Jeff Hirsch on Why Big Federal Spending Plus Inflation = “Superbooms”

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0:58The newly elected president, even before he was sworn in, threatened to take over Greenland, recapture the Panama Canal and to make Canada the 51st state. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss whether this saber-rattling has implications for your portfolio. To help us understand all of this and its implications for your portfolio, let's bring in Jeff Hirsch, editor-in-chief of Stock Traders Almanac and author of 2011's Superboom, Why the Dow Jones Will Hit 38 ,820 and How You Can Profit From It. And full disclosure, Jeff wrote a piece, I want to say it was like 2010, talking about the upcoming super boom driven by the combination of war and inflation and basically said the data suggests we should hit 39 ,000 by 2025.

1:56And I called him out on this nonsense. This is the single craziest thing I had. And by the time you and I finished that conversation and you showed me the data was overwhelming, not only did you convince me, but I wrote the forward to that book that ended up coming out in 2011. So let's discuss what war plus inflation means. In the late 1970s, your dad very famously said the combination of the Vietnam War and the oil embargo driven inflation was going to lead to a 500 percent bull market, which kind of shocked everybody when he came out with it. But that analysis turned out to be exactly right.

2:40Explain the thinking behind this. Yeah, we've still got some of the old 3420 t-shirts, Dow 3420 t-shirts. But yeah, that's right. In 76, founder of the Almanac, my late great father, Yale Hearst, discovered this amazing perennial pattern. And how this phenomenon is based upon the exorbitant government spending, creates high inflation, and how the subsequent decline of purchasing power of the dollar drives the market to incredulous new heights. You yourself, you know, were incredulous at the time. But cycles based on the previous moves from World War I, World War II, and Vietnam, which is what Yale was keying on, and the associated massive government spending and the inflation caused by it.

3:24And then the subsequent version that you were writing about was Iraq and Afghanistan. Yep. And there was some surges of inflation during the financial crisis, kind of eased back when the Fed took rates down to zero. Tell us a little bit about what you were looking at in 2010 that said, hey, we could get to 39 ,000 in 15 years. Yeah, I remember, you know what, I remember your actual post. I think the headline was WTF. That's right. That's right. We were about 10 ,000 on the Dow at that time. You were calling for going from 10 to almost 40. It felt like it was ridiculous. I mean, we had Yale's work behind us.

4:09That amazing chart that I redid of his, where it shows the, you know, it's the log chart of the Dow. It shows the inflation, the CPI and the moves. I mean, there's there was some, you know, people talk about these cycles with, you know, the 17 and a half year, the 18 year, the 60. They talk about these sort of arbitrary lengths of time. We looked at it and what Yale discovered was that these events in history that create these cycles, like Archduke Ferdinand getting assassinated in 1914, Germany signing the armistice in 2018, the Gulf of Tonkin Resolution in 64, Saigon falling in 75. And then for us currently, what we were seeing in 2010 was this development of after 9-11, which was an act of war.

4:57And ahead of the time, we had already gone into Afghanistan. We were the whole saber rattling. There was a bye-bye-bye we put out in 22, in 02, excuse me, when we went in there. But we were looking for the end of this huge military involvement overseas. overseas. U.S. boots on the ground in massive numbers is what created this pattern or initially created it. And we were looking for the end of the combat, you know, in Afghanistan to sort of spark the end of the war, end of the secular bear market and the beginning of the boom. And I think we all kind of have looked back a little hindsight. It's around 2013.

5:40I think that little bear market bottom in 15 and 16 kind of, you know, signifies the end of that secular bear. Not the ultimate bottom. I mean, we don't measure the secular bear market from 74 to 2000, we measure from 82. Right. That was the new highs that were set. And arguably this cycle, new highs were set in 2013 that eclipsed 07 and 2000. So I recall early on in the COVID crisis and the first CARES Act, and I read a fascinating analysis that pointed out the fiscal stimulus of CARES Act I and II was about 10 % of GDP. I think it was just CARES Act I, about 10 % of GDP. You had to go all the way back to World War II, and then after that, the Marshall Plan, to see 10 % of GDP as a fiscal stimulus.

6:35And I wonder how that equates to the equivalent of war, plus the obvious subsequent inflation we experienced in 21, 22, 23. Is the quote-unquote war on COVID very parallel to what we've seen in the past? 100%. Very parallel. And that's something we've spoken about. And it's really about overall federal spending. I mean, the evolution of this pattern of federal spending, it's not just war, but spikes, like you just mentioned, in federal spending, like we had in COVID, where it goes above trend. I mean, this probably started to change a little bit going back to FDR with the New Deal ahead of World War II, and then the federal highway, you know, spending - Interstate highway system, yeah.

