We discuss what an inverted yield curve usually means in the bond market and why Federal Reserve Chair Jerome Powell can’t tell the public the truth when he sees big trouble on the horizon.
We also discuss the global economy being trapped between massive debt and a starting place of low rates at the end of the economic cycle. This episode was recorded on May 29, 2019.
You can listen to the entire conversation right now in the audio player below. If you prefer to listen on your phone, GHOGH with Jamarlin Martin is available wherever you listen to podcasts — including Apple Podcasts, Spotify, YouTube, and SoundCloud.
Listen to GHOGH with Jamarlin Martin | Episode 64: Tunde Ogunlana
Part 1: Jamarlin talks to Tunde Ogunlana, the CEO of Axial Family Advisors, a wealth planning firm. We discuss what an inverted yield curve usually means in the bond market and why Federal Reserve Chair Jerome Powell can’t tell the public the truth when he sees big trouble on the horizon. We also discuss the global economy being trapped between massive debt and a starting place of low rates at the end of the economic cycle. This episode was recorded on May 29, 2019.
This is a full transcript of the conversation which has been lightly edited for clarity.
Jamarlin Martin: I wrote a book about my life named “Moguldom”. You can get more information about this book at Moguldombook.com. I talk about acquiring the knowledge of self, self-determination and building a business over 10 years. There are some gems in this book that you don’t want to miss. One way to support the GHOGH movement and this podcast is to go to Moguldombook.com. Buy the book on presale to support the GHOGH movement. Let’s GHOGH! You’re listening to GHOGH with Jamarlin Martin. We have a go hard or go home approach as we talk to the leading tech leaders, politicians and influencers. Let’s GHOGH! Today we have Tunde Ogunlana coming back to the show. He’s the founder and CEO and family wealth advisor of Axial Wealth Advisors in South Florida. Welcome back to the show Tunde.
Tunde Ogunlana: Thank you Jamarlin.
Jamarlin Martin: We spoke in mid-November of last year, we had a cautionary tone about markets. Since we spoke, I believe, the market’s crashed down in a very short amount of time, about 15 percent. Of course, they’re back up. Over 2,800, S&P nearing all-time highs, how do you handicap the market temperature and where things are probably going to go from here, for the stock investors out there?
01:19 —Tunde Ogunlana: Well, for every compliance person and lawyer listening, definitely this isn’t advice that I’m giving to the public here, but it’s a good question because obviously I don’t have a crystal ball, but I think that the consensus is we’re in one of the longest bull markets in American history and we’ve had some, I think, welcome deregulation and other events from this current administration, which has helped boost that expansion along. But I think everyone’s in the camp of just wondering how long is this gonna last, and without knowing the future, I think what happened during the time we spoke last quarter, what I really feel is that was a great reminder that there’s risk in the market. And so without being able to time when exactly to get out or when the top is here, I think that last quarter gave us all the kind of foresight that this boom won’t last forever and that when the market drops it drops fast and hard. So we better prepare ourselves on the downside through whatever hedging strategies one might employ.
Jamarlin Martin: Okay. So on that note, the Federal Reserve chairman Jerome Powell, he has pretty much gone on pause, him and the Fed and they have totally flipped the script within like four months as it relates to quantitative tightening in terms of draining liquidity out the system. And then also on rates where the market and the Fed was predicting rate hikes this year, at least one. Now. The Fed is saying they’re on pause. They want to be cautious. Is that added risk in the market where the Fed switches their policy in a four-month window, relatively quickly? Meaning that, would that kind of escalate your thinking on, hey, what’s going on in the economy? What’s likely coming down the pipeline?
03:25 —Tunde Ogunlana: So yeah, in the second part of your question, yes. That obviously has someone like me thinking, why would they change their mind. On the first part of does it affect things, I guess by answering yes on the second part, if millions of people did what I did and start questioning things, I guess directly, their comments will affect the outcomes long term of people’s behavior in the markets. But I do think it’s necessary that the Fed communicate and I do find Jerome Powell an interesting Fed chair because he’s stated publicly that he wants to go back to the Fed being more data-driven and not issuing what they call forward guidance. So basically what he’s saying in kind of layman’s terms is, I want to stop being like the Fed has been maybe the last couple of decades where we try and forecast and predict the future state of the economy. I’d rather just deal with data that I see now and then be able to pivot on that. And whether that’s better or worse, I don’t know. But that’s the type of Fed chair we now have.
