Peak Prosperity - Can a Systemic Crisis Even Be Avoided at This Point?

Episode Date: June 25, 2025

Michael Gayed, CFA, outlines the current economic landscape by tying credit cycles and market signals to systemic risks.Click Here for Peak Financial Investing

Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. For there to be this much liquidity causing so much leverage causing so much overconfidence causing so much re-leveraging at some point there's going to be a decline that will not bounce back anywhere near as aggressively as we've seen where you do have the margin cold and that can't be stopped. The following is the audio version of a video released at peakprosperity.com. Visit peakprosperity.com to watch the video and to find other insightful content such as articles, discussion forums, and exclusive subscriber-only content. Exclusive subscriber only content

Hello everyone and welcome to this finance you podcast and your host dr. Chris Martin here today with Michael Guyette Michael Welcome to the show. I always appreciate spending time with you and I'm jealous that you have a farm Well, we can talk about maybe why I think there's more people are getting jealous because the vibe is out there and we are going to talk about that and it's well how effed are we I can't say that on YouTube but Michael let me introduce you real quickly here we are talking with Michael Guyed he's he's well this is who he is he's got a big following over on Twitter on x 760,000 followers, rounding up very slightly. He is also the author of the leadlagreport.substack.com over on Substack, and I follow that,

and it's a very, very good Substack, and as well, the author of Intermarket Analysis and Investing. And Michael, let's start here. Look at you in your T-shirt. Last time I interviewed you, you were not looking that ripped. I'm just going to be blunt. Yeah, I was definitely in my thinnest.

And just to clarify, that was my father's book. I just republished it and put a forward on it. But I think I bulked up nicely in the last year or so. I'm going to the gym as much as I can. I need to do farming to get my biceps ripped and all that, like you. But that's on the list. There's high it's it's there's high intensity workouts, and there's just farm intensity workouts. It's one hole rung up the ladder It's just it's yeah, it is just this morning. I had a cow out I had to chase back in that is sprinting and

Pretending I'm a I'm a cut horse. You know real men are chased by cows is basically That's the real cardio going on right there. All right. So Michael, I do want to talk. I mean, obviously a lot going on in the world right now, even without everything going on in the Middle East. Yeah. We were already, I know you were tracking the same thing. It feels like we're kind of at the end of a macro credit cycle to me.

Maybe, and you and I talked about a credit event last time we talked. But let's just set the macro stage even without any of the hoopla going on that may spike oil to 400 a barrel or anything else that could happen. Where are we in our credit cycle? What's the story? The story is a tale of two cities. I think it's probably the best way to define that story. Look, it's, I've been very public about this view, which has not panned out yet, but I think still is out there that we're going to have some kind of a tail event some kind of extreme dislocation primarily because there's a disconnect between the message of credit spreads in the bond market differential

between junk and high quality paper and the differential at the same time between small caps and large caps, small caps massively underperforming relative to large caps massively outperforming. Why is that disconnect important? Because small cap stocks, the majority of companies, cantily post-COVID, have had a hard time trying to deal with higher for longer interest rates on razor-th thin operating margins. So there's been this sense among small cap investors that a lot of these companies may not make it as they roll over their debt into higher cost of capital.

While credit friends themselves are saying there's no default risk, small caps have clearly said there's default risk. So my entire thesis has been, there's a disconnect in the message. One of them is going to prove to be right. I think it's probably small caps, meaning small caps suggesting there is credit strain out there and that once junk debt gets the memo, then all hell

breaks loose for a moment in time. So what I like to say to people is that it's not that I'm bearish on stocks, it's that I'm bullish on a credit event because I think this divergence can't persist the way it has for as long as it has going forward. Now, Michael, I took a poll. You just had it up on your X feed this morning, which said should the Fed raise rates or lower rates. I was in the minority.

I said raise rates, and I did it because of another tweet that I saw earlier. Take us through this. We're looking for anybody just listening to this right now. Callum Thomas had put out the modeled Fed funds rate, which is a blue line, which is labor plus inflation model. I can't pretend to know what that model is, but going back to 1986, comparing it to the actual Fed funds rate, it does a pretty good job tracking and is wildly departed at this particular moment in time, suggesting rates ought to be

higher not lower And and I don't know the specifics of this model But it's consistent with a lot of my own research and I myself have made that argument on X I had a pretty viral post I said the Fed must raise race to save the system and That's not me being hyperbolic. Although obviously I have a tendency to do that on Twitter slash X because that gets engagement. The reality is that the Fed, when does the Fed historically lower rates? Or why should they lower rates?

They should lower rates because they're concerned around default risk. The Fed does not care about the S&P 500, the Fed cares about credit, right? Because that's what impacts the actual real economy, employment, so on and so forth. Okay. Credit spreads going back to the earlier point about junk debt versus high quality paper are very tight. The bond market does not see there any real risk of default risk systemically. Okay,

which means that they that financial conditions are too loose, which is odd because we just went through the fastest rate hike cycle in history. And yet the bond market is still saying there's too much liquidity out there. Now, you can argue that makes some sense because of everything Yellen did with the lag on the Treasury side, putting liquidity in as the Fed was trying to take it out, stealth quantitative easing following the 2023 regional bank crisis. Because tight conditions are still loose and because there's so much money that's clearly flowing to speculative areas. The only way to cool that is to actually raise rates and do it aggressively now.

