2027 Market Bloodbath: Worse Than 2022's Bear Market | Keith McCullough

Q2 of next year is going to be nasty. 2027 is 2022, but potentially a lot worse because we have a lot more bubbles and the Fed's going to make a major policy mistake, invert the yield curve, and then have to cut interest rates. I expect parts of the market to be crashing before you get a full-blown one like 2022. It's Thursday, September 24th, and the US 10-year Treasury yield has reached 5.13%, its highest again since 2007. While the 30-year is now at around 5.44%, 44% its highest since 2004. Our next guest is going to explain why Q2 2027 is going to be nasty in his words if this continues and why 2027 may be worse than the 2022 market downturn and accordingly how a defensive asset allocation strategy looks like in 2027. The Fed may even need to issue an emergency rate cut and he's going to explain why. A lot of what's cracking underneath the surface has to do with rising yields. Right now on Koshi, traders are pricing in a 42% chance that the 10-year Treasury yield will finish the year above 5.5%. If you agree, a $50 trade could yield $102 as a payout. Our next guest will give us his prediction, so stay tuned. This video is sponsored by Koshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events, from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below or scan the QR code here and use my code LIN L I N. New users can get $25 in app credits when they trade $25. Cashia CFTC approved and available in all 50 states including California and Texas. Keith McCulla joins us now. He's a founder and CEO of Hedgei Risk Management and Hedgei Asset Management. Prior to founding Hedgei in 2008, Keith has had a multi-deade career as a fund manager including at Carile Blue Wave Partners. He leads Hedgi's global macro research team right now. Keith, welcome back to the show. Good to see you as always. >> Yeah, good to see you, David. I appreciate it. Uh, just a little bit to talk about when you look at markets across classes. >> Just a little bit. Seems like we can talk an hour on each specific asset class, but we'll truncate um your entire uh thesis into 30 minutes. Let's start with uh this is a good visual to illustrate the um positioning that uh you currently have and the model that hedgei uses. This is a quadrant and within each quadrant are different strategies. So where are we right now? >> We're in quad 2 and solidly so. So quad 2 is when the rate of change of both growth and inflation are accelerating at the same time. So that's that's actually and always uh should be the quad that bond yields rip to the upside fastest. This has happened before. We've called this before because we've been in quad 2 before. Uh I just don't think the street really expected us to stay in quad 2 for as long as we have. >> I'm a little bit surprised we're not in quad 3. And here's my reaction now is that several reporters have asked uh Kevin Walsh at the FOMC, what are you going to do? Because this is not this inflation that we're seeing right now is not really caused by accelerating economic growth. I mean, there is economic growth, don't get me wrong, but it's more or less caused by a supply shock in the oil energy markets in the Middle East from the straight of Hormuz closing, right? And so the question becomes and and the and the Chicago Fed president Austin Goulby actually wrote about this. what did this what what does the Fed do during a supply shock and um that will be what qu 3 represents I guess is is inflation going up but it's not really growth but it's it's it's you know it's from it's it's a supply side equation anyway I'll let you comment on that >> yeah that would be a narrative that's not the reported rate of change numbers um you're quite correct on the inflation component but on the growth component I think most people just are either oblivious or they just don't read the the numbers. But even if you look at yesterday's PMI number, I mean, it was white hot. It was a a 58 versus 56.4 last month. Um that's a month-over-month quad 2. So that's growth accelerating. If you want to look at our GDP now cast, which again, the Atlanta Fed tends to, you know, chase us a bit on a lag. Uh but we're both between three and a half and 4% growth. I mean, that that's one of the best sequential quarters of GDP growth, uh you know, since the pandemic. So, you know, it is a rate of change growth acceleration. It is a rate of change growth acceleration that is certainly augmented by a lot of AI spending. But we don't like back out the AI spending. You know, when you know that that is actually happening. It is a bubble by the way. That's a big uh a big point of ours that we continue to make. If it wasn't a bubble, it wouldn't keep going up and the spending wouldn't either. Um but that's it's a debt finance bubble. There's a lot of growth that um I guess growth bearsers have had wrong. Eventually, you're right. Now, countries that don't have uh don't have the AI, you know, growth component that we have are in stagflation to your point. So, we're um you know, we're short Germany, we're short Switzerland, we're short India, we're short Australia, uh all their stock