Jamarlin Martin: Recently, the bond market pivoted to a prediction of rate cuts where the global data has been funky. It’s been trending to the downside and now you’re starting to see central banks cut around the world. Now you’re starting to see your first rate cuts in this economic cycle. And so the bond market of course, as you know, is forecasting a rate cut, meaning that the market was just predicting a rate hike. Now folks with billions and billions of dollars at risk with a lot of skin in the game, they’re betting that the Fed is going to cut this year. Where Jerome Powell will of course go up there and say, “Hey, the economy’s great, we see a lot of positive things,” blah, blah, blah. But at the same time, they’re pausing. People with a lot of skin in the game, they’re betting that the Fed is going to cut. Does it look like to you that, hey, we’re headed into a bigger recession? Typically before recession, as you know, the yield curve inverts. If you could share with our listeners what an inverted yield curve is and how that has been a reliable predictor of recessions, the last two recessions.
05:49 — Tunde Ogunlana: Yeah, no, definitely. So I’ll speak to the inverted yield curve. And that just simply means that longer-term bond yields are lower than shorter-term bond yields. So what does that mean? And let’s get back to this whole idea of the bond market in general and interest rates. So I appreciate the way you’ve framed the questions here because I’ve always told my clients that the bond market’s probably one of the most important things to watch in the world. If you’re curious about the state of global economies, maybe the direction that we might go with global wars, things like that, if you look at the history of the bond market globally, which is probably, I’m just trying to think, you’re probably talking about a 500 to 600 year history of central banks starting in Europe back in those days, in the Middle Ages, that issued bonds to fund themselves. And over that 500 or 600 year period, you could probably count every major war in the world and most major economic events that were driven by activity in the bond market. Without getting too off-topic, we could even go into the history of the United States civil war and how the confederacy basically lost the war pretty soon after the Europeans stopped buying their bonds, because as a way to make European investors feel safe, they decided to back the interest payments and the assets of bonds instead of cash with cotton, which was the highest or biggest commodity in the 1800s. And when the Union army took over the port of New Orleans, the European central banks basically said, we are no longer investing in you, we’re no longer buying bonds because we don’t have a guarantee anymore that if you can’t pay us cash, that the actual hard asset, the commodity, which is cotton can get out of the port of New Orleans and will get to Europe, and basically the war was over in less than a year after that. So those are the little things we don’t learn in school, but that’s how important the bond market is and investors in the bond market are. So what does that mean for us today? When you look at things like the interest rates that you’re talking about, the yield curve as being inverted. The U.S. Treasury issues bonds, just for a quick education for those that may not be as nerdy as us about bonds. The U.S. Treasury issues bonds to finance itself. So whenever we hear that the country’s in debt, that’s $20 trillion or now $22 trillion dollars in debt, or we hear recently on the news I think last month was the all time record for a budget deficit for the United States that that is all financed through bonds. That’s the government issuing notes. Investors buy the notes with the money that the investors are paying for the notes that the U.S. government can finance itself and operate, and for borrowing people’s money, investors money, they pay back an interest rate. And so what happens is there’s different types of government debt. There’s notes which are very short term. Then they have T bills that go out to about a year. And then treasury bonds, which go from two years, five years, 10 years. There’s, I think there are still 20s and then 30-year bonds. And so what happens is the interest rate that is paid on those bonds is usually seen as a reflection of what’s going on in the economy. And when interest rates are rising, like they were last year as you mentioned, it’s again a double-edged sword. The good news is it shows that the economy must be doing better and heating up because normally rates go up as a way to cool the economy. Because what happens when rates go up, money becomes more expensive to borrow. And for most of us out there that are consumers, you can imagine if a mortgage is 3 percent, you can buy a much bigger house than if a mortgage is 13 percent. And if a credit card is going to charge you 1 percent, you can borrow a lot more money than if they’re going to charge you 25 percent. So think about that when you think about interest rates going up. The double-edged sword on that is when interest rates go up, sometimes it hurts stocks because it makes it more expensive for companies to borrow money. And the consensus is that that’ll hurt their bottom line if they have to pay more interest for debt to expand. And that’s one reason why the market sold off last quarter when we last had our conversation. Then you’ve got the idea of lowering rates. That’s usually to stimulate an economy. So alluding to exactly what you’re discussing now, the concern is that Jerome Powell, the Fed chair has announced that they will not raise rates and they may even cut rates. That gives some people some pause because they feel that that means that the data the Federal Reserve is looking at must then mean that the economy isn’t as strong as we all have hoped.
