A Massive Sell-Off Is Starting… And Most Investors Don’t See It w/ Steven Van Metre

I think the key thing is if you're bullish on anything, then you should really be focused

on why you're wrong.

And if you're bearish, and as I am on the markets, and I think they're coming down, then

every day I'm looking at why I'm by wrong.

And I think that's a real key.

Oil prices are still rising.

Markets are pulling back volatility and uncertainty seem to be everywhere.

What do investors need to know to protect their capital and plan for success while still

taking advantage of the opportunities in the market?

Hello and welcome to Milk Road macro, the podcast that's here to panic about the current

thing.

So you don't have to.

I'm your host John Gillen.

Today is Friday, March 13th.

We'll be releasing this episode on Tuesday, the 17th.

And today we are joined by Steven Van Meter.

Steven is the president of Steven Van Meter Financial and has over 20 years of experience

in the industry as a macro strategist.

Steven is going to break down everything that's going on in the markets and walk us through

his strategy on how he's navigating all of this volatility.

If that sounds good to you, make sure you like and subscribe.

Share this episode with somebody who's going to enjoy it.

And without further ado, welcome to Milk Road macro.

Steven, how are you, sir?

Hi, John.

Thanks for having me.

I mean, talk about a lot of things moving to the markets right now and a lot of people

just don't know what to do.

So let's find out what direction they need to head.

Well, I thought a good place to start with would be where the direction of the market is

happening overall.

One of your most recent videos you put out talked about how we have reached price levels

now in equities where a lot of passive investing machinery of banks like Goldman Sachs, Bank

of America is starting to be triggered to sell automatically.

And I wonder if you can walk us through what you're seeing here.

What's triggered this and what investors need to know about this?

Yeah, John.

So what we're seeing is systematic selling, like you said, on passive strategies.

I mean, I wouldn't say they're exactly passive because they do buy and sell.

And they're called CTAs.

And the name has nothing to do with what they actually are.

But what they are is a track and index.

And the way they simply were is they have target level.

So as a marketer's going up and they hit a target level or a threshold level, they

buy.

And as a market goes up, they follow the trend.

So a lot of people are looking at this and said, do they anticipate the market?

They do not.

Their job is to follow the market.

So as a market goes up, they're going to add to the longs.

And if they get to a point where they're kind of maxed out on their longs, they're going

to go and use some leverage to get even longer on the market.

That's their role.

Now what happens is as a market goes up, those threshold levels actually start to rise.

So when you see the market roll over where a lot of investors just sit there and watch

things happen, the machines here see, oh, hey, we hit a threshold level.

We need to cut back some of our risk exposure.

So what we're seeing right now is a lot of these machines trade three levels.

They actually probably trade more, but publicly we hear about, you know, three of them.

And so Goldman Sachs and Bank of America, I have access to their CTA threshold level

data.

And what they're saying is their midpoint level.

This is one of the probably the most important ones because the short term at the top, you're

talking just cutting back a bit on your long, maybe dropping, you know, from 100% allocation

to 90.

But when you hit this midpoint level, which just triggered yesterday on the market close,

what you see is these things will cut down all of their long positions more down to a

neutral, maybe even slightly negative, depending on how far the tape goes.

So what we're seeing now from the data we have on Goldman Sachs and Bank of America is

over the next week.

And some people say, well, why doesn't it sell faster?

So, well, if you have a hundred billion to sell, how do you get out of the market quickly?

In fact, I had cocktails with the guy I worked at, had fun last night, and I posted

me as well as a good point.

If I had to move a hundred million, I can't move it in one day.

So what you see is it's going to scale over a period of a week.

Now the challenge is there's other investment banks, John, that have these CTAs.

And we don't get information on or we can't get information on.

So as logically we could say that if Goldman and Bank of America are triggering in this

range, that more or likely to hit as we see the market goes down.

And so what this leads to is a persistent amount of selling.

So you'll see like today buyers came in, you know, oil dropped, okay, that's good news.

Bid the market up.

And then all of a sudden it's like, oh, you run into a wall of sellers.

That's the CTAs.

They're going to sell into every move up.

And they're going to do that until they get their positioning down to neutral.

If it continues to go down, that's where we start to see them short the market.

Quick pause here.

If you like this show, you are going to love our milk road macro newsletter.

