Top Three Videos – September 19, 2023

Quick Summary Bullets:

Market Implications and Warning Signs

• The reverse carry trade with Japan could lead to a global margin call if oil continues to rise against the depreciating yen, potentially causing a collapse in the market.
• “It’s crazy to me that people look at a chart on Treasury yields and say, ‘This is how it impacts the stock market, mortgage rates, and housing’ without considering the broader implications.”
• “The issue isn’t the level of yield, it’s the speed of yields, and that’s ultimately what impacts risk assets.”
• “The gold Lumber Ratio has historically been a pretty good leading indicator for risk on or risk off appetite.”
• The utility sector, often considered boring, can provide important risk-off signals and is comparable to bonds in terms of its behavior in the stock market.
• The behavior of the utility sector, particularly when utilities are outperforming the overall market during positive market conditions, can be a significant warning sign of a cycle change and lack of belief from smart money investors.
• “There is some real serious weakness that’s gone on beneath the surface that does not get enough play because everyone thinks the market is only seven stocks.”
• The arrogance of intellectuals who think they know what tomorrow brings when time and time again all their models end up being proven wrong can be dangerous for investors.
• The speaker predicts a credit event and believes there is a higher probability of it happening than people realize, which could have implications for the stock market and emerging markets.

Wealth Inequality and Social Impact

• The top 1% and top 0.1% hold the majority of wealth in the US, and their wealth has been increasing in proportion to the rise in markets, while the bottom 50% is getting poorer, especially when adjusted for inflation.
• The widening wealth gap can lead to social unrest and potential revolution, highlighting the importance of addressing income inequality.
• “The one thing that I’m a big fan of is being open and honest and having the integrity and consistency of the thought process.” – Michael Gayed emphasizes the importance of maintaining integrity and consistency in one’s thought process, highlighting the value of transparency and intellectual honesty.

Asset Survival and Collapse Risk

• “Risk signals flash imminent collapse, which assets will survive?”
• Oil may be considered the most important asset in the world, surpassing even treasuries and bonds.

Transcript Summary:

The video warns of an imminent collapse in various markets and advises caution in investments, emphasizing the need for a defensive and rules-based approach.

