Episode Transcript
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Speaker 1 (00:00):
I'm so happy to have back on the show my
good friend, my old friend, I do mean old Brian Westbury.
Speaker 2 (00:07):
Brian and I have been friends.
Speaker 1 (00:09):
For at least thirty years, and Brian is one of
the great economists in the United States. He's the chief
economist at First Trust that has some I don't know,
a few hundred billion dollars of assets under management. His
opinion is very important, and we're going to spend some
time today talking about the economy and talking about markets.
(00:33):
Don't confuse them as being the same thing. They're related,
but they're not the same, and we are not really
going to In fact, we're going to explicitly avoid making
this about politics.
Speaker 2 (00:46):
We're going to talk about markets and the economy.
Speaker 1 (00:49):
So hi, Brian and your studio, your home studio looks fabulous.
Speaker 3 (00:54):
Well, thank you Ross.
Speaker 4 (00:55):
Great to be with you, and yes we are old friends.
Speaker 3 (01:00):
Uh.
Speaker 1 (01:00):
So let's let's talk markets first and then and then
we'll talk the economy.
Speaker 2 (01:07):
Uh.
Speaker 1 (01:07):
Yesterday the market was down a lot. Today it's up
almost as much. Before we talk about up and down.
In your view of stock valuations, what do you make
of the recent massively increased volatility in markets with much
bigger moves day after day than we used to seeing
for recent years.
Speaker 3 (01:30):
Yeah.
Speaker 4 (01:30):
I mean, so we have to begin with the fact
that I thought and still believe that the markets were
overvalued when we came into this year. And then you know,
I don't want to you know, beat up Trump or
not beat up Trump or whatever, but we have clearly
a completely different direction and policy.
Speaker 3 (01:51):
He's going after the Fed. Uh, we have tariffs. Uh.
Speaker 4 (01:55):
There there seems to be some worry around the world
about you know, the US bond market and reserve currency
status and all of these kinds of things. At the
same time, Deep Seek came out and it was a
game changer for AI and so that's I really think
that's when the mag seven started having their problems. And
(02:18):
then you add in all of this policy uncertainty on
top of it, and you get volatility. I expected the
market to go down this year, and so I have
a hard time blaming one thing or another on the
fact that it's going down. You need a catalyst, usually
something that kicks it off. And then finally I'll just
(02:41):
add we we were in ever since COVID what I've
called it is we were in the era of easy
everything We're running two trillion dollars budget deficits. The Federal
Reserve is printing money like crazy, was holding interest rates down,
then had them, then cut them again, and so all
(03:03):
of this going on with an overvalued market. It doesn't
it doesn't surprise me at all that we have more volatility.
Speaker 1 (03:09):
Let's stick with the overvalued thing for a moment. You
said that you believed that the market was overvalued, and
the market seems to have agreed with you thus far,
and then you said, I still think it's overvalued.
Speaker 2 (03:25):
So how are you How are you thinking about value?
Speaker 1 (03:29):
And let me just add one more thing that kind
of ties into what you and I were talking about
on the phone yesterday. So a lot of times when
people are talking about fair value for the market, they're
really just thinking in terms of, you know, discounted cash
flows and what's the interest rate and what's the earnings
on the S and P and put it in a formula,
and that's fair value. When when you think about fair value,
are you just are you doing that kind of analysis
(03:50):
or do you add in other stuff like, for example,
might foreign investors be repatriating money out of the US,
and therefore fair value you might be less than just
using that formula.
Speaker 4 (04:04):
Yeah, you know, yes, a little bit. So let me
explain how I look at value in the market. We
have seventy plus years of data, really good data on
the S and P five hundred, and that's what I
focus on. So it's the five hundred biggest companies in America,
and we know what their earnings are every quarter. And
(04:27):
by the way, I get that data from the Treasury
from the IRS.
Speaker 3 (04:31):
I figure if companies are reporting earnings.
Speaker 4 (04:34):
To the IRS and they owe taxes, then they really
did make that money. Sometimes SMP reported earnings are a
little suspect. I'm not saying anybody's lying, but they add
all kinds of stuff in it. I just want to
use the earnings that they pay taxes on, and so
we know that every quarter for the last seventy years.
(04:55):
And then you have to discount those profits with interest rates.
So the lower interest rates are, the more profits are worth.
The higher interest rates are, the less profits are worth.
And then I just do a simple three way calculation.
If you give me the S and P five hundred
and interest rates, I'll tell you what the market thing's
(05:16):
earnings are. If you give me earnings and interest rates.
