In this episode of Wealthion, host James Connor is joined by Ed Yardeni, president of Yardeni Research, to discuss the current state of the global economy and financial markets. Despite recent turbulence, Yardeni provides a surprisingly optimistic outlook, highlighting the resilience of the US economy and his predictions for the coming years. With insights on the Fed’s policies, the impact of inflation, and the potential for a market rally, Yardeni’s analysis offers invaluable guidance for investors navigating these uncertain times. Did you enjoy this episode? Hit the like button and let us know in the comments! This episode is sponsored by BetterHelp. Give online therapy a try at betterhelp.com/Wealthion and get on your way to being your best self.
Ed Yardeni 0:00 I'm still thinking 25 basis points in September and one and done for the year. I don't think we're going to get a cut in November and December, because I think the economy is going to surprise with its strength. James Connor 0:14 Hi and welcome to wealthion. I'm James Connor. Well, global markets have been under pressure in the last couple of weeks, and much of it is driven by a potential slowdown in the US. But is this the beginning of a significant correction, or is this pull back a buying opportunity to help answer this question, my guest today is Ed Yardeni, president of Yardeni research. Ed, thank you very much for joining us today. How are things in Long Island? Ed Yardeni 0:42 Can't complain. James Connor 0:43 Your Summer's going well. Ed Yardeni 0:45 Yeah, very well. Thank you. James Connor 0:46 So we have seen some turbulence in the financial markets of late. And the last time we spoke, you were very bullish on the markets, and you have been for some time, and the market started to show signs of weakness after numerous companies Mr. Q2, numbers, and they blamed the consumer companies like Amazon, Nike, McDonald's and also Starbucks. And then we also had a weak jobs number, and that kind of put some fuel on the fire. But before we talk about the jobs number, I want to ask you about the Fed. And the Fed came out last week. They left rates unchanged. They're still super focused on inflation, and even though we're seeing signs of a slowdown, what are your takeaways from Jerome Powell's speech last week, and do you think his attention to inflation is being maybe too much? Ed Yardeni 1:37 Well, I think the Fed's actually more or less gotten it right over the past couple of years. I mean, in 2022 they were a little late in raising rates, but then they caught up pretty quickly, and shockingly, they went from Fed funds rate of zero to five and a quarter percent in less than two years. And it's worked. The economy has been growing and inflation has come down, so I don't think that was badly managed, and now I think the economy is actually still in relatively good shape. I recognize what you pointed out, that companies reported that consumers were looking a little bit tired, but I think consumers just want lower prices, and then they're putting pressure on companies to do just that, and then companies are being forced to figure out how to do that by raising productivity. So I don't see this as a as a negative. I think it actually means that the consumer will succeed in getting lower prices. We're seeing companies doing that, and I think that'll revive consumer spending. And meanwhile, the labor market's pretty good. I know that that's sounds odd given the latest employment report, but the weather had a lot to do with that employment report. I know that the Bureau of Labor Statistics put on their employment report on the cover first page that the hurricane barrel had nothing to do with the weakness in the employment numbers, but then that very same report showed a really sharp increase in the number of workers who couldn't get to work or had to work part time because of that. They don't count as unemployed, but clearly it depressed the work week, and I think it did have some impact on the overall employment numbers. So by the way, it wasn't that the employment numbers were down. They were up only 114,000 during the month. And if in the month to month can be volatile. You take the three month average increase in payrolls, and they were up like 170,000 which, which is where we were, what we were doing before the pandemic. So, you know, Chairman Powell, in his press conference, kept talking about how the labor market was normalizing, and that's exactly the term we've been using for about six months is that the labor market's normalizing, so we think that's what it's done. And I think we're going to see the economy growing. We just saw the Atlanta Fed's latest estimate for real GDP, and it's, you know, so, you know, it was a solid number. I think it was 2.9% thereabouts, which is really quite good, especially since it just factored in the apparently weak employment numbers. James Connor 4:25 And so you don't think the Fed is making a policy error right now by focusing on the inflation and being so hyper focused on the inflation. Ed Yardeni 4:34 Well, there's a lot of Fed watchers like myself who do exactly that. They watch the Fed, and a lot of them like be very critical of the Fed. I think some of them would actually like to be Fed chair. So they figure if they're critical of Fed Chair Powell, somebody will notice them and conclude that they do a much better job. But I think Paul's done a very good job. I try to avoid being critical of. The Fed. Instead, what I try to do