We Asked Jim Paulsen What Happens When 87% of the Economy Can No Longer Be Ignored

Added: 2026-05-13

[00:00:00]So, here we got the Fed saying they may raise rates again. Why do you think that's going to bring down the price of oil? I don't think it's going to. In fact, oil's not going to come down till they get some kind of agreement on the the war or find a way to open the straight. Has nothing to do with how high the Fed funds rate is. Our policy officials are just missing what's going on in almost 90% of the United States economy because all we get is headlines about AI and how great the MAG7's doing.

[00:00:31]We have been fixated and obsessed with inflation for 5 years in this country.

[00:00:38]Okay? And that's created a certain environment for everything, economy, stock market, bonds, everything. I think that could change this year.

[00:00:51]>> Jim, it's great to have you back on.

[00:00:52]>> It's always good to be be with you guys.

[00:00:54]Thanks for having me.

[00:00:55]>> Yeah, as always. Um, so you've spent decades helping investors, I think, kind of step back from the noise and try to understand and get their arms around the bigger sort of economic picture and the things at play. And lately you've been writing about and framing the US economy in a pretty unique way as this bust booming type of scenario or economic backdrop. And that's kind of going to be one of the things we're going to talk about today among a number of other things. The Fed inflation and sort of how the markets are um I guess evolving and developing from from your perspective. All of the content that you always see here when Jim's on with us comes from his Substack. Um Jim's kind enough to share some of the charts and some of the things that he's focusing on and writing about, but please go over to Substack. It's Paulson Perspectives is the name of his Substack subscription.

[00:01:49]You can sign up for free. There is a paid version as well. But really appreciate when our audience supports the people that are coming on with us and spending so much time with us and our our audience. Okay. So, with that, Jim, we always want to start with you where we where we always start with you is kind of just get your general thoughts and it might not be that much different than where we were last month, but sort of your thoughts on the economy and and any important changes that you would highlight, you know, that that have happened over the last 30 or 60 days from your perspective.

[00:02:17]>> Yeah, I'm still I guess I'm still in the camp of and we'll talk about this a little bit more in a few minutes, but that a good big chunk of this economy is pretty weak, growing pretty weak. I don't think we're going to have a recession. I I still think that's uh less likely although I'd say it's a little more likely than maybe it was a couple months ago, but um I I think we'll get into it. Wise and for that the overall economy in aggregate is is getting pretty close to fall speed. It already has in terms of employment getting close there in terms of overall growth. Ultimately, I still think that, you know, and the crisis in Iran is not helping the situation because it's adding more downward pressure on growth overall. And I think ultimately we're going to have to have to come in with greater policy stimulation from both monetary and fiscal authorities to uh sort of uh change this situation, if you will. And uh I'm still looking for that.

[00:03:19]Um, I think that that's a real positive ultimately for the markets, both bonds and stocks. And um, I I think that we'll we'll be higher in both between now and and the end of the year. Um, and I still kind of uh are looking at that light. I I also think that bonds will also be rising because I think the bond yields are going to ultimately be coming down.

[00:03:44]Now, a lot of this is going to depend on when or if maybe the hostilities end in Iran and how that plays out. Um, and that's certainly dragging on longer than I anticipated.

[00:03:58]Um, you know, and he kind of asked about that two judgment where that's going to go and um I um I thought it'd be over. I thought we would have reached some agreement by now, but I I guess I look at the United States and what they've done is doing about all they could do as far as taking out military capabilities within Iran. Um there's not much less to bomb unless you're going to get into some other things like infrastructure and kind of mean-spirited bombing, if you will. Um and we're kind of I I think Trump has shown he wants to get out. I think Iran has blinked a few times wanting to get out of this and I think ultimately they're going to find that.

[00:04:36]Now, it might well be that we're going to have to find a solution to the strait before we officially end hostilities and that might be a forced solution on Iran.

[00:04:46]I don't know. Um, but I do think we're closer to the end of this than than not being and that's kind of where I'm at.

[00:04:52]If we're not, you know, that could be a wild card yet. I still think the bigger risk from all this would be a major terrorist attack from Hezbollah terrorists in the United States than it would be any conflicts that we get involved with there. But uh so I'm I'm constructively opposed towards the markets. Um, I I I really think though we've got to quit focusing so much on fighting inflation and we'll come back to that if and focus more on trying to promote greater growth that's fully participatory across the economy and not just in tech tech.

