Leverage Time Bomb: ‘Nobody’s Prepared’ For What’s Coming | Michael Gayed
Summary
Market Dynamics: The podcast discusses the positive impact of deregulation as a strong tailwind for markets, but warns of potential volatility due to high leverage in the system.
Geopolitical Concerns: The potential impact of geopolitical tensions, particularly between the US and Russia, is considered minimal on markets, with oil and equities remaining stable.
Central Bank Policies: Speculation around the Jackson Hole symposium suggests limited action from Jerome Powell, with market expectations for rate cuts possibly unmet due to persistent inflationary pressures.
Investment Strategies: The Free Markets ETF focuses on companies benefiting from deregulation, with a particular interest in regional banks and healthcare sectors as potential winners.
Leverage Risks: High levels of margin debt and concentrated investments in large-cap tech and AI stocks are highlighted as significant risks, potentially leading to market corrections.
Alternative Assets: Gold is expected to outperform Bitcoin in the next 12 months due to its potential as a risk-off asset during market downturns.
Volatility Indicators: The Lead Lag Indicator and other signals suggest increased market volatility, with utilities and lumber showing defensive trends.
Risk Management: Emphasis is placed on the importance of risk management over leverage, anticipating a future deleveraging event as a buying opportunity.
Transcript
There is some very strong positive bullish dynamics that are happening beneath the surface. Primarily when it comes to deregulation, primarily when it comes to getting rid of the red tape and cutting that, which is what the administration is doing with a lot of executive orders, all that is a very strong tailwind, but um in that tailwind, you're going to have some of these air pockets. And I think that's where you have to be very careful being overly bullish at this very short-term juncture. So, when you say that the biggest risk right now is the leverage facing the system, what exactly do you mean by that? fiscal uh uh the fiscal situation of the US, personal debt, uh corporate leverage, all the above, none. What do you mean? Major geopolitical and economic developments happening this week. We'll be previewing what's up coming up and we'll be talking about what happened over the weekend. Michael Gad joins us. He is the portfolio manager of the Free Markets ETF, publisher of the Lead Lag Report. Welcome back to the show, Michael. Always good to see you. you've always got some interesting tweets or posts on X to uh for me to jump off of, but I I've been scrolling through your X account and um couldn't find anything uh provocative in the last week. Well, it's unlike me. I know. I've been so busy with so many things. I haven't even had time to be provocative. Well, let's start by talking about um let's just jump right into Jackson Holes uh uh symposium that's coming up this week. a gathering of central bankers. Some speculated it may be Jerome Powell's last as Fed chair. What are you expecting this time? Honestly, probably a whole bunch of nothing. I mean, I think Powell himself probably recognizes that this may be his last time. Uh, so it's probably going to be more of a uh a way of maybe justifying his legacy and his prior actions more than telling as far as whatever he's going to do next because whatever he's going to do next is not going to matter if there's another chair to begin with. Um, candidly, I know the market is is pushing for rate cuts. Uh, I I don't think it's impossible to envision a scenario where rates cuts actually don't happen or if they do happen, it's like a oneanddone type of thing. Uh because the reality is inflationary pressures are still there independent of the softening jobs picture. Um and yeah, it's like you always have to go back to what's the incentive of P for Powell to try to lower rates. If he lowers rates, he's basically admitting that Trump was right all along. Um and I think at the end of the day, even though he's supposed to be doing what's right for the economy, everyone's got an ego, pal included. This is the chart of the DXY. It's um done poorly compared to uh previous years. 2025 has not been kind to the dollar partly due to tariffs uh probably maybe due to other factors. What is your view on the dollar? We we spoke many times about the bank of Japan being in your words the Godzilla of the markets. Is that still the risk primary risk for US equities, the US dollar and the bond market here? Look, I think the primary risk is is very simply u the sheer amount of leverage that's in the system. So go to the when it comes to the dollar, I think the dollar itself is probably likely to be in a sideways rangebound type of movement unless you have a real riskoff policy in case the dollar were to rebound. The bearishness got to be so extreme that I I I think it's one of those things where you want to bet against the crowd. The crowd believes the dollar is going to do nothing but keep on decelerating. So probably not going to be the case in terms of what's happen what happens next. Um but the the I think the bigger question here is how does the market react uh to whatever comes out of Powell's mouth um when in reality seasonality now favors higher volatility. Now we've had this kind of very slow gradual meltup in large cap equities. Uh but the reality is typically around now into end of September that tends to be a pretty nasty stretch for markets and volatility tends to rise from here on going forward. uh maybe it's not going to matter because nothing seems to matter to this market. Uh it doesn't matter how uh many strange things come out of the administration or how many uh negative pieces of news come out. The market the S&P just wants to keep pushing higher. But the primary risk is that nobody's prepared for a volatility bout, especially when you're starting leverage is as elevated as it is. You can see that when you look at the flows into leverage funds. You can see that when you look at call option activity. Uh everyone's betting on the same on the same trade. Uh and it's working. Uh, but when it doesn't work, it's probably going to result in nasty air pocket. I want to ask you about what's uh what's uh going on with Russia and the US and whether or not the markets could be impacted by any changes to bilateral relations between the two countries. As you know, Putin visited Alaska over the weekend. Here are some notable quotes uh from the summit. As is known, Russian-American summits have not been held for more than four years. This is a long time. The past period was very difficult for bilateral relations and let's be honest they have slid to the lowest point since the cold war. This is not good for our countries. Obviously sooner or later it was necessary to correct the situation to move on from confrontation to dialogue. I don't know if they have done that and I don't know if they've actually reached a resolution on Ukraine. But here are some quotes on Ukraine. As you well know and understand one of the central issues has become the situation around Ukraine. We see the desire of the US admin and President Trump personally to facilitate the resolution of the Ukrainian conflict. his