Latest / Financial Survival Network / Are You Ready for the 10 Year Bear Market -- Jim Welsh #5810

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Are You Ready for the 10 Year Bear Market -- Jim Welsh #5810 · Financial Survival Network

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The main thing is the equity market moves in big moves called secular bull markets
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and bear markets, and so you know, when you're in a secular bull
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market, every dip is worth buying. In a secular bear market, it's
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a whole different ballgame. And I do think that some of the problems we're
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dealing with are so significant that what is coming is going to be worse than
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in nineteen sixty six nineteen eighty two time period. You're listening to Carrie Letz's
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Well, we've got a real pleasure with us today. Jim Welsh macroditids dot
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com. Jim, it's great to have you back. So let me cut
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to the chase the coming secular bear market recession after mid twenty twenty three?
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Am I reading this right? You are Basically, I have a special report
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called the Coming Secular bear Market, and if listeners would like to receive a
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copy, all they have to do is send me an email Jim Welsh Macro
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at Gmail, and I'll send that out to them. I just think from
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a bigger picture heard, we have a lot of problems that I discuss that
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are longer term in nature and therefore are going to retire require an extended period
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of time ten fifteen years, much like the nineteen sixty six nineteen eighty two
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period of time where the market basically went sideways as we dealt with a lot
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of different issues. I think either this secular bear market has already begun or
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will after one more good rally in the SMP to another new all time high.
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I just think people need to be prepared that the buy and hold approach
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that's worked really very well since nineteen eighty two probably will not serve the majority
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of investors. Well, if I'm right about the coming secular bear market,
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all right, and what do you have based this on your expectations? Well,
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debt is one factor. Uh, you know, debt as a percent
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of GDP back in nineteen eighty was around thirty percent it's pushing about one hundred
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and thirty percent at this point time. Debts as a driver of economic growth.
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Back in the sixties, each new dollar of debt generated about eighty to
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ninety cents of GDP. We're now down below fifty cents, so, in
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other words, adding new debt is truly less bang for the buck. Demographics,
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GDP growth is really nothing more than the combination of the number of people
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entering the labor market plus productivity growth. And what we've seen is a tremendous
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slowing in the rate of births in the US, so that the labor market
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growth has dropped from one to one and a half percent per year forty years
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ago to about point three percent. And we know, based on the births
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of the last twenty years carry what's going to be happening in the next twenty
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to thirty years. In terms of that, you know how many people are
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going to be coming into the labor market, and so that is going to
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continue to weigh on growth. And productivity has been growing about one to one
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and a half percent, So what it really means is GDP growth will be
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less than two percent for the foreseeable future. And given the amount of debt.
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Interest on that debt is rising significantly, as I'm sure you have discussed
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many times. So we add it all up, and there's a number of
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other factors that go into this report. It just leads me to believe that
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we're going to see in an extended period of lower growth. Plus every eighty
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years there's been a war. Well, we already have a war in Europe,
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risk of a war with China over Taiwan and so forth. So a
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lot of longer term things kind of come into play, and that all adds
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up to me a more difficult environment where monetary and physical policy just don't have
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the same juice as they have in the past. And then that result is
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less growth in the economy, slower earnings growth, which also then means I
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think lower returns for investors. So we're looking at a depression here in the
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US. There's a risk, I think one cannot eliminate it. To me,
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the main thing is most people simply buying hole and that works great.
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I love it when you know, a last summer when the market was really
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kind of down in the dumbs, Bob Pisani and CNBC was an ice fallow,
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and you know, financial planet. Well, if you missed the five
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best days, your returns really are terrible. Well, mathematically carry if you
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look at most years, the biggest moves in any given year are not updates,
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they're down days. So somebody would somehow magically good enough to miss all
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five good days. If they also were good enough then to miss the five
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worst days, their returns wouldn't even be better. So to me, the
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idea of missing the best five days five worst day is just belogning. The
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main thing is the equity market moves in big moves called secular bull markets and
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bear markets, and so you know, when you're in a secular bull market,
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every jip is worth buying. In a secular bear market, it's a
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whole different ball game. And I do think that some of the problems we're
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dealing with are so significant that what is coming is going to be worse than
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in the nineteen sixty six nineteen eighty two time period, which gets to your
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question, deserve risk of a depression? Yeah, I mean at some point
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in time, you if the dollar loses its status as a reserve currency,
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I just think you have a bigger inflation problem. And so there's a lot
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of things that we've had kind of going for us the country and the divisiveness,
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the polarization, the inability of politicians to get anything done. Well,
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when you're dealing with big problems and you can't get things done, that's not
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a good outcome, and unfortunately, I think that's kind of where we are.