markets because they're in quad three. So, they don't have the growth component, they just have the inflation component. Uh but you're right in delineating between the two. think that our process and uh our framework with the four quadrants provides a a good basis to actually have a tangible debate if somebody's actually using the numbers instead of narratives. >> If we're in a progrowth environment, which is what Quad 2 illustrates, are you risk right now? Uh and I asked this because bond yields have been rising. So would you still be risk during an environment when yields are rising? >> Yeah, it's risk on. You got to define it though, right? Like I'm long uh I'm long software stocks. I'm long cannabis stocks, MOSS. I'm long Bitcoin, Ethereum. Like, for me, that would be risk on. Okay. Um, now what I'm not long is cyclical growth or or sectors that are rate sensitive. I'm short utilities. I'm short consumer discretionary XLY. I'm short industrials. So, uh, it's it's it's its own quad 2. Every Quad 2 has conditional factoring. In other words, it has different things that are driving it. Um, but they're, you know, again, it's a great alpha generating environment if you can, if you can play the game from both the long and the short side because you have such divergences. I mean, you have essentially you have the the the the widest divergence at the single stock level that we've had ever, which is a long time. 70% of stocks are down 10% or more in the S&P 500 from where they put in a 52- week high. So, there's horrible what I call dog breath or breadth uh of the market. We're short the Russell 2000. I mean there's there's a lot of positions like for me there's a lot to do. Uh but one of those things is not to say that the Fed isn't going to make uh you know the Fed's going to be forced to stay hawkish for longer than people think and I think that that's what changed yesterday. >> Okay. Well, like I mentioned earlier, the uh 10ear yield is at 5.13. Uh the 30-year reach 5.44%. What's causing this global bond sell-off? It's not just the US, by the way. It's most countries in the G7 uh outside of China. And so we can look at it as either it's tracking oil or it's tracking growth. >> Yeah. I mean it's it's track it's tracking all of it all at the same time. I look at markets from a fractal perspective. So I'm not one that believes it's just one thing. We as human beings want it to be one thing. Uh because that's that's AAM's razor. That's the easiest way to to to at least justify in our own simple minds, you know, why something's doing what it's doing. But what we do is we take all of it, right? all of the data whether it be the price of rice or the price of oil. A lot of people eat rice. A lot of people use oil. I mean you know the price of rice by the way uh has gone like up 30% in the last month. You know there are a lot of different things that are inflating in this world. Not the least of which is the cost of education. I don't need to go on and on and on but again the cumulative inflation's up huge for the world. If you're short oil like a country like India or Japan you know these are these are countries that are in quite a problematic place because they don't have organic growth. Now again to your point bond yields like the Australian tenure yields up uh 35 basis points I think or something like that in the last month. I mean there all bond yields have gone global because inflation globally is accelerating. So that's a major factor that Scott Bessant for example who said he was unfortunately said he he is the house. Now that was a very bad moment in time I think for him. Uh I think he'll regret it. Um the house is actually in my house it's it's it's gravity. It's economic gravity and it's global. So, you know, that's God that's God's house. Now, I don't want to get all religious on you on that, but again, fractals uh do subscribe to the laws of nature, and that's that's where we're at. I I I don't think there's any way for him to get out of it by buying more bonds. I mean, we have there's a lot more upside in the 10-year yield, by the way, and the 2-year yield. I I think the 2-year yield is going to keep going up faster than the 10-year yield. So, I think the curve the the Fed is eventually going to invert the yield curve, which is a huge risk going into 2027. And a lot of the positions that I have that are what you called risk on, you know, I better be getting out of those on time or I'm gonna get crushed. >> Is the Fed gonna invert the yield curve or is the Treasury going to do it? >> I think I think the Fed um you know the Fed the Treasury is trying to replace the Fed. Um you know you know Worsh is a bit of a lap dog to Bessant and and Trump or Pump as I call him and um it's what it is. I mean I I I I think that you know again if you have the hedge eye inflation now cast which by the way Bessie as I call him Scott Besson has that uh so does the entire hedge fund community and all those like we advise trillions in assets under management they all get our weekly hedgei inflation now cast they all know that that's easily the most accurate inflation now cast in the world right now and they know that it continues to tick