Paul Winkler: All right. It’s “The Investor Coaching Show.” If you have gotten in your ark yet, trying to keep from being blown away by a tornado, what a fun day to be on the radio.
I’ve had these weeks where you had really weird weather and I’ve had to do weather announcements on the radio. I’m hoping it’s not one of those weeks. Evan Barnard is with me.
Evan Barnard: When I was driving up here, the Duck River was swollen. Harpeth is starting to get swollen. Coming up 65, I was thinking about whatever it was, 2011. I was thinking, Okay, I wonder if I’m going to have to get a hotel up here and I can’t drive home, and we’ll just be talking about roads that are closed for another four hours.
PW: That’d be fun. No, no. I’d just say, “Come on over to the house. Let’s hang out.”
EB: What year was that? What year was the flood? Was it 2011?
PW: I have a plaque in the other office.
EB: Yeah. Yeah.
PW: I stayed on the radio and I was doing announcements on the radio about that.
Brian Egan: 2010.
EB: Thank you. 2010, whoever said that.
PW: 2010?
EB: Yeah.
PW: Who said that? Brian, maybe?
BE: Hi, there.
PW: Hey. Is it Brian?
EB: It’s either Brian or God.
PW: Hey Brian, how you doing, man? We haven’t even said hi yet.
All right. I saw him earlier in the week. We were hanging out earlier in the week over at the station, talking shop.
Anyway, yeah, that was a fun day for me. That was pretty crazy.
Likelihood of Inflation
PW: Let’s see. There’s a bunch of stuff. Oh, there’s so much stuff to talk about this week. Oh, my goodness.
I’m really looking forward to getting into it, not the least of which is social security, some interesting stuff on social security. That was a topic of conversation.
Also, the inflation. There was talk about inflation and deregulation. Are we going to have inflation or not?
Things that could go right. There was actually some interesting stuff on what could go right in the economy. Imagine that, the media talking about what could go right.
EB: Oh, my goodness. Positive news?
PW: I know. Can you even imagine?
EB: Say it isn’t so.
PW: Yeah, and I actually did some deep digging and we’re going to get into this, but you know Clark Howard?
EB: Yeah, absolutely. Not personally.
PW: I’ve had a lot of people who have made comments to me, go, “Oh, your show just reminds me of Clark Howard because it’s railing against the establishment and picking on things.” I’ve got some good stuff from him.
EB: Cool.
PW: Yeah. I’ve got some stuff that we’ll get into. Okay, one thing that was talked about is Trump. They’re talking about Trump.
Inflation, what’s going on? What’s the likelihood of inflation? Of course, inflation is prices going up; it’s the devaluation of the dollar. You have more money chasing fewer goods, is really one of the ways that it’s been described in the past.
Of course, that can wreak havoc on somebody’s financial plan because if you go back to, as I’ve often said, the 1980s, you could live off of, in early 1980, ’81, a family could live off of $11,000, $12,000, something like that, and you can’t live off of anywhere near that.
People don’t think about it, but it is a silent tax, hence the reason that we own equities or stocks is because we want to have protection against inflation.
We’re fixed-income investments. As much as it sounds nice to have safety, safety, safety, income, guaranteed income, have protection all the way through retirement, you end up with guaranteed reducing income when you have the same paycheck that comes in year after year from your investment portfolio. It’s one of these things I have to tell people: Don’t ignore this.
I know it’s a silent tax. I know you don’t feel it. You don’t see it.
DOGE Being Deflationary
PW: People complain about eggs and now they’re talking about Thanksgiving. Or not Thanksgiving — what did I say Thanksgiving for? They’re not giving any thanks for this. Valentine’s Day, receiving a dozen eggs instead of a dozen roses.
EB: There was a meme about somebody proposing to a girl on Valentine’s Day and opening the ring box and there’s an egg inside.
PW: That’s right. That’s right. It’s the thing now.
That was the topic of conversation, so let’s just hit that. What was being talked about. Hopefully this isn’t going to be too loud and hopefully Nick can keep an eye on the volume.
Speaker 1: Is there anything other than DOGE that could be deflationary, Greg? We had Jeff Curry on yesterday. He said, “We can say, ‘Drill, baby drill,’ but it’s really going to be tough to increase that.” I could see, and I’m not sure that the oil industry wants $40 dollar oil or $50 dollar.
PW: Real quick there, he says DOGE being deflationary. If you have a lot of government spending, and it’s a lot of unnecessary government spending, you go back to Keynesian economics.
The idea is that he basically said, “Hey, you know what? If we’re going to drag ourselves out of a recession, we want the government to spend a lot of money because sometimes the government’s the only entity that will spend money during a recession,” so you get them to spend money.