Because if you don't do it now, the Fed's going to be stuck in the same situation was stuck in post COVID, which is it then has to play catch up against a runaway dynamic. So as much as there are calls to low rates, I think all evidence says quite the opposite. I think they should raise rates. And by the way, I think the bond market is telling them they should raise rates because look at what's happening to yields on the long end. The markets are unraveling and the stakes could not be higher. If you're relying on passive strategies or so-called diversification, or perhaps using

an advisor who was, I don't know, maybe in elementary school during the great financial crisis, you could be on a collision course with staggering portfolio losses. Peak financial investing is your lifeline. We handpick wealth managers who will actively manage your portfolio with proven, market-savvy strategies, not the tired modern portfolio theory that could crumble under pressure. The unprepared will not just lose this time, but lose big. The future that I see consists of both winners and losers, but many more losers this time than last time. Go to peakfinancialinvesting.com today and schedule

your free consultation. This is your chance to protect your wealth. Again, that's peakfinancialinvesting.com and I'm Dr. Chris Martenson urging you, please don't wait another day. So three things I want to talk about. One, the systemic risk because that's actually what I think is most important here and I want to get to that. I want to talk about. One, the systemic risk, because that's actually what I think is most important here, and I want to get to that. But let me talk about this, because this has been a bone, a little bit wonky, but very important to me, because we all grew up, I know you probably did too, and your dad certainly did, on this idea that when the Fed raises rates, it tightens liquidity.

That used to be true, but this is an important point, a little wonky, but let me, everybody listening to this needs to understand this, but this is an important point, a little wonky, but let me, everybody listening to this needs to understand this, comprehend it even, that when the Fed raises rates now, it just turns a dial, pays more to interest on excess reserves, and it doesn't remove liquidity. So it could both be raising rates and nothing happens to liquidity now.

Is that possibly part of the dynamic we're seeing? Yeah, I think unequivocally. And I think just, you can also argue that maybe we're still in this weird environment where post-COVID, everything is just cycle-wise off. Right, I mean, think about the idea of long and variable lags. Right? So I think people underestimate what happened with COVID.

You shut down the entire economy. You reopened the entire economy. You did so with trillions of dollars sloshing around from both the monetary side and the fiscal side. That doesn't get resolved in just a few years. That could get resolved over a whole decade, for all we know. In the span—when you look at history, these types of extreme structural shifts, when they happen because of events like this, they have ramifications that go beyond a presidential cycle, for example.

So, maybe we're still in that sort of weird lag, where everything is just sort of amorphously moving in unusual ways, which is why a lot of active strategies have had our time, which is why a lot of the historical metrics people would rely on, me included, with my A-Tech Fund family, seemingly are not, in quotes, working for a moment in time. Now, there's an interesting dynamic here, which I think throws a monkey wrench on the risk of an event and the idea that Fed raises rates, okay, that that's what they should do, which is I do believe, and yes, I am talking at my own book on this because I just launched an ETF to play this theme,

I do believe deregulation could throw a lot of interesting dynamics into the system and a lot of the ways that we analyze what happens next. On the one hand, oil rising is inflationary as long as it's gradual. On the one hand, all of the stimulus is still in the system, and to your point, money supply, you know, they're raising rates and they're still doing other things which actually make financial conditions easier. All that creates these bizarre disconnects. But if you have a broader wave of deregulation, I think there's two really interesting implications of that. One is deregulation should result in the small cap companies,

maybe getting a lifeline in the sense that they'll be able to deal with higher for longer rates because now they have less red tape to deal with, less regulatory compliance costs, faster to market time in terms of what they can bring service and product wise. So that I would argue is actually margin enhancing for a lot of these companies which have been stuck because of the higher or longer rates. This maybe counters that. The other implication of deregulation is I think actually even more interesting, which is that think about it like this. What sector of the stock

market is the most regulated? It's utilities. Okay. I was going to say energy, but it sounds like it. It's a part of it because let's lump them together, right? So, okay. So, utilities, you know, arguably the most because, you know, of local monopolies and things like that. Okay. So, but then at the same time, what's the least volatile sector? It's also utilities. I can't prove it, but I suspect there's a link between high regulation and volatility suppression, which kind of makes sense. You think through it, right? Because it's like, all right, well, then if you have high regulation, the incumbents stay in power, there's less disruption risk. So from that standpoint, it just keeps things fairly, in quotes, steady because of that regulatory barrier. Now, if you get a broader wave of deregulation, if you have freer markets,

conceivably, you could have more pulses of volatility, more disruption, more uncertainty, which is not a bad thing for active managers and active traders, but that creates a different markets, conceivably you could have more pulses of volatility, more disruption, more uncertainty, which is not a bad thing for active managers and active traders, but that creates a different dynamic then to think through in terms of how an event plays out, what's inflationary, what's disinflationary, what's the net effect? Well, the biggest example of that I can think of obviously is nuclear because we just saw Trump sign a deregulation order. In fact, they set a standard, they said by January, July 4th, 2026, one year from now,

they want to have nukes that are critical, meaning these have to be off the shelf. It's going to be small modular reactors. You got your small companies, right? And obviously they've performed exceedingly well, even preceding that executive order. So that would be an example, right? 100%. And actually, so I just launched with three other partners in UETF, FMKT, the free markets ETF, which is using AI to determine which companies benefit the most from various derailatory measures, right? The number one position in FMKT, the free markets ETF right now is UEC, URIM Energy Corp, the US's largest uranium producer, precisely because of that measure that Trump took.

