Michael Gayed on Reverse Carry Trade Dynamics, AI’s Market Influence, and Independent Investment Strategies

Prepare to challenge everything you thought you knew about the macroeconomic landscape as we welcome Michael Gayed, the insightful founder of the Lead Lag Report, to dissect the future of global markets with a particular glance at 2025. With a bold statement about the reverse carry trade, especially through the lens of Japan's unique financial environment, Michael draws connections between low interest rates, currency strength, and international borrowing dynamics. Listen as he unravels the potential turmoil Japan could face due to inflation and currency issues, and shares captivating anecdotes, including a follower's experience with the carry trade from Honduras.

Anticipate a transformation in market dynamics as we examine the rise of AI and its influence on small caps versus large caps, questioning the long-standing dominance of tech since 2011. Younger investors are entering the market, and with them comes a thirst for high returns, leading us to analyze the unforeseen outcomes of the Fed's rate hike cycle and Yellen's interventions. Our dialogue navigates through the concerns of inflation and the looming concentration bubble in top stocks, scrutinizing the persistent efforts by policymakers to keep markets afloat amidst downturns.

Step outside the echo chamber of financial groupthink with us, as we advocate for independent thinking and critical analysis in market strategies. We call into question the YOLO mentality and meme-driven investment tactics while discussing the ineffectiveness of shorting. For those eager to deepen their understanding, we recommend resources like Onyx and the Lead Lag Report. The episode concludes with an exploration of skepticism surrounding AI's economic impact, potential market reactions to policy changes from figures like Donald Trump, and the volatile role of Bitcoin during credit events.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.

Chapters

• 0:06 Market Insights
• 12:39 Impacts of AI on Markets
• 21:24 Market Valuations and AI Skepticism
• 34:09 Challenging Groupthink in Market Analysis

Transcript

Speaker 1: 0:06

Paul always suspected King Crab was more of a title than a name, and he wants to be the first human to bend the claw, because one day the crustaceans will rise and only Paul will be spared. Foresight's a wonderful thing. Invest in innovation, including 3D printing with Opto.

Speaker 2: 0:39

Hello everyone and welcome to another episode of Opto Sessions. Today we're excited to have Michael Guyot on the show. Michael is the founder of the Lead Lag Report. We'll be discussing the current macroeconomic landscape, focusing on Michael's outlook for 2025. Will we experience the historical fifth-year rally or will inflation temper the bull market? Welcome to the show, michael.

Speaker 3: 1:00

You know I always enjoy speaking to you and your team. I appreciate the invite here.

Speaker 2: 1:04

No worries. Where are you calling from today? Is it your home?

Speaker 3: 1:08

Yeah, I've been remote for a long time, really even pre-COVID. I'm in New York but I've been all over the US. I've been to 47 states in my career presenting and I will tell you it's unequivocally true that New York is unlike any other state across the US. There's a lot more to the US than what's in New York City.

Speaker 2: 1:31

But are you based in the city of New York, like Manhattan, very close to it? Yeah, cool. So I thought we could start with something that you've been talking about on Twitter. I mean, you talk about a lot on Twitter, but, in particular, something that's important today from your perspective Japan. Can you discuss the reverse carrier trade for people and why you see it as an impending issue still?

Speaker 3: 1:56

Yeah, I mean it's funny, right. I mean I've been highlighting it really since August of 2023 as an endpoint that I thought would bring back the flight to safety trade back into treasuries. But basically the idea is, because Japan has had zero to negative rates for decades, or very close to zero rates, it's been a source of financing for the world. So a lot of people that want to borrow cheap capital or a lot of institutions, what have they done? They would go to Japan, convert their currency into yen, go to Japan, borrow a whole bunch of money in yen, then convert it back to their currency and then deploy that capital anywhere else that has a higher return than basically zero. So, basically, cheap margin is the idea, and that is the carrier trade money just borrowing from Japan and being deployed elsewhere across the globe.

