Why This Looks Worse Than the 1999 Bubble

Welcome to Trading Trends. This is IA Spievac, head of global macro here at Tasty Live with a very special guest. Senior commodity strategist over at Bloomberg Intelligence, Mike Mclo is with us. Mike, welcome. >> Well, thank you, Ellie. It's good to be back. With your title, I suspect I can learn a lot from you, too, in this interview. >> That is probably putting it more generously than I deserve, Mike. Uh, let's um let's dive right in and see. Um, we've had quite the October and of course we're sitting here waiting for the Fed to tell us stuff. Uh, and there's going to be a bunch of big tech earnings after the close, but let's pull back and take a look at the larger picture. October has been quite a month for where the trends were leading to before and where they now stand after. And probably the most kind of interesting thing for me has been the dramatic reversal in the bonds seemingly without any letup in oil. What's going on here? >> Well, I I think that's a good point. Let's uh also point out we all know October is the make and break month. Um just recent example last year cryptos peaked in October 5th. The market started breaking down on October 10th. The broad stock market bottom on October 12th, 2022. It's just the month that stuff happens and we all know that historically October crash 87 1929 and just when I used to be a trader my P&L always seem to have pretty significant L's and P's in October. We all have a tendency to pick highs and lows. So I think what's happening is first of all I'm pretty sure we've meet met an inflection point in terms of treasuries getting too high. For instance, I was using first of all been excuse me an area I've been wrong on for a while. I didn't think I still don't think that US 30-year is going to be able to stay above 5% very long. Now, we have the 10-year note at 5%. But when that five-year note reached above 5% earlier in the month, I put out a lot of stuff and pointed out that that's just too high for a 5year note. Mean, we're basically guaranteed in within 5 years, you're going to get a total of like 130% of return guaranteed. That's just too high for all non-income producing assets, most notably things like gold and Bitcoin. they're top of the scale and virtually all commodities. Um, but the key thing as you point out is that's happening with crude oil still rallying. But what's also happening in crude oils, everybody gets what's going on is we have midterms coming up in less than a week. And if you overlay that um prediction markets of the percentage of a tenant in the up the upward slope to the right trend of the percentage of Democrats maybe sweeping the midterms and that means the House and Senate it's running around 64% at the time right now by Kelsey. Overlay that with the price of crude oil or diesel or gas oil. It's the same chart. So the only thing that matters right now is getting through the midterms. It's completely within the vested interest of of um Iran to pound as hard as they can to make to influence the election they are that they are. It's the number one issue and and it's affordability and if you want to lose the 2028 election Republicans keep energy prices high and keep saying things like Mr. Trump is saying that no we're making a lot of money. It's just it's kind of getting to the silly stage. But the key thing is you look at it a year from now. Right now, I'm publishing all my outlooks for next year. And if just look at Brent right now, Brent crude right now is 116. The highest close ever for Brent was $111 a barrel in 2012. And we've had higher lower highs and lower lows since 2008. Are we going to stay above that level until year end? And by next year, will we stay above that level? I look at it, it's very unlikely because look at the iterations. If it does, number one, it means the Republican party's toast and virtually everybody in the party is probably going to pull away from the president. The economy, global economy is going to heading towards recession. and the Federal Reserve will keep tightening. Most central banks will keep tightening and if the stock market keeps going up, it means inflation. The key theme right now for everything the 10 on a one to 10 scale for every position I see every market, every economy in the planet is yet that US stock market has to keep going up and so far it is. That's great. But as we speak right now, we're going to get through the Federal Reserve. They're hiking rates. There's very little incentive for them to not continue to be vigilant about hiking rates. And the lesson I like to point out, I'll end with this, is certainly with risk assets, don't fight the Fed. >> And it's been an interesting kind of month, uh, really because you're right, everybody's sort of looking at this tech stock bogey as the sentiment barometer for all things. And as we start to get some of these earnings coming out, it seems like the market is basically saying, right, what have you done for me lately? The blended S&P earnings were expected to be about 29% annualized growth. That's about where they're running. So last week we had this thing where we waited, the earnings passed, markets sold off as soon as the event risk was out of the way. It looks like now we're about to get into the next big round of earnings for this week. But as long as the numbers aren't a blowout surprise to the top side, are we in a place now where there's just not enough speculative juice and so the thing just crumbles under its own weight? >> Well, I do love what Jim Cheno said is finally with all these IPOs in the US, we probably reach supply um is probably well matching demand in stock market and it's classic frenzy. 