Do you feel that the stock markets are in a bubble, and if so, are we finally at the point where that’s starting to crack a little bit? Well, hello there, my friends. Chris Marcus here with you for Arcadia Economics and what has been quite a volatile in both directions so far this week in terms of the trading and especially with the stunning decline that we saw on Monday coming out of Japan and the Mikkei. And certainly we’ve seen that in the Nasdaq over the past couple of days and the other stock markets around the globe. A little bit of a reversal on Tuesday, which we are recording Tuesday afternoon, August 6.

And I’m joined here by Greg Krennan, the chief economist at Golden Coast Consulting and also the market strategist for the Coastal Journal, which I think a lot of people in the audience here are reading and enjoying. Now, I’m excited to be a substack subscriber because, Greg, you’ve had talked and written a lot about many of the things that are happening now in the stock market, also gold and silver. So it’s a great time to check in with you and nice to see you again. And we can also revisit some past forecasts you made, many of which have come to fruition, especially now.

So, anyway, great to have you back here. How are you today? Awesome, Chris. I’m excited to be here. Go over some latest econ data with you, as well as going over what’s going on with markets. There’s a lot of uncertainty, a lot of people with questions, and hopefully I can provide enough answers to help make things a little bit more understandable for everybody. Well, that sounds good, because I have some questions that I think are on a lot of people’s minds. And the first one we will start with is, a, do you feel that the stock markets are in a bubble? And b, if so, are we finally seeing that bubble peaking, and are we finally at the point where that’s starting to crack a little bit? So my personal opinion is that I think the overall stock market is in a bubble.

And I think there are many indicators that kind of point towards that. This is a bubble. You can look at one, the Buffett indicator, which is the stock market captain market cap compared to total GDP, which recently that was at around near 200. And as we know over the weekend that Warren Buffett has unloaded 50% of his Apple stock. So he is looking at his own indicator and saying, well, if Apple is the top stock in the stock market and the stock market is overvalued towards his most known indicator, which is stock market cap to GDP, and he’s trimming 50%.

He’s clearly taking his own advice and getting out of Dodge and doesn’t want to partake or think that the returns going forward are going to be that great at current prices. The other one, you have the price to earnings ratio for the Nasdaq it was before the recent decline at about 29. And with the recent decline of 10% it has fallen to 24, meaning that it is coming down, but it’s still pretty elevated, especially when you’re considering that most of the earnings growth is coming only from the seven west coast tech companies. And you can also look at what kind of returns stocks will be providing against the discount rate, where you can get rated returns in the bond market near 5%, 4% depending on the duration of the bonds.

And so those type of economic headwinds are very bubblicious. You can also throw in how a lot of the market volumes are made up with call options or the zero date options, where people are just betting daily and weekly on prices going up. And that has also probably helped cause the recent VIx surge and volatility in the markets over the past month. Yes, which we will certainly touch on the VIX in a moment. Although just interesting, as you were talking about whether there were bubble indications in the market, when you look at the Nasdaq chart, you can see a trend.

Here is s and P. You can see a similar trend, which obviously a lot of this is affected by the inflation and the increase in the money supply. And we will touch on that too. But you did mention the VIX which obviously had quite a spike. Again, this was following the Nikkei being down 12% on Monday, then rebounded back up 10% on Tuesday. So anyway, you can, let’s zoom in here and get the one week so you can see quite a spike has now settled, got as high as 65. I saw it quoted at back down to 27.71 today.

And anything you’d like to share there? Because certainly it was quite a stunning move in these past couple of days. Yeah. So for most of this year the VIX was very low and a lot of traders in the markets, due to the euphorism and optimism on the Fed rate cuts this year and the AI narrative for the equity markets decided to short a lot of volatility. And they do this through different derivatives and options on how to short the volatility because everyone thought that theres no more risk in the market. And then they also skew taking bets called call options, meaning that they think that the price of stocks are going to go up.

