Jim Welsh on Higher Energy Prices, Higher Gold, and Higher Interest Rates

April 5, 2024 – In this episode of the Financial Sense Newshour, Jim Puplava and Macro Tide's Jim Welsh discuss the investment backdrop for investors today when it comes to the large amount of spending by the US government and what this likely means for future returns in stocks, bonds, gold, energy, and many other parts of the market.

For related charts and data mentioned in today's interview, see Jim Welsh April Macro Tides
Website: Macro Tides | Macro-Economics & Technical Analysis Expertise

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Jim Puplava:

Well, the markets did not like the news on Thursday hints that the Fed may not be cutting interest rates as well. As the war drums begin to escalate. What is this going to mean for the market? Inflation and fed rate cuts ahead? Let's find out.

Joining us on the program is Jim Welch from macro tides. Jim, I want to start out with a couple of things. We've been talking about fiscal dominance here on the show, and you are hitting some of the main areas where the government is spending money. Let's talk about Social Security and Medicare, often called the untouchables when it comes to politics. But we're headed for trouble by the year 2031 and 2034.

So let's begin with that in your piece from the latest macro tides.

Jim Welsh:

All right, Jim, always great to join you and want to offer your faithful listeners. If they send me an email, jimwelshmacro[at]gmail[dot]com, I will send them the April issue of Macro Tides, which dives into a lot of stuff in greater detail than you and I can talk about. All right. Yeah. The estimates right now of the trustees for both Medicare and Social Security gem have indicated that 2031, Medicare will run out of money.

2034, Social Security. Now what that will mean in the real world is this comes to pass in 2031, instead of paying 100 cents on the dollar for all the bills that people incur, Medicare will pay $0.89 for Social Security. It'll be a little bit more draconian because they'll cut back to like seventy seven cents of every dollar they're currently paying. And the point that I know you've probably made in the past is the sooner that Congress gets its act together and takes the steps necessary to bolster those two programs, those steps will be less draconian. They will be less of a shock, if you will, in terms of either raising taxes, cutting some benefits and so forth.

But unfortunately, we're in an environment where in Congress, both parties are more interested in trying to pick at the other party, tear the other party down, rather than doing what's best for the country. So none of this should be any news to people in Congress, Jim. And yet the reluctance to act and address this oncoming train sooner rather than waiting until it's at the doorstep to me is almost unconscionable.

Jim Puplava:

Yeah, because they could do some simple things like we had Social Security fixes and I think 84, 94, they move to greater taxation. But also, like for you and I as boomers, Jim, they moved full retirement age to age 67. So people are living longer they can do a few things like, let's say, moving full retirement age to 69, and there's some other issues that they can do to address that. But as you mentioned, we're in this divisive political atmosphere where it's basically attack the other side rather than work together. So this is leading to, I guess, maybe the next issue we ought to discuss, which is deficit spending.

I mean, Jim, we're adding almost $1 trillion of debt every 100 days. March 26, we just crossed 34.6 trillion. And as you mentioned in macro tides, it's not just that it's all that low hanging debt that the government issued at one 10th of a percent, half a percent. That stuff's rolling over now. And now I think, what are we up to?

Almost four and a half on the 30 year, over 4.3 in the ten year, rates are backing up. So let's talk about the deficit spending because it's clearly number one on an unsustainable path. And even if you look at the CBO, Jim, as you mentioned. It doesn't account for any recession occurring in the next ten years.

Jim Welsh:

Yeah, that's kind of the scary part, Jim. So, I mean, basically the numbers are that this year's deficit will be about 5.7% of GDP and the CBO, and the CBO is the congressional budget office, nonpartisan. So they're not one party or the other. Their job is to crunch numbers. And as they point out, a deficit as large as we're seeing, 5.7% this year has only occurred during, if you will, financial crises like the pandemic in 2020, the financial crisis in 2008, or very deep bad recessions like 1982.

