Catch the full episode: https://www.wealthformula.com/podcast/288-dennis-gartman-inflation-the-fed-and-trouble-ahead/
Buck: Welcome back to the show, everyone today my guest and welcome podcast. Well, he’s actually a pretty well known guy in this podcast ecosystem. His name is Dennis Gartman. Dennis is known. I mean, gosh forever for the garbage letter, which he recently stopped doing. Maybe we can talk a little bit about that and currently serves as the University of Akron endowment chair. Dennis, welcome to Wealth Formula podcast.
Dennis: Thanks for having me on. You’re at the bottom of the barrel. And there I was.
Buck: There you go. So I’m curious. First of all, the Gartman letter, I think you started it in the 70s. Is that right?
Dennis: Yes. I started in the late 1970s, did it for 35 years, retired December 31 of 2019. A little bit of Parkinson’s disease made typing a little bit difficult. But I was proud of the fact that for 35 years, I missed a total of two days. When I say two days on July 4, I had to write because the clients in England, I’ve never gotten them to be able to celebrate July 4. The clients over in Tokyo never wanted to take the day off. So I missed two days in 35 years. I was there for every business day. I’m pretty proud of that record.
Buck: Wow. Fantastic. And now Endowment Chair, How’s that going? Are you an alumnus of the University of Akron? Is that how this happened?
Dennis: Yeah. I did my undergraduate work at the University of Akron, so I’m the chairman of the University Endowment, and I’m the oldest standing member of the board of directors of NC State Endowment Investment Committee. I’ve been on that committee for about 15 years and how to do in both work. It’s really quite a good deal of fun, and it’s rather interesting.
Buck: Dennis, I have a lot of your take on the current economy that will be fascinating because it’s a very unusual time. And before we start into sort of specifics, I am curious as someone who’s been following this economy and missing only two business days since the early to mid 70s. How do you approach an economy like this now where it seems like traditionally somebody in your position could look back and say, Here are the rules and this is what’s happening. And this is what I can predict with some level based on what I know these days, it seems like all the rules have changed and they’re constantly changing. And the Fed’s mandates are changing where you might see in the past, the Fed was preventing a mandate of employment and stabilization of prices. Now they won’t even let the stock market drop. So how do you approach a market like that?
Dennis: Well, I guess the biggest thing is the fact that instantaneous information is so much more available to people, and the ability to panic is so much more available to people, the ability to misinterpret it. Economic data is so much more available to people. And I guess to me, the biggest change is the fact that the public is so egregiously, and I use that term carefully. It’s so egregiously involved in speculation in 35 or 40 years would be in the markets have never seen this sort of rampant, and I think you’ll advise speculation on the part of the public. We have meme stocks going crazy. We have stacks coming out everywhere. We have rework or rework being reworked and coming public again after having been a total and complete failure. These are unusual times, and I’m actually glad I don’t have to write every day.
Buck: Well, even beyond the investors themselves, when you look at the Fed and their mandate changing the way it has, it seems you’ve gone from a fairly hands off approach to a very hands on approach that sort of prevents the natural history of the economy from occurring the way maybe you would expect it to.
Dennis: Well, the Fed’s mandate is being expanded, and I think improperly. So the Fed had always had the mandate originally to be involved with keeping inflation to a low level. Then the mandate was expanded to keeping unemployment to a low level. Now we have the Fed’s mandate expanding to being concerned about global warming, climate change, which I think makes absolutely no sense whatsoever. How the Fed is going to be responsible for or do anything about global warming. Climate change is really quite beyond me. And what bothers me is that with the mandate being changed and being widened, one has to wonder where the next widening of the mandate is going to go to. Are they going to be responsible for education around the world? Are they going to be responsible for racism around the world? I find that disconcerting, dismaying and ill-advised to say the very least.
Buck: It also creates a level of unpredictability, I would say right in terms of what to expect when you make predictions.
