Speaker 1about we've been in a five-year supposedly uninterrupted economic expansion now and a three-year almost going on four-year bull market and still people on main street are looking at the future with the fear that they generally only uh emanate when when they're in the pit of a recession when the wealthiest most successful people finally throw in the towel i've had this terrible now it's looking awful oftentimes that's when you want to step up in bucks and if the governor came out and just passed a big tax increase no one would be saying that that's going to be inflationary but for some reason we because we don't call these taxes we call them tariffs they're suddenly inflationary it's amazing to me when you think about the stock market record highs it rising 75 percent that we have three quarters of the 72 industry that comprise the index itself that are relatively priced to the market overall below m gm we're excited
Speaker 2to kick off this new show with you um what we're planning on doing is doing a monthly series with you so each month we'll sit down and work through the latest research and commentary you're publishing on pulse and perspectives your substack newsletter we'll dig into the economic and market trends that you're tracking and highlight the data and signals that investors should be paying attention to and thinking about so um for anyone that wants to follow along directly with jim you can get his insights and analysis at paulson perspectives.substack.com uh today for this first episode and i think most of our episodes will be very visually and chart heavy because you're putting a lot of great data on your substack or your newsletter um we wanted to walk through a number of interesting charts which we'll do here in a minute and then we'll talk about some of the things that we're going to talk about but before we get into that maybe just let's get your sort of take your overall view on where you think the economy is right now it's a good time to check in a little bit past mid-year and so what are you seeing what are you thinking
Speaker 1well first thanks so much jesse and jack for having me i really appreciate the opportunity to to speak a little bit and visit um i um i guess i'm in the view that the um i don't think we are going to be able to do much about it but i do think we are going to be able to do much about it and i think we are going to be able to do much about it but i do think we are going to be able to do much about it but i do think we are going to be able to do much about it but i do think we are going to be able to do much about it but i do think we are going to be able to do much about it the reason the reason i don't is that i just feel like the private sector is just so well prepared for recession i think really ever since covid everyone's been telling him that where session is imminent and the result of that is very noticeable debt ratios among the consumer has been have been falling really since the 2007 crisis uh they're as low as they've been now in over two decades almost 25 years you've got to find the debt and disposable income ratios debt service um principal interest payments percent income are as low as they've been on record almost going back to 1980 when they've kept that data um so consumers and households are are just not overextended in any way financially like they typically are throughout post-war history if i look at the corporate sector they're not quite as healthy but they're just about as healthy um debt to market value of equities right now is almost a record low in post-war net cash flow to gdp come the corporate sectors closer to record highs than anything else um there there's there's just a balance sheet preparedness if you will and then i look at liquidity and it's everywhere it's sloshing all over out there in the economy m2 money supply is a percent of gdp i think as we're close to 70 percent it was typically never got above you know 60 percent for much of post-war era but then we had all these crises and we've ballooned it and it's just sloshing about everywhere retail uh money market funds are close to seven trillion almost close to record highs as percent of disposable income um corporations as i mentioned got flushed with cash flows and then the last thing is they're just there's pessimism still her you know consumer confidence indexes are close to post-war lows uh corporate ceo confidence is down not at lows but is down which is really odd when you think about we've been in a five-year supposedly uninterrupted economic expansion now in a three-year almost going on four-year bull market and still people on main street are looking at the future with the fear that they generally only uh emanate when when they're in the pit of a recession so if you're really scared about the future what are you you're cautious which means you're getting your house in order for the bad things you think that are coming if you've got a really strong balance sheet you're really liquid and you're really pessimistic how does a recession happen and that's kind of the problem i'm having we may grow really slow but how do you push this into recession when there's no vulnerabilities out there to be exposed because everyone's been in their best behavior jamie diamond is still telling us a recession is nearly every week and it's that kind of thing that keeps everyone good so that's my case for no recession right now i'd like to see a period where we don't see self-optimism and as a result of that have some animal spirit behaviors that get us in trouble you know get us overexposed and that might be a ways away but all that said we are growing very slowly right now and i think it's around one percent growth through the first half this year we'll come back to that maybe in a minute um roughly in real gdp terms and that is below that even the stall speed historically the two percent growth rate if you fall below gdp of that it's typically install speed where that tips it into recession job creation is at or slightly less than one percent depending on what aggregate uh you look at productivity has cooled off um i i just think that that we're growing very slowly and we still have a relatively tight policy perspective the real fed funds rate to the neutral rate still very high long yields have remained very high the mortgage rate still sitting at close to seven percent you know what are we doing with a mortgage rate of seven when existing home sales just today came out almost at uh lows compared to since 1990 um and we're growing real gdp around one percent it just seems kind of absurd the yield curve is still almost inverted every day the dollar even though it's come off a little is still among the highest values the real value trade weighted dollar index probably higher than 90 percent of the time since it was floated in 1907. um money growth has been rising which is good but it's still below nominal gdp and it's still relatively mild and the fed's still contracting its balance sheet there is some fiscal juice no doubt but even that has been contracting or lessening a little bit of late um so i just don't i just think we're going to grow very slowly and that's the key backdrop here is as we go forward but i'm i'm betting we're not going to recess and if you don't recess i think the market can get along with really slow growth um without recession without less serum collapsing but ultimately i think the fed willies will come back to that and we're gonna we're gonna need that to juice this thing up a little bit i think to have another run in this
