Peter Mallouk on How to Avoid a Revolution
High inflation, falling stock markets, rising interest rates, low unemployment—it’s a weird and worrisome economy. What should investors do? Worth spoke with Peter Mallouk, the president and CEO of Creative Planning, the Kansas City-based financial services firm with some $240 billion in assets under management, to find out.
Q: What’s your assessment of the state of the economy?
A: It’s an interesting time. On the one hand, we’ve had the lowest unemployment ever in recorded history in the United States, which is incredible. And until recently we had extreme confidence in the economy, which resulted in people borrowing. During the pandemic, you also had a bunch of people who retired early.
Separate from those other factors, you have high inflation. The Federal Reserve lowered rates, which made it easier to buy things. Congress sent out a ton of stimulus checks. That’s obviously inflationary.
There’s also the challenge of high oil prices, which, after some recent drops, look like they’re going up again due to OPEC’s cuts in production.
Everyone talks about oil prices, which is legit. But the more problematic thing is de-globalization, the de-linking of a country from the global supply chain. That, to me, is the real story of Ukraine—how it’s leading to permanent deglobalization. Every time countries try to control their personal supply chain by bringing those things home, you’re by definition paying more.
With so many negative economic trends ongoing, how do policymakers and federal banks address them all?
We do not have a way out of this unless unemployment softens and inflation eases a little bit. And all those pressures are going the other way. The only answer is to take a ton of air out of the balloon by raising interest rates shockingly fast, and that’s what the Federal Reserve is doing. They realize this is a serious, serious problem that they have lost control of.
We’ve had serious market downturns before, and they didn’t last long before rebounding. What’s different about this one?
What’s different about this bear market from every other bear market of the last two generations is that the Federal Reserve is trying to cause it. If you take the pandemic or September 11th or [the financial crisis of] 2008-2009, in all these cases, the Federal Reserve said, hey we’re going to try to lower unemployment and get the economy going by lowering interest rates. Here they’re saying the opposite. They’re saying, we have to make things more expensive to get things under control.
So when people say to me, “Do you think unemployment is going to rise? Is housing going to slow?”, the answer is yes. Because the Fed wants it to.
Some economists worry that the Fed is going too far with interest rates and will cause a recession. Do you agree?
The idea that the Fed can engineer a soft landing is probably unfounded. By the time the Fed sees the measurements and inflation rates…I do think they’ll probably overdo it. But they can turn around and lower rates and fix it.
What about the impact on interest rates on unemployment? How bad is that going to be?
Can the Fed screw it up so badly that we get double-digit unemployment? That’s possible. But if you imagine a world where we have 8 percent unemployment, a lot has to change. You’ve got the Boomers retiring, and the generation behind them can’t fill all their seats, so it’s hard to create a prolonged high unemployment narrative. That’s the floor that gives me confidence. You can’t have a prolonged recession with low unemployment.
In the stock market crisis of 2008-2009, wealthy Americans who didn’t need to raise cash did just fine, while Americans who needed to sell equities really suffered. Is the same thing happening again?
All these policies that have come out under both Trump and Biden have dramatically widened the wealth gap, to the incredible benefit of Worth readers. In the high inflation environment, there’s one group that really suffering. If you’re making $50,000 and everything costs 30 percent more, your life just got a lot more difficult. If you are an owner of things, you are a huge winner from inflationary policies. When people lose confidence in the dollar, it attracts them to buy assets like real estate and equities and inflates the value of those assets.
Now, the Fed’s going to try to soften this, but it will still accrue to the benefit of the wealthier. They’ll just try to contain housing—they won’t try to take unemployment to 8 percent. But the damage is done. In the last three years, we got a full generation of wealth gap widening.
What are the consequences of that accelerated wealth inequity?
The repercussions for the markets in a long run? They’re really bad. During the pandemic, the concentration of wealth in the top 1 percent rose to its peak in a generation. Great civilizations fall one of two ways—an external threat or a revolution. And the cause of a revolution is never what it seems to be on the surface. They’re almost always because of the gap between the rich and the poor. So if I’m a Worth reader, I’m very interested in having policies that don’t widen this gap.
So what does this revolution look like?
I think we’re heading to Western Europe-type socialism. That’s where the U.S. is heading. And the first dominoes to fall are going to be free college and free health care. If you look at the political spectrum that used to be a liberal thing to say. Now, it’s a moderate thing. But those are two very, very expensive things that will require substantially more taxes to pay for. Then we’re mandatory paternity leave and long vacations away from becoming Western Europe.
We’re not there yet, but we are seeing greater polarization in economic and social policy at the state level.
What we’re going to see now is California saying, we’re going to do all these things and our tax rate is going to be 48 percent, and Texas saying we’re not going to do any of these things and we’ll have low taxes. A very big implication for Worth readers is that we are going to see far more migration from state to state. The pandemic kicked it off—“Hey I can work for Silicon Valley and live in Montana,” that kind of thing.
I’ve had so many clients tell me I’m going to move to Texas, I’m going to move to Florida. Before Covid, they mostly just talked. Now they’re doing it.
In this period of uncertainty, what advice are you giving to Creative Planning clients?
If you’re 100 percent in stocks, I would probably ride it out. The market will find its way to the better. A year from now, if people have been investing through all of this, they are going to be well-served. Certainly two years—I have a high degree of confidence in that. If you’ve got 24 months, keep buying through all of this and you’ll be well rewarded.
What about for high net worth investors specifically?
Our high net worth clients are really looking at this market kind of hoping it gets a little worse. If you’re a very high net worth investor, you can’t do a lot of things in a bull market. But when it gets messy, you seize the opportunity. Markets are down 20 percent—they’re looking opportunistically.
You sound optimistic.
I am. Despite everything that’s happening— the trend toward socialism, deglobalization, the Fed fighting inflation, our immigration problem—at the end of the day, two things really drive markets: innovation and demographics. In the next ten years we’re going to see more technological innovation than at any point in history, and we’re going to see over a billion people come out of poverty. Those are two reasons to be extremely optimistic.