Transcription
[Music] Well, let's look what happened in that April 2nd, April 9th week. In that week, we saw the stock market drop by 15%. The S&P lost 15% of its value and the credit market started to seize up. No high yield debt issuance, you know, commercial paper drying up. This is the oil, as Larry Cuddle used to say, the oil in the money markets that keeps the economy going.
Why did that happen? I believe it wasn't related to, oh, we have a tariff that's going to cause a recession. That would have sent buyers into the Treasury complex, but Treasury yields spiked on the long end and that's what Trump called Yippi. I think what happened is that the tariffs were so onerous on China, I think it was 145% or something like that, where international trade grinds to a halt. That means our creditor nations no longer are taking our dollars and recycling them into our bond market and our currency. If that's the case, then the demand for Treasuries attenuates significantly. That caused Treasury prices to drop and yields to spike. And when you add on to it all these exotic hedge funds that are like 100 to 1 leveraged, you know, they're picking up pennies in front of a steamroller and dramatic leverage. There was a margin call in the Treasury complex, and that kind of thing could happen again.
I'm an active money manager. There are times like in April 2nd when I'm net short, or in 2020, or in 2007 when I am net short the market aggressively, and there are times when I've been bullish like 2024 and made money. I have a very good long history of making money for my clients in all macroeconomic conditions. So let me say that. But there is a grand or great reconciliation of asset prices to occur. You just can't have home price to income ratios at record highs forever, either. You know, the home prices stay static and incomes have to rise, or there's a crash in home prices, which is much more likely to occur. You can't have the total market cap of equities to GDP be over 210% when the median metric is closer to 100%. So equity prices have to stay where they are, or GDP has to catch up for years. I don't know which one's going to occur. I think it's much more likely for asset prices to crash. That's what I think is going to happen.
So, let's just say April, May 2026 comes along and that's when Powell is shoved out the door and we have a presidential puppet running the Federal Reserve, and he immediately slashes interest rates to 1%. And that just shoots an arrow into the heart of people who are called the bond vigilantes, and they start selling Treasuries aggressively because of this lack of concern about inflation. The Fed controls the overnight interbank lending rate. I mean, they can do Operation Twist, and they could do QE. They can do all kinds of things. But that's the rate they really control unless they want to assent to buying every single Treasury ever issued like the Bank of Japan. Then they can probably try to seek to control long-term interest rates. But if you want to be like Japan, you know, we could have a discussion about that where we, you know, have 35 years of a stock market that doesn't go anywhere and GDP in real terms that hasn't gone anywhere since 1989. But and what that would mean for the stock market, too.
So then we have these recession fears that spike up. Fed cuts interest rates to 0%, goes back into QE, and the long end of the bond market begins to spike. When the long end of the bond market becomes intractable, the yields rise inexorably. Then you have to think about how that interplays with not only the credit markets, but what does that have to how does that interface with real estate, which is sitting on the edge of a cliff, and how does that interface with the stock market that is so egregiously expensive in valuation? That's when I think you can get the great reconciliation of asset prices because there's not a damn thing the Federal Reserve can do about it. The more they agree to engage in QE and helicopter money and manipulation of interest rates, the greater the concerns of inflation and insolvency. And if that's the case, the higher yields will go on the long end of the bond market. And there's nothing they can do about it.
The normal way we get out of recessions and credit crises and stock market hiccups and potholes and bear markets, the way we get out of real estate debacles is to print a whole hell of a lot of money and then give it to banks. Then we started to giving it to people. If we do it again, you know, I think the faith in our credit markets will be eviscerated, both from domestic and foreign sources. And that's my big fear. That is what is going to engender the next crisis.
If you want to make money, you could have your own model. I'm sure there are other models that work out there. I have my model. I'm very confident, but I want to just expound on what you said before. It was on somebody on Bloomberg the other day saying there's no bubbles out there at all. There's no credit bubble and there's no overleveraged in the system. And I said, so I went back and I pulled up the Z.1. It just gives you the amount of debt outstanding. And if you look at the current ratio, so I look at total non-financial debt as a percentage of GDP. It's currently 257%. In Q4 of 2007, it was 234%. So that was right before the global financial crisis and the real estate bubble. And then in 2000, it was 189%. We have the greatest amount of non-financial debt, not just nominally speaking, but as a percentage of GDP in history, and by a whole heck of a lot.
