What Is The Triple Witching?

DANO WEIR: It is Friday, September 19th. You are about to go On The Markets. My name is Dano Weir from Sonoma Wealth Advisors and our Fremata family of brands, Fremata 401K, Fremata Tax.

DANO WEIR: We've got a special guest this week, and we've got Halloween in September, but not really. The S&P wasn't that spooky or great this week, but there was something that happened that we need to look at, the triple witching, plus how inflationary pressures might affect the standard 64.

MIKE PHILBRICK: 40 portfolio.

DANO WEIR: We'll look at that with our special guest and why small cap companies might finally be having a moment. But first, let's do this.

MIKE PHILBRICK: The stock market, the economy, your money. What's the latest and what could be next?

MIKE PHILBRICK: Find out now with Fermata On The Markets. Straightforward financial market updates for the brands of Fermata Advisors, Sonoma Wealth Advisors.

DANO WEIR: Formata 401k formata tax and formata insurance On The Markets starts now all righty as i said i'm dana we are the Marketing director joined by our managing principals Chris Sipes and Daren Blonski and our special guest today he is the CEO resolved asset management please welcome to On The Markets Mike Philbrick welcome Mike thanks Dan great to be here i love i love that music intro that's great it's got some energy Thank you so much.

DANO WEIR: I appreciate that.

DANO WEIR: I'm just going to read this. We are both podcast and video. So for our listeners who can't see, Mike is the CEO and co-founder of Resolve Global, the co-creator of the Return Stacked lineup with 30 years in the industry. It's a quant and systematic focus, leads portfolios targeting diversified, dynamic global asset and factor allocations. Mike, you're new to our show here, so you don't know this, but our listeners will.

DANO WEIR: Daren always, always gets on me for turning everything into a football analogy. He says the market is not football, Dan. And yet I have to say, Daren jokes on you this week, because in addition to these fabulous financial accomplishments, Mike is also a gray cup winner from the Canadian football league back in the day, which was their Superbowl Daren and a three-time all-star. So thanks, Mike. I had to share that.

DAREN BLONSKI CFP®: Dan, just for this week, you have permission to talk football.

DAREN BLONSKI CFP®: If you don't throw in Disney, I'll be highly disappointed, too.

DANO WEIR: That's right. That's right.

MIKE PHILBRICK: I don't know. I kind of think it's like football. You got to know whether to put the offense on the field, the defense on the field or the special Teams.

DANO WEIR: That's right. That's right. So that's where I try to go with it. So, Mike, thanks so much for joining us.

DANO WEIR: Let's see. Where do we want to start here, guys? We're the title of our episode is the triple witching. What is the triple witching? So, Chris, that did happen today. Can you start with that? Definition for audience of what that is and how it might affect the market.

CHRIS SIPES CFP®: Yeah. So the triple witching, it's what they call the last hour of the trading day, the third Friday of March, June, September, and December. And it's when the contracts for stock index futures, stock index options, and stock options all expire simultaneously. So a lot going on in that last hour, especially with how much yeah option, how much the options market has grown, over the last five years.

CHRIS SIPES CFP®: And so a lot of action in those, in those, in that last hour, Mike would probably know better, you know, in terms of how the markets actually work, Mike, does that, does that seem to make a big difference? You know, that level of volume on the, on those triple witching days?

MIKE PHILBRICK: Yeah. I was at a conference during the week and I found out this, this crazy fact that 60% of options are now, zero DT options. The trade, the volume is extremely short term these days.

MIKE PHILBRICK: And when you get into this last, the triple witching, the last week, you get a lot of the pinning because you've got all of the expiries happening.

MIKE PHILBRICK: And so you do get some volatility, but a lot of times it's volatility sort of centered around where the positioning is actually most occurring. So you get actually a little bit of less volatility at times. Sort of more idiosyncratic, but around a tighter points on, on the asset price.

DAREN BLONSKI CFP®: So Chris, just for our viewers, explain what an option is. Cause I think that's a confusing topic unless you're something you're really into.

CHRIS SIPES CFP®: Well, just like the name implies, it's, it's an option to do something right at a certain price. And, it always kind of cracks me up when people say they're, they're going to get into options because If you listen to someone like Mike, if you listen to, you know, someone who's very involved in the options market.

CHRIS SIPES CFP®: Or has been in the past, like you will quickly realize that if you're getting in the options markets, kind of like saying, I'm, I'm going to go play in the NBA all-star game. And by the way, I've never played before, but I can dribble a basketball sort of, I'm going to get in there and just mix it up with the all-star players.

CHRIS SIPES CFP®: It's, it's not as easy as it looks.

DAREN BLONSKI CFP®: Chris, that's a really good point. And I think that's a unique feature of the market that people can... Completely miss a ton of times. And that is that it's one of the few environments where literally you can go play with the pros with basically opening an account. And I don't think people appreciate that a lot of times and they'll go, yeah, I'm going to start trading.

DAREN BLONSKI CFP®: I'm going to start playing with options, but you have to understand that there are people like Mike out there who understand this world so much better, than you likely do. And their job is to extract value out of the market. That is. Short for take your money in the market. And that's nothing personal with Mike.

DAREN BLONSKI CFP®: That's just how market participants work. The whole point is to make money. And the only way you make money is take someone else's money. And if you don't have a strategy and you're not clear about your strategy and you think you're going to go in there and win a home run and do it consistently, well, that's a big mistake.

DANO WEIR: Mike, are they onto something here or you think the average person can do it?

MIKE PHILBRICK: Well, yeah, no, I don't think the average person can do it. Sophisticated investor who's an individual investor probably can take advantage of things just because they're smaller, but you've got things like the Greeks, right? The Delta, the Gamma, the Theta, the Vega, the Rho. These are all inputs to your options pricing that are beyond what would be in your normal sort of stock pricing.

MIKE PHILBRICK: How much is it changing vis-a-vis, how much does your option price change vis-a-vis the underlying stock? How much did that change of change occur? Theta is simply the time decay. So you do pay a price. Or receive some benefit from being long or short the options. And then you've got this sensitivity to what's the overall volatility of the market, right? The Vega. So is that rising or falling?

MIKE PHILBRICK: So are you buying the options cheap or expensive? And then finally, row, which is the sensitivity to interest rates. All of that is embedded in options pricing. And so there's a lot more levers and dynamics involved in any kind of... Options strategy or future strategy. And that's, that's a lot to take in. And you see a lot of the, the covered writing is pretty popular these days, especially on the higher wall stocks.

MIKE PHILBRICK: You know, and, and again, it's, what is the, what's the characteristic of the strategy that you're trying to impart? You know, so the covered rights pretty popular. But that, that's good in a market where you've got an asset class that is. Fairly stable, it's either rising very slightly or it's falling very slightly.

MIKE PHILBRICK: If it's highly volatile, then you're not giving yourself a lot of advantages. You're actually giving up the upside. So you buy a stock and you sell a call to some crazy speculator and he wants to just pay a dollar for the $20 of exposure, let's say.

MIKE PHILBRICK: And now he's got that upside. And so if the underlying asset It goes up a lot. You're out of the stock. This is the funny thing with equity type investments. They often have that right tail distribution where you really want that upside.

MIKE PHILBRICK: And if you're covered writing, you know, if you get big downsides, you're taking most of the downside. Your downside protection is just that little premium you got. So, you know, a lot of income investors try to use the auction strategy. And if you look at them, they don't say, oh, it's got a 20% yield or something like that.

