Fed Faces Stagflation Risks as Inflation and Economic Uncertainty Grow
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Good afternoon, fellow investors, and welcome back to InvestTalk. This is our Monday, March 17th, 2025 edition. And I'm excited for this hour with you. And my goal each and every weekday is help you achieve your own version of financial freedom and help. And by doing that, the way we do that is by furthering your educational journey. This is a challenging endeavor.

But in many ways, it's one of the most fruitful endeavors that you can embark on, which is learning about your money, your investment opportunities, as well as the risks that are out there so that you can avoid major risks that can really kneecap your entire financial picture. And I've seen that time and time again. But I've also seen thousands, tens of thousands of individuals really empower themselves to become entrepreneurs

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Now, in just a bit, we are going to talk about today's marked performance and run down the show topics. But as usual, we'll tackle this first caller question now. I was calling you guys about ticker symbol CLH, which is Clean Harbors. And I've held this for a while. It's done pretty good. Should I trim this? Curious to know your analysis. We really appreciate the show and hope you guys have a great day. Thank you.

All right, looking at Clean Harbors, Clean Harbors. And this is in the business of cleaning up environmental waste. It collects transportation, treatment, disposal of site decontamination hazardous material. So certainly a very good consistent business. It has pulled back recently. I will say that. But it's still in a broader uptrend.

It's fallen from 260 all the way to 193. Let me pull back to a monthly chart here. The monthly was overbought, and it needed this. It needed this pullback. Let's just say that. It was a little bit too expensive. It's now down to the 100-week moving average, and that is major support. But I do worry about the trends in earnings, which are expected to be a bit lower this year and next year from where they previously were.

And it's trading at a mid-teens multiple. Sorry, mid-20s multiple, excuse me, which is on the expensive side. Now, they have a good balance sheet, but it's a very profitable business. 16% return on equity, free cash flow about $300 million on a $12 billion enterprise value. That's a little steep from a free cash flow perspective, right? You're trading at 2% free cash flow yield. That's pretty low.

So I would say is I would be trimming this on a rally. Now it's oversold. Now after this drop, let me give you a number that we can get this back into.

Yeah, if this gets back into 215, 220, in that range, that's where I'd be trimming lean harbors. It's definitely overbought on the monthly chart and needs, you're not going to get the same returns, most likely, over the next couple of years that you have over the past few years. So definitely, still a great company, great balance sheet, just a name I would be trimming on a bounce.

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Now we have a lot of ground to cover over the next 45 minutes or so. And here are some, here's some of what I planned time permitting. Now our main focus point is about stagflation. How is the Fed going to handle the possibility of stagflation? We're, Fed meeting's coming up in just a couple days. So we'll talk a little bit more about that. In addition, are equities a sure thing? And we know they can be volatile in the near term. We're feeling it right now. But most people say you buy the dip and it's going to go up.

History says that's not always the case. So we'll talk about some data, both domestically here in the U.S., in our markets, and abroad. We'll look at that. Also, is this just a healthy correction? A lot of people think that this is a broader bear market that we're heading towards and a recession. And while that certainly could be true, you can't have preconceived notions. You have to, I say, call balls and strikes.

You can't, as I said many times, you can't allow your political bias or idea of way policy should be to color where you think the market is going. So we'll talk about this and whether, hey, maybe this is just another one of those yen carry trade unwinds from last summer that turned around and made new highs. That is a possibility. We'll talk about why that could be a possibility. I'm not calling for it, but...

You have to have that in your mind that that can be an outcome here. And then lastly, if we have time, we'll touch a bit on how crowded is the U.S. stock market? When I say crowded, I mean how much money is in our markets and does that tell us a lot about the future path of returns for our markets?

We also have voice bank calls. One is in regards to a potential market correction as well as BWXT. We have some questions as well that came in via the comments section over on our YouTube channel. And of course, I welcome your finance and investment questions right now, but we're heading into a short break. And on the other side, I'll take a look at today's market activity and tackle more of your questions here on the Best Talk at 888-99-CHART.

