Justin (2:18)

Apologies to our audience. If we all look about five pounds heavier, it's because we are coming off Thanksgiving where we all ate a bunch of turkey. Right guys? Yeah, the desserts are the best. Okay, so you know, here we are it's the home stretch of the year. December, you know, historically has been a pretty good month for the markets. Although I know, you know, that's not what you know, you're looking at per se, Jim, as you oftentimes go much deeper below the surface on the various indicators and the data that is sort of informing your views on what's happening in the market, in the economy right now and what it means for investors. And so like we always like to do with you, we're going to walk through a bunch of the charts and the data that you're paying attention to that you're looking at all of this from your substack paulsonperspectives.substack.com where people can go sign up CG Jim's research in real time. And you know, some of it's free, some of it's premium, but there's a lot of really good stuff here. Unfortunately, you know, Jim has, you know, been generous enough with his time or last few months and we'll continue this into next year going through some of the most important things, some of the most important charts that he's paying attention to. So we've kind of a lot to get through today, today because you've been putting out a lot of stuff. But before we do, maybe we could start where we always, I think like to start with you is when you look at what's happened in the last month or so in the markets, in the economy, what do you think are the most important things investors should be paying attention to?

Jim Paulson (3:50)

Well, a few things that you know, that I'm just on my mind a little bit, I guess I throw out, you know, we look into next year a little bit now as we always do in December and one of the things that you know, I think that I, I look back, you know, we have had pretty, pretty good corrections I think this last year. People think, well we need one and there's been a lot of talk about that lately. But you know, we can't forget that we had a 20% correction basically off the market highs that ended in early April of last year. You don't often get a 20% correction, which is basically a bear market that's a monster. And I, you know, last two and a half, three months, basically the S P has had another period of consolidation and kind of moving sideways. And I don't know, I think you look at that going into 20, 26 where you had a 20% full on correction and then kind of two, three months towards the end of the year to consolidate, catch up again and reassess some pessimism and whatever. I think it's a nice base to launch off into the next year and I just kind of point that out. Secondly, I'm, I'm interested by the fact that if you look from the start of this bull in, in 10-12-2022 until September 16th of 2024, and the reason I picked that period is because that was a period where the Fed had not yet eased once in this entire bull market during that period of time. Over that period of time there was only two sectors that outperformed the S and P. And you know what they are tech and communications and all the other nine weren't even really even close to outpacing the S and P over that period of time. Now it's interesting, if you look year to date where we are Today, we have five SEC that are basically outpacing the S&P 500. Two of those are still those decade comms, but we got three others and we got a couple others right behind that that are pretty close to outpatient. So we certainly have had broadening that's going on. I think that reflects a move to policy accommodation a bit more often over the last year or so. And one of the things that I would look at going into a year is watching for more evidence of broadening accommodation because I think we're going to get it Tom, and particularly with, with Fed easing. I also am attracted by the bond yield recently broke below 4. It's back up a little bit here today, but you know that's getting close to having a pretty major breakout. To the downside, the 10 year yield doesn't have to break much below 4 to really take us back to a low of three and a half, you know, in mid 2024 is its low point really in this bull market. And so we got a really decent shot, I think of breaking below that and having the bond yield go to the lowest level of this bull sometime in 2026. I'm also sort of watching the beginnings or ingredients of sort of what I say. This fear based assets that have been leading this bull market, you know, stuff like gold doing really well and money market funds being accumulated rapid, the dollar doing well, even things like bitcoin leading tech, it's hard to throw them in the conservative camps but they're kind of become where you go when you're fearful. You, you buy steady adding tech and bitcoin. And so if you look at those five asset classes right now, you know, they're starting to unravel a little bit of the seams. Gold's had a little more of a struggle of late. If you look at the ratio of money markets to disposable income, it's. It's rolled over just a little bit, which hasn't happened. The dollar's already off 7 or 8% from its highs after going up most of the time. Bitcoin, we know, is in a pretty good free fall and, and tech combat that. Some of the relative performance of tech is even starting to fade just a bit. And I would watch that as the final theme here. What's going on with that leadership of tech? I, I don't expect tech to collapse, but I do think it's starting a process of underperforming. If you look at the relative performance of the S and P technology sector, it's been flat really now almost since August on a relative basis. And it's really, it's not up that much really since June of 2024 at its relative price highs. So it's kind of sleepily, without being noticed, you know, starting to roll over at the top and that, that sort of straight upside outperformance. I think those are some issues that could really gather attention. If any one or any of those gain more momentum, you'll hear about it more. But I think of some of the things that I'm just watching as they crack down.

Justin (8:24)

Yeah, no, that's a good overview. Sort of stepping into some of your articles here. In your recent work. In the most recent article, you kind of made this point that, and we'll look at this chart here, that policymakers are mostly obsessing over this threat of inflation, but they're really maybe ignoring the real problem over the last 20 years, which is the, you know, collapse of real sustainable gdp. So can you kind of just explain this chart, what we're looking at, what, what your arguments are here?