[00:05:30]Do you have any sense of what you think the market would uh like react to if the straight, let's say, stayed closed for longer than any of us can anticipate? Like what if it's an extended period of time? What if it's, you know, late summer or something like that and the straight is still >> not really fully reopened? You know, I got buddies that I respect in this business that uh tell me that, you know, crude oil prices are they're going to go up to $150, $200 a barrel. And, you know, sort of disastrous levels and I don't think they're going to be right, but they they scare me because I respect them and it's sort of scary to think about that. And no one really knows for sure. Um, I think though that even if it drags on that I think we're going to find new avenues uh to bring oil to the world marketplace. We'll find other ways to get that done. There'll be other countries that'll step up, I think, and provide oil to Europe from other sources or whatever. And so probably that outcome, even if it drags on, won't be nearly as uh detrimental as people can dream up on any given day, how bad it would get. I also think that, you know, I kind of suspect US, if need be, we will make some progress in opening up at least some flow of ships out of the straight, whether we have to do it militarily or whatever. But I think I think we'll we'll find that we'll make progress there. But I also think other countries will bring additional fuel supply to the situation. Um, but I don't know. I thought it'd be over by now already. So, take that for what it's worth. But, >> yeah. Yeah. Sort of a a little bit of a hard pivot here, but did you have any thoughts on the latest Fed meeting? And I guess, you know, spec I think some people were somewhat surprised with Pal deciding to stay on the Fed during this sort of like transition period. Did you have any thing that jumped out at you there?

[00:07:30]>> Not so much. I I think that the Fed is I've always kind of had the view the Fed's dictated by the economics and if growth gets bad enough, they ease.

[00:07:39]Inflation's bad enough, they don't. Um, and I kind of think we're headed to where growth is going to kind of overtake inflation here. Um, and it will force the force the outcome for the Fed, whether it's Walsh or whether it's Pal or whomever's there. I think at some point they just can't ignore certain things going on and have to respond. But it is it's it it's a great reality television show. two fifth graders on the playground calling each other names and um tit for tat and that's what it feels a lot like and it just seems unseammly as the free world leaders I think but but it's probably not real important on my list as far as investing is concerned >> yeah in some in some weird way you know Trump wanted lower rates but if the lower rates are because of slower growth that's not necessarily a a good thing.

[00:08:39]Um I mean, what do you think? Do you think they're there's still a likelihood that, you know, they're going to cut here this year?

[00:08:46]>> I do. I think that, as I say, I think I think it's going to be more forced to cut. And that'll come out a little clear here in a little bit why I feel that way. Um, but I think there's a big chunk of the economy that's already kind of flatlined and uh they may start to wag the dog overall even over what technology is doing. And if that's the case, it's going to force a a refocus by everyone, including policy officials, towards, you know, making sure we don't lose the economy into the depths of recession as opposed to fighting a temporary inflation caused by uh a temporary uh hostility in the world. So, I think we're going to get easy. I do.

[00:09:28]And I think the bond yields will come down as well. Uh I haven't exactly been right on that in recent years, but in some regards, I haven't been wrong either. They haven't gone up either. You know, no one's been right unless you just said they weren't going to change.

[00:09:40]Some people probably have said that, but uh I would uh I bet on the down on the under, I guess.

[00:09:48]>> Do you have any thoughts on um I mean the market's kind of hanging in here, but it seems like in the last maybe two weeks, it's been back to the same old stuff that's technology is performing well. I mean, we just had like kind of pretty good earnings from most of the MAG 7, I think, um, last week. It was a big earnings day. And, you know, they kind of came through for the most part.

[00:10:10]And so, do you have any just thoughts on on any of any of those trends that are happening in the market both from the market standpoint hanging in here and also like some of the rotation that maybe we've been seeing recently?

[00:10:24]Yeah, I um you know this comes on the heels of a pretty big rotation away from tech as well, >> right?

[00:10:32]>> And and if you look at some of that, what I call broader market plays in tech, the relative performance of tech and the mag 7 for that matter is still below their relative highs last October.

[00:10:44]They've made a big recovery of that, but they're still have not broken out above those highs, either one of them, the S&P 500 tech relative, nor the MAG 7. And broad-based measures are still way above their low where they were in October.

[00:11:00]So, relative performance since it since this kind of selloff or change in leadership started is still more with the broad camp than the new era cap.

[00:11:09]Now, we'll see. It wouldn't take much more and that that could change. Um, I'm I think that tech is not going to take leadership uh the rest of this year. I I don't think they're going to fall apart. I don't see a crash in tech. I just see it underperforming kind of the themes that we started to see happening since late last year. And if you think about it, the key to me on that was policy easing.

[00:11:36]I mean, we we started easing late last year. And when we did, lo and behold, tech started to struggle and everything else started to do a little better. And then when the pause came because of the war, right? And now we're even threatening rate hikes. Guess what?

[00:11:52]Tech's doing better. Broad market's not doing as well. So the key in my view, Justin, to that is do we get an economy that brings policy juice again or do we not? And I think Tech's got other issues too that I'll be writing more about later this week if anyone's interested.

[00:12:11]Um that could uh bring some pressures to Bill. Um the one thing I would point out is it's an interesting sentiment right now among investors. I feel it's not irrationally exuberant necessarily. I wouldn't say I feel that way. It's not pessimistic. Certainly with record highs in the S&P and tech doing well. It's more complacent to me. It just it's it's not even quite complacent. It's more like, you know, I know these things are high and I know I have too much of it.

[00:12:45]Um, and I shouldn't have this much in this one little area, but gosh sakes, it just keeps going up. And so, in the meantime, I'm just going to let it ride.

[00:12:53]I don't really understand what'll change it or not. In the meantime, I'm just going to stay with it. I kind of feel like that's where we are sentiment-wise.