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Now let's go take a look at the market today. It was a positive day. A lot of this had to do with some, say, market structure.

events uh one is VIX expiration which is tomorrow uh we are also in OpEx week and so typically you get a market Trend change at least short term after OpEx and going especially the last the kind of back end of of OpEx week which you know which uh coincides with the Fed meeting so would not shock me to see a little chop into the Fed meeting from here and then a rally uh and so

that's kind of my base case now anything can happen we could still get a rollover now the good news is we had two consecutive positive days on the indices and typically that at least can mark some some short-term uh support and 5500 is major support on the s p and when today we closed around 5631 hit a high around 5700 on the day so you know near term i would say likely chop

but could get a bounce into the 5900 level on the S&P. Now, interesting enough today, we continue to get that rotation in markets. All the MAG-7 pretty much, I'm looking here, I think all the MAG-7 were either barely up or down. You had NVIDIA, Google, Amazon, and Tesla, and Broadcom all down, and Meta, that was down as well. Microsoft and Apple, those eked out a slight gain.

But if you look at the rest of the indices, sorry, sectors, it was green, mostly green. Financials did very well. Consumer staples continued to do well. Energy did well. Healthcare did well. As long as you were in the MAG7, you did fairly well today. You did great. So certainly a continuation of that rotation in markets, like I said.

Now, what happened with the rest of different asset classes? Broadly, treasuries were flat, so no real big move on interest rates. Not a shock considering we have the Fed coming up and that will be the catalyst for a potential move in interest rates.

The dollar was down 0.3% today, so continued weakness there. Gold up 0.2% on the day, continued strength there, still near all-time highs. Bitcoin futures roughly flat, and WTI up 0.6% on the back of the geopolitical concerns with the Houthis and the U.S. strike on the Houthis and Iran and all of the things that are going on in the Middle East. And when those...

Problems flare up. Typically, you get the premium starting to be priced into the oil market, and you got a bit of that today. Now, on the economic front, you certainly had disappointing numbers. Retail sales increased only 0.2% month over month. Expectations were for that to go up 0.7%, so big disappointment. And then January's reading was revised down from negative 0.9% to negative 1.2%.

So the market didn't really love that, at least I wouldn't imagine. But that was certainly something that was of note. You did get increased sales on online stores, but declines were seen in bars and restaurants down 1.5%. Gas stations down 1%. Clothing stores down 0.6%.

Car parts and dealers down 0.4%. Sports goods and hobbies down 0.4%. And appliances and electronics down 0.3%. So that's where the weakness overall in the retail market is right now. On the manufacturing side, these tariffs are not helping. Empire Manufacturing Index fell 26 points to negative 20. The consensus was for it to come positive 1.5%.

And it was new orders, really the ones that were, that was lower. Negative 14.9. Prior month was positive 11.4. And the prices paid in next went from 40.2 to 44.9. That's the highest in over two years. So you're getting that stagflation environment in the manufacturing sector. NAHB builder sentiment also dropped to the lowest since August. So home builders are less optimistic, etc.,

So very interesting, hard numbers, not just sentiment. These are hard numbers about what is happening in the economy. And the current trend of this administration is so far highly detrimental to the broader economy. And that's what's being reflected in markets. But as we know with Trump, that could change, right? He could flip, he could see these numbers and suddenly he changes his mind by the end of this month. And that's where major tariffs are expected to be implemented.

Now we're moving into a break still to come. My focus point and more answers to your voice bank questions. And of course, you can call me right now, live at 888-99-CHART. Justin Klein is here and he's ready with answers to your finance and investment questions. Call InvestTalk, 888-99-CHART.

888-99-CHART, 888-992-4278 is how you get through and ask your question on today's show. Now, my main focus point has to do with the Fed and its challenges it is facing here. We have the Fed meeting coming up on Wednesday. We all know that. But we are entering a different period than the last time they met. And that was, I believe, the end of January.

Now we have ongoing tariff negotiations. We have government spending likely being cut, jobs, job layoffs from the government. And this has all hit consumer and business confidence in a big way. And that's all going to weigh on the economy and likely economic projections for the Fed. Now, historically, this type of environment of elevated inflation and weakening economic growth is called stagflation.