Jamarlin Martin: Can you explain for the audience why investors take the inverted yield curve as a symbol for a recession?
11:11 — Tunde Ogunlana: Okay, so a normal yield curve speaks to the direction of interest rates from short term going back to let’s say two-year bonds, all the way out to 30-year bonds. And it goes back with just the concept of time and money and what investors are willing to take for the time that their money’s tied up. So if we can imagine, if I were to invest and lend someone money for two years, I know that I’m going to get it back in 24 months. So I might have a certain percentage that I charge for that. But if I were going to lend, let’s say you, cause they’re sitting across from me here, the same amount of money, but for 30 years and I’m not going to see my money back for 30 years, common sense would say I’m not going to charge you the same amount of interest that I would for only 24 months. If I go out 30 years. That’s 360 months. That’s a long time. So I might charge you a lot more interest for you holding my own capital that I can’t do something else with. So normally the yield curve slopes in an upward direction. Shorter-term yields are lower and longer-term yields like on 30-year bonds are higher. That’s a normal environment. What an inverted yield curve means, it just means that the yield curve inverts and it just goes opposite where shorter-term yields are higher and longer-term yields are lower. Now the Federal Reserve and others through things like you mentioned, quantitative easing, can manipulate sometimes how far out rates rise or fall on the yield curve. But normally when a yield curve inverts, the concern is that there’s much more demand for longer-term bonds. And what that means is, and if we look at today and I’m just curious, I’m going to look here…
Jamarlin Martin: Just to add to your point, that rates, you’re not going to have a lot of growth in the future.
Tunde Ogunlana: Correct.
Jamarlin Martin: It’s predicting the pain.
Tunde Ogunlana: Exactly. So that’s where I’m getting at, that’s why I want to look and give you accurate numbers here. So at 3:18 PM on March 28, the 30-year bond is at 2.87 but if you look at the 10-year bond, it’s at 2.44, so what’s that telling you? That’s a flattening yield curve between the 10 and the 30-year. But it’s basically telling you that if I had, let’s not say me and you with our pennies, but let’s say we were a big institution like Goldman Sachs or JP Morgan and I had $1 billion that I had to put somewhere or $30 billion. I could buy U.S. treasuries and get 2.44 percent to give the U.S. government my money, my capital for 10 years, they’re going to give me 2.44 percent per year back. But if I go three times that amount for 30 years, they’re only gonna give me 2.87. So the fact that there’s so much demand for 30-year bonds, to your point, kind of tells people like me that kind of just been around and understand the system that there must be a lot of either fear out there or there doesn’t seem to be many other better alternatives that are safe to put your money for 30 years. And that doesn’t bode well because 2.87 percent to tie our money up for 30 years isn’t really that attractive.
Jamarlin Martin: What do you think about this? The Fed comes out and says things are going great, but we’re going to stop QT in the fourth quarter. We’re going to stop raising rates. We’re going to go on pause suddenly. Watch what the Federal Reserve does. Don’t pay attention to what they say. And let me add to that. If Jerome Powell sees a truck coming for the economy, where there’s some real trouble brewing in the economy and things could be looking really bad, this storm that’s coming. Can he really come out until the world that we see a shit show coming?
15:29 —Tunde Ogunlana: Yeah. I agree.
Jamarlin Martin: That would be a nightmare, right?
Tunde Ogunlana: Yeah, you’re right man. I mean, look, that’s where I think everybody needs to calm down with their conspiracy theories about why things happen with this and that, especially with government. At the end of the day, unfortunately, the Fed has to also be political. And I don’t mean political between parties and all that. I just mean they have to play their own version of politics, to your point, right? Everybody wants the economy to do well and of course they do as well. But they have to be careful because obviously they don’t want to necessarily come out and outright lie, but you’re right. If they see some real storm clouds forming, they may actually, the perception may become the reality. If they just come out and say everybody needs to put their head in the sand and take all your money out of the stock market and all that, then everyone’s going to do that and it’s going to create the crash that they may be trying to avoid. So it’s a good point. And I don’t think there’s any magical way to get out of that conundrum. I think all leadership has that has to deal with that.
