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Financial Catastrophe – When the Fed Has to Undo What They’ve Done

Financial Catastrophe – When the Fed Has to Undo What They’ve Done

Episode #51  |  September 2nd, 2021

In This Episode:

This week, Trish welcomes veteran investor Neil Grossman.

Neil has spent the last two decades in the financial industry working as a proprietary trader, asset manager, and market maker in roles at JPMorgan Chase and senior risk banker at Norges Bank (Central Bank of Norway). 

In this episode, Trish and Neil discuss how the Fed’s actions of recent years have distorted any potential signals the markets usually show. He notes that their financial manipulation keeps warping the economy so much that regular American investors will end up paying the price. 

But with October being a historically challenging month for the markets, will next month be another correction?

And if not, when?

Trish and Neal discuss the upside of this potential Wall Street crash and more on this week’s episode. 

Click here to listen now.

Have a question or topic you want to hear in a future podcast episode? Send us an e-mail at trishreganfeedback.com.

Guests:

Neil Grossman

Former European Central Banker, former hedge fund investor, physicist, mathematician and attorney with an interest in constitutional law
Neil Grossman spent the last two decades in the financial industry working as a proprietary trader, asset manager and market-maker. In particular, he has traded liquid products in major markets around the globe, with particular emphasis on arbitrage-related strategies.

Transcript:

Trish Regan:               You know, most Americans are still going on about their life, they’re investing in their retirement planning, though nothing really unusual has happened in the financial system, I think we all know that, ha, something pretty unusual has happened, and that’s the $11 trillion that has been pumped into the financial system just in the past 18 months. I mean, this is a big deal… You’ve got, you know, many, many, many, many people that are coming out and they are publicly stating that Americans just aren’t paying enough attention to this development. I’m certainly one of them, and we had a gentleman on the program, recently, Dr. Eifrig. You remember Dr. David Eifrig, former Goldman Sachs banker, who is saying millions of Americans – they’re risking getting pushed out and pushed down from being in the middle class. Or risking their retirement, basically, because of all this money that has been spent. I mean, you run the risk of not being able to have a really good retirement and independence and privacy.

You know, he refers to it as a “financial lockdown,” and he’s warning Americans about this. I want you to check it out because it’s important to think about these things, you need to think about how to protect yourself, how to protect your money, how to protect your family. And he’s got a free copy of his new report that you can take a look at. In it, he’s going to show you the four steps that he’s recommending you need to take in order to prevent yourself from really suffering in this inflationary environment. So I want you to go to octobermessage.com and get a free copy of Dr. David Eifrig’s report. I think you’ll find it very interesting. Let me know what you think.

You know, a lot of you, like me, have been very concerned about the Federal Reserve… concerned that, really, they’re just getting way too far out there. They’re so worried about jobs and employment that they’re not worried enough about inflation. And inflation, as we’ve known over history, really can be problematic, because it acts as a tax on the middle class – it’s the hardest for middle class and poorer families that really are struggling to make ends meet. When the gas tank suddenly costs $85 to fill instead of, you know, $45, that’s a whole lot more money, and you can’t do other things, as a result. When food prices go up – you’ve heard me go on about diaper prices – when those are up 14%, you know what, that takes its toll on the average American family.

And let’s not forget what has made our country the success it is: having a strong, robust middle class. So the Federal Reserve, in trying to, theoretically, help this middle class and to help American poor, what does it do? It’s helping the rich. It’s helping people who can take on all this risk, who already have assets in the market, who already have real estate.

We’ve got a lot going on this week. I’m so happy to have with me, today on the program, my good friend Neil Grossman who has spent decades in the financial industry. He’s worked as a trader, asset manager, market maker, he was in the chief investment office at JPMorgan Chase where he was an executive director, he ran the proprietary trading group that focused on global rates and currencies. He was also a senior risk-taking banker with the central bank of Norway, so he’s got a little central-bank capacity [laughs] in his background. He was at Five Mile Capital Partners, an investment firm out of Connecticut… Global Asset Management, a European investment firm… also, Deutsche Bank, he ran a large derivatives portfolio there. He’s done it all.

And by the way, I should add to this: Neil Grossman is not just an investor, no, no, no – oh, and I should add chief executive office at Polaris Asset Management, as well… he ran the fixed income arbitrage fund there. He’s not just an investor – he’s a trained physicist and a trained attorney – a lawyer, he practiced law, went to Columbia Law School. I mean, Neil Grossman has done it all. And he is the proud owner of Elysabeth Vineyards, a wonderful, wonderful vineyard in Upstate New York.

Neil Grossman, good to have you back on the program.

 

Neil Grossman:           Thanks, Trish. That’s awfully hard to follow, you know.