Jim Paulson (8:57)

Yeah, this is just real GDP growth, annual growth going back there to 1950, I believe. And I guess what I'm trying to set out, if they're really the financial crisis of 2008, 9 and 10 or whatever, even a little bit before that, the US was starting to lose its sustainable or secular growth profile. If you look back there, the green line goes back, I believe, to 2005, 1950, 2005, the real GDP group, what was that? Three and a half percent. And since then, it's grown just a little over 2%. About 2%. That's a huge downshift in average growth over the last 20 years compared to what it used to be over most of the post war era. And what brought this up to me again, it's been going on a while so it's not a brand new phenomena. But we, we continue to fail to resurrect the growth potential of the economy now for two decades long after the financial crisis has passed. And we, and we've almost forgotten that. That is still a real problem. We've been hovering at an average of what I used to earlier years referred to as the stall speed of the economy. When it got to 2% growth, you started worried about recession. Well, we've been averaging that now for two decades and there's that to me, here we are fighting inflation. I don't see how you can have a sustainable inflation environment in 2% growing economy. I think it'd be a very difficult thing to do indeed. And, and so yeah, can we have a supply side distorted inflation burst like we what Covid for a couple years? Sure. But are we going to have a sustained demand driven growth problem when, when we can't hardly keep demand growth above water? Because to me that's the central problem the United States needs to focus on. And it shows up, Justin. And you know a lot more than just real GDP growth. If we look at the next couple of charts, this is household employment growth year on year going back over the same period. And it's, it used to average through 2005, I annualized about 1 over 1.6%. Now it's averaging about 7, 10 of a percent or a little less than 3/4 of a percent. That's a huge downshift. Just think about taking America and people coming up through the ranks, looking at possibilities, excited about their futures and suddenly the growth rate of new job creation is half of what it used to. And I don't, I just think when you put, when you think about that, we don't put that in proper perspective in this country. Right now we're, we're fighting inflation because it's some, it's still a little bit above the 2% artificial target of the Fed. And we're missing the fact that we're, we're growing jobs at half the pace we used to grow them in this country. We wonder why college grads can't find jobs and why people feel kind of pessimistic about the world on Main Street. This might have something to do with that. If you look at one thing that certainly on the next chart that's kind of bringing that I think is labor force growth and we know we have a population growth has slowed down that's turning into, I think the central economic problem of the day is much slower population growth than aging population on top of that. But again, you know, we used to, you look at that labor force growth in the 70s when we had a sustained demand driven inflation problem, it grew at 3% a year. We're barely hovering about half a percent a year right now. And we're worried about a runaway demand driven inflation. I think it's kind of ridiculous, is kind of where I'm at. And meanwhile we're letting Rome burn in a, in a slowly dying economic growth rate that's supposedly the envy of the world. And so, you know, I got one more chart that just sort of highlights this. That to me is almost appalling. And that's the duration of US unemployment. Now you can see that 1950 to 2007, the app, the average unemployed person stayed unemployed for 13 and a half weeks. Now they're staying unemployed for over 27 weeks, twice as long. This to me really raises the primary thing that we have damaged in this country, I think, and I think the, the envy of the world for us economic capitalists is because we generate a thing called animal spirits. And we've lost the ability to generate that threes and years. And you got people that once they get unemployed, they can't find employment again for half a year. It just kind of destroys, it isn't just frustrating, it destroys their hope for the future and we just let it continue. And I really think not only that we're doing a lot of things, I think that make it worse, like the chronic tightening to fight inflation, the fact that we're now shutting down immigration, which we desperately need. We're just kind of, not only we're not doing anything, we're almost doing the wrong stuff. And that's concerning. I don't think this is the 1920s and I don't think we're headed for the 1930s. But you know, when you, when a lot of scholars have looked back at the 1920s, at a lot of policy of mistakes that were made, we're tightening when we should have, should have been easy. That tightened long after the crash already started things of that nature that was the Roaring twenties, but yet growth in a lot of parts of the economy have stagnated for a while prior to that, prior to the 1930s. And it just feels a little like, you know, we're kind of making some of those same mistakes today.

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Jack (15:53)

Do you have any ideas specifically about like the thing that's most shocking of these first charts we've looked at is probably this one, this idea that the duration of unemployment has doubled. Do you have any like, more ideas as to why that's going on? That just seems like incredibly shocking that it would have gone up that much?

Jim Paulson (16:07)

