The Virtuous Cycle Continues

DANO WEIR: It's Friday, October 3rd, and you are about to go On The Markets with Sonoma Wealth Advisors and the Fermata family of brands. My name is Dano Weir. I'm the marketing director. I'll be joined shortly by Chris Sipes, CFP, Daren Blonski, CFP, our managing principals.

DANO WEIR: Today, we are looking at what we're calling the virtuous cycle, how cycles kind of, you just sort of wake up and you're in them and you don't necessarily know how they started or when they're going to stop because it seems like they just are feeding upon one another. It's a government shutdown right now. So clearly that means that everything's going up. We're going to look at that. AI companies have high valuations. Okay.

DANO WEIR: What historically has that done for the stock's performance? And Daren is already frothing at the mouth, jump in and talk about a bounce back for Bitcoin guys. Welcome into the show. And Daren, have you. You've done so many victory lapses. Is there something more you can do? Is there a parade? Is there a gala event? What is going to happen when Bitcoin hits another all-time high?

DAREN BLONSKI CFP®: No highs, no lows, Dan. It just keeps on moving. I actually don't get that excited about it or care that much about the downs or the ups.

DAREN BLONSKI CFP®: When you like the fundamental schematic of an asset, you just let it roll.

DAREN BLONSKI CFP®: Bitcoin doing Bitcoin things keeps on clipping upward.

DAREN BLONSKI CFP®: So I don't know if I'm going to throw a gala event or anything, but I think a wise mentor in our business long ago taught me that, that no highs, no lows, just stay the course.

DAREN BLONSKI CFP®: Makes sense. So I'm not going to throw in a party anytime soon.

DANO WEIR: What would happen at a Bitcoin Party? Chris, tell me what you mean by this is, we always have a discussion pre-show about what we're going to talk about, what our theme is, what we're feeling in the market and the economy for the week. And Chris, you threw this out there and I love this phrase. Explain to me what you think the virtuous cycle is.

CHRIS SIPES CFP®: Yeah, we just, so it seems like in the market right now, we've got this, this cycle that's feeding on itself, which is that the market's going up, which. We'll see soon that most of that wealth is held in a certain segment of the population. That segment continues to spend because the market keeps going up and their portfolios are doing well.

CHRIS SIPES CFP®: That spending just keeps feeding through to the various parts of the economy. And even though we've seen struggles in employment, we've seen struggles in different areas of the quote-unquote real economy. Delinquencies going up on student loans, for example, it doesn't really matter from an economic standpoint, from the, from the economy standpoint, at least in the short term.

CHRIS SIPES CFP®: Because much like the stock market itself, it really only depends on a small segment of the population, you know, continuing to do what they do, that affects, the market and, and, the kind of top line numbers in the economy.

DANO WEIR: We are your hosts today. We're from Sonoma Wealth Advisors, then Fermata Advisors, the Fermata family of brands, Daren Blonski, Chris Sipes, myself, Dano Weir. If you're new to our firm, you can learn more about our private wealth at sonomowealth.com, our private wealth service. And Chris, let's start it with a meme, your boy, Sam Altman.

CHRIS SIPES CFP®: Yes.

CHRIS SIPES CFP®: I saw this meme and it just... Cracked me up. So Sam Altman is the head of OpenAI, right? And the meme says, just need 200 more trillion and all your fresh water and electricity.

CHRIS SIPES CFP®: And that seems to be where we're at. The AI beast is being Fed. And we talked last week about the different companies that are just pouring so much money and so much capex into this and how it was had been just funded out of cash flows. They're starting to do that out of debt now. But it's, it's all, you know, pedal to the metal.

CHRIS SIPES CFP®: There was a recent interview with Jeff Bezos talking about the fact that he thinks, you know, likely we are overbuilding, but it'll end up being a good thing for society in the end, which is probably true. You know, given that most of the time with technologies, we kind of over We over-allocate, we over-build, and then...

CHRIS SIPES CFP®: You know, the benefits come later on down the road, you know, maybe a little bit later than what we might think. But as of right now, we're, we're talking about building these data centers. We are talking about, we need extra electricity. We need extra water. I mean, all this infrastructure to feed this beast that is AI that, we are all in on at this point.

DAREN BLONSKI CFP®: So there was this post, on this topic that... I think is pretty important. And, you know, we're making jest of this and fun of it, but the reality is this, I think, is the biggest linchpin that will determine whether or not this AI boom can go and then how it ends and what the future holds for it.

DAREN BLONSKI CFP®: And so there was this post I posted on my ex-account earlier, but... It was a Google employee talking about DeepMind. And so DeepMind is Google's AI large language model. And he said, the longest pull on the tent to get data center built is power, just lack of power. The supply chain has been largely solved. The contracting issue, we can really solve for.

DAREN BLONSKI CFP®: The permit issue, we can solve for it. The power, lack of available power, reliable power has become the biggest bottleneck for us. Utilities, they were not ready for this because they're upgrading. They're bringing on the sensitivity for gigawatts or something like that. Power is by far the biggest determinant.

DAREN BLONSKI CFP®: Once you solve for power, then it's pretty much a standard data center built. After that, it's permitting. Permitting is not really a bottleneck. So anyway, he's just going on and talking about the bottleneck here is power and the ability to draw power. So we make just a fresh water and electricity, but at some point...

