Speaker 1technology stocks right now have been market performers for 18 months. 18 months. And I don't know if that's widely appreciated yet. A lot of people say when they have this type of outsized movement in one sector, whether it was energy stocks in the 70s, you know, or dot-com stocks in the 90s or new era stocks today, that only ends one way. They fall out of bed and the whole thing comes crashing down. That's how it ends. I think there's a chance, a good chance, I've been arguing this for a while, that we could liquidate out this new era sector by reviving all the rest sectors that haven't done anything in this bull. And we could actually have a revaluation of new era go on while the overall market still goes up. Some of the best times for the stock market historically have been when volatility is at its highest levels. Every time the economy slows down, we get a big productivity boost. But is that a real rise in productivity or is it just the rise you get in every recession we ever have?
Speaker 2Jim, here we are, another get-together, meeting of the minds. It's early February, lots of sort of moving pieces in the market, in the economy. And these conversations, you know, with you help us and our audience sort of try to get at what you're paying attention to, what investors should be paying attention to, what's changing in the markets. And so, you know, where we always start with you and where we like to start with you is, you know, what are you paying attention to? What are you, how are you informing? I mean, you have a bunch of subscribers on Substack. You know, you're putting out daily pieces of research and content and interesting charts. We're for our audience is fortunate enough. We never get them in advance of your, you know, audience, but you know, you're, you're, you're nice enough to come on and, and share the things that you're paying attention to and share some of these charts and these interesting data points. So what are you seeing and what is maybe changing right now?
Speaker 1Yeah, well, there's always a lot, I think, that's changing. Not only in the markets, but just here in the country and across the globe and everything. But, you know, right here in my backyard of my state, we've had a little volatility of late too here in Minnesota. I'm sure that people have noticed. So, well, that we're still dealing with. But, you know, to me, for the economy and the markets, I guess I'm mostly interested in, fascinated with, and also a little hopeful, I guess, in the early evidence here that we're seeing since late last year of a leadership shift that's going on. In the stock market. You know, this thing has been led throughout this bull market almost without exception by new era stocks, large cap new era stocks. And what we're, what we've been seeing now in the last few months has been a pretty, you know, growing trend of a broader market leadership away from the old leadership. And I got a few charts you can just see one of them here that just looks at the relative performance of small cap stocks. You know, they've been dead for this entire bull market most of the time. And on a relative basis, now they're starting to show an upward trend that's last more than a week. And, you know, that's encouraging. The next one is cyclicals. I took the four major cyclical sectors of the S&P 500, the consumer discretionary, the financials, the industrials, the material stocks relative to the S&P 500. And I took the four major cyclical sectors of the S&P 500, the consumer discretionary, and it's had very similar pattern as well of picking up and starting to lead the market. If you look at the next one, just to show you, we have large cap value, which no one's touched for a long time. And it also has shown a pickup. And then lastly, I just threw in there the emerging markets on a relative basis. Now, what I want to point out before we leave these is what I noticed with this is they've had kind of two periods of leadership in just this last year of these charts. One occurred in late 2024 into early 2025. I don't show 2024 year, but that's when they started to pick up. And then they paused during much of 2025. And now towards the end of 2025 into 2026, you see another pickup in that leadership. I would argue the reason that you see that broader market leadership in late 2024 and 2025 that it paused, then another one has. that we're into now is because they coincide very closely with the Fed easing cycles that we've had over the last 12 to 15 months. The Fed's first easing cycle in this bull ever was in late 2024. And then they didn't cut rates for a while, then they paused. And then late 2025, they started to cut rates again. And now they've announced they paused. But my point is, when they did ease, you saw this broader market participation, really pick up relative to the rest of the market, one of the rare times in this bull. And it isn't just the Fed funds rate. You know, you look at money supply picking up, pausing a little and hopefully picking up again. You look at the dollar started to come down over that period of time. The yield curve has been steepening. You know, a lot of these, it's a policy cocktail that I think a lot of these broader market plays need to perform. And they're finally getting it. So when you think ahead, we'll come back to this. If this is going to continue, I do think it's going to need policy juice. I think that the Fed's really done for the year. I don't think this will persist. My guess is that's not going to occur. I think we're going to have to continue to be more accommodative with policy and broaden out the market. At the same time that this is going on, what is almost more fascinating to me is what, what is going on with new era stocks. Okay. And if you look at this chart, the red arrow got a little out of place there. But if you look at this chart, this is the relative total return of the S&P 500 technology sector. I could combine it with the communication sector for new era. They may have similar looking charts. But what I want to point out is look how much the relative performance of tech stocks have has really come down now off its high. Um, it's been a rather persistent trend most this year, even dating into late last year. Uh, and it's fairly significant. What's, what's really fascinating is if I, if that red arrow's in the right place, um, the relative technology stocks right now have been market performers for 18 months, 18 months. I mean, let's face it. Tech stocks have been doing so well for so long. We're all overweight them. You can't really help it. You own some, if you just didn't sell them, your, their weights went up relative to everything else. And everyone's gotten overweight in that whole new era sector. Um, and we, we can't bring ourselves to reduce them because, you know, every time we do, they go up more and they just don't lose. And so, uh, it's, it's kind of a rarity in this bowl to see, uh, an 18 month period where they have not outperformed the market. And it wouldn't take a lot of money to do that. So, um, if, so I, I, I do think that it's not just that broader stocks are picking up, you can see money kind of leaving the leadership areas. There's truly a, a sort of a rebalancing that I think is going on where people are finally saying, well, you know, maybe I shouldn't have