It hits your inbox twice a week with everything we can't fit into these episodes.

Charts, Fed moves, liquidity trends, recession signals, all of the big forces that are shaping

the markets.

It's free.

It's fast.

It keeps you ahead of the next macro move.

Hit up milk road.

Com and subscribe.

Gotcha.

So, okay, paint the picture for me on this.

You're saying that over the next week or so, a lot of major positioning in the market

is going to shift from bullish positioning on equities to neutral.

That's going to be a lot of selling pressure.

What are the risks of the second order effects of this?

Meaning, do you think we are going to get to that tipping point where it starts to get

very bearish?

And there's even more selling.

Our volatility strategy is going to be triggered.

Like, what happens now that this selling has started?

Yeah, so that's a really good question because you look back over say roughly the last

30, maybe 45 days.

And every dip, you see this heavy amount of retail buying.

Now, we know it's retail because that's what we're hearing from the investment bank,

the analysts who are looking at flows.

But we already know that hedge funds are levered long.

We know asset managers are extremely long in the market.

So we know strategies like the CTAs were already long.

So if you look at who had money, had capital to deploy in the market, it wasn't a lot

of big name managers, what it was is retail investors.

So right now retail investors are still seen by every dip.

The question is, is when do they run out of dry powder or when do they say, hey, you

know what, I've been buying the dip and it keeps going down, so I'm going to stop buying

the dip.

That's the risk.

But the second order of fact, I'm glad you brought that up because we've been talking

about the CTAs trading on the S&P 500.

They do trade the Nasdaq.

They trade foreign equities, you know, with fact Goldman Sachs just mentioned in their

note yesterday that of the global equity selling that's going to be a part of this, most

of us coming out of Europe.

So if you're invested in European equities, which have gone up a lot, keep an eye on that.

But you see Russell 2000.

So all these major indices, they're trading threshold levels on these CTAs and virtually

all of them, I want to say except the Nasdaq and that one has not broken yet.

So I would anticipate maybe the next couple of days, but what comes next?

Well, these aren't the only strategies on the market.

So these are the fast, the first ones, they kind of react faster to the flow.

So again, they're trend followers, that's the key.

The next order effect is you get something called a volatility control strategy.

And these are super easy to understand.

And someone watching this is maybe retired or maybe they have a parent that has a variable

annuity.

This is a concept that you have that you just don't know.

And so what you see is on a lot of products, particularly in variable annuities and they're

in other strategies, but they're very popular in the space.

You'll hear a broker, advisor is pitching this or the company saying, look, if the market

goes down, we're going to sell a part of your strategy.

If it keeps going down, we're going to sell more.

And then if it goes up, we're going to add that's exactly what a vol strategy does.

So as the VIX and people can kind of watch this, as it rises, and we haven't seen it

really get to a trigger level yet.

And that's what interesting.

It's a very slow burn.

It takes a while to get there.

And then once it starts triggering, then you start to see more of this happen.

And that's a big concern because the amount of money in CTAs, and again, we don't have

exact numbers, but we can say several hundred billion dollars easily.

In the vol control space, it gets bigger because you have an immense amount of baby boomer

retirement well tied to these strategies.

And it makes a lot of sense.

You know, if I'm retired and someone offers me a strategy, it says, look, if the market

goes down, we're going to cut your equity exposure and protect your downside risk.

I'm going to think that's a wonderful deal, but there's a problem, John.

You know, let's say you have a trillion or a trillion and a half dollars in this.

And guess what?

Volatility starts hitting its trigger levels.

Guess what that means?

All that money starts to sell at the same time.

And that's the risk of systematic strategies.

It's the same risk of indexing is you get everybody in the same strategies.

And the next thing you know, things trigger, and then that trigger leads to more selling.

So we haven't quite gotten to the point where I've seen any data that the vol strategies

are selling, but my expectation is looking at the VIX.

VIX gets, you know, closer up into around 30 or so.

It starts to sit there.

And again, these strategies weren't meant to instantly react overnight.

They were meant to design to say, hey, is Volstein elevated over a few days over a week?

Yeah.

Okay.

We need to start selling.

That's the next risk because there's a lot more money allocated in those strategies.

Then what you have is again, more persistent selling now from the vol strategies that triggers

maybe the next layer of the CTA strategies and triggers, you know, who knows what other

strategies are out there.

