Buy the S&P Melt Up Coming | Ed Yardeni and Jimmy Connor
Summary
Market Outlook: Ed Yardeni maintains a bullish outlook on the S&P 500, projecting it to reach 7,000 by year-end and potentially 10,000 by 2029, driven by strong earnings and a resilient economy.
Economic Insights: Despite concerns over tariffs and trade wars, the U.S. economy remains robust with a GDP growth rate tracking over 3%, supported by strong productivity gains.
Valuation Concerns: Yardeni acknowledges that current market valuations are stretched, with the S&P 500 trading at 22 times earnings, but believes these can be sustained if economic growth continues.
Federal Reserve Policy: Criticism is directed at the Fed's recent rate cuts, which Yardeni argues are unnecessary given the strong economic indicators and may fuel speculative bubbles.
Gold and Commodities: Yardeni is bullish on gold, forecasting it to reach $4,000 by year-end and potentially $5,000 by the end of 2026, driven by geopolitical risks and central bank purchases.
Geopolitical Risks: The podcast highlights geopolitical tensions, particularly involving Russia and China, as factors contributing to the attractiveness of gold as a safe-haven asset.
Technological Advancements: The ongoing digital and AI revolution is seen as a major structural driver of economic growth, likened to past industrial revolutions.
Investment Strategy: Yardeni emphasizes the importance of focusing on long-term structural trends and remaining cautious of short-term speculative bubbles, while maintaining a positive outlook on the U.S. economy and stock market.
Transcript
[Music] Hi Ed, thank you very much for joining us today. How are things in Long Island? Everything is great. Uh it's been very sunny, no rain for about four weeks now. So kind of like the stock market. Yeah, I love this time of year. We're heading into fall and it's just such a gorgeous time of year. It's the same way in Toronto, just blue skies and sunshine. So the last time we spoke, believe it or not, was December of 2024. And so much has changed since that time. But the one thing that hasn't is your conviction on both the economy and also the S&P or the stock market. And at that time, you were bullish on both. You uh just as a reminder to our viewers, the S&P was trading around 5,900. Your target was 7,000 on the S&P. Now, here we are. We only have a few months left to go in the year, and 7,000 is a chip shot. Um, what's how do you feel right now about the S&P? And is your target still at 7,000? Uh, yeah, I think we could still get to 7,000 by by year end somewhere between 6,800 and and 7,000. I I think by the end of the year, the market will be discounting $300 a share for the S&P 500 next year. And uh you multiply that by 22, you get 6,600, which is where we are already. So, we're sort of ahead of schedule on on that. But it looks as though earnings are actually coming. They are going to be stronger than $300 a share. So, uh, yeah, I think 6,800 7,000 makes sense. U more importantly is we're in a bull market. Uh, and I think that next year we'll be up to 7,700. Uh, and then beyond that, I think as we've discussed before, I think this is a roaring 2020. So, I could see 10,000 or more uh by uh 2029. And so, you know, when I look back in the last few months or let's just say in Q4 of 2024, there was so much uncertainty, especially when it came to tariffs and trade wars. And there was so much talk about inflation and there was a lot of talk too about that this was going to slow down the economy, the global economy, and we were going to head into a recession. And of course, this hasn't happened at all. And and to your point, uh I'm shocked by how good the earnings have been. Q1 and Q2 amazing just keep getting better and better and I can only assume they're going to continue on as we head into year end. But do you see any risk of a slowdown in the economy? Well, I I'm not convinced it's slowing down. The labor market looks slower obviously and that's why the Federal Reserve uh just lowered the Fed funds rate by 25 basis points. Uh but meanwhile, ironically, the economy is looking pretty pretty firm. You know, I do track I do want keep track of the Atlanta Fed's GDP now forecasting model, which is really a tracker. It it looks at the latest economic indicators and say how the quarter is tracking and it's crack tracking at uh over 3% and um that's pretty good especially considering that that follows a strong second quarter which was revised up to 3.3%. So the actual GDP growth rate of the economies is looking good. It's just the labor market indicators uh have been weak and they've been revised down which leads me to conclude that therefore productivity must be making up the difference here because you know you can't get 3% growth in the economy with basically 1% growth or or less in the labor force uh if uh if it's but for productivity. So and that might explain why inflation has u stayed back down. And it also might explain why corporate profit margins have held up so well. You would think that with tariffs, you know, the the the people who have to write the checks are the importers. So the first thing that happens is you would think it would uh squeeze the profit margins of American companies that that import. But that just doesn't seem to be the case. Or not on a macroeconomic basis. maybe on a micro basis, but even on a micro basis, you didn't hear about uh too too many uh awful uh earnings reports during the uh second quarter um season. So, uh I do want to dig a little bit deeper into the economy, but before we do that, I I want to stick to the S&P and valuations. And you mentioned that the S&P is trading at 22 times, which is a very rich number. Sure. And uh then if you look, it doesn't matter what indicator you look at, they're all very they're at extremes. The Buffett indicator uh which is just the value or the market cap of all stocks in the US over the GDP. That number is very extreme. It's well over 200% now. Yeah, that's the Buffet Well, if you're talking about the Buffett ratio, but it's basically the price sales ratio for the S&P 500, and that's actually at three. It's an all-time uh record high. And um you know the the the high that we all recall for the forward PE was 25 back in late 1999 during the tech bubble followed by the tech wreck. So yeah, you're absolutely right. Valuations are certainly uh not cheap and look stretched and but this doesn't concern you at all. It does concern me, but uh typically it it takes uh we'd have to have another significant recession scare or actual recession to bring the valuation multiple down. Um the uh the the forward PE at the beginning of this year when we had that uh that correction um it got down to 18 because usually in a correction you might get down to you know 18 to 15 in the forward PE. So, we got down to 18. Uh, in a bare market, you would expect to see something in the very low teens. Uh, maybe even 10 or maybe even lower than that. Uh, but uh, look, over the past three years, we've had the most widely anticipated recession that never happened. Uh, maybe it'll happen over the next few years, but I think we've had rolling recessions. I think the resilience of the economy has been well demonstrated, and I think the economy will remain resilient. If that's the case, I think these valuation multiples can hold up. Also, you know, we can drill down a little bit and see that the forward PE of the Magnificent 7 uh is over 30, whereas the uh forward PE of what I now call the impressive 493. Um I I think uh that's running around 19, which isn't cheap. uh but uh it's uh I think it's relatively uh sustainable uh as long as the economy continues to to grow and uh you know we just had this uh tariff stress test and we seem to be passing it uh pretty well. This is this is kind of important for me because if I'm talking about the roaring 2020s I always get push back well that didn't the 1920s didn't end well if that's the an analogy you're making. And it's true uh we had the smooth hallet tariff in June of 1930 and that's when the great crash really started. That's when the depression really really started. And here we just had uh as everybody's noted some pretty significant tariffs that's either been imposed or still being discussed. And yet we haven't had major uh retaliation. We haven't really had any significant trade wars. And all in all, it, you know, at least in our economy, we're not seeing it having much impact on either growth or inflation. Yeah. And I think it's safe to assume the world was a totally different place back then versus Absolutely. Completely different. So the other thing you mentioned the tech bubble, so I got to talk touch on this, but back in the late 1990s, we just had one massive bubble and that was technology. But in the last five years, one of the things that just astounds me is it's just like bubble after bubble after bubble. Like we had initial coin offerings, ICOs. Did you remember those things? And then then we had NFTTS. Remember that? That was just insanity. Metaverse. And then cryptocurrencies. Now we have sports betting. We have zero data options. It's just like all these levels of speculation just keep increasing. Uh any thoughts on that? Is that a concern? Yeah, I mean that's that's why I've uh been opposing uh Fed rate cuts here because uh you know why why are they cutting rates that remind me again the unemployment rate is 4.3%. That's basically full employment. So check that on the dual mandate goal of having maximum employment and the inflation rate isn't quite back down to 2%. It's running more like uh 3% but it had been heading heading down there I think. But for the tariffs, I think what tariffs did is they didn't increase inflation. They just caused it to stall at 3%. So it it hasn't gotten down to 2%. And meanwhile, stock market is at alltime high. Gold's at all time record high. Bitcoin is at all-time record high. So financial conditions seems to be pretty el. So what's the point of uh of lowering interest rates here, especially if uh well, the point obviously is to try to stimulate even more demand. And but as we just discussed, GDP looks pretty good. Um but the idea is to increase the demand for goods and services there thereby increasing the demand for labor. Uh but the labor market I think is is fine and I think most of the problems are on the supply side. I mean the the the population of foreignb born uh people has declined 1.5 million since March from March to April