Fed Speak & Interest Rates
In this episode of Fat Pitch, hosts Paul Barausky and Clint Sorensen discuss several pressing financial topics. They cover recent changes and expectations in Federal Reserve policy, particularly concerning interest rates and their impact on various markets. They debate the potential for rate cuts and the implications of current economic conditions, including inflation and labor market trends. Additionally, they explore the broader market shifts, such as the performance of real estate and other sectors, and touch on the upcoming election's potential impact on economic policy.
RECORDED SEPTEMBER 4, 2024
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Paul Barausky: Well, Hello, everyone, and welcome to the fat pitch. Podcast I'm Paul Borowski, your host, and I'm joined as always by my co-host. Clint Sorensen. How are you today, Buddy?
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clint sorenson: Doing, great man, it's finally good to see you in person, although we're not in the same room.
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Paul Barausky: That's right.
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clint sorenson: Place. It's nice to get to hang out.
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Paul Barausky: Well, it's nice to talk to our viewers or listeners. It's been quite a hiatus for us. I've been very busy in my role at Sealy investment securities, and you've been very busy cobbling together a lot of different things. And for those of you who have not seen us or heard from us in a while. We took a little bit of a hiatus, and we've decided to rework the fat pitch a little bit we found that our friends and colleagues and mentors are as busy as we are. So rather
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Paul Barausky: then have a guest each and every episode. Clint and I are going to try to come together once, twice a week. Talk about the fat pitch, and then maybe once every 3 or 4 episodes have a guest on from something that's relatable. We also noticed that, there was no shortage of podcasts in the world.
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Paul Barausky: I think we would all agree with that. There's no shortage of bad or boring podcasts. And we want to remain in that top 10% all of them out there. So we're gonna try to keep it a little bit shorter to to keep everybody interested. So, Clint, we find ourselves today recording on September. Is it the 4th or the 5? th I already forget? I think it's the 4.th
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clint sorenson: Of course. Yeah.
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Paul Barausky: And we are in for one heck of a week because a lot is going on with interest rates. A lot's going on with the election. And so I thought, for today, maybe we could cover 3 things, and the 1st would be what's going on with Fed? Speak
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Paul Barausky: where we had it?
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Paul Barausky: Number 2? What's changed in the election outlook? And then number 3, what's happened in this rotation in the market? I saw one of my wife's friends, childhood friends on TV today, former Sec litigator talking about potential charges against Nvidia. So how don't we tackle these one by one and start with the biggest one fed, speak and interest rates.
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clint sorenson: Yeah, I mean, I think that's the big topic, right? This is the the fed has really controlled the business cycle environment
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clint sorenson: for a long time, and that control has only grown in terms of the influence. Now we hang on every word, but I think Jerome Powell made it pretty clear. He left open the path. Great cuts, which is very smart.
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clint sorenson: he essentially said, Job, well done on inflation.
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clint sorenson: which was just allowing time to, you know, create the disinflationary pressures, the type monetary policy which worked.
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clint sorenson: And then he said his new focus was going to be on the labor market. So it was a acknowledgement
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clint sorenson: of the week
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clint sorenson: labor market, which we something, Paul, you not talked about a lot right heavy subject to heavy revisions. Those revisions were all downward, yet 818,000 jobs come off the
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clint sorenson: headline numbers that were reported in the Bls adjustment. That was enough for the fed. If you look at that. That's, you know, slightly over 100,000 per job or per 100,000 new jobs per month.
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clint sorenson: You need to be at about 150,000 or so call it that to be healthy. And so I think the weakness in the job market means that the Fed's going to cut. Now the question is, how how much do they cut and how fast? I think.
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clint sorenson: being quote unquote data dependent?
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clint sorenson: I, when I see the data, makes sense to me that they're going to be faster at the cut
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clint sorenson: problem is that causes a weaker, dollar, weaker dollar 6 months later causes higher inflation. So it's a it's a tough spot for them to be in for sure, Paul. I'll know what you think.
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Paul Barausky: Well, I I would love obviously coming from my prism, looking at commercial real estate and industrial specifically, I'd love 50 bits right out of the gates. Unless we've all gone mad. I think 25 basis points is table stakes. On September 18.th We really have one more number. They'll talk about right jobless claims and payrolls tomorrow, as you indicated. Then it's a blackout period.
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Paul Barausky: But we're seeing those future betting odds almost at 50 50 now for 50 basis points in September.
