Ed Yardeni, the investment strategist who coined the term “bond vigilantes” back in 1983 declares they are back & responsible for the painful recent rise in bond yields. Specifically, Ed thinks concerns about the high degree of deficit spending & increase in supply of US Treasurys is what has awakened them from their decades-long slumber.
Where does Ed see bonds & stocks headed from here? We discuss in detail in this interview.
Follow Ed at https://yardeniquicktakes.com/
Ed Yardeni 0:00
I think we’ve talked before that I coined the phrase bond vigilantes back in the early 80s. Right? And they’re back. They kind of were asleep for a while because inflation really wasn’t much of a problem. And the bond vigilantes, vigilantes job is to take law in order into their own hands in the capital markets and the credit markets, if they feel that fiscal and monetary policy makers are out of control. And I think the bond vigilantes my guess is they feel pretty comfortable with what the Fed has been doing. They’ve been laser focused on bringing inflation down and raising interest rates and that’s obviously hurt bond bond investors, but at some point that that will be good for the bond investors. It’s the fiscal side I think that’s got them really riled up. And that’s that’s where we are seeing this recent spike in in rates.
Adam Taggart 1:00
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Welcome to a special interview today, you’ll see I’ve got a different background. I am recording from the road while at Vid Summit, which is the world’s largest gathering of YouTube creators. But the content creation doesn’t stop just because I’m on the road. So we’re here bringing you another interview this week, a great one with Ed Yardeni, you know him as president of Yardeni research, he puts out some of the best charts and and research particularly on markets in general, but certainly what the central banks are up to I interviewed at a couple of months ago, a lot has happened since then. So I’m very excited to get this update from him, as well. Here he is, in terms of his thoughts on as he still remain a bull into these market conditions. Does he still give odds if a soft landing going forward? Definitely want to talk with him about what’s going on in the bond markets. Ed, thanks so much for joining us today. Pleasure. All right. Like I mentioned, there’s a lot to talk about here. Why don’t we start with what’s going on in the bond markets? Because I think that’s really been the big news. This week, the week that we’re talking the 30 year Treasury hit 5% 10 year treasuries getting close to that, in many cases, yields are higher than people could have imagined. A year ago. What’s going on? What’s driving this increase in yields right now? And how much further do you think it could go?
Ed Yardeni 2:24
Well, the increase in yields we’ve had since the low in 2020, when it was 0.52%. Now it’s as you said, the 30 year is already at 5%. The 10 year is moving in that direction. It’s still kind of below 4.8% While we’re talking, but I think what’s going on here is that the bond market suddenly cares about the supply demand dynamics of the treasury bond market. In the past, supply and demand never really mattered much to the bond market. Because the deficit typically widened during recessions, that’s when we had our most increase in the supply of treasuries relative to demand. But meanwhile, private sector demands for credit were drying up in recessions. The Fed switched from a raising rates to lower lowering rates during recessions. And this time around, though, it is different. What’s different this time around is that the deficits widening, and part of that is because of interest rates, driving up the interest outlays of the federal government. And so that’s become a concern to the bond market, especially since Fitch Ratings downgraded US Treasury debt from triple A to double A plus. I mean, nothing really changed in terms of the the ability of the federal government to pay. I think what that downgrade brought brought home to everybody is that, you know, we’ve kind of serious problem with this deficit. It’s it’s been widening, we’ve got a lot of debt. And as interest rates have been going up here, more and more of the outlays are going to just to fund the the interest payments. So I think it’s a supply demand issue I add to the bond market is repricing the yield to a level that will bring back demand or calibrate or rebalance the bond market. And I’m hoping that’s somewhere around here on board and three quarters 5%. And then the risk is that it’s it’s not high enough, and we’re gonna go still higher. You know, in some ways, we’ve we’ve sort of normalized the bond market. And we’re back to where we were before the great financial crisis. And when the yields were between four and 5% for the 10 years, so now we’re between four and 5%, obviously closer to the top of that range. But I’m not sure that the economy can withstand much more than that. I think it can handle four to five, but higher than that, and they were going have some problems.
Adam Taggart 5:03
I’m smiling it because as a good interview guest, you went right to where my next question was going to be which? No, no, it’s great, which is can the economy actually handle these rates? So you just said four to 5%? You think the economy could handle that now?
Ed Yardeni 5:19
It has been handling it in some ways. I mean, you know, I’ve been talking about a rolling recession, and the economy certainly has had recessionary developments. But they’ve been going through different sectors have different terms, as we discussed last time, and how unbalanced the economy is handled, handled? Well as of consumers. But go ahead. I’m sorry, I interrupted you.
Adam Taggart 5:41
No, no. Okay, you’re taking into the territory, when it take it into, which is, you know, the economy, we can, we can say, had been habituated to much lower rates. Right. Right. Some might even say addicted to them, right. Yes. So for some period of time, you know, it can absorb the rise in rates that we’ve seen over a relatively compressed period of time, right. Now, this brings up the question of the lag effect, right, which is you can it can it sustain these rates? Because it quote has been so far? Or does the lag effect, you know, with enough time, there’s a lag effect, break something and bring things down here? I guess first, just to clarify your general assessment. Do you think it could sustain it four to 5%? Or do you think at four to 5%? For long enough, things start cracking?