Gotcha.

So there's a lot of dominoes that can start to fall once they begin to tip.

I'm curious your thoughts on how this situation in the straight up form is impacting this

or even accelerating it because it seems like the market was sort of at a slowing pace

on equities and sort of a decision point was being reached.

And now we've hit the sort of like critical economic juncture where we're not sure what

the outcome is going to be or how long this blockage is going to last.

How does all this play into this and maybe accelerate what's already been playing out?

Yeah.

That's the point, John, because I think that is kind of like really the tipping point

here.

I've been really focused on the NASDAQ lately.

So if you look over the last six months, you see it ran up and went into a range.

It kind of traded sideways and every time it tried to break out, it got rejected.

But we again, we come back to the fact who was actually selling because virtually we couldn't

find anybody that was selling.

I mean, everybody was buying until we started to find out the corporate insiders.

They were selling on a ratio of five, one mean for every, every five executive selling

stocks, there was only one buying.

So that was very interesting because they hold a lot of shares that were selling at every

time that rallied.

So why does oil change this?

Well, if the executives of these tech companies are saying, look, we're spending a lot of money

on CapEx right now on this AI thing, we thought we would have the solution for it.

We don't.

We're not sure where that solution is, although we think someday it's going to do something.

We don't know if it's six months or six years, we don't know where it's at.

And the problem is we're burning money like crazy.

So the issue with energy prices, all of a sudden spiking, and this is kind of when you

go back and look at like the 91 recession, the dot com bubble, the financial crisis, you

look at the correction around 2022, oil is always a problem because in a slowing or weakening

economy, consumers can't afford higher energy prices.

So they have no choice, right?

So I can drive less.

I can say, you know what John, I need to run some errands, but instead of just running

one to day and one to tomorrow, I'm going to stack them up and then try to make one big

trip and really use as little gas as I can.

But summer months are coming.

I got to run the AC, I just had a big winter season, right?

People were running a lot of electricity then and a lot of different utilities.

So the problem is for the everyday consumer now is once again, they're getting hit.

Now on the plus side, they're getting a above average tax return, but they keep getting

hammered with higher consumer prices, higher energy prices.

What that, what that second org effect says is, okay, all of a sudden, hey, you know what,

I was going to take my family out for pizza tonight, but I think a price of gas went up.

I'm looking at the electric bill, what's happening.

I can't afford that.

So all of a sudden, I start cutting back my discretionary spending.

That's where I like to look at the restaurants, the bars first, they're the leading indicator

and then I look into the retail side.

So why does this impact the market?

Because everyone is starting to figure out, at least, you know, you look at the professional

money managers, the hedge fund managers and they're saying, wait a minute, if consumers

are going to spend less, it's going to impact profit margins.

So all of a sudden, they're saying, hey, look, I need to sell out because this next quarter

is, you know, we come to an early season, it may be fine, it may, may, may just slow,

show a slight slow now.

But the following quarter, if this continues to hit, it's a major red flag because if

you, again, you go back to all of these, you know, reslash recessions or financial crises,

there was one thing, one thing that happened every time going into them and you got a spike

in oil.

So if you've been kind of around, if you've managed money for a while, you've been in the

industry for a while or you've studied the trends, you start to think for a moment is there's

a lot of risk here and maybe, maybe this all blows over.

But if it doesn't, now you've got a market that everybody's really long on and there's

no exit.

See, I think that's very helpful framing and just context for our audience.

So I appreciate you laying all of this out.

I want to ask about something you mentioned, which is you talked about the relative strength

of the economy being an important context for what the impact a lot of these things are

going to be.

How would you make an assessment on the strength of the U.S. economy right now?

Because I think there's a lot of metrics people look at, you know, like the ISM manufacturing

service or picking up, you're seeing sort of a broadening out into industrials and

the Russell 2000.

Some people could say that this indicates a broadening of the bull run and economic

strength, economic acceleration, but obviously there's a lot of other things that would

be contraindicators.

How do you view the relative strength of the U.S. economy?

Is it strengthening?

Is it slowing down?

Where do you see this, where we are today?

Yeah, good question, John, because again, this ties right back to what's going on when

the iron conflict, the straight of hormones, energy prices is can the economy handle it?