1999 I had a conversation with my good colleague person I actually worked for in 1999 he said oh this is worse than that the amount of IPOs and the frenzy and everything um but you know you see alternatives but key thing that really struck me about I quoted him Jim Chanos is he really helped me keep my bearishness on on Bitcoin last year when he pushed back on strategy and Michael Sailor's silly strategies in strategy just was just a proxy for leverage Bitcoin but this is the key thing that's happening right now is I actually look at the the whole stock market now is just complete noise. Earnings, everything, just all the technical analysis, everything, just ignore it. Nothing matters until it reaches an apex and goes back down. Right now, I mean, stuff like you mentioned, earnings are just phenomenal, as good as it can ever get. Is it going to get better, but it's all feeding on itself. Um, it's just a classic, you know, self-fulfilling thing that's going to eventually be its own worst enemy. The only thing that stops that train is itself. And I I pointed that out in cryptos and Bitcoin last year. only train that stopped themselves as they went up too much. What stopped that train in precious metals, gold and silver, just you know Q1 it went up too much and at some point we're going to reach that reach that in cryptos I'm sorry in stock market and then everything everything on the planet will follow on a scale of 1 to 10 the 10 on a 100-year basis. So one good example is we know that stock market versus GDP is on year basis the highest since 1928. Everybody gets that but it's also the highest versus public debt since 2001. Now, people point out public debt is a, you know, unstoppable. Why ever stop that if the stock market advances more and everybody's making a lot of money? Why? Because at some point it's going to end. The only way to stop that is a crisis. It's also the highest versus the MCI XUS index ever and the highest versus commodities in about three decades. So, that's why it's all that matters. And that's why I look at it is key thing that I've been wrong on this year is we have not seen that surging volatility we saw in gold and silver and crude oil trickle over to the stock market. In fact, the the spread between volatility and gold and silver and crude oil and the stock market is probably the widest in 20 years. I mean, stock market volatility is the lowest in multi-dead versus these other proxies. So, I'm very concerned that some point that's going to matter. And I look at as a strategist, things like um gold and copper, they're complete stock puppets. The precious metals are complete stock puppets. You can see that in correlations and you can see that in least in a week or two trade when markets stock market goes down those markets go down the volatility adjusted amount and markets go up stock market goes up they go up less most notably copper copper has made a new record high this year but it's completely lagging what it's been doing with the X&P 500 for many years particularly cryptos and the key thing has happened is we've had significant peaks put in in Bitcoin and gold and now even housing is rolling over the highest 30-year mortgage rates in three decades so this is all just a matter of time that is all going to roll over and I look at smart money I see in the business and the some of the hot leverage money is all going to treasuries particularly that five and 0 to 5%. So I spent a lot of time traveling in the last two months. London, New York three times, Connecticut a couple times, a lot of conferences, a couple weddings, and I got a chance to speak a lot of people my age and older who run hot money and run a lot of money. And that five, you know, to 5% was just too high. And I my sense is yeah, duh was the quote I got from a lot of people like my yeah duh, this is the highest in three decades. We all know how stretch the equity market is. Sometimes there's time to hide and I think this is one of those times to hide and people are looking at that way. And if we can get through the rest of this year without a little bit of pickup in the stock market volatility, that would be wonderful. But Ilia, imagine this. Imagine if God help us, just imagine if we have a 5% draw down and yes, maybe 500 into the year end. What's that going to do for next year? And I already point out in commodities. This is a pretty severe um example of what usually happens commodities. You get inflation after I'm sorry, deflation after inflation. I call it postinflation deflation. Now, we're seeing that in things like natural gas. When people get bullish