higher it's up 27 basis points versus the 3.40% 40% uh headline CPI year-over-year that was just reported. So, that's the next number they're going to get. It's like looking, you know, you looking in the dealer's hand. I know what the number is and so does the street and that's why bond yields are doing what they're doing. So, Besset knows that too. And I think they're it's going to be a hell of a political exercise ahead of the midterms to get them not to raise rates in October. uh with like again the the probability of a Fed hike for October this morning went to 71%. After our CPI number gets reported uh the one that that were were the street high on that one um on in terms of Wall Street estimates, you know, I think that they're going to go higher than that. So yes, I think the Fed's going to raise rates. They're going to raise them too many times as they always do at the end of a cycle. Again, I'm I'm looking for this quarter being the peak of a cycle. So they're raising rates into Quad 2 data, but it's also peak data. Um, so then they're going to be now with in in a heck of a spot going into 2027 because they will have hiked into a pending slowdown. >> Yeah, let me just take a look at this. This is what you're referring to. 66% chance of a hike by October. It was previously 50% and now of course overwhelmingly in favor of a hike or at least one hike by December. Um, I want to flip over to something that you said earlier which is oil. Um, I think you told me offline you're long oil. Is that correct? Now, it's easy to look at this chart that I have on my screen, which is WTI versus the 10ear government yield. Uh, and that's the blue line here, and WTI is the bar chart. It's easy to look at this and say, well, if you're long oil, you got to be short bonds because these two have, like we said earlier, they've they've just been moving in tandem. Like you said, you look at things holistically, you look at fractalss, and so it tracks a lot of different things. But is it too simplistic to look at this and say, look, you're long oil, you got to be short chart uh short bonds. No, that that again simplifying the complex is fractal math. So we call them similar this would be called the similar set David right. So you take the rate of change and the conditional factoring of the oil price uh which is bullish trend oil bullish trade and trend in our vernacular short-term and intermediate term bullish uh signaling higher highs. Okay. Now that is a similar set that is linked and correlating to the 10-year yield to the entire uh yield curve. So that yes um that is it's not the only thing but it's one of the bigger things right so instead of people whining and moaning about like you know oh it's just oil well if you if you know that it's just oil if you're so brilliant then why aren't you long of oil I mean you know we're we're long oil the only sector in the stock market that was up yesterday was the you know one of the three that were long which is which is energy stocks um you know we're long we're we're long refiners we're long shipping we're long we don't we don't believe because The market doesn't believe like there is no peace and love in the Straits of Hormuse. You know, if if if people needed or wanted to believe on Monday and Tuesday that the oil price was going down because that peace trade was coming on or Trump was going to become friends with the communists because he's going to meet him on the tarmac uh with the Chinese. I mean, there were so many narratives, you know, but what you should have really done on Monday and Tuesday was buy oil. I mean, that's what you you could have done it all day for for, you know, for almost 48 hours. So, you know, that was the big trade this week was just to to gross up your oil position. And if you have that on, you can definitely see bond yields going higher. >> Yeah. Why would you be long oil at a time when oil is already at $100 and oil has shown repeatedly this year that it's had difficulty staying above $100 for a prolonged period of time. >> Well, because the last time people told me that it was it was going into 2008 and then it went to 150. Um, so yeah, I I the real reason, you know, kind of kind of kidding. Um, but not really. The, you know, the risk range is what I'm measuring math daily. The reality is, David, I have no idea where the oil price is going and neither do you. Yeah. >> So, so I use math instead of my brain. I have a So, for all the AI lovers out there, I use an AIdriven algorithm that tells me if it's going up or down, and I just listen to it. I have the humility to listen to it. Uh today it says Brent oil the highest it can go at least in in the next three weeks is 112. Um so if I bought a bunch of it where I bought it earlier this week then I'll sell a bunch of it at 112. If that number changes to 142 over the next two or three months or six then I'll do that. If it says it's done going up I'll do that. Um so I it took me a long time to to have that humility. I mean, I'm I I don't think people would accuse me of not being a confident person when I talk about markets, but my confidence is born out of of not having hubris at this point. It's just like