DAREN BLONSKI CFP®: The demand from the AI world becomes so strong that it pushes all the pricing up for power for us just to live our day-to-day lives. And once people complained about Bitcoin and how much power Bitcoin took, no longer. Because AI is taking more power than anything. It's said that the new Giga facility that, Elon Musk is building in Texas is going to take up the equivalent of the power for a medium-sized state on a daily basis.

DAREN BLONSKI CFP®: And you think about it, that's an insane amount of power. And so where is it going to come from? And at some point, it's going to jack all our power prices up. And they're going to have to set some type of government limiting on it. Otherwise, there's going to be a lot of unhappiness.

DANO WEIR: I had an interesting perspective on this this week, too, because just as.

DANO WEIR: The announcements of all of these massive data centers that they're building, which, by the way, it's not like we had zero to begin with. I have worked in a data center in my life, so I've seen some of them in person. And there are many data centers that exist already. So the fact that they need even more tells you the scale of it.

DANO WEIR: But just as an interesting other side of the coin, I mean... This week, did you guys see that there was some massive solar array in like the, it's like in the Mojave or something like that. It was a massive set of mirrors that they spent like $6 billion on 10 years ago to be like the California solar farm, basically.

DANO WEIR: They're closing it this week because it's not making enough power and it apparently caused a lot of birds to die because birds were like thinking that it was the sky. So it was a major issue with killing birds, but also affecting the grid. Anyways, long story short, I can just imagine that in 2015, we would have seen a news release about this huge build out.

DANO WEIR: It's a $6 billion build out. It's going to be the solar this and it's going to be the solar that. And so, guys, when we're doing this show in 2035, I'm going to pull this clip when they're closing one of Elon's data centers because it didn't work out. And we can all look back and say, see, interesting.

DAREN BLONSKI CFP®: You're always such a pessimist, Dan.

CHRIS SIPES CFP®: I hope our AI overlords remember to reference this episode. So amongst all the news, we got a government shutdown this week and the market did not seem to care whatsoever. Now if we look back at previous market or sorry government shutdowns that's that's kind of been the case this is looking back to the 1980s And what the returns have been in the S&P, you know, around government shutdowns.

CHRIS SIPES CFP®: And gosh, look at December of 18. So it seems like we've had kind of more often, we've had this the last several years. But look at December 18, we actually did pretty well when the government shut down. So we'll see. But in seven of the past 10 shutdowns since 1980, the S&P 500 actually generated a positive return, showing markets have often looked past the noise.

CHRIS SIPES CFP®: Which I think, incidentally, I want to say the average is right around there anyway for the S&P being up around 7 out of 10 years anyway. So it doesn't seem to be correlated, meaning a government shutdown doesn't equal good or bad for the market. It really doesn't seem to be something that the market even cares about, strangely.

DAREN BLONSKI CFP®: Well, what is interesting about this shutdown that I will mention. It's being used strategically, it almost seems now, by the Trump administration. What has me more concerned is the job losses. I think the job losses is building.

DAREN BLONSKI CFP®: We were supposed to get a jobs report out today, but it would seem that they're going to use this shutdown to really lay off a lot of people and get rid of some positions. I think there's more brewing underneath just anecdotally and talking with clients and individuals.

DAREN BLONSKI CFP®: That's happening in the job market right now that I don't think is certainly not being represented by the stock prices, the gold prices or the Bitcoin prices.

CHRIS SIPES CFP®: Totally agree. And that goes with the whole theme around the virtuous cycle. And this illustration from Visual Cap is a perfect representation of that when they put an actual pumpkin pie, which... I don't know.

CHRIS SIPES CFP®: Are you guys pumpkin pie fans? I certainly, certainly I'm a pumpkin pie fan. I think it's maybe number two or number three on my list behind rhubarb. Rhubarb would be tops for me, but I think pumpkin's probably right up there.

DANO WEIR: Chris, it's not rhubarb, is it really?

CHRIS SIPES CFP®: Yes. Rhubarb pie is my favorite. What's wrong with that, Dan? No, nothing, nothing, nothing.

DANO WEIR: I am a pumpkin fan, but it's got to be high quality. Don't give me the can.

CHRIS SIPES CFP®: Yeah, yeah. Really?

DAREN BLONSKI CFP®: I think some of the... Best ones are like the one that you know that's you walk into Safeway and it's just sitting right there and it's just a classic pumpkin pie nothing special and there's something about a pumpkin pie in the morning have you ever had pumpkin pie oh yeah yeah.

DANO WEIR: Yeah oh it just hits that's that's how I feel about the cranberry sauce Darren they give me the Jimmy I do need the ridges in the cranberry sauce.

CHRIS SIPES CFP®: Yeah, we got a little time before Thanksgiving, but it is pumpkin spice season. It is the fall. So anyway, pumpkin pie. We totally got distracted here, guys, on what the actual chart is showing us, which is that Americans' wealth by generation. And you can see there that biggest slice of the pie is the baby boomers with 83.3 trillion of the assets owned, roughly half of the financial assets, followed by Gen X.

CHRIS SIPES CFP®: At 42.6. That would be roughly about a quarter of the pie I see there. So, you know, like the market and its concentration, when I talk about the S&P, very concentrated, so is the wealth in the United States. At or near records in terms of the wealth.

CHRIS SIPES CFP®: I hate to call it inequality because it triggers so many people, but I would say with... Wealth concentration. You know, most of the wealth is concentrated in, in the baby boomers and in the top, you know, call it 10%, of earners when it comes to, income.

