Speaker 1real GDP grew, what was that, 3.5%. And since then, it's grown, you know, just a little over 2%, about 2%. That's a huge downshift in average growth over the last 20 years compared to what it used to be over most of the post-war era. We got a CPI inflation rate of 3. The PPI is a little less than 2. Both of these metrics are currently significantly below average, and yet we're fighting them like they're runaway, like we're still stuck in the 1970s. The average unemployed person stayed unemployed for 13 and a half weeks. Now they're staying unemployed for over 27 weeks, twice as long. The dot-com collapse was 80% of it was already over before the Fed even put in place its first easing move. So basically, the tech collapse was done before the Fed even got going to respond. Here, the Fed's already responding, even before the relevant performance of tech has peaked. Jim, thank you
Speaker 2very much for joining us again today. Oh, you bet, Justin.
Speaker 1It's always a pleasure to join you guys.
Speaker 2Apologies to our audience. If we all look about five pounds heavier, it's because we are coming off Thanksgiving, where we all ate a bunch of turkey, right, guys? And pies, too.
Speaker 1Don't forget the pies.
Speaker 2Yeah, the desserts are the best. Okay, so, you know, here we are. It's the home stretch of the year. December, you know, historically, has been a pretty good month for the markets, although I know, you know, that's not what, you know, you're looking at per se, Jim, as you oftentimes go much deeper below the surface on the various indicators and the data that is sort of informing your views on what's happening in the market and the economy right now and what it means for investors. And so, like we always like to do with you, we're going to walk through a bunch of the charts and the data that you're paying attention to, that you're looking at. All of this from your Substack, PaulsonPerspectives.substack.com. Where people can go sign up, see Jim's research in real time. And, you know, some of it's free, some of it's premium, but there's a lot of really good stuff here. And fortunately, you know, Jim has, you know, been generous enough with his time or last few months, and we'll continue this into next year, going through some of the most important things, some of the most important charts that he's paying attention to. So we've kind of a lot to get through today, today, because you've been putting out a lot of stuff. But before we do, maybe we could start where we always, I think, like to start with you is when you look at what's happened in the last month or so in the markets and the economy, what do you think are the most important things investors should be paying attention to?
Speaker 1Well, a few things that, you know, that I'm just on my mind a little bit, I guess I'd throw out, you know, we look into next year a little bit now, as we always do in December. And one of the things that, you know, I think that I look back, you know, we have had pretty good corrections, I think, this last year. People think, well, we need one. And there's been a lot of talk about that lately. But, you know, we can't forget that we had a 20% correction, basically, off the market highs that ended in early April of last year. You don't often get a 20% correction, which is basically a bear market. That's a monster. And I, you know, last two and a half, three months, basically, the S&P has had another period of consolidation and kind of moving sideways. And I don't know, I think you look at that going forward, you know, you're going to see a lot of changes. And I think, you know, going into 2026, we had a 20% full-on correction, and then kind of two, three months towards the end of the year to consolidate, catch up again, reassess some pessimism and whatever. I think that's a nice base to launch off into the next year. And I just kind of point that out. Secondly, I'm interested by the fact that if you look from the start of this bull in October 12th of 2022 until September 16th, of 2024, and the reason I picked that period is because that was a period where the Fed had not yet eased once in this entire bull market. During that period of time, over that period of time, there was only two sectors that outperformed the S&P. And you know what they are, tech and communications. And all the other nine weren't even really even close to outpacing the S&P over that period of time. Now, it's interesting, if you look year to date, where we are today, we have five sectors that are basically outpacing. The S&P 500. Two of those are still those tech and comms, but we got three others. And we got a couple others right behind that that are pretty close to outpacing. So we certainly have had broadening that's going on. I think that reflects a move to policy accommodation a bit more often over the last year or so. And one of the things that I would look at going into the new year is watching for more evidence of broadening accommodation, because I think we're going to get it, and particularly with Fed easing. I also am attracted by the bond yield, recently broke below four. It's back up a little bit here today. But that's getting close to having a pretty major breakout to the downside, the 10-year yield. Doesn't have to break much below four to really take us back to a low of three and a half in mid-2024 as its low point, really, in this bull market. And so we got a really decent shot, I think, of breaking below that and having the bond yield go to the lowest level of this bull sometime in 2026. Also, sort of watching the beginnings or ingredients of sort of what I'd say this fear-based assets that have been leading this bull market, you know, stuff like gold doing really well and money market funds being accumulated rapidly, the dollar doing well, even things like Bitcoin leading tech. It's hard to throw them in the conservative camps, but they're kind of become where you go when you're fearful, you buy steady adding tech and Bitcoin. And so if you look at those five asset classes right now, you know, they're starting to unravel a little bit to the seams. Gold's had a little more of a struggle of late. If you look at the ratio of money markets to disposable income, it's rolled over just a little bit, which hasn't happened. The dollar's already off seven or eight percent from its highs after going up most of the time. Bitcoin, we know, is in a pretty good free fall and tech, come back to that, some of the relative performance of tech is even starting to fade just a bit. And I would watch that as a final theme here. What's going on with that? What's going on with the leadership of tech? I don't expect tech to collapse, but I do think it's starting a process of underperforming. If you look at the relative performance of the S&P technology sector, it's been flat really now almost since August on a relative basis. And it's really, it's not up that much really since June of 2024 at its relative price highs. So it's kind of sleepily without being noticed, you know, starting to fall. But I think it's starting to fall. I think it's starting to fall. I think it's going to roll over at the top and that sort of straight upside outperformance. I think those are some issues that could really gather attention. If anyone or any of those gain more momentum, you'll hear about it more. But I think those are some of the things that I'm just watching as they crack down. Yeah, no, that's
Speaker 2a good, good overview. Sort of stepping into some of your articles here and your recent work, you, in the most recent article, you kind of made this point that, you know, and we'll look at this chart here that, policymakers are, you know, mostly obsessing over this threat of inflation, but they're really maybe ignoring like the real problem over the last 20 years, which is the, you know, collapse of real sustainable GDP. So can you kind of just explain this chart while we're looking at what your arguments are here?