Yeah, I think it's a host of problems, Jack. I think, you know, we have the biggest one in the room is slower population growth. And you know, that's a byproduct of new attitudinals of delayed family formation from what we used to have. It's, it's certainly a lower birth, birth rate which is tied into that new sort of attitudinal. It's certainly less immigration than we used to have, particularly early in our, in the development of our country, shut down. And then, you know, it's not just slower growth. If you look at, if you correlate across the globe historically, if you correlate the rate of population growth of these countries there and resource growth, land, labor and capital, they're very closely correlated to the pace of growth. And the United States was always a country where everyone was always coming to and we were chronically young and aggressive and, and you came to America why? Because you had that animal spirit itch and you wanted to have a future and you wanted to be part of that. And you know, we've lost that. I think the biggest reason is because our population growth is rapidly grinding to a halt. And if it does, it means growth stagnation. I don't care how much innovation you generate, it really becomes a problem. And also, you know, it's, it's aging so you got guys like me that 30, 40 years ago were in peak spending years and you know, we're boosting demand, doing my part, and, and now, you know, we're aging out and kids are gone and you know, we're not doing that anymore. And we haven't been picked up for the next bubble that's near as big as the one that's going out the door. And so that's a real problem as well. We also, this may surprise people, but we've had dramatically slower productivity growth in the last couple decades from what we used to have in post war history to 2005. Between 1950 to 2005, average productivity growth was 2 1/2% per year. And since 2006 it's been 1.6% per year. Dramatic downshift. Now, I don't know, productivity's got a lot of measurement problems, you know, and how do you measure service productivity and all that? We've become more of service cops. Some of this could be distorted, but nonetheless, the raw numbers showed a major drop in productivity, which has taken off a big piece of growth. Not only do we have our labor force growing, you know, from 3% to less than 1, but now it's half as productive labor force as it used to be. Earlier we also, I think this to me is a big one. We, we've had a, a de risking attitude that's emerged in this country since the 08 crisis. Maybe even before that. You know, there's. This shows up in a lot of ways. You know, I just give you one weird one, Monetary velocity, the rate at which the money supply turns over into GDP output that used to be pretty steady throughout the post war era. Pretty flat, always about the same level. In fact, it became so steady that economic theory assumed that V mv equal PY money supply times the rated turns over equals price times real output or real GDP or nominal gdp. That that V was constant, never really changed because stayed fairly robust. Well, that thing peaked starting all the way back in 2000 and has been chronic, chronically coming down fairly dramatically ever since. Where every dollar in the money supply now turns over more slowly than it used to, which means we have slower real GDP growth for every dollar. But really what that tells me is there's a de risking attitude that's developed. If you look going back to the OA crisis when I was a kid, the term common saying was, young man, it takes money to make money and you should go to the bank, borrow some money and lever up and put it to work on your Dream. And that's how you make money. Well, it's the opposite. Now people are deleveraging balance sheets. Debt to income ratios in the household sector, debt to profit ratios in the corporate sector have been falling now for the last couple decades regularly after always trending upward throughout the post. That tells me sort of de risking people are hoarding cash rather than borrowing money. And that just says something about what's happened to capitalism. I think if you combine that actual behavior with the level of chronic pessimism that we can't seem to shake in this country now on both sides now everyone's pissed off and pessimistic about the future, and you put pessimism together with de risking behaviors. And what is that? That's rip on animal spirits. I mean, that's what it is. We've lost animal spirits, which to me is the envy of the rest of the world in terms of American capitalism. And then we've become a more globally open economy. Trump is somewhat responding to this with tariffs. I think it's not a good way, but he's trying. From 1950 to 2005, our average annual trade deficit was 1.2%. Since 2006, it's average on an annual basis, 3.2%, nearly triple what it used to be. Now you can say what that mean. Well, it means that we're having a lot of what in our closed economy of earlier ilk, a lot of that spending stayed in this economy was spent here. Now it's leaking off abroad on a regular basis, much more so than what's coming back home, if you will, on a regular basis. Then finally we have contractionary policies and I think I'll get into that. This is sort of add insult to injury after all these list of issues I've given you for things I think that are causing some of this. And then our prescription for that in the last few years, really since COVID has been to tighten contract policies like we're trying to beat a dead horse a little bit. And we could, we could get into some of that as well.

Jack (22:18)

I was thinking back to my economics 101 when you were talking about that, because I think what I was taught, and I wasn't the greatest economic student, but I think what I was taught is economic growth is basically a function of labor force growth and productivity. And you were just hitting on both of those. That it kind of explains this whole thing, right? Neither one of those has been very good.

Jim Paulson (22:33)

They haven't been the one that's odd. We know about the labor force and what that has to do with a different attitude about having children in this country, as well as just having older and less growing population productivity. One's odd, you know, but it's interesting to me. We've had arguably some of the greatest innovations ever in more recent years, but it hasn't translated at least into how we measure productivity compared to how you. We had some really remarkable ones back in the day too. You know, you think about the mainframe computer by IBM in the 60s, Race to Space and, and so forth, which probably helped boost productivity back in the day, but you would have thought we wouldn't have such a fall off, but we have. And to me, I, I don't know how to fix all these problems. These are a multi, you know, dimensional problems. Some of it is better leadership in this country, I think would help in terms of somebody that could inspire people out of their pessimistic woes and, and entice them into the, the, the opportunity is America again or something along those lines. I think that's a difficult thing, but it'd be good. But whatever thing, I think we should be easing policy and not fearing inflation so much. I think it's a difficult thing to sustain inflation because we don't have the demand growth to do it. And so we should be cheering if we could lift demand at a high rate for a period of time, rather than fearing that it's going to return us to the one decade in US history that was horrific with inflation, the 1970s. And we just can't seem to do that. And you see on these next charts, if we get to them, you know, it's just how much we're cranking down on this thing right now, despite all these issues.

Jack (24:18)

Yeah. Just one quick question before we do the inflation. I want to ask you about because productivity is really interesting to me because like you said, you would assume with all the technological innovation we've had, the Internet and everything, productivity would have improved, but it hasn't. And it sort of makes me think about AI because I think about AI like the productivity of my own life and how it's improving. But I wonder if maybe we're overestimating, like how much it'll improve productivity across the economy. Because I have a hard time carrying like what I'm seeing to like an overall economy.

Jim Paulson (24:43)

Yeah, I, I don't disagree, Jack. I think that, I think we certainly. I'm a big believer that innovations lead ultimately to improvement, economic growth and improvement productivity. But this does make me wonder about a little bit. I also think There's a lot of innovations that we have had in the last several decades that you could argue also lead to distraction and loss of productive moments. I mean, I spent a lot of time looking at my phone and going through data over and over again, you know, every two minutes or something sometimes, and I just looked at too much. I don't really need to see it again, but that's what I do. There's also a lot of fun with AI man. You can make weird images and you know, do things. I don't know if I, I really moved American forward and all that, but it sure was kind of entertaining. You go through Twitter all day and you know, it's a lot of funny stuff on there. You know, it's entertaining. I'm not sure how much it moves the needle in terms of productivity. We, we've got so many entertainment, TV shows and movies we can watch and choices. I spend more time at night going through what I might want to watch than I actually watch. And, and you know, I, I, that's, I'm just giving some examples that sometimes I, I wonder, you know, if it really does hit to economic advancement as opposed to just sort of wasting time or I don't know what you want to call that. I also wonder if how much, how much of the today's innovation is getting the point. This one I have no, I have no backup for or proof. I just wonder about it how much of a lot of this innovation now really has become tech centric. And I'm wondering is it being exported to other parts of the economy as quickly, as thoroughly than it used to be, or is it just sort of increased the productivity of that sector itself, leaving a lot of the rest of the economy really not having a great impact. I've been looking into that one a little bit more quantitatively of late. I haven't got anything yet that I want to share, but I do think that there might be something there where the difference of earlier innovations hit more multiple parts of the economy more so than the, the ones we have today. And maybe I'm all wrong in that because most people, most are saying, oh, it's just going to ravish the economy and have dramatic impact. We'll see about that. I'm kind of, I kind of wonder about that as well. Jack.