CHRIS SIPES CFP®: So, you know, you've got two things, you've got the income, which is, which is one thing. And then you've got, wealth, and this is talking about wealth. So this would be like accumulated assets. So those are two different things.

CHRIS SIPES CFP®: But when the market goes up, When we have healthy returns in the market, those that own those assets feel more comfortable about buying things like houses and cars and doing remodels and going on vacation and things. And that continues to kind of fuel the markets. And this isn't my idea. This is Ed Yardeni of Yardeni Research.

CHRIS SIPES CFP®: That's his whole thesis on the roaring 20s is that the baby boomers are in the best wealth position in. In human history essentially and that they are just going to continue spending through pretty much anything and that is going to fuel both the markets and the economy moving forward and at least so far he's been he's been pretty spot on with that thesis it seems All right.

CHRIS SIPES CFP®: So we've got a, a Simpsons meme. My favorites, you combine the memes with the Simpsons and I'm, I'm in and the theme, the meme says literally the worst year for value investors. And it shows Bart cringing. And then Homer comes up and says, worst year for value investors so far.

CHRIS SIPES CFP®: So. Been a real struggle for, for, investors that, you know, traditional value. And I got to say, value can be determined many, many ways. There's many metrics that you can look at value from. And so I, I think the chart that this was in response to was probably referencing the Russell 1000 value versus the Russell 1000 growth.

CHRIS SIPES CFP®: And, at least in the United States value, which is essentially you're trying to buy something for less than it's worth. You're trying to buy a dollar's worth of value for 70 or 80 cents. That style of investing is having an awful year relative to growth investing.

CHRIS SIPES CFP®: Now, notice I said in the United States because outside the United States value is doing extremely well and has. For many years. It's really just been within the United States that value investing has struggled so much recently. But anyway, sometimes you got to laugh to keep from crying, guys.

DANO WEIR: Well, and this plays into the idea of today's theme, which is, you know, the cycle. So you've got the smaller companies which are not doing well, and so the money goes to the larger companies which are doing well.

DANO WEIR: Why would you go to the smaller companies who aren't doing that well, where you could stick with the larger companies who are doing well? Like, it just... It is because it is until it changes, but when's it going to change? Who knows?

CHRIS SIPES CFP®: Right. Yeah. That narrative is really important. And we've got the updated guide to the markets from JP Morgan this quarter. They put that out quarterly and some of the best research out there. It's just really great if you get some time to flip through that guide to the markets. And they're showing here the updated S&P valuation. Measures.

CHRIS SIPES CFP®: And this is, you know, the one on the chart is the price to earnings ratio, the forward price to earnings ratio, which is currently at 22.8 times, which is much higher than the average, the 30 year average at 17. You can see we're outside of two or sorry, outside of a standard deviation in terms of that valuation. We are now, it looks like higher than we were at the end of 2021.

CHRIS SIPES CFP®: We're only exceeded one other time and that was the.com bubble. But you look at these other valuation metrics, the Cape, which is the cyclically adjusted price to earnings. So it looks at it over 10 years. Same thing. Dividend yield. I think the dividend yield on the S and P is approaching 1% now, on the downside. So that's, that's very low in terms of the dividend yield.

CHRIS SIPES CFP®: And then you've got, valuation spreads expected yield on the S&P minus a junk bond, the BAA yield. So, I mean, it's hard to slice it any way and say that the S&P 500 is cheap at this point. I haven't seen too many metrics that would argue for that. I've heard a lot of this time is different, but I haven't seen anybody say it. No, look at this.

CHRIS SIPES CFP®: On this metric, it's actually really cheap. And then this is also from JP Morgan furthering that showing that the price to earnings ratio and equity returns both one year out and then five years out. The correlation they're showing that we should be, you know, expected returns on the S&P over the next five years would basically be zero at this point. Based on those valuations.

DAREN BLONSKI CFP®: So, Chris, it'd be super fair with valuations, and I think it's important to point out, I distinctly remember a conversation of you and I sitting in the office, I guess it would be 2019, talking to a client about valuations and then looking at Vanguard's predictions and BlackRock's predictions of what the moving forward likelihood of return is, and it was like the same type of thing, abysmal.

DAREN BLONSKI CFP®: And yet the market's just ripped, right? So I think it's just super, super important to point out that like, yeah, you could take away from the slide the feeling that things are overbought and returns are going to be awful for the next. 10 years in the stock market. And you could also take away and say, well, yeah, but that's what they said 10 years ago too.

DAREN BLONSKI CFP®: So I think you have to be cautious. And I think, again, the case for diversification, you don't know, nobody knows. And there's no indicator that it's a hundred percent right all of the time. And that's why you have to spread your risk and invest in a way that you win in any scenario. You might give up big wins, but you get little ones.

CHRIS SIPES CFP®: So true. And that is a perfect segue to the next slide, which is valuations are a poor predictor in the short term. And here it's showing the one year annualized return prediction of the S&P. And, you know, the takeaway is the data highlights that relying solely on the forward price to earnings ratio for short term predictions may not be a reliable strategy.

CHRIS SIPES CFP®: And yeah, it may not be a reliable strategy as an understatement. It is probably most likely we, we can't use absolutes, right. But, but to your point, Darren, yeah, it's not a timing tool and, definitely not something that you can bank on for sure. And so therefore diversification is what makes sense.

