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294: Navigating the BOOM/BUST Cycle with Murray Sabrin

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Buck: Welcome back to the show everyone. Today, my guest on Wealth Formula Podcast is Murray Sabin. Now Murray is an Emeritus Professor of finance at Ramapo college of New Jersey. And he was also the New Jersey libertarian party nominee for governor in 1997. Having also sought the Republican nomination for the US Senate twice as well. He is also the author of navigating the boom bust cycle in entrepreneur survival guide, which was just released this October of 2021. And that is what we’re going to talk about today. Murray, welcome to Wealth Formula Podcast. 

Murray: Well, thank you, Buck, appreciate the opportunity to help educate people and give them some tools to navigate the boom-bust cycle.

Buck: Well, yeah, and this is, this is really important. Sit off because as you and I talked about offline, we’re really, you know, my group, here we’re, you know, we’re investors and we, we tend to be investors in alternative assets. people who’ve got a fair amount to lose when these markets. Boom and bust the way they do.

So it would be great to hear your take on things. You don’t let me just jump right into it.  Murray. One of the questions I’ve got for you is, historically, the inversion of the yield curve signals a depression or re recession, I should say. And in 2019, the U S witnessed an inverted yield curve, but there was no recession or depression or anything. Maybe you can back up and just tell everybody how you define or how the yield curve inversion is defined, what the significance is of that it didn’t follow what it normally does in 2019. 

Murray: Sure. The yield curve inverts when the federal reserve, after years of easy money decides it’s time to raise interest rates and pull back the liquidity that has injected into the economy.

And when the short term rates go above long-term rates, since they’re most sensitive to the federal reserve policy, you get a scramble for funds that the bank said short term rates start going up. And, that, that, that, what that does is reveal. The what’s called the malinvestment. So the distortions in the boom that were unsustainable, if it weren’t for, easy money, easy money makes possible a lot of investments that would never have occurred because if depressed interest rates, what does that do?

It increases the net value net, present value of future investments and boom. You’ve got people flooding money into the real estate market and other markets where they see that the rate of return over 10, 15 years is great because you have a lower discount rate. So again, this is pretty, pretty much elementary from a corporate finance perspective.

And so what happened in 2019 is really fascinating. I, several people have written about it, but I talk about it in the book, is that the yield curve inverted. And then in the first quarter, COVID. And when COVID hit, the economy was locked down. The economy imploded, unemployment went to 16%. Number of people have lost jobs, businesses were closed. And what you had was the federal government under the Trump administration, flooding the economy with all sorts of stimulus money in order to backstop all the businesses and employees that lost their jobs. Well, the fed didn’t sit idly by, they started pumping money in. And before there was $4 trillion of new money created by the federal reserve and the very short period of time.

So basically the normal quote, normal business cycle would have occurred sometime in either 20, 20 or early 2021. But because of COVID. Not a recession, but you got, economic implosion because of the federal government, locking down the economy. And of course states, states were following suit.

So you had a horrible situation. And then the fed put the pedal to the metal. And, here we are a year later and we still have a sloping yield curve because the Fed has started to reduce its money printing, but nowhere near what it would take to invert the yield curve. So,  last year was, I guess, going to be studied for decades to come as to what happened to the economy.

It was the shortest downturn in US history, as you know, the stock market declined at 34 to 35% in a few weeks, which was the shortest bear market in history. And so, it’s very unique. To see what happened in 2020 as a repeat. Well, it happened in the future. No one can rule that out because obviously we don’t know what the future will bring if another pandemic occurs or some other events that could cause the economy to implode in a very short period of time.

But yeah, the yield curve looking back in history is probably one of the best, if not the best indicator that portends a recession six months to a year down the road. 

Buck: So basically. It was essentially hidden behind everything else that had happened in that period, in that massive liquidity injection from the Fed and the government intervention.

Essentially, when we look at what’s going on right now, obviously we’ve got this massive. Right. It’s massive boom. And when you look at all of the money that’s in the market, I mean, it’s sort of obvious why you mentioned some, you know, the Fed tightening a little bit. We’ll see if that happens, but you know, as investors, or maybe business owners, What kinds of signals should we be looking for? That might suggest a change in the business cycle. 

Mmm Yeah. There are several, obviously the ones that are most sensitive to interest rates would be commodity prices because it takes a long time to get a mine into production. Other commodity prices, very sensitive to the business cycle.

