CW 383: Bond Market Predictions with Teeka Tiwari Editor of ‘Mega Trends’ at the Palm Beach Letter and Founder of Point & Profit

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Welcome to the Creating wealth show. This is your host, Jason Hartman. And thank you so much for joining me today. We'll be back with today's guest or segment in just a moment.

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It'S my pleasure to welcome Teeka Tiwari to the show. He is editor of Megatrends at the Palm Beach Letter and he's got a very interesting background on Wall Street. One of the youngest VPs ever on Wall Street. You're going to hear about that and we're going to talk about some stocks and the economy in general. Tika, welcome. How are you?

I'm great, Jason. Thanks for having me on the show.

Good, good. It's good to have you on the show. So pretty amazing Wall street background you have instantly Jordan Belfort came to mind when you said that before we started recording, but without the criminal element, hopefully.

Indeed.

But he was a quick and early rising star. Tell us your story.

Absolutely, yeah. I started working for Lehman Brothers when I was 18 years old. Pretty much just getting the coffee. And at 20 I became the youngest vice president in the history of Shearson. Lehman Brothers always wanted to work on Wall street, was fascinated by stocks from a very young age.

Wow, that's amazing. So just out of curiosity, before the financial crisis and so forth, what year was that you're talking about when you were 20 years old?

Yeah. So I started working at Lehman Brothers when I was 18 and I worked on Wall street for many years. And then in 2003 I left Wall street and I started up my own private equity firm. Got involved in real estate deals. Actually Buying a hotel and splitting off the land from the hotel was very successful. And then started getting into the newsletter writing business in 2005 and also started teaching people how to actually invest in the market using etf. Basically taking what I learned on Wall street and making it easy to understand for the everyday investor.

Fantastic. Tell us about your hotel deals real quickly before we dive into some investing tips for today.

Sure. In 03, interest rates were still relatively high. I found a hotel with a huge slug of land next to it in Antigua. We managed to negotiate a great deal. We bought the hotel and the land. I had a short term note and I was able to cover the note and make a profit by splitting off the land from the hotel. So we sold the land to a developer, then we fixed up the hotel and we got a year of operating earnings behind us and then we flipped the hotel. We ended up making a couple of million bucks. It was a great deal.

Good. Well, fantastic. Well, tell us what you're up to nowadays and what your thoughts are on the economy. The stock market, bond market, I guess we're going to particularly discuss.

Yeah, absolutely. About three or four months ago, I started a brand new investment newsletter called Megatrends Investing. And what I wanted to do was really prepare individuals for what I believe is a coming crisis. If you look back at the last several years, we've had this huge crisis in tech stocks. We had a huge crisis in bank stocks. We've got a third wave crisis coming and that is in the bond market. Jason, in my opinion, buying bonds here is akin to buying Internet stocks in 1999. There is no way to make money from buying bonds. If you believe that inflation, any sort of inflation, is going to be around. You cannot make money buying bonds here. In fact, you will lose money buying bonds right here.

Yeah, and I agree with you, because inflation really destroys lenders. And that's one of the big philosophies that I preach to my real estate investor clients. And that is about the concept of what I call inflation induced debt destruction. So inflation transfers wealth from lenders to borrowers because the lenders get paid back in cheaper dollars as inflation keeps debasing their return. And so as a bondholder, you're essentially a lender. And that is not a good position to be in in an inflationary environment. But, you know, it kind of begs the question, just drill down on that if you would, and tell us, first of all, what are you considering to be the typical return for bonds? And then what are you considering to be the real inflation rate?

I'm not going to take a stab at the real inflation rate because everybody's been wrong on that for years.

I'll do it for you. But. Okay.

What I can tell you is I think that bonds are going to offer negative returns for the next 25 years.

Oh my gosh. That's an amazing prediction, by the way.

And I think it's going to be in stages. I think the first period will be kind of that drip, drip, drip, one and a half, 2.2% losses. If you look at the 20 year period from 46 to 66, bonds generally lag by around 2 to 2.3%. If you looked in the final stage of that bond market falling apart, which went from 66 to 82.

So you're talking about 1966 to 1982. I just want to be clear on that.

