We've Suffered Through Inflation...Will We Now Face the Dangers of Deflation?

Plus, Ric helps a listener avoid falling for a crypto airdrop scam...and hear from three top CIOs

Ric Edelman: It's Friday, September 27th. On today's show, inflation, plus a conversation with top CIOs who share what they're telling their advisors to convey to clients today.

Are you upset about inflation? Yeah, I think it's reasonable to say that you are. Oh yeah, the government's bragging that inflation is coming down dramatically, it's no longer a threat, but we're still stuck with the higher prices that the previous year's inflation has brought upon us. Be careful, because if you really want prices to come down, well that's the opposite of inflation, that is deflation. That's a risk, too. How big a risk? Well, the ultimate deflation is called depression. You remember the stories of the Great Depression of the 1930s, right?

Well, we are, in fact, starting to experience deflation in one big area of the economy, the energy sector. Give you a couple of examples of this. In China, the solar industry is in turmoil because of massive overcapacity. Prices and profits are down. Chinese factories are producing so many solar panels every year or so, that there are now five times more solar panels coming out of China than in the rest of the world.

That's a 300% increase in the past three years. China is making so many solar panels that they alone are producing twice as many as the entire world installs every year. This massive supply is driving down the costs. That's great if you want to buy solar panels. It's now less than 10 cents per watt, but it also means that the companies that are making the solar panels can't make any money from doing so. The panels are now selling for less than what it costs to make them, so companies are firing workers, and they are killing plans to build new factories.

You can imagine the trickle-down effects of all of that. In Spain, the wholesale price of energy is often near zero. In Germany, wholesale prices went negative. Power companies there are actually paying customers to use the energy that German power companies are producing. This is happening because last year, Europe installed twice as many new energy production facilities as the U. S. did. 56 gigawatts of new solar power, 17 gigawatts of new wind power. This surplus of energy means lower costs which is great. We love it as consumers, but it also means lower profits for the companies to the point where they're laying off workers and some might even go out of business.

This is also starting to happen in Africa. That's the poorest continent on the planet. African poverty, they say, is a result of energy poverty. Most of the population in Africa doesn't have electricity. There are 600 million people on the continent. 43% of them cannot light their homes or charge their phones.

And those who do have access to electricity find that it's not reliable. 40% of companies in Africa say they routinely experience outages that interrupt their business. And so, Africa has been installing solar panels. They've just installed a record number of them. 65% of new capacity of electricity over the past two years in Africa has come from solar. And the continent's goal is to get power to 300 million more people by the end of the decade. So they're big buyers of solar.

The problem is they're not buying enough relative to how much solar is being produced by countries like China and others around the world. We need to have a balance between trade and sales, between production and consumption. Otherwise, our inflation may become deflation with very negative economic implications.

 

Hey, a reminder, if you missed the two webinars we did this week, one this past Wednesday (Unlocking Alpha in Crypto-Equities and Beyond) and one last Friday Q4 Crypto Outlook: What You Need to Know Now, you have an opportunity to watch the replays. Details on both are in your show notes. Check them out. You'll really enjoy the content here on both if you have any interest at all on the topic of crypto.

 

The Truth About Your Future continues.  I got a question from Gene, and here's what he asked: “I looked at my crypto wallet and found that I received a token with a $14,000 value. But it says I have to buy another token in order to sell this and get the $14,000. It appears to be real because the value moves up and down with the stock market. Is this real?”

Ric Edelman: No, Gene. I don't think it's real. I think it's a scam. What you're talking about is called an airdrop. This is a very common strategy or tactic in the crypto community where you suddenly receive coins or tokens into your crypto wallet that you never asked for.

In legitimate cases, they are a marketing tactic used by companies that are promoting a new coin or a token or a business or an advertising thing or whatever. It's kind of like getting a coupon in the mail or looking at a coupon in the newspaper for 25% off. When you go buy something, these coupons entice you to purchase so that you can experiment with the product…see if it's something you otherwise might not have bought that you might actually like, and they're willing to give away freebies as a marketing shtick. That's when they're legitimate and that's what airdrops are in the token community. You might not be aware of this token. You might not be familiar with this protocol. They send you a free sample, in other words, and they invite you to check it out, look into it, and it may turn you into a customer or investor. That's what a legitimate airdrop does.

