We've got to talk about the next big risks that we Face We got to talk about what hedge funds are doing, the five big risks that our Market faces. What did Michael Burry just tweet and what significance does it have to us? What did Joe Jerome Powell say yesterday? And more importantly, how does what he said yesterday apply to what we have in markets now going forward? So let's talk about all of the big five next risks. And no, the big risks aren't exactly what Michael Burry is talking about. Though these five big risks could lead to what Michael Burry is talking about.

So why don't we start there? We'll start with what Michael Burry just tweeted Michael Burry tweeted the the essentially the meme this time is different and what he did is he tweeted a chart of the Federal Open Market Committee rates uh, aligned with the S P 500 and what he basically does is is he implies that the S P 500 uh, continued rotating down as uh Ultimately, the Federal Reserve started cutting rates. This goes back and hearkens back to the pivot argument. So a lot of people on social media are making the argument that as soon as the Federal Reserve pivots, the stock market actually collapses even more. Honestly, I've beat this to death on my channel.

But people still are recirculating this stupid argument that after the Federal Reserve pivots, the stock market collapses more. What they really do and I'd really prefer not to regurgitate the whole thing. But what they really do is they look at this particular chart that I've driven all over and they make the argument that oh, this time is different and they mock that. They mock that just like Michael Burry is doing and what I find and again just going to do a quick summary on this because we've got so much new information to cover.

but basically big argument. The Federal Reserve did not create the precedent of bailing out markets until the late 1980s. So really, pivot talk before the late 1980s, before 1987, and Black Monday is really not worth it. You're better off looking at the pivots post 1987.

this is where the Federal Reserve had a precedent of bailing out markets. And what you have to look at is the uh, the likelihood that prior crashes were structural crashes, right? We had structural crashes and structural pivots. For example, the crash after the 2019 pivot was coveted. Okay, like nobody could have predicted that.

That's nonsense. The crash after the 2007 pivot was the disaster of the mortgage crisis, the fact that dead people were getting loans, and there was rampant and insane speculation on real estate. much like the structural disaster of the insane, insane speculation around the.com era where people all they had to do at companies was add.com to their name and the stocks would double or triple a quadruple in value. These were massive structural speculative bubbles built up in 2000 and 2007, and they're very, very similar uh to to the the Uh or I should say uh to 2019 Where uh, all of a sudden you had a Fed pivot and the FED pivot? Really? Uh, let me rephrase that for a second 2000, 2000 and 2017 or seven had these massive structural issues right.

In 2019 had an issue that was not a financial structural issue because it walked right into the Covet Pandemic. So you have this argument that oh, when the FED pivots the market Falls and that when the FED pivots this time the Market's going to fall Again, that's the argument that's being made. My counter argument is you had real structural problems in 2000 2007 and it's very, very difficult to call what happened with the Covet Pandemic something anyone could have really predicted, right? Okay, so when you move that out of the way, how does that actually potentially make 2023 different? And this is where it's worth noting that yes, using the phrase this time is different is generally bad, because oftentimes history repeats itself. Or at least Rhymes right? and it ends up being bad.

So is it possible that markets fall after the FED pivots? Of course, it's absolutely possible. But why or what would it take for a pivot now to actually lead markets to collapse? Well, this is where I personally make the argument that what we have right now is a structural inflation problem. But as soon as inflation goes away, you actually end up having alignment with the Federal Reserve The structural problem. goes away, which aligns with when the FED pivots.

And since the structural problem goes away in alignment with the pivot, you're actually likely to see the stock market rise more than you're likely to see the stock market Fall. Understand that difference? When the FED pivoted in Prior eras, the Fed was not the reason the market was falling. the Fed was responding to real structural issues, speculation around the Savings and Loan crisis of the late 80s, the 1987 stock market disaster. You've got the speculation around.coms and the speculation around real estate.

What you have now is a Fed inducing a recession because because of inflation. however, the FED is not expected to Pivot or reduce rates. you turn until you actually end up having inflation proving that it's gone. So in my opinion, the uh, the the reason for the pain we're seeing now is totally separate from this basic chart in that in Prior instances, fed pivots were an attempt to soften but not solve the actual structural problem that was going on today.

