Could this decade redefine economic growth and markets? Ed Yardeni believes it might. He joins James Connor to unpack his prediction of record highs for the S&P 500, driven by revolutionary advancements in AI, humanoids, and productivity. Ed also explains why a long-anticipated recession has not been forthcoming, as the U.S. economy has showcased remarkable resilience, supported by robust markets and technological advances. However, risks like speculative market bubbles and policy missteps loom large. Learn how technological innovation, productivity gains, and pro-growth policies could lead us to call this decade the Roaring 2020s!
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Ed Yardeni 0:00
The roaring 2020s when I give that a 55% subjective probability, then 25% to a 1990 scenario, which is a melt up meltdown scenario, because the Fed eases too much and there’s too much irrational exuberance, so 80% that the stock market’s going higher, and then the remaining 20% is sort of my bucket for everything that could go wrong.
James Connor 0:27
Hi. Welcome to wealthion. I’m James Connor. Well, here we are in the last few weeks of the year. I don’t know where this year went, but one of the things I always like to do is we head into a new year. I like to set out some financial goals, and if you would like to have a discussion with a financial advisor about some financial goal setting for the new year. Go to wealthion.com/free to speak with the financial advisor. Once again, That’s wealthion.com/free now let’s get on with the show.
James Connor 0:58
Ed, thank you very much for joining us today. How are things in Long Island?
Ed Yardeni 1:01
Just wonderful. We’ve had a great fall, and hopefully we won’t have too bad a winner. Well,
James Connor 1:06
I am in Toronto. We have the same sort of weather here. It’s just been amazing fall. But again, I’m a skier, so I don’t mind having a little bit of snow. Okay, so the last time we spoke, I can’t believe the first time we spoke was a year ago, and at that time you were very bullish on the economy and also the markets. And this is also at a time when a lot of people were calling for a recession in early 2024 but you weren’t. You were very bullish. Your target on the S P at that time was six 6000 and here we are a year later, and you pretty well nailed it. The S P is at 6000 give or take and so great call by you. But what’s your target for 2025
Ed Yardeni 1:47
more the same but maybe a little bit more volatility? I’m sure there’ll be a roller coaster ride going into the new year. We have a new administration, Donald Trump’s or Trump 2.0 as people are calling it, is what we’re looking at. We’ve had some experience with President Trump during Trump 1.0 this time, he seems to have more of a mandate. He seems to be more in command of who he’s putting together a lot of loyalists. So he’s going to be really, quite, quite effective here, but it’s, it’s a lot of moving parts with his policies. But you know, one of the reasons that I’ve remained optimistic here is I’ve observed over the years, and I’m amazed by how well the US economy performs, despite who’s who’s in the White House. And so I was bullish about the outlook for 2025 and maybe the rest of the decade, irrespective of who was going to win the elections. But I’m, I’m still pretty optimistic. I think 7000 now, by the end of 2025 was likely. Then 8020 26 and then 10,000 by the end of the decade, as you can probably tell, not too good with numbers, so I’d like to keep them nice and round so I remember remembered them but 7000 8000 and then by the end of the decade, 10,000 and
James Connor 3:22
you raise a very good point there. It doesn’t matter if you’re a Republican or a Democrat or who’s in the White House at the end of the day. It all comes down to the men and the women who are going to work every day and providing for their families. That makes your country and my country great. Yeah, I
Ed Yardeni 3:36
think we often forget the working stiffs, which includes us. You know, we don’t really have that much time for politics. Politicians, that’s all they do for a living. And the rest of us have to do what we have to do with our jobs. Try to make ourselves more productive, you know, increase the value of our work, our businesses, for the good of our families and our country, community, as a country, and we do that despite despite our politicians. And when we do that, we have to factor in that they exist and that they have an imp certainly have an impact on what we do, but somehow or other, we continue to do it despite their meddling. And a lot of their meddling is counterproductive. It’s really not helpful to conducting our chores, but again, we allow for that, and we overcome it. So
James Connor 4:29
let’s spend a little more time on politics. And as you mentioned, Trump and the Republicans, they won by a landslide. They took the house, they took Congress, they took the Senate. And so you mentioned that you’re expecting some volatility this year, and I’m wondering why, and also because the Republicans took, yeah, the White House, and also the Congress and Senate. What does this mean for your expectations for the year? Well, there’s,
Ed Yardeni 4:52
