Something Wicked This Way Comes?
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Hello, everyone, and welcome to Barron's Live, our weekly webcast and podcast. I'm Ben Levison, Deputy Editor here at Barron's. Thanks for joining us for an update on markets and investing. My guest this week is Jim Paulson, one of Wall Street's great strategists, author of the Substack Paulson Perspectives. He was the Chief Investment Strategist at the Luthold Group, and before that, he was at Wells Capital Management for many, many years.

I've been talking to Jim for at least a decade now. And Jim, it's just great to have you here on our first Barron's Live of 2025. Welcome.

Well, it's great to be here, Ben. Always good to work with you, and I appreciate the invite very much. Well, let's jump right in with a little current events. It was a great year in 2024, but the end of the year was kind of meh. And the Santa Claus rally that if we define it as the last five days of one year and the first two of the next, I think we dropped about 0.5% or so. And there's an old saying, if Santa Claus should fail to call, bears may come to broaden wall. Is there a big downturn coming for the stock market?

Well, I don't think so. You know, I guess I always think we get kind of into funky training there in the last couple weeks of the year.

around those holidays and you get light trading and a lot of whipsaw movements. And I don't know how many years over the years, but I had a great year going right up to the last two weeks of the year. And then it got wiped out by some bizarre movement at the end of the year, which was promptly reversed in the first week of the new year. But it doesn't matter when you mark the market on 31st. Right.

I always say to everybody, I do think this year, you know, that we kind of had that Santa rally before December, before Santa came. You know, we had such a big move off the August correctional or even the mid-September when the Fed first started easing. We had such a great move by early December already that that could play a role in it partly.

And I'm sure there's some statistical significance there. But I think, you know, if I were to take my pick between the Santa Claus rally last week of the year and the January effect, if it's up in January, I'd much rather put my money on the January effect, where there's a much higher correlation between what we do in January and what we do for the year.

And it now looks like we're getting a better January with the S&P up, I think, more than 1% today. We need to start on that, yeah. So let's talk through some of these things here because I still sense that there's a lot of negativity about the bull market. I think it seemed like people were surprised that the market was so strong last year. They're pointing to the valuations for the big tech stocks and for the market in general. So let's start with those big sevens.

can they continue being the thing that drives the market higher? Well, it's certainly possible. I mean, I think these are just remarkable companies. We've had innovation throughout world history, no doubt about it. But I'll tell you, the innovation that we've had in the last couple of decades here in the United States is something very different than a lot of past innovations. I mean, you think about inventing the automobile industry,

In the early 1900s, it's doing the same function today that it did when Ford first brought that out. It still runs on four rubber tires and still patient from point A to point B. Airplanes do the same essential function they did when you had first

came up with them. But that's not the case with what we're dealing with. We're dealing with companies that first vented a mainframe computer that took up five warehouses to do what a calculator would eventually do a couple decades later. And then ultimately we had our own

our own computer, you know, sitting on our desk. And then we connected them with the internet. And then the internet became not only just a connection, but our new service. And now we're into AI and robotics. And the thing about these companies is it's not like, uh,

Like Ford, that's going to still be producing the same automobile 100 years from now. It's a company that when it's born five years ago, will be doing something entirely different today than when it first started. We won't even know the product that it's involved with. It's such dramatic innovation.

that it completely alters what the company even does over very short spans of time and totally disrupts, you know, not only United States activities, but worldwide activities. This is really pretty phenomenal, even compared to historic innovations. And I,

I think to try to sit here and say that we have a new company that comes on the scene, AI or robotics or computer technology or quantum technology today, that we can say that we can use valuation techniques that we've used for decades on that to figure out whether it's overvalued. I think that's silly. I think it's silly. We don't even know what.

its product will be maybe a couple years from now and how dramatic that might have growth rates. I'm trying to say that we have this misquantitated measure of whether it's a buy or not. I think it's silly. I was thinking about that yesterday, Jim, because I had breakfast with a friend of mine I grew up with in Denver. And he works in online gaming. He's out in California.