is tell the investors that want to get our research. I try to give them an indication of what I think the Fed will do next. I mean, as an investment strategist, my job isn't to run the Fed, it's to rather anticipate what the Fed will do, and how that will affect the market. So the bottom line of it, all of it, is that I think the Fed hasn't screwed up, as some people are saying. And look, if we suddenly fall into a recession, here, they got plenty of room to lower interest rates pretty rapidly. But I don't think we're falling into a recession. James Connor 5:40 According to the CME fed watch, the probability of a cut in September is approaching 100% what are your thoughts? Are we going to get a cut in September? And if so, how much? Ed Yardeni 5:51 Well before we had this recent sell off? Our view was that the economy is resilient enough and inflation is coming down well enough that there's really no reason to mess with success. There's no reason to for the Fed to do anything. However, as I said, my job is to be realistic and to assess what's really happening, not what I think should happen. But clearly the markets and the Fed are in the same wavelength here, thinking that, you know, we're going to need to get a cut in the Fed funds rate of 25 basis points after the the carry trade sell off, which is what I view it as. And over the past few days, the market now is thinking that it could be as much as 50 basis points. I'm still thinking 25 basis points in September and one and done for the year. I don't think we're going to get a cut in November and December, because I think the economy is going to surprise with its strength, as I think the August numbers, when they come out, will reverse, reverse, reverse, some of the weakness we saw in July James Connor 6:57 and Ed. There's a lot of commentary right now where people are asking for an emergency cut, and I think it was Jeremy Siegel saying that the Fed should cut now. Ed Yardeni 7:09 Professor Siegel, right? Professor, Marty Siegel, yeah. I mean, that's his opinion. I don't think that's I think that's alarmist. I think it's hysterical, and I just don't agree. James Connor 7:21 So let's talk about the unemployment rate. Okay, you said it came in at 4.3% you're not concerned about that, but the trend is definitely up. It was 4.1 the previous month. Why aren't you concerned with these numbers? Ed Yardeni 7:35 Well, look in the past, when monetary policy has tightened, you have seen some increase in the unemployment rate, and then, according to this widely discussed som rule, when the unemployment rate goes up slowly, at some point it goes up really quickly. And so there's some rule that kind of we seem to have triggered the SOM rule. So I think one of the reasons stock market took a dive recently is because of that employment report coming out and the unemployment rate going to 4.3% now, when you actually slice and dice the unemployment rate, you find that it wasn't people losing jobs. As a matter of fact, in July, layoffs actually went down quite sharply, according to challenger data. And what's really put some upward pressure on the unemployment rate is that people have been entering the labor force. They heard that the job market's pretty good, and so they're coming in pretty quick. By the way, there's also a lot of illegal and legal immigrants that are flooding into the labor market, and they may having be having some impact, and that's certainly something that we haven't had in the past in terms of its impact on the unemployment rate. So I think that when you look at the makeup of the unemployment rate, it's not the companies are failing on their employees and saying the consumer is too weak, we have to cut back employment. It's just that the supply of labor has been surging. Participation Rate of prime age men and women has increased pretty significantly here. So that's all a sign that people are are hearing and proceeding, that there are jobs out there. It may just take a little longer to find a job, by the way. Another possibility here is that there remains a shortage of skilled labor. There's a lot of immigrants, but a lot of the immigrants aren't skilled and there's a real shortage of skilled labor, particularly technical labor, as the as we become more technologically proficient in in the labor market, it's harder to find those kind of people. And I think what we may be seeing is that productivity is making up for that. We're augmenting the labor force that we have so that to offset the shortage of. Killed workers with more productivity, and as a result of that, we're seeing that the economy can grow with maybe a slower pace of employment gains, which is all productivity. Productivity is a fairy dust. I mean, it makes everything better. It makes real wages. Real wages can increase. Wages rise faster than prices. It means that companies profit margins can improve. You get better real economic growth with lower inflation. So I think that's the environment that we started seeing in the data last year, and I think it's continuing this year, and it'll continue on through the decade, which is one of the reasons that my base case for the decade that we're in is what I call the roaring 2020s it kind of rhymes with the 1920s and people remind me that the 1920s ended badly, but that's You still got a few more years before 2029 and the 1920s ended badly because the government came up with the Smoot Holly tariff, which shut off world trade. It's conceivable that if Trump wins, that