Jeff Hirsch on Why Big Federal Spending Plus Inflation = “Superbooms”

Summary

Masters in Business: Jeff Hirsch on Why Big Federal Spending Plus Inflation = “Superbooms”

Bloomberg Radio's Masters in Business episode, released on February 19, 2025, features an insightful conversation between host Barry Ritholtz and Jeff Hirsch, the editor-in-chief of Stock Traders Almanac and author of the 2011 book Why the Dow Jones Will Hit 38,820 and How You Can Profit from It. This episode delves into the intricate relationship between federal spending, inflation, and market booms, drawing parallels between historical events and current economic policies.

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1. Setting the Stage: Federal Spending and Market Cycles

Barry Ritholtz opens the discussion by highlighting the newly elected president's bold statements, such as threats to take over Greenland, recapture the Panama Canal, and make Canada the 51st state. He questions whether such saber-rattling has implications for investors' portfolios.

Barry Ritholtz [01:43]: "The newly elected president, even before he was sworn in, threatened to take over Greenland, recapture the Panama Canal and to make Canada the 51st state."

To explore these implications, Ritholtz invites Jeff Hirsch to shed light on his theory that significant federal spending combined with inflation can trigger "superbooms" in the stock market.

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2. Jeff Hirsch's Superboom Theory: Historical Foundations

Jeff Hirsch explains the genesis of his superboom theory, rooted in the observations made by his late father, Yale Hirsch, founder of the Stock Traders Almanac.

Jeff Hirsch [03:27]: "Yale Hirsch discovered this amazing perennial pattern and how this phenomenon is based upon the exorbitant government spending creates high inflation and how the subsequent decline of purchasing power, the dollar drives the market to incredulous new heights."

He references historical cycles where major government expenditures, often linked to wars, led to substantial stock market growth. The combination of increased spending and resultant inflation diminishes the dollar's purchasing power, making equities more attractive.

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3. Historical Parallels: From the 1970s to the 2010s

Hirsch draws parallels between the late 1970s and recent economic events. He recalls how the Vietnam War and the oil embargo-induced inflation in the late 70s culminated in a 500% bull market.

Jeff Hirsch [03:27]: "In 1976, my late great father discovered that government spending paired with inflation could lead to massive bull markets."

Transitioning to the early 2010s, Hirsch discusses the post-9/11 era, highlighting increased military involvement in Afghanistan and Iraq. These engagements led to heightened federal spending, echoing the patterns observed in previous decades.

Jeff Hirsch [04:34]: "We were looking for the end of the combat in Afghanistan to spark the end of the bear market and the beginning of the boom."

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4. The 2010 Superboom Prediction and Its Validation

In 2010, Jeff Hirsch predicted that the Dow Jones would soar from 10,000 to nearly 40,000 by 2025, a forecast that initially met with skepticism from Ritholtz.

Jeff Hirsch [04:34]: "... we could get to 39,000 in 15 years."

Over time, as the predicted trends validated his theory, Ritholtz acknowledged the robustness of Hirsch's analysis.

Barry Ritholtz [01:43]: "Not only did you convince me, but I wrote the forward to that book that ended up coming out in 2011."

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5. Contemporary Analysis: COVID-19 and Fiscal Stimulus

The conversation shifts to the COVID-19 pandemic's economic impact, particularly focusing on the fiscal stimulus packages like the CARES Act.

Barry Ritholtz [06:41]: "The fiscal stimulus of CARES Act 1 and 2 was about 10% of GDP. You had to go all the way back to World War II and then the Marshall Plan to see 10% of GDP as a fiscal stimulus."

Hirsch concurs, emphasizing that such spikes in federal spending, whether driven by war or pandemic response, are catalysts for economic booms.

Jeff Hirsch [07:36]: "This is really about the spending in general... massive government spending driving inflation and super booms."

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6. Current Administration's Policies: Military, Tech, and Energy Investments

Under the new presidency, there's a pronounced focus on military spending, energy production, space exploration, AI, and data center expansions. Hirsch believes these investments mirror past military-driven expenditures that have historically fueled market growth.

Jeff Hirsch [08:58]: "Ukraine and Israel have shown us and proven that the conflict is all about tech... I'd expect the US Military to be spending and ramping up tech."

He predicts that increased defense spending will flow into technology sectors, particularly defense tech, benefiting companies involved in drones, cyber warfare, and related technologies.

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7. Sectoral Impacts: Technology, Defense, and Energy

Hirsch identifies specific sectors poised to benefit from the current economic cycle:

• Technology: Advancements in AI, robotics, and defense technologies.

