Stock Valuations Are The Most Deviated They've Ever Been In History | Lance Roberts

**Lance Roberts** (0:00)
Valuation deviations from long-term growth trends is at 158%, never in record at this level, right? I mean, past the peak of 1929 So, when you look at how deviated earnings are from long-term trends, valuations of long-term trends, markets from long-term trends, you can have a massive correction in this market and still be in a bull market. That's the hard thing for people to understand.

**Adam Taggart** (0:32)
Welcome to Thoughtful Money. I'm Thoughtful Money Founder and your host, Adam Taggart, welcoming you for another weekly market recap here at the end of the week with my good friend, the ghoulish portfolio manager, Lance Roberts. Lance, happy Halloween, buddy.

**Lance Roberts** (0:46)
Hey, happy Halloween. I'm actually recording this on Halloween, so there you go. We'll do some extra scary stuff today.

**Adam Taggart** (0:53)
All right. Some of these topics we have here might be considered scary. All right. Before we get to them, let's just talk about the news of the week.
The Fed met this week, or yeah, they met, they had their release, Powell gave his press conference. The top highlights of that are the Fed did cut 25 basis points as everybody was expecting. They also announced the end of QT to start on December 1st, which I would say most people were expecting. I would say maybe the only real quasi curveball that came out of this was the market has been expecting the Fed to keep cutting from here, and Powell really did take pains to say, hey, look, I'm not saying if we're going to cut or not on December. I normally say we're data driven and we're going to look at the data to make our decision, but I'm saying more than that here. I'm basically, I just want to make a point that if you are committed to us cutting next month, slow your roll. Markets had to ratchet down their expectations for a rate cut in December.

**Lance Roberts** (1:57)
Yeah, and I don't think you need that surprise. Mike and I have been talking about the fact that the Fed would end QT back in January of this year because we were watching what was kind of going on in liquidity in the markets, and that eventually they were going to have to stop QE all entirely. And so, to your point, it was widely expected that they were going to do this by now. It wasn't expected when Mike and I were saying earlier this year, it's just now it became kind of apparent, particularly with what was happening in the overnight repo markets. So, you know, there's some good and there's some interesting things to that. So, you know, one thing that will happen is that they're now going to shift all their purchases to treasury bonds.
So, if you don't understand what QT is, there's a lot of misunderstanding about quantitative easing. And the first is the Fed Prince money, which they don't. It's an asset swapped with banks to credit reserves and exchange the reserve credits, which banks can then turn into money by loaning it out. The bank swaps treasuries with the Fed or mortgage-backed securities. So, every month, when we were doing full QT or full QE, right, we're doing $35 billion a month in treasuries. So, they were buying these bonds during QE. When we went to QT, they stopped buying the bonds and they were allowing bonds to mature off their balance sheet. That's why the balance sheet dropped. But what a lot of people didn't understand is they were still buying bonds in the market. So, when they were down to $5 billion a month in QT, if they had $10 billion worth of bonds matured a month, they bought $5 billion and allowed $5 billion to roll off. Now, why is that important to understand? Because what they're going to do now is they're going to get rid of their mortgage book. So, they have a bunch of mortgage-backed securities on their book that they should not have been buying really during the... They bought mortgage-backed securities to stabilize the housing market back in the financial crisis, and then they started buying mortgage-backed securities during the pandemic, which really they shouldn't have. And I think that the Fed now understands that that's a mistake. So, they're going to allow these mortgage-backed securities to roll off, and all those roll offs will also be bought into treasuries.
So, in other words, so if I have $50 billion worth of bonds mature in a month, that much is going to get bought back to keep the balance sheet stable, right? There's not going to increase the balance sheet, but they're going to be keeping the balance sheet stable. So, the important thing about that is this now adds a new buyer to the Treasury market. So, as the government is issuing debt to finance spending, they've now got the Federal Reserve back into the game of actually buying that debt. Now, they don't, and this is important, the Federal Reserve does not buy debt from the government. They buy debt, they swap, they do an asset swap with banks. So, the banks, the primary dealers, when the government wants to raise capital, they create debt, right? So, they create a bond, we create money through lending. So, the government creates a bond, the banks buy the bond, so there's a cash swap between the banks and the government. So, government gets cash to spin, banks get the bonds. The bonds then do an asset swap with the Fed in order to create the flow, so to speak, for quantitative easing or quantitative tightening, whichever you're doing, but that's occurring between the banks and the Fed, not the Fed and the government.