Business Intelligence and Insight and the Economic Outlook for 2019 and 2020.
CEO Adam Duso moderates Turnaround Management Association’s () annual keynote with Brian Beaulieu, economist and CEO of ITR Economics.
ITR Economics provides the best economic intelligence to reduce risk and drive practical and profitable business decisions.
What Brian Beaulieu has to say could change how you approach your business. As trade uncertainty and corporate chaos continue to increase, Beaulieu’s expert insight will provide guidance to what was once unknown. He has driven applied research regarding business cycle trend analysis as well as implemented that research at the practical, company level.
Over the past ten years, Second Wind has conducted thousands of reorganizations in the distressed space. Through a single, frictionless transaction, we preserve the full ongoing concern value and continuity of operations of a distressed business while eliminating all subordinate debt. For the ABL or factoring professional, we deliver back a pristine, debt-free enterprise in 45 to 60 days.
For alternative lending professionals, Second Wind turns untransactable deals into great situations.
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[Music] Thank you everybody I really look Forward to this opportunity to have the Opportunity to speak with you all and be Here at the conference I’m going to be Asking Brian Boleo to come out and for Those of you who don’t know Brian you Probably should Brian it works for a Firm called ITR economics and what they Do for their clients is they use Economic indicators and trends in order To forecast upcoming market Corrections So that their clients can make sure they Have investment strategies that preserve And increase wealth some of Brian’s work Notable work which there’s a lot but I’ll talk a little bit about some of it Brian wrote a book called prosperity in The age of decline which again if you Haven’t read it pick it up it’s a great Read in that Brian’s group was one of The groups that saw the financial Collapse of 2007 and eight coming and in Late 2016 advised all of his clients to Move out of risky real estate Investments which then saved them untold Amount of wealth Brian also in his book Which was published in 2014 Accurately predicted the GDP growth for 2015 16 and 17 within one tenth of one Percentage point so why is this Interesting all of us because everyone Here whether you’re a private equity Player you run an investment fund you’re
An asset based lender you were all here And we’re responsible for creating Investment strategies that perform well Regardless of market conditions it’s our Responsibility to make sure that we’re Getting accurate information and making Sure that our portfolios are aligned in A way that will minimize downturns and Increase opportunities for upticks in The market at second wind consultants we Work with the stress small businesses And medium mid-cap businesses all over The country that and we focus on Reorganizing those businesses Preserving the underlying value and Streamlining the short sale process and What we focus on is eliminating excess Debt and when we do this we solve a Problem that is common to almost all Distressed investing opportunities the Obstacle to closing or the obstacle to a Successful investment is too much excess Subordinate debt so our process allows Us to create a solution for that and That creates a lot of value for both Asset-based lenders private equity Groups but more importantly it preserves The underlying economic value of that Business and the jobs and the multiplier Effect that that has from that industry And that’s really our context we believe That we are responsible for making sure That we preserve as much economic Activity so on the macro scale one deal
At the one deal at a time we can move The needle in the right direction one Deal at a time so with that as our Context I want to introduce and bring Out Ryan bolillo to talk to us about What we’re going to see in the upcoming Years come on out Brian [Music] So Brian do you have any opening remarks For the group before I start peppering You with some questions just that I Think you all are going to be very busy In the years ahead there are tremendous Pressures coming upon businesses from Within and without that by and large so Many of them are not ready for you are Going to be very busy in this space for A good number of years to come they Suppose that’s a good thing yes for this Room so Brian let’s start at a very High-level question explain to me in Your own words what you perceive the Business cycle to be and why you believe So many companies are late to Acknowledge the cyclical nature of Growth the compound question the Business cycle occurs because imbalances Develop within the economy and these Undulations are just a normal phenomenon I think a lot of businesses are slow to Understand that and accept that because When they’re young particularly I was Thinking about it in terms of your space Adam these small and mid-cap businesses