Ed Yardeni 6:34
I don’t know for sure. But I think the odds right now, based on my kind of study of the history is that the economy can withstand four to 5%. The period you for two was the period between the great financial crisis and the great virus crisis. I refer to that as the new abnormal. As you said, interest rates were abnormally low those quantitative easing. And money was basically free, it was remarkably cheap. And now within a matter of three years, we’ve seen the bond yield completely reverse the drop during the the new abnormal back then, and now we’re kind of back to the old normal, the old normal was one to 5% rates from 2003 through 2007. And, you know, there’s certain sectors that obviously are interest rate sensitive that have already gotten hit housing, for example. And I hit got hit really, almost really quite, quite rapidly, early last year, as mortgage rates zoomed up to 7%. Now they’re zooming up to 8%. But there are plenty of people who really want to buy a house. And sometimes it just takes them a while to get used to this level of interest rates, and put the money together from relatives or from deciding that, you know, they’re going to be willing to pay up more for a mortgage. So I think Single Family Housing may actually have bottomed, it’s multifamily now that may be going into a rolling recession. The math just doesn’t really work anymore. Rent inflation has come down dramatically. There’s been probably overbuilding in the places where people are moving to the south in the West. And that’s bad news for the economy. It’s great news on the inflation front because we need right inflation come down in order to bring the CPI inflation rate down. And I think that’s, that’s happening. But we’ve had a recession in the goods sector, people went on a buying binge. Once the lockdowns ended in 2020, they wanted to buy services, they couldn’t buy services, they just binge on goods. And by the time retailers were able to restock because a lot of the merchandise got stuck in the port’s couldn’t get transported on trucks by the time that stuff arrived in 2021. And 2022. Guess what consumers said no mas, we’re going we’re going we’re going on the road, we’re going to travel. And so there was a there has been a recession in retailing. And they had to discount prices. And that’s helped to bring inflation down. Now that consumers have swung that to services, but there’s evidence that the goods recession may be ending yet. The manufacturing Purchasing Managers Index is still below 50. But it’s been turning up the past several months. So a rolling recession should be covered a followed by rolling recoveries. And I’m seeing one in the in the good sector. I’m certainly seeing continued strength in in construction of manufacturing facilities. They were going to have lots of strength and infrastructure spending by the by the government, but the recession is definitely rolling into the commercial real estate market now. And that’s going to be a multi year recession in that in that marketplace. And it’s affecting not just old urban office buildings, but every commercial real estate property that was financed at record low interest rates. If you know that it’s tied to variable rates or it’s been a start rolling Oh, over into a new debt, the math just doesn’t work with interest rates where they are now. And what’s happened to tenants in some areas, and just the whole change in, in the in the economy. I mean, people are continuing to massively buy online, and that’s affecting the malls. And we know that malls have been in some trouble. So I think the question is whether all these rolling recessions can all add up into an economy wide recession? I think the answer is yes, if the consumer caves in, but the employment numbers still the employment situation still remains pretty strong. I know the latest ADP number was weak, but the job openings are there. I think we’re seeing some easing in the tightness of the labor market. But I think the labor market is gonna continue to create jobs. I think wages are rising faster than prices. So I think the consumer hangs in there. I know the delinquencies are going up. We got auto sales today and they kind of were flat, they’re not taking a dive, you would think with auto credit getting tighter that people might be hunkering down. But all in all, it just looks like it I find myself in an interesting forecasting situation here at the beginning of last year, I was arguing about a rolling recession rather than an economy wide recession. Now, I’m saying well, did you know that strength in the third quarter was probably a fluke, and that things are actually going to slow down? But I don’t think to slow down to the point of a recession. But look, it’s not a you know, it’s not 100% situation.
Adam Taggart 11:37
All right, Ed, great answer. I took so many notes, because there’s so many things you touched on, take into with you. Why don’t we? Why don’t we start with housing. And I definitely want to talk about the consumer too, because there’s some we’re talking about a day where I think data just came out that showed that credit card spending really took a big dive in September, which may be an indication that the consumer household is beginning to really weaken here. But but let’s let’s start with housing. Right. So I think housing is a great example of what I was sort of asking about with a lag effect, right? So you mentioned how high mortgage rates have gotten seven. Housing prices really haven’t come down that much, though, I think on an annual basis are still down, maybe like 1%, or something like that. So we have had more than a doubling in the cost of a mortgage. And we really haven’t seen any relief in the price side yet. How do we avoid that? I mean, it’s supposed to be a mathematical relationship, just almost sort of like the bond market. Right, you know, higher rates, lower prices. So I’m really interested because you said we may residential housing may be borrowing here. And then I want to get into multifamily and commercial real estate in a minute. But But first off, just how do we have such a dramatic increase in the cost of mortgages, and not pay a price on the price side?
Ed Yardeni 12:58
Well, you know, it’s widely recognized that existing homes there just aren’t aren’t on the market, there isn’t a supply of existing homes, because a lot of people actually got it got locked into their homes by refinancing at record low mortgage rates. And the thought of moving to another house with a mortgage of seven 8% is daunting. And so a lot of people say, You know what, let’s just redecorate the house, let’s just stay here, we don’t have to go anywhere. And so there’s a real shortage of of that kind of, of inventory. And so the builders have suddenly been finding that despite high mortgage rates, they can actually build and find and find buyers, maybe they have to throw in some extras to get the deal done. But there isn’t a major update,
Adam Taggart 13:47
just to be clear, some of those extras are lower mortgages, right, like four to 5%. More.
Ed Yardeni 13:51
That’s right. That’s right. That’s correct. That’s correct. But whatever whatever’s going on, we are seeing signs that new home sales and housing starts are bottoming and that that the rolling recession which really started in a single family housing market, may be bottoming it doesn’t mean that things are about to improve dramatically.
