[00:00] How worried do we need to be about the market absolutely collapsing and taking a big dumply-doo-blah on bond yields, which just keeps going up? And why did it keep going up?
[00:13] And what is the underlying economy saying? And what, again, are the canaries in the coal mine? Because so far, we've been probably, honestly, too bullish on the NASDAQ 100. We were so bullish on the NASDAQ 100, we sent out a lot of talk in our alpha reports and our morning course member live streams on the NASDAQ 100,
[00:35] going straight up to all-time new highs, that we were so bullish. We pointed out specifically the 7-12-October-16 calls, probably about a month ago at this point, somewhere around September 14th-ish, somewhere around there.
[00:53] Right while we were in the midst of the tanker for tanker strikes, this option has literally gone from around $12 over here all the way to $44.
[01:06] That's almost a four-frickin'-Xer on this option. Why? What is going on? What are the underlying pros and cons to this economy?
[01:18] And what's going on with those credit spreads and bonds? We're going to talk about it. First, quick note, come join us over at what is now called Reinvest One. That is our product where you get everything we have to offer.
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[02:23] but if you get in before then, it'll be a lifetime access product for you, which we think is very exciting. That said, let's get into what's going on with yields and the economy. So right now, the economy, as we know, is cooking a lot.
[02:36] We just got the S&P Global final read for September, and we also got the PMI final read from the ISM. and we have two main canaries that we've been talking about on the channel
[02:49] and a lot of people get a little confused when I talk about these canaries because they wonder, is it really these two? And the answer is yes. So we are certainly seeing an insane boom in artificial intelligence spending right now.
[03:03] There's no question of that. In fact, we have the technology sector accelerating its growth to its fastest pace in over five years. We're basically comparing to 2021, which is kind of crazy because if we're comparing to 2021,
[03:18] we're comparing to like boom time, and we're saying we're going faster since then, which everything between then and now has been getting crouched by the growth the economy is seeing right now. A lot of it because of artificial intelligence spend,
[03:31] and what's becoming more and more ubiquitous use. People and businesses not using AI are really getting left behind. That leaves us with two main canaries. The one canary in the coal mine that does not change its color or its style or anything is the labor market.
[03:48] The labor market's ability to absorb layoffs and sort of rejiggering is what keeps all of this boom going. The labor market rolls over, we're all cooked. The economy falls off a cliff.
[04:01] This is why paying attention to what's going on in the labor market is very important. fortunately if we look at a three and six months trend of both the ADP private payrolls report which is sort of a fact check on the government data and the three to six months trend on the
[04:17] government data we actually see the economy's kind of picking up when it comes to employment I mean look at Nick T's post on X you've got right here the three and six months payrolls
[04:29] close levels plus private sector payroll. We kind of hit this floor in 2025 during that immigration era. A lot of nervousness that labor was going to go pretty negative here. And we've really rebounded off of this.
[04:42] We don't plummet off this cliff, something starts reversing course over here. The labor canary is doing good for now, which is great. It lets us stay bullish on the economy. And we're seeing this here in the ISM reports that came out this morning.
[04:54] Filling positions that have been vacated due to promotions or retiring. That's still happening. We've got employment returning to expansion in September, and we've got restructuring due to efficiency gains using AI. So the fact that you have restructuring going on and still important gains, so far, so good.
[05:11] And the second canary is what I call the underwriters of the AI trade That currently opening Ionthropic Those could be different in the future You might swap out who underwrites the purchases of AMD chips
[05:24] and NVIDIA chips via either NBIS or CoreWeaver, SpaceX, or whatever. It doesn't really matter. It's Microsoft, right? It doesn't matter so much who the underlying is. It matters who the end user is.
[05:36] The end user right now is, or buyer, opening Ionthropic on behalf of you and businesses. So the end user of those chips, core canary in the coal mine now. Good news is, in two or three years, those might be hot swappable.
[05:52] You know, there could be a new company. I don't know. It could be reinvest. And it takes over from OpenAI and Anthropic. Whatever. Point is, it could be a different company. And the benefit of that is, that canary can evolve.
[06:06] The labor market can't. So watching both of those is the most important factor going forward. But Microsoft is a fantastic play as well. We have a price target that we've been talking about for quite a while
[06:19] in our course number live streams of $562 for Microsoft. I encourage you to join us there. Join us at meetkevin.com with that. You pay once, you get lifetime access to everything. And so Microsoft has been clutching it.
[06:33] And I think they're quietly breaking out. People aren't paying attention to that breakout that's coming from Microsoft. But consider some of these notes here, and then we need to look at some of the more maybe concerning or, dare we say, the more nervous pieces about the acceleration that's cooking in yield.
[06:51] But if we go to this S&P here, we can see there's a sharp upturn that we're seeing in the technology sector. All seven U.S. sectors posted expansion of business activity during September. The majority saw stronger growth than in August.
[07:05] Technology was by far the best performing category at 62.7 in September, up from 56.6 in August. The sharpest rate of business activity expansion since June of 2021.
[07:17] September data also indicated the steepest rise in input prices. Now that's unfortunate. That obviously weighs on what we're seeing with treasury yields, which treasury yields in fairness right now are at about 5.32.