Speaker 3: 2:48

We're going through what I believe is the most consequential monetary shift in history, where Japan, which has God knows how much debt relative to the GDP, now, is having to deal with very real inflation with a population that it saves and does not know how to deal with inflation. It saves and does not know how to deal with inflation. Now, the reverse of that is exactly as the term would imply. The reverse carry trade is money starts selling what it was invested in from that margin cap or from Japan, and that money gets repatriated back to Japan to pay off that loan. It's just the carry trade is borrowing from Japan and then the reverse carry trade is paying it back to Japan. Now I've made this point that the currency dynamic is what makes this so interesting, in that if you're a foreigner and you're borrowing money from Japan, if you're a foreigner and you're borrowing money from Japan, you actually like when your currency strengthens relative to Japan's currency, the yen. Why? Because you're borrowing a fixed yen amount of capital. If the yen is depreciating, is weakening, you're having to pay off that loan with a stronger home currency, in which case you like that. That's actually beneficial. It means the liability is actually less. If, however, the yen is strengthening, well, now you've got to deal with the yen's strengthening against your now weakening home currency to pay back that loan. Yen's been very weak, obviously because a lot of people have been borrowing, and borrowing implies you're shorting the yen.

Speaker 3: 4:21

Now what makes it even more complicated is the fact that Japan imports all of its oil. So the whole thesis for me around this reverse carrier trade was what You've got all of this capital that's been levered coming out of Japan deployed all across the globe, including into US equities. The yen is weakening. Japan imports all of its oil. Oil is denominated in dollars, which means that they have to convert their currency into dollars to import that oil to power the country and that if the yen keeps on weakening, that they have to step in to intervene and save the yen to prevent that cost push inflation from oil price to yen basically skyrocketing. You had it, and the after effect of that, of course, is what All the levered players start selling their assets and you have what you saw momentarily August 3rd and August 5th of 2024. You had this VIX spike to 65. Japan's markets are trading insanely.

Speaker 3: 5:20

I got 14 million impressions organically on X on August 5th because everyone said, oh, you called it and it's like. And then I said to myself it's probably a rally from here now. And then I'll pause the point you mentioned about I don't believe that it's over. Yeah, I'm saying I don't believe it's over because it doesn't make sense to me that it's over. You talk about a dynamic that's been ongoing for well over a decade. You're telling me that that got resolved in two days, and here's a very good example of that On X.

Speaker 3: 5:49

I actually end up talking to a lot of followers. I do Zoom meetings. I notice people that are engaging positively and it's like all right, I don't know who I'm going to talk to, but I'm always happy to chat with people that actually are being thoughtful. So I spoke with a guy His handle was anonymous. Didn't know who he was until we started chatting and he said yeah, I started following you because of this carry trade dynamic and he said or your thesis? And he said that he's somebody who's been doing it himself for well over a decade Now.

Speaker 3: 6:14

This is a guy who lives in Honduras, who basically is a real estate owner, and what has he done? This is what he's telling me. What has he done? He's literally borrowed capital from Japan and bought a whole bunch of property in Honduras. What you think that he deleveraged because of two days. It doesn't intuitively make sense to me. So I still think it's very much out there as a risk and it's why I maintain this line I keep saying, which is that it's not that I'm bearish on stocks. People have this wrong. They think I'm something like Permabear, when I've been doing content for 15 years and plenty of times when I'm bullish, it's that I'm very bullish on a tail event. I think we are due for an extreme and I think the fact that everybody has now written off Japan as a risk probably is why it's a risk, japan as a risk probably is why it's a risk and you mentioned at the start that it would be.

Speaker 2: 7:07

it potentially affects US Treasury salaries as well.

Speaker 3: 7:11

Yeah. So I have this thesis because a lot of people have been confused by the price action the most recent month and a half or so. Right in that, Fed lowers rates and then yields start rising on the longer duration end of things, Trump gets elected, that gets even more accelerated as the dollar keeps on strengthening and the end keeps on weakening. I don't buy the argument that the yields spiking that's been happening is purely because of Trump. I don't because, first of all, inflation expectations have been moderating. It's true, and yeah, okay, tariffs are inflationary. It's probably not going to be as bad as people think. But even if tariffs are inflationary, that, I think, gets countered by deregulation.

