Latest / Financial Survival Network / 6 Charts That Prove We Are Heading for a Huge Bust -- Jim Welsh #5927

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6 Charts That Prove We Are Heading for a Huge Bust -- Jim Welsh #5927 · Financial Survival Network

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The leverage that monetary policy has had over the economy over the last sixty years
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has been weakening, and it implies that at some point in time there's a
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real risk that won't reach an economic malaise or recessionary period where the Fed monetary
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policy won't be as effective as in the past, and that will imply that
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economic growth will stay weaker for a longer period of time. And that's really
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why I expectation. I think we're close to a secular bear market in the
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stock market as well. It may have already begun with the high end January
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of last year. You were listening to Carrie Letz's Financial Survival Network, where
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you get valuable information you just can't find anywhere else to thrive in today's trying
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times. You need the Financial Survival Network now more than ever. Go to
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Financial Survivalnetwork dot com and get your free newsletter and gift. Financial Survival Network
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now more than ever, And welcome you are listening to and watching the Financial
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Survival Network. I'm your host, Carrie Lutz, and hey it's mid October,
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October seventeenth. Well, we got good news for you and bad is
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Jim wilt Is back on the show. That's the good news, but what
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he's about to tell you is really the bad news. Jim, it's great
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to have you back. So basically, well, you're going to explain three
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the world to us in three charts, and I think that will pretty much
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clear up everything, won't it. Absolutely. I mean, we're two weeks
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ahead of Halloween. Why wait? Why wait? All right, So I'm
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going to share the screen with you, share those charts with us. Please
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tell us what's going on here? Well, let me get this up here,
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all right. So the upper left chart that my arrow is pointing to,
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and you'll be able to go to Carry's a website and maybe blow these
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things up to see them blink. Well, yeah, does for you,
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and you'll look at them all all right. So the first chart is the
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long term chart of treasury bond prices. So, as we most people know,
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bond yields peaked back in nineteen eighty one, and as they've come down,
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treasury prices went up. And so you can see this forty year up
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trend has been broken in the last eighteen months or so. And the implication
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carry is that we're beginning, I believe a new secular bear market in bonds.
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Now, what many people may not know is that from nineteen forty six
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to nineteen eighty one we had a thirty five year window time where treasure yields
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just worked their way higher, which was then followed by this forty year period
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were rates came down. So the implications here are fairly significant in the sense
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that cheaper money in terms of borrowing costs for businesses and consumers over the last
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twenty thirty years has obviously spurred economic growth and demand. And if indeed a
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secular bear market has begun in the bond market, on balance, treasury yields,
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corporate fields, borrowing costs in general are going to be higher, and
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that has implications for the economy because one of the things that helped the economy
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grow faster was indeed lower borrowing costs. And the chart right to the right
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of it is the correlation between bond prices and the stock market over the last
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twenty years. A lot of financial advisors and a lot of investors were really
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bailed out in two thousand and one and two in the financial crisis two thousand
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and eight because bond prices rallied as the stock market went down. So if
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you had an allocation of forty percent to bond sixty percent to equities. The
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bond allocation really helped minimize and reduce the total loss to your portfolio. And
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I wrote a piece in June of twenty twenty one basically saying, I think
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this negative correlation window is going to be ending, and we're going to see
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bonds and stocks revert back to the pattern that existed for most of the time
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from nineteen forty five to two thousand and In that window of time, carry,
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bond prices and stock prices moved up and down together, so that in
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the seventy three seventy four bear market, bond prices were going down just as
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much as the stock market was going down. And what we saw last year
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is that sixty to forty portfolio had its worst performance ever. We're seeing bond
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prices dropped significantly last year in addition to equity prices falling. So the combination
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of these two charts carry suggests to me that the formula that financial advisors and
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most investors have users in terms of a sixty forty or something close to that
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allocation to stocks and bonds is going to be very problematic. If we've entered
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a window of a secular bear market in bonds, and what we've seen even
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this year, when rates have gone up noticeably, equities have sold off,
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and so that correlation continues to hold. So that to me is the longer
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term big picture that I think investors really need to understand and respect. And
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it'll be higher because everybody's been living in a world the last twenty plus years
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where most of the time bond yields and having them in your portfolio really help
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balance what was going on in the equity side of the equation, right,
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So that's that's kind of profound because it basically throws water on the whole investment
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philosophy for the past forty years. And it was valid for the most part
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for the past forty years because the FED could always cut rates further and we
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had a downtrend in rates, so that would kind of bail everybody out.
