Market Facing the Mother of All Bubbles, This Will End in Tears in 3-6 Months

Introduction

The economic picture is not looking good, and many billionaires are investing in gold. Keith McCullough, CEO and founder of Hedgeye, joins Daniela Camboni to discuss the economy and signals of a deep Quad 4 recession.

Janet Yellen vs Jamie Dimon

• Janet Yellen claims that US banks are stabilizing after a tumultuous March.

• Jamie Dimon believes that the latest financial shock will be felt for years to come.

• Regional bank stocks are breaking down to news cycle lows this morning.

Quad 4 Recession

• A Quad 4 recession occurs when both the rate of change of real economic growth and inflation slow at the same time.

• This scenario leads to profit decline, which has already entered a profit recession.

• A credit event follows due to a lack of cash flow and liquidity.

• The regulation embedded in banks is only putting a Band-Aid on something structural in nature.

Understanding the Market Cycle

Keith McCullough discusses the market cycle and economic cycle, explaining that they peaked in November 2021. He notes that we are currently in phase three of a bear market, which is characterized by bear market rallies. The widest wrist ranges typically occur after bear market moves.

Bear Markets and Risk Ranges

• The last two times the S&P risk range was this wide were March 2022 and November 2022.

• Investors who chase market highs paid for it just a couple of weeks later when the index plummeted.

• Bear markets bounce like they do unless they were bear markets.

• The first time the bear market got body bagged was in January and February of last year.

• Our wrist range opens up again, meaning there's more risk now to the downside than there has been since March.

Federal Reserve Interest Rates

• The Federal Reserve is too tight coming into a recession and then has to get out of it.

• When the Federal Reserve is cutting interest rates, that doesn't mean buying stocks; it means you're actually in a recession.

• Going back to prior recessions, dovish means you're actually in a recession.

• Our Nowcast for US GDP growth is at negative two percent growth for the next two quarters so we're already in one.

Recession Process

• You really know when you lose your job, and that's about to happen soon.

• Technically no one can fire Keith McCullough this time around.

Economic Indicators and Gold

In this section, the speaker discusses economic indicators such as staffing, jobless claims, and ISM readings. They also talk about how consumer confidence is affected by these indicators. The speaker then goes on to discuss their asset allocation strategy, which includes a rotation into gold.

Economic Indicators

• Staffing, work week hours, and jobless claims are all going in the wrong direction in terms of rate of change.

• The ISM report shows contraction for the second consecutive month.

• Consumer confidence readings show a decline in current conditions versus future expectations.

Asset Allocation Strategy

• The speaker's asset allocation strategy includes a rotation into gold.

• They went bullish on gold back in November 2021 when they predicted negative GDP numbers for Q1 and Q2 2023.

• The real reason to get long gold is when real interest rates and nominal interest rates have peaked and start to break down.

• Other assets included in their allocation strategy are TLT (a 20-year treasury ETF), IEF (7 to 10-year treasury ETF), Nancy Davis's ETF on longer-term duration (BNDX), gold miners (GDX), platinum (PPLT), and silver.

Bullish on Gold

In this section, the speaker talks about their history with being bullish on gold. They explain that they go both ways depending on economic quadrants but currently they are bullish due to disinflation or deflation.

History with Being Bullish on Gold

• The speaker went bullish on gold coming out of the recession in 2001 and again coming out of the recession in 2008.

• Currently, they are bullish due to disinflation or deflation.

Fundamental Picture for Gold

• The speaker takes into consideration the Fed's actions, central bank buying of gold, and China's addition to its reserves when considering the fundamental picture for gold.

• They have a macro presentation that includes the signal to quad setup, macro setup, and fundamental setup.

Gold and Capital

In this section, the speaker talks about gold cycles, capex, production, cost of capital inhibitions, and duration piece for gold miners.

Gold Cycles

• The last two gold cycles had depressed capex and production.

• When the gold price started to kick higher in those cycles, there were no cost of capital inhibitions.

• It takes around seven years to find and dig out gold. This makes it a scarce asset because it's hard to borrow capital with that duration of an investment horizon.

• If Gold is ever going to work, it should work big time now.

Cryptocurrencies

In this section, the speaker talks about cryptocurrencies such as Bitcoin. He discusses how they are traded like commodities and their volatility attributes.

