Unlocking the Roaring 2020s: Is Bitcoin the New Gold? ft. Ed Yardeni

[00:00:07] Ed

I want to say, for all your listeners, that Yardeni research is seriously considering issuing convertible bonds at 0% and buying bitcoin. I mean, if micro strategy can play that game, why can’t anybody play that game?

And you know, so bitcoin goes up, and then my stock price goes up, and then I issue more stock, and I buy more bitcoin. So, the guy’s discovered the fountain of youth. I mean, it’s El Dorado.

[00:00:35] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in all the discussion we’ll have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:31] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.

Please enjoy today’s episode hosted by Alan Dunne.

[00:02:16] Alan

Thanks for that introduction, Niels. Today I’m delighted to be joined by Ed Yardeni. Ed is president of Yardeni Research and he’s a well known commentator in the markets. He was on Top Traders Unplugged with us last year, so we won’t go back into the full intro, but Ed, great to have you with us again. How are you?

[00:02:34] Ed

I’m just fine, thank you.

[00:02:36] Alan

Good stuff. As I said, you were here last year, and you were bullish back then and markets have continued to rise. So, it looks like your roaring twenties thesis is playing out pretty well so far.

[00:02:50] Ed

So far so good. Only a few more years to nail it here, so.

[00:02:56] Alan

Yeah, I saw in one of your recent commentaries talking about the possible rolling 30s as well. So, I was wondering, are you getting carried away or do you see kind of a bullish outlook as far as we can see?

[00:03:10] Ed

Sure, I may be getting carried away. You never know about these things. And people remind me that the roaring 1920s ended very badly. And they ended badly because the US Congress and the President signed onto a bill called the Smoot-Hawley Tariff that shut off world trade. That was done in May 1930. And arguably that’s what caused the Great Depression and the Great Crash and set us up for a pretty awful period there in the 1930s.

And we’re probably going to get a test of something like that in the next six to 12 months because, under Trump 2.0, tariffs are going to play a big role. And the incoming president has already said that he wants a 10% across the board tariff, maybe even 20%. I think he’s looking to raise some revenue that way. But the problem is that could just start a trade war. So, I think there is that kind of risk, but I don’t think that’s the way it’s going to play out.

I think Trump is using tariffs as a stick for negotiating fairer deals for the US. If that’s correct, then I think we’ll get through this latest threat to the economy. The previous threat was tight monetary policy. And if that’s the case, then I think the economy should continue to grow through the end of the decade. And technology plays a very big role in my roaring 2020 scenario. There’s no particular reason why the technology revolution, the digital revolution, isn’t going to continue to play out in coming decades.

[00:04:53] Alan

Good stuff.

Well, obviously you touch on the possibility of tariffs from Trump, and I guess the change of administration is probably the big change in markets. People don’t know exactly, I mean, there are multiple dimensions to Trump’s policy platforms. You mentioned tariffs. Obviously, there’s an expectation of tax cuts, or at least extension of existing tax cuts. There’s a possibility of supply side measures, unleashing animal spirits. That’s the hope as well. And then there’s a possibility of deportations and reduced immigration flows. So, it’s quite a mix.

I mean, of those, do you expect we’ll see all of those or how much of each of those do you think we’ll see?

[00:05:36] Ed

Yeah, the way you laid it out can really make your head spin. There’s a lot of moving parts here and they could move pretty rapidly.

It seems that the Republicans know that they’ve got maybe 100 days to get all this done because once these things get a little bit stale, you start to see that political cohesion, particularly among Republicans, starts to fall apart. And then of course, they really only have two years because then there’s the midterm elections.

And somehow or other administrations always managed to annoy enough people in the first two years of their new administration so that the people vote for gridlock, they vote for checks and balances. They say, you know, we want to give the other party more power in Congress. So that’s the way it’s played out in the past.

So, they don’t have a lot of time to get a fairly ambitious program through. And they may very well try to do all these things at the same time. And there could be unintended consequences, both good ones and bad ones.

The good ones would be that, hey, you know, hitting our friends and allies and maybe others that we’re not so friendly with, with tariffs, it does work. They respond pretty quickly, and we get agreements and you know, the world is safe for relatively free trade. But it’s kind of like giving a sick patient a whole bunch of medications. Let’s try all these medications and see how they work.

And the doctor forgets to look on the computer screen to see the interactions, and there could be some pretty nasty interactions. But on balance, as a doctor of economics rather than as a doctor of medicine, my conclusion is on balanced, I think it’ll be a positive. I think the tax cuts will provide supply side incentives, deregulation, the same, with tariffs not so much. So, we’ll see how that plays out.

And then the fourth thing is the impact and the deficit of all this. You know, it looks as though this incoming administration has calmed my friends of the bond vigilantes down a bit by telling them, oh, you know, we’re going to have Elon and Vivek deal with cutting spending and maybe come up with some revenue ideas.

But those are kind of the moving parts.

[00:07:58] Alan

And yeah, you mentioned obviously the deficit and you’re well known for coining the ‘bond vigilantes’ phrase. And you know, the last time you were on I think was around October of last year. So, yields were rising and then ultimately came back down. So, I mean so far, coming into the election, the Trump trade was the steepener, sell the long end. Since then the market has kind of calmed down a bit.

I suppose the appointment or proposed appointment of Scott Bessant seems to be part of that, and I know you’ve highlighted that Scott Bessant seems to be a fan of your work as well. He’s referenced your roaring twenties pieces.