Speaker 2: 7:53

Yeah.

Speaker 3: 7:54

Which you can argue is disinflationary because it encourages competition as you lower the regulatory burden of newer entrants, right for various industries. Okay, so maybe that's a wash, maybe it's mildly inflationary, but it doesn't explain this yield spike that we've seen on the treasury side. So the only thing that comes to mind is I think the only thing that explains it is like the old joke it's like you know why did markets go down? Well, more sellers than buyers. So what entity would be large enough as a holder of treasuries to be a seller of treasuries? Probably Japan.

Speaker 3: 8:29

Japan holds a bunch of US government debt. If they're going to have to intervene to save the yen, they have to have dollars, us dollars, to do so. So how do they raise US dollars? They sell some of their holdings of US assets, us treasuries being the main one. I just wonder if and I have nothing to prove this it seems to make sense to me, given the way the end's acting and given some of the rhetoric from BOJ governors, that there maybe this yield move is actually Japan selling treasuries in anticipation of the idea that they will have to step in to intervene on the yen again, which again would spark another reverse carry trade.

Speaker 2: 9:03

Yeah, and you think this could be something. Well, we don't know when it will happen, but potentially there's something that would affect markets quite substantially.

Speaker 3: 9:13

I mean it did. I did for two days, right I?

Speaker 2: 9:16

mean it's.

Speaker 3: 9:20

I guess it's a question of the duration of it, right? I mean, I think that happened so aggressively and so quickly that if it's going to happen again, there's going to be skepticism and that's why it might take a little bit more time to play out right, as opposed to just a very concentrated event burst like that. But I do think it's still very much a possibility, which would be a good thing. It's like you want to have stocks go down, you want to have dislocations, you want to buy low. I don't know why everyone's so afraid of the idea that you have a correction, like if you have capital. You know, everyone talks about averaging in dollar cost, averaging capital. Everyone talks about averaging in dollar cost averaging. The best sequences to dollar cost average in are when you're averaging in to something that's going down, because then you're lowering your average price. It's just logic. So we'll see.

Speaker 3: 10:10

Now I'll tell you something. If I'm right on that, okay, then the implication would be credit spreads would widen as volatility rises in equities, which has been part of my whole credit event thesis, which I've been dead wrong on timing-wise, because credit spreads are very tied to the VIX. Treasuries would probably counter it. The return of the flight to safety. The old Phoenix analogy right comes back and, oddly enough, I'd argue that that would be the.

Speaker 3: 10:37

It's probably the thing that saves small caps. Right, because it's very clear and it's actually really interesting small caps, when Trump got elected, had a really nice outperformance and then gave it all back and then some. I just said, because we're back to the higher for longer environment. So if small caps are highly levered, need lower rates. You need a flight to safety to force lower rates so that some of the refinancing can then be at lower levels. So all this stuff I know it sounds convoluted, but I think it's all very much interconnected and I could be totally wrong on all this stuff. Obviously, right, I've been wrong for the last year and a half thinking on how this could play out other than August 3rd and August 5th, but again, I just think it's an underappreciated risk. It's a non-zero probability that it plays out like this.

Speaker 2: 11:19

A lot of it is related to just time, isn't it? You don't know when it's going to happen, even though eventually it might happen.

Speaker 3: 11:24

Yeah, I always use the analogy that I don't know the mile marker, that I might crash my car or, in your case, the kilometer, but I know the conditions under which I need to slow down. Slowing down doesn't mean you short, because that's going in reverse and that's going to get you into an accident too. Right, I mean it just means you have to de-risk, and by de-risking it means having more non-correlated long-running assets.

Speaker 2: 11:51

So I think it's a good time if we just segue into your wider outlook for 2025. Obviously, this is something to be aware of, a risk that could happen, but there's a lot of other things going on. How do you think the general market is going to play out over 2025? Based on what you know at the moment? Obviously, there's a lot of things to come soon, especially with Trump coming in. Nobody knows what he's going to do on day one, but from your perspective today, what do you think is going to happen?