So you're right.

You look at the ISM, you look at the S&P global and you see some new orders are up.

But what's interesting about those reports is you don't see the employment sudden index

really reacting to that.

So there are going to be in any cycle where you have seen new orders going up because

you had to maybe into summer season, well, you need to get summer inventory.

Now you can't move your old inventory, but hey, no one wants to buy snowshoes in the

middle of July.

So I get that.

So you do see some uptick in this and there's probably some other factors of what's going

on around the world, obviously, and trade and transportation.

But you look at the employment subindex and what do you see?

They're not really hiring.

In fact, in some cases, you see the employment index is dipping a little bit.

Or you see mentions in the report of hours just not being there.

So I look at the economy and I really care about the labor market.

That is the number one thing because if we have inflation, so energy prices are going

to go up, it's going to cause a CPI to go up in the short term.

But does that mean bullish for the market?

It only means it if people can afford it.

Now the labor market, we can look at the weekly unemployment claims it hasn't reacted.

I don't expect it to react just yet.

What I do care about is average weekly hours of your rank and file where it's called

your production and non-supervisor employment or the everyday American.

Because when you look at bull markets or you look at expanding your cycles, you always

see that, hey, energy prices or something's going up and yes, hours are going up.

So as long as if I'm going to work and my boss says, hey, see if you can get an extra

an hour this week, that helps.

Or in the least to come, I get another half hour or another hour, the prices go up,

I can afford it, I can keep spending.

But the problem we see, particularly like I said, the analog, as you go back to look at

these past recessions, and this is really what investors should be focused on because

if you're concerned about protecting and growing your wealth, you're studying the past cycles

is super important because every one of those instances and the last recessions, last

market corrections, financial crisis, whatever it is, where we saw energy prices rise,

we also had another interesting indicator, and that was weekly hours.

They were either flat, we saw that going to the financial crisis, energy prices just

went vertical, hours work went flat, consumers couldn't afford it, next thing you know, both

the reversing directions as a labor market of wines.

But you go back to seeing 91, you go back to the dot com bubble, what was the big indicator,

is hours worth were declining.

So that's the issue here.

You can band-aid this, you can give people a little bit bigger tax refund, but in the

end of the day, if it's persistent, and that's what the market's really concerned about

here.

You look at the market reacting every day, you know, oh, oh, it went down a little bit,

okay, stocks are up.

Because the market's saying, look, we know the longer oil prices stay up, the longer this

conflict goes on, we have a major problem.

We already know consumers can't afford it.

But if you're a business right now, this is a terrible situation because due to the

tariffs, you've already squeezed your margins.

And then on top of that, you already know that consumers are at their breaking point because

you know, we just heard from McDonald's say, hey, you know, we're coming out with the

extra extra value menu, which is translation to, hey, people are buying the regular value

menu.

So we've did cheaper stuff for them just to get them in the store.

And that is a big red flag for the economy here.

So you start looking at the impact of what's about to happen is consumers are saying very

clearly, we don't have any more money.

Employers are saying, we're not giving you more hours.

So if we don't get more hours here to absorb these higher costs, now we're seeing the same

stuff.

Again, we saw 91.com, late 07 and around 2022.

The risk right now are higher because we've got a week in the economy and we've got the

private credit space blowing up on top of that.

The way we build wealth is changing stocks, savings accounts, real estate, that playbook

is getting rewritten in real time.

So is the platform built for what's next?

It's an all-in-one digital wealth platform where you can earn interest on your crypto,

borrow against it without selling, and trade a wide range of assets.

All in one place with 24.7 support and institutional great security.

Oh, and by the way, next so is back in the US with new US clients getting 30 days of wealth

club premiere access.

That means elevated interest rates, lower borrowing costs, and crypto cash back on trades.

Benefits usually reserved for loyalty program members.

That started at milkgrove.com slash nexo.

You're holding Bitcoin, Ethereum, or XRP for the long haul.

Smart.

But here's the thing.

While you wait, your crypto is just sitting there doing nothing.

And if you've looked into putting it to work, traditional staking locks you up.

D5 means juggling like five platforms and a PhD in smart contracts.

Fortis X fixes this.

It's simplified infrastructure that lets you drop assets into liquidity pools and staking

strategies without lockups, without the complexity, and with full withdrawal access.

