How Bad It Can Get (Uncut) 03-20-2025

‘Stagflation’ Crisis: How Bad It Can Get | Ted Oakley

Stocks have had their worst week since 2022. We’ll talk about what’s going on with market volatility. Gold is up hitting $3,000 for the first time in history.

We’ll talk about that. Asset allocation is an important theme for our conversation today. And risk assets are looking very choppy.

We’ll talk about how to protect yourself against uncertainty in today’s very volatile times. Ted Oakley joins us today. He is a founder of Oxbow Advisors.

Always a pleasure to have you on, Ted. Good to have you back. Thank you for joining us.

Thank you, David. Always good to see you. So let’s just recap what I announced early in the conversation.

We’re in the introduction. The S&P is currently at 5,600 points. We’re off from its highs, which was more than 6,000 points, as you know, not too long ago.

Gold, as you know, is $3,000 just now. The Tanger yield has been sliding ever since growth expectations are down. The Japanese JGB bonds are actually at a 16-year high, although it’s still just over 1%.

We can talk about that if you like as well. It’s just a lot of things going on. How would you recap the current situation? What is the sentiment going on right now in financial markets? Well, I think the sentiment right now, David, it really shows from uncertainty.

When you get uncertainty in the economy, and I think businesses have uncertainty now, and then that makes people have uncertainty, and then if you look at everything going on job-wise and the government on down, you’ve created this highly uncertain period, and when you get that, that’s probably one of the worst periods you can have for the stock market because the stock market has never lacked a lot of uncertainty, and that’s what we have right now. Yes, absolutely. So let’s take a look at, well, this article sums up basically what you say here.

So this is from CNBC. It says the Dow is down because of heightened consumer fears, and Walmart, as you know, is down. Earnings, we can talk about that.

We have here stocks rallied on Friday. Let me just shut the screen here. A bit of a bounce on Friday, although we don’t know what’s going to happen next.

Big tech shares that were rattled earlier this week saw a sharp recovery on Friday, and video shares popped more than 4%. Tesla met a stock bounce after a lack of new headlines out of the White House related to tariffs, easy concerns, and on the consumer front, this headline here, U.S. consumers are starting to crack as tariffs add to inflation and recession fears. So the leaders of companies that serve everyone from penny-pinching grocery shoppers to first class travelers are seeing cracks in demand, a shift after a resilient consumer propped up the U.S. economy for years despite prolonged inflation.

On top of high interest rates and persistent inflation, CEOs are now grappling with how to handle new hurdles like on and off, again, tariffs. What are CEOs doing based on the conversations that you’ve been having? Well, I think, again, I think they don’t know what to do because you can’t plan on something when you don’t want, you know, if you tell me, okay, this is going to be, this is what’s going to happen in your company, you’re going to have to do this, pay X, that’s one thing. But if you’re saying, well, you’re going to pay X today, but we’ve changed it and you’ll pay half X tomorrow.

Oh, by the way, four days from now, maybe you’re paying 2X. Companies have a very hard time with that because they’re, you know, that’s not the kind of thing they can buy inventory for by cost of goods sold, that sort of thing. And it’s not just the public companies, it’s the private companies too.

They have this problem, not all companies, but if they’re buying goods that are coming in, you know, they’re all thinking about that. And that’s where we are right now. How are you as an investor, let’s just talk about your fund for just a minute, how are you as an investor positioned for this uncertainty? Well, one of the things that I think people have forgotten, David, is risk management, you know, how to manage risk.

And, you know, the reason they have is because you’ve had 15 years of nothing to worry about in the marketplace because of the Fed and the fiscal policy with all this money. But now things are changing and people should probably start to think about how do you manage risk? And for us to manage risk, we own treasuries. Now, you can manage it different ways.

But for us, if we don’t have something to buy, which in this case, we bought, you know, seven, six or seven things since January one. But the thing is, if we don’t have anything to buy, then we just hold it in the treasury because things are not cheap enough for us to go into it. That really is our style of what you want to call a market timing.

But it’s really value timing is what it is. We look for values. If they’re not there, we don’t spend it.

And right now we’re we’re defensive only because, you know, we see the prices and they’re really I have to tell you, we’re not that much cheaper than we were on February 28th. Really? After this big pullback, you don’t think valuations are more fair now? No, I think I think I think you have this, but I sent you something. Yeah.