Some of them still have the founder in Charge when they’re young within the First seven years of any Corporations Life really there are no cycles you’re Out there every single day grabbing Market share growing the business Garnering every dollar that comes Floating by the front door you’re making The growth happen yourself but as you Grow you become more and more dependent Upon the economic system and that’s a Transition that too many business Leaders failed to make and even when They get to be a good midsize cap Business I find that ego sometimes come into play Remember there’s a whole host of Examples they can give you but I Remember one in particular where we went In and we said your markets are going to Be down 12% next year what are you doing To prepare for that what’s what’s the Plan B in case we’re right so that you Can protect the bottom line there’d be a Company and this person has surrounded Himself with a great deal of young Talent and they said we’re just going to Grow through it we’re going to gain Market share So we said that’s great how are you Gonna gain market share what’s the plan Here what just gonna gain share that’s All like it’s right out of a textbook or Something like that you find it on the
Floor Yeah you find it on the floor sometimes And the next thing you know that CEO is Out and he’s no longer invited to board Meetings shall we say and there’s new Management in place and this company is Restructuring it’s not that business Cycles destroy your business it’s being Unaware of them and the pressures they Bring upon your business that ultimately Create these distressed situations and There are some towels that you can look For along the way of course but Generally its success in the past breeds Linear thinking going forward and they Don’t see the bends in the road that are Inevitable in our economy so let’s talk About some recent historic examples in What you think if anything could be done To have alleviated them or avoid them Altogether whether that’s the dot-com Era or the the 2007 8 9 is there Anything that could have been done to Avoid the situation or is it just about Weathering the storm there’s always Something that could have been done to Avoid the situation the issue is though It’s never going to happen so I don’t Really delve into the what the woulda Coulda shouldas o of those downturns Just like I you know we know what’s Driving some of the major problems we Have in this economy what’s going to Drive some of the long-term pain that we
See for the US and the global economy But there’s no need to go there you and I aren’t going to fix these Macroeconomic problems the best you and I are going to do is take care of our Firms our families and position Businesses so that they can weather the Storms and make money even when those Around us are not making money I am a capitalist to the core and the Number-one objective is for us to make Money through good times or bad and There are always ways to do that so what Do you feel the largest threats to Corporate solvency in the u.s. are Currently I think the largest threats Are in the rearview mirror they have no Experience dealing with the margin Pressures that are coming upon us we’re Not used to living through a prolonged Period of shortage of labor we’re living Through a long period of supply chain Disruption none of us have actively Dealt with and the global trend toward Nationalism that is currently underway And we don’t really understand all the Ways that that’s going to impact our Businesses impact our margins and allow Us to continue to prosper we haven’t Defined in many instances with the Competitive advantages of this entity What makes it worthwhile for somebody to Use my firm as opposed to somebody Else’s firm
It isn’t because I’ve been here the Longest it isn’t because we’re the Safest that were the nicest guy there’s A competitive advantage that is not Being articulated all those issues come To bear in terms of why people are now Saying well where’s my margin going they Get a temporary tax break from the Government that helps you know what the Government gives the government can and Probably will take away at some point in The future yeah second wind we’ve seen a Lot of increase of the use of leverage Even after acquisitions happen there’s a Lot of use of leverage which increased Fixed costs and therefore leaves less Variability for shifts in variable costs So along those lines I don’t know if you’ve seen this in a Lot of your forecast or analysis but Have you seen rising fixed costs and and And then leaving less room on in margins For variable costs for firms that are Operating on a fairly tight Lane of Profitability what you described is Going to be very painful and A very difficult road for them to go Through because there aren’t enough Reserves and those are the folks that Are at NDSU are looking for there are Plenty of companies out there that are Leveraging the future in doing so very Successful these interest rates are Incredibly low right now that we’re
Experiencing they’re only going to go up In the future there’s more inflation in Our future than we’ve seen in the last 20 years and that means interest rates While they’re taking a hiatus here in 2019 they are going to be going up so if You’re going to leverage now is the Right time to do it but with the right Interest rate and under the right Circumstances and people are doing it Under the wrong circumstances and Because they have to not because it’s The right thing to do I’m for Well-managed profitable companies my Admonition to them is this they say how Much money should we borrow and I say if You’re sleeping all the way through the Night you have not borrowed enough money But you got to make sure that you have a Road map of how you going to pay that Back they have more than just a 13-week Pro forma for cash flow and you know how This is going to pay itself back because The business is growing that rapidly That you can afford that increasing Costs great what industries do you Believe are aligned to handle and even Potentially thrive and upcoming changing Market conditions I think you have to Look for industries where the R&D supply Line is well established and maybe Distressed situations going to come Along where this particular player Hasn’t been partaking in that movement