Speaker 2bull market so let's work through some of these charts and this first one is the u.s economic surprise index versus the hard data economic surprise index and one of the things that you highlighted and it's in the circle here i'll let you talk to it but is this divergence between the surprise index and the hard data so just maybe if you could talk to what this is actually measuring and telling us and then when like this happened like is this what this what this means basically well let's
Speaker 1just if you start with the with the blue line which is the overall city group u.s economic surprise index what what that measures is not necessarily the the rate of growth in the economy it measures every day when reports come out on industrial production on jobs and personal control spending whatever it measures whether that report was above expectations over low expectations and if it's if it's above that blue line rises if it's less it blue line falls so it really measures um whether people are being disappointed by recent reports that is their expectations have to be revised downward or whether they're surprised and they're revising up it sort of gets to economic momentum is it getting better than people fear or worse than people fear so to speak um and if you look at that blue line you know it was something like plus 45 last fall it fell as low as i think minus 40 or something it's now uh or minus 20 it's now like plus five to ten or something it's still very low when you look back historically though it's kind of flat line reports are coming in about as expected now but what would why i put the hard data line on there which is the red one is it takes just the components that are reported every month that are based on surveys anything that says how do you feel about this how do you feel about that like the purchasing manager survey or the consumer confidence index and the reason that that's different is the reason i put it up there is the fed's been telling us all year long that Look, man, you know, the survey data is down, no doubt, but hard data, that based on physical counting the widgets off the factory floor, has remained very strong. You could see the red line there until May was still very strongly positive. But now, since May, hard data has collapsed as well, and it's now starting to come in at way below expectations as well. So we got soft data and hard data both weakening off. And a big part of the reason that the Fed says it could stay calm is kind of evaporating. And that's kind of why I put that out. I think it raises the specter of more pressure on the Fed to do something at some point when both the hard data and the soft data are weakening together.
Speaker 3How much of this is tariffs? You said, like, in May, the hard data started to deteriorate. Do you think a lot of that is tariffs?
Speaker 1I think tariffs are one. Several things. They talked about a lot of the policy variables that I think are still tight and have slowed us down really since last fall. And I think some of the decline in hard data is due to tight money growth and tight interest rates and the like. But I do think tariffs are playing a role as well. I've always looked at tariffs. I certainly have never looked at tariffs as an inflationary force. I just I don't think I'd come back to that. But I think that's a misrepresentation. I think primarily a tariff is a tax, just like any other tax. And if the government came out and just passed a big tax increase, no one would be saying that that's going to be inflationary. But for some reason, because we don't call these taxes, we call them tariffs, they're suddenly inflationary. But I think what they really are is a contractionary force on economic growth. And I think that is contributing to slower growth in different ways. One is directly. When prices of these goods go up, people are going to spend less on those on those goods. And to the extent they spend any at all, they'll have less left over to spend elsewhere in the economy. So it affects the whole economy, if you will, in terms of slowing down spending on on goods. Secondly, just the uncertainty that's been created by all of it. I call it trumpetility. He seems to like trumpetility, which is. It's another way of saying VIX, only it's it's on the economy as a fully loves creating uncertainty and shock and awe. And when that happens, you know, people sort of like a like a turtle kind of pulled back into their protective rather than hold on and wait and see how things are going to turn out, which then also reduces sort of economic motion. I think that's happening is happening as well. I think overall, the tariff story, though, and just maybe. It's a time to just, you know, that just a minute is looked at by the Fed primarily and others are not the only one. Many, many feel that it's going to be an inflationary result. And I could be wrong in this, but I think it's not going to be much inflation coming on. Does it mean I don't think prices are going to go up in certain areas? I think that's going to happen. One thing about tariffs is we don't have an extensive history on these, particularly to the size that we're talking about under Trump. We really history was the 1930 tariff hike. But that occurred when the Depression had already started. So it's hard to know, you know, if that had if it was inflationary or not, if you will. It certainly didn't turn out to be inflationary. It turned out to be depressionary. The only other one was in the 60s when we had a mild tariff increase. So we just are kind of driving blind because no one really knows. And that's probably why there's such big disagreement about it. But here's. Here's a couple of things that I'm looking at. We have an economy in the United States which is 70 to 75 percent service based. They are not tariff direct tariff effective. So we're talking about somewhere in the vicinity of 25 percent of the economy that's that's going to be affected by these tariffs. And of those, probably not all of those will be affected by tariffs. So the percentages are starting to get pretty small here. You could have a large increase on a very small piece of the economy. Is that going to mean? Inflation goes up everywhere. I don't think so. In fact, to the all these goods producing companies like take the automobile industry, they hire a whole bunch of service firms. They hire accounting and consulting and a lot of others. Guess what? If if their tariffs hurt their business, they're going to demand less from their service providers. And what's that going to do? It's going to drive the prices of services down even further. So I think what we're already seeing the data last month, we did see price increase. And goods, but we saw even continued and greater disinflation in the service economy. And so the overall numbers were pretty benign. And I kind of think that's the way this is going to go. We are going to see price increases on tariffed goods, but I think it's going to be more than offset by the much larger elephant in the room. Disinflation going on among service sector, resulting in not much change inflation. I certainly don't see it as a secular inflationary force that we have. We have to. We have to adjust big to the second thing I mentioned is I personally think that the financial markets themselves are sometimes not necessarily they're good or anything. They make mistakes all the time, but I think they're among the best leading indicators we have for the account. Often they are the first to adjust to that. And I don't see any financial worker right now giving me any sense that they're panicked about inflation, at least not anywhere close to what the financial market is. I think the financial markets themselves are the ones that are going to be the most panicked about inflation.