On February 28th, if you look at the multiples, the forward multiples still over 21 times. OK. On February 28th.

I mean, that’s that’s at the top end of the range. OK. And then if you look and if you look at, you know, it was twenty one and a half, for example, on the slide.

And if you look the last time we had a four over 4 percent 10 year, which was 07, we were at a 15 multiple. Well, that spread is 40 percent. And I know people don’t think about that, but that’s a 40 percent spread to get back to that level.

And then you could take it and measure it against anything on the 30 year average, too. And it’s all out of line. You know, we’re very high on current earnings are like twenty eight times.

So, you know, of twenty four. So it’s it’s a it’s one of those things where you have to know where you are in the marketplace. And no matter what people try to say today, you’re still expensive in this marketplace.

I have some more slides I want to show the audience, but let’s back up a minute. You said you’re defensive. What does that mean, practically speaking? Well, for us, that means that we have to have enough liquidity so that let’s say and we know we can’t forecast anything.

I know what’s going to happen today, but I have nothing else. So I can’t know if this this sell off goes down another two percent or 20 percent or 50 percent. It could, you know, any of those things could happen.

And what you have to do is be sure that you’re set up as such, which so nothing can really hurt you. In other words, what hurts investors is to have the big hit that they weren’t expecting. Some something that comes along or it keeps on going.

Say you’re on a two year bear market. We just don’t know that right now. I’m not saying we are, but if we were and you just keep on chipping away, people are very, very highly exposed to stocks.

And the most I’ve ever seen, really, I have to tell you. So anything that changes that C is going to affect that risk. We were looking for us.

The way we deal with it is we have we have enough liquidity so that the markets break. You know, we’re not going to get hurt that as much. I’m not saying we wouldn’t come down at all, but we know we know how to manage the risk.

I’ll put it that way. Well, here’s a chart that highlights what you said in a different way here. Equity markets market cap in the visualizes a percentage of GDP of the world courtesy of BCA research.

What do you do with information like this? Well, it tells you and that goes back to 1985 for my friends at BCA because I take their work. But it tells you that the US has gotten so far ahead of the rest of the world on a normal basis that everybody’s buying the US. You see that GDP line down there, the black line that just tells you that our market is so far ahead of what we’re producing relative to the world on GDP that, you know, it has to come back together.

Those lines go together over time. Sorry, how would you explain this American exceptionalism, which is what journalists are calling it? Well, I think the number one thing is that when the money came in to push the markets, we’re the one we every time that these things happen, we’re the first person to juice the markets, either the Federal Reserve or the fiscal policy. And so we led the way.

And the US, you know, when that money comes in, people buy things. And so it became the leading market because only the markets have been in and they’ve been in recessions. They’ve been beat up.

You look at Europe and China and Russia, all these countries, they’re not doing well. They’re starting to come around a little bit. But what’s happened is they said, well, we don’t have anything else to buy.

We’ll buy the US. And now even in MSCI or in those averages, worldwide averages, they’re two thirds US, two thirds the big 10 stocks here. Let’s take a look at what Trump said.

He made news this week by actually conceding that the economy may be in a transition period. You can’t really watch the stock market. He said there is a period of transition because what we’re doing is very big.

We’re bringing wealth back to America. That’s a big thing. It takes a little time, but I think it should be great for us.

Ask whether he thinks a recession is imminent. Trump said, I hate to predict things like that. Look, we’re going to have disruption, but we’re OK with that.

I think somebody in the audience actually said, no, we’re not OK with that. He laughed anyway. OK, how would you respond to this? How would you answer the questions that was posed to Trump? Well, I guess, David, I assume he’s probably taking a page from Ronald Reagan.

And, you know, I was in the markets then. And when Reagan came in, the first 44 days in the market were up until he got inaugurated. And then we went into basically an 18 month bear market.

They went down 30 percent or so, and it just ate away for the next 18 months. It was over in August of 82. But maybe he’s taking a page out of that to think, well, we’ll have the pain early.

And I mean, I think that’s what they’re thinking. I don’t know what they’re thinking, but maybe that’s the outcome of what they think would work. But, you know, we’ll see.

