The leverage that monetary policy has had over the economy over the last sixty years
has been weakening, and it implies that at some point in time there's a
real risk that won't reach an economic malaise or recessionary period where the Fed monetary
policy won't be as effective as in the past, and that will imply that
economic growth will stay weaker for a longer period of time. And that's really
why I expectation. I think we're close to a secular bear market in the
stock market as well. It may have already begun with the high end January
of last year. You were listening to Carrie Letz's Financial Survival Network, where
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Financial Survivalnetwork dot com and get your free newsletter and gift. Financial Survival Network
now more than ever, And welcome you are listening to and watching the Financial
Survival Network. I'm your host, Carrie Lutz, and hey it's mid October,
October seventeenth. Well, we got good news for you and bad is
Jim wilt Is back on the show. That's the good news, but what
he's about to tell you is really the bad news. Jim, it's great
to have you back. So basically, well, you're going to explain three
the world to us in three charts, and I think that will pretty much
clear up everything, won't it. Absolutely. I mean, we're two weeks
ahead of Halloween. Why wait? Why wait? All right, So I'm
going to share the screen with you, share those charts with us. Please
tell us what's going on here? Well, let me get this up here,
all right. So the upper left chart that my arrow is pointing to,
and you'll be able to go to Carry's a website and maybe blow these
things up to see them blink. Well, yeah, does for you,
and you'll look at them all all right. So the first chart is the
long term chart of treasury bond prices. So, as we most people know,
bond yields peaked back in nineteen eighty one, and as they've come down,
treasury prices went up. And so you can see this forty year up
trend has been broken in the last eighteen months or so. And the implication
carry is that we're beginning, I believe a new secular bear market in bonds.
Now, what many people may not know is that from nineteen forty six
to nineteen eighty one we had a thirty five year window time where treasure yields
just worked their way higher, which was then followed by this forty year period
were rates came down. So the implications here are fairly significant in the sense
that cheaper money in terms of borrowing costs for businesses and consumers over the last
twenty thirty years has obviously spurred economic growth and demand. And if indeed a
secular bear market has begun in the bond market, on balance, treasury yields,
corporate fields, borrowing costs in general are going to be higher, and
that has implications for the economy because one of the things that helped the economy
grow faster was indeed lower borrowing costs. And the chart right to the right
of it is the correlation between bond prices and the stock market over the last
twenty years. A lot of financial advisors and a lot of investors were really
bailed out in two thousand and one and two in the financial crisis two thousand
and eight because bond prices rallied as the stock market went down. So if
you had an allocation of forty percent to bond sixty percent to equities. The
bond allocation really helped minimize and reduce the total loss to your portfolio. And
I wrote a piece in June of twenty twenty one basically saying, I think
this negative correlation window is going to be ending, and we're going to see
bonds and stocks revert back to the pattern that existed for most of the time
from nineteen forty five to two thousand and In that window of time, carry,
bond prices and stock prices moved up and down together, so that in
the seventy three seventy four bear market, bond prices were going down just as
much as the stock market was going down. And what we saw last year
is that sixty to forty portfolio had its worst performance ever. We're seeing bond
prices dropped significantly last year in addition to equity prices falling. So the combination
of these two charts carry suggests to me that the formula that financial advisors and
most investors have users in terms of a sixty forty or something close to that
allocation to stocks and bonds is going to be very problematic. If we've entered
a window of a secular bear market in bonds, and what we've seen even
this year, when rates have gone up noticeably, equities have sold off,
and so that correlation continues to hold. So that to me is the longer
term big picture that I think investors really need to understand and respect. And
it'll be higher because everybody's been living in a world the last twenty plus years
where most of the time bond yields and having them in your portfolio really help
balance what was going on in the equity side of the equation, right,
So that's that's kind of profound because it basically throws water on the whole investment
philosophy for the past forty years. And it was valid for the most part
for the past forty years because the FED could always cut rates further and we
had a downtrend in rates, so that would kind of bail everybody out.
Yeah, yep, they could exercise the Yeah, and again from a bigger
picture standpoint, if you think about it, for most of the last sixty
years or so, whenever the economy slowed, the FED would cut rates to
stimulate growth. And what we started to see in two thousand and one is
the FED decided, oh well, now we have to push the real rate
to minus okay, So the FED funds rate are out at one percent for
a number of years, even though inflation was above one percent. And then
in response to the financial crisis, not only did they drive the funds rate
down to zero, they also expanded their portfolio, the balance sheet of the
FED from seven hundred billion in two thousand and seven to almost nine trillion a
year ago. So to me, what it implies, Kerrie, is that
the efficacy, the leverage that monetary policy has had over the economy over the
last sixty years has been weakening, and it implies that at some point in
time there is a real risk that won't reach an economic malaise or recessionary period
where the Fed monetary policy won't be as effective as in the past, and
that will imply that economic growth will stay weaker for a longer period of time.
