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Oil Shock Meets AI Bubble - Jim Welsh #6377 · Financial Survival Network

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  Speaker 1: But if oil prices stay above one hundred dollars and
• 0:03
  Speaker 1: now it's three months later, then the impact on economic
• 0:07
  Speaker 1: activity not just in the US, but globally because there
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  Speaker 1: are other countries that are more dependent on energy coming
• 0:15
  Speaker 1: out of the Middle East.
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  Speaker 2: You are listening to Carrie Letz's Financial Survival Network, where
• 0:20
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• 0:24
  Speaker 2: to thrive in today's trying times. You need the Financial
• 0:28
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• 0:33
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• 0:37
  Speaker 2: Survival Network now more than ever.
• 0:44
  Speaker 3: And welcome you are listening to and watching the Financial
• 0:47
  Speaker 3: Survival Network. I'm your host Carrie Let's Today with Us
• 0:51
  Speaker 3: is Jim Welsh. You find him at macrotides dot com. Jent,
• 0:57
  Speaker 3: it's great to have you back on the show. So
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  Speaker 3: we got a war going on. It's definitely having unintended consequences,
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  Speaker 3: not necessarily unexpected. What does it mean for what we're
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  Speaker 3: looking at here?
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  Speaker 1: Yeah, Well, the amount of time I think is a
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  Speaker 1: critical component carry If oil prices are above one hundred
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  Speaker 1: dollars for a couple of weeks, you know, I think
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  Speaker 1: you can kind of look through that impact. Financial markets
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  Speaker 1: will respond as we saw early Monday morning. But if
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  Speaker 1: if oil prices stay above one hundred dollars and now
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  Speaker 1: it's three months later, then the impact on economic activity
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  Speaker 1: not just in the US but globally because there are
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  Speaker 1: other countries that are more dependent on energy coming out
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  Speaker 1: of the Middle East. For instance, Katar declared a force
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  Speaker 1: masure on all their natural gas shipments. Well, Europe depends
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  Speaker 1: on that natural gas somewhat significantly, so to me, the
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  Speaker 1: element of time is going to be the most important component.
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  Speaker 1: The longer this lasts and sustains higher oil prices, we
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  Speaker 1: will see the economy got dented a little bit. But
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  Speaker 1: Europe Asia even is probably more vulnerable than we are.
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  Speaker 1: A In two thousand and eight, when oil went up
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  Speaker 1: to one hundred and forty seven dollars a barrel, we
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  Speaker 1: were producing five million barrels a day. We're at like
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  Speaker 1: thirteen eight point eight million now, so we're more insulated.
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  Speaker 1: The energy content of oil and energy impact on GDP.
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  Speaker 1: In the nineteen seventies it was eight percent. It's now
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  Speaker 1: down three percent. So the increase we've seen is pretty
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  Speaker 1: significant percentage wise. But people, you know, may not be
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  Speaker 1: as familiar with what happened in the nineteen seventies. In
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  Speaker 1: nineteen seventy three, oil went from three dollars a bit
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  Speaker 1: old to twelve, and by nineteen seventy nine wound up
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  Speaker 1: at thirty nine.
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  Speaker 3: Barrel dollars a barrel.
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  Speaker 1: That was a thirteen hundred percent increase. So if you'd
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  Speaker 1: adjusted for the energy content and all the rest, you know,
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  Speaker 1: oil would have to be probably close to one thousand
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  Speaker 1: dollars to equal what happened back in the nineteen seventies.
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  Speaker 1: And you know, could it get to one hundred and
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  Speaker 1: fifty of course, that's where it was in two thousand
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  Speaker 1: and eight. I'll be leaving a little bit higher if
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  Speaker 1: things are more protracted and we actually see some production
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  Speaker 1: damaged significantly in the Middle East.
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  Speaker 3: Yeah, and we don't know how long it's going to
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  Speaker 3: go on for. I think you know, war as always unpredictable,
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  Speaker 3: as we found out only too many times in the past,
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  Speaker 3: haven't we. Yeah, So how do you play this defensively?