Yes, that's right. You saw the average bond portfolio decline in purchasing power by somewhere around 83% during that period. So I think it will start off slow, Jason, and then it will pick up speed. So this is why it's so important, because we're going to have this huge period, this 25 year period where bonds are going to underperform and they're going to underperform dramatically. So if you're building your entire investment portfolio based on fixed income, you are going to destroy your future. If you bought bonds in 46 or if you retired in 66 and you said, oh, I've got a $2 million bond portfolio, I'm great. That buying power was completely annihilated throughout what should have been your golden years, your time to relax. Instead, it was a time where you saw your wealth get vaporized. That's the type of trend that we are moving into now, Jason, in my opinion.

Well, I agree, but gosh, a quarter of a century, I mean, you're making a prediction for the next quarter of a century. That's pretty amazing.

You're absolutely right. But life comes down to just a few decisions. What I do for my subscribers is I identify long term megatrends that we can play for years and years and years. And history backs me up here, Jason. When the bond market turns, it doesn't turn for a minute or two like an individual stock or even for a year or two. It turns for decades. If you look at the last major bond bear market, it went from the 40s until 1982. The last bond bull market went from 82 to, I believe it died last year, 30 plus years. This is a market that moves in a secular way. For an extended period of time. And if you get this one idea right, you can just make tons of money just by being on the right side of this trade. It's one little decision that can have a huge impact on your life.

Yeah, okay. All right, so what do people do? I mean, avoid bonds? I would agree with you there, but the stock market's pretty overvalued in most people's opinion.

I think that the indexes are overvalued, but there are still pockets of value within the individual equity market. And I think what you've got to look at is you've got to look at for companies that are growing their dividends and growing their earnings rather than staying with the defensive plays which are going to get priced like a bond, Jason, because they don't grow. I think what you've got to do is you've got to look for value stocks that are on the cusp of becoming growth stocks. And that's exactly what I do at Megatrends. Just by the way, if anybody has an interest in taking a look at what I do, the URL is megatrendsinvesting2.com that's the number2.com megatrends investing2.

Not spelled out, just number 2. No number sign, though. Megatrendsinvesting2.Com.

That's correct. What I do, Jason, is I'm looking for companies that are valued like a value stock, but there's a catalyst that's going to turn them into a growth stock. To me, that's where the rubber meets the road. If you look at it in a rising interest rate environment, growth outperforms value. I've identified some of these names that I think are just incredible values right now that are on the verge of really explosive earnings as interest rates go up. To me, it's an incredibly exciting time to be an investor.

Okay, well, interesting. So what are those great opportunities? I mean, everybody's a stock picker.

Most of the time, those tips don't work out well.

Let's talk about one idea that I think is incredibly cheap. There's a company, and I just published a buy recommendation on this company called MetLife, largest insurance company in the United States, trading below book value. Not only below book value, Jason, but it's trading at around the same book value level that it had from much of 2009. So that's just a fundamental mispricing of this stock. Typically speaking, an insurance company will trade at 1.5 times to 2 times book value. And the reason why it's so cheap is that interest rates are incredibly low. They just haven't been able to generate huge returns on the policy payments that they get. But if you are a believer as I am that interest rates have bottomed and are moving higher, in my opinion, there is not a safer way to play a rising interest rate environment than buying MetLife. You don't lose money by buying well run insurance companies below book value. It just doesn't happen.

Okay, so that's interesting because you know insurance companies, their favorite investment is real estate. It's income producing real estate. And you know, I'm sitting right near an office building at this very moment that has a big four lease sign in front of and below it says owned by MetLife. So you know, that's interesting. They like apartment buildings, they like office buildings, they own all kinds of real estate properties.

When you own an insurance company stock like MetLife, how much of that is really a real estate investment versus an investment in the insurance company's business?

What? Well, you make an excellent point.

Yes, they are huge owners of real estate, but if you look at their portfolios, actually their biggest investment is in bonds. You might ask yourself, well, why would you want to invest? Hear me out here.

I know, I know, I know. I'm just giving you our time. Go ahead.

Why would you want to buy an insurance company that has an investment in bonds? Here's the reason why. They are constantly getting new money in that has to be re put back into the bond market. So as bonds go higher, as yields go higher, they're constantly reinvesting at higher and higher rates. The other thing is, if you look at their bond portfolio, compared to every other major insurance bond portfolio, they have the shortest duration. They have bonds that are coming due faster than anybody else. Now why is that a positive? It's a positive because they're going to be able to deploy that money at higher rates at a faster level than everybody else.