that's what it what it dropped. Uh and we had something similar in the drop in the in the labor force. Uh so that's had a big impact and obviously uh employers aren't going to be rushing to hire people who don't have documentation. Um and then state and local governments that had hired a lot of teachers and social workers to deal with the in influx of migrants over the past few years that that has come to to a a halt. uh it's very possible, very likely that uh companies are spending some significant bucks on assessing AI, not implementing it, just assessing whether it's really a tool that uh will help to augment the productivity of their current workforce. And while they're doing that, you say, let's let's just not uh run out and hire more people. Let's see if we we can do what we need to do with artificial intelligence. So that's sort of a showstopper in that regard. None of these things are are so-called problems that they're they're structural. They're they're nothing that the Fed can solve with lower interest rates, but if they're going to do it anyways, which they just did, that liquidity, that stimulus uh uh increases the risks of a of a meltup situation. I wouldn't want to see 7,700 by year end with a 25 multiple. Um and um as you said uh you can do kind of a checklist of of things that happen before as bubbles are inflating and before they burst and uh you know right now we've got uh the AI reality and hype and u this whole Oracle deal is kind of a funny deal. Uh I mean the Mar went up on this huge order from Open AI which as I as far as I know has no profits. Um, and uh, so it's it's kind of a, you know, kind of makes you wonder how how realistic some of these numbers actually are. Uh, and on top of all that, the financials now in the sweet spot where a very strong bull market has opened up the market for IPOs and more M&A, which then means that the financial companies, the investment banks are making more money, so they go up, they take the market up. So, it's kind of like feeding on itself. Um, and uh, it's that's great until it's not. You're right. These numbers are just staggering. And you touched on Oracle. And in that one day alone, Larry Ellison saw his net worth go up by hundred billion dollars. Yeah. From a from a numbers company. Yeah. From a big order from a company that doesn't have any uh profits. Um, and there seems to be it's it's it's a funny deal. All right. So you touched on the Fed cutting rates and uh so let's dive into that a little bit deeper because you also mentioned the GDP is very strong 3% give or take. The Bureau of Labor Statistics recently came out with revised jobs for the year ending in March of 2025. It was down by 911,000 jobs. And so I'm assuming the weakness that we've seen in the jobs in the last few months, this is why the Fed thought they had to act. What are your thoughts on that? And are you concerned about these downward revisions that we continue to see in the jobs numbers? Yeah, I think there's also obviously been a tremendous amount of political pressure on the Fed. Uh they they'd like to they'd like to wake up in the morning and not get beat up by the by the president. Uh but um yeah, I think they did uh to to mostly respond. They they say they're data dependent and the data on pay perils has been pretty lousy and I think some of them also might have uh overreacted to initial unemployment claims which really jumped in the week right before the uh they voted on the 25 basis point cut and then wouldn't you know so that was uh so they voted on on Wednesday and then on Thursday uh we got the latest initial unemployment claims data and it was down sharply uh so you know clearly layoff offs remain extremely low. Uh on the other hand, maybe hirings are kind of uh slow for the reasons we discussed, but there's nothing that the lower interest rates are going to do to fix that. And then meanwhile, if most of the problems are are on the supply side of the labor labor market, not the demand side, then uh we're clearly seeing some pretty impressive growth in productivity, which is uh which is a wonderful thing. It's a fairy dust that it makes everything better. at uh every percentage point in GDP that uh you know I mean GDP is just the growth rate of the labor force plus the growth rate of productivity. So if the labor force growth is slowed dramatically to let's say 0.5% and we're growing 3% uh I mean that that that differential 2.5% is coming from productivity and uh so productivity is a great booster of economic growth. It's a lead keeps a lid on inflation because uh unit labor costs uh which is hourly compensation divided by productivity that's running around 1 and a half 2%. So that's helping to keep a lid on labor cost inflation. It's great for real wages uh hourly compensation adjusted for inflation goes up with productivity and it's great for corporate profits. So check check check check. I mean everything seems to be pointing towards productivity given us a really good economy and in that situation uh interest rates should be higher. I mean they should be where they are now. They shouldn't go any lower. Uh I think the so-called neutral rate is more like four to 4% than 3%. The Fed officials think it's 3%. But I look at it empirically. I say wait a second we're at full employment. Uh inflation's come down a lot. This is dual mandate nirvana. Why why do you want to screw it up by by easing and then possibly creating financial instability. So you rais a very interesting point and you did allude to the fact that they the cut that we just saw recently was because they were being pressured by the president. The last time we cut was in December of 2024 and in Q4, I believe it was 100 basis points, but and there was a lot of discussion then that they were doing it for political reasons, right? They were trying to help the Democrats. So I guess my question to you is do you think the Fed is becoming political or too political and in doing so they're losing credibility? Well, I think they definitely should not have done what they did last year. And I think from a fundamental perspective, it was a mistake. And I argued that it should have been none and done. Instead, they did listen to me and and they they cut by 100 basis points uh from September 18th through December 18th. First cut was 50 basis points like there was some sort of big deal emergency. And then they cut it again. And the economic data actually looked uh perfectly fine. uh and I think uh it's uh arguable that politics uh had had a had a had a consideration in their decision-making, but forget polit I I try to be apolitical. I mean to to me uh whether you're a Democrat or Republican, you want to be an investor no matter who's in the White House. Uh and don't let politics get get in get in the way. But uh the reality is that um the um bond yield rose 100 basis points offsetting more than offsetting I think the 100 basis point cut in short-term rates because a lot of borrowing goes on in the longer term end of the market not not on a you know one day overnight basis which is what the federal funds rate is all about. I mean, the whole thing of a neutral rate is it makes no sense to me. Uh, you know, it's a it's it's a nutty concept, but uh, hey, that's my opinion, and the Fed doesn't agree with it. They they they they actually believe in the long run the Fed funds rate should be 3%. And they they have no idea. They're making that up. I mean, uh, not about a year ago, they thought it was two and a half percent. They don't know. There's no way to measure it. And it's a kakami, uh, concept, but it is what it is. And I have to acknowledge the fact that that's they think it's a legitimate concept. But I think they're wrong. I think uh you know 4% is four four and a half% is the right fed funds rate. I think uh a bond yield of four and a quarter to 4 and a.5% is the the right bond yield. And they can't really control the the bond market anymore. They're not doing this crazy quantitative easing anymore. And so the bond market the bond vigilantes I I dubbed them that back in 1983. The bond vigilantes have uh have a say. They have a vote. And as we just saw, the Fed cut by another 25 basis points. And so far, the bond yields gone up by about 10 to 15 basis points. So already we're getting an adverse vote reaction from the bond vigilantes. And so, okay, now that you're talking about the 10-year, um, what what are your thoughts on the 10-year? because there was I believe it was earlier this year we saw the 10-year approach 5% and there was a lot of concern it was going to go over 5% but we were closer to 4%. What are your thoughts and what's that telling us? Yeah, I think we got up to the four and 3/4% which was a little spooky because we had seen in 2023 sort of the outlines of a of a debt crisis where the bond yield August was at 4% and by the end of October it got up to 5% and uh that was a little bit unnerving because suddenly people were talking about well the next stop is 6% and we're in a debt crisis and Ray Dallio was going around looking pretty depressed and talking depressed that we might be, you know, that in an we might get to a debt crisis imminently. Uh and um we saw some um uh we saw Aman short the bond made a lot of money on that. But then on November 1st, uh Treasury Secretary Janet Yalen came in on November 1st and basically told the bond vigilant, "Okay, I get it. uh you're you push the bond yield up to 5%. You're worried about too much debt, particularly bonds. Tell you what, I won't uh increase the issuance of of bonds. Whatever extra money I need, I'll get in the bill market. And that actually helps to bring the bond deal down pretty significantly. And so that's kind of uh disciplining the bond vigilantes because the bond vigilantes may want to push the bond deal up to five 6% to get the attention of the politicians to finally fix this uh awful fiscal excess that we have this this debt problem that we have. Uh and um uh on the other hand they recognize that the Treasury still has the power to just finance more of it in the bill market. As a matter of fact, Treasury Secretary Bessant was a big proponent of the Genius Act, which uh basically legitimize stable coins and stable coins have to be backed by Treasury bills, which creates another demand for for treasury bills. Interesting. And do you think this is why the administration is so positive on cryptocurrencies and stable coins? I think that's uh that's one of the explanations