We Asked Jim Paulsen Why the AI Rally Is Getting Riskier — And a Meaningful Correction May Be Coming

for technology or innovation to be, quote, and quote, success. It has to at some point. I think it will hear eventually, but it has to at some point be not just benefiting the sector that came up with it. You're also seeing another stripe changing. We're having unprofitable stocks, unprofitable tech stocks in particular, leading the tech world, if you will, overall. So, Meg Seven's not only getting beat by small little no-name companies, it's also getting beat by companies without any profits. Although I think we're going to avoid a bear market this year, I do think we will. I am getting more market-surned about a meaningful pullback here in the stock market. Jim, welcome back. Thanks for jumping on with us today. That's great to be here, Justin. Thanks. We always like to do these talks with you monthly where we talk about a whole host of things and related to the market, the economy, policy, and what you're seeing, I think, in the markets, with a lot of the data sets and things that you're looking at, trying to help our audience and investors get a read as best we can as to where things may be our headed and some of the more interesting things that you're paying attention to. A lot of these or all of these charts actually are pulled from policy perspectives, your sub-stack newsletter. So, we're really grateful and our audience is appreciative that some of the stuff that you're putting out to subscribers, you are sharing with us, which is really great. And so, it's always very important to get your perspective to help us understand what we're looking at when we look at these things. And I'm pretty sure I can say this. We are not going to be talking about SpaceX or AI in this conversation or what will we be? Put the revenue comment to AI here there. That's face-well. It seems like that's what's dominating sort of the headlines and the media. But from your perspective, what are your thoughts in terms of where we are with the economy and have there been any changes since we sat down with you last month? Yeah, I'd say there has been a little bit. I still suspect that economic growth is going to weaken here in the summer months into the fall from where people expectations are. But it's been better than I have thought here of late with some of the recent reports. We'll see what Friday's pay roping, but there's pretty low hurdle on that, or heading into that. But I think the underlying economy still remains fairly tepid. We're probably growing more at 2% at best, a real GDP overall, and employment is still quite weak. And I think a lot of the good feel from this is taken from what profits are doing, which have been spectacular. But as I'll talk about in a minute, that's really concentrated profit success. It's not really broad-based. So I think the key to me continues to be, because it's the economy slowed down a little bit. And if it does, I think we're going to move quickly for word about inflation to word about growth. And those would be very significant aspects of what could prove to be the second half. The other thing I'm just thinking, working about a little bit, is although I think we're going to avoid a bear market this year, I do think we will. I am getting more market-surned about a meaningful pullback here in the stock market, the US stock market, mainly because the bifurcation of this market movement lately has been so extreme between just new era securities and all the rest. Basically, all the rest have done nothing. And you got this one small part that's going to the moon to your point just at SpaceX. That's literally going to the moon with AI, I guess. But I'm a little taken back by how extreme the move has been, how it's really based a lot on emotion around another new technology, AI. And I just feel like there's enough things that are creeping up that are putting out warning signals for me of getting some pullback, particularly. If amongst all that, we also get a slowdown on economic activity. So I'm nervous about calling for a pullback. And I wouldn't necessarily, I don't think we're ever bearer, I wouldn't pull out of stocks, but I would move to underweighted positions in new era and overweighted positions in older stocks. That's kind of where I'm at. And I'm nervous about it because calling a peak in this market, I've never been good at that from the short term perspective. It could go on for a while on the upside. I don't know. But I'm staying enough that's got me a little concerned enough to at least tilt in that direction. I do expect a full pullback. But I also think that by the end of the year, we'll be back pretty close to where the highs have been recently again. In other words, I think it's going to be sharp and nasty and then have a good rally maybe in the fourth quarter. What about inflation? I think the May print, if I'm reading this correctly, 3.8 year over a year, which was fairly strong. Is there anything there that you're concerned about paying attention to, particularly with this war that continues to go on and with the streets being semi-closed? Not so much. The prints, not that surprising. I mean, along the side that hasn't filled their gas tank would know that I'm going to hear higher inflation here for me. I think I just went over 70 bucks here last time with the pump, which has got to be high for me for maybe ever. I don't know. But I think that that's not shocking and we're probably going to go a little higher in the next few months. I think what's encouraging on the whole front though is I still see quite a bit of disinflation going on. I've had a lot of the parts of the rest of the marketplace outside of energy and those tied really closely to that. I'll expect economy to slow down. We'll come back to that. But mostly it's interesting and encouraging to me that even while we're firing today on each other, I ran in the United States, all prices are up two and a half dollars. I think they're the low 90s. They're not really much different than they were in March. Gasoline prices are about national gas gasoline price, pump prices about pretty close to where it was in March as well. A lot of this surge energy prices was early on and since that it is called down a bit, even if we still got a conflict going on. If it stays in that range, then eventually those prints are going to go to zero for the month. You could still get a flat month at $94 oil if a month earlier it was $94 oil. The thrust of this inflation here, I think, is going to start to calm down unless we truly hit back in situatory, we're going to take a oil back to $120 a barrel or something. I don't think that's likely but who in the heck knows where this is going to be at. I still think the best case is that this is winding down and will wind down in the balances year. Lation probably stays elevated until later this year. But it's not at this point. That's not unexpected. A lot of that's kind of embedded already in the financial markets. What