Speaker 1this chart shows is the ratio of Walmart stock, relative price of Walmart stock, to the S&P Global Luxury Retailer Index. And you can see when you look back historically, the big surge there was back in the 08, 09 crisis, the financial crisis. And Walmart's, this relative ratio was an early indication of that coming. And then it also was kind of an early indication that things were improving before they were really notably improved. I'm kind of amazed a little bit of sort of the limited impact that such a big surge in oil has had. And in the sense that, you know, I look at the head year yield today on the Treasury bond, I think it's at 434 or something like that. And it was 417 at year end. So, I mean, we're talking, what, 10 to 15 basis points. We could perhaps have a bull within a bull here. Where one bull market is ending, but another one's starting at the same time.
Speaker 2Jim, how are you? Welcome back. Hey, thanks for having me, guys. We like to sit down with you once every few months and discuss a lot of different things. Today, I think the focus is going to be on really three different areas. We're going to look at some of the indicators that you're paying attention to, things like the Walmart versus the luxury retail signal indicator, and try to suss out what that actually means. For the underlying economy and where we are. We'll talk about the impact of what's going on in oil and just the overall policy uncertainty, given what's going on in Iran with this war. And then lastly, we'll kind of talk about where we are in the stage of the market and in this bull and how that kind of aligns with, you know, investor sediment in these types of levels. So a lot of good stuff to discuss. As always, you're writing about this, you know, every day or every other day on your sub stack, which is Paulson perspectives dot sub stack dot com. People can go over there, sign up and then get updated as new research comes out from Jim. So. So great. So, Jim, we wanted to start where we always start with you. Just, you know, general thoughts on where we are with the economy today. And has anything changed in your mind over the past month or so? You don't make tons of pivots on a monthly basis. You don't make tons of pivots on a week to week monthly basis, but always like to get a sense of where you're, you know, where you think we're at.
Speaker 1Yeah. I don't know about others, but I'm a little tired of all the war and the daily anything can happen today at a situation we're in. It sort of really takes you away from things that you think you might have kind of a handle on and where that might be headed. And it puts it into the random box. You know, that anything can kind of come up and we're kind of stuck in that mode. I guess, I guess a few comments just on that though. If anything, at this point, I'm kind of amazed a little bit of sort of the limited impact that such a big surge in oil has had. And in the sense that, you know, I look at the peg year yield today on the treasury bond, I think it's at 434 or something like that. And it was 475. It was 417 at year end. So, I mean, we're talking, what, 10 to 15 basis points rise in the 10 year yield through all this stuff from where it was when we started the year. That's hardly even, that's just a good day trade. Just very little response to that. You know, the inflation data, we don't know, because they'll be coming here with a lag. But if you look at the true inflation numbers, they're actually have gone down. That's a daily estimate of the CPI and that's actually gone down over this period of time or, you know, it's come up a little bit since the war, but it came up from almost zero to 1% or something. That's, you know, very low. If I look at overall commodity prices, they're up a lot because of oil. But if I look at just industrial commodity prices, the S&P Goldman Sachs Industrial Commodity Price Index, it's basically unchanged since year end. So, it's really been a real intense situation on one variable, if you will. And it's not like, in that sense, it's not like the pandemic where we had a supply shortage of everything. It's sort of this one commodity that's gone berserk. Now, the longer it's there, it's going to affect more and more things. That's no doubt. But I still think at this point, if we do bring some peace to this situation, I think we get back quite quickly to kind of where we were, probably with a slower tilt to growth overall, because I do think the growth has been slowing before us in the economy. And what this has done is a couple of things. It's made growth prospects worse directly. That is like the oil tax, you know, has affected spending patterns of consumers and businesses on a negative fashion. But maybe more importantly, it's paused all the easing that was going to happen. And it's taken that off the board. And meanwhile, like things like mortgage rates have backed up a little bit and, you know, kind of negative fallout. So I do think we probably have a bigger likelihood of even slower economic growth rather than the other way around overall. But I also think we still avoid a recession at this point. You know, I know that the strait has to open up for the oil to flow again on a regular basis. We'll see. That's still in doubt. Well, I've even seen reports, whether that was just warning, realistic, that, you know, the highest percentage of ships are getting through there. At any time since prior to the war beginning. So I do think there's even some good news going there. I still think that President Trump for all his robust talk, I think he's looking for an exit ramp here. And he's going to find one one way or another pretty soon. So I do think we're going to wind this down. And I think we're going to be left with an economy without a protracted inflation problem. Yeah, we'll have a month or two of elevation. Elevated numbers, but I think it's not going to be protracted. And I think we're going to be left with even weaker prospects for growth that we have before, which I think is going to eventually bring greater ease to the situation, which is probably what we need for the economy and also for the stock.