Adam Taggart 14:14
Okay, so in addition, obviously to retail right, whether there’s a another shoe to drop or not right, I mean, you’re right transactions are kind of at historic lows right now because nobody who’s sitting on a 3% mortgage wants to sell right. But there’s a lot of buyers that don’t want to buy today either because it’s the worst of both worlds right, you get the high price and the high mortgage right. So you did said that you’re much less optimistic about multifamily and commercial real estate. I have talked to a number of housing analysts on this channel recently who have sort of added validation to your your comments there that you know, inventory is coming on and a lot of these hot markets, it’s kind of the absolute worst time, right? So it probably will make things worse there. My point is, is if we see, you know, a housing freeze on the residential side, which is kind of what we’re seeing, right, where transactions aren’t happening. Obviously transactions are likely to be impaired in the multifamily. And in the commercial real estate side as well with your outlook. That’s right. There’s a multiplier effect. Housing is a big contributor to the economy. And if there’s a multiplier effect, because when a house gets built, it employs all sorts of people. Right. So I’m just curious. I mean, it seems like the economy may take a pretty material hit from this cooling off of it. Get across
Ed Yardeni 15:34
this housing recession has been with us for since the beginning of last year, in the single family housing area, and that employs a lot more people than multifamily. And yet we have a construction employment at an all time record high. So how’s that happening? And obviously, if you’ve got construction all time, record high, there’s a multiplier effect of all those construction workers who have jobs are getting paid pretty well. And there’s a lot of demand for their services. And so they have purchasing power? Well, the answer is that we’ve got a lot of the government spending a lot of an infrastructure. There’s a lot of onshoring going on, because of the tensions between China and the United States, because of the supply disruptions that occurred because of the pandemic. There’s a lot of construction of the non residential, non residential facilities, particularly for manufacturing, manufacturing, and construction or manufacturing facilities, has been off the charts, I had to recalibrate my charts to kind of keep keep them in there. So I’m watching the construction employment data. I mean, you’re not gonna see construction employment data, keep making record highs, so you’re gonna see it take a dive, if in fact, broadly speaking, the construction industry is in trouble. And right now that that’s just not the way it’s adding up.
Adam Taggart 16:58
Okay. So on the construction side, you’re right, from what I understand. There’s been a there’s been a lot of government stimulus coming in here. And you and you mentioned the deficit spending earlier in the conversation. It’s been really interesting, because we’ve had the Fed, and the banks, pushing hard on the brakes on the economy. And yet, we’ve had the administration and Congress pushing hard on the gas, right with the stimulus. I’d love to get your general thoughts on that. But specific to the point you’re making there. I have heard from some recent guests that I’ve interviewed, and I haven’t had the time to really confirm this with my own research. But that a lot of the approved spending for the inflation Reduction Act or whatnot, that that’s been flooding into the economy this year, is sort of I don’t know if it’s expiring or coming up for approval. But that basically, there’s a chance that that could could diminish materially from here, unless there’s strong bipartisan support to continue it.
Ed Yardeni 17:54
Yeah. I mean, I look at the monthly outlays data that the Treasury puts out. And honestly, I’m not saying that that that spending has been really started in a major way. The major reason that outlays has been increasing of late has been, we provided inflation adjustments for the Social Security and interest costs have been going up. So the government spending, it takes time for the government to spend money. It’s easy for them to allocate a lot of it, but to actually spend it is a whole different, different issue. So that’s actually still ahead of us. And a lot of what we’re seeing is actually been in the onshoring. And some of that may represent some tax incentives that are provided by the government’s which aren’t showing up in outlays but are showing up in reduced revenues. But all in all, the government spending is, is still ahead of us. I again, I just don’t see it. In the monthly data that the Treasury puts out. I’m not seeing the outlays excluding entitlements and excluding interest and excluding defense shooting up, it’s just not not in the data. And that’s where you’d expect to see it. If in fact, all of this spending that’s been allocated is actually happening.
Adam Taggart 19:12
Okay, so just to restate that, for the folks that are saying, Hey, we may start seeing the fiscal spigot turn off. Yeah, you’re saying I’m not even sure it’s been fully turned on yet?
Ed Yardeni 19:23
That’s what I’m saying. Yes. I’m not sure I’m not seeing it in the data on like the Fed, I’m very data dependent.
Adam Taggart 19:30
Right, which is what makes you such a great guest. So thanks for this. So let me ask you this sort of high level question then which is it maybe this is a good time to get into the consumer side of the equation. But if if rates are if rates are back to the pre abnormal highs, so the old normal highs, right, and I think you mentioned like, I can’t remember a range you said that like 2004 to 5% Right. But yeah, the years are used or like 2003 Two Deep in 2007, seven Yeah. Okay, one thing that’s really different between now and then is the debt levels. Correct? Right, both at the federal level and just at the household level, right. And so we have a lot more debt to apply these higher interest rates to right. So higher interest rates have a higher gravitational force, you could say than they did before. Right. But also, you know, incomes have not really kept pace certainly haven’t grown, that neither the national income and other the GDP or personal incomes have grown anywhere near as fast as the debt levels, whether it’s the national debt or the total credit outstanding, right. And even though you made a comment, which I believe is true, which is that real incomes are now positive, you’re now experiencing positive growth, again, typically, recent event and charts I’ve seen show that like, I think maybe like two or three months, they’ve been positive before then it was like 25 consecutive months of negative real interest rate growth. So my question is, is, if the cost of capital has gone up so much, and it’s being applied to so much more debt, like, where is the income coming from, to make it okay, for the system to continue, you know, as if everything’s alright.