Again, it's kind of they're in the best position. They have to invest in bonds. There's nothing that they can do about that. It's always going to be a big part of any insurance company's portfolio allocation. The difference is that they're going to have more money coming due sooner than other companies. Other companies, they have a bond duration of 20, 25 years. MetLife's average bond duration is 10 years and less for much of their bond portfolio. So on a rel basis, it puts them in a much more compelling position than their counterparts.

Okay, okay, interesting. So you explained the bond element to it. Anything Else Besides good old MetLife.

Yeah, what else am I looking at here that I think looks interesting? I'll tell you another idea that I'm looking at, although it is a little beyond.

My. Actually, no, it's right near my buy up to price. A company called mga, Magna International. And Magna International is one of the largest providers of outsourced car parts in the world. They're an international company. And what this is is a play on a resurgent consumer, on moving back to normalized auto sales, which as you know, during the financial crisis auto sales just got completely destroyed. So if you are a believer that the US going to limp back, that we are not falling into an economic abyss, never to return or to be heard from again, then you've got to be a believer that the US consumer is going to come back, consumer spending is going to come back and companies like MGA are going to benefit. We started buying this stock around 85. It's been as high as 101, it's at 97. I have a buy up to price of 100 and I think this is something to get to 120 this year yielding about 1.5%.

All right, very interesting. And what are your thoughts just on the general prediction of the future in terms of inflation or deflation? I know you believe in inflation, but do you have any thoughts or specifics or predictions on that?

Yeah, I do. I don't think we're going to see out of control inflation. I do think inflation will pick up. Remember, the biggest component in inflation is labor costs and we still have a pretty slack labor market. So long as the labor market is slack, you're not going to see out of control inflation take place. I think if you're betting on deflation, you're on the wrong side of the trade. And anybody that's buying bonds here, whether you know it or not, you are making a de facto bet on deflation. And again, the demographics in the United States and the psychological makeup of the average consumer in America does not support a deflationary environment. So we're not Japan. So people that are drawing parallels to Japan, it's a mistake. They have a completely different demographic makeup than we do. They have a completely different mindset.

And they have a declining population. I mean, that is the thing that's really killing Japan. I mean, you can look at their fiscal policy, you can look at their monetary policy, you can look at a bunch of things, but at the end of the day, this overriding demographic problem they have is just going to make it Very difficult for them to overcome because it's a very insular economy, It's a very insular society.

The only thing that can save Japan long term is if they open up their borders to immigration, which they have a long history of being very xenophobic. So it's probably not going to happen. So people that are pointing to Japan and saying, well, that's going to happen in the States. I got to tell you, you're going to be on the wrong side of the history. You're going to be on the wrong side of the market and you're going to leave a lot of money on the table.

Yeah, interesting. Well, drill down a little bit if you would, tika on the labor cost issue because we do have a very sluggish labor market. A lot of people are unemployed still, a lot of people are underemployed. It's amazing the quality and educational background of taxi drivers, Uber and Lyft drivers for the ride, the innovative ride sharing companies out there. I just cannot believe it. Every time I get into an Uber car talking to the guy, oh yeah, I have an mba, I used to work on Wall street, you know, I'm an industrial engineer. These are the types of things I hear. I mean, these people are massively underemployed and it's terrible. Go to the coffee shop and your barista has got a college degree, if not an advanced degree. A lot of times it is really a terrible thing, frankly. And then retail, which is sort of the de facto catch all for people in a sluggish labor market, has been shedding jobs. I mean, people are going online to do their shopping. And so you've seen the retail sector just shedding jobs dramatically. Retail properties, I wouldn't want to be investing there because I think the concept of shopping is changing rather dramatically. Although, you know, it'll still exist. I just, you know, I don't think it's a growth industry, I'll put it that way. But when you look at the labor cost, I mean, you know, you look at Europe and I think the thing that can drive inflation is just purely fiscal policy. Our government is massively in debt and monetary policy on the side of the printing and creation of fiat money has just run rampant. Can't we have inflation without the labor market improving? In other words, what has to give in the equation is the standard of living just declines. And that's what we see in Europe, that's what we see in Japan. I mean, people are living in micro, micro, micro apartments in Japan. It's A sad, sad story.