 

Trish Regan:               Neil, you’ve said to me, over and over again, that they have effectively taken the normal market equation away from investors. “They” being the Federal Reserve. They have made it really impossible to fairly evaluate risk. What do you mean by that?

 

Neil Grossman:           Well, the markets and the people who pay attention to the economy like to draw signals from things like how the bond market and the equity markets are behaving. And the problem is, or the way I would look at it is, you want to take those signals from people who are privately acting in their own interest and trying to make their own judgment. The problem is that the Fed is basically the primary participant in a very large swath of our markets, both in terms of the way they set rates, but what they’ve done through their quantitative strategies is they are the primary purchaser of Treasurys that are issued every month. I think that the $80 to $100 billion that they’re buying is almost a third of all Treasury notes and bonds issued. So they’re distorting any potential signals coming from the markets or from the Treasury market… they buy inflation index security which adds to that.

And then, of course, these asset purchase policies draw Treasurys, throw money into the market, and market participants have been buying equities hand-over-fist, which have propelled asset prices, equity prices, to absurd levels. And so, any indications you want to take even from equities are very hard to understand.

 

Trish Regan:               Let me jump in. The asset buying that you’re referring to, this is when, you know, the Federal Reserve is going out – and they’ve been doing this – and by the way, they told us, recently, Jerome Powell told us, in the virtual Jackson Hole event, that they’re scaling that back and they’re not going to do as much of that this year. They’re going to taper, and the market seemed to take that in stride, in part because they said, “Well, we’re going to leave rates so low,” still. But they’re going to allow a little bit more yin-yang, a little bit more of a natural market environment into the Treasury market. So, if Treasurys are now hanging out at 1.3% – that’s the yield on the 10-year – Neil, where would you see them going if they were really fairly traded? And what if the Fed wasn’t doing anything in the way of actually trying to actually buy up Treasurys?

 

Neil Grossman:           Right, well, that’s the first thing. I think as long as the Fed’s involved, it’s very hard to get a signal and understand what the markets would tell you. I’ll get to what I think it should be as a general matter, but let’s start… No. 1, they haven’t started to taper, yet. There is a reasonable chance that they will do this starting October/November, although, if they get a weaker-than-expected employment report, they may use that as further cover, just to push it a little bit further. Having said that, tapering doesn’t mean stopping. They also, by the way, Trish, don’t only buy Treasurys, but they’re buying about $40 billion worth of mortgage securities a month, which has also been part of the problem. They keep mortgage rates lower, which has an impact, obviously, on the housing sector.

But tapering will mean that they are still buying a lot of securities, and that will continue for a while as they slowly scale back. It’s not like they’re just going to do this cold turkey… it’ll probably take six months, maybe eight months, for them to go from the $120 to $130 billion a month they’re buying down to zero. Once they stop buying, of course, the markets will have to be absorbing all of these securities on their own, which should put pressure on both Treasurys and on maybe even equities. Now, what I would say, going back to your question, where would interest rates be? I would start with the fact that if you go back over a historical period that goes back, let’s say, 50 to 60 years that the Fed, when inflation is rising and is above what would be reasonable – and of course they’ve changed their definition of what’s reasonable, but at 5.4%, it’s not reasonable even by their measure – it would be unusual for interest rates to be set where the real rate of interest is negative, which is where they are.

I would argue that, as a general matter, with an inflation problem like you’re seeing, that the fed-funds rate probably would be between 3% and 5%, depending on whether you wanted to be somewhat loose, given other circumstances, to neutral. If it was to be restrictive, in theory, you’d be pushing the fed-funds rate above the rate of inflation. Now, what would that do to the long end of the yield curve? That’s an interesting question, right? Usually, in a tightening cycle, the shorter rates tend to move up towards maybe through where longer rates are, but again, you have 10-year notes, as you said, at 1.3%. Where would they be? You know, I think, given the amount of issuance, the amount of spending from the government, and the amount of debt, you would be looking for a yield curve that is far steeper than it is right now.

So I would’ve said 3.5% to 4.5% is where the 10-year might be more appropriate. By the way, that would actually be helpful to this economy, it would not hurt this economy, because –

 

Trish Regan:               Right, because it wouldn’t penalize savers, right? I mean, think about it right now, Neil, if you’re actually someone who’s risk-averse, you know, they’re basically thumbing their nose at you. Like, you’re not allowed to be risk-averse, you’re not allowed to be cautious and thoughtful and careful. If you are, you’re completely penalized for it.