listen to the signal. If the signal changes, I will. And and this week it said buy oil with both hands and hopefully people did. >> Okay. Going back to the Fed funds rate, how is this time different than 2022? Uh the last time we had a Fed hiking cycle and at that time the Fed hiked by 500 basis points all the way from zero. >> Yeah. Well, again, it's it's it's based on the same uh same same problem, right? Like for people that spend their their waking hours fawning over the Fed or getting paid by the Fed or or employed by the Fed for that matter, you like these guys always make policy on a lag to what they had wrong, right? So, what did they have wrong? They thought that inflation was transitory coming out of the pandemic. They they thought it would peak at 4%, then it went to 7%, then it went to 9%. Then they're like, "Oh I got to raise a bunch of interest." So here now they're now they're raising into a slowdown from the 2021 quad 2 highs. So in my vernacular 2021, we were long just like we're long now. We were long Bitcoin. We were long anything that you know what you can consider risk on from a tech perspective. We're long small caps. We were long meme stocks. And then all of a sudden the Fed starts getting aggressive into what was going to be a slowdown anyway because you're going to slow against 2021. 2027 is 2022 but potentially a lot worse because we have a lot more bubbles. You know, it's one thing to be long fartcoin like in 2021 or Melaniacoin or whatever people were doing with their crypto crap. You know, buying into Sam Bankankman fraud. Not that I remember all these things, but you know, people did some pretty crazy things in 2021, me included. Uh not believing Sam Bankman fraud was was, you know, was was definitely on the other side. >> 27 is 2022 accepted laws. Let's just recap 2022 for the audience watching. >> The S&P went down 30%. Uh bond yields went up. Gold went down. Bitcoin went down. The entire crypto sector collapsed. Uh how is this going to be even worse than this? Well, because now you have way more leverage in the system. You have way more retail participation using short-term options. 70% of the daily options flow uh on any given day can be zero days to expiration options trading. Uh you have levered ETFs at the wazoo. I mean, I I don't need to just parrot like what most people should probably know, but the the the bottom line is that you have much more leverage to the AI bubble now versus in 2021 AI wasn't even really a thing. So, you know, all the market cap, all the leverage, you know, all the performance, you know, that's what's really sitting out there and weighing in the balance. So, you can see like when they get when when they get out there and they give up on a stock like Google, I mean, people lose all their money. Now, there are a lot of stocks out there that actually still look okay um that are AI stocks, but that doesn't mean there that's a perpetuity. I mean, it means that it's probably the beginning of the end of the party is what it likely likely uh likely means from a signaling perspective, but we'll have to see. I mean, I'll rely heavily on my timing signal for things like SMH or DRAMM um which we currently don't have a long or short position in, but we're watching obviously very closely. >> Uh okay, I I'll come back to the software stocks in the semi in just a bit. I I saw a few comments on my channel and I asked some smart people watching the show and they wrote uh well look bond yields have already been soaring the market had the stock market in particular had many opportunities to pull back and correct on soaring bond yields and it didn't therefore I'm staying long screw it >> well that's good I mean it sounds like a a US stocks only fan out there and congratulations to you but and hopefully they're talking about Q's um because like I said 70% % of single stocks in the S&P 500 are down 10% or more. And and and the retail investor knows that. I mean, the retail investor, the CNBC type home gamer, like they got they're they peaked on May 28th. That was the peak and then they went down like 60 or 70% from there. If you look at the most widely held basket of of of retail investor stocks, uh I don't like our community isn't retail. Our community is a macaware, hardworking, entrepreneurial, self-directed investor. Right. So there's a good marketing thing that some of these people should should run with, but they won't because they're in the business of promoting products to the retail investor, but there's really like there is plenty of bare market out there depending on what stock you're looking at. Like 70% of them is either in draw down or crash. So that's what I have to say with that. Again, if your goal is just to get the S&P 500, right, that's great. That's a boring game. I don't play it. You don't get paid any money really to play it. Um, but inside of the game, I think, is where all the alpha's at. >> Okay. Keith, you and I are both Canadian. Where would you be low on the US dollar versus the Canadian dollar? Other way around right now. By the way, I'm mentioning this because the dollar just reached its highest level, the DXY that is in two months. Well, I am