Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week, two listener questions involving opportunities that look compelling on paper, but need a deeper look before deciding whether they really fit. We’ll start with a question about commercial solar investments that promise large tax write-offs and how to think about those deals beyond the tax benefits. Then we’ll work through a listener question about franchising, where the projected returns look strong, but a meaningful amount of capital is at risk, and what to consider before treating franchising as a passive investment opportunity.
To close, we’ll step back with our quarterly Scholar Big Picture with Dr. Deon Strickland and talk about what’s changed in the economy and how it shapes decision making right now. Let’s go ahead and get started.
Question 1 – Solar Investments and Tax Write-Offs
Listener:
I’ve seen some heavy tax write-offs by investing in commercial solar installations. Can you help advise me if this is a good idea?
Stephan Shipe:
Whenever we look at any type investment segment, especially on one fund or one typical project, what we want to look at is the investment itself and whether or not that made sense. A question like this be akin to asking, what do you think about me investing in restaurants. Like, well, that’s a big thing, right? There’s a lot of different considerations taken into account.
When we get into the solar investments or some of these properties that have a lot of tax incentives, that typically leads to the conversation. We start to hear things like, you could have negative returns in the first few years because of either credits or depreciation amounts. Usually in something like this would be a lot of depreciation amounts, where there’s going to be a lot of capital costs upfront for the solar installations, a lot of equipment that’s being purchased, lot of property.
And based on that, huge accelerated depreciation write offs early on. We’re seeing this especially now. Over the past few years, there’s been a lot of incentives toward accelerated depreciation. And this is where you even kind of outside of solar, Section 179 expenses and everything, where you could write off a significant investment early.
And that’s done by the government to incentivize investment. If I’m going to go install something that normally I’d have to depreciate over 10 to 20 years, that’s very different than me being able to take all 20 years of that expense and depreciating it all upfront. Because that’s going to mean I take this huge loss upfront on paper. And because I take that huge loss upfront on paper, that could be used to offset gains in other investments as well.
So I save more on tax upfront than saving the tax over the next 20 years. And kind of pure time value of money, I’d rather be saving money now as opposed to you telling me I could save money 20 years from now. So that helps to generate the benefit in these situations.
But what we have to do is step back and say, that’s great. The tax benefits are absolutely wonderful. But if we didn’t have the tax benefits in here, does the investment make sense?
And that’s what always worries me about a lot of these different types of energy investments. And it’s not just solar. Solar is having its own difficulties right now because we’re seeing a lot of pullbacks on some of these types of credits and incentives from the government to invest in solar. So because of that, that makes it a little bit risky.
But it’s not just a solar situation. We see this with oil wells as well, where somebody says, I’m going to go invest in oil wells because there’s a lot of government incentives to invest in oil. And I’m going to go buy five different oil wells or invest in five different oil wells down in Texas. And that’s going to help generate some losses upfront, especially from a depreciation perspective and all these credits for oil and gas investments that can help my investment.
I always go back and what worries me as an investor is I look at that and say, if my investment is solely reliant upon me taking depreciation and credits, then that’s not much of an investment for me. Because eventually those depreciation and credits go away. Most of the time they’re front loaded anyways.
Depreciation is a great example. If I could take a bunch of depreciation my first years, two years of investing, that’s wonderful. I’m going to generate a bunch of losses that I can use to write taxes to offset some of the gains. But what happens in years four and five when those write offs are done? Am I losing money now every single year?
What’s the liquidity in this? Can I get out? What is the timeline? What is their exit plan in these scenarios?
And what you end up finding a lot of times in these is that once you get past those tax benefits, and I’m saying this in general, this is not specific to any individual investment, but once you get past that initial benefit time period of where all these tax benefits reside, then the investment doesn’t look as good anymore.
And I’m not saying it has to be taking losses, but maybe your return is only 3% or 5%. And you say, well, now you’re stuck making 3% or 5% in something that’s not liquid and has an indefinite time horizon. That’s where the problem is.