And they’re the ones that are being Disrupted by the technology rather than Adapting the technology or utilizing it To go forward there’s industries that I Think are safe and therefore probably Not particularly worthy of you unless They are under bad management currently Would be food beverage security all Sorts of security logistics International facilitating international Financing those sorts of fields are Going to be wide open and for companies I know how to execute very well Very profitable fields so in your book You make a variety of projections about Upcoming market Corrections can you talk About what you see the next recession Being the when and why sure right now The economy is slowing down and that Alone is going to create some stress for A lot of companies because they were Buying into the tax cut change the Change in our accounting for capex etc Is changing the ball game and it changed Essentially nothing I mean the the Positive impact of that nitrous-oxide Being applied to our economy is in our Rearview mirror we’re going back to Normal economics and the leading Indicators globally are very clear the Whole world is slowing down and we’re Slowing down with it and as you slow Down including in the consumer retail Areas some parts of the economy are
Going to crack and you’ll see some Actually contract that is going to come Up you’ll see more of that in the second Half of 2019 in the first half of 2020 That’s really going to be the sweet spot For some opportunities to strike in Terms of distressed management Opportunities or distressed investing Opportunities what’s driving that is Simply the liquidity that was out there Has been deployed and now there’s as Almost like a fear factor that’s being Put up there there’s too much Uncertainty we’re seeing China is Withdrawing in terms of their ability to Grow and that’s a permanent phenomena by The way that’s not a just a today Phenomena we’re seeing the US businesses Taking a breather trying to assess what All this is going to mean down the road And once that slow down stats going Again there’s its own momentum until Something else turns it around I think We’re all going to start feeling much Better about the future when the Federal Reserve takes their foot off the Interest rate gas pedal and just allows Interest rates to stabilize and clearly That’s what the marketplace is telling The Federal Reserve to do when the Federal Reserve says they’re going to Have patients in 2019 all they’re doing Is reading the economic key leaves the Same ones that I read and
The marketplace is already telling them Back off on these interest rate Increases no more and the stock market Clearly is looking at Ford valuation is Based on profitability trends and They’re not liking what they see we’re Going to have to get through those two Issues first before we start seeing the Turnaround I already have three leading Indicators empirical leading indicators Telling me that the economy starts to Rip up in the second half of 2020 we Mentioned our track record thank you Very much One of the reasons for that is we’ve Developed very long-term empirical Leading indicators and they are telling Us about the second half of 20 and in 2021 the economy is doing much better We’re back to running on all eight Cylinders so back to your question we See the next danger period for the Economy being 2022 on into early twenty Three and the exact causes of that are Always difficult to nail down at this Particular Junction but if I was going To speculate on the whys rather than the Probability of its occurrence it would Be because the Federal Reserve will be Back to raising interest rates in Response to heightened inflationary Pressures it will because be because too Many businesses are not equipped for the Global nationalism and its impact on
Margins is because they haven’t Automated fast enough and are still Relying on hiring more people than Finding an alternative way to grow their Business without people so margin Compression becomes pretty extreme we Think in 2022 And you’ll see a general reset occur During that period just FYI right now Everything that we’re looking at at my Firm we think 2022 is going to be the Worst year any of us in this room will Have seen the economy go through since 2008 it won’t be that bad but it will be The worst cycle since 2008 and it’s Going to be a wake-up call for a lot of People so without giving us your secret Sauce tell us about those indicators What you know what are you looking and Tracking that leads you to this that Conclusion you’re asking me to describe My secret sauce to you Adam and I like You a lot but you haven’t bought me Nearly an Flowers and stuff for me to do that so Any macroeconomic indicators that are Like just screaming out at you though Not all of them is there one that that Is that as a the top of your pile that Is the most concerning about 2022 about 2022 yeah the the global inflationary Pressures that so much fiat currency was Created coming out of 2008-2009 we Haven’t seen the full ramification of