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The dead ceiling is kind of metaphor of that, in that, you
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know, these people just aren't doing their job. They're elected to go to
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Washington and pass a budget every year, and they never do it up.
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So what's the solution. Well, I don't think we're going to have a
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solution, it would be my point. In other words, all I can
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do is an investor is trying not to get run over and try to take
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advantage of the opportunities when they present themselves. So I was barish going into
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last year looking for the SMP to drop towards thirty five hundred based on some
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FIVNACI retracements and so forth. From last October, I've been looking for a
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rally. I think we're nearing the end of that rally, and we'll discuss
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that, you know, briefly when we talk about the SMP. Because I
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believe we're going to look at some charts that the probability is as we get
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in the second half of this year, the economy is going to slow meaningfully.
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I think we'll have at least one quarter of negative GDP growth. And
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I think a lot of investors are just too optimistic. Law Street is still
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looking for earnings to grow eleven percent this year. It's just not going to
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happen, you know. So you know that to me is you know,
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again taking advantage of opportunities. Market was deeply oversold, Sentiment was very negative.
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Now I think people have become complacent. Gee, if we haven't had
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a recession by now, it's not going to happen. And I think what's
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taken place is the amount of savings that people had over the last two years,
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in large part because the government distributed a lot of money, and then
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for a while while the economy was locked down, people weren't able to spend
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that money. Plus low rates, they fed suppressing rates for an extended period
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of time at a lot of people. About fourteen million people refinance their mortgages
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that allowed them to withdraw about four hundred and thirty billion dollars of home equity.
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That coupled with the savings is why the economy has continued to plow ahead,
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which has been my expectation when everyone else was saying last year of recession
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was taking hold, and said, no, there's not going to be a
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recession last in twenty twenty two. I thought the first half of this year
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would be okay. But as those savings start to dwindle down, you know,
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I just think the net result is we are going to see the economy
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slow. And why don't we show some of these charts, because the picture's
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worth a lot more than whatever words I'm going to use. The inverted yield
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curve is something that you know, a lot of people are very familiar with,
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and historically it has led recessions by about an average of nineteen months.
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Well, the yield curve in Verden July of twenty twenty two, So you
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take the average and you're like, year end this year, the depth of
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this inversion is the deepest since nineteen eighty, so you know that increases,
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you know, to me, the validity. The Leading Economic Index is a
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composite of ten different economic indicators labor, market, housing that also includes the
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yield curve that turn negative late last year has a lead time of about ten
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months, so that gets us into the third quarter, and then lending standards.
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I started writing about the tightening of lending standards last November, and it's
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funny carried now if the bank problems all of a sudden, people are paying
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attention lending standards in the FED announced it's Senior Loan Officer Survey for the first
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quarter came out last week and it showed forty seven percent of all the banks
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increased tightening tighten lending standards. And I heard a bunch of videos of well,
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I didn't increase that much. That wasn't that bad. I mean,
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in a light of all the news about the regional banks, they went from
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forty three to forty seven percent between the fourth quarter of last year in the
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first quarter of this year. So just looking at that, well, gee,
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that's not that big of a deal. The problem is, if you
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go back to the last thirty five years, every time lending standards more than
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twenty percent of banks increased their lending standards, there's been a recession. So
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if you look at the curve in version, leading Economic Index, and the
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increase in lending standards, all three of those indicators have been one hundred percent
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accurate in terms of forecasting a recession whenever they've reached the levels that they've reached.