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  Speaker 3: You're going to be in treasuries. Precious metals don't seem
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  Speaker 3: to be responding to the panic like we would ord Nearrow.
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  Speaker 1: Where you expected until Yeah, in terms of precious metals,
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  Speaker 1: and I sent you a piece and there's a chart
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  Speaker 1: of gold in that piece, And basically when gold got
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  Speaker 1: to fifty five ninety five and then subsequently dropped almost
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  Speaker 1: twelve hundred dollars in about four or five days, to me,
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  Speaker 1: that was the beginning of a correction that was likely
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  Speaker 1: to last months and months, and the rebound then was
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  Speaker 1: a natural rebound. After that big of a decline, the
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  Speaker 1: gold traded back up to about fifty four to nineteen,
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  Speaker 1: I believe. But my take in the last week has
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  Speaker 1: been is we're going to get this rebound and then
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  Speaker 1: I think we're going to see it roll over again
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  Speaker 1: and drop below at least forty six fifty six, and potentially,
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  Speaker 1: as possible, we could see a retested at forty seven
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  Speaker 1: h seven low as well. So I'm not really completely
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  Speaker 1: surprised based on the chart pattern, the fact that you
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  Speaker 1: had kind of a parabolic move move up into that
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  Speaker 1: fifty five ninety five high where it was going almost vertically.
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  Speaker 1: Typically to unwine that level of bullishness, you need time
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  Speaker 1: or price erosion. So if it's going to be time,
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  Speaker 1: we're talking many months price erosion, maybe drops all the
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  Speaker 1: way down to thirty eight hundred to four thousand, right
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  Speaker 1: right now, all I'm reasonably confident, Carrier is I think
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  Speaker 1: we're going to see gold drop below forty six fifty.
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  Speaker 3: Six really, so where will silver go? Then?
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  Speaker 1: Maybe sixty five really could be.
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  Speaker 3: It'd be I've heard it's low as fifty four. But
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  Speaker 3: but you think the bull mark it's still on and
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  Speaker 3: this is just direction.
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  Speaker 1: Yeah, I'm glad you raised that question, because gold bottomed
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  Speaker 1: in December of twenty fifteen at one thousand and forty
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  Speaker 1: six and then rallied to two thousand and seventy, then
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  Speaker 1: pulled back to six teen sixteen in September of twenty
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  Speaker 1: twenty two. The rally from that level to the fifty
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  Speaker 1: five to ninety five, I think is Wave three. We're
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  Speaker 1: in Wave four, and once this is concluded, we'll see
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  Speaker 1: another move to higher highs in both silver and gold.
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  Speaker 1: So I believe the bull market is intact. But I
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  Speaker 1: think you know, Wave two took gold down from twenty
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  Speaker 1: seventy to twenty seventy to sixteen sixteen. You know that
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  Speaker 1: was a twenty percent plus correction, so and it took
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  Speaker 1: quite a while. I mean, it took like more than
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  Speaker 1: a year I don't think we're going to take that
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  Speaker 1: long this time, but again, it just reinforces a the
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  Speaker 1: longer term trend I think is still positive. We're going
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  Speaker 1: through this pullback and I just think it has more
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  Speaker 1: to go.
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  Speaker 3: Okay, let's talk about AI stocks. AI rop predicted the
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  Speaker 3: war almost to the other cycle investors out there nail
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  Speaker 3: this thing. Pack cycle starting right in mid March a
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  Speaker 3: week before isn't too bad. What do you think of
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  Speaker 3: AI in terms of the market, in terms of how
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  Speaker 3: it changes investor behavior, That's what I'm really interesting. Yeah,
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  Speaker 3: I don't really care about, like how wonderful investment thesis
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  Speaker 3: it is. The story's out, but change you as an investor.