as much here in the new era as I used to have. And I really don't have much small caps or international, which now is doing really well. Maybe I should get a little over there. And just a little flow, given how little is owned over here. Yeah, I mean, it's, it's, I mean, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's making quite a difference in the relative, uh, performance of this. One last point I want to make on this. And this chart to me is where the hope comes in a little bit, a little bit here, but I also think it's, it's one of the most important, uh, uh, charts in what I'll talk about today that's going on. And again, it's kind of, it doesn't show up real well here. Um, it got a distorted, but what I overlaid here is the relative price performance of technology, which is the red line again. And then what I've laid on top of that is just the overall stock market S and P 500 or log scale, which is the blue line. Okay. Now note how close they are up until just since late last year, when tech started on a perform, we have never had in the last five years, at least we've never had a period where tech could underperform and the market could close to its record eyes. That just hasn't happened. Every time tech went south. So did the market. Okay. There just wasn't the other leadership there to take up the difference, but boy, we're starting to see quite a divergence here where we're liquidating the overweighted, uh, overvalued over owned, uh, risk area of the stock market. We're starting to resize it, revalue it, all of it, and yet we're still within a spitting distant a day trade of new all-time highs in the S&P 500. That is where I get to the whole. A lot of people say when they have this type of outsized movement in one sector, whether it was energy stocks in the 70s or dot-com stocks in the 90s or new era stocks today, that only ends one way. That's how it ends. In other words, I think there's a chance that new era doesn't just collapse, it just underperforms. It stops outperforming, it doesn't collapse, it might even go up yet, but it doesn't go up as much as the broader market. And it's very encouraging to see this on this early signs of the last few months where we're starting to get a gap. By the way, if I go back to dot-com, there's nothing like this. Dot-com, when that thing rolled over, the whole market came with. You didn't have this differential occur between what was going on with the relative price of tech and the overall market. They both came down together almost immediately. This is not occurring today. And it's not occurring like it did even in the last five years over and over again. So this is both, I think, maybe telling about how this could work out. Also, maybe it's just being a little hopeful that that can occur. I would argue if you interviewed most people, they'd probably say, this thing, right now, what's the fear? The fear is the semi-stocks and everything else is coming down. And there's just no way the whole market's going to come down under that. And I'm not saying it couldn't come down a little bit, oh, if we're going to get, you know, a full bear out of that. And even new era tech stocks themselves, I'm not so sure they have to go into full recession mode either. It's more that we actually put up a transition from new era to like old era parts of the market. One more thing before we leave this. One reason this, I think, could work a lot better today than let's say it worked back in dot-com is because back in dot-com, in the late 90s, all stocks in the market were going up pretty good. Tech stocks went up a lot more than the rest of them. But even smalls and value and everything else was going up pretty good in those latter years of the rational exuberance of the 1990s. That's not occurred here. This has really been a division of humongous moves in new era and then upward moves, but not very much in much of the rest of the market. So, I think it's a good thing that we could bring down this one sector while bringing up a lot of the rest. I also would just point out that one of the things that's made new era stocks go up so dramatically is certainly their fundamental performance. No doubt about it. They've been phenomenal and that's pushed those prices up. But I think it's almost equally supportive that they did this in a, at a time when nothing else in the stock market was doing well at all. Everything else in the economy and the market really was just laying there in the muck. So, if you have one sector that suddenly gives you great fundamentals and there's absolutely no choice anywhere else of anything else you can buy that's doing anything good at all, then the value you're willing to put in that sector is going up even multiple. And I think that's been one of the driving forces under tech is not only their own fundamentals, but the lack of any good fundamentals available anywhere else. That is changing today. We are now starting to see fundamentals pick up in other parts of the economy, other parts of the market, which is detracting from the flows, investment flows to new era, not because they're necessarily rolling over and dying, but just because they're not as attractive now that there's other alternatives and everyone is too overweighted and new to underweighted and old. That's why I think there's a good shot that we could just liquidate a new era without collapsing it and have an ongoing bull through this, even though tech is a period where it underperforms the overall work. One last chart here just throw out is kind of a move I think I would argue. The thing we've missed in this bull more than anything is animal spirits. We've just never, never raised them. I don't know if we will totally, but you know, we've had a bull that's been totally pessimistic most of the time and pessimistic attitudes on Main Street, pessimistic attitudes among CEOs a lot of the times. And really because of that, a lot of people holding excess cash, not using much debt. There hasn't been that old animal spirit, you know, rational exuberant, go get them behaviors. And we're starting to see a little bit of that because this, this is my animal spirit stock index. And all I'm doing here is I could buy and just look here. It's a geo weighted index of the S and P 500 low quality index of the S and P 500 high beta index, the Bloomberg micro cap index, and the IPO X IPO index. It's stuff you'd buy if animal spirits actually had a heartbeat. And for the first time on a relative basis here, just in the, in this bull market, first time, ever in this bull market, we have seen animal spirit stocks outperforming the market. Typically, I put the dates on these lower ones when they bought them in the past, those were all dates of a start of brand new bull markets. Now we can't have a brand new bull market today, cuz we've been in one, but in some regards, much of the old pure market is maybe starting. It's a bull market, a brand new bull market that we haven't ever had in much of the stock work. I think that's kind of
Speaker 2what is maybe going on anyway. It's interesting. It's like, the tale of two different bull markets. The bull market was driven largely by the, and you know, if, if that does in fact play out, that's gonna be a very sort of different type of, I guess, bifurcation of bull markets. You know, it's interesting.