Speaker 2interesting chart, Jim, which shows basically the market cap of the S&P technology sector relative to the sector employment. And it's just interesting that, you know, here we have like almost all-time highs from a market cap standpoint, but the relative employment really has kind of been flat over the last 10 years. What, I mean, just talk to this. It's an interesting thing because tech is obviously on a lot of people's mind, but it just goes to show, I guess, how valuable that these companies really are, given the input that goes into creating what they create.
Speaker 1Yeah. You know, I put this one out for a number of different reasons, but I think you raised really good points. When I was, I know in recent years, there's been a lot of, you know, STEM, you know, telling the young kids, okay, go into STEM because that's where all the jobs are and that's where the excitement is, that's where the future is, whatever. And the reality is, as you're starting to see, as you mentioned, Justin, in this chart, is, you know, that blue line there is the relative employment of the S&P 500 technology companies relative to the S&P overall employment. And it has been absolutely flat now for more than a decade. Just, so the biggest and best S&P tech companies aren't providing any net employment growth for more than a decade. And you think, how can that possibly be? And I actually, I've looked at this in the past. If I look at aggregate tech employment, just, you know, I've looked at it in the past, I've looked at it in the past, and just in general, it has had a similar pattern of flatness to decline relative to overall job creation. So the STEM story for kids is not necessarily as good as you think. And I think the reason is, is what we've kind of all feared all along. And that is the fact that technology in the United States has become so good, so dynamic, so fast-moving, so biting edge, that it's starting to replace workers, even in their own industry. And that's kind of what we see. Let's take this chart and compare the dot-com boom, okay, which was still a boom based on software, no doubt, the internet. It was still more of a computer-based sort of boom in technology innovation. But that boom definitely also created tech jobs all the way up. You can see that blue line rising throughout the 90s. That is to say, jobs and technology in the S&P were rising faster than overall jobs, okay? This, you know, it's not just the S&P, it's the S&P. It's the S&P. It's the boom has been very different. And you could argue it's gotten more software-based, more thought-based, if you will. And if you think about AI leading interquantum computing to some extent, and you can see that this boom has occurred without additional employees. That is, productivity of tech has been immense. It shows up in a lot of ways. If I look at real profit per job across corporate America, if I take total U.S. corporate profits divided by the number of jobs in the U.S. economy, if you look from World War II to the early 90s, that ratio stayed in the same range. Real profit per job never went up. But since the early 90s and the last 30 years, it's tripled. Tripled. That's across all industries. So I definitely think that one of the impacts of technology and the tremendous leadership of the United States in this area is really to massively improve labor productivity, profit productivity, market capitalization productivity, sales productivity. You're seeing that particularly at the epicenter in tech, but you're also seeing it in other industries as well. I'm not sure where that goes, but it's interesting at this point what it all means.
Speaker 3Yeah, I listen to a lot of tech podcasts, and I've been thinking about this a lot because with AI, there's two different ways this could go. Best case, this probably stays about the same, stays flat, and you get way more productivity out of the people you have, but you're not laying off people. But this also could go down here, I would think. Companies could do the same thing with less people, and will they go that direction? So I wonder, I don't know the answer to it, but I wonder a lot with AI how this affects this.
