Top Three Videos – June 11 2023

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Tavi Costa: 'Stocks To Suffer' As Cost Of Capital Rises But Earnings Fall

Tavi Costa warns that investors are betting on strong growth and low cost of capital for the next 10 years, but we may see low or negative growth with higher than average cost of capital, leading to potential suffering in equity markets.
“The economy is getting into what we think is going to be a hard landing and at some point we’re going to start seeing again prices begin to really reflect this deterioration of cash flows and fundamentals.”
The Federal Reserve’s responsibility is not just stability and inflation, but also financial stability as a whole, which may require them to become the buyer of last resort for debt instruments.
Stocks are set to suffer as the cost of capital rises and earnings fall, according to Tavi Costa.
Inflation is here to stay and we’re likely to see another wave of inflation coming back in the next five years.
Analysts who extrapolate past earnings trends are ignoring the historical pattern of major contractions of earnings following periods of significant growth, such as the 1920s and 1990s, which could be repeating itself now.
The Commodities to equity ratio is the most relevant chart of the next 10 years and shows the flow of capital going into technology, forgetting about the basic necessities of the global economy such as natural resource industries.

Gold recently broke out to new highs and could potentially see a breakthrough to record levels, similar to the market correlations seen in the 70s.
Other institutions are likely to follow central banks in increasing their gold holdings, potentially leading to a significant shift in portfolio allocations.
The bearish case for precious metals is based on backward-looking performance and the next decade will likely look very different due to changes in the macro regime.
The correlation between gold and interest rates may look quite different in an inflationary era, causing gold prices to rise as treasuries underperform.
“We may see gold prices surge well above that triple top and equity markets move lower given the fact that we’re seeing this level of euphoria towards AI.”

The increase in issuance of treasuries after the debt ceiling is lifted may lead to a rise in the cost of capital, causing stocks to suffer as earnings fall.
Companies with high costs of capital will suffer regardless of their margins or other emerging problems.

Key insights

The Bureau of Labor Statistics revised their real hourly compensation estimates from a weak but positive gain to a drop of 4.7%, which is an astounding revision.
The government’s job numbers may not accurately reflect the reality of the job market, as people may be staying in their current jobs out of fear of not finding a replacement.
The institutional incentives for government statisticians may lead to inaccurate job numbers.
A significant change in sample size can greatly impact statistical accuracy, highlighting the importance of understanding any changes in data collection.
The government’s job numbers only reflect growing companies and government contractors, leaving out important data on small businesses and self-employed individuals.
The government’s job numbers may be inflated to support their budget, rather than accurately reflecting the job market.

“Using weekly closing prices is perfect for getting a sense of key levels in long-term charts, as daily closing prices have too much data.”
The level of 2050 is a significant level for silver, as it was the peak in 2008 before the GFC and the peak in 2016.
Key resistance for silver prices is at the red line of $27.50, with a potential key level at $25.
Silver may potentially trade lower before it has a chance to test and break resistance levels, depending on the state of the banking industry and gold prices.
The net spec position for silver was much higher in the early 2000s compared to 2012-2013, yet silver kept going down.
Open interest in silver is at a six-year low, indicating a market that has been cleaned out.
Silver could potentially see a quick and significant rise to $40 in the next 6-8 months.