• 00:00 The recent spike in treasury yields and strange events in the oil market are causing concern about an imminent collapse, with potential impacts on various assets and a possible energy crisis.
  • Michael Gayed, portfolio manager of Title Financial Group, discusses leading indicators for the economy and stock markets, including a recent spike in the two-year and its subsequent decline.
  • There was a significant spike in treasury yields, with trades taking place at unusually high rates across various durations, and it is currently unexplainable.
  • Japan’s closure may have caused a lack of coverage on economists warning about market disruptions, but the recent strange events on oil suggest it may just be a data aberration.
  • Gayed, expresses concern about data quality and discusses the importance of oil as an asset.
  • Oil prices have been steadily increasing, which has led to a rise in inflation and interest rates, impacting various assets.
  • Gayed believes that if there is a credit event in the short term, it will bring down everything including oil, and if oil prices continue to rise, it will put pressure on consumer spending and discretionary stocks, potentially leading to an energy crisis and causing trouble for traders due to inflation and higher debt rates.
• 05:28 Rising oil prices could trigger a collapse of the reverse carry trade with Japan, leading to a global margin call and uncertainty about Japan’s monetary policy and fuel prices, while interest rates may have peaked and corporate yields are expected to rise due to credit risk.
  • Gayed discusses the potential collapse of the reverse carry trade with Japan due to rising oil prices, which could lead to a global margin call and uncertainty regarding Japan’s monetary policy and fuel prices.
  • Economists believe that interest rates may have peaked, with corporate yields likely to rise due to credit risk, while government yields are expected to decrease, causing potential trouble if long end yields continue to rise.
  • The speaker argues that looking at Treasury yields alone is not enough to understand their impact on the stock market, mortgage rates, and housing, and suggests that an increase in the long end of the curve signals confidence in the economy.
  • The speed of yields, rather than the level of yield, is what ultimately impacts risk assets, and if the two-year yield increases too quickly, it could have a negative effect on the market.
• 08:55 The gold Lumber Ratio is indicating changing volatility conditions for various assets, with housing and utilities showing risk-off signals and potential collapse, while the utility sector is the most bond-like sector of the stock market, suggesting a high risk period.
  • Gayed discusses the gold Lumber Ratio as a historically reliable leading indicator for risk appetite.
  • Lumber and gold movements indicate changing volatility conditions for various assets, with lumber showing lower volatility and gold showing higher volatility, and the failure of treasuries to counter equity volatility is interesting as it coincides with weakening home builders.
  • Housing and utilities are showing risk-off signals, indicating potential collapse, while the utility sector is the most bond-like sector of the stock market.
  • The movement of utilities relative to the S&P, along with other factors such as small caps weakness, AI froth, and poor periods in September and October, may be signaling a high risk period.
  • Entering higher risk, possibility of a melt up mentioned earlier in the year, but now turning more negative with a correction in the stock market and AI Mania taking over sectors.
• 13:40 Small caps are weak and vulnerable, suggesting a possible market collapse, while there are divergences and high-risk factors indicating that the peak for S&P and NASDAQ may have already happened; criticism of Yellen’s analysis, predictions, and intellectual arrogance; concerns about risks and potential black swan events; potential negative impacts from China banning Apple and a housing bubble burst in China.
  • Gayed highlights the weakness in small caps relative to large caps and discusses the negative performance of the Russell 2000 in pre-election years, emphasizing the importance of path and referencing the 1987 market crash.
  • There is a possibility of a sudden market collapse, particularly for small caps, which are oversold and vulnerable, and while historically the peak for equities tends to happen in July, there are many divergences and high-risk factors suggesting that the peak for the S&P and NASDAQ may have already occurred.
  • Gayed criticizes Janet Yellen’s analysis of the US economy, stating that there are signs of a potential downturn and inflation has been increasing.
  • He criticizes a person who made predictions in 2017 about the future, highlighting the uncertainty of financial crises and the lack of knowledge among those in power.
  • Complacency and the arrogance of intellectuals who think they can predict the future often lead to trouble, and investors should be concerned about the risks and potential black swan events.
  • China banning Apple and the potential bursting of the housing bubble in China could have significant negative impacts on Apple’s market cap and the entire economy, respectively.
• 22:30 The political uncertainty and potential market disruptions could lead to a collapse in treasuries and risk assets, causing a flight to safety back into treasuries, with gold serving as a hedge against volatility and treasury bonds being the best place to be during high volatility.
  • The political uncertainty surrounding the age of the president and presidential candidate creates a risky situation with unpredictable market reactions, making it difficult to determine the impact on assets.
  • Treasury market disruptions could lead to a collapse in treasuries and risk assets, causing a flight to safety back into treasuries, and the sequence of events will determine which assets will go up or down.
  • A spike in Treasury yields could lead to a collapse in the value of collateral for banks, causing a freeze-up of credit and a sell-off of risk assets, ultimately resulting in a flight to safety back into Treasury bonds.
  • Gold is likely to benefit from the current market conditions and serve as a hedge against volatility, as it has historically performed well during market crashes and periods of economic uncertainty.
  • Gold initially declines with equities during a sell-off, but eventually recovers; there is a correlation between gold and equities during sell-offs, with some nuance due to the disposition effect, and gold tends to hold up better than equities in the short term; treasury bonds are usually the best place to be during flight to safety and high volatility, and after volatility subsides, yields tend to continue going lower, making treasuries unique.
  • Treasuries are the most undervalued asset for risk off, but if there is a credit event, they may need to have one last flush before shining again; Bank of America is changing their stance on real estate, which may indicate someone needing to exit liquidity.
• 29:07 The potential collapse of the housing market and growing wealth gap could lead to societal unrest, emphasizing the need for rules-based funds and a defensive investment approach.
  • Mortgage rates going up may disincentivize people from selling their homes, but if there is a recession and unemployment spikes, people may be forced to sell, leading to a potential collapse in the housing market.
  • The top percentile groups in the US hold the majority of wealth, which has been increasing, while the bottom 50% have seen a slight decrease, indicating a growing wealth gap and potential implications for the economy, such as increased interest in the metaverse as a means of escape.
  • The wealthy driving consumer demand and investment in risk assets, such as real estate, is propping up the markets and benefiting the top one percent.
  • The widening wealth gap can lead to societal unrest and frustration, and the speaker emphasizes the importance of having rules-based funds in the current economic climate.
  • Gayed discusses the challenges faced by their mutual funds due to investing in small caps and emerging markets, and the potential for a credit event to impact their strategies, but expresses hope that a shift towards a defensive approach could lead to a recovery in performance.
  • Investors are currently heavily invested in long-duration Treasury bonds due to their thesis.
• 35:57 Emerging markets may benefit from a stock market crash due to a strengthening dollar, but small caps and NASDAQ stocks need to show momentum for a positive outlook; it’s important to stick to a rules-based strategy and understand risk signals to navigate investments.
  • Emerging markets may be winners in the event of a stock market crash due to a strengthening dollar, as a collapse in risk assets would cause the dollar to spike initially but then weaken, providing momentum for emerging markets.
  • To have a more positive outlook and positioning, there needs to be a broadening of momentum with small caps and emerging markets outperforming, and a strengthening of NASDAQ stocks.
  • Small caps may be a good investment in the long term, especially in election years, but for short and intermediate term investors, it is best to wait for persistent momentum before considering them.
  • Having a fear of missing out (FOMO) is natural, but it is important to stick to a rules-based strategy and not let emotions dictate investment decisions.
  • Gayed discusses the differences between his work on Twitter and the lead lag report, mentioning that the latter is more serious and involves deeper thought, and also mentions blocking people on social media.
  • Gayed emphasizes the importance of understanding risk signals and having a consistent thought process in order to navigate the complex world of investments and predicts a credit event.
• 43:10 He warns of an imminent collapse and advises caution during rainy times, while also promoting Black Friday sales and thanking the audience for their support.