What this does is it keeps the volatility index low and down. And then what happened was the options market became so heavy with the put to call ratio making like an all time low, that meant that the market just declined, which to me, the S and P, I think it’s only down about 7% from its recent record high, which just happened last month. And 7% decline is kind of normal in the real world. And so when you have a 7% decline, we actually ended up getting like the one single day largest spike in the VIX. And that’s very concerning because that tells me two things.

One is that no one is positioned or hedged for any downside volatility in their portfolios, whether it’s hedge funds, portfolio managers, et cetera. And so that the move, when people do buy protection, all of a sudden those prices surge, causing such a single day shift in the VIX, which shot up, I think, at the high, was up at one point almost like 70%. And so that’s come down since yesterday. And the issue is that if there is even more downside volatility in the future from today, is that no one is still not positioned to the downside.

And so the put to call ratio today is still like 0.8 and on the spy and in normal market bottoms in 2022 and in also 2020, when there was the, you know, everything that was going on in Covid, you had the put to call ratio shoot up to like one point and a quarter. So 1.25 or 1.3, meaning that more people were buying puts than they were buying call options, meaning that they were very pessimistic. They didn’t think markets were going to go up. So when you have the put to call ratio at 0.8, you have more people still buying calls than puts.

And so, you know, there’s still that, that risk that no one thinks that stocks can, can go any lower than they are today. And so that leaves the VIX that we can actually see the largest VIX moves that we’ve seen ever just because that no one is positioned for any more downside risk going forward. Yeah, and it leads into my next question, although I will pull back. Here’s the long term chart. So obviously we had, I believe it got into the eighties, back in 2008, so certainly a rather stunning move. And Greg, I guess the other question is, what do you think has changed? Why are we finally seeing the declines now? Is it just the earnings that are coming out or what do you find is different now versus two months ago? Again, we’ve had the higher rates for a while.

I think we’re certainly getting closer to the rate cuts. We’d love to hear your opinion on that. But here we see even since last October, we’ve had the expiration of the BTFP program, has not phased the stock market yet. What do you think in particular has led to what we’ve seen over the past month? Great question. And so I think it’s a combination of a couple of things. There’s been massive speculation in the markets, and there was also a lot of people forget that starting in January, many people thought on Wall street that there was going to be six rates.

I remember well, and I was one of the economists saying that there were going to be possibly no rate cuts this year. And if they were, there would be very limited or few. And I said under three rate cuts. I think we even talked about that last time we were on the show just because that inflation is so high. And so I think the Fed keeping the interest rates where they’re currently at instead of, in my opinion, they should have just kept on raising the interest rates to probably even closer to 6%, but they decided not to and they wanted to see how the data came in.

Well, we got earlier in the year that inflation was still rising above their 2% target, and so that caused a little bit of early year volatility. And then the Fed said that we’re going to keep the rates here and the rates basically aren’t high enough to tame inflation, and they’re really not low enough to be stimulative for people. So this causes an interesting dynamic in the economy, and we’re starting to see it, actually. So the overall market is say, down 10%, but a lot of individual stocks, especially consumer discretionary stocks, are down massively, like Nike, Lululemon, Starbucks, McDonald’s.

I mean, these things are all down 20% to 50% year to date. And so you’re seeing these individuals companies losing value drastically this year. And so why are they losing value? They’re losing value because the consumer is tapped out because of inflation. So the Fed’s failure of tackling inflation and stomping it out last year in 2023 by continuing to raise the interest rates has now caused a stagnation where people still have money, they’re still working, but because of the cost of everything, they’re cutting out all the wants in life. And so all those companies that have that sell wants are getting cremated, basically.

And then you have the few companies that are doing well don’t really are affected by consumers. So you have things like meta is still doing okay. You have Google that’s doing okay, Microsoft that’s doing okay. So, you know, the tech stocks, because they’re not really so keen and focused on the consumer, so they don’t really rely on consumer business. And so you have, the other real economy is not doing well. I mean, you can again look at real estate. Mortgage demand is near record lows, if not at record lows, because no one can afford a mortgage with today’s interest rates at today’s prices.