That that’s the biggest macroeconomic Concern I have the other one it has to Do with the US government seemingly Insatiable appetite for debt we’re Setting ourselves up for a very Interesting dynamic because at the same Time we’re becoming very difficult Trading partners to the people that are Lending us money we’re going to have an Even greater need for them to lend us More money that’s a dynamic that is not Setting us up for success and I think We’ll feel some pain from that in 2022 As well do you have any indication of Which sectors you feel might be hit First or most on the largest scale yeah I think the the way we’re looking at That 2022 cyclical decline you look for The traditional markets to be the canary In the mine that would be housing the Stock market then you go into the Consumer discretionary side of things The automobile retail sales you’ll see That a fairly classic domino effect Occur keep in mind when you’re doing That if retail sales which we all track Follow their normal progression its Welcome- as your tell the tale is that Retail sales going negative the tell is When retail sales in nominal dollars is Not growing more than 3% and when it’s Clearly slowed down to a 2.5 percent Retail sales growth nominal dollars Again then you’re looking at an economy
That is stalling out and that’ll be one Of your major signs that oh here we go Again you know people will still say Well Still growing it could be worse that’s That’s not the point the point is it’s Not growing enough to keep our economy Growing at large so going back to the Tax stimulus which is you know I guess Propping up a lot of companies at this Point in time do you feel that there is Still some residual stimulus effect and If so do you know when you expect that To run its course or has it is it in our Rearview mirror the data that we are Looking at suggests that it is indeed in Our rearview mirror one of the the Long-term factors we look at in that Regard is we looked at business gross Investment as a percent of GDP we’ve Been looking at that for over 40 years Almost 50 years now and it vacillates Around a very narrow band of 12% of GDP Good times are bad you’re not going to See much deviation from that it’s it’s The independent variable is GDP not our Amount of investment and even during the Reagan tax cuts we did not see an Appreciable deviation from that 12% and During the 2018 tax cuts we’re not Seeing an appreciable deviation around That 12% in fact you look at wall street Surveys you look at the Atlanta Federal Reserve survey you look at the hard data
And it breaks down this way what Corporations did particularly public Corporations did with the freed up cash Was buy back their shares publicly Traded shares perfectly logical rational Thing to do but it had very little Upside ripple on the macroeconomic scene Right about 25 percent of the money went Toward pay raises bonuses that has more Of an economic ripple and only 25 Percent went toward capex And there’s no follow-on to that I mean That’s a one-time deal now that cash Flow is normalized so we’re not about to Repeat that effort just because the tax Law is there particularly since most Business people know they’re savvy Enough to know that in two years that Could be taken away from them part of What ties into our rather concerning Outlook for 2022 is knowing that in 2021 2022 A lot of today’s upside tax benefits are Going to be with drunk that’s a very High probability and whatever a positive Benefit we have been deriving will be Withdrawn from the economy and you’ll Have a natural adjustment to that the Business cycle will affect more than Just the u.s. given that 8 percent Roughly of GDP is derived from exports In combination with mounting International trade disputes do you see The government currently accelerating
This business cycle or magnifying the Possible effects generally government Our governments are reactive so they Tend to be almost an afterthought when It comes to forecasting this round of Trade tariffs is different because in The annals of US economic history we’ve Never imposed trade tariffs when we’re At the top of the business cycle we’ve Always imposed tariffs to try and create American jobs which tariffs tend to do But why are we trying to create jobs and We have a job shortage why are we trying To create jobs when we’re trying to Limit immigration fortunately in the State of the Union address President Trump now says he wants to invite more Legal immigrants in here first time he’s Ever said that I hope he means it but You don’t go creating jobs or the demand For jobs there at the top of the Business cycle are you doing is Increasing inflationary pressures now I’m getting to answering your question Distorting the supply chain is only Increasing the pressure on businesses That were single sourced either Domestically or abroad normally that Isn’t an issue because they were at the Bottom of the cycle you have lots of Capacity that isn’t true we are not Looking at excess capacity globally in Many many markets so the impact of this Is heightened inflationary pressure down
The road leading toward even higher Interest rates than we other would have Seen I think therefore it’s an Exacerbating factor for the 2022 Downturn that’s how you’re going to see It ultimately get played out in that 2022 downturn It’ll affect more than just the US and So do you see some countries whether It’s Europe or South America or China That are really in a more vulnerable Position and that obviously would have Ripple effects from an international Trade standpoint clearly it will be a Global cycle the all the major players Of the world are linked it’s one Geosynchronous business cycle we no Longer find significant lead lags Between economies having my list of Concerns not only for 2022 but beyond 2022 would be China not only do they Have a real demographic problem but they Have a real debt problem they’re much Better at us at hiding their debt Problem but it’s very real nonetheless And the new change in power structure Within China meant that they’re gone They’re moving back toward fumbling Resources toward grossly inefficient SOE S instead of feeding that their Capitalists side of their economy it’s a Very negative sign Europe scares the Daylights out of me because they’re Demographic is grossly negative in too