Ed Yardeni 21:12
Yeah, just just as a side note, keep in mind that the government’s increased in interest expense is increased interest income to those who have government securities, money market funds, treasury bills, etc. And so there is actually, you know, it is an outlay by the government. And it’s a stimulative outlay, when you think about it, or for consumers, their personal interest income was at an all time record high. So is their dividend income, by the way, but you know, corporate America in the second quarter, generated at an annual rate, $3 trillion of cash flow, all time record high. It’s really tied where we had a couple of quarters ago, but it’s basically an all time record high. So corporations are still generating a tremendous amount of cash, they’ve got depreciation allowances that shelter a lot of their income from taxation. And so they’re actually generating a tremendous amount of liquidity. And many of them refinanced at record low interest rates back in 2020, to 2023. So the lagged effect that you typically see when interest rates go up, and corporations have to refinance that’s longer than usual. And it doesn’t all happen in one shot, it happens over over time. And we’ll see, we’ll see how interest rates play out. But even if they stay here, I think, as I said before, we did live with these interest rates before the stock market did rally and move higher with these interest rates before, I think it could do it again, there’s also still a tremendous amount of liquidity left over from the pandemic, this notion that consumers accumulated a bunch of extra extra savings that they’ve now all spent and they’re about to slam on the brakes. I don’t buy that. demand deposits are basically at an all time record high in the mtwo. monetary aggregate, there’s still a lot of liquidity in the system. And, you know, just because people got windfalls doesn’t mean that they spent it all they could very well have put it in their portfolios. And what we’re seeing is that the net worth of the household sector rose to an all time record high of $157 trillion during the second quarter, and half of that is held by baby boomers who are retiring. And guess what they’re doing, they’re spending some of their retirement money, which might also explain why the consumer is doing so well. My friends, are our baby boomers, I’m still working for living, many of them are retiring, and they go out to restaurants all the time there. They’re traveling, of course, they stopped by to take care of their health and health care facilities. But that explains why we’ve got record employment in the health care industry. We’ve got record employment in the hospitality industry. There’s a lot of moving parts here that need to be factored in. And I’m trying to do that.
Adam Taggart 24:18
Okay. And that’s a great point that you bring up there, which is that, you know, a fair material part of the government’s outlay right now that’s contributing to the deficit is payments to, you know, the debt payments that are finding their way to holders of US Treasuries, which in many ways are a lot of US citizens, right, who are now finally and enjoying a return on their fixed income. Right. Before Yeah, it’s a big deal. So, you know, you say that the consumer is not doing so bad and that may be a good reason why now I would, I would underscore the consumer consumers maybe not doing so bad on average,
Ed Yardeni 24:59
right? I was like, exactly going to say that because I always get feedback saying, you know, well, you live in a rarefied world, you know, maybe your friends are doing well, but nobody else is absolutely correct. I mean, you can’t really generalize about the consumers that are those who are not doing well, those that are living paycheck to paycheck, we know that. But you know, you know, we’re looking at the overall economy, we’re looking at the overall impact of the economy, on earnings in the stock market. And from that kind of top down view, the consumer still is still spending.
Adam Taggart 25:34
Alright, and I do want to comment that the last time you were on, we actually spent some time at the end of the discussion, opining upon the growing wealth gap in this country, the toxicity of that it’s something that concerns you very much. I’m not going to rehash that discussion, because because because we’ve already had it and folks can go watch that older video if they want to get your your detailed tracks. Alright, so you mentioned, you know, corporate America is doing well, in the sense that we have profit levels, you know, total profit levels kind of back up to where they’ve been at record highs.
Ed Yardeni 26:06
Okay, cat cashflow, very important. I mean, profits are also also near record highs. As a matter of fact, the s&p 500 earnings per share will probably hit a record high in the third quarter, we’re in the middle, we’re just starting the earnings season. And I think when all the data is comes comes in, we’re going to find that the s&p 500 earned a record amount during the third quarter, this is something we’ve been predicting for for a year when others have been predicting that it’s going to crash.
Adam Taggart 26:34
Right. And I want to get in a moment to your your outlook for the rest of the year. Because I believe from your recent writings, you expect as actually several recent guests on this channel had warned to warn but projected that the s&p could actually end the year relatively strongly. So we’ll get to that in just a minute. But but for corporate America, you know, I guess I’m gonna say on average, right? It’s probably doing quite well, for the reasons you mentioned. But I am curious, going back to the lag effect, how concerned you are or your level of concern for the fact that if rates stay this high, if we stay higher for longer hear that as debt maturities begin to catch up with these companies, right, you mentioned that they did what you would expect when rates were cheap, they borrowed as much as they could, right. So it sort of pushed off the day of reckoning more than normal. But it rates stay high here, it eventually will come. And it’s certainly going to hit the more overleveraged parts more over leveraged companies, you know, first, right and so the zombie quote, zombie fleet, right? I mean, is that something that you’re worried about actually materially impacted?
Ed Yardeni 27:43
I’m worried about the same issues that the bears and the pessimists are worried about it just I tend to also point out that I tried to be balanced about it, and say, look, it’s not like everything’s going wrong here. Constantly getting emails from accounts, and others. Give me a little litany of what can go wrong here. And I welcome that because it kind of keeps me sharp. I, I think I know the pessimistic story pretty well, if you wanted to spend an hour and told me Okay, I just bury everybody in pessimism, I can actually tell the story pretty well. But I’m not sure the pessimist could tell my story. Because they don’t, they don’t focus on what’s actually going on. Right.