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Yeah, yep, they could exercise the Yeah, and again from a bigger
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picture standpoint, if you think about it, for most of the last sixty
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years or so, whenever the economy slowed, the FED would cut rates to
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stimulate growth. And what we started to see in two thousand and one is
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the FED decided, oh well, now we have to push the real rate
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to minus okay, So the FED funds rate are out at one percent for
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a number of years, even though inflation was above one percent. And then
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in response to the financial crisis, not only did they drive the funds rate
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down to zero, they also expanded their portfolio, the balance sheet of the
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FED from seven hundred billion in two thousand and seven to almost nine trillion a
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year ago. So to me, what it implies, Kerrie, is that
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the efficacy, the leverage that monetary policy has had over the economy over the
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last sixty years has been weakening, and it implies that at some point in
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time there is a real risk that won't reach an economic malaise or recessionary period
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where the Fed monetary policy won't be as effective as in the past, and
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that will imply that economic growth will stay weaker for a longer period of time.
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And that's really why I expectation. I think we're close to a secular
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bear market in the stock market as well. It may have already begun with
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the high end January of last year, but all these pieces are starting to
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come together. That implies that equity investors are going to struggle for the next
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ten to fifteen years in a secular bear market. Wow, all right,
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ten to fifteen years, which is longer than the average person on Wall Street
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has been in their job, right probably. And again, you know this
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may sound like, oh my god, this is kind of extreme. Well,
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if you go back one two hundred years in terms of looking at the
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dol Jos industry average, there have been other windows a time where you had
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these secular bar markets, the most recent nineteen sixty six to eighteen eighty two.
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You know, So it's not like I'm talking about something that's never happened
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before, or oh my god, here's a guy just trying to be negative
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to grab a headline. No, I'm just trying to do economic analysis and
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keep my eyes open so that you know, I don't get run over and
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my subscribers don't get run over either. Right. Hey, what about the
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concept here that you know, if you had invested a dollar in nineteen twenty
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nine, all right to become whole again. I think you weren't whole again
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until nineteen fifty eight. Fifty great, I think with nineteen fifty four that's
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a really pong nine. Yeah, and you know that because to get you
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to invest in the market, they're always saying, oh, you know,
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over time, you've made money ten percent a year or whatever. But there
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was a period of time in those protracted bear markets where you didn't make any
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money, right right. I think the dobbles that were facing carried in terms
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of comparing what might happen in the next ten to fifteen years to what happened
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in sixty six to nineteen eighty two, I think some of the problems we're
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facing are more significant. I mean, back in that window of time sixty
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six to eighty two, that to GDP ratio is like thirty percent. Were
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at one hundred and twenty percent. And so we've spent a lot of fiscal
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bullets, if you will, again, trying to get the economy to grow.