An illegitimate airdrop is a scam. And that's what this one you've described sounds like. Why? Because they're suggesting that the token that they airdropped to you is worth $14,000. But wait, the only way to capture the 14 grand is for you to buy another token. That sure sounds like a scam. I don't think the $14,000 is real. And I think if you were to buy this other token, you would discover that what you're buying is worthless and probably part of a pump and dump scheme. Also known as a pig butchering scam. So no, I don't really think it's real. And I say that without really knowing anything about the token you're describing, because you didn't really give me its name. So, I would encourage you to investigate further and not just within crypto chat rooms where the criminals will lurk, but go to state and federal regulators, and do open-sourced investigation on the internet. Just post open questions in more harmless sites, not Reddit chat rooms trolled by crypto enthusiasts.  You can try to ascertain what's really going on here. But my radar's up. I think you're facing a scam.

 

This is The Truth About Your Future, I'm Ric Edelman. The following conversation is with Jack Ablin, CIO, Cresset Capital; Brian Andrew, CIO, Merit Financial Advisors and Elliot Dornbusch, Founding Partner & CEO, CV Advisors. They were participants in my Wealth Management Convergence back in March and are Chief Investment Officers from some of the biggest investment management firms in the country on stage:

So, we've had a lot of conversation earlier this morning about a variety of different categories. So, I want to just run through the list and I'd like each of you to comment on your view, outlook and engagement in your firms to the degree that you make these asset classes or investment areas available and what your thoughts are.

And we're going to start with, obviously the elephant in the room, bonds and interest rates. So, tell me Elliot what, what's going on with bonds and interest rates?

Elliot Dornbusch: Well, rates went up already at the long end of the curve to 5%. Now they're down to 4%. I think bonds are back in an asset allocation strategy. Over the next few years, probably three cuts and eventually a couple more as this economy slows down, the curve will become steeper. For asset allocation to have an allocation strategy in which you have longer term bonds that are yielding around 5% to 6% at an investment grade level. I think it's a great conservative part of the book with very little downside.

So, we do have an allocation to fixed income that is appropriate for different portfolios. We also manage endowments and foundations and banks. We have the treasuries of banks, in our firm. So, they only can invest in fixed income. So out of the $14 billion that we oversee, probably have around $6 billion in, ,

Ric Edelman: So, generally speaking, Jack, would you say that you are, today more long and quality, or are you more high-yield or more short in bonds?

Jack Ablin: First of all, I love bonds. I started my career as a mortgage-backed securities trader, in the early 1980s, the 10-year treasury was 14.5%

Ric Edelman: The good old days,

Jack Ablin: And I thought I was a genius just by holding bonds.

I didn't realize I had a huge Paul Volcker tailwind behind me. That said, as everyone knows, bonds have been trying to compete for capital between 2009 and through the beginning of 2022 with one arm tied behind its back. And now at long last, yields are where they need to be. So, the way I see it is really, there are three ways to earn income in the bond market. One is through interest rate risk, right? The longer the maturity, generally you get higher returns. Second is with credit risk. If you delve into lower quality credits, you should be paid for that. And then the third is illiquidity risk.  If we get below four, we would sell. If we got above five, we would buy. I think right now, private credit is probably one of the best opportunities on a risk-adjusted basis, that I've seen, certainly in the fixed income market. Senior secured cash flowing I think you talked about yielding around 12 to 12.5% right now.

Ric Edelman: That is something that you weren't doing as much a couple of years ago?

Jack Ablin: No, none.

Ric Edelman: Do you think you'll be doing it a couple of years from now?

Jack Ablin: It's hard to tell. One of the ways we measure illiquidity is really duration. So, you could just take a traditional duration metric and time your cash flows. And the fact is that most of your cash flows will return to you in private credit in three years. So, three years from now if rates are where I think they probably should be in the overnight basis, closer to 2.5%, we'll reassess.

Ric Edelman: So, Brian you share that view private credit is where it's at?

Brian Andrew: Yeah, I would share that view. I also think it's important to keep in mind that, we've had a pretty long tailwind, so I didn't start out trading mortgage-backed securities. I was trading CMOs about the same time.

Jack Ablin: I was selling to you then.