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Paul Barausky: So so we kind of feel from our corner of the world. Or I do. And the input I get. I don't want to put words in anyone's mouth that I'd love 100 basis points by the end of the year, and I'd love 2 50 total by the end of next year. Obviously, I have selfishness and a bias, but I feel like all the smart folks I talked to from coast to coast. Say, that's kind of where we are based on the acceleration that happened coming
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Paul Barausky: out of Covid, that inflation, all the pressures that mounted. And now we've somehow gotten into some kind of soft landing, even if I told you. I believe we've been in a mild recession now for months.
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Paul Barausky: Yeah.
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clint sorenson: I think we. I don't think it's soft landing. It's a soft landing from the markets perspective, but not all markets like just the indices, but
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clint sorenson: if you look at it manufacturing, we just put out even worse new orders. Yesterday in manufacturing manufacturers. Been in a recession. Trucking's been in a recession. Commercial real estate's been in a recession. Regional banking's been in a recession.
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clint sorenson: It's just we're very much a consumer economy. When you look at the aggregate and you look, we are very resilient economy, very diverse economy.
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clint sorenson: And so when you look at the aggregate.
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clint sorenson: it's easy to kind of get, you know, grab onto these narrative, these narratives and these notions that hey? We're in a soft landing. No landing, recession, not recession at the end of day. None of that stuff really matters. It's really about the direction of growth. Paul. And growth's been slowing, and that's what. And the fed's been too tight. And I feel like them waiting on jobs. The most lag data set we get is what's put us in this very difficult position. And I actually think to your point, cutting 50 basis points. I think that's too light.
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clint sorenson: I think they should. They need to cut. If you look at historically and a hat tip to David Rosenberg for putting out this. But essentially, the Feds always cut in a cutting cycle to below the 5 year average of the Fed Funds rate. So that would be like 275 by his math.
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clint sorenson: And above that we're too tight.
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clint sorenson: So think about it. From that perspective above a fed funds rate of just call it 3%. It's given the leeway above 3% is too tight. We're at 5 50, yeah side of the margin. So we've got. We've got to cut at least 200 base points. I'm with you. I think it's got to be faster.
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Paul Barausky: Well, you would have been in the Jeremy Siegel camp 3 weeks ago when he came out banging the gong for emergency rate. Cut 75 basis points. I called it click bait. He just wanted people to go to. I think wisdom Tree. He shills for great firm. But you know. What did I say to you before you got a better chance to see an Elvis come through the room riding a live dinosaur? So that's not gonna happen that would spook the market. But I will tell you something interesting that happened today.
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Paul Barausky: I don't know why. And you're the market technician, not me, because people tend to think in even numbers, 4%, 3 and a half, 3%, 380 has always been this kind of mythical support level for the 10 year Treasury.
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Paul Barausky: and nobody quite ever explains why. But all I know is, we were at 3 7 3.7 5 5 right kind of at the end of trading today.
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Paul Barausky: The 4.th I don't know where we exactly close it, but if we close below that 3, 80 a couple of times, Clint, we'll go test 3 50 on the 10 year, and then we'll eventually get down to testing 3, and so that all works with the fed coming down as well. We finally get to that uninverted yield curve which happened for what? A half hour about 2 weeks ago. And so the world starts to look like something
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Paul Barausky: normalcy that we're used to again. And it's not a manufactured world, maybe, as it was with Zerp for so long. So I would argue that maybe, yeah, the fed could be late. But we could also get into kind of a normalized environment.
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clint sorenson: I hope so. And I hope they get there quickly, because
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clint sorenson: the tightness in the money supply has really been an issue. And those issues. It's like a cancer.
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clint sorenson: The longer you let it metastasize, the worse the body becomes. And that's what's essentially happened. The fed.
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clint sorenson: you know, the birth of the the tightening cycle. Most aggressive in history. Yeah, from a rate of change perspective. So just to keep. And that's the way I think of everything is a rate of change and flow and trend.
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clint sorenson: The trend in tightness has never been witnessed before in terms of the steepness and the magnitude
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clint sorenson: ever in our nation's history, and so we don't know how long
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clint sorenson: that creates issues in the system.
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clint sorenson: I can tell you that liquidity measures last year were a saving grace to the banking system
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clint sorenson: in terms of the loan, guarantees not having to mark to market those assets. It was a huge boom for markets in general and liquidity. You know, corporate bond spreads, especially on high yield. Moving back back to low points. It was like risk was great again.
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clint sorenson: However, we can't forget the real economy trends. And those real economy trends are down. So the fed needs to cut needs to cut aggressively because I'm with you. A recovery trade is exactly what I want to see. The flat pitch investments are all correlated to recovery.