do you think we have the first Fed meeting in mid-June with Kevin Warsh at the Helm of the Fed who's taken over for Jerome Powell? Do you think it's going to be more of the same, I guess, or do you have any sense around? I mean, I think he kind of was brought in under the idea that rates would go lower, but that seems to be sort of a question mark now, I think, with what's going on in the economy and inflation, everything. Yeah, I think there's going to be drama at this point. That's much like a lower, but it'll be whether do they hike now or do they not. The immediate right. I think once we get beyond this first action or first meeting where they have to make a decision officially about what they're going to do, they could hike. I mean, you've got a 10-year treasure that's gone up to almost 4.5%. Here of late, that's certainly got a quarter or a half point. They could be put into the funds rate, leaving the yield curve where it was when the 10-year treasure was at 4. So there's room for the private market suggesting a Fed hike at this point. I think, personally, that'd be a mistake if they did that, but I'd probably the minority on that view at the moment. I'm not as worried about the real issue if you're raising rates for inflation. I don't see what a Fed hike right now is going to do any good for bringing the price of crude oil down. I don't think it's anything to do with it. The price of crude oil, we know what's driving that, and it's all about a conflict, geopolitical conflict, and that's not going to be altered by whether the Fed raises the funds rate. This is not an excess demand-driven inflation problem we have. This is a one-off supply restriction inflation problem. This is temporary until that ends, and I don't see why tightening policy is going to make a difference. It's not going to quicken that process, but they may tighten for a period. I'm hoping, and my guess is they won't, and maybe you worse will have, you know, some impact that is being the huge sharefeit or Fed share, but you know, he's just one vote on that. And we'll see where it goes. I mean, this is, this is gonna have a lot of stuff pitching for you know, Friday's payroll numbers will factor big in its decision and how people feel about it as well. So I'm not, - Exactly. - Heck, it's ultimately the economy's gonna dictate this. - Right. - It's either low down or it's not. That's where it's gonna come down to. - Mm-hmm. - Is that the market's expectation? Do you think that they will be hiking? - I think it's right. - Yeah. - I think it is right now. I think that will be wrong, but that's where I think the kind of the average expectation is. And certainly one Fed hike out the gate, that might even be more probable you know. But, but saying there won't be cuts, I think that's pretty aggressive. I think that's could be cuts that share before we get out of this. - You had mentioned the sort of concentration of performance and earnings robustness in sort of the new economy stocks versus old economy. And that bifurcation I guess that's sort of happening in the market. And that's what this first chart I think highlights. - Yeah, it starts to get to this. And basically what I have in there is the blue light. It is basically the division going on in stock market and looks at the relative price performance of what I call new era stocks, which is basically within the S&P 500, the stocks that are in the information technology sector and the communication services sectors. And they're on a cap weighted basis. How they're doing relative to the rest of the stock market, which I called old era stocks. And you can see what the blue light's done. We had that big boom in the dot com era in 1990s. And we've had a big boom here in the last several years as well in terms of the performance of new era stocks over older stocks. What you lay on top of that is what's going on in the economy and it's been very bifurcated as well. Because this economy divides it out to new era spending versus old era spending. It takes nominal GDP investment spending on information processing equipment and intellectual property products as a ratio of the rest of GDP or the rest of GDP. And that only makes up about 13% of total GDP is from new era or excuse me, not even 13 on nominal terms. Less than 10% of GDP is made up from nominal new era investment spending. And yet you can see it clearly traces out what the stock market's doing. Stock market's just following what's going on in the economy between new era spending and older spending on Main Street is going right into the stock market. So when you look at this, for me, when I think ahead of how this plays out, you gotta answer yourself the question here, if you're worried about what the stock market's gonna do, you gotta say, where's that red line going in this chart? And it's new era investment spending gonna continue to climb relative to old in the economy. 'Cause if it does, that blue line's probably gonna fall. And so that's a big question, I think for me. And if I look at the next few charts, Justin, I'm starting to see some things that tell me, you know, the timing's not perfect on any of this stuff, but tell me there's pressures building on that red line, which is now a blue line. And I changed up my color scheme. But the blue line there is new era investment spending as a percent of the rest of the economy. And what the red line is, is what I call total policy stimulus. And it's just to look at what is total economic policy been doing. And that red line just combines into one policy variable, money supply growth, the yield curve overall, fiscal deficit spending as a percentage GDP and the dollar. Those are four very key in policy variable. And they're putting a position where they're kind of weighted equally. And I put this on an inverse scale here. So when the red line's going down, that's suggesting policy easing. And when the red line is going up, it's policy tightening crossed all four of our major policy variable on average. You can see it's got a pretty close relationship here. The tech part of the economy does best when there's tightening going on in the economy. When there's policy tightening, you can see that throughout the '90s bull. You can see it throughout much of the recent years. And you can certainly see it in the lungs of this bull market where we've had mostly tightening going on most times since the 2022 inflation split. Now, the other thing to pick up here is the red lines leading by six quarters. I push the policy variable out of six quarters. There's generally a lag dream. What money supply does today and what the economy does, maybe four to six quarters later. And when I'm picking up here is the policy starting to ease. Now, the feds pause that again, if late. But on average, the dollars come off. Might be real. Money supplies gone up. Bond yields until very recently have come down. The yield curve is certainly steepen over this period of time. And I see that easing happening. And we're just about that point