I'll tell you what the S and P five hundred
should be compared to its average over the last seventy years.
And so when we look at that, at the beginning
of this year, the market's fair value was about forty
eight hundred. Now that's the S and P five hundred.
(05:38):
It's trading fifty one, fifty two hundred right now. Our
forecast was fifty two hundred. And the reason that I
made I didn't go all the way to forty eight
is we were going to get tax cuts and extension
of the Trump tax cuts, maybe some more tax cuts
on top of that. I thought we would have a recession,
(05:59):
but it would be relatively mild. And I didn't I
didn't add in big uncertainty over tariffs and on again,
off again tariffs, that kind of thing. But I just
said fifty two hundred. Now, one thing to remember about
my model, actually you just heard about it, but is
(06:19):
that it's just a thirty thousand foot view. I'm not
a stock trader just because the market is overvalued. I
tell everybody, don't go short like that. That doesn't mean
it doesn't mean you should just short the market. But
what I was saying is, hey, the MAG seven is
(06:40):
thirty five cents of every dollar you invest in the
S and P five hundred. So if you do invest,
stay away, like go to where there's value. Because the
smallest one hundred companies in the S and P five
hundred are trading at something like a seventeen pe, whereas
the MAG seven was trading at a thirty five pe.
(07:02):
So you can buy stocks that are cheaper now. By
the way, European stocks are really cheap, and they have
been for a long long time. The US market has
gone up, the European market has gone sideways at best
until this year, and so that's been a place of
value as well. So I'm not shocked to see Europeans.
(07:26):
Let's say, say, you know what, we're a little worried
about those high valuations. Maybe we should invest more at
home where we have low valuation. And anyway, we're a
first truss. We're a I guess I would call us
a quant shop. We invest like a lot of other
people do, but we really analyze the data about companies.
(07:47):
What are their earnings, do they raise dividends every year,
what are they doing with buybacks? And we look for
places where there's value rather than just growth and momentum.
In other words, we're always we want to buy a
we want to buy a dollars worth of stock for
less than the market average. And if we can find
(08:08):
those stocks, and you can all the time, they're not
hard to find. That's what That's what this model meant
to me. Yes, we're overvalued, it doesn't mean every stock
is overvalued. So I was just urging caution for people,
especially when we're going to move into a year where
there's a lot of policy uncertainty.
Speaker 1 (08:28):
We're talking with Brian Westbury, chief economists at First Trust.
The website is FT portfolios dot com. I encourage you
to go to FT portfolios dot com and sign up
for Brian's various emails. They're free, they're in plain English,
which you don't always get from economists, and they will
really help you understand not just markets, but the economy
(08:50):
as well. Before we get to the economy, just one
or two more sort of markets questions. What do you
think the significance is if any, Maybe people are making
too much of it of the recent weakness in the
US dollar, which I also see mirrored in a new
high price in gold.
Speaker 3 (09:12):
Yeah, I mean people are worried.
Speaker 4 (09:14):
Okay, so we could talk about Fed independence and Trump
going after Powell, and that's what's causing people to worry.
The last time a president really went after a Federal
Reserve Board chairman was the nineteen seventies, and that was Nixon,
you know, literally bullying Arthur Burns to keep interest rates low,
(09:36):
to keep printing money, and Arthur Burns complied, and we
ended up with the stagflation of the nineteen seventies. And
I think people are worried about that today. Right now,
I wouldn't be worried. The money supply, which is what
I really focus on. It peaked in twenty twenty two.
(09:59):
It's actually lower today than it was at its peak,
which is very unusual in the history of the US,
and interest rates. Right now, the Federal funds rate, which
is the rate the FED controls, is four and a
half percent, and inflation is running about two and a
half percent. Remember just a few years ago it was zero,
(10:21):
when inflation was one and a half to two. So
what it's called a real interest rate? How high is
the interest rate relative to inflation? Back when the FED
was holding rates at zero, it was below inflation. In
other words, too low. Today, it's about a percent and
a half two percentage points above inflation.
Speaker 3 (10:42):
So I look at the FED, and I'm not saying
gold is wrong.
Speaker 4 (10:46):
I'm just saying it's a place where people go when
they are worried about the future. And Trump leaning on
the Fed causes people to remember the nineteen seventies and anyway,
I'd love to talk about that more, but I'll leave
that for for now. Okay, what what I believe is
(11:06):
the era of easy everything is over. Doge is actually
cutting spending. It's hard to tell if you look at
overall government spending.