CHRIS SIPES CFP®: And I think it's just keeping in mind a lot of those Forward predictions too, when you're looking at say 2019, 2020, et cetera, those are 10 year horizons. So we still have some time, you know, for those things to play out. And a lot can happen, you know, in the short term. Like if you thought about that same prediction in the year 2000 or 99, let's say 99, the last time the market was this expensive.

CHRIS SIPES CFP®: And then you're reviewing those predictions in 2006. You'd look at that and you go, oh, well, they were way off. The market's actually done really, really well. Well, you know, 2007, 2008, the market corrected severely.

CHRIS SIPES CFP®: And so that 10 year prediction ended up being correct in those cases. But it takes 10 years to play out or eight years. Right. And we just you can't know. You can't know for sure. So you're exactly right. Don't use it as a timing tool.

CHRIS SIPES CFP®: In the quote unquote short term, which is really anything less than 10 years.

CHRIS SIPES CFP®: Now, going back to the virtuous circle, and just to point out basically how good a position the consumer, the average consumer is, which we spend a lot of time talking about how poor of a position the governments are, but the consumer is in an excellent position. And we're looking at the consumer balance sheet again from JP Morgan, and the breakdown of their assets.

CHRIS SIPES CFP®: And homes tend to be about 27% of the assets, but look at other financial assets at 44, which is why whatever's happening in the market is so important to what will happen in the market and what will happen in the economy. Because you're almost at half. And if you include pension funds, which is...

CHRIS SIPES CFP®: Also has an exposure to the market. Well over half of people's overall balance sheets are invested in risk assets. Now you look at the right-hand side, household debt service ratio, very low relative to history.

CHRIS SIPES CFP®: It's only been lower during the pandemic, which I think I could be wrong, but I think we reached maybe an all-time low during the pandemic in terms of the debt service ratio. And that is basically like how much debt can you handle versus how much income do you have? And, and when we say debt, we're talking about minimum payments.

CHRIS SIPES CFP®: So if you make a thousand dollars a month and, you know, you owe, you have to make, a hundred dollars a month in payments, that's, that's a, you know, 10% debt service ratio. So now. Look at the chart at the bottom, though, where you look at flows into early delinquencies. And you can see that we're back to pre-pandemic levels in delinquencies.

CHRIS SIPES CFP®: Not anywhere you would say is alarming, except for the student loans one. I mean, look at that thing just shot up. Of course, there was no delinquencies when nobody had to pay student loans. But then as soon as those came back online here recently, the delinquency level is shot up there.

CHRIS SIPES CFP®: And so, you know, there's the going back to the pie, the younger generation having a much smaller part of the pie. We've talked about how they're also struggling to find jobs. And now the student loans are coming back on on online. So But again, when you look at overall wealth, overall income, they just don't make up a big enough part of the market to make a difference yet.

DANO WEIR: Yeah, Chris, I got to ask you about the household debt service ratio because this is showing that it's historically relatively low. But could that also just mean that everybody's just making the minimum payment? Because we've seen a number of times that credit card debt's at an all-time high.

DANO WEIR: So does that mean that perhaps families have just resigned themselves to, we'll just make the minimum payment and not even tack, you know, taking away at the principal? I mean, not that you know, but you know what I mean? Wouldn't that be a little misleading?

CHRIS SIPES CFP®: That's that's part of it and and and part of it is that the all-time high quote-unquote is is misleading because they're talking dollar amounts in most cases which yeah the the dollar amount is an all-time high but like the percentage of this balance sheet over here. Right. And also again, to the, like, which part of the market are we talking about?

CHRIS SIPES CFP®: Like, I'm sure for the bottom, bottom half that's struggling to make it, there probably is a huge portion of their overall, what they're owing. But when you look at, you know, everybody in general and it kind of conceptualizes, think about yourself in a room with 10 other people. And one of those other people is... Someone very wealthy, right?

CHRIS SIPES CFP®: You know, to make it extreme, think of it, Bill Gates is in the room with you and, and Bill Gates and eight other people are in a room, right? Now, if you look at like the average of that room, you're going to look at this balance sheet and go, wow, things don't really look too bad.

CHRIS SIPES CFP®: But when, you know, seven or eight of those people are like, well, I don't have anything. And I owe, you know, everybody and their mother. You know, so that's what I'm saying is that it can be, it can look distorted based on that concentration of the wealth. Hopefully that makes sense.

DANO WEIR: Yeah, it makes sense.

CHRIS SIPES CFP®: So we got the, sentiment indicators this week. Not really much has changed there, in terms of the AAII indicators, the CNN, fear and greed index is the same, about 54, which is about the same as last week. But Bitcoin, we went from fear last week at 28, all the way up to 63 agreed within one week. And obviously, that's following the price jump, which makes sense, you know.

CHRIS SIPES CFP®: And so that that went into Darren's point, if you're if you're someone that is an investor in Bitcoin, especially someone who's been through, you know, a long, long time of owning Bitcoin, you really probably don't get excited about these ups and downs anymore because it, it just, it swings, it swings week to week. Right.

CHRIS SIPES CFP®: So it's a good, it's a good, numbing device.

CHRIS SIPES CFP®: Sorry there, Dan. So just to revisit our, our environments again. So we kind of burn this in our heads of what, and economic environment are we in gold continuing to, to do extremely well, silver, extremely well, Bitcoin extremely well.