[00:13:00]And if if now at this point tech rolls over again on a relative basis, I think that could cause even bigger portfolio changes by uh current investors that I think are still, let's face it, we're all probably overweighted the new era, more than we probably should be relative to a lot of the rest of the stuff out there. And it might take some additional like another failure on them rallying again before we make those changes. But I think that we could uh that might well happen yet this year. Again, I don't I don't see them collapsing. I would not sell out of that stuff. I think it tech's going to be there five years from now and you want to be participatory, but I think we might get a few years where this other stuff does a lot better than tech.

[00:13:44]>> Just one more before we get in the charts. You mentioned the idea that the MAG7's kind of taken leadership relative to the broad market plays. We've seen the same thing with the US versus international in the wake of this crisis. I mean, do you think that's the same type of thing where this might be a temporary thing? I mean, you've talked previously about how the how important the dollar is for that. Do you do you see the same thing about international versus US?

[00:14:01]>> Yep. When I talk about broad plays, I'm talking about small caps, midcaps. Uh, in the United States, I'm talking about Russell 1000 value uh index. I'm talking about the equal weighted S&P index as opposed to the market cap weighted. Uh, you could throw micros in there. You certainly could throw the uh international stock market XUS and merging markets. all I think all in the same bucket. These are things cyclical sectors of the S&P. These are things that need policy juice. Uh in reality, the the last time we had policy juice in this country in any meaningful way was the 2020 21 bull market when we were responding to the pandemic and we brought everything I'll talk about this in a minute to the party. And guess what? During that bull about two years long, not quite. That was the last time that small caps, cyclical stocks, value stocks beat technology stocks marginally during that bull. Ever since we took the juice away, tech's been winning. So again, I think that comes down to that situation. But international stocks are certainly there. How can we expect international stocks to do well when the dollar almost goes up to an all-time record high, you know, which is what it did prior to last fall when it finally started to come off. And since it's come off, some of the international stocks are showing some light, particularly emerging, particularly emerging exchina, which is a separate situation. And it's still doing pretty well. Uh it's almost at a new relative high again as we speak. So I do think jacket goes back to that. That's my guess.

[00:15:38]picking up on what you said earlier about people maybe being too focused on inflation. you wrote a great article recently, inflation obsession, question mark, um about this idea and about the idea that a lot of people are talking about, well, the 70s is coming again and and you don't think that's that's the case. And you had a great chart one in there, which is the uh annual CPI inflation rate versus the trailing four-year average annualized labor force growth and can you talk about that and why you think these inflation fears are overblown, >> right? Well, historically going back centuries really, if you look across the globe, any economy around the globe, the probably the most important factor that drives growth across economies is the rate of resource growth in the economy.

[00:16:16]Land labor and gap and primarily labor.

[00:16:19]Those economies that have the strongest growth in labor force or labor supply have generally the strongest sustainable real GDP growth rates. And those that don't are the opposite. Let's face it, in the developed world, Europe to Japan to us, we've all been talking in recent years about how hard it is to get growth because our labor supplies are drying up. So if if you want to look at inflation in the 1970s, that thing was totally the opposite of what we've had since 2020. That was a inflationary environment that came about from excess demand situation where we stimulated demand in the economy far greater than supply capabilities. And we had excess demand driving up price inflation over that period of time. This chart kind of gets to that. The blue line's annual inflation. The red line is the 4-year average annualized growth in labor force. And you could see that we came out of World War II in the early 50s and had labor force growth that was very modest, 1% or less most of the time. And then uh we didn't have much inflation as a result because we didn't have much growth. It's basically what it was. And then starting in about 1965, you can see labor force in this country surged. Um and as it did, so did inflation because demand, everyone got a job, everyone got an income, everyone got desires. and we added leverage on their credit cards and household spending in the 70s. And guess what? We had way too much demand for supply. And we had massive runaway inflation for almost 15 years. Okay?

[00:17:58]Now, in that environment, when you have excess demand, the correct policy is to slow demand. Slow it down so it's more in line with curtailed supply. That's what Vulkar ultimately did, right? that killed off demand and brought inflation down. It's very different of what we've had since in recent years. We haven't had for 20 years. We we we're back to the early 50s where we can barely get 1% labor force growth a year. If if you have zero productivity in 1% labor force growth, you know how fast you can grow?

[00:18:30]One. 1%.

[00:18:33]So, we're back to that. And there's no way we get excess demand out of 1%.

[00:18:39]We're actually growing labor force in the last several years about a half a percent uh a year. There's no way that's going to create excess demand over supply capabilities. This is a hugely disinflationary environment we're in where the 70s was very much the opposite. Now, how do we get inflation then? Well, this time it's been supply side problems. It's been it's been a pandemic that shut down global supply capabilities for a short period caused prices to go way up. Even if there was virtually small demand, it wouldn't have mattered. Then we had a tariff which supposedly was going to push inflation up. That's another supply side problem.

[00:19:16]And now we have a war which is uh uh created a supply problem in commodities which is causing their prices to go up.