Speaker 3 (11:16):
But they are.
Speaker 4 (11:17):
Congress is going to put a budget for that actually
cuts some spending and reduces the deficit. And at the
same time, the FEDS, you know, I mean, Powell is
pushing back against Trump. I don't want to cut rates.
I don't want to boost the money supply. So so
what that means is all this easy money, all these
huge deficits are gone.
Speaker 3 (11:37):
The era of easy everything is over.
Speaker 4 (11:40):
And so I think gold is it's a place where
people go for safe, safe haven.
Speaker 3 (11:46):
But I think it might.
Speaker 4 (11:48):
Be wrong that we're going to have massive inflation in
the future. I just don't think we will I think.
Speaker 1 (11:53):
I think part of what's going on with the rally
in gold is that some investors, particularly foreigners, are not
flocking to bonds the way they used to, and so
they're trying to hide somewhere. So they're hiding in gold
where they used to hide in bonds. That's just my guess.
Speaker 3 (12:11):
Yeah, yeah, exactly.
Speaker 4 (12:13):
You know, just to quick aside, when we buy foreign goods,
which we've been doing, you know, our trade deficit is
a trillion dollars a year, really close to it.
Speaker 3 (12:23):
That means we buy it with dollars.
Speaker 4 (12:25):
Now, foreigners at that point have dollars and they can
choose to invest in the United States, let's say, buy
a manufacturing plant or farmland. They can buy treasury bonds,
or they can buy gold. And right now they're worried
that we are, that Trump's serious about not having these
(12:45):
massive trade deficits, so then they want to protect their
dollars that they've earned by exporting to US. And yeah,
right now they seem to be picking gold over US
treasury bonds. By the way, that the US is not
going to default on its bonds in my lifetime, I
do not expect the US to lose its reserve currency status.
(13:09):
If anybody thinks that, tell me what country could replace it.
I don't see one anywhere in the world. I mean,
by the way, Switzerland could probably do it because they
have really good policies and they are you can trust them,
but they're too small. They can't be the world's reserve currency.
(13:30):
You have to be a big country. You have to
respect private property, enforced contracts, be honest in your accounting.
And if anybody can tell me a country that's like
that or anywhere around the world that can beat the US,
there isn't one. So I think people are freaking out
a little bit and using these market moves to justify
(13:53):
their position and trying to scare people. But it's I
think it's more politics than it's well economic reality.
Speaker 2 (14:01):
So what do you What do you have right now?
Speaker 1 (14:05):
Is your forecast for GDP for this year and how
much if any have you adjusted it because of uh
terriffs or disruptions to global trade.
Speaker 4 (14:18):
Yeah, we we were, we were negative coming into this year.
I basically have flat GDP. Maybe maybe even I thought
we would have a recession. It's not this, by the way,
this is not two thousand with with you know the
the market was overvalued by sixty two percent in two thousand,
all right, we were overvalued by about twenty percent at
(14:40):
the beginning of this year. So it's not two thousand
where we have this massive decline in the market. It's
also not two thousand and eight. In fact, this correction
in the market has been very orderly. It's uh, there
haven't been big strains in the in the system. All
that you know, gold soaring, bonds are moving every day,
stocks are moving every day.
Speaker 3 (15:01):
And everything's happening normally.
Speaker 4 (15:03):
It's there's no big strain. So that's a really good sign.
But I had basically flat GDP, maybe down a half
a percent, so it would it be a minor recession,
kind of normal in history. And then the trade stuff happened,
and so one of the things that's gonna happen.
Speaker 3 (15:20):
We're gonna first quarter GDP.
Speaker 4 (15:22):
Comes out in eight days I think now, and it's
it's going to be close to zero. And the big
reason for that is that imports in the GDP calculation because.
Speaker 3 (15:37):
We didn't produce them.
Speaker 4 (15:39):
Remember gross domestic product, what what do we produce domestically?
And so if we front run those tariffs and we
jammed in all these ships, and we boosted our trade deficit,
it'll take down GDP and that's gonna happen in the
first quarter. But at the same time, consumption has flowed
(15:59):
as well. Consumption growth is only going it's gonna be
less than a percent uh real adjusted for inflation in
the first quarter. So and business investment is slowed. I mean,
this is where I come back to deep seek. You
know you have you've probably debated this on your show,
and I'm sorry I didn't hear all the debates. But
(16:21):
but if you believe that that they were able to
do in China for a tenth of the cost of
what we're doing in the United States with AI, then
that changes the entire model. And by the way, if
we look at Microsoft and Meta and there's a lot
(16:41):
of cancellations of these AI uh you know, factories that
they were building and and I think deep Seek is
the reason for that. So so I think we're going
to see a little bit slower business investment than people thought.