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  Speaker 1: Well, first of all, I think you have to separate
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  Speaker 1: the economic impact from how the stocks may perform. Economic
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  Speaker 1: impact is going to be fairly significant this year. We
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  Speaker 1: add up all the hyperscale spending plans for twenty twenty
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  Speaker 1: six and it amounts to about one point seven percent
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  Speaker 1: of GDP. So, no matter what happens to the stocks,
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  Speaker 1: the economy is going to get a fairly significant lift
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  Speaker 1: this year. It may will be less as a percent
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  Speaker 1: of GDP next year, but it's still going to be
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  Speaker 1: fairly significant the psychology behind all those stocks. Again, historically,
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  Speaker 1: you get new technologies and people bid them up beyond
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  Speaker 1: what's likely to happen in the very near term. And
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  Speaker 1: so to me, we're in this phase like the Internet.
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  Speaker 1: The Internet became everything people imagined in two thousand and
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  Speaker 1: probably more, you know, but there was this dip where
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  Speaker 1: she whiz didn't happen quite as fast as we thought
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  Speaker 1: it was going to happen. And I think we're in
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  Speaker 1: that mode where you're going to see a valley as
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  Speaker 1: people start to focus on and well, look at how
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  Speaker 1: much they're spending. It's going to be out of this world.
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  Speaker 1: To man, there's yere spending a lot of money oneer
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  Speaker 1: if they're ever going to really make our money on
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  Speaker 1: all that an investment return on all that spending, and
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  Speaker 1: we're kind of net phase now. Carry So I think
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  Speaker 1: there's more downside possibilities for AI stocks, AI related stocks
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  Speaker 1: that are going to be hit by that. So that's
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  Speaker 1: why you saw a thirty five percent decline in software stocks.
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  Speaker 1: The idea being as hey, people aren't going to need
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  Speaker 1: those guys, or need them far less because AI is
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  Speaker 1: going to replace a lot of what they're doing for us.
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  Speaker 1: So the ramifications are many. Ultimately, will there be job losses, Yes,
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  Speaker 1: there will also be job creation as everyone adjusts and
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  Speaker 1: adapts to this. When spreadsheets came out in the nineteen eighties,
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  Speaker 1: people thought bookkeepers and accountants were going to be negatively impacted. Yeah,
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  Speaker 1: and a few hundred thousand jobs were lost. But the
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  Speaker 1: net result was a lot of people learned how to
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  Speaker 1: use spreadsheets and make them a management tool, and more
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  Speaker 1: jobs than were subsequently created. So the transition is going
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  Speaker 1: to be bumpy. Carry at the end of the day,
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  Speaker 1: there's going to be dislocation, but I think at the
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  Speaker 1: end of the day it'll wind up being more positive
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  Speaker 1: than negative.
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  Speaker 3: Okay. So as far as making you a better investor,
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  Speaker 3: I don't know if you played with AI, you're using
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  Speaker 3: it or not. How does that effect How does that
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  Speaker 3: affect the market? Because I can look up any stock
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  Speaker 3: anything I want to find out about it now, yes,
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  Speaker 3: and instantaneously. I don't got to go digging through k
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  Speaker 3: ones and you know all that stuff.
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  Speaker 1: Basically it's at your fingertailer tips yep, yep. Well, I
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  Speaker 1: think that obviously more information helps people get up to
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  Speaker 1: speed more quickly understand what's happening better, more thoroughly. At
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  Speaker 1: the same time, you mentioned something about psychology. It's a
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  Speaker 1: huge component of investing. In nineteen eighty two, the S
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  Speaker 1: and P spe ratio was eight. By two thousand it
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  Speaker 1: was thirty three. Now there was a company that made
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  Speaker 1: a dollar. In nineteen eighty two, the stock was eight
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  Speaker 1: bucks and in nineteen in two thousand it was thirty
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  Speaker 1: three dollars. So the psychology shifts that take place are
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  Speaker 1: of extreme importance. Right now households have more money allocated
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  Speaker 1: to the stock market than any other time in history.