Speaker 1Yeah, this is just real GDP growth, annual growth going back there to 1950, I believe. And I guess what I'm, trying to set out, if they're really the financial crisis of 2008, 9 and 10 or whatever, even a little bit before that, the U.S. was starting to lose its sustainable or secular growth profile. If you look back there, the green line goes back, I believe, to 2005, 1950, 2005, you know, the real GDP grew, what was that, three and a half percent. That's it. Huge downshift in average growth over the last 20 years compared to what it used to be over most of the post-war era. And what brought this up to me again, it's been going on a while, so it's not a brand new phenomenon, but we continue to fail to resurrect the growth potential of the economy now for two decades, long after the financial crisis has passed. And we've almost forgotten that that is still a real problem. We've been hovering at an average of what I used to, at earlier years, refer to as the stall speed of the economy. When it got to 2% growth, you started worrying about recession. Well, we've been averaging that now for two decades. And there's that to me, here we are fighting inflation. I don't see how you can have a sustainable inflation environment in 2% growing economy. I think it'd be a very difficult thing to do, indeed. And so, yeah, can we have a supply-side distorted inflation burst, like what, COVID, for a couple years? Sure. But are we going to have a sustained demand-driven growth problem when we can't hardly keep demand growth above water? Because to me, that's the central problem the United States needs to focus on. And it shows up, Justin, in, you know, a lot more than just real GDP growth. If we look at the next couple charts, this is household employment growth, year-on-year, going back over the same period. And it used to average through 2000. 2005, I annualized over 1.6%. Now it's averaging about seven-tenths of a percent or a little less than three-quarters of a percent. That's a huge downshift. Just think about taking America, people coming up through the ranks, looking at possibilities, excited about their futures, and suddenly the growth rate of new job creation is half of what it used to be. And I just think when you think about that, we don't put that in proper perspective in this country right now. We're fighting inflation because it's still a little bit above the 2% artificial target of the Fed, and we're missing the fact that we're growing jobs at half the pace we used to grow them in this country. We wonder why college grads can't find jobs and why people feel kind of pessimistic about the world on Main Street. This might have something to do with that. If you look at one thing, certainly on the next chart that's kind of bringing that, I think, is labor force growth. And we know we have a population growth that's slowed down. That's turning into, I think, the central economic problem of the day is much slower population growth and aging population on top of that. But again, we used to, you look at that labor force growth in the 70s when we had a sustained demand-driven inflation problem, it grew at 3% a year. We're barely hovering about half a percent a year. And we're worried about a runaway demand-driven inflation. I think it's kind of ridiculous is kind of where I'm at. And meanwhile, we're letting Rome burn in a slowly dying economic growth rate that's supposedly the envy of the world. And so, you know, I think I got one more chart that just sort of highlights this that to me is almost appalling. And that's the duration of U.S. unemployment. Um, but you can see that 1950 to 2000, 2007, the average unemployed person stayed unemployed for 13 and a half weeks. This to me really raises the primary thing that we have damaged in this country, I think. And I think the envy of the world for U.S. economic capitalism is because we generate a thing called animal spirits. And we've lost the ability to generate that. The reason here is now you got people that once they get unemployed, they can't find employment again for half a year. It just kind of destroys. It isn't just frustrating. It destroys their hope for the future. And we just let it continue. And I really think not only that, we're doing a lot of things, I think, that make it worse, like the chronic tightening to fight inflation, the fact that we're now shutting down immigration, which we desperately need. We're just kind of, not only we're not doing anything, we're almost doing the wrong stuff. And that's concerning. I don't think this is the 1920s. And I don't think we're headed for the 1930s. But, you know, when you, when a lot of scholars that look back at the 1920s, a lot of policy of, of mistakes that were made. We're tightening when we should have, should have been easing. Uh, that tightened long after the crash already started. Things of that nature that was the roaring 20s, but yet growth in a lot of parts of the economy had stagnated for a while prior to that, prior to the 1930s. And it just feels a little like, you know, we're kind of making some of those same, uh, mistakes today.
Speaker 3Do you have any ideas specifically about, like, the thing that's most shocking of these first charts we've looked at is probably this one, this idea that the duration of unemployment has doubled. Um, do you have any, like, more ideas as to why that's going on? That just seems, like, incredibly shocking that it would have gone up that much.