Many areas and because they have social Cost that could crush just about anybody Else thank goodness for the Germans Keeping Europe generally on its feet at This time Brazil is going to not be in a Pre sure ibly better position come 2022 Brazil always when we catch a cold they Catch the flu so Brazil is going to be a Hard hit which means South America is Going to be hard hit in 2022 company Countries that I look for as better than Normal Upside opportunities and it’s not Politically cool to say this right now Would be Mexico I love what’s going on In Mexico I think Mexico’s growing middle class That growing population based their Ability to harness natural resources They’re on tap natural resources their Latent ability to do that phenomenal Upside opportunities as we come to Realize that they’re a trading partner That Than not an enemy to be feared they were Partnered to be brought into the fold on The other side of the US mca agreement Which should it ever get signed you’ll Have Canada and Canada Falls born to the European in terms of the spectrum of Upside opportunity Canada is leaning more toward going the Way of Europe whereas Mexico is leaning More toward the way of going with the US
Economy make no mistake about it and This isn’t just us hubris and I say that Because there are seven countries are Represented here the u.s. is the world’s Dominant economy we’re twenty four point Two percent of the world’s economy Number two is China at about fifteen Percent and there are never going to Catch us Number three is Japan in their shrinking Number four is Germany we are head and Shoulders the 800-pound economic Orillia And that’s going to be the case for the Next 100 years for three reasons one Demographics our population is growing In the United States that is so Fundamentally important if you’re going To grow an economy organic growth Happens when your population is growing You have a second hand and you watch and You listen to an economy it’s it’s Boring so tick off thirteen seconds Every 13 seconds in the US OOP there’s a New person in the United States that’s What happens when you net out births Deaths and legal immigration and if we Open up the immigration portals that are Probably shrink back down to 12 seconds Every 12 seconds they’ll be that OOP I Call those instances F see you moments Future consuming units and when you have Future consuming units your future looks Good China doesn’t China doesn’t have Those future consuming you and as Japan
Doesn’t Europe does it we knew that’s One of our strengths long-term even in You’ve read our book prosperity in the Age of decline even after we’re going Through that demise we emerge from that Downturn looking so prosperous so strong Because we are going to be so young Compared to them because Gen the Millennials define that generation They’re amazingly big they’re the Biggest Gen Raesha we’ve ever seen here the Baby-boomers right then gen-x relatively Small relatively quiet then we have These tremendous Millennials and Underneath the Millennials we have Gen Z Which has a whole lot of potential by Itself most of the our trading partners Have this inverted demographic pyramid Top-heavy with old people we’re not that Way we have these beautiful hips that Are sustaining us bring on the hips Which is beautiful we also have natural Resources I mentioned before the age of Inflation that is coming upon us Countries just like businesses that Harness natural resources investors who Invest in natural resources countries That own the natural resources wind it’s Very clear we have been mightily blessed With those natural resources oh my gosh Compared to China There’s no comparison really which is Why China is buying all the rare earth
Mineral mines at Kent why is colonizing Africa why we’re so slow to do that Because we have so many natural Resources here it’s one of the things I Love about Mexico but India has growing Population India has natural resources But there’s still not even in the top 5 Why because India fails on the third Criteria as does China the third Criteria that makes us different is the Rule of law you have to have the vibrant Rule of law adjudicated law not Political law and that law has to Protect property real personal property Rights you have to protect the Intellectual property which is what our Current round with China is all about And you have to have legitimate Bankruptcy laws if companies can’t fail Forward then they’ll stop moving forward We learned that a long time ago did I Say since the only country that passes On all three of those measures India Fails on the rule of law they can get There but they’re not there yet why does This matter because if I was looking for Distressed investment opportunities I’d Be us or you Mexico centric and beyond that I’m Trying to save you some time stop Reading all the books and magazine Articles that equate the United States To the Roman Empire the Byzantine Empire Or some other Empire we are not them and