And that's really why I expectation. I think we're close to a secular
bear market in the stock market as well. It may have already begun with
the high end January of last year, but all these pieces are starting to
come together. That implies that equity investors are going to struggle for the next
ten to fifteen years in a secular bear market. Wow, all right,
ten to fifteen years, which is longer than the average person on Wall Street
has been in their job, right probably. And again, you know this
may sound like, oh my god, this is kind of extreme. Well,
if you go back one two hundred years in terms of looking at the
dol Jos industry average, there have been other windows a time where you had
these secular bar markets, the most recent nineteen sixty six to eighteen eighty two.
You know, So it's not like I'm talking about something that's never happened
before, or oh my god, here's a guy just trying to be negative
to grab a headline. No, I'm just trying to do economic analysis and
keep my eyes open so that you know, I don't get run over and
my subscribers don't get run over either. Right. Hey, what about the
concept here that you know, if you had invested a dollar in nineteen twenty
nine, all right to become whole again. I think you weren't whole again
until nineteen fifty eight. Fifty great, I think with nineteen fifty four that's
a really pong nine. Yeah, and you know that because to get you
to invest in the market, they're always saying, oh, you know,
over time, you've made money ten percent a year or whatever. But there
was a period of time in those protracted bear markets where you didn't make any
money, right right. I think the dobbles that were facing carried in terms
of comparing what might happen in the next ten to fifteen years to what happened
in sixty six to nineteen eighty two, I think some of the problems we're
facing are more significant. I mean, back in that window of time sixty
six to eighty two, that to GDP ratio is like thirty percent. Were
at one hundred and twenty percent. And so we've spent a lot of fiscal
bullets, if you will, again, trying to get the economy to grow.
In the nineteen sixties, for every one dollar of debt, it generated
about ninety cents of GDP. Now it's less than fifty cents. So my
point is that fiscal stimulus is having less of a impact on generating economic growth
because we have so much debt already and the amount of debt service which has
been suppressed for the last you know, fifteen to twenty years via monetary policy
that has obviously changed. That debt service, you know, is a dread
an economic growth along with a number of other things. You know. We
don't have time to go in the third chart on the lad because we'll talk
about the economy and inflation. So a lot of economists, all I got
inflation is behind is Paul Kruman said, yeah, you know, it was
transitory after all, and so forth. And the thing I've written about recent
months that I think most economists and maybe many politicians are overlooking is that prices
went up for many things that people live on and day to day needs by
forty percent. Needs, not wants exactly, up forty percent, and wages
during the last twenty months are up about eighteen percent. So yes, the
consumer price index has come down. It's important to understand the math on how
that is calculated. It's a twelve month ready change. So price is something
goes from a dollar to a dollar forty and then stays at a dollar forty
for the next twelve months. The rate of change is going to slow onto
it zero. But the reality is I'm still spending a buck forty for something
that used to cost a dollar three years ago, and my wages have only
gone up eighteen percent. This is why I think a lot of consumer sentiment
surveys show that people are less optimistic about the future will because they're struggling to
make ends meet, even though supposedly inflation has come down. And the other
the next chart, the fourth chart, there is a chart of excess savings.
So, as we know, the government sent out trillions of dollars to
consumers. Consumers weren't able to spend while things were shut down. They amassed
over two trillion dollars worth of savings. The San Francisco Fed has estimated that
that will, basically for eighty percent of consumers be gone at the end of
September. Now I've seen other estimates carrying They're like, well, there's still
this much and so forth. The point being is that consumers, especially the
lower income folks, have probably burned through most of the savings they accumulated,
and that's why this squeeze on their incomes because of higher inflation is most pronounced.
And this is another reason why the economy has held up better than many
people expected. You remember last year everyone was talking about a recession. I
was not in the camp. I said no recession in twenty twenty two,
no recession in the first half of twenty twenty three. My take is as
things like the excess savings it's worn down, the increase in student loan payments,
and the impact from rising lending standards which have gone up most aggressively in
forty years, all that's coming to bear in the next six months. So
I think we're going to see the economy slow more markedly than most people are
at this point in time expecting. Because now most economists on Wall Street think
we're not going to have a recession. It's like the perfect setup, you
know, where you know last year everyone thought of recession was coming. They
were wrong. Now they think a recession isn't going to happen. I think
there's a good chance they're going to be wrong. Yeah, imagine if they
threw recession Jim and nobody came. Well, they couldn't afford hey, I
mean, they'd be struggling depending on the ticket price. Right, what's that?