six quarters after policy changed from tightening to easing. And you can see what that suggesting, suggesting that that blue line may finally roll. Whereas the ratio of new to older spending may finally start to roll. If that happens, you can imagine what that will do to stock trends, stock market trends. And that's what I'm a little worried about. A couple of other things that come into play in this thinking. If you go to the next chart, this is another key variable for this blue line, the ratio of real to old euro spending in the economy. The rev line in this thing is total US corporate cash has a percent of new era investment spending. So if you look at it, it makes sense. If cash among corporations is building up relative to the level of new era spending, guess what? New era spending is probably going to be strong. And if cash starts to dry up relative to new era spending levels, then in the future, new era spending is likely to slow down. You can see what that's suggesting right now. It's been rolling over. It did have a recovery. So did the blue line. Now it's rolled over again. They have the legs are perfect here. Give or take. But I think again, it's another troubling sign for what may happen here for the trends of spending within the economy. And then finally, I would just point out that I think that generally economic policy has been tightening of late. And that's likely to slow the economy down. And one way to look at this is the blue line in this chart is city groups, US economic surprise index. And all that does every day is it calculates when the economic reports come out is that report better than what was expected or worse than what was expected. If it's better, the blue line goes up worse, it goes down. So it just picks up net, net positive surprises, net negative surprises in the economy. Well, really what that is is a momentum measure of economic growth. Because typically when the economy is accelerating, all of our expectations are behind where we're kind of catching up to the fact it's accelerating. So our estimates aren't as good as they actually come in. The alternative holds as well when the economic momentum starts to lose momentum, what happens typically as reports are worse than what was thought. And so it's a great measure of economic momentum. You could see it's gone straight north here in recent months. And that's showing up in the data. The data's been better than expected. That's why people are feeling better and what not. But what I've done here is taken that 10-year treasure yield, pushed it forward by three months and then inverted it. And you could see it's a pretty darn good relationship. When bond yields go up today, three months later, economic momentum fades. If bond yields go down today, three months later, economic momentum picks out. We've just been through a period of pickup and economic momentum. And guess what? That brought a big surge in bond fields because momentum picked up. But what's likely to happen now just about at this point, three months later, is I think economic reports start to disappoint as we go through the summer months. And if you get disappointing reports in the economy, brings greater fed ease, which has not been great for the tech part of the economy, I think there's room for me to believe that not only overall economic growth could be weaker than expected here in the coming months, but also maybe tech spending in general might weaken off as well. And that's what I've got a little concerned about, perhaps a correction or sorts. I don't last count on my make. I don't want to rest, but we'll come back this a little later. But I also got to think of the other tightening forces that have been applied on the economy here kind of quietly in the background in the last few months, most of which are tied to the geopolitical conflict. Geopolitical conflict gets wet hand. Oil goes through the rough. Okay. Well, now the inflation rates up, as you pointed out earlier, Justin, the inflation rates are, I guess what that's doing. The real wage has suffered some of its biggest declines in the last couple months that it's had the entire bullmark. But real wages are been negative of late. Uh-huh. Yep. You've also got, because oil went out inflation, it went, interest rates have gone up. Not only 10-year yields, but mortgage rates and across the spectrum, a tightening force. Oh, for a moment. You know, I got people inspecting Fed tightening to come through. You've had the dollar was depreciating. It started to appreciate again or strength a little bit as rates have come up in this country. That's a negative force. In the last 12 months, the net deficit spending from the federal government as a percentage GDP is contracted by 2 percentage points from about 7.2 percent stimulus to 5.2 percent stimulus. So you've got tightening in the real rate of the money supply has almost turned negative again after being positive for a while. And that's important because inflation is coming out. So you've got monetary tightening, you've got rate tightening, you've got dollar tightening, you've got fiscal tightening. What is that going to do? Probably going to slow the economy down. And that's what that's kind of where I'm looking here for the two summer months maybe under the early fall. Maybe selling may and go away this year might not prove out to be too bad even though it might be more like selling June or later it go away. Or whatever. Flarking through with Jay. This idea of new era spending against all their benefit. It's been like one of them thinking about a lot recently because the new era spending is kind of being done in advance. But you'd argue like for this to continue for a long time because that's kind of the big question now. Can it continue? You'd have to argue for it to continue. We have to start seeing benefit to sort of your average company, right? Because that's what's going to be the revenue that's going to come back to them that's going to allow them to keep spending. I mean, do I have that right? Yeah, I think so. And that's that's the other thing that bothers me, Jack, is this even much more so than the dot com boom in the 1990s. I'm seeing much greater bifurcation of success in this economy and in the stock market than we ever saw in the 1990s. In the 1990s, we were growing, you know, GDP was growing 3 to 4% rather regularly productivity was very explosive. It was close to 2 to 3% as well over the vast majority of that era. Job creation was very healthy throughout the 1990s. Optimism was everywhere. It wasn't just our Wall Street. It was throughout all across Main Street, Small, large companies, consumers. That was a very different world than what we have today. What we have today is we've got a world that's just phenomenal results from the innovations that we have in place, much like we had in the 1990s, somethings to have. But it seems like it's much more limited to that sector or all on the stories of what might come for the human race in the future. Kind of one of those