So I would encourage you as you’re looking at these investments to not look at it as I’m looking at this only from a tax perspective, but look at it as I understand why the tax incentives exist. I understand what they’re on. Now, can this business be sustainable without any tax benefits?
And if the answer is yes, then the question is, is that investment an investment worth doing in years five to ten as opposed to years one to five? Because with the lack of liquidity in these, you’re in it, you’re in this game for a while.
So those first five years may be great. And sometimes we get these blinders on and we keep looking at those projections and they show you a three to five year pro forma. And everything’s looking great. And they’re showing you comparisons of how much losses you’re to be able to generate, what that’s going to save you in taxes.
And then conveniently, five to ten is not there. And sometimes they’ll come back, if you question them, they’ll say, well, that’s too far in the future for us to estimate. So we don’t do that.
You got to watch that type of situation because of course that’s far in the future, but that is also convenient if all the tax benefits are done by year four and year six through ten are actual losses and you’re not earning anything on your investment.
So keep all that in mind. It’s not that solar doesn’t make sense in general when you’re looking at investments. It doesn’t mean that investments with large tax savings are a bad idea. We see this all the time. There’s great opportunities in energy. There’s great opportunities in real estate to be able to do this.
I would just encourage you to look beyond the tax benefits and say, is this a business that I want to invest in?
Question 2 – Franchise Investing and Passive Income
Listener:
I’ve been approached about investing in a 7 Brew franchise. The upfront investment is around $2.1 million for a five-store commitment, which would represent roughly 20% of my invested assets. The projected returns look strong, but I’m new to franchising. What should I be thinking about to determine whether franchising makes sense as a passive investment?
Stephan Shipe:
So these things are popping up every day. 7 Brew investments. Starting to see a lot more of this. I’ve seen it on the triple-net side of people buying the actual buildings, the actual franchise ownership.
It’s pretty common that we see franchises, especially smaller franchises, in buckets. In other words, they’ll come in as a region. 7 Brew says, we want to take over Winston-Salem, North Carolina. And what we’re going to do for that is we want to open up five different locations. Instead of having five different operators in there, they come in and get one operator to come in and run five locations.
This makes a ton of sense from a franchising perspective because you significantly reduce the human capital risk and the capital risk associated with running these types of franchises. You’re dealing with maybe five to ten employees for each of these locations, maybe more, a lot of part-time employees, and maybe not the highest reliability upon showing up to work and everything else, and a lot of turnover in these jobs.
So if that’s the case, having one store would be an absolute nightmare because you would have to overstaff. You’d have to go from five to ten positions to ten to fifteen positions just to have backup, or else you’re going to be in there blending up Frappuccinos and pouring coffees. And that’s not ideal. That’s very far from passive.
So the brands know that. The franchise companies know that that’s going to be risky and that’s going to cause these different franchises to fail. But if you could go into five locations and you need five to ten people at each of these locations, well now you could go hire fifty people. And if someone doesn’t show up at store one, you can move someone from store four over there.
You could do a little rotation around. You could do training collectively. Maintenance is done collectively. You’re buying in bulk. You’re buying coffee cups not just for one store, but you’re buying a truck full that you’re delivering to all the stores.
Which brings me to the comment about passive investment. This is by no means a passive investment, especially if you’ve never gone into the franchise world before.
Where you see a lot of success with franchising is typically on the operator side, which sounds like 7 Brew is trying to set you up with in the sense of they’re looking at the same thing. What would make you, as an investor, a franchisee, most successful. Scale actually makes you a little bit more successful.
Owning a whole region, so that somebody’s on a different part of town and they go stop at your 7 Brew, whichever one they stop by, it’s yours. So you would own that region.
But the real benefit is they want you to have a home office. You’re going to have one main operating center that you use to run all five different locations. And that’s where deliveries might be coming in. That’s where you’re running HR. That’s where you’re running payroll for the fifty to sixty people.
And they’ll likely have some support in these areas, but this is anything but passive.
Where this really becomes passive is like any other business becoming passive. And what I mean by that is it can become passive if you run these five and you hire a few really good managers and you have one true operator that’s running all five franchises for you.