Speaker 1I think I have those questions in my head too, Jack, and I'm not sure how they play out. I will say this. Our primary method of measuring productivity in this country is defunct. It's totally defunct. And we still use it to couch widgets off the factory floor and then look at how many job hours. And we're talking about a different type of productivity here that really shows up in stock market performance in terms of profit productivity and capitalization productivity, ways that we're not currently managing. I wonder if we need to change the way we look at labor productivity to really understand what's happening with our job. We'll see about it.
Speaker 3So you're saying like a lot of the AI stuff, the way we measure productivity now, a lot of this AI stuff is not showing up. It's not underestimating. It's increased productivity.
Speaker 1I think it's very hard. How do you, some of these things, how do you estimate the productivity of streaming services? And I think it's really hard, particularly it is by counting out real output per hour. It's just hard to calculate that. I think we need to use some different methodologies to understand what's happening and to get ahead of the impact it's having. You know, the job market and what that may mean for our education institutions and the like.
Speaker 3So this next chart is really interesting. We're looking at here, we're looking at dividend payments basically and how they're varying over time. So can you talk a little bit about what we're seeing here?
Speaker 1Yeah, I'm just looking here at the annual, average annual trailing three-year growth in total corporate net dividends and back all the way over most of the post-war era back to 1950. And I guess, you know, I was a little surprised when I pulled this up and wanted to look at it. Only because, you know, as I said, we've been in an uninterrupted recovery for some time and big bull market and dividends are really trailing here. There's not a lot of companies, you know, putting in a lot of dividend growth over the last three years, even though we've had a major bull market run. It's what, 75 to 80% up in the S&P 500. And you got to ask, well, why is that? And usually when you look back historically, you can see situations where dividend growth got as weak as it did today. But when you look back historically, you can see situations where it got much weaker. But to tell you the truth, since World War II, there's only been one instance where it got much weaker, which is really astounding. And that was, of course, the great financial recession of 07-08, a real 08-09. But if you look back, today's dividend growth has been flatlined in the last three years, but that's what happened during the dot-com cycle as well. You can look at 2000, it was about the same. And then there's other times like 08-09, certainly that top, that was a bottom, and other periods of the past. It seems to me there's two different ways dividend growth decisions can be made. One is you want to use those funds in other pursuits, whether that to be M&A activity or to plow into R&D and expansion going on. Another one is you get scared about recession and you try to hoard cash. And one of those areas is you don't pay out as much in dividends. You keep more retained earnings. I don't know which one is truly at work here. I could make a good case for bull. There's certainly a case to be made for the innovation cycle we're in and people wanting to invest in the future. But I've got to tell you, with such pessimism out there during this bull market and sitting yet with post-war lows and a lot of these confidence surveys, you can see where a lot of companies are holding capital back to prepare for a recessionary time. So I don't know which one. I just think it's a bit of an outlier, though, sitting where we are. Today, I don't think we're at the peak of this market and yet dividends are already well, well into kind of contractionary mode.
Speaker 3Yeah, just as an aside, I would have expected this to fall more over time because of buybacks, because so many more companies doing buybacks, but it really hasn't as much as I would have thought.
Speaker 1That's a good point. I hadn't really thought too much about that. But you're right. It could have maybe that could be part of the issue as well going on.
Speaker 2And just one comment there, you know, now you have this new thing with the, you know, corporate, coin treasury sort of trend, like the strategy, you know, so there's another option in terms of deploying or whole, you know, reasons to hold that cash.
Speaker 1Possibly. Yeah, that's both of those are good suggestions, guys. And that could be playing a part, part of the role. I, I find it interesting, though, that this happens at a time when the aging demographics, guys like me, man, I'm the poster child here of, you know, retiring out. And living off flow income, right? That at a time like that, dividend, dividend growth goes to zero. It's a sort of an interesting dichotomy.
Speaker 3This next one's interesting because we're talking about corporate profits above or below trendline. And corporate profits is something a lot of people are thinking about right now with everything that's going on and how it's going to impact corporate profits. But what was surprising to me at first about this is I didn't realize corporate profit had been below trendline for a long time. So can you explain a little bit what we're seeing here?
