Is The Market Hitting Its Breaking Point? | Jesse Felder

Jesse Felder (0:00)

The old economy is essentially in recession, as Jim Paulson put out a report today. The new economy is doing great, old economy is in recession.

And that dichotomy can only kind of persist for so long before the new economy essentially cannot, can no longer hold up everything by itself. And I think we're really close to getting to that point.

Adam Taggart (0:33)

Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart, welcoming you here for a discussion with the publisher of the Felder Report. I'm talking obviously about Jesse Felder. Jesse, thank you for rejoining us here. It's been a while since you've been on the program. You know, a lot's gone on since the last time you're on the program. Most notably, bond yields have continued to rise at a rate that I think is surprising most people.

The war between US and Iran has continued. So keeping oil prices high, we're really now starting to get to the point where things like the price of diesel are becoming a really big issue. That is impacting consumers' inflation expectations, which are important as we head into a midterm election here in the US in just the next couple of months.

The AI party continues to rage, even though when you look under the hood of the markets, while we're near all-time highs on the S&P and the NASDAQ, there's a lot of companies out there that are actually suffering quite a bit that aren't participating in the AI party. So I'm sure there's a lot more going on that I mentioned, but it's an interesting time. And I'm curious, when I've talked to you in the past, I would say in general, your position has been generally guarded in terms of your outlook. What's happened since the last time we've talked? Are you pretty much in the same place? Are you becoming more guarded or are you becoming less guarded?

Jesse Felder (2:01)

Well, I think probably a more fair characterization is bearish generally for the past several years, right? Bearish financial assets, bullish real assets, bullish hard assets.

Adam Taggart (2:14)

That's correct.

Jesse Felder (2:15)

And very bullish on energy, bearish financial assets.

The financial assets side of that thing has been, obviously, being bearish bonds has worked well. And I think I've pointed out to you in the past that gold is a great leading indicator of tons of different asset classes. Tom McClellan has kind of done some great work on this, where the boom in the gold price leads the broader commodity complex, leads inflation, leads interest rates. And so what we're seeing now in this move higher in the 10-year yield was essentially forecast by the huge boom in the gold price over the past couple of years. And interest rates are just starting to catch up to the inflation picture. If you look at kind of a multi-year chart of the 10-year treasury yield, you can see a very clear consolidation after we had the lift-off from essentially 0% interest rates in the wake of the pandemic, to that rate-hiking cycle, 10-year yields rose and then went through a sideways move for two or three years. We only recently broke out of that move in the last maybe a month or two ago, a couple of months ago, and that breakout, just from a pure technical standpoint, leaves the target close to 6%.

I think momentum on the upside interest rates right now is pretty strong. Where we are in terms of that lead lag indicator with interest rates and inflation, I'm sorry, with gold price and commodities and inflation, suggests that there's still plenty of upside to go in rates. So that's the financial asset side of it. Stock market, we can get into if you want to, but obviously, it's a clear dichotomy. There's AI stocks and the rest, and they're doing two totally different things.

Adam Taggart (4:11)

Well, I guess my question on this is, we're starting to look towards 2027

So investors are thinking about, well, what assets should I ride in 2027?

I think the big question on AI is the party is still continuing to rage on. Are we in the 1998 phase where the party is going to continue for another year or two? So go long and be happy? Or is it time to start putting in some defensive measures in case AI starts to disappoint? I'm not trying to poke holes in the AI story necessarily, but earnings expectation growth expectations are really high. There's certainly a lot of questions being raised about one, the sustainability of the financing and the rumors of circular financing and all that, and then also the business model itself seems to be under some pressure here. I mean, the business model has been in flux forever in terms of AI program, but now we're seeing that more and more companies are turning to open source models for the large percent of more routine tasks from AI rather than buying from the key frontier models themselves. And so it seems to be very disinflationary in terms of, or maybe even deflationary on the price of tokens. And so there's just a lot of questions being asked about its sustainability. So is 2027 the year where maybe some of those questions actually start to be reflected in lower stock prices?