two things because we've got this bull run, which is really spectacular, but it's very, very concentrated among a small cadre of technology stocks and profit successes also highly bifurcated in those areas. And meanwhile much of the rest of the economy and much of the rest of the market hasn't really participated. And I question, you can do that for a while, but can you do that forever? Can you really have a situation where tech is booming while the job creation is zero and the unemployment rate sort of grudgingly but slowly is rising a little bit. And everyone on Main Street says, this is the worst economy I've ever seen in the history of America with their sediment reports. No, I don't know the answer to that, but I kind of question it's sustainability. And that's kind of what these next charts get into a little bit, Jack. It makes me a little lary of this whole situation we're into here. This first chart just looks at this bull market since October 12, 2022. And says, you know, a lot of people, particularly investors are very optimistic about the stock market because profits are so good. And it's true. Profits eagerly are up 10 or 11% last year. Very, very solid profit growth. And they continue to show signs of growing very rapidly in the quarter where you. But when you look under the hood, if you will, it's all centered on new era of pursuits. All the rest of the economy is not really participating in that at all. The blue line in this chart just looks at the trailing 12 month earnings per share of what I call new era parts of the S&P information technology and communication services. And the rest of the red line is the other nine sectors, their market cap earnings results. Tech, new era is just exploding. It's as strong or stronger than they ever was in the 1990s. No dot a bot. But the other rest of the stock market of those nine sectors, their earnings are actually down today from where they were at the start of the bull. And they haven't done much for almost a year. They've been flat while new era earnings have been explosive older earnings have just sort of laid there. And this goes a long way of explaining sort of the kind of the dichotomies that we see out there. So why people are complaining about how bad things are when we're looking at a stock market going game busters. Why there's so few jobs being created at the moment when stock market going game busters. I think it's because of the fact that it's so concentrated and it's getting more and more concentrated into this new era sectors. That's the only place they're success to jack's point for technology or innovation to be. And the Gordon coach success. I think it will here eventually, but it has to at some point be not just benefiting the sector that came up with it. It has to start benefiting the other parts of the economy or it will not be a success and indeed in and itself will probably fall in on itself with if it doesn't correct that I still think. AI and everything else will create benefits, but I think it's taken a lot longer than it has in the past. And we're living off a very bifurcated situation in the interim. I'm just shocked when I look at no earnings. Advancement for nine of the 11 sectors in the S&P 500. I bet if I looked at small caps, we'd stocks were, you know, those we'd see similar results overall. So it's really been a limited thing. If you look at the next chart just looks at price action and people are more aware of this one. This just divides the stock S&P 500 into new era and old era. Now it hasn't been quite bad. Old ear stocks have gone up. You know, not not terribly. It's just that new air stocks have just gone up sickle much more just unbelievable and it's kind of getting worse. I mean, if you look at what's happened year to date year to date right now. Old ear stocks are up just slightly year today. I don't know in the low percentage points, but new air stocks have just gone through the through the roof year today. And most of this is a career just since the March 30 low there on the blue chart. The March 30 low, they've just skyrocketed. This chart looks very much like the chart of an AI stock, you know, but it's just the new year stocks within the S&P 500. And the red line looks like it. It's in a foreign foreign world. It's it's living on Mars while the blue lines living here in the United States. It's not any participation. I just question how much longer can that go on before something kind of has to take a pause and even it out a little bit. If we go to the next page, I will say that some semilets of this has happened at different times. What this chart shows is that, you know, these big moves when when the new air stocks start to outperform dramatically faster than old air stocks. That is when the blue line starts really ramping up higher than the red line does when that's happened. I've laid out four other times in the past during this bull market with that's curve where you can see what the arrows going up. Each one of those previous times once you had a significant differential and returns over very short period of time, it was followed by a pretty significant correction going on primarily among new era stocks. You can see the last four times that's occurred. And I this this one we've had since March 30th is easily as big as any of those before that. And again, doesn't mean it has to happen again, but it sure looks like we might be do for another one of those pauses. Yeah, doesn't mean we have a bear market, but it could feel pretty nasty for a while and there could be a lot of pull back in where there's the greatest emotional excitement that is in new era securities. Going back to your idea about like these benefits going down like it's interesting because I see like a dichotomy. I mean, you talked about they probably will and I kind of think they will too. Like I see what I use AI in my life and I talk to other people who are running like small businesses like you do you do feel like the benefits of AI are going to spread down. Everybody like I had to redo the website for access returns wasn't great and like we did like a new professional website. I did it with Claude and like three hours. Like the whole thing like end to end like to being like a live website in like three hours and it's but I can't like quantify that in terms of thinking about like what that actually means for the economy, but I have to assume as the technology diffuses down people are going to realize that they can. You know create a lot of efficiency or create revenue or whatever with this technology. I think you're right. I don't know. I'm not an expert on AI. I think that I think some of it to me for me, it's just like Google on steroids. You know, I Google Sultman, it could come back much more organized than it used to, but I could have done that before. I really want to look up stuff, you know, Google Sultman and figured out it's more than that. It's far more than that, of course. And I think the issues will be the power usage going to take to continue