we might have some tariff issues for the economy. It's conceivable that if Harris wins, there could be some economic issues as well from from that policy side. But all in all, the economies, through thick and thin, through Democrats and Republicans in the White House, has done pretty well, and so has the stock market. James Connor 11:28 Yeah, it's you raise a very interesting point, because it doesn't matter what party is in the White House at the end of the day, it always comes down to the people, the people in your country, my country, that's working their butts off every day to put food on the table. Ed Yardeni 11:43 That's exactly my point. Is that, you know, when you read the headlines you watch the financial news, it's all about the Fed, it's all about the White House, it's about Washington. And I've got this kind of folksy thesis about our economies, which you just expressed, is there's millions of working stiffs like you and me that are constantly trying to do better for ourselves, for our companies, our businesses, our employers, for our families, our communities, recognizing, as we All do, that Washington is not really on our side, that we have to do the best we can, not despite Washington, which is kind of the way I look at the economy, is the economy's been amazing despite Washington's meddling. And so I'm actually encouraged by what I see is the ability of the economy to continue to perform well despite some pretty screwed up policies that we we've had under both Democrats and Republicans. James Connor 12:47 let's talk about the economy. Because the last GDP number that came out, the q2 number, came in very strong at 2.8% much stronger than what was anticipated, and also stronger than the last q1 number, which was 1.6% but what's your take on that q2 number was? Is that the economy really heating up again, or is it just a fake number? Ed Yardeni 13:10 No, I don't think you can really do much with quarter to quarter changes. I like to look at the year over year percent change in real GDP, and it's been growing around 3% for several quarters now, which, by the way, is sort of the historical norm for real GDP growth. So it's actually been doing pretty well. Look, I think a lot of what we're seeing is normalization. We had this crazy period of the pandemic, the pandemic, the lockdowns, it took a while to, you know, to get back to normal. And I think we're kind of back to normal. And normal is good. We're even got normal interest rates. So I know everybody thinks that the Fed has tightened dramatically, but, you know, the Fed went from zero to five and a quarter percent on the Fed funds rate. That's a huge tightening. But let's not forget, they started from zero, and where rates are today is kind of normal. Prior to the great financial crisis, we had this weird, abnormal period from the great financial crisis through the pandemic, and that's when central banks were keeping interest rates near zero, sometimes negative, buying their own government's bonds, and that was a crazy time, and I think it's, it's it's healthy, it's encouraging. It's refreshing to see that we're back to a normal environment where investors who don't want to take a lot of risk and they want to keep their money in a bank deposit or a money market fund get a fair return. James Connor 14:36 So okay, so that's what's going on in the US, but we got to look at the world Okay, and there's even though the US is doing okay. The rest of the world isn't China. Who knows what's going on there, but it's definitely slowing down. Europe is slowing down. Germany's in a recession. The UK has slowed down. I'm in Canada. It is in a definite recession here. In spite of what the government says, things are pretty bad. But. And all these other countries have cut their rates. Okay, in Canada, they've already cut it twice. The Bank of England just cut last week. Europe's already cut. Why are these other countries cutting the rates? But the US has, and why does Powell continue to focus on inflation? Ed Yardeni 15:17 he's been able to focus on inflation and not worried about a recession, because the economy has been resilient. I mean, most economists thought we were going to be in a recession over the past couple of years, and it was logical the Fed goes from zero to five and a quarter percent on the Fed funds rate. How could we not have a recession with that kind of tightening? And my view was sort of really a contrary view that the economy is going to be resilient. We're going to have these rolling recessions hitting different industries at different times, but it won't add up to an economy wide recession, and I felt that inflation would be coming down regardless. Well, it turned out that there was a recession, but not in the US. The recession was actually in China. China's, I think, in a recession, they certainly in a property market depression. In order to offset that, they've continued to pump out goods from their manufacturing sector and dump them in global markets at reduced prices. So we've have seen inflation come down, led by durable goods, led by imports from places like like China. And so China's had the recession, which has helped to bring down world inflation. But I think Powell was right and hammering the point that they did want to get inflation back down to 2% by the way, there's signs of deflation now. I mean, copper prices, oil prices have been weak, and reflecting the weakness in the global economy that you're alluding to, we've seen McDonald's and