Recessions, really go back to the Depression, it was deflationary and prices kept going down, but we had this weird thing that we were doing: “Hey, let’s make sure that we don’t have a reduction in anybody’s paycheck.” Literally, because you had prices going down and paychecks remaining the same during the Depression, people actually became better off and better off and better off financially, and you don’t hear that story about the Depression very often.
EB: No.
PW: Right?
EB: I’m thinking I’ve never heard that story.
PW: What happened is that you had high unemployment, though, because you couldn’t reduce anybody’s paycheck and you had deflation. You had to lay off people because businesses are not in business to provide paychecks. They’re in business to make a profit. Hence during the Depression, that was the problem.
We had prices going down. When you look at government spending, the idea that John Maynard Keynes actually put forth was, if we can get the government to spend, then what we can do is, now we increase the amount of money supply out there, and that takes away deflation.
That takes away that problem. Then it also can create jobs. That’s the other part of the whole thing.
You look at that and then you had Hayek, who was saying, “No, no, no, just leave things alone. If you leave things alone, it’ll come back on its own in the long run.” Then Keynes came back and said, “In the long run, we’re all dead.”
That was a debate that went on forever, but that’s why he’s talking right there about DOGE.
If you get the government efficiency, you can take some of this money supply out of the economy and it will be deflationary.
That’s why he was talking about that right there.
What Could Be Inflationary?
PW: Listen, let me continue with this
S1: So I don’t know if we get cooperation there.
PW: By the way, let me just, one other point that he was making there. He’s talking about oil. He says, “I don’t know if the oil companies want $40 oil.”
EB: If they want $40 oil.
PW: The idea being “drill, baby drill,” you’re not going to want to “drill, baby, drill” if you’re just going to drive the price down of the commodity because there is no demand for the commodity or there isn’t enough demand for the commodity is the idea. That’s why he’s talking about that.
Deflation could be that the cost of energy goes down so significantly, and that’s a big part of the cost of goods and services that we buy.
S1: Tariffs, whether they come or not, you’d have to say may be inflationary. Immigration, as you say, inflationary. Deficit spending, if all those, you extend the tax cuts and put all the other new tax cuts in there, I don’t see how that wouldn’t possibly be inflationary.
PW: Immigration, if you have low-wage workers leaving the United States, you’re going to have to pay somebody higher wages to do those same jobs, so that’s what he’s talking about right there. Go ahead.
EB: Some of these things, some of it becomes semantics. There’s a difference between a price going up and it’s not necessarily inflationary. It’s just the price itself is going up, but the dollar didn’t get weaker as a result of that.
If we increase the wage base and productivity gains all of a sudden, that wouldn’t necessarily be inflationary to do that. If the government isn’t going to spend, let’s just say, an extra trillion dollars that it doesn’t have anyway, to me, that would more than offset any wage inflation worries, because they’re not inflating the money supply. They’re just paying people for a job, a higher wage for a job.
PW: That’s his point there is if you have the money supply go down simply because we’re getting rid of a lot of spending, we don’t have to create more money to actually spend on these things, then that could help out.
Trump and Inflation
S1: I agree with you. I think Trump’s got an inflation problem for the midterms, not now. I don’t think anyone is going to say bird flu is Trump’s fault, and that’s why egg prices — Elizabeth Warren, obviously, any chance she can get for dissembling — but egg prices are not Trump’s fault, but he’s going to be blamed for not bringing them down.
Speaker 2: You could make the case, Joe, actually, that if this is the peak in things like eggs, that actually prices will start to go down now and Trump will be able to actually look back on a period of falling prices a year from now. The picture’s really not all that bad.
I agree with you on the oil price situation.
The paradox is that the only way you’re going to get the U.S. oil patch to drill more is with substantially higher oil prices.
Which is of course, exactly what Trump does not want, but there’s a potential offset here. As we know, he started talking to Vladimir Putin about ending the war in Ukraine.
Obviously, part of Trump’s hope is that this could lead to an end or at least an easing of sanctions on Russia. That might put more oil on the market. That could help bring the price down.
As for the tax cuts, the House Republicans are making brave sounds about big cuts in spending. If they’re big enough and if they’re front load enough, that could take some steam out of the economy also.
PW: Yeah, that could be really interesting. He talked about, mentioned also in that clip, tariffs as well. How much of it is negotiating, as we’ve talked about here, and how much is it really going to go through?
You had the steel stuff and the aluminum, and we’ll talk a little bit about that later, but that right there, in a nutshell, is why people have a hard time deciding, “Are we going to have Federal Reserve reducing interest rates, or are they going to increase interest rates as a result of everything going on because it’s going to be inflationary?” Go figure.
You really don’t know simply because there are just too many unknowns, but I like that this guy was saying, “Hey, there are a lot of things that are on the other side” instead of the media just tearing things apart and saying it’s just going to get bad. It’s going to be terrible. It’s going to be awful.
European Markets Outpacing the U.S.