Your crypto stays productive.

You stay in control.

Go to milkgrove.com slash Fortis X to put your portfolio to work.

Gotcha.

So you're saying we're not seeing a lot of strength from consumers.

We're seeing a lot of softness in the labor market.

Another thing that the Federal Reserve watches very closely is, you know, in their dual

mandate is the labor market.

The other side is inflation.

I'm curious your view on inflation here because obviously the spike in oil is making

a lot of people panic about inflationary spikes here.

But I think you've also been warning about a lot of deflationary pressures that are already

in the economy.

What are your thoughts on inflation here?

Do you think that we're going to see a deflationary shock, an inflationary shock, or like

what are your views on this here?

Yeah, that's a great question, John.

So we are going to see inflation because inflation, and if you look at the CPI and you overlay

gasoline prices, it's very clear.

I mean, where one goes, the other is following.

So we already know that gas prices are up.

It means the CPI is going to go up.

In terms of persistent inflation, this is, of course, what everybody is worried about.

You have to see consumers come out and be able to afford it.

So if they say, okay, look, I have to spend more money on gas because I've got to drive

to work.

I've got to run errands.

I've got to take my kids to the soccer game fair enough.

Maybe they can cut back on, you know, the trips to grandma and grandpa out of town.

I don't know.

Whatever their cases, they're going to find ways to cut back on their spending.

The issue, again, it comes back to, if I'm spending more here, and my income's not going

up, I have to spend less money elsewhere.

That's what the market is really afraid about here.

It's not that inflation goes up because what happens in these cases is you see historically

there will be a rise in inflation.

Now will central bankers react?

If they're big giant idiots, yeah, they will say we need a raise raise, but I don't think

they're going to do that this time.

I think that they see the weakening of the labor market.

I know we've heard from various Fed speakers saying, look, we're concerned about this.

They know the moment this deal is over, oil prices are going to come crumbling down

same with inflation.

But again, the bigger risk is you go into the financial crisis.

You saw oil going vertical and nobody thought it was going to go down.

We're talking about a three-stander deviation move to the upside.

But what happened?

Was it you as a consumer that broke?

And then actually, you know, everything started to domino and fall apart.

So yes, will we get inflation in the short term?

Correct.

That will happen.

Will it be persistent inflation?

If paychecks and jobs are created to actually allow consumers to afford it, if they can't,

that's what turns into disinflation.

Where we get deflation or not is very dependent on how big the inventory overhang is and where

businesses are at.

From what I'm hearing out there, a lot of businesses are struggling.

We've seen small businesses in particular over the last three years.

They just been squeezed left and right.

So the question is, what happens when all this inventory needs to be cleared?

Does that lead to deflation in parts of the economy?

Possibly it does.

The private credit space, if it blows up and we see companies going out of business and

you've got somebody who's lent against that inventory, well, now they need to clear it.

And so the real risk here is not that we'll see complete deflationary crash, but just

like in a way, we saw pieces of the market in our deflation.

Are we going to see everything go in that direction?

Well, no, because certain things are just not going to come down in price.

This is not how the world works.

But yes, you see short term inflation bump leads to disinflation.

Possibly if we have a crisis, you'll see pockets of deflation.

Gotcha.

Okay.

So I think that the Federal Reserve is going to have to untangle all of what this means and

make policy around that.

But yeah, there's going to be inflation, as you said, the labor market is softening.

So they're kind of in a rock in a hard place and will be a new chairman.

So we'll see what happens there.

I want to ask about one more question here before I come to this portfolio shield of yours

that I think is so interesting.

I want to get your thoughts on gold.

Gold has seen this historic run of bullish at momentum.

It's still holding well above $5,000.

A lot of people are calling it to go to 6K or higher.

What is this telling the markets about the strength of the economy, the health of

the markets, like what's your read on this bull run we've seen in gold?

Where does it go from here?

Yeah, it's really interesting because with all the volatility picking up,

you would expect gold to be going higher.

And it's, I mean, I just pulled up a chart as we're talking about this.

And from a charting perspective alone, I'm not saying, you know,

the macro perspective or any of those reasons people are buying gold and silver.

Just looking at the chart, it tells you that something isn't quite right here

because you would expect as volatility is going to go up that you would see gold rise.