Speaker 2Yeah. And I guess in your mind, if, if we started to see the slower growth, but oil stays high and that sort of starts to work through its the inflation numbers, there's, there's no chance that the fed would take growth and easing over. Like I'm trying to, I'm trying to get at like, you know, them balancing this to your point, this inflation that's here, but that might be not long lasting because of the price, if this ends and the price of oil comes down and, and how they kind of balance that with sort of like trying to head off a slowdown in growth. Well, I think, I think that's
Speaker 1a great point, Justin. I mean, what do you do if it's truly stagflation? You know, that's kind of, you know, which way do you respond to that? And to me, I guess a couple of comments I make, I think that whatever this is, it's not stagflation like the 1970s. And that's really the only place that stagflation has ever come up in U.S. history, so to speak. That's where it came from the whole term. And what I mean by that is what we had is unrelenting aggregate excess demand in excess of aggregate supply. It wasn't due to any one thing. Oil certainly didn't help the situation and other commodity prices. But what we really had was we had two to three percent labor force growth every year that was way in excess of boosting aggregate demand, in excess of what we are, what we had record low productivity numbers to, ability to keep up with that. That is a protracted problem of inflation issue that we had. And then we were, you know, coming into that with massive policy juice and everything else. I don't think we got anything like that at all. We have a restriction in one commodity and it's probably an end date on the calendar. And when you take that away, we still got all the disinflationary, almost deflationary sort of tendencies, not only in the world, but certainly in the United States. You know, weak and aging demographic growth, you know, the lack of any debt usage, no real animal spirit type behaviors. We got aggregate demand, if anything, is below aggregate supply in a highly productive, supposedly world, you know. So I don't think, one thing I'd say is this is, I don't think this is, you can make a very good argument that we have a real stagflationary problem beyond a temporary event overall. Secondly, even if this does, you know, last with elevated oil prices for a period, I'll tell you what, we don't generally start the situation here with zero job growth already in the last year. I mean, we generally, this whole thing starts with like 2% job growth. Then we have to debate whether we're going to respond to jobs or inflation. I think the debate's going to get solved pretty darn quick if jobs go negative. In my view, I think the Fed's going to say, well, we got high oil prices, but doggone it, we have jobs being lost every month. We can't, we can't continue like this. So I do think there's a bias in this debate where they're going to have to ease, unless this thing shows some sense of, as I said, a more protracted stagflation issue, which I just don't see right now on the cards.
Speaker 2So one of the charts that was getting some play and socialized on the social channels, including X, was your Walmart recession signal. So I'll let you kind of talk to what this chart is showing us here.
Speaker 1Yeah, I published this several years ago for the first time, and it doesn't go back super far, just for the lack of good data that I've learned. But I kind of, the idea being, this is true, you know, recessions, when they come upon, sort of show up first in the lower income part of the distribution. Now, that part of the income distribution is always less well off, if you will, and they're always closer to recession than anybody else. And so naturally, if things start to get a little worse, they're going to feel that quicker than the rest of the economy. And I think, you know, how do you pick that up? Well, one good way. Or one way of getting some indication of that is look at a ratio of a low-income retailer to a high-income retailer. Sort of the differential of what's going on in a retailer like Walmart that services mainly low- to middle-income consumers is not, that's the only ones, but a lot of what they do. Compared to a retailer that serves mainly high-end retailers. And if that differential starts to change, then it's sort of an early. It's a peak that things are changing in the economy on the ground. So what this chart shows is the ratio of Walmart stock, relative price of Walmart stock, to the S&P Global Luxury Retailer Index. And you can see when you look back historically, the big surge there was back in the '08, '09 crisis, the financial crisis. And then it also was kind of an early indication that things were improving. Before they were really notably improved. And actually, I think it might be the next chart, if you lay it over like credit spreads here, the red line here is indeed that same relative price of Walmart stock to the Global Luxury Retailer. But the blue line is basically the credit spreads in the U.S. economy. And you can see they haven't done well here of late, but up until just this cycle, you can see that basically they, what? Walmart's relative price traced out was credit spreads to the United States. We had, it was an early read on, on, in some sense, on credit stress in the economy. And it did a pretty good job of that. Now, that has not worked here in the last few years, which often happens with indicators. You find them, they start working really well, and then they blow up as far as being able to predict credit spreads. And I think the last time I published this was before, right before this, this latest surge in Walmart stock. Well, during it and not picking up, credit spreads haven't responded at all. But there's still some other things that it does a pretty good job at. And maybe what's happening today, if you look at the next chart, is it's not suggesting so much that we've got a credit spread problem in this economy, public debt problem, if you will, the private sector debt problem, or overall. But we may have a private credit problem, which we've kind of heard about a little bit. And here are the Walmart indicators. The indicator is inverted. It's in the red. And it's just on an inverted scale. So you can see it's been heading straight south. It's now about as bad as it was in the suggestion of the OA crisis. But what I've laid on top of there is the Bank of America's private credit proxy equity basket. And you can see when private credit, when that equity basket heads south, it suggests some stress in the private credit industry. And maybe that's what Walmart's picking up this time. Is this not a. a public credit problem, but a private credit problem that's going on? And if that's the case, it's a little discouraging here because it still says there could be more of that left in terms of private credit problems emerging. But what I probably published this for this last month was the next two charts. And the next chart lays the Walmart indicator, if you will. And I took this back to 1990. It lays that Walmart. It's a relatively low indicator relative price indicator, which is the red line on inverted scale. So when it's going down, Walmart stock is outperforming. And I've laid that on top of annual real GDP growth in the blue line. And again, not a perfect indicator by any stretch of the imagination. But typically, though, when the Walmart indicator goes south, real GDP at a minimum tends to slow its growth rate. And we've got an indication right now of recession out of this Walmart indicator. I personally don't think we're going to reach that. But I do think it's another thing to put on the pile of we probably got a slower economy coming. And there's pressure. And this is the voice of the lower and middle income part of the economy that says it ain't good out here. We got some issues. We're feeling this a little bit. And, you know, in the past, when that has been spoken, it generally has caught up with real GDP. I also have a chart that just lays it over the unemployment rate. And again, in this case now, the Walmart is the red, and it's going up. Well, non-reverted scale. And typically, when Walmart stock outperforms, guess what? The unemployment rate starts to go up. And that's certainly been what's going on since this has come up here. So it's not the be-all indicator, but it's one more thing. And the reason I bring it up is because a lot of people don't often look at it. There's not many people I know, or if anyone, that look at this. It's sort of an indication, another indication, like an inverted yield curve or other things that people do look at. Here's one telling a story of a slowdown. And then the last chart here is just overlaying that Walmart relative indicator on an inverted scale again against the 10-year treasury yield. And obviously, there's not a perfect relationship here. But if you look closely here, every time Walmart relative price has moved up or down by any significant amount, even if a small amount, it generally has been mirrored by. The 10-year bond yield. And in this case, we've got a heck of a downward collapse in the Walmart indicator. We've not yet had any downward movement in bond yields. But that last leg of this Walmart relative collapsing there, most of that has occurred just since the war. So this could suggest that bond yields haven't adjusted to that yet because oil won't let them adjust yet. But if the amounts of peace or truce or whatever, oil comes down, maybe. Bond yields have got some catching up to it.