there’s, there’s so many policy proposals that, with many of them likely to get enacted pretty quickly. So. There’s, you know, on the happy side, what the stock market liked, once it was clear Trump won, is the promise to cut corporate taxes from 21% to 15% that’s a big deal. And then for the consumer, there’s he promised that there’d be no taxes on tips, that there be no taxes on overtime pay or on social security. That’s a big deal for a lot of lower income consumers. So that’s that’s important, and overall, those two should be positive for the economy. Then, on the other hand, he’s got the policies of that would possibly increase the deficit, which would be the tax cuts, and he’s also got policies that would increase tariffs, which could increase inflation. So, you know, the initial reaction for was from the stock market was positive, and the initial reaction for the bond market was, was not so much, but it’s a moving it’s a moving story here as a dynamic story. And now we have a new Treasury Secretary that’s been nominated, and this fellow seems to be relatively conservative in terms of how much he wants to see that the President implement. But let’s face it, we’ve seen Donald Trump before, and at the end of the day, it’s going to be all about what he thinks, not so much by what his policymakers think, but so the volatility in the market could be depend on how these things pass. They all going to be implemented all in one shot. I mean, from the get go, tariffs are easy to apparently implement with executive order, and so that’ll be the first thing. And stock market may not be too happy with that initially, and then all of a sudden we get tax cuts. The market might like that. So it could be a pretty bumpy ride here. But at the end of the day, I think the US economy is resilient. It’s proven that over the past three years, James, as you know, we’ve had this most widely anticipated recession of all. Times it never happened. It was the good doe recession, the no show recession, and the economy demonstrated that it could deal with a major tightening of monetary policy without having a recession. That was quite an accomplishment. That’s something we anticipated. But have to admit, even we’re kind of surprised by how well the economy has performed, and maybe that’ll continue to be the case through thick and thin. The economy does well. There’s been so many roadblocks, so many hurdles over the past few years, and yet here we are recognized in the stock market.
James Connor 7:47
I might have to use that term, the no show recession. Yeah, so you touched on tariffs, and a big component of Trump’s economic plan is to use tariffs as a proverbial stick, and he recently announced that he’s going to impose a further 10% tariff on China and a 25% tariff on Canada and Mexico. What are your thoughts on this? And maybe you can just give me your views on what you think of tariffs overall. Yeah, well, we’re
Ed Yardeni 8:14
not going to know exactly what’s going to happen. I mean, I’m a little confused, because last I recall, Trump is talking about 60% on China. So what is he talking now? Is he talking about 10% now? Of the actual tariffs on China right now already are 30% so it’s not as though you know Trump 1.0 actually survived Biden in terms of the tariff policies vis a vis China. But now he’s, you know, clearly getting the attention of Canadians and and Mexicans by threatening to raise the tariff to 25% basically throwing out the, you know, the treaty that was reworked during Trump 1.0 between Mexico the United States and Canada on free trade, and so whatever was worked out back then is kind of being thrown up in the air, and now Trump’s using tariffs as a very powerful negotiating team with our northern and southern neighbors and saying, you know, it’s not Just about trade, it’s also about immigration. And so it’s a tall order, and it’s it certainly is going to require policy makers and in Canada and Mexico to respond and to find some way to compromise with Trump, if there’s a way to compromise, or at least work out some sort of deal where the punishment of 25% tariffs is put on hold and just kind of continue to held over the heads of Mexicans and Canadians. But I’m not a big fan of tariffs. I think I. Most economists are not big believers in tariffs. Much rather have free trade. But as we know, that’s a, in many ways, a utopian delusion of economists that we can have free trade, or that, you know, the World Trade Organization has created a world with with freer trade in when China was brought into the World Trade Organization, December 11 to 2000 2001 I should say, Everybody expected that the Chinese were signing on to the rules of fair play, that they would almost force them to be more capitalistic. And for a while they they played that game, but along the way, they started to basically cheat on the rules. And it became more and more obvious, and more and more countries became very concerned about the fact that free trade wasn’t so free, not when you did business with with China. And now from the point of view of view the United States, it’s pretty clear that Chinese companies are moving to Mexico figuring that we’re not going to see them do that, and they’re just going to kind of truck their stuff up the back door. And that’s going to show up here with our tariffs with Mexico, rather than tariffs with China. And obviously that’s not going to that’s not going to play out very well, not with this administration. I think you know, history shows that tariffs can lead to tariff tariff wars to trade wars, and that trade wars are bad for everybody, but sometimes these things kind of build on themselves. Everybody knows they’re bad, but it becomes sort of a tit for tat, and both of you know it, you’ve really taken an ax to world trade. The Of course, the big example we’re all familiar with is the the smooth Holly tariff of May 1930 that’s really what caused the Great Depression. That’s really what shut off world trade, when everybody retaliated to the US tariff, and global economic activity took a dive. So the experience with tariffs is not a happy one, but they’ve been around for a while, and countries do use them, and Trump certainly uses them for negotiating purposes, but he’s also now aiming to raise revenues with it, kind of going back to the 1800s America, the good old days when there was no income tax, and the government raised revenues by putting a customs duty on imports. So I think he’s trying to go back to that, and it could raise some some revenues, but it could also be counterproductive to the extent that it depresses our imports and depresses global economic activity.