to do this if the demand ramps up for it, and what ultimately they can charge for it. I think about many of our past technological innovations, Jack, and there's a lot of this, the stuff that we all use that we really don't pay for. I mean, even coming out of the dot com era, a number of things that are done or changed that none of us really pay for, and we use it. And then there's a lot of that we use just for fun too, you know, looking up information on other things that probably detracting us from what we should be working on, if you will. So I don't know, I don't know where it will go all that. I think though the odds strongly favor when you have some technological major breakthrough, ultimately it tends to create greater productivity, at least in some measure. But I'm not, you know, I'm not sure we can keep doing what we're doing on this chart for that much longer when something breaks in the short run, if you will, even it might take five years before what we're talking about really gets disseminated. This situation or its speed of departure, I think has got to, got to change. We did episode Andy constantly one of the points he was making and I'm not sure exactly what it means, but I think it's interesting is he made this point that like if you referenced the 90s before, like when you looked at the 90s tech bull market, one of the interesting things was tech started out as a very, very small part of the market and then kind of grew throughout it like with this bull market tech has been a huge part from the beginning. I'm just wondering do you think there's like any implications of that do you think about what that means. Well in this bull market, I think about a chart of that coming up the market cap, it's a good, it's a good, good question. I do think that I think there is something not as stable in something that is growing so rapidly and impacting so much of the growth rate of the economy much more than it used to past innovations. I think that I don't know what the data is exactly like when the railroads are first for the industrial revolution, but I suspect that the, you know, that as far as sustainability, that it's hard that those things ever got to the size of dictating almost the entire gain of the stock market and entire gains of growth in the economy that we're kind of verging on today. It didn't get that big in the 1990s, like you said, it got pretty big by the end, but it wasn't nearly that big throughout where this one kind of was big and that was gotten even bigger and taken out the 1990s. I think it gives a certain sense of greater instability in that world than it was in earlier innovation periods when there was more that was still sort of propping up economic growth or raw. We're becoming almost too dependent on innovation for growth rather than having it be born and sort of come out and disseminated in a world where there's greater support going on in general. And then that diffuses how fast it has to come out so to speak and how fast it has started showing benefits. We need to seal this is actually that chart in another way. This thing just goes back to the start of this bowl, but this looks at the ratio of market capitalization of new era sectors to the total S and P 500 capitalization. We started this bowl where new era accounted for about 33% of market cap and now it's about 50%. In fact, what kills me out this chart is we have gone since March 30. Think about this. From March 30, a little over two months, we've gone from about 42% of market cap or even a little less than that, 41 something to almost 50% of market cap. 78% each points in too much. You want to project that out? Well, we'll be, you know, before the end of the year, we'll be over two thirds of the economy comprised by new era stocks. It's not going to keep going at this pace. It just can't. But even today, we're sitting, you think about it. It's been a little over three and a half years where new era, what counted for a third of the economic or third of the stock market. Now it accounts for half of basic. That's it. That's unbelievable. And where will we be if this is two thirds? I think particularly when you think about new era companies are probably the least job creation force. There is among all the industries out there. At least in the short or direct direct employment. So I'm just concerned about some of this. I'm not saying it's going to die or go away. But I think it's got to slow down. Yeah. And I think your point of views of the andies, which is his idea was there's only so much GDP pie like tech can't be everything like tech can't keep going over the entire economy. Because the certain point where it just doesn't get can't grow anymore. Well, you know, you're seeing, Jack, I used to say, I think this just came out of the 1990s when we were doing the dark on running is to say, you know, we're going to have to redefine our S and P 10 sectors, which it was 10 sectors back then. We can't. It seems stupid to have a sector called technology because everything's going to be technology. That was my argument. Everything's going to be technology. The only thing going will be technology eventually. So we'll have to, you know, maybe we'll call it the innovation sector or something, but you can't call it tech because everyone's going to be using tech into it. But in reality, what's wrong about this cycle to some degree is not everyone is. It's basically this innovation sector's create all this stuff. It's creating most of GDP. But no, it's not getting out and affecting others in a positive fashion. And that's that's a problem. Now, maybe it probably will still do that. But it's it's almost innovating itself too quickly to be absorbed. And that's a problem because it becomes too big a part of existing activity. And it seems to like every time the rally starts to broaden out and you kind of see it in this chart, like, you know, the beginning of this year, it was really great for value stocks and a lot of these other sort of non non new era stocks. And but then like it turned on a dime like in, you know, and whatever it is April or something like that. And it's weird that like it's almost like investors. They're so conditioned to these large cap growth names sort of working in. They take these pauses. They seem like, but then it's back to the old playbook. So I don't know. It's just an interesting observation that there's these we have gotten these fits and starts, you know, you can comment on on Jim on this gym. But, you know, but it's the same old playbook when I don't know that things go back to the large cap tech. I think that one of that one of the major things behind that Justin is in this bull market. It's one of the few in history that has lived almost its entire existence under economic policy type. Okay. And as I showed earlier that chart that much of the old economy needs policy support to grow. That's how it grows over time. It gets liquidity growth through modern terrorist and was lower rate environment that really matters for