I mean, do you think that’s part of the reason markets are more sanguine on the deficit for the moment? And what do you expect respect from him in that respect?

[00:08:48] Ed

Yeah, I think Trump bought some time and sort of allowed the bond vigilantes to back off and give the administration some time because they are talking about trying to rein in the deficit. Scott Bessent is talking about going from 6% of nominal GDP to 3%. Notice he never said over what period of time. Usually, the government budgets are extrapolated over a 10-year period of time.

And I think, you know, if they could make a convincing case, and the Congressional Budget Office signs off on the idea that they’ve made some changes on the outlay side and the receipt side that’ll get us down to 3% of nominal GDP, I think the bond market can live with that. I don’t think anybody realistically thinks we’re going to balance the budget. So, that’s not a goal that anyone is seriously thinking about.

But I think by having this Doge Committee, this Department of Government Efficiency, and apparently Vivek and Elon have already started to walk the halls in Congress to see what’s doable. But I think they’re also going to focus on maybe what assets that the government has that can be leased and raise some money that way – not just oil, but maybe minerals as well.

And then the fact that Trump appointed 15 people to run the various departments in the government, 15 people who are basically clueless about their departments. Their marching orders are one, you have to be loyal to Trump and follow his lead, and two, you have to do everything you can to fire people that we don’t really need, and to cut the budget. So, I think the bond market is buying into that right now. And it could take a while for the bond market to assess whether that’s real or not real. And so, for now, I think the bond vigilantes are kind of standing back.

[00:10:54] Alan

And I mean, if you look at it, bonds started to come under pressure after the Fed cut in September. So, it’s not just the Trump trade that kind of caused an ease in the bond market, it was obviously the Fed cutting in September. So, there is a sense that maybe that was unnecessary. They seem to be lining up again in December. But what’s your sense on that?

[00:11:20] Ed

That’s been my view. My view has been that there was no need to cut the Fed funds rate by 50 basis points. If they had this burning need to just demonstrate that they were done raising rates and that they’re starting to move in the direction of easing rates, they could have just done 25 basis points. But no, instead they did 50.

But even more than that, they signaled that this was just the beginning of several rate cuts over the next couple of years and that they were, on balance, on average, they concluded that the correct Fed funds rate, the neutral Fed funds rate, the nirvana rate, was 2.9%.

And look, they have this dual mandate of keeping inflation down close to 2% and having full employment. I think 4% on the unemployment rate is about full employment. And that’s where we are now. So, what is the rush to lower interest rates? And so, we were critical of that.

And then as a matter of fact, last week, Jerome Powell basically conceded the point and said that there’s no rush to lower rates given the strength of the economy. Well, you know, I think we could have said that a couple of rate cuts ago, but it is what it is.

If they do cut by another 25 basis points, it’s not the end of the world. It’s 100 basis points from where they started. It wasn’t really necessary. And what are the bad consequences of that?

Well, the bad consequences are that we might get a melt-up in the stock market, which is great on the way up, but melt-ups imply meltdowns and that would be the risk. And look, we’ve got lots of speculative juices flowing. We’ve got Bitcoin at $100,000. We’ve got some of these Ark funds, Cathie Wood’s Ark funds that are getting hot again. We’re seeing the stock market at an all-time record high, valuation multiples getting close to where they were right before the tech-wreck in 1999. So, there are speculative excesses out there.

[00:13:22] Alan

And yeah, you mentioned the possibility, or the likelihood of another rate cut. It seems to be what they’re saying. And I mean, we had Chris Waller also speaking last week (we’re recording on the 12th or 10th of December), he seemed intent on cutting rates, or at least that’d been the direction of travel over the next while.

But obviously the big thing that the Fed is kind of refusing to engage on is the impact of the potential policy mix from Trump. You know, obviously Powell sidestepped that at the last FOMC conference. You know, I mean, do you think that’s a bit naive on their part? I mean, surely this is the big thing that’s coming from an economic policy perspective.

[00:14:04] Ed

Well, Alan, you and I are exactly on the same wavelength here. That was another criticism that we had about what the Fed’s been doing here is like, are they not looking at the calendar? Are they clueless? I mean, September 18th was just a couple of months, you know, that we were going to get the election, and they had no idea who’s going to win. Nobody seemed to have an idea who was going to win.

So, we really had no idea whether we would get, you know, Biden at 2.0 with Kamala Harris, and have even more government spending, or were we going to have a bunch of tax cuts. Either way, there was concern that neither side was particularly interested in talking about the deficit.

And so, you know, does fiscal policy not matter to the Fed? It should matter. It’s certainly one of the reasons that inflation took off in 2022 and 2023. And for the Fed to accommodate inflationary fiscal policy is not a good idea. So, again, I don’t understand why they cut in the first place. And once they did cut, why they seem to promise that they were going to do some more.

Look, between now and the December 18th – 17th, 18th meeting, there’s going to be a couple of more economic indicators, a couple of inflation indicators. If they turn out to be concerning, and suddenly they ruffle some of the feathers of the doves at the Fed, they could always call somebody at the Wall Street Journal and say, we got a scoop for you. We’re probably not going to lower interest rates after all. Just don’t attribute it to us.

So, we’ll see between now and December 18th if there might be a Wall Street Journal story kind of guiding the market to maybe there won’t be a cut after all. I mean, I think Powell tried to guide in that direction when he said that we should be in no rush.