MIKE PHILBRICK: But if you compare the underlying asset to the cover written asset, you'll often find under performance if there's a strong trend and actually quite significant under performance but so those are all dynamics that you have to consider in in options writing and you know options versus futures is another interesting difference right futures are an obligation so you can buy a future and you can get lots of leverage but you're obligated at the end to accept the result with options you have the option to do that so if you know price falls and you're long the call, well, you lose that premium, but you're not obligated to buy the asset at that lower price.

MIKE PHILBRICK: If it goes up, obviously, you're going to want to take that obligation. But that's the core difference between sort of futures and options. Options, you don't have to. At the end, futures, you have to.

DAREN BLONSKI CFP®: So, Mike, question for you, right? In the last 20 years, right? It used to be if you wanted to buy, or I guess probably 30 now, if you wanted to buy an option, buy a stock, you'd have to. Go to a broker and the broker would sell it to you.

DAREN BLONSKI CFP®: And there was kind of this control that stopped people from accessing the market unless they went through one of the brokers, right? And then usually there's a financial advisor that would talk some sense into you kind of thing. And that, you know, kind of helped, I think, maintain some of the cadence to the market.

DAREN BLONSKI CFP®: That's not the case anymore, right? I mean, you can trade on Robinhood and with a click of a button. How do you think the access to the market that we have now as investors has changed the nature of the market? Or do you think it's changed the nature of the market?

MIKE PHILBRICK: Oh, yeah, I think it absolutely has changed the nature of the market. When you change the participants. And their level of experience and knowledge and, you know, what they're looking for as outcomes, it's, it's going to change the underlying asset flow, just like we've seen in these volume and zero dated options.

MIKE PHILBRICK: So it has implications. I'm not sure I know what all of those implications are. I do think that when you have, you know, the, the retail swarm of, I'll call it somewhat unsophisticated investors. I don't want to be too harsh. But those are, Those are, you know, pray for. More sophisticated investors.

MIKE PHILBRICK: And then you've got the banks themselves that are, you know, hedging and having to, do the next leg of hedging when the, you know, the retail swarm comes in. And so you're competing against, you know, really big balance sheets with really sophisticated technology and players, as you said, at the outset, you know, you're, you're trying to enter the NBA.

MIKE PHILBRICK: You have to be careful and thoughtful, you know, just, just, you know, and they've gamified it. With access at companies like Robinhood. So I don't think that's a bad thing necessarily. I mean, it is good for investors to learn more and think about how they can use these types of instruments. And they're great for risk control.

MIKE PHILBRICK: You know, you could buy a call rather than buying a stock as exposure, as a substitute. The challenge is most people do too much leverage, right? Let's say you're going to buy 500 shares of XYZ and you want to put a stop loss in. Well you can just buy the call of XYZ. You don't want to buy the same amount of money.

MIKE PHILBRICK: You know, if you're going to do $10,000, you don't buy $10,000 of the option because that's going to be a hundred thousand dollars of exposure and you can lose that quite easily. But if you were to say, well, I want $10,000 of exposure and I can replicate that with a thousand dollars. Then you've got a good risk control in there. And again, if it works, you're long.

MIKE PHILBRICK: And if it doesn't work while you were stopped out and your option premium is given up and that way you're keeping the upside. So there's lots of ways to use them. You know, put writing, you say, oh, I'd like to buy the stock at a dollar lower. So you sell, you put, you have your cash in your account. And, and if you get put the stock, great.

MIKE PHILBRICK: If it goes up, well, you received that little bit of a option premier dividend. You know, keeping it simple to some degree, I think, you know, as, as people learn and create their own intuition and experience, I think it's good in the long run. In the short run though, you're going to get, you're going to get some people that get hurt because they don't know what they're doing.

DAREN BLONSKI CFP®: Yeah. So Dan, let me ask you this question. Who is your all-time favorite football player?

DANO WEIR: My all-time favorite football player is Alex Smith from 49ers.

MIKE PHILBRICK: Okay. That's a good one.

DAREN BLONSKI CFP®: Wow.

DANO WEIR: And because he's inspired, not as accomplished as some, but absolutely inspiring.

DAREN BLONSKI CFP®: Okay. Who's your all-time hardest hitting football player?

DANO WEIR: Ronnie Lott.

DAREN BLONSKI CFP®: Okay. So you feel like, how do you think you would last if you were? On the grass with Ronnie Lott. You caught the ball. Ronnie Lott's coming at you. How's that going to feel?

DANO WEIR: Not very good. Or, you know, Mike can imagine any number of offensive tackles that he's probably gone against that, you know, probably were pretty hard hitters too, right, Mike?

MIKE PHILBRICK: Oh, yeah. A lot of times I had to take on two people.

DANO WEIR: So, Darren, I'm getting that you're saying this is what it would be like if Joe, if. The average investor walked into an options on the field in options trading.

DAREN BLONSKI CFP®: Well, so yeah. And here's a great example. So you know the movie Waterboy, right?

MIKE PHILBRICK: Yes.

DAREN BLONSKI CFP®: How could you forget, right? And so in the movie Waterboy, there's this scene where he's just getting tackled constantly, right?

DAREN BLONSKI CFP®: Do you remember that scene?

DANO WEIR: Yeah, but I'm loving that you now are taking the lead here with a football analogy.

DANO WEIR: Mike has brought something I'm loving to the show so far.

DAREN BLONSKI CFP®: I just appreciate you. So I met the stunt double for the water boy that took all those tackles. And he flat out looked at me and said, well, that took some out of me.

DAREN BLONSKI CFP®: Like that particular scene, he's like, I don't think I was ever the same after that scene. I got hit so many stinking times because that was not, Adam Sandler taking those hits. Yeah. And so I think that's just a super great way to think about it.

DAREN BLONSKI CFP®: Like, yeah, you can do it, but you got to be prepared to give it the respect that it's due when you get into the markets, you're going to take some hits. And if you're not ready to take those hits. Go slow or paper trade. Anyway, I diverge. Let's get onto the slides.

DANO WEIR: Yeah.

CHRIS SIPES CFP®: Yeah. So if all that sounds a little too crazy and like, gosh, I don't want to get hit by Ronnie Lott. What can I do that's more sustainable? That leads us to the big reason why we invited Mike on today, which is to talk to us about diversification and some of the benefits of diversification. We talk about that a lot.

CHRIS SIPES CFP®: On the show, but I don't think we really address sometimes why diversification can be a good thing. And so that's what this slide is here. And so those of you that are just listening and can't see it, it's a line with correlation between assets and volatility, which is just a Fancy word for how much the portfolio is going up and down on a regular basis.

CHRIS SIPES CFP®: And This is just a hypothetical. It doesn't exist. But if you had two assets with the same expected return, so let's just say you've got two options and they're both expected to give you the same return over the next year, and they have the same volatility, which in this case is 15%.

CHRIS SIPES CFP®: When you combine those assets together, if they don't move in the same direction, if they're non-correlated.

CHRIS SIPES CFP®: So if they have a zero correlation, you still get the same expected return, but you reduce your risk by about 30%.

CHRIS SIPES CFP®: So that's why they say that diversification is the only free lunch in investing. It's the only time where you can walk on the NBA court and hopefully sustainably play for a while is if you invest as if you don't know what's going to happen next. We'll talk about that this week with the Fed meeting.

CHRIS SIPES CFP®: And you do your best to kind of combine those different asset classes that can still give you that return but have a lower risk in doing so.