A Fed pivot would align with actually success on the underlying problem we face, which is inflation. So I I just really am trying to put to rest this idea that markets are going to collapse after the FED pivot because there's so many people who are like I'm going I'm staying 100 cash until the Federal Reserve pivots because then markets are going to collapse and then after markets truly collapse, That's what I'm gonna buy them. Sure, there are risks that that could happen and we're going to talk about a lot of those risks in this video. but do I think that these risks are going to be large enough to actually drive the market to lower levels than what we've seen recently? Well, you'll have to see.

So let's get into the risks. The first big risk that I see in markets is a negativity bias. And this is that Big Money is really shying away from the stock market rally that we're seeing right now. The reason for that is they're unconvinced that the rallies that we're seeing now are sustainable because we have too much mixed data.

And so the suggestion is hey, you know what? Maybe reduce your exposure to equities? So what you're doing or what you're seeing from institutions is you're seeing LS companies which are long and short companies actually doing something known as degrossing. They're reducing their exposure to both long positions and short positions, and they're moving into other assets. Whether that's cash or bonds, they're basically trying to escape the market In general, you're seeing this level of grossing at a level of which you have not seen since January of 2021, which is during the meme stock rally era. So this suggests that hedge funds right now are negatively biased on the stock market, that they don't believe that this rally we're seeing now is sustainable.

of course. I've regularly had the thesis that we are in a Nike Swoosh style recovery that it's not going to be a very simple straight up, but we're going to have a lot of volatility in the Nike Swoosh up. And the problem that I think you have is you have a lot of bears who are stuck in this bias and they're degrossing because they're under this impression that there's no way this Rally is sustainable and because of that, they are kind of blinding themselves to reality. For example, there's this dude macro Alf on Twitter I I put out a large piece on both Twitter and YouTube breaking down one of his charts.

We took about eight hours in the office trying to rebuild this chart and we're like dude, we can't replicate the negativity that you're sharing on Twitter Like, please show us where we're wrong because we can't replicate the bad news you're telling us is coming and after we couldn't replicate it and we pointed it out, we never got a response. It's very similar to these kind of tweets right here. This Macro guy says there are few worrying signs if you're a central Banker trying to kill inflation. He talks about housing showing some signs of Life used car prices coming up on a monthly seasonal adjusted basis and financial crisis loosening as if quantitative Easing was just announced in December Is it time to fight back and I replied to this: uh, just a less than an hour ago here and I said essentially, what are you talking about Financial conditions tightened, not loosened after the Jobs Report And that's very simple to see because we could just look at the Goldman Sachs Financial Conditions Index which we have on screen now and the Goldman Sachs Financial Conditions Index shows us that when the Jobs Report came out, which is right here, we actually had a large steepening in financial conditions.

Yes, Financial Conditions have been relaxing over the last six months, but to suggest that just recently Financial conditions have loosened as if the Quantitative Easing was just announced is actually the opposite of what actually happened Financial Conditions Immediately tighten. Why is that important? Because Jerome Powell in yesterday's report told everyone the world that, hey, you know my response to the Jobs data is, well, you know we know this is going to be a bumpy ride and what happened right after the Jobs data Well, Financial Conditions immediately responded Jerome Powell Literally said that yesterday Trump Dropout Literally said Financial conditions tightened right after the Jobs report. This was essentially drone pile saying look, the market is kind of doing our job for us as soon as something volatile comes out That suggests there's more tight and more tightening needed. The financial markets immediately tighten and he's not wrong.

You could simply look at the 10-year treasury yield to see the 10-year treasury yields were down at 3.38 After the Fomc press conference, where do they sit now after that Jobs report over 25 basis points higher at 3.6 Six five. So this idea of of this and we'll talk about some of the other items that uh Alfier brings up. But this idea that uh, that that uh markets are not responding in a rational way is is actually very misleading. But people are buying this negativity bias Hook Line and Sinker from from the Bears and I'm not here to suggest that I'm just Mr Bull and I'm super biased to the upside.

