Banks Borrow Record $50 Billion From Fed, Expert Reveals What's Next | Michael Gayed
Summary
Deregulation Tailwind: Guest strongly pitches deregulation as a disinflationary, pro-competition force and the core thesis behind the Free Markets ETF (FMKT), citing policy shifts that can drive new sector leadership and equity upside.
Defensive Sectors: Prefers Utilities, Healthcare, and Consumer Staples as bombed-out, under-owned areas likely to outperform large-cap tech on a relative basis as defensives hold up.
AI Concentration Risk: Warns of a concentration bubble centered on AI megacaps, where lofty expectations and leverage create downside risk if earnings momentum fades or breadth fails to improve.
Volatility Outlook: Expects an imminent VIX spike and a possible tail event, noting that overconfidence and leverage are typical precursors to sharp drawdowns even absent a clear macro catalyst.
Bonds and Treasuries: In a deflation scare or credit stress, long-duration US Treasuries should regain their role as the primary risk-off asset despite recent periods where credit spreads stayed tight.
Private Credit Risk: Highlights private credit as a potential hidden fault line, with concerns about non-marked exposures and BDC linkages that could catalyze wider market stress.
Fed and Liquidity: End of QT may not be straightforwardly bullish; more liquidity amid tight spreads could rekindle inflation and force policy reversals, pressuring both stocks and bonds.
FMKT Positioning: The Free Markets ETF (FMKT) is positioned to capture deregulation beneficiaries and has outperformed the S&P without relying on AI megacaps, reflecting the guest’s long-term bullish but near-term risk-aware stance.
Transcript
Banks tapped into the Fed's standing reple facility in record amounts last week. In fact, this was the highest usage since the tool was put in place in 2021. What does this signal is the financial system in distress as some people online are speculating that it is? And what does this mean next for markets? We're talking about this and the end of quantitative tightening of the Fed with our next guest, Michael Gad, portfolio manager of his new ETF called the Free Markets ETF and the publisher of the Lean Leg report. Michael also believes there's going to be an imminent spike in volatility. We'll find out why. Michael, it's good to see you and uh I I just have to point out that uh it's been a while since you're on the show and lots has happened. Thank you for joining us. You look great. Um you uh >> will get you everywhere. I'm just going to say looks [laughter] good. >> You um you you can help us out by understanding or helping us understand what's going on here. to start with banks tap fed standing repo facility in record numbers amid month end pressures. This was of um last Friday. >> Yeah. >> Federal Reserve liquidity facilities caught fire on Friday as month end pressures pushed a key lending tool to a record level of usage. The uh FSRF the Fed standing repo facility led a total of $50.35 billion on Friday to eligible financial firms in two separate availabilities. Now there's a lot of uh talk on social media about this being a crisis, some sort of uh liquidity crisis which which would necessitate this level of u borrowing from the banks. Uh you've got analysts and the Fed alike saying this is just normal. Uh so this particular analyst from curvature securities ironically the number of securities given to the Fed about equals the amount of cash received. This was the first time the SRF function is designed. Um analysts at like uh writes and ICAP expect funding pressures to ease next week and given how calendar dates traditionally influence money markets SRF and reverse repo activity should ease relatively quickly. Let me just pause there and get your take on what happened. Uh there was a big spike in lending activity and uh tapping into the reverse repo markets. Why did that happen uh based on the information that you have? I mean, as far as I can tell, it's it just suggests that there's there's stress in the financial system, right? And I don't think that should be a surprise to anybody because if you look at the equities of some regional banks the last several weeks, uh you look at the performance of Jeffre and and some of these headlines around uh private credit uh issuance blowups, uh yeah, it makes sense that you've got some stress that combined obviously with the government shutdown. uh it it it those are the right kind of conditions for uh banks to need some some capital. And I see a lot of people on on social media saying this is the Fed injecting money into the system. Actually, it's it's not I mean it's it's it's basically just a a lending uh facilitator for the banks to basically try to survive, you know, from credit perspective in the short term. Now, um is it a crisis? Is it a signal of something bad that might be happening beneath the surface? I'll tell you after it happens. I have no idea. I mean, it seems plausible that uh something is going on beneath the surface. I say that not as somebody's a perma bear because I have long only equity funds. Uh but I say that purely from the standpoint that um look at what the market itself is doing, right? I mean, despite me saying for years small caps hold the key, small caps still are not rallying. This is purely an AI concentrated seven or eight stock in quotes market. Most things are still struggling. I don't know why it's a surprise that the banks are struggling too. >> Yeah, it's actually the exact opposite of um liquidity injection. So if if it's so it's not that's not what whoever is saying that is not technically correct. But >> is there I will say real quick it is remarkable how that uh is said and then reposted and people say the same thing over and over again and it just shows you how much easily misinformation is is put out there and regurgitated by supposedly smart accounts. That's why you're on the show, Michael, to uh to educate trying. >> Look, we Is there a reason though? I mean, why why why look, I know there's a government shutdown. Uh but banks typically don't access or need to tap into the standing repo facility unless they need to. Or is it just because rates are so low that they they would lose out or not? But that's not really the case, is it? you know, it's um the truth is we still don't know if we're still in that long and variable lags window. And I I know that sounds strange to say because it's like, well, you know, how can you say that when it's been so long after the fastest rate cycle in history? I mean, these things do take time to kind of play out. So maybe there's an aspect of that. Um but you know, look, you you've heard the term K-shaped economy, right? it this is happening just not just in the economy but also across sectors across large caps and pretty much everything else or at least the magnificent seven or eight or whatever the number is now. So um [snorts] all this to me still suggests it's not in quotes healthy environment. You can make money in that obviously but uh you know maybe for all we know there is something very nasty coming and I always go back to this idea I was posting it a lot during the tariff tantrum. I said um two years wrong, 10 years right because I was referencing my own signaling or or concerns around a credit event that would have been wrong on for two years in Japan reverse carrier trade. And I always go back to markets are funny in that you can be wrong wrong and then very suddenly right and if you're right with magnitude and the market does go down heavy and it defines last decade who cares if you were wrong in the past. >> Well, that's kind of like betting on a black swan. You don't know when it's coming. You don't know if it's going to come in. But if you are prepared for such an event, um you're you're ahead. Who cares if you're wrong about I don't know. Let comment down below. Uh it's a rhetorical question. See if you can answer my question. >> Oh, the trolls are going to come out, man. Don't do that. >> Trolls are going to come out. They love trolling me. >> Well, you posed a good philosophical investment question. Who cares if you're wrong about the other trades if you're right about one big trade that wiped out or covered, you know, offset some of the losses? I I I I don't know if that's the approach everyone takes. Uh >> it's not. It's obviously not. No, because and that's shown by a lot of behavioral studies that people would rather have the reward of a daily dollar uh as opposed to waiting, you know, 100 days for $100, right? I mean, >> well, that just sounds like venture capital. >> Yeah, exactly. But it is funny, right? Just real quick because it's like you see all these people that troll Michael Bur for example. It's like, okay, the guy was right once, right? And everything else he said has been wrong since. Everyone trolls him. the dude is richer than all these people that are trrolling him. Like you just have to be right once in a really big way and that's all that really matters unfortunately in this game because markets don't form don't follow a normal distribution. >> So what's what's the really big narrative you're betting on right now? >> I guess it depends on which time frame and I think this is also what's always missed by people that critique others making predictions like what time frame are you looking at? I very short term I think and I've been saying this for the last two weeks I think we're due for an imminent VIX spike. Now, I don't know when exactly or what day, no different than the reverse carrier trade playing out August 3rd, August 5th of 2024, but um given the sheer volume on the call trading side, the leverage ETF launches, uh the sheer amount of overconfidence that I'm seeing on social media, the the margin debt that's being reported, I mean, everyone's extremely bullish into end of year, which is funny to me because everyone says the same thing. Seasonality has not worked this year. So, what's to say seasonality suddenly works November, December, right? I mean, for all we know, November, December could be awful, right? Who knows? That's short-term, intermediate, long-term. I do believe there is a massive tailwind that deregulation plays into the bullish narrative. Okay, that's why I launched the free markets ETF, FMKT. I believe that