Jack (27:14)

It's, it's funny to your point. I, I just made, my 6 year old, wanted me to make a realistic picture of him skydiving and so we got the Gemini and we made like the most realistic thing that looked like I Had thrown my six year old out there and then he'd been skydiving. I don't know, I don't think that benefits economic growth in any way, but.

Jim Paulson (27:29)

It is a lot of fun.

Jack (27:31)

It was very cool. Like we said it to his grandmother who was shocked and worried about what we were doing. But, but anyway, I won't, I won't get us too much off track here. Your next chart gets into what you've been talking about here, which is this idea of inflation and maybe inflation is not as much of a threat as.

Justin (27:46)

Many people are worried.

Jim Paulson (27:47)

Yeah, I've written off and on about this a little bit. This just shows to me the CPI is in red or excuse me, the CPI is in blue and this PPI is in red. Year on year growth and inflation. Right now if you look at we got a CPI inflation rate of 3, it's average since 1965 has been almost 4%. The PPI is a little less than 2 and its average has been 3 and a half percent. I mean we got both, both of these metrics are currently significantly below average and yet we're fighting them like they're runaway, like we're still stuck. In the 1970s we definitely had a supply side restriction that led to a burst of inflation in 202021 or 2122, no doubt about it, shows up in that chart. But it ended a long time ago. These were both back to these average levels really since basically early 2023 and they haven't gone anywhere since. And yet we're still fighting. If we didn't have this weird 2% rule that came out of nowhere, if we didn't have that, I don't know if we'd be having the same discussion about inflation right now. We'd probably be talking about, gosh, we got a lot of parts of the economy that need some help and be looking to fight those a little harder. I just come back to the charts I just showed you. I don't see runaway demand risk in those charts that would cause a 1970s style demand excess demand driven economy. I see the opposite. I see an economy that's more prone to deflation perhaps than inflation at the moment. And yet we continue to, to focus on inflation as primary. I do think it's changing. You know, the Fed now is starting to ease again. The discussions are starting to get more that way. I think 2026 is going to be more about promoting growth than it is fighting inflation. Mainly because I think we're going to be worried about the lack thereof or Recession a little bit as, as we go through that year. But I, I, I just don't see a lot of risk in the, in this chart. This is just one. But I, it's not like commodity prices are running away. It's not like wages are running away. It's not like inflation expectations are running away, break even rates in the bond market are going anywhere. And yet we continue to fight this like it's the number one problem in America. And we've convinced the public it is. Most people feel they have been really damaged by inflation in recent years. And the reality is real wages have been climbing for much less of years and they're almost all at all time record highs. Real profits have continued to climb despite this flake. That's not what happened in the 1970s very much funny because we, we want.

Jack (30:33)

To learn the lessons from the past, we have to be careful about learning them too much. You know, the whole idea from the 70s, if inflation gets out of control, you can't stop it. So everybody's worried about not getting it out of control. We got to look at the risk on the other side too, which is we're in a different world in the 1970s and there's also a risk to the other side here to economic growth. If we're too tight on this, well.

Jim Paulson (30:51)

Give me, Jack, give me 3% labor force growth and I'll start worrying about inflation again. That's the way I look at it. You know, we're a long ways from that, so we'll see. But here, here is the policy response that we're doing. I just to, it's good to look at it again. You know, money growth has actually improved quite a bit. I think this is why the stock market's broadened a little bit because we're starting to juice it up again. But we got a long ways to go. Even now at a little over 4% money growth is still lower than about 3/4 of the time since 1960. And look where it's been this period here. Earlier in this bull market we had 16 consecutive months where the annual growth in the, in nominal M2 money supply year on year was negative or below zero after never being negative in its history since this first came out in 1960. That's, that's a whale of a contractionary monetary price. And don't forget the Fed's been contracting its balance sheet and still is continuously in recent years all through this, this period of time. If you look at the real funds rate, you know, the real funds rate right now is Sitting up there a little over 1%, 1.13% when I did this. And you know, it's not much different than it was in the 60s and 70s. It's pretty close to that. But the problem is the economy is nothing like it was in the 60s and 70s. Again, we're, we don't have that kind of underlying growth thrust that can handle this type of real funds rate. You know what the real funds rate average has been in the last 20 years? It's that red dotted line in that chart. It's minus 1%. Basically, that's, that's what we've had to do just to keep 2% real GDP growth on average, we've had to have a minus 1% real funds rate. And if we think we could suddenly now get away with a much tighter funds rate, I just don't think we can. It'd be different if we changed something right now from where what we're where we've been in the last 20 years, but we haven't. We also, you know, we have an inverted yield curve that's, that's now finally positively slowed, but barely. And it's been inverted for the longest period of time ever in our history over this period of time, which is a huge contractionary force putting, you know, on this thing. I think the next chart is the US Dollar. You know, a rising dollar is a, a major contractionary force because what it's really doing every day, the dollar goes up 1% in value. Everyone in America that produces anything is now 1% less competitive to their global competitors. Well, we have the dollar go up 50% over the last decade. And we wonder, you know, we wonder why are many of our companies are struggling in this country if the last time we got anything close to this, we almost took out a brand new record high earlier this year in January. Since the dollar's been floated and that was achieved in 1984. And at least back then we were growing faster than we are today at that period of time. And we're nowhere close to that. But we're still, you know, imposing a very restrictive US Dollar policy. We seem to also have this view that a strong dollar is good, weak dollar is bad. That's just the way I don't, that's not true. There's good and bad about a weak and strong dollar both ways. Strong dollar is a huge contractionary force on real economic growth because it prices out many domestic manufacturers from international competition. It does keep inflation down because it just pounds price pressures into the ground. Whereas a weak Dollar makes us more competitive, makes us more ability to sell abroad. And that's more of an inflationary policy. Now a strong dollar is great if you're traveling to Europe, but it's not great if you want a job in America. And that's kind of where this, this is coming, coming down to.

