Jim Welsh on DeepSeek Decline: Tech’s Turning Point or False Alarm?

January 31, 2025 – Curious how AI, rising rates, and political shifts are reshaping markets? Join Jim Welsh at Macro Tides and Financial Sense Newshour's Jim Puplava as they dive into the hit to big tech stocks this week, the ripple effects of China’s AI breakthroughs, and what we are seeing with new all-time highs in gold. Explore why real estate may face unexpected headwinds, how Treasury yields defy historical norms, and why a dollar peak could spark opportunity in emerging markets. From Trump-era economic constraints to mounting inflationary pressures, discover why investors might need to brace for a 10-15% market correction. Listen in to hear the full discussion!

Website: Macro Tides | Macro-Economics & Technical Analysis Expertise
Discussed in today's show: DeepSeek Deep Sixes Nvidia | Macro Tides
X: Jim Welsh (@JimWelshMacro) / X

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Transcript

Jim Puplava:

Well, there's a lot of questions on where the market's going to be going this year. Everybody is still optimistic, with most of Wall Street analysts predicting another double-digit return for stocks this year. We're off to a choppy start. Let's find out where this is heading. Joining us from Macro Tides is Jim Welsh. Jim, let's talk about an incident that happened last week with Deepseek, the Chinese AI version, and it really hit some of these high-flying stocks. I think Nvidia was down about 17% in a single day. Let's talk about the MAG7 stocks, the AI stocks which have been the leaders of this market over the last two years, where you've had a handful of stocks that have driven the index. What does it look like to you now?

Jim Welsh:

Well, for a more detailed explanation, Jim, your listeners can go to macrotides.com, and the Weekly Technical Review from January 27th is available. The main thing, Jim, is expectations are extraordinarily high that artificial intelligence is going to revolutionize the way companies do business. And a lot of money has been spent on developing artificial intelligence programs. The amount of computer chips, for instance—Nvidia, I think, creates a chip that's $40,000 apiece—and some of these companies are using thousands and thousands of these chips. So there's been a big emphasis by many of the big tech companies pushing into this area, and the cost to develop some of these programs has been upwards of $100 million. So only a small number of people can, if you will, reach that kind of spending speed.

And what China came up with—or at least what they said—is, "We have a program that we've developed for about $6 million that's almost as good as everything OpenAI and other companies have produced." What that implied was the need for thousands and thousands of very expensive chips would be greatly reduced. And it created fears that, "Oh my goodness, these companies are spending tens of billions of dollars, and maybe the product will become commoditized much sooner than anybody expected."

Now, the counterargument was advanced by the CEO of Microsoft, and he said, you know, as the cost of this comes down, it will make it available for more people to play. And as a result, over time, demand will increase or stay strong as more people can afford the cost of getting into this area. So you had a knee-jerk reaction on Monday to this announcement. And then since then, we've had a rebound in tech stocks as people, in a sense, want to buy into the idea: we really don’t have to worry about this in the near term, and besides, longer term, it's going to be a good thing. So I think the full story hasn't been written yet, Jim. It will take time.

But like every commodity—or I should say technology—as success persists, it attracts more and more money, and eventually the cost of entrance into that new technology drops. And all of a sudden, it does, in fact, become a commodity. So I believe that's coming; it's just going to take a while for that to be realized.

Jim Puplava:

You know, one of the issues I think investors don't realize though, Jim, is these stocks. When you look at the PE multiples, I think the PE on the S&P is 26. If you look at the other 493 stocks, it's less than 20. But if you look at some of the PE, like Broadcom was 66, you have Nvidia over 63, Amazon 41, Microsoft a little less at 34, Meta 25. So they're priced for perfection. So everything has to go well—growth has to keep continuously earning bust-outs. And when you have something like this that calls into question these assumptions, this is what happens.

Jim Welsh:

You're right again. The faith in artificial intelligence and these companies' capacity to deliver on artificial intelligence is very, very strong. And so the shot across the bow, which I think is what happened this past week, you know, is kind of like, "Oh wow," and then ignored and dismissed. It takes a while, I think, for people to let go of something that they believe strongly in and they're putting their money into behind their belief system.

And in order to turn that around, Jim, you're going to need more than one shot across the bow. It's going to take time. But to your point, these stocks are priced for perfection, and as we know, on planet Earth, perfection does not exist. So it's just a question of when the psychology is forced to change. And when it does, I think we know the outcome.