 

Neil Grossman:           Right, I think their attitude is, “How dare you argue or disagree with us?” to be honest with you. And again, I think – we’ve seen the consequences of pushing the private sector, the investor base, of this country, and even the world, up the risk spectrum, you know, relying on the Fed and etc. Because when, and if this Fed has to do undo what they’ve done, it could be a bloodbath, and of course, I think that’s part of the problem: they’re more afraid of that bloodbath that they’re going to cause than I think anyone realizes. And I think you can also throw in – and again, this is my cynicism, but – hey, this guy wants to get reappointed, and he knows if he steps out of line right now, that there’s somebody else waiting in the wings at least until the announcement is made.

 

Trish Regan:               You know, someone was on the show, I think that was actually a couple weeks ago, we were talking to Steve Cortes, who’s now over at Newsmax, and was a presidential advisor in the previous administration, but his history was investing, always. And he made a similar point, just that, you know, that these institutions, unfortunately, have become politicized, right? The Fed shouldn’t be politicized, but Janet Yellen has a political viewpoint, and that’s become very apparent. You know, in some ways, I’m kind of surprised, Neil, because I’ve covered the Fed for a very, very long time, you and I have known each other for a very long time, and we’ve talked about Janet Yellen in the past. I’ve never gotten the sense that she was just oozing sort of a political viewpoint, until now.

But she’s Treasury Secretary now, I get it, and I think that there’s a lot of pressure on him, Jerome Powell, to kind of fall in line with that dovish view. I always liked him, because you felt like he came from the real world more than any of these other academics that are in the Fed, and he had a more realistic approach. I was a champion, actually, of him moving rates higher, even though the president at the time was kicking and screaming about it, you know, he didn’t want rates moving higher. But given that we had such a successful economy at the time, it seemed appropriate. Now we’re looking at an economy that I’d argue, again, is pretty successful: 5.4% unemployment? I mean, we’ll see what it is this Friday, but that’s pretty hard to argue with. And you know, I’d be focused more on that 5.4% inflation.

 

Neil Grossman:           I would agree with you. By the way, you said something, when you were introducing this, about some of the risks to what had been something that made the United States great over time, which was its economy and its dollar. I’ll say one other thing that I believe made this country great, and I think you’re seeing it sort of disappear in the wind: our government and the people we put in place were usually willing to make the tough decision, and willing to take responsibility for those decisions. Not to get too far off economics: I think we could probably find some other places you and I would agree where that’s disappeared. They’re not willing to do that, anymore, and that is, I think, an element of the Fed becoming a political animal. And we’ve had a number of heads of the central bank, over the last number of years, who I think have allowed politics to interfere with the decision-making, and I think we’re seeing a real problem with that right now.

 

Trish Regan:               Getting back to the Fed, then, and, you know, whether they’re political or whether they just, they don’t want to see the economy fail, their mandate really should be employment and inflation. And yet, it’s become, in some ways, the market. Like, if the market tanks, you know that the Fed governors are going to completely freak out, right? They don’t want the market to tank. And maybe that’s where this, you know, as we talk about it being sort of politicized as an institution, I wonder if that’s sort of where it gets really murky. Because, look, if the market tanks, the market tanks, right? And I’m a long-term bull, still, [laughs] believe it or not, despite all my criticism of what’s going on, I really do believe in the foundations of what we have here, and I still think we’re the best game in town.

But part of that also allows for failure, right? You think about a parent, Neil, and you have to be willing to let your child fail, but simultaneously be there to help along the way. But you don’t want huge failures, but if you don’t allow those little failures, then sometimes it could get far worse. And so, I kind of see the Fed as saying, “[Gasps] Oh, gosh – ” you know, the helicopter parent. I mean, you think about helicopter Ben Bernanke [laughs], right? He’s the helicopter parent who’s right there, and now Jerome Powell and Yellen was the same way, trying to sort of hold it all together. But sometimes that creates a whole other set of problems, I think as we saw, right? In 2007 to 2008, courtesy of Alan Greenspan – who, I’m just going to, before you start calling him Ali G., I’ve just got to, I’ve got to warn the listener, Neil has a nickname for Alan Greenspan: Ali G. Anyway, your thoughts on that helicopter fed.

 

Neil Grossman:           Well, I’m going to say, you actually made a very important point in that, not just the helicopter issue, but you talked about the fact that you need to let mistakes happen. We learn from mistakes. In fact, we learn much more from mistakes, I believe, from never making mistakes. And also, as you said, when you go through those mistakes, there’s an element of creative destruction. In other words, by mistakes and problems coming, we learn and we make things better. And the problem with the Fed is they’ve distorted this process in a way which only makes the consequences of a problem that they, you know, get confronted with, that they can’t handle, much more dangerous. In fact, it may be beyond danger, at this point.