deregulation is a big big driver, has all kinds of implications on sector rotation, new leadership. Um, and that should be ultimately positive for equities, but that doesn't mean you're not going to have volatility in between now and then, >> right? And actually, I don't I don't know if you've seen this, but Goldman Sachs CEO at a conference said it's likely there will be a 10 to 12 20% draw down equity markets sometime in the next 12 to 24 months. David Solomon said at a summit in Hong Kong, things run and then they pull back so people can reassess. A 10 to 15% draw down happens often, even through positive market cycles. It's not something that changes your fundamental or structural view as to how you want to allocate capital. Morgan Stanley, CEO, also had to chime in on that. We should also welcome the possibility that there would be a draw down 10 to 15% crackdowns that are not driven by some sort of macro cliff effect. If they're not driven by macro cliff effects like we've been talking about on the show, what are they driven by? So I always go back to a line I say on X on my atly lag report handle which is that um leverage is always the precursor to every major stock market crash period. Overconfidence leads to leverage. Leverage leads to crashes. It doesn't have to be some macro event. We live in a chaotic system. A butterfly flapping its wings can create a hurricane across the world. Right? So when you have so much leverage, it that as your starting point, it doesn't take much for an unwind, right? I think that's sort of the the major point. Now, I will say that every single buy the dip has resulted in even more leverage, even more overconfidence because retail has been right, buying into those declines, you know, the moment that they happen until they're not right. And whenever that day comes, I don't know when, I don't know what the catalyst is. Maybe it's going to be private credit, which I've been flagging as a warning sign or as something that could be a uh a potential source of risk. Maybe it's something totally unforeseen, which is usually how it plays out. Either way, the conditions are there for some kind of an air pocket. Could it be that the Fed is going to end QT soon. So, take a look at this. Um, the Fed's goal was to draw out enough liquidity. This is explaining QT. The Fed has shrunk its holdings from a peak of$9 trillion dollars in the summer of 2022 to the current level of 6.6 6 trillion. It did so by allowing Treasury mortgage bonds bought as part of the CO9 pandemic stimulus to mature and not be replaced. That's all coming to an end soon. The Fed's goal is to draw out enough liquidity to allow for firm control of the Fed funds rate and normal volatility and short-term lending rates. Um the unusually heavy use of Fed liquidity tools comes after the central bank said on Wednesday it would soon stop drawing cash out of markets. The central bank said that the draw down of its balance sheet called quantitative tightening will end on December 1st. Tell us more about QT uh the mechanisms and what that's going to do to yields in the market. I >> I think it's unclear what it'll do. I mean I think the assumption is that that means um that if they are no longer uh doing QT that that's the path towards QE again. Um and it seems like >> let's assume they don't. It's just they maintain the balance sheet size. Let's put it that way. >> I don't know if there's ever been an instance where a central bank has maintained a balance sheet when you have political pressure uh to spend more, right? And it's like, you know, for all we know, if uh from you talk about very very long term, yeah, given what's going on with New York and Manny and uh more socialist policies and potential universal basic income coming because robots can replace everybody's jobs at some point with AI as the driver. Uh I don't see how the Fed's ever going to keep [laughter] the balance sheet the where it is. is it's just going to keep on expanding it. Uh at least I think so. But um I don't know. I it's not clear to me if the end of QT is necessarily a good thing or a bad thing. Um so not clear what that will do to yields because every single time the Fed for example initiated QE buying up treasuries, yields actually fell. Uh it rose rather and then when they did QT it was the opposite, right? Um so I think the the knock on effects are not as obvious. Yeah, this was QE here at uh 2008 and then they did a series of QES as you remember all throughout 2010. Uh balance sheet stayed stable all throughout 2014 until COVID happened and then there was another massive QE as you remember and then they started tapering off in 20202. Uh taper tantrum, remember taper tantrum? >> Uh that was uh that that was uh ear that was all the rage around 2012 2013. Um and then we did kind of have taper tantrum in 2022. big market selloff uh as the Fed rose rates and now after 2022 nobody really cared but nobody I mean the markets didn't really care that the balance sheet continued to shrink because the rates continue to fall down or at least it was signaling that they would cut rates and now we have the reverse. Now, the question is whether or not, going back to what you were saying, we're going to have a flat central bank uh uh balance sheet or a a rise in assets due to QE. Either way, that should be good for markets. No, you have a less reduction um in the uh reduction of the money supply. So, the delta is zero. Uh or you have a positive addition, which is more liquidity. Either should be better for markets. No, you aren't you bullish on this news? Again, it's like, you know, it it's hard to see how uh more liquidity is a good thing when credit spreads are as tight as they are. That just is going to feed into inflation. And actually, if you look at the true inflation numbers, inflation is picking up using trueflation data. Um, so I don't think that's a positive because it means that yeah, sure, you're going to have more liquidity, but then the Fed's going to have to raise rates again and reverse course. And here we go again with another 2022 with bonds and stocks both selling off. Look, I I I cannot understand for the life of me why the Federal Reserve is cutting rates when junk debt relative to AAA basically says there's no default risk at all by highly levered borrowers. Now, could be the case that maybe they are seeing something in the private credit side because that's obviously not marked to market and I think a lot of the real garbage uh debt has been hidden there right in the private credit space. But more liquidity doesn't necessarily mean it has to filter into stocks. can filter into groceries. That's not a good thing. >> We've got um you brought up the mayor election in New York, but uh as of right now, the moment we're filming, we don't have a we don't have the result yet. It's ongoing. Uh I think more than a million people already cast their votes. As of now, I'm just following the live updates. This is interesting. Trump, this is [laughter] this is this is reality now here, not reality TV. Trump urged New Yorkers in a social media post to vote for Cuomo. Threatened to withhold federal funds from the city if Mamani wins. Uh I I don't I'll let you full full disclosure. I actually on a personal basis put a bet on uh that Cuomo would win because the payout is like 10x and uh it's not because I'm a fan of Cuomo or against Maldani. I just think the odds are skewed because the truth is a lot of the money is betting on Maldani is coming from countries that have socialist policy. So they see him and think, oh yeah, he's going to win because they're like he's like us, right? There's a bias there. That's that's a whole different discussion. Um and I think Cuomo himself said uh Trump is not endorsing him. He's just anti-Mani. Right. So Mami >> Trump uh Trump is accusing Mammi of being anti-Semitic. Uh which is a good tactic given that New York has the biggest population of Jewish people anywhere in the US. Mami has denied such claims. Uh however uh it's estimated by some sources that if Mami if Mamani wins, we can expect up to a million people to uh leave New York. Trillions of dollars lost potentially. Um it's interesting. I don't I don't know if this was a joke, but the um was it the governor of Florida uh recently said that he would tariff anybody coming into >> Florida from New York. >> Oh, it was Texas. >> It was one of them. Yeah, I know. Right. Right. Yeah. >> Or Texas or Florida. Anyway, I I don't know if that's going to happen. Uh what Okay, look, let's let's say let's I don't know if this actually has any market impact. If if a left leaning mayor wins the mayoral race of New York, are we going to see Brexit from New York? Is that is that where or where or where or where or where or where or where or where or where or where or where nobody's going to you got to stand the seed, right? Just not be part of the city at some point. I mean, there've been instances of that in the past. I don't know. I mean, look, I I think I think Bill Mer was the one that said it correctly. said, um, it's it's much bigger than your cuz it's a question of what direction does the Democratic party want to go, right? And if they want to go towards that angle or towards that end of the spectrum, I think they could have implications on markets at some point, not here, right? Although, I'll tell you, if mom donn doesn't win and the market crashes tomorrow, uh, we know what the headlines going to be. >> Uh, what's the headline going to be? >> Market crashes as mommy gets elected New York City mayor. You know, it's coming. [laughter] Come on. Well, I Okay, what is your view on uh the long end of the curve? So, it's been a pretty good year for uh for bond markets. Let me just show my screen. Uh the 10 year has fallen. Um actually, no, it hasn't. What am I saying? Uh year to date, uh the 10 year is slightly flattened up. >> Um but after liberation day, we've had a good run for the bond market. How how how are you viewing the um longer the curve progressing into 2026? We we know inflation's ticking up. Some of this may be following inflation expectations, but at the same time, the short end of the curve is expected to to come down on the uh back of the Fed funds rate coming down. So, um I I wonder if we're going to just get a much much steeper