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Welcome to "This is Health, Wealth, and the Pursuit of Happiness" your source for insightful discussions with economist and author, Dr. Murray Sabrin. Join us as we challenge convention, expand minds, and pursue truth.
Murray Sabrin (00:07.298)
Welcome to Health, Wealth, and the Pursuit of Happiness. I'm Murray Sabrin, B A A Ph D. There's no BS in my background, never has been and never will be. On this podcast, on this podcast, we explore the ideas, people, and principles that shape healthier lives, greater prosperity, and human flourishing. In each episode, we'll challenge conventional wisdom on healthcare, economics, politics, and personal freedom so you can think independently.
Make better decisions and pursue your happiness. Thanks for joining us today. With us today is a returning guest, economist David Ranson. he's had an illustrious career in the in the public sector and also in the private sector with H S E H S H C W E N Company. he's president since 1992. David brings a wealth of information to the financial markets.
And David, welcome again to Health, Wealth and the Pursuit of Happiness.
David Ranson (01:09.122)
Thanks, very nice to be back.
Murray Sabrin (01:11.146)
And David has provided us with a substantial number of charts. And since we only have about a half hour or so to go through them, David is gonna highlight the the key charts which explain where we are in the economy, where the economy is it the health of the economy, and what are the prospects for future economic activity, interest rates, oil prices, and gold prices. So, David, why don't we begin?
David Ranson (01:38.85)
Yes, my focus is on how to deal with it as an investor. And when you're investing, you have choices among innumerable assets, but you can simplify it all down to four major asset classes. They're shown on this graph. One is, of course, stocks. But I think we in the United States are much too dependent on stocks. Stocks do well for us under certain economic conditions, but not under others.
Bonds are another asset class. And on this diagram, stocks are in the northwest area of the graph. You could think of it as a narrow, although if you see a little red rectangle, that points to a place on the diagram where we are sitting recently. This is actually dated at the end of June.
In the northwest corner where we're not sitting are stocks. In the southwest area of the graph, that's bonds. We're not sitting there either. The third asset class, which is unique to, is gold. And the fourth asset class where we are sitting is commodities. And the location of the point pointed to by the red rectangle sells you how confident we are.
The model is that we should be making a better return on commodities than on stocks, bonds or gold. It is inside an ellipse. The ellipse is a measure of uncertainty. If you're at the very middle of the ellipse, you don't know anything at all. The further you are from the middle of the ellipse, the more sure you are that where the location is will tell you correctly which asset class
will outperform in the next year. And we are inside the ellipse so that we have less than average confidence at the moment, but still it's pointing towards commodities. As you know, commodities have done very well in recent months.
David Ranson (03:55.618)
So that's the point of the graph. The things that drive the graph that are predictive are a measure of a risk, which is taken from the corporate bond market. BAA and AAA corporate bonds have yields and the spread between the two yields is a measure of how risky the situation is. The other input is gold prices. And if the gold price goes up, that's a sign of inflation and that pushes the arrow or the point
that's pointed to by the red rectangle towards the east, you could call it, the right-hand side of the diagram.
So that's what that diagram says. Commodities should be the best performing of the four asset classes in the coming year.
Murray Sabrin (04:44.162)
Next chart.
David Ranson (04:46.04)
Yes, please proceed.
David Ranson (04:51.884)
Now stocks, I spend a lot of time on stocks because everybody else does, but I'm not a very big fan of the stock market. This makes a distinction between the way most people look at the stock market and the way I think they ought to be looking at the stock market. On the left, we have a comparison between nominal stock prices measured in US dollars and real stock prices measured in deflated dollars.
The deflator is the gold price, which is very strong deflator. As you see, the two lines move in parallel a lot of the time, but they diverge. There was a big divergence at the beginning of the graph in 1970 and another big divergence in 2000. And there's been another divergence recently in 2005. These divergences mean takeoffs in the rate of inflation.
and therefore a bigger difference between the real stock market's advance and the normal stock market's advance. But I believe it's a mistake to think that if you make a 10 % return on your stock market portfolio, you're 10 % better off. You're not. You should measure the stock market in real terms to tell whether you're better off or not.