  Jeff Hirsch [11:55]: "I think it's tech. I really think it's tech... drones, robotics, AI."

• Energy: Increased demand for energy production and infrastructure.

  Jeff Hirsch [11:55]: "Energy for sure because we've got to power everything."

• Healthcare AI: Emerging opportunities in medical diagnostics and treatment through AI.

  Jeff Hirsch [13:05]: "There's some future there... medical and healthcare AI."

Ritholtz concurs, noting the burgeoning fields within these sectors and the potential for substantial investment returns.

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8. Market Projections: A Bullish Outlook to 2030

Hirsch updates his superboom forecast, projecting the Dow to reach over 62,000 by 2030, driven by sustained federal spending and technological advancements.

Jeff Hirsch [08:58]: "... we've got some further upside to, you know, 62,000 and change, which I've written about probably by, you know, average 10% gain a year probably by 2030."

He likens the current technological surge to the early days of the internet in the mid-90s, suggesting that society is on the cusp of significant paradigm shifts powered by AI and related technologies.

Jeff Hirsch [14:36]: "... we're kind of at that period of time in this technological boom... we're at that, you know, early mid-90s time frame."

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9. Investment Strategy: Embracing the Superboom

Concluding the discussion, Ritholtz and Hirsch emphasize the importance for long-term investors to focus on sectors aligned with federal spending trends. They advocate for investments in defense, energy, technology, and healthcare AI, anticipating continued market rallies throughout the decade.

Barry Ritholtz [15:13]: "If you're a long term investor and you are constructive about both the economy and the market, you should be looking at sectors like defense and energy and technology."

Hirsch supports this strategy, highlighting the transformative potential of AI and defense technologies in sustaining economic growth.

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10. Final Thoughts: A New Era of Superbooms

The episode wraps up with a consensus that the interplay between federal spending, inflation, and technological innovation is setting the stage for unprecedented market growth. Hirsch's superboom theory, supported by historical evidence and current policy trends, offers a compelling narrative for investors aiming to capitalize on the next wave of economic prosperity.

Jeff Hirsch [15:13]: "We're at that early mid-90s time frame... the culturally enabling paradigm shifting technology, which AI and all of its related ancillary items that we spoke about are part of."

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Key Takeaways:

• Superboom Theory: Significant federal spending combined with inflation can trigger massive bull markets.

• Historical Patterns: Past events like the Vietnam War and COVID-19 stimulus align with periods of substantial market growth.

• Sector Focus: Technology, defense, energy, and healthcare AI are poised for growth due to current economic policies.

• Market Outlook: The Dow Jones is projected to continue its ascent, potentially reaching 62,000 by 2030.

For investors, understanding these dynamics is crucial for strategic portfolio allocation in the years ahead.

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This summary captures the essence of the discussion between Barry Ritholtz and Jeff Hirsch, highlighting the interplay between federal spending, inflation, and market dynamics that could shape the investment landscape over the next decade.

Transcript

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[Barry Ritholtz]

The newly elected president, even before he was sworn in, threatened to take over Greenland, recapture the Panama Canal and to make Canada the 51st state. Hi, I'm Barry Ritholtz and on today's edition of at the Money, we're going to discuss whether the saber rattling has implications for your portfolio. To help us understand all of this and its implications for your portfolio, let's bring in Jeff Hirsch, editor in chief of Stock Traders Almanac and author of 2011's why the Dow Jones will hit 38, 820 and how you can profit from it. And full disclosure. Jeff wrote a piece, I wanna say it was like 2010, talking about the upcoming super boom driven by the combination of war and inflation, and basically said the data suggests we should hit 39,000 by 2025. And I called him out on this nonsense. This is the single craziest thing I had. And by the time you and I finished that conversation and you showed me the data was overwhelming. Not. Not only did I, you convince me, but I wrote the forward to that book that ended up coming out in 2011. So let's discuss what war plus inflation means in the late 1970s. Your dad very famously said the combination of the Vietnam War and the oil embargo driven inflation was going to lead to a 500% bull market, which kind of shocked everybody when he came out with it. But that analysis turned out to be exactly right. Explain the thinking behind this.