And stagflation is really something nobody wants. If you're a consumer or a business, you don't want that. And if you're the Fed, you don't want that because you don't know which way to go. Do you continue to fight inflation, keep rates high, and do nothing about the decelerating economy? Or do you flip and say, eh, no big deal on the inflation front. We are going to support the economy. We are going to support asset markets by providing liquidity.

because that is more important. Now, which way do I think they'll land? Probably the latter. Why? Because of our debt. Now, one thing that's underappreciated with the Volcker era was that our debt to GDP ratio was at 30% in the early 80s. So when they took interest rates from single digits into the mid-teens on the 10-year, it didn't really impact the balance sheet of the government because there wasn't a lot of debt.

Now it's the opposite. It's not 30% of GDP. It's near 130% of GDP. And you've seen this already with now the interest on government debt over a trillion dollars. And so that is the backdrop that they're operating in. Now, inflation is challenging, challenging to get a hold of. Now, last time Trump did tariffs back in 2018, 19 didn't really impact inflation. Why is that? Well, it was pretty narrow.

It was mainly focused on a small subset of sectors. And even some of those sectors, there were loopholes like steel and aluminum. And people weren't used to inflation. Now people are worried about inflation. And inflation becomes a self-fulfilling prophecy in many respects. Why? Because businesses and consumers expect higher prices. So what do they do?

They buy earlier, they buy today versus down the line because they want to secure supply at a lower price. And then consumers, they demand or workers demand higher wages because they want, they need to be able to keep up with this inflation. And it forces the companies once again to raise prices to offset those higher wages, higher input costs. And that's why it becomes self-fulfilling. Now, the latest University of Michigan Consumer Sentiment Survey says

showed the biggest increase in long-term inflation expectations since 1993. now that's just a survey that's what we call soft data the market still doesn't think inflation is running away in fact it's actually expectations in the bond market for inflation have actually dropped recently if you look at cpi it actually fell from three to 2.8 last month so

It's kind of a mixed bag on the inflation front, whether it's accelerating or not. But either way, it's above the Fed's target, 2%. So how does the Fed handle that? Are they okay with it? Do they wipe it off as, hey, this is tariff-induced and we're going to support the economy? We're going to support asset markets. We're going to support the treasury market. And I think the simple answer to that is, yeah, I do. I do think that's the direction that they go. Because their ultimate job is to make sure the treasury is solvent.

If it's not solvent, what are we doing here? Right. You don't have a country. You have a bankrupt country and you're destroying the financial system because the Treasury is the backstop of the global financial system. And so while it's interesting to bat around this idea of which direction to go and head in, I really don't think it's a choice. Now, can they dance around it? Can they PR it to death? Yes.

But there's political pressure really on both sides of the aisle. And I think they will come out on the side of supporting asset prices. So I think on Wednesday, they'll likely focus on the plan for winding down QT to keep reserves in the system so you don't have a financial crisis, as well as prognosticating about future rate cuts, which likely will commence in the next couple of meetings. Now we're heading into a break. I'm ready to take your calls now at 888-99-CHART.

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The InvestTalk phone lines are open and waiting for your finance and investment questions. 888-99-CHART.

Hey, guys. Love the show. This is Eric from Utah. Just got a quick question. I like the aerospace and uranium industries a little bit, and I'm looking at ticker symbol BWXT. I had a recent pullback and just wanted to know your thoughts. Do you have a position in it now looking at buying more? Look forward to hearing your answer.

All right. Looking at BWXT, this is a name that we do own for clients. We've owned it for some time. I believe we bought it in the 60s, I want to say. And it's had a recent run up all the way up to 134 and change. And it's pulled back to around $100. In fact, today it closed right at $100.