And talking to him, I realized how much I don't understand these tech companies. We were talking about AppLovin. He has a good friend that works at AppLovin. Of course, AppLovin, we can't do anything about now. It's gained 700%. But I would have loved to have realized that

the understood app loving 12 months ago, rather than try to understand it now. But I think that's the point you're getting at is that these companies are doing things that for most of us as investors, it's very hard to understand or even know where that innovation is happening. Yeah, I totally agree that this is not like innovations of the past. And it's much more, most of these things are much more disruptive to everyday life

in the economy and just social life than were previous innovations. Well, I don't think they're going to go anywhere. I think they're going to continue to lead and dominate. I think we in the United States should be extraordinarily thankful

that the epicenter of this sits in the United States. The unchallenged leadership is here and has been now for a while. That wasn't always the case. I mean, you remember in the 1980s that Japan was eating our lunch with world-leading innovations. They're doing so well that they started buying up our golf courses in California, making us mad. So, you know, to be in that leadership position is huge. And I think they're going to continue to dominate stock market returns over the next several years.

But does that mean that they're not going to have pullbacks along the way? No, absolutely not.

Yeah, we've seen a lot of that, right? I mean, NVIDIA, I think, hit a new, or is that what would be a new record closed today if it closes there? But it's been sort of stuck in place for six months. Right. And, you know, we just had the big MagSever pullback in the July-August period. You know, I think we're going to get another one of those this year. I would say this. One thing I just wrote about recently regarding tech in general, as I look back,

to the relative performance of technology stocks, I believe going back to 1947. Accordingly, that are looked at their relative performance. And what I found was that tech stocks do extraordinarily well whenever the growth rate of real GDP, it's not necessarily accelerating or decelerating, but whenever it's kind of...

above its, in its top three quintiles of historic range. And basically this would be around two and a half percent real GDP growth. When you're in that situation, tech stocks have done really, really well. They don't do nearly as well at growth rates below two and a half percent. Now certainly you pick up recessions in there, I get that, but there's a lot of periods of time where we're growing below two and a half percent without recessions and tech stocks don't fare near as well. The reason I bring this up is

is in the last decade, going back to when this latest tech run began after the 2008 crisis, we've had growth now in real GDP that's been up

above that two and a half area, high percentage of the time, almost three quarters of the percent of the time. If I look at a chart of the trailing 10 year frequency by which you're above two and a half percent growth back to 1947, we've hit, this is at one of the highest levels that's been at going back there. And tech stock relative performance responds to that really closely. There's a close correlation with the frequency of above average growth and growth. And the reason I bring this up is that I think this year,

I suspect we're going to fall below that hurdle of 2.5%. I think growth's going to maybe slow to around 2%, and I think that might bring a correction in some of these markets.

tech darlings. I don't think that means I'd sell out on all of them because the timing is always problematic. But I think I might lighten up a little bit on them. And if they don't correct, you've still got own some, you're going up with them. But if they do correct, you'll have some funds that you can bring back and buying up at cheaper prices.

That's kind of how I'd look at this year with the tech darlings. I don't think we're going to have a bear market, but I do think tech stocks get hit pretty hard during the correction.

Well, let's dig into the economy just a little bit for a minute here. We have payrolls on Friday. They're supposed to come in around 155,000 jobs, which would be a down a little bit. But I think that's still a pretty solid number. But there's also the possibility that, as you said, there is weaker economic growth. And so how does this balance out, especially when you toss inflation into the mix and the fear that that is sort of either stopped coming down or maybe even is ready to pick up again?

Yeah, it's very interesting how worried we are about inflation. I'm not that worried about inflation. I think that we had a major supply-driven inflationary event.

driven by a pandemic that's created a massive supply shortage for a short period of time. And then once we ended that, inflation's kind of come back down close to where we were. And the reality is that the secular forces of disinflation that existed prior to the pandemic is equally, if not more strong today than they were then. We still have

aging demographics with, we just don't have, you know, in the 1970s, I think the labor force in the United States grew two to two and a half percent annually. We're barely struggling to maintain 1% growth in recent years.

And we have that, we have much greater competition with the closed economy in the 70s to a very open economy today. The old leadership used to be autos, which the tagline was sticker prices go up every year and every other corporate entity followed suit. Where now the leadership is tech where sticker prices go down every year. That's a deflationary force kind of chronically on the economy we never had before.

