The Wolf Of All Streets - Stock Market Crash Coming? Paradigm Shift For Gold? What About Bitcoin? | Macro Monday

Episode Date: September 25, 2023

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Is the stock market crash that we've been talking about for a long time finally coming? Why is gold not dropping when real rates are going up? And what does this all mean for Bitcoin? If you guys don't understand what that concept means, as real rates go up, as interest rates go up, as yields go up, you would expect assets like gold, especially, to go down because people, as Mike McGlone often says, hear that huge sucking sound, they go into the safer risk off asset like US treasuries and they exit things like gold. But gold refuses to drop Bitcoin even hanging in there. And we're going to talk about why that may be the case. And of course, get into markets in general and what we're looking for in the future. I got, of course,

Mike McGlone, James Lavish, and Dave Weisberger to talk it all out. It's Macro Monday, guys. Let's go. What is up, everybody? I'm Scott Melker, also known as the Wolf of Wall Street. Before we get started, please subscribe to the channel. Hit that like button, especially hit that like button because I'm COVID free. I've gotten past my evil cocktail of COVID and jet lag that was holding me back last week. The 12-hour time change and getting COVID the minute I got off the plane was a pretty ugly combination, but I'm feeling top of the world now. Feel amazing. Go ahead and bring on our three amazing guests. I've got James, Mike, and Dave. Good morning, gentlemen. Good to

see you all on this Monday morning. Last week, we did it on Tuesday, right? So we can actually macro Monday again for once. So listen, digging in, we got stock market crash coming, paradigm shift for gold. What about Bitcoin, right? Our big hyperbolic clickbait titles that we always have here. But there is a reason that we're talking about these things at the moment. And that's because, Mike, as I said, gold is supposed to be going down, right? We should see gold dropping if rates continue to rise. We're seeing interest rates break out. Chinese gold buying is driving a paradigm shift in bullion.

And of course, China's gold binge extends to 10th month as reserves climb. The Chinese are buying a ton of gold and so are other central banks. And that's effectively, at least according to Bloomberg, that's putting in a floor and causing gold prices not to drop in the way that they should. What does that mean? Well, that's a lot there. I want to hit you hard early. Perfect. Well, the average price of gold this year is the highest ever. Tell me another major asset you can say that about. And the key thing is that's pressuring gold recently.

It's a stock market's had its big pump. And you can get 5.1% in a two-year note and gold yields nothing. That's been a pressure factor for Bitcoin too. But you did mention the key facts. One of the most significant facts is ETF holdings of gold. That's mostly investors have been down about 10% this year. That's quite significant with the gold price up. That's basically never happened.

So it's showing divergent strength. It's like it should. I think gold's going to be one of the best performing assets. And it's a question of what's going to take for the catalyst to spark. It needs probably for the Fed to pivot, a sign for that potentially to pivot, the recession to kick in, no longer being able to see how I can get average annual 9% on the S&P 500 in the next few years. And I think gold will break off. To me, that's a breakout. It's a matter of time. So that Fed pivot's probably going to come from

just what you see in the screens this morning, a little more weakness in the stock market. So I think gold and the stock market, S&P 500, are going to meet about 3,000. S&P 500 around 3,000, gold around 3,000. I know that's going to tweak Dave. I love when I tweak Dave and maybe James too, but I can show you that I'll be publishing on that tomorrow. And it just pointed out that historic relationship between the two. And a key thing I want to point out in the simple facts of what I will be publishing in the macro big, first the small big picture is what we've been watching the last few weeks, just waiting for the Fed to,

I'll just show this on my screen if I can, show for the Fed to finally take out, if you can share it, finally take out this hiking, it's right there. It still shows hiking. This is a WIRP screen, shows the Fed still is about 20%, They're going to hike at the next

two meetings, November, December, but this level here, but 5.37% compared to the Fed rate of 5.33 was as high as 545. That's finally inching out. That's the first baby step. And the only way to take that out, I think is the stock market to go down. That's happening. That's where you might see that pivot towards gold, but it's so early days. We still have to get to the market. Still price are all this easing. Fed says they're not going to ease. Market thinks it's going to ease, but the stock market has to make it ease. That's your pivot. And I think that's what you're kind of seeing from weakness in stock market, weakness in Bitcoin, and specifically copper. Copper is breaking down this morning too.

And that has been a good leading indicator for years. James, what do you think? Yeah, I mean, like, well, on that last point, with energy prices so high, you're going to see industrials just start to break down because their costs, their input costs are, so they're arising so rapidly. So, you know, if you look at, look, we, we, you can look at the fed dots and like Mike said what the fed projects,

they're terrible at projecting what they think they're going to do. You know, they're, they're their predictions for the next year out are, are pretty much awful. The next meeting, maybe, but not the next year. So I also do like to look at the Fed futures to get an idea. And look, Mike, I don't disagree with you on gold. It's interesting. Gold acts differently in each recession, right?