So that is in it is into some good support. I will say that we like the company mainly because what they do is they manufacture power generation systems and nuclear components for the US government, industrial and utility space. And we think that the demand for nuclear power is going to continue to grow.

for many reasons from obviously climate reasons you also have base power needs for data centers uh you have cryptocurrency uh energy demands uh just growth uh globally etc so we think that these type of companies will continue to do well now nine billion dollar market cap so it's a mid cap it's

No, I would say we think it's fairly valued around these levels. So we think it's a good buy, not a steal, but a good buy and at good support. So we like BWX Technologies. And if you look at its profitability, let me pull it up here. Yeah, return equity 28%.

they have they have a very minimal debt on their balance sheet so good balance sheet there 250 million in free cash flow on a nine billion dollar market cap so about a three percent free cash flow yield not a steal once again but about fairly valued with its growth and the demand in the industry and they're taking uh that cash flow and

They are paying out a little dividend, about 1% dividend yield. But we think that has plenty of room to grow with a payout ratio of only 31%. And they've been raising that dividend. So we think that will continue to go up over time. So we like BWXT and it's had a nice pullback as of late. Let's make it two in a row from our voice bank number at 888-99-CHART.

Hi guys, love the show. A quick question about backdoor Roth IRAs. Could you explain what they are, how much you can contribute, and if there's a benefit to this process? Thanks, bye. So a backdoor Roth IRA contribution is pretty simple. You make a non-deductible IRA contribution and you immediately convert it into a Roth. Now there's some rules around this. You can't

have any IRA money that's out there in an account. So you have to clear out your IRAs and that can be a challenge from a tax perspective if you don't want to do that. But yeah, it's just a loophole to get around the Roth contribution income limit. So if you make too much money, you can't just make a normal Roth contribution. So instead, once again, you're putting into an IRA non-deductible and then you're

converting it immediately. So there's no, it's effectively a Roth contribution. It just takes a little extra, a couple extra steps. So I do that personally. And I think that's a good plan for somebody that doesn't have any money in an IRA or maybe a small amount that they're willing to convert.

now we've been telling your friends that our video our audio podcast is available in video form over on our youtube channel and we get questions submitted over there as well so let's gather one of those now and answer it gilliby24 says thank you for the excellent insights you constantly provide with medp experiencing a recent decline would you consider this an opportunity opportune time to increase holdings or might we expect additional downside before adding more

all right taking a look at med pace m e d p is the symbol and this is uh has has come down recently peaked out around 450 dollars per share now it's around 326 uh kind of chopping around the 100 week moving average and i think that's one of my issues here is that it tested that level back in november and had a bit of a bounce but it's rolling back over so to me the more a certain

moving average is hit the less support it is and I think this is going to break through now for everyone else out there. What what does med pace do? What does med pace do? Well, it's about a 10 billion dollar market cap and it provides outsourced clinical development services to the biotech pharmaceutical and medical device industries, so it's Running these clinical trials. Here's the problem revenue

It's slowing. It was going up in the mid 20% range late in 2023. Last quarter, only 8%. And earnings this year are expected to drop 2%. And those estimates for this year and next year continue to go lower. And it's still trading at a mid 20s multiple for something who has flat to negative earnings growth expectations. That is a recipe for a further decline. More margin, not margin, multiple compression.

And then you add on top of that the broader backdrop of what's happening. First off, higher interest rates. Higher interest rates are the death kneel of biotech. You saw that in 2022. And if you go to the biotech sector, they have not really recovered. IBB, for example, peaked out. IBB is a biotech ETF, iShares. Peaked out around 175, hit a low of about 104, but it's only balanced to 133 today.

and it's rolling over again, it has bearish pattern. So if the biotech space is struggling, well, MedPace is probably going to get less sales. And then you add RFK, right? Who's coming in and shaking up the industry to a degree. And you can discuss whether that's a good thing or a bad thing. I'm not arguing one way or another.

but what i will say is it's probably not going to be helpful for he's not going to be helpful his administration is not going to be helpful to a lot of what happens in the biotech space

I read a report recently that only 7% of internally produced studies in the pharma industry can actually be replicated. So that's a challenge, and I'll probably push on that. And the process is there, which will make it harder for the biotech space as well as med base. So I think there's far more downside for med base. I actually think it's a pretty good short term.