short of Canadian dollars uh versus the US dollar. And um you know, this is this this ruffles some feather. It's an amazing thing. I was just up in um Hamilton, Ontario, Steeltown. I'm sure you've been there um for for a hockey tournament. I >> I've not been there. Uh but yeah, would love to go. >> It's, you know, it's it's it's a it's like my hometown, Thunder Bay. It's like a hard scrabble place. I love it. Uh but you know, a lot of Canadians love Carney. I didn't realize this. And I'm like, so Carney, who I'm not especially a fan of because, you know, he was a Harvard goalie and I played I played a >> and he and he was he wasn't a good goalie. He was a terrible goalie. He was like the third string goalie and then he's a lifetime central banker and he worked at Goldman Sachs. So, if you can think of like why I may not like Carney, it has nothing to do with politics. It's just very competitive. Um, and um and and when it comes to macro, like I get it and I don't I don't think he does. Um, so, you know, I think that when he made the statement that he wants to become a quote unquote associate member of the European Union, first of all, that sounded like a freaking golf membership for somebody with a Harvard dinner club. But, I mean, it it is like embarrassing. the the currency market globally sold Canadian dollars that day and the day after that and I did too and it's a short until he stops with this stuff. I mean like I I just think first of and the other big thing in Canada like if you got a bunch of people that say well Carney's doing such a great job GDP in Canada for the first half of this year was less than 1%. It was 0.6% the first quarter and it was like 1.1 in the second. If that's a great job I'm embarrassed to be Canadian. I mean and I'm not. I love Canada. So that's what I think about that. >> See, I I think about this a lot because uh you know, even though I reside in Canada as a business, I get revenues in both USD and Canadian dollars. So I have to think about do I do I convert now or do I just wait? You know, does Trump make the currency worse here in Canada? I don't know. So this is >> You're like my dad. He's got a house in Florida, but he's Canadian, a Canadian pensioner. Um yeah, I I get that. I mean, I I I just think about it. US GDP is going to three and a half 4% this this quarter and Canada is running less than one. What currency if you're just looking at a one factor model which I wouldn't do um but that's one very important factor in the model that differentiates the two currencies. So again strong and I do think strong dollar you know this is a a function of the the whole shooting match as well. If the Fed's actually going to raise rates in October the dollar is just going to keep strengthening against other currencies. What happens to those countries like Canada, Europe, any other currency that starts to go down? Well, the purchasing power of the people in uh in an in a highly elevated inflation environment, you know, they lose even more purchasing power faster because those are the currency they're getting paid in currencies that are going down. So, that's stagflation for them. You already nailed that. I don't think the US has it yet. Uh the US eventually, we think they're going to hit. We think the US is going to go into quad 4 in 2027. That's a different part of the movie. Um, but that's a really important part for those of you that watch like Lioness or season 1 or two. This is more like season 3. Uh, and we're still in season 2. So, we need to finish that. >> Just and just to uh clarify, the the quadrants don't have to move in order, right? So, we're going to jump from two to four. >> Yeah. Yeah. Well, well, two is the opposite uh in in quad terms, two is the opposite of four. So, that's it's very cons. This is exactly why we hit quad 4 in 2022. Uh that was the last big stock market crash call that we made. Um so I do think first of all let's just say I don't have to make a stock market crash call. I have to be short things that are crashing and they could be parts of the stock market. Currently I am short of things that are crashing like XLU utilities. Uh it looks like consumer discretionary is going to start to crash as well. XLY we're short that. So, I do think that by the time we hit quad 4, uh, which is an economic slowdown in the first half of 2027, you'll go back and you'll say, "Oh my god, I can't believe I bought industrials at the cycle high, like an idiot." I mean, that's what idiots do, right? They they're completely unaware of the cycle. They're like, "Oh, these stocks are cheap." Um, but you no. Uh, so I I I I expect parts of the market to be crashing before you get a full-blown one like 2022. You know, most people would probably say, Keith, if you're right, that the Fed's going to cut rates. I think they will after they hike them. Uh, in fact, in fact, I think they're gonna have a panic attack and and have panic rate cuts. It might be like 08 where you know the Bernank and the whole nine yards. You bring in, you know, you you bring in you got to bring in the CEO from Goldman to be the head of Treasury at that point. Um, you remember Hank the market tank Pollson. I mean, I