Speaker 1Work piece I wrote recently. I didn't, I was gonna title it though, just to your point where you just brought up there, I was gonna title it a bull within a bowl. kind of the same thing you just brought up. Cause yeah, that's what I kind of think this is a little bit. It got so. hypercated between new and old era. We're now given the stuff that old era has always needed to grow, bringing it back finally for the first time. And to some regard, those, these stocks are experiencing their first move in this bull market. And if they haven't had one yet, they could drive this thing for a while. If, if we just don't collapse the entire 40% weight of new stocks on the S and P that's, that's the key. And maybe that's the hope rather than the, that's the reality.
Speaker 3We'll see. So we saw a boost. We just got the Q3 productivity growth, I think a little while ago, and we saw a boost in Q3 productivity growth, but you wrote a piece where you were talking about the idea that you think that might be a Mirage. Um, that may not be what it seems. So can you talk about that a little bit?
Speaker 1Yeah. Well, there's a lot of, uh, a lot of chat about AI and productivity. And, um, really it's always been around with new era, but it's even taken on with steroids lately with, with AI and its ability. I think the reason it's gotten so much tension is can it replace us humans, you know, which no one who we are probably wouldn't take a lot to do that on a lot of days. But, um, but it, I think that's got a lot of tension, the idea of, you know, having robots do everything and we can just sit at home, uh, is, you know, we can have that type of productivity going on. I don't know. I, I, I kind of suspect we haven't had as much productivity yet as we think, um, uh, that's, I'm going to get at this point with, with a couple charts here. This one, uh, just overlays the unemployment rate here. Um, with, uh, w which is the red line in this chart with annual productivity growth going back to 1948. And it's a busy chart, but I'll, I'll tell you what I point out the red dots in this chart on, on their unemployment rate, just show every cycle where the unemployment rate rose. Okay. Every cycle, there's like 10 or 11 cycles where you go from the lower dot to the upper dot in every one of those instances, when the unemployment rate goes up productivity searches. Well, it isn't really productivity. It's just, we cut staffs. If you think about it, I'm running a business with a hundred dollars in sales and 10 employees. If I come in today and I cut the employee count to five, my productivity is going to go through the roof for at least a period of time. Cause now I'm going to have the same sales with five employees rather than 10, and I'll have massive productivity. And that's exactly what happens. And every time the economy slows down, we get a big productivity boost. And what makes this expansion unique is the unemployment rates been rising for the last two, two and a half years by a full percentage point. And we've had a rise in productivity, but is that a real rise in productivity or is it just the rise you get in every recession we ever had? It's a real rise. It's a real rise. It's a real rise. It's a real rise. It's a real rise in productivity. It's a real rise. It's a real rise. It's a real rise. So if I look at the next chart, the, these separate the productivity cycles into those that are when unemployment was rising, which shows this chart, we got decent productivity here. And if you look at the period we've been in, we've got productivity growth of 2.73% annualized here in this cycle when unemployment rate's been going up. But really, there's nothing significant about that. It's pretty par for the course of what you typically get when unemployment rate goes up. Okay. It's what we almost always have had. What's more significant about real lasting productivity is the next chart. This looks at productivity cycles when the unemployment rate was going down or staying flat. And we're doing terrible on that basis, not only in the current cycle, but just in the recent cycles that we've had here. And we really haven't had a real live productivity cycle on this basis where we didn't just boost output per hour because we cut hours worked. We actually were boosting output per hour because we cut hours worked. We actually were boosting output per hour on more hours worked. We haven't had that since.com in the '90s. So I don't know. I don't know for sure. None of us know. But I suspect productivity might be less than we suspect going through this period. Not saying it won't show up. The other thing I'd point out is I don't know if we have an appropriate measurement in this country anymore about productivity. We've had an economy where that concept came up and we are an industrial economy and we've calculated productivity by counting the widgets coming off the factory floor. Number of widgets, people are working, boom, productivity. But now we've got basically a service-based economy and how in the heck do you calculate productivity of service-based economy? And tech is a lot of the same kind of thing. It's service-oriented. You can't really count. I use a computer to make these charts, and I'm doing it a lot faster than I did when I had to plot them on graph paper when I started in the early '80s before there was a PC computer to do this. But I don't know how to measure that. On the other hand, I also spent a lot of time today watching for the NBA trade deadline to see if the Minnesota Timberwolves might get Giannis. So how much productivity do I actually have because I have AI at my disposal? And I do think that this is one way to look at this, and it just gives you caution that maybe the productivity miracle is not as great as we think, and if it is showing up in this cycle, it's mainly showing up because we've been cutting jobs. We've been raising the unemployment rate in a completely unique fashion during this period.
Speaker 3And just for us to break some basketball news here, I believe they said Giannis is not getting traded. Is that correct? I think that's what, right before I came
Speaker 1off, I checked the notes, and it looked like they're going to hold off and wait until after the season's over.
Speaker 3Because I'm a Knicks fan as well. They were another team that was considering going after them. Yes, that's the point. So it appears he's staying put. So you heard that first here on the Excess Returns podcast. There we go.
Speaker 1There we go.
Speaker 3Breaking news. But the other thing that's interesting to me is, if you think about AI and productivity, we want to eventually see AI in these productivity numbers. But it's interesting, the balance here of, you've made the point here, these productivity numbers could go up for bad reasons, and maybe they also could go up for AI. So I would think it's probably hard to figure out, if AI starts having an impact, it's probably going to be hard to see it in the numbers, right?