I wouldn't touch it probably at least until the end of this administration. So you get some settlement in the space around HHS, etc. So I'd absolutely pass on MedPace. Now let's talk about equities, long term, long term returns. And this is a great study is by a Santa Clara University professor and looked at and looked at

Data for equities going all the way back to 18, where are we? Sorry, 1792, 1792, okay? And a lot of people think that, hey, by the dip, but we've been in this by the dip era since 08 or 09, right? But as they say, past performance is not a guarantee of future performance. And when you look even further back, you see that there are periods, decades even, where equity returns can be negative.

Now, the most recent example of that is from the two year, sorry, 10 years prior to February 2009. That was the bottom, right, in equities after the financial crisis. And you go back 10 years, you're talking about February 1999. Now, that wasn't the peak of the dot-com bubble, but it was pretty bubbly at that time. And it got, obviously, even higher, so returns are even worse if you're talking about nine and a half years prior to that date.

now over that 10-year period equities lost 37.4 in real terms so this is adjusted for inflation and there are other periods where equities lost money to inflation over a 10-year period you're talking september 1974 there was a huge bear market in 73 74 august of 39 so obviously go back to august 39 1929 june of 1921 so there was a mini financial crisis back then in 2020 in 1921

October '57, sorry, not 1957, 1857, we're talking Civil War era, and then April 1842. Those are the periods where the previous 10 years equities lost money in real terms. And there were actually periods where over 20 years equities lost money. Talking about June 1932, that was a 13.9% loss in total in real terms, the previous 20 years.

And then October 1857, that was about an 8.8% loss. And June 1921, that was a 4.7% real loss over the previous 20 years. And that can happen in international markets as well, such as domestic. I mean, places like Italian stocks, the 20 years prior to 1979, lost 78.2% in real terms. Japanese stocks, so you're not even, you're not talking about wartime or pre-World War II. This is

ending in 20 2009 the 20 years prior to that japanese stocks lost 64.3 because there was a massive bubble there so what is this telling you telling you that price matters price matters now they're looking at the broad indices so just because the broad indices were negative doesn't mean that all stocks were negative and there weren't other opportunities there were right plenty of companies did well from say 1999 until 2009 but

you can go through challenging periods and it's usually when equity values are rich. So what I'm saying here is likely going forward, you aren't going to get the same level of equity returns from the broad indices. Underneath the surface, there's plenty of great opportunities, plenty of great values. But this study tells you that you can't just bank on buying the dip

buying the big names the ones you know the most and you're going to do great it's not guaranteed doesn't mean it can't work out just understand that the last 10 15 years is more the anomaly not the rule let's keep moving and play another listener question from 88899 chart

Hi, Justin. I was hoping you could take a look at Roche Holding for me today, ticker ROG.SW. There is limited information on the stock because it is a Swiss company. But if you could take a look at the fundamentals and maybe take a look at the chart long term for me, it would be much appreciated. It actually has stock options that I need to figure out what to do with. And any guidance would be appreciated. Thank you. Love what you do. Bye. All right. Looking at Roche Holdings. Let me see what I have here.

These foreign stocks are always, I always have to bring them up on different systems, and those systems are a little bit slower. So bear with me here. So we're looking at, there's different ADRs. So we'll look at RHHBF, RHHBF on a longer term chart. There we go.

So this has been relatively flat since 2020, call it start of the pandemic. It hasn't done great. Now it's starting to do well recently. And this goes back to what I've been saying is foreign stocks are suddenly doing well. We're definitely looking at a lot of foreign companies more than domestic names right now. This is a Swiss biopharma and diagnostics company. And they're

it has a good oncology drugs that acquired from genentech back in the day and yeah i mean it's it's certainly a good business 302 billion dollar market cap let me take a look at the balance sheet here yeah not a lot of debt free cash flow about 17 billions that gives it about a almost six percent free cash flow yield

Solid dividend, and I think it continued to pay that dividend because that balance sheet and that cash flow. The chart is looking better. I would continue to hold it. Now, this is more of a broader, just looking at this name, but bigger picture, what is your weighting to this company? Talk about stock options. Maybe you still work for the company. I would worry about maybe having too much exposure, so think about that. But overall, I like what I see here.

valuation, trends in stock price, the fact that it's a foreign name, probably under-owned. It's plenty of cash flow to pay that dividend and it's taking some of that cash flow and buying back stock. So I'm going to give Roche a thumbs up. Now this is InvestDoc. I'm Justin Klein and we have one goal each and every weekday. That's just to help you. Help you become a better version of yourself, at least in the investment world.

and so you can achieve your own version of financial freedom. And our work continues after this final break, so if you have any questions at all, give us a call at 888-99-SHARED.