Each breakdown. And this one is, again, something completely different. We haven't had ZERP for 15 years to raise rates. This is a completely different situation. And whether it ends up being a financial event or not will matter. And if you look at gold over the centuries, it retains its purchasing power. And you can't say that when you look at something like the US dollar, you know, and forget about the Venezuelan currency or, you know, the Bolivar or anywhere else. This may be a divergent point that we haven't yet seen in gold. And I think the same thing will happen in Bitcoin eventually, once it gets off the risk train. Well, I mean, I do think that Bitcoin has held its own in the same period that we're somewhat looking at for gold here. So I'm not saying that we're getting the Bitcoin is digital gold narrative, but it's not like it's been dropping aggressively as rates have gone up. Dave, what are your thoughts? And that's a good point, though, Scott, because you've got the young people who are turning to

the digital assets and the boomers and the Gen Xers that will turn to gold and some of them will turn to Bitcoin. So it's an interesting point. The demand is kind of split between the two age groups. The word of the day is dysfunctional. Now, let me explain what I mean by dysfunctional, because we have plumbed new depths in dysfunctionality from this government. And that is what everything is reacting to. So let's start with the basics. Bitcoin was created in response, or at least it was birthed. It was probably created by the NSA, if you believe the more recent documentation that surfaced. And that actually wouldn't be surprising.

It's completely unsurprising that the DOD, which founded ARPANET, which created the internet, also laid the foundation for digital money and digital store of value. But that's a completely separate side trend, but dysfunctional. Bitcoin was birthed in a financial crisis that was created by the same shit that we're dealing with now. We then proceeded to kick the can down the road by

15 years of zero interest rates and flooding the market with liquidity. But the fundamental imbalances aren't still there. They're actually far worse. We have three branches of government, we have multiple different players, and all of them are fighting against each other. We have literally one financial part of the economy, the Federal Reserve, that has been assigned the goal of combating consumer inflation, while the other branch of the government, both executive and legislative, are actively trying to ramp up consumer inflation, saying, oh, the Fed can deal with it. What do I mean by that? I've been talking about on this show for quite some time, saying exactly what I thought Powell would do with complete and absolute certainty and been

right every time based on the notion that Powell, like me, understands that consumer inflation comes from inflationary expectations and you need to break the back of those expectations if you want to have any success. He knows it, I know it. And lots of other people know it. But here we have the Federal Reserve hiking rates at the fastest time ever, actually creating what, according to their measurements of inflation, are real positive interest rates for the first time in close to 30 years. I mean, we're not talking that now. I mean, we haven't had real interest rates where over the CPI,

the short-term borrowing costs are higher. At the same time, managing yield curve control, because they have to, because the government cannot afford for real long-term rates to have a real curve. And never forget, the long-term, the shape of the yield curve. Everyone says, oh, well, it's predicting recession. Oh, it's because it's going to go back down. We're talking

10 years out. If you could find one human being on the planet who trusts that the federal government will not run deficits in accelerating deficits over the next 10 years, that would be a really unique individual because there isn't one. So, one would loan money to somebody that they expect their purchasing power to not be eroded in 10 years, yet the 10-year is cheaper than the two-year by a lot. And we've seen that. So anyway, let's go back to dysfunction. At the same time, Powell is jawboning at the last two Fed meetings as we expected him to say, oh, we're going to push that back. You shouldn't be demanding more wages. The president, the speaker of the House, and the leader of the financial services complex in the Senate have all been cheerleading the UAW and

several other unions as they demand not inflation index wage increases, but 40 or 50 percent wage increases. At the same time, the president has been advised by his people to stop taking oil out of the strategic petroleum reserve because they're going to need it during the election season. So oil is starting to creep up and that's the input. So that's how I define dysfunction. You have a government where you're asking inflation, which if you look at macro inflation, asset inflation is certainly a monetary phenomenon. And that's what Mike's been saying. And he and I don't disagree. We like to dive each other. But the reality is we both mostly agree. The only place where we disagree is this. Bitcoin is an opt out and narrative against this dysfunction.

And there is a bid underneath Bitcoin from people who believe that. But digital gold for Bitcoin. Actually, I agree with that. Bitcoin as a narrative is a digital gold. I mean, why are we talking about Bitcoin to be the monetary value of gold? The lowest estimate you could come up with for that lowest would be somewhere around 250,000. And the mean estimate of what would it take for Bitcoin to represent the monetary value of gold would be somewhere around 500,000. And that's just gold as it is today, which represents eight to 10 percent of global monetary aggregates actually less than that. And so that's where you get all the various hyperbolic notions of what Bitcoin is worth.

But the truth of the matter is, the jury is out on Bitcoin. I personally believe it's a great asymmetric upside bet. But that's what it is. It is an upside bet on something that has yet to be realized. So if you're the Chinese government, what are you going to do? You're going to buy gold. You're going to probably buy silver if you can, but it's hard to do it because it's been demonetized by gold. But don't be surprised if they're not buying silver and they're the bid underneath that market. And at the same time, if the Chinese government isn't allowing their firms to mine

Bitcoin and not and by the way, the geolocation of Bitcoin miners still show mining in China. You think that isn't sanctioned by the government? If so, I used to live over this bridge that I would be happy to sell you because the fact is, is they're not dumb. You know, they may be, you know, Mike may be right. And in fact, you know, I tend to agree that authoritarianism tends to stop innovation and tends to make it harder for an economy to grow. And authoritarian governments don't grow. What they do is they single-mindedly focus. Every single authoritarian government that's ever grew in world power has done so by focusing their time and effort on the military, because that's easy for the government to run. The economy is much harder, but don't

think they're dumb. They're actually quite smart and quite brilliant in many respects. So if you really want to understand what's going on now, the question as an investor is, well, what are your bets? What's your dysfunction bet portfolio? And that dysfunction bet portfolio is gold, it's Bitcoin, and it's companies, you know, rotation into what people, what we used to politely call defensive sectors in, you know, in equities or long-term holdings and other, you know, pieces of value that you might find. But the reality is that's in real terms. In nominal terms, there's only one path now. And the Federal Reserve is like a little Dutch boy holding their finger in the dike. There's

only one path. It's monetary inflation, period. And that's why in nominal terms, it's hard for me to short the market because there's still liquidity coming in because there's no frigging choice. I mean, they can't afford to have US long rates at 10%. Think about what would be, I mean, James, you tell us, the long rates get back to historical averages, which are 2% or 3% over the real rate of inflation. What's the debt service part of our federal budget? We're over $2 trillion a year. That's right. Which means debt service equals tax receipts at that point. And of course, depending on who wins the next election, we'll either have a party that will say, well, let's cut taxes to try to grow our way out.