[Jeff Hirsch]

Yeah, we've still got some of the old 3420T shirts, Dow 3420T shirts, but. Yeah, that's right in 76, founder of the Almanac, my late great father, Yale Hirsch, discovered this amazing perennial pattern and how this phenomenon is based upon the exorbitant government spending creates high inflation and how the subsequent decline of purchasing power, the dollar drives the market to incredulous new heights. You yourself, you know, were incredulous at the time cycles based on the previous moves from, from World War I, World War II in Vietnam, which is what Yale was keying on, and the associated massive government spending and the inflation caused by it.

[Barry Ritholtz]

And then the subsequent version that you were writing about was Iraq and Afghanistan. And there was some surges of inflation during the financial crisis. Kind of eased back when the Fed took rates down to zero. Tell us a little bit about what you were looking at in 2010 that said, hey, we could get to 39,000 in 15 years.

[Jeff Hirsch]

Yeah, I remember. You know what, I remember your actual post. I think the headline was WTF?

[Barry Ritholtz]

That's right. That's right. We were about 10,000 on the Dow at that time. You were calling for going from 10 to almost 40. It felt like it was ridiculous.

[Jeff Hirsch]

I mean, we had Yale's work behind us, that amazing chart that I redid of his where it shows the, you know, it's the log chart of the Dow which shows the inflation, the CPI and the moves. I mean, there's, there was some, you know, people talk about these cycles with, you know, the 17 and a half year, the 18 year, the 60. They talk about these sort of arbitrary lengths of time. We looked at it and what Yale discovered was that these events in history that create these cycles, like Archduke Ferdinand getting assassinated in 1914, Germany signing the Armistice in 2018, the Gulf of Tonkin Resolution in 64, Saigon falling in 75. And then for us, currently, what we were seeing, what we were seeing in 2010 was this development of after 9, 11, which was an act of war. And ahead of the time we were looking at, we had already gone into to Afghanistan. We were the whole saber rattling. There was a bye, bye, bye. We put out in 22 when we in O2, excuse me, when we went in there, but we were looking for the end of this, this huge military involvement overseas. US boots on the ground in massive numbers is what created this pattern or initially created it. And we were looking for the end of the combat, you know, in Afghanistan to sort of spark the end of the war, end of the secular bear market and the beginning of the boom. And I think we all kind of have looked back a little hindsight around 2013. I think that little bear market bottom in 15 and 16 kind of, you know, signifies the end of that secular bear, not the ultimate bottom. I mean, we don't measure the secular bear market from 74 to 2000. We measure from 82.

[Barry Ritholtz]

Right. That was the new highs that were set. And arguably this cycle, new highs were set in 2013 that eclipsed 07 and 2000. So I recall early on in the COVID crisis and the first CARES act, and I read a fascinating analysis that pointed out the fiscal stimulus of CARES Act 1 and 2 was about 10% of GDP. I think it was just CARES Act 1, about 10% of GDP. You had to go all the way back to World War II and then after that the Marshall Plan to see 10% of GDP as a fiscal stimulus. And I wonder how that equates to the equivalent of war. Plus the obvious subsequent inflation we experienced in 21, 22, 23 is the quote unquote, war on Covid. Very parallel to what we've seen in the past.

[Jeff Hirsch]

100% very parallel. And that's something we've spoken about and it's really about overall federal spending. I mean, the evolution of this pattern of federal spending, it's not just war, but spikes like you just mentioned in federal spending like we had in Covid, where it goes above trend. I mean, this probably started to change a little bit going back to FDR with the New Deal ahead of World War II and then the federal highway.

[Barry Ritholtz]

You know, spending, state highway system.

[Jeff Hirsch]

Yeah, that continued after World War II. So it's really about, you know, past federal spending driven by war conflicts and, you know, but spending outside of the normal budget. And Covid and the Inflation Reduction act, the CARES act are prime examples of massive government spending driving inflation and super booms.

[Barry Ritholtz]

So it's a new era, it's a new presidency. There has been emphasis on things like military spending, energy production, space exploration. They're carrying over the previous emphasis on AI and data center builds. How do you look at that? How does federal policy and spending in those areas seem parallel to past military spendings? How does that affect your projections?

[Jeff Hirsch]

I mean, it's quite parallel, but it's part of my projections. I mean, we've updated our super forecast. I think we've got some further upside to, you know, 62,000 and change, which I've written about probably by, you know, average 10% gain a year probably by 2030. But, and that's all Dow based because what starts on. But right now, you know, it's about tech. It's all about tech. Ukraine and Israel have shown us and proven that the conflict is all about tech. Now got drones and cyber wars. You know, I'd expect the US Military to be spending and ramping up tech. So all that military spending, you may find its way into technology. I mean, let's call it defense tech.