Speaker 3: 12:18

I may have this wrong, but I'm pretty sure the January barometer, which is a fairly good predictor of year-end returns basically, I think how the market behaves in the first five trading years would suggest that it's probably going to be a negative year. You can attack that from here until tomorrow. It's like how wide does five days matter? For the rest of the year it probably doesn't, but there seems to be some historical relationship there. I would bet that, yes, probably this year small caps do outperform large caps.

Speaker 3: 12:43

I've gone on record many times saying that I think this AI mania is, with hindsight, will mark the blow-off top of large cap tech dominance. This is the narrative that you need to have that blow off of, because tech has been dominating really since 2011. Large caps have been outperforming small caps since 2011. Us has been outperforming international really since 08, but a large part of that is because US has tech and international does not. Growth has been outperforming value, because growth is tech and value is not, so it's been the story that's driven this underperformance in a lot of large swaths of the investment landscape in general. I think we are probably due for that to finally change and I do think, like I said, I think AI mania marks sort of the blow-off of that relative leadership. So I do think small caps, mid-caps, probably outperform large caps. I do think other sectors probably outperform but notice, I'm using the term outperform, not go up. So small caps, for example, actually historically more often than not, outperform, not by being up more than the S&P, but by being down less than the S&P when you're in a real recession or bear market. It tends to do well in bear market small caps.

Speaker 3: 14:03

I will also say that I think people have suddenly forgotten that there are lags in terms of when the recession typically hit following an un-inversion of the yield curve. It's like nobody wants to believe that you have a recession in 2025, except that the lag is there for the un-inversion. For all we know, it could be the case that we do have a recession finally, even under Trump. So I think it's going to be. I know it's cliche to say I think it's going to be volatile, but I think that probably is the most accurate statement. Volatility will bring with it opportunities. I mean, if it's interesting, right, you've had so many newer traders come into markets post-COVID and it's a younger generation and you know, and they say, the younger generation tends to feel entitled. I think the majority of money that's driving into these areas that are speculative feel like they're entitled to 20% annualized returns.

Speaker 2: 14:48

Yeah.

Speaker 3: 14:50

Newsflash. You're not entitled to anything.

Speaker 2: 14:54

Yeah, and you think a lot of that. Well, let's talk about the liquidity in the market and how that's affected it over the last at least couple of years. You can really see it. Has that distorted most things related to traditionally things that might imply recessions are happening? Things that might imply recessions are happening have all been distorted by the fact that the Fed's approach to monetary policy yeah, and it's just distorted the whole, whole regime.

Speaker 3: 15:24

Yeah, I mean, this was the real critical error that I made, with hindsight Right, the critical error I made in my own analysis around risk of a credit event at the end of 2023, which I do believe was there, but I obviously missed this. So the assumption that I had was that you just went through the fastest rate hike cycle in history. There are long and variable lags and that the long and variable lags would cause a dislocation. You momentarily saw that with regional banks in March of 2023. And then October. I thought was high risk and obviously the market then bottomed and then rallied.

Speaker 2: 15:54

I got my face.

Speaker 3: 15:58

So the Fed goes through the fastest rate hike cyclone in history, which you drain liquidity On the left hand. On the right hand, yellen says guess what? We're going to put even more liquidity back in, and the regional bank crisis was a catalyst for that, because it was effectively a restarting of QE, a shadow form of QE. So the Fed's taking liquidity away and then Yellen's putting it back in. I never thought that Yellen would counter the Fed, which is probably again why now there's like a legit concern of another round of inflation.

Speaker 2: 16:30

Yeah.

Speaker 3: 16:30

Also right the slag effects of that liquidity.