Speaker 3How do you think, going back to the first chart, how do you think about using something like this in context? Like, people might look at that first chart and say, oh, this is spiking just like 2008. We've got a huge catastrophe on our hands. But I know from you saying at the beginning, you probably don't even think we're going to have a recession here. Like, how do you think about using something like this in context?
Speaker 1Yeah. Well, one thing that's very different between 08 and today, and this is where I use a lot of indicators, Jack. I always have and I always will because I don't think it's good to be basing it. I don't think it's good to be basing a decision on any single indicator, and that's because things change over time. And this is one great example of that. 08, it did a good job of causing the collapse in the housing market and one of the worst crises we had in post-war history. But that was a time when we still had debt-to-income ratios throughout the private sector of the economy going straight north leading up to this. Debt-to-equity in the household sector, debt service burdens were exploding. Debt-to-equity was rising. Similarly, of course, housing and mortgage debt was through the roof, as well as credit card and credit creation. All of that was very much extended. But since the 08, 09 crisis, we haven't had a repeat of any of that. In fact, it's gone the other direction. You look at debt-to-income ratios in the household sector or debt burdens right now, they're close to lowest levels they've been at in decades. And so are equity, private company debt-to-equity ratios. And so it's a completely different private balance sheet situation today than it was in 19, excuse me, in 2007 or 8 leading up to that crisis. And I think that probably results in a very different situation. Does that mean there's any stress on the system today? I think there is. That's why this is showing it. And the balance sheets of lower income groups could be feeling that much more than the aggregate numbers suggest. So I do think that there still could be fallout and carnage from today's indication. But for a lot of reasons, I don't think we're going to have a recession. There's too much liquidity. There's too much healthy balance sheets in both the household and corporate sectors. And there's too much pessimism and pre-preparation, where none of which existed prior to 08, 09, for example. Almost the opposite situation occurred. So that's why I think there's a difference today.
Speaker 3The other one I wanted to ask you about is the private credit one, because we've been talking a lot on the podcast about private credit. We've had people on all ends of the spectrum. We've had people who think private credit is a ticking time bomb that's going to bring down the whole economy when it implodes. And we've had people who think it's not a big deal at all. That private credit is actually pretty strong and it's fine. But even if it was a big deal, like it wouldn't be a big deal to the economy overall, because even if we start to see much more bankruptcies and private credit, it doesn't have that much of an impact on the overall economy. I'm just wondering, do you have any thoughts at all in terms of like putting private credit in context?
Speaker 1Yeah. I'm not a huge private credit expert, but. like a lot of things, I've become a mini expert on international geopolitical conflicts and everything else we got. So put on my private credit hat for a minute. What I find, I guess, the most interesting about private credit versus public credit, what's going on. To me, the ladder goes through our banking system and our financial system. They're kind of all tied together with ropes and strings and knots. And the ladder is sort of separate from it. It doesn't mean it can't touch it. It will touch it. Because if there's enough fallout among those that are invested there, they participate in the banking system and indirectly will have some fallout. But it won't be a direct hit, if you will, like it is on the public sector side. So I think the answer to your question is both are right, Jack. In other words, I think it is a different animal. And- It's a much less frightening animal for the economy, I think, than is a public listed credit crisis, one that's more directly tied into the banking industry. But it doesn't mean it's not anything, I don't think. I think it's going to have fallout. If enough investors lose enough monies, that's going to have some fallout, even if not so much directly into the economy, even more into the markets. Because if we- I know, I said, on a couple of boards, but if we lose money in our private credit holdings, we'll make adjustments in our equity holdings. And probably they'll get more conservative, whether that goes to cash or whether it goes to treasure or whether it just goes to more conservative sectors. So that will influence the public markets, for example. And if it's bad enough, it's going to fall in to spending patterns in the economy and the like. And if nothing else, the headlines alone will cause a more defensive and- you know, conservative behavior by our private sector players. And probably- probably brings more stimulus from our policy officials. So I think it's somewhere in between. But it's not- I don't think it's nothing to worry about. I think it is-
Speaker 3So after a little bit of negativity with private credit and everything, we're going to move on to some positivity. You wrote a great article, Bear or Refreshed Bull. And we're going to go through a series of charts here that I think might give people some confidence that maybe we're not in the pit for long bear market here. So can you- can you talk to this first one?