I've written in the past, if you go back to the bear market of 2001 and 2002, and the financial crisis in 2008 and 2009, the semiconductor index lost 80-plus percent in the 2001–2002 episode and 65% in 2008–2009. So, to me, the valuations suggest that a decline of that magnitude again over a window of years is coming. And so I think investors have to be aware of history because they don't want to duplicate those mistakes.

Jim Puplava:

You know, when you look at the PE ratios and, once again, the MAG7 influencing what's happening with the S&P index. But Jim, there's a lot of stocks—the other 493 stocks—some of these companies have had their own bear market, down 40%, 50% from consumer products. I mean, that's where we've been going shopping. Almost sense that there is going to be a switch towards value, especially when you have events like what happened to Nvidia and some of these other high-flying stocks last week.

Jim Welsh:

Jim, history supports that conclusion. As I'm sure you remember, in the 2001–2002 bear market, as money pulled out of dot-com technology, semiconductor stocks, and so forth, money flowed into value stocks. The net result is, even though the Nasdaq was down over 75% during that window of time, a lot of these other stocks held up remarkably well. In other words, they might have been down 5%, 10%, 15%, but nowhere near the S&P's decline of 50% in that window of time.

So I think you're right. At some point in time, money is going to flow and rotate from those high flyers—they're overowned. There's a lot of money in them. So, even if people start to scale back their overweight position, it's going to have repercussions in terms of how those stocks behave.

The other thing I will point out, Jim, is the semiconductor index actually made its peak last July. So despite all this hoopla that we've seen in recent months regarding artificial intelligence, for whatever reason, the semiconductor index is below where it was seven, eight months ago. That, to me, is again another subtle sign and warning that trouble is brewing.

Jim Puplava:

I want to talk about something that the Fed did recently—they cut interest rates for the first time in September with 50 basis points. It cut interest rates by almost a full percentage point. You would think that bonds would rally, but they did just the opposite. We saw the 30-year get up to 5. We saw the 10-year get up to like 4.6, 4.7. Let's talk about interest rates. They're down from where they were a little over a month ago. But what about the issue of interest rates here and the growing deficits that we're seeing coming out of Washington?

Jim Welsh:

Yeah, I mean, I think there's a lot of reasons, Jim, for the increase that we've seen in the 10- and 30-year Treasury yields since mid-September. I mean, yields bottomed the day before the Fed cut the funds rate 50 basis points. So it's pretty counterintuitive that the Fed would launch a rate-cutting cycle with not just a 25- but a 50-basis-point cut and then follow on with two more. And instead of 10- and 30-year Treasury yields at worst going sideways, they've gone up about 80 basis points. That's never happened before.

Even in the inflationary craziness of the late 70s and early 80s, that's never happened before. So I think one of the points that you alluded to in terms of the deficit—the amount of supply that’s coming. Investors know that President Trump wants to extend the 2017 tax cut. The idea of cutting spending sounds good, but the reality of actually accomplishing it is very difficult. And I think those factors have played a role.

The other issue, and I discussed this at length in the upcoming February Macro Tides, is changes in the term premium. And the term premium basically is how much extra yield should I get for holding the 10-year Treasury bond above and beyond the 90-day T-bill yield. And what's interesting, Jim, is that the term premium has risen by 100 basis points since mid-September. So from a psychological standpoint, we've seen a lot of these concerns about the deficit, the potential of inflation in response to tariff hikes, and so forth play out in the term premium.

So almost the whole increase in Treasury yields has been a result of people wanting a greater rate of return—or a risk premium—built into the 10-year to reward them for holding it. So I think what that sets up, though, is the possibility that the tariffs aren't as large and as meaningful as people are worried about right now and that potentially the inflationary impact will be less.

The jury is out. This is a known unknown, and as the Federal Reserve and Chair Powell have indicated, they're waiting to see the details because it could be inflationary. As I write in the February Macro Tides, in 2018, the amount of tariffs that were put in place on China basically was 0.32% of GDP. The tariffs that President Trump is proposing this time around are 1.1% of GDP, so significantly larger.

The problem, though, is we have no idea—Is he going to discount that 25% tariff on Canada and Mexico to 5%, especially if they really indicate they're going to make efforts to cut back on fentanyl crossing into the U.S. from their borders? So there's a lot of unknowns regarding what we know is coming—tariffs of some magnitude, Jim. But I think potentially markets have overpriced this problem.