Third if you have adult chosen living With you at home kick them out on you Can make it this was number one economy Looking good move make it happen You touched briefly on unmounting debt So our countries that has been mounting Do you believe that we’re gonna see a Tipping point in the next couple of Years that’s going to lead to some of This downturn or we from a debt Management standpoint still in a healthy Standing we’re still in a healthy Standing when it comes to our national Debt in that we can finance it and Others are willing to finance it but the Trend isn’t healthy if you look at our National debt as a Britain not our National debt total government debt in The United States as a percent of GDP We’re at a post World War two record High and climbing the deficit in the Last fiscal year underneath and Ostensibly conservative president and a Conservative Congress increased 17% when Interest rates go up servicing this Increasing amount of money that we owe Becomes more and more onerous right now We’re at about a pace about 575 billion Dollars with the beat goes toward Interest payment on the debt that’s 575 Billion dollars I need to tax from us or They’re not going to spend on defense or They’re not gonna spend on social Programs or they’re going to print it
Doesn’t have to be that way other Countries have found a way to mitigate Some of that damage here in the United States so far at least culturally we Haven’t figured out how to do that some People like to ask is there a dollar Amount or is there a percentage with the National debt that once we reach that You know we’ve gone too far Brian you Know that the end is nigh upon us and The answer to that is no there’s no Magic number I look for that So bad in math I’ve looked for that I’ve Tried to develop an algorithm that looks At all the relationships globally that Says okay once we cross that line we’ve Gone too far Because it isn’t a number it’s more Emotive than that and that’s why the Terrorists scare the daylights out of me We have crossed that line when our Trading partners are no longer willing To lend us the money to continue to feed Our hungry beasts continue to feed our Lifestyle to continue to feed our needs That’s when we’ve gone too far and There’s no number that’s going to tell You all at this particular point in time That’s when it’s going to happen all I Know is that when they no longer have a Vested interest in keeping our economy Going because trade with us is largely Disappeared because of nationalism which Is a global trend not just the u.s.
Trying then you’re setting the stage for When that day comes but no one knows Exactly when that day is going to be not Even me So domestically ever since the last Correction traditional bank financing Has has been less scarce it’s been less Available especially in the in the Mid Cap in smaller Mid Cap markets and it’s Led to a rise of alternative unregulated Financing I’m curious as to what your Thoughts are regarding that whether or Not you see that as a benefit to future Growth or a threat to the future cycle That in downturn that we’re about to Experience it doesn’t have to be benefit Or threat it could be benefit and threat But let’s back up one moment talk about Why this alternative financing channel Arose it was one of the unintended Consequences of the dodd-frank Legislation I am I guess a libertarian If you want but more of an Austrian Economists government intervening in the Marketplace invariably creates Unintended consequences one of the Unintended consequences of dodd-frank Was we see home prices rising at a very Brisk pace through most of this country Another one is we had to find an Alternative means of financing our Which is what you just referenced that It is a benefit because the need is There it’s a benefit because we found a
Way to deploy the capital and we live Off deploying capital we are a Capitalist economy we do not want the Government handing out that capital but The risk comes when we’re chasing the Returns and when the ability to pay back That money evaporates and the revolving Door that covers that debt that drove Down the ratios in terms of ability to Pay Disappear then we finally while the Emperor didn’t have nearly as many Clothes on as we thought thank you ITR Is projecting in your book which again Everyone should read a correction in the Decade of 2030 to 2040 that will rival The Great Depression can you describe Some key indicators that which led to That prediction or expand on that Prediction a little bit more sure for us To show our hands if you don’t mind how Many of you in this room are over 57 Years old would raise your hand for me If you’re over 57 excellent you don’t Need to care about this all right you’ll Be retired or you’ll be on the wrong Side of the grass before it hits so not You’re not your deal how many of you are Under than say 44 years old raise your Hand if you’re under 44 all right sucks To be you all right because this is Going to hit you square in the face all Right and what’s driving this is it’s a Compound phenomena it’s like most big
Events that there’s some trends coming Together there’s a confluence of events And trends unsustainable trends one is Demographics we are getting older the Good news is that in the United States The majority of us baby boomers will be Dead by 2036 and the population gets a Reset back toward a younger average age Different mindset different people in Power rather than just old people Continuing to be in power but until then We have more and more old people and There’s lots of benefits to older people But from an economic standpoint remember Economists don’t have a heart They really don’t have a soul old people Just suck the life out of your economy That they take they take they take and They put back very little okay that’s a Burden that we have to bear along with The rest of the world but here in the United States we have this social Security nonsense to continue with Anybody who knows basic arithmetic knows How to fix Social Security our issue Here in the United States is there is ZERO political will to fix Social Security and that ties again into the Demographics because there’s no Political he wouldn’t cry to fix that Because there’s more old people than There are people close to having to Worry about that and this gets me kicked Out of a lot of stages across the