desire to delve into the essence and understand its origins. Now, I haven't personally read anything that is conclusive about a resolution on Ukraine. I don't know if you have, but anyway, the markets are kind of muted uh on Monday in reaction to what happened over the weekend. So, I don't think anyone believes that anything is going to come out of this in the inter in the immediate future. And also, oil is little changed. So, I'll let you evaluate whether or not there's going to be a significant shift, you think, in in the way Putin deals with Trump and vice versa, and whether or not that's going to move oil and or equities. Yeah, I can't I think you said it correctly. The fact that uh oil has not really responded much tells you the market is thinking nothing is going to really happen on that front. I think actually probably looking at some of the rare earths and some of the metals side that come from Russia, that's where things could get to be more interesting. Um, but for the most part, it doesn't seem like the market believes any of this is going to matter. It's also not clear if it's going to be in quotes bullish or bearish or if it's just sort of a a non-event. I mean, geopolitics have not factored in whatsoever to market movement at all. Um, and I don't see why this would would change uh anybody thinking now is the time to go more long or or take cash uh and raise it. Well, Zalinsky is set to meet Trump soon uh follow-up meeting. So, um, again, what are you expecting out of that? Memes. I think just more memes just like we saw when, uh, you know, the first time when it looked like they were those AI videos of them throwing down, uh, Trump. Okay. So, bottom line is you don't think Trump is going to resolve this conflict anytime soon. By the way, Hillary Clinton went in a podcast in a bizarre um, statement. She said that she would nominate Trump if he, you know, resolves this Ukraine war without Russia uh actually taking territory, without Ukraine actually seceding territory. So yeah. Yeah. I I think I think the uh I think deal making when it comes to politics uh when it comes to geopolitical dynamics for this are very different than dealm in business. So I don't I'm not so convinced that Trump is going to be able to do uh anything, but who knows? I mean, look, the war has been ongoing for a while, and Trump may just claim victory because both sides need to take a break. I don't think that's unreasonable. Before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. 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Fiscal uh uh the fiscal situation of the US personal debt uh corporate leverage all the above none. What do you mean? Yeah, all above in particular is sort of margin debt which hit a new all-time high, right? Everyone has gone in very aggressively into the same names all over again into large cap tech into the AI play. Everyone's uh we're at a point now where the concentration bubble has gotten even bigger in terms of the number of stocks, you know, select number of stocks driving the headline averages. Um, and the reason why the tariff sell off was so aggressive to begin with was because the starting point of that news was extraordinary leverage, right? It's like a crash is always uh preceded by extreme leverage and anything then setting off creates the margin calls, right? So I I fear that we're kind of back in that scenario again because you look at the data and clearly margin debt is back to very elevated levels. Now again seasonality wise you tend to have higher volatility here may not mean a thing. I do um just to be very clear I do make it I do believe very much so that independent of leverage and near-term risks there is some very strong positive bullish dynamics that are happening beneath the surface primarily when it comes to deregulation primarily when it comes to getting rid of the red tape and cutting that which is what the administration is doing with a lot of executive orders all that is a very strong tailwind but um in that tailwind you're going to have some of these air pockets and I think that's where you have to be very careful being overly bullish at this very short-term juncture. So, what are the major themes moving markets for the remainder of the year for the next last quarter of 2025? Michael, I I think the main one is actually going to be uh what Bessant and Trump do when it comes to um lending requirements, how much capital can be held by regional banks, community banks in particular. there seems to be a pretty big push to uh try to result in more liquidity coming out of regional banks um and deregulation in general when it comes to the banking sector. If that happens, I think you're going to see a whole new wave of liquidity coming into the market, but focused primarily around smaller midcap companies rather than large cap stocks. You can argue that a lot of the reason why small caps and midcaps have lag so badly beyond the AI play is that they just more starve for capital, especially against higher rates. Well, if you suddenly now loosen up some of these regulations on the banking lending side, then a lot of these companies now may have more access to capital, which allows them to compete faster and, you know, have a lifeline effectively to to try to uh increase their margins. So, it wouldn't surprise me at all to see that the next major story is going to be focused on the banking sector. Um, and I still think that we're going to see a lot more of these deregulatory measures taking place by the administration. This to me remains the most underappreciated undercurrent of the markets. Um deregulation inherently results in more competition results in um better earnings potential results in broadening out of momentum among mid and small cap companies and conceivably results in a lot of the big lagards uh suddenly becoming very big winners. You actually have an investment play around this theme. Tell us how this is being executed. Yeah, I appreciate it's called the uh the free markets ETF launched that June 10th. The idea is it's a fund that's designed to invest in companies that benefit the most from deregulation. Thankfully, out of the gate, it's been quite strong and it's got a really interesting mix of companies. I mean, you can clearly see how deregulation is being treated by the marketplace. When you look at a company like uranium energy corp on the nuclear uh uranium side, when you look at a company like Robin Hood which sits at the intersection of deregulation around financials, crypto trading um when you look at um even things which are slowly getting more and more attention which have already had big runs like Fanny May uh which is also in the portfolio. So there's a lot of really interesting companies and stocks that are in that mix. And the thing with this deregulatory push, it's like Trump comes out with these executive orders on a Wednesday or a Friday and these executive orders as they come out that are focused on deregulation, like the market doesn't respond that quickly to them. Um, and these ultimately result in much better conditions for these companies that nobody's paying attention to. So, uh, FMKT, the free markets ETF, thankfully it's it's doing well. I think the tailwind is there and I think it's a longer term