things like energy, the US natural gas is collapsing on a one-year basis is down 20%. It's indicating where things are going once things are resolved in the war. And by the way, if they're not resolved soon, the whole Republican party is going to probably lose the then lose the majority already and probably lose the next president election. It's just the way it is. It's all political. And the thing to remember is right now, Crude oil is still railing. It's right before that apex of probably the apex of the the battle of the Bulge is the midterm elections. If there's push back in the partying power that invaded Iran, then there's it's a lose-lose for energy, which probably means a win-win for bonds. And also, it's the check and balances kicking back in. And that's typically so I look at that's probably the best riskreward is bond markets in this environment because particularly if stock market goes down. It's a very interesting thing that's happened because it seems like over the course of the past month kind of the top paired idea long AI short the bonds basically hit a point together and both essentially said right okay we're going the other way. One of the most fascinating things about it is gold has sold off with stocks even as yields come back in and it feels like the dollar is strong if you just looked at it. But the fact that the euro can't even begin to sell off with all this craziness in French bond markets seems to suggest the dollar is under the surface very very weak. What do you make of gold and uh the dollar here and why they don't seem to be listening to what the bond markets say? >> Well, first I start with gold. I remain defensive and bearish on gold. Now, that's an oxymoron compared to my last 20 years in this business. I've been bullish gold for at least decades, particularly last year. Got way lucky, but it reached a too high apex. Right now, it's the highest versus a basket US Treasury since 1983. admitted I was only about 19 back then so I can show my lack of experience in these kind of things and traded gold a long time. So that's a pretty solid extreme. And also last year was the most high velocity rally in the history of dollar-based gold, excuse me, ever in the history of the dollar. It was up almost 80% in a disinflation environment. The only similar example of it being up more on an annual basis was in 1980 and we were running CPI around 15%. Now CPI's picked up a little bit because of the invasion of the US um and the US attack on Iran and the energy crisis, but that's the kind of thing typically when gold and silver rally at that velocity. Silver reach its highest ever versus copper and crude oil in Q1. When you rally at that velocity, you typically put in peaks that don't last years but last for decades. So I'm completely off the gold bull market. I'd love to get back on it. I was hoping it'd get back down to 3,000 before it goes back to 5,000. Because it gets down to 3,000 first, I can easily get bullish and say, "Yeah, it's back to longerterm moving averages and fundamentals are positive." If it gets back to 5,000, I'm still off it. And I still off that horse. The key thing to remember is one thing that's happened in all the metals. The Bloomberg all metals index is exact is a complete same chart syndrome with the S&P 500. Stock puppet, complete stock puppet. The number one beta in metals is gold. And then there's copper and copper's correlation on a 50we basis with the S&P 500 is about 065. It's the highest in the history of that US traded copper contract since 1988 on the way up complete stock puppet. So the whole metal space, a key thing I like to point out is from a broad commodity standpoint. The whole metal space led by precious metals is the only sector that made a new high in commodities this year. And they're completely economically and stock market sensitive. And the Fed's hiking rates, not just the Fed, most central banks. And by the way, the one that's not hiking rates is China and that tenure note yield in China is 1.62%. Severe deflationary forces. So I see an accident waiting to happen in things like copper potentially just following silver. They used to be the same chart syndrome. Silver has collapsed from 100. It just got way too expensive. And what was a deficit before is probably now going to be a surplus. Look back from the future because when you have sli supply and demand and then price on that left-hand scale when prices shoot up exponentially it shifts supply and demand. That's all that's happening. And the bottom line is central banks are hiking. That's interest rates are going up. Certainly that US 5, you know, 5% reach to me that's too high of a plateau for non-income producing assets. Most notably gold, silver, and all commodities. And right now we have crude oil having this rally. Not crude oil, most energies. And one thing I want to mention is a Bloomberg heating oil total return index. It's diesel. It's up about 200% this year. That's double its highest year ever, which was 2022 when Russia invaded Ukraine. Is that going to be a permanently high plateau or is it going to be an apex? It's much more likely to be an apex just