Speaker 1Yeah. I just think- I think the overall thing we're dealing with today, you know, you think about our mindsets and whatnot, you know, we've got a pullback. We've had correction in some of our markets like the small caps, the NASDAQ, you know, full on 10% plus correction. We got not somewhat close in the S&P. And whenever there's a pullback for a period of time, and now we're still in the situation where we're unsure the catalyst for how long it will go on, we get this feeling, well, you know, we're in a bull market, it's three and a half years, it's going to be four years by October, it's getting a little long in the tooth, you know, is- could this be it for a bear? And I think not for a couple of reasons, but one of them is I'm kind of amazed when we sit here three and a half years into this bull and the- the feeling by a lot of- a lot of people that, oh boy, you know, bear risk is pretty high. You know, valuations are- are very high. Earnings have been very good. They- are they going to- can they continue? Are they going to keep up? Are they going to continue to do that? Those kinds of things that really scare people. I'm seeing a lot of normal sort of indications that look more like the start of a new bull market than they do the start of a bear market. And just to run through this quickly, you know, one of them is just consumer confidence on Main Street. The dates here are listed on this consumer confidence index going back to 1960. And where we are today, and the dates I also have listed there, one reason those mark the beginning of a new bull market. Most of them mark what- you'd see confidence on Main Street like this when you're pretty darn close to being done with a bear and you're going to start a bull. We don't typically have confidence at this low of a level when we've been in a bull market, but we- we do. And I- and confidence historically, if I go back to 1960 and I look at the impact statistically of what rises in confidence in the bull market, I think that's going to be a lot more confidence. I think that's going to be a lot more confidence. I think that's going to be a lot more confidence due for the S&P 500. The numbers are just outstanding. In other words, if you look at every month when confidence went up versus every month when confidence went down, how did the S&P do? The- the difference in total return is something like almost 20% during annualized when months go up versus something like 8% when months go down. And my point about that is, we've suffered from the 8% when confidence goes down most times. If we get into a period where we could raise confidence for a period of time, that could be a powerful, uh, positive force.
Speaker 3Yeah, we- we've talked about it in previous episodes. It seems like low and increasing is actually a good place for confidence in terms of like a bull market, right?
Speaker 1That's a good point. It's- it's already- maybe you could argue it's already past the low, right? And- and, uh, it- it- low and increasing with the potential to increase. And I think that's where we're at. Um, so you could think about, can earnings go up? You know, can multiples go up higher? Well, one thing that could go up is confidence. And we've been playing, I would argue, we've played this entire bull without any animal spirits. And maybe we could get some animal spirits playing before it's over. And if we do, that's- that's a real positive bullish force. This is just the price of oil going back to 1970. And all I want to point out here is not every one of them, but many spikes in oil. Once they've spiked, it's time to buy. The stock work. And I just labeled again, uh, some pretty big spikes in oil prices, which again, were pretty close to the end. Uh, or a good time to buy the market. The last one, by the way, was the middle of 2022, um, when turned out that was a great time to buy to start this bull market, uh, within just maybe two months later. And so while- while oil is spiking, it's not good for the markets, no doubt about it. But once it's spiked, that's typically at that level then is often a good- good- signals a good time to buy stocks. Like another bull is starting. This one people are aware of, the VIX just going back. And, you know, if you- if you label the top of these VIXes, uh, those are all great buy times to buy stock. Now, what you don't know, you know, right now is 30, 35, the top of the VIX here, or is it going to go to 50 or 60 or 70? Who knows? But what I would say is you're probably, uh, even if it does go somewhat higher, you're probably not too far from the lows already, because you've already got the VIX elevated. It's not like you're down there at 15 and you've got to suffer through the market adjustment that happens when you go from 15 to a 30 VIX. You're already at a 30. People are well aware we're- we got a problem, Houston, uh, you know, and people have adjusted for that problem already to some extent. I think that's what the VIX is telling you. An elevated VIX tells you a lot of people have been already adjusting for worse times to come. That's often a sign of good times to come. This one looks at the S&P 500 just to the Treasury yield curve. And the reason I bring this up, the yield curve has been really weird in this cycle. It kind of moving differently from what it has in the past. The yield curve is in red. And the only thing I want to point out, and you can look at this for yourself, every time that yield curve has had a major bottom and then turns up, look down to the blue chart, the stock market. It turns up too. That's just, that's just what happens. And the worst times is when, you know, the yield curve is super positive and then it starts to invert or goes, uh, starts to, uh, flatten, if you will. We're at the other end of that. We, we not only bottomed out, uh, late last year, but we've now turned up. And there seems to me, there's more likelihood of this thing going higher rather than turning around and going lower. Now you could make the argument that if, if we decide that oil is bleeding out into other sectors and inflation is taking hold of the economy, this thing is going to revert again, come back down. But if, if you think eventually we wind down the inflationary force, even if we have a few months of that left, then I think we're well into yield curve steepening. And that's typically been a great time to buy stocks. This is just the CNN, uh, fear and greed index. It's, you know, extreme fear. Uh, uh, you can look at other ones. The AII bull bear got down to minus below minus 20 on a four week average at one of the, one of the lower end levels. That is a lot of the sentiment indicators were pretty high, but a lot of them got pretty loaded since we've been a month into this, uh, hostility. And, uh, so investment sentiment readings also are turning more bullish because do you have any thoughts on
Speaker 3like, how do you think about sentiment in your process? Like if you're looking at all the obviously real economic data, like how does sentiment play a role in that in terms of how you think about it?