So what the difference is, obviously, is the economy over the last year has been growing 3.1%. So as they say, that has never happened where you have a deficit as large as we have during a time of economic growth and expansion. The other thing that they came up with, Jim, is that the tax rates and tax revenue is actually going to go up between now and 2034 to about an average. I think it was 17.8 versus 17.2, which was the 50 year average. Spending, on the other hand, is going to be like 23.5% of GDP versus the 50 year average of 21%.

So to your point, in 2000, the outstanding debt was about 6 trillion. It's now over 34 trillion. And the CBO estimates that by 19, or, pardon me, 2034, we will have 48 trillion of outstanding debt. And with interest rates having gone up and the government is in a situation, Jim, where about each year they're, in a sense, refunding about $10 trillion of the debt. In other words, almost one third of the debt gets recycled when a bond comes due.

They get the proceeds, and then they have to issue new debt to roll that over, plus up to 2 trillion or more in terms of funding that current year's deficit. So you have a tsunami of supply as far as the eye can see. And the risk is, and I think it's a real risk, that at some point in time the credit markets will balk. In other words, you want to sell that paper at 4.5%. Well, that's not enough of a yield to get me to step up to the plate and buy.

And I think the longer term risk is that treasury yields have the potential of rising in coming years, which only then compounds the problem with interest expense, which this year I believe is going to exceed $1 trillion. So as interest expense continues to climb, and I think the CBO estimates that by 2034 it could be up to 1.7 trillion a year, the spending for other programs like Medicare or Social Security start to get squeezed. So we are on an unsustainable path. People have known this, and here we are in election year, and we can be pretty sure that there won't be much debate, serious discussion about what should be done. And the answers are really very simple.

Given the numbers, you have to cut back on spending or slow the growth rate of spending. Instead of programs growing at three and four or 5% a year, you have to scale that back. And obviously tax increases. But neither party wants to do that. The Democrats like to spend and the Republicans like tax cuts.

So we're in this position, and just like the Social Security and Medicare, Jim, I think that the problem is they won't act until things are out of control. And it doesn't have to be that way. But I think for most investors, and I think you do a great job of informing people, Jim, that this is a real risk that is bearing down on our country. And at some point in time, even if we deal with some of these problems, it's likely to be difficult in terms of it will have some negative impact for economic growth, which the stock market probably won't like in the short run. As we go through that process, I think investors just have to be aware that these problems are coming and we're not that far away now.

So if you're in your fifties and you're betting on the market just to continue to go up, I think you're going to face some difficult times because to deal with these problems, there's no easy solutions at this point. I think that's the bottom line. So I think you're 100% right in discussing this, Jim, people need to really be aware of it because it's going to have, I think, a big impact on their investment portfolios. Trey.

Jim Puplava:

And speaking of investment portfolios, let's talk about the implications of all this debt, which is inflation, and what's happened to the bond market, because, Jim, I'm looking at a graph of TLT, and this is the third consecutive year it's been down. And normally investors have used the 60 40 split, 60% in stocks, 40% in bonds. So if the stock market went down well, interest rates would rally in your bond market, would offset some of the losses in stocks. That isn’t working.

Jim Welsh:

No, it isn’t. And as I’ve discussed, and you and I have talked about this as well, if you look at the bond market over decades, what you see is that it goes through big periods of time where long periods of time where its rising prices are rising in long periods of time where it's falling. So from 1945 to 1981, the yield on the two year went from 2% to 15 and a half. From 1981 to 2020, it went from 15 and a half down to 50 basis points. So there's swings that took 35 years, 39 years, and the action in the bond market in 2022 and 2023, Jim, the trend line from 1981 that was religiously held, if you will, every decline in the 30 year treasury bond held above this rising trend line was broken decisively in 2022.