But I think the difference is, I will tell you this, nobody owned stocks in 82, but a lot of people own stocks today. And that’s the difference. If I went back and showed you ownership of stocks in 82, nobody wanted them and nobody owned them.

Today, everybody owns them. History lesson here. This is news to me.

What happened in 82? Lower percentage of people owning stocks. What’s the difference? Well, individuals weren’t in the marketplace. You know, they’ve been beaten up really from 60, if you look at it from 1966 or so all the way up to 82.

They’ve just been beaten up. Market never went anywhere. It never went over a thousand.

And so they were wasted. And so all of a sudden, Henry Kaufman, Solomon came in and said, hey, we’re going to lower the rates from 50. The treasuries, the rates are going to start coming down.

And that kicked the market off. And that kicked off, you know, a big bull market, obviously, over the next 40 years. But you didn’t have anybody in it then.

Now everybody’s in it. Everybody is in it. You know, the 401k, the personal pension, everything.

So it’s a different setup now. And we’ll see. We’ll see if that pain goes over real well.

Okay. I like showing the S&P 500 chart over the last five years. Take a look at my screen here.

And the point I’m trying to make is that Trump’s tariffs are not a complete new concept. We saw what happened to the markets during Trump’s first term, 2017. I’m going to stop before 2020 because that was COVID.

That wasn’t tariffs. But it was still up about 40 percent over the course of his presidency, despite major downturns in the markets. Right.

We had 2018. It was down about 20 percent, but a V-shaped recovery thereafter. So are tariffs really just, as he as he’s alluded to, Ted, short term pain for markets as well, meaning eventually we’ll just recover from the trade war? Is that something that you agree with? Well, I don’t have the graph, but I could show it to you where really when in 18 and 19, both we had 10 percent drawdowns immediately on those tariffs that he was pushing at the time.

And it didn’t last. No. But I think one of the reasons it didn’t last is because the Fed was in there with zero interest rates.

Yeah. What did you do in 18 and 19? That was Trump’s first term. Even more uncertainty at the time, one could argue, because now at least we have a reference point in history, but back then we didn’t.

Well, it was, you know, a 16 to 20. And we were we we were we were invested because we were more fully invested when the markets were lower and we found more things we would own at the time. Income wise, you had to be really careful then because rates were still down on that zero level, a quarter of a point on the Fed funds.

They bumped up in 18. But that’s what killed the market for. And that was only for a quarter, actually.

But you had to be really careful. And everybody stepped out to buy long bonds so they could get more yield. And it killed them.

By the way, we wouldn’t do that. We just said, hey, we’re going to take the we’re going to take the small interest rate for the time. And later on, we know it would change.

And eventually it did change. This is an interesting slide. This is allocation to U.S. equities broken down by age demographic.

It says 38 percent of all equities are owned by investors over the age of 70. Seventy nine percent owned by investors over the age of fifty five. What do we what do we do with this information, Ted? You know, I pulled that from the Federal Reserve at the end of the third quarter and we all know, I mean, everybody knows that the top 10 percent of people with net worth own eighty seven percent of the stocks.

Yes. And a lot of those are owned by this group over fifty five. But what you do with it is this.

And that is I think the allocations to people that are over sixty five, for example. David, I have people come through here, 75, 80 years old, sometimes eighty five, and they’ll have eighty five, 90 percent in stock market. And I’m like, well, we’re not going to take you.

We’re not going to do business with you. And here’s why. You know, that’s that’s that’s not good for you.

All right. And, you know, I know that’s what you want to do. But when we’re a fiduciary and I’m not going to take that responsibility, knowing full well, you have too much in the market.

And that’s where we are today. They’ve not only got, you know, and they’re feeling good about it. That’s why you’re getting on the spending by the people that have the market, you know, but that that’s that’s the reason we look at things like that, because those people should not be fully invested in the marketplace.

Their age doesn’t allow that. If you go through 20, if you go through a 20 year period, we’ve gone through 20 year periods where nothing happened, you know, and they’ve got it all on the market. That’s a problem for them.

I think they just and they what’s the problem is the last 14 or 15 years has gotten them in to lull them to sleep and they don’t think there’s really any risk anymore because it’ll come turn real quickly. Well, sometimes it doesn’t. So let’s talk about that right now.