Speaker 1Yeah. I do think that's the problem, Jack. I think we just don't have a good measurement for productivity anymore. It's hard to measure the productivity of what all of us do all day long, for example. I don't know quite how you do that. A lot of days, we just look and read things, and we get ideas in our head. That was maybe a good day, but maybe we didn't do anything with it yet. But is that a productive day or not? I don't know. It's not like we're putting stuff out on the factory floor in boxes. There's still things going on. Some things like that. There's still sales going out the retail door. There's things like that that you can measure, but there's a lot of things that we can't. And I also think there's a lot of noise in this. We use these new technological weapons and have for a long time in ways that aren't very productive. In fact, they can take your attention off the ball a lot during the day, and you end up doing a lot of other things that probably aren't that productive too. So it's hard to know where we're really at. But I would say that I would caution this idea that productivity is exploding, you know, because I think it's a lot just due to the fact that we're not growing the job market very fast. That's why it looks like we're getting a lot out with fewer people, so to speak. But that happens every time you cut jobs.
Speaker 3So I'd say, Jim, one of the things I'm guilty of all the time is saying there's an above average level of uncertainty. I think I pretty much consistently, 100% of the time, say there's an above average level of uncertainty. And by definition, I have to say, I don't think there's an above average level of uncertainty. I think I have to be wrong about that. But it does seem like, looking at this first chart, it does seem like maybe now we do have an above average level of uncertainty, but you can talk to that.
Speaker 1Yeah, this is just the U.S. Economic Policy Uncertainty Index, back to 85. And we have certainly had an explosion of uncertainty. I think this is, you know, a lot of this is just Trumpatility, right, is what it is. It's Trumpatility. The way he runs things is through shock and awe and through constant uncertainty of volatility. I think it isn't something new he's brought to the presidency. I think he's kind of run his entire private operation like that, his businesses in general. That way, I think that he feels good that that works out well for him. And I don't know if it works out as well for the country or not, but that's certainly how we're running this. And, you know, we have tremendous uncertainty throughout all our policies, whether it's what's going to happen with spending tax on fiscal front or the monetary front has been kind of elevated for a while anyway with an expanded balance sheet, you know, $9 trillion Fed balance sheet after being basically zero forever. And then will they, won't they ease or tighten and those kind of uncertainties. We've had incredible immigration policy uncertainties. We've gotten elevated defense uncertainties, you know, where we're bombing boats in the open sea and attacking Venezuela and we're threatening to take over Grenada by force. And we got to trade policy uncertainty with tariffs, you know, just on and on and on. So this chart is no lie that, you know, it went way above the uncertainty we had as measured by this device during the pandemic, for example. And it does give you an unsettling sense of, you know, gosh, when everything's so, what, so, you know, volatile every day, I get up every morning and something new is going on. And, you know, how do I make investment decisions in that environment? Well, what you find out is that some of the best times for the stock market historically have been when volatility is at its highest levels. If I look down at the bottom where those red dates are, you can see when it was calm and very predictable in 1987, 1998, 2018, 10, 24, or you could update that a little bit and move into the early part of 25. All those times when you felt good about the world, it felt like it was, it was settled, predictable, and we knew where earnings and everything else are going to go. Those were horrible times to be invested in the stock market. Awful times. Why? Because, you know, things turned out a little worse than you expected and you weren't, you weren't valuing things appropriately. But on the other side, look at all the green dates. Those were all wonderful times to buy this market. Wonderful times. The last best time was April 25th, on the day that President Trump, with his whiteboard on the White House lawn, was listing tariffs he was going to raise to everybody. That was, you should have turned off the television and called your broker that very day and loaded up. And it would have been a wonderful buy. It was the nadir of uncertainty in the United States and the perfect time to buy. The next chart that you just show, just, shows this quantitatively, you know, the, the difference in the highest quintile uncertainty versus the rest of the time, not even the lowest quintile, just the highest quintile periods of time versus all of the other four quintiles, if you will. And there's quite a divergence there that's going on. You know, from an investor standpoint in the equity market, uncertainty is your friend. It really is. It's not comfortable and we can keep you up at night, but generally it's, it's your friend. When there's disarray and people are that scared, guess what? They're underowning assets relative to long-term norms, probably. They're undervaluing them, all of that, because everyone knows it's bad. That's a great time to be buying. So I, you know, I, I, I wrote a piece on this called Careful What You Wish For, because the day you come in and you're feeling very calm and serene about things, you probably should call your broker and sell. That's probably a better time to, so if Trumpetility goes away, man, probably want to sell or that, or that.
Speaker 3We'll see. Well, it's interesting because I think you've just, I think you've just proven the old stock of market saying the stock market climbs the wall of worry, but it's on it with charts.
Speaker 1Yeah, that's exactly right. And we've had the wall of worry in spades here over the last few years on about every front you can imagine. And, but it's been very good, you know, very good for the marketplace overall.
Speaker 3It's interesting. I just wanted to get your thoughts on this. We had Lizanne Saunders on recently, and she was talking about this idea that In addition to maybe uncertainty right now, we also have this instance instability, which she thinks kind of, you know, is a big thing, part of this market. And I guess part of that would be like, we're not just thinking about things that could happen. Things are actually happening as well, which is probably what leads to the instability. So I don't know if you have any thoughts on like that and maybe the two of those together.