[00:19:24]But are any of those two things demand driven? No. And sustainable? No, they're all they're both temporary, number one, and more important to that, they're not tied to aggregate demand. So, here we got the Fed saying they may raise rates again. Why do you think that's going to bring down the price of oil? I don't think it's going to. In fact, oil is not going to come down till they get some kind of agreement on the the war or find a way to open the straight. Has nothing to do with how high the Fed funds rate is. But what that will do is slow aggregate demand even further and it's already so weak or we're we're knocking on the door of basically zero. So it makes no sense in today's world even going back to the pandemic to apply demand size demandside uh um economic policies to a supply side problem. Historically, uh, out of Keynesian economics, we've always learned for decades that how you dealt with things was if if if growth was too weak, you eased your demand side policies to pick it up. And if it got too strong, inflation started to rise, you tighten cuz we felt that everything was a demand side issue. That's not it's been the opposite of that today. And I would suggest that what we really need today is we need to uh change the supply side problem which has nothing to do with our economic policies. They can't affect it. But in the meantime, we ought to pick up our demand side which is if anything it's too weak. Um and I don't think there's a risk of inflation here.

[00:21:04]Uh because uh we we have relatively weak demand and the only way we're going to fix inflation is fixing the oil supply right now. So, I think we're misusing signals. Inflation's up. I don't think that means you have to tight. I think it's a different world when that was required. Anyway, that's kind of my take. I think we got a disinflationary world. And don't forget our economy is driven. If anything is growing, there's one thing that's growing massively disinflationary, deflationary sector called technology, which we did not have in the 1970s. Would you think any differently about the current supply problem versus the one post pandemic? I mean, it seems like this one is much more focused on specific areas. I mean, it's not just oil that goes through the street of Horus, but it doesn't seem to be as broad as what we saw post pandemic. Do you think about it differently because of that?

[00:21:54]>> I Yeah, I don't think it's near as serious. I mean, I I really don't. I I'm not saying we won't get a little, you know, we're going to get uptick in CPI reports for a few months, but unless you think this thing's going to drag on for a couple years or something and and even then, even if it does, let's say we sit at the $100 oil for the next two years, guess what? Inflation will be a one-year problem and then it'll go back to where it was. And where it is is is probably pretty low, back below 3% or 2 to 3% again. it would have to keep going up in order to become a constant inflationary problem because unlike an excess demand problem once this runs through the system at higher prices and people adjust to that and inflation comes back down again. So I the pandemic was much more serious supply problem that everything shut down. Um and even that one came right back down again. We took it from 91 to below three within a year.

[00:22:50]Okay. And I don't think it was the Fed that did that. They only started tightening like two, three months before it peaked. I think it was just that the global supply problem ended. And guess what? Soon as bid inflation went away.

[00:23:02]And I think we're in the same situation today. But we're we're we're here's the Fed and everyone else saying, "Oh, we got to we got to we got to tighten to fight inflation." I don't think it's going to do any good. So, let's ease.

[00:23:13]It's kind of where I'm at.

[00:23:14]>> I have to thank you, Jim, because I'm always looking for good titles for our YouTube videos. And and the article we're going to talk about next, give me one because uh this idea of the US economy is bus booming um is your most recent article. And uh so I guess probably as we get into chart one, that article, the first thing I should ask you is to define that. Uh what is bus booming?

[00:23:31]Nobody uh since I put that out, asked me why I wasn't boom busting or you know, I I have no answer for it. But I think that um what I'm kind of looking at I think what we got in the economy going on is we got really bifurcation in the economy and we we've kind of known about this for a while where you got this tech sector new era sector doing really well and then there's everything else and actually this has been going on for decades as we'll talk about but it's getting pretty extreme. It's finally getting pretty extreme in part because tech's getting larger and having even greater impact, but also more and more is not participating of the economy. So, this chart just starts out and looks at the size of what I define new era spending. And it's probably not even all new era spend. It's just a small slap of new era investment spending. It's it's investment by businesses on information processing equipment and uh intellectual property product uh spending. Those two things uh as a percent of real GDP back when the bull market started in 1990 the red dot there on the left uh shows that it was 3% or less of the economy. That was a very small piece of the economy uh that it really caused at that period of time. You can see that's grown steadily ever since. We're now up to 13.2%.

[00:24:58]economy by this very small segment of investment spending now comprises 13.2%.

[00:25:04]And it's going to keep going. You know, I don't know 7 years from now, could we have 20% of GDP comprised by a little bitty small segment of investment spending by businesses all concentrated in this new era segment. Uh it's getting bigger and bigger. when it was this small at 3%, it didn't wag the entire economic dog near as much as it is today. And I'll show that in the kind of the next chart here. Um, this chart looks bull market by bull market. I I I just looked at different bull markets we've had. First one being 90 to 2000.

[00:25:43]there looks at what was the cumulative percent change in real GDP in each bull market that was comprised by just this small segment of new era investments.

