Interview Transcript, Robert Zuccaro – Why this is the Worst Environment for Bond Investors:

Introduction of Robert & Aaron:

Aaron

So what What’s your perspective on inflation and what’s going on in the country?

Robert

Okay. During our last interview, I sounded the alarm on inflation, and did a paper in July of last year stating that transitory inflation is wishful thinking. And the reason I was pessimistic on inflation is that first, the Department of Labor has continuously been under reporting inflation for the past year. The latest report shows inflation is up on an annual basis 12 months 8.3% They have rank going up 5.1% Over the past year, if you look at the apartment list, national survey of brands they have going over the past 12 months of 17% realtor.com has inflation going up 16.8%. So rent is a very important component of the CPI constitutes 32% of the overall index. In terms of energy, the government claims that energy prices are up 23% natural gas has doubled in price in this year, gasoline is up 55% Over the past 12 months, and home heating oil is up 70%. So there’s no way in a world that we get to the numbers that are being reported. In addition to that food inflation is reported to be up 9.1% Tyson Foods which is a major food supplier, reported that has raised prices on pork 38% Over the past year 33% on beef. The United Nations reports food inflation worldwide over the past 12 months is running at 33%. So inflation is a lot worse than we’re being led to believe. And at the moment, we are in the worst environment in history for bond investors. Because as of this morning, 10 year bonds were yielding 2.8%. The government reports inflation has been running at 8.3%. We think it’s closer to 14 15% which means there is a loss in real terms of at least 10% taking place and bond investors in the current environment are being eaten alive.

Aaron

What would you estimate the actual inflation to be right now,

Robert

our work shows 14 to 15% using more realistic assumptions for right, more realistic assumptions, the food prices, consumers know what I’m talking about. They go to the market once or twice a week, and they see prices going up right before their eyes. From a personal experience. I bought a case of water yesterday. That case of water was 749. The last time I bought it a month ago. It was 578. So that commodity by itself or that product by itself is up more than 25%. A bottle of Coca Cola a real bottle not a container 12 ounce bottle last summer used to sell for $1. That same bottle today is on sale in supermarkets at $1. Ada. Now, there’s a silver lining and inflation. During the 1970s we had a high inflation period in that type of environment. companies raise prices to keep up with inflation. In this environment, something entirely different is taking place. Not only are companies raising prices to protect margins, they are also raising prices to expand margins. For example, in the first quarter, early estimates for corporate profits s&p 500 earnings per share, specifically were expected to expand by 4.7% with 95% of s&p companies reporting the first quarter growth right now stands at 11.1%. So businesses have done a good job in dealing with the adversity of inflation in dealing with higher fuel prices and also higher labor costs. Corporate America small companies America is absolutely drawing on how they run their businesses. American businessman and American business woman can adjust to all kinds of economic conditions, high inflation, low inflation, how soybean prices, low oil prices, strong dollar, weak dollar and so forth. And they are doing this today and doing a good job of it.

Aaron

So going back to the Department of Labor understand inflation, it said, I mean, are they just trying to like, keep panic under control? Or is this politically driven? Or are they just using some type of different model that eliminates a lot of the different factors that we just talked about?

Robert

All right, this is my opinion. The CPI has been purposely under reported, because if the true rate of inflation was reported, the government would have to pay out more cost of living allowances as of September 30, the government count calculated 12 month inflation at 5.9%, which was running probably double that Social Security recipients are pegged to the increase of the CPI in their payouts. If the government had to pay the actual rate of inflation, it means that they would have had to fork over to 70 million retirees, another $75 million. In addition to Social Security payments, which exceed $1 trillion, you have at least five other programs that are geared to Cola, one is better veterans benefits. Another is the SNAP program, which we used to refer to as food stamps, they are all indexed to inflation. If the government reported the true rate of inflation, the federal deficit would be a lot greater than it is.

Aaron

So basically, it’s because they’d be insolvent.

Robert

Well, they don’t have difficulty with the budget. As you know, we’ve been running a multi trillion dollar deficits for the first time in history, and it would only aggregate aggravate an egregious problem, which we have. And let’s talk about the national debt. At the end of the Bush administration in 2000, the national debt was $5 trillion. It took us 225 years to amass a national debt of $5 trillion. Today, the national debt exceeds $30 trillion. In 21, short years, we have created additional national debt of $25 trillion. If at some point down the road, when interest rates go up, when they go way up, the federal government is going to have great difficulty in financing their debt, they will finance the debt because they have to in order to protect the obligations to credit holders. And that means if they pay more to service that there’s less money for social programs for Social Security, Medicaid, Medicare and all the other government programs.

Aaron

Okay, now, not not all the companies are doing too well right now, though. Like thing for example, balls, Facebook, Amazon, Apple, Netflix, Google, I mean, what’s going on with them? They’re getting hit pretty hard.

Robert

Okay. There’s a major story here. And a story has to do with the seismic shift in big tech fortunes. The Fang companies, which are Facebook now called meta Apple, Amazon, Netflix and Google, last year had average revenue growth of 30% On average, and 38% profits growth in the first quarter. These growth rates fell so far, and most investors are aware of this, the same companies which have had meteoric growth for five years, and have generalized a collective annualized return of 25% per year over five years. Their revenues grew only 5% in the first quarter, and earnings per share growth 2% group of stocks is now down 36% on the year, and these five companies have a major influence on American business, because they constitute 80% of the overall weight of the s&p 500. So the decline in big tech shares is warranted and I think it’s going to continue because the economic circumstances has dramatically shifted for the fang stocks. They are No longer the growth vehicles that we’ve been accustomed to seeing over the past five years.