I suspect that the real problems here with unwinding the amount of liquidity in this system will become more than anyone realizes. But in terms of the helicopter money, that’s the point, I mean, we’ve been raining money from the sky, you know, handing it out without consequences, no requirement of paying it back or making people understand that they should have an obligation to repay. And you’ve seen it, it’s pushed prices higher in terms of what you buy, it’s pushed prices higher in terms of assets, and it’s pushed the national balance sheet into, you know, I’d call it a red alert –  whenever there’s a military problem… whatever the highest level or one of the highest levels of risk.

 

Trish Regan:               We’re going into what historically has been a challenging time, you know, you’re going into the fall – everybody, by the way, worries about October. I think it’s actually been well-documented that September, on average, is usually the worst month.

 

Neil Grossman:           That’s correct, September tends to be the worst month by performance, but the biggest nightmares, period, have tended to be October. I mean, you go back to, obviously, the crash in ’29, but the ’87 crash, I believe in ’89 it was October – you tend to have these October moments.

 

Trish Regan:               What is it about October? Anything special? I mean, does everybody come back from summer vacation and they settle in and they’re looking at things come September, and they realize, you know, that earnings are not going to be there to justify the sky-high valuations? I mean, is there anything particular about October that you might cite?

 

Neil Grossman:           I’m not sure. I have to think about that. I’m sure there are things tied to flows of money, you know, when people may be drawing down, when people need to use cash for other purposes, that they liquidate assets. And I’m sure it’s also been partially tied to valuations and this and that, but it’s a great question, Trish, to be honest with you.

 

Trish Regan:               You know, and we should point out that it wasn’t just 1929: there was also the panic of 1907 – I mean, we’ve been through – we’ve been through a lot of these – you know, 1907, that was pre-Fed. I guess what I would just say is, I hear you in that I get a little bit worried about the Federal Reserve being so heavily involved. And it’s almost like, you know, Neil, it’s like they figured out a way to kind of outsmart the system with this modern monetary theory, and I don’t know as you can really outsmart it. At the end of the day, I think human beings are human beings, and even computers are computers, but they’re programmed by human beings. So if you have all these algorithms that are, you know, kicking into place, there’s still some human intelligence behind that.

And as human beings, at some point, we’re just going to say, “All right, this feels too risky. I want to diversify out.” Or, you know, maybe you just throw in the towel altogether, I don’t know. I mean, I just think you can only have so much of as buildup, and if I were the Federal Reserve, I’d be very anxiously trying to taper considerably, as much as possible, I would’ve already begun it, actually. And I would be looking at raising rates instead of maintaining this low-rate environment for, potentially, the next couple of years. What would you do?

 

Neil Grossman:           I would do the same thing. Look, I would’ve done this a long time ago, as you know, and I think we’ve talked about it, and I’ll say this again, one of my favorite examples of how you react to situations. So I’m going to give you two, actually. The first is the Apollo 13 analogy, right? Apollo 13 had a catastrophic moment, and NASA and the scientists at NASA reacted with amazing alacrity, and that speed is the only reason that spacecraft ever was able to make it back to earth. As a general manner, the earlier you react, the less you have to make an adjustment to your trajectory, and the less impact it should have to get the desired result. These guys, by the way, if these guys were the ones, if Mr. Powell was in that movie, Apollo 13, I would suspect that Apollo 13 would be nearing Alpha Centauri now, and frozen for, you know, almost 40 years in space, the astronauts.

The other one, Trish, which is a great physical analogy, I’m sure you have a lot of listeners who like to boat, for example. Well, if you’re driving a motorboat, or even sailing, and you turn your turn your tiller in normal water, you know how your boat’s going to react. But if you’re actually going in turbulent flow and you turn the rudder one way or another, you’ll have absolutely no idea where the boat’s going to go. And the problem, I think, is we’re actually in an economy which is beginning to represent something of potentially very turbulent times, and the Fed will do what it wants to do. And sometimes that normal reaction function may work, but to be honest with you, there’s a growing risk that whatever they think they should be doing, the reaction is almost going to be likely to be opposite of what they expect.

 

Trish Regan:               You know, you think about what’s actually transpiring right now, in terms of, you know, they’re pushing sort of reality, I guess, I further and further out. By the way, we’re talking with Neil Grossman, who has had a just tremendous career as an investor, he’s also a physicist, a lawyer by training, so, he comes at all of this with many different viewpoints. You should follow him on Twitter, I encourage you to do that, @neilytics. He’s also occasionally guest-written for me on the Trish Intel blog, which we always love having your stuff, and you’ve been pretty forceful in all of your concerns. But I look now, Neil, at what’s been happening over the last, I don’t know, maybe you should say six years or so, and we’ve gone into a situation, most especially recently, where prices are spiraling out of control. And it’s not just, you know, the diapers I mentioned and food prices and energy prices, but we got a report, recently, in the last couple of weeks, that home prices have reached an all-time high.