remember the whole thing. I I launch I started hedgi making that call. It was it was crazy or people thought that I was. They still do, but I'm I'm older and and I remember and so does the fractal. What does that tell you about the market when you've got underlying sectors like the XLU, you mentioned XLI crashing right now, but tech's leading the charge and pulling out the entire index. >> That means so again when you go when you're in quad 2, you want to be long organic growth, which is tech, or you want to be long cyclical growth that's inflation like energy, right? So those are two examples of things that you can be long in quad 2. What you don't want to be long are things that are rate sensitive like housing, utilities, very obvious examples. and eventually the rest of consumer discretionary. So that's, you know, that's what's going on currently. For sadly, uh, and I mean that sincerely, uh, for at least twothirds, maybe maybe threearters of Americans, uh, life was unaffordable to begin with. Uh, and now, >> you know, you're talking about all-time highs in diesel prices uh, for people that run trucks and obviously five to six bucks at the pump and gas. So, you know, Trump can say all he wants about, you know, it's it's not as bad as when when we had Biden. But, um, it's getting worse is the only point. And all I care about is not good or bad. Is it is it getting better or worse? So, I think that that's why consumers breaking down. >> Here are the quadrants. Again, quad 2 specifically says inflation hedges are the play. And if if you think about inflation hedges, the um a lot of people think instinctively gold. Here is a uh here here's a trade on Koshi prediction market. annual return DXY versus gold. Traders are actually predicting with a higher percentage probability that the US dollar index is going to outperform gold by the end of this year on an annual return basis. Do you agree? >> Uh this year for now, yeah, that's the signal. I would agree with that. I mean the the only quad that gold doesn't like is quad 2. Okay. >> Because it has to compete. It has no no app it has no yield. So, if bond yields continue to go higher, you know, that's going to be a major or has been historically a major problem for gold. So, and silver's bearish trade and trend on my on on my model there. The precious metals are not where you want to be right now. Eventually, um, and I'm hoping because I love buying things on sale after people, you know, capitulate and puke them up. And I and I do think that's happening in gold. Don't forget, it wasn't too long ago that it was over 5,000 people were chasing the chart. So, um, you know, those people will be washed out just like most retail investors eventually get for chasing and they should be um to they're going to capitulate and we're going to buy uh we're probably going to buy gold again at some point next year right before the Fed stops hiking and goes into panic rate cut mode. >> Do you do you think about it from a value perspect value investing perspective like oh gold's at a certain level it looks cheap right now then I'll get in? >> No, I look at gold in terms of what my signal says on gold. So my signal is a rate of change calculation AIdriven. Uh that is again the rate of change of price as it relates to the rate of change of volatility and volume. So I go with my signal. I don't go with value valuation is nowhere near the core of what I do. >> Then that extends to stocks as well, right? You look at entire sectors and how the signals indicate whether or not these sectors should be in your portfolio. You don't look at an individual stock, do a DCF and then say this should be at, you know, this price. >> No. No. I mean so for example we you know like we we bought uh software stocks which have been getting we bought them in May uh we bought healthcare stocks you know again at in around the same time we're long healthcare energy and software and there are a lot of those stocks that we own that are like to the valuation expert's eyes too expensive in other words they missed it. I've never actually heard somebody I don't know if you've if you've ever heard somebody complain about their house being worth too much, but you know on Wall Street that's that's different um because you know because we have a whole different language that's that's paid that people get paid to uh to populate. But um you know expensive gets more expensive in Quad 2. Cheap gets cheaper in Quad 2. That's a real important concept. People should study it. somebody who uh tried to uh apply for student aid at some point in my life. It definitely is a problem if uh your family's house is worth too much. But anyway, uh that is one example. Um what do you what do you think about Bitcoin? Uh Keith, have you has your team looked into why Bitcoin's been soaring and whether or not this is a risk on indicator? >> Yeah, I Bitcoin to me like you know we're shorted up until um till it stopped going down which is nice. We have a very uh good Bitcoin trend tracker product that a lot of people subscribe to. They can look at when we're long it and short it. But we got it uh we got long that uh that in the last month. And um