They’re the ones running HR. They’re the ones fielding the phone calls that the coffee machine at store three is down. They’re the ones handling those types of situations.
If you don’t have someone in that key role, then guess who’s getting the phone call. That the ice machine doesn’t work at store seven. And that’s going to be you getting that phone call and you having to drive over there or coordinate with the maintenance person to go deal with all of that.
So I’m really hesitant to call this passive, especially without experience in franchising.
If you told me you had a ton of experience and, Stephan, I’ve been running franchises for years and I already own five Subways and a few McDonald’s, and you have all of this in your portfolio and now you want to throw a few 7 Brews in the mix, then you’ve already cracked the code.
You likely already have operators that you can move around into these different areas.
That’s why you see these different franchises typically around. We even see it scaled to like private status, where you’ll come in and you’ll have one fund open up where you come in and you run this region. You’ve got five 7 Brews and you’re killing it. You’ve got a great system in place.
So what do you do? Now you’ve stepped back. You’ve got a great operator there. You’ve got great employees. You have a great setup. The next move is you go look around and say, you know what, this city over here doesn’t have any 7 Brews. So now I’m going to go invest another $2 million and I’m going to own that region as well.
So now you own ten and now you’re very much removed. Now you might hire your own maintenance person that is maintaining all ten properties and they’re just cruising around in a vehicle that you own. And you become a management company for this exact franchise.
And then maybe you open up another ten, another fifteen, and you have a large fund that’s running all these. That has its own risks. That is one option.
But your risk now is you better hope everyone really likes 7 Brew because that’s your only option. And that the franchise fees don’t ever get high enough where it hurts you.
So that’s one angle that we take at it.
The other is, does it make sense for you to go put 20% of your invested assets into this as a passive investment?
If this, in your mind, is just a piece of the portfolio and you’ve got a job you’re running somewhere else, then I would say no. I wouldn’t go drop 20% of your invested assets into five different franchises when you have something else on your mind that you’re focused on from another job.
If you said, Stephan, I’ve got about $10 million in the portfolio. I’ve looked at it from a big picture perspective. I’ve gone in and looked at how much I can invest in something. Maybe you’re thinking about retirement or making a shift from your current job and say, I’ve always wanted to run five 7 Brews. This is my dream. This is my passion.
I’m going to quit my job. I’ve got my $10 million portfolio. I’m going to take $2 million, go invest in these 7 Brews. I’m going to have $8 million left and I’m going to create this as my business. Then I’d be okay with it.
I don’t think that would be crazy to take 20% at that point because it’s a different type of investment. Now you’re investing from a business perspective and you’re concentrating. But as long as that $8 million is still able to sustain what goals you’ve set for the future, then I don’t see any issue with you pulling 20% off and putting that in the investment if that’s going to be your focus.
The risk there isn’t necessarily the investment itself as much as it is the risk of you not having the time to make sure that that investment is successful.
And that’s what you’re balancing right now.
And that goes back to circling back to the beginning. I wouldn’t look at this as a passive investment opportunity. I would be looking at this as, do I want to get into the coffee business? And if so, is this a good option?
And if both of those are yes, then let’s talk about what percentage of your investments you’re throwing in there and how much percentage of your time and human capital is going into you running this 7 Brew empire that you’re creating.
Scholar Big Picture with Dr. Deon Strickland
Stephan Shipe:
All right. So to close out today’s episode, it’s time for our quarterly Scholar Big Picture conversation. We’re joined by Dr. Deon Strickland, financial advisor and our in-house economist here at Scholar Advising, and a finance professor at Wake Forest University.
We’ll zoom out from the headlines, talk through market behavior, broader market trends, especially on the economic side, and what we’re watching right now and why.
So I think the biggest thing I’d want to know is when you’re looking right now at the markets and taking that zoom out situation, what are the things that are concerning you? What are you watching right now besides just the overall market moving up and down?
Deon Strickland:
Well, I think the thing that concerns me more than anything else is uncertainty. We don’t know what inflation targets really are. The fight that’s really occurring, and it has become a fight, before it was a little snipey and now there’s a fight between the administration and the Fed.