Brian Andrew: Yeah.

Jack Ablin: I was selling to you.

Brian Andrew: Nobody wanted to do the math. But for most of my career, as a result of that, we've had lower highs and lower lows in interest rates, which has been a great tailwind. And then I think. people have to think about an environment where we have higher lows and higher highs that persist for an extended period of time.

And so, interest rate sensitivity, as an example, becomes a much more important conversation. In the session this morning, they were talking about financial plans for people who are a hundred. So then duration in a bond portfolio, maybe is less of an issue. But in a rising rate environment over time, we're just in a different situation than we were.

Ric Edelman: Would you say that you are allocating higher to debt today than equities, than a year ago?

Brian Andrew: Than a year ago, yes. We have more of an allocation to bonds because we've been using cash to allocate to bonds, and certainly more than two or three years ago, but I think in terms of thinking about the average duration risk that a client has, the average maturity of bond portfolios going forward, it will likely be shorter than it was a decade ago.

Ric Edelman: Yeah, I mean, if you can get a 12 or 13% coupon in private credit, are you expecting that kind of a return, Elliott, from the equities market this year?

Elliot Dornbusch: Well, this year is already at eight, and people didn't think that was going to be the case. I do agree that private credit is a great opportunity today, because your question was targeted to rates and what's happening with rates, those private credits are not going to be influenced a lot by short movements on the Fed, or movements on the ten-year rate.

But I do see, for people that can take illiquidity risk, a higher allocation into private credit. For people that want liquidity, I tend to be more for quality. I think that the spread between high-yield and investment grade is not wide enough for us to take a high-yield risk. And I actually think that if you go longer in the curve, you're going to be able to roll down the curve as the Fed eventually will lower rates. You can yield around 7%-8% over the next three years in investment grade credit. So, you're comparing 8%, which I expect to earn in investment grade, A- credit in the next three years annualized, versus 10% to 12% in private credit, a little bit illiquid, lower quality. So, it's equivalent, the type of risk reward that you're taking in both.

In terms of equities, to which you're referring, look, the equity market, is highly priced, but there is a lot of cash in the system. So, my perspective is any type of dip that the equity market will have, there's gonna be enough liquidity and cash equivalence to support the equity market.  I wouldn't be surprised if this year the equity markets ends up 15%. A lot of the things that have driven the market up have little to do with multiple expansion.  But also the new, artificial intelligence, NVIDIA, a couple of these names that have actually pushed the market a lot higher, and there's a reason for it.

Ric Edelman: One of the big worries that people have been talking about over the past several months, is, the state of commercial real estate, between the work from home thing and empty office buildings. They're generating half the rents that they used to be generating. At the very moment, they've got to refinance at far higher rates, resulting in massive defaults and foreclosures around the country. $2 trillion or so is coming due over the next year and a half or two. Tell me, Jack, what's your outlook on commercial real estate?

Jack Ablin: Sure. I'm not as pessimistic about the debt maturities. Granted, it is certainly focused primarily on office and even certain parts of office, I think newly constructed Class A office buildings are in pretty good shape. Where I see an issue is just the denial of remarks.  The fact is right now, even in multifamily, what we're seeing in cap rates, are not even. And so if I can get a higher yield, in CNBS, than what the cap rate is offering, our view is I'd rather own real estate debt right now than real estate equity. Until the markets adjust.

Ric Edelman: Could those debts be loan to own?

Jack Ablin: It could be loan to own depending on where we want to go in the structure. So that's one of the debates we have right now. Do we just want to go super clean, just, first position and call it a day.

Ric Edelman: And that's interesting, isn't it? That you're describing that you might actually have a higher return on the debt than owning the property. And if things blow up, you end up owning the property.

Jack Ablin: That's it. And well, all you have to do is compare cap rates, and unless you're pricing in some crazy swap curve where all of a sudden, rates are going to come down and you're going to be able to sell at a four cap. I just don't see why someone would want to own income producing real estate at these prices.

Ric Edelman: Do you share that view, Brian?

Brian Andrew: Yeah, I think that's right. I also think that the market is really bifurcated. I live in Milwaukee, Wisconsin, 90 miles to Chicago, and I feel like every time I make that trip, there's another, ten warehouses being thrown up somewhere along the freeway and so, if you think about logistics, and even in manufacturing we're seeing a resurgence of build out from a manufacturing perspective.