Most of the wealth, especially equities, are owned by people over 55 in the US. What happens when the boomer generation passes on this wealth to the next generation? This is going to be the largest wealth transfer in history, arguably, and we could see some changes here. What kind of changes can we expect to the markets once this wealth transfer takes place? Well, if you pass the entire wealth to younger people.

In a way, I hate to say this, but I’m going to say it because it’s my experience. Sure. A lot of second and third generation people that get a lot of money don’t have a clue.

I’m not saying all of them. That’s not a blanket statement, but I will tell you this. A lot of that money will be spent.

It’ll be blown. It’ll start out invested, but it won’t end up that way. I’ve had too many people that have given a lot of money to the second generation and I’ve looked up 15 years later and they barely had anybody left.

Now, that’s one thing. The second thing is that this group is going to live longer than people think and they’ll be spending a lot of it. They’re going to spend a lot of money now.

If you look at where you are today, if you’re 65 years old, there’s a good chance you’re going to be 90. You look at that and you’re going to have to spend quite a bit more money than you probably think you would. You’ve actually written books about that.

Wealth Preservation and some of the learnings you’ve… I have a new book coming out April 15th called Second Generation Wealth. Okay. Before we go back to the markets, let’s talk about that.

Give us a teaser. What have you found in here? Well, I think everybody wants the right thing for their children, but about half the people we deal with that have a major liquidity event don’t really follow through on that. They don’t set an example.

I’m dead against having a family office and bringing in a 15-year-old kid and saying, by the way, you’re super wealthy and this is what we do with it. You just kill the incentive. And our point in all of that is you’d be better off to put these kids out on the street and work for seven or eight years.

If you want to bring them back in the business, that’s fine. But we’ve seen it in practice. And if you spoil these kids early on, you’re going to spoil them the rest of their life.

And that gives them no self-esteem and no ability to really stand on their own two feet. And really, that’s what it’s all about. How should parents teach their kids the concept of money? Well, number one is by example.

I mean, you can’t fly all these kids in spring break down to Cabo on a private jet and say, you know, let me teach you something about money. Those two don’t go hand in hand. But you see that sort of thing a lot.

And the way you teach them, though, is you have them, number one, work for money. That’s how you teach them. The number one thing about money is you put them to work in the summertime, you know, between college years.

You know, you don’t need to travel Europe and go hang out at the swimming pool. You know, you go to work. OK, and then you appreciate the dollar.

Number one. Number two, the way you do this, if you really want to teach a kid about real estate, you sign a note, buy a home for them, not a home, but a home, a rent house. And and give them say, I’m going to give you one chance.

I’ll sign the note, but you have to lease it. You have to do the insurance, pay the taxes, keep it up. And if you fail on it, I’m you.

That was your only shot. You do things like that. You know, you make them responsible is what you do.

I’ve heard this also from other people. How do you feel about this? Giving your kids some money, I don’t know, a couple thousand dollars or whatever the case may be, and just ask them to start a business when they’re young. This is before they’re an adult and you teach them entrepreneurial thinking instead of asking them to work, which is preparing them for the workforce.

Well, I suppose that would work. I know with with my two children, both when they were younger, I just took cash and paid my friends that own businesses. I paid them.

I paid them the cash. And I said, you give them some cash every Friday as if they were working there. They couldn’t get insurance, that sort of thing.

But they did it for me. And those both kids learn how to work really hard, you know, because they were they were they turned out. And they were doing jobs, by the way, that they got a real taste of the real world.

All right. Well, I’m looking forward to that book. It’s coming out in April.

What’s it called again, Ted? Well, the top line, second generation wealth, the buy line is what do you really want for your kids? OK, we’ll keep tabs on that book. Let’s turn back to the markets and close off here. Gold.

I mentioned gold in the beginning. We haven’t talked about that yet. Three thousand dollars for the first time.

What do you think gold is signaling right now? Well, I think gold is signaling two things. Number one, I think the rest of the world does not want to own the dollar. I think they’re saying, you know what, when we have extra reserves, we’re going to use a lot of that money to buy gold.

Now, we’ve owned gold for quite a number of years and we’ve owned the miners for the same way. And so obviously we have positions in those. But but the thing about it is, I think the rest of the world is saying that.

