The US market faces an unprecedented 40-50% pullback followed by two decades of sideways trade due to Federal Reserve policy missteps, extreme leverage, and artificial liquidity.
Current market valuations are 40-50% overvalued based on historical price-to-earnings averages, even if reverting to a 20 multiple.
The Federal Reserve is trapped between lowering rates to manage $37 trillion debt and fueling inflation, potentially creating a deflationary depression.
The passive bid from 401k and ETF purchases creates a relentless buying program, making valuation irrelevant and causing poor market breadth.
Options gamma from trading in 100-lot increments forces dealers to buy equities to hedge, creating a bid under equities when calls outweigh puts.
Investors are psychologically unprepared for a major crash, conditioned to expect comfort in a fragile system vulnerable to small shocks.
Nvidia’s valuation at 40-45 times earnings with customer concentration issues is absurdly high and unjustified by fundamentals.
Tesla’s valuation at 200 times earnings, with a collapsed legacy business, is extremely high and not justified by fundamentals.
Meta’s valuation remains extremely high despite frozen AI hiring, cut capex spending, and disbanded AI divisions.
The Trump administration’s strategy of taking stakes in companies like MP Materials and Intel signals a move towards protecting strategic industries through subsidies and government involvement.
US government’s dependence on foreign companies for pharmaceuticals and semiconductors is a national security vulnerability being addressed through tariffs and strategic investments.
Trump’s tariffs have generated hundreds of billions in revenue and are expected to bring in $300 billion more by year-end.
Gold remains a safe haven asset with a 5,000-year history as real money, potentially serving as the foundation for the next monetary reset.
Central banks hold gold reserves because it’s real money, likely to be the candidate for the next monetary reset.
₿ Bitcoin, while more speculative than gold, holds promise as a decentralized currency that could democratize sound money and force global calibration to a sound money standard.
Gold miners are undervalued and popping, offering cash flow streams, dividends, and exposure to gold prices.
Psychedelic stocks and select equities in emerging markets offer attractive opportunities amidst major market distortions.
Diversification and redundancy are crucial for financial preparedness, protecting against counterparty risk and systemic failures even in stable economies.
The Fed’s liquidity and balance sheet are moving in opposite directions, with liquidity up $350 billion and the balance sheet down $250 billion over 5-10 years, creating a disconnection from financial markets and the real economy.
Despite shrinking its balance sheet, the Fed has been injecting liquidity through reverse repo and the treasury general account, positively impacting money markets and risk assets.
The Treasury’s insistence on rebuilding the Treasury General Account would drain $3-400 billion from money markets, but investors fear this won’t happen due to the Fed’s position.
The 65-month liquidity cycle is a standard rhythm of about 5-6 years in the global liquidity cycle, with the current cycle bottoming in October 2022 and moving up, driven by China’s phenomenon of elevated volatility.
The debt liquidity cycle is driven by the collateral stability requirement of the US Treasury market, with repo collateral markets being central and recent spikes in the move index and SOFR spreads indicating a shortage of good quality collateral.
The asset allocation cycle shows that in the upswing, equities, credits, and Bitcoin perform well, while in the downswing, commodities, cash, and bonds do better.
The Chinese economy is suffering from tariff hikes and a disruption in Triffin’s dilemma capital flow, leading to monetization and devaluation of paper money against real assets like gold.
The Chinese gold price has skyrocketed, reflecting the monetization and devaluation of paper money, with China being the world’s biggest gold producer and accumulating gold internationally as a natural hedge.
The Chinese liquidity expansion is expected to lead to a big inflow in commodity markets and a jump in gold prices, typically moving 6-9 months before commodity markets.
The elimination of SAB 121 and introduction of SAB 122 allowing banks to take Bitcoin as collateral opens up gates to new types of collateral in the system, critical for stability and potential financial crisis prevention.
The US officially endorsing Bitcoin may be necessary to maintain control of the global financial system, competing with China’s digital yuan stable coin backed by finite gold.
Bitcoin serves as a long-term monetary inflation hedge due to the exponential debt trend driven by interest rate compounding and primary deficits.
The growth of bank balance sheets driven by purchases of government debt is monetization, leading to monetary inflation and ultimately devaluing people’s wealth or increasing the cost of living.
Money supply growth rate, not interest rates, is the key indicator of monetary policy, with Fed’s broad measure M2 being the correct metric to monitor.
The quantity theory of money shows significant changes in money supply lead to asset price increases within 3-6 months, followed by economic growth and inflation 12-24 months later.
M2 money supply is the fundamental driver of asset prices, economic growth, and inflation, while the Fed funds rate is merely a controlled rate set by the central bank.
Money velocity remains relatively constant at -1.7% per year in the US, with occasional deviations reverting to the mean, making it a minor factor in monetary economics.
Money supply growth directly affects inflation and bond yields, contrary to the common focus on the Fed funds rate.
The Fed funds rate is an inadequate indicator of monetary policy as it’s controlled by the central bank, not market-determined.
Understanding M2 money supply trends is crucial for predicting asset price movements, economic growth cycles, and inflationary periods.
Investors should focus on money supply changes for a 3-6 month lead on asset price shifts and a 12-24 month lead on broader economic impacts.
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