Bitcoin as a Commodity

• Bitcoin is traded like any other commodity with price volume and volatility attributes that can be traded both ways.

• Crypto has a daily tracker risk range. The top end of that range is just inside 30 000 on bitcoin so yeah it could go there but it could also go straight back down to 27 000 and change which is the low end of the range.

• Expect crypto to trade with NASDAQ and actually fail here.

Downside Risk

• Downside risk for bitcoin exists because we haven't regulated the entire crypto market yet.

• Don't chase crypto up here at the top end of my range because you shouldn't.

Key Trend Signal

In this section, the speaker talks about the downside risk to bitcoin and how it could go back down to 12.

Downside Risk

• If Bitcoin can't get to 30 000 here and hold thirty thousand, it could see it go back down to 12.

• The key trend signal is bearish on crypto going back to November December of 2021.

Uninvestable Volatility

In this section, the speaker talks about the volatility of Bitcoin and how it is uninvestable.

Bitcoin Volatility

• The level of volatility even at this price is nauseating.

• 50, 60, 70 ball does not make a bull market.

• If Bitcoin volatility were to break down like the equivalent of the VIX towards like 40 or 30 then I would expect to see that you know the level 31,556 breakout to the upside but it doesn't look like it even wants to take a sniff at that level.

Mother of All Bubbles

In this section, the speaker talks about his opinion on the current market situation and how he thinks it will end in tears.

Market Situation

• The speaker has called it "the mother of all bubbles" for going on 16 months.

• The way that Bulls are behaving epitomizes bubble behavior.

• To think that we're going to go back and buy Bitcoin NASDAQ magma is absolute lunacy.

• This ends in tears at some point in the next three to six months.

Debt Ceiling Debate

In this section, the speaker talks about his concerns regarding the debt ceiling debate and its potential impact on markets.

Debt Ceiling Debate

• During prior debt ceiling debates, they get right to the wire and then solve it and everything goes up again.

• This time could be different because Federal Reserve is losing so much money each month.

• It's a good spot to come back to cash because everyone including US government's going to be looking for liquidity.

• June 5th or 6th Janet Yellen said that government runs out of money.

• It's going to be fascinating to watch who pays the price if the Fed is losing this amount of money per month.

Main Street's Reaction to Ongoing Bailout of Private Equity Venture Capital

Keith McCullough, author of Diary of a Hedge Fund Manager, discusses the potential reaction of Main Street to an ongoing bailout of private equity venture capital. He also talks about the value of the US dollar historically and its Reserve currency status.

The Value of the US Dollar

• McCullough believes that the US dollar is losing its Reserve currency status.

• However, he thinks that it remains valuable in terms of gold and cash.

• He mentions that being long on cash flow or cash itself can be beneficial during economic conditions where growth inflation and profits decelerate (Quad 4).

The Status Quo

• Despite talk about de-dollarization, 85%+ global commodities are settled in dollars.

• Corporates pay in dollars as well since most US dollar-denominated debts are paid in dollars.

• McCullough believes that if the dollar holds a higher low here, it remains bullish Trend and can go easily to 108 to 110 on the US dollar Index.

Bearishness on Dollar Long Term

• McCullough has not heard any bearish people on the dollar long term talk about how much their dollar position was last year.

• He thinks that they only come back when the dollar goes down for three weeks after going up for six weeks.

Keith McCullough's Take on D-Dollarization

In this section, Keith McCullough shares his thoughts on D-Dollarization and whether or not he thinks countries will turn their backs on the US Dollar.

Thoughts on D-Dollarization

• McCullough says that turning away from using dollars is not new.

• He believes that being bullish on the dollar is still a good idea.

• He thinks that it's not a huge conceptual leap for the dollar to go up to 108 to 110 on the US dollar Index.

Keith McCullough's Hockey Career

In this section, Daniella Cambone asks Keith McCullough about his hockey career.

Keith McCullough's Hockey Career

• McCullough led the men's Yale hockey team to a Division League Championship during his time.

• He admits that he can barely skate anymore but thanks Daniella for bringing it up.

Disclaimer

This section contains the disclaimer for Stansbury Research and its parent company or affiliates.

Disclaimer

• The opinions expressed in this program are solely those of the contributor and do not necessarily reflect the opinions of Stansbury research, its parent company, or affiliates.