Changes Ahead

Daren:
[0:01] All right Chris it's Saturday morning sorry to all those who look for our Friday show like your dad and my mom but um we uh didn't get it done on Friday because of travel so uh here we are Saturday morning and uh I guess almost afternoon uh to wrap up the markets for the week uh another exciting week but next week's gonna be interesting to say the least um changes ahead folks for good for bad for however you perceive it um but coming in strong with this week's meme chris for those who don't know last night um it appears that trump launched his own meme coin which for those who don't understand what a meme coin is it's like a joke cryptocurrency it's what gives all the cryptocurrencies a bad name and uh he launches this coin and it just skyrockets and people are like bidding a million bucks on it and then turning that into 125 million overnight. I mean, pretty crazy.

Daren:
[1:04] So anyway, it's interesting. It'll be interesting to see where that lands. But we're going to cover that and a whole lot more right after this.

Music:
[1:14] Music

Chris:
[1:53] I think it really captures the whole vibe or essence of markets these days, Daren. We've been talking about it really since COVID. I think it's kicked in more than ever. But modern markets today are much more about gambling than they are about investing. And it's meme coins. It's pump and dumps. It's fraud everywhere. I, for one, can't wait for this era to be over.

Daren:
[2:27] Well, will it be over, Chris?

Chris:
[2:29] Oh, gosh, I hope so.

Daren:
[2:31] I mean, what if this is the new normal?

Chris:
[2:32] I don't know how much longer. I don't know how much longer I can last, man. I don't. It just seems like something dumber every day comes out and I don't know how much longer I can take it.

Daren:
[2:43] You mean the president or the future soon to be president of the United States launching his own meme coin isn't dumb? Like, what are you talking about?

Chris:
[2:50] Yeah, I don't know how you can top that in the world of dumb, but I'm sure there's a way. I'm sure there's a way and it'll probably come, you know, it's coming fast and furious, that's for sure. Now, we've had a huge drop in sentiment. I don't remember the last time bullish sentiment was under 30. I don't know if you do. Maybe in 2022, you know, when everything was going down. But really since then, we haven't seen the 20s on bullish sentiment in quite a while. CNN Fear and Greed Index matches up with that at 38, which is fear. That's up from 26 last week, which was still fear, but it was almost extreme fear. It was like one tick off of extreme fear. And then we've got Bitcoin at 77, extreme greed, up slightly from 69 last week. so you know it's, And Bitcoin's been everywhere from what, like 90 to 106, maybe in the last like two weeks or so. So things really sloshing around there in terms of sentiment.

Daren:
[4:02] You know but when you look at just because you brought it up for us i mean come on and um the uh when you look at it in the scheme of things though what could be printing here uh you can see kind of an ugly double bottom but it looks like we might have a breakout of a double bottom right here uh and that's pretty bullish on its face the fact that it went down to 92 and then quickly went right up into 104 which is coming along this important trend line here um looks pretty positive. I'd say it's got to break this area right here, though, for me to feel like we're going higher, higher. Right now, I'd say that's a gentle rejection of that trend line.

Chris:
[4:42] Now, remind me, what did President Trump say about it this week before it jumped? I read it, and my mind's just skipped on it. I can't remember what he said he was going to do something and bitcoin really took off.

Daren:
[4:57] Well it's a it's it's the hype that's out there around a strategic bitcoin reserve and for those who don't know what a strategic bitcoin reserve is is the idea is as the dollar becomes more and more saturated with our printing presses and that creates stability issues with the dollar countries are looking for ways to shore up their balance sheets in the event that the dollar doesn't remain the primary operating currency of the world. And one thought of that is gold. So you've seen a lot of central banks buying up gold. And we've talked about this quite a bit on this show and this whole run up in gold we've had over 2024. And this is also looking pretty bullish, I must say, on its face. Yeah.

Daren:
[5:45] Because a lot of central banks are just gobbling up gold as a means. Well, if there is a dollar reset in the sense that we overprint the dollar, like we've been doing, uh, that, uh, there's a fallback currency. And at this point, there's not really a great contender. You're not going to use the euro. You're not going to use the yuan. Uh, you're not going to use the Japanese yen. Uh, There's really no currency. So you've seen countries grab gold and potentially Bitcoin. And so there's this talk, and there were multiple states this week, actually, that various state representatives put proposals on their dockets for a strategic Bitcoin reserve in the event that Bitcoin becomes the primary store of value across the globe.