I don't see where those forces have really gone away. And so I think inflation is an unlikely return back behind the 2% area, which really puts into question why we have 4.6% bond yield in a world of probably 2% or less inflation overall. And so I think the worry about inflation is overdone. I think we're staying too tight too long. And I'm more worried about a slowdown this year

If I look at bond yields going from basically up a percentage point now from where they were in September when the Fed started easing, I look at the dollar, it's up almost 8% year on year. It's up 6.5%, the real value of the dollar since the Fed started easing. I look at money growth, Ben, that's growing, two money growth year on year is growing 3.7%.

Nominal GDP is at 5%. That's just insufficient money growth to support that growth rate in nominal GDP. And since 1960, when money growth's been less than GDP growth, real GDP has slowed quite a bit in the coming year. And so I really think we're going to slow down to about 2% growth in real GDP. And if we do that,

I think there's these recession fears, which kind of have gone down a little bit of late. I think they're just under the surface, and I think they'll spike again pretty dramatically. Think about unemployment. We'll even see Friday. I think unemployment is 4.2%. It's risen more than a percent now, or right at a percent from its lows in the cycle, which should have set off already the SOM rule.

If that thing rises anymore, even 4.3 or 4.4, I think we're going to bring back recession fears mighty fast. And so if you get a recession spike again in terms of fears, when everyone's worried about inflation and overheated growth, I think that could bring a bit of a correction in this block. That's what I'm thinking. So it almost sounds like you think the Fed maybe made a mistake by leaning hawkish after the last cut in December.

I do. I do. The Fed, though, it has been out of sync since the pandemic. And I've written a lot about the backwards Fed. I just have more may explain a little bit that if I go back to 2020, mid 2020, the inflation rate started to pick up from about zero or half a percent started to rise.

Well, the Fed would not tighten the funds rate, even though inflation went from zero to eight and a half percent until the inflation rate got to eight and a half percent. It finally went off zero by up to a half of one percent. When inflation peaked at nine point one percent in June of 2022, the Fed had barely lifted the funds rate above one percent. In other words, it stayed easy throughout the entire surge.

in the early 2020s inflation surge. Never in post-war history can you find a situation like that. Almost always when the inflation rises, even a little bit, but certainly by that much, the Fed's in a tightening mode. This Fed did not tighten until inflation peaked. Then it turned around and did something equally unique

When inflation went from 9.1 down to 2.4 after the peak, the Fed stayed tight throughout the entire disinflation period. And then, most recently, it finally started to ease in September.

And this is at a time when all the other policies, again, started tightening. And what I mean by backwards is that during the period of time when the Fed stayed easing while inflation soared, everything else tightened. The money supply went from 24% down to minus 5%. Fed deficit spending as a percentage of GDP went from 18% down to 3.5%.

The dollar rose dramatically over that period. And bond yields went from a half a percent to three and a half percent before the Fed even started tightening. That's why inflation peaked, because these other forces tightened while the

and overrode the Fed's mistake of not tightening. And not to mention the tightening impact of rising inflation. Then when the Fed didn't ease, everyone worried we're gonna have recession 'cause it tightened as we eased, or as inflation came down. But fortunately, money growth picked up again. Fiscal juice started to pick up again. The dollar came down again. And inflation, disinflation, all those were stimulants that kept us out of recession, even though the Fed stayed tight to them.

Now, since September, the Fed has finally decided to ease. And what's happened? Long yields have gone up. Everything's tightening but the Fed. And so I think it continues this backwards Fed approach to this post-pandemic cycle that's unique to Fed history. But the good news is, despite these chronic tardy Fed moves, because other policies are responding appropriately, it hasn't had any impact.

And that's why I'm not too worried about the Fed, because I think it's being overrun by what I call laws and fair policies. And they're doing a good job. And so what about, you know, when you look at those bond yields, what do you think is driving them and how much of that is due to the federal budget? I know I see that getting the budget deficit getting tossed out there as the reason for these these higher bond yields. But how much of a problem do you think that is?

I think they're too high. I really do. If you look at, just consider the following. The inflation rate has gone, CPI has gone from 9.1% to 2.7% in the last two and a half years. Bond yields over that same period, the 10-year yield, has gone over that same period from a little over 3% to 460. And I got to tell you, Ben, if you look back to World War II, you won't find another period where inflation fell this much over two and a half years while the bond yield went up.