yield curve. >> Yeah. So I think that that's actually probably exactly what's coming unless you have credit spreads and some kind of you know real weakness metastasize a deflation scare in which case you have the flight to safety into long duration treasuries which we have not seen in some time which is what my taxable JoJo junk junk off bond ETF is trying to play whenever that comes in. Um which is possible you know to happen but I I agree with you. I think um you know all signs point to more all signs to me at least point to a Fed mistake uh with cutting and maybe that's why you know Powell basically said it's not a foregone conclusion that they'll cut again. Again, I don't see why the Fed would go on an aggressive cutting cycle when credit spreads are as tight as they are. Unless, and I keep going back to unless there's something going on with private credit and what you're seeing with the regional banks and BDC's is a signal of something very significant happening beneath the surface, which is not impossible. I just would find hard to believe that the Fed uh will actually get that right. >> How do you so how are you playing the bond market right now? >> Look, I think you can still make money in high yield, but it's like squeezing blood from stone, right? because it's and you know it's it's there's a there's a there's an asymmetric negative potential there for default risk to suddenly pick up because let's face it layoffs are still occurring right I mean you're seeing it from these these headlines from some pretty big companies yeah they might be arguing it's AI but I'm not as convinced of that personally um so I think you if you're going to be in bonds you probably want to be yeah you know more kind of tripleB you know higher quality and then if things really start to get nasty then as long duration treasuries will be, you know, the only thing that works. Um, I know everyone keeps saying gold, gold, gold is gold is the replacement for treasuries. Gold is had a spectacular one. Gold has not acted like a riskoff asset in this. It's been much more correlated to equities in this. Um, I think if you're going to have a real tailorment, I don't think gold would uh do better than treasuries in that moment in time. I think it's going to be the classic flight to safety, which again we haven't seen in a long time, which has been frustrating for me outside of my free markets ETF, which is long equities. Okay. So, uh are you more bullish on bonds right now or stocks? I would say in the in the next quarter or so. >> I I would say I'm I'm much more uh bearish on large cap tech relative to both treasuries and defensive sectors like healthcare and consumer staples. If you look at the healthcare sector relative to the S&P, you look at consumer staples relative to the S&P, those are so bombed out. Nobody wants to touch anything that's defensive. Those are so bombed out on a relative basis. And there will be some beneficiaries from a deregulation perspective that I think you know um will hopefully play in FMKT that uh that to me seems like where you're going to get some real alpha right some real out performance. Um look you saw the reaction to Palanteer which by the way FMKT has in its portfolio earrings that were strong. You know it's like at some point gravity takes hold and these valuations that everyone says don't matter at some point they matter. Well, it's not just that. It's just expectations for their earnings continue to get higher, right? And at some point, you can't meet expectations. That's what happened today. You got a bunch of tech companies. You mentioned Palanteer missed earnings. Oracle disappointed. And then Nvidia went down three and a half%. Um, and then uh Microsoft is down. Uh, defensives are holding up. Banding up, right? >> Sorry, which which I'm saying if you look at like consumer staples and healthcare asset check, right? While >> Exactly. And it's just, you know, if you look at the heat map, it breaks it breaks it down pretty pretty well because the headline numbers, you know, the NASDAQ's down 1.8%. Yeah. Most of that is coming from Nvidia, >> right? And these and these guys here, but the rest of the market's doing fine. Um, let's talk about then uh what you think you're going to do uh with this what people are calling a tech bubble. Do you think it's a tech bubble? And if it's if so, what what what do we do? Is this 2000 all over again? So, I I've said for the last year and a half that um we're in a concentration bubble, which is a different kind of bubble than the way people tend to think about what bubbles are. Concentration bubble gets bursts in one of two ways. Either the largest names break down heavily or there's breath that improves and everything else catches up, right? Um the way to play it is just not to be in where everybody else is, which is what has been working, right? Which is in the Nvidas and AI plays of the world. Um, I don't know. Like, you've seen the same memes that I've seen about Nvidia doing a deal with this or that company and how it's all kind of going back. It's money is basically left and right to the same entities. It it seems like a shell game optically. Um, if AI does not turn out to actually generate real earnings and revenue, then we're all going to say it was a bubble, but we'll say with hindsight. >> Okay. Lumber to gold ratio, we have to discuss that. It's been historically a pretty good indicator for where uh markets are going to go. Gold has been spiking. I wonder how the lumber gold ratio has been performing >> and what that's telling us, Michael. >> Yeah, I mean, look, the goes back to my point about gold has not clearly acted like a riskoff asset in this cycle, which has been frustrating to me. Uh because you're right, usually lumber to relative gold, the theory there is that lumber is the biggest input into housing construction. So if lumber is doing poorly and then gold which is traditionally a riskoff asset is doing well that's not a good sign for the economy and for risk assets. It's been straight down because you've got a double whammy. Lumber's cratered and gold has melted up. >> Yeah. >> Stock market hasn't cared right. Um could be just a false signal or maybe it's going to matter at some point again going back to my imminent VIX spike. One way to resolve the wrongness of the lumber to gold ratio would be something very sudden, very aggressive, a tail event in equities to make it look like lumber to gold was right all along just with a long lag. Um, but I do think it's interesting the um, housing could be entering a really nasty period here. Um, and you've seen some people argue that maybe we're starting a recession in housing, which is not impossible after this prolonged period of insane pricing. Um, so we'll see. I don't know. It it's I it's also sad. It's like no even if rates were down to 0% you couldn't even you could barely afford something New York mum donny or not right so it's uh housing still remains a big driver of the economy and housing is still I think a question mark especially given the way lumber's performing >> the underlying assumption behind this ratio is that gold is a safe haven play >> and going back to your point gold has not behaved as such fundamentally are you changing your stance on what gold is as an asset and if so maybe this entire ratio needs to be ignored for now. >> I don't know. Look in I I have all these different research papers and back tests and if anybody has any back test, you will always see in any back test, any data is just fact. You'll always see with a big enough sample period, several rolling three or four year periods where it looks like your indicator or signal is just not working for any number of reasons, right? It's like and and during those periods where it's not working, everyone would say the same thing. Is the indicator broken? and then suddenly it starts to work again because there's nothing that's foolproof. There's always things that you know times when things work and times when things don't. It's clear to me at least that this is a time when gold is just not working as a riskoff safe haven. It it's it's just not right. >> So what's been driving this gold rally? >> I think there is a lot of speculative uh mania that has come into this the last several months. Right. I think in the beginning it was clear that it was institutional money worried about something that was really around end of 2023 when I was on your show talking about the reverse carrier trade for the first time August of of 2023 when I said credit event and I thought markets would collapse and they didn't but gold was rallying I've been bullish on gold all the way up until April of this year and then I just started seeing that you ended up having Forbes have it on the cover and you ended up having everyone else talk about gold and the gold bugs getting louder and louder and it's like that seems like retail is chasing it. It's more than just institutions, right? So, I think it's just become a momentum play. That's all it is. At some point, I do think it goes back to its traditional riskoff type of behavior, but this isn't the time and you can see it. So, >> what is what is a riskoff play right now if gold lost that status? >> I still think utilities behave like a riskoff asset, a riskoff sector rather. Some people will say, well, how can that be when AI is still being a big driver of of power generation demand? I get the argument, but the reality is even this year utilities while they have outperformed the S&P, they haven't outperformed to the extent of that AI narrative. I just put a piece out in the lead lag report making that case. So, I still think utilities are defensive. I still think the dollar is defensive. The yen will be defensive. Uh and treasuries um you know, long duration, which you know, long duration has not worked because there's been no with hindsight need to be defensive. I it's it's not that treasuries haven't worked. It's just credit spreads have been so tight. So, it says there's no flight to safety. So let let's talk let's talk about 2022. I remember working with you back in 2022 and you were long where you were you were bullish bonds uh for the reason that uh that the volatility would spike. Volatility did spike. You're right. But bonds fell alongside stocks. What went