James Connor 12:52
Yes, I’m looking forward to how the Trump administration deals with our prime minister, Trudeau in the coming months. Should we quite
Ed Yardeni 13:00
it’s, how should we put, I guess, the delicate way say so early in vinegar. I mean, they’re not going to mix very well.
James Connor 13:09
I would agree with that. Okay, so you touched on Trump’s appointment for Treasury, and that’s Scott Bessette, and he has put forth is what he’s calling a 333 plan, okay, or an economic agenda. And that’s 3% economic growth, a 3% deficit of GDP, and he wants to increase oil production by 3 million barrels a day. What are your thoughts on this plan? Any concerns?
Ed Yardeni 13:37
It’s a clever marketing, you know, tool here to have this three arrows. It’s, he borrowed it from, from Japan’s Prime Minister a few years ago. It’s, it definitely highlights the goal here. The goal is to get better economic growth. Who wouldn’t want to get better economic growth? And certainly it’s possible the tax cuts certainly could help. But you know, I think the economy is already on course to grow at a faster pace, because productivity has been making a comeback that labor shortages have caused companies to use technology to increase productivity, and the technologies that are available now lend themselves to doing that to a whole host of different kind of businesses. So I think that was kind of in the works. I was, I was talking about the roaring 2020s back at the beginning of the decade, and I made no no assumptions about who was going to be running the White House. I just was focusing on technology and the impact on productivity and growth, and that, of course, has implications for inflation. So I think 3% growth is actually going to be pretty easy to get in the kind of environment I see, without the administration having to do much. And if they cut taxes and they provide deregulation that would help go. Growth even more, because it would probably fuel more more productivity. So I think that’s that’s achievable, and then 3% ratio of the deficit to GDP, that’s going to take a while. That’s not going to be an overnight thing right now. I think we’re at 6% so there’s going to have to be, you know, better. Growth will help some, but there’s got to be some slowing down of the pace of outlays and some increase in the pace of revenues. And I think Trump has managed to buy some time with the with the bond market by suggesting that Elon and Vivek are going to be running Doge, the Department of Government deficiency and that they’ll find some substantial savings and ways to cut, yeah, Trump clearly wants to go after the bureaucracy, and the bureaucracy employs, I guess, the federal government employs 3 million people, so it’s, it’s actually not as big as people imagine, but they certainly oversee a lot of spending, but getting cutting that spending, even Elon might find this a Herculean job. It’s one thing to run a company and tell people you want to cut costs and then fire people who don’t do that properly. It’s a whole different story in the government, so we’ll see how that that one plays out. But I think you notice that the Treasury nominee didn’t say when he expected to get this ratio down, and I’m sure he didn’t mean that it would be done by by next year. Maybe he was implying that we get it done by the end of the four years, which would be a good thing. It may be better than going the other way. And then the 3 million barrels per day, you know, it’s it’s a good goal. And the idea is to make the United States even more energy independent and more of a key factor in global energy supply, and the problem is it’ll depress energy prices, which then takes some of the incentive out of producing more oil. But I have been noticing that the energy sector is probably one of the most efficient sectors in America and maybe in Canada and in other places, particularly the oil drillers and frackers that are always coming up with new ways of getting more oil out of the same well, and they’ve been very successful at that, and they’ve been successful lowering the cost of production, so maybe the price of oil can come down, and they could still make a Profit at that lower level. And then, of course, natural gas is a big part of a story. Now we’re going to be producing more LNG export facilities and exporting more and initially that might actually raise LNG prices in the US, because right now that all that gas is literally bottled up in the United States under the export limitations, but we have a lot of natural gas, and I think it’s going to, I think it’s, I think if we look at energy more energy production, including gas and oil, I think it’s very feasible.