And what that implies to me is that longer term treasury yields have begun a new secular bear market. So longer term that obviously, if comes to pass, will create even more problems for the treasury, interest expense for the government, and it will continue to add to the deficit. So to your point, for almost four decades, people could have government bonds in their portfolio, and over time they appreciate it in value. I think we may have just entered a window of time where over the next 510 20 years, on balance, bond prices will go down as treasury yields go up, which has big implication, obviously, for the equity market, since stock prices are frequently valued relative to the ten year treasury yield. So the higher that goes, it demands a lower price earnings ratio for earnings of companies, and the lower price earning ratio means lower stock prices.

Jim Puplava:

And let's talk about what happened on the day you and I are speaking, which is a Thursday. You had a Fed governor coming out. Hey, given what we see right now, we may not cut interest rates, which is almost an opposite message from what Powell was implying two weeks ago. Well, we could see maybe by summer we could start cutting rates. So now we've got a backup in the ten.

We got a backup in the 30. And more importantly, Jim, and a topic I want to get to next, is inflation in oil, because now we have, on the day you and I are speaking, we've got WTI over $85 a barrel, and we all know that oil ripples through the economy because that's how we get our goods to the store. They're delivered there by a truck, which probably is using gasoline.

Jim Welsh:

And when we go to the store to get our food for the dinner table, we're using gasoline as well. And as we know, gas prices are up, I don't know, what, 30, $0.40 in the last month or so. No. The April Macro Tides that I offered to listeners of your show, Jim, I go into great detail looking at inflation, looking at energy prices, and the bottom line is the March consumer price index will come out on April 10, next Wednesday, and in February it was 3.2%. I am pretty confident that it's likely to jump to 3.4, possibly 3.5%, for a number of reasons that I explained in that letter.

That's going to be a little bit of a shock, I think, to the financial markets, because chair Powell did quantify some things, Jim. He did say, well, we're data dependent and we're going to need the data to kind of come in as we expect. But he also made an interesting comment that I didn't hear anybody else talk about. That is, he said, the last six months of this year, it's going to be tougher for inflation to come down because of the low values in the second half of 2023. So very quickly, all the inflation statistics, when they're the CPI, well, it went up 3.2% the last year.

Basically, it's a twelve month rate of change. So if you look at the numbers that are coming off from July to December on the PCE, it's like 15 basis points. Well, in the first half of this year was 35 basis points. So the point being is if the PCE numbers from July to December come in at 2.25, the annual change in the PCE, which is the Fed's favorite or more preferred inflation metric, could increase three tenths to five tenths of a percent in the second half of this year. So the point being is, Paula said, confident we're going to get inflation down.

We're data dependent. And I think the odds are that this March CPI, when it comes out next Wednesday and in the last half of this year, it's going to be really tough for inflation to make the kind of progress the Fed is going to need to cut rates. And this is what I've been writing about the last couple of weeks. So I'm not surprised that Kashkari came out and said, you know, we may not have to, you know, we may not be able to cut it all. And, you know, to me that is what the market has been ignoring is the reality that we may not get three cuts.

I'm in the, we might get one cut. And so, yeah, Kashkari's comments today was a wake up call. And technically, very quickly, the s and P, the Dow, all the major averages traded higher than the last two days in a day and then declined below the lows of the last two days and of course closed down. From a technical standpoint, that is a key reversal. And given where we're at, it normally would be, I think, a fairly negative reversal in terms of what we're likely to see in coming weeks for the market.

So I think the markets are finally set up for a decent sized pullback as we see that the inflation data isn't going to give the Fed the confidence it needs to come cut rates.

Jim Puplava:

And one of the things last year we saw inflation come down. But a big factor playing in the inflation rates dropping was the price of oil. Now we're going in the opposite direction and we're, like I said and day you and I are speaking, it's over 85 now. The Biden administration and other countries were able to bring oil prices down by releasing oil from the strategic petroleum reserves. I think we've used up.

We're now down to where we were in the 1980s. Biden just said it's too expensive to replace the oil. So I don't know if they would be that reckless if it came to election time to drain a good balance of what we have left just to get us through the election, because oil translates itself through everything we do in the economy and that I see as being difficult for. On the inflation rate for it coming down.

