We’re in a Debt Bubble — And the Pressure Is Building.

Jonathan Wellum (0:00)

We're in a debt bubble, so that's what I'm concerned about. There's going to be overspending, and there's going to be overinvestment, and that means there's going to be some write-offs, and there's going to be some damage. Investors need to think about preservation of capital. They need to think about preservation of purchasing power.

Maggie Lake (0:19)

Hello, welcome to Wealthion. I'm Maggie Lake. Joining me today to discuss what high inflation means for your portfolio is Jonathan Wellum, the CEO and CIO of RockLink. Jonathan, great to have you back on.

Jonathan Wellum (0:30)

Great to speak with you again, Maggie, in these turbulent times in the marketplaces. The volatility has been crazy. So lots of fun with your managing money.

Maggie Lake (0:38)

Yeah, exactly. It really has been. And as we always say, if anyone listening to this is trying to figure it out and trying to decide what to do and how to manage this volatility and what it means, you can get a free portfolio review from a member of RockLink or another advisor in our network. Just go to our website, wealthion.com, and we'll help direct you because I feel like we all need a little help. So we're going to lean on you today, Jonathan. And let's talk about inflation. We had a series of inflation readings out this week in the US that seem to show prices are remaining stubbornly high.

What does that mean for you when you see that in terms of the conversations you're having for clients? You know, are we in a higher rate environment now? How do you think through that?

Jonathan Wellum (1:22)

Yeah. And as you say, you're going to you're going to lean on me for some advice, and I'm going to lean on long-term discipline principles. You always got to get back to sort of bedrock. What are some of those foundations? And that's really what we're trying to do as we make our way through this, because of course, none of us know the future, but we look at sort of probabilities and how to handle it. And so it's a great question. How do you adjust your portfolio? How are you looking at stocks? I think a couple of things. The inflation trade, I think, is going to continue to be a challenge. I'm not calling for, you know, massive increase in inflation. It depends, of course, on response of the Federal Reserve and other authorities and policy responses and so on. But as we know, this inflation has come because of, you know, fiscal spending, overspending, large deficits, some addition to the money supply, the remnants of COVID, supply chain disruptions, de-globalization. There's all of these things. And then, of course, you now have the Iran situation, which is really putting upward pressure on oil. It's taking longer, I think, than the Trump administration had originally thought.

And distilling capacities have been destroyed and so forth. So the distillants coming out of the oil and so forth, they're all very expensive, diesel. And everyone's hearing all these things. So what do you do? I think a couple of things you gotta remember. If inflation is going to remain a little higher, that means price earnings ratio should actually come down. That puts pressure on valuations. And so if you're an investor, you're saying, I want to be careful what I'm paying for valuations, because if inflation is going up, that means interest rates have to be going up. Profit margins on companies, it's harder to pass on some of these increased costs. And we'll see that with companies over time if this remains high. And so I think you want to be careful. You want to be diligent in terms of not overpaying, be more focused on valuations.

You also want to try to find businesses that, if possible, can pass on some of these increased expenses. So they have pricing power. They have moats. They're in industries where they're leaders.

And so it depends on the kind of companies you're going to buy who won't get squeezed as much with some of these costs. And so that's where you're going to have to look. I think you want to be very careful about fixed income and longer duration fixed income securities. Now at some point, I mean, this has been the worst trade for the last 10 years, long bonds, right? I mean, you've lost money over 10 years. And I think one of the worst in recorded history, that will also reverse. And so you want to be careful and not to jump in with both both feet. What we're doing is we're staying short, but we're looking for the fact when things do seem to peak out on the interest rates that will allow us for appropriate clients to go a little bit longer on the duration. So I guess my point is, yeah, you want to be careful about valuations. Price earnings ratio should contract. If this if this continues to go on, you want to be in certain companies that can pass on the pricing and protect your purchasing power, so probably more hard assets, and you want to be very careful about fixed income and the duration while we're in this inflation cycle.