It's just never happened. If I look at commodity prices, the S&P Goldman Sachs Commodity Price Index peaked in March of 2022 and has fallen 33% since. And bond yields have gone from under 3% since March of 2022 up to 4.6%. That, again, is a very difficult thing to find. So it's been odd. I think bond yields are well-reacted. You go, why is that?

Well, I think a lot of it is the Fed has held up long-term yields. When the Fed finally started raising rates, bond yields kind of quit tightening, but they just couldn't come down. They might have wanted to when inflation decelerated, but the Fed held them up artificially, and they are still doing that today.

I think at the margin. I think also, though, you're right. There's other fears. There's fears that inflation's ticked up a little bit. We've gone from 2.4 to 2.7 on the CPI. And whatever reason, the latent impact of that inflation surge during the pandemic has brought back inflation fears like we're sitting in the 1970s again, even though I don't think we're anything like that.

And it's related to what bond yields are doing. And then you're correct. I think the massive public deficits that we've run in peacetime and the level of government debt overall and the rise in the interest burden of the government is scaring bond investors. And there's a little bit of the bond vigilantism tucked into bond yields as well. All those factors are playing a role. But I'll tell you what would dissolve that in a hurry.

is if the economy slows down and people get worried about recession. This episode is brought to you by OutSystems, the AI-powered application generation platform for enterprises. Unlike simple Gen AI code suggestors, OutSystems lets you generate modern, governable enterprise apps in minutes, then automates the whole DevSecOps lifecycle from a prompt. The generative software cycle is here. Learn more at OutSystems.com.

And so let me, you know, if we think about the things that can go wrong or scare people, I want to turn to the valuation on the S&P 500. It's around 21.8, maybe 21.9 today. How overvalued is the stock market? And I mean, are we looking at, you know, this eventually having to come down a lot? You know, I started in a value shop when I started over 40 years ago at the start of 1983.

And I cut my teeth on value stocks and,

Our culture, I developed a rule back then, Ben, tell you how old I am, that I wouldn't look at any stock that didn't have a single-digit P. Good luck. Those are the only car companies. Back then, there was a lot of them, but it didn't last long, of course, as multiples went up to 20 times, starting by 1987 when we had the great one-day crash. But my point is that there used to be, when you look back at 1870 to 1900,

or excuse me, 1990s, early 1990s, there was a really consistent valuation range. Price earnings moldable in the S&P 500 ranged between 7 and 21 times the clock. You rarely were outside of that range. It's very easy to say if we're close to 7, you buy. If you're close to 20, you sell. And it worked extraordinarily well. But then since the early 1990s, and really I think since the tech boom hit the United States,

valuation has blown apart. It's been horrific. You can't even use it, really. There's just no relationship at all hardly over that period of time between the current P-model and what the market may do in the next year. There still is some relationship

what it might do over the next 10 years, which is closer. But even that's debatable because the valuation range is blown apart so terribly since the 1990s. We're almost talking now about 35 years where we've been in this new valuation range. If I look at the Shiller PE mobile, I think the Shiller PE has been above the upper end of the old range, something like 75% of the time since 1994.

So one thing I have is I don't know what to look at when I look at valuation. I mean, another thing people point out is, you know, the market cap of the U.S. stock market is now so many times GDP, two and a half, whatever the number is. It used to get highest it would get would be one times GDP. I think some of that is because all these tech companies, a lot of their sales go to global GDP markets.

They don't really get their sales from here as much as they do here abroad. And if you looked at the market cap in the United States to the appropriate measure of what the GDP is they sell at, it might not look near as high, for example.

That's just one example of the fallacy of valuation. I found myself moving away from that. Maybe that's to detriment, but quite frankly, you tell me where it's really worked out well. Yes, eventually the market will have a bear market again, and people will be able to point to how high valuations were prior to the market fall, and that will be right.

But the reality is the market valuation has been high so much of the time, and yet the market continues to do well even in the face of that relative to what used to happen. I was going to say, even when stocks bottomed in 2009 in the financial crisis, they never got even close to single digits. If you'd waited for that, you would have missed everything. The entire range has been shifted upwards. Exactly.