So the question is, are there people selling here for a reason?

Are they selling because they need money or is investor focus shifting to oil or whatever?

I don't know.

But it's not unusual, John, that we do see oil pull back going into some sort of crisis.

One of the reasons we see that is sometimes people have things that they,

you know, they don't want to sell, which is gold, but they need to sell.

So for example, right now we're seeing one of the largest read early

retemptions out of 401Ks.

Now, if you have a 401K and you take it money out early,

that means only paying taxes, but if you're under 59 and a half,

you're paying an Earlwood drawl penalty.

So this comes to the fact that, hey, my wages are slow.

Maybe, you know, my spouse lost her job and I've got bills to pay.

I got food to put on the table for the kids.

I can sell something that gives me a huge tax liability where I can sell other things,

like gold or crypto things that there's a market for that I can sell.

And that's, I think there's something a lot of people don't understand.

They say, it can only go up.

And I said, I said, you know, maybe you're right,

but you have to be very much aware that there are people that may be forced to sell.

And if you don't think back in a financial crisis when we saw a gold drop,

that there were families that were sitting down and, you know, the wife told the husband,

like, look, we got to put, we got to pay the bill.

We got to put money on the table.

We can't lose a house.

You know, we can't do lose all this stuff.

And he said, I don't want to sell my gold.

And he's like, well, I don't want to pay 50% tax when we take money out of the 401K.

Yeah, I get it. Go sell the gold.

So that's the issue that people have to look at in the short run is, yes.

There are, there are these historic parallels that we would likely see gold go higher,

but in the short term, what you're seeing in the charts is telling me,

is someone you're selling better than, I don't know if it's a foreign central bank.

I don't know who it is, but all it's telling me is,

is all the people that are bullish on gold,

there's something else going on here.

So I would just say, maybe there is going to be a drop.

Maybe there's not, but expect one.

And it hope there isn't.

Yeah, I think volatility is just going to be the expected outcome for every market right now.

I want to ask Steven about your portfolio shield investment approach,

you're known for this strategy.

I want to just start with a high level.

Like, walk us through what the portfolio shield is, what that strategy is,

how you developed it, explain to our audience what that is.

Yeah, it's a long US equity strategy.

Years ago, John, I kind of, you know, you look at indexing it,

that's where people want to be.

It's going to generate the highest returns long term.

And so I wanted to build a strategy around that,

because you can diversify all you want,

but that's going to lead to under a performance.

So I wanted to create a strategy that people could get their statement

and understand and say, well, we got the SPY, the largest ETF,

and you got QQQ, the largest ETF in Nasdaq and S&P.

And so, hey, people get that.

But the problem is what happens when markets shift.

And so it has a hedging mechanism.

And if I would say arguably that's the biggest challenge of running any hedge,

or any strategy is not only knowing when to cut the risk is where to cut the risk.

So, you know, recently we went into long-term treasuries,

because I know how the cycle plays out.

Timing is very difficult.

And as a money manager, you don't try to time.

You just try to get somewhere and hope that, you know,

as a cycle adjusts that, even if you're early,

you're still on the right path.

But the hard part for any investor right now is saying,

look, do I cut my equity exposure?

And how much? Do you go 10, 20, 30%, maybe you go more?

But where do you go? Do you go into short-term treasuries?

Do you go to cash, dollars, Bitcoin or crypto, gold?

So, where do you go?

And that's a big challenge.

So, what my strategy is designed to do is kind of react to that

and again, the challenges is getting the hedge right and being in the right place.

And I do believe that the short-term,

so you look at kind of the current allocation,

the hedges in long-term treasuries.

Obviously, I can agree timing that was off over the last couple of weeks.

But again, to come back to the view is,

what do you see in these cycles where oil goes up?

You do see that initial, oh my God, there's going to be inflation.

And it's like, oh, consumers can't afford it.

And the next thing you know, that turns into disinflation.

That's where you typically see the bond market rally.

So, we've seen the short-term a little bit of an issue.

But again, for investors out there,

if you look at your IRA, your 401K,

how should you be looking at your portfolio right now is,

it does make sense to cut some risk.

How you hedge that?

Again, if you go to cash, that's fine.

But it starts to make sense.

And you look at your bond allocation.

And a lot of people don't hold a lot of bonds.