James Connor 18:14
So there’s a couple of things I want to unpack there. First of all, when you take the deficit from 6% down to 3% and you’re cutting taxes at the same time. How do you think they’re going to decrease the deficit by that much? Because you’d have to make some drastic expenditure, expenditure cuts. Yeah, I
Ed Yardeni 18:35
don’t know how you know how they juggle these balls. It’s not just three balls. It’s quite a few more, because all their policies, it’s kind of like, you know, when, when you the doctor prescribes the medication, and the doctor says, wait before I do that, let me check your record to see if there’s any interactions. We’re not checking interactions. You know, we got all these medicines to make the economy better, and we’re not really sure how they will interact. I mean, will tariffs cause a trade war and deflation? Will tariffs lead to inflation? Will tariffs generate enough revenues so we can cut taxes without increasing the deficit, and if it just kind of covers what we need to pay for the tax cuts, then what are we actually doing to reduce the deficit? So there’s, I think a lot of it is, is policies that sound right, that that makes sense if they work, but some of them have, like, medications have adverse consequences, and that’s why it’s going to be a volatile Europe ahead here, I think, on balance, the US economy is as a healthy patient, and maybe it’s got a few, a few areas where it could use a little. Bit of medication, you know, pick me up, or whatever you want to call it. But all in all, I think the US economy is just going to be buffeted around by these policies, but still prove resilient and move move forward.
James Connor 20:16
The price of oil has been hanging around $70 for a good part of the year, and this is in spite of what’s happening in the Middle East and also Ukraine. And I almost get the sense that if we didn’t have these hostilities going on, oil would be a lot lower, 60 watts a barrel, maybe $50 a barrel, I don’t know. But what are your thoughts? Do you think it’s at this level just because of a slowdown in the US economy or the global economy?
Ed Yardeni 20:40
Well, I think the most important explanation for the weakness in oil on the demand side is China’s weak. China’s property bubble burst. We know from what happened in Japan in the 80s and the United States in the 2000s that once the property bubble bursts, it takes several years for it to no longer have an adverse consequence on economic growth. And I would argue that the Chinese housing bubble is probably the biggest housing bubble of all times. And so that being the case, I think that’s depressing the Chinese economy. The one child policy of the Communist Party has come back to haunt them. They’ve got a geriatric demographic profile which is clearly not stimulative to consumption. Consumers have a negative wealth effect from home prices being down and from the stock market being down now, of course, they are doing their best to try to stimulate things, but I think they would have to do something pretty radical, kind of like what we did here in the US during the pandemic, and that’s actually send people checks to have them spend it without the consumer actually increasing their spending. I don’t know that the Chinese economy really is going to perk up. And the other thing is, with regards to energy, is they’re driving a lot of electric vehicles. I mean, that’s one that’s one country where I think the electric vehicle push really is turning out to to be a big deal. And that being the case, that reduces the demand for oil. It doesn’t reduce demand for energy, but they’re building more and more power plants, and they’re building their electrical power grid to handle all that. Of course, they’re doing some of that, maybe a lot of it, with coal fired plants. So that kind of counters what the world is trying to do in terms of reducing the amount of carbon carbon in the air. But that’s what they’re doing. India is doing very well, but, you know, I haven’t been to India, but I’m told the traffic is horrible. So I got, I got to believe they’re burning up a lot of gasoline. But then again, they’re not getting very far. So India just hasn’t been the kind of growth. Market for energy, the way China has been in Europe is is a mess. I mean, it’s got a lot of problems, and their their economy is kind of bumping along, struggling along. So that’s the demand side. The use is doing fine. We’re driving gasoline consumption is relatively high. We’re also buying electric vehicles. But on the supply side, there’s just a lot of oil, and it’s the Russian oil is getting out, one way or the other, and probably being and being sold to China and India and the United States. Said, despite Biden saying that he’s against fossil fuels, we’re producing at 13 million barrels per day in the oil fields, which is a, you know, basically a record high because of the productivity of of the oil industry. So you put it all together, and it’s hard to see much, if any upside here. And even with the geopolitical crisis, as you mentioned, we haven’t been able to get the price up, but at all, really. And so now there’s talk that Hezbollah and Israel are going to have a ceasefire, and maybe that’ll start to calm things down. But you know, we still have the issue to resolve between Israel and Iran, and that may still involve a military confrontation between the two of them,
