April 2024
Here are the key takeaways covered in their conversation:
- Amid conflicting market signals, gold remains a store of long-term value. Even after a century, a ten-kilogram gold bar is still worth the price of the average American home.
- Potential issues with our current financial system include heavy reliance on credit expansion and the balancing act of managing interest rates without destabilizing asset prices.
- Especially in times of inflation, gold serves as an important store of value in a portfolio to help preserve purchasing power over time.
Watch previous episodes here:
Ep. 79 Homeowner's Insurance: Are You Covered From Fire & Flood Risks?
Ep. 78 How Will Realtor Fee Changes Impact Home Buyers & Sellers?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor Patrice Bening. Patrice, thank you for joining us.
Thanks for having me, Chris.
April 2024. We're seeing a lot of interesting signals in the markets. Kind of conflicting. Yeah. Wanted to get your thoughts on it. So, right now you've got stocks hitting all-time highs. I know the S&P 500 last week is down a couple of percent, but that's not even a correction. So let's just say stocks are at or near all-time highs.
You also have, you know, real estate or asset prices, excluding office, pretty expensive. Then you've got gold and crypto hitting new all-time highs and then you've got people touting for the Fed to lower interest rates because we need lower interest rates, which is a completely different signal all in of itself. What do you make of it?
Well, there's a lot of conflicting information in everything you just shared. And I think even in conversations I'm having with my friends, my clients, as well, is that lowering interest rates, the Fed would do that to stimulate an economy.
Because things aren't going well.
Correct. So technically, what happened is when they raised interest rates because inflation was getting out of control a couple of years back and yeah, the market reacted; however it did not create the recession that still we were talking about soft landings, no landings, some kind of landing, but it's really not there. And I think one of the key points for people to remember is that we have jobs and that as long as people have jobs and the GDP is very much made up of consumer spending, we are going to have a resilient economy even with interest rates being high.
So I would say that if the Fed were to lower interest rates, it would create an even bigger problem in the economy. But yes, I think we should. The article you shared with me brought up some interesting points.
But like, that's the scary thing about consumerism and spending. It's like as long as we have money or as long as we have income, we're going to avoid some sort of a recession or a fallback. Like I think the recessions are completely healthy. And there has to at times be, you know, a little bit of pain.
Here's what I found interesting. We're all talking about the value of homes and how much they've gone up over the past few years, right? Real house prices. I mean, the average home here in L.A., homes have gone from eight, 900,000 at one point to 1.3 million.
My numbers are pretty off. So like, don't hold me to them. But everybody's talking about the value of their home for two reasons. Either they're blown away by how expensive it is and they would like to buy and they're entering the market or they're excited about how much money their house has made and they're potentially looking at and leaving and going and buying a new house.
But they're potentially stuck because they have a sub-4 % interest rate. And if you value your home in U.S. dollars, you're pricing in inflation. But here's an interesting thing. If you take ten kilograms of gold in 1929, which is how many pounds, ten kilograms?
About 20.
About 22. So if you take ten kilograms of gold, like just a gold bar in 1929, that was worth around $7,000. It was about the price of the average home in the US, a gold bar. You take that gold bar today that same ten kilograms. At current gold prices, it's worth $750,000, which is about the same amount as the average home price here in the U.S. So if I just kept my money in cash over that 95 years, it's maybe gone up a little bit, but it didn't go from $7,000 to 750,000.
Okay. I should have just bought gold and I can't... I mean, everybody talks about how great real estate is that we should always own real estate. To me, it seems like gold's been a pretty darn good investment over the last hundred years as well.
It really has. And I think that what people don't realize is the power of credit. So what happens when, you know, America's built on leverage? I come from a country that was a cash society for most of my life.
And leverage means expanding the banking system. All right. Banks. Banks still have $100 in deposits and then only lend out $100. They might have $100 on deposit and then lend out $1,000. So money creation is what our country was.
No, But to your point, is that someone that even... if I think of myself as an individual, I'll, you know, 25 years ago I did not have, let's say, $250,000 to buy a house. I had $5,000, but I borrowed the rest over 30 years at an almost 8% interest rate and paid private mortgage insurance on top of it. But what happened is, over the course of the following, you know, 5 to 7 years, the rates dropped.