Consumption is weakening, and then this quarter is really weird.
Speaker 3 (16:58):
Because the big trade deficit.
Speaker 4 (17:00):
And next right now, the number of ships coming from
China has collapsed, and so next quarter, we may actually
have a much smaller deficit, which would boost consumption. So anyway,
I'm looking for basically flat GDP and that one step further.
(17:20):
If you have slower GDP growth, you'll have slower earnings growth.
And so when we came in into this year, the
consensus of stock analysts they look at individual companies, was
that we would have about ten percent earnings growth, and
every almost every day, somebody is reducing that estimate, and
(17:41):
it's now down to about five percent this year instead
of ten. I wouldn't be surprised if it's not flat,
And that's another reason why I think the market's a
little bit over value today. Not as much as it was,
and certainly.
Speaker 3 (17:56):
Nowhere near it like it was in the.
Speaker 4 (17:58):
Dot com bubble, but it's it's still a little bit
over valued.
Speaker 1 (18:03):
I bet a friend of mine who's in this business
as well. I bet a friend of mine a beer
saying I think Q one GDP is gonna be negative,
And this was not part of the bet, but I'm
just adding I also think Q two GDP is going
to be going to be negative.
Speaker 2 (18:18):
I think the first I think Q one.
Speaker 1 (18:21):
You know, near the end, it got a little crazy
with the terarist stuff. I think it was essentially a
normal quarter economically, but the number is going to be
dragged down because of all the imports. And then I
think Q two is going to be negative because because
I think it's an actual recession caused by all this
uncertainty and stuff we've talked about.
Speaker 2 (18:36):
We'll see, we'll see.
Speaker 1 (18:38):
Uh, last very quick question, and I've got about one minute.
Speaker 2 (18:41):
And this is sort of.
Speaker 1 (18:41):
Half joking and half serious, but I've had a kind
of a lot of fun, uh, almost making fun of you,
but not really over the years for being so so
bullish all the time, right, and and actually some months
ago when you turned publicly bearish and you're like, this
is overvalue. It is not the first time, but it's
(19:02):
one of the few times that I've heard you say that,
and it really kind of stuck with me. And how
do you feel like it's unusual for you in a way?
Speaker 4 (19:13):
Yeah, you know, Well, the model that I described, we
take profits, discount them with the ten year treasury yield
said the market was from two thousand and nine at
the bottom when we changed mark to market accounting, which
is a whole other story, we were undervalued for fifteen years,
(19:34):
and so when we're undervalued, you know, people would say
what about Brexit? And I'm like bye, you know what
about the fiscal cliff? And I'm like bye, what about
murder hornets? And I'm like triple by so And then
people started saying, well, of course he's he's a perma
bull because he works for a fund company. And I
(19:55):
always laughed at that, because you don't know anything about
First Trust. Because if you think the is going to
end tomorrow, we got a product for you. And so
my job is to call the market as I see it.
I do not have to be bullish, I do not
have to be bearish, I don't have to be anything.
Speaker 3 (20:11):
I just have to read the model.
Speaker 4 (20:13):
And eighteen months twenty months ago, the model turned negative,
and as a result, I started to tell people to
be cautious.
Speaker 3 (20:22):
Not I mean, I don't predict crashes or I don't trade.
Speaker 4 (20:28):
I just give an indication from thirty thousand feet about
whether the market is overvalued or undervalued. And it was
undervalued for thirty years or fifteen years, and now it's
a little bit overvalued. So that requires caution. So I'm
not a perma bull, and I'm not a perma bear.
I just I take the data and tell people what
(20:50):
I see.
Speaker 1 (20:50):
Brian Westbury one of the great economists in the United States,
Chief economists at First Trust FT Portfolios dot com.
Speaker 2 (20:57):
You can just look up his name and you'll find him.
Westbury A W E. S. B U R Y. Brian,
always so great to talk to you.
Speaker 1 (21:05):
You're you're so good at bringing this into plain English
that everybody, even me can understand.
Speaker 2 (21:09):
And uh and I really appreciate it.
Speaker 1 (21:11):
I'll see you soon and my friend all right, Ross,
great to be with you, all right, Great for you too.
Speaker 2 (21:15):
Bye.