So you look at the CRB index and some of the components copper is considered one of the. of boom and bust indicators because copper is used so widespread in the economy and construction and then other manufacturing sectors. So the price of copper is a good leading indicator as well. And, you have other indicators as well. Heavy duty trucks are a good indicator. So when you drill down in the motor vehicle sector, you see all these subsets of  areas of the economy that are very sensitive to steel would be another example of the production of steel or iron or coal, things like that. Oil is a kind of interesting situation. We saw the price of oil skyrocket, 180, $140 during the housing bubble. Then it collapsed, I think 35 or $40, which was really. Bizarre to see it collapse, but 80% or so 70% in a very short period of time. So, but if you look at some of the big macro, the unemployment rate, by the way, is a very good indicator as well. When that bottoms out and sort of goes sideways, the unemployment rate starts creeping up, you know, a recession is on hand because businesses are seeing their sales go down and that’s one of the first things they do. They lay off people. So, again, you can do that by industry as well. So you look at these economically sensitive industries. You see what the employment rate is there, whether they’re hiring or not. And then of course, one of the last things that we I would look at is retail sales and, and divide that into discretionary versus,  consumer staples, consumer staples don’t have much of, of cyclical, trends, but, obviously discretionary items like automobiles and, housing and other things, high ticket items are very sensitive to the business. 

Buck: You know, one of the questions I wonder about myself is, you know, you’ve talked about a lot of the, sort of the, econ 101, you know, type signals, that the economy gives. We don’t really live in that world anymore though in some regards. And, you know, we, we live in some unparalleled times where we’ve seen some, you know, unparalleled, interventions. And how do you use it? Some of this information to kind of guide you. And how has that changed over time, given where we are now, in other words, the reality is different, it seems to me that some, you know, it seems different, right? It seems like the old rule book, not that you throw it out, but it’s, some of the rules have changed. How do you, how do you deal with that?

Murray: This is why it’s so important to understand the macro economy and how it’s affecting the micro economy, which is the world in which business people live in ethical decisions every single day about capital investment, hiring, firing, relocation of plants. The supply chain, which of course is the buzzword for this year because it’s been so disrupted because of COVID and other factors. And so you really have to have a good economic framework in order to understand supply demand, which is economics 101. And we noticed that supply in the US. Then the next thing you do is they say follow the money.

Where is the money being created? Where is it flowing through the economy? And how is it impacting different sectors of the economy? The average business owner, the average CEO. I think of, I don’t know if the other word should be average, but the typical CEO, a CFO. Doing a deep dive in the federal reserve database to see exactly what’s happening to all these time series.

Of course, they’re reported by different government agencies throughout the month such as the unemployment data, the producer price index, CPI index, consumer sentiment, which is a very good indicator as well. And so, to unravel all of that, you really have to have an economic theory. If you will, to explain it in the book, I will go into the different economic theories and which one I think is the best one. Wayne how the cycle unfolds and what to look for, especially in your particular business, because every sector is different in terms of where they are in the cycle. And then, make decisions that don’t get you caught up in what Greenspan said in 1996, irrational exhibit.

Well, you were expanding at a rate that is unsustainable because it looks like the trees are going to be grown to the sky. We know trees don’t grow to the sky. They slow down or sometimes they die. And, that’s why it’s important to really understand the macro economy to a certain point. But yet really have a pulse on your industry.

Cause I think that’s really the key and with all these trade journals out there and online information, and of course your own revenue flow, you know exactly what’s happening on a day to day, week to week, month to month basis. So you can get those reports if you’re the CFO of a large company. The COO or you’re a small mom and pop shop on main street that you know exactly what’s happening with your sales data.

And then you can plan accordingly based upon trends, because a lot of these things are not a one off shoot things. They take place over several months or several years. 

Buck: In terms of right now, you mentioned a bunch of indicators. For the most part, it seems to me that we’re, we are very steep in that boom still, is there any indication from your end that this is slowing down anytime soon? 

Murray: Well, it depends on what the Fed does, and not give a cop out answer. But, the Fed announced this week that they don’t think inflation is transitory. So that was a change in their view of the inflation picture that they, of course, created by boosting the money supply 25% of 27% last year, which is an extraordinary injection of liquidity and the U S economy. So again, if the Fed sees inflation ramping up and, and, every, what does the second week of the month, the bureau of labor statistics at ounces, the, the CPI and the PPI. And if those show. Inflation is accelerating or not slowing down the Fed may act preemptively or less this way, forcing the Fed’s hands to raise rates before they wanted to.