You know, there's various reasons for this, if I look back historically. One is that we used to have recession in the United States half the time prior to World War II. Now we're having recession last, you know, really since 1980, less than 10% of the time. And if you have recessions, you know, one-fifth of the frequency that you used to have, you're going to pay a higher multiple on a regular basis.

We also have a much growthier market today than we ever had over the industrial-led United States for much of its history. And if you have a stock market comprised by growth companies rather than industrial manufacturers, you can afford to pay higher multiples because they aren't as volatile and they aren't as related to downdrafts in the economy. We also have a market that is much more liquid today with many more investors than we ever had in the 60s, for example.

where there wasn't a lot of individual investors as near as many today, and it's also globally liquid around the globe. So there's a number of reasons. I'll just give you one last one that isn't as well known that I've written about. If I look at the level of what I call profit productivity, I take the real profit of the stock market, real profit, real U.S. corporate profits,

of just for inflation divided by the employment level of the United States. It's kind of like the average profit productivity of each laborer. What is the real profit per job? That ratio from 1947 up to 1990 in the early 90s moved in a very consistent range, much like the valuation, old valuation of the stock market. But since the early 90s, it's exploded. It's up like four-fold.

since the early 90s. There's just been an explosion in profit productivity. The amount of real profit per job has gone up massively. And it lines up a lot with what's happened with valuations. And if you think about it, you know, it makes some sense that

Just think about the technological innovations you have with the cell phone and the like, and everyone's probably more productive than they ever used to be. And if that's the case on a sustained basis, you're willing to pay a higher motive for that. So I think we're in this process of finding new valuation methodologies. I'm not sure what they're going to be. And it's truly probably technology that's changing that a little bit.

And so I know about that. I've got other ways I'm looking at it, but not so not as much on valuation. I still am aware of it, you know, and I don't ignore it, but I'm not sure I put as much weight on as I used to.

Yeah, I mean, I got a note in my inbox today that was talking about how high the price-to-book ratio of the S&P 500 is. And that one seems really obsolete just because book values just aren't what they used to be either. I mean, companies are getting rid of all those things that used to be included in their book value. That's exactly right. We don't have the brick and mortar anymore that you could use for a book value measurement. So I know what Sarah – I haven't got a good replacement for that.

But I do think a lot of investors have lost out because they've been chronically worried about overvaluation. So do you worry about the possibility of a bubble like we saw back in 1999, 2000? Absolutely. We'll have those again. I think we could again. I would say I think we're in a secular bowl that's been going on really. There's been three cycles since World War II.

Kind of those cycles have occurred with 10 terrible years where you depressed everyone, followed by 20 up years. And this occurred, you know, you go back to 1940, 1940, 1950, we had World War II and market went nowhere and it's viable for 10 years. Then from 50s and 60s, it went straight up.

Then you started the new cycle. The 70s were terrible. It was like 10 or 15 years ago and nowhere. Then 80s, 90s. Yeah, the death of equities. Yeah. Then we had 10 years of horrific bad starting with the dot-com collapse, ultimately with the financial market collapse in 2008 and 2009. Terrible 10 years. And since we've started, I think, on another 20-year run. And we're probably about, you know, that started in 2010. So we're probably 14 years into it.

It might run to 2030-ish if it follows that same pattern. I don't know that it will, but it could. One of the things I look to judge where you are in that in terms of your question of a bubble is in order to get a bubble, you need not just optimism on Wall Street. You don't need the AAII or the Bull-Bear Ratio to show bullishness. You need cultural bullishness.

on Main Street. You need to have consumers and businesses, small businesses all across the country that are really optimistic about their futures, the economic future. We just don't have that and really have not had that since the 08-09 crisis.

Can we look at our, if my barber comes to me and starts talking about Bitcoin and, you know, Palantir and things, is that still a warning signal? Or is this more about the people who are actually running the businesses feeling that confidence that you need to worry about? I think there's still warning signals like that for short-term pullbacks in the stock market. But I'm not sure that you have bear markets without having cultural optimism.