Speaker 1Yeah. This is interesting, Jack. I find it very interesting as well. I'm just looking at the profitability back to 1950 of total U.S. corporate profits from all companies as a percent of their trendline average. And they currently are about 7, 8% below trendline. And you can see that's one of the lower levels. It's right on the cusp being the lowest quartile of profitability. And it's been the longest period of time, 10 years, that corporate profits in this country have been below trendline. country have grown, have been below their trendline average since World War two. There's been no period, consistent period longer than what they did over this period of time. But here's what I find the most interesting about this. If you look at S&P 500 earnings versus Trimline, they're top quartile. And I didn't run this chart, but if you run it back historically, these two were almost perfectly correlated up until just the last few 10 years or so. Little divergences, but in the dot-com boom, this was up and also S&P earnings were up. But I'll tell you what, they have just totally parted company. So S&P 500 earnings are top quartile. U.S. corporate profits are lowest quartile. What the heck's going on? I think there's my take, and this is just a take because I can't prove this, but my take is this. S&P 500 earnings in this cycle may be more than any other or highly concentrated among a few new era darlings, okay, which are done fantastic. And the result of that is. Is that those earnings overall being weighted so highly in those areas have also done fantastic. However, most everything else hasn't done very well. And I think that rings true for any investor investing in recent years, that if you have bought anything but S&P 500, even better S&P 500 mag sevens, you've been left behind. If you went to smalls, if you went to value, if you went to the cyclicals, if you went to. You've been left behind. And I think the reason is their profits aren't doing that good. They're more like this chart. To me, a big reason for this has to do, again, I think, with our policy approach in this cycle in particular, particularly since COVID. But I think this is the only bull market in post-war history where the Fed has had a tightening cycle throughout except for three months late last year. Until then, it was an absolute outlier of having its entire existence live under Fed tight. And I think that's a big deal because it isn't just the Fed funds rate being high. If they finally lower the funds rate, what's going to happen? We're going to get a whole bunch of new positive forces for the broad economy and the stock market that we have not yet utilized in this bull. Because when you drop the funds rate, what happens? Bond yields can come down. Mortgage rates can come down for the first time in this cycle. If you drop the funds rate, what happens? The yield curve can finally steepen for the first time. If you drop the funds rate and improve the money supply, which comes with Fed easy, you got liquidity for the first time. You don't think small cap stocks would enjoy the first burst of liquidity from money supply growth in this entire bull market? And if you do those things, the dollar will come down. It'll come off. It's lofty. Restrictive levels. And combined together, if we finally lower rates, steepen the curve, increase the money supply, lower the contraction rate, force the dollar, guess what? Confidence in the future might finally improve. And those are all powerful forces that would help the businesses of small caps, values, cyclicals, global concerns, all these things that have been left behind because of an overly restrictive policy approach are living this bull market under. Confronted tightening. So that's why I think we got this. But the reason I like this chart is it kind of tells me that this bull could have a lot left when the vast majority of companies haven't even had a profit cycle yet. Really haven't had a profit cycle for many years. And that means there's a lot of excess capacity that could still be employed. So you could have the tech stocks or the darlings not do much. I can't collapse, but you could have not do much for a long time. If others take up the slack, you could continue this bull without tech leadership. That is to say, we, unlike the dot com, when corporate profits were sky high and S&P profits are sky high, we couldn't take one down without the other. But I think we could today and elongate the bull.
Speaker 3And one of the things you talked about in the piece is this is really good. If this does improve, it's a really good sign for, you know, broadening of the rally going forward. Like when we look at it historically, what's happened when this improves, it's good for broadening of rallies.
Speaker 1Right. Well, the chart is showing there right now just shows, I just real quickly looked at how stocks have done in a forward one quarter average annualized returns back to 1950 from the different quartiles. And they do really well from lowest quartiles and really well from highest quartile. Why is that? Well, I think the lowest quartiles is generally when profits are below trend line, investors think, wow, there's a lot of capacity. Okay. It's like being in the bottom of recession and you go, hey, a lot upside here. Okay. A lot of earnings leverage. And I think stocks do really well in that situation. Highest quartile, I think, has to do with earnings momentum kicks in. People feel good. Earnings have been going up. They're still going up. But the middle quartiles, they don't, it doesn't do as well. Okay. It doesn't do work, but it doesn't do as well. And I think it becomes sort of middling earnings trends, if you will, overall. But what's more important in the next chart, I think, is what happens as you move from the lowest quartile to the middle quartile. I went back and looked at just two major parts of the stock market that haven't been used or haven't really participated yet, and that is small caps and value. And, or sorry, I used the equal weighted S&P and small caps, just to give you an idea. And in the lowest quartile, they both underperform historically, fairly significant, which they have in this cycle. But when you move to the middle two quartiles, those both outperform. And actually, tech outperforms in the lowest quartile big, and then growth in tech underperforms in the middle two quartiles. So I think that we could see a leadership shift yet, if we finally move aggregate corporate profits from death warmed over, if you will, up into the middle quartile, where at least it's hitting a lot of different sectors of the economy. And I think. I don't expect necessarily tech and growth to die, but I think they could underperform. And then other parts of the market that haven't participated could start to take leadership. Again, this comes down to a general policy needs. If you think about it, when you're a low quartile profitability, what gets you out? Typically, when you're down there, the economy is so bad, everybody eases. And when they ease, you move to the middle quartile. We just haven't had that in this
Speaker 3bull cycle. Justin, I love what you're saying here, because we're value guys. And obviously, it's been a long period of. Value struggling and equal weight struggling and anything but Mag7 struggling, basically. So maybe some of this gives us some optimism for the future.