And that would start the countdown to when the yield curve inverts and when the stock market peaks out of. And so one indicator, which says that the stock market is grossly inflated, which you’re probably familiar with is the buffet indicator that the market capitalization of the stock market to the GDP is now 50% higher, where it was when the.com bubble burst.

So that indicator is now flashing yellow. Maybe even read the question: how high can it go in this cycle? And again, nobody knows the answer to that question, but what we’re seeing is these periodic downdrafts and the economy like shows that there are a lot of nervous investors out there and money managers that can drop the stock market three, 4% in one day, that’s not in the sign of a healthy market and then rebound 3, 4% in one.

So again, what I think this is telling us is that there’s a battle going on between the bulls and the bears and the economy. There are some people that are pretty bearish and there’s some people that are pretty bullish. And so that’s what makes markets, supplying the man and people’s perception of the future.

Buck: It seems to me that the irony here is that some of the threats, the more systemic threats, to. The economy are, potentially what’s, what’s keeping it booming. you know, for example, if you look at with COVID and now, you know, sure. The Fed could be thinking about tightening up monetary policy, but they also, you know, have the looming threat of a new strain of COVID that creates another round of shutdowns and that kind of thing. And then, so we’re kind of a no man’s land in that regard. And, and it’s that’s, I feel like that’s one of the biggest challenges because you, you just don’t, you’re not dealing with just the economy.

Murray: Yeah, this is why, I think that a lot of CEOs and CFOs stay up late at night because they’re trying to figure out what will the economy look like three, five years down the road, because remember a lot of these capital expenditure plans take place over three to five years or longer. And so, if you count COVID, which of course you could by engaging in major capital investment and then seeing the economy implode for six months or a year or so, or any time in between that may give you pause as to doing any major capital investment because there’s too much uncertainty. And that’s exactly what happened by the way, during the great depression, when economic policy was changing so much, it was hard for business people to plan for three to five years. And so the depression dragged on for the whole decade instead of, being a pretty short and swift up downturn, which we’ve got rid of a lot of the distorted investments of the 1920.

So again, As I told my students before I left teaching last year, I think we’re going to see days where the stock market goes down 5, 10% in one day. But I mean, we have, after all we saw a 22% decline in October, 1987. And, then the market rallied, if you look at a long-term chart, it was just a little blip.

It could be to this century what it was in the previous century, a lot of volatility, a lot of upward movement. And then, the interesting thing I came up with when I was doing the research is that there seems to be a hundred year cycle and the stock market, the panic of 1819. The forgotten depression of 1920 and then the implosion of 2020.

So if that’s the case, well we know what happened in 1929 after the roaring twenties. So who knows what 2029, 2030 could look like. In fact, there’s one indicator. I have a dimension because it’s public information Tom McClellan from Seattle, who does the McClellan oscillator. He came up with an interesting chart, which was published years ago, showing the relationship between the stock market and the price of oil.

So he shows whenever the oil price peaks, 10 years later, the stock market peaks. And so he’s showing that says the price of oil picks up in 2024 could be a very bad year for the stock market and the incumbent in the white house, which now is Joe Biden. So, that’s something to look at in terms of a fairly short term prognosis, but, or at least a forecast based upon this indicator oil and stock market, which he doesn’t have any explanation. He just came across it and did his research about prices. And he saw that there was this correlation between the stock market and the price of oil was a ten-year leg. 

Buck: You know, one of the questions I asked myself a little too, as again, when we look at these cycles and we talk about a hundred year cycle and, you know, big depressions, you know, certainly we’ve had other economists, on, on the show specifically talking about the night 1930s, ITR economics is another group we’ve added in predicting a depression in the thirties, a big confluence of debt and, you know, The other issues that they think are going to happen.

Then one of the questions I often ask myself again is, is this different now? Because the rule book is different. And like, I mean, the Fed can and does things that it’s never done before. Right? 

Murray: Well, here’s the thing that I believe could happen based upon what I was studying in the 1970s, when I was studying my, working on my doctoral dissertation, which by the way, was on inflation and how it spread through the economy.

And so the key thing to the US economy is really the dollar because the dollar is the reserve currency. And if you recall, it was 1979, 1980, we came very close. Total runaway inflation, where the dollar was imploding the price of gold, nearly doubled in a few months, because there was a flight out of the dollar, the Chinese, irrelevant to the world economy.