Walmart and Amazon cutting cutting prices. Again, you're right. A lot of companies are saying the consumers kind of being somewhat cautious here, and so to stimulate consumption, companies realize that they've got to take back some of those price increases that they've had since the beginning of the pandemic. You know, people, kind of economists, scratch their heads and said, We don't understand why consumers are so confidence is so low when the inflation rates clearly come down. But economists look at inflation as a year over year phenomenon, whereas consumers are looking at it sort of on a four year basis, they still remember where prices were four years ago before the pandemic's consequences led to this, basically 25% increase, 30% increase in prices over the past four years. And that's, that's that's kind of getting a lot of consumers agitated and but I think companies are responding with with deflation. So I won't be surprised if next year, we're actually below 2% and central banks are starting to worry again about inflation being too low. I hope we don't go back to zero interest rates and that kind of silliness. But all in all, I think the US economy has demonstrated that it can grow and inflation can come down, and the rest of the world has problems. But that's that, that's, I mean, it would be great to live in a neighborhood where everybody's doing really well, but on the other hand, you know, we're able to have our growth without inflation. That's not a bad thing, since we don't have a lot of competition from booming economies in China and in Europe, India is doing extremely well. Mexico is doing extremely well. But it's it's good for us to see commodity prices remaining quite low. I mean, even with the craziness going on in the Middle East that well, price has stayed down. James Connor 18:58 But a lot of the strength that you're talking about in the US economy. It's coming. It's coming from government spending, and that's coming at a big cost. The US has $35 trillion now, and in federal debt, it's growing at a trillion dollars every 100 days. I believe the debt to GDP ratio now is at 125% one of the highest ever. You're not concerned about that. Ed Yardeni 19:22 Well, my attitude is, it is what it is. I mean, you know, I'm not a big fan of big government. I'm not big fan of big government spending, but it, you know, the facts are exactly as you just stated them, and you can't ignore it, and it's clearly had an impact on the economy, not all bad. I mean, the onshoring has been very successful, the infrastructure spending, I live in Long Island, and right now it's a pain in the butt when you go to JFK, but there's JFK spending $19 billion on two terminals, and right now it's a big miss. The. LaGuardia now is, is a much better airport, and it's easier to get, get, get to parking. Is still a pain. But all in all, you know, you go around the country and you do see infrastructure spending, and some of that is directly financed by the government, some of it is indirectly financed through, if not subsidies, then tax credits, and that's what it is. Now, you might have noticed from our conversation that I tend to be an optimist, and we've had previous conversations where I've basically leaned towards the optimistic, bullish side in the market. And by the way, that hasn't been a bad place to be over the past few years, but I can't put lipstick on this pig of the federal deficit, and one day down the road, we may have a debt crisis. Won't be the end of the world. It could last three, 612, months, and it could cause a backup in bond yields and a recession. I'm not going to tell you that. You know everything's going to be hunky dory forever, but I am telling you that if we have a debt crisis, we'll probably have a solution to the to the deficit problem. Right now, there's no will whatsoever in Washington to do anything about the deficit. It's a man and woman made problems. So when and when and if it becomes a critical debt crisis, I think you'll see the politicians scramble to come up with a Lee, credible 10 year program to put put a lid on the growth of outlays and to do something to stimulate revenues. That's not an optimistic scenario. It's just a scenario that's kind of consistent with what's happened in the past. Sometimes you need a crisis to make make Washington do what, what it needs to do. We came pretty close to that last year in in August, September, October, we had a couple of really lousy Treasury auctions, and the bond yield went from four and a quarter percent to five and a 5% very quickly. And I think that got the attention of people in Washington. But interestingly, the Janet Yellen, the Treasury Secretary, came up with a short term fix, which is to tell the bond market, you know, I coined the phrase bond vigilante back in the 1980s but she basically told the bond vigilantes, Hey, you don't like my bonds, then I'll issue fewer of them. I'll issue it in bills. And you know, it's a temporary fix, it's a gimmick. We obviously don't want to be running deficits of one to $2 trillion all financed with bills. But in the short term, it calmed the bond market down, as did the fact that inflation continued to decline. And then there's always the safety the you know, the safe haven idea of the bonds, and we just had this pretty nasty sell off related to kind of a global credit, a global carry trade reversal, or unwind, if you want to call it that, and everybody ran into treasuries. Suddenly they're below 4% and then suddenly