Speaker 3: 16:33

Yeah yeah, countering the Fed, which did the whole George Bush mission accomplished, you know, at the exact wrong time when the war is still going, Mm, hmm, right so. So, yes, it is liquidity driven and part of liquidity is also the carry trade. I mean it's all related. I mean, liquidity is leverage Right is leverage right. So what's scary is that the liquidity has largely gone and been funneled into just a very concentrated group of stocks because of the AI narrative right, which everybody believes in. All that's resulted in what I've called many times a concentration bubble, where the floor cap average is, basically, you have so much concentration in the top 10 names that, historically, when you see those types of levels, that is when things start to break down heavily. I don't say that as a bear, I'm just saying that as a matter of fact. So now the counter is going to be well, people will say, well, how do you? They'll never stop with the liquidity? Well, that's true, but they probably need a reason to keep it going, and a reason tends to typically be a crisis.

Speaker 2: 17:38

A reason to keep going with liquidity.

Speaker 3: 17:40

Yeah, exactly right. What was the reason from 2003 to the regional banks?

Speaker 2: 17:45

So theoretically, then, any large underperformance in stocks seems to be like the reaction is intervention.

Speaker 3: 17:56

It feels like the end of the world. The policymakers step in, they reliquify, it creates a bottom where the bottom happens naturally, and then the fuel is added to it with more liquidity, and then the cycle keeps on repeating. I've never once argued that if you had a credit event, stocks would stay down. I've never once argued that it was just a function of. I think credit spreads are massively disconnected from the message of small caps and that there's any number of catalysts that can sync those two together.

Speaker 2: 18:23

And this persistent put they call it that the Fed has on markets to avoid any sort of downturn properly. That's a cause behind this. People have no fear nowadays of investing in whatever it seems. A lot of it is channeling into the large cap stocks, but I don't know when that ends. How long can that go on? For? I mean longer than.

Speaker 3: 18:46

Yeah, it's already been a while, and it's not just been funneled into large caps, it's been funneled into a lot of speculative ETFs and option trading and things like that. I mean, the levered funds have exploded in terms of volume. I mean, it's like this is you know I was joking about, about fart coin, a meme coin, right and I said, yeah, the Fed's going to raise rates because of fart coin, and people didn't understand what I was saying, which is just funny, because it's like I don't think I think it's very obvious. What I'm arguing is that the fact that you have these silly, stupid things, you know, having billions of market cap, tells you there's too much liquidity still in the system.

Speaker 2: 19:22

Do you think the Fed sees that though? Like what? How troubling scenario now, with inflation going up, where it looks to be persistent at least, and not down to the levels that they want it to be at, and on the other side you're seeing this excess liquidity causing markets to go up a lot. So how do you think that plays out this year? I mean, at least two months ago they were talking about more rate cuts. Do you see that happening this year?

Speaker 3: 19:45

Yeah, and in late 2023, they were saying there were going to be six cuts in 2024. They don't know what the hell's going on, man. How could they? It's a very complex system. I don't care how many PhDs they have, I don't care how many algorithms they have, yeah Right, and now it seems like they're.

Speaker 3: 20:00

It's weird to me, because they, they, they went from being reactive to now proactive. So you know, they would typically respond to a crisis after the crisis already started. Now they are trying to be proactive by saying, well, we'll see. We allude to the idea that Trump's policies are going to be inflationary and that they'd have to raise rates because of that.

Speaker 2: 20:24

Well, since when are they trying to actually anticipate the future. I don't get it. It hasn't been working well for them. And just quickly, you talked about the AI craze essentially topping out. What do you think would be the cause of that, craig, essentially topping out, what do you think would be the cause of that? Do you think at some point people are going to realize immense investment into AI from these companies has to have some sort of impact on the bottom line in the end, I suppose. Is that going to be one of the causes, or does that not matter?

Speaker 3: 20:49

Yeah, well, look, the longer it takes for it to matter from origins, the more the market will get tired of the argument. Right? I mean, at some point it's got to actually translate into actual dollars, beyond the mega cap companies that are using it primarily just to optimize their ad platforms, like Meta. Look, I do LeadLag Live, my podcast, and I had Julian Brigden on yesterday and he said something along the lines of the better the story, the bigger the bubble, and the story is really quite powerful when it comes to AI. But what is AI?