Dennis: I think the Fed has tried to go out of their way, and Mr. Powell has tried to go out of his way and I think it’s led to problems. But I think he said to say we’re going to lead the public and to understand what we’re attempting to do. When I first got in the business in the 1970s, you watched what the Fed funds rate was overnight, whether the Fed came in and did mass sales or repos with one or two basis points difference, you had to guess what the Fed was doing, and I think that was actually a better way of going about it. Now we have the Fed with a widening mandate, and Mr. Powell has to come out and explain what the Fed is attempting to do. Sometimes he’s wrong. Clearly, he’s been wrong with the idea that inflation was a transitory circumstance. Clearly, that is far more empirical, far more firmly set in the environment and likely to continue for a long period of time. I think the Fed has a very difficult job, and I’m glad I’m not the Fed chairman.
Buck: I want to talk a little bit, Dennis, about some of the things that are currently going on as we leave this, I don’t know if we really left it, but as we are feeling the repercussions of probably the deepest parts of the pandemic economy. Inflation. Tell us. what’s going on right now for people who maybe not following it and where you see it headed.
Dennis: Yeah. First of all, let’s understand that Mr. Powell has said that inflation that is now extended is basically being created by the supply chain problems that are all over the world. And it’s not just a problem in La, in Long Beach, it’s a problem here on the East Coast. It’s a problem in Savannah, it’s a problem in Rotterdam, it’s a problem in England, it’s a problem all over the world. The supply chain is problematic, no question about it. But that’s not the reason why we have inflation in the United States. That’s a temporary circumstance. What bothers me is I’m an old guard straight down the line, monitoring us when it comes to economics. And as Professor Friedman, Dr. Friedman once said, inflation is always and everywhere a monetary phenomenon. It depends upon what the central bank and the predominant obviously, the predominant central bank in the world is the Fed has expanded the supply of its reserves astronomically. We’ve taken the adjusted monetary base from call it two billion two trillion dollars five or six years ago, $8 trillion. Now the Fed has been buying Treasuries and agency securities for its own account, creating money out of thin air and creating the inflation that is now extant and is going to be even worse, two years, three years and four years from now, unless the monetary authorities take a far less expansionary perspective. And I don’t see that happening anytime soon. So I’m fearful about rising inflationary pressures. It has been predicated upon the Fed, the ECB, the bank of China, the bank of Japan, the bank of Canada, the bank of France have all been expansionary beyond anything that I think is reasonable and rational. It’s going to give rise to inflationary problems that are going to be excellent with us for a long period of time coming forth, no question in my mind.
Buck: Dennis, I’m curious too. Some people look back to what happened in the financial crisis in 2008/2009 and say, well, we had quantitative easing then didn’t really result in any significant inflation. Why didn’t it? And how is it different now?
Dennis: There’s usually a delay, first of all. And let’s understand, the Fed, I think, did exactly the right thing in 2007, 2008 and 2009 because the housing circumstances, the building circumstances had collapsed so dramatically, deflationary pressures were extended everywhere. And prior to that time, the Fed had not been expansionary at all. The Fed began to be expansionary in its policies in 2008, 910 and eleven probably overstay their welcome have remained that way for the past decade. And now you have an economy that is really quite strong other than the pandemic circumstances, and we’re bouncing back rather dramatically from even the pandemic and not just here in the United States, but around the world. We see things going better than they had been a year and a half ago. And given the supply chain circumstances that do prevail and are indeed causing problems, it is a different world now than it was in 2007, 2008, 2009. And the monetary authorities have been expansionary far longer than they probably should have. Therein lies with the rationale for inflation this time, as opposed to what happened in 2007, 2008 and 2009. Those were deflationary times. These are now inflationary times. The Fed did exactly what it should have done seven, eight, nine and ten. They’ve overstayed their welcome a bit too long now at this point. And I think given their propensity not to change policy dramatically, they will temper. They will run off. They will stop buying as many Treasury securities and agencies as they have been. Are they going to allow their monetary aggregates? Are they going to allow the adjusted monetary base to actually decline in price? Not so that money is going to continue to circulate. The other problem is money has not been used as far as velocity is concerned. You need to turn money over much more rapidly than we have been. And the velocity of money has happened since about 2007, 2008 and 2009. And given the fact that now it appears to me that velocity is quietly finally, slowly beginning to turn from a declining environment to a rising environment. Given that circumstance and given the amount of aggregate growth that has occurred as far as the aggregates are concerned, that’s going to give rise to inflation. So you had deflationary pressures going on at one time. Now you have inflationary pressures instead. This time is indeed different.