Jim Welsh:

Yep. No, I think you're 100% right. Gasoline prices, as I noted, have been jumping. And so when the CPI for March comes out, that is going to be one of the factors that gives the March CPI a boost, is the increase we've seen in crude oil gasoline prices as well. So I think people are going to be kind of rudely shocked.

The other thing I'll note is in the last week, President Biden has kind of chastised and asked Ukraine, who is in a war with Russia, to stop hitting refineries and other oil assets because it's causing oil prices to rise. So I wouldn't be surprised if he's willing to ask someone who's in a war and a battle, well, stop doing things that'll help you win. I wouldn't be surprised if, depending on where obviously gasoline prices are, Jim, come this summer, that they don't release more oil from the SPR because consumers, in terms of inflation, that's one of the pressure points for most consumers. You fill up your gas tank once or twice a week and you notice what's happening with energy prices. So you're 100% right.

The decline last year in energy prices pulled the CPI down. And what we're seeing is just the opposite. So far this year, the increase in crude oil and gasoline prices is going to add to inflation.

Jim Puplava:

Staying on the topic of inflation, front page of the Wall Street Journal on Thursday talked about how $100 goes in a grocery store. And Jim, they've got things like sport. Drinks are up 80% last three years. Sugar, 53. Dish soap, 46.

Eggs up 54%. 30, 40, 50, 80% over three years. So the Fed, in its favorite inflation gauge, ignores what the average person experiences every single day, which is the price of gasoline, the price of food at the stores. And I don't know about you, but every time I go, I'm not seeing prices drop at the grocery store.

Jim Welsh:

No, I think we must be shopping in the same store, Jim. No, you're 100% right. And that's why I think the administration is disappointed, because, well, look, we've gotten inflation down, but the reality is for people who are living, in a sense, paycheck to paycheck, the increase in the cost of living over the last three years has outpaced whatever their wage increases were. So if you got a pay increase the last three years, that was 15% to 20%, but you're spending 30, 40, 50% more on things like rent relative to that 20% and various food items from that perspective, like, hey, I think I'm making ground, but I can't catch up because things are costing. One of the things I went through in the April macro ties gym was looking at the charts of corn, wheat and soybeans, all of which declined significantly all during last year, another aspect of bringing headline inflation down.

And I looked at multi year charts of both corn, wheat, which look like they're coming down to multi year levels of support, which from my vantage point suggests we're going to see corn and wheat prices rally over the next six to twelve months. And I think soybeans will follow in later this year. So to your point, it's already expensive going to the grocery store. If we see a rally in grains prices, it's only going to add to inflation, food inflation, between now and early next year.

Jim Puplava:

One of the charts that you've, I've seen it a couple of times in macro tides, but I think it really illustrates the cycle. Lauren, and this is your 17 year cycle. But if I take a look at Jim going back to 1968, to 1982, you took a look at we had shorter bull markets, longer bear markets and shorter cycles on the uptrend. We didn’t have what we did in the last decade where the stock market went up for ten years. If it went up, it was maybe a couple of years.

What did we have? We had rising oil prices, we had rising inflation, we had problems with the Fed, and then we also had problems with the dollar. And then also it was a period of war and conflict, the 74 war, 79, the overthrow of the shah. And look what we just pick up your papers every day and read the headlines. It sounds eerily familiar.

Jim Welsh:

It does. And again, the idea of a secular bear market means that for a period of ten to 15 years, the stock market doesn't keep going up. In fact, it goes sideways to potentially down over that period of time. So in 1966, the Dow hit 1000. 1982 it was under 800.

So it was a lost 16 years for most people. And a lot of parallels are showing up in terms of global conflicts, energy, and as I said, we've got some serious problems that we have kind of ignored for decades in terms of Social Security, Medicare, and there's a host of other ones. And as those problems are dealt with, just like the problems from 1966 to 1982, you know, the solutions or the fallout from those problems wasn't a positive for the equity market. So I think we're very close, Jim, and we've talked about this previously, and I have a piece called the coming secular bear market that kind of goes in much more detail as to the reasons why. But I think we're close to a window of time where we'll see the stock market peak.