[00:25:54]Back in the bull market of 1990, the GDP new era spending comprised 3% of the economy, but it accounted for almost 15% of the gain in total GDP during that bull market. And you could see that that's grown rather steadily in every bull market since. I'll come back to the 2020 2021. But we now in this bull market, the one we're in, uh it's accounted for almost 30% of the total gain in GDP in the economy. It's 13 it was about 11 something when it started. But my point is it's it's count it's counting for almost double the gain in real GDP that it did in the entire 1990s bull market. So it's it's getting very large. Uh almost a third of the of economic performance is now tied to this one little small sector. Now I want to point out why didn't 2020 to 2021 bull market seem to suffer from this? Well, I think it's because of what we talked about earlier. That was the really one of the few bull markets where we had massive policy stiffness. We had 28% 26% I think it was year-on-year growth in the M2 money supply to try to get out of the pandemic. We had 18% deficit spending. We've never had that even in the biggest war in post-war history. We had a very steep yield curve over that period of time. We had a weak dollar. We were bringing everything to end that pandemic and the result is is it picked up all parts of the economy not just new era but everything did well in the economy and it was reflected in the stock market which had broad broad participation across all sectors and indeed uh as a result of that it only accounted for about 15% of the bull of the entire change in GDP that was because uh basically ally uh it accounted for about the size that new era spending was. New era spending I think was about 11 or 12% at the start of the 2020 bowl. We look at the chart ahead of it we need to but it accounted for about 15% of the total gain GDP and it was about the size that it was. That means that the rest of the economy also participated and accounted for the rest.

[00:28:17]But today we have an economy where about 80 I think it's 87% of the economy is outside of the new era at most 13% is new era and that's accounting for almost a third which means there's only about 2/3 left for the other 87%. It's getting so big the bifurcation that it's starting to create two entirely different economies. One booming one busted right now. If we go to the next chart, this is gets to the heart of the matter. How much is the rest of the economy growing? Not not the new era, but how much is the rest of the economy growing? And if you go back to the bull market of the 1990s, even though you had a very concentrated bull run in tech stocks, look at that. The other parts of the economy about 80% or something account were still growing at, you know, 3 and a.5% annualized in real GDP terms.

[00:29:12]No problem. It was not only a boom for tech, it was a boom for non- tech as well. If I look at the early 2000s bull, still had good growth in the rest of the economy, 2.5% annualized growth. Um, it very bad after the uh growth rate in the rest of the economy. In fact, there was very bad growth everywhere after the great financial crisis. If you remember uh that we had in 20089 the growth rate there over that entire bull run was 1 uh 8% perom uh despicable growth and we suffered from that and indeed that's why we kept interest rates at zero in this country for so long. It kept money growth growing. We had big deficit spending because we were trying to lift the growth rate after the after the great financial crisis that we had then in the in the 2020 post-pandemic bull was we had good growth again as I mentioned earlier because we stimulated everything so hard but look what we're doing now we're back to almost stall speed at 2.1% growth in the 87% of the economy that's not new era and that's getting deathly close that's not just in the recent period. That's for the entire bull market. There's a reason why the concentration of this bull market in the stock market was so extreme because 87% of the economy hasn't participated or virtually very little and so the stock market reflects that with extreme concentration and much of the rest not not doing well.

[00:30:46]Let's look at the next chart of where we are right now. Just in this bull market, just focus on this bowl. the red line, they both go back start at 1.0 indexed uh in the third quarter of 2022, which is when the bull market started on October 12th of 2022. The red line is the growth in that small portion, which is new era investment spending since the bull market began. The the blue line is the rest of the economy, rest of real GDP, which is about 87% of real GDP. uh since for the entire bull market there uh since the third quarter of 2022 new era investment spending the red line has grown 5.8% 8% peranom and the real GDP excluding the new era is 2.1 which we talked about earlier. But what's really concerning is what's happened in the last six quarters. In the last six quarters, new era spending has accelerated at a almost 8% annualized pace while the older economy is basically flatlined at 1.1% growth. And here we are in the last 18 months just to give you real GDP for the older economy is up 1.1%.

[00:32:06]Non-farm payroll growth has grown at 3/10en of 1% for 18 months.

[00:32:13]Labor force has grown at 610 of 1% and the unemployment rate is up by a percentage point. Now that's for six quarters in a row. And last week I heard the Federal Reserve say that we our policy is in a position today that we think we could we can wait and see.

[00:32:33]And we got we got some Fed men are saying we should raise. We got a president that basically seems fine with continuing the conflict and keeping another energy tax on an already 87% weak economy after putting on tariffs before that and limiting our immigration in this country because our labor force is growing so rapidly evident. My point is our policy officials are just missing what's going on in almost 90% of the United States economy because all we get is headlines about AI and how great the MAG7's doing. They are doing great.

[00:33:10]Their earnings are fantastic. Okay, that's that's wonder. If earnings are great, but they don't result in producing jobs in the rest of the economy, then it's not sustainable. You cannot do this forever. Uh, and I think that's the problem we're going to run into a little bit here. Um, is we're going to find out that our real problem in this country is not inflation. It's that almost 90% of the economy is flatline overall. Um, real quick on the next chart, um, just to show what's just happened, been pretty extreme. This is just the annual growth in red of the new era sectors and the annual growth in blue in the 87% old era. And I highlight just two parts. It's always been the case that the red has been greater than the blue. Makes sense. New era grows faster.