much of our older pursuits. It gets a positive slope yield curve that helps it gets fiscal juice that helps. It generally has a, you know, the dollar helping with weaker dollar which makes us more competitive to to for producers and the like. This one's been opposite that we've been pounding older pursuits with higher rates, inverted yield curves negative money growth. It's just lower fiscal juice one of the strongest dollars in our history. And it's just killed off older pursuits and the only game left in town is the game that doesn't need policy. It creates its own growth by itself and doesn't need any assistance from anybody. If I come up with an idea like the iPhone, I don't care what the economy out there is doing. I know I'm going to. And so they got their own internal growth rate that's invariant to everything else. And I think that's why we've seen such a dichotomy. I would step back. We wouldn't have had this had we not had this persistent fear of inflation in this cycle. Most of the time, by the way, inflation is averaged around 3% in this cycle. Big deal. We've averaged 3% inflation over many past cycles. No one cared though. And they ease appropriately in whatever. Have we eased during much of this? I think we'd have much better employment growth, much better confidence in this country, much better optimism. More profits for more older percent, but we didn't. And we've left the only game in town. And now it's collected all the capital that's out there. running to this one sector because it's the only thing working. That's why I say in that chart out there. In the reason that, as you mentioned, we did start to see older pursuits pick up, was because that's when we were easy. That was some of the brief window from late 04 to late 05 when we actually eased for a period of time. And guess what happened? Things broadened out. And then we quit this year with the geopolitical conflict and it all went back to the same place again. And I think that's what I'm saying. We still could have a pretty big shift back away from new era pursuits to old era if we have to end up for forced to ease, if you will. If our mindset goes from war inflation to we got to say growth, that would help, I think, correct some of this in balance. And that's kind of what I'm sort of betting on, what average over the course of this year. I got one quick thing on the iPhone. I was thinking about that when you were saying that. And I'm like, if I had to think in my life, like if I came on hard economic times, the things that I would cut before the iPhone like this, like I'd probably turn off the ear conditioning before I put it to the iPhone. It's pretty amazing. If you think about where that is in the order of things you would get rid of and in hard economic times, it's like at the top of things you're not going to get mad. Yeah. I really think, oh, Jack, that it's, they become not just innovators, but they become sort of invariant economic subjects to the old economic cycle forces, inventory cycles and policy tightening cycles, even inflation. And I think that they're kind of on their own cycle. That's a whole another subject. I brought this up. I don't think we study enough nor understand enough what drives these innovation cycle because it's not policy officials. It's not worse than the Fed, and fiscal authorities watching there. They got their own cycle going on. And I think that'll be the next big thing over the next few decades here is we're going to come to find out there's a whole cycle involved in innovation that's going to be mildly important for an economy which now bases so much of its existence on that part of the part of the world. And we'll see where that goes. I don't think we understand over a while yet. A couple of other things that makes me, as I say, this cycle is becoming much more concentrated, much more bifurcated, much more extreme. And now it's being driven by more risky parts of the market for the first time. So this is just one, this is the Russell 2000 small cap tech relative to the old mag seven. I mean mag is killing those very venerable mag seven. No one would not own those things. And they've been run over by small cap technology company. Well, I think that maybe that's fine. There's nothing wrong about a per se, but certainly there's more risk involved when small cap tech companies are leading the tech as opposed to having big old mag sevens with profits and everything else leading. This is the change in stripes we haven't seen yet in this bull. If I go to the to the next one, you're also seeing another stripe changing. We're having unprofitable stocks, unprofitable tech stocks in particular leading the tech world, if you will, overall. So mag sevens not only get beat by small little no name companies, it's also get beat by companies without any profits. And that's that changes the feel this thing. You know, one of the great things about this tech run it wasn't just dot com names without any earnings. It was these well-known, finance, big old cap names. That's changing here under the surface. This tech rally is suddenly becoming riskier in that sense looks a little like the end of the 19.9. And that's it. One I didn't have in there is by put a chart up on AI, the Goldman Sacks AI index. That's parabolic. Like parabolic. And it's it's multiple just into your point. It's multiple since March 30th on on trillion 12 month earnings for the gold. I think it's Goldman Sachs. Goldman Sachs AI beneficiaries index has gone from like 35 times earnings to over 70 times. Or just since the end of March. So that's it's a high biolic is the rest of that. That's it. So we got different drivers here in this rally than we did last year or the year before that in this bull market. And I'm not sure that's holy register. Yeah. Well, we'll see. So this this next chart is oil. And obviously this has been this has been a big part of the story here on what's going on with oil. And this was actually your piece where you're talking about this idea that we did a correction baby coming. So we're what were you getting out of this chart? Well, I'm just laying out oil back to the 19.7 here and just just kind of dating the previous major peaks in oil. It's what I come away with here is that every one of these peaks with the last one being the exception so far. Every one of these peaks has been associated with a meaningful sell off in the stock market. But the key is after it peaked. Not necessarily during its rise. In fact, during the rise of some of these stock market did pretty well. Now there were some where the stock market started to crumble before it peaked, but then the crumbled even more after it peaked. What am I point about this is is that most of the negative pressure on the stock market and indeed on the economy too doesn't come when oil is rising. It comes once it peaks. It's the aftermath of the peak where the most intense downside pressure on the stock market and the economy generally shows up. If you go to the next chart, Jack, it's going to