I'm so happy to have back on the show my
good friend, my old friend, I do mean old Brian Westbury.
Speaker 2 (00:07):
Brian and I have been friends.
Speaker 1 (00:09):
For at least thirty years, and Brian is one of
the great economists in the United States. He's the chief
economist at First Trust that has some I don't know,
a few hundred billion dollars of assets under management. His
opinion is very important, and we're going to spend some
time today talking about the economy and talking about markets.
(00:33):
Don't confuse them as being the same thing. They're related,
but they're not the same, and we are not really
going to In fact, we're going to explicitly avoid making
this about politics.
Speaker 2 (00:46):
We're going to talk about markets and the economy.
Speaker 1 (00:49):
So hi, Brian and your studio, your home studio looks fabulous.
Speaker 3 (00:54):
Well, thank you Ross.
Speaker 4 (00:55):
Great to be with you, and yes we are old friends.
Speaker 3 (01:00):
Uh.
Speaker 1 (01:00):
So let's let's talk markets first and then and then
we'll talk the economy.
Speaker 2 (01:07):
Uh.
Speaker 1 (01:07):
Yesterday the market was down a lot. Today it's up
almost as much. Before we talk about up and down.
In your view of stock valuations, what do you make
of the recent massively increased volatility in markets with much
bigger moves day after day than we used to seeing
for recent years.
Speaker 3 (01:30):
Yeah.
Speaker 4 (01:30):
I mean, so we have to begin with the fact
that I thought and still believe that the markets were
overvalued when we came into this year. And then you know,
I don't want to you know, beat up Trump or
not beat up Trump or whatever, but we have clearly
a completely different direction and policy.
Speaker 3 (01:51):
He's going after the Fed. Uh, we have tariffs. Uh.
Speaker 4 (01:55):
There there seems to be some worry around the world
about you know, the US bond market and reserve currency
status and all of these kinds of things. At the
same time, Deep Seek came out and it was a
game changer for AI and so that's I really think
that's when the mag seven started having their problems. And
(02:18):
then you add in all of this policy uncertainty on
top of it, and you get volatility. I expected the
market to go down this year, and so I have
a hard time blaming one thing or another on the
fact that it's going down. You need a catalyst, usually
something that kicks it off. And then finally I'll just
(02:41):
add we we were in ever since COVID what I've
called it is we were in the era of easy
everything We're running two trillion dollars budget deficits. The Federal
Reserve is printing money like crazy, was holding interest rates down,
then had them, then cut them again, and so all
(03:03):
of this going on with an overvalued market. It doesn't
it doesn't surprise me at all that we have more volatility.
Speaker 1 (03:09):
Let's stick with the overvalued thing for a moment. You
said that you believed that the market was overvalued, and
the market seems to have agreed with you thus far,
and then you said, I still think it's overvalued.
Speaker 2 (03:25):
So how are you How are you thinking about value?
Speaker 1 (03:29):
And let me just add one more thing that kind
of ties into what you and I were talking about
on the phone yesterday. So a lot of times when
people are talking about fair value for the market, they're
really just thinking in terms of, you know, discounted cash
flows and what's the interest rate and what's the earnings
on the S and P and put it in a formula,
and that's fair value. When when you think about fair value,
are you just are you doing that kind of analysis
(03:50):
or do you add in other stuff like, for example,
might foreign investors be repatriating money out of the US,
and therefore fair value you might be less than just
using that formula.
Speaker 4 (04:04):
Yeah, you know, yes, a little bit. So let me
explain how I look at value in the market. We
have seventy plus years of data, really good data on
the S and P five hundred, and that's what I
focus on. So it's the five hundred biggest companies in America,
and we know what their earnings are every quarter. And
(04:27):
by the way, I get that data from the Treasury
from the IRS.
Speaker 3 (04:31):
I figure if companies are reporting earnings.
Speaker 4 (04:34):
To the IRS and they owe taxes, then they really
did make that money. Sometimes SMP reported earnings are a
little suspect. I'm not saying anybody's lying, but they add
all kinds of stuff in it. I just want to
use the earnings that they pay taxes on, and so
we know that every quarter for the last seventy years.
(04:55):
And then you have to discount those profits with interest rates.
So the lower interest rates are, the more profits are worth.
The higher interest rates are, the less profits are worth.
And then I just do a simple three way calculation.
If you give me the S and P five hundred
and interest rates, I'll tell you what the market thing's
(05:16):
earnings are. If you give me earnings and interest rates.