And so they’re saying, you know, if you look at those central banks and people all over the world, they’re buying gold because they feel better with that than they would the dollar. And in some respects, you can’t blame them. If you look at everything that’s been going on here is relative to our government debt, et cetera, what goes on.

I think that’s the number one reason. But gold is an interesting item. Over time, it does well.

I don’t have it in front of me. I could show it to you, though. But if you go back to the last 25 years, gold has beaten S&P bonds in everything.

It’s beating everything out there. And everybody always says, you know, well, it doesn’t pay a dividend and it doesn’t pay a dividend. But a lot of people, I always say this to a lot of people on raw land out there and it doesn’t pay a dividend either, but they keep it.

So, you know. OK, the tenure yields. Let’s talk about the yield curve right now.

This is the tenure minus the two year. And as you can see here, it’s been steepening for quite some time. The steepening is not a new development, but I think more recently it’s kind of just flat lined around 0.3, 0.4. And I have two questions about this.

The first is whether or not this deepening actually signals a coming recession or do you subscribe to the theory that it already happened here in 2023, 2022 when the yield curve was inverted? Usually in the past when the yield curve inverts and then reinverts, that’s when the recession kicks in. Well, I would have to say the Federal Reserve to make the statement like they did last time that everything looks good. You know, all good is like is like, well, what are you reading? Number one.

But number two, if you look at the bonds themselves, I think what you’re going to get is one more turn here of when things go softer, either economically or the stock market, et cetera. I think you’ll have one more turn in here where the where that 10 year will go below four or somewhere in there. We took, you know, seven weeks ago.

I think it was right around there, maybe six weeks. We took a position. We didn’t have a position, but in their income accounts, we took a position in the 30 year treasury with the idea.

Let me just say this to you. It’s a trade for us. OK, we’re not going to keep it long term.

But I think I think if rates were to come down that 10 year down in that three and a half or less range, I think it’ll be one of your last times to get out a long term bonds. I don’t think people will, but I think they ought to look at it for sure. Why? Sorry, why would it be the last time? Can you elaborate? Because I think we’ll reinflate again and we’ll keep this inflation thing.

You look at it right now, we have stagflation. And so that probably would continue. And if it does, that’s just a guess.

I mean, we would trade it there and wait and maybe maybe they come back or people think, hey, they’re going to come back again to one percent. We don’t really think that. We just don’t think we’re in position for the treasury to be able to do that.

And I don’t think they want to do that. They want to they want to buy. They want to push this paper out long term right now.

Would you be a seller of bonds then at this current price? Not right here, but I would if you if you get rates down. That’s what I was saying. You get the 10 year down another half a point or three quarters a point.

We would be a seller. OK. Are you seeing any? Well, you said stagflation.

Well, the inflation rate currently is still, you know, it’s below three percent right now. Are you saying it’s going to pick up from here? Is that the projection here? I would guess the reason I say you get another you get a chance at this. I think between now and midyear, that’s when you would get this breakdown in the yield, probably because the economy, the market, whatever, maybe all of it together.

But later on, I’m talking about in the latter part of this year and then in the next year, your inflation rate goes back up again. We felt all along it’s going to average. The next decade is probably going to average three and a half or four percent on average.

That means sometimes you’ll have it at five or six. But I think people have been lulled into thinking they’ll buy a bond fund and they’ll take care of it. Well, they buy long term bonds.

And so, you know, if you look at the three years into 24, they got wrecked in those long term bond funds. I mean, the worst ever in the history of the bond market. So this time you need to sell if we get lower rates again.

OK, that’s that’s an interesting perspective. Let me close off on this slide here. So we have here per your asset allocation.

Sixty forty is more like now more like 30, 30, 30, 10. So short term fixed income, growth value equities, real estate, I’m sorry, real assets and trading. Can you just give us an example of each one so we have a sense of what your your your positioning looks like? Practically speaking, starting with short term fixed income.

Yeah, well, in fact, short term fixed income for us is less than 48 months. If you look at the bad bear market of the bond market during 22, 23 and 24, we we we did not suffer because we we had short paper and we could adjust to it with a lot of adjustable paper, too. So as the rates were spiking up, it didn’t affect us.

Now, if you go into a longer period, say you go into a 10 year period where inflation is going to be higher, you have to keep your maturity short. Wall Street won’t agree with that. They like to buy long paper.

