Two Forecasts for 2025

Hi, today I'm going to cover two people who have a view of the economy for 2025. Professor Steve Hincke from Johns Hopkins University and Dr. Mohamed El-Erian, two distinguished individuals and with insightful views on the economy. To begin with, however, I'm going to talk about my view of the Buffett indicator, which is corporate equities divided by gross domestic product. In other words, the stocks that are supported to the degree they're supported by the underlying economy. Hi, my name is Ben Repond. Welcome to my YouTube broadcast. Today is Tuesday, January 14th, 2025. Welcome to my YouTube broadcast. So I'm going to begin with this. This is a slide of the Buffett indicator. Warren Buffett has used this in the past as a macro indicator of where does the stock market stand. Valuations in the stock market stand to the underlying economy that supports those valuations. And this is a, okay, so this is a few inches, but it covers 75 years from 1950 to present. So over a 75 year period compressed into this, it does give you a macro view. So as you look at this, there is a regression line. The red line cuts through the data, through the middle of the data, and about half of the data is above the red line, about half is below the red line. I put a red arrow at the end of it to show you where we are today, approximately today. And what you can see on this is that when you look at it from this perspective, that it's not the stock market. Remember, this is stocks divided by the economy. That when you look at it from this perspective, you can see that we are overvalued. Now, we are not highly, highly overvalued. So we do have a couple of times where it has been higher than this. We could go back to the year 2000. We could go back to 2020. I guess that's about 2021. And I think if we saw all the way back to 1929, we would see that also very elevated line. Now, but here we are, we're what about the third highest in 75 years. So the question is, do you think that the market has a better chance of going up from here, or a better chance of going down from here? When you look at the historical pattern of up and down and up and down, to me personally, I look at it and say, there is more downside risk than there is upside opportunity. So people ask me from time to time, Ben, what do you think the stock market is going to do? Where do we go from here? Well, it depends on time. So are you talking about tomorrow or next week? Are you talking about this year or this five-year period or what? But the reason Warren Buffett, the indicator named after him, the reason he looks at it this way is because he has been stockpiling cash. He sold his positions in Apple, or a good portion of them. And I think the last number I saw was that he is sitting at about 400 billion in cash, waiting for an opportunity. He does not see an opportunity right now because of this chart, I suspect. And so for you, if you invest your own money, you can look at this and say, is this a time to lower my exposure, get out of the market, a time to buy more, because I think it's going to go higher? How do you view this? I am a tactical investor. I'm actually a tactical manager of money. And I use technical analysis in that. And so when I see something like this, I go, this tells me that the market is risky at this point. It does not mean that it can't go up from here, because it can. But it does have more downside risk than upside opportunity. So for you, if you have your money managed for you, or you manage your own money, again, you can evaluate it for yourself. Okay, I'm going to go into two presentations. The first is by Dr. Muhammad El-Erian. And about the first minute and a half of this is an introduction. Now, you may know a lot about him. And if you do, this will be repeating something you already know. But if you know a little bit about him, this will probably expand your view of who he is. If you don't know much about him, it'll be informative. So I'll start with that. And then he goes into explaining really the big picture view of the economy. Now, he's not talking about the currency. He's not talking about the stock market. He's talking about the economy. Sometimes the economy is correlated with the stock market. But sometimes it is not. So you have to be careful in how you view this if you're looking for stock market information. But if you're looking for economic information, between him and Professor Henke, there's probably not two more knowledgeable people that I could possibly play for you. This is about 55 minutes long, but I'm only going to play about four minutes of it. But I'm going to attach the entire video in the comment section below. So if you want to hear everything, which I recommend, actually, if you're interested in this topic, because he's very thoughtful and approaches it, he always approaches material from a kind of a neutral standpoint, and does not, he undoubtedly must have a bias, but it does not show when he's presenting material. So let's take a listen to Dr. El-Erian and the introduction that begins by Willie Walker. Thank you for joining us for another Walker webcast. It is my great pleasure to have my friend, Dr. Mohamed El-Erian, join me today. Mohamed came to Sun Valley for the Walker-Nolop summer conference last summer, and we published out on the Walker webcast that face-to-face interview we did, and here we are six months later. A lot in our world has changed, and I am honored to have