CHRIS SIPES CFP®: Mike, what did I miss there in terms of illustrating diversification?

MIKE PHILBRICK: I think you've nailed it. One is the idea of perfect negative correlation, which really doesn't really exist. Exist. So if you can get lowly correlated or those zero correlated assets, so they move independently and you can get eight to 10 of those sources, you actually bring the portfolio vol down by 80 or 90%.

MIKE PHILBRICK: Now finding eight to 10 non-correlated strategies is a tall, tall order. And that's something that Ray Dalio talks about a lot at Bridgewater. The next thing I think is a simple analogy that we often use.

MIKE PHILBRICK: On the benefits of diversification for the individual investor to crystallize this is, is the, is the, in Canada, we have a store called skis and bikes, and there you have two very simple, assets, the sales of skis and the sales of bikes. And they are definitionally non-correlated as you know, wintertime rolls around and skis and boots go off the shelf and the, and the coats and the goggles and all that sort of stuff.

MIKE PHILBRICK: And then you move into the spring season. You have the shoulder season where all of a sudden, well, the sales of the sales of skis and that sort of thing slows. But you rotate your inventory. You've got this cost of owning the store. And rather than having this negative carry through six months of the year where you're not selling any ski equipment, let's rotate the inventory and move to bikes.

MIKE PHILBRICK: And so the owner of the store moves out. Does the ski sale in the spring and has the opening, you know, early sale for the, for the bike buyers, the bike buyers come in, they buy and they buy during the summer.

MIKE PHILBRICK: And, and that, that repeats in the fall as bikes are moved out and skis are moved in. And that's that negative correlation that is structural in this case of the store. And that allows the cash flows for the store to be more consistent, to meet the rents, to meet the flows. And if we layer that onto a portfolio.

MIKE PHILBRICK: We're thinking of, okay, so you've got stocks for when there's growth and when there's growth going on. Oh, that's a wonderful thing. But from time to time, we run into 2008 or the 2000s and so on. And you have these periods where growth isn't in favor. Well, then that's where your bonds kick in because they do well in those periods.

MIKE PHILBRICK: Now, what's been so interesting is since 1982 to sort of 2022, that stock bond correlation relationship has been very negative, much like the skis and bike store. But now we're entering an inflationary regime and stocks and bonds do have some vulnerabilities. And that's where assets like gold and commodities can come in and some managed futures.

MIKE PHILBRICK: But from a very simple perspective, think about the diversity in your portfolio is simply that store owner, that entrepreneur who's using skis and bikes to smooth out the cash flows and smooth out the results of his business. That's what you're doing in your portfolio with diversification. That make sense?

DANO WEIR: It does make sense. And Mike, I should have said up front that ReSolve Asset Management is based in Toronto. So we're getting some great. Perspective here. You mentioned a store in Canada. I want to go to skis and bikes, but I feel like I will know.

DANO WEIR: I feel like I've been Canadian tire is one thing, but skis and bikes sounds like a party. I'd like to check that out. And this slide that we've got up here is actually exactly what you're talking about with this period of inflation that's happening.

CHRIS SIPES CFP®: And before you jump into that, Mike, if I could just add to the analogy, is it appropriate to say when you, when when you're thinking about it from an investment perspective, think of skis and bikes, except you don't know what season it is, right? Like you can't know ahead of time, Hey, it's winter better roll out the skis. Here comes summer.

CHRIS SIPES CFP®: Let's get the bikes out. Unfortunately, it's really, really tough to tell even when, when you're in that regime until it's, you know, past and you certainly can't tell what's coming, coming up front. So you kind of have to have the skis and bikes out. At all times when it comes to investing. Is that a good way to look at it?

MIKE PHILBRICK: Yeah. I think the skis and bikes analogy is just an extension of demonstrating the last slide you had on very simply, right? What is diversification? It's owning assets that do different things at different times. And that is the simple store owner who is trying to make sure the cash flows for the business are stable and make sure he can employ his employees.

MIKE PHILBRICK: And so in a simple framework, That's what you're aiming at for diversification. And now, as you said, you've added this extra layer in there where maybe you don't have the clarity on the seasons as such. And so that's where you want to add more diversifying assets.

CHRIS SIPES CFP®: Great. So tell us a little bit about this slide. Again, for those that can't see it, it's kind of looking at two different axes, which would be... Growth and inflation, the changes therein.

CHRIS SIPES CFP®: And, you know, I guess for the casual observer, it's good to know that really the market kind of fluctuates between these different environments of higher, low inflation, higher, low growth, and the relative expectations of all the market participants around those two things. So tell us a little bit about these different environments, Mike, and which assets tend to do well in those different environments.

MIKE PHILBRICK: Let's take a moment and just talk about the actual dynamics. So there are two dynamics that largely drive asset prices, and they're structural. So we're not talking about timeframes that are days and weeks. We're talking about timeframes that are quarters and years long. And when you think through that, there's these two dynamics.

MIKE PHILBRICK: Of inflation and growth and whether they are rising or falling above what the expectations are. And so when you take the two dynamics, you plot them on a graph, as we're showing here, it creates four sections or four areas. And those areas are the different types of regimes you're in from an economic perspective.

MIKE PHILBRICK: And those economic regimes structurally drive asset prices. In a different way. And so if you have a regime where you have falling inflation, it's stable, there's not a lot of volatility around inflation, and you have accelerating growth, think about the period since 2008, 2009, you had an abundance of commodities, you had low and stable inflation, and you had growing stable growth.

MIKE PHILBRICK: Assets in that regime that perform well are in fact your domestic developed equity markets. They do the best. And those bond markets also do very well. And in that regime, those two assets are also not very correlated to one another.

MIKE PHILBRICK: And so what happens in an environment where you have accelerating growth and falling inflation is stocks and bonds do really well. Commodities do really poorly. Gold does not do very well either. And in fact, managed futures, that area. Doesn't do well either. And I think if anyone's had managed futures experience for the last 10 years or so, save 2022, where that was a slightly different regime.

MIKE PHILBRICK: Then you've had this great experience owning a traditional U. S. Stock and bond 60-40 portfolio. But there are three other regimes that occur over time. And actually, these regimes over time occur about the same amount of time in total when you go back 100 years. So if you have a rising inflation and accelerating growth, think about that as 03 to 08 or 2000 to 2008.

MIKE PHILBRICK: And there was a driver. There was China. And so you had this inflationary global boom. Emerging market stocks kicked the pants off of U. S. Equities. U. S. Equities from 2000 to 2014 had kind of zero returns and had two 50% drawdowns.

MIKE PHILBRICK: Meanwhile, emerging markets and resource-based economies like Canada, South Africa, Australia did extraordinarily well. Commodities did extraordinarily well. Gold did quite well. But developed market equities, as I pointed out, didn't do that great. Also managed futures, trend following and the strategy there, that also did very well. Now think about the other side of the equation where you actually have slowing growth.

MIKE PHILBRICK: And slowing growth and rising inflation is that stagflationary period or that stagnation. And that's the 70s. We had oil shocks and things like that. And they choke the growth off in the growth side of the equation. So equities don't do well. Bonds also don't do well because you have inflation and bonds and stocks.

MIKE PHILBRICK: Correlate. And you know, so that, that efficient frontier that we see that has that usually that curve in it where, you know, you've got, you add some equities and you get a lower, lower volatility at higher return. It doesn't exist in a, in a stagflation environment.

