The Cracks Are Spreading Through the Economy

The cracks spreading through the American economy right now are more connected than most people realize.

Michelle Connell of Portia Capital Management and Andrew Tang of Turner Financial Group sat down with me on Wealth Transparency to unpack what is happening across commercial real estate, insurance costs, consumer credit, and the federal deficit simultaneously.

Office delinquencies are sitting at 11%. Insurance premiums are up 40% or more in storm-prone states. Fire departments in rural America are surviving on charity donations. Andrew made the case for Tesla based on his view that SpaceX and Tesla could eventually merge and shared his projection that federal debt could reach $40 trillion by August. Michelle pointed to picks and shovels, AI infrastructure names worth watching despite the recent pullback.

Watch this before the connections become impossible to ignore. If this opened your eyes, hit like, drop your thoughts in the comments, and share this with someone who still thinks the economy is fine.

Chapwood Investments, LLC, is a partner of Ethos Financial Group, LLC, a Securities and Exchange Commission registered investment advisor. No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this webcast or video. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.

All investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results. 
No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. 
Securities are offered through Innovation Partners, LLC (member FINRA/SIPC). Ed Butowsky is a Registered Representative with Innovation Partners LLC. Ed Butowsky is licensed to business in: CA, FL, LA, TN, TX. 
Innovation Partners LLC and Chapwood Investments are not affiliated.

Transcript

SPEAKER_02 0:12

Hello, welcome to another edition of Wealth Transparency. We have two of my favorite people in the industry as guests today. We have Michelle Connell with Porsche Capital Management out of Fort Worth, and we have Andrew Tang, who's the Chief Investment Officer at Turner Financial Group. Each week we try to find headlines that don't make it necessarily into the front pages of every news story, but these are things that impact your portfolio, and we try to dig in deep to discuss them. So thanks for joining me today, Michelle and Andrew.

SPEAKER_01 0:46

Thanks for having me. Thanks.

SPEAKER_02 0:48

So let's take a look at real estate. Because real estate, even though it's not part of the public markets except for a real estate investment trust, they have a major impact on the wealth building in this country. And there seems to be a lot of stress on loans, commercial loans around the country. Michelle, can you take us through a little bit about what you're seeing in the commercial real estate loan stress market?

SPEAKER_00 1:13

Well, when we're looking at delinquencies on those loans, overall commercial real estate, it's not too bad at 4%. But when you break it apart by category, office uh delinquencies are at 11%. And the reason is that people aren't going to work. We still have a lot of remote workers, and also the higher interest costs are really hurting the owners of these buildings. So that seems to be the issue. And I think from what I read, it's not as bad as eight yet, but it bears watching.

SPEAKER_02 1:50

And what percentage of real estate loans are coming due in the next couple of years? I heard that it was close to 25%. Andrew, can you address that?

SPEAKER_01 2:00

It's still uh more than a trillion dollars. Uh that's outstanding. I don't have the exact uh percentages, somewhere around, I think, yeah, 20% or so. But the areas that are hitting uh the hardest are the operators and the companies that are developing. So you can see projects halted because they couldn't get refinancing in a in a favorable term. And and that can dramatically affect the company and a lot of those development companies that go belly up or completely lose uh investors' money. Uh, this is a really sad scenario. It doesn't seem to hit the street because it is not a widespread uh contagion stage at this point. But at the same time, at the higher rates, it just forces businesses, tremendous challenge to continue the operations. Uh you also have inflation in raw materials, labor. And when you add all those together, it is very difficult for development companies to finish their projects. And then you have a consumer market that dictates how much rent that they'll pay so that the return on investments for their income in the real estate projects, it's really struggling.

SPEAKER_02 3:12

So is this going to find its way uh into the banks and hurting the banks and their returns?

SPEAKER_01 3:17

At this time, I don't think so, because this is still representing a small percentage of the overall loans that are outstanding. And we don't have a glut at the moment. This is not the same as 2008. 2008 we overbuilt. Now it's completely reversed. We have housing shortages almost everywhere. So builders are getting more and more cautious. And this was started from 10 years ago. And so going to today's time, they're not going to take down materials, they're not going to build any houses and then wait for somebody to buy it afterwards. It just doesn't happen this way. It's a lot more demand-driven. And so, therefore, I don't think that it's going to be a contagion situation here.