Jamarlin Martin: Yeah. In our last conversation, Tunde and I, we weren’t saying, hey, go out and sell everything and panic. Although markets did crash 15 percent. We weren’t saying just go out there and panic and sell everything. But we do realize and appreciate the fact that as an investor you can go in different risk gears. Hey, the bull market, 10 years in, the smart money, most likely has already been made. It may be time to go to another gear where there’s lower risk with your investments across the board. You’re taking less risks in an environment where it looks like the cycle is about to end and most likely things are going to crash at some point. And so that’s that kind of lower risk gear, that second gear that could be more exposure to bonds, more exposure to gold, more exposure to hard real estate or more exposure to cash. In Q4 cash outperformed stocks. Cash is not an embarrassing thing to hold, particularly at the end of economic cycles when the end of the last two economic cycles, you had crashes.
Tunde Ogunlana: Yeah.
Jamarlin Martin: I believe that we’re not just going into a recession, but the global debt around the world, China, when you look at the global debt, that is way higher than when it was in 2008 during the last financial crisis. So there’s a lot more debt in this system. At the same time, rates are relatively low. So, the idea is that the central banks, when problems arise, they’re going to cut rates. But this time around, when things get bad, there’s not a lot of room to cut, right? So they’re going to go to QE, they’re going to start printing money. I would say, bailing out the wealthy bailing out investors. And Janet Yellen, just this week came out and said that it sounds fine if the Federal Reserve, the United States started buying stocks and bonds, where for example if Tunde is holding a stock portfolio that he has accumulated over the years, the federal government will go in and start buying stocks. So, the Federal Reserve would be a buyer, whether it’s an index or individual stocks like Google, Facebook, they would actually own stocks and help investors to keep this fake stock market up, what I would call it. Everyone. I think people see that, the next crisis, they’re going to go back to QE. That’s all they know. They don’t have a lot of flexibility with rates. How could QE look different than, hey, we’re just going to allow big banks, big financial institutions to make a lot more money with QE in the system. It’s very favorable to stock investors and financial institutions. But what about that middle class? What about the people on the bottom? What kind of QE, what type of flavor of QE could benefit the middle class and the people on the bottom?
19:55 —Tunde Ogunlana: That’s a good question. And my first answer is, I don’t know. I mean, I’ll just be straight up with that. That’s because the thing is, what do people in the middle class and the bottom need? And I think that’s such a broad answer. One could say that you could just give everyone cash, but then we know that that probably wouldn’t work out the way that, I think philosophically people would hope. You could say that you could reinvest instead of giving so much to banks and these big institutions that the government could reinvest in things like retraining people that have fallen behind because of technology and technological changes. We could shore up our education system so that we have an educated population going forward that can figure these things out as new generations come about. I mean, it’s bigger than just money. I think where we’re at, it’s a societal issue because I agree with your point about 2008. I don’t disagree with QE and what the Fed did because we only had one other historical, I think, event and context to look at, which was the crash of 29, the Great Depression, when the Federal Reserve did the opposite, they tightened money. They didn’t have a quantitative easing program. And we saw that it led to a decade of a depression that took a World War II for us to get out of. So I think that the QE on its face this time worked. We avoided the depression. By 2011, 2012 I think unemployment was pretty much back in check. Companies were…
Jamarlin Martin: Inequality’s at a record high. Isn’t it skewed towards the wealthy?
Tunde Ogunlana: Well, yeah. I mean look, invariably it is because the wealthy own assets that inflated after, real estate and stocks.
Jamarlin Martin: If you own assets, QE is really helping you.