But until we get more detail and finality in terms of the actual trade agreements and so forth... One comment is that the USMCA Act, which was a tariff-negotiated deal back in 2018, it's due to be reviewed in 2026. And I think President Trump wants to not wait until then—wants to do that now. So I think there's a potential, Jim, that this tariff stuff could be drawn out for an extended period of time if Canada and Mexico indicate that they want to, in good faith, discuss that trade agreement and revise it and update it.

So, again, the increase in Treasury yields that you just noted is somewhat historic relative to the Federal Reserve cutting interest rates.

Jim Puplava:

You know, something else I want to hit, too. There's a lot of talk about DOGE. They want to cut $2 trillion from the government's budget, which has escalated over the last four years. But, Jim, if you take a look at the government spending—60% is Social Security and Medicare. You've got about another 13% in interest expense, the fastest-growing item in the government's budget, another 13% for, let's say, defense. So now you're talking about 86% of the government's budget. That only leaves 14%. That's parks, that's Congress, that's the judiciary, all that. I mean, where are they going to cut?

Jim Welsh:

I think that's one reason why President Trump is so enamored with tariffs, Jim, is that he really thinks that he—I mean, he made a comment that we could raise a trillion dollars from tariffs. I don't see how those numbers work, you know, given the current environment, the level of trade, and so forth. But I think that's—he's looking at a way to increase revenue, which in effect is a tax.

When importers have to pay an extra 25% on something they import from China or Canada and Mexico, they're not going to be able to eat all of that increase in their costs. Some of it absolutely has to get passed along in terms of them raising the price of their goods. And then the people who buy those goods are obviously paying it. But it's a backdoor way of increasing taxes without saying you're increasing taxes. So I think that's what he's enamored with.

To your point, the amount of spending that the government does that isn't mandated by law and/or national defense needs is remarkably small. So I think these are some of the concerns that the bond market has in terms of cutting $2 trillion. Sure, it sounds good. And then you look at the details—I don't know how that's going to be possible.

So I still have this view that we're going to see Treasury yields decline over the next six to 12 months. And then I think Treasury yields are going much higher. And I think if the economy slows, inflation doesn’t prove to be as big of a problem, and so forth, that’s the backdrop where Treasury yields could decline. But if we have a recession next year—or whenever one shows up, Jim—and I have been around long enough to know it's not a question of if but when—government spending is going to really rocket higher.

So again, for Treasury bond holders, for the Treasury bond market, I think it's kind of going to be in a treacherous environment over the next three to five years because we have these huge problems that aren't going to be solved easily. And I think there's going to be dislocations as President Trump and his team attempt to address them.

Jim Puplava:

I want to talk about another issue also on the Trump agenda: drill, baby, drill. And that's oil prices. On the day you and I are speaking, they're roughly about close to $73 a barrel. But, Jim, I watch the oil industry very closely, and oil companies over the last couple of years have developed discipline, and that's been brought on by Wall Street.

So rather than just spend a whole bunch of money to pump out as much oil as they can, they've been more disciplined, focusing on capital allocation, focusing on dividends. And, you know, he wants them to drill. But if I'm an oil company and the price of oil is coming down, why do I want to spend a whole bunch of money to drill a lot more, produce more oil, and drive the price down?

Jim Welsh:

I agree 100%, Jim. President Trump, as he was campaigning, talked about bringing energy costs down by as much as 50%. And the points that you bring up, I think, are the real-world points that his goal is going to encounter.

Oil companies have become very disciplined. They're using their cash flow to buy back stock, pay more in dividends at the expense of not investing in exploration as much. My guess, Jim, is just because you want to, let's say, curry favor, but you don't want to curry unfavor. I think the oil companies will modestly increase their exploration budgets, but not so much as to potentially cause oil prices to drop that much.

Now, if we go into a recession, oil prices will drop as demand contracts and so forth. But you're 100% right. And President Trump promised, I think, an awful lot of people—let’s say the people in the bottom 50% of the income range—that he was going to bring inflation down. And I think simplistically, for a lot of these folks who traditionally always voted Democratic, they’re not terribly knowledgeable about economics. Heck, high schools and colleges don’t teach economics—basic stuff—to people anymore.