MIKE PHILBRICK: In fact, the efficient frontier is a straight line and bonds just serve to reduce volatility only. But what does well, what, what's selling off the shelves of, you know, our skis and bikes scenario, gold does well, commodities do well. And managed futures do very well. And so those are nice compliments to your stock bond portfolio, and they help preserve that.

MIKE PHILBRICK: Lastly, we have the real bad bear markets of them all, which is slowing growth and falling inflation. And that's the Great Depression. That's that period in 2008 where it's return of your capital, not return on capital. Equities don't do well. Bonds do well in that circumstance. Gold does very well in that circumstance.

MIKE PHILBRICK: Commodities also don't do very well. But again, managed futures in that scenario do very well. And so what you find is there's a number of asset classes that do well in each regime. And then there's one or two that do really poorly. So if you're going to be diversified and you're truly going to say, well, diversification, first of all, is a recognition that I don't know what's going to happen.

MIKE PHILBRICK: So I want to own all of these assets all the time. That also means you're going to have something in your portfolio that's killing it and something that's. Killing you. And that's where it really becomes challenging, right?

MIKE PHILBRICK: From a behavioral perspective to hold that thing that's killing you through these tough times and these tough regimes. But this is diversification. Diversification is always having to say you're sorry, as Brian Portner says. Something in your portfolio, if you're truly diversified, something in your portfolio is going to be making you think twice.

DANO WEIR: Chris, are you just beaming?

MIKE PHILBRICK: Chris, are you just beaming hearing someone else say that guys who do you think i learned that saying from i was telling Mike you know i'm a first-time caller long-time listener so i definitely stole that from from them for sure you know i feel a little attacked because i thought we should just own all NVIDIA stock in our portfolios yeah well it hasn't hurt too much lately that's for sure and and i you know i'm i again We have to recognize that we don't necessarily know, but at the same time, in today's environment, when you think about are we in an inflationary regime or are we in a disinflationary regime, kind of think that we're somewhere in the other three quadrants.

MIKE PHILBRICK: This is not going to be disinflationary growth, which doesn't mean that domestic developed equities do horribly. There's just so much other opportunities and other asset classes that are going to be so complementary. And I think the world hasn't really woken up to that. It's woken up a little bit on gold, right?

MIKE PHILBRICK: Two years ago, we saw gold prices going up and the number of units in the gold ETFs going down. So people were, retail was actively selling gold into a strong market. Now that has, has reversed course. And I think maybe on the commodities and international. Equity side. We're sort of seeing that now.

MIKE PHILBRICK: No one's talking about the fact that international equities or global equities have beaten the pants off of U. S. Equities over the last while. Gold is beating U. S. Equities over the last one, three, and five years. And so I think it's a bit of a page 16 story that's going to continue to work to page one.

MIKE PHILBRICK: But, you know.

DAREN BLONSKI CFP®: I think there, how do you make sense of a story where the gold chart, right? Here's our gold chart. Yeah. And you look at this and I grew up thinking, hey, gold is risk off when gold goes up. Things are gnarly not going to be great but you look at this risk off asset just absolutely destroying everything else other than maybe like bitcoin yeah and make sense of that and also have equity now as of today just crushing it.

MIKE PHILBRICK: Well they were crushing it before but today even more what's the story behind the scenes there i think it i think it all makes perfect sense there's a there's a few dynamics at play here so One thing is to understand how scarce assets work in a portfolio and what their drivers are. Gold is a scarce asset. Bitcoin is a scarce asset.

MIKE PHILBRICK: So the unique thing about scarce assets is they cannot be reproduced easily. They can't be made and created from thin air. And this is precisely why they're so valuable in a portfolio. Now, mind you, right, if we go pre the last two years and look at gold from 2011, it was the thing that was killing you.

MIKE PHILBRICK: Not the thing that was killing it. And so we have to recognize that that's, you know, that's the reality of gold too, in an economic regime where you have stable inflation and growth in other areas. But now you've got a situation where it all started with the confiscation of Russian assets by the West when they invaded Ukraine.

MIKE PHILBRICK: At that moment in time, we didn't confiscate assets in World War II. We confiscated assets. So the West...

MIKE PHILBRICK: Confiscated us treasuries that belong to Russia and what that caused every other country to do is to look and say wait a second the the reserve asset that i'm holding is now potentially confiscatable if i do something that the West doesn't like and that moment that's when you saw other sovereign nations start to buy gold in size a thousand tons a year every year since that moment That was a watershed moment.

MIKE PHILBRICK: And that was the first layer of demand that came to gold. Remember we talked about new players in a market change the market and old relationships may not be what they seem. And so that was the first leg.

MIKE PHILBRICK: And no one really believed that. You had retail selling into it and institutional selling into that strength. But that was the watershed moment. And that was those sovereign nations looking for a reserve asset that was not confiscatable by.

MIKE PHILBRICK: Another nation that's places like India China and so they're looking for a new reserve asset the next layer is you have this burdensome debt and we know we're not going to do austerity to pay off the debt we're going to monetize austerity for the viewers what is austerity some people don't so so if you spent too much money you're at home and you've spent too much money and you don't have the ability to have a printing press in your basement what you do you Tighten your belt.

MIKE PHILBRICK: You cut back on what everybody's spending and you start to pay down the debt. That's austerity. That means people would have to sacrifice some of their public benefits that they're getting, that we'd have to spend less money, that we'd have to be more frugal in our government spending. That's just not something that works in a democracy because you won't get voted back in.

MIKE PHILBRICK: So what you end up doing is you're causing some inflation and you end up debasing the currency, which means the bond comes due and I'm going to print new money and pay you back with that money. I'm not going to pay you back with money I've scrimped and saved.

MIKE PHILBRICK: And so this is where scarce assets like gold and Bitcoin come in because they cannot be printed. But you have to remember that cash flowing assets are a function of earnings and interest rates, whereas scarce assets have to be bought from somebody else who already owns them. They are truly scarce. A rookie card signed by Michael Jordan can't be printed.

MIKE PHILBRICK: Waterfront property and real estate that's in prime, prime locations cannot be printed. Bitcoin cannot be printed. Gold cannot be printed. And thus, it must be bought from someone who owns it already. And when you have monetary debasement, the demand for those goes up because you want something that cannot be replicated easily.

DAREN BLONSKI CFP®: Explain to the group. Sorry, I'm interrupting you. We got off. The people that are listening to this show, some would get that somewhat.

MIKE PHILBRICK: Well, debasement of the currency is that thing I talked about where you monetize debt simply, right? So a bond comes due and you don't really have the money to pay it back because you don't have the revenue. So you just print more in the basement, you pay it back.

MIKE PHILBRICK: Well, that debases the currency. It creates more of the currency, right? Easily out of thin air. And you can't print more gold. So then gold must rise in price to match the fact that your monetary base has expanded. You've debased the monetary base.

MIKE PHILBRICK: And so like, Oh, sorry. No, People will say beanie babies are gold or they're Bitcoin because they don't have cash flow. And that's not true. If more beanie babies are wanted, more beanie babies will be produced. If more iPhones are wanted, more iPhones will be produced. The shortage is short term. If we need more oil, we'll drill more holes.

MIKE PHILBRICK: If we want more gold, the process of getting more gold, the gold world only produces about 2% of extra gold a year versus the stock of gold. And so it simply cannot be manufactured at that level. Thus, as the debasement happens, as the money's printed, as more money comes about, comes into fruition, the price of gold must rise because it's a scarce asset.