Speaker 1Yeah. I think it's a host of problems, Jack. I think it, um, you know, we have, the biggest one in the room is slower population growth. And, um, you know, that, that's a byproduct of new attitudinals of delayed family formation from what we used to have. It's, it's certainly a lower birth, uh, birth rate, which is tied into that, uh, new sort of attitudinal. Uh, it's certainly less immigration than we used to have, particularly early in our, in the development of our country. Uh, shut down. And then, uh, you know, it's not just slower growth. If you look at, if you correlate across the globe, historically, if you correlate the rate of population growth of these countries, they're, uh, resource growth, land labor and capital, uh, they're very closely correlated to the pace of growth. And the United States was always a country where everyone was always coming to. And we were chronically, uh, young and aggressive. And, and, uh, you came to America, why? Because you had that animal spirit itch and you wanted to have a future and you wanted to be part of that. Um, and, you know, we've lost that. I think the biggest reason is because our population growth is rapidly grinding to a halt. And if it does, it means growth stagnation. I don't care how much innovation you generate. It really becomes a problem. And also, you know, it's, it's aging. So you can't get guys like me that 30, 40 years ago were in peak spending years and, you know, we're boosting demand doing my part. And, and now, you know, we're aging out and kids are gone and, you know, we're not doing that anymore. And we're, we haven't been picked up with the next bubble that's near as big as the one that's going out the door. And so that's a real problem as well. We also, this may surprise people, but we've had dramatically slower productivity growth, um, in the last couple of decades from what we used to have in post-war history to 2005, between 1950 to 2005, average productivity growth was two and a half percent per year. And since 2006, it's been 1.6% per year. Dramatic township. Now, I don't know, productivity has got a lot of measurement problems, you know, and how do you measure service productivity and all that? We've become more of a service company. Some of this could be distorted, but nonetheless, the raw numbers shown a major drop in productivity, uh, which has taken off a big piece of growth. Not only do we have our labor force growing, you know, from 3% to less than one, but now it's, half as productive labor force as it used to be earlier. Um, we also, I think this to me is a big one. We we've had a, a de-risking attitude that's emerged in this country since the OA crisis, maybe even before that, you know, there's, this shows up in a lot of ways. Uh, you know, I just give you one weird one, monetary velocity, the rate at which the money supply turns over into GDP output that used to be pretty steady throughout the past year. Post-war era, pretty flat, always about the same level. In fact, it became so steady that economic theory assumed that V, MV equal PY, uh, money supply times the rate it turns over equals price times real output or real GDP or nominal GDP, that that V was constant, never really changed because it just stayed fairly robust. Well, that thing peaked starting all the way back in 2000 and has been chronic, chronically coming down fairly dramatically ever since. Where, every dollar in the money supply now turns over more slowly than it used to, which means we have slower real GDP growth for every dollar. And, but really what that tells me is there's a de-risking attitude that's developed. If, if you look going back to the OA crisis, when I was a kid, the term, a common saying was, young man, it takes money to make money. And you should, you go to the bank, borrow some money and lever up and, and, uh, put it to work. Yeah. That's your dream. And that's how you make money. Well, it's the opposite now. People are de-leveraging balance sheets, debt to income ratios in the household sector, uh, pro, debt to profit ratios in the corporate sector have been falling now for the last couple of decades regularly after always trending upward throughout the post-war era. That tells me sort of de-risking. People are hoarding cash rather than borrowing money. And that just says something about what's happened to capitalism. I think if you combine that actual behavior, with, uh, the level of chronic pessimism that we can't seem to shake in this country. Now, on both sides now, they're, everyone's pissed off and pessimistic about the future. And you put pessimism together with, with, with de-risking, uh, behaviors. And what is that? That's RIP on animal spirits. I mean, that's, that, that's what it is. We've, we've lost animal spirits, which to me is the envy of the rest of the world. Yeah. In terms of American capitalism. And, um, and then, you know, we've become a more globally open economy. And Trump is somewhat responding to this with tariffs. I think it's not a good way, but he's trying, you know, from 1950 to 2005, our average annual trade deficit was 1.2%. Since 2006, it's average on an annual basis, 3.2%, nearly triple what it used to be. Now you can say, what'd that mean? Well, it means that we're having a lot of, uh, a lot of what in our closed economy of earlier ilk, a lot of that spending stayed in this economy. It was spent here. Now it's leaking off abroad on a regular basis. Uh, much more so than what's coming back home, if you will. Um, uh, regular base. Then finally we have contractionary policies. I think I'll get into that. This is sort of add insult to injury after all these list of issues I've given you for things I think that are causing some of this. And then our prescription for that in the last couple of years, the last few years, really since COVID, has been to tighten, contract, policies, like we're trying to beat a dead horse a little bit. And we could get into some of that as well. I was thinking
Speaker 3back to my economics 101 when you were talking about that, because I think what I was taught, and I wasn't the greatest economics student, but I think what I was taught is economic growth is basically a function of labor force growth and productivity. And you were just hitting on both of those, and it kind of explains this whole thing, right? Neither one of those has been very good.
Speaker 1They haven't been. The one that's odd, we know about the labor force and what that has to do with a different attitude about having children in this country, as well as just having an older and less growing population. Productivity one's odd, but it's interesting to me. We've had arguably some of the greatest innovations ever in more recent years, but it hasn't translated at least into how we measure productivity compared to our use. We had some really remarkable ones back in the day, too. You think about the mainframe computer of IBM in the 60s, race to space. And so forth, which probably helped boost productivity back in the day. But you would have thought we wouldn't have such a fallout, but we have. And to me, I don't know how to fix all these problems. These are multi-dimensional problems. Some of it is better leadership in this country, I think, would help in terms of somebody that could inspire people out of their pessimistic woes and entice them into the opportunity that is America. I think that's a difficult thing, but it'd be good. But whatever thing, I think we should be easing policy and not fearing inflation so much. I think it's a difficult thing to sustain inflation because we don't have the demand growth to do it. And so we should be cheering if we can lift demand at a high rate for a period of time, rather than fearing that it's going to return us to the one decade in U.S. history that was horrific with inflation, the 1970s. And we just can't seem to do that. And you see in these next charts, if we get to them, you know, it's just how much we're cranking down on this thing right now, despite all these issues.