But if you do, you think about where that's at.

Are you in high yield bonds?

Well, you've got some indirect ties to private credit.

Not directly, but a private credit goes,

how you bonds are going to go.

So, you got to really think about that.

How about the corporate bond space?

Well, there's some risks there.

We're going to find out in the coming earnings season,

can companies continue to pay on their debt

or they're going to have to cut their stock buybacks?

What's going to happen here?

So, again, you start looking at your bond allocation

and you say, okay, reasonably maybe I go

to short-term traders or to cash.

Does any of this make sense?

It does, because again, tell me,

I would say someone challenged the view here is,

oil goes up and 91, you had a correction or recession.

Haband.com bubble.

Haband the financial crisis happened in 2022.

Maybe it doesn't happen now, but you want to take that bet.

I certainly don't.

So, what I would want to do, though,

is I want to be positioned in the way a hedge is designed

to work, is not just to control risk.

It's also designed to say, hey,

let's say there is a 30% correction in the market.

And let's just say my treasury hedge didn't make money,

but it didn't lose my, it just was, let's say it's neutral.

Well, then I'm ahead.

I sell the hedge.

I come in and I'm buying the market dip.

That's what a lot of investors really need

to be thinking right now is, is not that they're right

by buying every dip.

What if I'm actually right in history says,

look, energy prices are going to cause a big drop.

How are you going to be there to buy it?

You've got to have some cash.

You've got to have some options here.

So, that's when I, you know, that's how's my strategy

was designed to do as soon as the hedge markets

and then give the opportunity to try to buy back into dips.

Gotcha.

And your most recent update on your portfolio shield,

outline your decision to sort of hedge some of your exposure

to the equities, as you just said,

I'm curious what would cause you to change this positioning,

like other specific levels that you're watching for,

certain signals you're looking for to maybe get back bullish

on equities and get back more into the exposure

into that market.

What would cause you to change that thesis

from where you are now?

A lot would have to change on my thesis right now.

So, last month I went into short-term treasuries

as a hedge.

This month we adjusted that to long-term treasuries

because I kind of knew going into that

that the market was going to have an initial negative reaction,

but the banks are buying a ton of bonds here.

I mean, they've been buying bonds for the last year

and a half, two years.

So, there's a big floor under here where,

as we see the market go down

and they see the credit cycle break,

they're going to be buying bonds

because they're going to look at the market and say,

I don't want to lend it to this.

So, they still need to invest money.

They're going to buy in treasuries.

So, for the moment, if you said,

do you anticipate pulling your hedge off next month,

the answer is no, what I'm making a adjustment of the hedge,

potentially, but in terms of,

I have to see something shift here.

I have to see oil prices really come down quite a bit.

I have to see something in the consumer data

that tells me that there is a shift here.

I have to see a change in the market behavior.

I have to see something that I'm not seeing yet.

So, there are times to be cautious,

because remember, you can always come back

and you can always get back in the market,

but if the floor falls out, we've seen this happen before,

it's hard to get out because at this point,

and this is different than we've seen in past market cycles.

There's so much money allocated to index strategies

or so much more money in CTAs and vol control strategies

that everybody is highly concentrated

in a small number of stocks.

So, you have to be cognizant of that.

It's sometimes being early, doesn't look good,

but if things unwind, then being early looks really smart.

If you were listening to this right now and thinking,

okay, but what's really driving the economy right now?

Well, that's what Milk Road macro pro is for.

Every month, our big brain researcher, Thomas,

drops a monster report about the state of the economy,

including metrics and charts you can't find anywhere else.

It's all in-house analysis created by our research team,

plus you can even chat with me directly

in Discord and during our Milk Road macro pro AMAs,

which we do every month.

If you want to invest with context,

instead of just chasing headlines,

Milk Road macro pro is where you need to go to level up.

So, hit the link below in the show notes

to join our community and get on the alpha.

I want to get your thoughts on this.

There's been a huge gulf in sentiment

in the markets on certain things,

and one of these things is AI.

And I feel like the sentiment initially

was some excitement, enthusiasm, and investment.

And now we're seeing a lot of fears

that all this cap expending won't lead

to a return on investment.

We're seeing a lot of fears that AI has broken the moat

of SaaS businesses.

And Bernie Sanders put out a nine minute video

calling for a complete halt of all AI and stuff.