Speaker 1Yeah, I, you know, I started to look at that, but you know, you can, a lot of these sentiment indicators, you can almost replicate them by other data that's out there or market action. And so they, they sort of reflect, they sort of reflect kind of what market action's happening. What, what data, if you got really bad data and you got scary headlines and you got a pummeling market, you don't really have to look up the CNN fear greed. You can almost just watch CNN itself, right?
Speaker 3Without even looking at the fear and greed indexing, you know,
Speaker 1pretty much you almost, you almost get Jack. And so sentiment indicators really show up in a lot of things that you look at. And if you think about it, I, I could be tempted to say market itself is it's not all about sentiment, but it's a lot about. It's a lot about seven. There's an underlying core fundamental. running through them that you're trading around that fundamental the fundamental matters no doubt about that but where you trade around that fundamental is probably almost all about sin emotion where the cultural mindset is and so it's again just one more indicator to throw in the pile but you can kind of pick that a lot of this up without even looking uh to the actual survey sentiment numbers because it's it's in the other and it's in a lot of the rest of the data i'm just saying as a complete thing though as you go through this list it's amazing to me how much we're talking about potential bear market when there's so many indicators that sort of argue for the opposite side of that train one
Speaker 2of the things i was going to ask you on this one jim is do you think you know so many investors are allocated to these large cap you know mega cap growth stocks that kind of have been diverging a lot over the last you know six to twelve months and i think this year you know you have some tough performance in the group and i'm just wondering like but you have like some stocks like value stocks and other areas of the market the energy's having a great year obviously utilities are up i mean those aren't those aren't big air parts of the market but you know they're um i'm just wondering like i wonder how much of that is influenced by maybe this underperformance in a select group of stocks that almost everyone has exposure
Speaker 1to there could be some of that going on um i i think i think there's uh truth in that i think there's some truth in that as far as the negativism about the about the stock market yeah and i've written quite a bit about this change in leadership that we've had from new era stocks basically as you're talking about justin to what i call broad market stocks so they've include if you look at the in fact i got a broad index which includes the russell value small cap uh russell 2000 small caps the cyclical sectors the s&p the equal weighted s&p index and if you want to you can throw in the international stocks these are all things that perpetually had been underperforming really for the last several years while new era stocks were outperforming and now we kind of have the opposite situation going on where a lot of the new era continues to struggle in old era uh is outperforming and you're right everyone's nervous about that new era and underperforming because everyone's been in it and if it if you didn't make a conscious decision you've been in it by a unconscious decision whatever you bought you didn't sell it you didn't sell it you didn't sell it you didn't sell it it went up so much it increased your weighting and so everyone's probably overweighted in that book and the fact that it's coming apart to some degree is right i think because of its size i don't disagree disagree with that i personally think though it's pretty encouraging and i've written a lot about this in the last few months that we now have the the uh new era stocks whether you look at s&p technology 500 technology relative price or you look at the mag 7 relative a fair amount and they're now market performers over the last year or more basically and yet the s&p 500 is within five percent of an all-time high and the reason for that is these broad market plays have taken up the slack there's i wrote about passing the baton a couple months ago there's been a successful baton pass like an attract me from new era stock leadership to broad market stock leadership and um i think so far that's been more than a year and a half ago and i think being able to offset kind of the decline and revaluation of uh of new era stocks whether that continues is going to be a debate and it's certainly not solved yet uh but i think the early reads on that are are there and one reason to your point justin one reason you see all these bullish indicators or at least a number of them um is because um we got basically a corrective phase going on in new era stocks and we're not going to be able to offset that and we're not going to be able to offset that in the new era but all of the broad market plays have been basically they never really came out of recession since 2022 they really haven't done much and so they show up all this stuff shows up as being like starting a new bull and i could i could argue that what these indicators at the end of the day say is we are starting a new bull it's just we're starting a new bull where it hasn't happened yet in these broader market plays while bringing down what had had been leaded and normally the division between those two has been so extreme in this bull market uh that we can maybe do this whereas in the past it was never that extreme so when bolt when the bull market got old everything kind of got long in the tooth and too extreme overextended that's not the case today we've got better valuations in broads we've got a lot of under ownership of broad market parts uh we've they've got better profit potential because they haven't done much in recent years they respond good to policy stimulus which we haven't had a lot of yet but might be coming and so we could perhaps have a bowl within a bowl here where one bull market is ending but another one's starting at the same time that's kind of how i think i'm looking at this next one's interesting
Speaker 3you're looking at corporate profits uh relative trend line and this is surprising me we actually are below trend line right
Speaker 1now that's right now if i overlay and i have done this if i overlay s p earnings on this one and look at their trend line they they historically move up and down with broad corporate profits over time until 2022. since 2022 s p profits are now about 20 above trend line corporate profits overall are about 10 below and that divergence has never been like that in the post-war era that's kind of to justin's point how extreme this dichotomy has been between new era and the rest of the economy and it shows up here my point about this is here we are three and a half years into a bull market and we still got corporate profits across the entire u.s economy that look like they've been in recession the whole time and if i was looking at this chart and knew nothing else i'd say well geez if we brought a little policy stimulus to the party here we got a lot of capacity and potential to expand profitability for a number of years in all these parts of the economy that haven't had any profit growth for several years and that that's a real oddity um because the profit and economic performance has been so concentrated in a small number of information sector stocks um and companies it's left the rest of it behind that's a bad thing but the good thing now is we still have the potential to awaken it and bring it to life and i think that's what best chart can i tell you again if i put dates on this chart a lot of these lows are really good times to buy the stock market when profits were bad for a while yeah this next one