So, I agree with the notion. I think there are some parts of real estate, though, that are still in the early stages of a boom. So, you have to think about where you want to be in real estate. As opposed to just taking commercial real estate as a whole.

Jack Ablin: And to follow up, public real estate is already adjusted, right? So, public office real estate's down over 30% over the last two years or so. Private office real estate is down around 15%. And I do think there's an opportunity in public real estate, especially when we start to see that fact.

Ric Edelman: That crash has already occurred.

Elliot Dornbusch: Right. I mean, it has corrected. I do think there's an Armageddon coming in private office space. It's just a matter of time until banks let it go, until people foreclose. We've already seen it. We were in a transaction in Texas where we bought a building at $30 a foot. That building was sold, four times higher, five years ago and we bought it with no cash flow. It's a great building. So you have this stress already. It's just a matter of banks letting it go and the system letting it go and cleaning itself up.

In the public markets, of course, it's liquid and people can trade it. You can see what happened with Blackstone and B. Reed and all the fiasco. And you can see also other segments, but on the multifamily side, I completely agree that the cap rates are going to have to wait. The properties may be okay. They may be rented, maybe they're not increasing rents at 5% a year.  So, the asset is fine. The problem there is the way they financed it. So until the banks get a reality check and there's a refinance moment and they come up to the equity partners and say, you have to refinance this building or multifamily and come up with 20-$30 million and they let go, either you come in as a lender that ends up owning the property, or the bank is going to have to foreclose it. So, it's just going to take five years. And meanwhile, there's a lot of people praying, which is not a great strategy.

Ric Edelman: Those people being in the commercial real estate sector you're referring to.

Elliot Dornbusch: Yeah.

Ric Edelman: Jack made the distinction beween public real estate versus commercial real estate. And then you mentioned Brian, warehouses. There's a lot of different types of real estate throughout the country. Is there a particular sector in real estate that you think is terrific right now that is worthy of inclusion?  If it isn't commercial real estate, where is it?

Brian Andrew: I think manufacturing is one of the best areas right now because there's so much on-shoring happening. And as a result, there's a need for space and most often, the deal is attractive. It has somebody who wants to be in the property because they have something to do there.

They don't necessarily want to own the asset, but they need a place to bring something from offshore onshore. So, I like that space a lot. There's a lot happening there and I think we're still in the early innings of that.

Ric Edelman: Jack?

Jack Ablin: Yeah, talk about sticking our necks out. We are actually building  industrial property spec, in secondary port cities. So, like in Newark, in Savannah, and other places, we have sold a couple already. So that's one area. The other is, we also have found that the dynamics in hospitality and in, lodging is pretty favorable. There has not been a new hotel constructed in the last few years.  And so we're partnering with the Marriott family in buying, select service Marriott hotels.

Elliot Dornbusch: It's a matter of price. There are pockets everywhere. They mentioned too, Miami, if you can find a great multifamily at a great price in distress, it's a great thing to do. The high end in certain areas in Florida is doing very well. It has slowed down, but development in those areas is, people are moving towards to Florida. So, I could see great deals being done. And in direct lending, there's a property that had a loan just right next in Indian Creek to Jeff Bezos, the property that he bought.  And it was ridiculous. He bought the land for $50-some million dollars and the next-door neighbor was borrowing, for the same property at $20 million. So, there are buckets and you just got to find them.

Ric Edelman: It's hard to scale when you're doing something like that, it's all opportunistic.

Elliot Dornbusch: It's opportunistic. It's not like you're going to be able to throw into a pool of multifamilies and ride the wave of lowering rates and   lowering cap rates and making money.

Ric Edelman: So how do you translate, let's say you find that opportunistic deal, how do you translate that into an investment opportunity for the clients of the advisors in your firm?

Elliot Dornbusch: Well, it depends. Not everybody's for every type of deal. We have clients that are looking for one thing or looking for another thing, but there are firms that specialize in direct lending, for instance. You can, if you know the credits in there, you can do it. There are firms that are doing, let's say B and Cs, or there are firms that you could do it in a pool vehicle.