Well, if you say you’re in no rush and then you rush to do another 25 basis points, that’s kind of inconsistent. So, he may have actually tried to guide us and we just weren’t listening.

[00:16:16] Alan

Yeah.

And I mean, do you think the Fed will be true to their word in that sense, that they won’t make any major adjustments to their dot plots or forecasts until we actually see, you know, the details of policy under Trump, or do you think we might see an adjustment in those dots by next week?

[00:16:36] Ed

Well, you know, in early November, right after the elections, Powell was asked at his press conference (this is after they lowered by 25 basis points), he was asked a few times, are you factoring in fiscal policy? And he said, well, we’re not doing that. We don’t know what fiscal policy is going to be, so we can’t model it. Meanwhile, the stock market investors are modeling it all the time, thinking about what might be the consequences. And there has got to be some assessment of probabilities of these kind of scenarios. So, I think they’re working on a credibility problem if they don’t stick to the data. And the data right now shows the economy is doing just fine.

We’re basically at full employment. Inflation’s come down pretty close to 2%, but it’s not quite there yet. And that’s partly because some components are turning out to be kind of sticky and stuck around 3% to 4%, which is not a good thing. If some of the other components that have brought inflation down, like durable goods inflation, for some reason don’t continue to do that.

And we know that, for example, the used car prices are starting to go up, and that’s been one of the contributors to lower inflation is used car prices coming down after they surged during the pandemic.

[00:17:58] Alan

Yeah. So, the sense now is that core is going to be a little bit higher than maybe it was thought to be earlier, by year end, but the general trajectory is still in the right direction. And I mean we still haven’t seen the full impact. You know, people are still expecting more of a weakness in the housing component to bring that down.

I mean, taking it all together, I mean, if you were forecasting inflation for kind of the next six to 12 months, do you think it’ll be sticky around current levels, or would you still expect it to come down more from here?

[00:18:29] Ed

Yeah, I think it’s going to be sticky here, which is a sticky problem for the, for the Fed, because they were pretty adamant that they wanted 2.000%.

It’s not necessarily like pi in mathematics, but they made it sound like they needed to do that in order to maintain their credibility as inflation fighters. And for them to kind of make it a little squishier and say, well, we can live with 2.5% to 3%, that’s not going to fly.

If they had just kept the Fed funds rate at a restrictive level, at nearly 5.25%, 5.5%, and there’s precious little evidence that it was really all that restrictive after all. The economy was continuing to grow. We’ve seen speculative bubbles here and there. So, they do have a credibility problem building up here. And then we wouldn’t want to see them kind of suddenly realizing that, and overreacting the other way, which is what happened in 2022 when they realized they had an inflation problem.

[00:19:31] Alan

Yeah. So, as you said, the economy is still growing very robustly or reasonably robustly, notwithstanding the level of rates. So, you know, there is this debate in market, is monetary policy restrictive or not? And I think, as you say, the Fed seems was pointing to about 2.9% if you look at the dots, that was the implication.

I mean that’s been revised higher over time. It was 2.4%, 2.7%, 2.9%. There’s a good chance it might get revised a bit higher. But I mean where do you see it at neutral? I mean, I know it’s very hard to… Or what range would you put around it?

[00:20:04] Ed

Well, again, I think we have to be empirical about it because now we’re talking about the so called neutral Federal funds rate at which it’s nirvana. Right? Inflation’s 2%, and the unemployment rate is around 4%, which is consistent with full employment. We’re there.

So, from that standpoint, maybe the Fed funds rate is exactly where it should be, maybe right around 5%, not around 3%. I mean it’s a 200 basis points difference. It’s quite a stark difference indeed.

But empirically I think I’m right so far, that the Fed funds rate seems to be just about where it should be. Now, as you mentioned, on December 18th we’re going to get their latest quarterly summary of economic projections.

That’ll be interesting to see how they’re changing their view of the economy. And I think they will raise the long-term Federal funds rate – the neutral rate, as we’re calling it, but it is a fantasy rate. It doesn’t exist. You can’t measure it. It’s totally theoretical.

When I started college, I started out in physics, and it was too hard for me so I went to economics. And the only thing I remember, which I thought was pretty cool, was the Heisenberg uncertainty principle that if you know where an electron is, you don’t know how fast it’s going. And if you know how fast it’s going, you don’t know where it is.

In the case of the fantasy neutral rate, we have not a clue where it is, and if we knew where it was, it could be something different in six months. I think if you ask most economists, they’d say, we can’t measure it, we have an opinion of what it should be, but it’s not based on anything other than our gut feel. And oh, by the way, six months from now, after I tell you what it should be now, it could change.

We don’t know that it doesn’t move. I mean, it has got to move. Nothing in the economy just kind of stays stable. I mentioned the mathematical variable of PI, what is it, 3.14 and then, you know, so on. Did I at least get those digits right? I think I did. That’s a constant. There’s nothing to say that the neutral rate, even if we knew it was 2.9%, that that’s a constant. So, it’s a fantasy and it’s useless.

[00:22:28] Alan

I mean, taking all what you’re saying together, I mean, it’s possible that if they cut again, policy is less restrictive or maybe not even restrictive anymore, and the economy already has decent momentum. On top of all of this, we have possible stimulus to come from Trump.