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  Speaker 1: Prior peaks well in nineteen sixty eight, well, what followed
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  Speaker 1: about fourteen years of crummy markets. Two thousand was another peak.
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  Speaker 1: What followed well about nine or ten years of crummy markets.
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  Speaker 1: So when you evaluations get stretched, it's a reflection of
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  Speaker 1: psychology being all in and the pendulum swings the other way.
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  Speaker 1: So to me, AI is all great, Kerrie. But you know,
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  Speaker 1: when we get to the point where people can understand
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  Speaker 1: the counter intuitiveness when everything's looking really good, then at
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  Speaker 1: some point in time it's going to be less good,
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  Speaker 1: and then it's going to shift to being not so
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  Speaker 1: good to bad. That's the way things work. So I'd
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  Speaker 1: like to think that the human understanding and component of
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  Speaker 1: the whole equation won't be completely replaced by AI.
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  Speaker 3: Well, what you're talking about is like Thomas McKay of
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  Speaker 3: popular delusions and the madness of crowds. So, no matter
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  Speaker 3: what happens with tech, no matter what happens with the
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  Speaker 3: information in AI, human behavior is still human. Here. There's
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  Speaker 3: only two elotions on Wall Street, fear and greed, and
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  Speaker 3: depending what's going on in the world determines which one is.
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  Speaker 1: Predominated in play right right. And the thing about greed
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  Speaker 1: is it can last for a while. As long as
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  Speaker 1: the underlying structure of the economy and whatever driving the
• 13:00
  Speaker 1: current bull market remain intact. You can greed can last
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  Speaker 1: two three years, and sentiment can stay relatively high. In
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  Speaker 1: other words, fifty two percent of people are bullish and
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  Speaker 1: the Investors Intelligence Survey and now it's up to sixty
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  Speaker 1: percent and people are like, oh my god, we're going
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  Speaker 1: to top. No people need a reason to sell. This
• 13:22
  Speaker 1: business is structured to be long only. Institutions buy for
• 13:25
  Speaker 1: three to five years. Financial planners tell their clients, Hey,
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  Speaker 1: we're looking at it for the long term. Well, when
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  Speaker 1: things start to turn south and become less positive. People
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  Speaker 1: then react like a reason to sell. We've just seen it.
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  Speaker 1: Last year we had the increase in tearis that provided
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  Speaker 1: a pretty good increase or reason to sell. So that
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  Speaker 1: component always has to be factored in, and I'm not
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  Speaker 1: sure a lot of people really understand the importance and
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  Speaker 1: the dynamics of the reason to sell, because that dictates
• 13:58
  Speaker 1: whether you have a three to five five percent correction,
• 14:01
  Speaker 1: a ten percent correction, or wow, we're in a recession now.
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  Speaker 1: The S ANDP on average is down thirty six percent.
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  Speaker 1: So anyway, that's what I try to pay attention to,
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  Speaker 1: as well as technical analysis support levels. So we've seen
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  Speaker 1: in the last couple of months the SMP get down
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  Speaker 1: to sixty seven to seventy I think on four different occasions,
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  Speaker 1: and bounce each bounce carry went to a lower high. So,
• 14:26
  Speaker 1: in other words, the springboard was losing gas and so
• 14:30
  Speaker 1: on last Thursday in March fifth, I sent out a
• 14:33
  Speaker 1: special report to my subscriber saying we're about to break
• 14:37
  Speaker 1: sixty seven to seventy and when that breaks, the probability
• 14:41
  Speaker 1: is then increased that you'll see the S ANDP drop
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  Speaker 1: to sixty five fifty because we now have a reason
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  Speaker 1: to sell. That's going to last for a while.
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  Speaker 3: But in the final analysis, when we look at capital flows,
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  Speaker 3: it's away from Europe and Asia into the United States.
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  Speaker 3: That's kind of vailing. Forced to keep rates at least
• 15:03
  Speaker 3: at their current rate. And yet the inflationary pressures are
• 15:07
  Speaker 3: going to build if the price of oil stays up there.