Now that’s sitting on trillions of dollars of US debt dollars per se. So the question is. How long will overseas investors hold on to the dollar, especially foreign governments, as far as central banks are concerned, which basically prop up the US dollar because when you have a demand for something, its price stays relatively high.

And so the dollar is fairly strong given the world of Fiat currencies relative to other currencies. But, the point is a day of reckoning could come in the future. foreign holders of a dollar say enough is enough. We are worried about the inflation in the United States, which is appreciating the value of our dollars.

And so we’re going to start dumping those dollars, maybe not all in one day or one week or one month, maybe for several years. And you see a slow, steady drip of the dollar declining. And, that could signal that the Fed has really lost control because if they try to prop up the dollar. Buying up dollars by creating valors that’s when you go into a really hyperinflation scenario.

Buck: Although on the other side of that, it’s not like we’re the only country in the world that’s doing this. And so in many regards are sort of the least ugly economy. 

Murray: Well, this is why we have been in an experiment since August, 1971. When Nixon closed the gold window. The dollar Fiat currency. So we are in one of the longest monetary experiments in world history. And no one knows exactly what the end result would be.

The question is, can we muddle along with paper money and the fed, inflating and deflating and inflating and deflating, like a rubber band. If you keep on stretching it long enough, it’s gonna eventually break. So the question is when could the economy break? Because the underlying institution that we need to have sound money if you will, may be in jeopardy. 

Buck: There’s a few terms that you use, I think would be useful for people to know about what is a public economy versus a private economy. You talk about that. 

Murray: Yeah. The private economy is something we all participate in. We have a business where work for a private enterprise and we have retailers, e-commerce, that’s the private economy based upon supply and demand. That’s where most of the action takes place. 

Then of course we have government spending and the federal reserve. So government spending does what it takes money out of the private economy, shuffles it through Washington through the different agencies and then dispenses it to the different agencies for various social and military programs.

And then you have, then you have the federal reserve trying to manage this by targeting short-term interest rates. So there’s a tug of war going on in the natural economy, the private economy, which by the way, is something that very few people talk about in the mainstream media. The tendency of prices in a natural free economy is for prices to slowly fall.

As we saw in the last third of the 19th century, when we had fairly sound money and tremendous productivity and investment in infrastructure and capital goods. Real wages were going up for a fee every year. Now there were bumps in the road, the panic of 1873, the depression of the 1890s, but basically it was a great period for the US economy.

It became the world’s great economic power during this period. And that of course carried through the 20th century and now in the 21st century. So all these things come together in the data. And what I try to do is sort it out in terms of, what’s the good stuff that’s happening in the economy. And the really good stuff is that there are incredible entrepreneurs, men and women who are just building great businesses from scratch despite all the regulations, that’s a plus that’s another part of the public economy or the regulations that businesses have to do that. Whether it’s minimum wage laws, whether it’s, environmental regulations or whether it’s,  labor regulations. There are a host of things that businesses have to deal with.

And of course, the smaller the business, the less room for error, because they’re working on tight margins. And if their costs are going up because of regulation, they have a tough time staying in business. All these generate enough revenue to grow. 

Buck: So you wrote a book called why the federal reserve sucks. What’s it about? 

Murray: Well, what he did was, look at the testimony of Greenspan and Bernacchi during the dotcom bubble, the housing bubble, and it looked like they were pretty clueless as to what was going on, given that they’re supposed to be pretty savvy people.

In fact, the Armani is that a Greenspan wrote a wonderful article in 1966, called golden economic and freedom where he pinpointed the problems of the right depression on the feds, easy money policies of the 1920s. And so when he became fed chairman in June of 1987, What did he do? He did the same thing that the federal reserve did in the 1920s, put the pedal to the metal and increase the money supply.

A flood of the economy was liquidity, and we got the.com bubble. And then the housing bubble, which of course Bernacchi didn’t do anything to stop when he was appointed in 2006 after Greenspan served for 19 years. So again, you look at the testimony that they made in Congress. You look at the record of the economy and what they’re there to do basically is to, for lack of better term, do the bidding of wall street, which loves low interest rates in order to have funds to boost the stock market and other markets. 

Buck: What happens when, you know, if, and when, I mean, obviously it’s clear that it wouldn’t would not be good for the economy, but okay. Realistically, people talk, but people have been talking. You know, the Fed and tightening, tightening of monetary policy and, you know, trying to get inflation under rain and rates going up all of these things, but given the fragility of the economy, do you really think that’s realistic?