arry there? Why did that not go according to some people's expectations? Traditional theory would tell us that bonds should have done well during that period. It did not. >> Yeah. I mean volatility uh spiked but not didn't have the big spikes right that would traditionally force a flight to safety trade but also a question of which bonds when I say volatility is tied the the the transmission mechanism of volatility to bonds isn't credit spreads so if volatility is rising credit spreads historically widen if you were to look at credit spreads relative to volatility the last 3 years have been massively massively divorced in a very historic way meaning you have these bouts of volatility in equities but credit spreads are not responding even during the tariff tantrum when literally on the day of the low I screamed on on X saying you will remember me this day cuz I said we're going to have the biggest intraday turnaround in history and it happened that Wednesday. I was literally on a boat on a Creed cruise for God's sake making that call. Um like like a raving lunatic. Um I was saying that because in that selloff the VIX was spiking aggressively but credit spreads were barely budging, right? If credit spreads were barely budging then it's actually the VIX that's wrong, right? In that kind of scenario. So 2022 was unusual because credit spreads didn't didn't blow out which goes back to the Fed should probably keep on raising rates because money is still too easy and it's too easy because credit spreads are telling you they're too easy. Okay. Uh tell us about the uh deregulation trend right now and that feeds into the theme of the free markets ETF. >> What exactly is being deregulated? Which sectors will benefit from this trend? So first of all just from a macro perspective deregulation is disinflationary. Okay, which and there have been other studies that suggest that deregulation has the has the effect of of lowering inflation because the impact of deregulation is more competition. Okay. The impact of deregulation is faster uh to market types of services and and products less waste on things which don't impact the final end uh consumer. So deregulation from that standpoint is a disinflationary is is you can argue bullish right from that standpoint. Um, now deregulation is something that's hard to back test because it's based on whatever executive orders Trump puts out, right? So some of the the easy tells there have been nuclear, right? Um there have been deregulatory measures around uh FAA flying cars, Archer Aviation, Joby, for example, are two stocks that are in the FMKT ETF because of that deregulatory push. Um and there's a lot of things that I we we are tracking just from a from a legislative perspective that resulted in some really interesting companies. Um we all know about the EPA, Environmental Protection Agency and the cuts that have happened there, the deregulations happened there. That's been a big tailwind for a company like Comfort Systems, ticker FIX, which is one of the biggest winners in FMKT and one of the larger holdings. So, um it is a very positive tailwind, which is why again I'm not some perma bear. uh just because I think you're gonna have some of these short-term hiccups doesn't mean that long-term isn't positive. But um yeah, I think it's I think it's a massively underappreciated dynamic, this deregulation theme. And you know, FMKT was launched in June. We now have 21 million in the ETF. It's uh I think as of today, it's up around 350 basis points over the S&P. Just outperformed the S&P despite not having tech or AI. So the theme is is real. I'm very bullish on that. So, it sounds to me like 2026 may very much be a stock picking year, but are there any overriding macro themes that may dominate >> if uh inflation were to pick up meaningfully here? >> Mhm. >> Uh I I think I [snorts] think it can get ugly very quickly. Um >> Okay. >> That that's because if you end up having that and then the central banks start panicking uh and start very aggressively raising rates, which is hard to believe, but you never know. Well, that they will they won't do that because the next chair will be pro whatever the administration wants to do, which lower rates, right? >> It's it's a narrative. I don't know. I mean, unless Trump runs for a third term, I I don't know if that's going to matter. >> Okay. So, yes, if inflation picks up meaningfully, any Fed would need to put their rate cuts on pause and um and um uh yeah, we'll see what happens. I mean when when when Jerome Powell at his last FOMC press conference said that the December cut is not a foregone conclusion. The uh chance of a cut dropped from 90 something% to 60 something% >> um overnight. The markets didn't move significantly on that news, but it the S&P's I think down on the week. Yeah, it's down on the week. I don't know if it's because of that or other things like earnings being missed. Um I I by the way that could explain why Bitcoin is also very weak too, right? It's like you know Bitcoin I think what hit 120 everyone's like oh this it's going to 150 and then you know complete turnaround right I mean I'm not a Bitcoin hater by any means but it goes back to like when everyone is convinced of something happening because of a narrative suddenly things go the other way. Um, let let's talk about that. Bitcoin is a good indicator for risk on sentiment in the app in the markets where historically has been at least. This year hasn't been great for Bitcoin. It's not terrible either. It's actually exactly flat on the year because it was $100,000 right at the beginning of January. It first hit 100,000 uh late November, early December 2024 last year and then it hovered around 100,000 uh for the remainder of the year and then it went up and down this year but it's exactly flat on the year which is surprising because the NASDAQ is up 21% on the year and usually in bull markets for stocks Bitcoin outperforms. That shows you, going back to your concentration risk statement, that the market really is just a reflection of a few comp companies in the tech space, outperforming everything else um driving up everything else. Uh that's exactly what happened in 2023, though, and Bitcoin still outperformed the year after. So, I don't know what's happening. I'll let you answer uh or look look at this your way, but it it certainly seems like Bitcoin's win has been uh taken out of its sail, so to speak. >> Yeah. Yeah. And a lot I see a lot of people on on X the crypto bulls outside of Bitcoin and saying this is the worst crypto bull run ever. Um isn't it funny by the way on a side note that everyone is cheering the Max 7 and and these AI companies and investing them and making supposedly all this money. It's like they're cheering for the companies that are going to replace their jobs. We're in a really upside down world. Are nobody can replace your job, Michael. We still need fund managers. We still need uh we still need economists. Um and chat JBT is not um not at our level, not at your level yet, >> dude. The the only thing that AI will will not replace >> is charisma. Not that I have it. Okay, you have it. Okay, but the point is the point is like you the only this is on a side note, it's like I do believe this that's why like sales sales people will always have a job. Like the real skill is the ability to communicate and to be able to to to emote properly and >> nothing else is going to matter. Okay. So, so, so let's just look ahead here. What what longer term investment opportunities are there when, to quote what you just said, we're all going to lose our jobs. >> Yeah, exactly. [laughter] >> Well, it probably means that UBI has come universal basic income just to keep the system going. >> What are you most bullish on right now? Let's say uh if you had to pick an asset, >> you know, I I think I think it's it's it's two themes. Um, and I think they're related. Again, I'm bullish on deregulation. I put my money over my mouth as the free market ETF, FMKT. And I'm also bullish. I've said this for a while and I've been wrong for a while. I remain bullish on a tail event. It's not that I'm bearish on stocks. I'm bullish that you're going to have some kind of an extreme, you know, sudden aggressive decline that will, you know, people will buy into and it'll keep declining. And at some point, obviously, that'll stop. But just given the structural leverage in the system, I go back to leverage is the precursor to every major crash in the stock market. I don't know when, but I just know that these are the types of conditions that typically result in an accident. How you position for that? You got me, right? Because then it's just timing as far as the playing of the risk offside. But, um, deregulation, long-term, very bullish, you know, short-term, yeah, I I still think there's an imminent VIX spike coming. I just don't know when. >> Excellent. Uh, what uh what uh platforms are you on? Where can we follow you, Michael? at Leadlag Report on X Instagram uh YouTube Lead Lag Media uh that's my other company separate from my funds which works with financial advisors and fund issuers to get them in front of the right audiences and yeah just reach out to David David knows me he can he can just he can just tell me on >> DM send send all the mail to me >> don't I don't want to deal with it send it to just spam David it's fine [laughter] >> right okay he's paying me to be his personal assistant in bubble tea that's my >> I need I need I need >> that's my that's currency of choice >> cuz you're so [laughter] charismatic. It goes back to that just, you know, >> I think you of all people need AI the most. Every time I talk to you, you're juggling like 25 things at a at a time. So I I like to see people like you have a better work life balance because most of your tasks are automated. >> The hell is work life balance? The the fallacy in work life balance. There's no such thing as work life balance. You know why? Cuz if you if you think there's work life balance, there's somebody working harder than you. >> [laughter] >> No. Spoken like a true New Yorker. >> Yes. [laughter] >> Go. Go Quomo. >> Way healthy. [laughter] >> All right. Thank you, Michael. We'll speak again soon. Follow Michael. Links down below. And don't forget to subscribe and like this video.