I don’t think I could have ever predicted that a Fed chair would drop a video or comment on a Sunday night saying, I’m being pressured to change rates, I don’t want to change rates, and there’s a criminal prosecution as a result. That’s really unusual.
And so I think we all know that the thing that investors hate more than anything else is uncertainty. If you can tell me the rates are going to run hot, rates are going to run cold, inflation, you know, if you can tell me those things, investors can rationally adjust their portfolios and their expectations. They’ll anchor, they’ll move their anchors.
But when there’s uncertainty, they don’t know where to move their anchor. So I think the biggest threat to what has otherwise been an amazingly resilient economy is growing uncertainty.
Stephan Shipe:
Do you think that’s helped if we just let it run hot, cut the rates? I guess better for you. What do you think is likely? Do you think we see the rates drop over the next year, and if so, what’s the problem with that?
Deon Strickland:
If we run it hot, I think that is true in the sense that if you go back and you look, right, the Fed has historically, say for the last decade at least, had this notion of a 2% inflation target. And if you go back and look, and I did, it’s not clear where that 2% comes from, right? It’s not a tablet that was delivered on high. That’s not where we got this 2% number from.
So I’m not sure it really matters whether we run at 2% or 2.5% as long as we believe that is a long-run cycle, right? That we believe that’s going to be consistent. And I thought the Fed had moved off to 2%, right? I think there was a lot of discussion from the Treasury Secretary to economists throughout the economic community. And they’re like, well, maybe we’re going to see 2.5 or 3%.
And so that would mean that we’re going to just see higher risk-free yields or yields on treasuries and that we’re willing to accept 3%. But I saw Austin Goolsbee, the president of the Chicago Fed, give an interview this morning, and he was still stuck on 2%, really stuck on 2%. And he was conditioning any 2026 cuts on movement towards that 2%, right?
Now, I’m not sure that view of the world is consistent with what we’re seeing. Yeah, it’s not consistent with what we’re seeing. I don’t know if it’s consistent across the FOMC. I don’t think we know that. But I’m not sure he would have gone out by himself and said that unless there were some number of members of that committee who are really still anchored a little bit to that 2% number.
But I don’t think it really matters, right? It just means running at 2%, running at 2.5%, running at 3%. I’m not sure I care.
Stephan Shipe:
Which is super interesting, right? It doesn’t matter. The 2% comes out of nowhere. We’ve just always targeted it. Now, I do think there’s a benefit of having a target. Because if you don’t have a target, then there’s nothing to shoot for.
So I think even Bessent has come out and said that. It’s like, let’s get back to the 2% first, so that way we can at least say we can get to where we need to be. And then we can talk about there being a range.
But if that’s the end goal, and let’s say we hit 2% here in the next six months and then we move to a range, what’s the difference between that and then just saying we’re in a range now of 2% to 3% and we’re good with it?
Deon Strickland:
I agree with you. I agree with you. Right. That simply means though that I don’t think that’s going to make politicians happy right now. Right. Because if you look, if you’re going to run it hot, let’s say run it hot at 3%, then you’re going to consistently see 10-year yields are going to run higher than people have seen during the ZIRP era.
And so that means mortgage rates are going to be stuck at 6%, and everybody would prefer mortgage rates to run a little cooler than that. I don’t see that happening.
Stephan Shipe:
It doesn’t make any sense though. Historical means are 6%. Everyone’s anchored to 2% mortgages, and everyone forgets that 6% would be relatively normal.
Deon Strickland:
I agree with that. But I think it’s pretty easy for me to sit here and go, oh, that’s 6%, that’s pretty normal, and my mortgage is at 2.5%. I’m like, oh yeah, that’s okay if everybody else gets hurt, but I’m okay.
But if today you told people that mortgage rates were going to be stuck between 6% and 7% for the next decade, you’d have a lot of discussion of affordability and the like. Right.
So I’m not sure. I think running it hot is a short-term phenomenon in the sense that that would be great. And then when they see the repercussions for that, I’m not sure in the long run it would matter.