Speaker 1Jack, I've had a lot of bets in my portfolio that it just. You know, it just has the rest of G5 runs. So I could welcome a little broader participation
Speaker 3myself. Well, we have seen. It's a different topic, but we have seen the international at least improve this year. After a really long period of struggle, that is getting a little bit better.
Speaker 1The dollar's coming down. That's why. And I think. see a little bit of evidence of markets sort of picking up. If Feds get close to ease, you start to see more things picking up here just of late, not only international with the dollar coming off, but I recently saw micro caps stocks, their relative performance pickup relative to the Russell 2000. There's a big gap where it's just the last few months, and maybe at the lowest of lowest caps are starting to lead the way. You also started to see some better, a little better information in IPOs and going on a little bit, and some things coming, some animal spirit areas sort of coming to life, if you will. And it might be because the market's starting to sniff and ease
Speaker 3could be. And we can throw this chart in as well, but there is some evidence, right, that micro caps tend to lead small caps a little bit, you know, in a turn?
Speaker 1Yeah, I think historically, yeah, that's going on, and they've been kind of similar now for some time, both dying, if you will, a slow death on a relative basis. But just in the last few months, micros have been, you know, they've been kind of, you know, they've been kind of, you know, picked up, and smalls have not. And I'm wondering if, you know, maybe that cap trend starts from the very bottom of cap, you know, and moves its way up through the system. But we'll see. It's pretty early in that.
Speaker 3So this next one is interesting, because we're looking at consumer sentiment, and we're looking at the wealthiest people. And actually, this is sort of a contrary thing that from what I thought, it turns out, I guess, when these people are getting less optimistic, that actually might be a good thing. Is that right?
Speaker 1I know this is odd. I'm not sure I totally understand. But I've actually used this one a fair amount for a number of years at different points in time. And it just looks at the University of Michigan's Consumer Sentiment Index, but it takes the wealthiest 25% of respondents, their confidence relative to the poorest 25% of respondents. And as you'd imagine, there's a difference. And typically, as you look on here, wealthiest, as you'd expect, generally have higher confidence most of the time than do the other people. And so, you know, I think that's a good way to view poor people. It just makes sense. They generally feel better about their lot in life. But on occasion, as you see here, wealthiest 25, wealthiest confidence kind of collapses. And right now, wealthiest still have a slightly higher confidence level by about three points, but it's pretty close to zero. And you can see historically, it hasn't got a lot lower in this, this divergence. And I don't know if I totally understand, but in the past, when you finally have the wealthiest confidence levels collapse it's often a good time to step in and buy stocks. I've just highlighted a few of those bottoms. And anytime you would have bought any one of those was a wonderful time to buy stocks. And I think that maybe what this says is it's the ultimate contrarian signal. It's the way I look at it. When the wealthiest, most successful people finally throw in the towel, I've had, this is terrible now, it's looking awful. Oftentimes, that's when you want to step up and buy. Warren Buffett would say you got to buy when everyone's selling or buy when everyone's fearful. But maybe the correct thing is you got to buy when the most successful are fearful. And that's kind of what this chart says. I can't remember the exact numbers, but the performance returns on forward basis are very strong off these low levels.
Speaker 3You have any feeling for why the wealthy are getting less confident? On one hand, I guess you could say- You could say tariffs and all the stuff that's in the news. But on the other hand, they seem to be doing better relative to everybody else than they have in a very long time. So you'd think they
Speaker 1should be fairly confident. Well, I do think that it's not like wealthy have been immune to the decline in confidence in this country. Their confidence has come down too. It stayed higher relative to the poorest. But if you look at a chart of just the wealthiest 25% alone, their confidence has come down quite a bit too. So they're being impacted by the same things. They're being impacted by the political divide in this country that seems wider than ever. They're being impacted by having global conflicts with nuclear arms involved around the globe. They're being impacted by the greater friction that's come from Trump fertility, not only within the country, but across our relations with other countries. They're being impacted by massive federal deficits. And they're being impacted by their fears are up on that as well, about what that means to have deficit to GDP above 100% and rising highest levels since the end of World War II. You know, they're being impacted by recession fear, ongoing recession fears, and being hung out. I looked recently at, if you look at a chart of the, there's an index called the billionaire index. Okay. And it records the major holdings of the, of the billion, of the big, major billionaires in the country. And if I look back at that, they didn't do a lot. It goes back to like 2015. They didn't do a lot, 2015 up to COVID. But since COVID, they have just soar in value and it mirrors or relates, correlates very highly with the relative performance of the mag set. So billionaires themselves, I think are fairly highly concentrated to mag seven type names. And they get, they get concerned. Maybe the poor don't as much, but they get concerned, you know, when people start talking about, well, maybe these mag seven AI is going to run out of gas and maybe it's going to underperform or we got earnings announcements coming up in a couple of days on some of those names. I think they get concerned and it could, it could affect things like finally reducing the weighting in some of those areas, the billionaire start coming. But it does seem to suggest, that there's growing fears among them, probably for the same reasons that the poor are, but maybe more magnified given where they hold their wealth and where their businesses lie and what could happen. I think that's a great point.
