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.

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.

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.

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."

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."

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."

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.

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.

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."

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.

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."

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.

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.