Speaker 1: But if oil prices stay above one hundred dollars and
now it's three months later, then the impact on economic
activity not just in the US, but globally because there
are other countries that are more dependent on energy coming
out of the Middle East.
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Speaker 3: And welcome you are listening to and watching the Financial
Survival Network. I'm your host Carrie Let's Today with Us
is Jim Welsh. You find him at macrotides dot com. Jent,
it's great to have you back on the show. So
we got a war going on. It's definitely having unintended consequences,
not necessarily unexpected. What does it mean for what we're
looking at here?
Speaker 1: Yeah, Well, the amount of time I think is a
critical component carry If oil prices are above one hundred
dollars for a couple of weeks, you know, I think
you can kind of look through that impact. Financial markets
will respond as we saw early Monday morning. But if
if oil prices stay above one hundred dollars and now
it's three months later, then the impact on economic activity
not just in the US but globally because there are
other countries that are more dependent on energy coming out
of the Middle East. For instance, Katar declared a force
masure on all their natural gas shipments. Well, Europe depends
on that natural gas somewhat significantly, so to me, the
element of time is going to be the most important component.
The longer this lasts and sustains higher oil prices, we
will see the economy got dented a little bit. But
Europe Asia even is probably more vulnerable than we are.
A In two thousand and eight, when oil went up
to one hundred and forty seven dollars a barrel, we
were producing five million barrels a day. We're at like
thirteen eight point eight million now, so we're more insulated.
The energy content of oil and energy impact on GDP.
In the nineteen seventies it was eight percent. It's now
down three percent. So the increase we've seen is pretty
significant percentage wise. But people, you know, may not be
as familiar with what happened in the nineteen seventies. In
nineteen seventy three, oil went from three dollars a bit
old to twelve, and by nineteen seventy nine wound up
at thirty nine.
Speaker 3: Barrel dollars a barrel.
Speaker 1: That was a thirteen hundred percent increase. So if you'd
adjusted for the energy content and all the rest, you know,
oil would have to be probably close to one thousand
dollars to equal what happened back in the nineteen seventies.
And you know, could it get to one hundred and
fifty of course, that's where it was in two thousand
and eight. I'll be leaving a little bit higher if
things are more protracted and we actually see some production
damaged significantly in the Middle East.
Speaker 3: Yeah, and we don't know how long it's going to
go on for. I think you know, war as always unpredictable,
as we found out only too many times in the past,
haven't we. Yeah, So how do you play this defensively?
You're going to be in treasuries. Precious metals don't seem
to be responding to the panic like we would ord Nearrow.
Speaker 1: Where you expected until Yeah, in terms of precious metals,
and I sent you a piece and there's a chart
of gold in that piece, And basically when gold got
to fifty five ninety five and then subsequently dropped almost
twelve hundred dollars in about four or five days, to me,
that was the beginning of a correction that was likely
to last months and months, and the rebound then was
a natural rebound. After that big of a decline, the
gold traded back up to about fifty four to nineteen,
I believe. But my take in the last week has
been is we're going to get this rebound and then
I think we're going to see it roll over again
and drop below at least forty six fifty six, and potentially,
as possible, we could see a retested at forty seven
h seven low as well. So I'm not really completely
surprised based on the chart pattern, the fact that you
had kind of a parabolic move move up into that
fifty five ninety five high where it was going almost vertically.
Typically to unwine that level of bullishness, you need time
or price erosion. So if it's going to be time,
we're talking many months price erosion, maybe drops all the
way down to thirty eight hundred to four thousand, right
right now, all I'm reasonably confident, Carrier is I think
we're going to see gold drop below forty six fifty.
Speaker 3: Six really, so where will silver go? Then?
Speaker 1: Maybe sixty five really could be.
Speaker 3: It'd be I've heard it's low as fifty four. But
but you think the bull mark it's still on and
this is just direction.
Speaker 1: Yeah, I'm glad you raised that question, because gold bottomed
in December of twenty fifteen at one thousand and forty
six and then rallied to two thousand and seventy, then
pulled back to six teen sixteen in September of twenty
twenty two. The rally from that level to the fifty
five to ninety five, I think is Wave three. We're
in Wave four, and once this is concluded, we'll see
another move to higher highs in both silver and gold.