they're back above 4% as people get a little bit less scared. James Connor 23:21 This show is sponsored by BetterHelp. To feel my best, there's two things I do on a regular basis. I work out with a personal trainer and I meet with a therapist. Working out keeps my body in shape, but working with a therapist keeps my mind in shape and keeps me thinking in a positive manner. Life can be crazy busy with family and work commitments and managing your investment portfolio, and just so much more. With all that, it's hard to fit in time to relax and have some fun. That's why it's important to keep your mind fit and focused as much as possible. Therapy can provide you with the skills which allow you to manage stressful situations more easily. If you would like to speak with a therapist or give it a try. Consider better help. It's all online and fully flexible according to your schedule. Never skip therapy day with better help. Visit better help.com/wealthion. To get 10% off your first month. That's better help, h, E, l, p.com/wealthion, now back to the show. So let's talk about Japan in a little more detail, because they're the only country in the world that just lifted their rates by 25 basis points, which is really nothing, right? But Japan's the Kai was down 12% on the back of that, the biggest one day dropped since 1980 and South Korea was down 8% Taiwan was down 8% but why do you think there was such a negative reaction to this? Ed Yardeni 24:49 I think we just learned that there really has been a speculative bubble in the in the global economy. You know, before the stock market. It went into a bear market in 2022 there were people were saying that there's a, you know, a bubble in everything, and they pointed out the SPACs and meme stocks and a few other things, and those things all kind of blew up, and the economy continued to grow and the bear market ended, and we've since been in a bull market since October of 2022 and so in the current situation, what we're discovering is that there's been another kind of stealth bubble out there that we didn't really have any idea of. I mean, we knew that's out there, we just didn't have an idea of how big it is and what impact it could have. But the bubble is pretty straightforward, and that is, the Japanese central bank has been keeping interest rates near zero for much longer than other central banks. Other central banks have been raising interest rates. That's raised bond yields. The US economy has been doing well. The stock market's been doing well. So there's been better returns on bonds and stocks in the United States. You know, you get better yields than you get in Japan and Mexico and Brazil. So speculators, traders figured out, Hey, this is, this is a layup. All you got to do is go to Japan, borrow money at zero. They'll give you a whole they'll give you a whole bunch of yen where there's that's costing you zero to borrow. And then all you got to do is figure out, what do you want to do with the yen? Because there's a whole world of opportunity. Well, some of those yens actually stayed in Japan and got invested in the Japanese Nikai, the stock market, and it went straight up, and quite a bit of the Yen was converted to dollars and pesos and Brazilian currency and so on. And got invested in the assets in those currency markets. And I gotta believe that The Magnificent Seven, the NASDAQ 100 attracted a good part of this money. So it was a great trade borrow money that costs you absolutely nothing, put it in Nvidia, and you become wildly rich without putting a cent into it. However, that trade started to is a crowded trade, and it started to fall apart with the Bank of Japan announced over the past couple of weeks that, you know what? Maybe it's time for us to raise interest rates. Maybe it's time for us to do it more aggressively. Over the next several weeks, next several months, and suddenly, the yen, which has been going down. Now, Why'd the yen go down? Well, if all these people are borrowing yen, in effect, they are short the currency. They're short yen, because what they're doing is say, we'll take we'll take the yen and we'll convert them to other currencies where, oh yeah, we at some point we're going to have to reconvert it back into yen. And so the yen's going up. All of a sudden, it's like, oh my gosh, I'm I'm going to have to pay back more than I expected to gonna have to get more dollars to buy back the yen. That's getting stronger. And suddenly that trade looked a little bit less like a sure thing. And in a matter of days, these carry traders just went on a stampede and said, You know what, let's let's get rid of the assets that we got a lot of profits in. Let's convert them back into into yen. So the yen suddenly going up, and it kind of feeds itself the assets that so. So anybody who wasn't, who was a carry trader, wasn't playing, you know, reversing their positions was was forced to do it by the stampede of all these other carry traders that decided to unwind that that trade. And I think it's kind of like a global margin call, but I don't think it's anything like the magnitude of the great financial crisis, I don't think this is going to have major macroeconomic global impact, and I think it could be over pretty quickly. As a matter of fact, you know, a lot of the damage was done on a Friday followed by a Monday, just the past week, and then Tuesday last I looked we had a pretty nice rally, and the Japanese stock market made a good comeback. Of course, you know, it's