for sure. I think they somehow got it in their mind that uh stable coin uh would allow us to re re somehow refinance uh this debt or at least create a huge demand uh for treasury bills basing up stable coins so that uh they could in fact finance more and more of the debt uh through treasury bills. Uh yeah, so I I think that was a a big consideration of uh of this administration. But, you know, I don't think there's any uh ma magic ways out of the the the debt problem we've we've created other than uh getting both sides of the aisle to come to re realize just how terrible the the debt situation is uh and how dangerous it is and to come to terms on slowing the pace of outlays and increasing the pace of uh of of revenues. But politicians uh would always prefer to have a deficit because uh no nobody no constituency is going to get upset with them other than the bond vigilantes. And if the Fed can deal with the bond vigilantes, if the Treasury can deal with it, then we're not going to fix the problem anytime soon. And um you know, we've got some uh cautious tales out there. We've got uh what's going on in France uh their bond yields have soared on a potential debt crisis. Same thing in the United Kingdom and Japan. So they're actually countries right now where the bond vigilantes are work working their uh their uh power to uh try to get the politicians to do something about the uh fiscal excesses. And Ed, just as a basis of comparison, where are the yields in France, the UK, and Japan? Well, uh I think the important thing to know is that the the French bond deal is right around where the Italian bond deal is. Uh the the Greek bond deal has come down dramatically. uh the German bond yields have gone up even though you know that country doesn't really have a a major inflation problem or a deficit debt problem but they could have a debt problem because uh they've agreed to uh run bigger deficits in order to finance defense uh and their economy is slowing so it won't be too long before they start coming up with stimulus programs. So I want to pick your brain a little bit more on inflation. you brought this up earlier, but it's uh I'm sure you would agree with me. It's surprisingly how resilient inflation is. And uh I'm based in Toronto and I was recently in London and I can't believe how much prices have gone up in London in the past year. A c a cup of coffee like Americano, I would pay three bucks in Toronto. Over there it would be $6. And there was just so many other things. I took a black cab uh downtown. It was 100 pound which is $200 Canadian dollars. The price of gas, Ed, okay, you think we we're paying a lot of money here. The price is gas would probably be close to $7 a gallon US. Okay. And uh what are you paying by the way in Long Island for gas? We're we're okay. Yeah, we're paying about three three and a quarter for regular gas. Yeah. Yeah. If we if I do the FX Sarah in Toronto, I'm probably paying around 375, which is not too bad compared to London. But uh when you look at inflation, like man, I just can't get over the prices. They are not coming down. And does this concern you? You you made mention of the fact that you don't understand why the Fed's cutting rates because inflation is not going away. It's being very resilient. What are your thoughts? Well, there's there's the price level and then there's the uh percent change in that price level over one month, over one year, whatever period. Usually we we tend to look at it on a one-year basis. And it sure looks like uh coincident with the tariffs, inflation stopped coming down and kind of stalled at 3% whereas the Fed still is is talking about 2% as their uh their target. The fact that they cut by a quarter points has raised some questions about whether in effect they are now targeting 3% or they're learning to live with 3%. and they'll they'll talk a game a good game about 2% but you know they're they're more concerned about the labor market than they are concerned about inflation at uh at three 3%. Uh the price level is not going to come down and the reason for that is because uh while we all know how much prices have gone up since the pandemic uh I think we have to recognize that uh our wages and salaries have gone up by at least as much. Uh so in other words, the labor market uh did respond to the higher price level. Uh it's just we're still in shock because we we see the the prices uh every day. And yet the reality is we're also making more in nominal terms. But then, you know, people like to see their standard of living increase. They like to see wages increasing faster than prices. So a lot of people aren't saying that. uh they're saying that at at best their wages have kept up with uh with prices. So, we're not going to get a situation where prices come down. That would take actually a pretty nasty recession uh in order to to do that. Um there are some areas where we may have some deflation like in the auto market, but more overseas than here because we don't import any Chinese cars, but the Chinese have are building way too many cars for the for their economy. So they're dumping them in global markets and um you know you can get a beautiful car for about 20 grand is on a comparable basis would cost here 40 grand. Uh so um it's it's a very very mixed up picture to to say the least. But uh the reality is central banks first and foremost should be responsible for financial stability. Second goal should be uh infl keeping inflation down and third goal should be doing what you can to help on the labor market side. If you can't make all those consistent you really have to focus on financial stability and infl in inflate and price stability. Uh the unemployment rate if you if if the monetary authorities can't help there's always fiscal fiscal policies that could certainly help. So, I was reading one of your notes and I just want to read from it for the benefit of our of our viewers and I'm going to quote right now. More often than not, in the past, monetary easing cycles started with the previous tightening of monetary policy triggered a financial crisis that quickly turned into an economywide credit crunch and a recession. Right? Easing at such times is clearly warranted. But the Fed cut the Fed funds rate by 100 basis points at the end of last year and there was no credit crunch and no recession when they did so. That makes another round of rate cuts in this cycle more likely to cause inflation to remain above the Fed's target while fueling speculative fires in the stock market. End of quote. But it sounds like you're you mentioned this, but you're concerned about inflation heating up again. Where does it go? Like do we go to 4%? Do we go to 5%? Well, it uh for now I think it just kind of sticks at stays at 3%. Um we um you know one of the areas where we clearly can see the tariffs that had an impact on inflation is in the durable goods component of the CPI and the consumption deflator kind of just alternative measures of the same thing which is consumer price inflation and the dur durable goods in the past before the pandemic those prices kind of consistently fell uh because of cheaper import of uh goods of durables uh or because of uh more productivity in the manufacturing of durables. Uh and sure enough after we had that spike in 2022 2023 which is largely a supply disruption uh spike once that all kind of cleared up durable goods were falling again until this year where they suddenly are rising and again that's got to be because of the of the tariffs. So instead of having like a negative 1 or 2% on durable goods, we have something closer to 1% plus 1%. And the other thing is the services inflation rates are still running higher than they were prior to the pandemic. Uh so they're they're still relatively hot. So um I think the problem with 3% is it uh continues to erode the Fed's credibility uh if they continue to lower rates or with the benefit of hindsight if they don't. it would just say that well that was a it was a mistake the whole ring by 25 basis points which isn't uh much but that follows a 100 basis points at the end of last year. So I want to bring up gold now because this is something else you've been bullish on. I believe you got long around the $2,000 level. Y we're at 3600 3700 not too far away from 4,000. Uh are you still bullish on gold and do you have a target price on it? Yeah, I I I got bullish when it crossed 2,000. Uh when I crossed 3,000, I I I put a target of 4,000. It crossed 3,000 at the be beginning of the year. I said I think we get to 4,000 by the end of the year, which looked like a stretch, but here we are at 3,700. So not not such a stretch. Uh, and then if we get to 4,000 by the end of the year, which is my target, I think we can get to 5,000 by the end of um of next year. Uh, I mean, I I could see a scenario where it could get to 10,000 uh by 2029, which just happens to also be my target for the S&P 500. 