We’re actually starting to see a little bit of softening, there, in home sales, because the home prices were just so insane, but home prices have just skyrocketed in massive ways, I mean, more than we’ve ever seen. And we know that this has tended to happen in other periods of strife, I mean, I think if you go back to 1973, you’d see that median housing prices were increasing more than 16% over a 12-month period, so that was pretty significant. And then you go to, what, ’73 to ’74, and from the start of 1973 to the end of 1974, the stock market plummeted by 46%, you had unemployment soaring, 8.5%, in May 1975. So, you know, when you draw these analogies, and I know that these times are very, very different and the Fed has many, many more tools than it ever had back in the ’70s.

But the similarities, I think, are somewhat eerie. As a physicist, as a mathematician – I forgot to mention, of course, you’re a mathematician, as well [laughs] – you know, highly, highly educated in that field. But what do you think of those similarities back to the ’70s?

 

Neil Grossman:           Well, there’s no doubt that – and by the way, going back to one of your early questions about what causes October, sometimes it’s exactly things like the housing market. The economy, through the housing market, is also the banking system, in many ways, right? You know, the banks lend against real estate assets like mortgages, and so when housing prices rise and people borrow more at higher valuations, there is stress that can be put onto the financial system. We saw that in ’87 to ’89, by the way, that, you know, it almost brought down Citibank, etc., back then. And I suspect that you could have some of this risk right now.

 

Trish Regan:               Can I jump in, because I think that we’re sort of onto something, Neil. We’ve just talked about the housing boom in prices in ’73, which then led to, ’73 into the end of ’74, a big market problem, turmoil there, down, what, 46% or so. And then you mentioned it would be a decade later, 1987, again, huge uptick in home prices, and what happened? The market had the ’87 drop, right? Twenty-two percent in a day, and to your point, it put all the stress on the financial system, including Citi. And then, you have, again, a housing boom, right? And housing prices skyrocketed higher, as we went into 2007. And then by 2008, the whole thing nearly came undone. I mean, I’m starting to see, I’m not a mathematician [laughs], or a physicist, but I’m seeing a pattern.

 

Neil Grossman:           Well, there is a pattern. The question is how at risk is our traditional financial system, or has this now been spread out to other places, as well. But again, if you’re relying on collateral through the housing market, you know, for loans to be repaid, and the collateral becomes worthless, you have a problem, and when those loans have problems, there’s usually almost always flowthrough risk that comes. And that’s one of the ways that real crises in the economic system take place. Now, look, we have some other ones going, which, again, to make some points to you, not only are housing prices rising significantly right now, but so are rents. And rental affects, you know, the moderate-income people, often, more than the higher-income people, but rents are starting to rise.

Of course, we saw the Supreme Court decision telling the government, “You have to let landlord start collecting rent.” There’s been a lot of problems that have from the rent moratorium. Now, I’m not necessarily talking about the big landlords, but a lot of mom-and-pop’s put their savings into real estate that they were acting as landlords to help pay, and there have been a lot of problems there, and god only knows how that will run through the system now. But, you know, there are a lot of – again, this is distorting how our economic system has worked, and the government has basically stood there and said, “Don’t worry, we’ll do what we have to do.” But, you know, they’re putting pressure on, again, their own balance sheet, they’re putting pressure on prices in other ways that are going on.

By the way, another problem with prices, just, this hurricane is likely to put pressure on commodities and other things and push, you know, prices higher, over the next couple of months, as well. I mean, there is a risk that you’re going to see the highest inflation going back to the oil crisis, very shortly.

 

Trish Regan:               Wow, OK, so, by the way, I’ve been writing about this on Americanconsequences.com. I’m going to encourage people to go to Amercianconsequences.com, subscribe to the newsletter there, I write a couple of times as week. We always make sure that you get a write through, as well, of these podcasts, so you’ll hear more from Mr. Grossman there. We have established a tremendous following here because I think that there’s a real need and hunger for people to understand the economic policy in a way that’s really manageable and actionable. And so, that’s absolutely what we’re trying to do. And then, of course, on my own blog, trishintel.com, similar, which you’ve been there, as well. So, back to, if we’re trying to think about this, Neil, this is the one thing, you know, I look at it, and to me, I’m just long term, right? I’m a long-term investor, so I’m not in and out, I’m not trying to short things, I’m not trying to time markets.

But then again, I’m starting to get nervous when we see how historically this has played out, the Federal Reserve maybe being too active. I would argue that, by the way, in the ’70s – and I don’t know if you and I have talked offline about this, but I’ve been fascinated by this. Because if you go back to the ’60s, during the years of William Martin, when he was running the Federal Reserve, he really, for the most part, did an excellent job, until 1965, until the Johnson administration, of sticking to the Bretton Woods framework where the U.S. dollar was pegged to gold, and so there was a certain sort of, you know, code of behavior that you needed to engage in. And it meant that you really needed to focus on inflation and employment, simultaneously together.