Daren:
[6:36] That was probably more than you wanted, Chris, but that's what's going on.

Daren:
[6:43] All right so um let's go on to the next one here all right so chris do we got you All right. Looks like Chris, there's some kid stuff being sick going on in the background. So I'm going to jump right back in here. So if we take a look at SPY for the week, some good things on the SPY. So the SPY is the measure of the S&P 500 in the largest 500 US-based stocks.

Daren:
[7:18] And we've been kind of in this downtrend look since December. You can see where it kind of topped out right here and then we've been trending down the trend has been down and on friday we bounced up above that trend line that's bullish on its face right that says okay stocks probably go higher from here again we want to see some follow-through one of my favorite trade setups is this breakout test and resumption that we're looking for so too yet to say, but I would say on his face, that looks pretty bullish, bullish move. When we look on a weekly chart, you can see this big green engulfing candle that is larger, more or less than this red, slightly invalidated by this wick being just slightly above the wick of that green candle. But overall, I'd say that's a pretty bullish move for the week in the S&P 500.

Daren:
[8:10] So when we look at And where that might be coming from, I always like to use FinViz and use their, nevermind the advertisements always pop up, and use their heat map, I think is a great visual way to see the S&P 500. And when you look at FinViz, you can see these big dogs yesterday, the Magnificent 7 really took off and did pretty well. And that took the whole index higher. And that's really what's going on. Only really healthcare was read yesterday. When we look on the one week performance, it'll be a little bit more varied, but largely just green apples, the only dog in the street right now. So that's positive, right? I think you have to take that positive, whether you like the changes coming at us or don't like the changes coming at us.

Daren:
[9:02] So I think the currents are looking green right now.

Daren:
[9:07] One real important piece of data that came out this week, the core CPI, you can see core CPI came in below expectations. Expectations were 0.3, it came in at 0.2. And that was good news because there was a lot of fear in the markets around inflation. When that core CPI number came down, we saw the 10-year then drop. And this has been a concern looking at the 10-year because the 10-year really sets a lot of our base rate or one of our base rates for much of the economy and mortgages and et cetera. And rates going up so significantly like they have since September has been a headwind, no doubt. And we're starting to see that trend absolve itself a little bit and switch directions. And you can see this long-term trend line with the 10-year. And you can see that we are trading much above it all through 22, 23, and parts of 24. And then we sold below it. We went below it. And that was the relief rally outcome with the bond market. And then when rates started going back up, bonds started doing bad again. That was very painful for anyone who was diversified. So the only ones that have actually made any money in the markets has been...

Daren:
[10:35] The stock market, because the bond market is absolutely punished because of rates. So for the diversified investors who are perhaps frustrated with the portfolios or their portfolio because their bonds are going nowhere, this bodes well that we're seeing the rate cap out here. And it got rejected in what you would expect to be resistance, which was this trend line here. So that move looks more or less done. Um and we'll see um i'm not confident saying hey this is a total rejection till we get this move there a double rejection there and then resumption down but that would bode well for the ag and um um so if we're looking at the ag um here let me go back i didn't switch the chart on you i apologize so here's the 10 year we're looking at this trend line so the 10 year has been trading above this trend line. It went below it. That was relief rally for the bond market. Then rates started going back up and that was pressure on the bonds. Bonds not doing as well after that. And then now we've been rejected at this seemingly obvious line and we're rejected here. That could bode well for bonds doing well coming into 2025.

Daren:
[11:58] So when we go to the ag and we look at the ag, you can see they responded nicely to that rate change or that CPA, that lower than expected print in the CPI. And we got a nice bounce in the bond market back above that 100 period moving average, you can see right here. But we're coming into kind of some spaghetti soup as far as resistance is concerned. All right, Chris, do I got you with me?

Chris:
[12:27] I believe so. Can you hear me?

Daren:
[12:29] Yeah.

Chris:
[12:30] Yep. Okay. Sorry about that technical difficulties.

Daren:
[12:34] We'll dive right back in here. I thought one of your kids puked on you again.