Speaker 3: 21:26

What is?

Speaker 2: 21:27

AI.

Speaker 3: 21:29

It's machine learning that's faster, that's all it is. Machine learning has been ongoing forever. Nvidia obviously empowered the speed part of it, but I also think people conflate AI with NVIDIA. Nvidia is providing the picks and the shovels for it through the process of power, but if the algorithms are not being used, who cares? Just because it's faster doesn't mean you're going to use it. Just because a car can go from zero to 60 in 3.7 seconds doesn't mean you're going to drive it more. So it's like this is where my skepticism comes in. I'm not saying that ai isn't transformative or isn't going to be some massive, you know boon to the economy, but tell me when yeah, yeah, it's that classic cycle, isn't it?

Speaker 2: 22:16

we're at this sort of fever's part where everyone thinks it's going to be so solve every solution, but then reality kicks in at some point. But it can take some time to do that.

Speaker 3: 22:26

People get caught up in. It's very well known in a lot of behavioral studies People are very poor at estimating time. They tend to think it's going to take less time. They tend to think it will cost less money. That's why all these home construction projects are always double the time and double the money. It's because we're very bad at this, as you can see. So now apply that to a bunch of system one thinking retail investors who are YOLOing into zero DTE options, and you can clearly see how the better the story, the bigger the bubble.

Speaker 2: 22:58

And you mentioned so related to this AI trade top and out that small caps might perform better. Is that because you think there will be a downturn and you said you know, during recession small caps do slightly better, relatively speaking? Or is it because you think yields will eventually come down, supporting small caps as well?

Speaker 3: 23:18

But it's both right, because, I mean, recession will bring yields. I mean this is the thing you need to have, that this is the irony of this the more that yields stay at this level, especially with all the refinancing that's just starting to pick up right as the debt gets rolled over from maturing post-COVID at the very all-time lows on yields, you need to have some dislocation, otherwise a lot of these companies really will go bankrupt, in which case the market will tell you and start responding by saying unemployment's rising, now we just have to drop. But the damage will already be starting in a real world sense and it's like all right. Well, it's actually very tricky, right? Because then, if things start to go through a dislocation, what the Fed's going to? Start to lower rates while inflation is, in quote, sticky.

Speaker 2: 24:00

The pressure now is actually with the Fed to not lower rates, even if you have some kind of a crisis, that the crisis may be what actually lowers inflation, not the fed and obviously, just moving on to to trump as well, you mentioned just to re-dig into it a bit further than we already touched on it which, um you mentioned about deregulation and also the tariffs. He's also looking into tax cuts. He's got the the Doge Society looking into reducing government spending, deportations, other things Collectively. Do you you've got the feeling that this is going to be positive or negative for the markets over the next sort of 12 months?

Speaker 3: 24:38

It's. I think it's positive. I just don't know if it's as positive as the market narrative would have you believe.

Speaker 3: 24:43

Okay, Now this is the other thing too. I mean okay, so clearly, you know, under the first Trump administration the markets did well, but that was also when rates were basically at zero and hit a QE. So I don't think you can make the same argument as a repeat. But you know, it's not a function of me thinking that Trump would disappoint. I just think that the magnitude is either largely priced in and the likelihood of disappointment is actually probably a lot higher than people think.

Speaker 2: 25:10

Yeah, ok, and all the reaction to that happens after Trump's come in, some of his policies come in the realization would be because it's not affected the actual fundamentals as much as people would have hoped.

Speaker 3: 25:26

Yeah, and honestly, it would probably be a good thing for Trump if markets were to break down heavily early in his term, or at least early relative to when the midterms are, because recency bias is what causes people to vote and since the people are swayed by markets, you'd rather have the markets recovering into Republicans. So I would argue he probably wants equities to break down, because as long as there's a window here where and you can see he's already starting to frame it that way on truth social with his wording the ideal thing to do would be to have Apple leave for him for markets to go down so he can still blame Biden.