MIKE PHILBRICK: And so that it's not a quirk that these scarce cash flowing assets are going up like Bitcoin and gold. It's a feature. It's not a bug. And that's why they provide such a wonderful diversification opportunity. In a portfolio where you've got mostly cash flowing assets like things like stocks and bonds Darren we've got the the Ukraine war started in February 2014.

DANO WEIR: Could you dial the gold gold chart back to that because Mike i think that is such a fantastic point about what has happened with gold and the seizure of assets that i i haven't heard before i'm sure i'm sure or maybe you've said it elsewhere, but I think... The average person had not thought of that moment as the moment where, you know, perhaps that was the catalyst to send gold to the moon.

DAREN BLONSKI CFP®: What was the month of the war starting?

DANO WEIR: February, 2014, 2014.

DAREN BLONSKI CFP®: Well, let's do the second war.

MIKE PHILBRICK: I know they took, when they actually, when they actually invaded recently, 2022, sorry.

DANO WEIR: Yeah.

DAREN BLONSKI CFP®: 2022. So yeah, you're, this is probably the spike right there went down, but then it just took off.

MIKE PHILBRICK: Correct.

DANO WEIR: That's interesting.

MIKE PHILBRICK: And so you saw one of the features that you saw was gold moving from the West to the east. Gold was trading the London exchange for about $100 cheaper an ounce than it was in Shanghai. And gold was being bought in London and delivered in Shanghai. And there was a premium to do that. And that was the Chinese and the Asian countries.

MIKE PHILBRICK: Accumulating gold and having it shipped and held in their in their sovereign reserves and that was the watershed moment and it's not talked about enough because it truly is something that had never been done before because you know we're going to fight about stuff you know we disagree with Russia or we disagree with China we're going to have our spats but we still have to do global trade we still have to settle things and once you say well I can take your assets if I don't like what you're doing.

MIKE PHILBRICK: That light bulb goes on and says, well, I can't have my reserves in my enemy's coffers.

MIKE PHILBRICK: And you're seeing a lot of things along this, this, these, I don't want to get too negative. That was really driving the bricks movement. We can go down that path if we want. Correct. It's not only the bricks movement. It's the, it's the, it's the detangling of global trade. There's.

MIKE PHILBRICK: Mutually assured destruction if China's making everything that the U. S. Buys. China doesn't want to have a war, neither does the U. S. And so we're starting to reshore that. China's starting to reshore what they have, and they're starting to disentangle that global trade. That sets the stage for the opportunity to have more conflict because we're not so mutually assured in our destruction.

MIKE PHILBRICK: And so there's a lot going on here that is, you know, I hope for a more peaceful resolution, and I hope... That the mutually assured destruction keeps everybody at bay from having a, you know, a larger conflict. But at the same time... That's what these things are being.

MIKE PHILBRICK: Cared for. And I don't think it's kind of a, I don't think it's a joke that it's not, it's going from the department of defense to the department of war. I think that's a very serious thing.

DAREN BLONSKI CFP®: I agree with you completely. So let me sort of pivot here and ask another question. Can the U S government stop debasing the dollar?

MIKE PHILBRICK: No, I, I don't, I think that we've, we've, we have, accepted that that is the, the only outcome that democracy will tolerate. So, you know, debasing or diluting everybody's benefits through inflation is how we've always done in the past because it's the only palatable way. We won't do austerity. And so the administration, honestly, it's almost brilliant the way they're orchestrating this.

MIKE PHILBRICK: The move to rationalize digital currencies and the U. S. Understands that it's no longer the global hegemony. So there's the petrodollar. And the petrodollar was, you know, Saudi Arabia and countries of the world are going to drill oil and the U. S. Is going to protect them. And for that protection, they buy U. S.

MIKE PHILBRICK: Treasuries with the proceeds of those oil products and those oil products are priced in U. S. Dollars. When you lose the ability to do that because of the debt and because you have a rising power in China, we are in a multipolar world. It was a unipolar world. U. S. Was the global cop. Now it's a multipolar world, the rise of China. And so...

MIKE PHILBRICK: When that occurs, what's my train of thought here? Multipolar world. And, oh, so then, so then you can no longer be the hegemony. You can't control the U S dollar because we're going to have the bricks movement.

MIKE PHILBRICK: We're going to try to price things and other dollars. Saudi Arabia had, has just entered into agreement with Pakistan to protect it, on a nuclear level. That's just happened recently. There's very meaningful reasons for that, but let's hope it resolves peacefully.

MIKE PHILBRICK: But when you can't own the currency anymore you own the protocol and that's what the U. S has decided to do that's the legislation around the genius act that's the clarification legislatively regulatorily and tax wise on digital assets and that's why a cent is going to roll all of those treasuries in U. S debt on the short end of the curve in the hopes that the the stable coins sop up all that liquidity.

MIKE PHILBRICK: So if you can't own the currency.

MIKE PHILBRICK: Own the protocol and by owning the protocol and taking the lead in AI you keep the united states at the center of commerce globally you're not doing it through the currency though you're doing it through the protocol and nobody else can do that Europe can't do it China has currency controls they can't do it Japan can't do it and so it's a brilliant stroke of strategy to do that in this situation and that's why you know you've got to be a little bit bullish in these digital currencies you've got to be bullish on AI And that bullishness leads to a de facto, you must be bullish on commodities because everyone's heard of AI.

MIKE PHILBRICK: What is AI? Does it live in the cloud? What's the cloud? The cloud lives on the ground. It lives in data centers. It lives in concrete and steel. And it lives in computer chips. And then those computer chips require energy.

MIKE PHILBRICK: And that energy travels on copper cables. Copper cables to power generation. I mean, we just brownfielded the, constellation energy and Microsoft brownfielded and got back up and running three mile Island, you know, the nuclear disaster, three mile Island.

CHRIS SIPES CFP®: Right.

MIKE PHILBRICK: We have used up every bit of brownfields excess energy generation. And so the next rollout is going to be, we need more energy. It's going to come from everywhere. It's going to come from hydrocarbon. It can come from solar. It can come from wind. We need it all. We need it all to win the AI War.

MIKE PHILBRICK: We need it all to make the U. S. The center of digital, of currency, which moves digitally now. And if we do that, then the West remains at the center of commerce and remains in a position of strength with the tools it has. But that all leads to some very interesting implications for portfolios.

DAREN BLONSKI CFP®: Are you saying that more or less that... The train has left the station when it comes to like the green movement where we're only going to have renewable power because effectively we need it all. And if we're going to beat China in this AI race, which we very much should, if we all like to keep our lifestyles the way they are, we have to use everything and anything we can to generate the power we need to drive AI.

MIKE PHILBRICK: Yeah, basically, but it's, it means that we need both everything green. It means that we need a nuclear renaissance, which is happening. That's why the administration is going through and starting a process of deregulation to make sure that we can tap these energy sources. That's why, hey. They said, China, you can't have any chips. And then China said, well, you can't have any rare earths.

MIKE PHILBRICK: And then we said, well, here are your chips. And this little thing called MP Resources, we're going to buy a stake in that because that's the rare earth mine that we have in a domain that's in our backyard. And we need to fast track that because we need to have domestic supplies, those critical elements.

MIKE PHILBRICK: And I don't know if you saw also, you know, we have a strategic petroleum reserve. We also now have a strategic. Mineral reserve that came into effect last month. And that strategic mineral reserve is about making sure we have reserves in copper, in nickel, in rare earths, and those materials-based aspects of everything that we're going to need for the build-out of the AI infrastructure.