Speaker 3is interesting because uh this is like i wouldn't have seen this chart if i had put dates on this i guess this is a function of the political environment right i mean because we're seeing the economic policy uncertainty index we're seeing the highest level or we just saw the highest level we ever saw and
Speaker 1we're still pretty high yep um well you know the thing that president trump has brought is he's bought brought a lot of uh uncertainty and that constant sort of sense of of uh of uh randomness and shock and awe and you know all the stuff that he's been saying is that we don't like uncertainty we all hate it we all want to stay away from it we crave surety but the reality is as far as stock returns are concerned it's just the opposite the best returns in the stock market looking forward are from the the the times when there is great uncertainty and if you have if you're into a period of of stability surety and forecast ability and you're feeling calm and and good about everything man you probably should pick up your phone call your broker and sell because those are awful times the low points on this chart will be times when you should call your broker and sell the high points are been great buys and i got the dates on there if you bought on those points in time you would have made a lot of money historically so uh i i think i i wrote about this maybe last year but i kind of careful for what you wish for you know i get tired of all the shock and all from our president and all the i mentioned earlier in this thing i'm getting tired of all you know i'd like a little surety of things i know i got maybe can have a handle on but the reality is these are often good times to buy and to be in the market when there's that much uncertainty because i think it it's kind of suggest that people have already priced things you know for an expectation of great uncertainty and terrible things that that could occur rather than the other way around uh you know you could say this is just another measure of vix and it is in some measure but this isn't stock market volatility this chart reflects economic policy uncertainty so monetary fiscal trade uh immigration all the types of policies uh and their volatility is reflecting these charts and we certainly got that in space today um again reflecting a good time to buy for a start of a
Speaker 2new bull well what's interesting with this too jim is if you look like the low here was like you know end of 07 obviously before the financial crisis but if you were to divide this like right at that point you know the economic uncertainty is has been higher post-financial crisis than it was pre-financial crisis going back to 85 but we've had less recessions and business cycle you know, like, like variability in that, in, you know, in the last 15 years or 16 years or whatever it is, 17 years than we have had from let's say 85 to 2005 ish. So it's interesting that, you know, it's, that's what, that's what the economic uncertainty data shows, but yet the variability in the business cycle, I would, I would argue has actually been probably less.
Speaker 1I think it's a great point, Justin, you're dead on. Um, and the point that these aren't random connect, these are connected. The two, the two things you brought up are definitely connected. When there is certainty, when you get into these periods of stability, you can even think historic, I think 1960s, you know, we thought we had solved the economic cycle. That was the mentality of the day, uh, that we had solved the economic cycle and all we need to do is tweak it now. And then of course the 1970s came. Um, but what, what promotes a risk in the economy when you think about it is when people are calm, overly confident and sure about the future, because then, and they've been rewarded for doing the same thing too long because then we do a little more of it, a little more of it, a little more of it. And we, we get so, we're so confident because we've been so successful and we're all out over our skis without even knowing it. And boom, you change a little something and suddenly no one's prepared for, and you have a disaster. So it's difficult for, this is another reason why the economy has a hard time recessing when everyone is fully hungry. They're down and waiting for the terrible thing that's going to come. It's hard to get a terrible thing if everyone's fully prepared for it. And, and so you're right. There's definitely a connection here, but what, what makes it a good bowl entry point is when everyone's hunkered down and, and, and under risk, if you will, and, and over safety eye, you know, it's just, that's the kind of world you want to invest in rather than the other way around. And so they're definitely connected. I think if we get back to a period of time of having a period of long certainty and success, that's when the volatility in the economy, the risk of that gets higher.
Speaker 3So this next one is a money market assets to income, and that's also very high right now.
Speaker 1Yeah. I just think the, the degree of liquidity throughout the economy, this shows up this in money funds, but it shows up if I look at the cash holdings of the household sector and the cash holdings, the corporate sector is a percent of GDP. I look at M2 money to GDP, the M2 money all those are close to. Post-war highs today. And that's just another reflection of what we kind of been talking about when people are scared and people are nervous. What do we do? We, we, we get the cash. So, you know, we don't want to have it all hanging out and things that we think might go down. And, but if they don't go down, there's a lot of people that are under allocated risk right now is reflected in their over allocated safety by, by these cash charts. And, and that's a lot of power. Power. And that's a lot of powerful flows that could come towards risk assets. If somebody on television just says, oh, I guess it's turned out better than we thought. Oh, if it is, I, I need a little more of it. And I've got some free cash to do just that. That's, that's again, a chart that looks a lot like the start of a new bowl or close to one rather than.
Speaker 3And I guess this next year, another thing we do when we're panicked as we start to buy some puts.
Speaker 1Yeah, that's exactly right. And that's all this is showing that we've got a lot more puts in the calls right now. And those are. Those low points are often good buy, buy points into the marketplace. And the flip side of that, if everyone's got calls on, you probably want to stay away. But it's still, it's not like any one of these charts. A lot of people know about these charts and all that. It's just the number of them that are out there today screaming more like a bull market is coming than a bear in a time when we talk more about a bear potentially coming than a bull. Yeah. And it's just sort of. It strikes me is, I think it's a little odd, but it's also very.