Murray Sabrin (06:10.336)
some people use the CPI as a deflator, but you use the price of gold. what's what's the drawback in using the CPI, the consumer price index?
David Ranson (06:20.642)
The CPI moves too slowly. That's the major drawback. The CPI is based on prices, but prices in the consumer marketplace are often based on variations in the quality of what's being sold. And so the CPI understates the inflation rate regularly, because when inflation is taking off, quality goes down to disguise the rise in price.
So you don't see the full rising price in the CPI. You do see it in the gold price where there's no way to escape.
Murray Sabrin (06:56.62)
Now, this is not generally used by most analysts that I can see that appear on CNBC and other networks to talk about the health of the economy. Why do you think that is?
David Ranson (07:08.738)
Well, people are familiar with the CPI. They're not so familiar with the price of gold, but it's a matter of research. If you deflate the stock market relative to gold, you get very consistent and informative answers to your questions. If you divide by the CPI, it has hardly any effect on the results at
Murray Sabrin (07:32.042)
Next chart, okay. And what does this tell us, David?
David Ranson (07:36.578)
This tells us over the long haul, I'm only going back to 2007 in the table and back to 2008 or so in the graph. Let me see, no. The graph goes back much further. That's 2008. No, that's right. My eyesight is a little weak here and the picture is not completely.
Murray Sabrin (07:57.784)
Right, two thousand eight.
David Ranson (08:06.296)
plane. But look at the table, the cumulative performance since 2007 of the stock market using the S &P 500 in nominal dollars has been 499%. But if you deflate it relative to gold, it's only been 24%. So there's an enormous difference. And it's a difference that's important to recognize when we're doing research.
and trying to find the correlations between the performances of different asset classes and different assets. And it doesn't hurt you to measure everything in dollars. can compare the return on stocks and the return on bonds, the return on commodities and other assets. It can all be compared in nominal dollars if you like. But if you want to figure out what the real wealth implications are, you need to deflate by
and I believe the price for gold is the right deflator.
Murray Sabrin (09:07.266)
Fantastic. Let's go to the next chart. here's a good one. Price of oil, which has been in the news for quite a number of years now. So what does this chart tell us?
David Ranson (09:17.082)
First of all, before we get to oil, look at gold. There are two lines on the chart that reflect gold. The red line and the brown line. Now start with the brown line. That's the simple price of gold measured over a century of data. And I'm using a logarithmic scale. Otherwise it would be too extreme. So you see a very major rise in the price of gold with big fits and starts, especially in the 1970s.
and again in the 1990s and again we're in the middle of another one now. Now to analyze the gold price, it's better to recognize that gold is a safe haven investment and it's driven not only by inflation. There is another factor driving gold and that's risk. Gold is a safe haven and so when there's a very large rise in uncertainty,
People are looking, investors are looking for safe havens and they bid up the prices of safe havens including bonds and also gold. So to correct for that effect, the pure inflation version, the version of the gold price that looks at inflation only, I use the forward market. I go forward 20 years and I estimate what the forward price of gold is 20 years from now.
And I plot that on this graph and that's the red line. You see, it's rather more unstable than the brown line. And there's a gap between the red line and the brown line that represents essentially the interest rate. And that has fluctuated a great deal. It was particularly high during the end of the 70s and the 80s. It turns out that if you want to analyze
the effects of the price of gold on investment performance and economic performance, it's better to use the forward price rather than the spot price. It makes a big difference. Oil can be plotted on the same graph. We see a big rise in the price of oil cumulatively over a hundred years. But if you measure oil relative to gold, relative to the forward gold price, that's the black line relative to the red line.
David Ranson (11:39.042)
you get the line at the bottom, which is green. And you see there, oil goes sideways in the long way. Measured that way, oil goes sideways. And that leads to predictive power. It's norm-reverting. It diverges from its average and then comes back to its average in both directions. And it takes a long time to come back. It's a very easy, very...
solid prediction that it will come back when it's low. And currently, in spite of the fears about oil prices this year, at the end of last year, it was quite low. It was below its average historical level. So it's not going to go down in the long run. It's going to go up in the long run.
Murray Sabrin (12:29.228)
Okay, so next chart. Okay, what are the implications, the stock market implications for the price of oil?