So I believe the bull market is intact. But I
think you know, Wave two took gold down from twenty
seventy to twenty seventy to sixteen sixteen. You know that
was a twenty percent plus correction, so and it took
quite a while. I mean, it took like more than
a year I don't think we're going to take that
long this time, but again, it just reinforces a the
longer term trend I think is still positive. We're going
through this pullback and I just think it has more
to go.
Speaker 3: Okay, let's talk about AI stocks. AI rop predicted the
war almost to the other cycle investors out there nail
this thing. Pack cycle starting right in mid March a
week before isn't too bad. What do you think of
AI in terms of the market, in terms of how
it changes investor behavior, That's what I'm really interesting. Yeah,
I don't really care about, like how wonderful investment thesis
it is. The story's out, but change you as an investor.
Speaker 1: Well, first of all, I think you have to separate
the economic impact from how the stocks may perform. Economic
impact is going to be fairly significant this year. We
add up all the hyperscale spending plans for twenty twenty
six and it amounts to about one point seven percent
of GDP. So, no matter what happens to the stocks,
the economy is going to get a fairly significant lift
this year. It may will be less as a percent
of GDP next year, but it's still going to be
fairly significant the psychology behind all those stocks. Again, historically,
you get new technologies and people bid them up beyond
what's likely to happen in the very near term. And
so to me, we're in this phase like the Internet.
The Internet became everything people imagined in two thousand and
probably more, you know, but there was this dip where
she whiz didn't happen quite as fast as we thought
it was going to happen. And I think we're in
that mode where you're going to see a valley as
people start to focus on and well, look at how
much they're spending. It's going to be out of this world.
To man, there's yere spending a lot of money oneer
if they're ever going to really make our money on
all that an investment return on all that spending, and
we're kind of net phase now. Carry So I think
there's more downside possibilities for AI stocks, AI related stocks
that are going to be hit by that. So that's
why you saw a thirty five percent decline in software stocks.
The idea being as hey, people aren't going to need
those guys, or need them far less because AI is
going to replace a lot of what they're doing for us.
So the ramifications are many. Ultimately, will there be job losses, Yes,
there will also be job creation as everyone adjusts and
adapts to this. When spreadsheets came out in the nineteen eighties,
people thought bookkeepers and accountants were going to be negatively impacted. Yeah,
and a few hundred thousand jobs were lost. But the
net result was a lot of people learned how to
use spreadsheets and make them a management tool, and more
jobs than were subsequently created. So the transition is going
to be bumpy. Carry at the end of the day,
there's going to be dislocation, but I think at the
end of the day it'll wind up being more positive
than negative.
Speaker 3: Okay. So as far as making you a better investor,
I don't know if you played with AI, you're using
it or not. How does that effect How does that
affect the market? Because I can look up any stock
anything I want to find out about it now, yes,
and instantaneously. I don't got to go digging through k
ones and you know all that stuff.
Speaker 1: Basically it's at your fingertailer tips yep, yep. Well, I
think that obviously more information helps people get up to
speed more quickly understand what's happening better, more thoroughly. At
the same time, you mentioned something about psychology. It's a
huge component of investing. In nineteen eighty two, the S
and P spe ratio was eight. By two thousand it
was thirty three. Now there was a company that made
a dollar. In nineteen eighty two, the stock was eight
bucks and in nineteen in two thousand it was thirty
three dollars. So the psychology shifts that take place are
of extreme importance. Right now households have more money allocated
to the stock market than any other time in history.
Prior peaks well in nineteen sixty eight, well, what followed
about fourteen years of crummy markets. Two thousand was another peak.
What followed well about nine or ten years of crummy markets.
So when you evaluations get stretched, it's a reflection of
psychology being all in and the pendulum swings the other way.
So to me, AI is all great, Kerrie. But you know,
when we get to the point where people can understand
the counter intuitiveness when everything's looking really good, then at
some point in time it's going to be less good,
and then it's going to shift to being not so
good to bad. That's the way things work. So I'd
like to think that the human understanding and component of
the whole equation won't be completely replaced by AI.
Speaker 3: Well, what you're talking about is like Thomas McKay of
popular delusions and the madness of crowds. So, no matter
what happens with tech, no matter what happens with the
information in AI, human behavior is still human. Here. There's
only two elotions on Wall Street, fear and greed, and
depending what's going on in the world determines which one is.