Country but you know just because it’s Been one way for all these years doesn’t Mean it has to continue that way Demming The great management Bureau one of my Heroes of the past he once said it is Not necessary to change survival is not Mandatory all right we have a system That we can’t afford anymore changing That system is now mandatory but we have Zero political will by the way and a lot Of the companies I assume you’re Investing in you’re going to find that Exact same phenomena that same ethos I Don’t need to change I’ve been Successful I couldn’t possibly see this coming I’ve Never encountered this before how would I know that sort of thing right this Case you constantly need to be evolving You constantly need to be changing the Other major culprit that we’re looking At is our healthcare system in the United States some people like to say Well if we had a single-payer system Would be all better if we simply use the Government to negotiate down drug prices It would be all better if we made Hospitals go electronic it would all be Better if we allowed the consumers to See the real cost of what they’re Spending money on it will be all better And I look at all those things and I say Those are great exercises folks but They’re not going to fix the problem see
It’s a supply and demand problem the Supplier in the They never touch whether it’s a Single-payer system or the current Insurance system or whether you know you Can get it more cheaply down the road if The money’s not coming out of your Pocket what do you possibly care how Much it’s going to cost I’m going to go Where it’s convenient I’m going to go to The best doctor what do I care about how Much it’s going to cost There is no connection there and until We find a way to make it a connection We’re not going to fix the system here In the United States relatively unique To the United States we have this Culture that if we spend enough money on A problem we can solve the problem we Don’t have to face that problem we view Death the same way we continue to spend 80% of our healthcare dollars in the Last two years of an individual’s life And if that’s my wife we’re talking About it’s worth it if it’s somebody Else’s person to me it’s not worth it Right if it’s my first wife not worth it We can save some money here okay can we Vote on this you see what I mean though We we don’t want to make that call We will spend money because we think we Can cheat yeah death is not part of our Culture every death is treated as a Tragedy instead of a passage and until
We change that facet of our culture how On earth are we going to possibly change How much health care is costing us in The United States have you what do you Think the effects recently of either Obamacare or Trump’s version thereafter Has that made things worse has that made Things better is it kind of a push it to Push all we’re doing either with Obamacare or Trump hair is we’re just Moving the cheese we haven’t Fundamentally changed much of anything We’re still out of step with the Demographics the need it’s I don’t like To delve too much in history but I Remember 20 years ago talking to Businesses and telling them look you let You pull your employees man They’re going to tell you that health Care is a right that they have and as Soon as it becomes a right that they Have you are cooked and as long as Government expects you to fund it They’re right instead of the government Funding they’re right then you’re going To be looking at a cost squeeze that you Somehow have to contend with and fYI by The way and this is the short-term Business cycle phenomena health care Costs in the United States and Particularly employer paid health Insurance costs in the United States Have ramped up over the last three to Six months and they’re going to be
Ramping up like that for the next two Years they had been stable for a while That’s come off and we’re back to Ramping it up and well some people are Going to blame it on Trump care versus Obama care that’s just circumstantial But we’re gonna see more and more Businesses where these health care costs Are going to become something that they Can’t adequately fund back to social Security you you said that anyone who’s A student of arithmetic realizes that we Have to change the system that we have If we had the political will which we All acknowledge that we do not but let’s Assume that we do is there time to make Those adjustments whether it’s raising The retirement age you know raising Taxes to fund it changing benefits under The program or has that ship sailed I am Despite the words that have come out I Am by my nature an optimist but I also Know how to run numbers so I’m careful To distinguish between those two when I Answer your question when I run the Numbers there is time we can still avoid This 2030 phenomenon we can at least Take the social security aspect of it Off the table we can still fix health Care there’s still time it is just my Opinion that there’s zero political Probability of that happening all you Have to do is look at the last 40 years Different administration’s different