And then you made the very important point about the importance of the 10-year note. What kind of debt is it? Like people say, well, who cares if we have so all this debt because it's public debt and it doesn't matter. Well, when the bond vigilantes come and they say, like they did in April 2nd to April 9th, it was caused by tariffs, but maybe it was so much bond vigilantes, but we had the freezing up of the credit markets because of what Trump did with his the level of and degree of tariffs, which was a total surprise. It froze the credit markets. And when people say, well, why does it matter if the 10-year note goes up? Well, there are other rates attached to that. Mortgage rates are attached to that. Corporate debt is attached to the 10-year note. Student loan debt, car loans are attached to the 10-year long end of the yield curve. So, this is why it's so crucial. When we lose that confidence, and I have no doubt in my mind that we will, the economy will come crashing down. And as I said before, and I want to make this point very clear, what is the government going to offer to stop that from happening? They can only offer what they've always offered in the past, which is QE, ZERP, and helicopter money, which will exacerbate the problem, not fix it this time around.
What else are they going to do? I think that they were going to go to ZERP, QE, helicopter money, and then try to cap the long end of the bond market's yield. We will buy every single debt instrument benchmark and longer in duration and keep it below 6% or whatever rate they choose. The bond vigilantes will cover their shorts. But what do you think that's going to do to the middle class of this country? What do you think it's going to do to inflation when the Fed is forced to, and the Treasury is forced to join into that unholy union of helicopter money where they're just buying debt just to make sure the interest rate doesn't go higher?
Went through a very destructive time in this country, and it's precisely because of these decade. Listen, here's the most important thing if I could. Well, we had a very unusual situation happen between 2002 and 2022. The vast majority of that duration of time, we had negative real interest rates. That has never happened before. The only time in history that was even remotely comparable was '74 to '79. And that helped engender the debacle. But if you were around in the early '80s, the stagflation and the destruction that this country went under, you know, gas lines and odd and even license plates, and this was just, you couldn't get a job. And I remember when I was in high school, my mother told me to get a job. I had to get a job at Burger King eventually. I couldn't find a job. There were no help wanted signs anywhere. The labor market was a disaster. We had over 10% unemployment rate. These are the things that you have to think about when you look at, oh, you know, everything is great right now. Everything is wonderful. Well, it is, but have a model, have a robust model, and be on guard, be on the lookout for the things that I am looking at because when these people that actually run the world, the oligarchs and despots and multi-billion dollar hedge fund managers and the people that run the biggest banks in the globe, when they get nervous, they take action. I want to know right after that happens.
Well, first of all, I'm not going to tell you what I'm going to be doing in December, but I will tell you where I am right now. 68% T-bills. We have about 10%, maybe a little less, in foreign equities. We've got the inflation hedge. We've got platinum and gold, 5% each in that. And we have, yeah, 2% it's a whitewash short. But I just want to comment on what you said before about preparing for this. It's very crucial that people aren't out there shorting the market right now or doing something silly like just buying 100% of their money in the long end of the bond market. I am very convinced that unlike other occasions where you could sit in sector one for multiple quarters, like you think about the global financial crisis, you could have sat in sector one from like Q2 or Q3 of '08 all the way to Q1 of 2009. I believe this time around it'll be a truncated sector one, which you so adroitly picked up on, which could morph quickly to sector five where you have to be short the long end of the bond market, and you have to be overly aggressive in your energy exposure, your uranium, your natural gas, and the shorts in your portfolio should be anything that derives its valuation from fixed income because I think it could be a disaster, an unmitigated dis. And I, I think it could be something that this country has never even before imagined could happen to the stock market. That's how bad I think it could be. And I understand a lot of my friends think, you know what, why can't you just be happy? Because when you have the amount of debt that we have in the system, both public and private, and things like we haven't even talked about private credit, you know, you try hitting a recession and then, you know, it trying to sell an illiquid asset that hardly ever existed before. Now there's, you know, $1.5 trillion dollars, probably more, in private credit and private equity and all sorts of exogenous things, derivatives in the stock market that we don't even understand.
Listen, if I am a Cassandra, then explain to me what happened between April 2nd and April 9th. Why did we lose 15% of the value of the S&P 500 in a handful of trading days? Why is it the credit? How is it possible? We have plenty of reserves in the system. The reverse repo facility still has like $180 billion left in it. We still have the standing repo facility for banks. What happened? The system is so fragile given the level of debt and the deformation of asset prices and the formation of asset bubbles that you just can't close your eyes and go to sleep and think you're going to have a fun retirement. It's not going to happen.