5 Mega Risks & The Fed Pivot Disaster | -50.1% to Go.

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