[Barry Ritholtz]

And you see that in companies like Palantir and Lockheed. Not just drones, but signal jamming and there's just an endless array of security. Yeah, it's clearly causing a big boom in fiscal spending. But let's bring this back to the newly elected President Trump. Canada, Greenland, Panama, Canada. I can't believe we're talking about Canada take off. So, so that sort of saber rattling, do you need a hot war for the same thing to take effect or do you just need the government's fiscal spending and the threat of war to lead to the same sort of cycle?

[Jeff Hirsch]

I think it's not so much the threat of war, it's overall federal spending and, you know. Saber rattling. Yeah, it's saber rattling. You know, I'm not convinced anything is going to happen there per se, but it's really about the spending in general. And if we're going to be doing deals with Greenland for security and raw materials, that would be beneficial. We've got, you know, China doing deals in Africa and around the world. There's, there's, there's definitely a new push for, for global, you know, security and global dominance and we've got to play in that field. And Trump's kind of showing some, doing a show of strength, but he's a deal maker. Whether, you know, you like the man or not or voted for him or not. He's going to try to do everything in his power to leave a legacy like we spoke about previously, of, you know, a prosperous economy, a raging bull market and, you know, global peace and security is what he's going to try to do. And that's going to help our economy. All the spending, whether it's Stargate or military or otherwise is going to create jobs and keep the economy going. I mean it's really all about the economy as Jim Carville likes to say.

[Barry Ritholtz]

It's the economy stupid, of course. So let's look at sectors we've mentioned defense. What about energy? What about consumer staples? Is there any specific sector effect to this war plus inflation, long term cycle?

[Jeff Hirsch]

I think it's tech. I really think it's to tech. I mean you're talking about, you know, drones, robotics, AI, Energy for sure because we've got to power everything. I actually currently have a position in, in the gas and energy, you know, explorers and producers. The, the equipment people there. The XCS XLE is, it's a seasonal treat for us as well. I'm not sure Staples is, is the, the place to be but you know, general retail and buying of things is up. But I think energy and tech and all this new technology that that is that we're fighting wars with, that we're operating everything on is, is where it's at. I mean you got to own the queues basically, right?

[Barry Ritholtz]

The QS, there's a BlackRock ETF run by the guy who's running their technology group for a long time. I want to say it's their artificial intelligence etf. The symbol is bai and I don't know, some crazy chunk of it is Nvidia, Microsoft and then everybody else in that space and it's sort of like Q's on steroids.

[Jeff Hirsch]

It's like two XQs and then there's the health care AI. We just heard, you know, Altman and Ellison talking about it, you know, in the White House with Trump there. It's. Hopefully it'll help us.

[Barry Ritholtz]

Sam Altman from OpenAI and Larry Ellison from Oracle.

[Jeff Hirsch]

Yeah, how we could cure cancer and do disease analysis. There's a small micro cap stock I have that's trying to do medical, you know, AI to better diagnose and get you better proper treatments and identify things with all your numbers. You know, medical data as you know is still analog. Huge, but it's not quite digitized enough yet. So that's, I think there's some future there. So add that to the list of technologies is you know, medical and healthcare AI.

[Barry Ritholtz]

So to wrap up we have a massive shift from just monetary policy in the 2010s following the financial crisis to the COVID spend. The military buildup, the AI buildup, the energy buildup, these are all policies and sectors of the economy that have been running fairly hot for the past five or so years. The new administration is expected to really supercharge this. And if historical patterns hold up, according to Jeff Hurst of the Stock Traders Almanac, we could see this market continuing to rally for the rest of the decade somewhere in the high single digits, low double digits. Is that a fair way to describe your perspective?

[Jeff Hirsch]

For sure. Think about AI and all the related tech about where we were in like 92 to 95 with Windows 95.

[Barry Ritholtz]

Right. You know, early Internet days.

[Jeff Hirsch]

Early Internet days. My view is that we're kind of at that period of time in this technological boom. Remember the other part of the super boom equation that I added to it, on top of war and inflation and peace, was the culturally enabling paradigm shifting technology, which AI and all of its related ancillary items that we, that we spoke about are part of. And I think we're at that, you know, early mid-90s time frame.

[Barry Ritholtz]

So to wrap up, if you're a long term investor and you are constructive about both the economy and the market, you should be looking at sectors like defense and energy and technology. And you should not be surprised that the current bull market might have a whole lot further to run. I'm Barry Ritholtz and this is Bloomberg's at the Money.

[Oracle Representative]

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