Speaker 2And that's probably true for a lot of like, not only the billionaires, but ultra wealthy people, because I feel like a lot of those investors do have a lot of mag seven. And, you know, there's been a pretty wide dispersion of performance in the mag seven for the, for the whole bunch, but this year it's not, you know, not nearly as, uh, good across the board. So that could also drive you.
Speaker 1You know, I think that they, I think everyone kind of got a taste. This is what's interesting. You know, the.com just came along and it crashed, you know, but, but here everyone got a taste, even going back a year ago now to last summer, the market gave us about a 60 day period of what it would be like if mag seven losses lost. You know, and then it kind of came back and then it didn't do much. Now it's back up again, but we also had, we had a taste during the Trump utility lawn lawn announcement tariffs, and we had a taste last summer. And so it may be causing some of these billionaires and other wealthy investors to starting to reconsider how much they want to expose in that area.
Speaker 2So this next chart might not be all that surprising, just given what we talked about a few minutes ago with the profit trend. Um, and given that most companies really haven't done that well from a profitability standpoint over the last 10 years or so, but it still is interesting and, you know, somewhat surprising that what this shows is the, uh, how many stocks trade below their historical average from a PE standpoint. So from a price to earnings valuation standpoint, and I think it shows roughly like 70% or 72% of stocks in the S and P industry groups are trading below their historical price to average, right?
Speaker 1Relative relative relative. Yes. Thank you. Yeah. The relative values is I think right now it's at 76%. It's higher than 99% of the time since 1990. Um, and two, you're right. It is. It's amazing to me when you think about the stock market record highs at rising 75% that we have three quarters of the 72 industries, uh, comprise the index itself that are relatively priced to the market overall below average. Uh, I'm three out of four and, uh, of those 72 industries. And it just, it's almost a record high. As you can see, it just, again, to me, kind of like profits laying in the lowest quartile of corporations in this country to have three quarters of the industry segments of the S and P still what could be considered cheap after the, after the, after the, after the, after the, after the bull run we've had, it's very odd. It's, it's pretty darn odd. Um, you know, you look back historically at some of these highs in this ratio. Um, and, uh, this one, you know, is even higher than those overall. And I, you can look at that, you know, as maybe the bull market getting old and falling, but I, I kind of still think it's another, it's another example of capacity that is still left in this bull. And, you know, it's kind of like the wealthy baby boomer generation is going to transfer all this wealth to these younger folks coming behind us at some point. Well, some point, all the wealth that's been generated by the mag sevens and the very concentrated bull that we've had probably is going to come out. And if it does, boy, there's a lot of relatively cheap sectors. It could go into tack and it could, it could roll. It could really make a huge difference in the prices of big part chunks of this market marketplace.
Speaker 2The other chart, this kind of drives that point home a little bit more from a, it's a different data set, but you're taking the Fama French sector data set, and you're looking at the percentage of those sectors that have, um, outperformed the S and P and I, you know, you're kind of showing like a historical low here. It's pumped up a little bit, but I think your point is, you know, I like how you kind of mark that these, these different points in history where those ended up being like great buying points. And this looks like almost like, uh, historical, historical, maybe even lower than 1953, perhaps it is.
Speaker 1It is. I just looked at there's 48 French sector separate sectors. And I compared over a 12 month basis, what percentage of them outpaced the S and P 500. Okay. Um, and then I took a five-year moving average. I took a five-year moving average. I took a five-year moving average of that annual percent outperformance. And that's what this chart is. And, you know, the last five years, at least in 2022, uh, near, near the start of this bull, um, we had the lowest five-year percent of, of, uh, outperformance of those sectors ever going back all the way, I think to whatever it is, 1932, whatever it is, the French database goes back to 1926. And again, it's just another idea of how we're going to be able to, you know, we're going to be able to, you know, how much has been left on the shelf in this bull. That's what, that's what decides me. And I think it's true in the economy. Um, you know, we've left a lot, I think on the shelf because we've approached this most of the time with fear of inflation over the last five years. And that's, that's held the economy back from what it would be. And it's held, I think a lot of parts of the stock market back. If we finally decide to juice the economy for a good, I think a lot of these could come to light. And that's kind of what different evidence, like you said, different ways to see that in the day.
