Join us for an insightful discussion with Michael Lebowitz, where he provides valuable perspectives on inflation, monetary policy, and the role of precious metals in investment strategies to navigate today's complex economic landscape with confidence.
Watch the full video or listen podcast below:
Announcer: You're listening to "Ask the Expert," on Sprott Money News.
Craig: Well, hello again from Sprott Money News, at sprottmoney.com. It's the month of February 2024. It's time for your "Ask the Expert" segment, and I'm your host, Craig Hemke. Joining me this month is a new guest, someone that you're gonna wanna get to know and hear from, Michael Lebowitz. Michael is an analyst. He's a commentator. He's also a registered investment advisor. You've certainly seen his work. He's quoted all the time at Zerohedge, other sites on the internet besides his site, realinvestmentadvice.com. Michael, it's great to have you on the show. Thank you for joining me.
Michael: Great to be here. Look forward to the conversation.
Craig: Let's do two things before we get started. I wanna remind everybody that of course, this content, all the content you get all month long, is brought to you by Sprott Money and sprottmoney.com. They're currently still running a wonderful special, where you can buy a 1000-ounce silver bar, one of those babies that weighs, like, 60 pounds, and they'll store it for you for three months. That's a pretty good deal. Low price on the silver, and free storage for 90 days. Go to sprottmoney.com, or of course, just give them a call at 888-861-0775. Michael, you're a new guest. Tell everybody a little bit about what you do at realinvestmentadvice.com.
Michael: So, we, realinvestmentadvice.com puts out research, we talk about markets, economics, the Fed, the Fed, the Fed, because that's everything these days. And, at the same time, I'm a portfolio manager with RIA advisors. So, you know, most of my time I spend managing money for our clients. But, unlike most RIAs, we put out a lot of information. We do podcasts, we write articles, myself and Lance Roberts. So, you know, my day is devoted to typing up something, an article, whatever the current topic du jour is. And then, you know, doing some trading, managing some money, and going back and forth. So, yeah, that's what I do.
Craig: I've got your site bookmarked, so that I regularly check it and don't forget to, because you and Lance, again, put out great content, almost daily. You've had a wonderful series you've been writing on inflation, and I'd encourage everybody to go there and check that out. Let's kind of start there, Michael, because, as we record this on the 15th of February, big shock to everybody this week was the CPI inflation in the U.S., and suddenly, hey, inflation is coming back, and rate cut expectations plunged, and yields on the 10-year note went soaring. What do you make of this? You know, I know you've been in the camp that I have, that everybody got way ahead of themselves, expecting seven or eight rate cuts as last year began. The Fed's been saying maybe only two or three. Where do you fall on this rate cut expectation cycle stuff?
Michael: You know what? There's no reason for the Fed to cut right now. The economy's doing well. They don't wanna stoke inflation. They want inflation to come down. So, if you just put yourself in their shoes, why... You don't need to be in a hurry to cut. So, I think what Powell and most members of the Fed have been telling us is correct. We're gonna do two or three, probably weighted towards the latter half of the year, and that's what you should expect from us. That's what they're telling us, and that's what is logical. Barring, you know, the economy comes crashing down, things change. I get it. But based on what we know, that's a logical conclusion. The market, you know, is always hungry for rate cuts, so, you know, like you said, they started pricing in seven or eight cuts. The economic data has been good, so that's slowly going from eight to seven to six.
And then we got the CPI data Tuesday. And, first of all, I think the data was a little bit of a joke, but the market just reacts and takes out all those Fed cuts. And the reason I think it's a joke is because a third of the number is shelter cost. So, that basically is rents, people's paying for rent, and then this imputed rent, that is, they call owners', OER, owners' equivalent rent. And if you look at it, it just, it shot up. And that's the reason CPI was higher than expected, but all evidence on the ground is that rents are coming down, that they're flat to even below zero, depending on who you look at, Zillow or Redfin.
So, and the data lags by so much. Consider that everyone with a lease, it resets once a year. So, your data is really one-twelfth real-time, whoever's leases are resetting that month, unlike orange juice, or pick your other commodity or other service. It's what's the current price for the service or the good today, that one is lagging by 12 months, and they only do this, they only survey you twice a year. So, if I just got surveyed last month, and my rent got decreased this month, it won't even show up for five more months. So, you know, I think the number was garbage. I think, what I focus on, because you can't calculate inflation, you can only focus on the trends. It's an impossible number to calculate. So I focus on the trends, and when you strip out, when you just normalize shelter, I think we're below 2% already. And then there were some other one-off factors, like medical costs, insurance premiums, that was all January-related. That happens every January, but it's hard to seasonally adjust it correctly. So, I think, you know, as we continue through the year, we're gonna see CPI and inflation numbers continuing to fall, and the Fed will get more comfortable with cutting rates. But, you know, that's probably a June, July, August event, unless something else happens.
Craig: I was reminded again this morning of a chart I've seen quite a few times over the last 12 months, and it's the falling M2 money supply, which is kind of one specific measure. But some people look at that and go, look, if the monetary base is contracting, if you measure it that way, and at a level the U.S. hasn't seen since the Great Depression, does that also kind of blend into your argument that inflation continues to come down this year, rather than whatever shock people got earlier this week?