21:46 — Tunde Ogunlana: Correct. But I think that it’s not as simple as that. I think there’s things like the tax code. I think there’s other things that help with widening the wealth gap. I don’t think it’s just QE and just that alone, because also, I mean, look, I’m just thinking off the top of the head here. We could have an environment where if something like this were to be retried, then instead of just throwing money at the banks and the institutions and that’s it, what one could say is, we’re gonna take companies that have a 401k plan, for example, and incentivize hire matching or something like that to help, or some variation of that to help the middle class as the market rises again, maybe they’re participating a little bit more too. There’s always a give and take because, and here’s what I’m getting, at the end of the day, this is what I think where our country is at right now with a lot of things. Because we see it manifested in the political arguments. You get the Democrats that can’t figure out if they want to be socialists or capitalists or democratic socialists or whatever. You’ve got Republicans that can’t figure out if they’re tribal to the party of one man or the party of Lincoln and what the Republican Party stood for. And I think it all comes down to the real question that we’ve had in our country since its founding, which is what is the role of government versus private industry and capital. And I think that if you look at something like QE, QE was basically no different in my mind than a welfare program for corporations. If you look at what we grew up in in the 80s hearing about welfare queens and all that, and the idea that you’re giving something to somebody who didn’t earn it on an individual basis, if we are honest with ourselves and look at QE, we gave money to institutions that didn’t deserve it because they got us in this mess. So I just look at that it’s neither right or wrong. It’s more like, let’s just be honest and say that the government, when the shit hits the fan, for lack of a better point, the whole point of the government is they’re the only ones there that can create money and be a backstop to a downward spiral. And whether it’s delivering that to individuals, corporations, or a combination thereof, that’s probably what’s going to happen again.
Jamarlin Martin: I’m not a big fan of QE. America is broke. America needs to be restructured. The system needs to be re-imagined, but we know that the authorities, the rulers of America, they’re scared of looking down that window because that’s a very dark window where this thing has been a Ponzi scheme, we have to restructure and make some huge sacrifices. The people don’t want to do that.
24:36 —Tunde Ogunlana: Correct.
Jamarlin Martin: So they’re gonna start printing money, printing money, printing money, until that stops. And when that stops, now that they’re experimenting with QE and money printing, maybe it works again next time, but there’s gonna come a time when rates are zero. You don’t have any room to cut anymore. And when QE stops working, when that doesn’t work, it’s going to be lights out in the United States. But I have some ideas. So, I’m not a fan of QE, but if they’re going to go to printing money again in the next downturn, rates are at zero. We need to start printing money, stimulate the economy. Instead of allowing the banks to borrow at zero and handing the banks money to go buy up assets, why couldn’t the Federal Reserve buy out student debt? Why couldn’t there be student debt relief? If there’s not total relief for certain classes of students, certain categories of students, why couldn’t they go ahead and buy the student debt up? They’re already holding a portfolio and say, we’re going to knock down the student loan interest rates to zero for the next 10 to 20 years to let some of you potentially catch up. I’ve got one more…
Tunde Ogunlana: That’s a big answer there. So let me just start because we’ll be jumping around too much. Here’s my cynical answer, because students who have debt don’t have a lobbying group in Washington C.D. spending $100 million a year to buy congress people to make these laws.
Jamarlin Martin: Preach.
26:16 —Tunde Ogunlana: And I hate to be that cynical, but at the end of the day, we’re human beings and it seems like every system of human history works in a way that is all about money and power ending up finding each other. That’s why we haven’t seen communism work, I think, in a practical sense, because even if you look at those systems traditionally that were called communist, it seems like the government leaders were always wealthy and had a lot of money and they weren’t living like everyone else. So it goes back to that. I think that, like you said, if they give a zero rate relief to student borrowers, who’s gonna buy that debt behind the scenes that says getting 0 percent. Are you gonna want to invest in a mutual fund or hedge fund that buys that debt at 0 percent and get no return for the next 20 years. That’s why there’s an inherent imbalance in the system. And I think that goes back to the role that the government is supposed to play. And I put air quotes there. And that’s why I say if you go back to just Keynesian economics, the whole point of government spending during a down business cycle is because the Keynesian economic theory states that the government, when the economic cycle is bad and we’re in a recession, private capital has dried up. So the only capital left is governments and governments going into debt. And then the idea is that if you go into debt as a government during a recession, then the growth, when the boom turns around and if you had a disciplined leadership in government, they turn off the spigot once the growth starts, the tax revenue from the growth would then replenish the coffers of the treasury that spent the money of the government and the cycle would play itself out. The problem we’ve had in the United States really since probably starting in the early eighties, I mean, we’ve had government debt before that, but it really started exploding in the 80s and it never stopped. We did solve the budget deficit by the end of the Clinton administration in the year 2000 and there’s actually for the people listening, you can Google and look at Alan Greenspan in the year 2000 actually gave speeches. And it’s amazing to think of now just 19 years ago where he said, we may have to do away with the 30-year treasury bond because he basically thought that we’d have the debt paid off by 2010, the total United States debt. And again…
Jamarlin Martin: He was wrong.