And so demand there is at record lows. And so all the data shows that it’s stagnating right now. And that’s what stagflation is. And so basically stagnation is there is no real growth. And all the things that we would normally are wants, you start to see those collapse, but our needs continue to go up in price. So energy prices, food prices are still rising. And so we’re seeing all that data show that those are the important keys. And I think now that the Fed said, well, we’re not even going to cut the interest rates maybe until September, there’s a fear that these, now we just talked about how the economy is evolving because of this stagflation, that the longer they keep interest rates higher for though it keeps squeezing out.

And so it’s a longer process to get the inflation out of the economy. And so instead of just raising the interest rates faster and sooner and get it over with, kind of like ripping the Band aid off, they’re going a slower, longer process. And so by just slowly declining or lowering the interest rates, it won’t be good enough first to stimulate the economy and eventually them just keeping the rates here high enough will most likely continue the path of a slowing and possibly recession economy. Okay. And with that said, what do you think they actually are going to do? Again, we have, here’s Morgan Stanley saying no need for intermediary or 50 basis point cuts.

On the other hand, you have someone here that I know well, did I, Greg? I don’t know if I ever told you. I was in his class. It was interesting. This was back in early 2004, and that was again learning about, I remember him telling us basically the economy’s weak, the Fed steps in. They do some open market operations, put some cash in, and he was out on Monday morning saying that they needed 150 basis points of cuts, 75 emergency, another 75 in September. So you’ve explained what would be ideal and the impact it’s having. Any thoughts on what you think we will actually see by September? I think what we’ll see is exactly what Powell said.

So I think as long as the inflation reports, which we’re getting one this month and then one in September before they make their decision on the rate cuts, I think as long as their PCE comes in below 2.5% at the end of this month and next month, and CPI doesn’t get, you know, go move closer to 4%, I think they will lower the interest rates only by 25 basis points. And so I think that the rates will still be over 5%. And then this is where I think will be more volatile. The market wants the rate cuts, as we can see here now.

And what the Fed is doing is they’re trying to tame that inflation. And so by cutting interest rates now may actually reignite inflation. And so basically, the longer the Fed, basically it’s like a kid with parents, the kid wants their sugar and mom and dad say no, and then they go into a temper tantrum, but eventually that wanes off and then you can go back to normal. And so what the Fed’s doing by keeping the rates higher for longer, it causes and helps cause to get that inflation back down. And by lowering the interest rates at a more gradual pace than emergency and massive swings, that allows them to be more dependent on the data and move based on how the data flows.

I mean, you’re overreacting to a market that’s technically it’s not in a correction because it’s only down like 7% from its high. There’s really, and so, by the way, the market’s down just recently this month, but the s and P is still up 9% on the year. And so you have a market that’s up 9% on the year. Unemployment technically is at near record lows at 4.3%. And you do have claims rising. And so you have a dynamic of managing the economy. But the other issue is obviously the deficits. And so you have a lot of those balancing acts.

But based on the current data and what the Fed has said specifically from Jerome Powell, I think they’ll just lower by 25 basis points in September, see how the data goes. And if inflation stays in that current range at about 2.5, they’ll cut again in November. And then if the data gets worse going into December, I could see them cutting at least 25 in December, or if not, if it’s really bad data, cutting interest rates at that point a lot lower. Do you see them running into banking issues prior to the end of the year. I know that’s another thing that you cover and write about quite a bit of.

So, yeah, so that’s a great question. So we’re not sure if there’s going to be a credit, you know, as of right now, there is no credit crisis or credit crunch. Excuse me, but we do know that the BTFP is going to be drained, and what that will do is that will put stress on the market. And so I wouldn’t be surprised if the Fed did something like they did when Silicon Valley bank collapsed, where they may provide liquidity to the markets but leave the interest rates the way they are, because basically they’re trying to reduce the economy inflation.