So, endlessly—I mean, this is even a story bigger than A.I. I mean, U.S. only makes 1% of what producers extract only 1% of uranium. I mean, just from an upside potential perspective, there's a lot—I'm quite bullish on that part of the energy space. And that's consistent with the idea that deregulation opens up opportunities, which in turn could ultimately be disinflationary. So, as much as I think the Fed needs to raise rates, the longer term tailwind could actually be in favor of lower rates as deregulation momentum picks up. Just to complete this point about rates and what's different now, the last time I looked, $455 million a day is being funneled by the Fed out to the banks because rates are higher, because the Fed raised the rates.

And they gave first, let's follow this through. First hand out trillions of dollars to the banks because emergency COVID. They park it back at the Fed. And then the Fed pays interest on it, but then raises rates on that. So $455 million a day is not exactly Disinflationary no wonder the markets have been so supported no wonder we saw the largest volatility crush in the last nine weeks in history Because we're that this all Michael this all tells me we are flush with liquidity right now Not the opposite which which actually I would argue should scare the shit out of everybody.

Okay, and you can bleep that out, right? And this kind of goes to this idea of how effed we are, okay? So look, every round of severe declines, like we saw the terror tantrum, is ultimately met by some kind of wording that I'd argue is a form of manipulation that essentially stops the bleeding and causes a V reversal. Okay, now on that Wednesday, which was the low, I was actually on a cruise and I posted, I was with the futures were down 1500 points of now. And I said, you're about to see the biggest intraday turnaround for the stock market history. This is the day of the low, right, that completely and the and I explicitly said, you know, the prior Monday,

there was a rumor that the White House said we're gonna pause tariffs for 90 days. The White House said we never said that. And if you remember that Monday, when that rumor came out, the NASDAQ was up like 10% intraday within minutes. Then came back down as they denied the rumor and I made the argument on X that Wednesday, when I was on that cruise, they were floating the balloon, they were trying to see what the market's reaction would be if they paused tariffs. That was the ammunition they needed to stop what I believe that week would have been a cascade of margin calls. That week was the low, it was actually a very dangerous week, it had the administration not stopped that selling pressure, I think would have resulted in an await type moment that was I even said that's the Hank Paulson moment, because everyone was leveraged like crazy

prior to the tariff tantrum. And margin calls happened with a delay. Okay, so they came, they basically they were in a pause terrorist market ripped, everyone started then not having to worry about selling and bathing. They double down, then they started going more on the retail side into leverage funds. Now here's my point in saying well this as far as being scared about liquidity, every single major dip is bought not just by retail but leverage retail, like very aggressively bought, high conviction, which means every single round lower result in even more margin going into the system. Result even more risk seeking behavior,

because hey, it worked last time, let me double down, and then it goes down, let me triple down, then it goes down, let me do zero DT, right? So it's like, you end up having this escalation of commitment and leverage, and I do believe that, and I've said this many times before, all that creates a sense of overconfidence.

Like if you're right every time as a retail investor to buy every single dip it creates overconfidence. You feel like you're on stopple. It's like you know at a time in the market. So do so with leverage. Well guess what? Overconfidence leads to leverage and leverage is always the precursor to a market crash. It's like the one commonality in every single market crash in history is that the the condition that surrounds it is leverage. What causes the crash is the deleverage and the margin call, which causes the speed of the forced sale. It's literally like a mechanical dynamic.

So for there to be this much liquidity causing so much leverage, causing so much overconfidence, causing so much re-leveraging, at some point, there's going to be a decline that will not bounce back anywhere near as aggressively as we've seen, where you do have the margin calls and that can't be stopped. At least not initially, not easily. So now I want to get to the important part of this conversation, which is the word systemic.

You mentioned the Fed doesn't really care about the S&P 500. I think they pay attention to it. Let's be absolutely clear, they don't care about stable pricing and full employment. That's for the plebes. What they care about is the system, right? And so if you look at like right now, if anybody wanted to look at say the piping and plumbing of Wall Street, right? Now we've got these OTC things, we've got the derivatives, of course you have all the

clearing houses, your DTCs, your seeding companies, you got all your brokers, you got all these networks, it's all this piping and plumbing. And it's all one big borg now. I make this point all the time Nobody seems to care about as much as I do Michael, but when I watch The Japanese stock market the DAX over in Germany the footsie and all of ours indices here in the US They trade tick for tick perfect lock steps like one board. It's a hive mind entity It's like this global thing like why should Japanese stocks be ticking up at 2 a.m

In the morning their time because some news came out that wiggled our small caps over here. It just does. So my hypothesis is that we have this global borg now and the Fed is not just responsible for making sure that the US markets are liquefied, but it's kind of a it's a family affair. I think they I think they've mission creep right? The camel's fully under the tent and now they're responsible for every wiggle and jiggle. And as we back up and look at that though, you note, I note, that the fingers of instability grow

because the leverage gets higher, the risk-seeking behavior grows, everybody's conditioned to get way over on one side of the boat. And so now, when you say a credit event, please spell out what that means and be as non-ufamistic as you want to.

