Economist Jim Paulsen is no fan of high interest rates.

The titles of two recent Paulsen Perspectives newsletters say it all.

“10-Year Treasury Yield is Too High,” proclaims his June 5 newsletter. “The Federal Reserve needs to take a BREADTH” is the headline on a June 10 follow-up, which includes this clarifying note:

“The good news is when the Fed eventually does take a breath, stops obsessing about inflation and eases interest rates, this bull [market] should enjoy a further ‘delayed’ run driven by expanding breadth.”

Paulsen grew up in Iowa and wrote deeply resourced investment newsletters for four decades. He retired in 2022 but couldn’t stop thinking about market economics, so earlier this year he resumed writing Paulsen Perspectives on the online platform Substack.

Recent newsletters explore the interest-rate conundrum that has eluded members of the Federal Reserve’s rate-setting committee.

“Compared to several economic and financial market metrics, the 10-year Treasury yield looks too high,” Paulsen asserted on June 5.

“Since the consumer price inflation rate peaked in 2022, bond yields have continued to rise, making them appear increasingly out of whack,” he added.

Paulsen cited nine metrics “which have been closely aligned with the 10-year yield for the last 15 years, but which are currently disjoined, suggesting bond yields should be lower.”

His metrics are commodity prices, high-yield equity investments, GDP growth, CPI inflation, expectations about interest rates and inflation, bond market volatility, leading economic index indicators and a gold-copper ratio.

Paulsen produced graphs for all nine metrics and overlaid them with 10-year Treasury bond yields since 2010. In every case, he found a divergency beginning in 2022 that has widened over time.

The widening gaps in his charts show how high bond rates are hurting other parts of the economy by helping push down commodity prices and hold back GDP while needlessly boosting inflation and interest rate expectations.

One particularly telling metric, he explained, is called the gold-copper ratio. “Copper is tied closely to economic activity, while gold is tied closely to private player emotions,” Paulsen wrote. “When copper outpaced gold, it indicated economic growth was healthy.” 

But since 2022, gold has outpaced copper, implying more difficult economic conditions, which should result in lower bond rates that would help spur activity.

But that has not happened. At least, not yet.

In his June 10 newsletter, Paulsen noted that U.S. stocks have been in a bull market for the past 20 months but that it has been a very narrow run-up.

Driving the stock market, he said, are a group of stocks known as “the Magnificent 7” – Apple, Microsoft, Google’s parent Alphabet, Amazon, semiconductor maker Nvidia, Tesla and Facebook’s parent Meta.

Remove those seven companies, and the bull market that began in 2022 disappears. In fact, my own retirement portfolio of stocks, which is not overweighted with any of those seven, still has not achieved the peak it hit in late 2021, when the last bull market ended.

Paulsen’s research suggests that today’s narrow bull market could be much wider and include more investors as winners if the Fed lowers interest rates, which it again refused to do on June 12.

“The Fed’s aggressive and stubbornly prolonged tightening cycle has so far kept participation in this stock market remarkably narrow,” Paulsen wrote. 

If “the Fed eventually does take a breath, stops obsessing about inflation and eases interest rates, this bull should enjoy a further ‘delayed’ run driven by expanding breadth,” he wrote.

In his June 10 newsletter, Paulsen created charts that show how much interest rates have effectively held down gains since 2022 in several market indexes, including the S&P 500, the Russell 2000, dividend paying stocks and defensive stocks that typically perform well regardless of economic conditions.

“Bull markets are typically initiated and supported by Fed easing” interest rates, he wrote. 

But this time, he added, “the lack of Fed support and its corollary – rising bond yields – has simply suffocated stock market breadth.”