In order for quantitative easing to create inflation, we would need the banks to start lending that money. But if you look at the M2 numbers, that money has never left the banking system. It's just been traded back and forth among the banks or redeposited back into the Fed, which is why it didn't create inflation. So I don't think inflation is going to come from monetary policy. I think if it was going to come, it would have happened.

Okay, so before you go on, aren't the banks just like every other investor in the sense that when that wealth effect occurs, and we saw this in the last few real estate cycles, of course people feel wealthy, they've got money, they look around, they look at their personal balance sheets and they think, gosh, you know, I've either got money to spend or invest or credit facilities that I can use to invest or spend. Investing is obviously the better alternative to spending. But that money's eventually going to trickle down and hit the streets. Isn't.

Hasn't so far. And that's been a big problem.

I mean, you can't say it hasn't. Right? I mean, that's not a totally fair statement. I know you're saying that figuratively, but some of it has. Right since the crisis.

I'm sure some of it has. But let's look at the real estate market, the refi boom, that happens, and it only happened to people that had excellent credit scores that never got down to even, not even subprime. You had to have credit scores above 720 to get access to capital. When we were at 3.3%.

Had the banks loosened credit standards a little bit, I think you would have had more of a boom. If you look at the people that have benefited from really low interest rates, Jason, it's been either one, the wealthy or two, the fiscally conservative that have excellent credit scores. When I say it hasn't trickled down, I mean it hasn't trickled down to the man on the street, the average everyday person that has maybe a 650 to 680 credit score, that person hasn't benefited at all from quantitative easing, in my opinion.

Yeah, well, that's really kind of almost another discussion, but I think that's one of the ways in which the banksters, especially from a central banking, big banking picture, are essentially taking advantage of the population because they create a bubble. I mean, if you look, this is a bit of a conspiracy theory, I'll admit, but you always see these bubbles. I mean, the Federal Reserve 100 years ago when it was formed, one of its stated purposes was to eliminate the big swings in the economy by evening out the money supply, by controlling things, by having some central power that would smooth things out. That didn't happen, right?

No, I mean all they've done is create bubbles. They created the tech bubble when long term capital management should have been left to go out of business. Instead they saved them and lowered interest rates. They created the real estate bubble when we had the crash in 2000 by lowering interest rates. And then now they've created the biggest bubble of all, the bond bubble. This is going to be one.

But don't forget the student loan bubble.

Yeah, indeed, indeed. For people that can't even get a return on that investment. But for me, the event that I'm tracking is even bigger than all of those events and that is this bond bubble that's been created. It's the biggest bubble in human history. It's $38 trillion large. So you've got this incredible bond bubble, these yields that are totally perverted and it's just going to destroy millions and millions of investors that that think they're doing the right thing by buying these bonds or buying these income investments. But again, they're just getting fattened up for the kill again by the Federal Reserve. My job here is just to warn as many people as possible, hey, be aware, this is coming and it's coming a lot sooner than you think.

Yeah, I would agree. I think that is happening. But yeah, interesting. It's a scary thing. And this is what most people are doing. They've the general middle part of the population always becomes the sucker and they are the ones who get burned by this. So it's unfortunate. Hopefully the word will get out and people will avoid fixed income. The other thing I wanted to say about bonds is when you look at it from the bond issuer perspective, what happens in an inflationary environment is that their debt becomes cheaper to repay. So they, the bond issuers who you're essentially lending the money to, in essence, they get a benefit. The wealth transfers to them because their debt looks really cheap. But if we have deflation, I mean, I think there's a small segment of people out there who believe deflation is coming. Harry Dent being one of them that I've had on the show several times. He predicts gold at $250 an ounce. Ultimately he thinks it's going to go below 750 fairly soon. We'll see. I don't know if he's going to be right. Or not, but whatever. So if deflation occurs and that debt becomes more expensive to pay, I think we've got to be concerned about defaults, bond issuers just defaulting and walking away from their debt. Right? Is that a concern?

Yeah, well, that's certainly a concern. But again.

I just have trouble getting my head around dense arguments that we're going to see inflation.

I agree, I agree.