So what did I do as a good consumer? My income went up as well as rates dropped, I was able to refinance. I was able to pull more money out of my house. But I'm not the only one doing this.
Okay. So when you did that you refinanced and took money out because you were refinancing at a lower rate.
Your payment actually was even lower than it was.
And so this science experiment that we're living through, where we just had zero interest rate policy for 15 years, that the Fed, our country, and other countries around the globe had printed trillions and trillions of dollars. But now all of a sudden we're in the science experiment where we've raised interest rates. We're not likely to go back down to zero unless there's a real problem with the issue.
Why? But our system is reliant so much on the expansion of credit. And what do you think we go from here?
Well, I get a lot of questions where it's like where, you know, you brought the point of people kind of being stuck because they were able to take advantage of some incredible interest rates going back a couple of years. Right. So if I don't want to move either. So if I don't want to move and you don't want to move, but there's you know, we have somebody who wants to buy our houses, their inventory is tight.
So because of that, real estate prices are staying high. That's kind of keeping along line with everything else you said, like with their, you know, high stock market and you've got all these other factors that come into play. So where does credit come into play here in the sense that we are people who are still going to borrow even at today's interest rate because they need a place to live.
And then going forward, when rates will drop, they'll be even. And the perennial flurry of activity around that, if we if you were to think about it.
And so that's some of my concerns is that when you have a system where that's predicated on being able to print money and increase the money supply, it allows policymakers to support your economy during good and bad times. Right. If things are going too well, we can raise interest rates to slow things down.
If things aren't going well enough, we can lower interest rates to try to spur growth. But what's happened recently is we've almost lost control. Now. The Fed has done a good job of that by raising interest rates and not breaking anything. Right. Right. But if you handle this responsibility of increasing or decreasing interest rates improperly, it can lead to explosive moves in asset prices.
And again, I go back to the signals that the world is pointing to us. People are raising their hands, saying inflation's too high. That's out of control and it's expensive. I need you to lower interest rates because I'm a business or I can't survive. At the same time that asset prices are hitting new all-time highs and gold, which is more of a store of a haven or a store of value hitting all-time highs, there are just conflicting signals.
I don't have a crystal ball, but I just find it really fascinating.
It really is. I do. We love gold here as part one, part of the investment in our portfolios. And I think even you know, your example going back to, you know, almost a century ago, truly as a store of value, having that in your portfolio to kind of anchor, considering depreciation with the dollar.
So it's like the banks losing really, I'm winning every single time I make a mortgage payment.
Beyond just the picture on that, let's say your mortgage payment is $5,000 a month sedan, but then it's that same $5,000 a month over the next 30 years, 20, 25 years from now, that same $5,000 doesn't feel the same.
That is exactly what I'm referring to.
It's fascinating. I just I'm so glad that we do love gold as a company and we allocate a meaningful amount of clients' portfolio dollars to gold to be that store of value. Because in a given year, you're not going to see or appreciate the benefits of it. But when you look at it right now and just this pure fact, that brick of gold could buy an average home in the U.S. 100 years ago and a brick of gold can still buy an average home in the U.S. today.
You may understand a little bit more about what we mean by store of value, maintaining its purchasing power over time because the dollars in my wallet will not do that. And when inflation gets out of control, what do you want to do with the dollars in your wallet? You want to spend it as quickly as possible because tomorrow it's going to buy you less and less stuff.
And therein lies the problem that we're in and why the Fed maybe can't lower interest rates or can't quite back off from this fight against inflation because they're competing against 30-something trillion dollars that have been created in a very short period.
Disclosure: Information presented herein isfor discussion and illustrative purposes only and is not intendedto constitute investment advice. The views and opinions expressed by the speakers are as ofthe date of the recording and are subject to change. It should not be assumed that Morton will makeinvestment recommendations in the future that are consistent with the viewsexpressed herein. The investments discussed may fluctuate in price or value. Theseviews are not intended as a recommendation to buy or sell any securities, andshould not be relied on as financial, tax or legal advice. Pastresults are no guarantee of future results. All investments involve risk,including the loss of principal. You should consult with yourfinancial advisor to thoroughly review all information and consider allramifications before implementing any transactions and/or strategies concerningyour finances.