Okay, a credit event is no different than saying a significant VIX spike. That's all it is. So there's a quantitative aspect to what a credit event is. A credit event means you end up having default risk getting priced into highly levered borrowers because suddenly the lenders of capital to the borrowers are worried about their ability to pay back their loads. So they need to get more yield to compensate for that risk that they may not get back their money. So it's a risk premium. Historically, if you were to track the VIX index, which is for equities, relative to

credit spreads, the differential between high quality and junk, which is basically a way of perceiving the bond market's perception around bankruptcy risk for these companies, it's a very tight relationship. Meaning if you have a VIX spike, you see credit spreads widen. So volatility in equities is typically, I say typically for a reason, seen as increased bankruptcy risk for the real economy, which is why people think the Fed cares about the S&P.

They think they care, but the Fed cares about the S&P, but then misunderstanding that it's really about the volatility transmission mechanism in terms of bankruptcy perception in the bond market that the Fed then responds to, right? And that's why they come in and liquefy. Okay, the issue there is really from 2022 up until recently, this divergence has gotten wider,

meaning we have these VIX spikes, small or, you know, I'd argue you started seeing the behavior kind of kick back with the reverse carry trade, August 3rd, August 5th last year, which we can touch on, but you started, you started this tremendous divergence now between VIX movement and credit spreads not responding. A credit event would suggest you have a convergence of the historical relationship, meaning VIX spikes, junk debt falls off hard and very aggressively. Default risk gets priced in. That's when you end up having some real effects on the actual economy.

And that's when with the lag, the Fed would would step in but you hadn't seen that because of all these distortions and all these shenanigans that are happening on the monetary supply side that I think are creating this again this dislocation messages between small caps and junk debt. Well I mean listen one end of a credit event is okay some some risk gets repriced and some people take some losses on the other end of that it's bad, you have your Lehman moment. Nobody knows if party A can pay party B so party C doesn't get paid and you get that freezing.

I think that's what the Fed really is most scared of is a freezing of the piping of the system because if that happens, all sorts of things break very, very rapidly. So they have to keep the system working. But if all of a sudden we find out the OTC market for credit spreads and derivatives right you know credit default swaps suddenly freezes because they don't have enough you know in margin what does the Fed really do there well that's what every single central bank does which is panic and then cause some coordination right

like we saw on November 2011 you know know, with the summer crash, then the eurozone crisis. And then that November, before Thanksgiving, they coordinated, opened up swap lines, right? They got a massive coordination that's that way. But let's touch on something you just mentioned, which is important. I've obviously been wrong on a credit event. I was right for a moment in time in the reverse carry trade, which I thought would be, you know, Japan will be the catalyst for it for two days. time in the reverse carry trade, which I thought would be, you know, Japan will be the catalyst for it for two days.

Everyone gave me a high five, and then everyone forgot about it. Still, I think it's out there, right? But ask yourself, why is it that gold is doing as well as it is? Since 2023, since the end of 2023, which is when, in my original thesis, I said, I thought that a credit event would happen

at the end of that year, which didn't occur, but gold started taking off off as if it's sensing That something is coming Because what is gold? Gold is the ultimate counterparty hedge. I'd argue just like Bitcoin. It's a counterparty hedge I don't believe it's an inflation edge. I don't believe it's a store of value. We can we can debate the definitions I do believe it is a counterparty edge, which means it, which is why historically gold does well during credit crises, because you don't have to worry about a counterparty paying

you back. You got gold. You got the collateral. Right? So why does, I don't know why nobody's asking themselves, why is it that gold has done as well as, what is gold sensing about the financial system? And I think it's that gold is sensing that a credit event and credit risk is real. Right? It's just that the credit event and credit risk is real.

Right. It's just that the credit markets themselves have not gotten the memo yet because of all these lag distortions. I would agree with you. I chase it back to that fateful decision in February of 2022, where the Bush administration, sorry, the Biden administration weaponized the dollar and said we're going to freeze Russia's sovereign reserves and and ever since then the United States dollar has been Desevering as a reserve slowly, but but surely to me you want to know you know When if somebody asked me when did I know? 2008 you know was finally the thing right Looking at it now it probably should have been bare-stearns When they broke their money

market fund. But I was a little later to that game. It was a different event for me. This time, where was my event where something happened in gold? It was in April. We had somebody stepped up, bought 45,635 contracts on COMEX and took delivery on the front month in a single day, $11 billion at that price at that time.