Adam Taggart 28:24
Great. And I’m building up to a question here, which is what are the bears have wrong here? So I very much want you to keep you know, swinging at these pitches, the way you are in bringing the data that you’re bringing are
Unknown Speaker 28:37
wrong real quick, just back to
Adam Taggart 28:40
back to the the bond market, the rise a recent rise in yields. You listed a number of factors, right, you know, things like the the Fitch debt downgrade, right? The tightening by fed the Fed in the banks, the rise, injuries. But none of that is like super new news. Right. I think those are all things the market knew had been coming for months, at least. Right. So why why is it now what why is the bond memos seem to be only getting the memo now?
Ed Yardeni 29:09
Right? It’s a very good question. I think that you know, the the bond market basically has been focusing on the Fed. And when the Fed started raising interest rates aggressively, the bond investors along the way, pushed bond yields up along with short term interest rates. And then last summer, we started to see that bond yields weren’t going up as quickly as the Fed was raising interest rates, the yield curve inverted In other words, and of course, the pessimist said that was going to lead to a recession and they could still be right. I’m not saying that, that they’re, they’ve been totally wrong about that. And as a matter of fact, inverted yield curves have a very good history of predicting recessions. Why because what they predicted is that if the Fed keeps raising interest rates, something will break in the financial system. Get a credit crunch and get a recession. Well, the inverted yield curve was right this time again, we had a banking crisis back in March. But the Fed played Whack a Mole. It got its hammer out and provided tremendous amount of liquidity to the banking system. And so we haven’t had a credit crunch, haven’t had a recession. And then this past summer, a few things happen. One is that all of a sudden, everybody was pat me on the back, say, you know, you said there wasn’t going to be a recession. And, and so far that that looks right. And that kind of got my got me a little nervous here because my contrary instincts came out. And I actually started to raise my concerns about a recession, as I was getting complimented for having stayed the course, on the idea that the economy wasn’t going to fall into recession. As you know, at the beginning of the year, that was kind of a widespread talk. So when the bond market came to that same conclusion, hey, wait a second, you know, we’ve inverted here we’re buying bonds of 4%, when the two year is 5%. Maybe that doesn’t really make much sense if we’re not going to get a financial crisis or credit crunch in a recession. And then, of course, we had the Fitch downgrade, which I think really was a a big deal. I think it really reminded everybody that, hey, this deficit situation really is out of control. And, and it Oh, and by the way, the Treasury announced that sure enough, they were going to up the ante and how much they were going to have to raise in the in the treasury market. And I think ever since then, supply has become a very serious issue. And I think the bond market is just trying to find a yield level that will clear the marketplace. And I think it’s going to be right around where we are four and a half to 5%. But as you know, there are people talking about it spiking up both 5% and 6%. And if that were to happen, let’s do this again, and you’ll probably get a more pessimistic view for me, but I’m thinking that inflation is moderating. And that’s going to help, I’m thinking the economy’s going to show some slowing without going into recession. And that’s going to help to stabilize the the bond market. And and, and the fact that yields are extremely attractive relative to an inflation rate. That right now has been coming down and may very well, they’ll still lower.
Adam Taggart 32:32
So I haven’t seen them super recently. But some of the last charts I saw in stocks versus bonds is that the equity premium was like at the lowest it’s been in like 25 years. Right? And bonds are only getting more attractive from a return standpoint. Right. Now, you’re you’re somewhat sanguine still on stocks in the short term. It sounds like,
Speaker 3 32:55
let’s talk about Yeah, okay, short and long term. Okay, great.
Adam Taggart 32:59
But we have this great alternative right now, right? I mean, we’ve just gone through this multi year era of Tina, right, where there was no wealth a, in fact, a long period of time, where there was no alternative. And all of a sudden, there’s a really attractive alternative right now. But you still see stocks, you know, churning higher from here. So explaining?
Ed Yardeni 33:18
Well, there’s, again, as we all know, there’s its head spinning, head spinning world right now, there’s so many moving parts. By with regards to this stocks versus bonds issue, first of all, bonds have to stabilize, I mean, nobody wants to buy a bond yields at 4.8%. If they look at the past few few weeks and say, Oh, my God, this thing could be at five, five and a half percent. And you know, let’s what’s, what’s the rush? And meanwhile, you’re actually being paid in money market funds not to do anything in the bond market, right? You’re being paid five 5%. So what’s the rush to jump into bonds here, when they’ve the velocity at which they’ve been increased? The yields have been increasing. It’s been staggering and unprecedented. And everybody keeps talking about, you know, this is a unprecedented three year debacle in the in the bond market. So I think that’s one of the one of the issues, I think, maybe when the bond yield finally settled down, and people have a confidence that it could stay here for a while, then and if it’s in the four to 5% range, you’re right, it could pose a challenge for the stock market. But the stock market obviously is driven by two variables, earnings and valuation. I started on my career, by the way as an economist on Wall Street. And then over time, I took on both roles as a strategist and economist. I wanted to be a strategist because it’s an easy job. All you have to do is predict the earnings and the valuation multiple getting getting them right is the tricky part, but there’s only two variables. So let’s talk about those for a second on the earning side. Again, I think it’s going to be at an all time on record high for the s&p 500. In the third quarter, we’ve, we’ve been talking about $225 per share. This year for earnings, the analysts are 220. Right now, they tend to be too low going into earnings seasons, so they could very well revise that number up by 220 is close enough to 225, especially compared to some of the Wall Street’s pessimist. We’ve been talking about 180 to $200. For this year, so far, so good, but, you know, gotta keep looking ahead. Looking backwards is, is you know, that your successes or failures is only useful if you learn from them and, and use that to your advantage for thinking about the future. And the future, I think that 2024 will be a good year, for earnings. Again, a very good year $250 a share in in my Outlook. So that’s a plus four, for the s&p 500. The negative is the competition from the money market funds from bond yields. And the fact that the valuation multiples still pretty high. Last I look, there’s about what 18 and a half for the s&p 500 using forward earnings, but as we know, the mega cap, eight, I mean, something like the focus on the Magnificent Seven I, I like to include Netflix in there, I watch a lot of Netflix. So I put it in there and the mega cap eight now account for about 25% of the s&p 500, these companies are not going to go away, they’re going to continue to account for a significant share of the market cap of the of the s&p 500. And that being the case, I think we have to factor in that they do have high valuation multiples, they’re highly prized for all sorts of good reasons. For one thing, they don’t have a lot of debt. And can investors want to buy companies that don’t have a lot of debt. So I think the companies that have less debt are going to have higher valuation multiples. And some of them have happened to be account for a lot of market cap of the s&p 500.
