How to Turn Current Market Pain Into Opportunity

Publisher’s Note: I recently sat down with one of the hottest financial YouTubers out there, Joe Brown of Heresy Financial, to discuss current market pain, why the Fed isn’t going to pivot, and what you can do about it to protect your finances.


Joe Brown: What's up everybody? My name is Joe Brown. This is the Heresy Financial Show. I’ve got my good friend Nick with me here. We've been talking about what the Federal Reserve is doing, the overall economy. 

You've made millions of dollars for yourself, your own money, over the last 15 years just investing your own money. Now you're teaching other people how to invest, beating the market for years now with what you're teaching people to do. So we've been talking about that. Give us a little bit of a rundown on your view of the economy right now. Are you bullish… are you bearish… and why?

Nick Hodge: Yeah, we're coming out of a great bull run in stocks that really lasted for over 10 years. On the back end of this pandemic, I think we're coming into a significant slowdown. I think everyone's coffers are sort of dry. They’ve spent their stimulus money and the economy is in the tank. 

We're technically already in a recession. We've had the two consecutive quarters of negative GDP. We've seen softness in hiring. A lot of tech companies have announced layoffs, or at least a slowing in hiring, and we've seen housing prices come off, and then housing starts and housing sales slow down significantly as interest rates have gone up, which means people can't afford as much house.

S&P earnings are also significantly soft. The only reason, really, there was earnings growth in the S&P in Q2 was because of the energy sector, which was, if you think back, profiting from $100 oil. Well, oil’s been below $100 for several weeks, if not a couple of months now. I think oil prices peaked, in fact, back in March. And so when the next quarterly earnings come up for the S&P, they're not going to have that high oil price to bank on the energy sector carrying them to earnings growth.

So housing recession, earnings recession, tight consumers facing high inflation, pinching their wallet, tightening their belts, not spending as much, which, of course, cascades down into the economy. I think that Q3 GDP growth comes in closer to zero as well. And I think the malaise could last for several quarters longer, if not a year.

How to Turn Current Market Pain Into Opportunity.

Joe Brown: Now, a lot of people will probably agree with that assessment, but they'll think, based on the last 20 years, hey, when things get tough enough, the Fed's going to pivot, the Fed's going to start bailing out the market again. They're going to lower interest rates. They're going to start up QE again. They're going to save everybody's 401ks. You disagree?

Nick Hodge: Yeah, I'm not so sure about that, man. The Fed just came off their Jackson Hole meeting and people were saying that there was going to be a pivot there… significant call volume activity in the options market… people betting the stocks were going to go up. And in fact, what happened was the exact opposite. Jerome Powell said that households should prepare for more pain, that they were going to continue tightening, and not only continue increasing rates, but also quantitative tightening, whatever that is. None of us really know because we've only said quantitative easing for the past decade.

And on the back of that, stocks completely reversed. They had been in what I was saying and have been saying was a bear market rally since June. You'll remember that the S&P went down like 15% or 17% to start the year and everybody was calling the bottom, right, ever since June. ‘Oh, the bottom is in, the bottom is in!’ It's always funny how those people who were telling you the bottom was in, they never told you that the top was in. But maybe that's for another video.

Yeah, I think that the Fed is going to stay its course. I'm not sure if Jerome thinks that he's Paul Volker or not, but I do think that he's content on trying to rein in inflation. And I'd also say that the Fed Funds Rate, wherever it's at, 2.5% currently, after a couple of races isn't high enough to combat the inflation that we're seeing. And so he can't have his cake and eat it too. He either continues raising rates to rein in inflation… and that might work… but he's going to kill the job market and potentially the stock market at the same time. And I think he's willing to risk that to rein in inflation.

Joe Brown: Yeah, I agree with you. The hard part then is that most people say, ‘Well, what can I do? Do I just need to go out there and short the S&P?’ But you've been extremely successful for a long time in up markets, down markets, and part of that is just finding the areas that do well. So looking at the stock market right now, what are some of the areas that you're looking at and why?

Nick Hodge: Well, let me back up a little bit and first say, the best thing you could have done was go to cash. So two of the things that we did in my monthly letter to get ahead of what I saw coming was sell oil stocks, which we had been in since 2020. We sold those in the fall of 2021, and then later in 2021. We got out of the NASDAQs. 

So I tell people in my quarterly videos how I'm personally allocated in my IRAs with my so-called safe money. I've been in a third cash, maybe 33% to 35% cash, for most of the year. That's been an incredibly smart decision. I mean, we haven't mentioned the strength of the dollar. If you look at the DXY index, it's up around 108, has been as high as 110 or 111, and that's a 20 year high in the strength of the dollar.

You hear a lot of talk about the dollar being doomed, and you might be able to argue that inflation eats into the purchasing power of that dollar. But at the same time, dollars have their own bull market when most other assets are in a bear market and continues to remain the cleanest dirty shirt in the currency baskets. And we've done well just by holding dollars and avoiding the sectors that are going down. The NASDAQ has corrected over 20% since last fall, since November, when it peaked. It's been good just not to be in the NASDAQ.