[07:29] from five basis points above sort of my ideal, like, ah, this is where we should really stop going up because you're eventually going to break something. And that's exactly why you've got Academy Securities nervous.
[07:46] Not only is it this yield getting back to, or the spread between the twos and the ten getting back to 50, which is shock territory, she doesn't necessarily guarantee you're going to get a shock, right? We sat over 50 from Liberation Day through basically the end of the, well, the original ceasefire.
[08:04] You were above shock territory. So it doesn't necessarily guarantee you're going to have a shock, but it does indicate that the risks are higher. And that's where Academy Securities gives us a little bit of color, where they actually, towards the end of their article,
[08:18] they argue that, look, a deal with Iran and more news on AI, all that can help. Duh, we already know Kevin's bullish on a deal with Iran. that's bullish for the market. The market's going to go up
[08:30] and people are going to go look back at this market and they're going to say, wait, how did it just go from 700 to 800 on a queue? It's going to happen in like a blink of an eye. It's the same thing with NVIDIA. You know, I've been bullish this 227 breakout on NVIDIA
[08:46] and it's now a 237. We are starting the very breakout we have been calling for, baby. At the same time, even Marvell has been breaking out of our 266 line that we've been watching pretty heavily. So with that said, they do say, call me
[09:02] nervous, not scared. Now, why are they nervous? Because they're nervous due to this widening that we're seeing in higher yield credit. Now, we've talked about this last week as well. A lot of
[09:17] people have been talking about these spreads widening. And when you zoom out, they're not horrible in the context of themselves. When we zoom out on the high yield spreads, yes,
[09:30] they have widened, which is a risk for the economy. Are they higher relative to what we saw in 2022, for example? No. But one of the reasons they're spreading, or things are
[09:42] even worse now, if you will, is because that nominal yield on the 10-year treasury is so damn high. And the market is just blatantly ignoring it. This is what makes this individual
[09:55] nervous, and I think rightfully so. And they give us a little bit of color into where they think retail is buying versus where the suits are not paying attention. So I'm going to show you that in just a moment. I think that's quite interesting. But a lot of people ask
[10:10] me, hey, when this nonsense happens, we touched on this also this morning in our first number last year. I'll just make a quick little note on this. People often say, like, Kevin, you know, how do you allocate in this? Like, how do you hedge? If you have a little pie that you invest
[10:24] into stocks how do you hedge yourself against some kind of panic And so my thesis is that what you do is sort of like a little electrical circuit You take money that you earn and you have this little resistor
[10:40] and the resistor limits how much money you throw into the stock market. I think the allocation is the way that you hedge. In other words, you could be a really big bull on your stock portfolio,
[10:53] but maybe out of every $100 of investable capital you have, you're only putting, you know, maybe 30% into this. And then maybe you're putting some into private equity,
[11:05] some into real estate, some into debt payoff, some into cash, right? And so this is really a way that you could hedge. All of these become a hedge to the stock market.
[11:17] Stop saying stocks are bad. You could be bullish on stocks. I mean, heck, we are. This is why we're buying the dip and sending out trade alerts with 700 on the queues going, nah, man, this is bull crap. This is peak fear.
[11:29] And people still, I'll see the comments, people are like, but Kevin, I thought you said peak fear was three weeks ago. I don't look at the queues three weeks ago. It's right up from there. But anyway, look at this. This is the 10-year.
[11:43] And what they're talking about here is this acceleration is being ignored by the stock market and it creates risks, right? The slope of the line was already aggressive over here. also aggressive here, but the slope has gone nuts over here.
[12:00] That increase in the slope creates a lot of potential risk for the economy, hence us being at this sort of shock territory. Now, an interesting note that they say,
[12:12] is they say there are no treasury bearish. Like, anytime you talk to people, they're not bearish on treasuries. In fact, they say that retail is probably early and beating the pros again by throwing inflows like crazy into TLT.
[12:28] TLT has received the largest inflows, and it's now at the highest level since late 2024. Now, TLT is really interesting because it's now losing my bottom line over here.
[12:40] You can see the last time this happened was in October and November of 2023, and we usually tend to bounce, bounce, bounce, bounce, bounce, bounce, right, off of this 78-77 line.
[12:53] We're under that right now. This author argues that retail is early at buying the dip on bonds, but also says there are no bond bears.
[13:05] Like, people are either neutral or bullish on bond yields. So why are bonds losing value? Why are yields going up? Well, he says because of the following. The price of oil is bearish for bonds.
[13:17] The deficit is bearish for bonds. Long-term treasuries issuance is bearish for bonds. The global supply, so every country's issuance of bonds is bearish.
[13:29] Corporate supply, so how much, you know, SpaceX has to suck money or Google has to suck money. That's also bearish. Google just did a preferred. Maybe you didn't hear about it, but it's worth knowing.
[13:41] Google just did a preferred. they raise, I think it was at a 6.5% preferred stock deal where you earn 6.5% between now and the summer of 2029.
[13:58] So basically they pay you 6.5% a year for three years. And then that either gets, I'm not sure if it's mandatory convertible, I'd have to look. But basically, it converts into Google stock at like $440 or something like that.