Adam Taggart 37:07
Okay. And if we do have time, I do want to ask you, your thoughts on the AI part of the Magnificent Seven, you’ve written some you’ve written recently on the fact that you know, everybody’s making semiconductors right now. Yeah, I’m curious to hear what you think that’s going to go especially because it powers so much of the general indices, back to bonds just for a second. So you’re right, people are looking at the yields going up and saying why they look really attractive, but I don’t want to necessarily catch the falling knife, right? I don’t want to buy them at 4.8 if they’re going to be six at some point in the future, right. But trees don’t grow to the sky, you know, at some point in time, we’re gonna hit the plateau, and then maybe things will come down. And we’ll talk about that in a second too. But bonds it looks like are due for an unprecedented treasury bonds, and unprecedented third year of declines. You’ve probably seen the same stats I have right, like since the beginning of records in the 1700s, we’ve never had three years of decline. Do you think that we will have a fourth year of decline? Or you know, like, are we in a truly different scenario right now? Or may this be a really wonderful bond buying opportunity? Because you know, we’ve had this unprecedented third year, highly unlikely we’re gonna have a fourth year. And there may be other factors as well, that you’re looking forward to that you think could support bonds?
Ed Yardeni 38:26
Well, I think there’s two alternative scenarios. And I think in both of cases, the bond yield declines. In my happy one, the inflation rate comes down, consumers keep spending but at a slower pace. So some of the anxiety that the economy is too strong, dissipates, the deficit is still a problem. But at these kinds of interest rate levels is enough demand to balance supply and supply and demand. And in that scenario, the Fed could very well deliver on the summary of economic projections that the FOMC recently put out, in which they said that if things go according to script, we should be able to lower the Fed funds rate a couple of times next year. And so that suggests that if you buy bonds here, and that kind of scenario, you might regret that having bought them at 5%. If they spike up like that, as you said that the 30 is already there. But they should work out, at least you you would probably earn the coupon. And you might actually get some capital gains on them. So no, and that’s an I I don’t think that there’s going to be a third year of a debacle in the bond market within the context of that scenario. The other scenario is an ugly one. And it’s one that Ray Dalio has been talking about recently. The hedge fund community I think is I’m very excited about it, because they’re all short the bonds. And the idea is that we are in the early stages of a debt crisis, and that with the government deficits, increasing with the interest component of the government outlays, increasing that we’re going to find that it’s going to take five and a half 6% bond yields to get the supply and demand in in sync. And then at those kind of levels, I’m not convinced as, as are the bears. They’re not convinced either that the economy can withstand that kind of much higher level of bond yields. I mean, certainly, the commercial mortgage market would continue to get annihilated. And that could that could spread out to other credit issues. As you know, we had a banking crisis in March, and it’s could very well come back in this debt crisis scenario. So what happens there, of course, is private credit demands, evaporate, you have crowding out, which is a term we haven’t really used for quite some time, but you get the government crowds out the the private sector, and you get a really bad recession, you get a credit crunch or a recession, you get deflation. And, and that’s now you, we may not own enough quality, high quality bonds. I don’t know that I’d want junk bonds in that scenario, but that government bonds, even though there’s plenty supply them might be the only game in town. So I’m not sure. I guess there probably is some scenario in which, you know, the bond yield goes to 6789 10%. I think that scenario would require that inflation makes a surprising comeback, that the that the Fed just caves in and suddenly everything’s falling apart. So they stopped quantitative tightening, quick switch back to QE and lower interest rates that said, the you know, we even if if you enter for risking inflation making a comeback, we can’t have this whole debt crisis implode the financial system. So that’s a real outlier. That’s not where I am. It’s not even where the debt crisis bears are, in my opinion, it seems like what they’re saying is, we just got way too much Treasury securities rates are gonna go up to a level at which the rest of the economy can’t can’t deal with it. You know, I’m, I think we’ve talked before that I coined the phrase bond vigilantes back in the early 80s. Right, and they’re back. They kind of were asleep for a while, because inflation really wasn’t much of a problem. And the bond vigilantes, vigilantes job is to take law and order into their own hands in the capital markets and the credit markets, if they feel that fiscal and monetary policy makers are out of control. And I think the bond vigilantes my guess is they feel pretty comfortable with what the Fed has been doing, they’ve been laser focused on bringing inflation down and raising interest rates, and that’s obviously hurt bond bond investors, but at some point that that will be good for the bond investors. It’s the fiscal side, I think that’s got them really riled up. And that’s, that’s where we are seeing this recent spike in in rates, because up until the summer, we were kind of between three and three and 4%, that kind of between three and a half and 4%. And that seemed to be the new that come into the new normal, or the return to the two levels that the economy can could live with, then bang out of the blue, we got this spike up in the yields to currently 4.8%. All right.