Speaker 3So this next one's interesting too. It's gold relative to total commodities, which I guess would also be some sort of a measure of fear, right?
Speaker 1It is. And I put that in there just because gold's been so interesting and a lot of people have been in it and whatnot. I mean, one thing, this is gold relative to overall commodity prices. So it's kind of, it's a relative price, not the exact price of gold, but relative to other commodity prices. And it's had a pretty good indication of when gold cycles end. And it has had a pretty good rollover here. relative to the overall S&P Goldman Sachs Commodity Price Index, it's come off its high here by the biggest amount any time since this bull cycle began for gold. And I'll tell you what, I know in this cycle, gold and stocks have gone up together in the last few years. That's a complete oddity. Normally, if gold's doing well, stocks are not doing well. And if stocks do well, gold is not doing well. And typically, as it shows, once gold starts to turn from a bull to a bear, those green dates is a good time usually to buy some stocks. Because gold, as Jack says, is generally the commodity you buy, like cash, that helps you sleep at night when you think terrible things are going to happen. And when that starts to fade away, I think people move back to risk assets. This chart just overlays that total consumer credit growth on the entire S&P 500. And I think that's a good time to buy some stocks. And I think that's a good S&P 500. And the red is consumer credit growth, annual growth. The only thing I want to point out here is normally when you go through recessions or whatnot or bear markets, the consumer credit growth declines a fair amount. And that's exactly what we've had here. Even though we've been in a bull market, we got consumer credit growth really slowing. And once consumer credit growth collapses, if you look at this chart, after the collapses of consumer credit, look down to the stock market chart, it's an awful good time to buy. Once people finally liquidate their credit, decide they better clean themselves up, and they do, then it's a good time to buy stocks. And that's where we are today as well.
Speaker 3This next one's really interesting because this is data we haven't had before. This is the polymarket data in terms of probability of recession by the end of 2025 and by the end of 2026. So it's just interesting. This is like something new we have in our toolkit here in terms of this polymarket data. So how are you thinking about that?
Speaker 1Yeah, I mean, in some sense, to me, I look at it as another sentiment indicator. You know, a lot of these are, but they are new. And the top chart is kind of what people felt about the prop bill of recession in 2025. And it's no coincidence that this thing, when this thing spiked up to, I believe, 60% to 70% or something, was in April of 2025, right when President Trump had his white board out on the White House lawn telling us about tariffs. And we thought, you know, the world was coming apart and the market was down almost 20%. That was a great time to balk at when people were that scared that we were headed to a recession. Now, we're not as bad as that today, but we've had a very significant rise in the recession probability in the bottom chart there for this year yet in 2026. I think it's up to around 35, 40% or something like that. But in any regard, whenever you have a spike in recession like that of expectation, I'm always in to want to lean into risk rather than the other way around. This is just a daily economic sentiment read by the San Francisco Federal Reserve. It goes back to the 1980. And, you know, another read on the economy, how people feel about it. And it has really gone south just since the war started. This thing was above zero, almost plus 20.2. And now it's just collapsed here when the war started. So their idea about what's going to happen to the economy, it's gotten really sour. It could get worse. You can see there's worse readings on here, so it could get worse yet. But I believe, you know, when sentiment on the economy goes south, you've got to be thinking about where's the entry point to buy here. And that's what this is kind of suggesting. This is pretty archaic, but, you know, it's just looking at the number of people, the survey from the University of Michigan's regular Consumer Conference Survey, it just looks at the number of people expecting rates to go up, less those that expect them to go down. And right now, there's still more people thinking rates are going to fall that go up. And typically, in the past, you can see when that's the case, that's been a good time to buy stocks. And, you know, it's just another indicator. It's not necessarily the best indicator or the only indicator, but it's another indicator that's sort of bullish here amongst a lot of bearish attitude at the moment. And then finally, this one's kind of unique to today because what I got here is the other one. It's the one that I got here. It's the S&P 500, which is the blue. And the red line looks like an EKG report, maybe, but what it really is, is the annual three-year annual growth rate in the U.S. unemployment rate. We've had this thing rise by about 25% in the last three years. Now, first off, that's really never happened without being in a recession. Okay. And if I take that dark line backwards and look at all the other times when the U.S. unemployment rate rose by 25% over the previous three years, those are those red dots. And if I connect those red dots to the blue dots on the stock chart, boy, I'll tell you, it's got a darn good record. If unemployment's up 25% in three years, it pretty much matches the low point of the stock market historically. And that's where we are today. So now it's sort of different today because usually if you're up 25% in over a three-year period, you're going to be in a recession. You had a recession or in one, and we haven't over that three-year period. But nonetheless, when that's happened in the past, it's generally marked very close to a low in the stock market. Overall, you know, I don't know how many there are there. I made a lot because that was my point. I'm just amazed by the quantity of signals that are things you'd normally see at the start of a bull rather than the conversation that we're hearing about the end of them today. We'll see how it works out.
Speaker 2And what about these last few on productivity? I guess you're charting here like IT or technology versus.