CHRIS SIPES CFP®: So, and if you look at this chart, which environment does gold tend to do the best in what environment do commodities, hard assets tend to do the best in it's inflationary booms. And so, and, and you've got equities doing well as well. And equities are positive in this environment, just not as positive as those hard assets.

CHRIS SIPES CFP®: And so I would argue that with most assets up this year, it feels like we're in that inflationary boom segment of the environment today. And to back that, one data point would be from Lizanne Saunders, the chief investment strategist at Schwab.

CHRIS SIPES CFP®: She says, not a perfect relationship, but CPI, which is the orange, this is the consumer price index year over year, which is widely considered the inflation gauge, the main inflation gauge in orange there, has tracked with a lag prices paid component of ISM manufacturing, which is the blue line here, over the last 10 years.

CHRIS SIPES CFP®: She says this suggests continued upward pressure on inflation. And so... Gold has got to be foreshadowing something. And you would think that that could be it, right? So if we continue to see inflation kind of creep back up, that would make sense. And of course, the market is going to price this in ahead of time.

DAREN BLONSKI CFP®: Well, the other argument, too, real quick for gold going up as much as it has is if you look at what's happened to the dollar this year and the value of the actual dollar has been absolutely abysmal, right? And decreased. And so in theory, then those assets could flow into.

CHRIS SIPES CFP®: Into gold and it gold is more valuable against the dollar because of the value of the dollar going down yep yep gold being money over you know millennia and the dollar being a fiat currency it's it's my daughter said something that cracked me up the other day you know she's seven eight now sorry eight and she said dad it's so weird that all of us care about pieces of paper.

CHRIS SIPES CFP®: And I said, what are you talking about? She's like, money. It's just a piece of paper. Why do people care about it? It's like, that's actually a really good question. Very good philosophical question there. And the answer is that because we all think it is worth something and we all accept it as worth something, right? And with fiat currency, especially that something is changing all the time.

CHRIS SIPES CFP®: And recently it's been worth less and less, right? And so what are we looking at here? This is the 10-year treasury and the 30-year mortgage since the Fed cut rates on September 17th. You can see the treasury rate has been a little noisy, kind of up and down, and most recently down. However, the mortgage rates have been pretty steady, just continuing to climb. And it's way too early to tell.

CHRIS SIPES CFP®: This has only been a few weeks. Purely noise and conjecture at this point. But going back to the inflationary thesis, fixed income, bonds, treasuries, mortgage rates, et cetera, are going to bake in some sort of inflation assumption, right? And if bond investors, if lenders, debt holders are expecting inflation to go higher, then you should expect the market to set interest rates higher.

CHRIS SIPES CFP®: No matter what the Fed decides to do, unless they decide to do something like QE or yield curve control or something that's going to actually affect the longer term rates, until they do that, they are just controlling or have influence on the short end of the rates, which doesn't really affect things like consumer credit. And so we talked a lot about that last week, about why that makes.

CHRIS SIPES CFP®: Sense why you need to take a look at your cash investments because those are on the short end and that the long end is at least right now baking in more inflation as the expectation all right and those interest rates are going to have an effect on home sales and this is from lance lambert by way of residential club residential clubs put out puts out some great charts on the on the real estate market and lance says turnover remains very low in the existing home market in fact you'd have to go back to August of 2010 to find an August with fewer existing home sales than in August of 2025 5.

CHRIS SIPES CFP®: I mean, that's pretty impactful. You remember August of 2010, that was, that was pretty close. I think the housing market bottomed in 2012, I believe.

CHRIS SIPES CFP®: But remember the housing market back then. Wow. Ghost town, right?

CHRIS SIPES CFP®: In hindsight, totally wish I would have been buying with both hands at that point.

DANO WEIR: But, I'm going to reach out. I'm going to reach out from the internet right now and say, that's how it is right now. I'm like right now, the inventory that's out there, I feel like a similar to 2009, 2010. It feels like.

CHRIS SIPES CFP®: Yeah. Yeah. We just haven't seen the prices drop, like we did back then. Of course.

DANO WEIR: That's true. That's true.

CHRIS SIPES CFP®: And we've got, we've got record, you know, housing unaffordability based on that debt to income ratio. So even though... Consumers are in great shape as a group. Homebuyers, it's very difficult. So going back to that debt service ratio, banks want to see you under 40, under 30, ideally under like 25 to be able to afford a home.

CHRIS SIPES CFP®: And with interest rates the way they are, and so far they've just been creeping up higher. Unless housing prices drop, that is going to continue to put pressure on the housing market. Now, notice this is existing homes. This is not new homes. The new home market is a different market.

CHRIS SIPES CFP®: And I don't know of another time in U. S. Housing history where there's been more of a bifurcation between new homes and existing homes in terms of supply, the market, how it's working, functioning. But For all intents and purposes right now, the existing home market is locked up.

CHRIS SIPES CFP®: All right. And so, Darren, your point about gold, you know, in terms of this is from the Financial Times showing, does the official data show gold has overtaken U. S. Treasuries as a Central Bank reserve asset?

CHRIS SIPES CFP®: They say not quite, but almost. And Mike Fillebrick talked about this, about how a lot of central banks were choosing to purchase gold instead of treasuries because of the fear of being sanctioned and having their assets seized.