I'm not saying that won't work. I'm just saying it seems unlikely. It's not going to happen. Or we have a party that says, oh, they're going to increase taxes, which of course will decrease growth and actually make the problem worse because that's what governments do. They see a problem and they never find one that they can't make it worse. The truth of the matter is the only really way out is the lever that the government doesn't want to talk about that isn't really fought in election. It's regulation. And there's one candidate who actually understands that. And it's worth talking about that because I was lucky enough to attend a private event with Vivek.

Don't get it. He understands what I just said to be true. He won't phrase it that way. He phrases everything optimistically. But it's important to understand that my narrative of Bitcoin, why do I think Bitcoin at every time it goes above 26 these days, it gets met with selling. Every time it falls below and starts getting down, it's met with buying. Why? It's because of this dysfunctionality argument. So that's the thesis. I got to piggyback on that a little bit if I can. First of all, I agree with you in the big picture, but the problem is Bitcoin's a 50 vol asset. It's the best performer asset in the history of mankind.

And everybody's bullish, as you see, and most sentiment. And also, if you remember when the financial crisis hit, gold was a 20 vol asset and still dropped 30% from 1,000 to 700. And then it went up to 1,900. That to me is, well, you have a volatile acid that's two to three, four times a typical volatile acid. When people hit stops, it doesn't go up. Maybe we'll get lucky, but that's going to happen to me. That's the next bridge. If I can share a screen, I'll show you where I think things are going. And just a simplistic measure of you take the per ounce price of gold, which I show you there in orange, and you put that in the same scale as S&P 500. Every time we have a recession, if the gold is below the S&P 500, it takes off.

If it's above it, it goes down. This has been since we came off the gold standard in 71. So we've got 50 years of history here. Right now, the S&P 500 is very expensive at 4,300. Gold is very cheap. For recession, and I just show that in the bottom, the leading indicators has a 100% chance of predicting recessions when it's minus 7.6% for the last 100 years is showing recession. So we're going to get it. It's just a matter of time. And then one thing was put in the shorter term.

One thing I love about the macro in terms of the S&P 500 is if you can take it, S&P 500, divide by 1,000, you have the same price of copper. And that's what I show you here. In white, it's copper. In orange, it's S&P 500. Got a little expensive. And that's the 10-year yield in gray. I mean, they're all on the same scale scale and they're all heading lower in a recession. So to me, that's the key thing to remember is we might be able to avoid this recession, but it's almost inevitable now because what's happened since we had that pendulum swing from,

oh, it's going to be, the whole world said it's going to recession. And then the whole world said, we're not going to have a recession. And now what's happened this year when we tilted back is the Fed's raised another hundred basis points. So To me, this is the key thing to think about with risk assets. The number one factor is that U.S. government two-year note. It's just oppressive. Right now, the dividend yield on the S&P 500 versus a two-year note is about 370 basis points below. That's the cheapest, lowest dividend yield versus the two year note versus Fed funds since 2001. And here's one final chart I got to show you. And then I'll stop annoying with charts because this to me is the most significant thing. That's a Warren Buffett

model. Takes a little time to load. It's what everybody has forgotten is that if you just take the S&P 500 and you divide it by U.S. GDP, just take that GDP in trillions times 100 and you have the S&P 500. That's what I show you here for 90 years. It's the most expensive now, the S&P 500 versus GDP. Same scale implies that S&P 500 should go to 3,000. And that peak last year was the highest in 90 years. And what's really changed? Easy money, WIRP, the ZERP, I'm sorry, zero interest rates are gone.

It's reversed. And that to me is what's happening now. It's in the early stages. And for this to stop reverting, we need rates to go down fast or the dollar to go down fast. And what's it going to take for that? The dollar is breaking the global economy. The stock market probably has to just revert to this long-term relationship with GDP unless

we've reached a new higher, permanently higher plateau, which would be wonderful for everybody. I'm not the doom and gloom. I'm just pointing out facts, evaluation, and history. And typically, one thing we need to remember is Bitcoin was born in this area of zero interest rates. We had no choice. Zerp. Now we do. That US government, to your note, gives you 10% in two years. Well, Bitcoin wasn't born in it. It was, well, yes, it was because we were in the middle of it. But the acceleration of it happened basically as a way of giving it hyperbolic baby food. I mean, I don't know what the right way to say it.