I'll tell you what the S and P five hundred
should be compared to its average over the last seventy years.
And so when we look at that, at the beginning
of this year, the market's fair value was about forty
eight hundred. Now that's the S and P five hundred.
(05:38):
It's trading fifty one, fifty two hundred right now. Our
forecast was fifty two hundred. And the reason that I
made I didn't go all the way to forty eight
is we were going to get tax cuts and extension
of the Trump tax cuts, maybe some more tax cuts
on top of that. I thought we would have a recession,
(05:59):
but it would be relatively mild. And I didn't I
didn't add in big uncertainty over tariffs and on again,
off again tariffs, that kind of thing. But I just
said fifty two hundred. Now, one thing to remember about
my model, actually you just heard about it, but is
(06:19):
that it's just a thirty thousand foot view. I'm not
a stock trader just because the market is overvalued. I
tell everybody, don't go short like that. That doesn't mean
it doesn't mean you should just short the market. But
what I was saying is, hey, the MAG seven is
(06:40):
thirty five cents of every dollar you invest in the
S and P five hundred. So if you do invest,
stay away, like go to where there's value. Because the
smallest one hundred companies in the S and P five
hundred are trading at something like a seventeen pe, whereas
the MAG seven was trading at a thirty five pe.
(07:02):
So you can buy stocks that are cheaper now. By
the way, European stocks are really cheap, and they have
been for a long long time. The US market has
gone up, the European market has gone sideways at best
until this year, and so that's been a place of
value as well. So I'm not shocked to see Europeans.
(07:26):
Let's say, say, you know what, we're a little worried
about those high valuations. Maybe we should invest more at
home where we have low valuation. And anyway, we're a
first truss. We're a I guess I would call us
a quant shop. We invest like a lot of other
people do, but we really analyze the data about companies.
(07:47):
What are their earnings, do they raise dividends every year,
what are they doing with buybacks? And we look for
places where there's value rather than just growth and momentum.
In other words, we're always we want to buy a
we want to buy a dollars worth of stock for
less than the market average. And if we can find
(08:08):
those stocks, and you can all the time, they're not
hard to find. That's what That's what this model meant
to me. Yes, we're overvalued, it doesn't mean every stock
is overvalued. So I was just urging caution for people,
especially when we're going to move into a year where
there's a lot of policy uncertainty.
Speaker 1 (08:28):
We're talking with Brian Westbury, chief economists at First Trust.
The website is FT portfolios dot com. I encourage you
to go to FT portfolios dot com and sign up
for Brian's various emails. They're free, they're in plain English,
which you don't always get from economists, and they will
really help you understand not just markets, but the economy
(08:50):
as well. Before we get to the economy, just one
or two more sort of markets questions. What do you
think the significance is if any, Maybe people are making
too much of it of the recent weakness in the
US dollar, which I also see mirrored in a new
high price in gold.
Speaker 3 (09:12):
Yeah, I mean people are worried.
Speaker 4 (09:14):
Okay, so we could talk about Fed independence and Trump
going after Powell, and that's what's causing people to worry.
The last time a president really went after a Federal
Reserve Board chairman was the nineteen seventies, and that was Nixon,
you know, literally bullying Arthur Burns to keep interest rates low,
(09:36):
to keep printing money, and Arthur Burns complied, and we
ended up with the stagflation of the nineteen seventies. And
I think people are worried about that today. Right now,
I wouldn't be worried. The money supply, which is what
I really focus on. It peaked in twenty twenty two.
(09:59):
It's actually lower today than it was at its peak,
which is very unusual in the history of the US,
and interest rates. Right now, the Federal funds rate, which
is the rate the FED controls, is four and a
half percent, and inflation is running about two and a
half percent. Remember just a few years ago it was zero,
(10:21):
when inflation was one and a half to two. So
what it's called a real interest rate? How high is
the interest rate relative to inflation? Back when the FED
was holding rates at zero, it was below inflation. In
other words, too low. Today, it's about a percent and
a half two percentage points above inflation.
Speaker 3 (10:42):
So I look at the FED, and I'm not saying
gold is wrong.
Speaker 4 (10:46):
I'm just saying it's a place where people go when
they are worried about the future. And Trump leaning on
the Fed causes people to remember the nineteen seventies and anyway,
I'd love to talk about that more, but I'll leave
that for for now. Okay, what what I believe is
(11:06):
the era of easy everything is over. Doge is actually
cutting spending. It's hard to tell if you look at
overall government spending.