And if it does happen, if rates do start going up, aren’t we kind of in a, in a really bad place, for that to happen, just in terms of the second. 

Murray: Yeah, it could happen. What happened in 1966, do a little economic history analogy. The Fed was tightening because of the Vietnam war and a great society program.

And, LBJ got very concerned and he called the chairman of the third reserve down to his ranch in Texas and basically, hovered over him and said, what are you doing? You got to keep rates down. And we had a mini recession in 1966, the fed put the pedal to the metal. The economy overheated in the late sixties.

And then we got the 69/70 recession. The Fed could do the same thing this time around when the economy starts slowing down and stock market tanks. And, the fed says, we can’t continue the pain out there. And so they do another round of quantitative easing and we’re back to the races again. So again, nothing is unusual or should I say nothing is off the table in terms of what the fed could do before. Their reaction to the economy after it slows down. It’s quantitative easing.

Buck: The latest book is Navigating The Boom Bust Cycle: An Entrepreneur Survival Guide. Tell us about it. Who’s it written for? Who can benefit from this? 

Murray: Well, I think there are several target audiences. Obviously it’s the small business owner, the CFOs, the CEOs, the CEOs of major corporations. It’s also, I think, a great book for college business students or MBA students who really want to know what’s going on in the economy. How can we tell when the economy starts peaking and when the bottom occurs?

Because ironically enough, for some business people, if they’re savvy enough, you pick up a lot of cheap assets. At the bottom of an economic cycle and you’re ride that sucker off in the next boom. And you can make a lot of money, which is what Sir John Templeton did in the 1930s when he bought stocks. I think his goal was to buy quality companies that was selling for about a dollar in 1930-33, and the market imploded 90%.

And he made a ton of money during the 1930s because the Fed was pumping so much money in the stock market and had a big rally in the 1930s. One strategy is to get some cash in your portfolio. Listen, Warren Buffet has $149 billion on the balance sheet of Berkshire Hathaway. So what is he telling the world?

He doesn’t think there are many good values out there. And so therefore he’s keeping his powder dry. Possibly for the next downturn to buy up assets, either companies or stocks. Remember he wrote an op-ed on October 19th, 2007, actually 2008, just before the market bottomed in March of 2009 saying, Hey, I’m buying US stocks. There are great companies out there at good prices. Of course he was a few months early, but over the term, Those stocks turned out to be really good buys for buffet in October, 2000.

Buck: Is the book written at a level where you don’t necessarily have to have a lot of financial or economic education before. I mean, I know a lot of it’s interesting, you know, with my audience it’s educated individuals, but you know, if you were a biochemistry major and you didn’t take Econ, except for macro. And just to get your requirement done 25 years ago, then you know, you don’t have a lot of knowledge, but is this the type of book that would be good for, you know, a smart person who’s interested in learning how things work in general, or you have to have some backup.

Murray: Absolutely. I try to write these books for the target audience and also people who don’t have a background in economics and finance, because I think that’s one of my strengths as a teacher and writer is I could explain fairly complex concepts to a general audience because these concepts are pretty common sense when you think about it.

And so, I’ve gotten great reviews. The testimonials are in the front of the book and I’m really proud of them because they talk about the book. It’s an indispensable guide for people who really want to know how the economy unfolds over time and, and what the landmarks are to look at. So, I think anyone who is curious about the economy who wants some more insight about the economy, can pick it up.

And by the way, the publisher has a 20% discount audits with a code boom20. And if you go to my blog,  MurraySabrin.com, it links you to the publishers of books, a website, and it’s Black Friday, everyday at Business Experts Press for them.

Buck: So, okay, so you can find the book at your website, www.murraysabrin.com.

That’s murraysabrin.com. Can you also get it on Amazon?

Murray: The publisher’s discount is not available on Amazon. So, that’s the nice thing about the publisher. They really think this book could have a tremendous impact in terms of people really understanding it and having more educated entrepreneurs.

Buck: Good stuff,  Murray, I really do appreciate your time. And, looking forward to reading the book, I have a copy and I just sort of skimmed a little bit so far, but, I want to get into it a little bit more and I appreciate your, your willingness to, to teach, you know, those of us who don’t know as much about this stuff.

Murray: Thank you so much, Buck. Appreciate it. 

Buck: We’ll be right back.