10,000 on the S&P 500. Uh, but uh I I I'm gonna do this a thousand points at a time. Uh, let's see if we can get to 4,000. And then I I think I'll I'll I'll feel pretty good that we could get to 5,000 and then we can talk about it some more in in in future discussions. And what's the scenario that would take it there? Like what's driving it? Well, uh several factors. uh the uh there's sort of a central bank uh put going on where the central banks of uh countries that don't like us, we don't get along with them like uh for example, China and uh uh Iran, Venezuela, um North Korea, there's a few of them so-called axis axis of evil uh from our perspective anyways. uh they just uh you know they they don't like democracies and they tend to be autocracies and when Russia invaded Ukraine and the United States froze the assets uh the reserves uh international reserves of uh Russia uh those uh uh central banks started to realize that the last thing they want to do is have dollars that can be frozen if the United States doesn't agree with their policies. So they've been accumulating gold. Uh meanwhile, Chinese uh individual investors got uh really uh wiped out in the uh apartment uh real estate market there. They bought all these apartments in Ghost Cities and um they can't even rent them out. There's just there's no demand for these things and they can't sell them. So, they got really hurt uh in real estate. They didn't do too well in the stock market because of the volatility there. So, they've been buying gold. uh Indians have a long history of uh liking gold for jewelry and for uh uh asset uh as an asset class. Uh so there's uh there's a lot of that. There's also I don't know just uh I think the market the gold market is focusing more on geopolitical risks than it ever has before. And you know, it's unnerving. Not only you see that the Russia Russia's invasion of the Ukraine, that that war is still on. Uh but now all of a sudden uh the the Russians are playing chicken with drones over uh Poland. I think there was another Eastern European country that complained today about an overflight of jets by the Russians. uh you know uh you know Putin is nuts and uh it's and so you need something to to hedge against that uh insanity that's coming out of Russian uh foreign policy and then um there's always the unsettled conditions in in China, the Middle East. uh so the geopolitics remain bullish but I think at the end of the day people feel more comfortable in gold because they have a sense that there is a put that's uh that that's attributable to some of these central banks that that clearly are buying gold. Yeah, you can never own enough gold. Well, there have been there have been periods of time where it didn't do much, but in the grand scheme of things, in a in a lifetime situation or in in the long run, gold uh works works pretty well. You know, people people have been saying that Bitcoin is the uh the digital gold uh and uh maybe gold is the uh physical Bitcoin. Yeah. And I think they keer to two different investor groups like you mentioned, central banks. they've been buying approximate approximately 25% of all gold production here in the last three years. Yeah. So that's you know uh of course and then the people that trade bitcoin or other cryptocurrencies they're are totally different individuals. So yeah, I think also um gold has a long reputation of being a way to hedge against fiat currencies uh and governments that issue currencies um and to the extent that uh people don't trust governments don't trust the the the relationship of governments with one another geopolitics uh gold gold looks pretty good in that context and we can't have a discussion on gold without talking about the dollar The US dollar has been under pressure here in the past year. I believe it's down 10% against the DXY. Yeah. Um what are your thoughts on the USD? Does it continue to go lower? I think it's important for everybody to recognize that the DXY is a fixed weight index of uh the the the big reserve currencies and the euro has a weight of 52%. So you it's basically the dollar euro relationship to that drives the the DXY. And for the life of me, I don't know what all the excitement is about uh the euro. Uh you know, the French economy and politics is a mess. Uh the the German economy is getting hollowed out by by Chinese competitors. Uh the the Russians are going to force Europe to spend a lot more on defense and increase uh their their deficits. Uh but maybe it's as simple that uh as simple as uh global investors are looking for a cheap way to catch up with the bull market and stocks that has been led by the US and uh there's been a lot of buying of European stocks. European stocks have done extremely well notwithstanding uh some of the issues that I have with the the European uh economic situation and outlook. Uh but um meanwhile there's monthly data that just came out through July uh that the Treasury compiles on net capital inflows and you look at the dollar and you think my god foreigners must be just bailing out of dollar securities and jumping into European ones and that's not the case at all. As a matter of fact, we had through through July, we've had almost record buying of US equities by foreigners uh net net purchases of around $600 billion and almost a trillion dollars in uh fixed income securities. So, uh I I am not bearish on the dollar. Um my contrary instincts are out because everybody hates the dollar or or they're bearish on the dollar and uh I'm not. I think um you know uh as uh some of these issues pop up with the bond yields going up in the UK, France, Japan uh with uh instability that we have in some emerging economies in Dunia recently had had some some issues in Southeast Asia. we have sort of uh the Gen Xers uh staging uh uh protests against the older folks running their governments. Uh China's got a lot of issues. Put that all together and I think the US still is the safe haven both in terms of our capital markets which are bigger than everybody else's and in terms of uh safe safety safe haven rule of law. And just because we're talking about foreign governments or other countries, uh any thoughts on Canada? I'm based in Toronto, so I'm curious to hear if you have any thoughts. Well, uh from a stock market perspective, uh Canada has been a um you know, does well when commodity prices are uh are surging and uh they aren't. Commodity prices uh they're not really taking a dive, but they're they're certainly not going up. Um uh Canada's uh financial sector has uh has traditionally been a big one and has uh done very well. It's relatively well uh regulated. So the the financials are are doing uh quite quite well. Uh real estate uh you know there's been too much building there. But I don't know that that you know is going to have any immediate impact on the the stock market in in Canada. And um you know I think um the investors have kind of you know shrugging their shoulders and learning to live with this uh tariff war or uncertainty that's occurring between the United States and Canada. I mean, you know, the president of the United States could wake up one morning and uh you know, raise the tariffs or or lower them and say everything is okay now. Um, so I think as long as uh the Canada and the United States has continued to talk on trade, um, I think that's a good thing and u, we'll probably end with it with some sort of deals that u kind of conform or bring in a lot of the items that weren't in the U 2000, you know, what what Trump negotiated in his first term, bring him into that uh into that tariff deal. So um you know Canadian economies uh like the US economy has has labor market issues but u all in all um I u I I I think that at least for the stock market perspective things look okay. Yeah, the stock market is doing well, but the uncertainty associated with the economy and the trade wars and tariffs, etc., it's really having a a toll on the economy. Believe it or not, at our unemployment rate across the country is at 7%. In the province of Ontario, where I reside, it's at 8%. In the city of Toronto, it's 10%. Oh, I got to throw one more stat at you, Ed. Youth unemployment, which is 15 to 24, it's at 14%. So, this country has serious troubles. Well, Ed, that was a great discussion and I want to thank you for being with us today. Uh, I just want to summarize a few of your key points. So, one, you're still bullish on the S&P. Your target is uh 7,000 easy. And then at the end of 2026, I believe you said 7,700. Yep. Uh you're still bullish on the economy. No concerns. Uh you're bullish on gold. You think it goes? What's your target for 2026? 5,000. 5,000. Yeah. So, for the most part, you're pretty positive or pretty bullish, but do you have any concerns? Is there anything that keeps you up at night? Is there anything that might change your whole analysis? Well, um, look, um, I've staked out a pretty, uh, bullish outlook for this decade. And now, not only am I talking about the roaring 2020s, I'm also talking about the roaring 2030s. Um, I I've uh the way things are going with the Fed, I've actually been more concerned about a meltup uh situation like 1999 2000, but it it could be like 1999 2000. Um, but it doesn't necessarily have to lead lead to a recession. It could be a correction. It could be a short bare market. Um, I I would probably view that as a as a as a buying opportunity because uh the kind of the future is here. I mean, we didn't talk about what's going on in technology land, but uh I I think uh AI is an evolutionary development in uh the digital revolution. Uh which means we've been able to process more data uh more cheaply uh more quickly than ever before. And as we do that, it feeds on itself because it means we can process even more data. Uh and so it creates a lot of demand for uh data centers and software and and hardware. Uh and so I think that the technology revolution like the a revolution, like the industrial revolution, the digital revolution is a major driver of our economy. And so it's a structural it's a structurally bullish underlying uh trend. So, I'm more concerned about kind of short-term uh uh divergencies from from that trend and that could be speculative a speculative bubble that that bursts. But uh look, we we saw at um you know, at the beginning of of this year that we had a significant decline in the uh in the stock market. Uh we've we have had the meme phenomenon blow up before. We've had the spec phenomenon blow up before. uh and yet that didn't cause a uh a credit crunch and it didn't cause a recession. It would really take a recession uh to uh to occur to uh create a significant bare market and as I said I've uh been observing the economy and uh been impressed by how resilient it is. You mentioned how earnings have been phenomenally strong. you know, American companies from my perspective have done a phenomenal job of uh mana managing their their companies under some uh tumultuous situations. I I'll leave you with this thought. What I've learned over the years uh is that u it's really extraordinary how well the US economy and stock market have done despite Washington. I think that's an important uh insight because too many of us kind of do it the other way around. We we see what Washington is doing and we shake our heads and said this can't be good. And uh meanwhile there's the there's all the rest of us, a few hundred million uh working stiffs that uh aren't doing the best we can given what gets thrown at us. and uh put it all together, economy is doing great, earnings are doing great, stock market's doing great, and I always like to finish on a positive note and I think that is a very positive note, worth mentioning. And uh to your point, one of the reasons why the market has done so well in the last 100 years, regardless of what political party is in power in the US and also in Canada, it has to do with the men and the women that go to work every day and bust their humps to put food on the table and pay for the rent. Yes, that I think it's that straightforward. Uh, by the way, if anybody wants to uh get give a try of our research, they can go on uh yordeni.com to see the what we do for institutions and for individuals. And for individuals uh two years ago, we created a product called yardeniquict.com uh which is a short daily uh insight into the relationship between the macroeconomy and the stock market, bond market, gold and all of that. Yes. Yes. And I will have a link below in the show notes and I would also encourage our viewers to check you out on LinkedIn. You're also quite active there and you also have your own YouTube channel. Correct. Well, Ed, once again, this has been a very informative discussion and I want to thank you for making time for us today. Thank you. Thank you very much. [Music]