Speaker 3 (11:16):
But they are.
Speaker 4 (11:17):
Congress is going to put a budget for that actually
cuts some spending and reduces the deficit. And at the
same time, the FEDS, you know, I mean, Powell is
pushing back against Trump. I don't want to cut rates.
I don't want to boost the money supply. So so
what that means is all this easy money, all these
huge deficits are gone.
Speaker 3 (11:37):
The era of easy everything is over.
Speaker 4 (11:40):
And so I think gold is it's a place where
people go for safe, safe haven.
Speaker 3 (11:46):
But I think it might.
Speaker 4 (11:48):
Be wrong that we're going to have massive inflation in
the future. I just don't think we will I think.
Speaker 1 (11:53):
I think part of what's going on with the rally
in gold is that some investors, particularly foreigners, are not
flocking to bonds the way they used to, and so
they're trying to hide somewhere. So they're hiding in gold
where they used to hide in bonds. That's just my guess.
Speaker 3 (12:11):
Yeah, yeah, exactly.
Speaker 4 (12:13):
You know, just to quick aside, when we buy foreign goods,
which we've been doing, you know, our trade deficit is
a trillion dollars a year, really close to it.
Speaker 3 (12:23):
That means we buy it with dollars.
Speaker 4 (12:25):
Now, foreigners at that point have dollars and they can
choose to invest in the United States, let's say, buy
a manufacturing plant or farmland. They can buy treasury bonds,
or they can buy gold. And right now they're worried
that we are, that Trump's serious about not having these
(12:45):
massive trade deficits, so then they want to protect their
dollars that they've earned by exporting to US. And yeah,
right now they seem to be picking gold over US
treasury bonds. By the way, that the US is not
going to default on its bonds in my lifetime, I
do not expect the US to lose its reserve currency status.
(13:09):
If anybody thinks that, tell me what country could replace it.
I don't see one anywhere in the world. I mean,
by the way, Switzerland could probably do it because they
have really good policies and they are you can trust them,
but they're too small. They can't be the world's reserve currency.
(13:30):
You have to be a big country. You have to
respect private property, enforced contracts, be honest in your accounting.
And if anybody can tell me a country that's like
that or anywhere around the world that can beat the US,
there isn't one. So I think people are freaking out
a little bit and using these market moves to justify
(13:53):
their position and trying to scare people. But it's I
think it's more politics than it's well economic reality.
Speaker 2 (14:01):
So what do you What do you have right now?
Speaker 1 (14:05):
Is your forecast for GDP for this year and how
much if any have you adjusted it because of uh
terriffs or disruptions to global trade.
Speaker 4 (14:18):
Yeah, we we were, we were negative coming into this year.
I basically have flat GDP. Maybe maybe even I thought
we would have a recession. It's not this, by the way,
this is not two thousand with with you know the
the market was overvalued by sixty two percent in two thousand,
all right, we were overvalued by about twenty percent at
(14:40):
the beginning of this year. So it's not two thousand
where we have this massive decline in the market. It's
also not two thousand and eight. In fact, this correction
in the market has been very orderly. It's uh, there
haven't been big strains in the in the system. All
that you know, gold soaring, bonds are moving every day,
stocks are moving every day.
Speaker 3 (15:01):
And everything's happening normally.
Speaker 4 (15:03):
It's there's no big strain. So that's a really good sign.
But I had basically flat GDP, maybe down a half
a percent, so it would it be a minor recession,
kind of normal in history. And then the trade stuff happened,
and so one of the things that's gonna happen.
Speaker 3 (15:20):
We're gonna first quarter GDP.
Speaker 4 (15:22):
Comes out in eight days I think now, and it's
it's going to be close to zero. And the big
reason for that is that imports in the GDP calculation because.
Speaker 3 (15:37):
We didn't produce them.
Speaker 4 (15:39):
Remember gross domestic product, what what do we produce domestically?
And so if we front run those tariffs and we
jammed in all these ships, and we boosted our trade deficit,
it'll take down GDP and that's gonna happen in the
first quarter. But at the same time, consumption has flowed
(15:59):
as well. Consumption growth is only going it's gonna be
less than a percent uh real adjusted for inflation in
the first quarter. So and business investment is slowed. I mean,
this is where I come back to deep seek. You
know you have you've probably debated this on your show,
and I'm sorry I didn't hear all the debates. But
(16:21):
but if you believe that that they were able to
do in China for a tenth of the cost of
what we're doing in the United States with AI, then
that changes the entire model. And by the way, if
we look at Microsoft and Meta and there's a lot
(16:41):
of cancellations of these AI uh you know, factories that
they were building and and I think deep Seek is
the reason for that. So so I think we're going
to see a little bit slower business investment than people thought.