Don't get me wrong, there are plenty of risks and we're going to talk about them here. But I think it's really important to look at some of the differences from Fed pivots of the past to now that this is the first time you have an alignment with a Fed pivot implying the war against inflation has been won. You did not have that in Prior crisis. You didn't have that at all.

You also don't have only the bad news that some of the Bears are pointing out. There are. there's good news and there's bad news and I think it's worth covering both of those because the last thing you want to do is you. you don't want to end up being that person that you know a year from now is still all in cash and you're like just double dip.

I swear it's coming again. you just got in the hose sitting out the market for the last year. I Think there are a lot of bears who are already frustrated. they've sat out the market for the last five weeks because the Market's been on a tear.

No, Again, that's not to say that's sustainable, but it is to say that uh, you do have positioning that potentially is self-fulfilling and I think this negativity bias is dangerous. In fact, we're starting to see inflection points already from Uh investment bankers surveyed by Bloomberg who suggests that they're actually leaning towards wanting to increase their exposure to tech stocks more so than they felt six months ago. And the question is, do you want to increase your exposure to Tech over the next six months in September when they were asked only 32 percent wanted to? Now, you're seeing 41 percent want to. Now that's still less than 50 percent.

But you're starting to see a slight transition to a two to where some of the Bears and institutions are starting to roll over and they're starting to see maybe we do need to deploy some of the money that we have sitting on the sidelines. Maybe earnings just aren't actually as bad as they've seemed. And that's statistically what we talked about in the intro as well that S P 500 EPS has only declined 2.8 percent. Uh, whereas the expectation was a 3.8 3.3 percent decline, That's a 500 basis point.

Beat Things just aren't coming out as terribly as expected. We're seeing more than 69 percent of companies report Revenue beats over very bad expectations. and even companies that end up reporting bad earnings like the Chip companies Nvidia Taiwan Semiconductor Samsung have almost all rebounded. And so the thesis that the worst is yet to come really relies on some form of massive Black Swan coming through.

And don't get me wrong, that could absolutely happen. For example, Bridgewater Capital gives us an example or or they give us a thesis that says look the biggest risk that Bridgewater Capital sees which we'll call risk number two for the purposes of this video. Risk number one being negativity bias. but risk and and essentially institutions trying to self-fulfill this negativity.

Uh, then you have the risk number two, which is I Think a more realistic risk, Which is that the recession ends up being deeper and longer lasting than we're expecting in Prior recessions. We've seen that the Federal Reserve has been able to essentially come out and bail out markets very quickly, but if inflation stays High what do you have this time? Well, this time you have a Federal Reserve that maybe can't come out and bail out markets because the FED has to stay strong in the inflation fight. and if inflation stays high or takes back up again like in fairness, as the Bears are pointing up out, used car prices shot up at their highest Pace Since September of 2021 in month over month data between December and January, it's a red flag. It's a red flag that yeah, inflation may be more sticky than we expect.

That is a realistic red flag. that in inflation stays High Because then you're not talking about a Fed pivot crashing the market. What you're actually talking about is inflation Staying High crashing the market and the FED not pivoting. So let me make that really clear.

If you hear people making the argument that oh, the FED pivot is going to crash the market, realize that in the cycle we are in now, what is more likely to crash the market is the Fed not pivoting because it implies that the war against inflation is even harder to win. That is the real risk you face right now is the Fed not pivoting. So really I think it's way too basic Basic of an argument to say say that oh, the FED payments. uh, the Market's fault.

It it like lacks the fundamental in this. It's a fundamental misunderstanding of how the market actually works. That's my thesis. Of course other people are going to have different Theses but I think it is way too basic.

It's it's people who got a hold of one chart and they can't look past the chart they're like but Devin I'm sorry. Okay, it's I know that's aggressive and I shouldn't be making fun of other people I Just think it's very it's way too basic. Markets are very complicated and they deserve a deeper look. Okay, so the FED not pivoting is the big risk and this is a risk that Bridgewater agrees with.