And so they look at it in terms of, like, you know, in 2018, my rent was such and such, and, you know, life was good, it was okay. I was in a better place than in 2024. And I think naively, they’re thinking that, okay, Trump gets back in, and he’s going to make us turn back the clock to 2018 and bring my costs down and so forth. That’s just not going to happen.

And so to me, this is one of the greater risks to President Trump in terms of advancing his agenda because in two years, we’re going to have midterm elections. So if we don’t see real progress—are rents going to come down a whole bunch? I don’t think so. Then some of these people who, you know, voted for that guy might start thinking, “He hasn’t helped me at all with inflation.”

The other thing that we’ll see is, word is happening this week, you know, some Democrats talking about eggs, the price of eggs, and so forth. Now the reality is the price of eggs went up a lot because 100 million chickens were killed due to the bird flu. They’re not going to explain that part of the equation when they say, “Look, President Trump said he was going to bring prices down. Look what’s going on with egg prices.”

I heard Elizabeth Warren complaining that, you know, since the election, oil and gasoline prices went up when he wasn’t even in office. You know, so my point is they’re going to attack as much as they can. And I think it’s going to be tough for President Trump to deliver on that promise. In large part, as you point out, the oil companies are going to be reluctant to increase their exploration budgets enough outside of a recession to bring oil prices down that much. So I think that’s a real challenge.

Jim Puplava:

You know, speaking of the difference, one of the points that we have brought up, Jim—if you go back to 2016, when Trump ran for office and got elected, interest rates were at zero to half a percent, oil prices were in the $30 to $40 range, and the deficit and total debt was $19 trillion. Fast forward to today—oil prices are over $70, interest rates are almost near 5%, and total debt is now on its way to $37 trillion. That's a different environment to operate in and want to do a lot of things that he's promising.

Jim Welsh:

You're right. I mean, basically, the constraints are much tighter today than they were back then. And again, the problems that he's going to have to confront—and any administration over the next five to 10 years—is how are we going to rein in spending?

One thing I'll note: if you go back the last 50 years, federal government spending as a percentage of GDP averaged about 21%. In the last couple of years, it's over 23%. Tax collections average just under 18%, and that's about where they are right now. So there truly is a spending problem.

If you look and say, "Okay, over the last 50 years, we had Republicans, we had Democrats in the White House, and we had different compositions in Congress," it's clear we have an issue here that needs to be addressed. Treasury Secretary Besant has talked about cutting the deficit. It was 6.4% of GDP last year, and they're aiming to bring it down to 3%. The deficit was close to $2 trillion.

So as the government makes efforts to cut spending by a trillion dollars, that's going to have economic repercussions. It's going to slow the economy, and that's one of the reasons why, as they announce some of this stuff, I think Treasury yields can decline over the next six to 12 months. But it is going to have economic repercussions as the economy slows.

I'm not sure that realization has fully come to the forefront in terms of equity valuations and equity prices, but that's what their goal is. And I think they're going to pursue it.

One thing I'll point out—when President Trump got elected in 2017 and took office, he wasn’t prepared. I don't think he expected to win. It was kind of a shocker. This time, they are so much better prepared. And I think we're seeing that preparation play out in terms of how quickly cabinet nominations were made and executive orders issued.

You may not agree with what he's been doing, but there's a huge contrast between what he's done in the last 10 days or so versus the first term. I think they understand that speed is necessary. I'm not sure markets have fully appreciated some of the dislocations that are going to be necessary and the results of some of the changes he's intending to make. But we're going to find out soon.

Jim Puplava:

I want to talk about another sector of the market. On the day you and I are speaking, gold is at a new record—it’s over $2,800. Silver is close to $32. And you’ve got Bitcoin marching to $106,000. What’s your take here, and what do you think is driving gold, silver, and Bitcoin?

Jim Welsh:

I think definitely gold is being driven by the idea that inflation is going to pick up, that the Federal Reserve won’t be increasing rates anytime soon, and that eventually they will cut rates.

So I think a lot of it is tied to speculation in markets. And as we've seen, Jim, the PCE—the Personal Consumption Expenditure Index—comes out on January 31st. I think it’s going to tick higher. It was like 11 and 13 basis points in November. In December, it might have a 2 handle, and that might kind of shake things up a little bit.