David Ranson (12:37.318)
For an investor, what makes oil important? Well, this is a graph. I discovered this. I never anticipated that I would find this kind of relationship. It shows the percentage change in the price of oil, which is the green line, and the percentage change in the S &P. And they're one year apart. I've drawn it so they're side by side. But being one year apart, oil moves a year ahead of the stock market.
And so a strong inverse correlation on this graph means you can forecast the stock market with some confidence from the price of oil. You can see the correlation is pretty strong. And it goes back far beyond the 2012 starting point of the graph. I've traced this relationship all the way back to the 1930s, and it has been a constant relationship between oil prices and the stock market all this time, for nearly a century.
So it's a very good input for anticipating what the stock market's performance will be. It also anticipates the performance of other assets such as bonds and commodities.
Murray Sabrin (13:46.392)
So what is this telling us now about the stock market, given the price of oil rise in the last few months?
David Ranson (13:52.93)
Well, the next slide may show you that. Okay. Then next, let's go on another slide. We can come back. This is the graph. I've drawn a graph to answer your question. The equation that I can fit to the 1932 to 2015 period, which is about 90 years, results in...
lines across the page which are in pale blue in color. Right. And they're all labeled. The inputs are on the vertical axis and the horizontal axis. One is the forward gold price change in the horizontally and vertically we have the change in the oil to gold ratio. Between the two we get a lot of different stock market results which are shown on these blue lines.
And then what I show is what actually happened. But before we look at what actually happened, let's answer your question. You can see it's printed in blue. There's two blue stars. One shows where we are as of the end of May. And the other one below it shows where we are at the end of August. So we can see how the forecast has changed.
over that period and we can see what the forecast would be. The one at the end of August is almost on the line that's labeled 10%. So the answer to your question is 10%.
Murray Sabrin (15:33.208)
So we can expect the stock market based upon this model to go up ten percent from now? Five yes.
David Ranson (15:38.978)
for next year.
Murray Sabrin (15:47.566)
Okay, so for ten years from now t ten a year from now, the market should be up according to this model by ten percent. That's the S P five hundred index. Okay, very good.
David Ranson (15:56.574)
Exactly. Let's go back a slide and cover what I was going to say on this previous slide. This is an illustration of how important it is to think of the stock market in real terms. On the left, I have various scenarios involving the gold price and the oil price, and the green bars show the stock market result on the average over a long period of time. I guess it goes back to 1945.
And you see the green bars are all very similar. They vary between 10 % and 15 % roughly. So the stock market measured in nominal dollars doesn't seem to care what the economic scenario is. But this is an illusion. On the right, I show the stock market measured in real dollars. And we have the four scenarios and they produce completely different stock market results, that is real wealth results.
We have the worst result where I'm going to get my magnifying glass out because I can't quite see it. The oil gold ratio has risen and the forward gold prices has also risen. When both of those things rise, on the average, historically, going back to 1945, we've had a negative real stock market result. The other extreme on the right,
When the oil-goal ratio has gone down and the full gold price has gone down, we have a very positive 14 % real return on the stock market. And the two cases in between give you two other scenarios. There are four possible combinations of up and down in two inputs. And so you see a very strong relationship, straight line relationship. So that reveals
the strong connection between gold and oil and the stock market.
Murray Sabrin (18:02.272)
Next chart.
David Ranson (18:03.843)
Yes.
Murray Sabrin (18:05.646)
We did this one already, so now we're gonna see gold price and
David Ranson (18:09.836)
The beauty of this approach using gold and oil prices, it's not limited to its ability to predict the stock market. It predicts the bond market too. As a matter of fact, it predicts the prices of nearly all assets. Here's a graph that comes out of some work on the bond market. You see I've divided the possibilities into six scenarios. The gold price can be up a lot.
or can be only a small amount. The BAAA spread can be either higher than usual or lower than usual. You can get six scenarios out of that and you can rank them from the most pessimistic scenarios to the most optimistic scenarios and you see the bond market corresponds historically fairly well to that. So there's predictive power for the bond market as well.
I'll be including slides showing my predictions for the Devon market in future presentations, but I don't have any more at the moment in this particular set of slides.