Somebody said, I need gold. I've never seen anything like that. People sort of looked at it, went, Pat forgot about it. The new cycle is like eight minutes long now. But I just looked at that and I thought, Mike, I was like, that's a whale. That is somebody big saying, I need to know that this money is safe. Yeah, that was a big deal And I would already think you know Whether you're bearish directionally on gold or you believe I'm sorry on stocks or you believe stocks are in a lost decade gold is

the answer Right. It's like How do you how do you counter a lost decade for equities? It's by going into gold. It's a cycle question. Look, I had been extremely blessed repeatedly on Hex, gold ascending warning, gold ascending warning, gold ascending warning. And people are like, oh, what warning? And then you see these geopolitical flare-ups between Israel and Iran, gold is spiking,

and then come back down, but still trend higher. So nobody was paying attention to gold until maybe like two and a half, three months ago. Then you started getting the speculative fee roll. And that was, by the way, pretty much around the near term peak. I then turned bearish on gold because I think it flipped from being a defensive counterparty hedge trade to let's just chase momentum.

Went sideways, now you're pushing higher again. Gold, by the way, is in the free market CTFF, MKT. So as much as I think, you know, gold, maybe you have to get some of that speculative behavior out for the next leg higher. That has nothing to do with sort of the theme of the free markets fun. But the broader point here is that if we're in the if we're possibly in a lost decade, which you can't discount, I mean, for God's sake, small caps are halfway through a lost decade. Everyone's looking at the S&P. The S&P is not the stock market. You look at the pure number of stocks, I'm talking the number of stocks in the total stock market, and you look at how many of them after inflation are above their 2021 respective highs. Less than half are. It's the most de the most susceptible market in history? Everyone says I'm a perma bearer and yet if you actually look at the data and have a different perspective it's like this is very unusual. That's why I go back to the story of the book is a tale of two cities, tale of two markets, right? So I think gold has been clearly telling you something is wrong. Now,

that's not to say it's not gonna have its own corrections. That's not to say somebody goes all into gold, but is a signal Okay, and something you have to keep in mind. I always go back to our job as allocators as thought leaders is not to Is not to predict the exact mile marker you might crash your car Our job is to be the weatherman to tell you when to say we're identifying conditions that suggest it's dangerous. Slow down. Don't short. You want to go into cash with some yield? Okay cool, right? But slow down because you might have an accident. Yep, well a lot of people focus on the 37 trillion at the federal level

and it's important. I focus on the fact that we're over a hundred trillion total credit market debt outstanding in the United States. That's TCMDO on the Fed series and it's over a hundred trillion. There's 315 trillion in the developed economies. We have a third of it. We have 6% of the population. We got to just keep that train going. What if we can't, right? What if we don't can't keep the credit expansion going? But Michael, my problem is just, I'm not a mathematician, but I'm good enough at math to understand that you can't compound your debts at three times the rate of your economy forever. Jerome

Powell has said that, now Scott Bacenta said that. It seems like they said that for a while but then big beautiful bill they said ah through the towel and said you know what let's just keep spending it will back load the spending cuts for for later somebody else can deal with that. To me this looks like I couldn't be more constructively bullish on things that aren't the dollar under that scenario. Yeah. Right? Which is a lot of things, by the way, and gold's just one.

Right, and actually, and I'll take it a step further, I would argue that we may be seeing the beginning of the endgame with Japan. That that's the sort of the endgame with Japan. That's the sort of foreshadowing, right? Because look what's happening. You talk about the most indebted country in the world, which lends the most amount of capital, which is the source of leverage for a lot of the speculative trades globally, which is the carry trade.

And they're dealing with high inflation. The Bank of Japan has no idea how to play catch-up. Look what's going on on the long end of the curve This is a developed economy whose long duration yields are acting like shitcoins. I mean That's that's tell you something about this experiment that Japan has done which we in the West and Europe have been doing because we thought out if it's working for Japan Let's just keep spending. It's the MMT, modern monetary theory idea. And then at some point, it's

like there is an endgame. And the issue there is that the more that Japan's bond market goes unhinged, the less options the Bank of Japan has. Right? It's not like, okay, so they raise rates, okay, they raise rates, but then they're going to absolutely destroy their banking system. They're going to cause the reverse carry trade to accelerate because now the yen is gonna get propped up by that. Okay, and that causes repatriation of leverage yen that's everywhere else in the world

suddenly having to cover that short, basically on their currency. And meanwhile, the population is old. There's more diapers for older people than for babies. And they can't deal with the inflation. It's not some game for the Japanese people. Somebody said to me on X, and I love the quote, I don't know if he sold from somebody else, but I'm going to steal from him.

It said something along the lines of, you know, stock market crash can cause a recession. A bond market crash can cause revolution. I know that sounds dramatic, but like it actually historically there's validity to that. And I just I do worry, which goes back to how effed we are. I do worry if Japan is is what's happening in Japan is a model for what's coming soon to a theater near near you when it comes to the US and that has all kinds of very ugly ramifications. I don't care what anybody's technical charts tell you.