following the rules of commas. You go up too much, you set a high and you go back down. It's almost always the case. And like I mentioned, that dispar disparity between collapsing natural gas, which is the number one source of heat, electricity, and fertilizer in this country. Collapsing natural gas is the indication where things are going. Now, natural gas might bounce a little with a colder than normal winter. We've already had two of those, which is rare. But overall the whole space for me is this is a commodity market that's ready to roll over. Bond market's starting to figure out the 5% in the 500 is too high and everything now is completely a stock puppet as we speak. If if you're running any position on bonds, commodities, copper, foreign equities, if you're even sitting in in any other country, you have to look at that S&P 500 and your value at risk model and say, "Yeah, if it's up 10%, I'm okay." If you're long anything except for even um except for um short bonds and if it's down percent down percent everything goes with it. This is where this is the status we are. So all that matters is that stock market and one thing that Mr. Worsh gets and I fully expect he's going to be hawkish and the bond market's already done a lot of tightening for him. I mean we're up well over 100 basis points in long end which is equivalent sometimes I've heard of 125 basis points of actual short-term hiking. But if the stock market starts doing a little bit of tightening form, he's set. And so housing market's already started to do some tightening. It's just a question of how far does it go and can we keep riding this train, riding this unstoppable train. And I've already pointed out a lot of the trains have already peaked. >> Yeah, that's maybe the most interesting bit here is on the one hand you have this very lopsided stock market driven by one narrow piece with ridiculously skewed market cap. And then on the other side, you have an economy that barring the second quarter where we had all kinds of fuzz from the World Cup already in the first quarter was telling you the data center boom is doing more for growth than consumption except consumption is 68% of the economy and business investment is 14. So how sustainable is this? How hot must you run this business investment? and how inflationary must it be to get any kind of growth out of this? Uh do you think uh we're about to get the third quarter uh GDP numbers this week and we're pacing it looks like 3.2% on consensus forecasts. I think the Atlanta Feds update was 3.4. Do you think that number when it comes out matters where people will go oh it was a two handle now it's a threehandle or do you think people are going to look at the makeup and go this is not sustainable much like the stock market is skewed this is skewed and if it turns it all turns >> old news gets revised a lot and the 10 on a 1 to 10 scale for the economy now is the stock market if it here's a fact um the quote from Jack Bogle if you can't imagine a 20% drop in the uh S&P 500, you shouldn't be I'm sorry in the stock market shouldn't be in stocks and I can't because it's 50% of GDP. That's the most on a for a 20% move in 100 years. That is the stock market like I even mentioned versus debt. So I think this is a wonderful thing. We're still riding this wave. But the key thing I really find disconcertingly is we have this unstoppable debt spending which is a big part of our growth in GDP and there's nothing to stop it. I mean, people talk about it until the market makes it stop and that's not going to be guy going up. So, it's a lose-lose. And then what's going to happen? We have austerity, which is already kicking in in this in this win midterm election. Like I said, we have, you know, there's basically prediction markets right now about 64% against the party in power against Mr. Trump said he's on the ballot. And I think people are underestimating the market to me. It's complacency to me is underestimating this how substantial this human being is, the most substantial president in our history. He's probably just hitting an inflection point of his peak power heading towards lame duck. And we're already seeing that in things like a lot of the Republicans are pushing back, particularly in some of his latest proposals, like with things with um um diesel, with um with Russia and the $5,000 pledge. Two of the three Supreme Court justices he appointed pushed against his tariffs. And the most significant profile courage I've seen, which is the top for everything, is the person he hired at the Federal Reserve or appointed to cut rates, has hiked rates. That's a classic example of the checks and balances kicking in, kicking in. I think it's a sign of um the endgame for rapidly appreciating wealth in this country, which has reached the most significant levels in history. And we're way overdue for some reversion of that. And to me, that's what the bond market's saying. That's what peaking cryptos are telling us, what's peaking precious metals are telling us. Um, and that's why it all comes down. The stock market hits. God, I keep going up. But GDP to me is so old and basically says to me that