label those same dates on the S&P 500 since 1997. You can see for example in 1974 the market peaked, excuse me, 1972 the market peaked, but when oil peaked in January 74, look what happened after it peaked. Most of the time these red dots occur right at the top of market peaks. That is, generally the market peaks about the time or shortly after oil prices peaked. So it's kind of this sense. The piece I put this in, I entitled it by on the cannons and selling the trumpets. When I meant by that was I think it's this sense that oh my gosh, maybe we're going to make it through this oil went up to $100, $120 and we have this geopolitical conflict and now it looks like it's winding down. I guess we're going to be okay. It's okay to stay in stocks and that's kind of what March 30th was about, right? March 30th was the first time when Trump and Iran both blinked together a little bit and said that maybe we're widening this thing down. I guess what the stock market was straight north. But my point is historically some real pain generally occurs after oil peaks, not wallets peak. And I'm not sure that's well appreciate. I put this out recently because I think it speaks volumes about what's going on with the bond market primarily. And all this is the trailing one year correlation between daily movements and the SP 500 and the 10 year treasure yield. And what you look back historically is this speaks volumes to what the mindset on Wall Street is among investors. Typically when correlations are positive as they were most of the time after the great financial crisis in 2010 and even after the dot decline when they're positive that suggests that people the primary concern among most investors is growth. We cannot be growth that's their major concern. Why? Because if bond yields go up and stocks go up it says that the equity investors are looking at that rise in yields as a positive commentary on the economy's healthy enough to support higher yields because it's worried about it's really weak. So if stocks and bond yields go up together it suggests that people are primarily worried about economic growth. If yields go down that just says all economies weakening stocks fall with it. Okay. But it gets very different in a negative correlation. Well when you're negative it's primarily worried about inflation. In that situation if bond yields rise stocks generally fall because they're not looking at it as it means the economy's healthy they're looking at this that means more inflation. And if yields fall stocks often go up because stock markets looking at it as if yields go down it must mean inflation as we it deal it did initially when we got you know this 40th started out you had a bit of a drop in yields and stocks to look off. We've still kind of been in this negative correlation at least until very recently. And the real question is if you go to the next chart why this matter so much for the bond worker the the red line near is the tenure treasury and the blue line is that same chart I just showed you converted. So when correlations are negative like they were in the early 90s bond yields are at the highest. When correlations very positive bond yields are at their lowest because all that's really saying is people are mainly worried about inflation or they're mainly worried about growth. We've been more worried about inflation lately that's why bond yields have been higher. But I think if we end this war I think inflation is going to come down if you couple that at a time when the economy is also slowing. I think we're going to quickly go from inflation the growth is being a primary worry in this blue correlation is going to fall down in their deposit. of territory, allowing I think body yields to fall firmer. The problem is, could go from lower rates mean higher inflation to lower rates mean we could growth is a big change in the mindset. So for a period of time, we could see here between now and let's say at the end of this year, we could see where the war ends and rates go down, but people are, bond markets taking out some inflation, but the stock market goes down with rates as they start to worry about weak growth. That's how they could reconnect again, but we could actually eventually, when people decide that lower rates were not going to recess, then we might get back to a situation where lower rates or lower rates or rates stop falling and the stock market can take off again if you will. But I do think, important to look at, how do we get for where we are today to a situation where we could get rates back to in the threes again? And I think part of that is going through a process or a mindset of focused on inflation is your biggest fear to growth. And that's kind of where I think we might do yet before the years old. Last few here, I just got a couple of one-offs that I think are interesting, worth mentioning. I'll just throw out. This chart overlays the S&P 500, which is the blue line there at a log scale, with a ratio of core capital good orders, poor job, the rev line. In some ways, it's kind of rather remarkable. You can say what's driving the stock market and what has been driving the stock market. This chart, you could argue that really, since 1990 at least, the stock market has really just been about capital investment per job. How much are we investing in our labor force? That's all that's mattered. Once we invest less in our labor force, guess what? Stock market goes south. And once we, what's a capital investment to per job goes up, knocks you gray. It's really rather remarkably close relationship. And the reason I bring it up right now is we are just peaked out at an all-time record high of more capital good orders to per job and it rolled over pretty big in April. But I do think it's going to be problematic to some extent if for no other reason that at least real capital good orders are going to be under pressure from higher inflation overall. And if the job market does start to pick up, you could see where this ratio of capital good per job starts to fall. We're right with basin. That could bring some pressure to stock. We'll keep working. Are those capital good? Would that be, would that be including things like, you know, what's going on with like the AI build, like that type of stuff like data center? It's in there. Yeah. It's in there. So that could be, it's not just that it's old and new. It's all of it. Yeah. But it's definitely in there. Yep. But it just kind of just a road over in April too. I think. Well, what you'll see, and it also depends on what the denominators do to your boy Justin, the job, job growth changing too. Well, a little better. This chart I just put out, I guess early this week and I just thought I was kind of saying I'm not sure what to make of it. It's a busy chart. But I call this a bull market of booms. I just find it interesting. I'm still kind of thinking about this, but I got several different things of this chart. I probably less to read it. But the two that started this bowl really were the Mag 