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Jim Welsh: We’re Heading for a Bear Market Unlike Any Seen Before

Tom welcomes Jim Welsh to the show. Jim explains his approach to market analysis, which combines technical with macro forecasting.

Jim discusses how monetary policy has changed over his career and the consequences of negative real rates and quantitative easing. There has been more and more accommodation by the Fed. Most investors today have never experienced a period of high inflation. Further, bonds and equities are now both selling off, which has surprised many.

Since 1981 the use of fiscal and monetary policy to limit economic slowdowns has created unintended consequences of not properly purging the economic system. The Fed has overplayed its hand and is now cornered. Every unit of debt added today is increasingly less beneficial to growth. Debts are now growing faster than GDP, and money velocity has been declining since the mid-90s. This is why we’re setting up for a major secular bear market.

Many people believe we are in a recession, but the first quarter demand was good. Consumer finances remain strong and people have refinanced mortgages at lower rates. The majority of consumers are in a reasonable position to withstand some inflation. We’re not entering a recession yet, but perhaps next year once savings have eroded.

Jim shows long-term charts that demonstrate the unusual nature of the recent inflation cycle. We’re now seeing good prices decline somewhat, while costs of services have begun to rise. Inflation is affecting a considerable section of the CPI metrics, which probably means a tough time to get below five percent. The odds of the Fed preventing a recession seems low.

Wrong chart was inserted during the discussion on the S&P. Below is the correct chart.

Gold has done very well for mitigating inflation, but the dollar has created some big headwinds. Gold is likely going to rally toward 1850. We could be looking at a re-test of the highs at some point.

Europe is facing a cold winter, and it will be interesting to see what happens to Germany’s industry, which is hungry for energy. A recession for Europe is certain given all the dynamics. The dollar is probably approaching a top.

Talking Points From This Week’s Episode

  • The negative impacts of controlled rates and quantitative easing.
  • Why we’re not in a recession yet, likely next year.
  • Thoughts on the labor market and overall consumer finance sentiment.
  • His outlook for gold, the dollar, and indoor thermometers in Europe this winter.

Time Stamp References:
0:00 – Introduction
0:48 – Technicals + Macro
2:20 – Time & Monetary Policy
6:30 – Q.E. & Investment Risk
9:20 – Fed Losing Control
16:55 – Recession & The Charts
21:38 – Consumer Strength & Credit
26:15 – Labor Market Tightness
36:28 – Job Growth Slowing
40:33 – Recession Indicators
43:49 – Fed Success Rate
48:43 – The Neutral Zone
54:20 – Fed’s Breaking Point?
56:52 – Inflation History
59:32 – Recession Odds
1:06:00 – Inflation Relief
1:07:59 – Treasury ETF TLT
1:10:27 – S&P Chart Thoughts
1:13:35 – Gold Outlook
1:17:35 – The Dollar & Europe
1:20:10 – Wrap Up

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Jim Welsh is a student of the financial markets and a seasoned veteran of investing with forty years of portfolio management experience, including security research & analysis, model building, portfolio construction, asset allocation, and is a specialist in technical analysis and macroeconomics. Did we mention he is also an all-around good guy?

As a nationally recognized financial expert, Jim has been quoted in Barrons, the San Diego Union-Tribune, Consensus, the Big Picture, Econintersect, and Market Views. Mr. Welsh has been interviewed on Fox Business News and CNBC, CBS radio and given more than 3,000 interviews on TV, radio, and internet business shows since 1988.

An example of Welsh’s impressive market calls includes the major sell-off in world markets in 2007. That year, Jim correctly anticipated the housing & credit crisis and predicted the bear market in stocks in 2008. In February 2009, just before the market bottomed, and economic statistics improved, Welsh identified the signs of a turnaround in the stock market and economy.

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