Jack (34:53)

We're choosing interesting because like all of us have like this patriotic thing I think in us or something like where we want, like if the dollar is our currency in the United States, so we want it to be strong. But to your point, that's a double edged sword. It is pros and cons on your side.

Jim Paulson (35:05)

Very much, Very much double edged sword. And, and we're choosing, I think too much of the one side of that coin right now. We ought to adopt more of a, a competitive dollar, if you will. I've often thought that President Trump chose, his whole idea was we wanted to make America competitive again. That's kind of what his story is. And I'm going to do that by raising tariffs on product, on foreign products to make us more competitive. Well, there's a much easier way and that is heck with tariffs, let's just drop the value of the $10 and suddenly we'll be 10% more competitive with all our trading partners overnight. And we've failed to choose to do that which we could. Now one of the reasons the, the dollar has remained so high is that over much of this time we have been adopting a fairly high interest rate, fairly high tight monetary policy. If you restrict the supply of dollars and you keep the rate of dollars high, you're going to get a strong dollar. And that's what we've, we've got. It's a byproduct of other type policies.

Jack (36:08)

The other thing that was really interesting to me for this, by the way, for this chart was just this idea that everybody's been talking about the weak dollar this year. But when you put it into context, I mean, the dollar's barely down relative to this massive ruin.

Jim Paulson (36:18)

It helps. I mean, look, look, you're right, Jack. It's not much, but you know, look, international stocks I think are leading this year. There's one reason why that's the case. This chart, this little pullback in the dollar has suddenly made them the stars of the stock market. But look at how far this sucker could go. You might want to own anything but America for a while. If we adopt a weak dollar policy for a while, and I don't know if we will, but I think that a weak dollar is one reason that international stocks have been probably the primary reason they've been outperforming even fiscal. Now there's no doubt fiscal policy. We're running 6% deficits to GDP in the federal government, which are still very large by historic standards. Although during this bull in recent years, that's actually been coming in, you know, in the heart, in the heat of the pandemic viral. We had like 18 half percent deficit spending to GDP. Then it went back to about 4 and it went back to 7. Now it's back to 6 or so around that ballpark. But what this chart looks at is something a little different. It looks at kind of the aggregate US Tax rate in this country. And if I take not just federal, but federal, state and local taxes collections as a percent of gdp, what does it look like? And it looks like this right here. The average tax rate across all governments as a percent of GDP was a little over 27% from 1950 to 2005. Since the US economy slowed down since 2005, that rate is actually 1% higher, about 28%. And I know we have big deficits, but the tax bite on the total GDP is 1% more, even though our growth rate is maybe, you know, almost half of what it used to be. And it just doesn't seem to jive to me overall.

Justin (38:15)

Is this individual and corporate?

Jim Paulson (38:17)

Yes, it's all. All taxes. Just all taxes. Kind of an aggregate tax bite, if you will. And it's not, you know, not record highs or anything, but it. But it's still to, in my mind, a question why we're doing that when the economy is growing half as much as it was earlier. It just seems like it should be more like why not have a 20 tax rate if we want to get this thing going again or something. Oh. Anyway, and then the next chart is just on what Trump is doing with tariffs and that people are well aware of that. But again, it's sort of like to me, putting a tax rate on the economy at a time when we're already sort of suffering from a growth problem doesn't make a lot of sense. I understand what he's trying to do, but I think there's a better way to do that with a weak dollar.

Jack (39:10)

Do you feel like we've felt the hit of tariffs now? Because that seems to be a debate a lot in terms of. It doesn't seem like, obviously, to your point, there's certainly a contractionary force here, but it doesn't seem like it's as bad as people had thought it would be, but then other people say, all right, you know, it just hasn't hit yet. Like this is going to take some time for all this to take effect.

Jim Paulson (39:27)

Well, I, I don't, you know, I, I think it's, I don't think it's going to come through a lot in inflation. I think we've got enough other offsets going on too. You know, it certainly is going to show up in some products and that's what you hear about in the nightly news. You know, eggs are up, whatever or, or something. Right. But you don't hear about all the other parts of the pricing that is, is maybe they haven't come down, but the rate of inflation is slowed. And, and again we've have three quarters of our economy is now service based and we're talking about tariffs on, you know, one quarter of the economy and probably less than that overall. So when you, when you look at it that way, it's not as, as dramatically large as, as it seemed to be when he was on the white, his, his whiteboard showing how much he was going to raise tariffs, that most of the economy is not directly affected. Rather they're indirectly affected because of the reduction in business in those 25% that get hit go directly to service businesses. You know, all those auto companies, everybody else that are eating tariffs, they hire consultants and tax advisors and everybody, they're not getting as much business as they used to get so that their feel the pitch and have to lower their prices or not raise them as much. And so I think again it's, it really is a tax and a tax is a disinflationary force. And I think that's kind of what we're seeing through this experiment. It publicly, it just felt like we all know when you raise tariffs, you raise prices. Right? It's got to be inflationary. But the reality is if, if, if we had a, if we going to raise the income tax in this country by 10%, no one would say it's inflationary even though that would greatly raise the price to you and me. Okay, whatever. But the reality is no one would be claiming it's inflationary, but somehow we raise tariffs. And that isn't supposed to be inflationary. It's not. And I think that's what's happened and I still think that's going to be kind of what will happen a little.