But when you find those unique opportunities, you find the right family for that fit. And we actually don't have many families. We have 110 families managing $14 billion. So these families are large in nature. We don't really have financial advisors the way that Mariner has and a thousand advisors. We are five partners. So it's a very tailored.

Ric Edelman: You're going to go to these, families and say, do you want to participate in this?

Elliot Dornbusch: Yeah. You want a $20 million loan on this property, it's paying you 12%. We want to keep it. They're not gonna default, but in the meantime, you're gonna earn 12%.

Ric Edelman: Got it. So, China, Brian. Bullish or bearish on China?

Brian Andrew: Bearish.

Ric Edelman: Anybody disagree with that?

Jack Ablin: I can't disagree with that.

Ric Edelman: Tell me why, Brian, you're bearish on China.

Brian Andrew: A couple of reasons. I think, the primary reason just has to do with demographics. The fact that the workforce is shrinking at a rapid rate. We can argue about whether the data's right or wrong, but if you just do the math over the last 40 years, they're in a difficult situation. They've spent hundreds of billions of dollars all over South America and Africa. Trying to buy favor with a lot of countries doing infrastructure projects, but most of that is financed with debt, and they don't have an internal consumption, to grow the economy. And I think they had hoped that was going to take place and it's not. So, if you're an export driven economy forever and no consumption internally, that just has to end badly. Because eventually you have what's happening right now, which is people don't benefit from the same off shoring costs because labor costs go up, and as a result they start to pull back, or they move it somewhere else in the world. And that's the situation that they're facing.

Ric Edelman: When you say end badly, what does that mean?

Brian Andrew: Well, I think if you look at where China ends up, it's an extremely over-leveraged economy. It has thousands of years of challenges between the cities that are on the coast and the internal part of the country. And those almost always happen when the coastal cities are doing a lot better than the people in the internal part of the country. And the poverty is tremendous there. The people that are benefiting from, exports over the last 20 years are the people on the coast.

And so, there's potentially political unrest there and that could create even more problems and challenges. And you're starting to see a lot of people pull back on their investment there.

Ric Edelman: Would you say that this helps to explain some of China's aggressiveness around the world and in the region with Taiwan and so on?

Brian Andrew: I think they have to be able to show a win somewhere. Because they're not winning at home.

Ric Edelman: So, when you say end badly, that really ends badly.

Brian Andrew: Potentially that ends badly.  Yeah.

Jack Ablin: There's an interesting book on the subject. If you buy the argument about, East-West decoupling is what we call it. There's a book, I'm sure many of you have heard of, The End of the World is Just the Beginning, by Peter Zeehan, who looks at the world through three lenses, demographics, energy production, and food production. He figures in a world where we start to go back to our respective boundaries and kind of close ranks, who's best positioned in such a world.

And what he concludes is, if you look at the US as a block in North America, Mexico, Canada, and US, the demographics here aren't bad. If you consider Mexico as part of that China, obviously not so great. Food production, we're sending food all over the world and th US just by itself is producing 13 million barrels a day, and exporting natural gas now through LNG.

So, all three elements are really well positioned for us, whereas China relies on 8,000 miles of transport from the Middle East to get their energy. They're not supplying, they're not growing enough food for themselves. And without the US overseeing global trade, if we decide, alright, we don't want to start patrolling the Red Sea anymore, we're not going to be the policemen of the world. I think there are gonna be many regions of the world that suffer as a result. But I think that, like I said, the North American trading block is actually very well positioned.

Elliot Dornbusch: You guys mentioned two great reasons why to be bearish, but I would argue that some of those reasons are more multi-decade reasons. Like these demographics. We've been talking about demographics in China for decades. What's gonna happen? I think that the thing that gets me very, bearish is the political situation in China. And the change in regime and the attitude. I think that Xi has an attitude of a dictator that will change China in years, not in decades.

They have a demographic problem, but he's accelerating a huge problem. He's not going to allow middle class to emerge as a consumer, which you alluded to, but this political regime for those who have lived it and I have lived it, I come from South America. It changes the situation extremely rapidly.

And people talk about the population rising up and the Chinese Communist Party being afraid of the population coming up and taking them out, it's not happening, it's not gonna happen. They have complete control. This is not 1800s, where you take a politician out of his bed and you can't find him.