Banks Borrow Record $50 Billion From Fed, Expert Reveals What's Next | Michael Gayed
Summary
Transcript
Banks tapped into the Fed's standing reple facility in record amounts last week. In fact, this was the highest usage since the tool was put in place in 2021. What does this signal is the financial system in distress as some people online are speculating that it is? And what does this mean next for markets? We're talking about this and the end of quantitative tightening of the Fed with our next guest, Michael Gad, portfolio manager of his new ETF called the Free Markets ETF and the publisher of the Lean Leg report. Michael also believes there's going to be an imminent spike in volatility. We'll find out why. Michael, it's good to see you and uh I I just have to point out that uh it's been a while since you're on the show and lots has happened. Thank you for joining us. You look great. Um you uh >> will get you everywhere. I'm just going to say looks [laughter] good. >> You um you you can help us out by understanding or helping us understand what's going on here. to start with banks tap fed standing repo facility in record numbers amid month end pressures. This was of um last Friday. >> Yeah. >> Federal Reserve liquidity facilities caught fire on Friday as month end pressures pushed a key lending tool to a record level of usage. The uh FSRF the Fed standing repo facility led a total of $50.35 billion on Friday to eligible financial firms in two separate availabilities. Now there's a lot of uh talk on social media about this being a crisis, some sort of uh liquidity crisis which which would necessitate this level of u borrowing from the banks. Uh you've got analysts and the Fed alike saying this is just normal. Uh so this particular analyst from curvature securities ironically the number of securities given to the Fed about equals the amount of cash received. This was the first time the SRF function is designed. Um analysts at like uh writes and ICAP expect funding pressures to ease next week and given how calendar dates traditionally influence money markets SRF and reverse repo activity should ease relatively quickly. Let me just pause there and get your take on what happened. Uh there was a big spike in lending activity and uh tapping into the reverse repo markets. Why did that happen uh based on the information that you have? I mean, as far as I can tell, it's it just suggests that there's there's stress in the financial system, right? And I don't think that should be a surprise to anybody because if you look at the equities of some regional banks the last several weeks, uh you look at the performance of Jeffre and and some of these headlines around uh private credit uh issuance blowups, uh yeah, it makes sense that you've got some stress that combined obviously with the government shutdown. uh it it it those are the right kind of conditions for uh banks to need some some capital. And I see a lot of people on on social media saying this is the Fed injecting money into the system. Actually, it's it's not I mean it's it's it's basically just a a lending uh facilitator for the banks to basically try to survive, you know, from credit perspective in the short term. Now, um is it a crisis? Is it a signal of something bad that might be happening beneath the surface? I'll tell you after it happens. I have no idea. I mean, it seems plausible that uh something is going on beneath the surface. I say that not as somebody's a perma bear because I have long only equity funds. Uh but I say that purely from the standpoint that um look at what the market itself is doing, right? I mean, despite me saying for years small caps hold the key, small caps still are not rallying. This is purely an AI concentrated seven or eight stock in quotes market. Most things are still struggling. I don't know why it's a surprise that the banks are struggling too. >> Yeah, it's actually the exact opposite of um liquidity injection. So if if it's so it's not that's not what whoever is saying that is not technically correct. But >> is there I will say real quick it is remarkable how that uh is said and then reposted and people say the same thing over and over again and it just shows you how much easily misinformation is is put out there and regurgitated by supposedly smart accounts. That's why you're on the show, Michael, to uh to educate trying. >> Look, we Is there a reason though? I mean, why why why look, I know there's a government shutdown. Uh but banks typically don't access or need to tap into the standing repo facility unless they need to. Or is it just because rates are so low that they they would lose out or not? But that's not really the case, is it? you know, it's um the truth is we still don't know if we're still in that long and variable lags window. And I I know that sounds strange to say because it's like, well, you know, how can you say that when it's been so long after the fastest rate cycle in history? I mean, these things do take time to kind of play out. So maybe there's an aspect of that. Um but you know, look, you you've heard the term K-shaped economy, right? it this is happening just not just in the economy but also across sectors across large caps and pretty much everything else or at least the magnificent seven or eight or whatever the number is now. So um [snorts] all this to me still suggests it's not in quotes healthy environment. You can make money in that obviously but uh you know maybe for all we know there is something very nasty coming and I always go back to this idea I was posting it a lot during the tariff tantrum. I said um two years wrong, 10 years right because I was referencing my own signaling or or concerns around a credit event that would have been wrong on for two years in Japan reverse carrier trade. And I always go back to markets are funny in that you can be wrong wrong and then very suddenly right and if you're right with magnitude and the market does go down heavy and it defines last decade who cares if you were wrong in the past. >> Well, that's kind of like betting on a black swan. You don't know when it's coming. You don't know if it's going to come in. But if you are prepared for such an event, um you're you're ahead. Who cares if you're wrong about I don't know. Let comment down below. Uh it's a rhetorical question. See if you can answer my question. >> Oh, the trolls are going to come out, man. Don't do that. >> Trolls are going to come out. They love trolling me. >> Well, you posed a good philosophical investment question. Who cares if you're wrong about the other trades if you're right about one big trade that wiped out or covered, you know, offset some of the losses? I I I I don't know if that's the approach everyone takes. Uh >> it's not. It's obviously not. No, because and that's shown by a lot of behavioral studies that people would rather have the reward of a daily dollar uh as opposed to waiting, you know, 100 days for $100, right? I mean, >> well, that just sounds like venture capital. >> Yeah, exactly. But it is funny, right? Just real quick because it's like you see all these people that troll Michael Bur for example. It's like, okay, the guy was right once, right? And everything else he said has been wrong since. Everyone trolls him. the dude is richer than all these people that are trrolling him. Like you just have to be right once in a really big way and that's all that really matters unfortunately in this game because markets don't form don't follow a normal distribution. >> So what's what's the really big narrative you're betting on right now? >> I guess it depends on which time frame and I think this is also what's always missed by people that critique others making predictions like what time frame are you looking at? I very short term I think and I've been saying this for the last two weeks I think we're due for an imminent VIX spike. Now, I don't know when exactly or what day, no different than the reverse carrier trade playing out August 3rd, August 5th of 2024, but um given the sheer volume on the call trading side, the leverage ETF launches, uh the sheer amount of overconfidence that I'm seeing on social media, the the margin debt that's being reported, I mean, everyone's extremely bullish into end of year, which is funny to me because everyone says the same thing. Seasonality has not worked this year. So, what's to say seasonality suddenly works November, December, right? I mean, for all we know, November, December could be awful, right? Who knows? That's short-term, intermediate, long-term. I do believe there is a massive tailwind that deregulation plays into the bullish narrative. Okay, that's why I launched the free markets ETF, FMKT. I believe that deregulation is a big big driver, has all kinds of implications on sector rotation, new leadership. Um, and that should be ultimately positive for equities, but that doesn't mean you're not going to have volatility in between now and then, >> right? And actually, I don't I don't know if you've seen this, but Goldman Sachs CEO at a conference said it's likely there will be a 10 to 12 20% draw down equity markets sometime in the next 12 to 24 months. David Solomon said at a summit in Hong Kong, things run and then they pull back so people can reassess. A 10 to 15% draw down happens often, even through positive market cycles. It's not something that changes your fundamental or structural view as to how you want to allocate capital. Morgan Stanley, CEO, also had to chime in on that. We should also welcome the possibility that there would be a draw down 10 to 15% crackdowns that are not driven by some sort of macro cliff effect. If they're not driven by macro cliff effects like we've been talking about on the show, what are they driven by? So I always go back to a line I say on X on my atly lag report handle which is that um leverage is always the precursor to every major stock market crash