Speaker 2This last one was interesting, just in the sense that it, it does show from, you know, a relative risk adjusted return standpoint, how strong the tech sector has been in terms of delivering, you know, good, good risk adjusted returns, which, you know, might talk to like the quality of tech, versus, you know, maybe times in the past when you've had great runs in technology like the dot-com boom and then you know but there wasn't good quality within that
Speaker 1makeup i i think that's right i i just let it because i was kind of fascinated when i stumbled into this myself um you know the return of the the relative price of the s&p 500 you know was back relative tech stocks or back to where they were in 2000 for example really close right but if i look at the the the 15-year return of the tech sector on a relative basis not just its return but adjusted for its volatility its relative volatility or uh of it you get this this profile and you can see how much better the last 15 years has been for tech investors than was the dot-com it's night and day uh it's almost i think three times better in terms of their trailing risk-adjusted uh total return over the last 15 years compared to the 15 years reached in 2000 why is that the returns were fairly close but the volatility during the dot-com era was much higher in terms of the relative volatility of tech stock performance um the other period which mirrors today's more closely was when the period when ibm announced its first major computer back in the 60s and that was the 15 years it was actually in the early late 50s or 50s and then it was the 15 year leading up to 1968 and it had a similar top line return but it also had very low relative volatility so the history i put a chart in my piece the history of the relative volatility uh risk of tech stocks on a relative basis was very low up up until this dot-com era or exploded and then it's come back down it's been very low again and so um it truly is a very low volatility and it's a very low volatility and it's it is in 2024 it was an all-time record going back to 1926 i think uh of the performance per unit of risk for technology investors and so when we we often say oh this is ridiculous people have too much tech they they're way overweighted they're taking too much risk that might all be true well we'll find out but i'll tell you what it actually was one of the lowest risk high reward periods technology's ever had
Speaker 2you so this has been great jim i'm working through all these charts with you i think um you know on a monthly basis we'll try to do this draw out some insights what investors can sort of take from this and learn from maybe imparting a non-chart related question just because it's very topical right now and while we have you um we might as well ask what are your just general thoughts on you know trunks a sort of aggressive posture towards powell and the fed independence i mean we've asked this to a lot of the guests that have come to the podcast some people have completely just dismissed it because it's like trump just being trump and then but you know i'm i'm seeing more and more credible sources like the journal and other places sort of write more actively about this like it is being taken more seriously in the market and people sort of questioning like because i mean trump is getting everything he wants right now so it's like this is this is this a really risk on the table or is not so i just in general what are your sort of thoughts as we kind of uh wrap
Speaker 1this up first you know first thing i would say is that look i think the federal reserve and throughout its entire history has been a political animal it's not like it's been independent of political discourse or political pressures it's always been pressured by politics i don't think that's anything new in fact the people on the federal reserve board all have their own political makeup and their own and own biased views because of that it's no different than the court the only difference is the court has protection of multiple years fed officials know okay they want to come out of this and still be able to do something else and so they're even more affected by politics and political opinions and political force than the court is for sure and my point is i i i think it's not like this has never gone on before now it suddenly is i think that's not right at all i think they've always been under political pressure and they've always been under political pressure and they've always been under political pressure all the time um and so the second thing is i don't think they're wilted flowers either you know they got to where they got not because they're they're tepid and you know fall under any pressure right you know cow-tailed or whatever they got to where they got because they're they're confident in what they think and so forth um so i don't i don't think in those regards that it's that new i would say this about trump i think trump's mo essentially and is to throw a concussion grenade into the room let him blow up and then walk in to negotiate and i think he's used that successfully not just recently i think he's used it successfully his entire career in negotiating deals of the like and his idea you know you can agree or disagree is if i have a foe i'm going to put pressure on that foe i'm going to keep the pressure on because it works because it works it softens them up it it brings more pressure makes other forces put on them to change change their what they're doing and the like to get them to come around to what i'd like to see him do um that's that's his approach that's that approach been has been used forever it might be used even more overtly today than it's ever i'm sure in the past it was used very behind closed doors with coffees at the white house at the same kind of pressure and by whispering to friends that could bring pressure and all those things now it's really just out there but i i i think that that is you know i think he thinks it works and that's why he's doing it all that said is he going to fire the chairman i think it's very unlikely that that's very unlikely if number one it's so close to where he's a lame duck and he's going to be gone anyway um but but number two is this pressure working does it make a difference yeah because every day he gets a headline that he's criticizing the fed what happens the media lights up brings pressure to say well is the fed big or is the being too sluggish and slow are they you know raise the questions bring it ask the fed about it it keeps pressure on the system so i do think there's something real about the pressure i don't know if it's that much different than it's ever been it's maybe implemented in a slightly more overt different manner and so i don't think the fed is going to dysfunction suddenly because of outside pressure i guess that's where
Speaker 4i put it all right jim thank you you bet you bet thanks you guys so much for tuning into this episode if you found this discussion interesting and valuable please subscribe on youtube or your favorite podcast platform or leave a review or a comment we
Speaker 3appreciate it no information on this podcast should be construed as investment advice securities discussed in the podcast may be holdings of the participants or their clients
PodcastTranscript AI