DANO WEIR: I feel like Darren is like one or two questions away from making this about Area 51 too. You're tapping into his global, he's getting excited.

DANO WEIR: Should we, Mike, we've taken a lot of your time. Are you good to hang out longer through the rest of the day?

MIKE PHILBRICK: I'm good to hang out as long as you guys need me.

DANO WEIR: Awesome.

MIKE PHILBRICK: Awesome.

DAREN BLONSKI CFP®: So this is, I think, all really interesting, right? Because at the end of the day, it informs a thesis on a portfolio. It informs an approach to investing. It informs how we engage with the markets. But I also think it painted a larger tapestry for what is happening economically.

DAREN BLONSKI CFP®: I think all too often we're quick to hang to the headline that we're getting Fed by the Wall Street Journal, but not really look underneath the hood of what's happening. And I think your point about the strategic mineral reserve is absolutely paramount because if we're going to win this AI race, China right now controls the majority, vast majority of all of these minerals that we need to continue to build chips.

DAREN BLONSKI CFP®: And all have computers in our houses and i don't think that that the U. S has played a very strategic long game and now we're in catch-up zone and actually i've had that confirmed to me by people who work in the intelligence community that one of their biggest concerns is our lack of access to these rare precious mineral resources and now the administration's playing catch-up Which the headlines about Greenland were all about us taking Greenland and it was all the kind of bravado.

DAREN BLONSKI CFP®: But there's also an argument being made that we are going after the minerals there.

MIKE PHILBRICK: Yeah. And I think we're, you know, Australia is our Cuba in the China theater, in the Asian theater. And when it comes to the North American, South American theater, we need to shore that up. And you saw that the actions after China was going to do some funding and purchasing of the Panama Canal.

MIKE PHILBRICK: And that was like, no, you're not. We're not going to have that. So I think the U. S. Is realizing, the West is realizing that there are geographic constraints of where we can be dominant and where we need to sort of retrace from. And Greenland is part of that. There's a resource element to that.

MIKE PHILBRICK: There's also a nice separation from Russia. From perspective of that, because that's a, that's a short path, to North America and also, you know, why Canada has to, you know, sort of get over itself. I'm a Canadian, but listen, we're, we're rocks, trees, and natural gas.

MIKE PHILBRICK: I marvel at how we're trying to be the green revolution leader. And I'm like, we've got that upside down. We don't need to be embarrassed about our hydrocarbons and our, and our mineral resources. We need to be proud. Hey, listen. We're the tobacco company in Canada. Ours is toasted. We don't want to support the...

MIKE PHILBRICK: Listen, that's where we got to be part of this solution when it comes to the West's preservation of itself over time. We got lots of copper, lots of nickel, lots of oil and gas. We need to get on board with the West's strategy, with the U. S. Strategy here. And I think we will.

CHRIS SIPES CFP®: Yeah.

DAREN BLONSKI CFP®: How do you think oil plays into all this that's going on? I mean, it used to be real dominant, right?

MIKE PHILBRICK: Everything. It still is. It absolutely still is. And drill, baby, drill. And nuke, baby, nuke. Drill, baby, drill is all about making sure that we have this one critical input that translates into inflationary pressures across the board in this build-out.

MIKE PHILBRICK: We have it at a reasonable price. It's also a critical element in combating Russia. How did we bankrupt Russia the first time around in the late noughts in the early 2000s? We took oil to $9 a barrel.

MIKE PHILBRICK: You don't create... A situation where, you have all the sanctions on Russia and drive oil prices up. That gives Russia more money that gives them more profits. That's not how you do it. And by the way, every bit of oil that was pumped by Russia was used. It was, it was transported through shallow ships to shallow ports. It was processed in India and it's fungible.

MIKE PHILBRICK: You don't know whether you're burning a Russian oil or a Norwegian oil at the end of the day, when it comes in the tanker. And all of it was used. There wasn't one drop that wasn't used. The way you get to Russia is you take oil to $40 to $50 a barrel, and they just don't have the profit margins at that point. And that's the way you win that war. And I think this administration gets that.

MIKE PHILBRICK: The other thing that that does, if you look at, you've got the chart of oil up, that drop in oil probably more than offsets any kind of increase in prices from tariffs. So tariffs are one lever, but... When you drop the price of the transportation and production of every asset right through the chain, that saves a lot of money. That's a disinflationary force. And so that's a key plank in the strategy.

DAREN BLONSKI CFP®: It's interesting. I don't know if you've noticed in the last few weeks, the headlines of Ukraine starting to really strike hard inside Russia because they're developing the missile capabilities to do so now without the West technology, or at least not labeled West technology.

DAREN BLONSKI CFP®: And they're starting to hit these key like oil ports yeah it will really put some pressure on the the Russian government and drive to take Ukraine more than anything probably if they can knock that off then Russia pretty much has to fold the cards because they don't have any other way to make money yeah.

MIKE PHILBRICK: And it puts them in a desperate spot though too so i know that that's the scary part yeah i'm what you want to do is you you want to you kind of want to do it slowly and methodically And, and, you know, when in the long run, I think, if it gets too hard, too quick, I don't know what Russia would do.

MIKE PHILBRICK: So again, I'm not, I'm not an expert in the, in this area. I'm, I'm speculating from the, the mosaic of pieces that we can pick up.

MIKE PHILBRICK: I think it, it's, it's dangerous when, when they do that. I think, you know, that's, that's the, and then we have, you know, Israel attacking parts of Qatar. And as I said, there's recent. Alignment between Saudi Arabia and Pakistan. That's very much like NATO.

MIKE PHILBRICK: This is a development, I think, again, page 16 story that people aren't realizing, sort of like the Ukraine confiscation of assets. If you attack Saudi Arabia, it's like you attack Pakistan. That's what they're saying. And in this arrangement, and Pakistan is a nuclear power. And so that is a very troubling development.

MIKE PHILBRICK: And that is probably. Something that has been triggered by because it happened so quickly after the Israeli attacks of the factions that were in Qatar one can't help but maybe connect those dots a little bit yeah.

DAREN BLONSKI CFP®: Interesting times to play out for sure so risk investing in the power of compounding wow what what a segue Going on macro economic theory.

DANO WEIR: I know. This is where I step in and I go, all right, guys, let's get back to the topic.

CHRIS SIPES CFP®: Yeah.

MIKE PHILBRICK: All of this, all of this, by the way, has implications for how you want to think about your portfolio. And I, you know, the markets are saying, hey, listen, the Israeli stock market is ripping. Right. It's doing well. So, you know, there's indications that we see all these developments under the surface and they're fine.

MIKE PHILBRICK: We should be aware of them. But how is this going to change how we. How should we make sure our portfolio is diversified in these types of times and arrangements? Where are the blind spots in a typical portfolio today? I think these are good things to talk about.

CHRIS SIPES CFP®: That's right. And taking it back to the original concept of we're looking for different assets that have an expected return that are at least not correlated fully, right? So that we can still get those returns, but reduce our risk. And this shows, I think nicely, even though it's illustrating stocks and bonds, the concept of a risk premium.

CHRIS SIPES CFP®: We talk about this a lot with clients of like, yeah, sure, you can get X percent in a CD or a money market, or you fill in the blank for your safe asset. However, over time that is likely to underperform if capitalism is going to continue the way it has in the past where people have to be paid something to take on that risk.