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So to me, it's not a question of if we're going to have
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a recession when, And that gets back to you know, consumers still having
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savings right how severe it will be as well? Right well, in in
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the May Macrotides, I went through and looked at commercial real estate. Office
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real estate buildings have lost more than twenty five percent of their value. Apartments
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are down eighteen percent, small malls are down eighteen percent, and we have
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over a trillion dollars worth of loans coming due in the next twelve to eighteen
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months. On these properties, sixty seven percent of them carry have been extended
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by small banks. So that's the the yield of small banks. So the
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thing about lending standards, it's not like a light switch, Oh geez,
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they raise lending standards, the whole economy is going to come to a halt.
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What happens is if I don't have a loan for three months, the
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lending increase in lending standards doesn't impact me until my loan comes due, and
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now I've got to renegotiator. They're going to give me the same amount of
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money, how much more they're going to make me pay. So the FEDS
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increased embraces by five percent. What typically happens is the banks will add at
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the increase the spread above the prime rate. So the point being is that
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the increase in lending standards takes time to hit more and more of the bowers.
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And with the big drop in the evaluation of a lot of properties,
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a lot of banks aren't going to be willing to expend the loans that they've
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made. Some of these loans are going to in other words, of property
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you're worth less than the loan. So all of that's yet to come.
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And the other thing is the average bank account pays about fifty basis points on
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savings. Well, you can get four and a half to five percenting your
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sleep these days. So the deposit outflow from the banks, both large and
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small, is going to continue, and that's one of the foundations that the
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banking system utilize. The more deposits, the more they can lend. You
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get a contraction and deposits that starts to restrict the amount of lending. So
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these are all the things that are coming and that's why to your point about
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a hard landing. I think in twenty twenty four the risk of a hard
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landing is a lot higher. It's just that simple or how hard landing?
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Yeah, hard landing. I mean, you know, once the unemployment rate
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goes up, what starts to happen is obviously the people get laid off,
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pulling their horns, but people start, oh, gee, the unemployment rate
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over four percent. You imagine that the unemployment rate in the next six to
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nine months goes over four percent. With the headlines, you're going to be
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all lie odd, all right. So those even with jobs begin to pull
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back or cut back on their spending. And more often, if you look
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at the chart of the unemplumbent rate, once it starts trending up, it
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continues to trend up. So that's another risk as consumers really pull back more
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meaningfully next year a because they're worried and be the savings pool that they've accumulated
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is being run down. The San Francisco FED did an analysis and they said
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that in the first quarter, consumers were spending about eighty to eighty five billion
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each month of their savings. And they're best guests and no one has an
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exact number on this carry, but the best guests they had was five hundred
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billion. Well you take eighty billion and you do that six months and you're
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just about at five hundred billions. So again my point and to your question,
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is next year, the risk of a hard landing I think goes up
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significantly because I think a bigger retrenchment by consumers is possible, and consumer spending
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is seventy percent of GDP. So you know, again, I don't think
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Wall Street's completely ready for this, given that they're looking for earnings to keep
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going up. And the other point is how and other members of the FOMC
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now might take is I thought they'd raised the funds rate to five five in
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a quarter, which they did at the May meeting. I think they're going
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to hit the pause by them. Of what I don't think is they're going
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to cut rates in the second half of this year. The Fed funds futures
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are looking for two rate cuts in the second half of this year. Not
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going to happen. The unemployment rates at three point four percent, it's at
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a fifty four year low. There's no way the INFLOMC is going to cut
15:50
rates with unemployment solo. The labor markets so tight. So that's I think
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one thing that the FOMC members and speed in coming weeks, they're going to
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drive that point home. We have no plans to cut the funds rate,
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so inflation is still going to come down. But as long as the labor
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market is as tight as it is, I think the FED is their goal
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was to avoid the nineteen seventies where they kept raising rates. For raising rates,
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we got a recession, then they had to cut rates. Inflation would
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drop during a recession, but it kept making higher loads. The FED wants
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to avoid that, so Paulas said, the bigger mistake would be eating too
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soon. So their ideas, we'll get the funds right up to a kind
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of a modestly restrictive level, and then we're just going to wait and allow
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all these prior tightenings to kind of take hold. And now with the bank
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lending standards going up, that adds credibility to that. If you will approach,
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and I just think over time, it's going to, you know,
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weigh on economic growth, and ultimately I think the odds are we're probably going
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to go into a recession. That's simple. Okay, Well you're another breath
17:07
of fresh air here today. Hey, if you see it coming, you're
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not surprised, and if you can to you Edny good, Well, if
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you're you know an idea here, I mean to me, I think there's
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a decent shot that the SMP can have one more pop above forty two hundred.