play again independent of risk on riskoff dynamic short-term. I think everyone can agree that deregulation inherently frees up more potential for alpha among companies which nobody's really paying attention to. Okay. Any particular sectors that you may be more focused on? So going back to regional banks, we've been adding more to that space because we do anticipate that's going to be a big winner. Healthcare I think um is probably going to be the next major interesting place to focus on when it comes to deregulation. Um, a lot of has been made around HIMS uh and proximity uh because of deregulation when it comes to federal versus state lines on the healthcare side. Um, and healthcare probably does have a lot of potential outperformance that could come from anything that Trump announces on that end. Um, but it's the fund is active. So, a lot of this depends very much on whatever executive orders are taking place and seeing how the market itself responds broadly, right? Um typically tech is not a huge beneficiary of deregulation but utilities would be uh which is you can argue adjacent to tech because of the AI demands around electricity. So a lot of interesting uh companies on that end like Vistra and others. Um but yeah it's an interesting mix. I'm I'm I'm quite happy with the results of FMKT so far and it seems to be striking the right cord among investors. Are you still long treasuries? In the other funds as of this conversation on the 18th in Ruro and Jojo, they are riskoff short-term in long duration treasuries because that's how they have to express risk off. And as you know, treasuries are still not acting like a riskoff safe haven play. It is interesting because I do think that deregulation should in theory result in more volatility anyway, which I think should result in more risk on riskoff dynamics. And I say that very purposely because you think through regulation and sector volatility. The most regulated sector of the stock market is utilities which is also the least volatile to the extent that you free up markets from regulation and red tape. I think it should result in more volatility in general which actually a good thing if you're an active trader right separate from the theme of deregulation and investing those companies through an FMKT type vehicle. But um I do think deregulation should result in more more scarce right because freer markets have less volatility suppression right so to the effect to the extent that deregulation will move capital into some of these sectors would they move capital away from some riskoff assets like treasuries then it seem yeah for and which is why I think that's it is actually a it is a a very much a bullish tailwind right but I don't think it's bullish in the things which have already worked. I think that's sort of more the point. It just it unlocks a lot of new potential opportunities and things which have just been left for dead because regulation's been choking a lot of these companies. Okay. I I did find one tweet um here we go. Uh not as juicy as some of the other ones you've posted in the past, but anyway, we can jump off this. The market has made a lot of very stupid people think that they are intellectual geniuses. I don't know when it ends, but when it does, the sheer stupidity that surrounds us will bankrupt many. Well, I think that's a warning for us all. I mean, we've all done stupid things in our lives. We've all made stupid mistakes. But what exactly are you referring to? What prompted you to write this? I I see so many people saying things without getting too deep into which funds they're talking about, which are just patently false, right? But, uh, it's their excuse for why something has done well. And it takes all of two seconds to actually see that their excuse is actually it has nothing to do with why the performance is the way that it is. But people have la latched on to narratives that just are not based on any sort of fact or real data and it's working because they're just getting I think lucky in a moment in time. But I I do believe that there is a complete lack of any sort of real thinking when it comes to investing. I think it's a lot of automatic dumb flows that go in and people thinking that it's because they themselves are genius that their portfolio is going up 10 15% a month when in reality you may just be may be in a bubble, right? And I I I think in at the end of every sort of major bull run, you tend to see less and less sophistication. And by the way, that's borne out on the leverage side because the more leverage you are, the more risk you're taking, the more you think that you're not going to have a margin call, which I'm pretty sure means you don't care about losses, which means, hey, you're probably not that smart because you don't realize that you could lose it all, right? Okay. So practically speaking then what are some stupid mistakes that people have been making that you've noticed? I think over uh concentration in a particular stock um is a very dangerous thing. Look, it is true that the way that you make a lot of money is by going all in. It's also the way you go bankrupt. And I get the sense that when you look at a lot of these story stocks, there's a lot of money that's gone all into companies which I don't know. I just think that a lot of these things from a valuation perspective, a lot of the crowding into some of these names is going to end badly. Again, I don't know when, right? I I you know, I've been wrong in terms of my concerns around the concentration bubble around AI for last year and a half, two years, and it's still working and still making money. But the more that I'm wrong, the more that they feel emboldened that they're right, which means even more leverage, which makes the risk even higher. You've uh previously stated on X uh not too long ago, right before the summertime, that gold and Bitcoin are the ultimate expressions of free money. Tell us about that. Bitcoin dropped a little bit today, but it's above $116,000. Gold briefly surpassed $3,500 a couple of weeks ago, reaching new highs. It's now back down to $3377. So, both assets are doing exceptionally well, outperforming the stock market, broad stock market in the last month. What is your view on these alternative assets? Yeah. Yeah. And and I think the quote was more around um that there the ultimate expression of free markets because you know Bitcoin and gold are not as regulated even though you had that scare with Trump saying he might tariff uh gold. Um and in the free markets ETF FMKT we we do own IBIT and and GLDM. So we're playing Bitcoin and gold through their respective ETFs. Um and I'm not bearish on uh Bitcoin or gold long term. I don't think it's something you wait too aggressively. But if we're going to talk short-term, um, you know, it wouldn't surprise me to see a pullback in both because again, things have done uh been incredibly uh strong for both. And there's a significant amount of leverage I think that's happening in both of these asset classes. But you said it correctly, alternatives. Um, as long as people view them for what they should be, which is they should ideally be not beta plays. Bitcoin is still, I think, largely tied to equities, but as long as they exhibit the characteristics of