Adam Taggart 44:07
And I get often criticized for for asking questions that are too long as I’m going to be very validly criticized now, because I’m, I’m looking at the time, we don’t have a ton of time left. So I’m trying to manage a couple of questions together.
Ed Yardeni 44:21
I can also keep my answer shorter.
Adam Taggart 44:24
No, your answers are just great. So I want to ask you what you think the Fed is going to do from here? You know, I’ve been talking to some people recently who feel pretty confident that even though they’re guiding the market, there’s probably one more bullet left in the chamber, they’re not going to fire it that they’re really done. In your answer. We’d love to get a stronger sense of your your expectations on inflation. Sounds like you think they are going to become well managed. But I’ll let you describe that in your answer one more thing, which is how long can the fiscal spending continue at its current rate, right as a percentage of GDP. It is at an X The optional high right now and you can’t have fiscal spending like that. Eventually, without creating more inflation, right, it begins to become contrary to the the efforts of the Fed. So if your answer if you could try to tackle all those together?
Ed Yardeni 45:13
Well, I think the Fed is done, I think they’ve got to be concerned about what they’re seeing going on in the bond market. I mean, monetary tightening isn’t just a function of where the federal funds rate is. So obviously, at a restrictive level, they’ve said that they they think it’s restrictive, there’s no reason to do another 50 basis points when the bond market’s been tightening by 70 basis points since the last meeting. So the bond markets done a lot of the tightening for them additional tightening, and meanwhile, contributing to their rebound in bond yields, of course, has been the underlying quantitative tightening, where they’ve been letting their balance sheet run off as the securities mature. And by the way, the commercial banks have been doing exactly the same thing. Because one of the things that happens when you go from QE to qt is you’re actually depressed deposits in the commercial banking system. And on top of that, of course, people are putting their money in money market funds rather than deposits, to a certain extent. So the banks too, are letting their assets mature. And so that doesn’t leave too many buyers other than individual house, individuals or household investors, institutional investors and for foreign investors. So I think the Fed is done, I think inflation is going to continue to the moderate, we continue to see with all the latest price indexes from prices paid indexes, for manufacturers and for service companies remain low that’s come back down to where they were, basically before the pandemic before the inflation surge. So I’m encouraged by that, I think quits have come down at suggesting that the wage inflation should moderate people quit for a higher wage. And so that coming down is healthy development. The whole key here to happy scenario is that inflation continues to moderate and that the economy slows somewhat.
Adam Taggart 47:19
Alright, so if inflation somehow ends up researching here, on the channel, and you may have a different outlook for things Oh, yeah, I
Ed Yardeni 47:26
mean, everybody, everybody would have a different outlook. Okay. But there are people who are still, I guess, in that camp who think that, you know, it’s just, it’s just going to stall out here. And it’s not going to continue to come down. Well, what was the second part of your question?
Adam Taggart 47:41
Well, how long can the fiscal spending continue at these elevated levels before it really starts contributing to more inflation?
Ed Yardeni 47:48
I’m reminded of the generic answer to a question like that is, I don’t know, but we’re gonna find out.
Adam Taggart 47:54
Okay, so you think we’re gonna keep doing it until we hit it?
Ed Yardeni 47:59
There’s nobody in Washington that really cares at all about fiscal responsibility. Ever since the pandemic, both Republicans and Democrats have been on a spending spree, they’ve all seemed to have bought into modern monetary theory that and modern monetary theories and monetary sound modernization theory, just the notion that the government could spend it, you know, as much as it likes, in order to keep full up full employment. And, you know, they can use tax policy to beat down inflation wherever pops up. I mean, the thing is just ludicrous. But it’s, I think that’s where the bond vigilantes come in here is, if we, if we don’t see inflation continued to moderate in the face of the widening deficits, then I think the bond vigilantes will basically, push yields up to levels that create a crisis, and hopefully causally lead to a political solution. But there’s so much partisanship in Washington for them to agree on. So how do you actually narrow the deficit? Do you cut outlays while the Liberals aren’t going to be happy with that? Or do you increase taxes? Well, the Conservatives aren’t going to be happy with that. So it’s going to take some grand compromise here to to get the deficit, I’d like to be some somewhat more manageable than it is right now. And factoring in that. As we’ve been saying, the the real problem here is interest expense, just mounting.
Adam Taggart 49:39
So Ed, if I may, one of the big reasons where I really appreciate you and your willingness to come on this channel is you know, I’m, I’m always on the lookout. And I would say, a lot of the people that I interview on this channel, I’m not, I’m not selecting them for this, but the data that they’re looking at, gives them a more pessimistic view of worth And so people are always telling me, Hey, bring in a bowl, we’re going to bowl right. And I would put you in the bullish camp on a relative basis of the people that I interview. But it’s because you bring the data and you say, this is the data that is causing me to be bullish, but to be more optimistic than maybe most folks do. And there are people out there who are bowls. But for them, it’s a philosophy and in many cases there, I think, can be validly accused of being like water carriers for either the administration or for financial advertisers or whatnot. I don’t see you in any way like that. I think that you can point to a lot of things in the system here that you don’t like, period. They may be with AR, but you don’t necessarily like them the way that a lot of our viewers get enraged about a lot of other things that are going on. But I also get the sense that if your data changes, you will absolutely change your outlook, right. So very much what this channel is about is bringing on, you know, intelligent people talk about how they interpret the data. And what’s so important. And what makes a market is intelligent people can interpret the same data differently, right? Yeah. And I appreciate that your your view, while it is it is less common. And the folks on this channel it is it is no less important to be looking through the lens of an analyst like yourself. So thank you for doing so. In wrapping all this up, you’ve already given a good nod to a lot of this. But to get down to brass tacks because this is a wealth building channel and investors are looking for ideas to consider and things to look into. It seems to me that your market outlook for the rest of this year and going into 2024 is pretty optimistic right now, I think your latest numbers say that the s&p You see, you know, could go to 4600 or so by the end of the year, and then higher for next year, for reasons that you’ve already largely shared. I think I heard you say you think bonds, probably likely going to have an up here next year, you know, probabilistically. So at this point, are there any assets that you think you’re particularly encouraged by and vice versa? Are there any assets that you would not touch right now, given your market outlook?