Philosophies and you know what the Trends are and all of a sudden to say Well now we’re going to understand these Trends and Beer off this course before the pain is Here and let’s see what it means it Means that our politicians have to say Look we’re in the types of short-term Pain here folks but there’s long-term Gain we’re going to avoid all this pain Down the road and you’re still going to Reelect me in two years or four years Because I’m doing what’s right for the Long term when I set up to do that we’re Not equipped to do that the American People don’t want to hear that what they Want to hear is that they’re going to Get more free stuff that’s what they Want to hear so I have one last question For you and then we’re going to turn it Over for Q&A for anyone who has any Questions for Brian but I think there’s A lot of us in this room who are Wondering you know what can be done to Maximize wealth between now and 2030 and What can be done to protect and preserve Wealth in that decade of decline that You’re predicting you have to be in Between now and say 20 30 20 29 Investing into those three areas that I Talked about used to your advantage our Natural advantages demographics yeah It’s a resources rule of law and to me That breaks down into I’m going to avoid
A lot of fixed income investments unless That fixed income investment can Function like a traditional barn ladder Would as interest rates are going up so I’m going to overweight equities a Little bit more but in particular when You look at how many more Americans are Going to be running around and they all Need a place to live I’m overweighted Personally in real estate and mobile Weighted in commodities because Commodity prices do very well during Extended periods of inflation so I’m Breaking some of the paradigms of the Last 30 years recognizing that the Paradigm of the last 30 years was set up By globalization and globalization is Dying So my new investment paradigm has to be Toward what’s driving the next 12 years And that’s going to be this inflate Inflationary move sometime around 2029 Sometime around 2030 you got to flip And the trick is going to be knowing When you have to flip and other than it Continue to attend these conferences and You invite me back to these conferences I’m not sure how you’re going to know But I know this you’re going to hear More and more frequently the four most Faithful words in finance and that is It’s different this time When that’s on everybody’s lips it’s Different this time
Don’t worry about that it’s different This time it’s not different this time Folks history never repeats itself You’re absolutely right but history sure Likes to rhyme You know what hasn’t changed this time People and what drives us we just find Different ways to accomplish the end Means so they’re going to flip and You’re going to sell your real estate You’re going to keep one big house Because that one big house is going to Come in handy because the kids are Moving back in with you all right You’re going to eschew your stocks most Of the real estate you’re going to have Sold off your commodities and you’re Going to buy government bonds but not The US government gone because we’re Going to be one of the epicenters of the Problem it’ll be a global problem you’re Going to go to a Swiss government bond Australian government bond and Canadian Government bond those will be the three Pillars of your investment portfolio You’re going to be buying at a time when Interest rates are very high so the Interest income off those bonds is going To be very nice and because the interest Income is very high the interest rates Are very high the coupon rate is very High Theoretical coupon rate those bonds will Be called and they’re going to be called
Around 2035 wish maybe 2036 so they’re Going to have an influx of cash you’re Going to take that newfound cash and You’re going to start investing in hard Assets again forget about gradualism Between 2029 and 2036 there is no Gradualism you’re all in alright and You’ve got to be willing to make that Move as it shows itself most people will Not help your kids through this period By the way if I made you a public Service announcement if you have Children or grandchildren still in School somewheres in the school system Help them show me I’m Eric and who’s bilingual and I’ll show You an unusual American for one thing The first language they should learn is Proper English like proper the second Language I think should be French first Language ubiquitous every place the French Foreign Legion has gone they know French so in Asia Africa Europe they Generally know French or English I Happen to think that Africa has an Incredible potential that they could Ever get their law portion squared away They score very high on the other two Factors if they ever get the rule of law And Africa I want my grandchildren to be Able to do business there and they’re Going to be able to do business there if They are bilingual and help your kids or Your grandkids be strong in math strong
In math bilingual you’re always going to Have a job I think during the 2030s We’re going to have an unemployment rate In this country that’s going to be like 20% unemployment rate and for economists To think on the margin that’s Devastating I choose to look at it the Other way I am busy preparing people to Be part of the 80% that always has a job Then it’s always accumulating wealth That is always making the system work Because they are as the TMA spokesperson Was saying facing forward they’re seeing The future before it’s here and they are Prepared for that future best way I can Wrap this up and I know we’re out of Time so please forgive me but my Generation we did a terrible thing we Told our kids just go to college doesn’t Matter what you study it’s important That you get a college degree what dumb Advice that was don’t you want to know The difference between an art history Graduate and a park bench the park bench Can support a family This cannot support a family that’s the Difference Adam thank you very much Thank you all very much [Music]