Consumption is weakening, and then this quarter is really weird.
Speaker 3 (16:58):
Because the big trade deficit.
Speaker 4 (17:00):
And next right now, the number of ships coming from
China has collapsed, and so next quarter, we may actually
have a much smaller deficit, which would boost consumption. So anyway,
I'm looking for basically flat GDP and that one step further.
(17:20):
If you have slower GDP growth, you'll have slower earnings growth.
And so when we came in into this year, the
consensus of stock analysts they look at individual companies, was
that we would have about ten percent earnings growth, and
every almost every day, somebody is reducing that estimate, and
(17:41):
it's now down to about five percent this year instead
of ten. I wouldn't be surprised if it's not flat,
And that's another reason why I think the market's a
little bit over value today. Not as much as it was,
and certainly.
Speaker 3 (17:56):
Nowhere near it like it was in the.
Speaker 4 (17:58):
Dot com bubble, but it's it's still a little bit
over valued.
Speaker 1 (18:03):
I bet a friend of mine who's in this business
as well. I bet a friend of mine a beer
saying I think Q one GDP is gonna be negative,
And this was not part of the bet, but I'm
just adding I also think Q two GDP is going
to be going to be negative.
Speaker 2 (18:18):
I think the first I think Q one.
Speaker 1 (18:21):
You know, near the end, it got a little crazy
with the terarist stuff. I think it was essentially a
normal quarter economically, but the number is going to be
dragged down because of all the imports. And then I
think Q two is going to be negative because because
I think it's an actual recession caused by all this
uncertainty and stuff we've talked about.
Speaker 2 (18:36):
We'll see, we'll see.
Speaker 1 (18:38):
Uh, last very quick question, and I've got about one minute.
Speaker 2 (18:41):
And this is sort of.
Speaker 1 (18:41):
Half joking and half serious, but I've had a kind
of a lot of fun, uh, almost making fun of you,
but not really over the years for being so so
bullish all the time, right, and and actually some months
ago when you turned publicly bearish and you're like, this
is overvalue. It is not the first time, but it's
(19:02):
one of the few times that I've heard you say that,
and it really kind of stuck with me. And how
do you feel like it's unusual for you in a way?
Speaker 4 (19:13):
Yeah, you know, Well, the model that I described, we
take profits, discount them with the ten year treasury yield
said the market was from two thousand and nine at
the bottom when we changed mark to market accounting, which
is a whole other story, we were undervalued for fifteen years,
(19:34):
and so when we're undervalued, you know, people would say
what about Brexit? And I'm like bye, you know what
about the fiscal cliff? And I'm like bye, what about
murder hornets? And I'm like triple by so And then
people started saying, well, of course he's he's a perma
bull because he works for a fund company. And I
(19:55):
always laughed at that, because you don't know anything about
First Trust. Because if you think the is going to
end tomorrow, we got a product for you. And so
my job is to call the market as I see it.
I do not have to be bullish, I do not
have to be bearish, I don't have to be anything.
Speaker 3 (20:11):
I just have to read the model.
Speaker 4 (20:13):
And eighteen months twenty months ago, the model turned negative,
and as a result, I started to tell people to
be cautious.
Speaker 3 (20:22):
Not I mean, I don't predict crashes or I don't trade.
Speaker 4 (20:28):
I just give an indication from thirty thousand feet about
whether the market is overvalued or undervalued. And it was
undervalued for thirty years or fifteen years, and now it's
a little bit overvalued. So that requires caution. So I'm
not a perma bull, and I'm not a perma bear.
I just I take the data and tell people what
(20:50):
I see.
Speaker 1 (20:50):
Brian Westbury one of the great economists in the United States,
Chief economists at First Trust FT Portfolios dot com.
Speaker 2 (20:57):
You can just look up his name and you'll find him.
Westbury A W E. S. B U R Y. Brian,
always so great to talk to you.
Speaker 1 (21:05):
You're you're so good at bringing this into plain English
that everybody, even me can understand.
Speaker 2 (21:09):
And uh and I really appreciate it.
Speaker 1 (21:11):
I'll see you soon and my friend all right, Ross,
great to be with you, all right, Great for you too.
Speaker 2 (21:15):
Bye.
The Ross Kaminsky Show News
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