Murray Sabrin (19:17.676)
So what is this telling us now about interest rates for the next year? Up. Okay.
David Ranson (19:21.026)
That they're
David Ranson (19:27.742)
Now, another thing you can forecast with the same basic ingredients, incredibly simple, gold and oil, is the CPI, the inflation rate. On the left, I try to forecast the inflation rate and these green and blue bars show correlations. But on the right, I get much bigger correlations. The difference between the left and the right is that on the left, I try to forecast the inflation rate, but on the right,
I'm trying to forecast the change in the inflation rate and it's much easier to do that.
So that explains why I've set up the diagram for forecasting the inflation rate the way I have in the next slide.
Murray Sabrin (20:15.404)
be the next slide.
David Ranson (20:17.1)
Yeah, okay here. the next slide before we get to the next slide. Okay, we have Yes, go ahead to 10. Okay What I do here is to illustrate a paradox when the oil price has risen We get a lower inflation rate when the oil price has gone down. We get a higher inflation rate. It's not what you expect. Mm-hmm and the
The explanation I can propose for this is that when the oil price has risen and it's high, then the likelihood that it'll fall is also very high. so over the period that you're forecasting the inflation rate, you're implicitly you're forecasting a fall, a low inflation rate for oil because oil is already high. It's norm reverting.
When it's high, goes down. When it's low, it comes back up. That would be enough to explain what we actually find out. The way the oil price forecasts inflation is not immediately understandable.
Murray Sabrin (21:30.998)
Interesting. Okay, we're gonna have to speed it up a little bit because we're gonna be soon running out of time.
David Ranson (21:36.81)
Okay. Well, here's a diagram showing very similar to the one we had for the stock market, but now it's for the inflation rate. One blue line shows where we get an acceleration of the inflation rate of one percentage point. Then there's a line parallel to that where we get no change. And below that, there's a deceleration. I'm sorry, I got these mixed up. The deceleration is at the top and the acceleration is at the bottom. Where we are
Currently is shown the most recent data are for July. I only have this every three months It will be too much work to do this every month or so But you see there a shift in the inflation rate, but it's not a forecast of a very high inflation in the immediate year the the forecast back in April would have been about a quarter of a percentage point acceleration and the
point now for July is about 0.6 of a percentage point of acceleration in the inflation rate. So it's gotten worse, but it's not panicky.
Murray Sabrin (22:45.56)
So right now the inflation rate is running around three and a half percent. So you're looking at a four percent inflation rate for next year?
David Ranson (22:52.492)
Yeah, a little bit over 4. OK.
Murray Sabrin (22:54.774)
All right, n next chart. Okay, here here's what we're talking about, right?
David Ranson (22:59.916)
Yes, if you look back and see how the model would have performed in the last, how many years is that? 13, 14 years? Right. This is the graph you would get. The dotted line shows what the forecast would be from the diagram we were just looking at. Here's the dotted line. The solid line is what actually happened. Okay. So it's a pretty good fit. Right. Considering the simplicity of the model, it's remarkable.
So I have diagrams like this for forecasting in the stock market and for forecasting the bond market and other things too.
Murray Sabrin (23:37.58)
Okay. Almost done with the slides here, so we're in great
David Ranson (23:41.322)
Now the next several sets of slides for which we perhaps don't have time today is for emerging markets. How do you deal with emerging markets and how does this kind of economics explain how emerging markets work, when they go up and when they go down, what are they reacting to? And the answer is their currencies. Just as in the case of the US, our currency measured in gold terms is a big driver.
of our economic performance. So it is with emerging markets.
David Ranson (24:17.71)
Let's stay on that slide, but I think we don't want to go much further than this slide. Okay, very good. me explain what the slide shows. Emerging market performance. This is an average of about, I think I have a sample of 17 countries in the calculation. You get the lowest equity market performance where the
Murray Sabrin (24:25.973)
Very good.