things which are not beta equity tied plays, then you want to have them. It's like that's diversification. Do you have an outlook on Bitcoin and gold in terms of uh how they will perform for the next 12 months? Which one do you think will outperform the other? Uh versus stocks, which one would you prefer? I I think if you're going to say for the next 12 months, I would argue gold probably outperforms Bitcoin only because I do think at some point in the next 12 months, you're going to have another draw down and risk off period. And Bitcoin has yet to fully prove itself to be a riskoff asset, meaning either down less or up when equities are down hard. So, gold probably does outperform and benefit there. Um, I'd probably weight gold higher than Bitcoin here. Um, but that's because I view it more as a diversifier, not as a way of, you know, taking more money out of fiat or taking more feat out of the system into into a scarce asset. On this upcoming draw down that could happen in the next, you know, year or so, somebody on Twitter called you a perma bear. Yeah. You know, love that. What's your reaction to that? Uh, my reaction is that person probably is a bot. uh because they don't really understand what I don't see how I could possibly be a perma bear when I've got funds that need risk on which is not perma bear and I have a fund focus on deregulation which is a long only equity fund in in FMKT. Look, I just because you're pointing out risks that are there doesn't mean you don't take the risks, right? I mean, I think this is what's missed by a lot of people. When when it's raining outside, you're still going out and driving. You're just driving slower. Doesn't mean you're just not going out, right? If you still have to get to somewhere. So, um I I goes back to I think the the silly arguments that people make. A lot of people have made a lot of money. It's resulted in that thinking that they are they understand another person's viewpoint when they don't have a clue. So metaphorically speaking then, how fast are you driving in the markets right now? You going 100, 50, 30, like you know. Yeah. I mean, I guess it depends on kind of your your view on speed, but it's definitely not at the speed limit. Okay. Cautious, but still going forward. The analogy I like to give is, you know, when you come out of a a a slowdown when you're driving, when there's a lot of traffic and and suddenly it's free and clear, when you drive, what do you do? you probably go above the speed limit for a period of time because you're trying to play catch-up, right? So, it's it's like after the slow period is when you want to really gun it, right? Um that time will come. I mean it happened you obviously with the tariff flow when I was very bullish actually uh midappril but um right now I just think that caution is warranted and unless small caps really start to short-term really run crazy and and really aggressively get some momentum I just don't I think the market's tired and again that's borne out by the seasonality and the the point in the calendar we're at now. Okay. Well, this is a um chart that somebody posted on your Twitter page on your ex in response to um the comment that I just showed you. US margin debt, this goes back to what you were saying, surpassing record highs. I I just noticed just by, you know, by quick glance that this is somewhat correlated to at the actual stock market performance. So, so I mean I mean is this actually a problem? I'll let you comment on this chart. Yeah. Well, I also if you look at um you are exactly right. It's correlated because when people see the markets going up, they're using the most recent past to extrapolate into the future, which is what causes them to feel confident to lever up. That works until it doesn't. And when it doesn't, you end up having those very nasty declines and then a relevering, right? Because every single decline has not lasted that long. I mean, as we know, it's been like a month and a half, two month phenomenon, and then back to the prior push. That will work until it doesn't. But this this is exactly what I'm talking about. It's like when your margin levels are this extreme, you have to be careful because anything can set it off. All right. Well, on that note, another um risk indicator that you have is the lead leg indicator. We can't finish an interview without discussing that. You are famous for that among other things. Um any updates on that front? Yeah, I mean so look, I think um treasuries are giving some signals in terms of riskoff behavior. utilities on a very short-term basis are also giving some warning signs of risk off not because of AI but just because they're starting to show some relative strength especially in down periods which is not consistent with the AI narrative. Um and then when it comes to uh lumber that's been making a lot of rounds on X recently lumber has just like totally collapsed and finally people are starting to realize well yeah that that could be a problem because lumber is directly tied to home construction. Um, so I yeah, here's a lumber to gold ratio. It's been, if you if you look at the multi-year view, it's been down significantly since 2023. I don't know if that means anything to you. Um, I it would suggest that the markets have had a much more defensive tone, which I would argue is why small caps have have proven the bears have been correct even though the S&P has. Um, but it is it is something that's concerning because if lumber does not show signs of strength after all this movement that we've seen in the wealth effect through the S&P, then what's it going to take for home construction to really pick up? I don't know. Maybe it is more deregulation. Maybe that maybe I'm answering my own question with my own uh strategy. But um lumber is a cyclical indicator just like copper. So if lumber is not doing that well, you know, that tends to also be a warning sign. Okay, great. Uh thank you, Michael. We'll uh we'll leave it here. So you've got a lot we've got a lot of things to digest from today's interview. So thanks for coming on. Where can we find you and uh learn from you and um study your work. Yeah, appreciate it. So lead lag report on lead lagreport.substack.com and then of course freearketsetf.com to learn more about the FMKT free markets deregulation fund which hopefully will keep on getting some good traction. But uh we'll put the links down below so make sure to follow Michael there. Final question before we go. What are you most bullish and least bullish on right now given everything we've talked about? I'm most bullish on risk management. Uh okay. And and least bullish on leverage. You know, I'm staying true to true to form and what we've talked about. I think uh I think the pendulum has a funny way of swinging to the extremes like never before in history. Uh and point there's going to be a deleveraging which will be nasty and then that'll be a good time to buy in. I want to talk about um risk management in more detail uh in the next interview. There's lots to discuss there. Put your comments down below. Write to us or write to Michael if you have any questions for the next time he's on. Cheers, Michael. See you next time. Thank you, sir. Thank you for watching. Don't forget to like and subscribe.