You certainly could have a, you know, I think there's times when Main Street or, like I say, barbers get really excited about Crypto or tech stock or the Mag7, Darley's, whatever. Maybe too much and you get a corrective praise. But a bear market, when I look back at bears, if you do a chart back to the 1950s of the Consumer Confidence Index in the United States and then mark where bear markets start, they most, all of them start much higher levels than where we are today.

And there's the one that didn't was the 2022 bear. It's only, it started slightly higher than where we are today, but all the rest of them, like, you know, we're around 75, let's say with consumer university of Michigan consumer sentiment index today. And most of the other bears, the other 13 bears we've had since world war two, I think all started like a hundred or higher. And, and we just have never had a confidence revival on main streets.

Even though we got over the pandemic, even though we took care of inflation, even though the bull kept going, even though unemployment was brought down, it's never really occurred. And I think to your point, we could have a blow off. But I think what will be part of that blow off on the upside will be a resurrection of confidence in this country. And if that does occur and there's some signs it may be starting, then I think that could be the final leg of the bull where and then put you at risk of it.

of a blow-off situation here. You've seen a little bit of recovery in small business optimisms, a little bit in consumer, but it's still pretty bleak. And what happens if I look at what confidence rises, if I look at every month since 1950, when confidence on Main Street rises versus falls, the returns of the S&P 500 are up like 20.5% versus 5.5%.

So rising confidence is a huge stimulus to good stock market. We just haven't had a lot of it. Okay. Well, why don't we go to some listener questions? We got a bunch of them. Let's try to get through as many as we can. Robert wanted to know if you have any sector recommendations for 2025. I think that...

I do. It matters how cute you want to get. I'm not sure if you want to get that cute, but I kind of suspect we're going to get a more bumpy road to correction. I look at

the type that's going on with the dollar and interest rates and lack of sufficient money growth. I think we're going to slowly economic growth and get into recession fear period. That might bring correction phase 10 to 15% drop in the S&P, bigger drop in the tech stocks probably. So do you want to play that? And it might make a little sense to me at the margin to say, okay, look at all these defensive sectors are really beat down. Consumer staples,

utilities, healthcare, pharma, high dividend S&P plays, high quality, all those have not done that well. Maybe you take a little off your portfolio from some of the good performing sectors. A lot of that could be new era tech, but also things like cyclicals, consumer discretionary has had a nice move recently. Some of the other cyclicals, financials had a pop and move a little bit to some of these defensive sectors. I wouldn't do a ton. I certainly wouldn't raise cash.

right now because I still think we're in a secular bull. And the other problem is always the case that corrections are perilously hard to predict. You have to be right at the front end of a correction and the back end of a correction or it really isn't worth it.

If I market falls 5% before I decide to move more, more defensively, and then it goes up 5% before I decided to get back, it doesn't do much good for you. So rather than try to time that perfectly, I might just move a little more defensively. If it, if the market goes up all year long without a correction, you're still going to participate.

But if it does pull back, you'll feel good. You can maybe sell out of a little defensive areas and move back into some of these more aggressive areas with some dry powder, if you will, rather than bet big with cash and then get left out of an ongoing rally. So I think a little defensiveness replacing some of your stars, maybe not eliminating your star positions, but just reducing them. So Adnan wanted to know if you have an opinion on China.

Uh, yeah, I've not been a China fan since the pandemic. Um, and I'm still not, I know they had a bounce here last year for a period. Uh, I think they got, they had a host of problems. Um, the biggest problem they had is the pandemic. The biggest pandemic loser loser is China because what it did was it, it, it, uh,

focused every company in the world on the idea that they need to diversify their supply chains. And since everyone was in China, the biggest diversifier is diversify away from China. They're losing business as everyone moves away to Vietnam or India or elsewhere to diversify their chains. In addition to that, China's...

developed a bad reputation of stealing innovations, not a good corporate player that you want to play with. And there's other options out there that you can do with the company, expand into. They also have what the U.S. used to have. They've overused debt.

And they've got a big debt overhang. And as we know, in the United States, we suffered after 2000 and 2008. The debt overhang is painful and you have to liquidate a lot of things. It takes several years to get through it. And that's what China is just heading into now overall, I think. And then China.