So, the implication is that we could have a reacceleration, potentially, in growth and the Fed might have to do in about turn. Presumably it would be very reluctant to do that. But if you were to put a percentage likelihood on that scenario, how likely would you say that is?

[00:23:01] Ed

A scenario where they do what?

[00:23:03] Alan

If growth proves to be stronger, and inflation sticky, and they end up tightening again next year.

[00:23:06] Ed

That’s my roaring 2020 scenario. But my roaring 2020 scenario is based on productivity. And productivity is like fairy dust. It makes everything better.

If you get better growth in productivity, it goes straight into real GDP. If productivity grows at 3% instead of 2%, that extra percentage point goes right into real GDP.

Real GDP, in arithmetic, is one of the most simple formulas in economics. It’s the growth rate in the labor force: how many people are actually working, and then what’s their productivity? What’s their output per person? And that gives you GDP growth. So, if the population, and therefore the labor force, is growing, let’s say at 1%, and productivity is growing at 2%, you’ve got 3% real GDP growth.

In my scenario, I could see productivity growing 3%, maybe even 4%. Let’s not get too carried away. Let’s just say 3% instead of 2%. So, 3% productivity growth plus 1% labor force growth gives you 4% growth instead of 3%.

That doesn’t sound like a lot, but it compounds and it makes some magical things like inflation remains moderate simply because unit labor costs (which is hourly compensation divided by productivity), the unit labor cost of inflation is the underlying inflation rate in the labor market, that goes down. Wages relative to prices, real wages track productivity really well. And in a competitive marketplace, which we still have, the rising productivity does in fact boost real wages.

And then, of course, it’s great for profit margins. So again, win, win, win, win, win is what you get with productivity, and you don’t get inflation. So, I think we could have the best of all worlds; a strong economy with low inflation, real wages going up, that doesn’t require the Fed to do anything. Just leave the Fed funds rate where it is, here. Now of course there are alternative scenarios, that’s my base case.

But we could have a surprise on the inflation side. The sticky areas could remain sticky, and we could have some problems on the less sticky areas of inflation. And at the same time, we may come out six months from now and the bond market concludes, you know what, they’re really not doing anything about the deficit. So, you have that plus inflation scare and suddenly the Fed has to consider raising interest rates. So, it’s not out of the realm of possibilities.

[00:25:47] Alan

And on productivity, obviously the productivity numbers have shown a rebound in the last kind of two to three years, but prior to that they had been low. So, some people might suggest, okay, don’t extrapolate what we’re seeing in the last two years. Maybe average out over the last four to five years.

Now I know you look at the minutia of all of this quite closely in terms of your labor costs and margins, et cetera, but I mean, at a high level, what do you think the narrative is? I mean, you mentioned the digital economy. Is it just that the greater adoption of digital era, or is it AI or what’s fueling the productivity, do you think?

[00:26:22] Ed

Well, first with regards to productivity, the data that’s available, I always say that whatever data supports my story is good data. If it doesn’t support my story, it’s bad data. And so far, the productivity data has been supporting my story.

You know, a lot of people question how do you even measure productivity? But we do, there is a series for it, and try to look at it, and see whether it makes sense. But actually, on a five year trailing basis at an annual rate, productivity growth bottomed at 0.5% at the end of 2015.

Now, the latest number, which would be for the third quarter of this year, that five-year trailing or 20 quarter trailing productivity growth rate is 2%. So, it’s quadrupled. That’s pretty impressive. And you’re correct, 2% is kind of the historical average. So, saying that we’ve gone from 0.5% to 2% is like, okay, we’ve just kind of normalized. But it’s nice to be normal. I mean, it’s better than 0.5%. And if we’re right that the technology story is going to drive productivity even higher, and let’s make it realistic, 3%, not 4%, that’s more economic growth and more downward pressure on inflation.

With regards to the technology story, I think we know, from reading our economic history, that there was an agricultural revolution a few centuries ago. That was followed by an industrial revolution in the 1800s and 1900s. And now I think we’re in a digital revolution that, arguably, started around 1950s when we had the IBM mainframe. Then along the way we had smaller minicomputers, then PCs, laptops, the cloud. And here we are with AI.

In the context of the kind of historical evolution of the digital revolution, I would say that it’s all about data processing. How can you take more and more data and process it more and more rapidly to come up with some important conclusions?

And so, from that standpoint, AI is really just a continuation of data processing, where we’re now able to process so much data, so quickly, and relatively cheaply, with basically supercomputers. I mean, Nvidia chips, when you put them all together, allow for very, very rapid computing.

So, what does all that mean? Well, somewhere along the lines, not too long ago, somebody figured out we can process so much data so quickly now. Why don’t we just design some programs, large language models, that can interpret that data for us, come up with some conclusions. And so that’s really what AI is all about.

Now it’s totally useless if you use these models with the data, all the data that’s available on the planet Earth, plug it into the Internet, and it’ll be garbage in, garbage out. It’ll use garbage information, and it’ll generate garbage information, and it could very well make the Internet kind of like the ocean. It may have a lot of areas of pollution that aren’t good.

However, if you take your models and just put in your own corporate data, or you buy some data that you know is clean, you can get a tremendous amount of power from that kind of data processing. And that’s where we are.

So, now that allows us to have autonomous driving, allows us to have humanoid robotics, just more efficient robotics, generally speaking. I think it is a game changer in productivity.