Stephan Shipe:
Yeah, but I think the American public has still not recovered from the price hikes we saw in 2023 from the higher inflation, right? I mean, I think they still remember what it was like to go to the store and pay $2 for an item in the grocery store. And now that item’s at $2.75, and they’re still unhappy about that.
It’s never going down. That’s still the funniest misconception, I think, of inflation. People are like, I can’t wait for inflation to come down so that the prices come back down again.
Deon Strickland:
That’s not how it works. That just means it’s going to stay at $2.75 for longer.
Stephan Shipe:
That’s exactly right. That’s the hope.
So tell me, if we back up a little bit, because we’re jumping into this idea of running it hot and everything, what does that mean? What would be the implications? When we say running it hot, we’re talking about inflation that’s still a little high, maybe high in the range, and then we drop rates even with higher inflation.
Deon Strickland:
That’s right. That’s right. Unless we drop the rates. We drop the rates with inflation at close to 3%. Now you run a situation where everyone has prices that are going up, but capital is cheaper.
So then you would hope that people jump into investments at a heavier rate, spend a little bit more. That would be the idea of running it hot.
Stephan Shipe:
And then what’s the bull and bear case of those scenarios?
Deon Strickland:
What’s interesting here is that, all right, let’s go back to cutting rates. The Fed has cut rates three times. They’ve cut 75 basis points off rates.
And if you look at the 10-year, the 10-year has traded in terms of yield in a very narrow band now for a protracted period of time. So they can cut rates and it doesn’t really affect the 10-year, at least so far.
But historically, if you cut the Fed funds rate below inflation, then you’re running negative real rates, at least on the short end of the curve. And that is really running it hot.
That should have consequences, because it makes no sense to invest in anything on the short end of the curve. You’re never going to make money by investing in money markets. You’re losing money by investing there.
So you have to go invest in equities. And historically, negative real rates are associated with a hot equity market. If you go back and look, a lot of people believe that one byproduct of the ZIRP era is a hot equity market.
There’s a long notion that if you run rates too low, then you’re going to get what was called irrational exuberance.
Stephan Shipe:
Yeah, that goes back before Bernanke.
Deon Strickland:
Exactly. So if they do that, maybe we’ll have a little irrational exuberance over the next year. But after hearing the talk this morning, I’m not convinced they’re going to run it hot.
I’m not convinced without substantive change at the Fed that we’re going to see them push rates down below 3% in the next six months. You’d have to see two or three cuts in that time, and I just can’t conceive of that right now.
Stephan Shipe:
Do you think it’s possible for us to hit GDP above 5% if we don’t have rates cut that low?
Deon Strickland:
I’ve been thinking about that a lot. If you want a 5.5% GDP print, the question is what’s inflation going to be?
The only way you get GDP growth like that while holding inflation around 2.5% is through real productivity growth. There’s a lot of talk about AI-driven productivity, and I believe AI is real and meaningful.
But I don’t think we can attribute substantive productivity gains yet across the broader economy. I think it’s going to take time.
So the only way to run the economy hot and keep inflation low is through productivity gains, and I’m not sure where those come from yet.
Stephan Shipe:
Do you think tighter labor markets or immigration trends could juice productivity?
Deon Strickland:
Maybe, but higher wages tend to push inflation higher. What everyone really wants is 5.5% GDP growth with 2.5% inflation.
If that happened, I don’t know how you wouldn’t want to be long equities. But if you told me GDP was going to be that high, I’d put a three in front of inflation, not a two.
And that sounds great from an equity perspective, but there’s a subset of people listening right now who are freaking out at the idea of inflation at 3%. And what becomes questionable is the beyond one-year scenario. We’ve seen that this year. Gold is through the roof. You have silver going nuts over the past few days. So what does that look like? How can those two be combined?
Are those two differing opinions where we have the bull case for equities, the economy is going to run hot, there’s no issue, and then you also have a group that’s saying if we run that hot, what goes up must come down? It’s going to cause long-term rates to go up because we’re not fixing the debt issues. We’re not handling any of those concerns completely.