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Maybe the death ceiling gets solved. There's a fair amount of shorts out
17:26
there, they squeeze it. If that happens, to me, that's a
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great opportunity to sell into that strength because I think then once the dead ceiling
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is out of the way, Kerry and we start getting more and more data
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point showing things are slowing and the FED isn't going to be in a quick
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rush to ease. I think that's the window of vulnerability for the SMP.
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I think the SMP is going down to the lowest last October near thirty five
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hundred, and there's a shot if we get closer towards the idea of a
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hard landing thirty two hundred. I'm the SMP. So if you see it
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coming, and if it actually does fall into place like that, then it's
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not such a bad thing. If you don't see it coming and you get
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run over, Yeah, it's a bad thing. Yeah, yeah, but
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the country is going to be run over because nobody's expecting this, or maybe
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people are expecting it, but they they've thrown up their hands and don't think
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there's anything you can do about it, right, Yeah, yeah, I
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mean in the American Association of Individual Investors show that the percentage of bears that
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they serve it every week is like there's twenty percent more bears than bulls.
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But if you look at their allocation the stocks, it's gone from like sixty
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eight percent to sixty five. So to your point, maybe worried about it,
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but they haven't gotten to the point where, on my goodness it's happening,
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I'm really now afraid and I'm going to start pulling my money out.
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And that typically is what happens as you go really into the end of a
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bear market, is people finally kind of cave in, so they're worried,
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but they're still out spending on balance, and they're still invested. All right,
19:11
so it's gold going to go up. Well, here's the thing.
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The chart I short of the dollar. I think the dollar rallied from January
19:21
into early March, and then there's news of the regional bank problem hit the
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tape, the dollar pulled back from one oh five eighty eight to under one
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oh one. So my belief here is that the dollar has made it a
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bout, and part of that decline in the dollar was predicated on the FED
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cutting rates in the second half of this year. I don't think that's happening.
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Last Friday the dollar got about one h two twenty five, which was
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a kind of an area of resistance. So my take carry is that the
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dollar is going to rally up towards that one five eighty eight and maybe go
19:53
a little bit higher when people realize, no, the Fed is not cutting
19:57
rates. The gold picture longer term is bullets from the low less September you
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can see on the chart one, two, three, four five. So
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from a longer term standpoint, I think that five wave move up is wave
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one of a much bigger advance that's going to take gold to higher highs,
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new all time lives. But after a five wave advance, you're gonna have
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a pullback, And so to me, we're at that point where we're likely
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to see gold pullback maybe to nineteen hundred eighteen eighty, but I think subsequent
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we're going to see gold rally to a new all time high twenty two hundred
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twenty three hundred. So this pullback in gold, I think is a pullback
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to buy is just a question of you know, I think it's going to
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take six to ten weeks, where a couple of weeks already into it.
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But I think it's a buying opportunity. So that is the limit. Huh
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With gold, I don't know about sky's the limit, but I think there's
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a big, you know, a pretty nice move to the eyes coming.
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And in an environment where the equity market might be suffering, gold would then
21:10
offer an attractive alternative. Okay, well, so gold and silver along with
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that as well. Right absolutely, now, what they I'll mention is um
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TLT, which is the ETF for long term treasury bonds. It rallied from
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under ninety two chamber one O nine in early December from a low in late
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September. It's been chopping sideways. UM. I think TLTs a buy.
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UM. I think TLT is going to rally to one fifteen to one seventeen
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um A if I'm right about the economy. Historically, treasure yields rally or
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partly come down which would result in a rally and treasury bond prices m So
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to me, it's just nothing more than a big ABC. But from the
22:00
area of around one oh three ish up to one fifteen to one seventeen,
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that's a pretty nice trade. So that's the other thing that I'm if you
22:08
will, positive about. So this isn't just going to be a localized to
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US banking tobacc although either right, it's going to be global. Yeah.