But the problem of that is you’re making a 25 or 30 year bet that the rate you’re buying today is what it should be. So we keep those when I say short term fixed income, we keep that at two, three, four years. You know, we’ll buy munis, for example, that have a short call and a short maturity both.

And we’ll get a better rate than than most munis. But yeah, is this how you manage the portfolio? Right. And what what about growth value equities? By the way, why do you say growth slash value? Are you making a distinction here? What is this distinction for you? I think people will get back again over time where we’re starting.

We’ve been seeing that this year, but I think over time, they’ll get back to where they looked at the true value of a company. Excuse me. What what that company what’s it worth? What what’s that company’s value? And not necessarily I’m going to buy momentum all the time.

It’s a bit, you know, it’s been nothing but a momentum market for 23 and 24. Just jump on and hope it goes up. But I think they’ll get back to saying, OK, this company will produce enough cash, dividends, whatever for me for the next five to 10 years that it really will make me a lot of money based on the fundamentals.

That’s what we call the value. And yeah, and I don’t really separate necessarily growth and value because a lot of good value growth stocks can become great values. And so that’s what we look for.

So you don’t have like a particular fund mandate for your equity side. You have to be growth or you have to be value or, you know, or you have to be right. All right.

Growth over a certain metric. Real assets. I’m guessing you mean precious metals.

Do you own real estate as well? We do classify anything in that real estate income, particularly income producing real estate. And you look at all metals commodities, you look at the Bloomberg Commodity Index. It really hasn’t gone anywhere in 25 or 30 years, really, almost relative to the stock market.

So you’re set up to where commodities could do fairly well. And people don’t realize, but a lot of times commodities will do OK, even in a recession. But, you know, I just think real assets are going to you need to own some real assets.

And that can be a lot of things for us. It’s fertilized and metals and we iron ore. We own different things.

We obviously own the miners, own gold. It’s not, you know, it’s not the whole portfolio, but we put that into that sort of thing. And then trading, I’m guessing is more short term holding period or speculation.

No. I think one of the lost art today with people that manage money is that they don’t understand how to take money off when things are expensive and put money on when things are really cheap. They just go out and buy 10 or 12 exchange rated funds or indexes, throw it in and say, you’ll be all right the next 20 years.

Well, if you go through these periods, they go long periods like 2000 or 2011, for example. Well, you couldn’t do that. All right.

You had to take money out from time to time. And when companies get expensive like they are now, you know, you take money off. And I think you could go through periods like that where it just goes up and down and up and down.

And I mean, when I first got in the business, the first eight years I was in the business, the market never went over a thousand. And it traded back and forth 25 or 30 percent. Yeah.

If you sat there with the same stocks, you never made any money. Last question. I mentioned the JGB earlier in the interview.

How do you feel about the DXY as a trade with interest rates, interest rate differentials perhaps widening between the U.S. and other countries like Japan, for example? Some people might be bearish on the dollar. On the other hand, though, tariffs have been proven to be bullish for the dollar. People short other currencies when tariffs are implemented on those other countries.

So a lot of crossroads. Yeah, you know, we don’t we don’t trade the dollar, David. We look at it.

It’s important. We don’t trade it. But what what I do think is going on and I don’t know what I don’t know the man’s stock Scott Bessett, so I can’t really know what he’s thinking.

But from what I read, they’d certainly like to have a lower dollar along the way to make it more effective for people to do business here. I mean, that’s that’s that’s their standard policy. So I think in the long run, I think, you know, you’re going to get that.

And then also if you get inflation, you’ll get a lower dollar, too. I think I think I think those things will press against us here. But I don’t trade the dollar.

So it does. You know, that’s not something I look at. All right.

Excellent. Appreciate your insights, Ted. Always good to see you once again.

And we’ll look out for your new book coming out in April. Where else can we learn from you and Oxbow Advisors? Well, the best place, David, is just the website oxbowadvisors.com. And we’re very transparent. Almost everything we do is there.

So just be you can just be on the lookout for that for sure. OK, great. We’ll talk about we have talked about cryptos today.

Bitcoin reaching new all time highs, but it’s coming down. It’s been trading like the Nasdaq, perhaps for another time. We’ll leave that conversation for another time.

Thanks very much, Ted. Speaking soon. Thanks, David.