And that's like end game type shit. Well, it is. And I've long thought that Japan is the dark horse for the apocalypse, right? So, and for reasons you just mentioned, right? Aging population, the economy honestly should be shrinking in support of its population. But instead the Bank of Japan has been doing

the crazy central banker thing, which is we just have to keep all our debt aggregates growing. Right? And so that's that central banking in a debt-based monetary system. I get it. But we saw this, maybe you can shed some light on this. This really, I didn't understand because Japan has been the, their Bank of Japan has been the bond market for decades.

All of a sudden they start backing away from that. Why? It had been working all that time. Why not just keep going? Because the issue is there comes a point where all of the monetary inflation no longer just find its way into the market. It finds its way to the real economy. The spillover finally occurred.

Okay, so let's go back to the US with QE3, Quantitative Easing III, Operation Twist 2012-2013 time period. Everybody back then was screaming hyperinflation for the U.S. It's like the Fed is now going to be, when there was no clear reason for them to do it, going to be monetizing more, buying up Treasuries, Quantitative Easing III, out on this unprecedented monetary experiment, and everyone thought it was going to cause inflation in the economy. And yet you didn't have it. You had this period of disinflation for pretty much a decade.

Now why is that? Because the inflation that would otherwise would have gone to the economy went into the stock market. Bingo. Right, now you're at a point where it's like, well, now there's spillover, okay, that goes into the economy,

as it no longer can find its way into the stock market, it goes into other parts of the real system. And that is the problem. This is why they can't just keep on kicking the can down the road. If it no longer, if that liquidity is no longer funneled to just asset markets and goes into other aspects of the way that we live our lives, and that then becomes downward sticky, good luck. Now, now, now you, now you have no choice but to aggressively raise rates to try to

reverse that, which in turn then must cause a breakdown in asset prices. For a moment in time, I'm not arguing that stocks stay down or that asset prices stay down, but that's how you have to clean out all this excess liquidity, which is finding its way into very undesirable places for the majority of the people which really can't afford it to deal with that. Well those imbalances build up over time right like dead wood in a forest and the Fed has been very clear about this. They are smokey the bear, no fires shall be started right and we haven't had one of those Joseph Schumpeter you know creative destruction clearing events. It feels to me like there's a lot of dead wood built up you know I've been tracking this for a long time. How many zombie companies are out there in the small caps?

It's like something ridiculous, like one in six, meaning they're operating income can't cover their interest payments. So they have to continue to roll debt on a, on the ongoing basis. And here we are. That it's very unsustainable. Why is the fed so afraid of allowing a correction to happen? Well, and again, the only counter there is maybe deregulation becomes a counter force to that, but we'll see, right?

Okay, all right. I'm just as a counter argument. But why does the Fed not want to see, because there's a lot of reasons, I think, why they don't. I think you can make an argument that as a society we're soft, okay? Nobody wants to take pain anymore, which is problematic. I'm a big David Goggins fan. I think if you had more of that in a society, just take the pain and suffer, and you're

going to be better off. If you have friction, you're going to grow. As a society, we'd be much better off having a real robust economy. But I think the simplest answer to the right one, the reason the Fed doesn't want to break stocks is because, again, the starting point of leverage is so high because every time the market dips, there's a re-leveraging, which is even greater than the prior dip. So the starting point of the decline in terms of how levered you are becomes ever higher, which means any kind of a breakdown almost instantaneously creates a margin call, even

with a very small amount. I do believe this is exactly the problem that the Federal Reserve has. How do you try to take the air out of the inflation side, how do you take the air out of equities, when every time you try to do that, the speed is so aggressive because of the re-leveraging effect from buying the dip every other prior juncture? The only way to do it is just let it free fall, right? And nobody wants to see that. You'll have every single politician screaming to Powell. Yeah, where's the bottom? Where's the bottom? It's over, right? They always scream the same stuff. It's always an emergency. I get it.

We just saw Trump tweet out, I think just a couple days ago, he said, best labor wage growth in 60 years. And he was all excited because he's taken credit for that. But I don't know if he knows this, but obviously that complicates the Fed's efforts to say we're making a case for cutting rates. Yeah. Right. Highest wage growth in 60 years. So the inflationary pressures they feel like they're still with us right. Yeah. I thought it was Biden's economy. I could have sworn I heard that. I guess a later. It's not no longer by his economy And listen, I just don't decide I'm not I'm definitely not and I'm not anti Trump. I'm not anti Harris I'm anti anything. I just you know, I think people need to think a little more nuanced, right? It's like you can like things that he does and dislike things that he does just like president

You don't have to be just so gung-ho. I'm it's um a Whole different conversation, but I'm blown away at how simplistic people view the world now. It's like, shit is nuanced. OK? Exactly. It's not that simple. Stop thinking in terms of just yes or no. There's always a gray.