SPEAKER_02 4:01

So, so that kind of plays into inflation, and insurance seems to be the number one factor with inflation right now. Insurance pre premiums are going up tremendously. We just redid our health insurance here, and it was up 25. And that's not just because I'm unhealthy. And it's it's really become a huge problem. And you're seeing it become much more difficult for companies to make as much money because they have to pay out so much more in insurance. Uh, Michelle, can you address that issue?

SPEAKER_00 4:33

I'm just kind of looking at it from the policies for homeowners and property owners, because those, especially if you're in a part of the country that gets a lot of storms and rough weather, like Florida, Louisiana, and Texas, those premiums have gone up, if you're a storm-related area, 40% or more. And so in you have to keep in mind that for most mortgages, you have to cover at least 80% of the value of the property. And when you're passing that along to homeowners, especially who are barely getting by, and you have these huge premiums now being put upon them, a lot of them are looking at relocation. And I can tell you, as somebody who manages money for a city outside of New Orleans, they're seeing people leave and put their homes for sale because of the insurance costs.

SPEAKER_02 5:31

That's just that's so counter to what you believe that insurance wouldn't be that much of a hindrance, but obviously it is. Andrew, do you want to uh address that?

SPEAKER_01 5:41

Yeah, and and I'll take the other uh part of it is that health insurance costs continue to go up. It's just that uh it's too many, too many parties into the pot. And so you have the middle management company, you have the benefit managers that are dictating the prices that are going to be charged to insurance companies. And then you have an amazing continuation that are really nonstop in terms of inflation for medical services. And then on top of all that, you have a lot of fraud, you know, waste and abuse among the healthcare industry. And so all that you add together, it it's very difficult for insurance companies to be profitable and to be more efficient. However, there is good news out there, and obviously it has to do with tech and innovation. Once again, you're probably many people are probably sick of hearing it, but artificial intelligence are working its way into the risk assessment and to be able to efficiently discover fraud, waste, and abuse. So, underwriting process used to be a very cumbersome manual labor process. Uh, now it can be done uh with the help of artificial intelligence, and that can be done very efficiently. So, over time, I do see light at the end of the tunnel, but it just can't happen soon enough. And also, it's going to require government support, you know, in order for all this to improve efficiency.

SPEAKER_02 7:08

Well, that brings me to the next subject, and it has to do with local governments facing a budget squeeze. You know, state and local governments are losing pandemic era federal support while facing uneven sales, property, and income tax trends. You know, some of this is political, some of this is just pure economics. But Michelle, why don't you uh take us through the squeeze? You know, because our police and our fire depend on federal budgets, and our federal budget depends on other countries because we borrow so much money. So China in a strange way and Japan are backing and basically paying for our police environment.

SPEAKER_00 7:48

And I'd also add on that education. So it's, you know, those areas, those critical needs of a community. And again, I'm going to go back to the the city that I manage their foundation. It's not the city's foundation, it's a private foundation. That foundation, because of the declining tax revenues, now supports nine schools and the community college and the police and fire department. And I met with the fire department and they said they would not be able to operate if it wasn't for the charities, local charities, pooling their funds and adding to what they need to run a fire department. That's ridiculous. So it's easy now, it's easier for in the cities, but when you're looking at these smaller communities in rural America, they're really being hit hard. And that's why I'm using that example.

SPEAKER_02 8:48

Yeah, it's it's amazing. If anybody took the time to really dissect the balance sheet of not just our federal government, but our state and local governments, they would be horrified to know how tenuous the relationship is and how much money we need. And when people are out, you know, doing fundraising, they really need that money or they're gonna have to shut down. Yeah. It's a real problem. Which then brings me to the federal interest expense is eating the budget. The SIBO projects a 1.9 trillion federal deficit, not debt, but deficit in 2026 and then rising to 3.1 trillion by 2036. That's three times what Elon Musk is going to be worth after today.

SPEAKER_00 9:36

But but maybe by then though, Ed, he may be worth three trillion.

SPEAKER_02 9:40

Maybe. We'll see. But but think about that that we bring in about six trillion dollars, maybe five and a half trillion in tax revenue, and we spend just on on interest alone almost two trillion a year. I mean, again, going back to dissecting the balance sheet of our country, I mean, this then puts a tremendous amount of pressure when we go to borrow money. We have to come up with a really good you know reason for people for other countries to borrow money from us. And right now it's that we can print more money, so that's inflationary. So we're really in a real you know pickle here.