[00:30:14] Alan

I mean, there are other interpretations of the productivity data like some people suggest. You know, productivity kind of slumped a bit after Covid. A lot of workers moved jobs and now they’re settled in, so they’re more productive. I saw somebody else making the argument that, you know, there was a Gallup survey, I think, of employee sentiment.

A lot of employees feeling like they’ve been working harder than ever, that maybe they were asked to do more during COVID and that’s kind of continued. And that’s what accounts for the productivity. Is there any truth in any of that or are they kind of peripheral kind of explanations?

[00:30:53] Ed

Those are kind of anecdotal issues. You know, you make a list, and then you make the positives and the negatives. And then maybe the third column is the actual data and how the economy’s actually performing.

So, if you got five negatives and five positives on whether productivity is making a difference, and then you look at the data. And the data suggests that it is making a difference because we’re getting better real GDP growth, which we are around 3%, and we’re getting lower inflation, which we are. Wages are rising faster than prices for the past year and a half, two years, and profit margins are expanding. So, check, check, check, check.

You know, we’ve got a lot of data confirmation that the positives are outweighing the negatives. I would never dismiss that kind of analysis. You have to be balanced when you’re putting your story together. But I actually like to start with the data and then come up with the explanations and say, well, which ones are working?

[00:32:00] Alan

And one of the reasons the US is attracting a lot of inward investment, at least in the industrial manufacturing side, is low energy prices and low gas prices. Is that part of, like a competitive advantage, at least relative to Europe? Is that part of the productivity story or not?

[00:32:17] Ed

I think it’s very much a part of the productivity story because it turns out there’s data suggesting that one of the most productive industries in America is fracking. You know, we’re not using too many rigs right now, and yet we’re producing oil at a record 13 million barrels per day.

And we’re doing that because the frackers go into the same hole that was depleted and figure out ways to move the pipes around in such a way that they find more oil and gas. So, that’s been a very productive area. And of course, that there’s an abundance of oil and gas in the United States. We’re now a net exporter.

We’re going to be, under the Trump administration, exporting a lot of liquid natural gas again. And that does give America a competitive advantage because energy is an important part of production. Especially now with artificial intelligence. We need to have a lot of electricity, and we are going to need to generate that with natural gas. Maybe still some oil, but certainly with natural gas.

[00:33:22] Alan

And I mean, you label this bullish phase the Roaring Twenties, which obviously kind of makes people think back to the 1920s. But the other obvious parallel is the 1990s, where we had this productivity boost in the kind of mid to late 90s. And Greenspan took advantage of that by not tightening during that phase. I mean, in that period, what was behind… I know we had the Internet, but the Internet came in the late 90s. With the benefit of, like, looking back on that now, what underpinned that productivity boom?

[00:33:54] Ed

Well, again, I can make sense of that in the context of this digital revolution. In the late 1990s the revolution evolved to desktop PCs. I worked for, as the Chief Economist and Strategist, at Deutsche bank, in New York City, in the late 1990s, on 52nd Street. And we had a nice office building there. And when you walked down the halls, you had to be very careful not to trip over a Dell box. Suddenly, everybody was getting computers.

A few years before that one or two people got computers, and everybody was jealous, but the company wasn’t going to spend the money on computers. And then suddenly, in the late 1990s, everybody got computers.

We needed to have a few hundred people in the IT department because they had to install all these computers in the offices, and then they had to install Microsoft office into these computers. And that’s really what created the productivity. You know, Dell sold a lot of boxes and Microsoft sold a lot of software.

But if you think about it, the application that was available at the time was pretty limited. It was basically Excel and Word. So, if you had a whole bunch of secretaries on selective typewriters, IBM selective typewriters, you got rid of them. And everybody kind of was on their own typing the reports on Word. So that was a big productivity enhancer for that particular application.

And then, if you had a whole bunch of bookkeepers, you could probably cut back that department with Excel. But once you’ve done that, that was about all you could do. It didn’t really have a lot of applications for a lot of other businesses.

So, once we had that boost in output of computers and software and then everybody had it and there wasn’t any more of it, the whole thing kind of fizzled away. Also in the late 1990s, a lot of companies went on a spending binge in IT because of the year 2000 problem. All the Chief Information Officers used that as a great excuse to upgrade to the state-of the-art computers and software at the time. And there was no Y2K problem as a result.

And as a result, demand for technologies kind of fell off a cliff once the clocks changed, and there were no problems, and everybody had loaded up on technology. So that’s, I think, what happened back then.

And now, to the here now, I would argue that technology that’s available lends itself to increasing productivity in every business. I tell our accounts, look at your portfolio and look at every company in your portfolio as a technology company. They either make it or they use it. If they don’t use it, they’re going to be at a competitive disadvantage.

[00:36:44] Alan

And so, I mean, if you look back to that period, that mid to late 90s, as you say, we had the productivity boom and the Fed was kind of able to allow the economy to grow strongly without tightening, which is the kind of the scenario you’re talking about now. And then, obviously we had kind of a, I guess a Wall Street guy at the treasury in Robert Rubin. So certainly, there were some parallels. I mean, that was an era of a strong dollar.

I mean, we’re hearing conflicting noises coming from Trump and his appointees with respect to kind of trade in the dollar. On the one hand, you’ve got Lighthizer involved in trade and he wants to balance bilateral trade relations. Scott Bessen seems to be more pragmatic and in favor of, or at least open to a stronger dollar.