But, you know, my view has been that gold is in a bull market. My expectation had been that in October, we would see a pullback. Gold dropped from $2,789 to $2,541. It’s been rebounding. I think there’s another pullback coming, Jim. So I would not, in the very short term, be a buyer here with gold above $2,800. If I’m right, we’ll have a pullback, and then I think gold is going to make a move north of $3,000.

So I’ve been bullish on gold tactically. I thought we’d have a pullback.

Bitcoin—you know, it’s also running on expectations that President Trump looks at Bitcoin favorably. And so they’re expecting more and more support, as opposed to pushback from the Biden administration, in the Trump administration. And I think that’s the other driver with Bitcoin.

Jim Puplava:

You know, one of the things we tell our listeners on the program, Jim, is that three things determine investments and returns when it comes to investing. One is the fundamentals—you know, things like the economy, earnings, return on equity, things like that. Then you have the technicals—what the charts are telling you. But the third is politicals.

And I can’t think of a time in the last three or four decades where politicals are going to have such an influence on the market. Because if you take a look at what he wants to do—whether it’s extend his tax cuts, add new tax cuts, he’s talking about dropping capital gains to 15%, not taxing tips, overtime, and Social Security, rebuilding the military—a lot of these things are politically driven. Deregulation, those kinds of things. Or he’s talking about ending the war in Ukraine.

So I can’t remember a time—and maybe you do—where politicals have played so much in terms of what happens to the market.

Jim Welsh:

Well, maybe going back to 1981 and Ronald Reagan coming into office—that would be the only parallel I can come up with. We were in a different world then. Inflation was very high. Federal funds rate was, I don’t know, 14%, 15%. I mean, you know, the valuation of the equity market—I think the PE was under 8.

So very, very different environment. But to your point, what President Trump is trying to accomplish in a very short period of time is to make dramatic changes in terms of how the government has been operating for decades.

There are going to be positive results from that. But there are also going to be negative impacts from the changes that he's proposing right now.

Psychologically, I think market participants have been—and continue to be—more driven by, “Oh, I’m just going to look at the positive side of the equation.” Like I said, they cut a trillion dollars worth of spending. They’re not going to do it over a period of months, but it is going to happen in a relatively short period of time.

At least they’re going to make those attempts. That’s going to have a slowing effect on the economy and potentially a fairly pronounced slowing. So again, I think people are underestimating the magnitude of the changes and the implications.

Ultimately, they may prove to be more good than bad, but as you go through a process and things are changing, you know, it raises questions. Depending on how the tariff negotiations go—if at some point talks break down either with the EU or Canada and Mexico and so forth—people might start talking about, "Oh my God, retaliatory tariffs, a trade war."

Well, something like that starts to be in the narrative and conversation, and that can, I think, be fairly disruptive. So again, I just think that, to your point, the challenges are very, very big, and the changes that are kind of required to reset how the government operates are going to feel pretty dramatic.

As you might remember, when President Reagan took office, air traffic controllers went on strike. He fired them all. So, in a sense, that's a parallel to what we're seeing now with how President Trump is addressing the federal workplace. You know, you show up for work, and if you don't, you're gone. And there's going to be some people, I think, who take him up on that, you know, plus getting paid for six or eight months or whatever it is.

So I think you're right.

One point I’ll make about that—you mentioned technical analysis. And the one thing that, to me, is troubling is historically when the S&P makes higher highs, and the majority of stocks are also making higher highs, as measured by the advance-decline line.

What we’ve seen is the advance-decline line peaked on November 29th. The S&P made a new high last week. It may make another new high, but so far, the advance-decline line is, you know, comfortably short of getting above that high from November 29th.

In January 2022, the S&P made a new high. The advance-decline line did not confirm it. You know, we got a pretty good sell-off. That was inspired by the Fed raising interest rates. In 2007, the S&P made a new high in October, but the advance-decline line didn’t confirm. There was a very significant decline.

So if there are really good reasons to sell the market that start to show up, that’s how you get 25%, 35% declines. The divergence between the S&P and the advance-decline line right now, to me, implies that, at a minimum, we’re looking at probably a 10%, maybe a 15% correction coming in the not-too-distant future.

So that’s my take. I think the market is approaching a high. I think we’re going to see a sharp break over the next one to three months of 10% to 15%, and then we’ll see what happens after that. That’s the signal that the technical side, at least the way I interpret it, Jim, is giving the message right now.

Even if the S&P makes a higher high above 6,128, as long as the advance-decline line doesn’t confirm that, I think it’s a real warning that investors who are conservative should heed.