What's that old saw? You know economists have called the five out of
the last two recessions. It's close to that something like that. But again,
you know, when they were all talking about recession last year. It
was because there were two negative quarters of GDP first and second quarter of last
year. Historically, whenever there's been two consecutive quarters of negative GDP, there
has been a recession. But there's so many unique and remarkable features to this
recovery because of the pandemic and the fiscal and monetary response that they took that
formula with like blinders. Well, wait a second, if we're in a
recession, why are we generating three hundred and fifty to four hundred thousand jobs
every month in the first half of twenty twenty two. Yeah, it didn't
add up. It was just kind of okay, this is what the formula.
The other thing is I like to say there's always a bull market and
heard mantel on Wall Street because the advice, you know what Paul said in
the place was going to be transitory in June twenty twenty one. And I
disagree with them, and I'm wrong. That could be a career problem if
I agree with Chair Powell and everybody's wrong. There's you know, I guess
safety and numbers. So h Anyway, So the fifth chart is a chart
of the dollar. I turned bullish on the dollar in July as it was
trading under one hundred, I thought a rally to one oh four was coming,
and if it got about one oh four, then it would run up
to one oh five eighty eight. It got to about one oh seven thirty
four. I think the dollar's near a high, and trading the dollar has
been very important because last year, as the stock market went down, treasureyals
went down, the dollar rally into October. My view last October was the
dollar was topping, and if that proved correct, I thought it would drop
from around one four team to one oh five. We would see rallies then
all the things that went down, namely stocks and bonds and gold. So
you know, the correlation between that a strong dollar and weakness and all the
other markets has been really really high. Doesn't always last that way, you
know, forever, but it has been in the last two years. So
the point being is if the dollar pulls back, that should take some of
the pressure downside, pressure off of other markets and the next charges of gold.
In May, I thought gold would pull back to under eighteen fifty,
and I guess the bigger picture was And you and I have done interviews back
in July. I said, hey, you got five waves up in gold.
That suggests that an important major bottom has been made when gold traded down
around sixteen sixteen in September of last year. But then five wave up meant
Carrie, we're going to have a pullback for a wave too. I think
that completed last week, and we've begun wave three, which I believe will
take gold to twenty three hundred, maybe even higher. It sounds like an
Elliot wave THEORISTR. Jim Well I used Elli waves theory. I mean,
I've been doing it since nineteen eighty one. I started off in nineteen eighty
one carry doing hand or drawn charts of the doll every how, okay,
it is my memory only goes back. I remember very well what it is,
but most of you out there don't because so you don't even know what
a bear market is. Yeah. So it just a pattern analysis. Certain
patterns show up and they can provide information, you know, to me.
I try to tie all this happy stuff in with economic analysis, the fundamental
side of the equation. I have a much higher conviction of what I think
is going to happen when the two sides come together. So I think the
dollar going to pull back. I think fundamentally the FED isn't going to be
raising rates in the near term anymore. That should cause a pullback. I
think your presenter recession. That means the euro is going to be I think,
on balance weaker, and it's fifty seven percent of the dollar index.
So going back to gold, I think what we've seen is the beginning of
this wave three rally to higher prices. There's resistance at nineteen eighty that's that
horizontal line, and then obviously up near the twenty and fifty. So typically
you're going to have a move up, then you're going to have a pullback,
and then the takeoff. And so my guess is gold we'll rally up
at least to nineteen eighty, maybe get up to the twenty twenty five,
then have a pullback, and then I think in the first half of next
year Gold's going to really make a big move to the upside. As the
economy weakens. The dollar is going to weekend because people will start to anticipate
when the Fed is going to be cutting rays. That I think is going
to be very supportive for goal. Okay, all right, next truck he
charged the bottom left one. Now is the Treasury yields. On July twenty
seventh, the Bank of Japan said, you know, we're going to raise
the ceiling on our ten year treasury note from fifty bases points to one percent.
And when that happened, Carrie, I'm like, this is going to
raise global interest rates across the board. Now, what we've also seen,
obviously is all of a sudden people are waking up to, oh my goodness,
we have a two trillion dollar deficit that has never happened during a period
of time when the economy was growing, only in times when gee, we
got a recession. Let's spend a bunch of money. Marproof we've really been
in a recession. When you take into effect real rates of growth rather than
these fake numbers that are inflated by inflation. Well, I mean, at
the same time, I got to take the numbers that are being showed.