all a little bit unnerving, so there could be a lot of volatility around this for a while. But I think this is one speculative bubble that could actually burst pretty quickly without all kinds of horrible consequences. James Connor 29:24 And you recently wrote that this sell off reminded you of 1987 maybe you can expand on that in life. Ed Yardeni 29:31 well, I was, I've been around for a while, so I was around in 1987 young lads. Still was a chief economy. Was chief economist of a firm called EF Hutton. And then Prudential securities is, I guess, where I was in the late in 1987 and what happened is, we're all kind of, you know, having our usual, uh. A meetings and sessions, and all of a sudden we hear the mark is down 20% in one day, and there's basically a credit derivative called portfolio insurance that was sold by Wall Street. The only problem with with a portfolio insurance is that it failed to work. When the market went into a crash situation, it probably would have worked if we just had gradual declines in the market would have given you some protection to the downside. But when it didn't work, it all kind of imploded on itself. And the you know, it was a bear market, but it didn't last very long, and the economy wasn't affected by it at all. The economy was was still growing. And so there's a similarity in that. Now this, this particular speculative bubble, may be bursting just as rapidly as we saw the portfolio insurance bubble, without any significant macroeconomic consequences. James Connor 31:04 So when you add everything up, and when you look at this increasing unemployment rate, and also the troubles we're seeing over in Japan and other countries, China slowing down, you you're not concerned about any of this in terms of valuation. Ed Yardeni 31:18 we stand out in that in that world, the US economy looks pretty good in that kind of environment. As I said, it would be better to live in a world where everybody's doing well. But you know, the consequences of weaker growth in Europe and in China is commodity prices are staying down. The price of oil is staying down and and that's all good. I'm actually much more concerned about the geopolitical insanity that go going on between Russia and Ukraine and in the Middle East. I think that's, that's, that's kind of got my attention as where we could have another scare for the markets, which might even scare me. Just just don't like what I'm saying on the geopolitical front, but on the global economic front, the US really does stand out. And therefore, I think the dollar doesn't take a dive. I think the dollar hangs in pretty well, and maybe remains relatively strong. And I think our economy is resilient. The consumer continues to spend. You know, I understand that there are consumers that are stretched, the consumers that are not doing well in this environment, but there's also lots of consumers who are retiring, baby boomers, who've accumulated a tremendous amount of assets that they're now spending, and that's helping the economy, and some of that money is actually trickling down to their to their kids. So there's a lot, lot going on the consumer, in a way that makes it hard to generalize about the consumers. Though there's only one kind of type of consumer out there, but on balance, I think put it all together, and consumers doing well, consumers not doing too well. Put it together, and the consumers are still, on balance, quite resilient. Capital spending is extremely strong. Technology spending is extremely strong. The economy has become less interest rate sensitive because that technology, capital spending is less interest rate sensitive. Look, we used to have to spend a lot of money to buy software. Now you can rent software. So if you rent software, if interest rates go up, I mean, what impact does that really have? And that your cost of renting does, doesn't impact you whatsoever. We're spending a tremendous amount of money in research and development, and it's panning out. It's, it's, it's working. And we have now technologies that lend themselves to increasing productivity in every business. Back in the late 1990s the technologies that were out there were great if you had secretaries and you had accountants, because Word and Excel were the technologies of that time. But other than that, the technology revolution in the 1990s wasn't all that productivity enhancing, whereas now, I think it really, really is. So you know, here we are in 2024 before you know it, will be going into 2025 and before you know it will we'll be looking back at the end of the at the at the decades and and have a discussion of whether, you know, our view was correct or not, in terms of the roaring 2020s but we're in the future. You know. I mean, you know, if back back in in 2000 which, you know, a lot of us were around in 2000 and we were younger and and probably just entering the labor market or whatever, but you know, 2025 Well, that's a long ways off, and here we are, and we've made a lot of progress in a lot of areas. Real GDP, all time, record high real consumption per household, all time. Record high standard of living is at an all time. Record high. I know I can get into a debate with people about that, but it is. I mean, that's. At the macroeconomic data shows, not for everybody, but on balance, that's, that's what's been going on. James Connor 35:06 And what about valuations? When you look at the S P, you look at the NASDAQ, a lot of these stocks are insanely priced. Even with this