So we could have a credit crunch where you have these smaller banks. Regional banking crisis may be in trouble, but they may not actually lower the interest rates. Kind of like what happened in March in 2023. And I remember in 2023 they were saying the Fed should stop raising the interest rates. And they didn’t. All they did was they printed $500 billion and then caused more inflation in 2023 and then raised the interest rates. So I guess we’ll have to see what type of event would actually arise in the future. But I also wouldn’t be surprised if they lower the rates gradually if that were to happen, and then just provide the liquidity or come up with some sort of facility to help manage that stress.

Okay, that certainly doesnt seem out of the realm of possibility. Probably a high favorite there. And of course, im sure you knew I was going to ask you about gold and silver in here. And Greg, I was reading a Goldman Sachs report they put out last week on the gold market. They had one interesting quote in there, which in one sense is very simple, that they were talking about. Will the Fed rate cuts finally bring the western investor back into the market? Which may not be groundbreaking news yet, as ive been thinking about that more. I mean, we could sit here and say what they should do or what the east is doing, or what sound money advocates would advocate.

But in the end, to the degree that there is a long history now, that pattern between the gold price and yields was broken right at the same time that these sanctions were placed on Russia. So probably not entirely a coincidence yet. Still, I think there’s a degree to which in the western investing mind, especially institutional and Wall street rates down. Then that’s when we start bringing money back into gold and silver. We’ve seen that in the inflows in both gold and silver. I’d say over the past month we’ve seen metal come back in. And anyway, with that said, any comments on that or gold and silver in general? Would love to hear what you’re thinking there.

Yeah, so I’m not really one of the big believers on the lower interest rates is something to be bullish about for gold and silver. And actually we’ve talked about it before, gold actually sees its biggest gains when theres fear in the market. So if you actually look on a percent change on a year over year basis, you see the VIX spike. Gold usually is joining the ride in that. And the reason why is people are looking for a safe haven asset. So if you dont want to, a lot of people who dont short things or bet against the markets will seek a safe haven asset.

So that’s why when the VIX rises, when things are selling off, gold rises because they want an asset during fear times to store their wealth and they don’t want to store it in dollars. So where do they go? They go to gold. And so I think if there’s a chart I have, I’ve sent you with the fed funds rate and the VIX, which also ties into gold prices. And what this chart shows you is that over the past 24 years, so this 24 years is a good amount of data, when the Fed raises the interest rates, they’re trying to slow the economy down.

What we all know is that this normally causes a recession. That’s why there is a lot of debate on what’s going on in the economy right now. And normally when they stop raising the interest rates and actually start lowering the interest rates because the economy is in a recession. And so when that happens, it means that each time stocks are overvalued, like they were in 2000 and 2008, and so stocks go down. And as the Feds trying to stimulate the economy or prevent it from going into a crashing or a recession, investors are fearful. So that’s why the VIX actually spikes after or at when the Fed starts cutting the interest rates, because they’re fearful that because the VIX goes up, when people buy more puts, puts is protection on their portfolio.

And so more people are buying puts, which causes the VIX to rise. And so when the Fed actually starts lowering the rates, it’s because the economy is weak. That means that future earnings on stocks are going to be probably worse in the future. And so the put to call ratio, which it makes up the VIX, goes up, more people are buying puts because they want more protection. And so then also what happens if you don’t want to do that strategy, which what Wall street does, actual investors who don’t do options or derivatives will want to own gold, and so they’ll buy gold as a safe haven asset.

And so that’s why gold saw some of its biggest yearly gains when the VIX rises. And that’s why we’re seeing the VIX rise, because there were talks of the Fed lowering the interest rates and possibly even emergency rates, rate cuts because of the economy. And so if that were to happen, you would see here in the blue on the chart, the VIX would skyrocket. And so that’s a lot of the things that are going on in the markets that people should be aware about and why I think that the lower interest rate forecast isn’t really why gold’s going up.

A lot of people associate just because, well, if interest rates are at zero or zero adjusted for inflation, why would I want to hold those bonds? And so I actually look at that. Well, interest rates were zero from 2010 to 2015, and gold was in its worst five year period ever. Well, that was just because there was no fear in the markets. And then you had the huge story in Apple and tech from 2010 to 2015 and 2016. And so I just wouldn’t necessarily say that lower interest rates is actually good for owning gold or getting good, good returns for gold.