[00:34:03]But what is if you look back historically generally they at least moved in the same direction. So if new era was accelerating so was old era and vice together. They both went up and down together. kind of like economy was getting better, our economy is getting worse. But there's been two instances where this stopped. One was back here in 2004 2005 when I got it highlighted by the by the rectangle box. Uh new era growth accelerated from about 5 to 12% while old era growth went from 4% down to one.

[00:34:38]Okay? And it's just happened in the last six quarters again here of late where we just pointed out that period of time where new air has picked up when you get to a situation where not only is the difference in growth very extreme between the small sector and the much bigger sector but the big big not growing sector is not even participating in expansions that are accelerating. I think that's that's a real issue and a real problem that we're into. the last chart. There's been a puzzle the whole time why confidence is so bad on mainstream laying it. We've got some of the lowest confidence readings we've ever had. Worse than the 200 uh8 to 2010 financial crisis. Worse than any other time in post-war history. This is a short period of time just back to 2000.

[00:35:28]But I overlaid the confidence index in the United States, US consumer sentiment in blue with the inverse of the difference between real GDP and excluding real GDP um uh x the technology sector. And basically what what I'm saying here when that red line goes down the uh uh the overall overall uh technology sector is way outperforming what real GDP excluding technology sector is doing. I think it mystery solved a little bit here. Why do people feel so bad on Main Street?

[00:36:02]Because most of them have their bread and butter hunt with 87% of the older economy.

[00:36:08]They're not a big participant of the one part that's that's booming. Uh so I don't know. I I think this has been going on for a while. We've all known that we've got this one sector booming and the rest not. A lot of us investment people say, "Well, what's to worry about? Earnings are still going up. It's great." Yeah, but I'll tell you, if you got six months, six or six quarters where there's no job creation, no hope for anyone for the future, I just think that's not going to be sustainable. And so, I do think that we're we're being duped into believing that the de the demand is signaling runaway inflation in this country. And as a result, we're we're maintaining a tightening focus to fight inflation when underneath this, we've got real growth kind of uh the lights going out on. And I think I think ultimately it's it's going to require greater, you know, sort of massive policy support. And I think it I think it ultimately if it brings that, I think um I think a lot of these broader market areas will pick up with that support.

[00:37:18]Well, my my first take, Jim, is we got to get the Fed a subscription to policy perspectives here because they're they're spending all this money for all these data.

[00:37:24]>> They can run they can run over the cliff >> affordable price. Even if we had to get one for every one of the governors, it would still be a very affordable price for them and they could they could see some of this data that maybe says something a little different than what they're seeing.

[00:37:33]>> Yeah, they probably tuned me out long ago. Jack, >> my second question though is in terms of the new era stuff, I guess I could have two takes. The new era spending has obviously been driving the economy. Like one take could be that's going to be a huge problem. Like if new era rolls over, it's a huge problem for the economy. But another take could be if this juice finally comes, the rest of the economy can kind of take over and we can sustain. Even if new era doesn't keep doing what it's doing, we still can do pretty well. And like which one of you which one of those do you think is right?

[00:38:01]>> Yeah, I kind of go with the second on that. I I really think that that's probably how this thing plays out most likely that maybe tech does start to roll over a little bit.

[00:38:12]It it scares me a little bit with tech because I don't think any of us under what the tech I've talked about this in the past. The tech cycle has has divorced itself from the normal cyclical forces of the economy. That's why you've got the old old parts of the economy are very much cyclally depressed. Tech isn't. They're divorced from it. And that's good in a way. But I think it's left us though not really understanding what drives tech in this country. We don't really know the forces that cause it to do well or maybe do bad. And so we might all get shocked if it just suddenly dies because I don't think we fully understand yet the the tech cycle in this country. We certainly understand old older cycles, inventories and and sentiments and policy tightening and we we get that. We don't I don't think even myself. So I do have a fear that that tech just rolls over and we don't really know why. It just does. And I but I guess I put the odds in that less than what you brought up that it it's slowed.

[00:39:19]It's probably already doing that a little bit. And we we recognize that we've got a big chunk of the economy that needs help and we bring the juice.

[00:39:27]And I think that old era growth could help revise uh new era growth again uh and probably keep the economy overall out of recession. And if that occurs, all of it could continue to go up while while we're doing this. But, you know, there's a lot that could go wrong in that equation if if uh New Era would die quickly uh before we really start easing things like that. I worry a little bit about that, but I think that's less likely than what I just uh laid out there. Just one more for me before I hand it back to Justin. How do you think about the impact of the stock market on the economy? So, kind of the reverse of what people usually think because there's been a lot of charts we've seen on the podcast recently about this idea that way way more people have money in the stock market now. And so, this idea if the stock market goes down, it's going to drive the economy down. And I was thinking about that in the context of what you've been saying because tech is such a huge part of the stock market.

[00:40:16]Like, would we see a big effect if the mark if tech went down and drove the market down? Would we see more than a usual impact on the market or on the economy because of the market being down?