Speaker 2: 26:00

Yeah.

Speaker 3: 26:01

The further he is in the term, the less you can blame the prior administration. You probably wouldn't mind there to be a nasty correction here.

Speaker 2: 26:07

That makes sense. Yeah, that's a good point, and he's also talked about come across as pro-Bitcoin. He's been talking about the Federal Reserve, I believe, buying Bitcoin as an asset on their balance sheet. What are your thoughts on that balance sheet? What are your thoughts on that? Do you think it's obviously people have got pretty positive on Bitcoin because of this story? Do?

Speaker 3: 27:01

you think that's going to play out you know it's interesting In October of 2023, I kept on saying Bitcoin will diverge because people think I'm some like Bitcoin hater and I'm not at all. I just think the narratives are stupid. Yeah, like it deserves a place in a portfolio, but the whole have fun staying poor and all this stuff like that irks me. It's just a nasty thing to say. It's a very egotistical thing to say.

Speaker 3: 27:27

Again ego is the same as overconfidence. Overconfidence creates leverage. Leverage creates crashes. It's no wonder Bitcoin has these huge swings.

Speaker 3: 27:39

So I said Bitcoin will diverge, because I thought the markets were going to have the credit event and I do believe that Bitcoin, like gold, is a counterparty hedge. So I thought actually, ok, if I was going to be right about that, it would probably do well. And in October it was as stocks were going down it actually acted non-correlated. Then come the ETFs and that changes everything and everybody, and their brother and mother, starts going to ETFs. Cold storage, be damned right, and that becomes the vehicle of choice for a lot of investors and traders. The overconfidence is back in Bitcoin. I don't think a strategic reserve is going to change the fact that typically, when you see cycles with this type of overconfidence, it's the top.

Speaker 2: 28:18

Yeah.

Speaker 3: 28:19

Right. So I don't know, I'm skeptical. Candidly, both candidates. Obviously, as you know, harris too was talking about Bitcoin and you know it's one of those things where it's like you know they were probably just pandering to the younger vote.

Speaker 2: 28:33

Yeah, makes a lot of sense. Entering to the younger vote. Yeah, yeah, makes a lot of sense. So you believe there's basically a potential that the market Bitcoin is very correlated with the general market. It's topped out already for the year.

Speaker 3: 28:47

It's possible and that's why I've been saying Bitcoin will converge. Yeah, when I say converge, what I'm talking about is you know, it's been well documented you really want to get a proxy for Bitcoin. Just go into the three times levered queues. It's just a levered tech play.

Speaker 2: 29:04

Yeah.

Speaker 3: 29:05

Right In an unlevered vehicle for Bitcoin itself. It's like all right. Well, converge would mean, as the Nasdaq is going down, it converges down to the Nasdaq. Yeah, that's what I'm referencing.

Speaker 2: 29:15

I just wanted to talk about valuations as well, which obviously is related to all this Federal Reserve liquidity injections, obviously pushing the market higher and higher. The share PE ratio, which a lot of people use I think Buffett's the one who uses this heavily as well is currently more than double its historical average, a threshold surpassed only before significant market downturns in 20 in 1929, 1999, 2007. So what? What forward risks? Because I mean the market's not cheap at the moment. I mean it might act like it is, but it really isn't like, and that I mean this is what shows that from the data. How much of a forward risk is that? I mean we've talked about if we have this persistent put, if, if they constantly have that evaluations just typical valuations now higher or the norm is now higher than whatever they used to be, or is at some point it going to sort itself out?

Speaker 3: 30:09

It's an interesting thought. I mean it's certainly you can argue that we're in a permanently higher average P level. You can argue that we're in a permanently higher average P level because of that point and because of the cost of liquidity that the policymakers put into the system. I'm sure you've seen that meme across X of you know somebody throwing out Graham and Dodd's book, the Intelligent Investor. Yeah, it is my garbage. Can I still think fundamentals matter? I still think valuations matter. I still think that the market is designed to punish the speculators, ultimately, and reward the patient. Hasn't been the case for some time. I get it. But yeah, valuations, I think, do matter. I think probably the forward-looking returns for the US markets are not going to be that phenomenal, ai or not. I have gone on record saying which is very unpopular opinion that I would bet in the next four years China's stock market outperforms the US stock market.