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In the nineteen sixties, for every one dollar of debt, it generated
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about ninety cents of GDP. Now it's less than fifty cents. So my
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point is that fiscal stimulus is having less of a impact on generating economic growth
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because we have so much debt already and the amount of debt service which has
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been suppressed for the last you know, fifteen to twenty years via monetary policy
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that has obviously changed. That debt service, you know, is a dread
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an economic growth along with a number of other things. You know. We
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don't have time to go in the third chart on the lad because we'll talk
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about the economy and inflation. So a lot of economists, all I got
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inflation is behind is Paul Kruman said, yeah, you know, it was
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transitory after all, and so forth. And the thing I've written about recent
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months that I think most economists and maybe many politicians are overlooking is that prices
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went up for many things that people live on and day to day needs by
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forty percent. Needs, not wants exactly, up forty percent, and wages
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during the last twenty months are up about eighteen percent. So yes, the
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consumer price index has come down. It's important to understand the math on how
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that is calculated. It's a twelve month ready change. So price is something
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goes from a dollar to a dollar forty and then stays at a dollar forty
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for the next twelve months. The rate of change is going to slow onto
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it zero. But the reality is I'm still spending a buck forty for something
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that used to cost a dollar three years ago, and my wages have only
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gone up eighteen percent. This is why I think a lot of consumer sentiment
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surveys show that people are less optimistic about the future will because they're struggling to
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make ends meet, even though supposedly inflation has come down. And the other
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the next chart, the fourth chart, there is a chart of excess savings.
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So, as we know, the government sent out trillions of dollars to
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consumers. Consumers weren't able to spend while things were shut down. They amassed
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over two trillion dollars worth of savings. The San Francisco Fed has estimated that
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that will, basically for eighty percent of consumers be gone at the end of
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September. Now I've seen other estimates carrying They're like, well, there's still
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this much and so forth. The point being is that consumers, especially the
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lower income folks, have probably burned through most of the savings they accumulated,
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and that's why this squeeze on their incomes because of higher inflation is most pronounced.
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And this is another reason why the economy has held up better than many
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people expected. You remember last year everyone was talking about a recession. I
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was not in the camp. I said no recession in twenty twenty two,
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no recession in the first half of twenty twenty three. My take is as
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things like the excess savings it's worn down, the increase in student loan payments,
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and the impact from rising lending standards which have gone up most aggressively in
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forty years, all that's coming to bear in the next six months. So
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I think we're going to see the economy slow more markedly than most people are
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at this point in time expecting. Because now most economists on Wall Street think
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we're not going to have a recession. It's like the perfect setup, you
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know, where you know last year everyone thought of recession was coming. They
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were wrong. Now they think a recession isn't going to happen. I think
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there's a good chance they're going to be wrong. Yeah, imagine if they
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threw recession Jim and nobody came. Well, they couldn't afford hey, I
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mean, they'd be struggling depending on the ticket price. Right, what's that?
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What's that old saw? You know economists have called the five out of
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the last two recessions. It's close to that something like that. But again,
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you know, when they were all talking about recession last year. It
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was because there were two negative quarters of GDP first and second quarter of last
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year. Historically, whenever there's been two consecutive quarters of negative GDP, there
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has been a recession. But there's so many unique and remarkable features to this
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recovery because of the pandemic and the fiscal and monetary response that they took that
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formula with like blinders. Well, wait a second, if we're in a
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recession, why are we generating three hundred and fifty to four hundred thousand jobs
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every month in the first half of twenty twenty two. Yeah, it didn't
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add up. It was just kind of okay, this is what the formula.
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The other thing is I like to say there's always a bull market and
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heard mantel on Wall Street because the advice, you know what Paul said in
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the place was going to be transitory in June twenty twenty one. And I
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disagree with them, and I'm wrong. That could be a career problem if
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I agree with Chair Powell and everybody's wrong. There's you know, I guess
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safety and numbers. So h Anyway, So the fifth chart is a chart
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of the dollar. I turned bullish on the dollar in July as it was
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trading under one hundred, I thought a rally to one oh four was coming,
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and if it got about one oh four, then it would run up
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to one oh five eighty eight. It got to about one oh seven thirty
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four. I think the dollar's near a high, and trading the dollar has
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been very important because last year, as the stock market went down, treasureyals
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went down, the dollar rally into October. My view last October was the
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dollar was topping, and if that proved correct, I thought it would drop
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from around one four team to one oh five. We would see rallies then
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all the things that went down, namely stocks and bonds and gold. So
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you know, the correlation between that a strong dollar and weakness and all the
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other markets has been really really high. Doesn't always last that way, you
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know, forever, but it has been in the last two years. So
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the point being is if the dollar pulls back, that should take some of
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the pressure downside, pressure off of other markets and the next charges of gold.