Buck: Let’s assume we’re looking at five or 6%. I’m putting words in your mouth. I don’t know how bad you think it’s going to get. Those are words I’ll take, yeah, 5% or 6% over the next few years. My listeners are a bunch of retail investors, right? And so when you hear about that kind of inflation, I think a lot of us think, well, that to me means I should just be invested in something. Maybe it’s equity markets, maybe it’s real estate, because everything is going to rise in prices. I just need to make sure that I’m on the train. Is that a logical way of thinking? And if not, why not?
Dennis: It’s been a logical way of thinking for the past several years. It’s been the proper way of thinking for the past several years. What bothers me is it is now so universally accepted, so utterly embraced by everyone that I’m beginning to wonder what happens when everyone is already heavily invested in the markets. And who is the last buyer to be a buyer, who is the last buyer to come in and take prices higher? I worry about the fact that, as I said in many other instances, Justice Kennedy got worried about stock prices. When his shoe client Shoeshine boy came in with stock tips. I started to see things like Robin Hood expanding as dramatically as it has stacks expanding as dramatically as they are meme stocks being embraced by one and all and the public utterly as I was telling somebody the other day. My email is filled every morning with people explaining to me why I should be involved in trading options, why I should be involved in trading stocks, why I should be involved in meme stocks? And the public’s awareness of the stock market is to me a bit frightening and too many people are involved. So it reminds me too much of speculative, enthusiastic environments in times past that always end up in tears. I don’t doubt for a minute that stock prices can go higher. I think you’re in almost a panic, parabolic type of atmosphere right now, but this will end badly within the next year or two.
Buck: Given that, where do you think people ought to be? I don’t know if it’s investment advice per se, but I’m just curious what your take is. How does this all play out? You say it plays out badly, obviously, if you’re in oil, if you’re in commodities, if you’re in real estate or in the stock market, what’s safe haven in your view?
Dennis: There are no safe havens. The only thing you can do is take safety precautions. You have no choice. I mean, the fear of being left behind is a monstrous psychological battle to be fought. You have to be long in the stock market, you have no choice. But the only way to do it is either buying stocks. And I think you buy less. Lower beta, higher dividend paying stocks. Energy stocks are, to me, probably the one place that is some safe haven of some sort. But you want to buy stocks with what’s underneath them to protect yourself. You want to sell calls above them to give you some income. The notion that we’ve seen that Tesla go parabolic in the last 50 to 48 hours. To me, it’s frightening, to say the very least. It makes no sense, but you have to earn upon the side of still being bullish on the stock market with protection. You can also use futures to head yourself if you need to. But I think buying puts is probably the best place to be. I think you want to own gold. There’s no question in my mind that you want to own gold rather than cryptocurrencies. I’ll be blunt, I have never understood cryptocurrencies. It’s for younger people than I am. It’s for higher tech people than I will ever be. I’ll leave other people wiser than I and more secularly involved than I trade into cryptos. But I think you want to own gold in an inflationary environment. So I think you want to err upon the side of owning stocks that pay good dividends and gold hits yourself and put on those stocks at the same time. I think that’s the place to be. I’m not sure there’s any safe haven. As in the past, you might have been able to go to the debt market, the treasury security debt market as a safe haven. I don’t think you can go there anymore.
Buck: As you see this play out. And you have. I mean, first of all, I guess one question is how when you do see things go south, what does that look like? And then the next question is a corollary to that in the past the Fed has had some dry powder to combat that, so obviously asking you to look into a Crystal ball here. But how do you see this playing out?