CHRIS SIPES CFP®: And I'm sure that's a part of it. It could also be fears of inflation. It could also be fears of we've gone through a really horrible bond market over the last three years. So all those things are kind of creating the perfect storm. For, you know, struggles in the treasury market struggles, getting people to buy treasuries at current interest rates, which is, probably going to keep pressure on interest rates going higher.

CHRIS SIPES CFP®: And which has been a total tailwind for the gold market and the gold market just continues to chug higher. It seems like almost every day it's going up. It's really crazy. So we'll see where it heads. But at this point, a lot of, a lot of. A lot of crosswinds in the market.

DANO WEIR: Darren, it's about that time.

DAREN BLONSKI CFP®: It is about that time.

DANO WEIR: The table has been set and we've laid down the tablecloth and I've got all the place settings ready to go. And all we're missing are the candlesticks.

DAREN BLONSKI CFP®: The candlesticks.

CHRIS SIPES CFP®: Oh, I see what you did there, Dano. Nice.

DAREN BLONSKI CFP®: Pretty stylish.

CHRIS SIPES CFP®: We've already talked about, you know, pumpkin pies and we're setting tables. We're just going to skip over Halloween and go straight to God knows.

DAREN BLONSKI CFP®: Did the Halloween stuff come out like way early this year?

DANO WEIR: I was about to say targets already skipped over it. So might as well.

CHRIS SIPES CFP®: I'm like, what on earth it is.

DAREN BLONSKI CFP®: There we go. There's the tab I wanted to share.

DANO WEIR: All right, let's get you up here. Bam, bam.

DAREN BLONSKI CFP®: I thought we would start with NVIDIA. I mean, here we go again. We had a breakout in NVIDIA and NVIDIA is sucking up. I think this week it became the first company in history to be a $4.5 trillion company. That's if you didn't take a $5 trillion Mark. That's pretty insane when you think about it. I mean, it's just a juggernaut and it's so massive. Now, you just have to wonder where it all ends.

CHRIS SIPES CFP®: Approaching 8% of the S&P now.

DAREN BLONSKI CFP®: 8% of the S&P?

CHRIS SIPES CFP®: Yeah.

DAREN BLONSKI CFP®: You just have to wonder where it ends though. Just, I mean, so wild, but strong run. We're getting a breakout here. We had this bull flag happening and we broke out. So here we go. Market. If this keeps going up, I think you can only expect the SPY, or SPX in this case index to keep moving higher, which is the largest 500 us based stocks. We close at an all time weekly high today. That's. It's bullish.

DAREN BLONSKI CFP®: You know, I guess we have to, there's victory laps and there's, oh, we were wrong laps too? What are those called?

DANO WEIR: That's called the walk of shame.

DAREN BLONSKI CFP®: Okay, so let me take a walk of shame here. You know, usually in September, the S&P 500 takes a dive and has over the last few years. We didn't have it this year. Like, we just ripped through September. We had a little bit of a hiccup here. In the third week of September. But other than that, we just plowed right over it.

DAREN BLONSKI CFP®: So we'll see what October brings, but typically, you know, I'd expect some volatility with the government shutdown, but going into the end of the year, the market's usually pretty strong and we made it through September. So that's, I think pretty positive on its face. So here's me taking my walk of shame for you.

DAREN BLONSKI CFP®: S and P 500, this is the largest 500 us.

DAREN BLONSKI CFP®: Based stocks you can see NVIDIA i mean just so massive and so think about the squares and it's the size of capitalization compared to the other companies out there and just absolutely sucking up all the oxygen out of the room it's just phenomenally crazy and scary all at the same time the NVIDIA is literally bigger than like the whole financial sector insurance Healthcare, medical devices, diagnostics, all that.

DAREN BLONSKI CFP®: It's like twice the size of the oil energy sector. Bigger than basic materials, utilities, real estate, and bigger than industrials. I mean, that's just, the only thing is, I guess it's not bigger than communication services. It doesn't look bigger than consumer cyclical, but it is bigger than consumer defensive. And there you have NVIDIA, the juggernaut of the S&P 500.

CHRIS SIPES CFP®: So going back to our 2035 show when our clone AI bots are doing that's right oh we won't even have to do it does that square take up like three quarters of the screen at that point right how big how big is the square then because or or things to consider Chris things to consider seven times it's it's currently trading at 27 times It's sales. So it's revenue.

DANO WEIR: Things to consider, Chris.

DANO WEIR: Can you guys hear me okay?

CHRIS SIPES CFP®: Yeah, sorry.

DANO WEIR: I just kept interrupting you. That's fine. No, totally fine. Something to consider, you know, because it all is going this way and it's all seeming it's getting bigger and bigger and bigger. This sounds crazy to say, but there was a time in this country when if companies got too big, they broke them up. So.

DANO WEIR: I'm not saying that there's any indication of that, but I'm saying, you know, as things like that all of a sudden pop up and exist and it's like, oh, OK, well, now that totally changes the chessboard, you know, so who knows? But yeah, it's kind of again on our cycle theme right now. It's going big. It's getting bigger and there's nothing stopping it.

DAREN BLONSKI CFP®: Yeah. And it's hard to see the political will existing to stop it. Right. Like what would be. The impetus behind stopping it. Nobody wants to stop the music and be the one without a chair politically. And I think you've got that kind of scenario right now where like who's going to touch, what politician is powerful enough to touch a $5 trillion company? It would take some kind of extreme event.