period. Overconfidence leads to leverage. Leverage leads to crashes. It doesn't have to be some macro event. We live in a chaotic system. A butterfly flapping its wings can create a hurricane across the world. Right? So when you have so much leverage, it that as your starting point, it doesn't take much for an unwind, right? I think that's sort of the the major point. Now, I will say that every single buy the dip has resulted in even more leverage, even more overconfidence because retail has been right, buying into those declines, you know, the moment that they happen until they're not right. And whenever that day comes, I don't know when, I don't know what the catalyst is. Maybe it's going to be private credit, which I've been flagging as a warning sign or as something that could be a uh a potential source of risk. Maybe it's something totally unforeseen, which is usually how it plays out. Either way, the conditions are there for some kind of an air pocket. Could it be that the Fed is going to end QT soon. So, take a look at this. Um, the Fed's goal was to draw out enough liquidity. This is explaining QT. The Fed has shrunk its holdings from a peak of$9 trillion dollars in the summer of 2022 to the current level of 6.6 6 trillion. It did so by allowing Treasury mortgage bonds bought as part of the CO9 pandemic stimulus to mature and not be replaced. That's all coming to an end soon. The Fed's goal is to draw out enough liquidity to allow for firm control of the Fed funds rate and normal volatility and short-term lending rates. Um the unusually heavy use of Fed liquidity tools comes after the central bank said on Wednesday it would soon stop drawing cash out of markets. The central bank said that the draw down of its balance sheet called quantitative tightening will end on December 1st. Tell us more about QT uh the mechanisms and what that's going to do to yields in the market. I >> I think it's unclear what it'll do. I mean I think the assumption is that that means um that if they are no longer uh doing QT that that's the path towards QE again. Um and it seems like >> let's assume they don't. It's just they maintain the balance sheet size. Let's put it that way. >> I don't know if there's ever been an instance where a central bank has maintained a balance sheet when you have political pressure uh to spend more, right? And it's like, you know, for all we know, if uh from you talk about very very long term, yeah, given what's going on with New York and Manny and uh more socialist policies and potential universal basic income coming because robots can replace everybody's jobs at some point with AI as the driver. Uh I don't see how the Fed's ever going to keep [laughter] the balance sheet the where it is. is it's just going to keep on expanding it. Uh at least I think so. But um I don't know. I it's not clear to me if the end of QT is necessarily a good thing or a bad thing. Um so not clear what that will do to yields because every single time the Fed for example initiated QE buying up treasuries, yields actually fell. Uh it rose rather and then when they did QT it was the opposite, right? Um so I think the the knock on effects are not as obvious. Yeah, this was QE here at uh 2008 and then they did a series of QES as you remember all throughout 2010. Uh balance sheet stayed stable all throughout 2014 until COVID happened and then there was another massive QE as you remember and then they started tapering off in 20202. Uh taper tantrum, remember taper tantrum? >> Uh that was uh that that was uh ear that was all the rage around 2012 2013. Um and then we did kind of have taper tantrum in 2022. big market selloff uh as the Fed rose rates and now after 2022 nobody really cared but nobody I mean the markets didn't really care that the balance sheet continued to shrink because the rates continue to fall down or at least it was signaling that they would cut rates and now we have the reverse. Now, the question is whether or not, going back to what you were saying, we're going to have a flat central bank uh uh balance sheet or a a rise in assets due to QE. Either way, that should be good for markets. No, you have a less reduction um in the uh reduction of the money supply. So, the delta is zero. Uh or you have a positive addition, which is more liquidity. Either should be better for markets. No, you aren't you bullish on this news? Again, it's like, you know, it it's hard to see how uh more liquidity is a good thing when credit spreads are as tight as they are. That just is going to feed into inflation. And actually, if you look at the true inflation numbers, inflation is picking up using trueflation data. Um, so I don't think that's a positive because it means that yeah, sure, you're going to have more liquidity, but then the Fed's going to have to raise rates again and reverse course. And here we go again with another 2022 with bonds and stocks both selling off. Look, I I I cannot understand for the life of me why the Federal Reserve is cutting rates when junk debt relative to AAA basically says there's no default risk at all by highly levered borrowers. Now, could be the case that maybe they are seeing something in the private credit side because that's obviously not marked to market and I think a lot of the real garbage uh debt has been hidden there right in the private credit space. But more liquidity doesn't necessarily mean it has to filter into stocks. can filter into groceries. That's not a good thing. >> We've got um you brought up the mayor election in New York, but uh as of right now, the moment we're filming, we don't have a we don't have the result yet. It's ongoing. Uh I think more than a million people already cast their votes. As of now, I'm just following the live updates. This is interesting. Trump, this is [laughter] this is this is reality now here, not reality TV. Trump urged New Yorkers in a social media post to vote for Cuomo. Threatened to withhold federal funds from the city if Mamani wins. Uh I I don't I'll let you full full disclosure. I actually on a personal basis put a bet on uh that Cuomo would win because the payout is like 10x and uh it's not because I'm a fan of Cuomo or against Maldani. I just think the odds are skewed because the truth is a lot of the money is betting on Maldani is coming from countries that have socialist policy. So they see him and think, oh yeah, he's going to win because they're like he's like us, right? There's a bias there. That's that's a whole different discussion. Um and I think Cuomo himself said uh Trump is not endorsing him. He's just anti-Mani. Right. So Mami >> Trump uh Trump is accusing Mammi of being anti-Semitic. Uh which is a good tactic given that New York has the biggest population of Jewish people anywhere in the US. Mami has denied such claims. Uh however uh it's estimated by some sources that if Mami if Mamani wins, we can expect up to a million people to uh leave New York. Trillions of dollars lost potentially. Um it's interesting. I don't I don't know if this was a joke, but the um was it the governor of Florida uh recently said that he would tariff anybody coming into >> Florida from New York. >> Oh, it was Texas. >> It was one of them. Yeah, I know. Right. Right. Yeah. >> Or Texas or Florida. Anyway, I I don't know if that's going to happen. Uh what Okay, look, let's let's say let's I don't know if this actually has any market impact. If if a left leaning mayor wins the mayoral race of New York, are we going to see Brexit from New York? Is that is that where or where or where or where or where or where or where or where or where or where or where nobody's going to you got to stand the seed, right? Just not be part of the city at some point. I mean, there've been instances of that in the past. I don't know. I mean, look, I I think I think Bill Mer was the one that said it correctly. said, um, it's it's much bigger than your cuz it's a question of what direction does the Democratic party want to go, right? And if they want to go towards that angle or towards that end of the spectrum, I think they could have implications on markets at some point, not here, right? Although, I'll tell you, if mom donn doesn't win and the market crashes tomorrow, uh, we know what the headlines going to be. >> Uh, what's the headline going to be? >> Market crashes as mommy gets elected New York City mayor. You know, it's coming. [laughter] Come on. Well, I Okay, what is your view on uh the long end of the curve? So, it's been a pretty good year for uh for bond markets. Let me just show my screen. Uh the 10 year has fallen. Um actually, no, it hasn't. What am I saying? Uh year to date, uh the 10 year is slightly flattened up. >> Um but after liberation day, we've had a good run for the bond market. How how how are you viewing the um longer the curve progressing into 2026? We we know inflation's ticking up. Some of this may be following inflation expectations, but at the same time, the short end of the curve is expected to to come down on the uh back of the Fed funds rate coming down. So, um I I wonder if we're going to just get a much much steeper yield curve. >> Yeah. So I think that that's actually probably exactly what's coming unless you have credit spreads and some kind of you know real weakness metastasize a deflation scare in which case you have the flight to safety into long duration treasuries which we have not seen in some time which is what my taxable JoJo junk junk off bond ETF is trying to play whenever that comes in. Um which is possible you know to happen but I I agree with you. I think um you know all signs point to more all signs to me at least point to a Fed mistake uh with cutting and maybe that's why you know Powell basically said it's not a foregone conclusion that they'll cut again. Again, I don't see why the Fed would go on an aggressive cutting cycle when credit spreads are as tight as they are. Unless, and I keep