Speaker 1: Predominated in play right right. And the thing about greed
is it can last for a while. As long as
the underlying structure of the economy and whatever driving the
current bull market remain intact. You can greed can last
two three years, and sentiment can stay relatively high. In
other words, fifty two percent of people are bullish and
the Investors Intelligence Survey and now it's up to sixty
percent and people are like, oh my god, we're going
to top. No people need a reason to sell. This
business is structured to be long only. Institutions buy for
three to five years. Financial planners tell their clients, Hey,
we're looking at it for the long term. Well, when
things start to turn south and become less positive. People
then react like a reason to sell. We've just seen it.
Last year we had the increase in tearis that provided
a pretty good increase or reason to sell. So that
component always has to be factored in, and I'm not
sure a lot of people really understand the importance and
the dynamics of the reason to sell, because that dictates
whether you have a three to five five percent correction,
a ten percent correction, or wow, we're in a recession now.
The S ANDP on average is down thirty six percent.
So anyway, that's what I try to pay attention to,
as well as technical analysis support levels. So we've seen
in the last couple of months the SMP get down
to sixty seven to seventy I think on four different occasions,
and bounce each bounce carry went to a lower high. So,
in other words, the springboard was losing gas and so
on last Thursday in March fifth, I sent out a
special report to my subscriber saying we're about to break
sixty seven to seventy and when that breaks, the probability
is then increased that you'll see the S ANDP drop
to sixty five fifty because we now have a reason
to sell. That's going to last for a while.
Speaker 3: But in the final analysis, when we look at capital flows,
it's away from Europe and Asia into the United States.
That's kind of vailing. Forced to keep rates at least
at their current rate. And yet the inflationary pressures are
going to build if the price of oil stays up there.
So it's a less major part. It is. Everything is
energy now. The airlines, they're smarter nowadays. They hedge. Southwest
was the one that started it, so their fuel prices
are locked in probably for the next six to eighteen months,
many of them. The rest of us we got to pay.
Speaker 1: Gee, I didn't hedge my gas solam consump et.
Speaker 3: Well, you could hedge it. This is like a little
theory I created. You can hedge your electrical prices by
buying key utilities. You can hedge. You can hedge your
your energy consumption by buying petroleum companies, right because that
on a spike on this so you really can hedge
buying food companies.
Speaker 1: Yeah, consumer staples are yeah. Well the other thing and
it's a great point you're bringing out because even if
if the market gets hit much harder than anticipated. At
this point, those stocks will hold up way better for
the very reason you're citing. You know, you need a
lot of staples every single day. We all need to
brush our teeth, we need to clean clothes, things like that.
So it doesn't matter what's happening in the world. People
that demand for that kind of stuff isn't going to
change materially, which is why those sectors do well during it.
One thing we're going to point out, all the hyper
scale spending is going to erode the free cash flow
that they have for things like stock buybacks. So over
the last four or five years, stock buybacks from these
Microsoft and Google and Apple, oh yeah, you know all
of them, Meta so have been very, very big. Well,
now you know, two or three years ago, all this
spending was about thirty percent of cash flow. It's up
to ninety two percent this year. Jaried and we've already
seen it. Last year companies started issuing debt. Meta actually
did some debt transactions and kept them off their balance sheet.
So my point is one of the biggest props under
the market has been stock buybacks because they removed the
amount of shares outstanding, and which has been a natural
lift force, if you will. Underneath the market, they're going
to change and be far less of a contributing factor
over the next couple of years because the companies aren't
funding all this spending as much through cash flow as
they were three years ago.
Speaker 3: All right, well, it's been an interesting conversation, more on
the macro side than the micro side, which we always appreciate.
Macrotides dot com go there, subscribe and I appreciate your
coming on as always, and we will talk to you
again soon. Questions comments for Jim, myself, klafcarrieluts dot com
and Jim. We'll talk to you soon. Thanks, Carrie, stay.
Speaker 2: Well, thanks for listening to Carrie Letz's Financial Survival Network,
your solution to today's trying times. For the latest, go
to Financial Survivalnetwork dot com. Financial Survival Network now more
than ever