Speaker 2: 31:07

Really, what would be the causes of that?

Speaker 3: 31:10

Look at the difference in terms of the valuation US versus China. It's not even close. It's like the ultimate contrarian trade. Under a Trump administration, china's stock market outperforms the US. You can't write a better contrarian trade than that.

Speaker 2: 31:24

That's interesting, so I I was just going to say the Alibaba example. You've probably seen it. The valuation compared to the actual revenues are going in opposite directions over the last sort of five years. Um, so some really, yeah, theoretically very good value stocks there, but then you've obviously got this risk from uncertainty in china. Is that, what are the main reasons why this stock market hasn't recovered there? I mean, I know they're struggling a little bit as an economy. They're trying to stimulate that now. Will that stimulate eventually? You know, bottom the market properly and it will recover, like you're saying I think you know so.

Speaker 3: 32:01

Obviously, there's the huge debt load, and then the real estate crisis. I think the ultimate answer, though, is you just haven't had animal spirits because china was so brutal with lockdowns. You didn't have the same sort of built-up consumerism that we saw in the uS, right, so they have all this liquidity, but nobody's using it on the ground. That's probably the real answer. Now, the thing is, that gets you know, the further you are away from the memory of those COVID lockdowns, the more likely you are to then go back to normal spending patterns, I would imagine and if that's the case, then I would think that you know you'd probably see a pickup in China consumers.

Speaker 2: 32:41

Yeah.

Speaker 3: 32:41

Then the stimulus starts to work again.

Speaker 2: 32:44

And because for a lot of people the Chinese market, you know they don't know it at all. So if people were looking at a trade there, do you focus on the sort of mega caps in tech or, like the indice, what's the what's a safer play there?

Speaker 3: 33:00

Yeah, In quotes safer.

Speaker 2: 33:02

That's always a loaded word.

Speaker 3: 33:03

Well, I think you probably do want to tilt large, because it is true that you know the smaller companies can just be taken out by the China government A lot harder. The very large companies, where CCP is, you know, also themselves involved and there's less incentive. So probably the Babas of the world would be the place. Those covers aren't going to go away.

Speaker 2: 33:24

Yeah, yeah, that makes sense. Well, michael, it's been great chatting, we've covered quite a lot and it's been really good to get your insights, as always. Are you able to just let us know, let our community know, where they can get more of your insights from and sign up to the Leadlag Report? Yeah, I appreciate that.

Speaker 3: 33:43

So I have a sub-stack leadlagreportsubstackcom same content as leadlagreportcom. I also work with a bunch of financial advisors and fund issuers through a sister company, an entity that's part of the same company called Leadlag Media, so that's leadlag. The same company called lead lag media, so that's lead lag mediacom. And then, of course, I'm on all the major platforms x, youtube, linkedin, instagram at lead lag report. My style of communication on x is very different than my style of communication in real life because I'm playing with you, but yeah, I I do. I do hope, at least, that those that see my content and and and hear my research and my thesis and arguments laid out and my core beliefs like shorting doesn't work I hope that they hopefully appreciate that I'm trying to get them to think differently. I have to tell you I find the level of groupthink that's going on right now is stunning, really stunning. Nobody's thinking anymore. It's just YOLO and memes and silliness, and it is a very serious endeavor. I don't think you should take markets lightly.

Speaker 2: 34:38

Yeah, definitely. So where would be the best place to start? Is there like a?

Speaker 3: 34:43

Probably Onyx. Onyx that lead lag report. Okay, okay.

Speaker 2: 34:46

Brilliant Well, thanks, michael, it's always been a pleasure and yeah, have a good rest of the day. I appreciate it, okay.