Ed Yardeni 52:04
Well, look, the energy sector still looks very attractive to me. Energy companies as a result of climate activism, particularly at the political level, have gotten the message that they can cut back on their capital spending, and just generate a lot of profits and lot of cash. With oil price, it’s relatively high, partly because we’re not drilling drilling as much. So the result is they’re they’re using their cash flow to pay investors, dividends have been very strong buybacks have been very strong. So this is a sector that should continue to work. Some people may be philosophically against investing here because of the climate issue. But from a, you know, straightforward return perspective, these are very profitable companies that likely will remain profitable. The large cap financials look very strong to me, they are in good financial position, I think there’s going to be a wave of m&a activity in the smaller banks, regional bank area, and that’s what will keep those stocks from tanking as they deal with some of their loan loss problems. They’re going to have to consolidate and become bigger banks or be acquired by bigger banks. Love technology, you know, I mean, you know, they tried to sell the the mega cap aid off last year, and what the management’s did is demonstrated that all they had to do was fire some people and cut back some, you know, pie in the sky capital spending on meta versus and things like that. And wow, their earnings were phenomenal. And so they are, you know, real real players. Yeah, as, as we’ve been writing, everybody’s getting into the semiconductor business. In some ways, I might my thinking is any company that really, budgets a good chunk of their capital spending on technology is a technology company. They’re not making technology, they’re using technology to become more efficient, more productive. And I think from that perspective, most companies are or technology companies, they have to do it, they if they don’t do it, they’re just going to be left behind. So technology still makes a lot of sense to me. But I would leave it leave it there for now, as overweights All right,
Adam Taggart 54:47
thank you so much, and I really appreciate you being so specific and so direct. That’s exactly what we hope our guest experts do here is give people you know, individual asset classes to go off and research after they’ve listened to these these discussions. Thumbs up. All right, well, Ed, if you can hang with me for one second, because I want to give you the last word, I just want to share some resources for viewers here real quickly, folks, just a reminder, that Wealthion fall conference on October 21 is coming up super fast. Now, folks, it’s less than two weeks away. The early bird price just expired this past weekend. That’s the lowest discount that we offer on these tickets. Hopefully, most of you locked in your tickets, then if you didn’t enter kicking yourself, don’t worry, we’re still offering our last chance to save discount price for this week, before the tickets go up to full price. So if you missed the early bird, go lock in your tickets. Now at that last chance to save price to go do that. Just go to wealthion.com/conference. And if you’re an alumnus of one of our previous conferences, check your email, you should have a code for me that will give you an additional 15% discount off of that. And just in wrapping up here, Ed gave us you know, great outlook about the future a lot of good direction of different asset classes to go investigate. If you are, you know, a regular investor who doesn’t have a lot of time, has spends most of their focus on their family on their job, etc, which I’m guessing covers about 98% of the people watching this video, I just want to reinforce our general message that we deliver every week that you should consider working under the guidance of a good professional financial advisor in making your portfolio allocation and management decisions. If you’ve got a good one who’s doing that for you, who also takes into account all the macro issues that Ed and I discussed here, great stick with them. But if you don’t have one, if you’d like a second opinion from when your does consider talking to one of the financial advisors endorsed by Wealthion. These are the ones who see with me on this channel week after week after week. To set up one of those consultations. Just go to wealthion.com Fill out the short form there only takes a couple of seconds to fill out the form. These consultations are totally free. There’s no commitment to work with these guys. It’s just a free public service they offer to help as many people as possible physician is prudently as possible today. If you’ve enjoyed having had on this program, we’d like to see him come back on soon, please let them know and encouraging them by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. Alright, for people that have really enjoyed this whole interview, maybe this is the first time they’ve listened to you. And they’re interested in learning more about you and your work. Where should they go?
Ed Yardeni 57:18
Well, we about a year ago created a product for individual investors and it’s reasonably priced and it’s really almost almost a daily and it really focuses on understanding how the the macroeconomic data influences the markets and how to anticipate that. So it’s your Denny quick takes.com www dot Yardeni quick takes.com Ye AR D and I and you know how to spell quick takes,
Adam Taggart 57:47
right and Edwin we edit this will overlay on the screen the URL so folks know exactly where to go. We’ll also have a link down in the description too. So if you just want to click on that and go there, I am a subscriber to the quick texts. They’re great. I was prepared with all these questions for Edie because I read those quick texts all throughout the week. And it’s been really wonderful. Thank you so much for your time. I really hope you can come back on the program again soon.
Ed Yardeni 58:11
It’ll be my pleasure.
Adam Taggart 58:12
Thank you. Alright, everyone else. Thanks so much for watching.