Leverage Time Bomb: ‘Nobody’s Prepared’ For What’s Coming | Michael Gayed
Summary
Transcript
There is some very strong positive bullish dynamics that are happening beneath the surface. Primarily when it comes to deregulation, primarily when it comes to getting rid of the red tape and cutting that, which is what the administration is doing with a lot of executive orders, all that is a very strong tailwind, but um in that tailwind, you're going to have some of these air pockets. And I think that's where you have to be very careful being overly bullish at this very short-term juncture. So, when you say that the biggest risk right now is the leverage facing the system, what exactly do you mean by that? fiscal uh uh the fiscal situation of the US, personal debt, uh corporate leverage, all the above, none. What do you mean? Major geopolitical and economic developments happening this week. We'll be previewing what's up coming up and we'll be talking about what happened over the weekend. Michael Gad joins us. He is the portfolio manager of the Free Markets ETF, publisher of the Lead Lag Report. Welcome back to the show, Michael. Always good to see you. you've always got some interesting tweets or posts on X to uh for me to jump off of, but I I've been scrolling through your X account and um couldn't find anything uh provocative in the last week. Well, it's unlike me. I know. I've been so busy with so many things. I haven't even had time to be provocative. Well, let's start by talking about um let's just jump right into Jackson Holes uh uh symposium that's coming up this week. a gathering of central bankers. Some speculated it may be Jerome Powell's last as Fed chair. What are you expecting this time? Honestly, probably a whole bunch of nothing. I mean, I think Powell himself probably recognizes that this may be his last time. Uh, so it's probably going to be more of a uh a way of maybe justifying his legacy and his prior actions more than telling as far as whatever he's going to do next because whatever he's going to do next is not going to matter if there's another chair to begin with. Um, candidly, I know the market is is pushing for rate cuts. Uh, I I don't think it's impossible to envision a scenario where rates cuts actually don't happen or if they do happen, it's like a oneanddone type of thing. Uh because the reality is inflationary pressures are still there independent of the softening jobs picture. Um and yeah, it's like you always have to go back to what's the incentive of P for Powell to try to lower rates. If he lowers rates, he's basically admitting that Trump was right all along. Um and I think at the end of the day, even though he's supposed to be doing what's right for the economy, everyone's got an ego, pal included. This is the chart of the DXY. It's um done poorly compared to uh previous years. 2025 has not been kind to the dollar partly due to tariffs uh probably maybe due to other factors. What is your view on the dollar? We we spoke many times about the bank of Japan being in your words the Godzilla of the markets. Is that still the risk primary risk for US equities, the US dollar and the bond market here? Look, I think the primary risk is is very simply u the sheer amount of leverage that's in the system. So go to the when it comes to the dollar, I think the dollar itself is probably likely to be in a sideways rangebound type of movement unless you have a real riskoff policy in case the dollar were to rebound. The bearishness got to be so extreme that I I I think it's one of those things where you want to bet against the crowd. The crowd believes the dollar is going to do nothing but keep on decelerating. So probably not going to be the case in terms of what's happen what happens next. Um but the the I think the bigger question here is how does the market react uh to whatever comes out of Powell's mouth um when in reality seasonality now favors higher volatility. Now we've had this kind of very slow gradual meltup in large cap equities. Uh but the reality is typically around now into end of September that tends to be a pretty nasty stretch for markets and volatility tends to rise from here on going forward. uh maybe it's not going to matter because nothing seems to matter to this market. Uh it doesn't matter how uh many strange things come out of the administration or how many uh negative pieces of news come out. The market the S&P just wants to keep pushing higher. But the primary risk is that nobody's prepared for a volatility bout, especially when you're starting leverage is as elevated as it is. You can see that when you look at the flows into leverage funds. You can see that when you look at call option activity. Uh everyone's betting on the same on the same trade. Uh and it's working. Uh, but when it doesn't work, it's probably going to result in nasty air pocket. I want to ask you about what's uh what's uh going on with Russia and the US and whether or not the markets could be impacted by any changes to bilateral relations between the two countries. As you know, Putin visited Alaska over the weekend. Here are some notable quotes uh from the summit. As is known, Russian-American summits have not been held for more than four years. This is a long time. The past period was very difficult for bilateral relations and let's be honest they have slid to the lowest point since the cold war. This is not good for our countries. Obviously sooner or later it was necessary to correct the situation to move on from confrontation to dialogue. I don't know if they have done that and I don't know if they've actually reached a resolution on Ukraine. But here are some quotes on Ukraine. As you well know and understand one of the central issues has become the situation around Ukraine. We see the desire of the US admin and President Trump personally to facilitate the resolution of the Ukrainian conflict. his desire to delve into the essence and understand its origins. Now, I haven't personally read anything that is conclusive about a resolution on Ukraine. I don't know if you have, but anyway, the markets are kind of muted uh on Monday in reaction to what happened over the weekend. So, I don't think anyone believes that anything is going to come out of this in the inter in the immediate future. And also, oil is little changed. So, I'll let you evaluate whether or not there's going to be a significant shift, you think, in in the way Putin deals with Trump and vice versa, and whether or not that's going to move oil and or equities. Yeah, I can't I think you said it correctly. The fact that uh oil has not really responded much tells you the market is thinking nothing is going to really happen on that front. I think actually probably looking at some of the rare earths and some of the metals side that come from Russia, that's where things could get to be more interesting. Um, but for the most part, it doesn't seem like the market believes any of this is going