Buy the S&P Melt Up Coming | Ed Yardeni and Jimmy Connor
Summary
Transcript
[Music] Hi Ed, thank you very much for joining us today. How are things in Long Island? Everything is great. Uh it's been very sunny, no rain for about four weeks now. So kind of like the stock market. Yeah, I love this time of year. We're heading into fall and it's just such a gorgeous time of year. It's the same way in Toronto, just blue skies and sunshine. So the last time we spoke, believe it or not, was December of 2024. And so much has changed since that time. But the one thing that hasn't is your conviction on both the economy and also the S&P or the stock market. And at that time, you were bullish on both. You uh just as a reminder to our viewers, the S&P was trading around 5,900. Your target was 7,000 on the S&P. Now, here we are. We only have a few months left to go in the year, and 7,000 is a chip shot. Um, what's how do you feel right now about the S&P? And is your target still at 7,000? Uh, yeah, I think we could still get to 7,000 by by year end somewhere between 6,800 and and 7,000. I I think by the end of the year, the market will be discounting $300 a share for the S&P 500 next year. And uh you multiply that by 22, you get 6,600, which is where we are already. So, we're sort of ahead of schedule on on that. But it looks as though earnings are actually coming. They are going to be stronger than $300 a share. So, uh, yeah, I think 6,800 7,000 makes sense. U more importantly is we're in a bull market. Uh, and I think that next year we'll be up to 7,700. Uh, and then beyond that, I think as we've discussed before, I think this is a roaring 2020. So, I could see 10,000 or more uh by uh 2029. And so, you know, when I look back in the last few months or let's just say in Q4 of 2024, there was so much uncertainty, especially when it came to tariffs and trade wars. And there was so much talk about inflation and there was a lot of talk too about that this was going to slow down the economy, the global economy, and we were going to head into a recession. And of course, this hasn't happened at all. And and to your point, uh I'm shocked by how good the earnings have been. Q1 and Q2 amazing just keep getting better and better and I can only assume they're going to continue on as we head into year end. But do you see any risk of a slowdown in the economy? Well, I I'm not convinced it's slowing down. The labor market looks slower obviously and that's why the Federal Reserve uh just lowered the Fed funds rate by 25 basis points. Uh but meanwhile, ironically, the economy is looking pretty pretty firm. You know, I do track I do want keep track of the Atlanta Fed's GDP now forecasting model, which is really a tracker. It it looks at the latest economic indicators and say how the quarter is tracking and it's crack tracking at uh over 3% and um that's pretty good especially considering that that follows a strong second quarter which was revised up to 3.3%. So the actual GDP growth rate of the economies is looking good. It's just the labor market indicators uh have been weak and they've been revised down which leads me to conclude that therefore productivity must be making up the difference here because you know you can't get 3% growth in the economy with basically 1% growth or or less in the labor force uh if uh if it's but for productivity. So and that might explain why inflation has u stayed back down. And it also might explain why corporate profit margins have held up so well. You would think that with tariffs, you know, the the the people who have to write the checks are the importers. So the first thing that happens is you would think it would uh squeeze the profit margins of American companies that that import. But that just doesn't seem to be the case. Or not on a macroeconomic basis. maybe on a micro basis, but even on a micro basis, you didn't hear about uh too too many uh awful uh earnings reports during the uh second quarter um season. So, uh I do want to dig a little bit deeper into the economy, but before we do that, I I want to stick to the S&P and valuations. And you mentioned that the S&P is trading at 22 times, which is a very rich number. Sure. And uh then if you look, it doesn't matter what indicator you look at, they're all very they're at extremes. The Buffett indicator uh which is just the value or the market cap of all stocks in the US over the GDP. That number is very extreme. It's well over 200% now. Yeah, that's the Buffet Well, if you're talking about the Buffett ratio, but it's basically the price sales ratio for the S&P 500, and that's actually at three. It's an all-time uh record high. And um you know the the the high that we all recall for the forward PE was 25 back in late 1999 during the tech bubble followed by the tech wreck. So yeah, you're absolutely right. Valuations are certainly uh not cheap and look stretched and but this doesn't concern you at all. It does concern me, but uh typically it it takes uh we'd have to have another significant recession scare or actual recession to bring the valuation multiple down. Um the uh the the forward PE at the beginning of this year when we had that uh that correction um it got down to 18 because usually in a correction you might get down to you know 18 to 15 in the forward PE. So, we got down to 18. Uh, in a bare market, you would expect to see something in the very low teens. Uh, maybe even 10 or maybe even lower than that. Uh, but uh, look, over the past three years, we've had the most widely anticipated recession that never happened. Uh, maybe it'll happen over the next few years, but I think we've had rolling recessions. I think the resilience of the economy has been well demonstrated, and I think the economy will remain resilient. If that's the case, I think these valuation multiples can hold up. Also, you know, we can drill down a little bit and see that the forward PE of the Magnificent 7 uh is over 30, whereas the uh forward PE of what I now call the impressive 493. Um I I think uh that's running around 19, which isn't cheap. uh but uh it's uh I think it's relatively uh sustainable uh as long as the economy continues to to grow and uh you know we just had this uh tariff stress test and we seem to be passing it uh pretty well. This is this is kind of important for me because if I'm talking about the roaring 2020s I always get push back well that didn't the 1920s didn't end well if that's the an analogy you're making. And it's true uh we had the smooth hallet tariff in June of 1930 and that's when the great crash really started. That's when the depression really really started. And here we just had uh as everybody's noted some pretty significant tariffs that's either been imposed or still being discussed. And yet we haven't had major uh retaliation. We haven't really had any significant trade wars. And all in all, it, you know, at least in our economy, we're not seeing it having much impact on either growth or inflation. Yeah. And I think it's safe to assume the world was a totally different place back then versus Absolutely. Completely different. So the other thing you mentioned the tech bubble, so I got to talk touch on this, but back in the late 1990s, we just had one massive bubble and that was technology. But in the last five years, one of the things that just astounds me is it's just like bubble after bubble after bubble. Like we had initial coin offerings, ICOs. Did you remember those things? And then then we had NFTTS. Remember that? That was just insanity. Metaverse. And then cryptocurrencies. Now we have sports betting. We have zero data options. It's just like all these levels of speculation just keep increasing. Uh any thoughts on that? Is that a concern? Yeah, I mean that's that's why I've uh been opposing uh Fed rate cuts here because uh you know why why are they cutting rates that remind me again the unemployment rate is 4.3%. That's basically full employment. So check that on the dual mandate goal of having maximum employment and the inflation rate isn't quite back down to 2%. It's running more like uh 3% but it had been heading heading down there I think. But for the tariffs, I think what tariffs did is they didn't increase inflation. They just caused it to stall at 3%. So it it hasn't gotten down to 2%. And meanwhile, stock market is at alltime high. Gold's at all time record high. Bitcoin is at all-time record high. So financial conditions seems to be pretty el. So what's the point of uh of lowering interest rates here, especially if uh well, the point obviously is to try to stimulate even more demand. And but as we just discussed, GDP looks pretty good. Um but the idea is to increase the demand for goods and services there thereby increasing the demand for labor. Uh but the labor market I think is is fine and I think most of the problems are on the supply side. I mean the the the population of foreignb born uh people has declined 1.5 million since March from March to April that's what it what it dropped. Uh and we had something similar in the drop in the in the labor force. Uh so that's had a big impact and obviously uh employers aren't going to be rushing to hire people who don't have documentation. Um and then state and local governments that had hired a lot of teachers and social workers to deal with the in influx of migrants over the past few years that that has come to to a a halt. uh it's very possible, very likely that uh companies are spending some significant bucks on assessing AI, not implementing it, just assessing whether it's really a tool that uh will help to augment the productivity of their current workforce. And while they're doing that, you say, let's let's just not uh run out and hire more people. Let's