Speaker 3Yeah, just one quick question before we do the inflation. I want to ask you about, because productivity is really interesting to me, because like you said, you would assume with all the technological innovation we've had, the internet and everything, productivity would have improved, but it hasn't. And it sort of makes me think about AI, because I think about AI, like the productivity of my own life now it's improving. But I wonder if maybe we're overestimating, like how much it'll improve productivity. Across the economy, because I have a hard time carrying like what I'm seeing to like an overall
Speaker 1economy. Yeah, I don't disagree, Jack. I think that, I think we certainly, I'm a big believer that innovations lead ultimately to improvement in economic growth and improvement in productivity. But this does make me wonder about it a little bit. I also think there's a lot of innovations that we have had in the last several decades that you could argue, also lead to distraction and loss of productive moments. I mean, I spent a lot of time looking at my phone and going through data over and over again, you know, every two minutes or something sometimes. And I just looked at two minutes, I don't really need to see it again, but that's what I do. There's also a lot of fun with AI, man, you can make weird images and, you know, do things. I don't know if I really moved American forward and all that, but it sure was kind of entertaining. You go through Twitter all day and, you know, it's a lot of funny stuff on there. You know, it's entertaining. I'm not sure how much it moves the needle in terms of productivity. We've got so many entertainment TV shows and movies we can watch and choices. I spend more time at night going through what I might want to watch than I actually watch. And, you know, I'm just giving examples that sometimes I wonder, you know, if it really does hit to economic advancement as opposed to just sort of wasting time. I don't know what you want to call that. I also wonder if how much, how much of the today's innovation is getting the point. This one I have no, I have no backup for or proof. I just wonder about it. How much of a lot of this innovation now really has become tech centric. And I'm wondering, is it being exported to other parts of the economy as quickly, as thoroughly that it used to be, or is it just sort of increased? The productivity of that sector itself leaving a lot of the rest of the economy really not having a great impact. I've been looking into that one a little bit more quantitatively of late. I haven't got anything yet that I want to share, but I do think that there might be something there where the difference of earlier innovations hit more multiple parts of the economy, more so than the ones we have today. And maybe I'm all wrong now because most people, most are saying, oh, it's just going to ravish. economy and have dramatic impact we'll see about that i i'm kind of i kind of wonder about that as
Speaker 3well jack it's it's funny to your point i just made my six-year-old wanted me to make a realistic uh picture of him skydiving and so we got the gemini and we made like the most realistic thing that looked like i had thrown my six-year-old out there and then he'd been skydiving i don't know i don't think that benefits economic growth in any way but it was a lot of fun cool thing it was very cool like we sent it to his grandmother who was shocked and uh and worrying about what we were doing but uh but but anyway i won't get us too much off track here um your next chart gets into what you've been talking about here which is this idea of inflation and maybe inflation is not as much of a threat as many people
Speaker 1are worried yeah i i i've written off off and on about this a little bit this just shows to me the cpi is in red the or excuse me the cpi is in blue and this ppi is in red year-on-year growth in inflation and and the right now if you look at you know we got a cpi inflation rate of three it's absolutely average since 1965 has been uh almost four percent uh the ppi is a little less than two and its average has been three and a half percent i mean we we got both that both of these metrics are currently significantly below average and yet we're fighting them like they're runaway like we're still stuck in the 1970s we definitely had a supply side restriction that led to a burst of inflation in 2020 21 or 21 22. no doubt about it shows up in that chart but it ended a long time ago these were both back to these average levels really since basically early 2023 and they haven't gone anywhere since and yet we're still fighting if we didn't have this weird two percent rule that came out of nowhere if we didn't have that um i don't know if we'd be having the same discussion about inflation right now we'd probably be talking about gosh we got a lot of parts of the economy that need some help and and be looking to fight those a little harder i just come back to the charts i just showed you i don't see runaway demand risk in those charts that would cause a 1970s style demand excess demand driven economy yeah i see the opposite i see an economy that's more prone to deflation uh perhaps than inflation at the moment and yet we continue to focus on inflation as primary i do think it's changing i think it's changing but i think it's changing i think it's changing but i you know the fed now is starting to ease again the discussions are starting to get more that way i think 2026 is going to be more about promoting growth than it is fighting inflation mainly because i think we're going to be worried about the lack thereof or recession a little bit as as we go through that year but i um i i just don't see um a lot of risk in this chart this is just one but i it's not like commodity prices are running away it's not like wages are running away it's not like inflation expectations are running away break even rates of the bond market are i'm going anywhere and yet we continue to fight this like it's the number one problem in america and we've convinced the public it is most people feel they have been really damaged by inflation in recent years and the reality is real wages have been climbing for much less over the years and they're almost all at all-time record highs real profits have continued to climb despite this flick that's not what happened in the 1970s very much funny because i think it's
Speaker 3we we want to learn the lessons from the past we have to be careful about learning too much you know the whole idea from the 70s if inflation gets out of control you can't stop it so everybody's worried about not getting it out of control we got to look at the risk on the other side too which is we're in a different world than the 1970s and there's also a risk to the other side here to economic growth if we're too tight on this
Speaker 1well if give me jack give me three percent labor force growth and i'll start worrying about inflation again that's the way i look at you know we're a long ways from that um we'll see but here here is the policy response that we're doing i just to it's good to look at it again you know money growth has actually improved quite a bit i think this is why the stock market's broadened a little bit because we're starting to juice it up again but we've got a long ways to go even now at a little over four percent money growth is still lower than about three quarters of the time since 1960. and look where it's been this period here earlier in this bull market we had 16 consecutive months where the annual growth in the in in uh nominal uh m2 money supply year on year was negative or below zero after never being negative in its history since this first came out in 1960. that's that's a whale of a a contractionary monetary and don't forget the fed's been contracting its balance sheet and still is continuously in recent years all through this this period of time if you look at um the real funds rate um you know real funds rate uh right now is is sitting up there a little over one percent one point one three percent when i did this and you know it's not much different than it was