PW: If you look over Europe right now and you look at what’s happening in European markets, they’re far, far outpacing U.S. markets right now.
EB: And Hong Kong.
PW: Yeah, as a matter of fact, you look at international value stocks. Now this doesn’t mean, “Hey guys, go out and buy international value stocks now, because they already went up a lot more than U.S.”
I’m just saying you had to own them before this all happened, but I thought that was super interesting. Why? Did you have something on that, Evan?
EB: Just Spain, the last year, was up 30. Germany was up almost 33. Gosh, who was the other big performer?
PW: Isn’t that interesting? Oh, that’s interesting. Yep.
EB: Hong Kong was up 38.
PW: Yeah.
EB: Yeah.
PW: That is part of what’s going right. If you look at these things being straightened out, you would think that America, America, America, everything is America first, make the U.S. great and make us all wonderful again here.
The reality of it is, that doesn’t mean that American stocks are going to be the benefactors of that. Doesn’t mean that American investors. … Actually, we see that it could be quite the opposite, but this guy was continuing. He was talking a little bit more about what could go right, and I thought it was an interesting conversation.
S2: I think that if I were to say that there were one kind of black swan out there that could really work in the Trump administration’s favor, it would be surprising resilience and determination on the part of congressional Republicans and the president himself to really get spending down. In some sense, that could actually be the best of all worlds, because that takes a little bit of the pressure off of aggregate demand, so it tilts inflation risks downward. It might also start to bring deficits down or at least stop pushing them upwards.
You get long rates that start to behave better and maybe you finally get some relief on mortgage rates.
The final thing that might actually do is take some of the air out of the dollar. We know, of course, that Trump cares a lot about the dollar, because it’s a major factor driving the trade deficit.
Renewed Confidence in Social Security
PW: That is something I’ve talked a lot about here on the show is the idea that when people talk about Bitcoin, I go, “Price of Bitcoin going up versus what? The dollar.” They’re competing.
I’ve said, “No, no, no, wait a minute. He has said many times that that is something that’s super, super important, keeping the strength of the dollar.” You were nodding your head over there like crazy, Evan.
EB: Just a reduction of government spending is a net positive, totally, in my view. I don’t see any downside. Even if there is, it’s like anything: It’s a recession if your neighbor gets laid off. It’s a depression if you get laid off.
PW: It’s a depression if you get laid off.
EB: That’s right, but the fact that those dollars aren’t coming into the economy, that drops down prices, supply and demand basically. The more solid the government’s finances are, just like unintended consequences of all kinds of things that we study over the years, if all of a sudden, people have renewed confidence in social security, that it’s going to be there — you don’t really know just how far-reaching that can be when people see the government making responsible financial decisions.
PW: Yeah. I think it’s interesting you say that because I’ve heard Trump say things like, “I want interest rates to come down,” and people laugh at him and go, “What does he keep saying? What’s he going to do? Is he going to take control?”
I don’t know that that’s necessarily what’s in the back of his mind. What I think of so much is, we think about inflation.
One of the biggest problems with inflation is, if prices start going up, people start to expect that prices will continue to go up.
EB: Go up, yeah.
PW: Because of that expectation, they’ll do this. They will buy right now rather than wait because they know the prices or they know, they think they know that the price is going to be higher a year from now. When they decide to buy right now to avoid that price increase, they actually create more demand for products, which creates more need to produce more products, which creates more inflation, which it’s a self-fulfilling prophecy.
The Government Borrowing Money
PW: For him to say, “I would like to see interest rates go down,” maybe just planting that seed that I’d like to see this happen, and it sets people’s minds in a different direction that maybe it’s not going to be inevitable that interest rates keep going up, which is so tied to inflation. I think that’s all part of it.
I think it’s just fascinating, really tearing this stuff apart and looking at what’s going on as far as fiscal policy. I think that you look at the government and you say, “The government is a borrower of money.” You have businesses borrowing money, you have people borrowing money, but the government is a borrower of money.
When they’re borrowing money, there’s a finite source of it, so to speak. You can increase money supply, but there’s a finite source of it, so therefore, it has an upward drive on interest rates when there’s a limited amount of money to be borrowed, because the government can crowd out other borrowing, as an economist would say.
They can crowd out other borrowers, and therefore, what ends up happening is that drives up interest rates.
Now, how much of an impact? That’s very, very debatable, but the idea being that if we can get an expectation of lower inflation rates in the future and lower interest rates in the future and lower borrowing by the government, we can actually drive back the long bond, which is, as he said, so tied to mortgages. That will be what people are really, really focused on.
If the mortgages aren’t driven down, the interest rates aren’t driven down, due to just how the economy is operated, it will be driven down by innovation. We will come up with different types of loans like we did in the 1980s to make it so that you can buy homes still. I’m not worried about that so much, but I think as an observer, I think it’s just interesting to hear what people are saying about what’s going on right now.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