Jack (41:37)

Bit when we think about the solution to the slowing growth. We've, we've looked at a lot of charts here and a lot of individual factors that are playing a role here. I mean, do you think that's the solution as well as it's sort of an all encompassing solution across a lot of things, or do you think certain things are more important than others as we look at this?

Jim Paulson (41:50)

Well, I think there's things we can do and things we can't do. You know, we, we can't suddenly make people get married earlier and have more babies. I, I can't think of a quick solution to that. And so, you know, culturally that's probably not going to happen. So there's certain things can't do. You can't. It'd be wonderful if you could make me 40 again. I. Let me know if you find out about that.

Jack (42:10)

I was science, Jim.

Jim Paulson (42:12)

I guess I will give you a lot of animal spirits if you make me 40 again tomorrow. That'd be great. I don't think happened. But, but you know, there are some things, you know, very clearly we could ease more and we could adopt a policy. And this isn't really about talking, easing or not. It's just saying be nice to have a leadership policy leaders, political leaders that got up and said, you know, I, I'm coming in front of you today to tell you that, you know, we, we kind of think inflation's out there. Yeah, it's, it's sort of an irritant and it'll probably continue to be maybe a little bit for a while yet, whatever. But we're, we're going to shift to focusing on getting growth going again in this country. We're going to do stuff to increase your opportunities for success and we're gonna, we're gonna jumpstart job creation and you know, cut, cut taxes and rather than, rather raise them where we're gonna juice the system with what we can to try to get this thing moving again so we don't have college graduates coming out of school and don't can't get jobs. We're gonna give you a future. And I think if you did that, because I think the biggest thing holding animal spirits back in this country is just chronic pessimism. It's almost become a, you know, everyone, oh, why would you want to do that now? It's really bad out there, you know, why would you want to take that risk? Right. My gosh sakes. You know, that's stupid, you know, and that's a very hard thing to overcome. But one of the things that could really help that is if we had leaders in the country that said we are going to, we're going to bring your dreams back and not just say it, but with actions, you know, trying, trying to do that, saying, I'm not as scared about inflation, war, I'm going to get growth going again, then we'll worry about inflation. I think, I think, I don't know. I'm not sure what else, what else to do, to do with that. You know, some might even argue, Jack, you say, well, we should slow, you know, innovations down or something to, you know, to avoid displacements and the like. I don't think that would be appropriate at all either. But I do think there's, there's policy easing that we could do and I do think we could have confident leaders that are letting, letting the public know that that's their primary goal. That is their primary goal is to, to get the economy going again. That will, will ultimately create the opportunities for more and more people rather than trying to subsidize everybody up from the bottom, get it going on the top and opening up. App called I know that becomes political, but that's kind of where I'm at.

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Jim Paulson (45:43)

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Justin (45:46)

Jim, in these next couple of charts here, you've introduced this total policy stimulus index. And then you kind of, you know, I want you to explain what it is, but then work through some of the other charts here too, because you're kind of putting this relative to different parts of the market and showing how different parts of the market have, I guess, reacted during these, this, these indicators, this time, this levels.

Jim Paulson (46:09)

Yeah, I'm focused on this because I do think we're close to the point to where we are going to be adopting a period of time of policy Easing again here for a period. We're starting to do it. We've already dropped the dollar a little bit. The yield curve has been steepening a little bit. Bond yields are down, the Fed funds rates coming down, money growth is picking up. We are into that and I think that's going to get more aggressive in 2026. And if it does, what does that mean for the stock market? It means a lot for the economy, I've talked about that. But what does it mean for the stock market? I think one of the primary reasons this has been such an incredibly narrow bull market led really by two sectors most of the time is because those two sectors are largely policy invariant. Their innovation sensitive period. As I said in the past, if I could come up with a thing called the iPhone, I don't need any policy juice because everyone in the world's going to need what I got and I'm going to have plenty of sales growth for as long as I can say I don't care if the funds rates 30% or zero, I'm going to do well. And that's kind of what's happened with those two sectors. But most everything else is tied to the traditional industrial sort of economic cyclical pattern that needs policy juice and we did not give it in this cycle at all. And I think we're getting close to finally bringing some of that. And one way to look at that then what has been the state of economic policy stimulus. And I've used this for many years and it is not, you're not going to find it in any economic textbook. It's not approved by the American Economic Association. But I'm a, I'm an economist by training, but I'm a investment manager by practice. And I have over the years I use what works. I'm less concerned about whether it's theoretically correct. I just, if it works can make me money. I'm fine with that. And this thing's been useful to me. And all I'm doing is taking all these diverse policies and putting them into one variable, total policy stimulus. And I'm going to be able to add them together just by the simple construct of for each separate policy, I'm going to do a percentile ranking of it. Now they all have the same scale and so I can add them from 0 to 1. They will be percentile rankings. I can add them together and take an average and I get the average policy stimulus on a percentile rank basis. The four things that go into this are the annual growth of money supply, the Treasury Fed Funds yield curve, the US dollar and the deficit to gdp, deficit or surplus to GDP ratio and fiscal policy. So you got monetary, fiscal policy, dollar policy, all in one sort of thing going back in this case to 1970. And you could see it ranged from 0.1 to 0.9. Basically on a percentile ranking basis, point nine would be maximal stimulus and point one would be minimum. The way I have this set up, and if you look at the red, I highlighted in red the October 12, 2022 to date, which is this bull market, and you could see how paltry stimulus has been. We never had most of these bull markets the past the blue line shoots up at the start of those bulls. They generally are getting us out of a recession. And that's how bulls start. This one never did that. It went down and then it's just recently started to improve. On average it's been a little over point three, which in the past, when you're at point three policy, you're generally going to, you're either in or headed for recession. Historically, that's how weak the policy response has been. But what happens when this policy variable goes up versus goes down or is very weak? And that's what I want to look at in the next few charts. Just looking at some different things in every one of these charts, the red is the total policy stimulus and the blue is going to be the particular investment, relative performance of the investment. I'm talking about this. The blue is the relative performance, total return performance of the equal weighted S&P 500 index. And all investors know this has been a pathetically bad investment for a long time. But if you look at this without getting the real, you know, cyclicals up and down, just look secular for a minute. If you go back to 2010 to date, policy juice mainly has been headed south almost all the time. With the only exception being the response to Covid for a few short months. Well, guess what? The equal weighted performance has been equally crappy for just as long with one short period of outperformance 21, 22 during the time when they finally gave a little juice. Otherwise it's been bad. Now, you know, it looks like it's been good or bad over time. But on the green, on even, each of these charts shows how this particular segment of the stock market has performed on a relative basis for all the months when the policy variable went up and all the months when it went down. And you can see up there for, for, for the equal weighted index for all the months that the TPS fell, it it underperformed by about 180 basis points a month annualized and for all the months it rose it outperformed by 3.14% annualized. So certainly equal weighted likes juice compared to the market cap weighted. If you go to the next one, same thing. Only this one is looking now at small cap stocks and they have a closer cyclical relationship and they this one has the greatest relationship up and down to policy juice which is not shocking. We kind of know the sense. Well yeah, small is like small like like liquidity. They like lower rates. But it's pretty dramatic. I mean when you're talking about 719 basis points when policy goes up versus 555 negative when it goes down. And if you're a small cap manager, you know, life has been horrific and I think a lot of it is that red TPS chart. The good news is it's starting to turn up and maybe play play in your favor for one.