[14:14] Now, I personally think that's a bad deal. And you should look up the details yourself. I personally think it's a bad deal because it converts at a premium. And Google's at like $340 right now. So you're already building in a lot of upside.
[14:28] I think that deal would have been a lot more fair if they ran it at, it's 6.5% for three years. but we're giving you the option to get in basically as a stock at $340 or $360,
[14:40] you know, somewhere over here. Not such a massive premium. But whatever, that's just an example of more suckening. And the fact that countries like Saudi Arabia, or if you include what I said, Japan and Europe selling U.S. Treasuries,
[14:53] you've got a lot of people basically getting rid of Treasuries because they need to raise money themselves. Not because they're bearish on a 5.3% 10-year Treasury yield, It's just because they have other needs.
[15:05] They've got to fund the AI, build out, whatever. So in other words, they argue that right now is a time to be maybe cautious slash nervous, but not fearful.
[15:19] And I think that really kind of puts together how this market feels, because people are so nervous about this economy, and yet the economy keeps impressing to the upside.
[15:31] And if we look at the copper to gold ratio, this is basically a pick the rising price of copper, which has been performing very well as an industrial metal and compare it to gold And typically well first of all we can pinpoint over here that the bottom was basically when Warsh was chosen which is really interesting because if you hold copper stable and gold prices come down gold is a fear metal so if fear in that case goes down this chart goes up
[16:05] So you could say that, oh, this chart is getting higher, which, you know, gold goes down and then copper goes up as well. That spread widens so the chart goes up even more. Generally, you say, as the chart goes up, the economy feels more bullish.
[16:19] But it's been coming after this plummeting of the chart, which is really gold rising. So, because copper has been doing very decently the past few years. So, let's chart that out like this,
[16:33] and it's going to make a little bit more sense here. Okay, so this downtrend right here has pretty much been driven by gold rising.
[16:46] Okay, so this would be gold rising. Now, if we look at the trend over here on the right, gold stopped here due to Warsh.
[17:01] Remember on January 30th, I predicted that the top was in for gold. Because Kevin Warsh is not a money printer Fed chair. That's bad for a future recession, and it's also bearish gold.
[17:15] I think gold is going to be in an eight-year bear market because Kevin Warsh is at the helm of the Fed. So that's me taking my studying from the Fed and applying it to gold. Now, this section that we're getting right here
[17:30] is actually being this sort of uptrend right here. This is not driven much by gold, in my opinion, or as much by gold. I think this is being driven by copper
[17:42] and driven by the economy. So, basically, economic boom. Now, you can explain this chart, however, but I think this helps putting perspective on why this chart is moving like this.
[17:55] And what we're finding is we're actually now reversing a five-year downtrend in the copper-to-gold ratio. And it's possible if the economy keeps booming like this, this line could actually be substantially higher in the future.
[18:07] Even if gold just stays stable, copper could keep moving. Okay, and if copper stops moving, gold should fall. Either way, the spread is often a barometer of the economy.
[18:21] And my take is that this spread continues to widen in spite of the fears regarding the treasury market. So going back for a moment on the underlying economy, the underlying economy on S&P data that we got this morning indicates that industrials are outperforming.
[18:41] consumer services maintained strong business activities, and even financials, which came down and saw a loss of their growth momentum,
[18:53] are still expanding faster than they did in the first half of the year. So in other words, even where things are not doing as well, are still doing very well. Healthcare was the weakest sector, though, they did admit.
[19:07] So all of this together does suggest an economy that's booming on AI spend, and we do have these two real risks. Could we incorporate a credit crisis into this? It's possible. I mean, I always think, like I say, you want to sort of,
[19:21] the way you hedge is you allocate to different things outside of the stock market, but I think trying to hedge for that black swan is a really complicated thing to do, and you'll probably get the timing wrong. So this is why I prefer the two canaries for determining what issues we have in the economy.
[19:39] As long as these two canaries are kicking butt, which both of them are, then we should be bullish stocks. And that's what we're seeing. That's why I think we continue to drive all-time highs on the Qs.
[19:52] And as maybe unpopular as an opinion is, I think the rise in Meta, the rise in Microsoft, the NASDAQ 100, NVIDIA all this stuff is just at the beginning
[20:05] well, I shouldn't say the beginning but it's still ahead of the big euphoria to come which should be very exciting and if you want to see exactly what trades we're making how we're positioning our research platform
[20:19] that's coming later this year the reinvest terminal, you want to be part of that before we get rid of lifetime access you can lock that in before the end of the year And, of course, we'll have price increases coming between now and the end of the year.
[20:33] So you'll see the best price if you join today versus later this year. But anyway, check that out over at meetpattern.com. I think it's a really great product. And what we're building is really, really exciting. So we'd love to have you as part of it. If you like that video, check this one out.
[20:46] I think you're going to love it. Why not advertise these things each month here? I feel like nobody else knows about this. We'll try a little advertising and see how it goes. Congratulations, man. You have done so much. People love you. People look up to you. Kevin Passer, Fair Finance,
[20:59] and you too, but meet Kevin. Always great to get your take.