James Connor 24:26
and the higher oil production will definitely be good for inflation. But what about these tax cuts and also deregulation? Can that not be construed as being inflationary? Do you see any risk of inflation heating up here in 2020 I
Ed Yardeni 24:40
wouldn’t think deregulation will be an issue on the on the inflation side, because presumably that would cut cut the costs of doing business and in a competitive marketplace, which we still have, we should be able to see some of that actually pass through and keep a lid on inflation. Tax. Scott’s might be inflationary if they stimulate a lot of demand, but overall, I think fiscal policy is not going to be any more stimulative than it has been during the Biden years. I think it was the spending during the Biden years that really kicked up inflation. That wasn’t the only explanation. I mean, the pandemic caused a lot of supply chain disruptions that took a while to abate. But I think on the inflation front, again, it may be a bumpy road, but all in all, I think the outlook for energy suggests that that’s not going to be a major source of inflation. The global demography. A lot of countries are experiencing aging demographics, and I think those kind of societies tend to consume less as So, and that people drive less as they get older. So I think that may be a disinflationary force, and then productivity. I think that we don’t fully appreciate the fact that the future is here. It wasn’t too long ago. This in my memory, I can still remember 2020 or 2021 and back then, if we talked about 2025 it’s like, Whoa, that that’s the future. And here we are in 2025 and there are a lot of aspects of, you know, our society that fiction books on, you know, science fiction books and anticipated, and we’re on the cusp of seeing humanoids that are really quite capable of working increasing the productivity of the labor force. We’re seeing the potential here for the AI technology, which is not revolutionary, it’s evolutionary. I think we have to put AI in the context of data processing. Data Processing is something that goes back to the abacus, of course, but true data processing really got going, I think, with the IBM mainframe in the 50s and 60s, and that evolved in the 90s into the PCs, and then the following decade, we had the cloud. And so it’s kind of kind of a one thing after another on data processing. And the name of the game is to process as much data as fast as you possibly can. And that’s what AI is, sort of the latest generation of it’s, it’s a process of taking what is, what people call big data, just an enormous amount of data, and processing, getting it to make sense of it, to use it to increase productivity, to work more efficiently with marketing and consumers. And that’s what this is all about. So you combine Nvidia chips and Elon Musk is talking about buying 100,000 Nvidia chips. He’s raising $6 billion so he wants to build a super duper computer to stuff all this data into it and come up with autonomous driving vehicles with more productive and useful humanoid robots with space technologies. And so he’s not the only one doing it, of course, and these things are no longer pie in the sky there. They’re going to be increasingly affecting our lives over the next several years, and I think they’ll increase productivity. And, you know, technology, once it really takes off, it really takes off. It that technology really didn’t take off in the 1990s once everybody had a Dell box with IBM Word and Excel, you know, we got a certain amount of applications that you could use with that, but it didn’t lend itself to a whole host of businesses. Now we have technologies that are very powerful, very cheap, very easy to implement, very easy to update, that I think will have a tremendous impact on our lives over the next five to 10 years.
James Connor 29:17
Interesting points. So when we spoke a year ago. I want to talk about the Fed now, but when we spoke a year ago, there was, there was individuals out there calling for six cuts in 2024 and we’ve had two cuts. We got 50 in September. We had another 25 in November. We have one more Fed meeting coming up before the year end. What do you think they do?