My guess is sometime this year, in 2024, and we'll be entering a window of time that'll last ten to 15 years, where the stock market really struggles. And most investors are just not prepared, nor do they have the skills to deal with it. And I think that's where what you're doing and what you discuss and the information you provide I think will be indispensable for a lot of people in coming years because you've been around a block more than a couple times, and that's really what's needed to deal with the kind of window of time that I think we're on the cusp of.

Jim Puplava:

I want to talk about something that is almost an anomaly, and I want to talk about the price of gold in interest rates in the dollar. Typically, when you've seen interest rates rise because gold doesn't pay any interest or dividends, gold declines. Or if you see interest rates rise and the dollar rise, we've got interest rates rising, the dollar has been rising, but we also have gold setting new records. I'd like to get your take there.

Jim Welsh:

Well, as we've talked over the last handful of months, I've been bullish on gold. My expectation was that we would see gold trade up to 2300 sometime this year. I didn't expect it really to happen quite as quickly as it has. I think there's a little bit more near term on the table. My expectation, Jim, is there'll be a pullback.

Gold broke out of a sideways pattern, really going back to 2011 when it traded up to $1,970, I believe. So it finally broke out above 2100, which to me signals that a new longer term uptrend is taking hold. Frequently when markets break out of something, a long term ceiling, which gold has just done, that it will often pull back towards that ceiling, which in this case would be around $2,100. So my take is that I think gold hits a peak relatively soon and then has a pullback that takes it down towards $2,100. After that, my expectation is gold is going to ramp higher in the course of this year.

So longer term, I think the chart analysis of gold is very positive. And that's what I was basing it on more than anything, because it's ironic, when inflation went nuts, people think of gold as an inflation hedge. Inflation went nuts in 2022, and gold did nothing because the Fed was ramping up interest rates. But we're at the point in time where additional rate increases are really unlikely. And I think that prospect is what has helped golden finally break out above 2100.

So I would be a buyer. If I'm right about a pullback towards 2100 over the next month or two, I think that will provide a good entry point.

Jim Puplava:

Yeah, one of the things I would say, and you talk about it in your newsletter. We're entering a different cycle, as you shown that chart between 1968 and 1982, inflation, wars, higher interest rates, a declining dollar. And that, I don't think is a cycle. As you mentioned, investors are prepared for, you know where they're prepared for it. They're going into index funds, which worked well last year with the magnificent seven, but they also work in reverse.

Jim, as we saw in the year 2022, where a lot of the mag seven stocks were down 50 and 60%. I don't think investors are ready for that.

Jim Welsh:

No, they never are. I mean, again, when there's a stampede into a small number of stocks in the short term, they obviously can do quite well, but eventually they're over owned. And on March 8, Nvidia and a number of the other semiconductor stocks that have had great advances experienced a key reversal. And I pointed that out back right after it occurred. And those stocks are typically all down, I think, more than 10% from the high that was achieved on March 8, so much like we saw in the.com bubble when it burst.

Not that AI isn’t going to be a big deal and beneficial. Its just stock prices have a tendency of getting way ahead of what the future brings. And I think we may have talked about this. RCA in the 1920s went from like $10 to 500 on the anticipation. Oh, my God.

Not only radio, but they're going to have pictures, too. All right, so RCA then went from 590, I think, under $30 by 32. And it wasn't as if they didn't deliver the goods in terms of television. They did. But the stock price never, ever got anywhere near where it was in 1929, when the psychology about that new technology was so rampant.

So if history is a lesson, Jim, when there’s so much feverish interest in something, the odds are its overpriced in the near term and declines. As you pointed out in 2022, 30, 40, 50% in some of the stocks. I think well see the same thing happen. If I’m right about a peak in 2024 in the stock market, in a pullback of at least 20%, those stocks are going to get hit harder.