SPEAKER_01 10:19

Yeah, we it's it it's it's not getting brighter soon until we can really control our spending. When it comes to uh pension underfunded, that really has has two areas of IC because many of those pensions they are not invested properly. You know, how come these pensions can only invest in fixed income? And meanwhile, fixed income are not giving you the return to begin with. And then you have a continuous rise of cost of living, and it's just programs that are not efficiently run, in my opinion. And so the federal debt, it's very close to it in my projection that by August this year is gonna hit 40 trillion. We pay roughly about 1.2 trillion in interest alone, so that's about 20% of it. And so, you know, going forward, we could grow out of this debt problem by increasing the tax receipts. But at the end of the day, we need to have a government that spends less and be more efficient. And again, sovereign AI, sovereign AI is supposed to solve that. But again, it will take time for that to happen.

SPEAKER_02 11:23

What do you mean by sovereign AI?

SPEAKER_01 11:25

Sovereign AI, it's what Jensen Wong has talked about in terms of the multiple stages of growth wave of artificial intelligence affecting the overall markets and society. And sovereign AI is when the governments around the world start to adapt AI to improve the lifestyle of their citizens. And so, in terms of social program, in terms of public infrastructure using artificial intelligence to enhance the efficiency of doing things.

SPEAKER_02 11:55

Michelle, you want to address the federal deficit?

SPEAKER_00 11:58

Well, the more we spend, uh, the higher the interest rates that may come upon us as well, because we're getting lower credit ratings, we have more need for uh money, and in order to attract buyers of our credit, we're gonna have to pay more. And we're seeing that anyway right now, with interest rates you know bubbling up around the world. So I would expect our interest expense to stay where it is or go higher, as Andrew alluded to, unless we do something to really evaluate the expenses, and maybe AI can go in and help with that too, and make what we spend more efficient and not redundant, hopefully.

SPEAKER_02 12:44

So, consumer credit delinquencies, we talked about this last couple of weeks, but it continues to soar, and we're seeing more and more people get into credit card debt, and the interest rates on credit card debt is really, really high, and almost to the point where if you just make the minimum payment, it'll take you roughly 50 years to pay off some of the interest that you owe. So, you know, how much of a strain is that, Andrew, on the economy of the delinquencies?

SPEAKER_01 13:14

Yeah, it reflects the stress uh among the consumer for sure. And uh we monitor the revolving credit because whenever household gets into trouble, the first thing they turn to is credit card, and that's the revolving credit. And we monitor that, and we see that uh the savings rate has gone down, the revolving credit has gone up, auto loan delinquencies have gone up. So this reflects the households are are stressed. Uh consumer loan delinquency also provides a broader picture, and that typically is less than you know 2%, you know, for example. But once it ticks up, it really shows that households, especially in the lower income bracket, they are more dependent on loans than most households, right? You know, than the the the rest of the economy. And that's why it really revolves uh, you know, on the Fed raising interest rates or not, it's going to be really important. Uh for and I have to say, for example, a policy mistake will be raising interest rates because of inflation due to high oil prices. Because high oil prices is a raw material as part of the solution into producing a product. And so, and that also acts as a tax on consumers. So if you add or increase rates because of this type of inflation, you're making a huge mistake. And I think Europe has done that in the past, and we're seeing the uh the terrible results of it. And so that's why it's really important for the Fed to keep the rates low so that the economy can continue to chuck along. Otherwise, to create a restrictive environment is to really strangle the lower income part of the economy. That's why it's really important.

SPEAKER_02 14:56

And I've been saying for many, many years what a big problem our national debt is, you know, just the interest that we pay on it alone, and then just our deficit. And remember, deficit is what we're short every year, debt is what we owe long term. So for those of you watching, you know, remember that the deficit is what you're asking your local, you know, your congressmen and senators to give from the federal budget for new roads and bridges, which we have a terrible infrastructure problem in this country.

SPEAKER_01 15:26

So the congressional budget office, the CBO, that's the official department that handles the budget, they project that this year it's going to be about about 1.9 trillion. It's high as ever. So it seems that we are continuing to top off. Each year we have a higher deficit, higher deficit, higher deficit. And uh it's really bad because we could enter into a deaf spiral to get out of control. And then if there's any kind of uh a backward or if we lose the strong demand for US treasuries, that's what you were alluding to, Ed. If we have uh any kind of a pullback and the demand for U.S. treasuries, you're gonna see the yield go up, and that's why we monitor the yield so much, because it is uh an indirect way of monitoring the demand for treasuries.