DANO WEIR: And I'm not advocating for that at all. I'm just saying it's always interesting to me that- Even Dan's scared to advocate for it.

DAREN BLONSKI CFP®: I mean...

DANO WEIR: I just, I always think it's interesting when something's going one way and everyone's just like nodding the same, like, oh yeah, no, oh yeah, no, this will never change. And then like, they have amnesia. And then when the change comes, they're like, oh yeah, well, the change is here.

DANO WEIR: Okay. And there's never like never during the nodding period, do they acknowledge like, oh, hey, this could happen, this could happen, you know, potential. Like things that could cause this from, you know, just being up and to the right every time. So it's interesting. It's interesting.

DAREN BLONSKI CFP®: Yeah, it is. Well, and I think that's the opportunity to, to step back as an investor, you know, when everybody's on one side of the table going, yes, yes, yes. To be like, okay. And what's the rest of the story here?

DAREN BLONSKI CFP®: Right. It's really hard with you though, because when. A stock like NVIDIA is soaking up all of the money and the value in the market. If you had NVIDIA in your portfolio, it looks great. If you didn't, it doesn't.

DAREN BLONSKI CFP®: That's a hard pill to swallow. Diversification is a very hard pill to swallow in these moments because it feels like it's going to go on forever. It won't go on forever. It will end at some point, and it's probably going to end in a pretty ugly way when it does. What will be that impetus will be the lack of power to continue feeling the growth.

DAREN BLONSKI CFP®: Because I think that's ultimately the factor that stops AI is that it just can't keep growing the way it's been growing. And then everybody figures out like, oh, okay, now let's figure out where the emperor with no clothes is and where the house of cards was.

DAREN BLONSKI CFP®: And then when it falls apart, then you get that ass curve of adoption. And then it really does change our lives in a pretty drastic way. The owner of Amazon or founder of Amazon, Bezos, was saying today, he's like, he really believes that AI has created an industrial bubble. In the bubble and electronic parts and building these gigafactories and all these things.

DAREN BLONSKI CFP®: So eventually the music stops and there's going to be some people missing the chairs. At that point, though, I think then we really start to see AI shape and change our life in a way that I don't believe will be even recognizable from today as we sit. It will be drastically different.

DAREN BLONSKI CFP®: So let's talk about Bitcoin. So we've seen Bitcoin going up. We've seen gold going up. We see NVIDIA taking on all-time new highs. And here goes Bitcoin with that kind of bear flag breakout, just like NVIDIA just did, but similar. So you can see this kind of consolidation pattern and then breakout.

DAREN BLONSKI CFP®: If history proceeds itself, I would expect to close at 5 o'clock. It looks like it's going to close at all-time highs at 5 and $122,000 per Bitcoin.

DAREN BLONSKI CFP®: Far cry from these days i remember these days very very well i remember this this is why when Chris says oh you can take your your victory lap nope because i've been through this and i've been through that and i've been through this and i've been through that so you just roll with it no no highs no lows is what it is just take a look at the bond market so the bond market continues And I think...

DAREN BLONSKI CFP®: If there's any asset class that has quietly come back in vogue this year it's been the bond market right like nobody's calling us saying hey do you look how good my bonds are doing said no human ever and but you know we're back now so the 2022 kind of high we've broken into this whole neckline area be interesting to see how it does now but Let's just say, hypothetically, we get a market down and some risk-off sentiment, you could really see bonds shooting up here.

DAREN BLONSKI CFP®: And there's some room to be made up for in the bond part of the portfolios. And it's looking like that's something that's in the cards at this point.

DAREN BLONSKI CFP®: All right, let's take a look at, we'll take a look at RSP, which is the Equally Weighted Index. And I think this is also good news. Spx.

DAREN BLONSKI CFP®: Broke out to all-time new highs and so did RSP which is the equal weight index that is the index that tracks and makes all these boxes the same size and that index broke out to an all-time high that means there's pretty broad participation where it's in past it's just in like NVIDIA and the seven others a lot of green on the screen there's a lot of companies doing really well right now the oil chart though is peculiar And maybe signaling something, you can see we're right down along this primary support line that we've been hanging out in for a while and continue to kind of have downward pressure on the oil markets, which could either be a sign of too much supply coming online.

DAREN BLONSKI CFP®: It may be with geopolitical tensions calming. It looks like as of today, we're going to get maybe some peace out of Hamas in Israel, and that could quiet down.

DAREN BLONSKI CFP®: The Middle East which would then allow more supply to come online so that's interesting but definitely putting downward pressure either supply or the oil micro to saying actually things are slower than they look i do think it's a we're in this kind of tale of two cities again Chris i remember talking about that coming out of Covid it was a tale of two cities like and that's when we saw blm happen and some of these other kind of social things fomenting Interestingly enough, we're seeing that foment happen now with the ice raids and the protests with those and some of the Hamas stuff and Palestine.

DAREN BLONSKI CFP®: You tend to see social things exacerbated when there's groups of the population that are under more economic strain than others. And I think anecdotally in talking with people who are in the lower income echelon of society.

DAREN BLONSKI CFP®: There is financial pressure there right now, and that's a very different experience than those who own capital markets like that we talk about day in, day out, like the stock market, the bond market, the Bitcoin market, etc.