And then in ’65, you get the whole social remake of America with Johnson, you’ve got the Vietnam War going on, and so what happens? Martin decides he’s going to forget about inflation and he’s going to focus entirely on employment. And so, all of his policies, at that point, kind of threw Bretton Woods out the window, he focuses on employment, sure enough, you know, you get to the point where people are, like, “Forget this. I want my gold back,” right? And so, they’re cashing in their dollars for gold, there’s a run on gold. Nixon in ’71, 50 years ago this August, had to make the decision to – and it was the right one at the time because it would’ve been a complete run on the system – to de-peg the U.S. dollar from gold. And then you go into the ’70s and that inflation continues.

So I just wonder if it’s rooted in this, “Let’s focus on employment,” instead of, you know, looking at employment and inflation. Your thoughts.

 

Neil Grossman:           Well, two things, I’m going to answer that and I wanted to make one other point about risk to inflation, as well, but there are a lot more similarities. We’re actually going through a social tsunami right now, as well, and so, you know, in fact, you’re seeing pressure on the Fed to use social issues as a barometer for what they’re doing, as well. We’ve monetized the debt in this country, in a way. That’s what they had to do to fight the wars, well, I mean, put pressure on the government’s balance sheet, you know, to fund the war in Vietnam. So there are a lot of similarities, and I will say this, generically, I believe, ultimately, that you’re going to find that inflation is a monetary phenomenon.

If you have $2, and $1 in the system that represents all goods and services, and all you do is redenominate the dollar from $1 to $2, you’re going to have inflation. But one more important point, again – and Mr. Powell uses this “transitory” word, you know, quite glibly, in my view – you’re about to have a real major event in October. There is an enormous part of this economy that is inflation-indexed, and that inflation index’s to the CPI, and you can start with social security. There is a Social Security reset coming in October: the estimate is it’s going to be 6%, or 60-plus million Americans who are going to get a 6% pay raise, basically. I believe there are an enormous number of government employees in this country whose compensation is tied and reset to inflation on an annual basis.

There are many defined pension payouts that will come, you know, and I’m not sure exactly how it runs through the healthcare system, but I would not be surprised, through the healthcare system. You saw that Mr. Biden, with his own stroke of a pen, decided to raise food stamp recipients, the amount of food stamps they’re getting by 25%. I mean, there are a lot of things running under this economy and how it’s being handled now, that add to the risk of prices continuing to rise at a much higher than expected, in a non-transitory manner.

 

Trish Regan:               So, Dr. David Eifrig and I were just talking about that, actually, a couple weeks ago, and he writes a newsletter and is warning about this stress to the U.S. economy and the financial system. And he’s concerned that it could be, to your point, as well, you guys are completely sympatico on this, pretty dramatic. And he used to be at Goldman, and then he was a doctor, so [laughs], like you, Neil, all these people with very, you know, very interesting careers that come at this. And he said most Americans are completely unprepared for what’s about to take place in our country.

 

 

Trish Regan:               And he’s concerned about October, as well. He’s actually, if anybody wants to go online and find out, he’s got octobermessage.com, the website. Again, octobermessage.com. We did this story on trishintel.com about the social security pay raise: the prediction is a 6.2% increase. And what’s interesting to me, Neil, is the reason is because they look at sort of the average of July, August, and September, to try and reset what it’s going to be for the next year, so 2022. And look, you’ve got 5.4% increase in July, you know it’s going to be more in August, how can it not, when producer prices have already shown up at 7.8%, a record increase. So you know that’s going to be high.

 

Neil Grossman:           Well, there are a number of ways and variations on how things are priced that you never know what a single month can do. So, you know, I don’t know, but I do think that all this tells you it’s not going lower. By the way, even if you average, like, 0.2% for the rest of the year, you’re not going to have any change by the rest of a year. So, in order for the inflation to drop below 5% by year end, CPI – by the way, all we’re talking about, CPI, the Fed, with all the risk to the economy measured through CPI, the Fed uses a different measure, which would tell you, again, one of the funky things about these guys. They try and use measures which, you know, there may be some legitimacy to saying they’re a little bit more accurate, but they ignore things that don’t take that into account. And, you know, those inflation linkages are to something different.

You also asked the question about how you protect yourself from being long term and not long term, Trish – I think we may have discussed this before. And again, I think that most people, when they have a long-term plan for how they invest, also have a long-term expectation on what type of return they need, right? And if, let’s just say, over a 10-year period, you thought you needed 7% or 7.5% on your, you know, invested money, to do well – and I’ll leave housing prices out, because often people have money in their houses, as well, that becomes very significant. But if you’re making money and you’re looking 7.5%, if you’ve managed to guarantee 12%, for argument’s sake, over that 10-year period, or 12-year, whatever it is, what’s wrong with taking stuff off the table as risk rises?