to matter. It's also not clear if it's going to be in quotes bullish or bearish or if it's just sort of a a non-event. I mean, geopolitics have not factored in whatsoever to market movement at all. Um, and I don't see why this would would change uh anybody thinking now is the time to go more long or or take cash uh and raise it. Well, Zalinsky is set to meet Trump soon uh follow-up meeting. So, um, again, what are you expecting out of that? Memes. I think just more memes just like we saw when, uh, you know, the first time when it looked like they were those AI videos of them throwing down, uh, Trump. Okay. So, bottom line is you don't think Trump is going to resolve this conflict anytime soon. By the way, Hillary Clinton went in a podcast in a bizarre um, statement. She said that she would nominate Trump if he, you know, resolves this Ukraine war without Russia uh actually taking territory, without Ukraine actually seceding territory. So yeah. Yeah. I I think I think the uh I think deal making when it comes to politics uh when it comes to geopolitical dynamics for this are very different than dealm in business. So I don't I'm not so convinced that Trump is going to be able to do uh anything, but who knows? I mean, look, the war has been ongoing for a while, and Trump may just claim victory because both sides need to take a break. I don't think that's unreasonable. Before we continue with the video, let me tell you about a very serious threat that you're facing every day that you may not even be aware of. 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Fiscal uh uh the fiscal situation of the US personal debt uh corporate leverage all the above none. What do you mean? Yeah, all above in particular is sort of margin debt which hit a new all-time high, right? Everyone has gone in very aggressively into the same names all over again into large cap tech into the AI play. Everyone's uh we're at a point now where the concentration bubble has gotten even bigger in terms of the number of stocks, you know, select number of stocks driving the headline averages. Um, and the reason why the tariff sell off was so aggressive to begin with was because the starting point of that news was extraordinary leverage, right? It's like a crash is always uh preceded by extreme leverage and anything then setting off creates the margin calls, right? So I I fear that we're kind of back in that scenario again because you look at the data and clearly margin debt is back to very elevated levels. Now again seasonality wise you tend to have higher volatility here may not mean a thing. I do um just to be very clear I do make it I do believe very much so that independent of leverage and near-term risks there is some very strong positive bullish dynamics that are happening beneath the surface primarily when it comes to deregulation primarily when it comes to getting rid of the red tape and cutting that which is what the administration is doing with a lot of executive orders all that is a very strong tailwind but um in that tailwind you're going to have some of these air pockets and I think that's where you have to be very careful being overly bullish at this very short-term juncture. So, what are the major themes moving markets for the remainder of the year for the next last quarter of 2025? Michael, I I think the main one is actually going to be uh what Bessant and Trump do when it comes to um lending requirements, how much capital can be held by regional banks, community banks in particular. there seems to be a pretty big push to uh try to result in more liquidity coming out of regional banks um and deregulation in general when it comes to the banking sector. If that happens, I think you're going to see a whole new wave of liquidity coming into the market, but focused primarily around smaller midcap companies rather than large cap stocks. You can argue that a lot of the reason why small caps and midcaps have lag so badly beyond the AI play is that they just more starve for capital, especially against higher rates. Well, if you suddenly now loosen up some of these regulations on the banking lending side, then a lot of these companies now may have more access to capital, which allows them to compete faster and, you know, have a lifeline effectively to to try to uh increase their margins. So, it wouldn't surprise me at all to see that the next major story is going to be focused on the banking sector. Um, and I still think that we're going to see a lot more of these deregulatory measures taking place by the administration. This to me remains the most underappreciated undercurrent of the markets. Um deregulation inherently results in more competition results in um better earnings potential results in broadening out of momentum among mid and small cap companies and conceivably results in a lot of the big lagards uh suddenly becoming very big winners. You actually have an investment play around this theme. Tell us how this is being executed. Yeah, I appreciate it's called the uh the free markets ETF launched that June 10th. The idea is it's a fund that's designed to invest in companies that benefit the most from deregulation. Thankfully, out of the gate, it's been quite strong and it's got a really interesting mix of companies. I mean, you can clearly see how deregulation is being treated by the marketplace. When you look at a company like uranium energy corp on the nuclear uh uranium side, when you look at a company like Robin Hood which sits at the intersection of deregulation around financials, crypto trading um when you look at um even things which are slowly getting more and more attention which have already had big runs like Fanny May uh which is also in the portfolio. So there's a lot of really interesting companies and stocks that are in that mix. And the thing with this deregulatory push, it's like Trump comes out with these executive orders on a Wednesday or a Friday and these executive orders as they come out that are focused on deregulation, like the market doesn't respond that quickly to them. Um, and these ultimately result in much better conditions for these companies that nobody's paying attention to. So, uh, FMKT, the free markets ETF, thankfully it's it's doing well. I think the tailwind is there and I think it's a longer term play again independent of risk on riskoff dynamic short-term. I think everyone can agree that deregulation inherently frees up more potential for alpha among companies which nobody's really paying attention to. Okay. Any particular sectors that you may be more focused on? So going back to regional banks, we've been adding more to that space because we do anticipate that's going to be a big winner. Healthcare I think um is probably going to be the next major interesting place to focus on when it comes to deregulation. Um, a lot of has been made around HIMS uh and proximity uh because of deregulation when it comes to federal versus state lines on the