And then, the other thing you do is look for things that traditionally work in bear market scenarios. Two places we've had success with is in staples. And we do that in various ways. You can buy as SPDR funds; SPDR funds that track that entire sector like XLP, for example, would track the consumer staples sector. But we do it a little differently. I dive into the sector and look for what's even going to outperform within the staples. And so we've had great luck with tobacco companies; has been the primary hedge we've been using there. And they've done phenomenal. Altria is up since we've been in it and that's the tobacco stock we use.

And then, the other sector that's performing relatively well, if you look at the 11 sectors of the S&P, is utilities. And so we have the same sort of strategy there. You could buy the XLU, which would be the SPDR fund for utilities. But again, I dive into it and I select what I think is going to be the best performing of the utilities. 

And so the company we own there is Next Era Energy, which is one of the biggest utilities in the country and the largest holding in that XLU fund. So those are two ways that we've been outperforming the market, the staples and the utilities, which are beating the pants off all the other S&P sectors as the market remains in a bear market.

Joe Brown: I like that you mentioned the fact that a lot of people are concerned about the dollar's purchasing power being eroded because the question is, eroded to buy what? Because if you're looking at the dollar versus stocks, there's no purchasing power erosion there. You're gaining purchasing power dollar-versus-stocks in the last six months maybe versus, well, definitely food and gas and things, the stuff people need. 

But if you're looking at your investment portfolio, the cash has increased in its purchasing power a lot. Next question, then, that I have for you is real estate. A lot of people, so many people are extremely bearish on residential real estate right now. What are your thoughts on it right now?

Nick Hodge: So I'll give you a split answer, a real world answer, and a stock market answer. It might depend on the market you're in. I was talking to somebody here… we're in Spokane. I was talking to somebody who owns property in Boise, and Boise continues to blow up. In Spokane, it's softened a little bit, but prices are hanging in there relatively well.

You might have a year or two slowdown in residential real estate. But the fact of the matter is Millennials, of which, I would bet you are one and I'm one of the oldest Millennials, there's 65 million of us, and we're just now coming of age and starting families and beginning to buy homes. They're going to be a significant driving force in real estate over the coming years.

The other thing is big funds are still deploying billions. I was reading that BlackRock, as a $15 billion fund, is ready to deploy to the sectors. So they were buying, I think, 30% to 50% of houses in the past year. People like me were buying additional houses. So we just bought a rental property in March here in Spokane. And there's people that have excess income and that can afford second homes… and private companies and funds that are going to continue buying houses. Yes, you could see a softness and we are seeing a softness just because the rates are high and people can't afford the housing that they once could. But on the whole, I think real estate will be okay.

And then, the second part of the answer, I think we'd have to dive into the market with trusts, real estate investment trusts (REITs), and there are all different kinds of those. You can buy trailer park REITS, you can buy medical property trust REITS, you can buy IT REITs, server warehouses. You can buy cannabis REITs, IPR or whatever it is. 

And so if we're experiencing a recession or we think we're going to experience a recession, I might shy away from ones that are related to business and stay more in the residential side of things, which is where I like to be. We're long a residential REIT in the portfolio and we'll continue to be, and they also kick off pretty good yields by the way.

Joe Brown: They do. Yeah, that's true. So if you're looking for income, that's typically a good place to be. All right, last question… Crypto. Bitcoin down around $20,000. A lot of people expect it to go down to around $12K. Everything else in the Crypto universe is just getting slaughtered right now. What's the outlook for the next couple of years in Crypto?

Nick Hodge: So it's been shadowing the S&P, and you might have to look to see what's going to break that bond. I mean, it's been just following the S&P lower; a correlation that's been close to one-to-one. There's a halving coming up that might be a catalyst for Bitcoin to break out. 

And then, I look for people to start looking back to Crypto as it bottoms out. So I get into a little bit of technical analysis and it seems like Bitcoin wants to hold up around the $18,000 or $19,000 level. I've been a personal buyer when it dips below $20,000. Even if you get a total breakdown, the chart shows that, I think, it can only go as low as $14,000 or $15,000.

Joe Brown: It's got a lot of support there.

Nick Hodge: Yes, and so the timeframe is always the question. I'm one of the people who think that Bitcoin, at least, has a firm place in the future of finance. I continue to see major figures at banks leaving their jobs to go work at Crypto startups. I continue to see Crypto being adopted. PayPal just started offering the ability to use their services in Bitcoin. And I do think that you get Bitcoin in the six-figure range in the next three years, let's call it.

Joe Brown: Fantastic. Well, thank you so much. And for anybody who's interested, fantastic newsletter. We've got it linked here if you want to start getting some of these alerts, some of this information about different sectors that, for a long time, you've been able to use to outperform the market. So thanks again, Nick, for being on here and great info and we'll talk to you again soon.

Nick Hodge: Appreciate it, Joe.

Nick Hodge

Nick Hodge
Publisher, Daily Profit Cycle