going back to unless there's something going on with private credit and what you're seeing with the regional banks and BDC's is a signal of something very significant happening beneath the surface, which is not impossible. I just would find hard to believe that the Fed uh will actually get that right. >> How do you so how are you playing the bond market right now? >> Look, I think you can still make money in high yield, but it's like squeezing blood from stone, right? because it's and you know it's it's there's a there's a there's an asymmetric negative potential there for default risk to suddenly pick up because let's face it layoffs are still occurring right I mean you're seeing it from these these headlines from some pretty big companies yeah they might be arguing it's AI but I'm not as convinced of that personally um so I think you if you're going to be in bonds you probably want to be yeah you know more kind of tripleB you know higher quality and then if things really start to get nasty then as long duration treasuries will be, you know, the only thing that works. Um, I know everyone keeps saying gold, gold, gold is gold is the replacement for treasuries. Gold is had a spectacular one. Gold has not acted like a riskoff asset in this. It's been much more correlated to equities in this. Um, I think if you're going to have a real tailorment, I don't think gold would uh do better than treasuries in that moment in time. I think it's going to be the classic flight to safety, which again we haven't seen in a long time, which has been frustrating for me outside of my free markets ETF, which is long equities. Okay. So, uh are you more bullish on bonds right now or stocks? I would say in the in the next quarter or so. >> I I would say I'm I'm much more uh bearish on large cap tech relative to both treasuries and defensive sectors like healthcare and consumer staples. If you look at the healthcare sector relative to the S&P, you look at consumer staples relative to the S&P, those are so bombed out. Nobody wants to touch anything that's defensive. Those are so bombed out on a relative basis. And there will be some beneficiaries from a deregulation perspective that I think you know um will hopefully play in FMKT that uh that to me seems like where you're going to get some real alpha right some real out performance. Um look you saw the reaction to Palanteer which by the way FMKT has in its portfolio earrings that were strong. You know it's like at some point gravity takes hold and these valuations that everyone says don't matter at some point they matter. Well, it's not just that. It's just expectations for their earnings continue to get higher, right? And at some point, you can't meet expectations. That's what happened today. You got a bunch of tech companies. You mentioned Palanteer missed earnings. Oracle disappointed. And then Nvidia went down three and a half%. Um, and then uh Microsoft is down. Uh, defensives are holding up. Banding up, right? >> Sorry, which which I'm saying if you look at like consumer staples and healthcare asset check, right? While >> Exactly. And it's just, you know, if you look at the heat map, it breaks it breaks it down pretty pretty well because the headline numbers, you know, the NASDAQ's down 1.8%. Yeah. Most of that is coming from Nvidia, >> right? And these and these guys here, but the rest of the market's doing fine. Um, let's talk about then uh what you think you're going to do uh with this what people are calling a tech bubble. Do you think it's a tech bubble? And if it's if so, what what what do we do? Is this 2000 all over again? So, I I've said for the last year and a half that um we're in a concentration bubble, which is a different kind of bubble than the way people tend to think about what bubbles are. Concentration bubble gets bursts in one of two ways. Either the largest names break down heavily or there's breath that improves and everything else catches up, right? Um the way to play it is just not to be in where everybody else is, which is what has been working, right? Which is in the Nvidas and AI plays of the world. Um, I don't know. Like, you've seen the same memes that I've seen about Nvidia doing a deal with this or that company and how it's all kind of going back. It's money is basically left and right to the same entities. It it seems like a shell game optically. Um, if AI does not turn out to actually generate real earnings and revenue, then we're all going to say it was a bubble, but we'll say with hindsight. >> Okay. Lumber to gold ratio, we have to discuss that. It's been historically a pretty good indicator for where uh markets are going to go. Gold has been spiking. I wonder how the lumber gold ratio has been performing >> and what that's telling us, Michael. >> Yeah, I mean, look, the goes back to my point about gold has not clearly acted like a riskoff asset in this cycle, which has been frustrating to me. Uh because you're right, usually lumber to relative gold, the theory there is that lumber is the biggest input into housing construction. So if lumber is doing poorly and then gold which is traditionally a riskoff asset is doing well that's not a good sign for the economy and for risk assets. It's been straight down because you've got a double whammy. Lumber's cratered and gold has melted up. >> Yeah. >> Stock market hasn't cared right. Um could be just a false signal or maybe it's going to matter at some point again going back to my imminent VIX spike. One way to resolve the wrongness of the lumber to gold ratio would be something very sudden, very aggressive, a tail event in equities to make it look like lumber to gold was right all along just with a long lag. Um, but I do think it's interesting the um, housing could be entering a really nasty period here. Um, and you've seen some people argue that maybe we're starting a recession in housing, which is not impossible after this prolonged period of insane pricing. Um, so we'll see. I don't know. It it's I it's also sad. It's like no even if rates were down to 0% you couldn't even you could barely afford something New York mum donny or not right so it's uh housing still remains a big driver of the economy and housing is still I think a question mark especially given the way lumber's performing >> the underlying assumption behind this ratio is that gold is a safe haven play >> and going back to your point gold has not behaved as such fundamentally are you changing your stance on what gold is as an asset and if so maybe this entire ratio needs to be ignored for now. >> I don't know. Look in I I have all these different research papers and back tests and if anybody has any back test, you will always see in any back test, any data is just fact. You'll always see with a big enough sample period, several rolling three or four year periods where it looks like your indicator or signal is just not working for any number of reasons, right? It's like and and during those periods where it's not working, everyone would say the same thing. Is the indicator broken? and then suddenly it starts to work again because there's nothing that's foolproof. There's always things that you know times when things work and times when things don't. It's clear to me at least that this is a time when gold is just not working as a riskoff safe haven. It it's it's just not right. >> So what's been driving this gold rally? >> I think there is a lot of speculative uh mania that has come into this the last several months. Right. I think in the beginning it was clear that it was institutional money worried about something that was really around end of 2023 when I was on your show talking about the reverse carrier trade for the first time August of of 2023 when I said credit event and I thought markets would collapse and they didn't but gold was rallying I've been bullish on gold all the way up until April of this year and then I just started seeing that you ended up having Forbes have it on the cover and you ended up having everyone else talk about gold and the gold bugs getting louder and louder and it's like that seems like retail is chasing it. It's more than just institutions, right? So, I think it's just become a momentum play. That's all it is. At some point, I do think it goes back to its traditional riskoff type of behavior, but this isn't the time and you can see it. So, >> what is what is a riskoff play right now if gold lost that status? >> I still think utilities behave like a riskoff asset, a riskoff sector rather. Some people will say, well, how can that be when AI is still being a big driver of of power generation demand? I get the argument, but the reality is even this year utilities while they have outperformed the S&P, they haven't outperformed to the extent of that AI narrative. I just put a piece out in the lead lag report making that case. So, I still think utilities are defensive. I still think the dollar is defensive. The yen will be defensive. Uh and treasuries um you know, long duration, which you know, long duration has not worked because there's been no with hindsight need to be defensive. I it's it's not that treasuries haven't worked. It's just credit spreads have been so tight. So, it says there's no flight to safety. So let let's talk let's talk about 2022. I remember working with you back in 2022 and you were long where you were you were bullish bonds uh for the reason that uh that the volatility would spike. Volatility did spike. You're right. But bonds fell alongside stocks. What went arry there? Why did that not go according to some people's expectations? Traditional theory would tell us that bonds should have done well during that period. It did not. >> Yeah. I mean volatility uh spiked but not didn't have the big spikes right that would traditionally force a flight to safety trade but also a question of which bonds when I say volatility is tied the the the transmission mechanism