pullback, the SSP is still up 10% on the year. Bitcoin is still up, I don't know, 30 to 40% it changes it by 10 every day, but Nvidia is still up over 100% on the year. Ed Yardeni 35:25 Yeah. Well, we should also mention that Warren Buffett sold some of his portfolio and is sitting on a pile of cash, biggest pile he's ever owned. And Warren Buffett's does pay attention to valuation. There's the Buffett ratio, which is price to sales, basically, and that's quite elevated. Uh, look, I'm not telling you that there's screaming bargains in the market. I've been arguing in some bullish markets since November 2022, back then, there were a lot of values. And, you know, I'm not a magician. I can't make them all come back and tell you, you know, here's here, here, here we go again. But look, I'm looking at this, at what's going on in the market, and I kind of try to understand whether some things are sustainable or not. I suspect we're going to continue to have the Magnificent Seven having high valuation multiples because they are companies that have have achieved quite a bit of success. They generate a lot of cash profits. They're not as dependent on borrowing money. They have internal investment banking departments that allow them to pick the cream of the crop in terms of new companies to acquire, and so they're going to probably continue to be highly prized and highly valued, and that'll skew the valuation multiple of the S p5 100, because they account currently for 30% of the S and p5 100. If you take all technology companies and all communication companies. You get them accounting for about 40% of the market cap of the S, p5, 100. And people say, well, that's that's crazy that you know, just a few stocks make up so much of the market. But you look at other markets, whether it's Korea, Japan, European markets, you'll see that concentration is not unusual. You can have some pretty big companies that account for much of, much of the, much of the stock market. So it's not, it's not out of the realm of what we've seen elsewhere. And so I don't get that concerned about it, and that I don't think it's like the 1999 tech bubble, where a lot of the demand came from dot coms who got first round of financing, and then they didn't get any more. They burned through all their cash, and all that spending that they had done suddenly evaporated. I just don't see that that's a current situation. I think technology companies have much more solid demand for what, what, what they make. But I the way I look at the market is every company is a tech company. They either, they either make technology or they use technology. If you don't use technology, you're going to be out of the game. And so I think that's that's a way to look at the market. Look at the companies you own, see if they're using technology to increase their productivity, I think they have to do that. I think they will be doing it. I think they are doing it. And that's what will drive profit margins to get to record highs. People think of margins as very cyclical and kind of going sideways, but they actually do have a trend, and I think the trend is going to be higher for corporate margins. Again, productivity does a lot of wonderful things. It allows for better growth, lower inflation, higher real wages and higher profit margins. And so that's what happens in the roaring 2020 scenario, like it doesn't come with a money back guarantee. It's the most likely base scenario, I have 60% is what I give it. I give another 20% to repeat of the late 1990s where we have a melt up. And it sure looked like that a couple of weeks ago. It could look like that again, I suppose. And then 20% the things don't work out well, and mostly because of geopolitics. You know, recessions are caused either by tight monetary policy, leading to credit crunches and then a recession which doesn't doesn't seem to be playing out right now, or else, spikes in oil prices and other commodity prices and geopolitical uncertainties and unsettled conditions and tumult could could certainly lead to a surge in oil prices that once again depresses our economy. But you know, notwithstanding is how crazy the Middle East has been. Price of oil has stayed remarkably subdued. James Connor 39:57 So I just want to summarize a few of the points that you. Mean, first of all, you're not concerned about the economy, economy, you think it's still in relatively good shape. Yes, you're not concerned about the unemployment or rising unemployment rate. I believe you the term you used was normalizing, and you're still very bullish on the S&P Ed Yardeni 40:14 still bullish on the S&P. And to put some numbers on it, we've been thinking 5400, by year end, on the S&p 500. And we got there. We got over there on July 16. We got there like 5600 and maybe it turned out to be a great contrary indicator when we raised our number from 5400 to 5800 by year end, because that you know, one week later, the market took this dive. I'm sticking with it. I think, you know, we could turn around some more here through the presidential elections, and then have a really good year end rally that'll take the market maybe up back to 5600 and possibly 5800 next year, next couple of years, I think we could see 6500, 7000, 8000 by the end of the decade. So I got, you know, it sounds awfully optimistic, by 8000 by the end of the decade. I got time. I mean, I got time is on my side. I think earnings which are likely to coming in in a $250 a share this year, will get up to $400 