Michael: That's half the argument. So, inflation is a combination of the money supply and the velocity of money. So, it's not just how much money there is. It's how often it spins through the economy, right. If the government prints a trillion dollars and they dig a hole and they throw all that trillion dollars in the hole, there's no effect on anything. It doesn't matter. It's sitting in a hole there. Now, if that money gets released, and people start spending it, then the velocity increases. So, I think what's going on is there's still a lot of stimulus in the system, there's still some pent-up demand from COVID, and velocity is still running high, at the same time M2 is still contracting. So, you know, just everything for the last three, what, it's been four years now, has been crazy. So we're dealing with these echoes of what's happened.
You remember, I mean, money supply rose by so much, so to see it contract is not unsurprising. Shouldn't surprise us. And you just kind of gotta look at the line in general, and it's still above where trend money supply growth was. So, contraction is a factor towards deflation, disinflation, but velocity is probably the more variable factor right now, and will the government do more stimulus, will consumers start back off, like we saw with retail sales today was a weak number, but one number doesn't mean anything. Ultimately, unemployment is the most important number we can focus on, and right now, that's pretty strong. There are flaws in it, but it's pretty strong.
Craig: Where do you stand on the hard landing/soft landing/buzz-the-field economy? You know, again, and what data do you even use to make that determination, you know, that we're in a recession or we're in growth anyway? But where do you stand on that? Do you still think this tighter monetary policy of the last couple years leads to recession?
Michael: I do. I don't think that the Fed can drive the plane like they think they can. We know they can't. I mean, this has been proven time and time again. They overdo it, they underdo it, their timing is off, and, you know, you can't blame them. This data is so ambiguous and tough to gauge. I do think we have a landing. How hard it is, how bumpy it is, I don't know, but I do think we have a recession. Timing that recession is extremely difficult, but, you know, my guess is later this year, maybe early next year, and I've been wrong on this. I thought it would come sooner. But, again, employment is my gauge. When I start seeing jobless claims picking up steadily, and then ultimately, the BLS reports, showing that there's weakness, I think that's when we go into recession mode. And keep in mind, the UK, Germany, and Japan are in a recession. China is technically not in a recession, but they might as well be. For them, 3% growth is a recession. So, you know, that's, other than India, those are your top five, other than India and America, those are your top, the leading economic nations. And, you know, you could say of the six, four of the six are in a recession.
Craig: It's, like, global contagion.
Michael: So, it's not normal. It's not normal, given the global nature of the economy, for America not to be in a recession when the rest of them are, and vice versa.
Craig: So, we'll watch the job report, more than anything?
Michael: Watch... Yeah. And ADP, and jobless claims, and some of these surveys, and try to mash all that data together and see where it gets you.
Craig: Yeah. Let's go back to the Fed for a second. Part of the rationale of the ramp-up of rate cut expectations at the end of last year was this notion that the Fed, you know, they established that term funding facility last March, March of '23, when all these regional banks were in trouble, and allowed them, and, you know, because their balance sheets were all messed up because their invest, you know, their bonds they bought at 1% were suddenly trading at 80 cent on the dollar. And if you held to maturity, fine. But in the meantime, the banks were insolvent, so they park them in this facility, and get 100 cents on the dollar back from the Fed. Everybody's happy. Well, anyway, the Fed came out and announced, I don't know, three weeks ago, four weeks ago, that they're gonna go ahead and discontinue that, per plan. And it's gonna go away in March. So, people are like, "Okay, well, there's a problem coming back." We've also had that massive amount of cash, marked in that reverse repo account, the excess reserve account, if you wanna call it that, at the Fed. It peaked at $2.5 trillion dollars, what, a year and a half ago, and now it's down to $500 billion?
Michael: Yeah.
Craig: Anyway. This is a long answer. Do you, I mean, that would seem to be factored into this idea that the Fed was gonna start cutting in March. Have you ever thought that that was gonna be an issue? Do you think that might still be an issue?
Michael: I think it's an issue, but Craig, who owns the Fed?
Craig: The banks.
Michael: Who are the shareholders? Right. The banks are the shareholders of the Fed. It's not the government. I know everyone likes to think that. They are not. It is the banks. So, first and foremost, yeah, we could talk about price stability and maximum employment, and all these congressionally-mandated goals. At the end of the day, it's what the bank presidents want or need is what's gonna happen. And look, the Fed is not dumb. They're very bright people at the Fed. They understand that removing a lifeline from potentially troubled banks can be problematic. So, they know a lot more than we know. So, I'm, right now, I'm kind of going on the whim that they're not as concerned about this banking issue as some people are. Can it...you know, the Fed's been wrong, right? Grossly wrong about the health of banks. And there certainly are some banks that could fail, right? We've seen this New York Community Bank kind of teetering on the edge. They're the ones that bought Signature Bank, which failed. So, I'm not saying that there won't be some regional banks that don't struggle, but at the end of the day, based on what we know, and assuming the Fed has a lot more information than us, I think it could be a rocky period, you know, come March, April, May. But I think the Fed thinks that this is a very manageable situation. So, whether you trust the Fed or not, you kind of have to appreciate their point of view.