Doesn’t mean you don’t have a long term and it’s not that you have to pull your money all the way out of the market, but if you’ve made, you know – you know, and again, I’m not running the numbers in front of me. But let’s say you start with $100 and so you were looking to have, for the fun of it, $250 by year 10, and after year six, you’ve got $375, OK, what if you take $100 off? You’ve basically paid off, you know, everything’s then, is house money, so to speak. And if you do get some sort of normalization in real estate prices and asset prices, rather, you have the chance to put money back in at a much more appropriate level, which means you actually might do better. You know, it’s just one of those things.

I know everyone says timing the market is hard, but you don’t have to time a market when you’ve set yourself certain, you know, yardsticks and you meet those yardsticks. You can think differently.

 

Trish Regan:               Look, it’s tough, you know, when people say, and we’ve all been in this situation, you get out of a stock or you get out of the market too early and you’re, like, “Ah,” you know, and it goes up another X% and it’s hard. But I think if you try and stay disciplined about it, Neil, and you say, “OK, these are my objectives, I’ve met this objective” – I think the other important thing, and I know this is, like, nauseating for people to hear, but it’s just the reality of it, right? It’s diversification. And so, whether that means you hold a certain percentage of your portfolio in gold that’s just always there. You know, I was telling somebody, the other day, and they reminded me that I told them, you know, I don’t know, 20 years ago to buy gold. [Laughs]

It was a family member and I said, “You really, really should, you know, be buying gold,” and this family member said to me, “You know, you told me that when it was, like, $300 an ounce.” And so, it’s sort of just trying to also, even out some of the stress, I guess, in your portfolio, by whether it’s oil – I agree with you, oil is going to go up, but at some point oil could go down, too. I mean, it was a heck of a buy when it was at sort of the middle of the storm there with coronavirus, in early March 2020, but, you know, we’re back up at, what, $68 or so a barrel, West Texas crude intermediate. I think there’s a good chance it could be heading, you know, still upwards of $70 to $75 into the, even, $100s, as the economy starts to come into a recovery and we see more stress in the Middle East, and we also have a very green energy-oriented government that’s going to make it harder to pump oil here.

 

Neil Grossman:           Although that’s an interesting point, by the way, Trish, it’s hard to point – and this is supposed to be a green oil, right? And yet, the President is trying to argue to the Russians and the Saudis, “You need to lower oil prices,” which means that it puts more demand on the oil market and oil usage, which is anti-green.

 

Trish Regan:               I will say, and I don’t want to get too political on this, but I would say it’s kind of funny how the U.S. is, like, trying to dictate everything, “We’re going to be green, but, you know, you don’t need to be.” [Laughs]

 

Neil Grossman:           It’s interesting, yes. I mean, by the way, the same thing for the pipeline, you shut our pipeline down, but you don’t want the Europeans pipeline looking eastward to be shut down.

 

Trish Regan:               I would only say, from a national security standpoint, because I’m a little bit of a hawk on these things, I’d kind of like to have our own pipelines. I’d kind of like to have our own stuff. I’d like to have our own semiconductors, I’d like to have our own oil, I’d like to make sure that we – I’m proud of the program in space, to effectively have the ability to really, you know, operate up there. I mean, there’s a lot of things that we need to do to protect ourselves first. You know, we don’t have a ton of time left, but I want to get your thoughts on this, and I haven’t even warned you I’m going to ask you about this, so, bear with me. But I was thinking, what is one of our challenges right now?

I think one of our challenges, when you compare, like, the 1960s, or even the ’50s, to now, there was a time when it was a big deal to go and work for the government, and to go and work for NASA, and sort of the brightest minds were all flocking to government. And we were in the space race with Russia, and there was just a lot going on. Nowadays, it’s, like, the brightest minds, the brightest and – and, you know, you’re a physicist and a mathematician – but all those people go to work in Silicon Valley or on Wall Street, because that’s the best opportunity to make money. And I wonder what’s happened and what will happen in that we’re not getting, necessarily, the best and the brightest there in government. Do you have any concerns about that?

 

Neil Grossman:           Well, I would start with, I’m not sure whether we’re getting the best and the brightest anymore in the way we used to, I mean, whether it’s government or non-government. You just look at the way we’ve treated education and where we want to inspire people to go, and I just think that we’ve really hurt our educational system significantly, over time. And you look at the – you know, by the way, it’s sort of inflation, too, and our intellect is not keeping up in some ways. Now, we have some tremendous capacity, don’t get me wrong, and some of that is in the private sector. To your question, the government doesn’t do as much basic research, although it does do some, but many people draw funds in various ways from the government through the private sector.