CHRIS SIPES CFP®: People have to be paid to buy into a stock or a bond or put their money at risk with commodities. There has to be a premium over what you can get in cash or nobody would ever leave the safety of cash. And, and what this chart from JP Morgan illustrates is that over the long run, there has been a premium in these different asset classes. And that's what we're looking for.

CHRIS SIPES CFP®: Not just with stocks, not just with bonds, but, but with these other asset classes that they have to entice you in with some sort of premium over what you can expect in cash over time, or else no one would invest in it. Right.

MIKE PHILBRICK: Yeah. And the chart you have up is very important to point out that this adjusted for inflation. So it's 1994 to 2024. And what we're talking about is not the nominal return, but after you adjust for inflation and what we haven't done here is adjusted for money printing.

MIKE PHILBRICK: And if we adjust that, you see even a worse result, but you can see cash. Once you adjust for inflation has a zero as a slightly negative return over the last 30 years.

CHRIS SIPES CFP®: Yes. And that necessitates the risk. Of course, the famous asset quilt from JP Morgan, again, just showing the white line. So the white line is an asset allocation and they've got a split, which doesn't really matter because that's not the point of this. But you can see year to year, which was the top performing asset class. And you'll notice that that changes almost every year.

CHRIS SIPES CFP®: And if you look all the way to the left where you see the annualized returns versus the volatility over that time period, you can see that you're getting a higher return than the risk you would expect for that return based on the combination of the asset classes.

CHRIS SIPES CFP®: But to Mike's earlier point, look, you'll notice on this quilt that asset allocation is never the top performer on here. You're not talking about it at the barbecue, your well-diversified portfolio, but it's also not the bottom performer. And more importantly, it's never, hopefully, the catastrophic performer like you can have when you're in any single asset class.

MIKE PHILBRICK: Skis and bikes.

CHRIS SIPES CFP®: Skis and bikes. That's right.

DANO WEIR: I feel like barbecues get a really, really rough go on our show. We always go to the barbecue stock tips as the worst.

CHRIS SIPES CFP®: Yeah. I've noticed I've not been invited to any barbecues since we started this show. There's probably a reason for that. Nobody wants to hear about your barbecue. Mike, we always cover the sentiment just to look for my contrarian signals.

MIKE PHILBRICK: What a massive jump this week. This has been something I've been at my eye on. As to last week, 49% of investors were bearish while the market's hitting all-time highs. Like, I know we've talked about a lot of stuff that we have to manage on the global macro side, but at the end of the day, this is a bull market. And the great thing is it's a hated bull market. This is the best kind.

CHRIS SIPES CFP®: Yeah. Yeah. Well put. So the CNN fear and greed index was at 62 this week, which is greed, a slight greed up from a week ago at neutral 53. And Bitcoin, strangely enough, at neutral, even with the price jump that we saw. This week. So interesting, interesting, that, that Bitcoin is not getting any love despite, despite its jump.

MIKE PHILBRICK: So, that's good though. That means it's still, you know, opportune to, for an allocation if, if you haven't started.

CHRIS SIPES CFP®: Yes.

MIKE PHILBRICK: And I think the, I think we're running into the quarter end here. I think, you know, if I'm going to speculate just short term and have some fun, I'd say the last part of September is going to be pretty good just because of the...

MIKE PHILBRICK: You saw the jump in the last slide of the jump down of bearish investors moving from 49% to 42%. It's a lot of people moving money into the market. And I think a lot of investors and allocators have been caught not long enough. And they're starting to leverage themselves into the quarter end to try and catch up.

CHRIS SIPES CFP®: Yeah. Yeah. And of course, the big news this week was the Fed finally lowering rates.

CHRIS SIPES CFP®: I was joking with the team on Teams this week that, you know, it seems like we just are perpetually going higher either on the expectation of the Fed lowering rates or them actually lowering rates. It feels like that's been the topic of conversation nonstop over the last few years.

CHRIS SIPES CFP®: And you can see here the Fed funds rate versus the two-year treasury rate. So we've got about a 75 basis point spread between those two still. So at least according to the two-year treasury market, the Fed's still a little tight.

CHRIS SIPES CFP®: And it looks like based on the expectations on the market moving forward, that we should get a couple more drops by the end of the year, which We have to remember that the hikes of 22 to 23, what we're coming out of when we had that inflation spike and remembering just a few years ago when kind of everything was going down. And that is a known kryptonite to a diversified portfolio.

CHRIS SIPES CFP®: So if you own all assets, when interest rates go up, especially when they go up quickly, That really hurts most risk assets because of that same concept of, hey, you get paid a certain amount to be in safety, and then you should be getting something in addition to that to be taking risk. Well, when that amount that you're getting paid to just be in safety is going up really quickly, those risk assets have to adjust.

CHRIS SIPES CFP®: And when I say adjust, they have to go down in price so that their future returns are higher to account for that risk premium that everybody needs in order to take on that extra risk.

CHRIS SIPES CFP®: But also this illustrates that we really have no idea. Of course, we're sitting here now thinking that the Fed is going to be lowering rates and la-di-da. I listened to Brett Donnelly on with the guys at Excess Returns. And he was talking about a dinner that they had with these hedge fund.

CHRIS SIPES CFP®: There was like 10 hedge fund managers there or something. I'm butchering the story. But coming into 22, guessing, you know, each one of these experts guessing how much they were going to raise rates during the year. And they were all comically low.

CHRIS SIPES CFP®: I think the consensus was somewhere around four or six rate rises during that year. And they were way off. Right. And so... We don't know what will happen in the future. We could be way off about the expectations. But right now, we're in that lowering of rates, and that curve is going down moving forward.

MIKE PHILBRICK: I think the survey numbers have it. We're going to get at least three, maybe four more cuts and 25 base points every meeting into the end of the year.

MIKE PHILBRICK: Yep. And that's, I think, if you look at that. I don't know if you guys look at the Fred, the money market funds that are on the sidelines, seven and a half trillion dollars or something like that. All of that money now is getting a lower rate of return. So it may start to chase risk assets.

CHRIS SIPES CFP®: Right. Yeah, that's a great point, Mike. And you can think of money markets are going to be very closely tied to that short-term interest rate, which is highly influenced by the Fed.

CHRIS SIPES CFP®: And the Fed With them lowering that rate, that's going to be lowering money market rates moving forward. So, and most likely, and so investors will have to have to take a look at that.

CHRIS SIPES CFP®: So we've got that target rate going down. The two things that the Fed is trying to keep control on is price stability and full employment. And you can see that they're, they're getting a little painted into the corner on both of these items because we've got the consumer price index going up slightly.

CHRIS SIPES CFP®: And we've also got the unemployment rate going up slightly. So it's going to be interesting to see how the Fed kind of juggles these dual mandates along with the pressure to lower rates and keep growth going moving forward. Said this a million times, definitely glad that is not my job.

CHRIS SIPES CFP®: And here we got the target rate probabilities for the next meeting in October. As you can see, this is as of yesterday, 94% chance we see a quarter percent drop at that October meeting.

CHRIS SIPES CFP®: And we don't have it on this slide, but the same thing for December is pretty close in the high 80s, I believe, probabilities of another quarter point. We should, based on market expectations, get about another half a point drop by the end of the year.

