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So, as for postponing his target until the middle of next year, I don't think so... I think he's still pretty optimistic about earnings. It sounds pretty optimistic overall. Is it just because of all these headwinds and perhaps because they think the ratings have dropped a bit ? I mean , I've always said that I prefer being a strategist to being an economist.
Although I do both. Economists have to think about all these variables in advance. The strategist only uses price for profit . I mean, that's easy. The challenge is to get it right. As an economist, I'm quite comfortable with profits. They look good because the economy looks good, and I think we could continue to have positive earnings surprises.
But in recent weeks we have seen this surge in oil prices. So higher oil prices for longer. That scared the Fed, and that's why the Fed raised the federal funds rate. They're talking about two years or so . Um, then we get news that makes us think about AI. So it's difficult to know which company will benefit and which won't.
Um, but yes, I started to think that perhaps, due to these developments, I should reconsider the valuation multiple. Uh, right now, um, you know, towards the end of the decade, just to show you how easy it is to do the calculations to forecast the market. By the end of the decade, in 2029, I think the market will be pricing in $500 per share for the S&P 500.
Right now, industry analysts are saying something like $415 per share. So let's see, I have a couple of years to get to 500 and, by the way, 500 is what the market will anticipate for 2030 . So I think it's a reasonable assumption, if my basic premise is correct, that the economy is resilient and we're not going to have a recession.
Multiply that by 20, a future price-earnings ratio of 20 , and you get 10,000 by the end of the decade. I mean, I could do this at home. It's, people, it's not, it's not that difficult. But you know, obviously I spend a good amount of time trying to observe how things develop and see if it's still a reasonable prospect.
I think it is. How worried are you about rising interest rates? On the one hand, I think we had the biggest increase in a monthly rate in September since 2022. But on the other hand, I think much of this is probably due to growth expectations, which is a good thing. That's a good thing. So, how worried are you about these rising rates?
Yes, that's interesting. In fact, I have a colleague, a young man who joined our firm, Eric Rippey Trott. He is in Amsterdam. So now we do many of these things together. We had a Zoom call to discuss what we're going to write on Monday. And I think the title is, uh, bond yields on a spectrum from good to ugly.
In other words, the spectrum is like a psychological idea of ours. But there is a good scenario that you just summarized. The good scenario is: hey, don't get so worked up, friends. The bond markets simply reflect that the economy is doing really well. The Fed was thinking at the beginning of the year: here 's our federal funds rate.
Here is the neutral rate, the rate at which everything is perfect. We're still a bit restrictive. So we'll probably have to lower it . That's what the market thought. And then the war comes and the new Fed chairman and suddenly we go from maybe the neutral rate being up here and we're down here . And he just described the recent rate hike as, uh, cutting back on a dose of stimulus.
So we went from "we'll probably have to relax" to "we'll probably have to keep tightening." But I think a lot of that is because the economy is doing very well. I mean, the economy can function well with higher rates, and higher rates are just a validation of how well the economy is doing. So I'm on that side, but at the same time we try to stay balanced and open-minded and try to care enough about our base case so as not to be caught off guard.
The other side of... that's the good side of the spectrum. The whole way down to the ugly side would be a Ray Dalio-style debt crisis, you know, we've sinned, we've borrowed too much. I call it the revenge of the "bond vigilantes". I coined the phrase "bond vigilantes" in 1983. And the idea is that the "bond vigilantes" are furious and they're not going to take it anymore.
And what they are furious about is that the world's central banks kept them locked in a dungeon from the great financial crisis to the great virus crisis. They couldn't do anything. They were buried because central banks were manipulating the bond market . They were pushing short- term rates towards zero.
They were applying quantitative easing . And now the bond market has been liberalized, but central banks no longer implement QE. They realized it was n't such a great idea after all. And it's conceivable that what's happening here is that the bond wardens have come out of that dungeon and see the light of day and say, "Yeah, we didn't like what was going on before we went into the dungeon.
Now they've accumulated all this debt thinking they would n't have to pay much in interest. Well, we have news for them. They have to pay a lot more. And we're more powerful than ever. Why? Because the bond wardens basically have more debt to work with to reprice. And so all these companies and governments that have accumulated debt thinking their maintenance costs were fine yet because bond yields were zero forever.
Well, now they're getting their comeuppance, and something could break. There could be problems, and that would be the debt crisis scenario, and a lot of it is fiscal. You know, Ray Dalio has been saying that we need to get our fiscal house in order. We need to fix that. I mean, the nightmare scenario is that he's right, and bond yields just keep going up and up and up.
And we start to We feel like Greece in 2010 when their bond yields hit 40%. Well, now Greek bond yields are below French bond yields. And that's because the Greeks, the politicians, got scared and freaked out by what the bond watchdogs were doing in Greece. So, maybe that's the happy story: that we have a real debt scare for a few months.
The politicians get the message and put us on a better fiscal spending path . There I go again being naive. But, I say, and I say, that's where the midterm elections get kind of spooky, and that's if the elections happen and it's not really different anymore. I think everyone expects that we're on a path of more, not less, partisanship.
And if the bond market is screaming that we need to put our fiscal house in order and Congress gets the message and the Democrats say, " tax the rich," then everything they have . Income, wealth, whatever they can find, just tax it. Tax the babies. Boomers. I mean, the baby boomers have a hundred trillion dollars.
Just take 30 trillion of that and make the marketable debt disappear. Uh, on the other hand, the Republican will say, " No, no, no, we have to cut social benefits." And, uh, if they can't agree, uh, the debt crisis just spirals out of control." So, I, uh, respect Ray, Ray Dalio. On the other hand, it bothers me a little when billionaires go around trying to scare us as much as possible.
I mean, the way they, the way they got rich was by taking risks and overcoming fears like this. Um, but they want all of us, you know, to be in cash and gold and keep it under the mattress. At least if the "bond vigilantes" come back, it's free publicity for you, right? And maybe people will give you credit when they use the term.
Well, I, and it's, it's true. Um, it came up in the '80s, in the early '80s , in '83 I came up with that term and it was immediately very, it was a very practical term and the press picked it up because, well, it was relevant in the '80s. And then Bill Clinton came along and was warned that the "bond vigilantes," uh, They would kill his administration if the administration didn't practice fiscal discipline.
So, he actually listened to that advice and they practiced fiscal discipline and inflation, uh, came down. Then we entered the great financial crisis, several crises, where the "bond vigilantes" were locked up, locked in the dungeon. Uh, and now here we are where the "bond vigilantes" might very well be, um, critically important.
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