Chris:
[12:39] Good guess, but not the case. So one of the big things that happened this week on Friday actually was the housing starts came in better than expected. And so we talked a little bit last week about how there's been a lot of signs of struggle in the housing market of late. And, you know, so an uptick in housing starts was something that hit the markets on Friday, which was good news for the markets and things kind of took off. So much of the U.S. Market is driven by housing, and if that shows strength, that will be something that will bode well for the markets.

Chris:
[13:25] And so this is something to keep an eye on moving forward. And that's that dark blue line, the single-family housing starts, and that tends to correlate with the sales over the next six months.

Chris:
[13:45] So I think you and I haven't particularly had a chance to discuss this, but I think we would be in agreement that the biggest driver of markets over the next three to five years is going to be, and probably 10 years, is going to be the U.S. Debt situation, the fiscal and monetary situation in the U.S. We have a new administration taking over in a much different position than they were in 2016 for the U.S. In terms of the financial picture. We did get the somewhat favorable CPI this week at 3.2, although Jim Bianco was pointing out that had they rounded up to 3.3 because it was 3.2 something something, they could have rounded up to 3.3, which would have been a miss. The market probably would have uh you could do a.

Daren:
[14:41] Lot of things yeah

Chris:
[14:43] So but i think that this this is showing cumulative uh cpi uh over since uh looks like going back to the the 1900s and you can see that we've just hockey sticked since the the pandemic when we put uh more money into the system than has ever been put in before which you can see on the next chart with the m2 uh money supply chart. So this looks a lot like the CPI chart. And I think it was Milton Freeman that said something like, inflation is always... In everywhere a monetary phenomenon. It's not just voodoo where it comes from. It comes from the fact that they're pumping more money into the system. You got more dollars chasing fewer goods. And so inflation has been a problem. It seems like the market is concerned about inflation with interest rates, although I hope you're right that we're starting to see some relief there because you wonder how much further the market's able to go with these higher interest rates if the market is baking in higher inflation. I think a big part of that is just not sure exactly what's going to go through with all the campaign promises.

Chris:
[16:03] Because I was listening to some investment radio this morning and they were talking about how if we're really not going to tax Social Security, if we're not going to tax tips, If we're going to add certain things to the Medicare coverage, all these things.

Chris:
[16:21] Those are all more deficit spending, something like an additional $6 trillion over the next 10 years, when you already have the U.S. In a fairly tight monetary and fiscal position compared to where we've been historically. So uh you know if this money you can see we saw a short-term drop in the money supply in 22 which caused all kinds of havoc in the markets um and now we're back on the uptrend and so i think as an investor you know the so what here is you better have some things in your portfolio that do well in inflationary environments you know uh the old traditional plain 60 40 um might have some struggles because it's not geared towards an inflationary environment,

Chris:
[17:14] which we have not seen in a very, very long time. And so some of those diversifiers that have not worked for a very long time might start to kick in here if we start to continue to see inflation.

Chris:
[17:34] So here we have the inflation, continue, continue to see inflation coming back. Right. You know, because if you've got, you see here, the U S government deficits, and this is not a, you know, it wasn't just a Biden thing. It wasn't just a Trump thing. It wasn't just Obama. It's really started quite a while ago where we started seeing this deficit spending. The last president to not have deficit spending was Clinton. So that gives you an idea of how many administrations have been in power since then. And we've just seen further and deeper and deeper and deeper deficits, meaning that basically they're not collecting the taxes to cover the spending. So they're spending without covering it, and it's all going into debt. And that was fine when our debt to GDP was a lot lower than it is now. But now that if you look at the next slide, this will show the federal debt to GDP, and we're currently at 120%. This is the highest it's been since the end of World War II. So after we did all the borrowing to literally win a world war, we're in a similar position as a portion of our overall debt.

Chris:
[19:01] So debt is one of those things where sort of like on a personal level, you tell me somebody borrowed $100,000. I don't really know if that's a lot of money until you tell me what their total net worth is. Their total net worth is $200,000. That's significant leverage. If their total net worth is $10 million, that's very doable. We've accumulated a debt as a country to this point where it is starting to be onerous. And there was a book written back around when the great financial crisis happened called This Time is Different.