yeah, stock market's up, GDP will be up. Stock market's down, GDP will be down. Just it's it's a hundred-year extreme. >> Here's an interesting question for you about an asset that um tried to resist the winds of sentiment earlier in the year and got yanked back over there. One of your uh favorites, Bitcoin. It seemed to be asleep through most of the Iran war. Uh the markets were going this way, bonds here, gold there, dollar this way, all the usual inputs. Bitcoin was asleep and then Scott the house Bessant comes out and starts saying things about bond buybacks and all of a sudden Bitcoin wakes up with a vengeance. It's been kind of leaking lower now that he's stopped talking about it. Uh where are we here? Don't fight the Fed, particularly in a highly correlated risk asset in a space of unlimited supply that's um bounced in a bare market. So, I will reiterate my view. Q1 um last year I when Bitcoin first got above 100,000, I put out the view it's likely to drop a zero, get to 10,000. And I'm I will add to that view. I'm emboldened by what's performed so far right now since it's got above that level at least on a one-year basis. Bitcon Bitcoin's down 28%. And the S&P 500's up 13%. It's highly correlated. And my point is my key theme hasn't happened yet. Just a 20% draw down in the S&P 500. We'll see what Bitcoin does. I fully expect the whole space. Things like Dogecoin and the millions of cryptos that crack need to get purged to zero. And then we can rinse and repeat and reset. They're all linked. I mean, I love when people say Bitcoin is different. I get it's different. It was a first in 2009 and now there's millions of similar type cryptocurrencies. The bottom line is the glory days are over. Those of us who loved it and got bullish at when Fed was printing a lot of money and the biggest money pump in history in 2020 when it was at 10,000. I'm like, yeah, it's going to add a zero. I got lucky. Didn't ride it the whole way, but now that we got to 100,000, it's going to lose a zero because we're on the back now. We're going to head towards a hangover. Typical post-inflation deflation is the lessons of history. One example is the price of time by Edward Chancellor. And now where it's a great leading indicator really early and it's telling me and telling us I think you're supposed to get out of risk assets. So I look at the 50week moving average in Bitcoin. It's right around 76,000. It's popped above that average. But with the Fed price for three hikes in the next year historically that's never a time to buy Bitcoin. So I look at this bounce as a chance to sell. I think what happened it just purged a lot of the aggressive shorts. Um just like the bond market probably purged a lot of the aggressive leverage longs. Rinse and repeat. I've been pointing out. You look at things like WIRP or um IBIT, I'm sorry, IBIT is the top Bitcoin ETF. That's the um isn't the eyeshares one? It's um you look at it versus TLT since the end of 2025. It's down like 15%. I mean, it's not even keeping up with bonds and bonds are down. So, to me, this is a classic case of selling Bitcoin, buying bonds might be in the next big trade, at least liquidating your Bitcoin and putting into long bonds and it's all heading that way. And the bottom line, we still have not seen that test. Let me see that test. Let me show it some divergent strength. Even copper and metals will show some divergent strength when we get that next 20% draw down the S&P 500. Just imagine though if it goes down and stays down. Number one, that means a potentially probably means a pretty high probability of a global recession. It's a very high chance of a US recession. Remember, it' be 50% of GDP. Um, you know, it's like $40 trillion to the stock market right now. And we're having all these IPOs coming back on. Um but and to me that's the leading indicator and that will be the flush to look for. But right now I think this is just kind of the silly stage and um Bitcoin has peaked. It's bouncing. Um precious metals have peaked and there Bitcoin's hovering on $80,000 support. Gold's hovering on 4,000 support and they're facing three Fed hikes in the next year. That's ne I mean they're at support but it's never been a good time to buy these type of assets. And so I'm still bearish. Um, and I have no reason to resend the view. It's going to 10,000 until proven wrong by at least showing some divergent strength versus the S&P 500 when it goes down. And it hasn't happened yet. >> Mike Malone, everybody, uh, senior commodity strategist over there at Bloomberg Intelligence. Mike, let the good folks know where they can get more from you >> on your show. Hoping hoping to come back. I enjoyed being on with you. I really appreciate the banter with the macro strategist, which we both are doing. I'm on the Bloomberg terminal on X at Mike McGloin 111 and and uh and LinkedIn Mike Mcloan senior commodity strategist. So thanks for having me on IA. Looking forward to the next time. >> It's been a pleasure. We'll try to get you back here very soon. We got all kinds of macro situations going on. We'll need you to explain them all to us. Mike Mcloin, everybody. Cheers.