Speaker 1Yeah. To me, instability is, you know, they're almost, they're just a variant of the same word to me a little bit somatically. I don't know if there's a big difference. I mean, think about things that are unstable, whether they're going to tip right, left, fall down, go up. That's kind of the definition of uncertainty. I don't know which direction it's going, you know, up, down, right, left. That's uncertainty. So when things are unstable, perceived unstable, I think it's kind of the same thing in my book. I would argue in some regard, we've had more stability than instability in this period. We've had a uncertainty, though, in the sense that, you know, think about how stable profits have been in this period of time. You know, very, very stable. The stock market has been, for the most part, fairly, fairly stable. Interest rates have been fairly, fairly stable. Inflation has been hanging around two and a half, three percent, fairly stable over this period of time. Fed actions, for the most part, you know, a little here, a little there, but pretty much, you know, even trumpetility has become very stable. It's just massive every day. So, I mean, in some regard, I would argue that there's much more pockets of stability today, in some sense, rather than instability. It's more just chronic uncertainty, I think. I don't know. And who knows who's right
Speaker 3on? Well, it's interesting because there's been like a stability of like wild announcements and threats. And maybe it's like this, you know, the boy who cried wolf type of thing where we sort of, to start to tune it out as it happens on a daily basis.
Speaker 1I think that's going on. I always have argued that what you need, what you need to worry about is the, the thing that no one has brought up yet. That that's the worst thing. You wake up some morning and something happened overnight. No one's ever talked about it. You never thought about it. That's going to bring a big adjustment in the market. But I don't care how much volatility there is. If you've vetted already and the market does that pretty rapidly, vets new issues. If it's been vetted, it's no longer a real risk anymore to the market. That's, the markets have adjusted for that. And so old news and even new news that everyone knew was coming because it's the same pattern of behavior. Eventually it's just discounted the way. I think that's some, somewhat of what's happened with tropatility. We've just kind of come to know that we're going to have more and more and more and more and more, and it's just going to have less and less impact from what it might've had earlier. You wrote a great piece recently.
Speaker 3And one of the things everybody's been looking at right now is the jobs market, because that to some extent, the fed is very focused on the jobs market and people want to understand what the fed's going to do. So they want to understand what's going on behind the scenes. And you wrote a piece recently talking about some of the warning signs you're identifying within the job market. And so we want to just work through some of these charts and maybe you can talk to some of those things you're seeing behind the scenes.
Speaker 1Yeah. The reason I'm focused on job market is because there's been some data of late, particularly GDP numbers that were pretty strong. You know, we had like, what, what a three and a half percent second quarter growth and 4.3% third quarter growth. We, we had recently a GDP Atlanta now number that was, you know, five and a half percent for the fourth quarter. And I think that's given people a sense of economy is really doing good. It's doing great. And I don't really think it is. I think the economy is a lot weaker than people anticipate or think right now. There's reasons why those numbers have been up and it's largely due to trade volatility. We just talked about volatility and uncertainty. It's the wicked trade volatility and imports and exports that has really created unsustainable levels of GDP growth. If I look year to date at GDP through the third quarter, it's, it's 1.8% annualized taking out trade volatility. So I think that's a better representation of where we're at. But at the end of the day, regardless of what economic statistic, I think jobs are going to rule eventually what's going to happen here because jobs go to zero in this country. It trumps everything else. No pun intended. It literally does because you cannot have zero job creation because you take away the essence of American capitalism. And that is opportunity. And if you eliminate opportunity, you have killed, killed the essence of the economy. And there will be a response to that. Have to. The public will demand to, to respond to that. So to me, if you want to know what the policy officials are going to do, watch the job market. As long as that is weak, it's going to force the issue regardless of what the other day they did. And that's why I'm focused in on this. And I, I just see a lot of weakness here. This is just the combination of the, the monthly manufacturing and service employment surveys, uh, done by the PMI. And if, if I average those two together right now, you could see throughout this bowl really, or at least since 2024, they've been extremely low. They just, it's been a very, uh, moderate kind of almost, you know, living on the edge of what we'd call recessions in the past or very close to, if it got any weaker, it would be recession like in a hurry. Uh, it's not up there at 55 to 60 or something where you can say anything there's robustness and health here before we got into any trouble. We're on the cusp of that in this job, this particular job metric. Um, another one, which is kind of archaic, but it's had a pretty good record is I'm looking here at growth. The blue line is, uh, annual growth in ADP, uh, employment for private non-farm payrolls. You can see that itself has gotten down close to the half a percent, three, uh, you know, one third of 1% growth year on year, about with the, with the, with the, with the, with the national non-farm payroll employment growth rate is that is pretty close to stall speed in job creation by itself. But what I've overlaid over that is, uh, an indicator, which is basically looking at the performance of Walmart stock to luxury, uh, global retailer index. And it's on an inverted scale. So Walmart has been outperforming, uh, high-end retailers, low-end Walmart, uh, has been outperforming high-end retailers. It's becoming straight down and you can see historically, it doesn't go back that far, but historically that's been really closely lined up with what happens to the job market. When Walmart's doing well, the job market's generally doing poorly. Why? Because Walmart serves the lower income distribution and more people that come to Walmart in bigger numbers means the economy is getting worse. They're coming to look for bargains or, or whatever. And, and typically in the past, when we've had this type of decline, or in this case, increase in Walmart stock relative to luxury retailers, uh, you've had continued ongoing weakness in the job market. So another indication that weakness is not only here, but is likely to continue. Um, another one looking at here is youth employment, unemployment. The blue line is the youth unemployment rate. The red line is the total unemployment rate. Um, historically youth unemployment rate goes up first a little bit and it goes up further than does the overall unemployment rate. Makes sense. When things slow down the economy, it hits the, the least experienced youngest people. First and the hardest. Uh, and so the blue line's kind of a good indication of where the red line may be going. The, the gap historically between