Ed Yardeni 29:37
Well, you know, I don’t. I didn’t buy into the multi cuts in the Fed funds rate at the beginning of this year. And you’re right, the people were talking about six to seven rate cuts this year. And then we got closer to the fall, and people were talking about. The 25 basis points at the September 18 meeting, and we kind of caved in and said, okay, they’re gonna, you know, they’re not listening to us. The economy doesn’t need it. Inflation is moderating. The economy strong. The Fed doesn’t really need to cut rates. Rates are actually probably where they should be, but they just wouldn’t listen to me, and instead, went their own way. And not only did they cut, but they cut by 50 rather than 25 basis points. And my reaction was, watch the bond yield go the other way. And that’s exactly what happened. The bond yield went up like 75 basis points after that meeting, and then they went down 75 basis points, all told, so far this year, by cutting by another 25 November. There’s they believe that the Fed funds rate is restrictive. And I said, Well, wait a second, they’re supposed to be data dependent. And I’m looking at the same data as they are. And I’m saying the unemployment rate’s just about 4% inflation is about 2% I mean, aren’t we there? I mean, it’s like the kids, you know, you take a long drive and the kids are in the back seat saying, Are we there yet? Well, we’re there. We’re at Nirvana, where, where you’re we’re supposed to be. And somehow they think that these rates aren’t are too high, but the economy has demonstrated that it could do just fine with this level of interest rates. So I’m not convinced that they really have to lower interest rates much more. I think they’ve sort of started back off and say, Well, you know, we’re still lowering rates, but maybe more gradually, which is fine. I mean, if they want to do it slowly and and see how the economy is responding, they were going to do that anyways. But I think interest rates have normalized four to 5% bond yield is kind of where we were before the great financial crisis, before all the abnormality was zero interest rates. It wasn’t, it’s not, not a Fed funds rate of, you know, four and three quarters percent. It’s not a bond yield of 4.25%
James Connor 32:08
and I’m glad you brought up yields, because the 10 year, it’s been quite volatile here. In the last few months, I think it’s gone from a low of 360 up to maybe 440 give or take, 450 Yeah. 440, so What’s that telling us?
Ed Yardeni 32:23
I think what’s you know, I coined the phrase bond vigilantes back in 1981 and it’s telling us that the bond vigilantes aren’t happy. They’re concerned that the Fed is tightening too much too soon. They’re concerned that with the economy doing this well, that the Fed may be stimulating an economy that really doesn’t need to be stimulated, and that that could perk up inflation. And while the Fed may be very comfortable that, you know, wait a few more months and inflation will be down to two to point 0% which is what their target has been all along, and it was all along. They were very adamant, 2.0% not the 2.1 2.2 they wanted a 2% and they wanted it to be there for a while, so that they gained gain confidence that that’s the case. But they stopped talking about that. Instead, they said, we’re close enough, and we want to make sure the unemployment rate doesn’t go up, so we’re going to lower rates. But there’s some sticky areas still in the inflation area, rent inflation has actually started to pick up a little bit, and everybody, including ourselves, thought it would continue to moderate over time, but now it’s not quite working out that way. And there are some areas in the country where rent inflation actually is starting to pick up. So that’s a concern. I guess. The problem is, you know, homes are so expensive that people just can’t afford them, and they’re being forced to continue to rent, and there’s still a shortage of homes relative to the potential demand. And then, of course, there’s what Paul himself, himself called a super Core inflation, which is services inflation, taking out energy and taking out housing. And that’s still stuck around three to 4% it’s not a 2% and he made a big deal about it being sticky and too high about a year and a half ago. So the bond market remembers all that, and the bond market what doesn’t doesn’t want to have uncertainty about the Fed’s commitment to bringing inflation down to 2% so I think that’s what we’re seeing in the bond market. Is the bond vigilantes threatening to saddle up and take law and law and order into their own hands by pushing bond yields up to slow the economy down, to slow inflation down, if the Fed gets too sloppy here and too easy.