Dr. El-Erian back on the Walker webcast. Mohamed, let me do a quick bio, not that it's needed for you, but just quick to remind some people of the perspective that you bring to my questions today, and then we'll dive into the conversation. Dr. Mohamed El-Erian is the president of Queens College at Cambridge University. He served as chief economic advisor at Allianz, the corporate parent of PIMCO, where he was chief executive and co-chief investment officer between 2007 and 2014. He is chair of Gramercy Fund Management. He is a columnist for Bloomberg Opinion and a contributing editor at the Financial Times. He's a professor of practice at Wharton and a senior global fellow at the Lauder Institute. He served on two corporate boards and several advisory committees and non-profit boards. Prior to PIMCO, Dr. El-Erian was a managing director at Solomons McBarney City Group in London, and before that, he spent 15 years at the International Monetary Fund in Washington, D.C., where he served as deputy director before moving to the private sector. He also spent two years as CEO and president of the Harvard Management Company. He's a graduate of Cambridge University and his master's and PhD from Oxford. So, Mohamed, I went back two years ago right now, and you were on CNBC, and you said, quote, I'm not in the camp that a recession is 100% probability, but I am in the camp that the probability of recession is uncomfortably high. And then you went on to say the probability of soft landing is, quote, meager. So here we are two years from then, and the uncomfortably high probability didn't happen, and it seems to be that the meager outcome has actually happened. When we were together six months ago, you had a probability chart. It was actually, it was wonderful. It was a multimodal distribution, which, as you described to all of us, is very difficult for humans to look at and sort of, if you will, not only analyze, but have conviction around. But on that chart, you had the chance of a recession at 35%, the chance of a soft landing at 50%, and the chance of a better than soft landing at about 15%. Where do you stand today on that distribution as it relates to the chances of recession, soft landing, or even better? And thank you for having me. So the good news is that 35% probability of recession has not happened, and the 65% of something better is what has prevailed. What's even more interesting is that we really haven't had a soft landing. We've had a no landing. Growth has remained robust. Inflation has gotten sticky. So we're not back to the 2%. In fact, the Fed itself has acknowledged that once again, it has been confounded by what has happened to inflation. So we are living in this no landing scenario where growth is robust, hasn't reacted to what has been significant increase in interest rates. Inflation has stopped coming down. The markets have repriced Fed cuts. The markets not only expect one to two cuts this year, we may get even less than that. So we are in this world of economic exceptionalism. And I say that because compared to Europe, compared to other countries, we are doing extremely well, and we continue to surprise on the upside. Okay. Secondly, I'm going to play Professor Steve Hanke from Johns Hopkins, and he is making the case for a slowdown in the economy in 2025. Not a crash, not a collapse, just a slowdown. And he states why. It is tied to money supply, and he correlates this with previous periods, actually four previous periods since the Federal Reserve began printing money came into existence in 1913. So this goes back over 100 years, four of them. And he sees this as one of those periods. Now, Professor Hanke, as well as Dr. El-Erian, take a view that I've always found it to take a view that is not political. And we all have political leanings or biases or preferences. Most people do. What I find is that a lot of times when I talk to people, it will come out their political view. And a lot of that is centered around Trump, you know, and they're looking for things that will support their view, that an anti-Trump view or a pro-Trump view. And it's not, I don't think it's helpful to do that because it's, I find that politics, again, it used to be, you know, Clinton or Bush or Reagan or whatever. Obama, it's not, those don't come into play. I mean, if you look at your political leanings and look at what the market has done, it will some, many times will favor the other party rather than your bias. So I like the way that Professor Hanke does it because he takes that out of it. If you want politics, you can go look at it on the TV. I think they play it all the time. And maybe you can find something that supports your view. But when you look at economics or the stock market, if you solely do that, I think you're going to be led into a conclusion that may not, may not support your view. And it may be wrong. I think if I were to do that, I'd be wrong about half the time. So it's, I think the best thing all I can say is it'd be helpful if you can just put your political views aside and look at this as pure economics. So as he says, it's all about the money supply. And in terms of the, I guess you could say the Federal Reserve or the monetary system, this is called M2. So if you ever heard, hear the word, the phrase M2, that means the flow of money, or the amount of money in circulation. And he points out that tariffs also come into play. So where we are in the money supply, and where we are