There's always pros and cons to every single person that's in power. End of story. Right? Anybody that thinks otherwise is a simpleton. Sorry. Right? So, you know, when Trump says it's like that, I laugh. Because it's like, you know, aside from from the regular that's just the way he is

It's like they'd be really think any of this has to do with Trump No, of course. I'm just the legs Delays so I when the tariff the tariffs actually impact the real economy is gonna then go back and say oh this is because of Biden Like come on guys. Yeah. Yeah. Yeah, I mean it's a silly. Yeah. Well, I think we still have the inflationary pressures I'm gonna pull up a chart here. So the annual price changes for us consumers housing up four and a half percent Yeah, I think that's light because they don't they don't include property taxes in here Appropriately, so it's even higher than that and also house inflation for insurance. Whoo Michael insurance has been a hot topic.

Auto insurance is up 85% on a five-year lag basis, right, on an average basis. House insurance, unbelievable increases. Where, do you have any sense of why insurance is going up so much? Supposed to be a highly regulated business, they're supposed to go to regulators, say here's why it has to go up, but clearly they must be taking losses in their portfolio somewhere and passing that through I guess CNBS, I don't know what's happening any ideas. I think a lot of people would argue that a lot of insurance is inherently a scam I Don't know. I don't have a really strong opinion. I've seen a lot of people argue that myself I mean when you see those types of the type of gouging that's occurring and to your point point, it's regulated. Right. So it's like, all right, well, what is the implication there? Well,

you can't really have competition if it's regulated. So, you know, as I go back to deregulation, could solve a lot of these issues, right? If Trump continues to be serious about these, he's already, I think, shown that, which again is why I came out with the free market CTF as a way of playing the idea. But yeah, and this is also why I think the housing market is cooked. Like at some point, it's largely true that most people are house rich and cash flow poor. But there's a point where you become almost too house rich

that you can't even live in a house anymore because the cash flow doesn't allow you to pay for your insurance. And I think that explains a lot of what's happening maybe now at Florida, okay, with some of these listings that are coming on to be like I can't afford all these insurance You know rate increases so as you hear Airbnb owner, and you got 20 properties, and it's like well How do I deal with this right? So I? Again I go back to this nuances to even the way to think about housing. I think insurance is actually a big deal

Yeah, I just crunched some numbers way to think about housing. I think insurance is actually a big deal. Yeah, I just crunched some numbers. Somebody had posted just a Dallas home. It's a ranch built in the 70s, just a home, three bed, two bath kind of a thing. Just looks like a ranch. 802,000, which means your monthly payments 5,600, which applies to about 1% of earners in households in Texas. So it's that's a that's a 1 percenter home dude it was just a house right But hey the economy is great. It's great. It's great so

In the time we have left I because I know we just got about ten minutes here I do want to talk about what's going on in Iran vis-a-vis I care about oil. I'm an oil guy This is what I care about so here's what I'm putting up a chart now from trading economics as of June 17th today being the 21st So a couple days old but but the the trends are right If we look at the monthly indicate Increases in natural gas crude oil heating oil Brent all of that stuff. We're looking at numbers Michael 14 to 25 percent obviously Skipping ahead we see that oil is now positive year to date. It's obviously spiking on what's going on in the Middle East. Let's be clear, inflation

is when you print too much money and it chases too few, whatever, stocks, bonds, houses, doesn't matter. But this is a supply-demand cost push. The Fed really can't do anything about that, right? I mean, they'll call it inflation, but sometimes prices rise for supply-demand reasons, which is pure economics, and sometimes they rise for inflationary reasons. They're not the same, but they tend to throw it all in one blob for public consumption. What would they do about rising oil prices? What could they do? Wait for the lag to result in a recession for them to then cut rates.

So, the issue is, let's go back to nuance, right? Okay, so everyone sees oil prices and they think it's cost-push inflation, and it's true. That's how the market is seeing it right now. The question whether oil is inflationary, disinflationary, or deflationary is a function of speed, not level. So, okay, so when we talk about cost-push inflation,

let's talk about the mechanics of that. Cost-push inflation means the price of oil filters down into the price of goods and services. Okay. What's not ever addressed in people that make that argument is, well, how long does it take for companies to respond and actually push that price down for it to be seen on the shelves? Right? There's a lag there, right? So it's not like they just suddenly raise prices overnight based on oil ticking up $10 a barrel. Okay. so if oil is gradual and you can model it out as a company, you can then start to plan those price increases in the actual price of your goods and services in the actual economy.

If the price of oil spikes and it's too quick for you to respond to pass down that price, now your margins get crushed because you don't have the time to charge more for the higher oil price, because it happens so suddenly. So, and this is why historically these oil spikes with a lag then cause recessions. Right, because it impacts the margins so aggressively that suddenly they have to be layoffs. So, which then becomes disinflationary or deflationary.