SPEAKER_02 16:14

I've often thought about a movie about if the head of China and the head of Japan got together and decided not to buy any US debt, what would happen to the world? It would be an incredibly, you know, terrible thing. And I feel like we're in the simmering point. You know, just like when we had the mortgage crisis, there were some, you know, kind of little like notes about, you know, is there gonna be a mortgage crisis? And then there was. I feel as though this is the beginning of a debt crisis. And I I just think that we're gonna look back at this podcast years from now and remember that when we were talking about this, uh, how how realistic it came to be. Because I really do believe that we're in our uh beginning stages of a fiscal crisis.

SPEAKER_01 17:00

May I add one more thing? Sure. This is already happening, so we can see that the BRIC Alliance is already doing that. So behind the scenes, China, it's been trying so hard to court and to uh nurture many emerging economies and try to court them into settling for petrol dollars and also global trades outside of US dollars. Okay. Uh among themselves, the BRIC countries, the uh Brazil, Russia, India, and China, and now they add to Saudi Arabia, right? So this alliance among themselves, they already trade outside of US dollars. Okay, and on top of that, we also have the digital currency. We have Bitcoin and many of the trades, they do settle in Bitcoin because if they don't want to uh use US dollars, so going forward, this poses a threat. And that's why at the same time, it's my belief from the reports that I have seen that the US is trying to promote stable coin so that it will settle instantaneously, it doesn't have to wait a couple of days, and it's a digital on-chain uh item, and then it's backed by the treasury. So if the US can successfully promote stable coin at USDT and USTC, then the US will continue reign supreme to continue reign supreme on his demand for his debt and let the world finance his debt. So that's where we're at. And then mark this.

SPEAKER_02 18:25

So, Michelle, let's let's turn to AI data centers and uh turning electricity into an economic bottleneck. We continue to hear the need for data centers, but I don't think anybody has ever really looked at the addressable market and know exactly what the total addressable market is for data centers because they continue to grow. What what do you think about uh the amount of money going into data centers?

SPEAKER_00 18:50

I don't think that it's going to uh decrease. Actually, I think they're the amount of data centers will double in a short period of of time, probably within the next 18 to 24 months, from what I've read. But it's what you're starting to see though is pushback in communities and states saying we don't want it here, you know, and I haven't looked closely at what it's like to live near a data center. I've heard it's not pleasant, people say they're very noisy, etc. But some builders of data centers are trying to offset the nuisance and the pushback by paying communities to have the data centers in their areas. I just heard today, I don't know what uh parish or county in Louisiana, but data centers that were built there are paying the teachers a bonus of $50,000 this year so that they can have their data centers in that community. Let me tell you, $50,000 is a lot of money in Louisiana that's below the average uh salary in that area. I'd have again, I'd have to look at the county, it may be even double, but fifty thousand dollar bonus so that we can do business in your community. I think find that very interesting.

SPEAKER_02 20:15

That that's amazing. The numbers we're talking about these days. Yeah. 50,000 is probably double what they're making in their salary.

SPEAKER_00 20:23

As a teacher in Louisiana, probably.

SPEAKER_02 20:25

So the the last uh subject matter today is the real cost of home ownership is outrunning the mortgage payment. I mean, is it worth buying a house these days?

SPEAKER_01 20:36

Yeah, you want me to take that?

SPEAKER_02 20:38

Yes, please, Andrew.

SPEAKER_01 20:39

Yeah. Uh I still uh believe being a property owner, it's uh good. Unfortunately, the rise of home ownership uh has pushed back the the average age of a first-time home buyer to 40 right now. I think I've said that many times. And that's really, really sad, you know, for a new couple um wanting to start a home and basically live the American dream, right? Unfortunately, probably taxes continue to climb. Uh I I think what you alluded to also insurance costs are constantly going up. Utility cost has been going up, especially for electricity and water. So it's becoming less and less affordable. Building material, labor, you know, in the old days you can probably, you know, build a deck in your backyard for about $10,000. Now it's at least double that, you know, for any decent deck out there. And so the affordability issue in housing, it it really is putting a dent into homeownership, unfortunately. But I still believe it is the way to go because when you're paying rent, this is my personal opinion. When you're paying rent, you're paying somebody's mortgages. That's a good point.