healthcare side. Um, and healthcare probably does have a lot of potential outperformance that could come from anything that Trump announces on that end. Um, but it's the fund is active. So, a lot of this depends very much on whatever executive orders are taking place and seeing how the market itself responds broadly, right? Um typically tech is not a huge beneficiary of deregulation but utilities would be uh which is you can argue adjacent to tech because of the AI demands around electricity. So a lot of interesting uh companies on that end like Vistra and others. Um but yeah it's an interesting mix. I'm I'm I'm quite happy with the results of FMKT so far and it seems to be striking the right cord among investors. Are you still long treasuries? In the other funds as of this conversation on the 18th in Ruro and Jojo, they are riskoff short-term in long duration treasuries because that's how they have to express risk off. And as you know, treasuries are still not acting like a riskoff safe haven play. It is interesting because I do think that deregulation should in theory result in more volatility anyway, which I think should result in more risk on riskoff dynamics. And I say that very purposely because you think through regulation and sector volatility. The most regulated sector of the stock market is utilities which is also the least volatile to the extent that you free up markets from regulation and red tape. I think it should result in more volatility in general which actually a good thing if you're an active trader right separate from the theme of deregulation and investing those companies through an FMKT type vehicle. But um I do think deregulation should result in more more scarce right because freer markets have less volatility suppression right so to the effect to the extent that deregulation will move capital into some of these sectors would they move capital away from some riskoff assets like treasuries then it seem yeah for and which is why I think that's it is actually a it is a a very much a bullish tailwind right but I don't think it's bullish in the things which have already worked. I think that's sort of more the point. It just it unlocks a lot of new potential opportunities and things which have just been left for dead because regulation's been choking a lot of these companies. Okay. I I did find one tweet um here we go. Uh not as juicy as some of the other ones you've posted in the past, but anyway, we can jump off this. The market has made a lot of very stupid people think that they are intellectual geniuses. I don't know when it ends, but when it does, the sheer stupidity that surrounds us will bankrupt many. Well, I think that's a warning for us all. I mean, we've all done stupid things in our lives. We've all made stupid mistakes. But what exactly are you referring to? What prompted you to write this? I I see so many people saying things without getting too deep into which funds they're talking about, which are just patently false, right? But, uh, it's their excuse for why something has done well. And it takes all of two seconds to actually see that their excuse is actually it has nothing to do with why the performance is the way that it is. But people have la latched on to narratives that just are not based on any sort of fact or real data and it's working because they're just getting I think lucky in a moment in time. But I I do believe that there is a complete lack of any sort of real thinking when it comes to investing. I think it's a lot of automatic dumb flows that go in and people thinking that it's because they themselves are genius that their portfolio is going up 10 15% a month when in reality you may just be may be in a bubble, right? And I I I think in at the end of every sort of major bull run, you tend to see less and less sophistication. And by the way, that's borne out on the leverage side because the more leverage you are, the more risk you're taking, the more you think that you're not going to have a margin call, which I'm pretty sure means you don't care about losses, which means, hey, you're probably not that smart because you don't realize that you could lose it all, right? Okay. So practically speaking then what are some stupid mistakes that people have been making that you've noticed? I think over uh concentration in a particular stock um is a very dangerous thing. Look, it is true that the way that you make a lot of money is by going all in. It's also the way you go bankrupt. And I get the sense that when you look at a lot of these story stocks, there's a lot of money that's gone all into companies which I don't know. I just think that a lot of these things from a valuation perspective, a lot of the crowding into some of these names is going to end badly. Again, I don't know when, right? I I you know, I've been wrong in terms of my concerns around the concentration bubble around AI for last year and a half, two years, and it's still working and still making money. But the more that I'm wrong, the more that they feel emboldened that they're right, which means even more leverage, which makes the risk even higher. You've uh previously stated on X uh not too long ago, right before the summertime, that gold and Bitcoin are the ultimate expressions of free money. Tell us about that. Bitcoin dropped a little bit today, but it's above $116,000. Gold briefly surpassed $3,500 a couple of weeks ago, reaching new highs. It's now back down to $3377. So, both assets are doing exceptionally well, outperforming the stock market, broad stock market in the last month. What is your view on these alternative assets? Yeah. Yeah. And and I think the quote was more around um that there the ultimate expression of free markets because you know Bitcoin and gold are not as regulated even though you had that scare with Trump saying he might tariff uh gold. Um and in the free markets ETF FMKT we we do own IBIT and and GLDM. So we're playing Bitcoin and gold through their respective ETFs. Um and I'm not bearish on uh Bitcoin or gold long term. I don't think it's something you wait too aggressively. But if we're going to talk short-term, um, you know, it wouldn't surprise me to see a pullback in both because again, things have done uh been incredibly uh strong for both. And there's a significant amount of leverage I think that's happening in both of these asset classes. But you said it correctly, alternatives. Um, as long as people view them for what they should be, which is they should ideally be not beta plays. Bitcoin is still, I think, largely tied to equities, but as long as they exhibit the characteristics of things which are not beta equity tied plays, then you want to have them. It's like that's diversification. Do you have an outlook on Bitcoin and gold in terms of uh how they will perform for the next 12 months? Which one do you think will outperform the other? Uh versus stocks, which one would you prefer? I I think if you're going