But a couple of points that you make. First, the Bitcoin market is hardly bullish. Even CoinMarketCap's fear and greed index is still in fear. I mean, there's not a lot of excitement in terms of the price. And there's still the whole Binance issue that's sitting out there that is not going away anytime soon, or at least doesn't look like it is. So there's that. But look, in general, I agree with you. There's a couple of things I would overlay. Overlay number one, where's the money going to go? Most of the money, and I mean literally most of the holders of equities that hold the S&P, the amount of money that is either indexed or closet indexed to the S&P from pension

funds, sovereign wealth funds, et cetera, is at an all-time high with regard to stock holdings. Full stop. Second, we have an entire generation conditioned to the idea that, yeah, you're right. Maybe things will fall, but the fact is things will go up in the long run. Do I think they're right? No. Do I think you're right? Actually, yes. But you have to understand the contributing reasons why it's so difficult. You have actuarial assumptions on pension funds, which are trillions of dollars at 8%. You ever get to actuarial assumptions of pension funds

that get anywhere close to risk-free rates, putting in treasuries, last one out, turn out the lights. You're right. You'd get the crash of all crashes and you get a lost decade or two or three, such as you had in Japan when the exact same thing happened there. When Japanese savers decided to put their money into savings accounts instead of into the Nikkei and each one started, it just accelerated upon itself. Right now, what you have is this kind of interesting, it's like Wile E. Coyote runs out over the mountain uh and only until he look and stays up until he looks down and as soon as he looks down of course you know look out below boom and you get the dust cloud and all the other stuff and being a funny

cartoon you know that's what happens a roadrunner can go can defy gravity and the coyote can't well what am i saying what i'm saying is that you have many many trillions of dollars that are staying in the stock market because yeah it's expensive but where the hell else are they going to go until they see their their their neighbor down the road or the next guy over starting to cut their their allocations you start cutting your allocations and that's how you start that's how you you get a crash when real money starts pulling out because there's no bit of last resort beyond that. Will that happen? Well, I think there's a very reasonable chance that it could. Maybe it won't though. And then we stay in the situation where in nominal terms, the market

stays where it is, but we have real inflation going on. And so that to me is the issue. It's really that. And I will continue to say the same thing about Bitcoin vis-a-vis those markets and gold. The last point I want to make is everybody remembers the three months, that it took three months for gold to dip. People tend to remember what happened the last time and the time scale shrinks. So I wouldn't be surprised to see a similar thing. Everything sells, but gold delink quicker. And if the Chinese bid is truly there, which I think it is, gold may not delink at all to the downside. It may just kind of stay there. And the question is, where will the bid in Bitcoin be? It totally depends how much money is sitting with believing in the narrative that I'm spinning. Because if there's enough and there aren't the

sellers on the margin, Bitcoin will do what I predict gold will do, which is if there is a stock market crash, yeah, it'll leak downwards. But I don't think it goes. I think the vol decrease, I think the beta decreases on the downside. Volatility, people always contribute, assume volatility and beta are stable. If you look at history, and look, I ran stat arb desks for over a decade. Volatility is incredibly unstable, and beta is equally unstable in certain assets. We always say correlation goes to one in a downturn, but beta actually also goes to one in a downturn. High beta stocks don't necessarily perform worse unless they're high beta for a

reason, i.e. they're way more expensive and speculative. So let's talk about that. Exactly. And Scott, I have my screen shared here. Awesome. Guys, we're getting out of Boomerville. We're like doing technology over here. You see this? To Mike's point, though, think about just how fragile this rally has been because you've got seven stocks.

You've got the magnificent seven that are literally holding up the entire S&P. If you look at the divergence between the two of them, you basically have just barely any, about a 4% gain in 493 stocks versus over a 50% gain in those seven stocks. So this rally has been fragile. And so, Dave, when you get a sell-off, if you get any hint that this AI, this drive for AI expansion is not as rapid as the market expects it to be, this collapses, right? So that's problem number one.

And so to your point of dysfunction, you know, you've got this, you've got the Fed who's been raising rates at arguably the most rapid, the most rapid pace that I've ever seen, right, in my market experience. And so that's causing things like there's there's a lagging effect to it. You can't argue that there is a lagging effect to the Fed raising rates. And this is one of the lagging effects where you have bankruptcies are starting to rise. They're they're accelerating. Right. So now you have bankruptcies that are accelerating at a faster pace than at any time since 2009. Right. And now you're going into this next year where you've got this,

the, all of these high yield companies that have, that these are companies that have high yielding debt, that have lower margins that have in a year and a half, you have a wall of this is a wall of debt that's coming due. And so if we remain at this level in rates through 2024, which I don't think we will, the market will just get destroyed. You will go into depression era. And that's the problem that we're facing. But, you know, there's just so much dysfunction between, like you said, the fiscal and the and and, you know, the monetary policy with the with the Treasury running these kind of deficits. It's forcing the Fed to just continue on with with their path. It is absolutely inflationary for us to run these

types of deficits. And then you've got the White House and you've got the different politicians that are all piling on and cheering on the 40% rate raises, the wage raises, and it's only going to exacerbate the situation. So until we get a spike in unemployment, and that's going to happen when these companies start to default and they go out of business or they have to start tightening the belt, and you're not going to see unemployment spike, as we've said, over and over and over again until we hit a recession. And so the whole notion of a soft landing is just a fallacy. It's an absolute pipe dream. There's no way that we have a soft landing, in my opinion.