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Paul Barausky: Yeah.
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clint sorenson: Correlated to a new regime of higher than average inflation, probably over the long term. So maybe the 3% is the base rate, not not one. But ultimately, no matter how that plays out, all the fat pitch from evaluation perspective are in, are are allocated or correlated with that recovery trade, Paul. So that's
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clint sorenson: we need to see it. Interest rates. The good thing is, we're seeing rotations. I know it's 1 of your points. Some of the rotations on the under the hood, this market cap concentration starting to move away.
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clint sorenson: Right? We're starting to move away from the Mag. 7. They're all starting to trail and lag and guess what utilities that's needed for AI, right? But utilities.
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Paul Barausky: We cannot talk about the demand for power.
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clint sorenson: Yeah. So utilities are are in outperforming the S. And P. Golds outperforming the S. And P. And this over the last 3 months, low volatility is outperforming, and my favorite Paul, is real estate
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clint sorenson: real estate, breaking out on a relative basis to the S. And P. Hitting 5 month highs. It's been one of the top performing sectors. Now, if you look out over the last year.
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clint sorenson: real estate has made it into the top 4 sectors. It was the worst.
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clint sorenson: So it just shows you how much the real estate sector is rallying. And that's what I want to see. When I see rates coming down. It's like, Okay, there's tons of opportunity. It's a fat pitch trade. Now I'm seeing it break out when valuations suggest that reits. If you just look at reits.
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clint sorenson: They're priced for 8 plus percent per year returns paying on the segment for the next 10 to 12 years, according to research and affiliate. So
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clint sorenson: I'm like. That's exactly where I want to shop, and when I see it breaking out in that rotation it gets me really excited. However, the fed can't get caught
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clint sorenson: being too slow on this path. Because here's the situation that can manifest they come out 50 basis point rate cuts. They're saying we're going to be data dependent. They don't really know where neutral is.
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clint sorenson: It's, you know, Powell's not really committed to getting below the neutral rate. And so what ends up happening is, you get inflation accelerations that maybe last a quarter on the back of the weak dollar. That inflation, acceleration spooks them out of an aggressive rate, cut cycle, and it pretty pretty much puts a cap, or at least a temporary restraint on any recovery. So you get into this rolling contractionary phase. Fed's got to be committed.
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clint sorenson: Who cares if the market gets spooked? We're all big boys and girls and need to manage risk. They need to jump out. They need to cut, and they need to support the economy. If not, I start to question their motives.
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Paul Barausky: Well, what do we take off the balance sheet with these 2 trillion.
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clint sorenson: Yeah, but I mean, we. We expanded it from 880.
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Paul Barausky: RAM.
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clint sorenson: Today to 9 trillion.
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Paul Barausky: I'm going to back up and touch on something you said, and that is looking at recovery. I'm going to focus in on my part of the world. I would urge anybody who looks at Mercer terrific consulting firm. Right? Look at the last 3 big downturns for real estate. Early 19 nineties, the global financial crisis and the tech crash. They put a piece out that showed the trough
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Paul Barausky: and then 2 quarters either side.
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Paul Barausky: So that's 5 quarters to make that entry point, and real estate is just a proxy for all the different sectors. You're talking about your outperformance over the next 5 years, and just a passive basket. Say, use an innate grief. Index
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Paul Barausky: was like anywhere from 130 to 400 basis points. And I'll just call maybe baseline 10%. So that's a significant outperformance. And that's just, you know, I love running any race I can run with a head start.
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Paul Barausky: Not everybody is Noah Lyles in the Olympics, 40 yards 40 meters into 100 in last place, and can close with a kick. So I I think it's black and white. We always talk about it in investing, particularly all the time that you and I have spent over decades.
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Paul Barausky: Talking to individual investors and advisors about, you know, looking for opportunities. You may not have a bottom, but, boy, the fed may have teed us up for some great opportunities, and who's to say what those are. So what about this election cycle as it draws nearer? Do you think that's creating any opportunities, or just a bunch of mush.
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clint sorenson: I mean, I tend to see it more as noise than any signal.
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clint sorenson: you know. If you think about it, and you reflect on past elections. Look both, here's the one thing I can I can not guarantee, but I would place my bets on. Deficits are going to continue to expand.
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Paul Barausky: Yeah.
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clint sorenson: Right now is, the percentage of Gdp is 8%. We've
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clint sorenson: never seen that outside of either a major world war
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clint sorenson: or a pandemic.