in the 60s and 70s. It's pretty close to that. But the problem is the economy is nothing like it was in the 60s and 70s. Again, we don't have that kind of underlying growth thrust that can handle this type of real funds rate. You know what the real funds rate average has been in the last 20 years? It's that red dotted line in that chart. It's minus 1%, basically. That's what we've had to do just to keep 2% real GDP growth on average. We've had to have a minus 1% real funds rate. And if we think we could suddenly now get away with a much tighter funds rate, I just don't think we can. It'd be different if we changed something right now from where we've been in the last 20 years, but we haven't. We also, you know, we have an inverted yield curve that's now finally positively sloped, but barely. And it's been inverted for the longest period of time ever in our history. Over this period of time, which is a huge contractionary force putting, you know, on this thing. I think the next chart is the U.S. dollar. You know, a rising dollar is a major contractionary force because what it's really doing every day, the dollar goes up 1% in value. Everyone in America that produces anything is now 1% less competitive to their global competitors. Well, we have to think about that. We have the dollar go up 50% over the last decade. And we wonder, you know, we wonder why many of our companies are struggling in this country. If the last time we got anything close to this, we almost took out a brand new record high earlier this year in January since the dollar's been floated. And that was achieved in 1984. And at least back then, we were growing faster than we are today at that period of time. And we're nowhere as close to that, but we're still, you know, imposing a very restrictive U.S. dollar policy. We seem to also have this view that a strong dollar is good. Weak dollar is bad. That's just the way it is. I don't, that's not true. There's good and bad about a weak and strong dollar, both ways. Strong dollar is a huge contractionary force on real economic growth because it prices out many domestic manufacturers from international competition. It does keep inflation down because it just pounds price pressures into the ground. Whereas a weak dollar makes us more competitive, makes us more abilities to sell abroad. And that's more of an inflationary policy. Now, a strong dollar is great if you're traveling to Europe, but it's not great if you want a job in America. And that's kind of where this, this is coming, coming down to. It's interesting because like
Speaker 3all of us have like this patriotic thing, I think, and this is something like where we want, like if the dollar is our currency in the United States and we want it to be strong, what's your point? That's a double-edged sword. There's pros and cons on either side. It is. Very much.
Speaker 1Very much. Very much a double-edged sword. And we're choosing, I think, too much of the one side of that coin right now. We ought to adopt more of a competitive dollar, if you will. I've often thought that President Trump chose, his whole idea was we wanted to make America competitive again. That's kind of what his story is. And I'm going to do that by raising tariffs on foreign products to make us more competitive. Well, there's a much easier way, if you want to raise tariffs, let's just drop the value of the dollar 10%. And suddenly we'll be 10% more competitive with all our trading partners overnight. And we've failed to choose to do that, which we could. Now, one of the reasons the dollar has remained so high is that over much of this time, we have been adopting a fairly high interest rate, fairly high-type monetary policy. If you restrict the supply of dollars and you keep the rate of dollars high, you're going to get a strong dollar. And that's what we've got. So, byproduct of other type policies.
Speaker 3The other thing that was really interesting to me for this, by the way, for this chart was just this idea that everybody's been talking about the weak dollar this year, but when you put it in the context, I mean, the dollar's barely down relative to this.
Speaker 1It helps. It helps. I mean, look, you're right, Jack. It's not much, but international stocks, I think, are leading this year. There's one reason why that's the case. This chart, this little pullback in the dollar has suddenly made them the stars of the stock market. And I think that's the reason why the stock market is so strong. And I think that's the reason why the dollar is so strong. I think that's the reason why the dollar is so strong. And I think that's the reason why the actually 1% higher at about 28%. And I know we have big deficits, but the tax bite on the total GDP is 1% more, even though our growth rate is maybe, you know, almost half of what it used to be. And it just doesn't seem to jive to me overall.
Speaker 2Is this individual and corporate?
Speaker 1Yes. It's all taxes, Justin, all taxes, kind of an aggregate tax bite, if you will. And it's not, you know, not record highs or anything, but it's still, in my mind, a question of why we're doing that when the economy is growing half as much as it was earlier. It just seems like it should be more like, why not have a 20% tax rate if we want to get this thing going again or something? Oh, anyway. And then the next chart is just on what Trump is doing with tariffs. And people are well aware of that. But again, it's sort of like, to me, putting a tax rate on the economy at a time when we're already sort of suffering from a growth problem doesn't make a lot of sense. I understand what he's trying to do, but I think there's a better way to do that with a weak dollar.
Speaker 3Do you feel like we've felt the hit of tariffs now? Because that seems to be a debate a lot in terms of, like, it doesn't seem like, obviously, to your point, there's certainly a contractionary force here, but it doesn't seem like it's as bad as people had thought it would be. But then other people say, all right, you know, it just hasn't hit yet. Like, this is going to take some time. Well, I don't, you
Speaker 1know, I think it's, I don't think it's going to come through a lot in inflation. I think we've got enough other offsets going on, too. You know, it certainly is going to show up in some products. And that's what you hear about in the nightly news, you know, eggs are up, whatever, or something, right? But you don't hear about all the other parts of the pricing that is, is maybe they haven't even come down, but their rate of inflation is, you know, slowed. And again, we've have three quarters of our economy is now service-based. And we're talking about tariffs on, you know, one quarter of the economy and probably less than that overall. So when you, when you look at it that way, it's not as dramatically large as it seemed to be when he was on the White House lawn with his whiteboard showing how much he was going to raise tariffs. Most of the economy is not directly affected. Rather, they're indirectly affected because of the reduction in business in those 25% that get hit go directly to service businesses. You know, all those auto companies, everybody else that are eating tariffs, they hire consultants and tax advisors. They're not getting as much business as they used to get so that their fuel and pension have to lower their prices or not raise them as much. And so I think, again, it's, it's, it really is a tax and a tax is a disinflationary, a force. And I think that's kind of what we're seeing through this experiment. It publicly, it just felt like we all know when you raise tariffs, you raise prices, right? It's got to be inflationary. But the reality is if, if, if we had a, if we were going to raise the income tax in this country by 10%, no one would say it's inflationary, even though that would greatly raise the price to you and me. Okay. Well, whatever. But the reality is, no one would be claiming it's inflationary, but somehow we raise tariffs and that isn't supposed to be inflationary. It's not. And I think that's what's happened. And I still think that's going to be kind of what will happen.