7:19That continued after World War II. So it's really about past federal spending driven by war, conflicts, but spending outside of the normal budget. And COVID and the Inflation Reduction Act, the CARES Act, are prime examples of massive government spending driving inflation and super So it's a new era. It's a new presidency. There has been emphasis on things like military spending, energy production, space exploration. They're carrying over the previous emphasis on AI and data center builds. How do you look at that? How does federal policy and spending in those areas seem parallel to past military spendings?

8:10How does that affect your projections? I mean, it's quite parallel, but it's part of my projections. I mean, we've updated our superman forecast. I think we've got some further upside to, you know, 62 ,000 and change, which I've written about probably by, you know, average 10 percent gain a year, probably by 2030. and that's all Dow-based because it's what starts on. But right now, it's about tech. It's all about tech. Ukraine and Israel have shown us and proven that the conflict is all about tech now. You've got drones and cyber wars. I'd expect the U.S. military to be spending and ramping up tech.

8:50So all that military spending, you may find its way into technology. I mean, let's call it defense tech. And you see that in companies like Palantir and Lockheed, not just drones, but signal jamming. And there's just an endless array of security. Yeah, it's clearly causing a big boom in fiscal spending. But let's bring this back to the newly elected President Trump. Canada, Greenland, Panama, Canada. I can't believe we're talking about Canada. Take off. So that sort of saber rattling, do you need a hot war for the same thing to take effect? Or do you just need the government's fiscal spending and the threat of war to lead to the same sort of cycle?

9:41I think it's not so much the threat of war, it's overall federal spending. And, you know, saber rattling, yeah, it's saber rattling. You know, I'm not convinced anything is going to happen there per se, but it's really about the spending in general. And if we're going to be doing deals with Greenland for security and raw materials, that would be beneficial. We've got China doing deals in Africa and around the world. There's definitely a new push for global security and global dominance. And we've got to play in that field. And Trump's kind of doing a show of strength. But he's a dealmaker, whether you like the man or not or voted for him or not.

10:23He's going to try to do everything in his power to leave a legacy like we spoke about previously of a prosperous economy, a raging bull market, and global peace and security is what he's going to try to do. And that's going to help our economy. All the spending, whether it's Stargate or military or otherwise, is going to create jobs and keep the economy going. I mean, it's really all about the economy, as Jim Carville likes to say. It's the economy, stupid, of course. So let's look at sectors. We've mentioned defense. What about energy? What about consumer staples? Is there any specific sector effect to this war plus inflation long-term cycle?

11:10I think it's tech. I really think it's to tech. I mean, you're talking about, you know, drones, robotics, AI, energy for sure, because we've got to power everything. I actually currently have a position in the gas and energy, you know, explorers and producers, the equipment people there, the XCS, XLEs. It's a seasonal treat for us as well. I'm not sure Staples is the place to be, but general retail and buying of things is up. But I think energy and tech and all this new technology that we're fighting wars with, that we're operating everything on, is where it's at. I mean, you've got to own the Qs, basically.

11:57Right. The Qs, there's a BlackRock ETF run by the guy who's running their technology group for a long time. I want to say it's their artificial intelligence ETF. The symbol is BAI. And I don't know, some crazy chunk of it is NVIDIA, Microsoft, and then everybody else in that space. It's sort of like cues on steroids. It's like 2X cues. And then there's the healthcare AI. We just heard Altman and Ellison talking about it in the White House with Trump there. Hopefully it'll help us. Sam Altman from OpenAI and Larry Ellison from Oracle. Yeah. How we can cure cancer and do disease analysis. There's a small micro cap stock I have that's trying to do medical, you know, AI to better diagnose and get you better proper treatments and identify things with all your numbers.

12:50You know, medical data, as you know, is still analog. Huge. But it's not quite digitized enough yet. So that's I think there's some future there. So add that to the list of technologies is, you know, medical and health care AI. So to wrap up, we have a massive shift from just monetary policy in the 2010s following the financial crisis to the COVID spend, the military buildup, the AI buildup, the energy buildup. These are all policies and sectors of the economy that have been running fairly hot for the past five or so years. The new administration is expected to really supercharge this. And if historical patterns hold up, according to Jeff Hurst of the Stock Traders' Almanac, we could see this market continuing to rally for the rest of the decade, somewhere in the high single digits, low double digits.

13:48Is that a fair way to describe your perspective? For sure. Think about AI and all the related tech about where we were in like 92 to 95 with Windows 95. Right. You know, early internet days. Early internet days. My view is that we're kind of at that period of time in this technological boom. Remember, the other part of the super boom equation that I added to it on top of war and inflation and peace was the culturally enabling paradigm shifting technology, which AI and all of its related ancillary items that we spoke about are part of. And I think we're at that early, mid-90s timeframe. So to wrap up, if you're a long-term investor and you are constructive about both the economy and the market, you should be looking at sectors like defense and energy and technology, and you should not be surprised that the current bull market might have a whole lot further to run.

14:47I'm Barry Ritholtz, and this is Bloomberg's At The Money.

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