Invest Talk, now with more than 60 million downloads. Justin Klein and Luke Guerrero are ready to answer your finance and investment questions 24-7, 888-99-CHART. 888-99-CHART, 888-992-4278. It's how you get through and ask your question on today's show. Now let's drop in a fresh question from the comment section over on our YouTube channel.

Ryan Ketzer says, hi guys, wondering what do you think of Kinsale Capital Group fundamentals look pretty good. I know you like insurers to do specialty insurance. So I was wondering if KNSL might be a good investment or if the niche of excess surplus insurance is inherently risky. Well, all insurance is risky to some degree, but especially insurance typically is pretty profitable.

because it's not commoditized and it takes specialist expertise, et cetera. So this is a name that has been growing consistently. I like its growth. My earnings went in 2018, $1.79. This year, it's worth $17.37. It's a tenfold increase in seven years. That is quite impressive. Small dividend, but good growth. It's trading at a...

you know, a high multiple for an insurance company, but the growth is warranted. Now, what I would do a little more research, and obviously I haven't looked at this, you know, I can't look at it so quickly, but, you know, what's driving that growth? And is there a cap? Because once the growth does decline, its multiple is going to contract. So how much runway is there on this growth? It's been compounding its growth 10X over seven years. That is very impressive.

Is it likely to do that again? Probably not. But if it does a quarter of that over the next seven years, it's still going to do very well. But what is the source of that growth? That's what I'd be looking at. Now, the technicals are fine. It's in an uptrend. It's kind of consolidating. It's been consolidating since the beginning of last year. So the recent performance has not been amazing. But what about this company that makes it so special with that level of growth? That's what I would be asking. And whether...

they can start to hit a continued level of mid-teens growth. If they can do that, then I think it's worth it. If it decelerates into the single digits in growth rate over time, I think that's a challenge and multiples will come down. Now, lastly, let's talk about this pullback in markets.

Now, if you look at the driver of this pullback, it's mainly been the big tech names. And I've said this multiple times, but it's so important because if you look at the returns of the 50 worst performing stocks since February 19th, they have a total negative return of 22% on average, average total return, negative 22%. If you take those same 50 stocks,

and you look at their performance from October of 2023, the last real major market bottom up until last month, they returned on average 104% over that period. So they've given back a quarter of those returns pretty much since. If you look at the 50 best performing stocks over the past month, they're on average up 11%. And no, not a surprise. Their returns since the last rally were not nearly as strong.

so really what this is is it's profit-taking and a lot of it has to do i've said this before it's market structure it's the speculative speculation around option activity and get dealer hedging and that came unwound in a big way now can that continue to come unwound absolutely can this correction in the big tech names those top 50 shall we say growthier names could that continue absolutely

But in order for a bear market to commence, you're going to need the sell off to widen out. And it's not really doing that. Like I said, if I pull up a month chart, you go look at a heat map of the market over the past month. It looks very interesting because there's a ton of red in Nvidia, Apple, Microsoft, Google, Amazon, Meta, Tesla, all down double digits. But a lot in healthcare is up. Consumer staples are up.

Many energy names are up. Exxon's up almost 5% over the last month. Berkshire's up 9% over the last month. So this could be a garden variety correction and profit taking in those names that were just too expensive. That can be a result. Now I'm not calling for that, but you have to be on the lookout for signs if that's all there is. And we'll keep you up to date on that.

now i'm justin klein this completes another invest stock program we thank you for listening we encourage you to tell your friends and family about our free podcast downloads which you can find anytime at itunes spotify or google play and be sure to rate and review on itunes and join our second annual invest stock market madness competition it is underway but today is the last chance to enter because the first matchups start tomorrow and if you win you win a thousand dollars and if you need help understanding your financial situation and whether

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