Speaker 3We think about the solution to the slowing growth. We've, we've looked at a lot of charts here, a lot of individual factors that are playing a role here. I mean, do you think that's the solution as well as it's sort of an all encompassing solution across a lot of things, or do you think certain things are more important than others as we look
Speaker 1at this? Well, I think there's things we can do and things we can't, you know, we, we can't suddenly make people get married earlier and have more babies. I can't think of a quick solution to that. And so, you know, culturally that's probably not going to happen. So there's certain things you can't do. You can't, it'd be wonderful if you could make me 40 again. I, let me know if you find out about that. I will give you a
Speaker 3lot of animal
Speaker 1spirits if you take me 40 again tomorrow. That'd be great. I don't think it's going to happen. But, you know, there are some things, you know, very clearly we could ease more and we could adopt a policy. This isn't really about talking easing or not. It's just saying it'd be nice to have a leadership, policy leaders, political leaders that got up and said, you know, I'm coming in front of you today to tell you that, you know, we kind of think inflation's out there. Yeah, it's sort of an irritant. It'll probably continue to be maybe a little bit for a while yet, whatever. But we're going to shift to focusing on getting growth going again in this country. We're going to do stuff to increase your opportunities for success. And we're going to jumpstart job creation and, you know, cut taxes rather than raise them where we're going to juice the system with what we can to try to get this thing moving again. So we don't have college graduates coming out of school and can't get jobs. We're going to give you a future. And I think if you did that, because I think the biggest thing holding animal spirits back in this country is just chronic pessimism. It's almost become a, you know, everything. Everyone, oh, why would you want to do that now? It's really bad out there. You know, why would you want to take that risk, right? Oh, my gosh sakes. You know, that's stupid. You know, and that's a very hard thing to overcome. But one of the things that could really help that is if we had leaders in the country that said we are going to, we're going to bring your dreams back. And not just say it, but with actions, you know, trying to do that. Say I'm not as scared about inflation anymore. I'm going to get growth going again. And then we'll worry about inflation. I think, I think. I don't know. I'm not sure what else, what else to do with that. You know, some might even argue, Jack, you say, well, we should slow, you know, innovations down or something to, you know, to avoid displacements and the like. I don't think that would be appropriate at all either. But I do think there's, there's policy easing that we could do. And I do think we could have confident leaders that are letting, letting the public know that that's their primary goal. That is their primary goal is to, to. To get the economy going again, that will, will ultimately create the opportunities for more and more people rather than trying to subsidize everybody up from the bottom, get it going on the top and opening up. I know that becomes political, but that's kind of where I'm at.
Speaker 2Jim, in these next couple of charts here, you've introduced this total policy stimulus index, and then you kind of, you know, I want you to explain what it is, but then work through some of the other charts here too, because you're kind of putting this. Relative to different parts of the market and showing how different parts of the market have, I guess, reacted during these, this, these indicators, this time, this, uh, levels.
Speaker 1Yeah. I I'm focused on this because I do think we're, we're close to the point to where we are going to be adopting a period of time of policy easing again here for a period where we're starting to do it. We've already dropped the dollar a little bit. You know, the yield curve has been steepening a little bit. Bond yields are down. The fed funds rates. Coming down. Money growth is picking up. We are into that. And I think that's going to get more aggressive in 2026. And if it does, what does that mean for the stock? I mean, it means a lot for the economy. I've talked about that, but what does it mean for the summer? I think one of the primary reasons this has been such an incredibly narrow bull mark led really by two sectors. Most of the time is because those two sectors are largely policy and variant. They're. Their innovation sensitive period is, as I said in the past, if I could come up with a thing called the iPhone, I don't need any policy juice because every one of the world's going to need what I got and I'm going to have plenty of sales growth for as long as I can say, I don't care if the funds rates 30% or zero, I'm going to do well. And that's kind of what's happened with those two sectors, but most everything else is tied to the traditional industrial sort of economic. A cyclical pattern that needs policy juice. And we did not give it in this cycle at all. And I think we're getting close to finally bringing something. And one way to look at that, then what has been the state of economic policy stimulus, and I've used this for many years and it is not, you're not going to find it in any economic textbook that it's not approved by the American economic association. Um, but I'm a, I'm an economist by training, but I'm a. Investment manager by practice and I have over the years, I use what works for less concerned about whether it's theoretically correct. I just, if it works, can make me money. I'm fine with that. And this thing's been useful to me and all I'm doing is taking all these diverse policies and putting them into one variable, total policy stimulus, and I'm going to be able to add them together just by the simple construct of, for each separate policy, I'm going to do a percentile ranking of it. Now they all have the. Same scale. And so I can add them from zero to one. Um, they will be percentile rankings. I can add them together and take an average and I get the average policy stimulus on a percentile rate basis. The four things that go into this are the annual growth, the money supply, the treasury fed funds yield curve, uh, the us dollar and the deficit to GDP deficit or surplus to GDP ratio and fiscal policy. So you've got monetary fiscal policy, dollar policy, all in one. Sort of thing going back in this case to 1970 and you can see it range from 0.1 to 0.9, basically on a percentile ranking basis, 0.9 would be maximal stimulus and 0.1 would be minimum the way I have this set up. And if you look at the red, I highlighted in red, the October 12th, 2022 to date, which is this bull market, and you could see how paltry stimulus has been, we never had