This is a situation where they have military power, they have resources, and the population is completely under control. So they can do whatever they want. And he's not backing out. So, I think he's gonna change China in the next five years. And in five years we will not recognize what we see and what we perceive of China.

I'm completely out of China. I don't want to touch it. I don't want to have anything to do with it. And that has happened since we saw a change in attitude. We've seen it in South America and Venezuela. We've seen it in Turkey, we've seen it in many places. And I think this guy's for real, and what I'm afraid is Taiwan.  At some point he'll take Taiwan, maybe there is an implicit agreement with the US that they're going to let the US build the semiconductor industry outside Taiwan because that will disrupt the entire world and that will create a big situation, not only for the US, for Europe. So maybe that's what's happening behind the scenes, I don't know.

I think China is going to go into Taiwan and that's the big win that they want. The Chinese people think Taiwan is theirs too. So this is something that is just a matter of time and it's a big disruptor. That is the big if and when that happens. And that's a big correction for the markets.

Ric Edelman: Well, that's exciting.  (laughter)

Elliot Dornbusch: That's happening, so, sorry. That's the thing that keeps me up at night. I'm serious. If you tell me, what are the one thing that keeps you up at night is China and Taiwan. And this idiot doing at some point something when we're not ready and the world's not ready.

Ric Edelman: Does that keep you up at night more than Russia, Ukraine, or Israel?

Elliot Dornbusch: Yes. Look, I'm Jewish. I'm telling you, it's a terrible situation what's happening in Israel but that's just not worldwide, that it will not destabilize the world unless you're talking about Iran-US, which is a completely different thing.

And in Ukraine and Russia, unfortunately, that's a situation that is going to last for years. And the question to me is does Ukraine have the capability of fighting an infinite war? Because if they are capable, they'll win. That's a big if. And if not, it's going to be 10 years of disaster there.

Ric Edelman: Is what's keeping Elliot up at night keeping you up at night, Jack?or you have something else keeping you up at night?

Jack Ablin: You know, it's funny.

Elliot Dornbusch: Maybe I'll just give you an excuse.

Jack Ablin: No, it's funny because I do this thing with clients and it's always, it always goes low. It just like spirals down very quickly, 'cause there are things that yes, I lose sleep at night and then there are things that I'm really optimistic about.

Ric Edelman: Talk about the sleeplessness.

Jack Ablin: Okay. But yeah. So no, I do worry about, certainly the geopolitical instability.  But I think it's really our financial system. Obviously our fiscal situations on it.

Ric Edelman: Debt you're referring to?

Jack Ablin: Yeah. Debt. Although I think Bernanke made the point, I don't know, last year. So, this really isn't our debt that we have to worry about, it's our interest payments, right?

Ric Edelman: It's a percentage of spending.

Yeah, if it's really starts to crowd everything out, that's where we're going to feel it. It's not going to be, oh, we're at 150 debt-to-GDP.

Ric Edelman: That's what people say about their credit cards. It's not the balance, it's the monthly payment.

Jack Ablin: It's the monthly payment that, that kills. So, it’s the insolvency, that ultimately does it. And, we'll see, you know, and meanwhile, of course, and this is really leaning into alternative currencies, whether it's gold or crypto.

Ric Edelman: Which we'll get into next.  Brian, what's keeping you up at night?

Brian Andrew: I would say that the same thing.

Ric Edelman: Which same thing? The China same thing, or the,

Brian Andrew: No, no. I mean, geopolitical concerns, occasionally keep me up at, but that's at night.

Ric Edelman: The federal debt?

Brian Andrew: I think what's happened, it's like what happened in the pandemic, the whole work from home thing where everybody said this won't last. And then we realized that anybody that does anything for two years, if they like it, they want to keep doing it. And so it's pretty obvious after a couple of decades that there's really no desire to reduce spending by either party. It's really been since the mid-90s that we've had a decent looking budget.

And to your point, interest expense is fast approaching 25% of the federal government's budget. So that becomes untenable, because it ultimately crowds out social programs, which then is going to create some pretty significant problems.

Elliot Dornbusch: If you haven't slept because of that problem, you haven't slept in two decades. I mean, at least I haven't slept in two years, but you haven't slept in two decades.