I also think that what's happening a little bit, China's now underperformed long enough, five years running it. If you did the EMXC ETF, which is the emerging market ex-China,

ETF, you've done far better than sitting in the China ETF or sitting in the just overall EM ETF with China in it. So I think kind of what's happening, Ben, with emerging market investing is people are reacting to a little bit like they did with Japan after in the 1990s. Japan started to underperform so badly that when people

bought developed market mutual funds, they'd buy the developed market ex-Japan. And I think that's kind of happening with China, that people are still investing in emerging market, but it's ex-China. And now if you look at what's happening there, their interest rates are collapsing, their economy is kind of collapsing on top of everything else that's going wrong there. And I just think it's fine to stay away from that and still invest in emerging markets, but do it outside of Japan.

All right. So David had a question about valuation. He was saying that it sounds a lot like a this time is different argument. And he wants to know if he's understanding that correctly. Yeah, I think he's right. And I guess that's that's kind of my point. If I would encourage David to look at a chart.

Go to Shiller data if you want to on the internet. It's there for anyone. And look at a chart from the Shiller data, valuation data, going back to 1871 and run it all the way up. And you can see how different the valuation range of the stock market has been since the, let's say, early to mid-90s, the last 30 years, than it was for the previous 150 years.

And so there is something different going on here. This isn't just a one time, one year flash in the pan, like maybe the dot com surge was or something. This is something now that's three decades old where the valuation range has remained permanently above what it used to be. So I'd say there is quite a bit of evidence that something is different this time.

And I understand that you can get in trouble with that argument. I would argue, though, that most of the time something's different. When inflation hit in the 70s like it did, that was very different.

And the 90s run with tech was very different. And I say valuation's been very different. We used to be so focused on energy prices at the end of the 70s and the 80s. We used to be so focused on the dollar in the middle 80s. We used to be so focused on the money numbers on Thursday afternoon, early 80s. And a lot of those things no one even pays much attention to anymore. So things do change and are different.

I get that there's always rhyming. The one thing that's a constant for me that never changes is you and me and our emotions and the fact that we're driven by fear and greed. That is the one constant that makes everything rhyme over time. But a lot of the rest of it very much changes, I think, over time.

All right. Theodore wants to know if there's an indicator or a signal that you follow that tells you when there's a top in place and that it's time to exit. There's one thing you had to look at. Well, I wish I had one. If I had it, Ben, I wouldn't be telling you. I, um,

You know, I don't. I've always relied on a number of things rather than a thing over time because I find that over the years that things no longer work over time. I used to develop golden rules when I first started this business, but then that golden rule I used blew up.

and just didn't work anymore. And that's happened over and over and over again over the years. And so I look at a number of things. One of the reasons I still think we're in a secular bowl is there's a number of really good things going on. One of them is confidence. The biggest one to me is confidence on Main Street is very low. And the biggest asset that is yet untapped is we could revive confidence.

And maybe we'll do that by calming down some of the geopolitical conflicts we got in the globe by deregulations promised by the new administration. Who knows? But that's a huge asset left untapped. Now, if that was high today, that would bother me a lot. I also certainly look at tightening forces.

So we have some of this today. We've got yields going up. The dollar is very strong. Money growth is insufficient. You know, those are abolishing me. One of the reasons I think we have a correction.

We still have money growth, though, at 3.7. There's a lot of room for money growth to move up. That's a positive. Money growth high and coming down, that would be a negative for me. If yields were very low and were likely to go up, that'd be a negative. But they're kind of the opposite position right now where I think they're more likely peaking than coming down. I also keep an eye on what's the...

The possibility of a recession. And to me, you can look at that with pressure, like rates, dollar pressure, lack of money growth, fiscal tightening, all that. And that's important to keep an eye on. But also the vulnerability of a recession, I think, is very important to consider. And what you see today is most people are scared about a recession, which means they're being conservative and they're fully prepared for it.

It's hard to have a recession when everyone's worried about it, so they're hunkered down and waiting for it.

Because what you need to get a recession is when people are too optimistic and they're borrowing too much and running up their credit cards, taking down their savings, you know, buying houses beyond their budget. And then all of a sudden some strikes and they're very vulnerable to significant contraction. I don't see vulnerability today in the household or corporate sector, at least not much. Corporate or household debt ratios have been falling for more than a decade.