CHRIS SIPES CFP®: So far, though, that has not followed through to mortgage rates. And this is as of yesterday. The longer term rates, which are controlled by the market, have actually gone up a little bit over the last couple of days. So additional pressure on the Fed, right?

CHRIS SIPES CFP®: If we see that 10-year continue to go up, and that makes things like mortgages more expensive because typically mortgages and other types of credit are loosely tied to the price of the 10-year treasuries.

CHRIS SIPES CFP®: And there's a spread over those 10-year treasuries for those investors. And so it's going to be interesting to see how these rate cuts flow through to the longer-term market and the actual price that people are paying for credit. Any thoughts on that, Mike?

CHRIS SIPES CFP®: You think we'll see lower rates on the longer end, or you think we'll continue to see those rates float higher?

MIKE PHILBRICK: I think it's lower. And you can look at the 30-year, you can look at the TNX or the TNY, and they're kind of broken down below support. And we've had just a reflux bounce that hasn't changed the trend. The trend is lower. And I know everybody's talking about the fact that they're going to go higher.

MIKE PHILBRICK: The reasoning is it's going to cause long-term inflation. But I think people are underestimating the impact that AI will have in the long term. And so, I'm in the lower camp. I'm bullish. I think we're going to see rates resolve. I think things are going to resolve in a positive way for risk assets.

CHRIS SIPES CFP®: Great. I don't know if this is true or not, but it feels like we got into a different regime around April 9th when the market burst higher with the delays of the tariffs. And since then, the small caps have been on a tear with the Russell hitting a new all-time high finally this week. This is the second longest dry spell for the Russell 2000 in its history.

CHRIS SIPES CFP®: And so here you can see the various indices and their returns since the April 9th low. And we've got the small caps leading the way. We've got emerging markets. Up there as well. So to your point, Mike, about the risk-taking, seems like people are, you know, the market, maybe not the people getting surveyed, but the market seems to be pretty bullish coming off those April lows.

MIKE PHILBRICK: Yeah. Remember the market target we reviewed at the beginning with the inflation and growth dynamics? All of this is absolutely congruent with an inflationary growth environment. Higher rates were wonderful for the tech. The mag seven that had massive amounts of cash in the bank and were horrible for small cap companies that have to finance on the shorter end of the curve.

MIKE PHILBRICK: I mean, I think small cap finances, financials, industrials, resources, all those small cap companies have been going through a bit of a bear market and we're finally easing the financial conditions for them to be able to participate in the build out for what we're going to need to have happen for AI.

MIKE PHILBRICK: And they're going to take advantage of AI in executing all of that. You're seeing the market broaden. You're seeing emerging markets participate. You're seeing small caps participate. And then we hear about valuations being too high. That's nonsense.

MIKE PHILBRICK: If you take the small caps and look at the S&P 600 on the small caps, that's trading at a P multiple of 15. That's simply not expensive. Emerging markets, not expensive. Europe, not expensive. So there's a lot of the world that represents pretty good value. And we're switching into a regime where it's actually a tailwind for those.

MIKE PHILBRICK: So we are seeing that regime shift. What you're feeling is real. And you're seeing it in the quarterly and annual numbers of the asset prices. You're seeing it in the bond prices being kind of meh. But these other stock areas of the world being so robust. And that's the diversification we've got to make sure we cover off.

DANO WEIR: Chris and Mike, just to clarify, when you're talking about regimes, you're talking about the mood of the market and not necessarily that.

MIKE PHILBRICK: Presidential in a regime i'm actually talking about the growth and inflation dynamics we talked about at the beginning right that's the regime shift we're now in an inflationary growth regime not a disinflationary growth regime five year five year forwards have inflation at two and a half to three percent not two we're going to be at a higher inflation level we're going to run growth a little hotter or run everything hotter That's the regime of inflationary growth.

MIKE PHILBRICK: That's the top right quadrant we looked at, not the bottom right.

MIKE PHILBRICK: And that's where the asset class prices changed, how these stocks react and how these bonds react and how commodities react. Is different. It's different than it's been for the last four years.

CHRIS SIPES CFP®: It could be changing from summer to winter, you're saying.

CHRIS SIPES CFP®: Right. We might be looking out the window at a different season.

MIKE PHILBRICK: Yeah. If you're a fan of AI and the tech buildup, as I said, it all manifests in physical assets. Those physical assets require commodities. That means that those commodity-producing countries are going to do well, emerging markets. It means that smaller cap... Companies in the U. S., those exposed to financials and resources, industrials, they're going to do better.

CHRIS SIPES CFP®: Excellent point. Now, this chart, I would not probably have believed if it wouldn't have come from a reputable source. We're looking at global equity returns, and this is from the October 22 low. And what this is showing is Europe, Japan, and the S&P 500, if you just took out one company. Which is NVIDIA, which of course you wouldn't be able to do.

CHRIS SIPES CFP®: But I think it would come as a big surprise to most people that there's actually been some healthy growth in the equity markets in Europe and in Japan. And that if say NVIDIA was headquartered in one of those other countries, we probably would be talking nonstop about those countries instead of the S&P 500.

MIKE PHILBRICK: Precisely. And I think the regime shift occurred in 2022. That's when it started. When we had that in stocks and bonds correlating, that's when you can see that beginning of that.

CHRIS SIPES CFP®: Yeah. Now, a lot of times future returns can be highly affected by today's price, right? And fundamentals, you know, despite what some say, usually the market follows fundamentals over the long term. Now this... Chart from JP Morgan shows the average range of price to earnings. And the way I was thinking about price to earnings recently was sort of like the vibes.

CHRIS SIPES CFP®: We went to a meeting this week where we kept saying the vibes, the vibes were this, the vibes were that. Well, the price to earnings ratio is sort of a way to measure the vibes where when people feel really good about something, they are willing to pay a higher price for it, you know, because they don't see as much risk in it.

CHRIS SIPES CFP®: And, and vice versa, when they feel a lot of risk and the vibes are not good, you got to really do a lot to entice them. And so you can see in the U S the vibes are pretty high, the current and, and, and to Mike's point that that's talking large cap, you know, market cap weighted, S and P 500 type of, of valuations. But if you kind of look under the hood, this, this would be different.

CHRIS SIPES CFP®: But then you look at Japan, the Euro zone, the emerging markets in China, there's really, you know, a lot of room to run potential room to run. If those vibes change in those areas where people suddenly start feeling more confident about, about those areas and, and, and their future returns. So, I think that's the end of these slides for this week, guys. And, and yes, we've kept Mike a long time. So yes, we have.

MIKE PHILBRICK: It's been great. It's been great guys.

DANO WEIR: Oh, it's been awesome. We really appreciate having you again. Did you want to show a couple of graphs or did you hit those enough already?

DAREN BLONSKI CFP®: You know, I think I pretty much hammered it enough home for the day. So let's roll. All right.

DANO WEIR: All right. So, thank you so much to Mike, CEO of ReSolve Asset Management. You can learn more about him and resolve at the website, instant resolve.com.

MIKE PHILBRICK: It's invest, invest, resolve.com.

DANO WEIR: That's a typo. Investresolve.com, my goodness. Thank you, Mike, so much for joining us.

MIKE PHILBRICK: My pleasure. Returnstack.com as well. I'll throw that one up there. So investresolve.com and returnstack.com.

DANO WEIR: We are On The Markets from the family of Fermata advisor brands, including Sonoma Wealth, Fermata 401k, Fermata Tax. Thank you so much for checking out the show. Like and subscribe wherever you are. And we will see you next week.

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