Jim Puplava:

Yeah. And they forget. I can think back in the heyday of the Internet, where Cisco had sales of 20 billion, had a market cap of 600 billion. They’ve never reached that again.

Jim Welsh:

No, no. And its a great company. Thats the thing that I think people don’t completely grasp is what the stock market is willing to value. Something at any given moment may or may not be related to the reality the opposite happens at a bear market low. In 1982, the average PE was under eight.

So that means if you made a dollar, your stock was selling at $8. By 2000, the average PE was north of 30, same company making a buck. Now the stock sells at $30. Psychology and the swings above and below true valuation are what really drives the market over time. And the key, I think, is being a contrarian when everyone else is bullish.

It's time to become cautious and challenge, if you will, the assumptions that are being cited by all those who are bullish. Conversely, last October, people were very negative. I looked at that and said, I think it's time for the market to rally. And it subsequently did. So those are the when you've been around for a while and you've seen a few of these cycles, it's a little bit easier to be detached and not caught up in the fervor. And I think that comes with being around markets and understanding how they really unwind.

Jim Puplava:

Okay, so if I was summing up, Jim, just taking your latest macro tides, number one, fiscal dominance, deficit spending is only going to get worse. That's going to put pressure on interest rates. Also, it were more likely to see higher inflation as we head into the second half, the interest rate cuts that Wall street is praying for daily may not take place as much as they want or if at all. And bonds have entered a long term secular bear market, which would imply to me if you do own bonds, you want to keep them short term so you don't get hurt and then roll them over as interest rates rise. And then your take on the stock market, at some point this year you think we're headed for a peak in that market and then back to a bear market. Would that be correct?

Jim Welsh:

Yeah, that sums it up pretty good. I mean, I think near term, five to 8% pullback. There's some technical things that have been really pretty healthy, which suggests that a decline greater than 10% isn't likely. So my guess here, Jim, is we get a pullback and then that next rally will be really informative in terms of how the market trades during that rally, how much strength it shows, the breadth in terms of the advanced decline line and so forth. But near terminal, I think we get a pullback.

Ultimately, yes. I think there's a 20% plus decline coming between this year and next year, and it could be more significant. Now, the one thing I will add, we didn't talk about it is I do think the economy is going to slow more as we get into the second half of this year than most people realize. And one of the foundations underpinning the market has been a rate cuts by the Fed. At the beginning of the year, you know, they were looking for six.

Now it's free. They may not get that. And that, I think in the near term is what could cause pressure to the downside on the stocks. But if I'm right in the economy slows, that will undermine the other issue where Wall street has been. We're not going to have a recession.

We don't have to worry about a recession. So if later this year we see the economy starting to slow more than Wall street expects, that I think would be the other reason why the market could have a larger decline as we get into next year of 20% or more.

Jim Puplava:

All right, well, listen, Jim, we're going to post your April macro tides on our website. So I'd encourage our listeners go to the website. We're going to make it available free so you can take a look at it as Jim goes into greater detail than what we've been able to do on the show today. But you get the gist of the main things that we're talking about that are going to affect you personally and your going forward. And Jim, once again, as we close, if they want to follow you, I know you have a Twitter handle and you have a website. Would you give that out, please?

Jim Welsh:

Yeah. Thanks. Macro Tides is the website. Jim Welsh macro is the twitter handle. And again, to get the April macro tides gem, people can send me an email, JimWelshmacro[at]gmail[dot]com, and I'll send them the April macro tides and then the, the piece you're going to post on your website.

There's a couple other things that I'm offering to people who are curious, the coming secular bear market and a piece regarding the 17 year cycle. So a lot of information available. I hope your listeners take advantage of it.

Jim Puplava:

Well, I always enjoy reading your newsletter, Jim. You put a lot of effort and a lot of wisdom into it. Thanks so much for joining us and hope to talk to you soon.

Jim Welsh:

Thanks so much. Stay well.

To speak with any of our advisors or wealth managers, feel free to Contact Us online or give us a call at (888) 486-3939.

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