We either have a hard landing because a spike in unemployment and just a wipeout and a really quick deflationary event, or we have a credit event, which is what we've been talking about also for a while now. I don't know when it happens, but you have all the factors that are lining up to cause some sort of credit event that has enough contagion that would affect large companies, that would affect the treasury market. And that's the problem. So now you hear the treasury come out and start whispering about, oh, they're going to enter the market and start

buying off the, they're calling them off the run treasuries, which is Mike and Dave, you guys remember this, which back in the day you had, when you walk onto a bond desk, you had the, you know, dot matrix printouts of, of, of the bonds. And there was this printout of, of all the bonds that, that people were trading. Those are the most traded bonds. And if, if the bond wasn't in that printout, it's called off, it was called off the run. So you didn't have it on your run and it was illiquid and you could pretty much make any market in it. And, you know, so this is how Michael Milken made, you know, his hundreds of millions or close to billions back then.

So, but the treasury is starting to whisper that they're going to be out buying off the run treasuries. I mean, that's just a hint that they're going to enter the market at some point to provide liquidity in order to prevent illiquidity in the treasury market, which is the ultimate dysfunction. And you can't have that. And so I just love hearing all these Fed officials come out and say there might be a soft landing. Our base case is soft landing, although Powell admitted that's not his base case anymore. Some of the other officials have not. So it's, it's just, it's almost laughable to me. I can pick you up on that one a little bit. It's impossible. This morning in our meeting,

our economist on along said the Fed's way too optimistic. And I want to share a screen of what James said. We've talked about this a lot, if we can. And that's about how unemployment's bad. It's like when people say markets, inventories are low, that's usually a sign that the commodity prices have peaked. And what I show you in this screen is, this is just, it'll come up in a second, Scott, if you can bring it up. The unemployment level in the US is bottoming from the lowest level in about 50 years. And I just overlay that every single time it does, this is the lowest level since we go back to 1969. What happened? Oh, we had a pretty significant recession. Unemployment bottoms,

significant recession. Unemployment bottoms, recession. Unemployment bottoms, recession. Unemployment bottoms, it's bottom. It's the state goal of Fed to reduce inflation, unemployment, and making that go up is part of that deal. It's just inevitable. So to me, this is how macro and big picture we are right now. And I don't know what stops it. It's just inevitable. So to me, this is how macro and big picture we are right now. And I don't know what stops it. It's kind of the key thing. Other than what James said, at some point, a bridge way too far, I think, is what James and Dave are talking about. Yeah, at some point, Bitcoin will do well. But I think the first thing is you get through there, start the recession, yields, risk assets go down, which we know the riskiest asset in the planets are cryptos. And they've already started.

Look at the alts. They're just going to zero. I think some of them. I mean, there's only 30,000. Big deal. But then it's where we go from there. But one thing I want to mention. But Mike, take a close look at that chart and take a really close look at the recession areas and where unemployment just barely ticks up and then it explodes.

Every single recession. Look at that. Every single recession explodes after the recession begins. So it's almost like they define the recession on the unemployment spike. So all this drawboning and this gaslighting from the Fed and the Fed governors and the Fed members saying that unemployment's low, we see no danger is absolute and utter bullshit. And they know it and they're feeding it to the American people every single day. And it's nonsense. So that, yeah. See this level here, that's 4.5%. That was their target for unemployment to go up to. They dropped to 4.1 this level here, that's 4.5%. That was their target for unemployment to

go up to. They dropped to 4.1%. It's like your classic signal. Thank you very much. What stops it going from five or 6%? That's, I mean, okay. Even let's look at even the peak back from 1971. It's nothing right now. But one thing I want to mention as we tilt a little bit is I had the chance, I enjoyed listening to your program last week. And here was my takeaway that, Dave, you sound like Yoda. You look like Yoda. You sound like Yoda. James, you're kind of like Han Solo.

Scott, I think you're like Luke Skywalker. And I feel like Grasshopper amongst this crowd. But I think that fits for our group here. I'm not sure he was in Star Wars, but I like it. Yeah, I agree. I want to actually briefly pivot over to inflation as well, because, you know, Mike, obviously, you think a depression is coming. That means inflation drops way below 2%. I think there's a consensus, though, that people believe that 2% is unattainable at this point, that eventually we're just going to see sort of a benchmark rate that's higher than 2%. They'll

say, hey, you know, 3% is fine now, right? We have core inflation gauges are following in US and Eurozone. Of course, this is when you take out food and energy. I love when they take out food and energy as if they're completely irrelevant. Those are the things that literally matter to every person. But I understand these are better economic gauges. Your average person only cares about their food and energy. Right. But how do you kind of square this peg? I don't understand, you know, Mike, if there's a depression coming, why do so many people believe that, you know, inflation stalls three percent and that's it? Well, you have to have that human nature. Let me show you this chart. I just put this out this morning. Once everybody believes that it's too late, that's why my call for this

big reset can't happen. But this is a chart of you just take CPI minus Fed funds. It's lower now. It's negative and it's worse than it was at the start of the financial crisis, which was the last time our, I'll just maximize this chart, which the last time our economists model on a Wong showed us, can take a second. So this is the last time here we are right now. Fed CPI minus Fed funds. It's clearly restrictive. Minus 2.3%. Fed funds are much higher than CPI. And the last time we had our model in six months. By the way, that's called positive real interest rates. There you go. Exactly. Positive real interest rates.