Chris:
[19:46] And it was a couple of professors, I believe from Harvard, Reinhardt and Rogoff. And I realized there was some calculation error in there that everybody said, they basically just wrote the whole book off based on that one error. But their main point was that after I think it was about 100% debt to GDP,

Chris:
[20:08] you're no longer getting the return for the borrowing. So instead of getting, you know, more than a dollar's worth of growth for every dollar that you're borrowing, you start to get less than a dollar's worth of growth. And that's mostly because the interest costs start to take over and become more and more of a big part of the pie. so um.

Chris:
[20:31] If we go to the next slide, you'll see the interest expense at the end of the fiscal year. So when interest rates have gone from zero to now where they're at, you know, four or five percent, the government, the interest expense goes up exponentially as well. So currently over a trillion dollars a year that we're spending just in interest. Now, I'll never forget my economics teacher freshman year of college used this analogy of you go to the family picnic and there's food everywhere. Everybody bought food, right? And so there's a supply of food there. And everything is fine until Big Papa Steve gets there. Big Papa Steve comes in and he eats the most, and he's always the first one that goes through, and he takes the biggest share of the pie. Right and in this analogy big papa steve is the u.s government and the more demand the government has for that money the more the interest rates are driven up uh based on on the the demand for that money which causes the the uh the price of that uh money to go up for everybody else that's at the party and.

Daren:
[21:51] I had no idea there was such a thing as big papa steve this is a new concept to

Chris:
[21:55] Big Papa Steve, hey, you know what? It worked. Here it is 20-some years later, and I still remember that analogy.

Chris:
[22:04] His whole point was, look, when Big Papa Steve gets to the party, the food's going to be gone soon, and it's going to be scarcer. Right?

Chris:
[22:17] I think there's a big question right now of when does this matter? When do all these imbalances start to matter for the markets? When is the breaking point? When do we have the quote-unquote Liz Trust moment like they had in the UK where she tried to put together their fiscal plan and the bond market just blew out. The interest rates went sky high overnight and basically the bond market said, nope, you're not doing that. It's not going to work. And so we have not had that moment yet, thankfully, but when will it happen? I don't know. because it seems like this type of imbalance can't go on forever, at least it hasn't historically. From an investment perspective, what do governments usually do when they get in this much debt? They monetize it because really they only have three choices. They can default, they can pay it down, or they can monetize it, which is basically where they try to keep the rate of inflation above the rate that they're borrowing at so that they're paying back that money with cheaper dollars.

Chris:
[23:36] And I think that the new administration would also argue that you can grow your way out of it, through just making the economy so powerful and hot that it will attract more tax dollars, more growth, and grow your way out of it. I suppose that's a way. I don't think that's historically how governments have gone about it. So, you know, for me personally, I would bet on the easy route for the politicians, which is the trying to inflate it away through monetization.

Daren:
[24:13] I think in the, and there's this fine balance, right? Like if you're going to inflate away, you can do it in theory, if you're not inflating it too fast and you've got to inflate it. And I, we, we've been talking about this for a very long time, but I referred to it many times as the slow burn, right? You got to make it a slow burn. And that's the only way to really inflate it. If you make it a fire and it's a huge cumulus cloud LA type fire they had this week, last week, then you have issues. But if you can just slowly burn it with inflation out of the economy, in theory, it's possible.

Chris:
[24:54] Absolutely. So let me just read what Jim Bianco said from this chart, which goes back to the 1800s. Amazing. You know me, I'm a sucker for any chart that goes back that far. Now this is the rolling three-year u.s long-term nominal bond total returns and he says it might be worse than the portrayed below the last three years have been the worst stretch for bonds in 180 years no typo yes this has led many to violently oppose the bond market a move to five 5.5% 10-year yields is effectively a rounding error for these charts. But should such a move create an audible scream of pain, it would be a textbook contrarian buy signal. I think it was Sir John Templeton saying that you want to buy when there's blood in the streets. I don't know if this is blood in the streets for the bond market, but it certainly feels like it. Nobody wants bonds.