So that's risk number two. Risk number three obviously is uh is is the fact uh, that look the last time around uh, we ended up having uh, the last recession. we ended up having a a fiscal regime that decided the best thing to do is print money while another hedge fund on Wall Street thinks that a real risk we face is that if inflation stays High you could literally have potentially Congress or state governments which California has already embarked in this stupidity. Uh, and basically you could have governments sending inflation relief stimulus checks which would just end up exacerbating the inflation issue which leads to the other risk of again, the FED not being able to Pivot because inflation doesn't go away.

So that's a risk that you have moronic governments like in California where they sent out inflation relief stimulus checks to households earning up to five hundred thousand dollars. It's moronic and now the state is in a deficit now. Some people like to respond to that and they say, but Kevin California requires that unspent money be returned to the taxpayers. Fine.

But guess what you could have done California You could have invested that for better education, better mental health, better policing, better or water Control Systems better fire suppression systems or methods. You could have invested that into actually solving homelessness. You could have made California a better place and you could have saved for a rainy day. Instead you send inflation relief stimulus section.

It's just completely moronic and defies logic. But then again, the governor of California is trying to buy votes, so that way he could run for president. That's the nature of politics. Unfortunately, it's not actually trying to solve the problem, it's trying to get to the next, uh, the next tier.

So to speak of government, It's pathetic. Then the next risk that you have, which we'll talk about more later is: China Any kind of adversarial relationship with China would be a massive potential Black Swan Event: Any kind of war or incursion uh into Taiwan uh is something that the United States would end up getting uh lassued into. much more so than they're lasted into. Uh, the war between Ukraine and Russia and we're already pretty darn involved involved in that.

But a war between China and Taiwan would would be substantially worse. Uh, For for the United States points of view, uh, in an involvement sake in the involvement of South Korea and Japan, That's really where you could potentially create a World War. So that would be a potential Black Swan And that is risk number four that our economy faces and markets face. And then another risk.

Uh, which I personally am not the biggest believer in. but it's this believer that we're actually going to maintain an inflationary and sticky inflationary regime because of de-globalization This idea that much like Joe Biden said in the State of the Union Address that we have to invest in chips at home and a manufacture more at home, which increases the cost of goods and services because of course, labor costs are more expensive. It's more expensive to build a factory out here. The only reason Taiwan Semiconductors is building a factory out here is because it potentially enables them to get more contracts from companies like Apple.

Maybe in the future, they'll be able to try to lure in the Department of Defense because they're manufacturing things locally and they're getting massive subsidies. So deglobalization is your fifth risk now. I Personally think the government is likely to re-globalize Uh, that is. even though a lot of folks think, uh, we're You know, after Covet, everybody's going to try to Homegrown grow all of their manufacturing because they're frustrated and they don't want to be suffer from the supply chain nightmares that we had during covet.

I Actually think it's more likely that the entire Globe re-globalizes which is basically you get away from China and you start globalizing into Indonesia Vietnam and India the Philippines Mexico South America whatever. I Think that is much more likely that you basically just rebuild Supply chains elsewhere rather than completely de-globalizing That is the fifth risk that it seems like we are facing. So those are some of the the big risks that are facing our markets. Notice they're very different from a Fed pivot.

I Really? Just want to put a nail in the coffin of that because I'll tell you I keep seeing people making videos about the pivot and I'm like oh my God How many times do I have to kill the pivot? This is such an incredibly uh or an Incredible moment where it's so obvious the Fab will only pivot when inflation is conquered. And if inflation is not conquered, then the real risk to our markets is actually the in the FED not pivoting I Don't know. Again, it's it's a basic level of analysis that just needs to die. Now, of course, there are the economic arguments that is.

You know what's going on with the Phillips curve. Okay, let's briefly talk about the Phillips curve and this actual risk that inflation does stick around because In Fairness. If we're going to talk about inflation and what's going on with inflation, we should briefly look at some of the issues that we're facing with inflation, right? and uh, the Phillips curve. So briefly, the Phillips curve suggests that basically, when unemployment is low, you should create inflation.

and when unemployment, or when inflation is high, you basically need higher unemployment to kill inflation. And so this is leading a lot of people to say that Central Bankers are going to reactivate this the Phillips curve. And basically they're not going to lower rates until unemployment is up, because the only way you actually kill inflation is by Leading people to lose their jobs. Okay, that is the old school traditional Phillips curve argument.