22:18
I mean, I think if you look at real estate prices. A couple
22:21
months ago, I did a section in one of my letters looking at global
22:25
housing prices. I mean, I think we were up like fifty percent real
22:30
price increases two thousand places like New Zealand, Australia, even Great Britain was
22:36
up like eighty percent. So, in other words, the housing bubble is
22:38
we have bubble here in the United States. The bubble oversees much larger,
22:44
and the US banks did after the financial crisis, you know, strengthen their
22:49
balance sheets more so than the European banks and so forth. I mean,
22:55
remember there was a period of time when yields in Europe are so negative that
22:59
if you lived that I think it was Sweden or Switzerland one of those two
23:03
that the mortgage yields were below zero, the banks were basically paying homeowners.
23:10
Talk about upside down. So the risk I think is greater in Europe than
23:15
it is here. But you know, and again I'm not looking for another
23:19
financial crisis and so forth. But do I think housing prices can come down?
23:25
Yeah? I do. Are they likely to come down? Yeah?
23:27
You know base of rising inflation. Well again, people, you know,
23:32
when the unemployment rate starts to tick higher, that's going to be the litmus
23:37
test because one of the things that's been supporting housing prices is the lack of
23:41
inventory, so you don't have forced selling. When if the unemployment rate ticks
23:47
up to four or four and a half percent, you're going to get some
23:51
more forced selling. Plus you have if you will. The demand side is
23:56
also constraint. If you're seeing in a house with a less than a three
24:02
percent mortgage, you're not moving for until mortgage rates come down significantly, because
24:07
if you move, you're going to immediately incur a much higher monthly cost in
24:11
terms of your mortgage expense. So you know, on one end, the
24:15
fact that people are locked into housing because they have low mortgage rates is helping
24:22
to prop prices up at this point in time because you don't have an influx
24:26
of supply. But when you do have an increase in supply because unemployment goes
24:30
up, that will turn into a negative because people, unless mortgage rates come
24:34
down a lot, a lot of people are just going to say, hey,
24:38
why should we spend an extra four or five hundred bucks a month because
24:42
our mortgage is going to get reset at a higher rate. So I think
24:48
the unemployment issue can be a driver that will weigh on housing prices. And
24:53
you know how psychology is, it feeds on itself. So for a while,
24:57
hey, housing prices are going up a lot, we got to buy
25:00
it. We got you know, twenty offers above. Ask yeah, well,
25:03
you know, housing prices start declining and people read more stories about that,
25:07
you all of a sudden that willingness to bid that is decreased again.
25:12
That's where next year, to your point about the hard landing's next year kind
25:18
of stuff in terms of dough some of these other factors come into play that
25:22
turn a recession into something a little bit deeper. So then what happens to
25:27
the deficit. Can the deficit quadruple from where it is, and what does
25:32
that do with things? Well, I again, from a long term pattern
25:34
of treasure yields, I'm bullish in the near term in terms of bond prices
25:41
rallying treasure yields coming down. But the long term pattern from the lows in
25:45
twenty twenty suggests that we've had a one two three in terms of yields going
25:51
up that ended in September of October last year. This rally that I'm talking
25:56
about where bond prices go up and yields come down is way war So ultimately,
26:00
to your point, the big increase in supply is going to be one
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of the factors I think that will cause treasury yields to go back up after
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we see this rally and we get into twenty four twenty five and supply starts
26:18
to become a bigger problem. Okay, well, this is real encouraging here.
26:23
Here. I thought you're going to give us some good news, and
26:29
now sometimes no news is good news. But in this case, it's all
26:32
coming up bad. So you've got to make your decision how you're going to
26:36
handle the impending gloom and doom. Certainly a major downwave is coming and all
26:42
the things that worked twenty years ago until a couple of years ago aren't going
26:48
to work anymore, so you have to start thinking in different ways. We
26:52
appreciate it coming in coming on with us, Jim macrotids dot com. That's
26:59
the site. Hey, just send us an email k L at krylots dot
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com. We'll send you a copy of all the charts. They'll be posted
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on the site. And for the question comment for Jim myself. K l
27:12
at krylots dot com is the email address to use, and when you're at
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Jim, always a pleasure to have you on and we'll talk to you again
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soon. Thanks, Terry enjoyed it. Thanks for listening to carry Lutz's Financial
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