Justin (52:28)

What's interesting on that too is that even goes back further than the large like the, the TPS starts to decline like in you know, late 2000, whatever 0809 and then it just kind of has that one spike up. But it's been basically. And small caps have been a tough place to be.

Jim Paulson (52:42)

Yep. For the. But I think it's because policy's been pretty bad for the whole time. That's kind of my point. And I just think that you know, even if you don't whatever you think about relation to pot, you just think we can't forever take policy south. I don't think and you know, we've kind of been there for 15 years most at some point it's probably going to go the other way. And I think we're getting close to that point. That's kind of what I'm getting at here. This one looks the blue line in this case is cyclical stocks. They also have a pretty darn close relationship as you'd expect with policy overall. Actually I just published this this morning. If I take long term 10 year bond yield and I push it forward by 18 months and invert it, it's got a very close relationship to cyclical stock relative performance and it's now pointing straight up for the next 18 months for cycle stocks just now bond yield started to come down about 18 months ago and it's now the appropriate lag time that probably shows up for the cycle sectors. In this case the cycle sectors are your basic ones in the S and P materials industrials, consumer discretionary financials. Some of which have been doing better of late and some which are still trailing. But I do think we're starting to see some broadness and we're starting to see it in part because of the policy pickup. This is just value stocks. Now, what's interesting here, this is the least sensitive to TPS that I looked at, which I wouldn't have thought going in. I would have thought value be pretty sensitive to this, but it's not. You can see in the green there, when the TPS fell every month, it only, it outperformed by 62 base points. Since 1970, when it rose, it outperformed by 221. So there's not a huge difference like we see in a lot of the other components. I'm not sure why that is exactly. There certainly is a difference between value and cyclicals and smalls and some of these other things, but it still kind of responds differently to policy, but it's not real strong. So value managers, I don't know what to tell you on that. It might not be the best place to be, even though they might do a little better. And finally, I think I have foreign stocks. And this one on the tps, it doesn't, it doesn't look super close, but again, it has that same secular pattern. You can see the, the as policy has been coming off since 2010, international stocks have done very poorly over the whole time. And they, they do positive 2.06 versus when TPS falls, minus 374. But there's only one policy that really, really matters for international stocks. Of those four in there, they matter. But the big one is if I just use the dollar on here, the real value of the US Dollar, it, the difference in returns are something like when the dollar goes up, it's minus 10% relative performance and when the, when the dollar goes down, it's plus 15% annualized performance. So a lot of this performance to the overall TPI is mainly just what happens to the dollar on international stocks. And they could have a lot of room today. And this is just kind of a summary chart, Justin, of, you know, the policy response of these, of these different, different pieces. And you know, we've been dealing mostly in the red most of the time here in this bull. That's my point. And I, I think that we're, if you're outside of the, the new era sectors, you're, you've been struggling with red and maybe we're finally getting to the blue for a period of time. If we bring some policy dues, we're going to see a very different leadership market than we've had up to today.

Justin (56:29)

This next one here is looking at the. I think you just tried to introduce some of the technology price earnings multiple.