Ric Edelman: Well, we all know that Americans have a big sleep disorder problem. So, you've got stuff keeping you up at night that is very sobering and none of what you said are new to any of us. We all probably are sleepless for the same reasons.

Tell me how you are taking those fears and sleepless nights. How is that translating into investment strategy?

Elliot Dornbusch: I just want to say one thing about this debt. In the emerging markets like Argentina, when you have a lot of debt, interest rates go up. They keep printing money and throwing it actually to the streets and then eventually default. In developed markets in the US it's very different. The more debt you have, the less ability to grow you have, the lower the GDP you have, the lower ability to pay, let's say, those debts. And therefore, instead of rising rates, you have lowering rates. The more debt-to-GDP, it's counterintuitive. But rates don't go up because you have more debt. They actually go down because you have less growth. And that allows you to have more debt. Because you have less interest payments. So that doesn't keep me up at night. I don't like it. But it doesn't keep me up at night.

So, in terms of opportunities. Look, I'm super optimistic about the US. I don't have money almost anywhere else. We're not the type of firm that wants to diversify. I leave that to banks. We're not banks. We have an asset allocation that puts our assets exactly where we want them to be. And in terms of equities, we are 100% inside the United States. I don't have any exposure to Europe. I don't have any exposure, which I don't like, by the way. I don't have any exposure to Asia. I don't have exposure to China. It’s the US and in the US we have a tilt towards technology. And we have had it for years and we still have it. So, in terms of equities, that's where I am. In terms of fixed income, you have direct lending, which is great.  You have corporate, which at the very least we believe we can do 7 to 8% in the next few years. So, we are very safe there in high quality credits. So, I'm worried a little bit about other stuff, but in terms of the portfolio, I think it's safe and sound and it's in a better shape today than it has been in years.

And hopefully you'll touch on crypto, but we have been advising on crypto for, five years and it's been a controversial position, but hopefully we'll touch that subject.

Ric Edelman: We will. Brian, tell me about, how you're positioning the portfolio relative to your fears.

Brian Andrew: Yeah, I think the comment about the home country bias makes a lot of sense. It seems like, there's a lot of momentum to try to push capital overseas, to buy equities overseas because everybody talks about how inexpensive those markets are. But I have to agree with you that the dynamics in the US, for a whole host of reasons outside of what I talked about that keeps me up at night, are actually really, really good.

You go back to what you talked about in terms of how we're positioned from a geopolitical perspective. You think about the fact that we have a next generation that most other developed countries don't have. And that generation is at a point in time where they're beginning a road to consumption that looks like the 50s. Or 60s almost. So, there's a lot of reasons to be, positive, I think. And then you mentioned technology and obviously most of what happens in terms of innovation still happens here. So, there's a lot of reasons I think to be, underweight overseas, and overweight the US from an equity perspective.

Ric Edelman: So, we had a lot of conversation earlier today about alternatives. And within alternatives is crypto. So, you had started to raise that point, Elliot. So, tell me, what have you been doing in crypto, what's the allocation you've been using, and what's your outlook?

Elliot Dornbusch: So, this is where we were in crypto. First, we had to really understand the technology. To understand what are the possibilities of that technology? Understanding that there was a high probability, and there still is, of a zero. Anybody that doesn't like a zero, I would say you can't get involved.

The way we got involved is by using anywhere between, I would say, three to six months of coupons. So, we gave the idea to our families, let's use some of our income and build a crypto position. In 2019, we started and clients that came in 2020 started building that allocation that wanted to understand that this is a technology that will take 20 years to develop. Not bitcoin, which we were invested in. That was our key position. But every other altcoin based on a decentralized system. The idea that you could build a system that is decentralized was very attractive. So, we had two pillars, decentralization and basically digitalization of a store of value through an asset called bitcoin.

So, we placed anywhere between 1% and 2% of our asset allocation, 1% in altcoins and we used Ethereum as our proxy, even though we did invest in private equity through managers and for those who wanted to do a third leg, and bitcoin 1%. And we've never sold. We still hold our positions. We will hold our positions for the next 10 years and see what will play out.

Ric Edelman: So, you started with a 2% allocation.

Elliot Dornbusch: Anywhere between 1% and 2%.

Ric Edelman: What percentage of the portfolio does it now represent?