David Ranson (24:47.544)
currency surprise has been the worst. Now, what do I mean by a currency surprise? It's the change in the currency's depreciation rate in the year to come relative to the year that we've just experienced. So we don't know what it is ahead of time. Sure. But when it's bad, we get low emerging market performance. And when it's good,
A good currency surprise is when the currency depreciation rate is reduced in the year to come. Then we get a high emerging market result. Now, because we don't know what the currency is going to do before it does it, we have to make do with less information. And it's a very subtle point. When an emerging market suffers a major depreciation, the chances are
that the next year will be a positive surprise. And when it's had a relatively small depreciation, the chances are that it'll be a negative surprise. And if you use, therefore, the currency depreciation rate that we've observed already and which we know firmly, then the largest depreciation is going to result in the best equity market performance. And the green bars show
that it does, although the differences don't look very large, they aren't very large for most emoji markets because the depreciation rates are not very large. If I was to redraw the graph using the most volatile currencies, then you would see a big impact.
Murray Sabrin (26:30.304)
How does the recent events in Japan where the yen has been going down? their stock market has done quite well, hasn't it?
David Ranson (26:38.894)
I haven't been following Japan. It's not an emerging market. So without looking at the facts, I can't answer your question
Murray Sabrin (26:46.914)
So which has been with the best performing emerging markets the last year?
David Ranson (26:51.31)
Yes, Argentina crops up a lot in the last 10 years and Argentina is still the highest ranked country on a list where the highest depreciations are at the top and the lowest depreciations are at the bottom.
Murray Sabrin (27:07.352)
So for an American investor, it w it it is it's they would be benefiting from a a country that has a depreciation in currency because the stock market would be going up quite a bit.
David Ranson (27:20.002)
Yes. You can jump now to the last slide in the pack.
David Ranson (27:31.202)
What lies in between is all the evidence, but here's the last slide. And I haven't calculated this more recently than the end of July, but it shows Turkey at the top and Argentina in second place with fairly large depreciations, not as large as they have been sometimes in the past, but still large, much larger than all the other countries. So the investor's portfolio should be invested in those two countries.
which is easy to do because you have an ETF for Turkey and you have an ETF for Argentina and that's what I do.
Murray Sabrin (28:06.292)
Interesting. So again, anyone who's watching, check with your financial advisor regarding any outlook that David has provided with us because it's up to you to determine what's best for your portfolio. So there are no guarantees in investing. We won't know that. And so David, can you sum up exactly what you see happening in terms of oil, interest rates, inflation, gold, and the stock market for the next year?
David Ranson (28:36.184)
Well, I think the cause of the rise in the gold price is fiscal insolvency. The US is very far from an insolvency, but we have a lot of countries that have started out being perfectly stable in their fiscal and monetary stance and have overspent to such an extent that their currencies declined. they've always been unsuccessful in rescuing themselves from that.
It's a very hard problem to solve once you're in it. And I believe that's what happens when the nominal price of gold goes up a lot. And it's happening now. So I'm expecting it to continue. I don't think the present administration or any conceivable administration in the near future has enough knowledge to stop this inflation from going any further. But it comes from overspending
a fiscal deficit in Washington that is out of control and the markets force the currency down in response to that.
Murray Sabrin (29:41.336)
Okay. So and we we talked about inflation you think is gonna arise over the next year. b how how will bond prices react over the next year?
David Ranson (29:52.502)
I think bond prices will go down, bond yields will go up. I would prefer to answer your question with my tools here, and I don't have them in the top of my head. I believe the inflation rate increase is going to be small. We saw that 0.6 % for the CPI in the first year, but I think much higher in later years.
Murray Sabrin (30:18.102)
Okay, David, you've given us a lot of food for thought here regarding the financial markets. We'll have you back toward the end of the year or early in 2027 to see exactly how things work are working out. So thank you again for these incredible charts that you've put together. I haven't seen anything like this in any other venue. So thank you for that. And we'll get some of this material out to our listeners.
So again, thank you for listening to Health, Wealth, and the Pursuit of Happiness. I'm Maurice Saber. And until next time, keep questioning conventional wisdom, keep pursuing truth, and keep striving for a healthier, freer, more prosperous life. And visit mafiausa dot com so you can learn about how to become financially independent in these turbulent times. Until next time, have a good week.
David Ranson (31:08.428)
And bye bye from me. Thank you.
David Ranson (31:14.571)
Okay.