[00:40:26]>> We could. We could, but I I really think that the 87% of GDP that's produced by uh people on Main Street, they may own some stocks in their pension plan, and there's no doubt about that. They own more than they used to in the 60s and and and the like. But I think the bigger thing for them uh is still a job with a decent income and that still wags the dog among those.

[00:40:57]Certainly there's a lot of the upper upper income part of the distribution much more sensitive to the stock market and it would it would definitely change their attitudes if if that cracked. Um, and if you have a a full-on stock market crash, it's probably reflecting a recession and that that would hurt everybody, right? But I think it would be more if if if tech started just to underperform, not do very well, maybe just be flat while other things were going up. Uh, that wouldn't be a disaster as much as it would would probably cause uh a lot of wealthy individuals to rebalance their portfolio towards some of the new areas that were showing momentum. uh that could even drive those areas even more. Uh overall, there's a wealth effect, but I still think it's pretty small in the middle to lower income parts of the distribution relative to what it is in the upper income parts.

[00:41:51]Jim, if someone was trying to like exploit this new era thing from an investment perspective, like how would you, this isn't necessarily what you do, but I'm thinking like would you look at like sector earnings growth? Um, I'm trying to like tie the stuff in the charts to how it might be um uh how someone might be able to like exploit that within their within their portfolio. But let's say if we we we round the clock like you know two to three years and we started to see this like straight up you know growth in this very concentrated area of the market like how would an investor like back into that from an investment standpoint do you think?

[00:42:34]>> You mean if if if it if it if it kept if it keeps going up >> if it keeps going or Yeah. I'm even saying if you see a trend like that like cuz I think you have like one of the charts you went back to uh yeah it's it's you went back to 2020 you know mid2022 where you had it at one and then you show the new era going straight up. I'm just wondering backing into it like from a sector and or even industry perspective because this GDP number is like all aggregated up but how would you kind of peel the onion back to find investment opportunities do you think?

[00:43:07]Well, I mean, I don't know if that'd be hard if if you're just looking at if you think that if you think that the tech portion of the e economy is going to keep booming >> then I think those are out there and well known. I think you know AI is probably a big leader in that quantum and robotics and you know the stuff that that's kind of well well advertised.

[00:43:28]Yeah, >> a lot of it has momentum already and and uh that probably continues to do well if if that's be where you were and probably be American focused uh because that's where the epicenter of a lot of that is, you know, and that's certainly a possibility. A lot of people I think most people believe the tech's going to lead again coming out of this. If this this hostility wraps up, the tech's going to lead. I think that's a consensus more the consensus view than the one I'm say suggesting might happen is that broader broader market uh sort of take leadership for a while. So, I don't uh I don't think it's a mystery of where where you might go. And I would I wouldn't say you just sell out of all this because I I still think technology is going to be there over the next several years. But I think that I think they could underperform for a while and and that would probably cause a lot of portfolio allocations for a period of time to and maybe the next run Justin to your point where they really take off again could be when portfolios are much more uh allocated away from tech again not entirely but they're there's room for them to be boosted again you know than the next run as opposed to now there's probably more room for them to be uh subtracted from from that situation. But, you know, there's strong momentum going on right now in profitability and innovation and and the like. So, um, and this has been going on a while. So, wouldn't shock those trends keep up?

[00:44:59]>> Well, I guess it wasn't too hard like, you know, if you bought the S&P 500, you were getting exposure to the companies that were, you know, investing in that new era. So, that that question is kind of maybe a silly one from my perspective, but I wonder I do I'm going to try to weave two things together here. So, you know, in one of the charts, you know, it showed going back a couple decades, you know, the last time you might have had this real big discrepancy was in the late throughout the '90s, in the late '9s, where you had the internet build out and then obviously everything kind of, you know, in that bare market, you had all these tech companies kind of fall apart, most of them. But, you know, they kind of set the stage for the modern-day internet and all the value that we derive as an economy from the internet and the technologies and the companies that have kind of been built on the backbone of the internet. And I'm kind of wondering could this also be sort of what we're seeing with AI in the sense that you're having this big massive, you know, capital expenditure build out in AI and yet we're not yet seeing sort of the benefits really in the economy from AI yet. And I think Kevin Warsh kind of brought this up in his um in the Senate Banking Committee confirmation hearing where you know he was kind of making the argument that AI is probably one of the most disruptive this is going to be one of the most disruptive technologies in economic history and there's both you know demand side I guess benefits but also you know we could quite possibly see pretty big supply side potential as well. So I I don't know. I'm just wondering your your sort of thoughts on how you would think about that.

[00:46:36]>> Yeah. Um it's it's definitely uh I I think it's likely that it will have an impact and just like other innovation cycles have but I wouldn't conflate today with 1990s and in some ways that's true. But as I pointed out there's major league difference. 1990s there was a big boom in technology and that's what we think about but as I showed here in this earlier chart Xtech growth in the economy was phenomenal in the 19 three and a half% annualized growth during the '90s bull market in real GDP Xtech >> okay x new era and so everyone all boats in the harbor were going north during that during that boom And in part probably to your point because all other parts were benefiting from what was happen wasn't really necessarily on the come it was happening right when it went down. I wouldn't say that's the case.