Aaron

Okay, so believe back in November, I guess advice word device that we’re given out, there was luck, just stick with the NASDAQ tech is going to continue to leverage and be able to adapt. Is that still what you would suggest? Or should we be looking more towards the blue chip stocks or mid markets or small cap?

Robert

I painted a bleak scenario for five companies. But if you look at the aggregate of tech companies, which make up 36% of the s&p today, according to our calculations, and 60% of the NASDAQ, tech will still continue to lead the way. Tac is where the innovative companies or tech is where the knowledge base of America is. We are an intellectual asset society today, and intellectual assets grow faster than physical properties. It’s just that the NASDAQ, which has dramatically outdistance. The s&p Since the NASDAQ Composite was introduced on February 6 of 1971. The NASDAQ before dividend considerations because we don’t include total return for the NASDAQ, but on an index basis since 1971. The NASDAQ has gone up 163 times versus 41 times for the s&p 500 index alone. So tech will lead but it’s an advantage over the s&p 500. The NASDAQ advantage will be less than it has been over the past 10 years, whereas tech or the NASDAQ has provided a 500% cumulative return versus 363% for the s&p 500 return.

Aaron

Okay, great. So do you see us right now? Do you see us heading to a recession. I mean, we’re obviously it looks like bear market right now. Going up and down. It’s been hugely volatile last couple of months.

Robert

I think the current downturn which started for the s&p on January 3, and for the NASDAQ and most growth funds started in November of last year, but the NASDAQ through Friday’s close down 29%. The Russell 101,000 growth index is down 21%. On an intraday basis, the NASDAQ or the s&p 500 moved into bear territory last week. As of Friday’s close it recovered Wednesday through Friday of last week and is now down 13% of the Year. Concerns are inflation, rising interest rates and recession. We’ve talked about inflation and how businesses are moving to protect and expand margins. Many investors today have like a 10 or 15 year perspective, where we’ve been in a very low rate environment. But if you look back historically, interest rates on average have been much higher than they are today. The 30 year treasury bond has averaged since 19 64.5%. Yield. We are well below that today on the tenure at 2.8%. The Fed has enough room to continue raising interest rates in this environment before it adversely affects economic growth by sending the economy into recession. Right now the economy is very strong. The owner ployment rate is a very historically low level of 3.5%. The best indicators that I found in evaluating the strength of the economy, or the is m readings every month on manufacturing and the service sector. And as of last report, services were expanding at a 58% rate versus 56% for the manufacturing index, and anything above a reading of 50 shows expansion. So as of now the economy still continues to expand at a healthy rate, unlike others, thinking that we going to end up recession. I think others have not looked at the history of economic cycles. We’ve had 32 economic cycles since 18. 50 and three of the longest economic cycles have occurred over the past 30 years. During the 1990s. The expansion lasted 10 years, the most recent expansion, which only ended as the pandemic struck in February of 2020. Ran one month short of a record 11 year run. So what we are witnessing in the economy is longest economic economic expansions. This expansion is just about two years old. I think it has many more legs to run, and I wouldn’t expect to see a recession for at least two to three years out.

Aaron

All right. Well, thank you, Robert. It’s been great having you on the program. Again, parting thoughts?

Robert

Yeah, I would say you know, stay where you are. Don’t make too many changes. The economy will do Okay, for the balance of the year. And I would expect that the worst of the downturn is behind us. And as long as the economy continues to grow, which I think it will, and corporate profits continue to expand, which should reach record levels in 2022. I think we will make money and get recover some of our horses before the years out. And as always, it’s I’m always delighted to be on your program. Thank you. Well, it’s,

Aaron

it’s great to have you. Once again, this was Robert Zucarro of Golden Eagle strategies.

As a prolific researcher, life-long educator and philanthropist, Robert has authored numerous studies, market commentaries, and the book, How Wall Street Reshaped America’s Destiny.

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This transcript was generated by software and may not accurately reflect exactly what was said.

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About Robert Zuccaro

Robert Zuccaro is the Founder & CIO of Golden Eagle Strategies. Over the course of his 40 year investment management career, he has managed institutional portfolios, corporate and municipal pension funds, and two mutual funds. Robert is one of the most successful investment managers, having been named a top 10 manager by the Wall Street Journal and Lipper and cited for outstanding performance and track record by leading publications including Financial World, New York Times, and USA Today.

Robert began his career at E.W. Axe & Co. managing the flagship Axe-Houghton Stock Fund, which outperformed the S&P 500 for six straight years under his management. An early pioneer in the development of quantitative strategies, Robert developed a lifelong passion for identifying the common threads of top performing stocks. Golden Eagle Strategies represents the culmination of four decades of research and expertise honed over the course of 9 bull and 8 bear markets. His research has revealed unconventional truths that drive the performance of the Golden Eagle Growth Strategy.

As a prolific researcher, life-long educator and philanthropist, Robert has authored numerous studies, market commentaries, and the book, How Wall Street Reshaped America’s Destiny.