what's interesting about Bitcoin again, it was a it was an asset class that was Bitcoin and crypto. We're long um Ethereum. I'd be long Salana. Um even some of the more, you know, dicey uh dice some of the more dicey crypto stories out there like they're signaling bullish trade and trends. So the machine's buying it. And what's interesting is that Bitcoin, we'll see if it holds. This is I'm see you don't see this very often, but Bitcoin and the US dollar have are developing a positive correlation. Okay, they're going up at the same time that and gold has gold has the most inverse correlation to the dollar and Bitcoin has the most positive. I'm talking about like big commodities uh or currencies that are trading against dollars. So that's new. Um, I have no idea why and I don't care. I think that's the best part about being long Bitcoin. When I'm long Bitcoin, I'm like the I'm like the uh I'm like the idiot, right? Like I don't know anything. I mean I I still I still can't understand what people were telling me about the blockchain when when we shorted Sam Bankman fraud at the end of 2021. I still don't understand what they're saying. Um so I don't need a narrative on Bitcoin other than it go up. And that's I don't want to be long when it's going down and my signal says to buy it. So, I actually just bought some today cuz today was the first correction day we've had in a little while. >> Despite the uh Fed funds the Fed funds rate going up, the M2 money supply in a growth rate as as a growth rate is a a a year-on-year change basis is actually still going up. So, it is growing at 5.7% the highest since 2022. >> So, that may more liquidity may explain why uh Bitcoin the dollar are going up together. That's just it. >> It may it it may also mean that I'm right and the Fed's going to make a major policy mistake, invert the yield curve and then have to cut interest rates. You know, in that environment, the money printing go burr. I mean, that that's I understand. I'm not an idiot on that thesis. I mean, that's a and again, I don't buy it for a thesis, but it's an amazing thing how macro exposures you can be long them or short them and not have to know why. And then in the future, you end up knowing what the why was all along. You know, to me, I think that's like at least one of the great learnings for me in the last 20, well, 27 years of doing this, and I've screwed up a lot of different ways to get there. But I I do think that that's going to be a big thing next year is that the Fed's going to have to turntail after making, you know, late cycle rate hikes and cut. And that's going to be a real interesting thing to watch people, a lot of people say, well, you buy stocks when that happens, just like that's what they said in the early part of a wait. And that obviously ended in tears. So, you got to be careful of that. Yeah, it depends why they're cutting rates, which is my question next. Why would they cut rates in that particular environment? Let's say the Iran war doesn't end next year or at least for the first half of the year. Would there be an environment in which oil still stays high? The Iran war is still ongoing, but the Fed would have to cut rates. >> Yes. I mean, that's like '08. I mean, they would have to they're going to the rate of change of GDP growth is going to get cut in half next year. If we're right, it wouldn't be hard to do because we're going to print three and a half to four. So, you know, divide that by two and that's where we're essentially at for the second quarter uh of 2027 on our model. So, I do rates of change, right? If the growth's accelerating, expensive gets more expensive. If growth starts to slow and it's either a stock or an economy, you have to be very well aware of that and understand where the plane attempts to land, you know. So, Q2 of next year is going to be nasty. Um, that's going to be the the big GDP slowdown and that's the one that you want to be you you really want to be watching like you know what the what the Treasury what the Treasury bond market signals are saying once it starts to acknowledge that because that's different than a white hot PMI number that was reported yesterday. >> Transitioning from Quad 2 to Quad 4, where do you want to be in a quad 4 environment sector uh as sector-wise and asset allocation wise? Well, you want to be long all my shorts and you want to be short all my longs. That's that's easy. >> So, like I'm I'm as short treasuries as you can be. I'm short TLT, Zeros, ZROZ, LQD, which is investment grade credit, high yield credit, HYG, Jojo, which is kind of like a poser manager. Um, you know, I would b I buy I buy four three of those five. Um, you know, I'd buy investment grade credit, TLT, etc. So, so once the world, you know, once the bond market says we're done accelerating in in US economic terms and if the AI capex bubble starts to implode at the same time, that would be like literally I I'd have to switch my my book from my longs to my shorts and my shorts to my longs. >> Would you buy an anthropic IPO or an OpenAI IPO if it were to happen before 2027 Q2, let's say? >> I'd buy anything. I mean, I buy anything that ticks if my signal tells me