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In May, I thought gold would pull back to under eighteen fifty,
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and I guess the bigger picture was And you and I have done interviews back
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in July. I said, hey, you got five waves up in gold.
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That suggests that an important major bottom has been made when gold traded down
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around sixteen sixteen in September of last year. But then five wave up meant
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Carrie, we're going to have a pullback for a wave too. I think
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that completed last week, and we've begun wave three, which I believe will
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take gold to twenty three hundred, maybe even higher. It sounds like an
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Elliot wave THEORISTR. Jim Well I used Elli waves theory. I mean,
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I've been doing it since nineteen eighty one. I started off in nineteen eighty
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one carry doing hand or drawn charts of the doll every how, okay,
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it is my memory only goes back. I remember very well what it is,
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but most of you out there don't because so you don't even know what
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a bear market is. Yeah. So it just a pattern analysis. Certain
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patterns show up and they can provide information, you know, to me.
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I try to tie all this happy stuff in with economic analysis, the fundamental
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side of the equation. I have a much higher conviction of what I think
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is going to happen when the two sides come together. So I think the
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dollar going to pull back. I think fundamentally the FED isn't going to be
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raising rates in the near term anymore. That should cause a pullback. I
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think your presenter recession. That means the euro is going to be I think,
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on balance weaker, and it's fifty seven percent of the dollar index.
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So going back to gold, I think what we've seen is the beginning of
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this wave three rally to higher prices. There's resistance at nineteen eighty that's that
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horizontal line, and then obviously up near the twenty and fifty. So typically
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you're going to have a move up, then you're going to have a pullback,
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and then the takeoff. And so my guess is gold we'll rally up
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at least to nineteen eighty, maybe get up to the twenty twenty five,
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then have a pullback, and then I think in the first half of next
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year Gold's going to really make a big move to the upside. As the
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economy weakens. The dollar is going to weekend because people will start to anticipate
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when the Fed is going to be cutting rays. That I think is going
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to be very supportive for goal. Okay, all right, next truck he
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charged the bottom left one. Now is the Treasury yields. On July twenty
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seventh, the Bank of Japan said, you know, we're going to raise
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the ceiling on our ten year treasury note from fifty bases points to one percent.
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And when that happened, Carrie, I'm like, this is going to
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raise global interest rates across the board. Now, what we've also seen,
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obviously is all of a sudden people are waking up to, oh my goodness,
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we have a two trillion dollar deficit that has never happened during a period
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of time when the economy was growing, only in times when gee, we
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got a recession. Let's spend a bunch of money. Marproof we've really been
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in a recession. When you take into effect real rates of growth rather than
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these fake numbers that are inflated by inflation. Well, I mean, at
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the same time, I got to take the numbers that are being showed.
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I don't disagree with you. At the same time, you know, again
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you still see a lot of staticts of showing spendings up and even after inflation,
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because inflation has come down, some of these number, I mean,
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nominal GDP growth I think is probably six to seven percent. In inflation by
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the PCE is around four, maybe a touch under, so you know,
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there was a window of time where real incomes are declining. Real GDP was
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negative because of the big surgeon inflation, because inflation has come down and am
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of those numbers are positive. But besides that, to me, the thing
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here is that the supply issued at a time where the FED was buying sixty
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five billion dollars of treasury paper every single month, So you had this huge
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shift in the balance between supply and demand. Supply is ratcheting higher and the
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demand is coming down because the FED isn't buying anymore. Countries like China has
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actually been a net seller, Japan isn't buying as much, so and you've
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got this outlook regarding inflation. It isn't Fed going to be cutting rates and
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so forth. So I think pension funds insurance companies have been a little reluctant
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to buy last year or last week. It was a ten and thirty year
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auction that went very poorly. Added to the spike we've seen in treasury will
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sell when a chart analysis that blue trend line shows a breakout. To me,
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the first sign that treasure yields have peaked is when the ten and thirty
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years get below that blue line, and then the red horizontal line is like
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we've seen higher hides and yields and higher lows. That's the definition of an
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uptrent. So we need to see in my view, the dollar reverse lower.