James Connor 34:58
So just to. Summarize a lot of the points. You just said you think the economy is going to continue to hum along at three to 4% Yep, you see the s, p going higher 2025 it’s going to be choppy, but it’s still going higher. And you see no risk of inflation heating up and no risk of a pullback or a recession,
Ed Yardeni 35:19
correct? And that’s, look, I try to be reasonable about these things. That’s my base case. I’m not going to tell you things can’t go wrong, and they can go wrong in a in a bullish, even more bullish direction for the stock market, and a more bearish one. So I’ve been talking about three scenarios. I’ve been talking about the roaring 2020s which is the base case you just kind of outlined just now. And I give that a 55% subjective probability. Then 25% to a 1990 scenario, which is a melt up meltdown scenario, because the Fed eases too much and there’s too much irrational exuberance, so 80% that the stock market’s going higher, and in one case, it’s going to go higher without a lot of you know things going straight up and straight down the way they did in the 1990s and then the remaining 20% is sort of my bucket for everything that could go wrong. Initially, it included mostly geopolitical risk, which seems to have actually not been an issue so far. I mean, it’s not as though things aren’t still awful between Ukraine and Russia and in the Middle East, but they don’t seem to have much of an impact on the global economy, and certainly not on the US economy. And then I threw into that bucket, because a lot of people have asked me, What about a potential debt crisis? And so you have to put that in there. But I think, as I said, before, Trump might have bought us some bought bought some time on a debt crisis by promising to have a look at ways to cut spending, ways to raise revenues. So we’ll see how that all shakes out. And so that’s the way I’m looking at the world.
James Connor 37:10
Okay, so let’s talk about the stock market now. And you mentioned this concept of irrational exuberance, and I think we see this. We see a lot of it going on right now. When you look at it here in the s, p, it’s up 25% on the year, give or take. But you have a lot of individual stocks, like, I’m going to say micro strategy, it’s up 500% on the year. Palantir is up 250% Nvidia is up 200% like, these moves are just astonishing. And then just recently, I’m sure you saw this individual his name was Justin. Son, just paid $6 million for a piece of art which was essentially a banana to the wall. Yeah, not taped to the wall. But when you see things like that, these moves and also this piece of art going for 6 million bucks. Does that not concern you a little bit, that we might be in a period of irrational exuberance?
Ed Yardeni 37:59
James, it concerns me a lot. It concerns me that I picked the wrong career. I should be an artist and just tape a banana to the wall and, you know, get $6 million for that. That’s, that’s, that’s pretty sweet, if you can, if you can, do something like that. And I, I think you forgot to mention Bitcoin. Bitcoins also been kind of that verdict, vertical ascent we’ve seen in some areas of the marketplace. So kind of the the irrational exuberance, aspects of irrational exuberance are certain, certainly there. Interestingly, though, of late, the market seems to be broadening out stock market to mid caps, to small and mid cap stocks, and there’s no irrational exuberance there. That’s quite the opposite. They’ve been really cheap for a long time, but, you know, irrational exuberance could lead them to be overvalued pretty quickly. We see some pretty remarkable moves in a very short period of time. So I am starting to see a little bit too much bullish sentiment. And so, yeah, I may have to reconsider the subjective probabilities that I assigned to kind of a civil bull market that carries us through the end of the decade without any major drama, and reconsider the potential for a 1990s kind of, kind of melt up, because there are aspects of it. But, you know, some of these areas where we were seeing the market, the big moves to the upside, this kind of justified bear earnings. I mean, Nvidia certainly looks like it’s it’s still justified by earnings and its growth rate is, what is it now only, only doubled over the past year. So that’s a little bit disconcerting, I suppose. But yeah, I mean, the bottom line is, there’s irrational exuberance. Is here in some areas, for sure.
James Connor 39:58
And I. And you mentioned earlier that there are a few years ago you’ve actually coined this decade is the Roaring 20s, just like the 1920s and we all know how the 1920s but makes me think of that book. I’m sure you read it by Charles McKay, the madness of crowds. Yeah.
Ed Yardeni 40:19
Well, I think you’re making a really good point, and that is, you know, history is relevant, and it doesn’t repeat itself, but it rhymes. And in this case, I’ve been thinking that what causes recessions in bear markets is tight monetary policy. So we had that, and we actually, as we noted earlier in our conversation, I’ve been kind of pushing against that. I would say, You know what the surprise this time is going to be that monetary policy doesn’t cause a recession because the credit system is more resilient. The economy is more resilient, consumers more resilient. I made a lot of arguments which are more specific, why I thought the economy would handle it. So all right, so let’s, let’s move on. What else could cause a recession? Well, oil prices soaring. Shortage of oil. We’re all waiting in gasoline lines, not able to enjoy our lives. Go on with our lives, and so here we had the geopolitical crises and the price of oils down, and there’s plenty of oil Iran. Okay, so that didn’t cause a recession. So what’s left? Well, as you said, the 1920s ended very badly, and I think we all know there’s no debate that one of the main reasons that it did was because of the smooth Holly tariff, which was passed in May of 1930 and that shut off world trade. So I guess we can say, oh, you know, if we can’t find any recent reason for why this economy should have been in a recession, well, we got a new one here, which is an old one, and that’s tariffs. And if we get tariff wars, then we very well could see a global recession. So it’s a very good point, and it does make the 1920s relevant as history, because while there was a lot of fun for a while, it’s when the government implemented this horrendous tariff and policy that things started to really fall apart. It wasn’t really the speculative excesses in the market. It was. It was a recession, a depression caused by a smooth Hali tariff. So I would put that certainly in the bucket, in the bucket of what could go wrong. Geopolitics is still in there, but maybe it’s less of an issue, and the debt crisis is still in there, but again, maybe it’s less of an immediate issue, and then all of a sudden, because of Trump winning, we got tariffs in there, and it’s it’s more of an issue.
