. Right. And, you know, at the very base are the things most important. You know, it's like shelter and food and that type of stuff. In the economy, you know, if you just really want to study basic economics 101, it's demographics, it's pace of innovation, it's resources.

43:04And then there's the cost of capital and the more debt laid in an economy and I'm not just talking about the government, I'm talking about people and corporations that cost of capital becomes a more and more important part of that triangular that base to the pyramid. So, you know, that's one thing that we're contending with right now is that one of our core economic print, you know, basic building blocks is becoming very expensive and that will have an impact on everything above it. Exactly. All right, Mike, any closing thoughts here as we wrap up our second best day of the week. No, we're in a new quarter. So, you know, just keep in mind that some of what we saw over the last few days was quarter and some of what we saw in bonds yesterday, we saw what was it? The mag seven stocks all did well, everything else was red. That had a typical kind of quarter and fingerprint to it. So, you know, we'll see how we kind of reverse some of that trade out of or we don't out of quarter and into the new quarter.

44:10Exactly. And fourth quarter tends to be one of the better quarters of the year. So, you know, bulls can be a little bit optimistic about that, but there's no guarantee, you know, as we talked about before, there's no guarantee of anything when you're talking about, you know, statistical performance averages, those type of things, those are averages some years of better, some years are worse. And, you know, it's always worth paying attention to that fact. So, but again, quarter four tends to be a better quarter for the year. We've got midterm elections coming up. So, there's a lot of things to be kind of weighing on the markets when the next Fed meetings in November. I should know that right. I think it's early November, but not mistaken. I actually want to think it's Halloween. I think it's very, very late October. Okay. Well, there you go. So we got to be wrong now. Well, no, we got another. Oh, and I forgot tomorrow, we have employment data. Right. So I know it's only the second day of October, but the employment data comes out on the first Friday of every new month. So we're going to have employment data tomorrow, which is certainly going to move the markets of that employment data is extra robust, extra strong. That's obviously going to, you know, potentially point to higher inflation. That's going to keep the Fed on on path to high rates, most likely, because, you know, employment is doing well.

45:21So we'll see what that number says. If exceptionally weak, you know, that's going to be a different outlook for the markets, but the ADP report was pretty strong. And Joltz, if you take a look at the Joltz data micro to piece about Joltz earlier this week. And our daily market commentary, but take a look at the Joltz data. Right now we talked, we touched on this. I think yesterday or day before is that companies are doing what's called labor hoarding right now. They're not firing people and they're not hiring people. They're holding on to their employees. That typically suggests one of two things. One, that they're, you know, concerned about the future of what's going on. Interest rates are going up, you know, those type of things. So they're saying, hey, let's be a little bit more budget conscious. So let's not hire people. But things are still good enough at the company at the moment. Profits are doing well. The company's operating that they're not in the need to fire anybody right now because getting rid of employees. It's hard to get good employees. So if you've got good employees, you really want to hang on to them. So they're reluctant to fire corporations are always the last to hire and last to fire because they're always trying to manage, you know, and you know, kind of what's going on in the economy, kind of economic risk.

46:30But you know, what we're seeing right now is kind of this labor hoarding environment where they're just holding on to everything they have, but they're not really hiring. And that's does suggest there is some concern about the future in terms of what earnings are going to be what the outlook for demand. Going to be particularly in higher rates, higher rates go up that reduces demand for their business, potentially. So they're certainly showing some signs of concern, Mike. Yeah, again, back to employment. It feels like the employment data is kind of the we saw it with ADP a little bit that the employment data is what's going to sway the market to price in another rate increase or not. And the rate cut odds did come down. There were over 60% now they're down like I want to say 30% 25% but that'll go up and down like a roller coaster based on, especially employment tomorrow, then CPI in a week or two. And then I think the market will have a better feel for what the Fed will or want to.

47:31All right, Mike, thanks so much. I appreciate it. All right, the rest of the show for the day futures right now, dial up about 102 points implied open SMP's up about 30. So we'll kind of see how the how the market does here on this first day of a new month in a new quarter. It's hopefully it will get better from here and rough kind of a sloppy couple of months. Hopefully we'll see a bit a little bit better return. Anyway, happy trading to you. Hope you do well. And of course always give us that thumbs up here on the on the show. We certainly appreciate it very much. Just take seconds. Absolutely free. Just click that thumbs up and certainly helps get our show out there and helps us. Helps you promote us and we do appreciate it very much. Here by the website, real investment advice.com or daily market commentary is posted this morning already. It's up on the website for you. It's there. Get ready going for the day. If you have any questions at all. Just hit the ask a question button right there on the website, real investment advice.com. I answer every question every day. Happy to do it. Send me an email and I'll be happy to get back to you. Y'all have a great day. See you back here tomorrow for financial fitness Friday.