a share by the end of the decade. Put a 20 multiple on that, and you get 8020 multiple may sound high, but I'm factoring in that The Magnificent Seven, or some variation of them, are still going to be a big component of the S&p 500 and have a high valuation multiple. James Connor 40:50 Ed you have a very extensive library. Are you reading any interesting books? Well, Ed Yardeni 41:48 actually, actually, my eyes aren't as good as they used to be, and print seems to be tinier than ever, so doing audio books, and I'm the reason reading, you know, listening to a fascinating autobiography about Elon Musk? Yeah, I think I would recommend it. It's very relevant, since Elon Musk is still very much a force of nature in our economy, and so I think it's also just an interesting insight into how entrepreneurs very often get to the edge of a cliff and they look like they're going to fall off, and somehow or other, they manage to avoid that. And Elon Musk, he's been to the edge several times. I like books and the histories of entrepreneurs. It's entrepreneurs have made life better for us, for all of us, they are constantly coming up with with goods and services that we all want to buy, and then they get very rich. But they do so because they are always thinking about the consumer, and getting rich is kind of like a, you know, a consequence of what they like to do, which is to to invent and to make things better for the rest of us. So I'm really enjoying that, James Connor 43:11 yeah, I'm always amazed at his energy levels, like he must drink a case of Red Bull a day, because the guy, Ed Yardeni 43:22 yeah, the the amount, the amount of emotional energy that Elon Musk has has gone through is it's, it's literally insane. I mean, the business, they've been periods of insanity in his life, basically. And he's, you know, he's overcome the emotional and financial obstacles, and he's accomplished a lot, and he's not done yet. I mean, he could still go over the edge, I guess, but he's, you know, he likes risk and he's able to deal with it. James Connor 43:50 Well, Ed, that was a great discussion. I want to thank you very much for spending time with us today. Now, our viewers would like to learn more about you and the services that you offer working there. Well, you know, Ed Yardeni 44:01 I started out on Wall Street as a economist and strategist, dealing providing research, mostly to institutional investors. Had a lot of requests over the years for something that individuals, individual investors could enjoy and and find helpful. And so we came up with quick takes. So it's the Yardeni Quick takes.com and at yardeniquicktakes.com you'll see that we have a daily publication, uh, aimed at individual investors. And what we try to do is relate the economy to the markets. How does the economic data that's coming out, how does that impact the market? So for example, when that very surprisingly weak labor market number came out, employment number came out, and the market declined on it, we did a lot of work very quickly on it, and in the quick take, said, You know, it's not as bad as it looks in it. Maybe what. They're related, and so don't, you know, don't, don't sell everything just on, you know, this, this little panicky number that everybody thinks is a recession. So we, we try to have a fairly balanced view of things. I know I've been accused of being a perma bull, but that's because the perma bears do such a great job of telling us how things are going to fall apart, that all I've got to do is try to provide some balance, and when I do that, I come out as being bullish. But that's okay, as a matter of fact, on my tombstone, I wanted to say Ed Yardeni was a perma bear. He was usually a perma Bull. I should say, I hope that they get that right. So Ed Yardeni was a perma bull. He was usually bullish and usually right. And I'm just looking at the trend of the markets. And generally speaking, stocks are meant for the long run, and you do well in the long run. And that's kind of my pitch. James Connor 45:57 once again, it goes back to what we were talking about earlier. It always doesn't matter who's in the White House. It's about the men and women that go out there every day, and they're working their butts off to put food on the table, a roof over their head, and that's why the s&p, or whatever index you want to look at just keeps going higher. Ed Yardeni 46:14 You're investing in management and labor and others that are involved in these companies that you're you're betting that they're going to continue to do a great job of doing what they're doing, and they're going to deal with the policy makers and yet still come out ahead. James Connor 46:35 sure. Thank Ed, once again, thank you. Ed Yardeni 46:37 sure thank you James Connor 46:38 We all need help when it comes to planning and preparing for our financial future. And if you have a financial advisor and you're happy with them, then great, stick with them. But if you don't have a financial advisor, or maybe you want a difference of opinion, consider having a discussion with wealthion endorsed financial advisor@wealthion.com There's no obligation whatsoever to work with any of these advisors, it's a free service that wealthion offers to all of its viewers. Don't forget to subscribe to our channel, wealthion.com and hit that notification button to be kept up to date on upcoming events. Once again, I want to thank you very much for spending time with us today, and I look forward to seeing you again soon.