And Trump previously had talked about talking down the dollar, but seems to have changed his tone of late. So how do you see international policy, dollar policy playing out?

[00:37:44] Ed

Yeah, I don’t know if Lighthizer is involved anymore. He was in Trump 1.0. He may still be an advisor informally, but I don’t think he’s got an official position. I think Trump’s appointed a younger trade negotiator, but Lighthizer certainly still has an influence on trade policy.

But look, that, again, gets back to there are lots of moving parts here. If Trump does in fact impose a 10%, 20% tariff across the board, and much will depend on the reaction of the dollar. If the perception is that, well, we have to own the dollar because so many countries are going to be at a disadvantage here by not being able to sell to in the United States or they’ll be at a competitive disadvantage.

So, if you get a stronger dollar, let’s say the dollar goes up 10% and the import is 10%, then the inflationary consequences might actually net out to zero. Somebody’s still going to be paying that 10%, but it’s not going to be inflationary. But I am bullish on the dollar.

Not to say it’s going to go up, up and away, but I think it’s going to remain strong, may get stronger. It’s hard to get wildly excited about the euro, given what’s going on in the politics and economic backdrop of that region.

I think the idea that the BRICS are going to come up with an alternative currency. How shall I put it? It’s a joke. I mean, you know, the strongest economy gets to have the reserve currency.

I mean, that’s the way it’s always worked and that’s not going to change very much. And who really wants to own a currency backed by Russia or even China? Right now these are not stable economies.

So, I think the dollar does remain strong. I think the US Continues to remain a big factor in global stock markets. I think we now account for 70%, 75% of the market capitalization of global stock markets. I mean, it’s absolutely huge.

As a contrarian, I’m, I’m constantly thinking about what could go wrong, what could suddenly make investing overseas a bit more appealing. And I can’t really come up with it. But then I’ve been biased.

I’ve been arguing since 2010 that, from a US perspective, we should overweight US stocks relative to foreign stocks. I’ve been saying stay home rather than go global. And it’s worked remarkably well. It’s working maybe better than I thought, recently. And so, it does kind of make me wonder how much longer can this go on. But I can’t think of any reason why it shouldn’t go on.

[00:40:42] Alan

It’s interesting, you touch on a few points that are kind of interesting from that perspective. You had the Goldman report, which I know you addressed in some of your research as well, where they were forecasting 3% annualized returns, I think, for the S&P 500 for the next 10 years. And part of it was based on this concentration issue. I think the same guys are actually bullish on the market for the next 12 months. But it’s kind of on a 10-year view that they’re pessimistic. I think you took issue with that analysis, or you kind of didn’t buy into it.

[00:41:12] Ed

Yeah, I mean historically the growth rate of the S&P 500, including dividends, which is important to include, has been 11%. And the Goldman people acknowledge that there was actually 13% over the past year.

So, we’ve been tracking the historical growth rate all along and I don’t know that concentration changes that, just because seven great companies account for 30% of the S&P 500. I don’t particularly see any reason why that would change the potential growth rate of the S&P 500.

And I, again, I have to be true to my school, you know, if I’m going to talk about the roaring 2020s, I’m looking at better productivity, which is great for profit margins. I think economists, generally speaking, never give technology enough weight, enough respect. And technology really has been an extraordinarily important variable in understanding economic history and understanding where we’re going. So, I think they may be missing that.

They also have a commercial interest in telling other customers that buying stocks, you know, with very low commissions isn’t going to get you a good return. Instead, look at all these alternative investments that we’re creating in our other shops. So, I wonder whether they might be somewhat biased in their recommendations.

I don’t have that luxury. I just have to talk about the markets, and I have nothing else to sell other than my opinions. And my opinion is that the stock market’s going to do very well, continue to do very well. I admit the valuation multiples are stretched and we could have certainly a correction along the way.

I wouldn’t be surprised if we have a nasty sell-off in January just because people have so many capital gains that they’re going to want to rebalance that. You’re not going to want to have so much in Nvidia, so much in Tesla, and there could be a natural tendency to want to sell some of these.

But why sell it now when you have to pay taxes on the capital gains immediately in April, when it might be better just to sell in January. But that’ll be just a buying opportunity that wouldn’t be anything to try to market time.

[00:43:46] Alan

Yeah, I mean obviously you talk about the possibility of a melt-up and as you alluded to earlier, a melt-up means that then at some point a meltdown. So, I mean we certainly saw that in the late 90s. Obviously it ultimately ended in a big reversal in 2000. But along the way, you know, in ‘97 there were decent corrections. And then obviously, in ’98 there was the LTCM and the Asian or the Russian debt default. I mean, you know, even in the roaring twenties scenario, a bullish scenario, presumably we’d have 20%, 30% drawdowns along the way. Or are you thinking more in terms of kind of 10% to 15% corrections?

[00:44:19] Ed

Yeah, I’m thinking more corrections. You know, bear markets are caused by recessions and for the past three years, as you know, we’ve had the most widely anticipated recession of all times that didn’t happen, as I call it, the Godot recession. Unfortunately, we were on the right side of that.

But most people were sure we were going to have a recession because it made sense that tightening of monetary policy has always, in the past, caused the recessions. This time, for lots of reasons that we came up with, that was not the case.

So, if that monetary policy isn’t tightening now and maybe they’ll listen to us and just kind of leave things alone as is, but they’re more inclined to lower rates. So, we’re not going to get a recession caused by a tight monetary policy anytime soon.