They're back to their levels in the early or mid-1990s. Debt service ratios are close to record low. Net worth to household disposable income is at record high. Money market funds currently are at $7 trillion or very close, and that's almost closing in on a record high relative to disposable personal income. So households are very liquid and have very strong balance sheets, and I think they're pessimistic and conservative. Companies aren't much different.

Net cash flow to GDP is close to post-war highs right now. Profits are still rising, not falling. Profit productivity, profit per job is very strong overall. And so I just don't see the vulnerability that brings a recession. And if I saw that, that would be very concerning. And I'd be thinking more about a bear market.

situation. So I hope I give you a flavor. To me, it's a number of different things rather than a single indicator. And Raj, I hope that I know you asked about what would cause a recession rather than just a decelerating economy. And I hope that answered that. We got a few more minutes and a couple more questions. Harry wants to know, do you have an outlook for precious metals?

I'm negative on precious metals. I think that they're up dramatically. Gold's done really well over this period of time. If you're in it, I tip my hat to you. It's done extraordinarily well here really since the pandemic. And other precious metals similarly, gold kind of stands out. The reason I'm pessimistic is gold reacts and is very closely correlated with pessimism.

I mean, I had one old guy tell me once that whatever your problem is, whatever you're worried about from an investment standpoint, the answer is gold. If you think we're recessing, buy gold. If you think we're inflating, buy gold. If you think the government debt's too high, buy gold.

If you think there's a war in the world, buy gold. I mean, and there's some truth in that. The gold is pushed up by people's fears. And right now, there's no coincidence that consumer confidence on Main Street is very low and gold has been priced very high. I think we're going to resurrect consumer confidence in the next few years. And if that happens, I think gold's going to be sold. All right.

All right. Lisa wants to know, what is your outlook for small caps? I like them, but boy, that's been a bad, bad forecast. I've had that one for a while. They have not done well. I still like them. I think you want to own some. I think that the problem I have right now is I don't know if I'd be super aggressive if we do slow the economy down.

I think small caps might not do well in that period of time. But if economy slows and we do get a pullback in the stock market in general, then I would load up on small caps because if the economy slows down,

People start worrying about recession. The Fed's going to ease more aggressively. We're going to drop yields. The dollar's going to come down. Money supply is going to improve. And I think it could be led, like the 2020 bull when it started, could be led finally by the last leg of this thing, by small cap stocks and maybe more aggressive parts of the market as well. But I think there's a difference, though, between if you're just going to buy in

indices, the Russell 2000s are much more levered. A lot of companies without earnings in an index compared to like the SPS 600 small cap index or

I might be more tempted to delve into the higher quality small caps than I am into the deeper. Let's go with one last question and we'll call it a call. This is from Lee. Jim, he says, do you see oil stocks ever having double digit PEs again or are those days over? Well, it's hard to... I mean, yeah, they will, but they often do in a sense, but they do because their earnings go zero.

That's the problem you have with materials companies and industrial cyclicals is it's hard to get a valuation technique that's more stable enough because when earnings go negative, you can't do a P. And even when it goes to zero, it becomes sort of insignificant. A lot of times in the old days, we'd buy cyclical stocks when the P's were high because that meant that earnings were low and they were about ready to turn up again.

And you want to buy them not when multiples were low, because that meant that probably oil stock earnings were peak levels. So I think they'll certainly see high multiples again. But whether that's a sustainable valuation level based on kind of like long-term moving average, I don't know. I don't think they'll have as high of valuations in that regard as they did, for example, back in the 1970s.

All right. Well, Jim, I think we'll leave it there. Remember, you can find all of Jim's writing on Substack at, I think it's Pulse and Perspective. And go look for it. It's great stuff. And Jim, I want to thank you for being here with me for the first Barron's Live of 2025.

It's great having you here. Next week on Barron's Live, Lauren will be back. We may even have a surprise guest. And I see these requests for some other guests. We'll see about maybe being able to get Avi on or Tay to talk about what they know so well. Particularly, I think there's a lot of interest in nuclear reactors and chips and whatnot. But Jim, thanks again. And thanks to all of you for listening. Happy investing.

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