Stephan Shipe: I guess how I think about it is these are different fears.
Deon Strickland:
I think they’re different fears, right? That’s what I’m getting to. I think they’re different fears.
If you go find your average gold bug today and ask them why they think gold is a good investment, why gold has run up in 2025, I think a lot of them are going to talk a lot more about not trusting the overall stability of the system.
In other words, the debasement trade. We’re running GDP deficit numbers of around 6%. Over the long run, that’s a pretty scary number for somebody who believes that running huge deficits invariably leads to weakness in the US dollar.
That person would say gold is what we should buy. I’m not sure that the precious metals investor today is really thinking about the Treasury sector and saying we’re going to run it hot. Which is interesting, because that would be a rational option.
But I don’t think that’s what they’re thinking about. I don’t think the average gold investor is really thinking about that now.
Stephan Shipe:
And we could figure that out a little bit, right? It would be interesting to look at inflation prints and see what gold pricing does around those.
Over the past year, inflation has come down. We’ve seen it become more stable, or at least directionally moving in the right direction, yet gold is going up.
Deon Strickland:
Right. So to your point, we’re seeing more of the debasement trade as opposed to gold being used as an inflation hedge.
Stephan Shipe:
But then that’s even more risky for the gold buyer, right? Because now you’re betting on an actual move from a debasement perspective as opposed to holding gold as a long-term hedge against inflation.
Deon Strickland:
I agree with that, except I would say this. I am really, really convinced that if you said to me, “Deon, the federal government is going to get the deficit under control,” I would take the under on that trade every single day.
I just can’t conceive that we’re going to see that get fixed. I think I heard someone in the administration basically say that in order to fix the deficit, both political parties would have to jump off a cliff.
Stephan Shipe:
Absolutely. Taxes would have to go up and spending would have to come down.
Deon Strickland:
Right. And there’s just no way any one party is going to do that. It would take the reincarnation of George Washington, and I find that to be an unlikely outcome.
Stephan Shipe:
So we end up with a mixed portfolio then. Equities and gold?
Deon Strickland:
That would be right. Maybe some gold-backed bonds.
Stephan Shipe:
Those are gone.
Deon Strickland:
They’re gone, but that would be a really cool buy right now. If you could find that, I’d buy it.
Gold-backed bonds and equities. You get the juice from equities and the long-term protection on the currency side.
Stephan Shipe:
That would make sense if you believe that’s what’s driving metals.
Deon Strickland:
Right. And I don’t know that it is. What still doesn’t make sense to me is that over the past 12 to 18 months, the 10-year has come down while gold has gone the other direction.
At first blush, that doesn’t make a ton of sense. Because if gold was going up because people were worried about inflation, you’d expect to see that reflected in higher long-term rates. Investors would require a higher return for higher government risk.
Stephan Shipe:
And you’re not seeing that.
Deon Strickland:
Right. You’re not seeing that in Treasuries, and you’re not seeing that in TIPS either.
Stephan Shipe:
So let me take another angle. Gold has gone up significantly this year. Silver hasn’t gone up nearly as much. Do you buy silver with the expectation that it should catch up?
Deon Strickland:
I would not. But that’s because when I look at silver, I don’t think that if you ask the person who’s doing the debasement trade, I’m not sure they view silver as the same hedge that they view gold.
You used the words, not me, of non-rational. I think either one of those is potentially non-rational. Right. But I’m not going to get in the way.
I think you would have to be really, really brave to try to get in the way of a silver or gold trade right now. But I think if there is irrationality, it is stronger for gold than it is for silver. That’s my guess.
Unless you get into the physical side. If you’re on the debasement trade, physical bullion has a little bit more appeal than owning an ETF like GLD.
Stephan Shipe:
So you used to have this kind of magic range for stocks, like $30 to $70.
Deon Strickland:
Price per share, you mean.
Stephan Shipe:
Right. Could you use that same theory now for gold? Gold has moved out of that range where it’s attainable for a person to add gold to a portfolio, and then that leads to silver being purchased, almost like a commodities stock split.