That argument was created in the 1990s, but what happened between the early 1980s and 2020? Well, you had 40 years of the Great moderation. You had unemployment falling and inflation falling. This led to the thesis that the Phillips curve was dead. Now you have inflation falling and unemployment is at record lows.

It's the second massive piece of evidence that suggests the Phillips curve does not work, that you can have low unemployment and inflation falling now. Hopefully that remains true, but there are a lot of people that say no. What could end up happening is the Phillips curve could magically start working again and inflation ends up being much more sticky. And if inflation ends up being much more sticky, we will have to force unemployment.

That is the struggle the Federal Reserve faces right now. We don't know the answer to that, but what we do know is look, there are still problems with prices. Prices are not over yet even Uber This morning was talking about how prices for for food and ingredients are are high. Now they mention that it doesn't look like they're getting higher, which is good.

It seems like prices for goods and services are stabilizing, but it's still a problem. Uh, so what do you have when you actually chart this? Well, here's actually probably one of my most favorite charts and it's something I've seen nobody talk about. but then again, I sit in an office with my head in the computer all day long when I'm not flying for Real Estate Uh, because? Well, I for some reason really enjoy looking for stuff like this. And so I Found this has inflation recovered from Covid and the blue line shows you Covid sensitive inflation.

Like, think about it like used car prices, airfares, right? Things that were directly affected by Covet and you're seeing that kind of covet sensitive inflation fall. But then you have Covid insensitive inflation like food prices or haircuts or serves. Although maybe haircuts isn't the best example. personal service Services is is really your generally deemed to be your coveted insensitive inflation which uh, not haircuts.

It would be better to say Medical Services right? Medical Services uh and and other wage based uh and and food based uh expenditures, those are actually still on an upward trajectory, right? This is more of our core. Our super core inflation is still technically Rising Now we think that Covid's sensitive inflation falling will eventually lead to covet insensitive inflation falling, but we haven't actually seen that level of inflation fall. Coveted sensitive inflation could also be deemed your goods-based inflation. so this could be Goods based and then the white line here, or coveted insensitive inflation could be called housing.

which obviously we expect housing to plummet very soon. but it's also that super core of services. Uh, and and again, we haven't seen disinflation there yet, but we were looking for it. So I think this chart is very useful.

Now it reiterates that yes, there is still work to be done, but once that white line starts falling, covet, insensitive inflation starts falling. Let me draw it. Okay, so let's go ahead and draw it for a moment. In my opinion, this is how it works.

Once we get the blue line coming down, which I don't believe it's going to come down in a straight line. I Think it's very reasonable for it to come up and go down, come up and go down right? It's nothing's going to be a straight shot, that's my opinion. But when eventually you start getting this white line, come down and follow the same pattern. that in my opinion is when the Federal Reserve can pivot.

But remember, their pivot is going to align with killing the underlying problem that is causing the recessionary issues. Now the structural problem today is inflation. The pivot would align with that problem. go down.

Pivot rates go down. That's very different from prior Cycles where pivot had nothing to do with solving the underlying problems of the crashes. Okay, hopefully I've beat that horse dead now because that is the one that really bothers me. anyway.

those are, in my opinion, the risks that we face right now. and I think they're very critical to understanding what's going on, because hopefully they help you position correctly into the future. which I think is Nike Swoosh subject to the risks that we face now. hopefully.

if that didn't make it clear enough, let me add a little bit more clarity: I am mostly in invested in the market. Now that could mean I'm biased or it means I'm responding to the data and the point of view that I have which I think I just outlined in this video. Uh, who knows I'll leave that up to you. but if anybody leaves me another comment and says you Kevin your tires are gloomy, you must be shorting the market and totally uninvested in the market, you darn suit.

I'm just gonna vomit because it's just an example of another idiot title reader who doesn't actually listen to me.