Chris:
[25:57] Advisors are not wanting to hold them. Clients are not wanting to hold them. But typically, If these higher interest rates sustain up here, and that ends up in turn causing lower growth than what's expected, which the stock market has very high growth programmed in right now and expected. If that does not happen, what performs best in a low growth environment? It's bonds. and so especially if you get some sort of a deflationary bust where a lot of credit is coming out of the system and so you know there's a lot of you know when you look back on the on the big opportunities buying stocks in 2009 as an example did anybody want to own stocks at that time, especially U S stocks? Absolutely not. Uh, that was after they were down 50 some percent. And, um, so usually these times where it's literally a puke point, right. Uh, where nobody wants this, this asset class, you're getting close to the time where it might be, uh, you know, worth considering as, as a contrarian play as Jim Bianco says here.

Daren:
[27:16] Well, and that's, but that's also the other like i guess i would just offer the an alternative argument though that we've never been in this position before where we've printed money so insanely and we put so much debt on us in the last few years the assumption here is that the u.s debt continues to exist as the premier debt option for the world? And I think that's the question you at least have to interrogate, at least have to ask that question. I don't want to say this time is different, but I think you can't just print trillions and trillions of dollars nonstop like we have been since COVID or before that and not have an economic output with that economic input.

Chris:
[28:10] Yeah, agreed. And, and I think that the bond market is showing that that has been absorbed into the bond market, you know, in terms of where we are financially today. Right. And so that's why it's so, I think, important wherever, whichever direction the administration goes forward now. Because if we go from 120% debt to GDP to 160, 170, they keep pushing the envelope further, run bigger and bigger deficits, and the market sees more inflation and higher rates. If we go from 5% on the third year to 6%, 6.5%, the question to me is, where does that pain from the bond market finally flow through to the other markets where it sends the signal to the government, hey, you can't keep doing the things that you're doing and continue to operate in the world that way? The market just will not allow it. We'll see. And maybe there's a case of the Fed comes in and monetizes that debt. They've done it before. They've threatened to do it before.

Chris:
[29:25] And so that might be the way that they try to do it where the Fed comes in and prints and pays and buys the bonds like they did in Japan.

Daren:
[29:36] It's going to be really interesting, though. In theory, Trump could be in a really bad position because Trump's, So there's been a lot of support from the Bitcoin world and from these alternative stores of value to support the Trump administration in the hope of getting an administration that's pro their perspective, right? And it'll be really interesting if he has to throw them under the bus in order to save the dollar. You can almost kind of see that happening.

Chris:
[30:12] Um, yeah, you know, I think it's Brett Johnson. He's had that, that theory about, um, you know, the strong dollar, the dollar milkshake, absolutely been a hundred percent right on. Cause there's no sign of weakness in the dollar at this point. In fact, it's getting stronger and stronger, which is, uh, you know, a headwind for all risk assets when, when the dollar gets stronger. So you don't want too strong of a dollar but his end his end situation of that theme as I understand it is that basically the dollar gets so strong that it destroys itself, the system that it's surrounded by ends up collapsing because of the fact that the dollar gets too strong not because it gets too weak which is an interesting, inverting of that thinking.

Daren:
[31:08] Yeah that is interesting that it destroys itself huh

Chris:
[31:11] Yeah so um which you know sort of makes sense, that's basically what happened with the gold standard that the money just got too tight and so they had to break the gold standard because of because of that um it's it was It wasn't because it was getting too weak. So interesting times. I just think that the upshot is that the next 10 years are not going to be the same as the last 10 years. You think? Because the conditions are so much different at this point than they were 10 years ago.

Daren:
[31:53] All right. All right.

Chris:
[31:56] So this is from B of A showing that this is the worst long run return for the U.S. Treasuries in 90 years. So this is instead of a three-year rolling average, this is a 10-year rolling annualized returns. And so the last time we saw this was in the 60s. And so they say this is peak. This is the peak in, quote unquote, anything but bonds trade. So you know that sounds to me like b of a is declaring there's blood in the streets in the bond market um it is especially the u.s bond market um the sentiment is just in the doldrums for sure and if you look at the last chart here the so what for equity investors because i know a lot of people are saying i don't care i don't own bonds anyway i never would um why do i care Well, this is from a high amount via Willie DeWiki showing the S&P 500 when yields are rising on that red line. You'll notice that's down to flat versus the S&P 500 when yields are falling. And so it's important because the bond market is going to, or at least it has in the past, Again, maybe somehow we have some magical decoupling that's never happened before.