DAREN BLONSKI CFP®: So I think that is why we're seeing the social stuff kind of come to the surface even more. There's usually an economic reason for sociological kind of blowups. And you can see the dollar has really, this is DXY in juxtaposition to the other currencies, the dollar has really gotten just pounded, which has actually helped our mid-cap stocks do better this year.

DAREN BLONSKI CFP®: Because when the dollar is going up, it's really punishing to the mid-cap stocks. But you can see this year, give or take, the dollar is down about 11%. That compared to another basket of currencies, while gold taking a massive victory lap. I can't, gold looks like a tech stock, YOLO, crypto chart. I mean, I think if I, I think I did this last week. Didn't I pull this up and I'm like, what stock is this? It's gold.

CHRIS SIPES CFP®: Yeah.

DAREN BLONSKI CFP®: It's completely like a YOLO.

CHRIS SIPES CFP®: I think maybe a couple of weeks ago, but yes. And silver's looking very similar.

DAREN BLONSKI CFP®: Yeah.

CHRIS SIPES CFP®: It's interesting that it's done so well and it's done so well for so long. And yet, I don't know about you, but I'm still not really getting many questions about it. I mean, I'm okay with that.

CHRIS SIPES CFP®: I don't want people storming me, but it doesn't seem like you're getting a lot of chat about gold, even though it's crushing AI and gold miners. Wow. I mean, AI gets all the press, but man, you look what's going on in the gold and silver market, and it's pretty wild.

DANO WEIR: I still think, and this is just really a personal opinion talking to people, so grain of salt always, but I think there's a disconnect for people between buying gold and buying a gold ETF and all of the various ways to buy gold. And so some people still conceive of gold as... The infomercial and I'm buying a physical bar and then I'm hiding it somewhere.

DANO WEIR: And I still don't think people see it as like just another equity on the, you know, that you can buy on a trading platform. So I think, I think that kind of breed, I don't think Chris, that they think of you as someone they buy gold from. I think of, I think they think they have to, you need a 1-800 number, bro. So they can call you to get their gold.

DAREN BLONSKI CFP®: You need a 1-800 number and a full page ad in The New York Times.

DANO WEIR: That's right. At Costco. At Costco. You need to be at Costco, Chris.

CHRIS SIPES CFP®: No, thank you.

DAREN BLONSKI CFP®: And then the world's ending and you're playing on some type of fear in order to get you to buy gold, right?

CHRIS SIPES CFP®: Right. Yeah. And that's what I kind of go back to. I distinctly remember those first couple weeks during COVID where you're in the grocery store and it feels very apocalyptic at that point. Like everybody's covered up and everything. And the shelves are all empty.

CHRIS SIPES CFP®: And I literally thought to myself, I'm like, what if I wanted to pay with gold right now? Like, what if that was the only way? Like, I don't feel like that would be appropriate at all, nor would I even feel safe walking around in that environment with like a bunch of gold in my pocket, you know?

DANO WEIR: And Darren's got his public and his private keys on him. So he's worried about his Bitcoin passwords, though. You know, there's all kinds of manner of protection going on.

DAREN BLONSKI CFP®: Yeah, Dan, thanks for that. Let's talk about the VIX. So the VIX is a measure of look, it's basically a indicator of how complacent those who trade the futures on the S&P 500 are. And so in theory, the market tends to work higher. While the futures market is more complacent.

DAREN BLONSKI CFP®: And when they get excited, that's because things are going down. And so these big spikes, this was the tariff tantrum we had earlier in the year. This was COVID. This was 2024. I'm trying to remember what that was on 2024, what people were worried about then.

DAREN BLONSKI CFP®: So you can see kind of this panic.

DAREN BLONSKI CFP®: Happening in the vix when people start tripping out but the fact that kind of volatility settled down into the that 14 zone usually we get some kind of spikes after that right so because the S&P 500 has run so hard so fast like you look at that that's a pretty hard run pretty quick makes me suspect we'll probably get a pullback but i thought we would in September I thought that was going to be the correction going into the end of the year.

DAREN BLONSKI CFP®: Please don't tell me we have another December correction. That was like the worst year in 2018, Chris, when we had a December. That's what happened last time Trump won is we had a bad December. I hope that doesn't repeat.

CHRIS SIPES CFP®: That would be just not fun. I was told there would be Santa Claus rallies, and that's what I expect.

DANO WEIR: If there is a bad December, it's not his December. It was somebody else's December. It was the worst December. I've never had a December like this December.

DANO WEIR: That will be the answer if you get a bad December, Craig.

CHRIS SIPES CFP®: Yeah.

DAREN BLONSKI CFP®: So anyway, overall. Things look pretty bullish out there. I don't see anything under the hood that's saying, ah, let's run for the hills, other than the fact that this has been going on a long time, and you would think there's a correction in the near future.

DAREN BLONSKI CFP®: So I think we'll leave it there for this week, and I hope everyone has a great weekend. We're getting some great rain in Northern California, which is awesome because fire season is probably officially over at this point. Pretty hard to start a big complex fire when you get rain like this. And with that, take care.

DANO WEIR: Darren, Chris, thank you for a great show. Thank you for checking us out. We are Sonoma Wealth Advisors. You can learn more about us at Sonoma Wealth.com. If you're a client, you already know us very well. We thank you for following along this far. If you're new to our firm and you want to learn more, find out what we do for our clients.

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