Elliot Dornbusch: Right now?  Sometimes it's 6%. And some families have wanted to sell their original position. We try to prevent that from happening. Sometimes they got to 4% they sold their position. Right now, we are trying to encourage people to sell their original cost especially on bitcoin and Ethereum. We can't get out of the privates, which is very little, but they're doing better than the original bitcoin and Ethereum position. And we are investors in Solana, and we were seed investors in one of those. We have several positions in those privates, but I still believe that there is a huge probability of zero.

And even though it's much lower with now the acceptance with an ETF on bitcoin, but if it's not a zero, it still could be a 5 to 6x. And when we invested, we thought probability of zero was 90%. But where can you go and say that if it's not a zero, it's basically 50x. So, we really like the risk-reward. We are involved with the people who originally started the movements or invested heavily in the movements. And so, it's played out. But last year, people weren't not as happy, like, oh, but it's a 10-year thesis. It doesn't play out that fast.

Ric Edelman: Jack, what's Cresset doing with crypto?

Jack Ablin: Sure. So, we have it on authorized, approved for clients and advisors to use. We haven't made a specific allocation to it. Our view on crypto is, you've got the anonymity, ability to, as it will store a value, anonymity and then you can cross borders without state interference.

And so the underlying tokens I think have more value than say an ETF just because it's more of a proxy. And it's the same reason why my ancestors went into the diamond business, right? It was a way to take wealth and move it across borders during the Holocaust.

Elliot Dornbusch: You have to have that view of a different world. Or a world that has the ability to be different in a certain way. And I'm sure there's going to be another crash, not so sure in bitcoin, because now all the retail guys are coming in and they're supporting the system. But the idea that you have an asset that is better than gold. And it is better than gold for what gold is used for without jewelry, and 50% of gold is not used for jewelry. So, if you take out the bvalue of gold for jewelry only, it's worth a lot less. But my point is that if the idea of bitcoin is only that if people accept that as a store of value, over time, because of the scarcity of the asset, this asset will go to $200,000…$300,000…$400,000 per unit and people won't think of bitcoins, but will think of how much money do I have in this asset class. Now the ETFs, of course, just ripped the band aid because now people are not even thinking, do I own so many bitcoins? They think how much money of my net worth I have in this asset class.

Ric Edelman: What I find interesting is that all three of you are saying yes to crypto allocation. You're divergent in the how and how much, but none of you are saying no. Would you say that that's a common attitude among your colleagues and throughout the industry?

Elliot Dornbusch: No, I think in the people I've talked to, they either don't like it. They didn't agree to it. And now they have to kind of agree on a bitcoin, especially with the ETF. Now the ETF is actually physical. So it's, I believe the way our clients own bitcoin was actual owning, because there was no other way through Coinbase institutional, but having the ETF is actually better than owning those bitcoins yourself through Coinbase.

And we're transitioning all our positions to the Bitcoin ETF. The Bitcoin ETF is a much more efficient way of owning bitcoin than actually opening account at Coinbase.

Ric Edelman: So, you're a fan of the ETF platform.

Elliot Dornbusch: 100% yes, and the people will approve the Ethereum ETF eventually, you'll see.

Ric Edelman: Got it. Ladies and gentlemen, say thanks to Jack and Andrew and Elliott.

I'm glad you're with me here on The Truth About Your Future.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.

I’ll see you Monday.

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Links from today’s show:  

Wealth Management Convergence: https://www.thetayf.com/pages/convergence

10/23 Webinar - How to Factor Longevity into Your Financial Planning: https://www.thetayf.com/pages/october-2024-webinar-how-to-factor-longevity-into-your-financial-planning

9/25 Webinar Replay - Unlocking Alpha in Crypto-Equities and Beyond: https://dacfp.com/events/unlocking-alpha-in-crypto-equities-and-beyond

9/20 Webinar Replay - Q4 Crypto Outlook: What You Need to Know Now: https://dacfp.com/events/q4-crypto-outlook-what-you-need-to-know-now

9/11 Webinar Replay – Rates are Poised to Drop, Now What?: https://www.thetayf.com/pages/rates-poised-to-drop-now-what

Become Certified in Blockchain and Digital Assets: https://dacfp.com/certification/

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