Jim Puplava:

You know, you bring up a point. Let’s say he gets lucky—they cut $1 trillion from the budget. That’s going to have an impact on the economy and slow it down.

Something else that could also do that—one of the big pieces of his legislation is extending his tax cuts. Jim, if he can’t get those tax cuts through, you’re talking about a massive tax increase, which—you know—look at it as inflation.

I have a table that I use, and I show clients the tax rates under Obama before Trump got in and where the tax rates are today. The poor, the middle class, and also the upper class will see their taxes go up. So, in a way, that’s kind of like inflation too, because you’ll be having less money to spend, and that impacts the economy.

Jim Welsh:

Absolutely. I mean, that’s another risk that, you know, is out probably six months or so, something like that. But again, if it looks like those tax cuts may not pass, you know, that would be troubling for the market at some point in time.

So it’s a good point. If people have less disposable income—which means after taxes—the economy is going to slow.

I think Treasury Secretary Besant, during his nomination hearings, used the word "calamity." Now, I’m not sure it’s the right word—it may be an overstatement—but to your point, if there’s a significant tax increase coupled with prices on goods going up because we just had tariffs increase, it’s going to drain a lot of spending power out of the economy.

And if the financial markets—when they have a decent-sized correction, Jim, because it’s not a question of if, it’s when—we’ve had a bifurcated economy. The bottom 50% have really been feeling the squeeze from inflation. That’s why some of those folks voted for Trump, who in the past never voted for anybody other than a Democrat.

The top 50%, and as you get up higher in the wage spectrum, those folks haven’t felt anything or very little. That’s why you had 3 million people going through TSA checkpoints over the holidays. But if the financial markets—the S&P—go down 25% or so, all of a sudden, some of those folks will cut back.

And so, you know, what you’re talking about is the potential for the dominoes starting to set up again. Those are just concerns. If they’re realized, then they’ll be problematic for the equity market.

Jim Puplava:

The final topic I want to cover is real estate. Typically, when you see an economic recovery, the Fed’s lowering interest rates, and that brings down mortgage rates. That did not happen. The Fed lowered interest rates, and interest rates went up.

You’ve got mortgage rates in the 7% to 7.5% range. You’ve got people sitting on their homes because, you know, a lot of them locked in on 3% mortgages. Why would you want to sell your house and go from a 3% mortgage to, let’s say, 7% or 7.5%? Let’s talk about real estate and its impact on the economy.

Jim Welsh:

Well, I think one of the important determinants is the cost of real estate relative to median incomes. That was a problem in 2006 and 2007. Home prices were way above median income. Well, they’re even more stretched today.

That means the pool of people who can afford to buy a house—in part because of mortgage rates, but also because the price of the home is so high—and the pool of people who are, in a sense, locked into their house because of such a low mortgage rate.

So if and when we see the economy slow, Treasury yields actually drop significantly, and mortgage rates then subsequently come down, I think we’ll see an increase in the supply of homes for sale. We’re already seeing in some parts of the country—down in Florida, some places in Texas—home prices are dropping in those locations.

So I think there’s a risk, Jim, that, again, it’s counterintuitive that mortgage rates come down, the supply of homes increases, and that weighs on prices. So I think home prices over the next few years are going to fall because of the affordability issue that can’t be completely addressed, even if mortgage rates drop toward 5%.

Jim Welsh:

So again, asset values have kept those in the upper 50% of the wage spectrum spending because their net worth has gone up. But if you’re in the bottom 50% and you’re a renter, well, you haven’t seen any price appreciation. The only thing you’ve seen is your rent go up by 40%. You probably don’t have a stock portfolio.

This gets to the point of the bifurcation in the economy and why, at some point in time, the economy will become more at risk if we see asset values decline. I just think the risk of housing prices falling—and just as an aside, it doesn’t necessarily mean I’ll be right this time—but back in 2006 and 2007, I was writing about housing prices falling 20%.

And it was based on the notion that, at that point in time, housing prices were more than 30% above their historical norm based on median incomes. Well, they’re even more stretched today. So I think that’s a vulnerability that, obviously, very few people are talking about.

Jim Puplava:

You know, interesting aside—the gal that cuts my hair, she’s married, she’s living in an apartment. She was telling me that every single year for the last three years, her rent has gone up $200 a year—$600 in the last three years. They have not renewed their lease, and they’re moving in with their parents.