And a lot of people don’t realize, which we talked about last time on our show, is that when the Fed is actually raising interest rates, another part of why they’re raising interest rates is because the dollar is losing value. And actually gold has its next to when the VIX rises, gold actually performs some of the best times when the Fed is actually raising the interest rates, because that means that they’re trying to get the rates above inflation or at inflation because the dollar is losing value. And so if investors know that their dollars are losing value, they’re going to seek assets to store them in to protect their purchasing power.

Steven. All right, well thought out there. And I know you’ve cited many times in your column how basically we’ve lost 20% in the value of the dollar just from since the COVID days alone. So not an ideal trend there. Although, Greg, the last thing before we wrap up that I did want to run by you, Washington, just where you see the whole real estate picture at this point. I’m in Florida, and I’ve been watching some videos and reading some articles about how Florida and Texas in particular, seeing inventories build price reductions. Some of the things I’m seeing suggesting that we’ve hit a turning point.

Prices nationwide at least, median price, which I know can often be a bit skewed depending on the buckets that you’re looking at. But on a nationwide level, at least a number that people are looking at showing the price is higher. So obviously a topic that I think is on a lot of people’s mind and anything you could share there that would be helpful for them going forward. Yeah. So when it comes to real estate, I always, it’s, and it’s always been this way. So don’t let anyone ever tell you anything else is different, that real estate is always driven by interest rates because it’s always about the amount that you can borrow.

So if interest rates are low, then you can pay more for your house or pay more for in house, which means that allows you to put in a higher bid on the house and drive up real estate prices. When interest rates rise, people can’t afford or borrow at that higher interest rate. So therefore housing prices have to come down so that people can afford those homes. Now, what’s happening today, though, is that we’re not seeing a lot of on the economic data, whether it’s the case Shiller report or the median sales price of a house on a decline, but they’re not going up anymore.

And that’s because the people that are still buying houses, because we talked about earlier mortgage demand for houses at record lows. So really the only people who are buying houses are if they’re getting money from family or if they already own a home and they can sell that home to buy another house. And so you have the different market dynamics going on right now. So it’s very confusing when people see record housing prices, but mortgage demand is that record low. And also pending home sales are at record low. So it’s not necessarily telling the whole picture by just seeing the case Shiller report, say, for example.

All right, well, appreciate that update on real estate. And Greg, a lot you shared there, and again, a lot that you share in the coastal Journal. So perhaps in wrapping up, you could just let folks know where they could find you and keep track of what you’re doing on Twitter and with the Journal. Yeah. So for anyone who’s interested in more in depth analysis on the economy and markets, please go to the coastal Journal, where you get weekly and almost daily updates on what’s going on with the markets. You’ll get insights on earnings, why things are moving, and you’ll get more in depth information on how things, unlike today’s report, was with Chris.

Alrighty. And Greg, the Twitter handle as well, where you’re quite active. And again, I made me smile to see my old economics teacher there. But where they can find you on the coastal journal. Yeah, the coastal Journal. And then also if you want to follow me personally and at Greg Crennan as well. So there’s great information, obviously, in the world of economics, especially with today, with interest rates being at 24 year highs now, is very prudent to take on investment strategies and be informed and preserve your purchasing power, because the last thing you want to do is to lose that purchasing power during an inflationary bear market where maybe assets rise, but they may not rise to keep up with the cost of goods.

Well, Greg, I appreciate that. I really enjoy getting your columns and being a subscriber to the journal. I mean, I suppose I’ve been saying this for years, and maybe it’s been true, an important time to at least be aware of some of the things that are going on as people make decisions. And I think you’re a great resource in that process. So thanks again for making some time. Always fun to catch up with you and I. Couple months, we’ll check back in and see how things have played out since then. Awesome. Appreciate it, Chris. Thank you.
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