coming into a period where Trump is talking about tariffs, this is going to play into the view of what's going to happen with the economy. Is it going to slow down or not? Now when we have tariffs, we don't know how that's going to play out. We don't know if he's going to put, what he's going to put tariffs on. And then the other countries that he puts tariffs on, are those going to be, apply tariffs on us? So you have tariffs and counter tariffs. How is that going to play out? This country versus that country. So it could be positive for us. It could be negative. We don't know. So again, I think it's helpful to take your political views, put them aside, and look at this independently, and view from the standpoint of economics, not politics. So I'm going to play this. This is Daniela Camboni interviewing Professor Steve Henke. She does a good job. I like the way she does her interviews. So take a listen. Professor, Happy New Year. Thank you for joining us. Well, Happy New Year to you, Daniela. Great to be with you. Always great being with you as well, Professor. You know, I follow your work closely, and I love how you say, look, yeah, there's a new sheriff in town, Trump's inauguration right around the corner here. But you say there's a lot of uncertainty that comes with it. Like, he talks a tough talk, but we don't know exactly what he's going to do. And on top of all this, many folks are excited and feel the market is going to be strong. It's going to be a robust economy. But you say, don't get excited too soon. You still see a slowdown. Talk us through your thoughts here. Okay. The slowdown idea is that the fuel for the economy is really what's going on with the money supply. If you're injecting more money into the economy, it kind of revs the engine up. If you slow it down and lean back on the fuel, it slows things down. So and the reason for that is that the money supply drives nominal GDP. And remember, nominal GDP has two components, the real rate of growth in GDP plus the inflation rate. So you get it all wrapped up with nominal GDP. And the best way to predict it is changes in the money supply. And what have we seen? If you look back to July of 2022 and look at the money supply, now look at the money supply, the stock of money is actually a little bit lower now than it was a couple of years ago. So we have, the stock of money has contracted. That's one factor. And the current rate of growth in the money supply year over year is significantly lower than Hankey's golden growth rate of 6% of M2 growth year over year that's consistent with hitting a 2% inflation target. So the stock has gone down over the last actually year and a half, two years. And the rate of growth, although it's picking up a little bit, it's still below where it should be if the Fed wanted to be hitting its inflation target of 2%. So that's what, that's the story. That's the slowdown. Now, why am I pretty convinced that there's going to be a slowdown? We've only had four times where you've had significant contractions in the money supply in the United States since the Fed was founded in 1913. And all of those, as night follows day, we've had recessions. Actually, one of them, we had the Great Depression. The money supply, the stock of money went down from peak to trough about 39% from that 1929-1933 period. So it was a huge plunge in the stock of money. And that, of course, set off the Great Depression. And then you had the smooth holiday era come in, and that added to the problem. That complemented the slowdown in the money supply, the collapse of the money supply. And we had a terrible Great Depression. So today, we've got the slowdown in the money supply. We've also got a lot of threats of tariffs, by the way. By the way, the smooth holiday era was a big deal because the US put the tariff on, and our imports of goods in the United States went down by about 70% from where it was before. So there was a huge contraction in imports coming into the United States. And that meant economic activity overseas contracted. And there was a tit-for-tat. We put the tariffs on, but then the foreigners put tariffs on us. So international activity shrunk, and we had a worldwide Great Depression. It just wasn't the United States. It was a worldwide problem that we had during the Great Depression. So that's the kind of... I'm not saying, by the way, that we're going to have a Great Depression. I'm just saying that we're inevitably going to slow down because when you get these big changes in the money supply, there's a transmission mechanism and a lag between the time the change occurs in the money supply and the time in which economic activity, that's real GDP, and inflation start changing. Okay. So this is the view. This is the cartoon I've got for today. You can take a look at it. The bulls are getting pushed around right now. And so it may be punched in the face versus the punch bowl. But I think 2025, my view, is that 2025 will have some periods that are rising that will go up in the market. And I think there will be periods where it will go down. I think it will be a mixture. Where is it going to end on December 31? I truly don't know. But I do think it's going to be a rocky ride. January has generally started out negative. And that did not surprise me. But, you know, be prepared for both. And I think that'll put you in good shape. Okay. Thank you for watching. If you have questions or comments, leave them in the comment section below.