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I think we'll see treasure yields come down, especially over the next six
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months or so when data starts to show the economy is indeed lowing. But
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in the near turn, they can still continue to spike higher. And you
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know, the trend is your friend until prove another rise until I don't stand
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it high until the end, until the end, you know. And lastly,
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the S and P five hundred, it peaked in early late July early
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August. I was looking for a five to seven percent pullback. The decline
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was seven point nine percent in the S and P. You can see there's
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a down trend still in place. I thought that, you know, yesterday's
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weekly technical review, I thought the S and P would rally to forty four
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oh one. There's a gap there that normally gets closed, right, and
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some rather retracements up around forty four to twenty five. So to me,
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we're at an interesting juncture here, Carrie, because as long as the economy
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shows signs that is doing okay. That's a positive for the stock market because
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Wall Street has this idea no recession means are going to go up next year
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and in twenty twenty five, and that's what's kept them bullsh So I think
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there's a chance the SMP could have one more rally that a gets above forty
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six oh seven, the high that we fall in late July. But if
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I'm right about the economy slowing materially next year, I think the SMP is
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going to have a very very difficult year next year. Declined back towards the
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thirty five hundred or possibly lower I think would set up. Once we have
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definitive signs the economy slowing down, Ernie's estimates will get cut, pe ratio
23:37
will compress. So again, as I said at the very beginning, a
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buy and holds strategy using sixty forty, I think is not going to be
23:49
very successful over the next ten to fifteen years as we deal with a lot
23:55
of these big problems. All Right, well, I think you summed it
23:59
upright. Will tough times ahead? You really could, And I might write
24:03
an article about this and I will totally credit you. Six charts that prove
24:07
that we're heading for an economic bust. And I mean the kislay is very
24:14
clear. It's firy, Yeah, I know, I know, you know,
24:18
so you know, there's demographic problems, you know, in terms of
24:22
the birth rate is the lowest in a couple of years ago, since nineteen
24:26
thirty seven. Well, what that tells us carry is that the number of
24:30
people entering the labor market twenty twenty five years from now is going to be
24:33
less than what we've seen over the last twenty twenty five years. Like penns
24:37
China exactly, like what I'm not as bad as China. China is horrific,
24:41
all right, yeah, because they're one child policy. But the point
24:44
being is one of the drivers of economic growth over the long term is how
24:48
many people are entering the labor market. And given our birth rate, you
24:52
know, that suggests that that will add maybe point three percent to GDP growth
24:57
over the next twenty years. So we're in a window time where GDP growth
25:03
will likely be less than two percent at a time when we have enormous debt
25:10
needs, a higher interest expense consuming more of the federal budget, wrestling with
25:15
what do we do with entitlement, spending, social security, Medicare and soulting
25:19
question. It's not going to be easy from a society standpoint, and good
25:25
questions questions. Hey, appreciate you coming on macro tides dot com and I
25:30
suggest you go there. The link will be in the show notes this interview.
25:34
Well, we will give you a link for these six charts so you
25:38
can follow along whether you're on video or audio. And Jim really appreciate you
25:44
coming on. Question for Jim myself kl at Kerrie Leeds dot com. That's
25:48
the email address, and hey, you can find all this info in the
25:53
show. That's this interview on Financial Survival Network dot com. Just click that
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you want to sign up for the newsletter. Jim, we'll be talking to
26:03
you again soon. Thanks so much for coming on. As always, Carrie,
26:07
thanks very much like having our conversations. We covered a lot of ground
26:10
today certainly did and it's appreciated. You're welcome. Thanks for listening to Carrie
26:15
Letz's Financial Survival Network, your solution to today's trying times. For the latest,
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go to Financial Survivalnetwork dot com. Financial Survival Network now more than ever