I tend to be – I think we got sort of lucky, in a way, Trish. I mean, when President Kennedy said, “Let’s go to the moon,” we all got behind him. But I’m not as big a fan about the government making decisions as I am about letting the private sector and people in the private sector decide how to, you know, direct their intellectual and emotional capacity and make their own decision.

 

Trish Regan:               If Elon Musk can do it, [laughs] I – I think I have more faith in Elon Musk and, you know, around up there than I do, perhaps, in a government program that’s going to be filled with waste.

 

Neil Grossman:           Not only Elon Musk, I mean, the private sector has tremendous capacity. Look, one of the areas where you and I might look and ask, what is that, how do you say, [inaudible] the words, but the universities in this country are being redirected away from things, I suspect, which may have some consequences to this. Because in universities, a lot of the great minds conducted their research, and we got tremendous benefits, you know, over generations, that came that way. But I’m not sure that the political mix in this country is intent on directing to the basic research in a broad enough spectrum that we used to do. And that could have real consequences, I don’t know, I haven’t really looked into it as much, but you can see it.

I mean, we’ve definitely – look green stuff, if we can figure out how to make energy cheaper and with less environmental impact, great. I mean, we would all like to see that, we’d all like to see the United States basically figure out the best way to make energy, I mean, it’s to all of our benefit. But, you know, again, some of the consequences – look, even the green car issue, and I don’t follow this as much, but, I mean, how much energy does it take to mine the minerals to get the chemical compounds like lithium that go into that.

 

Trish Regan:               Not to rub salt in the wound, but, hey, in Afghanistan, they’ve discovered that’s, like, one of the biggest sources of lithium in the world. China is already way ahead of us on mining lithium and creating EV batteries: it’s one of the things that we need to be able to do better here, if we’re actually serious about this green energy revolution. I do want to point out, because I think our listeners will just love this, you are somebody who is kind of a gentleman farmer, these days: you’re back to the earth, growing lots of tremendous vegetables [laughs], there at your vineyard, Elysabeth Vineyards.

 

 

Trish Regan:               And of course, wonderful, wonderful, wonderful wine at Canoe Hill, Elysabeth Vineyards, spelled, actually, with a Y, E-L-Y-S-A-B-E-T-H-vineyards.com. You can check out Neil’s vineyard and wines there, because I’ve had some of them, sir, and they are wonderful.

 

Neil Grossman:           Thank you very much.

 

Trish Regan:               It’s so good to talk to you, Neil. Thank you for so much insight. I want to encourage everybody to go to your Twitter handle @neilytics, you’re going to get some really interesting information from him there. You can go back and listen to past episodes of American Consequences, he’s been a guest on this show before. And, well, you’ve been very, very spot-on, this Fed is kind of out of control. Let’s see what happens as we go forward. We’re all saying a prayer it gets a little bit better. But I just want to thank you for your time, and appreciate you coming on the program, Neil.

 

Neil Grossman:           I always love spending this hour with you, Trish, it’s really enjoyable. Thank you for having me.

 

Trish Regan:               [Music playing]

Again, my thanks to Neil Grossman, just a really fascinating individual who has such a perspective on all of this. And like I said, I always like it when people come from different backgrounds and they have sort of the science aspect, the math aspect, and the investing aspect. It’s like, you know, the Renaissance man, as I like to call Neil, similar to Eifrig, it’s just funny that they’re both actually [laughs] vineyard owners and winemakers. Eifrig, of course, Dr. David Eifrig having had that background in medicine, and also, background in finance. If you have not, check out his octobermessage.com – octobermessage.com – because he’s warning of some of these same exact things that Neil and I have been talking about, through the course of the show.

You need to be prepared for the inflation that is coming. I mean, I don’t know how else to say it: 5.4%, two months in a row, 7.8% increase in consumer prices. You’re seeing, as Neil and I discussed, probably a six-percent-and-change increase in Social Security, right? It’s nice, actually, people are going to get a pay raise, but you know with that pay raise is going to come higher prices in general. Not to mention the fact that, well, when Social Security goes up, guess what, somebody’s got to pay for all that, right? So that’s the younger generation that’s still working. We have what I would call some systemic problems, and so, these are things that you need to check out.

I write about this all the time in americanconsequences.com. I write about it all the time at my own website, trishintel.com. And, of course, Dr. David Eifrig has a wonderful sort of explanation of all of this for you at octobermessage.com. So you have lots of places to go, lots of homework to do. Don’t forget to go to octobermessage.com, americanconsequences.com, follow me on Twitter @trish_regan. And I’ll see you next week.

 

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