Deon Strickland:
No, I see your point. I see your point.
There was always this notion that when a stock traded out of that range, we would split it. Shares in a hundred, a lot of them. But no more. But I see what you’re saying.
Stephan Shipe:
Because it’s getting too expensive. It’s not as easy to go buy a small piece of gold anymore. Now you’re talking about a significant amount of money.
So maybe you go pick up some bars of silver because that’s easier to attain, and that would be equivalent to a stock split that’s normally followed by an increase in stock price.
Deon Strickland:
I see your point. I would say I haven’t thought very much about that. But I think I would buy an equity before I went and tried to buy silver to hedge.
Stephan Shipe:
Yeah.
Deon Strickland:
Because when somebody asks me, “I’m really worried about inflation, what do I do?” my response is usually that you shouldn’t hold bonds, you should hold equities.
I think you and I both believe that the return to holding an equity is basically inflation plus a little bit more, plus a risk spread. And even if you hold that risk spread constant, as inflation goes up, in the short run you may take a beat down, but over the long run we would expect equity returns to adjust.
Inflation has to get high enough to actually crash the economy before equities really fall. And even then, I don’t know what that really means.
Everybody learns in economics early on that inflation in and of itself is not bad. Because if you could frictionlessly change prices, it wouldn’t trash the economy.
But investors and market participants don’t always react rationally to those price changes.
Stephan Shipe:
Irrational market participants are a problem?
Deon Strickland:
They’re a problem for me at least. But not everybody views the world that way.
Stephan Shipe:
So looking ahead to the next quarter, coming up to the end of Q1, biggest issue, biggest thing people should be watching. If they’re watching the news, things are constantly coming across the screen. Anything that sticks out to you? If you see news about this, pay attention. If you see news about this, ignore it.
Deon Strickland:
I’m going to be really interested to see who the replacement for Jerome Powell is.
I think if you see Hassett, if you see the current economic advisor get the nod, that may tell you something about running the economy hot versus Kevin Warsh getting the nod.
That might tell you something different about whether we were going to see negative real rates and you were going to run the economy hot. So I think the first thing I would actually pay attention to is that, because we’re going to see that I think relatively quickly, right? Because Powell’s position as Fed chair ends in May right now.
And the other thing I would pay attention to then is when the replacement gets announced, does Powell step down? Right. Because he actually, I think his position as a Fed governor stays on until ’28. Right. I think his position as Fed governor does not terminate at the same time his position as chair does.
And so I think that is going to be revelatory. Right. So I think the market would move on the end. And the market’s going to move on that information.
Stephan Shipe:
Absolutely. Yeah.
Deon Strickland:
And I know this is a little bit of a segue, but one of the things I think that’s fascinating that we’re starting to see now is you’re starting to see prediction markets. You’re starting to see the prediction markets move as a result of this, right?
I think you had one favorite up until a few days ago, and then now that’s changing. So in terms of the Fed, I really do think we should pay really close attention to who gets nominated, because I think there is information in who gets nominated.
And I also think the Supreme Court case on tariffs is going to be important. These are all about, obviously, these are all about inflation.
So I think the first quarter of this year, and in fact, we may get apparently news on the tariffs as early as tomorrow. I think I’m going to pay attention to anything that really reflects what I think might happen to inflation, the Fed’s willingness to cut rates, and the like.
Because I’m telling you, if they announce, if the market starts to believe the probability of rate cuts is falling, then I think that will be bad for equities in the short run.
So I think those are the things I think we should really pay attention to in the short run, because we’re going to get a lot of information.
Stephan Shipe:
What would be interesting about that is that could be good for interest rates, for bonds.
Deon Strickland:
Yeah, absolutely. With having the certainty there, having the certainty there. Right. I think certainty in this case would be really, really good for knowing that the Fed really is going to try to move back to this 2% target or are they going to accept 3%.
And I don’t know that I know what that is, but I think I’ll get information on that. That’s the stuff to watch. That’s, I think, the stuff to watch.
Stephan Shipe:
Perfect. Well thank you very much.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
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