Dennis: First thing you have to be able to get the Fed needs dry powder and the dry powder is almost nonexistent. However, it can continue to be as expansionary as it wishes to be. And if it does so by continuing to buy treasury search, which I think they should stop immediately, but that’s the only place they can go to. They can’t take interest rates at the short end of the lower than zero. I hope we don’t go to negative numbers. It’s a disastrous experiment in Europe, so I think at this point you have to remember that in a bear market and a bear market will come whether it comes next week, next year, next month, next year. The next bear market is around the corner somewhere, and you have to remember that he or she who loses the lease is going to be the winner. At the University of Akron in the endowment. I’ve actually moved in February. I had the strong arm for lack of a better term. The other members of the committee to reduce our exposure to the equities market. We took it down by about 3% and bought 3% gold. We’re a little bit ahead on that trade. And the operative words here are a little bit. We’re just marginally ahead. But I’m comfortable with that position. I think that decently my propensity shall be to increase the gold position a bit in the next six months or so and decrease our exposure to the equities market a bit in the next six months or so. I want to be more safety oriented. Do I want to go to the government bond market, however, now, with the ten year treasury yielding at ten point 65%, I think you might see in the next two months you might take the ten year treasury down to one point 35 or one point 45. But I think over the course of the next five or six years, ten year Treasuries have to get back to four or 5%, and even that will be less than the inflation rate that we’ll have at the time, and you’ll be at negative real yields. So you have to take interest rates over the next five years higher over the next two or three months. They may go down just not much.
Buck: Looking at some of the current Biden legislation. Specifically, we’re talking about a lot of spending, right? And obviously that ends up increasing the likelihood of the inflation thesis. Specifically in that, though I’m curious about one thing which is the transitioning from fossil fuels to green. Now Biden wants to cut those fossil fuels without necessarily having a green energy plan to immediately replace it. Perspective on that.
Dennis: I think it’s probably without question the stupidest idea I’ve heard in a long period of time doing away with fossil fuels 100 years from now, we will do away with fossil fuels 100 years from now. We’ll either have nuclear fusion. One of the two will be green will windmills and sun energy replace fossil fuels anytime in my lifetime. Well, I’m 71 years old, so I’m in the 9th inning of my term, but that’s not going to happen. And I think the stupidest thing that we’ve seen is delaying denying doing damage to the fossil fuel industry in the United States. And at the same time asking OPEC if they would pick up their production of food oil. It makes no sense to me whatsoever if it is foolishness of the first and worst order, and it has to stop. The problem is it’s not going to stop, green makes no sense to me at all. Nuclear makes eminent good sense. Experimentation and research and diffusion makes eminent good sense. But knowing that fossil fuels are still going to be the dominant fuel for the next 25 or 30 years, people just have to get used to that fact. They don’t wish to, and our College students and College professors seem to think otherwise, but they’re wrong.
Buck: It seems to me when it comes to the green issue. Like you said, eventually, this is going to happen, right? And the reality is that at some point economically it will make more sense. But the problem is trying to force it. That seems to be the fundamental problem when we’re not quite ready for the transition rather than just letting it happen, trying to push it through. And that, to me, sounds like a catastrophe.
Dennis: The worst thing that we’ve done is deny and denigrate the efficacy, the superiority, the goodness of nuclear power. We should be working harder to have more nuclear facilities in the United States than we have. Instead, we’re refusing to build new ones and letting the oldest ones die. That’s ill advised. The French seem to have a much better opinion of a much better methodology of administering their electricity programs through nuclear power. We in the United States seem to be going exactly the opposite way, and at the same time we’re trying to put windmills everywhere around the country, which are killing birds and looking bad and denying pipelines and denying access to crude oil and natural gas. I commonly talk about the fact that one of the funniest maps you’ll ever see is to go to the web and look at the number of drilling rigs on the border of Pennsylvania and New York in New York. You’re not allowed to drill in New York for crude oil or natural gas from the Marcellus Shale. There are hundreds of wells drilled on the Southern border of New York and Pennsylvania. The drillers will argue that they’re not drilling into New York, but of course they are. The Marcellus Shale should be one of the dominant sources of energy in the United States, especially given the fact that it’s here on the East Coast and denying its viability. It makes no sense. If it weren’t so sad, it would be funny.
Buck: I want to ask you about one more thing, which is obviously where a lot of my listeners head is in the real estate market. This has been an extraordinarily hot real estate market for us real estate investors. This has been absolute gold even through the pandemic. It’s just been extraordinary. Obviously, a lot of this is linked to cheap money, and I’m curious where you think the real estate market ends up. Do interest rates and in the foreseeable future, can they possibly go up when the Fed is completely involved with artificial suppression?