these two has been about 10.3% differential between the youth unemployment rate and the overall unemployment rate today, though, that differential is 11.2%. So it's almost 1% higher than its average differential, which again tells me there's still upward pressure on the unemployment rate. Uh, this one's just a, almost a crime, kind of chart crime. Yeah. Couldn't be this way. And I've written about the fact that we had a downshift in growth in the United States in 2009, 10, that we've never regained. And we've been growing much slower since then. And it shows up here. This is the average duration of unemployment. If you go back prior to 2000, you know, nine, 10 there, we never had an average duration of unemployment of more than 20 weeks. And it averaged, around at, it averaged from 1948 up to 2010, it averaged about 13 and a half weeks. Today, our unemployment rate is twice as low. The average duration of unemployment, it's a half a year long. So not only is there no job creation, you can't get a job because job creation is basically zero. But if you lose your job, you can't get another one. You're out, you're just out of work for half a year. And, um, you know, the only thing I can tell you is that the average duration of unemployment in the United States, the only time it's really been worse, uh, was, was during the severity of the housing, the great recession of 08, 09, briefly during the pandemic. But it's about as worse as it's ever been. And it's going up during an economic expansion. We're not even in a recession, supposedly. Um, so again, I, how does, how does the Fed decide not to ease when job creation has fallen to zero and when people are out of work almost half a year? They can't get a job. And that's what I mean, the pressure is gonna build I think. Unless these numbers improve, the pressure is going to build to bring more policy juice. I think it's going to build on fiscal juice, too, on spending and tax juice. It's already starting to get its own. You know, slower growth begets more fiscal juice automatically because tax receipts fall and welfare expenditures rise. You know, it's bringing the dollar down is helping improve the competitiveness of U.S. produce. The yield curve is steepening, which should help in the out years here as we go forward. So it's starting to do. But I think that this is where these charts that I'm showing, I think there's a lot of pressure here for the Fed, even in those last commentary, to say that the job market looks like it's stabilizing. Where the heck does he see that? Because I sure don't.
Speaker 2Do you have any sense about like what what like has fundamentally changed in the last 15 to 20 years? Like these are just like for examples, like. Maybe like I'm just thinking like home ownership in this country has gotten a lot harder and you have, you know, much less, you know, household formation happening and maybe people are having kids later or like I'm trying to think like what since the financial crisis would have been the big drivers of this? I mean, do you have
Speaker 1any thoughts? You named some of them. I wrote a piece about this, I don't know, with a year ago, maybe. And I might write another piece about it. And what I'm going to write about that piece is I'm going to give the day that animal spirits died, taking after the song, the day that music died, you know, the old famous song. And and you listed some of them. Certainly demographics play a key role. If you look at what our population or labor force participation rate, it went, you know, up regularly, regularly, regularly. And you got into 2000 and it rolled over and it's been sideways to down ever since. And that that's that's good. But in addition to that, you know, demographic is bad. Now we're shutting down immigration. And my kids, you know, I come from I come from one of one of seven kids and I only made three labor inputs myself. And my kids, you know, probably won't average a little more than one each each. You know, like you say, they're way more than one. waiting longer to have kids and they're having fewer kids. And that's kind of the state of America. And if you go back historically, the biggest driver to growth throughout the world and throughout history has always been its rate of resource growth, land, labor, and capital, primarily labor. And the story of America and its success has been, we always had fabulous labor growth because of immigration coming to this country. We don't have that anymore. But in addition to that, I think in 2008, 9, and 10, we killed off animal spirits, literally. If you look back, we convinced everyone that it's dumb to borrow money in this country. It's really, that's how you get in trouble. And we're going to pass regulations to make sure no one can borrow. And we did that. So if you look at debt propensities, they have just plummeted since. 08, 09. If you look at debt to income in the household sector, it rose steadily. Debt to equity in the corporate sector rose steadily up until that 08, 010 period. And they've both been coming down ever since, just chronically. We're borrowing less and less per dollar of income than we ever used to. When I grew up as a kid in the 70s, you know, when I started in my area, I was told all the time, it takes money to make money. With the idea being you should borrow a little money. Okay. I wish I would have, because my mentor told me I should borrow money and put it in the stock market. And if I would have done that 40 years ago, I'd have a lot more now than I would. But my point about it is that's an attitudinal shift of conservatism that's been there ever since. That was such a frightening event that we promoted, our leadership, I think, promoted it as such a frightening event. There've been books written about it and interviews given about it and how. And ever since then, there's been conservatism in this country. Also, cash holdings are very high. And so, you know, we've been, you know, we've been, you know, we've been We have some of the highest levels of cash relative to GDP that we ever have had historically today. Confidence has been notably lower, particularly in this cycle. You know, those are things that was just part and parcel of capitalism. You know, people would take risk. They'd use leverage. They'd roll their cash. If you look at monetary velocity, Justin, it rose kind of, or it stayed flat. That is M vehicle PY. The dollar of GDP created by each dollar of the money supply stayed kind of constant or grew at a slow, steady pace. But you got at this in the early 2000s, it's gone straight south. The biggest collapse ever. The rate of turnover, the money supply is far less than it used to be. So I think we, it's a combination primarily of demographics. That's a lot of it. But it's also, I think, killed animal spirits. And if a leader in this country, wants to get America great again, or whatever you want to call it, I think what they need to do is to stoke and restart animal spirit. The thing that made America great, that's what they need to do. Get people to do that as a way, of course, to path to success in this country. Because we, we certainly don't have that. And we've been suffering from that, I think, over the last 15 years. One reason we haven't had a recession in 15 years, outside of the pandemic, I would say an endogenous recession, is because no one's been aggressive enough to get in trouble. No one's leveraged the balance sheet. No one's taken their cash down. No one's got out over their skis. No one bought too many goods. No one overstaffed their companies. And there was nothing that the recession could bite into. Even in very slow growing times, we couldn't tip it down because everyone's been so concerned.