SPEAKER_00 21:52

I would like to add on to that when I did some research, tax and maintenance for the average home homeowner now is. $16,000 to $24,000 a year. That may not be a lot to an upper middle class or ultra wealthy person or wealthy person, but to a middle class person, like Andrew's talking about an average home buyer, and you're trying to get in just to qualify for your mortgage, and you're like, okay, I got in. I'm gonna get that home. I can afford the mortgage. But then you have another maybe $24,000 in cost that you have to budget in. That that makes things even uh tougher for people to get in and be a home buyer.

SPEAKER_02 22:35

Yeah, my daughter and her husband can't believe she's married, but they're about to have a child and they're looking at houses and we're going through cost analysis, and it just doesn't make a lot of sense. They're renting right now, and I keep encouraging them to rent, even though it makes you know economic sense to buy, but I'm gonna have to come out of pocket for the down payment. So maybe that's why I'm skirting it a little bit. But but to make an excellent point.

SPEAKER_01 23:01

Yeah, Ed, congratulations, you know, first and foremost. I'm gonna take the other side of the discussion here about AI data center, because this is where data centers can actually help, because AI data centers belong in the commercial real estate space. So they can actually help in this effort in this subsector within real estate. And then you also don't see and don't understand and not really talked about is that when AI Dentist Data Center is up and running, they offset a tremendous amount in property taxes for that zip code. Okay. So that is a hidden gem for houses that are, you know, basically uh around the data center. They offset a lot of the property taxes. And at this stage, AI data centers, they're not going to be approved unless they can secure their way of providing power. And then this water issue is really not an issue. It's just not true, you know, that they use a lot of water. They don't. And so that's why I think if people could further research about this topic, I think AI data center can live in harmony with communities.

SPEAKER_02 24:11

So you're telling me that when a data center goes in, it will replace the need to tax the homeowner?

SPEAKER_01 24:18

No, no, not 100%, but they will reduce the property taxes, they will reduce the tax base.

SPEAKER_02 24:25

Interesting. So as we do every week at the close, I ask you for your stock based on these news stories. And uh so, Michelle, why don't you take it away?

SPEAKER_00 24:36

And I still like tech. I mean, we've had a pretty good uh pullback in the last week or so. And so I'd be picking up the names which are necessary for the AI build out because I I still like like that area. I'd stay away from the tech companies that are taking on more and more debt so that they can have their infrastructure build out. But I do the picks and shovels, still like semes, still like Dell, still like utilities, you know, the things that we need to build out the AI infrastructure.

SPEAKER_02 25:12

Okay.

SPEAKER_01 25:12

Andrew, what about you? Well, you know what I'm gonna say is that today is the debut of SBCX ticker symbol, uh, SpaceX, and they're looking to open at $175 a share. IPO is at $135. When devaluation hits the secondary market for SpaceX, it is my opinion that it is advantageous to buy Tesla at this time because ultimately these two companies will merge, and Tesla right now is grossly undervalued for its Robotaxi, its AI, and robotics uh line of business. And I talked to you about this before that this belonging into the strategic tech sector, looking at the progress of Tesla, they have made tremendous progress, even though the revenue doesn't show it yet. By the way, there are multiple upgrades of the company because Tesla is officially able to achieve level four, okay, in the state of Texas. They are officially level four autonomous driving. And so it is the matter of time for this revenue that's coming into this RoboTaxi space to reflect on their balance sheets and their valuation. And so at today's prices, I still think it is very undervalue. And if these two mega companies are going to merge, you know, right now I would sell the fairly value and then buy the undervalue. If I know that these two entities are going to merge somewhere between one to two years. So I'm investment advice, by the way.

SPEAKER_02 26:51

I rarely give my opinion, but I I've recently become uh a big fan of Rivian. The R2 is their new generation. And if they're able to knock it off, you know, just basically knock it out of the park, that stock is going to go a lot higher. Uh it's not expensive, it's about $57,000, and it's a really great car, the R2, and they're putting a lot of emphasis behind it. Never been a fan of electric vehicles, but recently I've become a lot more of one due to my kids encouraging me. And uh so I'm looking at that and uh like it quite a bit. So I'd like to thank both of you, Michelle Connell with Porsche Capital Management in Fort Worth. Please reach out to her if you have any needs on your financial situation. And Andrew Tang, a chief investment officer with Turner Financial. Thank you very much to both of you.

SPEAKER_00 27:45

Thanks, Ed. Thanks, Ed.