So, going back to your question of the Fed, the Fed can't do anything really about the price rise. Maybe the administration can do certain things on the Street of Petroleum Reserve, or they can do other deregulation measures to get more oil out of ground faster, whatever it is. But the reality is the only thing the Fed can do is wait in the event that it spikes, you then have the lag,

it causes recession and they have to cut. Right, but the oil inflation, I actually think oil, if it were to, if war continues like this, and oil continues to spike like this, between Israel and Iran, I think there's a non-zero probability that it's gonna be extremely bullish

for long duration treasuries. Okay, because I think that becomes more, which sounds counterintuitive, but I think that becomes sort of the tell that that's a deflation shock, not an inflation one. Well, at some point, high prices reflect the fact that there's a shortage, right? So I will note that at this moment in time from an oil standpoint, the United States, our SPR has been slightly refilled,

but it's mostly was drained by Biden. Right. Our above-ground stocks, the Cushing and everything kind of bumping along a five-year low. For the OECD more generally, we're at a five-year low of stocks stored up all across the G20. So we're kind of poorly positioned for a supply shock should one happen. And I don't really see anybody talking about that

at the administrative level or sort of the global level. But it's a big deal. And I do worry that supply shock actually becomes a true economic shock not just because of the financial impact of that but because eventually That's the stuff that runs all the little motors that make everything go And a high price is reflective of the idea that there's not enough of the stuff and that actually has a real Giant impact on economic activity activity but at a very foundational level it's like it's like if you have a metabolic condition in a body that's a foundational problem right that goes beyond what the temperature is right now outside so so the question becomes how

do you hedge that and the simplest answer is the right one simple so if you're going to be in equities you hedge that probably by instead of being you know in tech you probably are more in energy i tease out the idea it's like i wonder if this is the prelude to another 2022 repeat you hedge that probably by instead of being, you know, in tech, you probably are more in energy. I tease out the idea, it's like, I wonder if this is the prelude to another 2022 repeat, where energy diverges so dramatically as a sector relative to every other sector of the stock market. I'm a little biased in that because right now, at least from the executive orders, the sector that has the highest weighting the free market CTF, FMKT, is energy, because it benefited directly from deregulation.

And now you've got war and an additional tailwind, right, to that space. So energy becomes potentially edge. Again, I go back to long duration treasuries in the event that it's a deflationary shock becomes a hedge for a moment in time, not talking buy and hold, just for it from a sequence trade perspective.

Gold becomes a way to play it. And the dollar, you know, it's amazing to me how everyone turns so aggressively bearish on the dollar. I mean, you look at the positioning, you look at the sentiment. It seems plausible that the dollar is in a secular bear market, but secular bear markets have these ripper rallies

that throw everybody off and makes it seem like it was never a secular downtrend to begin with. So I would be surprised to see the dollar then rally substantially into that as well. So there's a lot of, I think, interesting dynamics in terms of what can happen next. And the one thing that I feel confident in saying is that it has never been easier to be contrarian because the hive mind that you mentioned gets so aggressively convinced so quickly about a particular thesis and positions that way very quickly with leverage that it

becomes very obvious to anybody that just thinks independently that you don't want to go with the crowd this time. Well one of those areas that that really confuses me because I'm a business analyst at heart and I own businesses is I don't understand the AI thesis from the standpoint of how am I getting all this money back as a business case. I understand it from a national security standpoint we're worried digital canyon China can't get there first I got it from a national security standpoint. We're worried digital canyon China can't get there first I got it, but I unless the government secretly funneling some s fast 56, you know hidden money to support that I just look at this and I say wow very easy to predict. We're gonna have energy shortfalls

We're gonna have great instability show up because they are slapping these things in the data center so fast That sometimes they just don't have a plan for how they're going to support that with grid. So 2.2 gigawatt gas-fired plant for the meta installation down in Louisiana took directly up to a gas field on and on. So I think there's a strong thesis to be made here that people are throwing a lot of money at this. Picks and shovels I'm pretty sure is the right way to go here. You know, and less certain is who the winner is the right way to go here you know and less certain is who the winner is gonna be at the back end of that from a tech

standpoint as usual. And the cycle repeats just with more amplification and shorter time frames that's all it is. Yeah great well we're at the end of our time here Michael last words what do you got? We're fucked. I don't believe that out too. no, I which which my way is kind of like it has got a calling card That's comedic. Yeah, but I do kind of I don't know like I really sometimes I wonder I put on this pose I wonder if like we are actually all dead post covid and this is some weird like afterlife Parallel universe. Yeah, like last season of lost right where everyone's gonna realize right? It's like they're in some bit purgatory because it's like like, I feel like we've, like, people, everyone's lost their minds. We went from tariffs to shrumps on the F-steam list and Musk making a whole fight about that, to now

they're buddy buddies again, to now war, in the span of two months. Like, what? Can we take a step back and just be like, and can we actually have an attention span that lasts less longer than six seconds and actually think about how crazy this all seems, almost not real? I'm in complete agreement. I blame the shots. I don't know. Something caused people to get brain fog, but it it's or we've weaponized the the social media beyond our capability to absorb

I don't know what it is, but I agree with you. It's very uncertain which is why I have a farm So which which is I I want when I grow up. I want to be like you Well fantastic likewise and in return so Michael, thank you so much for your time today. Really appreciate it and keep going. So, leadlagreport.substack.com, also Michael Gayed, G-A-Y-E-D, over on X, Lead Lag Report there as well. So, thanks and let's do this again. And free market CTF, FMKT. I know you love energy, you should love that fun. FMKT, I'm going to have to look into that that to be honest I haven't seen what's in there but I like to you know dig in and figure out what the holdings are I know all right I'll take a look I will take a look all right until

next time thanks Michael you