Going to verge off here a little bit. But if you look at the demographics, if you look at the next section of peak spenders, the millennials and the gen Xers in 2017, you've got this huge demographic shift of these people coming into the market, coming into their peak earning years. And yes, it's not going to be as big as when the boomers hit their peak earning years in 82. Not even close, but it's still incredibly positive for the US Economy.

When you say that, when are saying Gen X and Gen Y will hit their peak earning years and peak spending years too, because that's fairly far away.

In 2017 that wave will start which will mimic the wave that you saw in 82 when the boomers started hitting their peak earning years. If you look at the demographics, it just doesn't support a picture of deflation. If you also look at what's going on with energy, that we're moving towards US Energy independence, look at onshoring. So people are actually coming back to the United States to bring their manufacturing here to the United States. You got to look at this whole big picture and it's not deflationary, it's inflationary.

Well, how does the onshoring make it inflationary? Because it's more expensive to manufacture here.

Well, it's going to create demand for labor and that's inflationary. You're going to have more demand for labor. And getting back to your original question about, about, well, what's going to turn the job market around? I think it comes down to capex, Jason. What you've seen here is most businesses in the United States, I'm talking about S&P 500, they've been deathly afraid to reinvest in their business. So what they've been doing is they've been investing in their stock, they've been doing these huge buybacks, they've been raising their dividends and Capex spending has been really muted, really, really muted. But we're starting to see an uptick in Capex. You can only postpone investing in your business so long before competitors start eating your lunch. I think if you're looking for an area to follow for a potential leading indicator. Look at Capex on the S&P 500. It is starting to tick up and I think that is going to help spark an uptake in new jobs that will help create some wage inflation, which is a good thing.

Yeah, that really goes to the other point that I made earlier that there's all this money sitting on the sidelines and eventually, eventually it trickles down. Now you're saying it hasn't really happened much with the banks and it won't really happen that much with the banks, but certainly that's the pressure. Money always looks for yield and you got to invest it, you got to use it to get yield. Because you certainly don't get yield by saving it.

Correct. I think that's going to be driven more by corporate America than by the banks. I think as capex budgets get increased, I think you're going to see some of this slack starting to come out of the labor markets.

Interestingly though, the thing you didn't mention when you talked about inflation coming is you didn't mention fiscal and monetary policy. I mean, those are giant. You haven't kind of glossed over those.

Well, they are issues, but however, let's look at the facts. Government deficits were 10% of GDP in 2009. They're now down to 2% of GDP. Our debt is out of control and the only way it can be paid back is through inflating it away. In my mind, there's no question in that. But if we look at the pace of government spending, it's actually slowing down. If you look at the most recent data on receipts, on income tax receipts, they're up. They were up 15% in March. That's the last data that.

I was looking at. So again, government spending is declining. It's declining really dramatically. So governments are always going to spend more money, money than they take in. Our debt, yes, is wildly out of control, but I think inflation will take care of it. You raised the point of.

Big debtors basically benefiting from inflation. There's no one that's going to benefit more than the US government. And again, I want to make the distinction. The US government's balance sheet is highly leveraged. But if you look at the corporate balance sheet and the individual balance sheet sheet, we're seeing some of the lowest leverage ratios that we've seen in decades. The consumer is in much better shape than they were 10 years ago and so are corporations.

Well, good stuff. Give out that website one more time and wrap up with any closing thought you might have.

Sure. It's Megatrends M E G A T R E n d s investing2.com megatrends investing and then the number2.com tika any closing thoughts? Again, just please heed this warning. Remove yourself from the bond market. If you own any preferred stocks, find out if they're perpetual preferreds. Perpetual preferreds have no maturity date. They will just trap and crush your money if interest rates spike up the way that I think they will. So please go to my site. I have a whole presentation on this idea. Believe me, it could absolutely save your retirement. So please check it out. And Jason, thanks for having me on the show. It's just a pleasure being here.

Pleasure is all mine. And watch out because inflation is most likely going to come and that's bad news for China because they're going to get paid back in cheaper dollars. Pretty good deal for the U.S. indeed. We didn't talk about the geopolitical thing. Maybe we can talk about that on a future episode. But Tika Tiwari, thank you so much for joining us today.

Thank you, Jim.

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