Craig: Sure. What do you think about that reverse repo balance? I mean, that's $2 trillion that was kind of quarantined, if you will.
Michael: It was excess cash in the system.
Craig: Yeah. Now that that's, $2 trillion has come out, to kind of keep the liquidity, you know, gears greased, if that trends to zero or it goes to zero, do you think that kind of adds enough tightening that the Fed is forced to do something?
Michael: It will. It definitely will, because I think that's... What the Fed did was they created that program, or they resurrected that program, to take the money out of the system. Otherwise, yields would have fallen even further, and their goal is to manage the Fed funds rate. So they took that money out of the system, by offering somewhere else for that money to go. Well, now the Treasury is borrowing heavily, and there's other needs in the economy, so that money is flowing into the economy. It was extra money, extra liquidity. And they successfully pulled it out, and now that extra liquidity is kind of flowing to where it normally flows, and it's going away. So, as we get towards zero, the question is, are we out of excess liquidity, and is the Treasury, and other borrowers, starting to grab out of the liquidity pile, the needed liquidity pile? Because that's when you potentially have issues. So, yeah. We are keeping a close eye on that number. And the number is not necessarily zero. Could be $400 billion. It could be minus $100 billion. But it's definitely, as we get closer to zero, it, potentially, it's pulling liquidity out of the system, which we have to keep an eye on.
Craig: Yeah. Well, we had a lot of stuff happen here, obviously, in just the first six or seven weeks of the year. Gold has held in there, pretty well. I think, off the spot price, it's maybe down about $60, or 3%, given all that has had to deal with.
Michael: Right.
Craig: Not too shabby. Let's kind of wrap up with your experience as a registered investment advisor, and managing people's money. You know, I get a lot of people on my site, you know, they're like, "Oh, I just, all I wanna do is own gold." And I've always been, "Come on." I mean, it has a purpose. How do you view gold, and how do you position it for people in their minds, you know, for the people who trust you with their assets?
Michael: Right. So, I personally own a little gold, both in physical form and some in ETF form. And, to tell you the truth, I don't follow... I, you know, I don't even know exactly how much gold I have. It's just like my life insurance policy. I don't read up on it every day. It's an insurance policy, that I think is appropriate in a portfolio. As far as, as an RIA and managing other people's money, I am fine with owning gold, but we tend to trade it a little more. And what we have, our research shows us, is that the correlation, that the price of gold is more predictable when the Fed has policy that's too easy. So, when the real yields are about 1% or less, gold and real yields are very highly correlated. And all that's really telling you is that when the Fed's kind of stepping over bounds, and doing too much, they're bringing rates below where they should be, gold does well. Right now, the Fed's doing what they should be doing. They got rates up at 5%. They're keeping them there. It's not, you know, there's not a lot of correlation between gold and real yields above about 1%, 1.5%.
So, from my point of view, I'm kind of rudderless. I know what drives gold when real yields are 1% or lower, and I can trade that and manage around that all day. Then you kind of get to other factors driving gold, and that's just not my cup of tea. So, real yields, and essentially, like everything in our conversation, it all comes down to what the Fed is doing. That's unfortunately the state of the world that we live in, that we have so much debt that the manager of liquidity is the one that's kind of pulling all the strings. So, and I think that holds true for gold as well. So, you know, right now, we, as a RIA, we don't own any gold. We actually have one portfolio with gold. When the Fed starts getting active, we will probably add gold to the portfolio. But right now, the Fed's not really showing signs of getting real yields back, you know, anywhere close to where they were.
Craig: Yeah. So, you weight, it's an asset class in your money management.
Michael: Right.
Craig: Like any other asset class, when the signals look right, you start to move in.
Michael: It's an insurance policy and an asset class, and separate those two out, and asset class is tradable. Insurance policy, just like life insurance, you know, I don't know what's in my life insurance. I haven't looked at it since I signed those papers. I pay the check every year. It's there. And hopefully I never use it. Just like that gold in my basement, hopefully, someday I go sell it.
Craig: Right.
Michael: Not trading it for food or something else.
Craig: That's always...I always think that's the best analogy. Or maybe it's a metaphor. You've got, that your gold is an investment, or it's an insurance policy against madness.
Michael: Exactly.
Craig: Just as you insure your house against disaster, you insure your net worth against disaster too.
Michael: Right.
Craig: Michael, it's been fascinating to visit with you. This is great conversation. I wanna remind everybody on the way out the door, though. There's more great conversations to come, and Sprott Money provides all of this month-long stuff, free of charge. Later this month, we'll have your "Monthly Wrap-Up," and of course, month of March, it all continues, with podcasts and videos through the whole month. So, if anything, hit the subscribe button, the like button, and make sure that you are notified every time Sprott Money posts something new. We'll have more, again, in a couple of weeks. Michael, thank you, though, for your time. It's been great to visit with you, and I think everybody's really enjoyed hearing from you.
Michael: Good. Thank you very much for having me.
Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for watching, and we'll have more information for you before the end of the month.
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