most of these bull markets in the past. The blue line shoots up at the start. Those bulls, they, they generally are getting us out of a recession and that's how bulls start. This one never did that. It went down and then it's just recently started to improve on average. It's been a little over 0.3, which in the past, when you're at 0.3 policy, you're generally gonna, you're either in or headed for recession, historic. That's how weak the policy response has been. But what happens when this policy variable goes up versus goes down or is very weak. And that's what I want to look at. In the next few charts, just looking at some different things in every one of these charts, the red is the total policy stimulus, and the blue is going to be the particular investment relative performance of the investment I'm, I'm talking about this. The blue is the relative performance, total return performance of the equal weighted S and P 500 index. And all investors know this has been a pathetically bad investment for a long time. But if you look at this without getting the real, you know, cyclicals up and downs. Just look secular for a minute. If you go back to 2010 today, policy juice mainly has been headed south almost all the time with the only exception being the response to COVID for a few short months. Well, guess what? The equal weighted performance has been equally crappy for just as long with one short period of outperformance, 21, 22, during the time when they finally gave a little juice. Otherwise it's been bad. Now, you know, it, it looks like it's been good or bad over time, but on the green on even each of these charts shows how this particular, uh, segment of the stock market has performed on a relative basis for all the months when the policy variable went up and all the months when it went down. And you can see up there for, for, uh, for the, uh, equal weighted index for all the months that the TPS fell, it underperformed by about 180 basis points. A month annualized. And for all the months it rose, it outperformed by 3.14% annualized. So certainly equal weighted likes juice compared to the market cap weighted. If you go to the next one, same thing, only this one is looking now at small cap stocks and they have a closer cyclical relationship and they, this one has the greatest relationship up and down to policy juice, which is not shocking. We kind of know the sense. Well, yeah, smalls like small, like, like liquidity, they like lower rates, but it's pretty dramatic. I mean, when you're talking about 719 basis points, when policy goes up versus 555 negative, when it goes down and, uh, if you're a small cap manager, you know, life has been horrific. And I think a lot of it is that red TPS chart. The good news is it's starting to turn up and maybe can play. Play in your favor for one.
Speaker 2What's interesting on that too, is that even goes back further than the large, like the, the TPS starts to decline, like in, you know, late 2000, whatever, 08, 09. And then it just kind of has that one spike up, but it's been basically, and small caps have been a tough place to be.
Speaker 1Yup. For the whole time. But I think it's because policy has been pretty bad for the whole time. That's kind of my point. And I just think that, you know, even if you don't, whatever you think about inflation, you just think we can't forever take policy south. I don't think, and you know, we've kind of been there for 15 years. Most of the time, at some point it's probably going to go the other way. And I think we're getting close to that point. That's kind of what I'm getting at here. Um, this one looks the blue line. in this case is cyclical stocks. They also have a pretty darn close relationship as you'd expect with policy overall. Actually, I just published this this morning. If I take long-term 10-year bond yield and I push it forward by 18 months and invert it, it's got a very close relationship to cyclical stock relative performance. And it's now pointing straight up for the next 18 months for cyclical stocks. Just now, bond yields started to come down about 18 months ago, and it's now the appropriate lag time that probably shows up for the cyclical sectors. In this case, the cyclical sectors are your basic ones in the S&P, but materials, industrials, consumer discretionary financials, some of which have been doing better of late and some of which are still trailing. But I do think we're starting to see some broadness and we're starting to see it in part because of the policy pickup. This is just value. Stocks. Now, what's interesting here, this is the least sensitive to TPS that I looked at, which I wouldn't have thought going in. I would have thought value would be pretty sensitive to this, but it's not. You can see in the green there when the TPS fell every month, it only outperformed by 62 base points since 1970. When it rose, it outperformed by 221. So there's not a huge difference like we see in a lot of the other components. I'm not sure why that is exactly, um, there certainly is a difference between value and cyclicals and smalls and some of these other things, but, uh, it, it still kind of responds differently to policy, but it's not real strong. So value managers, I don't know what to tell you on that. It might not be the best place to, to be, even though they might do a little better. And finally, I think I have foreign stocks. Um, and this one on the TPS, it doesn't, it, it doesn't look super close, but again, it has, that same secular pattern. You can see the, the, uh, as policy has been coming off since 2010, international stocks have done very poorly over the whole time. And they, they do positive 2.06 versus when TPS falls minus 374. But there's only one policy that really, really matters for international stocks. Of those four in there, they matter. But the big one is if I just use the dollar on here, the real value of the U S dollar, it, the difference in returns are something like when the dollar goes up, it's minus 10% relative performance. And when the, when the dollar goes down, it's plus 15% annualized performance. So a lot of this performance to the overall TPI is mainly just what happens to the dollar on international stocks. And they could have a lot of room to think. And this is just kind of a summary chart, Justin, of, you know, the policy response of these, of these different, different pieces. And, you know, we've been dealing mostly in the red most of the time here in this bull. That's my point. And I, I think that we're, if you're outside of the, the new era sectors, um, you're, you've been struggling with red and maybe we're finally getting to the blue for a period of time. Uh, if we bring some policy juice, we were going to see a very different leadership market than we've had up to today.
Speaker 2This next one here is looking at the, um, I think you just tried to introduce some of the technology price earnings, multiple.