Chris:
[33:21] But rising yields are not good typically for stocks, especially in the short run. And so this is over the last 25 years. And he's saying, hey, just own stocks when yields are going down. Well, it's not that easy, of course. It's only easy in hindsight to do these types of back tests. But I think it's illustrative of the point that rising interest rates are very bad for risk assets.

Daren:
[34:00] So, Chris, we've been talking about the oil chart for quite a few weeks. And we definitely got that breakout on that long-term downtrend line, trend zone. You can see that breakout and we're coming back in for the test right now. So there's kind of an interesting possibility brewing here just to kind of run with me through the tea leaves for a minute. But if we look at the oil market, And you can see this breakout happening, which isn't really great for the economy, right? Because so many things are made out of oil. So if oil is going up and we're breaking out of this long-term trend line, anyway, you'd want to measure that. And we've got the ag starting to turn around and perhaps showing us that it's at a bottom, right? We got a little bit of bounce. I don't want to call it yet, but you can see this bounce here that happened because the 10-year got rejected up here.

Daren:
[35:03] I'd say there's the whisperings here of a weak economy or weakness in the economy. And this really gets back to what we were talking about just a few minutes ago around money printing and the importance of that to keep this economy stabilized because that's what the last administration's doing. I think you should bet on the fact that Trump's going to do the same thing. I don't think he's going to be any different. He'll just buy different things and use a lot of fiscal stimulus. There's monetary stimulus, fiscal stimulus. And the point is, do we run that fiscal stimulus so far out that we're to the point of no return? But you also have this other challenge, which is the dollar being strong. And the dollar being strong is a headwind for the economy that we were just talking about. And if the dollar continues moving in strength, that's not great. That's basically saying the investors would rather be here in the US in the dollar than the rest of the world. And that makes it hard for our companies to export. So we have the fundamental makings, I think, of an economy that will be more challenged. I'm not saying that we won't continue to see growth and the economy won't continue to do well, because I do believe that the Trump administration is going to print to no end, just like the Biden administration did.

Daren:
[36:27] But I think it's something to pay attention to here. There's kind of a change

Daren:
[36:31] in how things are operating at the moment or the beginnings or the whisperings of it, I should say. So that's interesting, something to pay attention to for sure.

Daren:
[36:47] All right, let's take a look at VIX. VIX is just a measure of volatility looking 30 days out. Pretty calm right now. Nothing too extraordinary there. But something to watch for sure. When we get really low, then we see these bounces up. But this is just a measurement of how complacent those who trade the S&P 500 futures are right now. And they look pretty complacent at the moment. They're not too worried about it.

Chris:
[37:11] Very complacent. And I think along with the VIX is the corporate credit spreads on junk bonds, which is also extremely tight. A lot of the bond investors are saying There's really no reason to take that extra risk because the spreads are so tight. You're not getting compensated, which generally only happens when people are very, very complacent about risk. Usually, those spreads blow out along with the VIX. When the VIX goes up significantly, suddenly those spreads blow out on the credit spreads as well.

Daren:
[37:58] So there's the S&P 500 SPY. So this is the cap weighted index where all the squares are relative to each other based upon the size of the capitalization. And then you have the RSP, which is equally weighted index. And I mean, really quite the sell off on the equally weighted. And it looks like we based out support here and now we're moving up and into the rejection of the 50 day simple moving average. But perhaps that's rolled over now. The move is in, the corrections in but I think on a longer time frame we need to be mindful of a triple top forming here. You can see this move here with the head and shoulders so we want to watch that over the next few weeks and see how that plays out. So all in all, lots of changes ahead, lots of shifts We're going to play it day by day. We'll see if TikTok shuts down tomorrow for those who are TikTokers. It looks like I think Trump is offering a 90-day stay so that someone else could buy it before it shuts down. It'll be interesting to see if that happens.

Daren:
[39:14] Nonetheless, as always, we're going to stay close to the markets, close to the economy, and we'll update you as it goes. Hope everyone has a great weekend. Take care.

Music:
[39:22] Music