Speaker 2Anyway. Well, what's interesting with that is you have like businesses in the private sector, being very conservative. I'm not saying the animals, animal spirits were like in the government sector, but certainly the borrowing and the balance sheet expansion and debt levels have expanded in.
Speaker 1True. And I think some of that is because it's subsidizing for the lack of growth created by the private sector. That's what it's doing. I mean, it mandates more. There's a reason why we didn't have much debt in the government sector back in the fifties and sixties. Because the private sector didn't need it. They were, they had an endogenous growth driven by the things we just talked about, primarily demographics. We don't now. What do you do with that as a government? If you don't do it, well, you know, you give it some juice to try to help it. And you set up new programs to support those that are falling behind. And that's exactly what we've done. I would say that rather than set up the programs, what we need to do is focus on how do you restart animal spirits? Because that's the real, the rest of it's band-aid.
Speaker 2Do you have any, we're kind of getting off the, we'll get back to the charts here in a sec, but do you have any thoughts on the, I don't know if I leave the, the, the, the Trump accounts for the savings, the thousand dollars per new child. What do you think of that? That's going in the market that can be used, you know, that they will have that as a savings. It's not even a savings. It's like an investment account effectively.
Speaker 1Yeah. Yeah. Yeah. I think I like the concept. I don't know if I like the specific program. But I've always long time. I wrote about this many years ago. I like the concept. I think that rather than have, I mean, one of the problems we have now in social security is that that was set up on the basis of having a bunch of, a big bubble of baby boomers paying in and a small bubble coming out the other end that needed, and it works fine. That's also why we got healthcare problems today because it was financed the same way. You got this big bubble paying in while they're working and only a small bubble. Declared benefits, taking benefits. So it's easy to finance it. Well, now we got big bubbles going to the tail end and all of us need retirement funds and we all need healthcare and there's only a smaller bubble supporting it. It's not going to work. Okay. We're, we're suffering from that. And I would argue that rather than what we did is take money out of your working accounts and put it into a fixed dollar. We didn't even invest it. We just, the government has a liability on the books, like kind of like a defined benefit plan, not a contribution plan. What we're talking about, I think it makes a lot of sense that you demographics, people could come up with the correct number that if you, and you're born in America, or maybe when you become a citizen in America, even at the older age, you are given a stock portfolio that invested in us stocks or global stocks, whatever the case may be. I don't know. Exactly. But it would be an amount, but it would be an amount that by demographic tables would be by the, by retirement, there would be enough to fund that, uh, situation. I think it's a great thing. I think it would, it, it work better. It's not as dependent upon, uh, demographic flows. Um, it also, I think the bigger benefit of it, it would put everyone in America on the same page. We wouldn't have main street being angry with the, with the, uh, equity owners on wall because everyone would be on wall from the day they were more, everyone would be not just getting a wage from the man they would be getting, of participation and ownership in American ingenuity and creativity. And to me, that brings much greater cohesiveness in this country around a shared goal of making America great, not just labor versus capital owners, because everyone would be both in this. And I think that would help a lot of our infighting that you see, as well as probably be better at funding some of the needs that we need to do. Just as we all know, as investors, you can't do this for a 10-year period. You have to do this for a lifetime period to fund lifetime commitments down the road for healthcare and pension. I think it makes sense. A thousand bucks, I don't think that's near enough to really do it. The concept makes some sense. The size of it really is inadequate, you know, I think. All right.
Speaker 2So let's get back to the, we kind of got off the chart thing. Sorry about that.