28:45 —Tunde Ogunlana: But you know what, he couldn’t predict this. He couldn’t predict that the next administration, this is why I don’t want to make this so much political, because it isn’t knocking particular people, it’s more of the philosophy. The next administration, the Bush administration did their tax cut, cut $1 trillion in revenue for the treasury over a 10-year period while simultaneously going and having two wars, the Iraq war and the Afghanistan war, which kind of has never been done in our country’s history, where you’re cutting so much revenue while spending so much at the same time. So that means when Bush left office, there was a $4 trillion debt and a $1.4 trillion budget deficit. And then of course, when Obama left office, there was a $19 trillion debt, but they had gotten the budget deficit down to about $500 billion. So the debt ballooned in general, even though the budget deficit came down. And now under Trump, I think it’s a $22 trillion fiscal deficit and the budget deficit’s back up to over a trillion dollars. So we’re at the point where it may start spiraling. And the point is, going back to the Federal Reserve and interest rates, something important to just tell the listeners, the Federal Reserve doesn’t control the bond interest rates. The Federal Reserve only controls the Fed funds rate, the discount rate and the Fed funds rate is the overnight lending rate between banks, period. So the real controllers of the bond interest rates that we’ve been talking about and the yield curve are actually bond buyers, bond investors. Now what QE did, the Fed was a purchaser of bonds. So the Fed can play that role, but it’s different from the one the Fed says we are raising or lowering the Fed funds rate. That’s only the overnight lending rate for banks. The others that play a role are, and people don’t know this, but every Monday the U.S. Treasury has an auction, it might be Wednesday as well. And I think this week, the auction, they sold $41 billion worth of treasury bonds. And what happens is they start the auction at par when par for a bond is a hundred. Well, if they’re bid up then the yield that is paid to the investor is squeezed lower. And if the bonds, if the buyers aren’t that interested, that means that the Federal Reserve has to lower their price and they might have to sell bonds at 97 or 98 to attract the investors to buy, that would cause interest rates to rise. So the concern I have now, I would say in the medium term, not short term, like the next year or two and not long term like 20 years out, but I’m talking over the next five, six years would be if our debt starts hitting the levels of like 30-plus trillion, and God forbid our budget deficit were to hit like $1.5 to $2 trillion. Some crazy numbers like that. The bond market might finally start saying, and the people at the auctions might say, we’re no longer gonna take 10-year debt at 2.4 percent. We’re gonna force you, the U.S. Treasury, we’re going to force and bid down and we’re going to start buying bonds way below par so that we’re paid a much higher yield in order to continue to lend money, to your point, because at some point investors are going to hit that tipping point where they’re going to say, are you going to be able to pay us this back and what’s the strategy? So I don’t know if we’re there yet, but we could get there at some point. And I think what we saw in the last decade, and I think this is where the public is all screwed up and I mean that in in just a positive way. Not that it’s their fault, but they’ve got so many mixed messages from our leadership. That’s what everybody was scared of 10 years ago when under the Obama administration they did that, trillion dollar bail out or whatever. And when the Bush administration did TARP, remember everybody thought that rates were gonna sky rocket and we were going to have all this hyperinflation. And what people didn’t predict was that you would have the Fed come in with quantitative easing and be an artificial buyer of that debt to keep rates low. So that’s why it’s hard to predict interest rates and where they’re going to go because they can be manipulated from so many different forces. And that’s why I, it’s just tough to tell by the end of this year, are they going to raise or lower rates. I mean, I think it’s just going to be data-driven.
Jamarlin Martin: This is part one. Tune into the next episode for part two. Thanks everybody for listening to GHOGH. You can check me out @JamarlinMartin on Twitter and also come check us out at Moguldom.com. That’s M O G U L D O M.com. Be sure to subscribe to our daily newsletter. You can get the latest information on crypto, tech, economic empowerment and politics. Let’s GHOGH!