of volatility to bonds isn't credit spreads so if volatility is rising credit spreads historically widen if you were to look at credit spreads relative to volatility the last 3 years have been massively massively divorced in a very historic way meaning you have these bouts of volatility in equities but credit spreads are not responding even during the tariff tantrum when literally on the day of the low I screamed on on X saying you will remember me this day cuz I said we're going to have the biggest intraday turnaround in history and it happened that Wednesday. I was literally on a boat on a Creed cruise for God's sake making that call. Um like like a raving lunatic. Um I was saying that because in that selloff the VIX was spiking aggressively but credit spreads were barely budging, right? If credit spreads were barely budging then it's actually the VIX that's wrong, right? In that kind of scenario. So 2022 was unusual because credit spreads didn't didn't blow out which goes back to the Fed should probably keep on raising rates because money is still too easy and it's too easy because credit spreads are telling you they're too easy. Okay. Uh tell us about the uh deregulation trend right now and that feeds into the theme of the free markets ETF. >> What exactly is being deregulated? Which sectors will benefit from this trend? So first of all just from a macro perspective deregulation is disinflationary. Okay, which and there have been other studies that suggest that deregulation has the has the effect of of lowering inflation because the impact of deregulation is more competition. Okay. The impact of deregulation is faster uh to market types of services and and products less waste on things which don't impact the final end uh consumer. So deregulation from that standpoint is a disinflationary is is you can argue bullish right from that standpoint. Um, now deregulation is something that's hard to back test because it's based on whatever executive orders Trump puts out, right? So some of the the easy tells there have been nuclear, right? Um there have been deregulatory measures around uh FAA flying cars, Archer Aviation, Joby, for example, are two stocks that are in the FMKT ETF because of that deregulatory push. Um and there's a lot of things that I we we are tracking just from a from a legislative perspective that resulted in some really interesting companies. Um we all know about the EPA, Environmental Protection Agency and the cuts that have happened there, the deregulations happened there. That's been a big tailwind for a company like Comfort Systems, ticker FIX, which is one of the biggest winners in FMKT and one of the larger holdings. So, um it is a very positive tailwind, which is why again I'm not some perma bear. uh just because I think you're gonna have some of these short-term hiccups doesn't mean that long-term isn't positive. But um yeah, I think it's I think it's a massively underappreciated dynamic, this deregulation theme. And you know, FMKT was launched in June. We now have 21 million in the ETF. It's uh I think as of today, it's up around 350 basis points over the S&P. Just outperformed the S&P despite not having tech or AI. So the theme is is real. I'm very bullish on that. So, it sounds to me like 2026 may very much be a stock picking year, but are there any overriding macro themes that may dominate >> if uh inflation were to pick up meaningfully here? >> Mhm. >> Uh I I think I [snorts] think it can get ugly very quickly. Um >> Okay. >> That that's because if you end up having that and then the central banks start panicking uh and start very aggressively raising rates, which is hard to believe, but you never know. Well, that they will they won't do that because the next chair will be pro whatever the administration wants to do, which lower rates, right? >> It's it's a narrative. I don't know. I mean, unless Trump runs for a third term, I I don't know if that's going to matter. >> Okay. So, yes, if inflation picks up meaningfully, any Fed would need to put their rate cuts on pause and um and um uh yeah, we'll see what happens. I mean when when when Jerome Powell at his last FOMC press conference said that the December cut is not a foregone conclusion. The uh chance of a cut dropped from 90 something% to 60 something% >> um overnight. The markets didn't move significantly on that news, but it the S&P's I think down on the week. Yeah, it's down on the week. I don't know if it's because of that or other things like earnings being missed. Um I I by the way that could explain why Bitcoin is also very weak too, right? It's like you know Bitcoin I think what hit 120 everyone's like oh this it's going to 150 and then you know complete turnaround right I mean I'm not a Bitcoin hater by any means but it goes back to like when everyone is convinced of something happening because of a narrative suddenly things go the other way. Um, let let's talk about that. Bitcoin is a good indicator for risk on sentiment in the app in the markets where historically has been at least. This year hasn't been great for Bitcoin. It's not terrible either. It's actually exactly flat on the year because it was $100,000 right at the beginning of January. It first hit 100,000 uh late November, early December 2024 last year and then it hovered around 100,000 uh for the remainder of the year and then it went up and down this year but it's exactly flat on the year which is surprising because the NASDAQ is up 21% on the year and usually in bull markets for stocks Bitcoin outperforms. That shows you, going back to your concentration risk statement, that the market really is just a reflection of a few comp companies in the tech space, outperforming everything else um driving up everything else. Uh that's exactly what happened in 2023, though, and Bitcoin still outperformed the year after. So, I don't know what's happening. I'll let you answer uh or look look at this your way, but it it certainly seems like Bitcoin's win has been uh taken out of its sail, so to speak. >> Yeah. Yeah. And a lot I see a lot of people on on X the crypto bulls outside of Bitcoin and saying this is the worst crypto bull run ever. Um isn't it funny by the way on a side note that everyone is cheering the Max 7 and and these AI companies and investing them and making supposedly all this money. It's like they're cheering for the companies that are going to replace their jobs. We're in a really upside down world. Are nobody can replace your job, Michael. We still need fund managers. We still need uh we still need economists. Um and chat JBT is not um not at our level, not at your level yet, >> dude. The the only thing that AI will will not replace >> is charisma. Not that I have it. Okay, you have it. Okay, but the point is the point is like you the only this is on a side note, it's like I do believe this that's why like sales sales people will always have a job. Like the real skill is the ability to communicate and to be able to to to emote properly and >> nothing else is going to matter. Okay. So, so, so let's just look ahead here. What what longer term investment opportunities are there when, to quote what you just said, we're all going to lose our jobs. >> Yeah, exactly. [laughter] >> Well, it probably means that UBI has come universal basic income just to keep the system going. >> What are you most bullish on right now? Let's say uh if you had to pick an asset, >> you know, I I think I think it's it's it's two themes. Um, and I think they're related. Again, I'm bullish on deregulation. I put my money over my mouth as the free market ETF, FMKT. And I'm also bullish. I've said this for a while and I've been wrong for a while. I remain bullish on a tail event. It's not that I'm bearish on stocks. I'm bullish that you're going to have some kind of an extreme, you know, sudden aggressive decline that will, you know, people will buy into and it'll keep declining. And at some point, obviously, that'll stop. But just given the structural leverage in the system, I go back to leverage is the precursor to every major crash in the stock market. I don't know when, but I just know that these are the types of conditions that typically result in an accident. How you position for that? You got me, right? Because then it's just timing as far as the playing of the risk offside. But, um, deregulation, long-term, very bullish, you know, short-term, yeah, I I still think there's an imminent VIX spike coming. I just don't know when. >> Excellent. Uh, what uh what uh platforms are you on? Where can we follow you, Michael? at Leadlag Report on X Instagram uh YouTube Lead Lag Media uh that's my other company separate from my funds which works with financial advisors and fund issuers to get them in front of the right audiences and yeah just reach out to David David knows me he can he can just he can just tell me on >> DM send send all the mail to me >> don't I don't want to deal with it send it to just spam David it's fine [laughter] >> right okay he's paying me to be his personal assistant in bubble tea that's my >> I need I need I need >> that's my that's currency of choice >> cuz you're so [laughter] charismatic. It goes back to that just, you know, >> I think you of all people need AI the most. Every time I talk to you, you're juggling like 25 things at a at a time. So I I like to see people like you have a better work life balance because most of your tasks are automated. >> The hell is work life balance? The the fallacy in work life balance. There's no such thing as work life balance. You know why? Cuz if you if you think there's work life balance, there's somebody working harder than you. >> [laughter] >> No. Spoken like a true New Yorker. >> Yes. [laughter] >> Go. Go Quomo. >> Way healthy. [laughter] >> All right. Thank you, Michael. We'll speak again soon. Follow Michael. Links down below. And don't forget to subscribe and like this video.