• 15:12
  Speaker 3: So it's a less major part. It is. Everything is
• 15:17
  Speaker 3: energy now. The airlines, they're smarter nowadays. They hedge. Southwest
• 15:23
  Speaker 3: was the one that started it, so their fuel prices
• 15:26
  Speaker 3: are locked in probably for the next six to eighteen months,
• 15:29
  Speaker 3: many of them. The rest of us we got to pay.
• 15:34
  Speaker 1: Gee, I didn't hedge my gas solam consump et.
• 15:37
  Speaker 3: Well, you could hedge it. This is like a little
• 15:40
  Speaker 3: theory I created. You can hedge your electrical prices by
• 15:46
  Speaker 3: buying key utilities. You can hedge. You can hedge your
• 15:52
  Speaker 3: your energy consumption by buying petroleum companies, right because that
• 15:58
  Speaker 3: on a spike on this so you really can hedge
• 16:03
  Speaker 3: buying food companies.
• 16:07
  Speaker 1: Yeah, consumer staples are yeah. Well the other thing and
• 16:11
  Speaker 1: it's a great point you're bringing out because even if
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  Speaker 1: if the market gets hit much harder than anticipated. At
• 16:17
  Speaker 1: this point, those stocks will hold up way better for
• 16:21
  Speaker 1: the very reason you're citing. You know, you need a
• 16:24
  Speaker 1: lot of staples every single day. We all need to
• 16:26
  Speaker 1: brush our teeth, we need to clean clothes, things like that.
• 16:30
  Speaker 1: So it doesn't matter what's happening in the world. People
• 16:33
  Speaker 1: that demand for that kind of stuff isn't going to
• 16:36
  Speaker 1: change materially, which is why those sectors do well during it.
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  Speaker 1: One thing we're going to point out, all the hyper
• 16:43
  Speaker 1: scale spending is going to erode the free cash flow
• 16:49
  Speaker 1: that they have for things like stock buybacks. So over
• 16:52
  Speaker 1: the last four or five years, stock buybacks from these
• 16:55
  Speaker 1: Microsoft and Google and Apple, oh yeah, you know all
• 17:01
  Speaker 1: of them, Meta so have been very, very big. Well,
• 17:05
  Speaker 1: now you know, two or three years ago, all this
• 17:08
  Speaker 1: spending was about thirty percent of cash flow. It's up
• 17:11
  Speaker 1: to ninety two percent this year. Jaried and we've already
• 17:15
  Speaker 1: seen it. Last year companies started issuing debt. Meta actually
• 17:20
  Speaker 1: did some debt transactions and kept them off their balance sheet.
• 17:25
  Speaker 1: So my point is one of the biggest props under
• 17:27
  Speaker 1: the market has been stock buybacks because they removed the
• 17:31
  Speaker 1: amount of shares outstanding, and which has been a natural
• 17:34
  Speaker 1: lift force, if you will. Underneath the market, they're going
• 17:38
  Speaker 1: to change and be far less of a contributing factor
• 17:42
  Speaker 1: over the next couple of years because the companies aren't
• 17:45
  Speaker 1: funding all this spending as much through cash flow as
• 17:49
  Speaker 1: they were three years ago.
• 17:51
  Speaker 3: All right, well, it's been an interesting conversation, more on
• 17:54
  Speaker 3: the macro side than the micro side, which we always appreciate.
• 17:58
  Speaker 3: Macrotides dot com go there, subscribe and I appreciate your
• 18:04
  Speaker 3: coming on as always, and we will talk to you
• 18:06
  Speaker 3: again soon. Questions comments for Jim, myself, klafcarrieluts dot com
• 18:13
  Speaker 3: and Jim. We'll talk to you soon. Thanks, Carrie, stay.
• 18:16
  Speaker 2: Well, thanks for listening to Carrie Letz's Financial Survival Network,
• 18:20
  Speaker 2: your solution to today's trying times. For the latest, go
• 18:24
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• 18:30
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