Dennis: It’s ridiculous to think that you can buy $400,000 $500,000 house with a mortgage of less than two or 3%. That’s nonsense. Mortgages need to be back at 5% to be viable and in the long term duration they’re going to go there in the next five or six years. The problem shall be that it’s going to put downward pressure upon people who just bought their 400 or $500,000 house with an income of maybe $80,000 predicated upon 2% 30 year fixed rate mortgages. It’s utter and complete nonsense, and it will stop when it stops. It doesn’t make any sense. It should have stopped two or three years ago. It’ll eventually do. So I think real estate is quite honestly to be avoided. At best. I think the interest rate rise is going to be over the course of the next five or six years. And again, I think in the short run, the next two months, interest rates may go down a little bit, but over the course of the next five or six years, interest rates have to go up rather dramatically. I remember when I got my first mortgage on my house 25 years ago, I paid 9%. Wow, that’s a little too high. 5% or 6% is probably more rational and reasonable. And if you get to 30 year mortgages of five or 6%, that $500,000 house that you think is worth $500,000 is suddenly worth $350,000.
Buck: I guess one question follow up on that, though, is how do the rates go down? I mean, haven’t they positioned themselves by buying bonds sort of at will to artificially suppress as long as they wish to do so how did the rates go up?
Dennis: The Fed has been buying Treasuries and agencies for the last several years. I think they should stop. Maybe they won’t stop. Maybe they don’t even stop, and maybe they even become even more aggressive. Maybe they suppress rates for another 5, 10, 15 years. To me, that’s nonsense. To me, it seems to be utterly and completely impossible and improbable and ill advised. But can it happen? It can happen. If so, I’ll be wrong. Do I think it would make sense for them to do so? No. I think it makes sense for them to quietly stop the purchase of Treasury securities and agencies, allow their just monetary base their assets to run off slowly but laboriously over the course of the next 5, 10, 15 years and allow interest rates to long end of the curve to quietly go higher, getting the ten year yield back to four or 5%, maybe 6% in ten years, getting the 30 year back to five or six or 7%, maybe in the course of the next ten years. Do I think that that’s what’s going to happen? I hope that’s what happens. Do I think it might happen? I have no reply. I think we’re in a very untoward and very ill advised and rather frightening place that I don’t have any idea how we’re going to get out.
Buck: Do you foresee, Dennis, at some point this 10/15 years, some sort of, I guess, the type of global reset you ever see every 50, 60, 70 years. It’s sort of a little dystopian view of what’s going on. Maybe. Or maybe it’s not. Maybe it’s sort of just where we are headed. Do you see that?
Dennis: Buck, let’s hope that that’s not what happens. Let’s fear that that’s what might happen. I think there’s a 15% to 20% probability that it could happen. I hope that it doesn’t happen for my two daughters’sakes. I hope that doesn’t happen, but can it happen? Yes. And do I think that as long as the monetary authorities continue along the path they are on, that’s what’s going to happen. Let us hope they come to their census and slow down this aggressive expansion of the monetary aggregates that has been with us now for almost a decade. Let us hope they find some lesser active perspective on their part. And what I really fear is that Mr. Powell will not be renominated to the chairmanship of the Fed. He’s not the best, but he’s the best that they talked about. I fear that he might have to be forced out and Lyle Brainer becomes the next chairman. And if so, she’s even more expansionary than he has been. That is my great fear at this point,
Buck: Dennis, without the letter, how can people follow your work now?
Dennis: I do Fox Business on Monday mornings with my old friend Stuart Varnish, which is always fun. I do Fox Business on 07:00 Tuesday Mornings with Maria Bartiromo at 07:00 a.m.. And I’m there every week and on alternate Monday mornings at 515 and 545 in the morning on Bloomberg Radio. So that’s probably the best place they can hear what I have to say or on a podcast such as yours. Buck.
Buck: Dennis, thank you so much for being on Wealth Formula podcast. This has been very eye opening.
Dennis: Thanks for having me on. I look forward to doing it again sometime in the future. And as I used to say when I wrote my newsletter, good luck. Good trading.
Buck: Thanks again. We’ll be right back.