And there's no reason in the world to buy risk assets, I don't think, when you can get a 2.0 to 5.12% and the highest rate in 20 years. But the last time we had our model or their model go towards 100% in six months for recession, and this fits with the LEI conference board, is this level was clearly positive for recession. And this fits with the LEI conference board is this level was clearly positive for markets was running around positive 2%, meaning the Fed funds is well below inflation. So here's my point is also the low this year in PPI is minus 3.1%. The high in 2008 was almost 10%. This is severe deflationary trajectory. Now it hasn't happened yet, but you have to look forward. Retail sales ex-inflation are negative. PPI and retail sales in Europe are both negative contractory. Existing home sales are contracting at a greater pace, a similar pace to 2008, and the Fed's still tiny.

These are clearly recession trajectories, but the bottom line is, what is the base? The median existing home value in this country went from about $200 just six years ago to $400. And it's starting to tick lower. It's that base. Now, the base of $400 is going to be hard to beat. Everything's starting to tick lower. Fed's still tight. Head towards recession.

That's deflation. It's from such a high base now. It's hard to have inflation without massive money printing. Put up the chart that I just put out. I was going to share this earlier. And this is to your point, Mike. Now, it's hard to have inflation without massive money printing. Put up the chart that I just put out. I was going to share this earlier, and this is to your point, Mike. I mean, your medium sale price of a home sold versus your median income. Look at that. I mean, look at the spike here.

I mean, it's just incredible. It's almost breathtaking. But back to CPI, what people keep forgetting, and this is another gaslighting tactic of politicians, is that, yeah, the CPI may be coming down, but the prices are still high. This is just the ongoing price index of goods. And you could see how it's steepened so severely after COVID. And that still has to come down. It's not. And until either wages catch up or housing prices come down or asset prices come down,

you have the S&P that there's there's still that with the. But how does this happen if oil is $100 a barrel? Good, Good question. And what happens is you have the market break, period. So that's a good question, Scott, because oil is part of the intrigue. Dave, one second. That mic. We are next June, going into the election.

That's obviously the plan. But we'll see. Never forget. You said empty the SPR? Isn't it almost empty? No. It's down 60%. We don't know how much more they can actually release

because there's a lot of sludge at the bottom of those barrels. Maybe if there's 20 or 25% sludge. I don't know what it is. I have no clue what that is. Maybe Mike does. I got a comment on that one because the SPR is no longer necessary compared to the reason why we had it in the past. And I'll show you that in a second in this chart.

For hurricanes, maybe. But we have an excess of liquid fuel production minus consumption problem in the U.S. and Canada. Six million barrels a day is where we are at the moment. How many of those barrels can we actually refine, Mike? Okay. Well, that's the key thing. The refining is another issue, but the lack of refining is making refining prices higher. Crude oil, I'm sorry. That's right. The gasoline. Diesel, aviation fuel. Exactly. But, what, oh, exactly. But what does that do for demand for the underlying? It pressures the price and it pressures the economy.

So that's a key thing I want to show you in the screen. The number one factor that I enjoy pointing out and has worked well for crude oil pressure in the last 15 years has been this paradigm shift. And what I was pumping gas in 79, I mentioned this before, and we had to price gas in half gallons because the price went over a buck. That world, when we brought in the SBR, has completely reversed. We have to export, have to export. We have a massive surplus. Scott, can you share my screen if possible? Surplus of liquid fuels in this country.

And this is something I point out, I enjoy pointing out, is also crude oil, remember, is a wrecking ball commodity. When it goes up a lot, everything gets squashed. We remember this from the 70s, but this is a key chart I'll point out. It's the top crude oil pressure factor has not reversed. It's one of the most enduring trends I've ever seen. We were running deficits of around 10 million barrels a day in the US and Canada, and now it's a surplus. And I'll bring that up in a second, But there's also another factor here. Yes, OPEC, they were 40% of global supply 10, 15 years ago. It's a big chart. It takes a second. Now they're 28% of global supply. And we are now a competitor. We used to be a customer. So here's the key trend. Watch. This trend is a surplus now. It used to be a deficit of US and Canada liquid fuels. That's crude oil, ethanol. Ethanol demand, gasoline

demand in this country is dropping. It's about 5% below COVID, part of that's efficiency. And you see this thing. Remember, crude oil is a bear market. Higher high, the highest high ever, 2008, lower lows, and a lower high. It's a bit expensive here, but the number one thing I keep pointing out is just look at Fed funds in one year. They're not giving you that liquidity to look forward to. Why? Because crude oil bounced recently. Fed funds are going lower. There's the lose-lose when crude oil bounces.

Yeah, that was a lot. I feel like I'm getting a master class here on the relationship between all of these things. It's very challenging, I think, for the average person to understand how all of these things work. So we got to pivot, though, to stock market. We say stock market crash coming, right? Well, we've got a lot of indicators flashing now, apparently, that are saying that that might happen. In this case, stocks flashed recession warning as trouble spreads to industrials. It doesn't take a genius to look at a chart like the SPY right now and see that even if you're looking at technicals, this looks very toppy, head and shoulders, breaks down, touches the neckline, drops. I mean, Mike, I know what you think. I know the levels that you think we're going to. I even, maybe six weeks, two months ago, came on this show. I did a whole show saying why I was looking to sell stocks into all that strength that we have. I sold a whole bunch of meta that I had bought below and other things. I mean, have we topped for the year? Are we going to

get one of these Santa Claus rallies that rips everyone's faces off? What do you think? Well, you know, my view, I think we have top and it's part of the risk. I think the S&P 500 is going to 3000. I think copper is going to three. I think the 10 year is going to three. It's not that complicated in a recession. Our model's at a hundred percent, six months.