Speaker 1I think, well, I just wanted to real quick, I won't spend a lot of time in this, but I just wanted to, I, I think a big, uh, certainly a big debate in every investor's mind is what's going to happen with tech stock here. I mean, if policy shifts and we go to easing, um, does that going to, will it can only happen with a collapse in technology stocks? I mean, a lot of people think the only way this can end is bad, right? Have another bubble. The only way it can end is bad. And, and there's certainly a possibility of that. I'm not saying they know that's not the case, but I suspect that there's a case where I think more likely is tech just starts to underperform. Doesn't beat the mark somewhere because the juice much like 2021 to 2022, when they brought the juice, that was the last time tech underperformed by the way, equal weighted beat it. Smalls beat it. Okay. The last time when the juices brought tech didn't. Not participate. It went up. It just went up less than the overall market. And I think that's kind of, what's going to happen with tech. The real issue is, is this.com? I don't think it's even close. This is just a chart on valuations. The trailing 12 month multiple is 45. Sounds horrendously high until you look at.com and it was 65. Then it sounds well, maybe, maybe it's okay. Uh, on the next chart. Um, I think there's other differences that aren't as well brought out. This looks the blue line here. Overall is the S and P 500 technology index, the price index, and the red line is the X tech index of the S and P. And what I want to kind of compare is how did all the other stocks do in.com versus how are all the other stocks doing the last few years here and in.com up until about 1998, up until the last two years of that bull run, they did just as well as tech stocks. They went up. Every bit as much as tech stocks did. That is by the time you reached the top in 2000, most all stocks had gone up a lot. That is not the case here. Case here is really the rest of the stock market. What's in red. Hasn't gone up hardly at all in this bull market in tech. So tech could come apart in a lot of the rest of the market. Doesn't need to come apart. Like it did to some degree after the.com go to the next one. The Fed response has already been much different than it was in.com. This looks at the relative, uh, total return index in blue for tech stocks to the Fed funds rate in red. And when, when the relative performance of tech stocks peaked in March of 2021, it was already down. If you look there, uh, on one to 21, the January 2nd, 2021, it had fallen from almost 0.5 or 0.4, eight to 0.25. Basically the.com collapse was 80% of it was already over before the Fed even put in place its first easing move. So basically the tech collapse was done before the Fed, Fed even got going to respond here. The Fed's already responding even before the, the relative performance of tech has peaked. So it's a very different response. And I think it lends itself much more to one where tech doesn't necessarily have to collapse, uh, because the Fed's already, uh, easing conditions where it was playing catch up, if you will, in the.com. Um, and then finally, I, I just, I just went back compare two 10 year runs in the bowl because we haven't had a 10 year tech run here that wasn't interrupted. But really, if I go back to 2015, uh, over this period of time, that that's the contemporary bull market in blue. And it is the relative total return index of technology stocks from 2015 to date. And the red is what the.com relative performance tech stocks did from during the bull market from 1990 to 2000 in tech. And what I want to point out is they both ended up about in the same place. And that's what people kind of reflect on. It's just that our bull market did it over 10 years over, multiple bull markets, whereas the.com did it all really just in the last two years. It really wasn't much of a bull for technology until the end of 2000 or the end of 1998 until March of 2020. Um, the great bulk of that bowl was all achieved in that last two years. I think this is very different bull markets. The blue one, the one we have today is kind of a steady Eddie controlled bull and the red one.com. It's very much a baddish, emotional, irrational bull run at ending in a colossal advance in the last two years. The latter is much more susceptible to collapse than is the form. Well, I don't think tech's going to necessarily collapse. I just think it might underper.
Speaker 2Yeah. And you know, you're, uh, certainly, um, if you want to give like a 20, 26 S and P, you know, target, you know, by all means throw it out there. I don't mean to put you on the spot here, but I think one thing I'll say is from listening to you is that, you know, it could be a year where something like the F S and P has like below average, maybe muted returns. It's not an all out catastrophe by any means, but then there's other areas of the market that, you know, where that, that show much stronger leadership. If some of this stuff that we've talked about today actually materializes. So I think next year is going to be an interesting year to see how all that plays out.
Speaker 1Yeah. I'm not a big one on targets because. I don't know. We just change them all the time. And I, I, I, um, I, I guess though, I would lean towards kind of what you're talking about, Justin, is that, um, you know, what, what, you know, what are we doing this year? What we up 10, what are we up 10%, 12%. I don't even know.
Speaker 2Yeah. 12 or 13%
Speaker 1on this. I think, I think maybe we do a little better than that next year. You know, I'm not saying 20, but maybe, maybe 15 or a little better. And the only reason I say that is because, uh, a juiced market typically delivers better results than one that's not. And you know, And tech, you know, this year tech had another great year, but a lot of the rest didn't again, although some of it started to. I kind of think if we if we bring the juice and we have a more broad based run, that'd be like 20, 20, 21, 22. I just think a lot of those stocks haven't had a run yet, so they could have a pretty good first year run to them. It's like a first year, first year stimulus run. And so I guess I'd err on the side of maybe having something, you know, surprisingly like 17 percent advance, something like that, rather than a 10. But I'll take what they give us, I guess, overall.
Speaker 2Yeah. You know, we for the past few years have done our own year end price target episodes. And then we rewind the clock to just see how wrong we were because it's impossible.
Speaker 3We actually, yeah, we actually do them as a joke to basically show how hard it is to make targets. So we effectively do our absolute best to come up with targets, but we're always completely wrong. And. Yeah, we just go to show that it's such a challenge to do that correctly.
Speaker 1Well, I don't know. But, you know, what what's what's the annualized what what is the annualized volatility in the S&P 500
Speaker 2over something like 16 percent annual vol?
Speaker 1You're going where I'm going. So like every most every street estimate for the coming year will be way inside the average normal volatility error of the S&P, which basically means if you're doing a T. Statistic on the significance of that forecast, it would it would have no significance whatsoever. Right. And that's kind of how I feel about it a little bit of that. And who needs to stick their neck out more than I already have? Oh, exactly. All right.
Speaker 2Listen, thank you. Thank you very much, Jim. The next time we see you, it will probably be after the new year. So if we don't see you before then, happy new year, happy holidays. And thanks so much for sharing your views with our audience. We appreciate it.
Speaker 1You guys. You thanks for having me.
Speaker 4Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the excess returns network and excess returns pod dot com. If you have any feedback or questions, you can contact us at excess returns pod at gmail dot com. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.
PodcastTranscript AI