to. It's like um you mean currently we're bullish on SpaceX for we weren't bullish on the IPO, but we're bullish now. I mean, it if if it needs some time in space. >> Uh no, I probably won't run out and buy some anthropic like people bought SpaceX at like $23 and then got eviscerated because that's not what I do. But I'll give it some time, you know, like I mean we're long Meta right now. We're long Apple. We're long Microsoft. I mean, there's a lot to do out there. You know, I think that's one of the great challenges for people is you can you maintaining two opposing thoughts like bubble and I own it at the same time and remain sober. I mean, it's only 11:00 or 11:30 here, so everyone should be sober. Um, but the but but the but that's a hard thing for people. I mean, that you got to learn how to do that. So, I think there will be stocks that that that there will always be stocks that can work irrespective of that capex or AI bubble popping or not. Do you have any signals that it would tell you to rotate out of tech if it if valuations get to a certain point? >> It's not on valuation ever. The catalyst for the catalyst for a growth stock to go down is that growth's going to slow, >> right? No stock ever stopped going up because it was too expensive. >> Like again, back to the example of your house. Okay. On that day in Westport, Connecticut, that house just stopped going up because that was the perfect valuation that some dude from some business school told you that he calculated in his model. No, >> you got to get look what is the causal factor that makes something expensive. Well, it's in Westport, Connecticut. There's no supply and there are a lot of rich people. Okay. What is the what is the calculus like currently? Is Palanteer's revenue growth accelerating? Yes. Are we long that and Octa and you know you pick Crowd Strike whatever the you know the the software stocks that we have on if if my analyst tells me that the rate rate of change of revenue growth is about to flatten out or andor slow we're out of that thing. I mean that is the catalyst for something expensive to go down. The expense of being expensive is not a catalyst. >> Okay. Finally, let's talk about uh your expectations for um the Xi Jinping and Trump meeting. I just want to find this video that I want wanted to play for you. I can't find it right now. Anyway, they're meeting right now and uh Scott Bessant is uh making some remarks having met his counterpart in China as well. What kinds of deals can you expect this to come to to materialize here from this weekend? >> Oh, like tremendous, beautiful, wonderful deals. Deals like you've never seen, you know? It's I like really like we started the week with with Trump essentially shaking hands with the socialist Mundami and and or however you pronounce it and now they're and now it's we're going to sing kumbaya with the Chinese. I mean it's I think it's actually irrelevant. I mean what the Chinese could buy more from like from us like we're long egg. Okay. Okay. That I'll take. Um but let's just look at the Chinese stock market. I mean, on the eve of him actually putting his feet on US soil, the the stock market went straight down in Shanghai and Shenzen. Like, it was down over a percent last night. I mean, what do locals actually believe about Kumbaya? I mean, they don't believe in it. There's no there's no bromance pending that has any longevity between the Chinese and and the Americans. So, um I I'm not long anything China. I'm short India. Um that's a different story. the the one macro um I guess event would be working together to end the Iran war which would violate your long oil thesis. Do you see anything like that coming out of it? >> Yeah, it's like my mom working on my wife to like me more. I mean it's like uh okay. Yeah, it could happen. Um when it happens maybe my wife will listen. I don't I mean I I cannot invest with these theories, right? I mean um I would I would like it. True. I I I would like both scenarios. Mom, I I'll give her a call later. Talk to my wife you to say good things about me. And I would love for China and the US to end the war in Iran. Who wouldn't? Um maybe some people wouldn't, but but that sounds great, but I'm not going to invest on that thought. >> All right, on that note, let's end with this video. This is um President Shei getting off the tarmac here. This just that became an overnight meme. Anyway, let's see. More uh meme memes pop up. Thank you, Keith. Uh well, we appreciate your insights. Where can we follow you? >> Hedgei.com. Uh it's Keith McCulla on Twitter. And we also launched our ETF business which is hedgeiassetmanagement.com or hedgiam.com is the is is the address for that. >> Yeah, I spoke to one of the um ETF managers from your team earlier. Uh so congrats on that. Thank you. We'll put the links down below. So make sure to follow Keith and Hedgey there. Speak again soon, Keith. It's good to have you on again. >> Thanks David. Appreciate it. >> And thanks for watching. Please do like and subscribe. Follow Keith and Hedgi links down below. And please use my code lynn l i n when you sign up to koshi. 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