LEI is at, you know, it's a hundred percent probability. And it's, I mean, a hundred% accurate over a hundred years leading indicators, and maybe we'll get lucky. That would be wonderful. But the fact is just pointing out what I see is if I don't, I'd be remiss if I don't point out the risks of the biggest, it was put in historical context. We're just going through people. I can mention three books. One is Boom and Bust. One is The Empire of Wealth. And there's just some domino effect. Another one is The Price of Tomorrow from Jeff Booth, all pointing out what happens in history when you have too much liquidity. Risk assets always get expensive. That's what I showed you in that earlier chart. No, it's just no longer the case. Interest rates are high relative to inflation and risk assets are still expensive. There's going to be some reversion lower in risk assets. Unless we get lucky, as Dave said, maybe we have a permanent higher plateau, as Irving Fisher said in 1929.

When you have the tenure, when you have the tenure. I had to fire you up on that one, Dave. Had to casually throw in the Great Depression on the way out the door. I think that we are at serious risk on the economic side, serious risk of an actual Great Depression. I think that the wrong policies over the next year and a half could easily cause it. I think that this year-end window dressing, selling, locking in gains period is as fraught with danger as any that we've had in a while. I have said that in terms of the stock market. I don't know if it's a crash. I do know that the Fed put is not alive in wealth, at least

for 2025. I think at Mike's level, I think if it starts breaking down below 3000, yeah, the Fed put will come back, but ain't coming back for 25 for the first 25%. And that that's important, because we used to be five or 10% was enough to trigger the Fed to do something. And at this point, I don't think they can, unless they change their mind. Unless Powell walks out the door, it's pushed out the door, and you end up with an MMT or in the Fed, in which case they're going to try something. What they're going to try is to say, well, look, easy interest rates allows us to substitute capital for labor. It allows us to increase productivity. It allows us to create asset inflation with consumer disinflation. And they'll try that. I mean, that is literally the next big

step. But I agree with Mike, you have to have pain before that happens. Generally, pain creates more opportunity for stupidity. And I would see that that's sort of the next cycle that investors I mean, I always come back to the famous scene in the Princess Bride, where the me says, well, surely you can't choose the glass in front of me. Investors are always trying to anticipate this. They're always trying to anticipate, well, look, we see this. We know this. The truth is, is the fact of what could happen is if things start falling apart on the stock market side, there are a lot of people out there who have gains to lock in. And that's why October tends to be the most dangerous, because that's generally when people are starting getting close to closing their books. There is always that opportunity. There's I mean, every one of the major crashes has been around this time of year for a reason.

It's because pension fund says, well, my actuarial assumption says eight percent. I really can't tweak. Maybe I'll go from 65% in equities to 60, but none of them go to zero, right? The only time they ever go, big funds go to zero or major changes, like 30%, you know, like massive holding changes are when they're really afraid. And we've seen that. And, you know, and those are the causes, the big problems. The other thing to point out is we are but those big problems are caused by the the you know the window dressing of of large portfolio managers okay so pension funds endowments their window dressing at 5 10 15 because they're having

reviews come up they're having they're having to show their book and they're having to say look well i'm going to take a little bit of this off because I don't want to go into the end of the year, into my end of the year review or into the next year holding these and have to explain it. I just don't want to. So, and that trips up that, yeah, exactly. That tips off. People who are holding the big Magnificent Seven right now, as you put it, what happens if the people who are overweight, double weight or more, the magnificent seven, say, you know what, I'm going to take it back to neutral weight. What happens to the S&P? Because that is a very real possibility. I mean, let's be- In fact, I would say it's over 50% possibility that they take those holdings down significantly.

And if that happens, what happens to the S&P? Does that immediately get us to where Mike thinks it's going to? I don't want to say want. I don't think. Yeah. I appreciate you saying that. I don't want it. But if that happens, it's definitely possible.

But to that point, you've got two things. Dave, you've got two things going on. You've got that factor. And you've got what Mike was describing earlier. You've got bond yields rising. You've got the 10 year approaching four and three. You've got four and three quarters probably approaching five percent here. Right. How can you argue that it's that it's a better risk reward allocation to the Magnificent Seven than a two-year bond. You can't, right? It's impossible to argue that. The risk reward is just not there. So I think that's a good point. When the 10-year yields and yields overall swing too high, too fast, it's like crude crude oil it's a giant wrecking ball for the economy and also right now it's like you said dave you kind of just made me worry that we're going to have a really significant period um this q4 which just and remind the facts of 1987

the stock market and ended up two percent if you look at in history it was nothing it was just one day still had a good year up two percent as an okay year right now okay you can see you can lock in p bills you can um you're up 13 percent on the year maybe 12 percent if you have nasdaq up 30 if you're an actuary you're getting the best yields ever i think it's imprudent i look at these meetings i see it happening with people i know run money if it's imprudent not to be locking in gains now at these. To me, that's just to look back at from the future and say, what do you mean you didn't lock in some of that when the treasury gave that level to you? But I want to show you one thing that Dave mentioned,

if I can share screen a little bit quick, Scott, and that is this is a conundrum we're in right now. And I wrote about this, published it today. We might need the risk-asset to go down for the Fed to ease. And it's a key thing that you pointed out is historically, I was surprised by this. I went back, let's see, 50, 60 years on this. And every single time on a 12-1 basis, the S&P 500 is down 20%, which we were hurt. The Fed was easing almost every time. One exception was 1988 because it was after the stock market crash. But every time you do this, you don't have to – you can – you know, every time.