Speaker 1Yeah. I just did a piece on productivity because it's really, you know, it's in a lot of people's minds. It's not just me thinking about this, but, you know, the issue, is there real productivity going on here with AI, robotics, quantum computing, you know, is it showing up? I don't know how much it's really showing up. It is in the tech sector. This goes with annual data back to 1988, I believe. And looks at just the information sector of the economy, which is most of the technology sector of the economy, and then the rest of the economy, which is in blue. So the total economy less the information sector is in blue. What I want to point out is that technology sector productivity has been growing at about a 5% annualized pace over that whole period of time. But productivity in the rest of the economy is just barely over 1%. Which sort of like. Well, at least since.com, there hasn't been a lot of transmission of the new innovations going on in the tech sector, leading to greater productivity in the rest of the economy. If you go down to the second chart, it kind of brings this home more clearly. This is the year in and year out productivity growth in the information sector alone, and in the rest of the economy. And two points I'll make. One is, you could see that the rest of the economy's productivity hasn't changed much for 25, 27 years. Nor has the technology sectors. But it's just been perpetually about five times higher over the period of time. Now, maybe there's a little bit showing up of late, just in the last year. In the technology sector, it's even gotten better. But the other thing I want to point out is the spikes in productivity growth that you see. The glasses, this one. You see there and. In 2002. You see there in 2009 and 10. You see there in 2020. And you see it today, where there's spikes in productivity growth, right? Every one of those occurred basically when there's recession. Or very weak growth, like there is today. Which then brings up the question, are we really experiencing productivity? Or are we only really just experiencing productivity because the economy slows down? When the economy slows, companies can really quickly improve productivity by just laying off staff. So if you have $10 of sales and you've got five employees, and economy starts to slow, you'll still have about $10 sales, but you can cut your staff to two employees for a while. Then suddenly your productivity, measured productivity, goes to the roof. That seems to be what happens during recessions. So if you go to the last chart, on this productivity, this looks at. Annual productivity growth is the blue, and the red line is non-farm payroll employment growth. Now, if you go up to basically 2000, when productivity growth went up, so did job creation. When productivity growth died, so did job creation. They tend to move together, regularly. This was particularly the case in the dot-com era of the 1990s, when productivity went from basically zero up to 4% over that decade. We regularly had 3% employment gains going on in the economy. So productivity gains were associated with greater staffs among companies. They not only had more productive labor force, they hired more of it. That's real productivity there. You not only can do it with your existing staff, but you can add staff and still maintain productivity. But look what's happened since 2000. Since 2000, what you've had is productivity has only gone up when employment growth has gone down, almost every time. And that's the case right now. In the last few years, job growth has gone from really strong to zero, and productivity growth went from negative up to two and a half to three. So that's the problem. We can't cut staff. We can't cut staff because we're already at zero growth. So the rubber's going to hit the road here real quick. And if we do opt to increase job creation, we have to cut staff, because we're already at zero growth. So if we cut staff, we're going to cut productivity. We're going to cut productivity. And if we cut staff, we're going to cut productivity. If we do opt to increase job creation, we may, in fact, lower productivity gains. I'm wondering how much productivity we're really having, particularly outside of the technology sector. And this is different than it was in the 1990s, and really any time prior to that. So I just think it's sort of an interesting, and I don't hear that being talked about out there, is a way to think about or look at what's going on with productivity.
Speaker 2What would you say, Jim, as we kind of wrap it up here, what are the most, is there anything that you're really going to be paying attention to over the next month or so? Or are there any indicators that you're kind of working on? We don't want to take anything away from subscribers, of course, but anything that is you're sort of paying a little bit more attention to at this point in the cycle?
Speaker 1Yeah, two things, I think, just for me at least. One is, it'd be very interesting to see what happens with economic growth here. Does it stay okay? Does it weaken further? Is it picking up? And some people think it's picking up. I don't subscribe to that. I may be wrong, but like the jobs numbers we got, you know, just recently, 177,000 gain. Everybody go, "Oh, good. We're good." Well, we revised down the previous months nearly as significantly. And if you take the loss in February and add it to the gain in March, the average job gain over the two months was 40,000 or something like that on average, which is about the same it's been for the last six, six months, which is virtually close to zero. And it dovetails with what ADP's been telling us as well. I suspect that we're weaker than we think, and we're still weakening, and it's probably gotten worse now with the backup and energy prices, with the pause and easing and the like. But I could be wrong. Maybe we are picking up. There's some reports, ISM numbers, not this morning's. The ISM this morning was weak for the service sector, but some ISM numbers have picked up of late. And so that's going to be a debate, and I'm thinking that's a very critical issue because it's going to determine whether policy officials ease again or whether they know, which is very important for the stock market overall. The second thing I'm going to watch or watching is, we talked about a little bit earlier, there's been this baton handoff from new air stocks to broader market plays. Now, there was a pullback in broad market plays during the initial stages of this crisis, but broad market play performance has picked back up again now in the last couple of weeks. And really, my broad index has gone on to a new relative high. So I'm suspecting that. That's why I'm curious, if we do settle this crisis, do we go back to new air stocks, which I still hear a lot of people talking about, or do we stay with broad market leadership? And new air stocks, I don't think they're going to collapse, but I think they continue to underperform. And that will occur more likely should policy officials opt to ease more aggressively against the slowing economy fear after this, if we bring peace there in the Middle East. And so those two things are a bit of a question mark, even for me. And those are the two things I guess I'm thinking most about.
Speaker 2That's great. Thank you, Jim. We'll look forward to talking about those things in early May with you. So thanks so much.
Speaker 1Hopefully they turn out okay. Thanks, you guys, very much for having me. I always appreciate it.
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