We’ve had geopolitical risks that haven’t led to a spike in oil prices, which has been another way to get recessions. So that kind of leaves us with Smoot Hawley tariff, with Trump’s tariffs as a potential cause of a recession.

But our opinion is that’s not going to happen. So, I’m kind of hard pressed to say, well, what’s going to cause a recession between now and the end of the decade. So, I’m thinking if there’s no recession, there’s no bear market. But that doesn’t mean we couldn’t have, you know, 10%, 15% corrections along the way.

[00:45:42] Alan

Yeah, I mean it’s interesting you mentioned, you know, as you said, bear markets are normally caused by recessions. And there are arguments put forward by economists as to why the economy is less recession prone these days. You know, it’s more service driven economies. You don’t have this kind of manufacturing cycle managing inventories.

And I know you’ve written about often the recession is some kind of credit crisis or where the Fed has to respond. And now the Fed seems to have better crisis management tools. So that kind of takes that one away as well.

So, I mean, if you think about it then, so what happens in that scenario? Do valuations then just go to more extremes because we live in better times for longer periods? Is that how it plays out?

[00:46:24] Ed

Honestly, I’m a little bit uncomfortable here with a couple of things. Valuations are stretched. They are near record. I mean the Buffett ratio, which is the S&P 500 divided by revenues per share, it’s price to sales ratio is at an all-time record high of 2.9. Buffett in the past said 2.0 is about as high as he wants to see it.

And it does unnerve me to see somebody as smart as Warren Buffett raising a lot of cash. I mean, the only obvious explanation for that is he had a lot of cash before and couldn’t find anything to buy because everything was too expensive.

So, he came to the conclusion, well, if I can’t find anything to buy, why do I own all these things that are expensive, and why don’t I sell them and wait for an opportunity to buy them cheaper? So that is of a concern. And this guy has an amazing track record.

Another concern is we are seeing speculative excesses other than valuation multiples in areas like bitcoin. And the Ark funds are starting to get hot again. So those are issues. I’m not telling anybody that stocks are cheap here.

I’m just saying that I think the economy is going to get boosted by productivity which is going to show up in earnings. And so, I’m looking for an earnings led melt-up, which isn’t a melt-up at all. It’s valuation led melt-ups that we need to be concerned about.

And we could have a melt-up followed by a meltdown, but it doesn’t necessarily have to be 1999, 2000 all over again. It could be, I suppose, a bear market melt-up followed by a meltdown. It would be, presumably, more than a correction. But it could be pretty short lived and again, it could be pretty hard to play that.

Getting out at the top is great if you can do that, but then you also have to be smart enough to get in at the bottom, otherwise you’re just going to miss the move up. We’ve just seen that in 2022 when some people call the top and just forgot to tell anybody to get back in.

[00:48:29] Alan

It’s interesting. I mean, I just say there are these signs of excess. I mean obviously credit spreads are very tight as well and that’s obviously a positive for the economy in terms of the cost of capital. And then obviously as the stock market goes up that creates wealth as well. But obviously it’s things like bitcoin, doge coin, all of these things.

I mean, where do you stand on crypto? Do you think bitcoin has now established itself as a feature of the landscape? Is it here now that it’s hit $100,000?

[00:48:56] Ed

Yeah, I think whenever you ask somebody that, you have to ask whether they own any or not. And if they don’t, they’re going to badmouth it because they missed a great… So, I don’t, but I’m not going to badmouth it.

For quite some time, I’ve been calling it digital tulips, which sounds like I’m badmouthing it because then I’m saying, well, this is just another bubble, like the tulip bubble. But actually, if you think about it, the tulip bubble was basically in Amsterdam and the marker was open during the day, it wasn’t open at night.

And once everybody that wanted to speculate had a tulip bulb, then you kind of ran out of buyers and the whole thing kind of imploded. So now let’s take this example and say, okay, so what does a digital tulip mania look like?

Well, the big difference is that it’s global, so you’ve got a lot more people that are potential buyers. I don’t want to jinx it for anybody. Once I buy, I should kind of announce it to the world and that’ll be the top.

So, there are still plenty of potential buyers. And like the tulip mania (and by the way, it’s open 24/7), and like the tulip mania, there’s no fraud involved. Everybody knew what they were getting. There’s no Ponzi involved. So, it’s not kind of the classic mania in that regard. So that’s kind of where we are.

And then, of course, in the tulip mania, to my knowledge, the municipal government didn’t say, we’re going to create a government reserve for bulbs the way that Donald Trump has said. So now that politicians are jumping in. And he said it because he wanted the crypto voters to say, hey, he’s one of us. And so, he got that vote.

And what does it mean if they buy bitcoin? I guess Trump could imagine a scenario where they do kind of the micro strategy game and instead use tax… Well, they borrow money in the treasury market, they put it in bitcoin, bitcoin goes up, they borrow more money, they put more money in bitcoin, and then when they think they got enough, they say, hey, we’re going to pay off all the debt. Well, try to do that and get out of all the bitcoin to do that. Yeah. So, I don’t know. It’s going to go to a million? Sure, why not? I mean, I don’t know.

[00:51:26] Alan

Yeah, well, I’m trying to remember my economic history. I think tulips, because these were rare tulips. It wasn’t just any old tulip that they were buying. They were very rare. I think they traded for nearly about the cost of a house. So maybe bitcoin can go to $300,000 or $400,000 based on that kind of metric. If that’s the case.