Here's one example. The Fed was already easing when you're down that low. This time they're tightening. Why? Because we're at the end of the rope. We've finally reached the end of that period where every single time the market's down, the Fed's there to save you. That's the end. That's why I think we're going to get normal reversion of the most expensive risk assets in 90 years.

That's not very profound. Right. And if you look at the I brought up the the 10 year, two year spread for them, you know, inversion. Like even when we're talking about how high the 10 year is is moving, it's still look at how inverted this is. And the money managers know this. They understand that a recession is coming. It's 100 percent probability if you look back over the last 50 years that this is this is going to be leading into a recession. And so how can you not be taking risk assets off the table? You have to be. And here we are. It's we're bearing down on October and it's that time of year.

So Merry Christmas everybody hold on tight I mean you know so we've talked about this I mean the 70s are very relevant here right you know it's like people are looking at you know

well we had you know it's like stagflation what happened to yields in the 70s as we had this huge recession at the same time as inflation? Yeah, that's the point. So now the real question is in a normal, I mean, normal, whatever, you know, a normal yield curve where people are judging the credit worthiness of the U.S. government. I mean, recession, you know, the reason that it goes down is they say, well, it will knock inflation down. But what if we have decided that inflation is structural and necessary to get out from underneath debt? Then what happens? Then does a recession really take the long rate down? Or do we see a spike in long rates to be, you know?

But that's not the Fed's decision, right? No, I'm aware of that. Right. Exactly. Exactly. It's not the Fed's decision, right? No, I'm aware of that. Right. And you know that. Exactly. Exactly. It's not the Fed's decision to do that. But yes, the Treasury would be thrilled to have long-term perpetual above 3% inflation. Why?

Because it drives up nominal GDP, which drives up tax receipts, which lowers the deficit. But it's, you know, that's not- It's not doable. They can't engineer that. I mean, yield curve control, they can try. But I mean, think about it. We have 30% of the US debt coming up, right, which means that they're going to have to go up to a 8% rate instead of a sub 2% rate. By the way, if you're reading anything in the financial news, that's also now happening to a ton of companies, right? And we're seeing bankruptcies at the highs of the Great Recession. Companies are now going to have to take care of that debt that's coming up. And individuals, that's why the housing market's frozen, because nobody's going to do that to their mortgage. And to the point of both Mike and Dave,

you've got this spike in crude oil and energy prices. And then we go back to the 70s, Dave, and the spike in interest rates. But we were not at 130% debt to GDP in the 70s. And that is- 34 at the top. We're at 34. 4x that, and that doesn't count unfunded liabilities from Medicare and Social Security. So this is making me nervous as even talking about it. If I bring up James's screen again, you'll just see him hitting sell buttons.

I don't want to dox his equity accounts. One month treasuries, one month treasuries, T-bills only. Well, let's look at some historical examples. The what bottomed deflation and the stock market in 1933 was in USD based. It's that in the currency versus gold. That is a potential bridge. We had to deflate our way out of it or inflate our way out of it. We debased it.

That is a potential bridge we're heading to in any case of a severe. Now, I don't think it's going to happen anywhere near there, but maybe something similar. That stuff only happens when you have a significantly lower plateau. And I pointed how high the plateau is now is I would be delighted at least a year or two from now when people say, John McGlone, I only made 10% in those two notes and everything's fine. That would be wonderful. I'd love to live that one and hear it versus just the lessons of history.

And that is you can just, we all knew it was going to end at some point. You can't just buy the S&P 500 every time it's down 20% and think, oh, thank you very much. It's rigged. Well, Fed has told us the rigging is over. Yeah. has told us the rigging is over yeah the one thing i will say scott is the biggest fortunes are made by people who build new things during periods that are that both james mike and all james mike and i are predicting and so important for people to understand that i mean it's like it's not everything is doom and gloom,

but a reset, I mean, to use Michael's words, you know, Mike's words, the great reset, a reset literally is what's necessary. And, you know, it's painful when it happens, but it is necessary. And we do need to get back to a sustainable fiscal regulatory policy framework in the Western world. We're not there now. And that's really what all three of us are saying. Yeah, I agree. I mean, it's the old Talib, anti-fragile, the example everyone gives. You need to burn all the small trees in the forest to save the big ones. And the longer you kick the can down the road and let those little trees grow, the bigger the fire is eventually. And I that that's what everyone agrees it had nobody knows if it's going to happen now but it always happens it's it's inevitable i also dave i have to say i just love when you uh quote the princess bride

i think it's my favorite things that happen here you fool you fell victim to one of the classic blunders right never get never get involved in the lamb war in asia but the only slightly less well known is never go in against a Sicilian when death is on the line. Literally one of my favorite movie quotes of all time. Gentlemen, it has been a pleasure. Have fun storming the castle. Have fun storming the castle.

He's only nearly dead. Anyways, man, what a great movie. Anyone who is, by the way, who's too young, I guess, to have seen The Princess Bride, it's one of those few that's going to stand the test of time. Show it to your kids. Show it to your friends. One of the greatest.

Guys, that was incredible perspective. Really helpful today. I think we put a lot of things in very practical terms that people could understand. And I love having the charts and the visualizations to support it. So, guys, we did it. Another Macro Monday under our belts. See everybody tomorrow. Thank you,

gentlemen. Thank you. Ciao. Let's go.