Top Three Videos – September 20, 2023

Quick Summary Bullets:

Global Economic Concerns

• If the collateral contagion crisis gets out of control, it will become a monumental global problem that nobody wants, and countries like China and Japan will do everything in their power to prevent it.
• The global economy is in a very bad and worsening position, while the financial markets are currently looking pretty good with strong liquidity and momentum.
• The end of the “great moderation” era, characterized by low volatility and falling interest rates, has come to an end due to factors such as globalization, financialization, and mercantilism.
• The US consumption economy, driven by cheap imports and a strong dollar, has led to a massive debt problem of $95 trillion, raising concerns about the country’s creditworthiness and the sustainability of this model.
• Inflation has taken off and the cost of debt has exploded, indicating a shift from the era of low inflation and moderate growth to a more challenging economic environment.
• “Don’t ever underestimate the government and what it’ll do to change the rules to stop [a financial crisis] from happening.”
• The current strategy of printing more money and increasing debt to sustain the market is unsustainable without government intervention.
• The current unsustainable system is likely to continue until the elections, but the real question is when and how the government plans to replace it with a twofold approach involving guaranteed credit and contingent liabilities.
• Many countries, including China and Russia, are selling off their US treasuries, which could weaken the value of the dollar and have significant implications for the global economy.
• The need for the Japanese carry trade is crucial to support the increasing debt levels in the US without adding it to the Federal Reserve’s balance sheet.
• Inflation is a big risk that is not yet solved and could potentially reach higher levels than predicted by experts.
• The ostracization of Saudi Arabia has shifted control of the world’s energy market to three new members, highlighting the significance of the energy problem.

Risks in the Derivative Market

• The global currency and interest rate swaps alone trade a staggering $660 trillion, highlighting the vast size and opacity of the derivative market.
• The risk of a cascading collapse in the derivatives market is a global problem that authorities will do everything in their power to prevent, including changing rules and regulations.
• The interconnectedness and complexity of the derivative market poses a significant risk, as a failure in one asset class can trigger a ripple effect that is difficult to predict and control.

Financial Market Volatility

• The speaker suggests that the current market situation may resemble the dot-com bubble of 1999, emphasizing the unpredictability of when a triggering event could cause a rapid downturn in the market.
• The market’s upward trajectory is supported by stealth liquidity, which offsets the tightening of credit standards and ensures liquidity in the market.

Transcript Summary:

• 00:00 There is a risk of a market crash due to untested ETFs, but active portfolio management and seeking lower-risk opportunities can help navigate the risks and provide better long-term returns.
  • There is a collateral contagion crisis that is coming because the true collateral is unknown and changing, but it is good news because those managing it will do everything to prevent a global problem.
  • The global economy is in a bad and worsening state, while the financial markets currently look good due to liquidity, momentum, and earnings.
  • The speaker warns that there is a risk of a market crash due to untested ETFs and compares it to the 1999 market crash.
  • If capital starts coming out of the market, particularly from the top seven stocks, the indices will be heavily impacted, as seen with Apple’s stock value dropping due to China’s restrictions on iPhone sales to government entities.
  • Investors need to actively manage their portfolios and adjust on a quarterly or half-yearly basis to navigate the risks posed by sophisticated artificial intelligence systems, but working with a professional can help.
  • The speaker cautions against chasing the last five percent of market value, emphasizing the high risk and comparing it to picking up nickels in front of a steamroller, and instead suggests looking for lower-risk opportunities in the market that will provide better long-term returns.
• 10:22 The end of the “great moderation” period has led to increased volatility, inflation, and debt costs, indicating a shift to a higher level of risk in the markets, with potential for a looming crash and government intervention.
  • The speaker discusses the end of the “great moderation” period characterized by low volatility, interest rates, and stability in the markets, which has now ended due to changes in globalization, financialization, and mercantilism.
  • Foreign countries buying US bonds drives up bond prices, lowers interest rates, and makes it cheaper for the US to consume, but it also leads to a consumption economy, high debt levels, and potential risks of higher volatility, inflation, and interest rates.
  • Inflation has increased, debt costs have risen, and volatility has heightened, indicating a shift from an era of low inflation and moderate growth to one where inflation is harder to control, although the compression of the equity risk premium has not been fully reflected yet.
  • Stock prices are expected to come down as risk premiums increase in both equity and bond markets, indicating a higher level of risk than previously experienced.
  • The speaker discusses the low equity risk premium and the fear of missing out on the market, but warns that there may be a looming crash and a lack of buyers.
  • Capitulation in the market can lead to violent changes, and it is important to never underestimate the government’s ability to change rules to prevent it from happening, as seen in the 2008 financial crisis.
• 19:35 The derivative market is a massive and opaque risk that could lead to a catastrophic collapse, as it is interconnected and difficult to control, while the stock market continues to rise due to aggressive deficit spending and liquidity problems are being addressed by pumping money into banks and investing in reverse repos and treasuries.
  • The derivative market is much larger than the stock and bond markets, with a potential for catastrophic consequences if there is a cascade of failures, as it is traded over the counter and is opaque to most people.
  • The derivative market is so large and powerful that the stock and bond markets are just reflections of what’s really going on, and there is a collateral contagion crisis looming due to the rehypothecation of collateral, leading to uncertainty about true ownership.
  • The risk of a cascading collapse in the derivatives market is a global problem that authorities are actively trying to prevent, but there is still a likelihood of trouble in the market that could get out of control.
  • The complexity and interconnectedness of the derivative market poses a significant risk as a failure in one asset class could trigger a ripple effect throughout the system, and due to its vast scale and lack of understanding, it is difficult to predict and control the potential consequences.
  • Despite concerns of an imminent recession due to the reduction of monetary and fiscal stimulus, the stock market has continued to rise, which can be attributed to the aggressive deficit spending and the presence of stealth liquidity in the system.
  • Depositors have been withdrawing money from banks and putting it into money market funds, causing a liquidity problem, so the government is pumping money into the banks to keep them solvent while the money market managers are investing in reverse repos and treasuries.
• 32:55 The reverse repo market decrease and reliance on artificial intelligence and government handouts could lead to a withdrawal factor, while countries selling off dollars may weaken the dollar and push into the market, and the Japanese carry trade is being used to increase debt without putting it on the FED balance sheet.
  • The reverse repo market has seen a significant decrease in funds, which were used to buy treasuries and then distributed directly to consumers and corporations, resulting in a strong economy through the implementation of Bidenomics version of modern monetary theory (MMT).
  • The unsustainable strategy of relying on artificial intelligence and government handouts to sustain the market will eventually lead to a withdrawal factor once the high ends.
  • The unsustainable stealth system currently in place will likely continue until the election, with the government using off balance sheet transactions and contingent liabilities to sustain spending and growth until someone defaults.
  • Countries are selling off their dollars, particularly China and Russia, which could lead to a weaker dollar and a potential short-term push into the market.
  • Banks and insurance companies have been hedging currency risks for years, but there is currently a big push for the Japanese carry trade to continue in order to increase debt without putting it on the FED balance sheet and prevent the Japanese from selling their dollars and causing their currency to rise.
  • Treasuries are currently yielding a real return, making them attractive for investors, and there is a possibility that the Fed will have to pivot and bring rates down, leading to capital appreciation in long-term treasuries.
• 45:09 Inflation is predicted to rise due to government stimulus, with no resolution in sight, leading to another major wave of inflation and a volatile economic and financial environment.
  • The speaker predicts that the price will decrease and then trade within a specific range.
  • Inflation is expected to rise significantly in the future due to government stimulus, and the speaker believes that the three factors that helped resolve inflation in the 70s are not being addressed, leading to a prediction of another major wave of inflation.
  • Volcker, before becoming Chairman of the New York Federal Reserve, believed that the only way to solve the economic crisis was to tighten liquidity, which he did by increasing interest rates and driving the economy into a recession.
  • The speaker discusses how the liquidity level was managed through various measures, including quantitative easing, to address recession and inflation concerns.
  • The removal of the petrol dollar agreement with Saudi Arabia, along with the energy problem and the collapse of the Japanese carry trade, have created a significant risk of collateral contagion that is not being discussed.
  • The speaker predicts that the current unsustainable bond yields will lead to a correction, followed by inflation and tightening rates, resulting in a volatile roller coaster-like economic and financial environment with increased volatility in currencies, bonds, and credit.
• 53:50 Inflation and deflation are impacting the economy, with inflation affecting necessary items and deflation impacting desired items, while collateral contagion poses a risk to the global economy, exacerbated by the increasing cost of living and stagnant wages, influx of immigrants, and potential reshoring of jobs.
  • Inflation and deflation are both present in the economy, with inflation affecting necessary items that are paid for in cash and deflation impacting desired items that are financed, driven by changes in finance and credit.
  • The speaker discusses the potential impact of collateral contagion on the global economy, particularly in relation to inflation and consumer spending.
  • The increasing cost of living and stagnant wages are impacting economic growth, leading to higher inflation and a rise in strikes as labor demands better conditions and benefits.
  • The influx of immigrants across the southern border will create a need for jobs, which will further exacerbate the threat of artificial intelligence on professional white-collar workers.
  • The Biden administration is considering bringing in cheap workers to absorb the shock of reshoring and address the issue of labor costs being higher in the US compared to countries like China.
  • Pay attention to the political and economic factors that will impact profits, direction, funding, and liquidity, as they are strategic moves that can have a significant influence on the economy and markets.
• 01:02:22 Be cautious and prepared during this period of transition, focusing on buying gold and silver, investing in bonds and credit, and being aware of the power of commodity players in dictating pricing, in order to avoid financial losses and seize the best investment opportunities.
  • Take your foot off the equity side of the house and consider buying gold and silver for your portfolio.
  • Government will tax and regulate commodities, so it’s important to invest quickly and be aware of the power of commodity players in dictating pricing.
  • Investment focus should be on bonds, credit, and high yield risk, with advice on how to navigate these areas, as it is a time to be cautious and prudent due to the changing world, and being prepared with available capital is crucial for seizing the best investment opportunities.
  • The speaker advises caution and preparation during a period of transition in order to avoid financial losses and take advantage of future opportunities.
  • You are invited to come back on this channel to share your insights and predictions when the events you have warned about start happening, and to provide a calm voice of reason during times of emotional turmoil, as well as to share any obvious opportunities that arise in the future.
  • The speaker promotes their website matassi.com where they share their research and seek feedback from knowledgeable individuals to make money, expressing gratitude for the invitation and willingness to return if profitable.
• 01:08:51 Collateral contagion is a big risk that everyone should worry about.