see if we we can do what we need to do with artificial intelligence. So that's sort of a showstopper in that regard. None of these things are are so-called problems that they're they're structural. They're they're nothing that the Fed can solve with lower interest rates, but if they're going to do it anyways, which they just did, that liquidity, that stimulus uh uh increases the risks of a of a meltup situation. I wouldn't want to see 7,700 by year end with a 25 multiple. Um and um as you said uh you can do kind of a checklist of of things that happen before as bubbles are inflating and before they burst and uh you know right now we've got uh the AI reality and hype and u this whole Oracle deal is kind of a funny deal. Uh I mean the Mar went up on this huge order from Open AI which as I as far as I know has no profits. Um, and uh, so it's it's kind of a, you know, kind of makes you wonder how how realistic some of these numbers actually are. Uh, and on top of all that, the financials now in the sweet spot where a very strong bull market has opened up the market for IPOs and more M&A, which then means that the financial companies, the investment banks are making more money, so they go up, they take the market up. So, it's kind of like feeding on itself. Um, and uh, it's that's great until it's not. You're right. These numbers are just staggering. And you touched on Oracle. And in that one day alone, Larry Ellison saw his net worth go up by hundred billion dollars. Yeah. From a from a numbers company. Yeah. From a big order from a company that doesn't have any uh profits. Um, and there seems to be it's it's it's a funny deal. All right. So you touched on the Fed cutting rates and uh so let's dive into that a little bit deeper because you also mentioned the GDP is very strong 3% give or take. The Bureau of Labor Statistics recently came out with revised jobs for the year ending in March of 2025. It was down by 911,000 jobs. And so I'm assuming the weakness that we've seen in the jobs in the last few months, this is why the Fed thought they had to act. What are your thoughts on that? And are you concerned about these downward revisions that we continue to see in the jobs numbers? Yeah, I think there's also obviously been a tremendous amount of political pressure on the Fed. Uh they they'd like to they'd like to wake up in the morning and not get beat up by the by the president. Uh but um yeah, I think they did uh to to mostly respond. They they say they're data dependent and the data on pay perils has been pretty lousy and I think some of them also might have uh overreacted to initial unemployment claims which really jumped in the week right before the uh they voted on the 25 basis point cut and then wouldn't you know so that was uh so they voted on on Wednesday and then on Thursday uh we got the latest initial unemployment claims data and it was down sharply uh so you know clearly layoff offs remain extremely low. Uh on the other hand, maybe hirings are kind of uh slow for the reasons we discussed, but there's nothing that the lower interest rates are going to do to fix that. And then meanwhile, if most of the problems are are on the supply side of the labor labor market, not the demand side, then uh we're clearly seeing some pretty impressive growth in productivity, which is uh which is a wonderful thing. It's a fairy dust that it makes everything better. at uh every percentage point in GDP that uh you know I mean GDP is just the growth rate of the labor force plus the growth rate of productivity. So if the labor force growth is slowed dramatically to let's say 0.5% and we're growing 3% uh I mean that that that differential 2.5% is coming from productivity and uh so productivity is a great booster of economic growth. It's a lead keeps a lid on inflation because uh unit labor costs uh which is hourly compensation divided by productivity that's running around 1 and a half 2%. So that's helping to keep a lid on labor cost inflation. It's great for real wages uh hourly compensation adjusted for inflation goes up with productivity and it's great for corporate profits. So check check check check. I mean everything seems to be pointing towards productivity given us a really good economy and in that situation uh interest rates should be higher. I mean they should be where they are now. They shouldn't go any lower. Uh I think the so-called neutral rate is more like four to 4% than 3%. The Fed officials think it's 3%. But I look at it empirically. I say wait a second we're at full employment. Uh inflation's come down a lot. This is dual mandate nirvana. Why why do you want to screw it up by by easing and then possibly creating financial instability. So you rais a very interesting point and you did allude to the fact that they the cut that we just saw recently was because they were being pressured by the president. The last time we cut was in December of 2024 and in Q4, I believe it was 100 basis points, but and there was a lot of discussion then that they were doing it for political reasons, right? They were trying to help the Democrats. So I guess my question to you is do you think the Fed is becoming political or too political and in doing so they're losing credibility? Well, I think they definitely should not have done what they did last year. And I think from a fundamental perspective, it was a mistake. And I argued that it should have been none and done. Instead, they did listen to me and and they they cut by 100 basis points uh from September 18th through December 18th. First cut was 50 basis points like there was some sort of big deal emergency. And then they cut it again. And the economic data actually looked uh perfectly fine. uh and I think uh it's uh arguable that politics uh had had a had a had a consideration in their decision-making, but forget polit I I try to be apolitical. I mean to to me uh whether you're a Democrat or Republican, you want to be an investor no matter who's in the White House. Uh and don't let politics get get in get in the way. But uh the reality is that um the um bond yield rose 100 basis points offsetting more than offsetting I think the 100 basis point cut in short-term rates because a lot of borrowing goes on in the longer term end of the market not not on a you know one day overnight basis which is what the federal funds rate is all about. I mean, the whole thing of a neutral rate is it makes no sense to me. Uh, you know, it's a it's it's a nutty concept, but uh, hey, that's my opinion, and the Fed doesn't agree with it. They they they they actually believe in the long run the Fed funds rate should be 3%. And they they have no idea. They're making that up. I mean, uh, not about a year ago, they thought it was two and a half percent. They don't know. There's no way to measure it. And it's a kakami, uh, concept, but it is what it is. And I have to acknowledge the fact that that's they think it's a legitimate concept. But I think they're wrong. I think uh you know 4% is four four and a half% is the right fed funds rate. I think uh a bond yield of four and a quarter to 4 and a.5% is the the right bond yield. And they can't really control the the bond market anymore. They're not doing this crazy quantitative easing anymore. And so the bond market the bond vigilantes I I dubbed them that back in 1983. The bond vigilantes have uh have a say. They have a vote. And as we just saw, the Fed cut by another 25 basis points. And so far, the bond yields gone up by about 10 to 15 basis points. So already we're getting an adverse vote reaction from the bond vigilantes. And so, okay, now that you're talking about the 10-year, um, what what are your thoughts on the 10-year? because there was I believe it was earlier this year we saw the 10-year approach 5% and there was a lot of concern it was going to go over 5% but we were closer to 4%. What are your thoughts and what's that telling us? Yeah, I think we got up to the four and 3/4% which was a little spooky because we had seen in 2023 sort of the outlines of a of a debt crisis where the bond yield August was at 4% and by the end of October it got up to 5% and uh that was a little bit unnerving because suddenly people were talking about well the next stop is 6% and we're in a debt crisis and Ray Dallio was going around looking pretty depressed and talking depressed that we might be, you know, that in an we might get to a debt crisis imminently. Uh and um we saw some um uh we saw Aman short the bond made a lot of money on that. But then on November 1st, uh Treasury Secretary Janet Yalen came in on November 1st and basically told the bond vigilant, "Okay, I get it. uh you're you push the bond yield up to 5%. You're worried about too much debt, particularly bonds. Tell you what, I won't uh increase the issuance of of bonds. Whatever extra money I need, I'll get in the bill market. And that actually helps to bring the bond deal down pretty significantly. And so that's kind of uh disciplining the bond vigilantes because the bond vigilantes may want to push the bond deal up to five 6% to get the attention of the politicians to finally fix this uh awful fiscal excess that we have this this debt problem that we have. Uh and um uh on the other hand they recognize that the Treasury still has the power to just finance more of it in the bill market. As a matter of fact, Treasury Secretary Bessant was a big proponent of the Genius Act, which uh basically legitimize stable coins and stable coins have to be backed by Treasury bills, which creates another demand for for treasury bills. Interesting. And do you think this is why the administration is so positive on cryptocurrencies and stable coins? I think that's uh that's one of the explanations for sure. I think they somehow got it in their mind that uh stable coin uh would allow us to re re somehow refinance uh this debt or at least create a huge demand uh for treasury bills basing up stable coins so that uh they could in fact finance more and more of the debt uh through treasury bills. Uh yeah, so I I think that was a a big consideration of uh of this administration. But, you know, I don't think there's any uh ma magic ways out of the the the debt problem we've we've created other than uh getting both sides of the aisle to come to re realize just how terrible the the debt situation is uh and how dangerous it is and to come to terms on slowing the pace of outlays and increasing the pace of uh of of revenues. But politicians uh would always prefer