Jim Paulson (56:36)

I, I think. Well, I just wanted to. Real quick. I won't spend a lot of time on this but I just wanted to. I, I think a big, certainly a big debate in every investor's mind is what's going to happen with Textile here. I mean if policy shifts and we go to easing does that gonna will it can only happen with a collapse in technology stocks. I mean a lot of people think the only way this can end is bad, right? Have another bubble. The only way it can end is bad. And, and there's certainly possibility of that. I'm not saying I know that's not the case, but I suspect that there's a case where I think more likely is tech just starts to underperform. Doesn't beat the marks anymore because the juice, much like 2021-2022 when they brought the juice, that was the last time tech underperformed by the way. Equal weighted. Beat it Smalls. Beat it. Okay. The last time when the juice was brought, tech didn't not participate. It went up. It just went up less than the overall market. And I think that's kind of what's going to happen. Tech. The real issue is is this dot com. I don't think it's even close. This is just a chart on valuations. The trailing twelve month multiple is 45. Sounds horrendously high until you look@.com and it was 65. Then it sounds well maybe, maybe it's okay on the next chart I think there's other differences that aren't as well brought out. This looks the blue line here overall is the S&P 500 technology index, the price index and the red line is the X tech index of the S and P. And what I want to kind of compare is how did all the other stocks do in.com versus how are all the other stocks doing the last few years here and in.com? up until about 1998 up until the last two years of that bull run they did just as well as tech stocks. They went up every bit as much as tech stocks did. That is by the time you reach the top in 2000 most all stocks had gone up a lot. That is not the case here. Case here is really rest of the stock market. What's in red hasn't gone up hardly at all in this bull market in tech so tech could come apart and a lot of the rest of the market doesn't need to come apart like it did to some degree after the.com go to the next one. The Fed response has already been much different than it was in dot com. This looks at the relative total return index in blue for tech stocks to the fed funds rate in red. And when, when the relative performance of tech stocks peaked In March of 2021 Tom, it was already down. If you look there on 1221 the 1-2-2021 it had fallen from almost 0.5 or 0.48 to 025. Basically the dot com collapse was 80% of it was already over before the Fed even put in place its first easing move. So basically the tech collapse was done before the Fed even got going to respond here the Fed's already responding even before the the relevant performance of tech has peaked. So it's a very different response and I think it lends itself much more to one where tech doesn't necessarily have to collapse because the Fed's already easing conditions where it was playing catch up if you will in the dot com. And then finally I, I just, I just went back compare two 10 year runs in the bowl because we haven't had a 10 year tech run here that wasn't interrupted. But really if I go back to 2015 over this period of time that that's the contemporary bull market in blue and it is the relative total return index of technology stocks from 2015 to date. And the red is what the dot com relative performance tech stocks did from during the bull market from 1990 to 2000 in tech. And what I want to point out is they both ended up about in the same place. And that's what people kind of reflect on. It's just that our bull market did it over 10 years over multiple bull markets whereas the dot com did it all really just in the last two years. It really wasn't much of a bull for technology until the end of 2000 or the end of 1998 until March of 2020. The great bulk of that bull was all achieved in that last two years. I think this is very different bull markets. The blue one, the one we have today is kind of a steady eddy controlled bull and the redone.com is very much a faddish emotional irrational bull run ending in a colossal advance in the last two years. The latter is much more susceptible to collapse than is the four. Well I don't think tech's going to necessarily collapse. I just think it Might underperform.

Justin (61:53)

Yeah. And you know, you're certainly, if you want to give like a 20, 26 S P target, you know, by all means throw it out there. I don't mean to put you on the spot here, but I think one thing I'll say is from listening to you is that you know, it could be a year where something like the F S P has like below average, maybe muted returns. It's not an all out catastrophe by any means. But then there's other areas of the market that you know, where that, that show much stronger leadership if some of this stuff that we've talked about today actually materializes. So I think next year is going to be an interesting year to see how all that plays out.

Jim Paulson (62:30)

Yeah, I'm not a big one on targets because I don't know that we just change them all the time. And I, I, I, I guess though I would lean towards kind of what you're talking about Justin, is that, you know, what, you know, what are we doing this year? What we up 10. What are we up 10%, 12%? I don't even know.

Justin (62:50)

Yeah, 12 or 13% of the S.

Jim Paulson (62:52)

And P. Like that of the S and P. I think, I think maybe we do a little better than that next year. You know, I'm not saying 20, but maybe, maybe 15 or a little better. And the only reason I say that is because a juiced market typically delivers better results than one that's not. And tech, you know, this year tech had another great year but a lot of the rest didn't again. Although some of it started to. I kind of think if we, if we bring the juice and we have a more broad based run, that'd be like 20, 20, 21, 22. I just think a lot of those stocks haven't had a run yet, so they could have a pretty good first year run. To them it's like a first year, first year stimulus run. And so I guess I'd err on the side of maybe having something, you know, surprising like 17% advanced, something like that, rather than a 10. But I'll take what they give give us I guess overall.

Justin (63:49)

Yeah, you know, we for the past few years have done our own year end price target episodes and then we rewind the clock to just see how wrong we were because it's impossible.

Jack (63:57)

We actually, yeah, we actually do them as a joke to basically show how hard it is to make targets. So we effectively do our absolute best to come up with targets but we're always completely wrong. And you know we just go to show that it's such a challenge to do that correctly.

Jim Paulson (64:08)

Well, I. I don't know. But, you know, what, what's, what's the annualized. What, What. What is the annualized volatility in the.

Justin (64:15)

S and P500 over something like a 16% annual volume?

Jim Paulson (64:20)

You're going where I'm going.

Justin (64:22)

Yeah.

Jim Paulson (64:22)

So, like, every. Most every street estimate for the coming year will be way inside the average normal volatility era of the S and P, which basically means if you're doing a T statistic on the significance of that forecast, it would. It would have no significance whatsoever.

Justin (64:41)

Right.

Jim Paulson (64:42)

And that's kind of how I feel about them a little bit. That. And who. Who needs to stick their neck out more than I already have.

Justin (64:48)

Exactly. All right, Jim. Well, listen, thank God. Thank you very much, Jim. The next time we see you, it will probably be after the New Year. So if we don't see you before then, Happy New Year. Happy New Year. Happy Holidays, and thanks so much for sharing your views with our audience.

Jim Paulson (65:04)

We appreciate it, you guys too. Thanks for having me.

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