[00:51:48.] Ed

Yeah, yeah. I mean it’s, it’s a conundrum.

I want to say, for all your listeners, that Yardeni research is seriously considering issuing convertible bonds at 0% and buying bitcoin. I mean, if micro strategy can play that game, why can’t anybody play that game?

And you know, so bitcoin goes up, and then my stock price goes up, and then I issue more stock, and I buy more bitcoin. So, the guy’s discovered the fountain of youth. I mean, it’s El Dorado.

[00:52:19] Alan

Financial alchemy, yeah.

I mean, one of the reasons people point to the bullish case for bitcoin, I suppose relates back to one of your specialist topics, which is debt and the deficit, and the fact that we have such large debts and ongoing deficits, and that’s going to require ongoing liquidity provision from central banks. And because of that, all of the monetary stimulus will go into real assets.

And obviously bitcoin is seen as kind of a digital goal in that respect. I mean, are you sympathetic to that view? I mean, would you be bullish on gold from the same perspective or is that a valid argument?

[00:52:58] Ed

I think gold has been held back by bitcoin because why play with gold when you can play with digital currency. But I think there’s a lot of similarities there. I don’t know what gold is worth.

All I think I know is ever since Russia invaded Ukraine and we slapped sanctions on them, especially confiscated their reserves, or at least frozen them, central banks have said, well, you know, if the US turns against us, we’d rather have our reserves in gold. So that seems to be what’s driving the gold price up.

And so, other than kind of geopolitical concerns, there’s no fundamental demand by these central banks to buy gold to make jewelry or do something industrial with it. So, I think bitcoin has actually held gold back in some ways. But, yeah, sure, I mean, I have no problems with gold.

I know the same thing that everybody else knows. China and other central banks are buying gold. So, the gold price is going to go up. And that’s the story.

[00:54:11] Alan

I mentioned at the outset, you were on last year around kind of the October time, and bonds had been under pressure, and yields had been rising. And the big change that seemed to turn the market, at the time, was the change pattern of Treasury issuance or shifting more towards bills away from coupons. And I mean, there was a paper out then, we had Steve Miran on here as a guest as well.

He and Roubini wrote a paper suggesting this was a Treasury tactic. I mean, do you buy that or how do you see what the Treasury has been doing?

[00:54:42] Ed

I got a PhD from Yale six years after Janet Yellen did. And I got through Yale because of Janet Yellen. She took meticulous notes of Professor James Tobin’s class. I didn’t understand anything he was saying, but her notes were brilliant. And so, I thank her for getting me through that.

She’s a very bright lady. And so, she’s Treasury Secretary. And last year, November 1st, she basically said to the bond vigilantes, well, if you don’t like my bonds, I’ll just do more bills. And there’s seems to be an infinite demand for bills. There are no problems getting US treasury bills sold.

So, that took the pressure off, though suddenly there weren’t going to be as many bonds being issued. And meanwhile, inflation is also kind of moderated. So, that was a big contributor as well. So, that’s what happened on November 1st.

And, you know, people like Ray Dalio were going around really looking very, very concerned that we were on the edge of a debt crisis. And it kind of felt like it there, going from 4% to 5% in a couple of months is very unnerving. And that just didn’t play out.

And again, I think the Trump administration has bought some time on getting the bond vigilantes to stand down with some of the promises they’ve been making of what they’re going to look into. At least they seem to care about reducing the deficit.

I mean, it’s conceivable that Trump will become just as sensitive to the bond vigilantes as Bill Clinton was. Bill Clinton, as you said, was warned by Robert Rubin and James Carville, don’t mess with the bond vigilantes. Don’t mess with the bond market. And I think Trump is going to be told that by his advisors like Bessent.

[00:56:37] Alan

Okay. Yeah, it’s interesting.

I think the BIS and Claudio Barrio were out today warning that you have to see progress on deficit reduction, that you can’t just leave it to the markets to enforce it. So, I guess it’ll be interesting. Because obviously I think, and even I think Scott Bessent has alluded to this, that whether the treasury can actually term-out those bills that they’ve issued is obviously going to be an interesting challenge for them.

[00:57:07] Ed

It never comes with a money-back guarantee. I try to be balanced. Nevertheless, I’m often characterized as a permeable, which is okay by me. I view that as a compliment because, on balance, the stock market goes up and I’ve been pretty good at calling bottoms. I’m still working on calling tops. And again, that’s the problem I have with the permeables. Even if they tell you when to get out, they’ll never tell you to get back in and you’ll miss a lot of wealth creation.

[00:57:43] Alan

Absolutely. So, I mean for listeners, for readers who want to follow your work more closely, where’s the best place to keep track of your work?

[00:57:50] Ed

Yeah, well, we have for the past couple of years have a research product for individual investors. It’s called YardeniQuickTakes.com.

[00:57:59] Alan

Okay, great. Well, Ed, thanks very much for coming on here today. It’s been a great conversation and yeah.

So, for all our listeners, make sure to check out YardeniQuickTakes.com to keep track of Ed’s work as we are no doubt living in a macro driven world. So, from all of us here at Top Traders Unplugged, stay tuned and we’ll be back soon with more content.

[00:58:22] Ed

Thank you, Alan.

[00:58:23] Ending

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