Speaker 1It's cut more unemployment. This is just part-time employment. And for economic reasons, and, you know, this kind of leads the unemployment rate too. And it starts to go up ahead of the overall unemployment rate. You can see it's been going up pretty strongly. So this idea of labor market stabilization, I don't see it in this leading indicator. I'm not sure what else I have in there, Jack. Do I have another one? Oh, I do. There's one more I wouldn't mind hitting on. This is overlaying, the unemployment rate, the blue line there again, with the savings rate in the red line. And the reason I throw this in here is this is what's happening right now. Not only is the unemployment rate going up, but people are spending down their savings too. That's a double whammy of weakness for the future. That is a double whammy of weakness. Not only are people losing their jobs, but those that aren't, are trying to maintain lifestyles, not because they can afford it through their income they're generating. They have to use their savings and they're bleeding them down. The savings rate has gone from 6% down to 3%, while the unemployment rate has gone from 3.4 to 4.4, roughly, over the last couple of years. If you look back historically, I just took it back here to 1990, when the unemployment rate goes up, people tend to save more because their unemployment rate goes up. They're worried. They start to save more. They start to hang on to their, they reduce their spending because, you know, things are looking worse in the economy. And then when the unemployment rate goes down, they lighten up, use some of their excess spending power, get some luxuries. This is just the opposite of what's going on right now. We're not only losing people in the workforce, but we're taking down our dry powder. And to me, that leads to further weakness down the road, not the other way around. This one last thing, this is S&P earnings there in the blue line. 500 trailing 12-month earnings. And the red line is S&P 500 company employment. And I just, no one thinks earnings are at risk. Everybody feels really good about earnings this year. I think the expectations for S&P earnings are something like 15% growth or something. And I'm a little worried about that. I think the economy is weaker than you think. And one of the things that could really kick us would be if earnings start to roll over a little bit. Well, I'll tell you, if earnings are this great, why are companies cutting staffs among S&P 500 companies in, one of the most aggressive ways they've done in this entire bull. And in the past, whenever they've cut staffs, their earnings either were or started to roll. So I just, I just see evidence of weakness here emanating from the jobs market that tells me that I don't, I'm not sure we can just stand pat here. I think, I think we're going to end up easy. Just this morning, by the way, you know, we had the Challenger layoff announcements come out for January and they surged up 180,000 or whatever biggest January surge we've had since 2009, by the way, in layoffs. And we had the jolts, new openings that fell big. And they're now back to levels that we first had in 2018. So they just, to me, I don't think it's, I don't think the job market's stabilized. I don't think the economy is healthy in the sense of growth. I think it needs help. And I think it needs to And I think it's going to be these job reports that's going to force policy officials, not just the Fed, but I think the federal government too, to end a greater action on that front to restabilize the job market.
Speaker 3Do you think there's any AI yet in any of this? Like, are we seeing, like, this is one you could argue maybe AI plays a role, like the youth employment one is one you could argue maybe AI is playing a role. But you could also argue, I guess it's too early and maybe we're not seeing that impact here. Do you, do you think there's any AI at all in this type of stuff?
Speaker 1The true, true answer is who the hell knows? I don't, I don't think anyone really does know. And it's been bantered around a lot. I mean, you know, people are keeping statistics like the number of mentions of AI that companies make in their reports. So they certainly say a lot and that kind of stuff, but that doesn't mean it's happening. And I think I lean a little towards the view. It'd be a little quick for that to be happening. If I look at past innovations to the future, what's they come about? It doesn't generally, you know, we just learn about AI and then boom, everyone's out of work. It doesn't quite happen quickly, but I don't know. You know, AI is not anything we've ever had before. So I don't know, but I suspect that this isn't AI at work yet in that, in that regard. But I don't, I don't know. I don't know any more than anybody else does on that front for sure.
Speaker 2So, so Jim, it sounds like if I were to try to sum up, you know, seeing these cracks, these weaknesses in the labor market, you, it sounds like maybe the fed is possibly a little, and from your perspective, possibly a little bit behind the eight ball here. Um, but that from a stock market standpoint, you know, you're still positive, particularly on those parts of the market that are kind of playing catch up, but that it also is tied into the fed easing cycle and monetary policy outside of something exogenous that shocks us that we're not just kind of talking about here. Is that kind of correct? Cause it's like on the one hand, it's like you're positive on different parts of the equity market. And I think the equity market in general, but you're also kind of saying, listen, there are some things that we might need to be paying a little bit more attention to, particularly in the labor market. And that if the fed is sort of doesn't do anything about it, then it's not going to do anything about it. Anything here this year, you know, that, that, that might be problematic. Is that kind of a correct summary? Uh, yeah, I
Speaker 1guess my, the thing that's good about this, if you go to the next one, just real quick, Jack to the other side of this arguments, inflation that the fed's hanging on, this just came out during the last few days to the blue lines there, the annual CPI inflation rate two seven. And the red line is just the true inflation rate number that calculated every day. That's now down to 1%. Now, you know, just by it's, the history that that would suggest we're going to return to 2% inflation maybe this year on CPI. But my point is, I think both the stories are debunked. I think, I don't think we have inflation problem. I think the job market is way too weak. I think we need policy support. Now, the reason that that is important is because I don't think we would have awakened old era parts of this marketplace. We wouldn't have awakened the equal weighted S and P small caps, typical stocks, IU international stocks, unless policy easing was brought to the party, which it has started. As I mentioned, we started in 2024 with easing, but we've also improved the money supply. We've steepened the yield curve. We've brought the dollar down significantly over that period of time. I personally think fiscal stimulus is going to expand as well. Over the, over that all of those are ingredients that generally are required to, to push up the old era parts of stock market. Indeed, most bull markets start with massive policy easing and they're led by old era parts of the marketplace. We didn't get that to start this mark. We started with tightening and lived under tightening. And it's just now happening that we're starting to bring ease for the first time. And guess what? Early cycle, old era sort of stocks are responding. So if, if the fed doesn't respond and the federal government doesn't respond to policies, if the dollar goes back up again, if the yield curve rolls over, money growth slows, then I, I think, I think the bull market is going to get into more trouble because I think a lot of the stuff that's hard to come up will end here. And then it's going to go back to dependent solely upon kind of technology. The good, the bad news is the economy's not all that strong. The good news is because of that, we're going to bring policy juice, which maybe elongates this bull market beyond just the tech world.
Speaker 2Thank you very much, Jim. We always enjoy these conversations. We will see you, um, and our audience will see you in March. Okay. Thanks you guys.
Speaker 4Well, thank you for tuning into this episode. If you found this discussion, interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the excess returns network at excessreturnspod.com. If you have any feedback or questions, you can contact us at [email protected]. Information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients. 
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