to say for the next 12 months, I would argue gold probably outperforms Bitcoin only because I do think at some point in the next 12 months, you're going to have another draw down and risk off period. And Bitcoin has yet to fully prove itself to be a riskoff asset, meaning either down less or up when equities are down hard. So, gold probably does outperform and benefit there. Um, I'd probably weight gold higher than Bitcoin here. Um, but that's because I view it more as a diversifier, not as a way of, you know, taking more money out of fiat or taking more feat out of the system into into a scarce asset. On this upcoming draw down that could happen in the next, you know, year or so, somebody on Twitter called you a perma bear. Yeah. You know, love that. What's your reaction to that? Uh, my reaction is that person probably is a bot. uh because they don't really understand what I don't see how I could possibly be a perma bear when I've got funds that need risk on which is not perma bear and I have a fund focus on deregulation which is a long only equity fund in in FMKT. Look, I just because you're pointing out risks that are there doesn't mean you don't take the risks, right? I mean, I think this is what's missed by a lot of people. When when it's raining outside, you're still going out and driving. You're just driving slower. Doesn't mean you're just not going out, right? If you still have to get to somewhere. So, um I I goes back to I think the the silly arguments that people make. A lot of people have made a lot of money. It's resulted in that thinking that they are they understand another person's viewpoint when they don't have a clue. So metaphorically speaking then, how fast are you driving in the markets right now? You going 100, 50, 30, like you know. Yeah. I mean, I guess it depends on kind of your your view on speed, but it's definitely not at the speed limit. Okay. Cautious, but still going forward. The analogy I like to give is, you know, when you come out of a a a slowdown when you're driving, when there's a lot of traffic and and suddenly it's free and clear, when you drive, what do you do? you probably go above the speed limit for a period of time because you're trying to play catch-up, right? So, it's it's like after the slow period is when you want to really gun it, right? Um that time will come. I mean it happened you obviously with the tariff flow when I was very bullish actually uh midappril but um right now I just think that caution is warranted and unless small caps really start to short-term really run crazy and and really aggressively get some momentum I just don't I think the market's tired and again that's borne out by the seasonality and the the point in the calendar we're at now. Okay. Well, this is a um chart that somebody posted on your Twitter page on your ex in response to um the comment that I just showed you. US margin debt, this goes back to what you were saying, surpassing record highs. I I just noticed just by, you know, by quick glance that this is somewhat correlated to at the actual stock market performance. So, so I mean I mean is this actually a problem? I'll let you comment on this chart. Yeah. Well, I also if you look at um you are exactly right. It's correlated because when people see the markets going up, they're using the most recent past to extrapolate into the future, which is what causes them to feel confident to lever up. That works until it doesn't. And when it doesn't, you end up having those very nasty declines and then a relevering, right? Because every single decline has not lasted that long. I mean, as we know, it's been like a month and a half, two month phenomenon, and then back to the prior push. That will work until it doesn't. But this this is exactly what I'm talking about. It's like when your margin levels are this extreme, you have to be careful because anything can set it off. All right. Well, on that note, another um risk indicator that you have is the lead leg indicator. We can't finish an interview without discussing that. You are famous for that among other things. Um any updates on that front? Yeah, I mean so look, I think um treasuries are giving some signals in terms of riskoff behavior. utilities on a very short-term basis are also giving some warning signs of risk off not because of AI but just because they're starting to show some relative strength especially in down periods which is not consistent with the AI narrative. Um and then when it comes to uh lumber that's been making a lot of rounds on X recently lumber has just like totally collapsed and finally people are starting to realize well yeah that that could be a problem because lumber is directly tied to home construction. Um, so I yeah, here's a lumber to gold ratio. It's been, if you if you look at the multi-year view, it's been down significantly since 2023. I don't know if that means anything to you. Um, I it would suggest that the markets have had a much more defensive tone, which I would argue is why small caps have have proven the bears have been correct even though the S&P has. Um, but it is it is something that's concerning because if lumber does not show signs of strength after all this movement that we've seen in the wealth effect through the S&P, then what's it going to take for home construction to really pick up? I don't know. Maybe it is more deregulation. Maybe that maybe I'm answering my own question with my own uh strategy. But um lumber is a cyclical indicator just like copper. So if lumber is not doing that well, you know, that tends to also be a warning sign. Okay, great. Uh thank you, Michael. We'll uh we'll leave it here. So you've got a lot we've got a lot of things to digest from today's interview. So thanks for coming on. Where can we find you and uh learn from you and um study your work. Yeah, appreciate it. So lead lag report on lead lagreport.substack.com and then of course freearketsetf.com to learn more about the FMKT free markets deregulation fund which hopefully will keep on getting some good traction. But uh we'll put the links down below so make sure to follow Michael there. Final question before we go. What are you most bullish and least bullish on right now given everything we've talked about? I'm most bullish on risk management. Uh okay. And and least bullish on leverage. You know, I'm staying true to true to form and what we've talked about. I think uh I think the pendulum has a funny way of swinging to the extremes like never before in history. Uh and point there's going to be a deleveraging which will be nasty and then that'll be a good time to buy in. I want to talk about um risk management in more detail uh in the next interview. There's lots to discuss there. Put your comments down below. Write to us or write to Michael if you have any questions for the next time he's on. Cheers, Michael. See you next time. Thank you, sir. Thank you for watching. Don't forget to like and subscribe.