[00:47:43]I would say the case so far has been there's not that much evidence that I see that a lot of the innovation in this bull market has yet been transferred to other parts of the economy in a beneficial way. It it's not showing up.

[00:48:00]uh I don't believe and now that said I think it will I think there'll be net benefits that come out of this um eventually but it maybe it's going to take long or I don't know but I don't see where there's a lot of evidence that that's happening it's stayed very concentrated um overall now you could argue that the that the growth in jobs and the like are already being held back by AI high.

[00:48:30]Okay. I don't know if I see that either accurately. The the one place you see that in spade and probably is pretty noticeable is in the technology sector itself.

[00:48:43]I I see that there's there's jobs going down in that sector. Okay. But you I don't really think that's obvious to me in a lot of these other sector that job growth being held back in that way. Um, I think we got other issues there like labor lack of labor force growth and and too tight of policies and things like that of of not stability those companies. So, I'm not here to say that there's not going to be any positive fallout from this innovation cycle, but I think it's very different so far from what we saw in the 1990s.

[00:49:16]>> Yeah.

[00:49:16]>> As far as how quickly it showed up.

[00:49:19]Well, and I think to the point I guess you've been making, it's it's, you know, we much we'd be better off if all boats were kind of rising rather than you have one boat way way out ahead and then the others are all far behind. That's not a healthy >> and I would say just one more thing to you asked about, you know, Wars' comment that could have supply side impacts, right? Mhm. And uh it could, but we're we're talking about the opposite supply side impacts that we fear than we're having like with Iran or with the global pandemic. We're talking about ex will create a lot of additional excess supply rather than a lack thereof. If AI does what everyone fears, right? We won't need as many people. We won't need as much of this or that. So they'll there'll be a weakness uh because there'll be an excess supply of resources that we can't fully employ.

[00:50:14]That's what's feared. See what I'm saying?

[00:50:17]>> Yes.

[00:50:18]That is a huge if that's right, if you buy into that, if that's what we think, you better be easing like a banshee because that means that all this excess supply in the economy is going to need policy juice to try to help those parts that are going to have to get through this transition period before we have an economy which creates enough jobs equal to the population. In other words, we we need that just argues you need more help in stimulus, not less because that would be a disinflationary, deflationary, sluggish growth environment if you took the AI story to its limit that we didn't need anybody.

[00:50:59]>> Guess what that means? Guess what that means for you, Jack? More time for podcasting.

[00:51:04]>> Yeah, exactly.

[00:51:05]>> And more more AI tools, I guess, to help me as well.

[00:51:08]>> Jack Jack's going to need that stimulus check. I don't know that. I don't know.

[00:51:13]>> Um >> uh so all right. All right. Always always a great conversation with you, Jim. We always like to end is >> you guys, >> you know, as you think about the rest of the year, what's the most important things you're you're paying attention to? We've covered a lot on today's call uh you know, call on in this presentation. Maybe some of this is is what you you will be paying attention to, but what's on the what's top of mind? Well, you know, I I guess for me, um, you know, certainly I wish the Iranian crisis would find a place where would be able to move on a little bit from that. Um, and there's not much we can do about it, so probably don't have to worry too much about it. Investors have had time to vet it. I I'm a little worried about the tech cycle and still investigating, looking into what drives that. I haven't been very successful at it figuring that out, but I I think it's out there and there's something that could create a very dark story there that turns it down. Um, you know, what were all the causes even in in 2000 when that went down? Well, part of that was policy tightening, no doubt. Part of it was companies that didn't weren't making money and earnings and you know that very different today. But but I I do worry about that coming out of left field a little bit. Although again, I'm not sure what to do with it. although it does factor in a little bit with my desire to want to diversify a little bit. And then the other thing I'd just point out is uh you might want to think about finally having a little bond in the portfolio. Again, long bonds uh that no one really thinks about and I'm not sure why they would at the moment, but I kind of think we might be happy if you put one or two in and we'll probably get a pretty good riskadjusted return on that with stocks overall here in the up in the upcoming upcoming period. And uh so I don't know those are some of the things I guess I'm I'm focused on. I think one one more thing I just draw I really think that one of the biggest things that could happen here I've made this point but we'll make it one more time that is a huge change that I don't know if people are totally focused on is we have been fixated and obsessed with inflation for 5 years in this country.

[00:53:25]Okay. And that's created a certain environment for everything, economy, stock market, bonds, everything. I think that could change this year. And if that finally changes, that will be the really the first time it's in five years that we've gone from primary focus on inflation to primary focus on growth.

[00:53:46]That's a big change. And everyone should give some thought to if that happens, is my portfolio in position or at least give it some thought.

[00:53:58]>> Great. Good stuff, Jim. We will see you again in uh the beginning of June.

[00:54:02]Really appreciate your time.

[00:54:03]>> Yeah, unless the weather's too nice out here that day. So, thanks you guys. Always a pleasure.

[00:54:10]>> Thank you for tuning in to this episode.

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