7 and Bitcoin, which is basically the blue line of the purple line in there. They really started and they didn't just start. They boomed. They really boomed, at least really for quite a while in the early part of this bowl. We're talking about starting 22 and maybe it was early 2024 where they kind of stopped booming finally. And the summer of 2024, they kind of both peaked out. And if you look at that, Bitcoin's gone down a lot over almost two years now. And Mag 7 has been a market performer at best over that time. And it's still below its all-time relative high that has occurred last year. So Bitcoin just absolutely and Mag 7 relative to the S&P has really lost its lustre, if you will. No matter, big deal, because as soon as Bitcoin and Mag 7 kind of topped out, guess what? Gold took off for the races. Another market boom. And then it kind of peaked out, you know, last year a little bit. It has really come down hard relative to the commodity prices there as shown. No big deal. Because as soon as it comes, because the oil took off. It went from gold to the world, the black line to the bottom there. And then, you know, oils now started to peak out, but no big deal. Because a couple of months ago, the red line took off. That's AI. And I just, I don't know quite what to make of it, except it's kind of odd that we've had a three and a half year bull market. And it's really been made up of major blooms in all these different assets over that period of time. And you got a wonder if AI rolls over what's going to, what's left to go. Maybe that's older or a stock. I don't know. I can't imagine they're going to swing as hard as these guys. But it's really, I don't have a big conclusion on this. I just find it fascinating how many market blooms we have experienced in this bull market compared to others I can think about. One thing I'll be coming out with is I'm comparing the risk return frontier of the current bull market comparing the risk return frontier doesn't go for 100% stocks to 100% bonds. It goes from 100% new era to 100% old era. And what you'll find out when I look at what happened in the 90s to what happened today is that as you go from new era to old era, the risk goes up substantial in this bull market. Whereas in the 90s, it was almost a straight line of nothing, but excess returns with not any additional risk. But with the very different risk or potential in this market compared to the 90s, that kind of came from after I did this chart of looking at what's really moving or what is. And then the last chart I just thought are just kind of fun and a question mark to the blue line here is the relative performance of technology stocks in the S&P 500. And the red line is Bloomberg US billionaires investments select relative total return index. And basically that index is set up by Bloomberg captures the 50 largest holdings of US billion errors in the stock market. And this index captures how it does in a relative basis. And they're told return basis. And what I want to point out, look how close this has been. The billionaires have been all over tech stocks throughout this bull. But then suddenly at the March 30 lows, tech took off and billionaires just kept going down. So I don't know either billionaires got scared out of the tech market before it took off on March 30 after it was pulling back or billionaires know something the rest of its normal people don't. I don't know which it is, but it's kind of fascinating that there either be a left in the dust and maybe they'll decide they were wrong and they're going to start coming in on AI now. Or maybe they've been out for reasons that they understand that we don't really know. I don't know for sure. Obviously, because we don't know what's in the day. But what's interesting about the technology sector is, into your point about the mag seven, there's been a lot of these names like micron, you know, Oracle IBM, these like, I would say second level tech companies have kind of ripped here like over the last month or so. And so, you know, I don't know if that's, I mean, obviously Oracle, Larry, else and billionaire, whatever. But it's just like, it seems like there was like a shift in sort of some of the more speculative or let's say the eight, the tech companies that were just un Calling them second level. That may not be the right word or not. That's just a hypothesis. I have no idea. That's just an observation, you know, to I think it's a good observation. What I talked about a little bit earlier too, just would support that, you know, kind of being made up with unprofitful tech companies now in small caps tech companies. That could be part of that. Maybe the billionaires were owning the mag sevens and really made no change in and mag sevens done a little bit better than they have over that period, but not a lot. So that could explain what's kind of gone on. It's become a more speculative tech market. And maybe the billionaires have been sitting in some of the more stable large companies. I hadn't thought about that. It's a good point. I do have Jim though at some point I can do with the billionaires. You know, so maybe I can, maybe I can find out what they're doing. They're over their secret meetings are. I hope I get invited. Me with you. Me with you. That one. We both be going to the next game here on soon. If we, yeah, that's right. You almost have to be a billionaire to go to the next game right now. That's just by that expense. And I think a lot of the billionaires probably wouldn't spend what it was costing me. I wouldn't hear. It's all they made of billions. Yeah, that's exactly right. But not doing that. But just briefly as we wrap up, Blake, are there any main to be taken? We as you want people to have here as we head forward in the next month. Well, I, you know, I, I guess for me, I. I'm nervous about it where we're going because it's got such a head of steam in the upside of it feels like death Word over suggests to any kind of correction when you got this much momentum and it could go on for a while But I just trying to keep myself thinking ahead Year from now or whatever rather tomorrow or next week or next month I've always kind of invested for a year out and I just think we're gonna get a better opportunity here to look at this investment world Not just going from disastrous levels or anything, but from better levels than what tech stocks are selling at currently Maybe I'll be really wrong and one of these episodes. I'll Say a carpet and we'll move on but that's where I sit right now. I'll be looking for Information that suggests there's more of a struggle coming at All right, thank you very much Jim. We'll see you in about a month or so All right, thanks for having me guys as always take care Thank you for tuning into this episode if you found this discussion interesting and valuable Please subscribe on your favorite audio platform or on YouTube You can also follow all the podcasts in the excess returns network at 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