James Connor 42:48
So I was going to end our conversation by asking you how, or what you suggest, how investors are going to make money in 2025 but it sounds like the answer is very simple. Just stay long for
Ed Yardeni 43:00
now, just stay long. You know, it’s hard for me to recommend to somebody who’s been in cash all this time to jump into the market. You know, I’ve been bullish on this market since late October 2022 so we got that bottom pretty well nailed. It was a lot of cheap stocks back then and now not so much. The valuation multiples are extended. But you know, I mean a lot of the S p4 193, you know, the S p5 100 taking out the mega cap seven. I think there’s still opportunities in that area, in technology, in financials and industrials and and communication services. We think health care, we think, is going to continue to be an issue here with well Bobby Kennedy will see, see how he and Dr has what they do to the health care industry, materials and energy. It’s hard to get excited about them when China’s kind of muddling along. Gold has had a big run. I think it may continue to move higher, but I’m just not the right guy to come to talking about gold or Bitcoin. I’m an old fashioned strategist. I need income. I need dividends. I need interest income. I need rents. I need something I can I can value. And when it comes to Bitcoin and gold, I think it’s really has more to do with the, you know, mob psychology, what you know, how do people feel about things? And gold has actually been held back by Bitcoin, because bitcoins a lot more exciting than than than gold, but Bitcoin, who knows? I mean, there’s no way to value it. And you know that markets open 24 by seven, and the potential buyers are everybody on the planet Earth, whereas you know previous I think it is a speculative bubble. And by saying. That the conclusion is going to burst. But before everybody starts to say, you know, putting out all these nasty comments about how I’m ignorant about Bitcoin, let me just say that I am saying it could go to a million, so, you know. And then ask me again, in which case I say, Well, you know, I guess I missed it to the million. And then I am scratching my head and asking myself, What could possibly burst this bubble? And maybe I’m just missing something here, and I have been getting feedback on that issue, so I’m I’m open to learning about it, but again, I’m more focused on stocks and bonds and commodities and real estate assets that I have more familiarity with. I
James Connor 45:45
I’m very similar to you and in terms of my investment approach, very, you know, conservative and but I always have an allocation toward gold. And I thought gold was doing quite well this year, up 30% give or take. But meanwhile, Bitcoin is up. It moves so fast I can’t be up well up over 100% on the year, right? So, and I think last year was up 150% so even though I never played, I have the utmost respect for people that do play, absolutely money for from it. So that was a great discussion, Ed, and I want to thank you very much for spending time with us today. If somebody wants to follow you online or learn about your services, where can they go? Yeah, a
Ed Yardeni 46:25
couple years ago, we created a service for individual investors, and it’s called Yardeni y, a, r, d, e, n, i, quick takes.com. Yardeniquitix.com have a look and give it a try.
James Connor 46:38
I’m a subscriber, by the way. Good dad once again. Thank you. Thank you. Well, I hope you enjoyed that discussion with Edgar Denny, and maybe in a year from now, when we have another chat with him, the S P will be at 7000 which would be quite a move. 2025 is just around the corner. And if you’ve been neglecting your finances because you’re too busy or you don’t have time, consider having a discussion with a vetted financial advisor at wealthion.com/free it will only take a few minutes of your time to fill out some information. There’s no obligation whatsoever to work with any of these advisors. It’s a free service that wealthion offers to anyone who has an interest. Once again, you can find out more information@wealthion.com slash free. Thank you for joining us today. And if you want to check out some more content on wealthion, check out this video now.