Jim Welsh:

Wow. Yeah. No, I mean, obviously here in California, the problem is extreme in terms of affordability because of housing prices. In other parts of the country, it may be a problem, but not quite as severe.

But yeah, the number of people that have moved in with parents because, best efforts aside, they just can’t save enough money. Now, the Biden administration was moving toward lowering down payments and such to try to make it possible. But again, for a lot of people, the price of a home is just out of reach.

So this is, I think, a serious problem. And the other thing that’s happening is if you look at the number of babies being born in this country, it’s declined significantly. The birth rate is down to like 1.6 over the last few years. Well, the replacement rate—in other words, to keep the population steady—is 2.1.

So the point is that the demand for housing, because fewer couples are having two children or three children, will all of a sudden change the dynamics of how many people will decide, “You know what? The rent’s going up, but we’re going to just stay here because we can afford it.”

And by the way, we can’t—we don’t have the capacity to be able to save enough money to buy a house. So, to me, the supply-demand dynamics for real estate are just not positive. And I don’t think even if mortgage rates come down, that will solve the problem.

And as I said earlier, longer term, to me, the pattern in the 10-year Treasury suggests that over the next five years or so, the 10-year Treasury yield will go to 7.5% or higher, which could...

Jim Puplava:

...be 9%, 9.5%, or even 10% mortgage rates.

Jim Welsh:

Exactly. And so, if that happens, it obviously means affordability will become even more strained.

Jim Puplava:

So, Jim, as we conclude here, given where the market is—as you mentioned, it got hit with Deepseek, but some of those stocks are bouncing back—what would you do as an investor?

We’re finding, you know, the opportunities are in value stocks—companies that have been beaten up 40%, 50%, with high dividend yields, low PEs. But what would you recommend people do at this point?

Jim Welsh:

Well, one of the things I’ve been writing about, Jim, is the anticipation that the dollar is making a fairly significant peak. You know, people understand, “Oh man, tariffs—that’s good for the dollar.”

At the same time, President Trump, back in his first term, was not a fan of a stronger dollar. And if you want to create more manufacturing jobs in the United States, you want the dollar to decline. That makes our exports to other countries cheaper for them to buy.

So I think the technical aspects, which I write about every week, suggest that the dollar has made a top—or is very close to an important top. I think it will decline by 10% to 15% over the next year.

If that proves correct, I think looking at emerging markets makes sense. In other words, I wouldn’t go after European assets—I think they’ve got some problems. But emerging market assets, for instance, emerging market bonds yielding more than 6%, could be attractive.

There are ETFs that you can access for this stuff. For example, Brazil—they’ve had some issues, but the ETF yields 8%. So those are the areas that I want to look at.

If we see the dollar, in fact, decline, emerging market assets, I think, will appreciate. Or at a minimum, even if the S&P experiences a decent-sized decline, they will—like value stocks—hold up better.

I also think, as I said before, that Treasury yields are going to decline. So my expectation is there could be one more pop up in Treasury yields, which would require TLT—the ETF related to the long-term Treasury bond—to dip below $85.50. I think that would be a buying opportunity.

So those are the things that I’m looking at, Jim, because I do think, given the advance-decline line and so forth, that we’re going to see a correction develop over the next one to three months in the S&P and the overall market that could bring it down 10%.

Jim Puplava:

All right. Well, listen, Jim, as we close, tell our listeners about your newsletter, Macro Tides. I love the way you blend technical analysis along with the fundamentals. The charts tell you one thing, but the fundamentals explain why the charts are reacting the way they do.

Jim Welsh:

Couldn’t express that any more succinctly, Jim, and thank you.

Listeners can go to macrotides.com. As I said, you’ll be able to access the most recent Weekly Technical Review. You can send me an email—Jim Welsh Macro—and I’ll send you some other information.

I really believe strongly in the combination of technical analysis and fundamental analysis.

As I just explained about the dollar, President Trump isn’t a fan of a strong dollar. The technicals are suggesting that the dollar is in the process of making an important top. And when the technicals and fundamentals combine like that, it just gives me more confidence that the outlook I express might actually happen.

But again, as always, I really appreciate our conversations. You always ask terrific questions. So thanks again.

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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. Content is for informational purposes only and does not constitute financial, investment, legal, or other advice.

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