to have a deficit because uh no nobody no constituency is going to get upset with them other than the bond vigilantes. And if the Fed can deal with the bond vigilantes, if the Treasury can deal with it, then we're not going to fix the problem anytime soon. And um you know, we've got some uh cautious tales out there. We've got uh what's going on in France uh their bond yields have soared on a potential debt crisis. Same thing in the United Kingdom and Japan. So they're actually countries right now where the bond vigilantes are work working their uh their uh power to uh try to get the politicians to do something about the uh fiscal excesses. And Ed, just as a basis of comparison, where are the yields in France, the UK, and Japan? Well, uh I think the important thing to know is that the the French bond deal is right around where the Italian bond deal is. Uh the the Greek bond deal has come down dramatically. uh the German bond yields have gone up even though you know that country doesn't really have a a major inflation problem or a deficit debt problem but they could have a debt problem because uh they've agreed to uh run bigger deficits in order to finance defense uh and their economy is slowing so it won't be too long before they start coming up with stimulus programs. So I want to pick your brain a little bit more on inflation. you brought this up earlier, but it's uh I'm sure you would agree with me. It's surprisingly how resilient inflation is. And uh I'm based in Toronto and I was recently in London and I can't believe how much prices have gone up in London in the past year. A c a cup of coffee like Americano, I would pay three bucks in Toronto. Over there it would be $6. And there was just so many other things. I took a black cab uh downtown. It was 100 pound which is $200 Canadian dollars. The price of gas, Ed, okay, you think we we're paying a lot of money here. The price is gas would probably be close to $7 a gallon US. Okay. And uh what are you paying by the way in Long Island for gas? We're we're okay. Yeah, we're paying about three three and a quarter for regular gas. Yeah. Yeah. If we if I do the FX Sarah in Toronto, I'm probably paying around 375, which is not too bad compared to London. But uh when you look at inflation, like man, I just can't get over the prices. They are not coming down. And does this concern you? You you made mention of the fact that you don't understand why the Fed's cutting rates because inflation is not going away. It's being very resilient. What are your thoughts? Well, there's there's the price level and then there's the uh percent change in that price level over one month, over one year, whatever period. Usually we we tend to look at it on a one-year basis. And it sure looks like uh coincident with the tariffs, inflation stopped coming down and kind of stalled at 3% whereas the Fed still is is talking about 2% as their uh their target. The fact that they cut by a quarter points has raised some questions about whether in effect they are now targeting 3% or they're learning to live with 3%. and they'll they'll talk a game a good game about 2% but you know they're they're more concerned about the labor market than they are concerned about inflation at uh at three 3%. Uh the price level is not going to come down and the reason for that is because uh while we all know how much prices have gone up since the pandemic uh I think we have to recognize that uh our wages and salaries have gone up by at least as much. Uh so in other words, the labor market uh did respond to the higher price level. Uh it's just we're still in shock because we we see the the prices uh every day. And yet the reality is we're also making more in nominal terms. But then, you know, people like to see their standard of living increase. They like to see wages increasing faster than prices. So a lot of people aren't saying that. uh they're saying that at at best their wages have kept up with uh with prices. So, we're not going to get a situation where prices come down. That would take actually a pretty nasty recession uh in order to to do that. Um there are some areas where we may have some deflation like in the auto market, but more overseas than here because we don't import any Chinese cars, but the Chinese have are building way too many cars for the for their economy. So they're dumping them in global markets and um you know you can get a beautiful car for about 20 grand is on a comparable basis would cost here 40 grand. Uh so um it's it's a very very mixed up picture to to say the least. But uh the reality is central banks first and foremost should be responsible for financial stability. Second goal should be uh infl keeping inflation down and third goal should be doing what you can to help on the labor market side. If you can't make all those consistent you really have to focus on financial stability and infl in inflate and price stability. Uh the unemployment rate if you if if the monetary authorities can't help there's always fiscal fiscal policies that could certainly help. So, I was reading one of your notes and I just want to read from it for the benefit of our of our viewers and I'm going to quote right now. More often than not, in the past, monetary easing cycles started with the previous tightening of monetary policy triggered a financial crisis that quickly turned into an economywide credit crunch and a recession. Right? Easing at such times is clearly warranted. But the Fed cut the Fed funds rate by 100 basis points at the end of last year and there was no credit crunch and no recession when they did so. That makes another round of rate cuts in this cycle more likely to cause inflation to remain above the Fed's target while fueling speculative fires in the stock market. End of quote. But it sounds like you're you mentioned this, but you're concerned about inflation heating up again. Where does it go? Like do we go to 4%? Do we go to 5%? Well, it uh for now I think it just kind of sticks at stays at 3%. Um we um you know one of the areas where we clearly can see the tariffs that had an impact on inflation is in the durable goods component of the CPI and the consumption deflator kind of just alternative measures of the same thing which is consumer price inflation and the dur durable goods in the past before the pandemic those prices kind of consistently fell uh because of cheaper import of uh goods of durables uh or because of uh more productivity in the manufacturing of durables. Uh and sure enough after we had that spike in 2022 2023 which is largely a supply disruption uh spike once that all kind of cleared up durable goods were falling again until this year where they suddenly are rising and again that's got to be because of the of the tariffs. So instead of having like a negative 1 or 2% on durable goods, we have something closer to 1% plus 1%. And the other thing is the services inflation rates are still running higher than they were prior to the pandemic. Uh so they're they're still relatively hot. So um I think the problem with 3% is it uh continues to erode the Fed's credibility uh if they continue to lower rates or with the benefit of hindsight if they don't. it would just say that well that was a it was a mistake the whole ring by 25 basis points which isn't uh much but that follows a 100 basis points at the end of last year. So I want to bring up gold now because this is something else you've been bullish on. I believe you got long around the $2,000 level. Y we're at 3600 3700 not too far away from 4,000. Uh are you still bullish on gold and do you have a target price on it? Yeah, I I I got bullish when it crossed 2,000. Uh when I crossed 3,000, I I I put a target of 4,000. It crossed 3,000 at the be beginning of the year. I said I think we get to 4,000 by the end of the year, which looked like a stretch, but here we are at 3,700. So not not such a stretch. Uh, and then if we get to 4,000 by the end of the year, which is my target, I think we can get to 5,000 by the end of um of next year. Uh, I mean, I I could see a scenario where it could get to 10,000 uh by 2029, which just happens to also be my target for the S&P 500. 10,000 on the S&P 500. Uh, but uh I I I'm gonna do this a thousand points at a time. Uh, let's see if we can get to 4,000. And then I I think I'll I'll I'll feel pretty good that we could get to 5,000 and then we can talk about it some more in in in future discussions. And what's the scenario that would take it there? Like what's driving it? Well, uh several factors. uh the uh there's sort of a central bank uh put going on where the central banks of uh countries that don't like us, we don't get along with them like uh for example, China and uh uh Iran, Venezuela, um North Korea, there's a few of them so-called axis axis of evil uh from our perspective anyways. uh they just uh you know they they don't like democracies and they tend to be autocracies and when Russia invaded Ukraine and the United States froze the assets uh the reserves uh international reserves of uh Russia uh those uh uh central banks started to realize that the last thing they want to do is have dollars that can be frozen if the United States doesn't agree with their policies. So they've been accumulating gold. Uh meanwhile, Chinese uh individual investors got uh really uh wiped out in the uh apartment uh real estate market there. They bought all these apartments in Ghost Cities and um they can't even rent them out. There's just there's no demand for these things and they can't sell them. So, they got really hurt uh in real estate. They didn't do too well in the stock market because of the volatility there. So, they've been buying gold. uh Indians have a long history of uh liking gold for jewelry and for uh uh asset uh as an asset class. Uh so there's uh there's a lot of that. There's also I don't know just uh I think the market the gold market is focusing more on geopolitical risks than it ever has before. And you know, it's unnerving. Not only you see that the Russia Russia's invasion of the Ukraine, that that war is still on. Uh but now all of a sudden uh the the Russians are playing chicken with drones over uh Poland. I think there was another Eastern European country that complained today about an overflight of jets by the Russians. uh you know uh you know Putin is nuts and uh it's and so you need something to to hedge against that uh insanity that's coming out of Russian uh foreign policy and then um there's always the