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clint sorenson: That's it. Like going back as far as we have data. And we're running that at
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clint sorenson: a rising unemployment rate. But an unemployment rate that's historically low.
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Paul Barausky: Yeah, much lower than the pundits thought would occur. As the fed started to take action.
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clint sorenson: Yes, I mean, you're close to full employment. There's some weakness, but you're close to full employment, and you run an 8% deficit relative to Gdp.
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clint sorenson: That's going to happen, no matter who's in office and it's just how, how, what's, how does the money get spent? Well, in.
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clint sorenson: you know in a Democratic run
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clint sorenson: office that money's going to get spent through governments.
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clint sorenson: That's how it gets routed to the system
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clint sorenson: when you look at it. For most Republicans or right leaning policymakers when they're in control.
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clint sorenson: From a policy perspective, what tends to happen is that gets, you know, moved through the private sector.
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clint sorenson: and no matter what side you're on, there's plenty of corruption in both of those we call now. You can call it lobbying or bribery.
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clint sorenson: Yeah, it's just it just works. But no, that's the way the system works. So when I look at that, and I look at these long term deficits
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clint sorenson: it gets back to some of the big key themes we talk about all the time, Paul, and like, if you look at all, most of the guests we interviewed. I think this is unanimous.
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clint sorenson: Real assets over financial assets are are due their time from a long term perspective. And so that seems like a good bet
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clint sorenson: going into where we are from an economic regime fact that real assets have really been hit and are cheap valuations. But you start to think through this long term devaluation of developed nations, currencies that policymakers are are going to continue down the track because they can't get elected if they cut off the spigot.
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clint sorenson: And so I think it's just a good nature to kind of bet on that or good fat pitch. And so
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clint sorenson: yeah, I think real assets are the way to play it. The more and more I think about it, everything kind of correlates to that big overarching theme. So you're in a you're in the right spot. Paul.
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Paul Barausky: Well, I didn't.
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clint sorenson: In the right segment.
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Paul Barausky: My 3rd thing to talk about, Nvidia. I didn't bring it up because I thought there was some major government action. I brought it up, because again, one of my wife's childhood friends was on Cnbc this morning speaking about it, former Sec Litigator. And also frankly, we're starting to hear about competition right about other things hitting that trade which it seems like the world was in.
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Paul Barausky: So, to differentiate yourself, you had to be elsewhere, and maybe folks are starting to look elsewhere. The only thing that I've been really looking at economically with the impending election is Trump's idea tariffs and Kamala's idea of 28%. You know, corporate taxes.
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clint sorenson: Or unrealized tax, like.
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Paul Barausky: And Andre a lot.
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clint sorenson: Unrealized gains which makes people borrow to pay. It's that's just so
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clint sorenson: degree. It's exponentially regressive to the economy. So I don't see any of that passing.
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Paul Barausky: There's no way. I mean, how do you even implement that with the with our layers of investing.
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clint sorenson: Too expensive to implement the costs don't outweigh the benefits. So whoever's running her economic policy needs to really
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clint sorenson: do a little digging into the. I know they just adopted the Biden plan. So it's the same same folks. But, man, they need to do some digging into into just basic economics. But the trump tariffs. Tariffs are an issue as well. So you know, they're both problematic, and they're both economic suppressants.
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clint sorenson: at least temporarily.
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clint sorenson: now hopefully.
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clint sorenson: And and again, the tax thing is big. A big question, too. When you, when you start to think about
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clint sorenson: the deficits, were running, it's hard to raise taxes. If fiscally, you're not demonstrating responsibility. That's a very challenging thing to do, because it's kind of like. Do as we say, not as we do so.
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clint sorenson: And I think tariffs are just another word for tax, too. So you got to think about it on both sides. Both of these policies
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clint sorenson: are, in my opinion, poor choices when you're running fiscal deficits that continue to increase, and they're not going to slow down.
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clint sorenson: So that's my thought process.
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Paul Barausky: All right. Well, there's 3 quick
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Paul Barausky: points to talk.
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clint sorenson: And hey, we didn't get yours. You gotta you gotta share, so you can't leave me on the hook. Here you go.
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Paul Barausky: Oh, come on! I talked about valuations in real estate, and gave you some info from Mercer. Remember, I never come up with an original thought on my own. So listen. We appreciate everybody tune into the fat pitch. As we said, we're back from a self imposed hiatus, and we look forward to coming to you at least once a week, probably twice a week, sometimes on our own, and sometimes with a guest. But Clint, as always, thanks for joining me today, and I'll look forward to our next time. Take care.
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clint sorenson: Paul, see ya.