I don't disagree with you. At the same time, you know, again
you still see a lot of staticts of showing spendings up and even after inflation,
because inflation has come down, some of these number, I mean,
nominal GDP growth I think is probably six to seven percent. In inflation by
the PCE is around four, maybe a touch under, so you know,
there was a window of time where real incomes are declining. Real GDP was
negative because of the big surgeon inflation, because inflation has come down and am
of those numbers are positive. But besides that, to me, the thing
here is that the supply issued at a time where the FED was buying sixty
five billion dollars of treasury paper every single month, So you had this huge
shift in the balance between supply and demand. Supply is ratcheting higher and the
demand is coming down because the FED isn't buying anymore. Countries like China has
actually been a net seller, Japan isn't buying as much, so and you've
got this outlook regarding inflation. It isn't Fed going to be cutting rates and
so forth. So I think pension funds insurance companies have been a little reluctant
to buy last year or last week. It was a ten and thirty year
auction that went very poorly. Added to the spike we've seen in treasury will
sell when a chart analysis that blue trend line shows a breakout. To me,
the first sign that treasure yields have peaked is when the ten and thirty
years get below that blue line, and then the red horizontal line is like
we've seen higher hides and yields and higher lows. That's the definition of an
uptrent. So we need to see in my view, the dollar reverse lower.
I think we'll see treasure yields come down, especially over the next six
months or so when data starts to show the economy is indeed lowing. But
in the near turn, they can still continue to spike higher. And you
know, the trend is your friend until prove another rise until I don't stand
it high until the end, until the end, you know. And lastly,
the S and P five hundred, it peaked in early late July early
August. I was looking for a five to seven percent pullback. The decline
was seven point nine percent in the S and P. You can see there's
a down trend still in place. I thought that, you know, yesterday's
weekly technical review, I thought the S and P would rally to forty four
oh one. There's a gap there that normally gets closed, right, and
some rather retracements up around forty four to twenty five. So to me,
we're at an interesting juncture here, Carrie, because as long as the economy
shows signs that is doing okay. That's a positive for the stock market because
Wall Street has this idea no recession means are going to go up next year
and in twenty twenty five, and that's what's kept them bullsh So I think
there's a chance the SMP could have one more rally that a gets above forty
six oh seven, the high that we fall in late July. But if
I'm right about the economy slowing materially next year, I think the SMP is
going to have a very very difficult year next year. Declined back towards the
thirty five hundred or possibly lower I think would set up. Once we have
definitive signs the economy slowing down, Ernie's estimates will get cut, pe ratio
will compress. So again, as I said at the very beginning, a
buy and holds strategy using sixty forty, I think is not going to be
very successful over the next ten to fifteen years as we deal with a lot
of these big problems. All Right, well, I think you summed it
upright. Will tough times ahead? You really could, And I might write
an article about this and I will totally credit you. Six charts that prove
that we're heading for an economic bust. And I mean the kislay is very
clear. It's firy, Yeah, I know, I know, you know,
so you know, there's demographic problems, you know, in terms of
the birth rate is the lowest in a couple of years ago, since nineteen
thirty seven. Well, what that tells us carry is that the number of
people entering the labor market twenty twenty five years from now is going to be
less than what we've seen over the last twenty twenty five years. Like penns
China exactly, like what I'm not as bad as China. China is horrific,
all right, yeah, because they're one child policy. But the point
being is one of the drivers of economic growth over the long term is how
many people are entering the labor market. And given our birth rate, you
know, that suggests that that will add maybe point three percent to GDP growth
over the next twenty years. So we're in a window time where GDP growth
will likely be less than two percent at a time when we have enormous debt
needs, a higher interest expense consuming more of the federal budget, wrestling with
what do we do with entitlement, spending, social security, Medicare and soulting
question. It's not going to be easy from a society standpoint, and good
questions questions. Hey, appreciate you coming on macro tides dot com and I
suggest you go there. The link will be in the show notes this interview.
Well, we will give you a link for these six charts so you
can follow along whether you're on video or audio. And Jim really appreciate you
coming on. Question for Jim myself kl at Kerrie Leeds dot com. That's
the email address, and hey, you can find all this info in the
show. That's this interview on Financial Survival Network dot com. Just click that
you want to sign up for the newsletter. Jim, we'll be talking to
you again soon. Thanks so much for coming on. As always, Carrie,
thanks very much like having our conversations. We covered a lot of ground
today certainly did and it's appreciated. You're welcome. Thanks for listening to Carrie
Letz's Financial Survival Network, your solution to today's trying times. For the latest,
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