unsettled conditions in in China, the Middle East. uh so the geopolitics remain bullish but I think at the end of the day people feel more comfortable in gold because they have a sense that there is a put that's uh that that's attributable to some of these central banks that that clearly are buying gold. Yeah, you can never own enough gold. Well, there have been there have been periods of time where it didn't do much, but in the grand scheme of things, in a in a lifetime situation or in in the long run, gold uh works works pretty well. You know, people people have been saying that Bitcoin is the uh the digital gold uh and uh maybe gold is the uh physical Bitcoin. Yeah. And I think they keer to two different investor groups like you mentioned, central banks. they've been buying approximate approximately 25% of all gold production here in the last three years. Yeah. So that's you know uh of course and then the people that trade bitcoin or other cryptocurrencies they're are totally different individuals. So yeah, I think also um gold has a long reputation of being a way to hedge against fiat currencies uh and governments that issue currencies um and to the extent that uh people don't trust governments don't trust the the the relationship of governments with one another geopolitics uh gold gold looks pretty good in that context and we can't have a discussion on gold without talking about the dollar The US dollar has been under pressure here in the past year. I believe it's down 10% against the DXY. Yeah. Um what are your thoughts on the USD? Does it continue to go lower? I think it's important for everybody to recognize that the DXY is a fixed weight index of uh the the the big reserve currencies and the euro has a weight of 52%. So you it's basically the dollar euro relationship to that drives the the DXY. And for the life of me, I don't know what all the excitement is about uh the euro. Uh you know, the French economy and politics is a mess. Uh the the German economy is getting hollowed out by by Chinese competitors. Uh the the Russians are going to force Europe to spend a lot more on defense and increase uh their their deficits. Uh but maybe it's as simple that uh as simple as uh global investors are looking for a cheap way to catch up with the bull market and stocks that has been led by the US and uh there's been a lot of buying of European stocks. European stocks have done extremely well notwithstanding uh some of the issues that I have with the the European uh economic situation and outlook. Uh but um meanwhile there's monthly data that just came out through July uh that the Treasury compiles on net capital inflows and you look at the dollar and you think my god foreigners must be just bailing out of dollar securities and jumping into European ones and that's not the case at all. As a matter of fact, we had through through July, we've had almost record buying of US equities by foreigners uh net net purchases of around $600 billion and almost a trillion dollars in uh fixed income securities. So, uh I I am not bearish on the dollar. Um my contrary instincts are out because everybody hates the dollar or or they're bearish on the dollar and uh I'm not. I think um you know uh as uh some of these issues pop up with the bond yields going up in the UK, France, Japan uh with uh instability that we have in some emerging economies in Dunia recently had had some some issues in Southeast Asia. we have sort of uh the Gen Xers uh staging uh uh protests against the older folks running their governments. Uh China's got a lot of issues. Put that all together and I think the US still is the safe haven both in terms of our capital markets which are bigger than everybody else's and in terms of uh safe safety safe haven rule of law. And just because we're talking about foreign governments or other countries, uh any thoughts on Canada? I'm based in Toronto, so I'm curious to hear if you have any thoughts. Well, uh from a stock market perspective, uh Canada has been a um you know, does well when commodity prices are uh are surging and uh they aren't. Commodity prices uh they're not really taking a dive, but they're they're certainly not going up. Um uh Canada's uh financial sector has uh has traditionally been a big one and has uh done very well. It's relatively well uh regulated. So the the financials are are doing uh quite quite well. Uh real estate uh you know there's been too much building there. But I don't know that that you know is going to have any immediate impact on the the stock market in in Canada. And um you know I think um the investors have kind of you know shrugging their shoulders and learning to live with this uh tariff war or uncertainty that's occurring between the United States and Canada. I mean, you know, the president of the United States could wake up one morning and uh you know, raise the tariffs or or lower them and say everything is okay now. Um, so I think as long as uh the Canada and the United States has continued to talk on trade, um, I think that's a good thing and u, we'll probably end with it with some sort of deals that u kind of conform or bring in a lot of the items that weren't in the U 2000, you know, what what Trump negotiated in his first term, bring him into that uh into that tariff deal. So um you know Canadian economies uh like the US economy has has labor market issues but u all in all um I u I I I think that at least for the stock market perspective things look okay. Yeah, the stock market is doing well, but the uncertainty associated with the economy and the trade wars and tariffs, etc., it's really having a a toll on the economy. Believe it or not, at our unemployment rate across the country is at 7%. In the province of Ontario, where I reside, it's at 8%. In the city of Toronto, it's 10%. Oh, I got to throw one more stat at you, Ed. Youth unemployment, which is 15 to 24, it's at 14%. So, this country has serious troubles. Well, Ed, that was a great discussion and I want to thank you for being with us today. Uh, I just want to summarize a few of your key points. So, one, you're still bullish on the S&P. Your target is uh 7,000 easy. And then at the end of 2026, I believe you said 7,700. Yep. Uh you're still bullish on the economy. No concerns. Uh you're bullish on gold. You think it goes? What's your target for 2026? 5,000. 5,000. Yeah. So, for the most part, you're pretty positive or pretty bullish, but do you have any concerns? Is there anything that keeps you up at night? Is there anything that might change your whole analysis? Well, um, look, um, I've staked out a pretty, uh, bullish outlook for this decade. And now, not only am I talking about the roaring 2020s, I'm also talking about the roaring 2030s. Um, I I've uh the way things are going with the Fed, I've actually been more concerned about a meltup uh situation like 1999 2000, but it it could be like 1999 2000. Um, but it doesn't necessarily have to lead lead to a recession. It could be a correction. It could be a short bare market. Um, I I would probably view that as a as a as a buying opportunity because uh the kind of the future is here. I mean, we didn't talk about what's going on in technology land, but uh I I think uh AI is an evolutionary development in uh the digital revolution. Uh which means we've been able to process more data uh more cheaply uh more quickly than ever before. And as we do that, it feeds on itself because it means we can process even more data. Uh and so it creates a lot of demand for uh data centers and software and and hardware. Uh and so I think that the technology revolution like the a revolution, like the industrial revolution, the digital revolution is a major driver of our economy. And so it's a structural it's a structurally bullish underlying uh trend. So, I'm more concerned about kind of short-term uh uh divergencies from from that trend and that could be speculative a speculative bubble that that bursts. But uh look, we we saw at um you know, at the beginning of of this year that we had a significant decline in the uh in the stock market. Uh we've we have had the meme phenomenon blow up before. We've had the spec phenomenon blow up before. uh and yet that didn't cause a uh a credit crunch and it didn't cause a recession. It would really take a recession uh to uh to occur to uh create a significant bare market and as I said I've uh been observing the economy and uh been impressed by how resilient it is. You mentioned how earnings have been phenomenally strong. you know, American companies from my perspective have done a phenomenal job of uh mana managing their their companies under some uh tumultuous situations. I I'll leave you with this thought. What I've learned over the years uh is that u it's really extraordinary how well the US economy and stock market have done despite Washington. I think that's an important uh insight because too many of us kind of do it the other way around. We we see what Washington is doing and we shake our heads and said this can't be good. And uh meanwhile there's the there's all the rest of us, a few hundred million uh working stiffs that uh aren't doing the best we can given what gets thrown at us. and uh put it all together, economy is doing great, earnings are doing great, stock market's doing great, and I always like to finish on a positive note and I think that is a very positive note, worth mentioning. And uh to your point, one of the reasons why the market has done so well in the last 100 years, regardless of what political party is in power in the US and also in Canada, it has to do with the men and the women that go to work every day and bust their humps to put food on the table and pay for the rent. Yes, that I think it's that straightforward. Uh, by the way, if anybody wants to uh get give a try of our research, they can go on uh yordeni.com to see the what we do for institutions and for individuals. And for individuals uh two years ago, we created a product called yardeniquict.com uh which is a short daily uh insight into the relationship between the macroeconomy and the stock market, bond market, gold and all of that. Yes. Yes. And I will have a link below in the show notes and I would also encourage our viewers to check you out on LinkedIn. You're also quite active there and you also have your own YouTube channel. Correct. Well, Ed, once again, this has been a very informative discussion and I want to thank you for making time for us today. Thank you. Thank you very much. [Music]