And it just seems like sentiment in America

and investment's investing markets

has gotten very negative on AI as opposed

to excited about the productivity gains

and the brighter future of the promise of this technology.

Do you think this is an opportunity

where the market is just overly fearful

and mispricing these things,

or do you think that there's actually some there there

to a lot of these fears around AI right now?

So I think a lot of investors are so very bullish on it.

Actually, I don't think they're that bearish

because if they were, they'd be selling here, not buying.

So I think there's a lot of warnings

we're starting to hear from this.

And I think that was the expectation that Wall Street

really drove up tech stocks.

They got people to buy into it.

They got people to buy a late cycle.

And then you saw the insider selling.

So the insider just saying, look,

this is not turning out quite the way we thought.

It turns out we need to spend more money,

which is notable that their solution to the problem

is just spend more money.

So you're taking these exceptionally profitable companies.

I mean, Oracle is a perfect example.

This company just mined money.

I mean, they might as well just have a money printer

in their basin because that's what they do.

And now they're gonna have negative free cash flow

for the second year that Coli question is,

when does that change?

But all these companies saying, we need more data centers.

We need more chips.

We need more stuff.

And Wall Street saying is, when do we get some return

on investment here?

And then you start to look at, okay,

how much of AI is the everyday person using?

And they're using it like a search engine.

So there are some people that are very savvy.

I know some people that are really using agents

and building things, but the everyday employee

is treating it like just an enhanced search engine.

Is it helping their productivity?

Sure, but it's not generating the outcome

that everyone thought.

Everyone thought it would generate massive profits,

just place a lot of businesses,

and now it's not happening.

And that I think is the risk

as we go into earnings season,

is you're gonna see Wall Street's response to this saying,

hey, look, when are we gonna get an ROI?

These companies are like, yeah, well, we don't know.

And that in lies the issue here.

So you have a number of things.

You have everybody crammed it at the top.

You have the companies that were just massive money

generators are starting to say, okay, well,

that's not happening.

Then the risk is they're the largest buyers of equities.

Next to retail is corporate share buybacks.

So if I'm running negative free cattle,

what point do I go to my investors and say, look,

I'm gonna borrow money because they need you to pay the bill.

But I also need you to keep buying my stock back.

At some point, maybe I start cutting my stock purchases.

So now you pull the biggest buyer out of the market.

You've got retail setting up there.

Some point, they're running out of money.

Then you have the oil shock, hammers,

the average consumer, and behind that,

you've got private credit breaking.

You start to look at the picture here,

and it doesn't look good.

And then you look at the chart.

You look at the market and say,

does is what I'm seeing validated in the charts.

And the problem is, yeah, it is.

And that's never a good sign.

You know, when you're trying to trade and you're trying

to do all this stuff, you want to be wrong.

And you look at this and you're like, oh, wow.

This is like, this is starting to look really bad here.

And that's the risk.

So the question is, as we continue

as we head into the early phases of earnings season here,

is when these companies report,

what's the reaction going to be?

And if it's bearish, watch out.

I mean, now we're starting to look like the early stages

of 2008 more than we are.

The early stages of 2007,

which is what a lot of investors are thinking right now.

Well, Steven, I'm sufficiently scared.

So thank you for laying out that context for us.

It's very helpful.

I want to ask a little bit more about one thing

you did touch on, but I want to get just a drill

in on this a little bit.

In your most recent portfolio shield update,

you talked about this pivot from short-term treasuries

towards favoring or being interested now

in longer-term long bonds.

To me, that's a little bit of a non-consensus thing,

but I'm starting to hear this from more analysts.

So I wonder if you could just explain,

because like for a long time, short-term treasuries have been

the move and what everybody's preferred.

Going out longer on that curve, I think is a change

that I'm starting to hear from some smarter people than me.

But I'd love to hear you explain that these system

why longer bonds are getting attracted here.

Yeah, well, part of it has to do with who's buying.

So the banks have been massive buyers here.

In fact, I'm pulling up a chart as we're talking.

I'm looking at two-year chart of TLT.

I overlaying the volume profile.

So this is something any of your viewers can do.

And what do you see?

The most shares are traded right about where the price is right now.

And who's been buying it?

We know for a fact it's the large commercial banks.

So that's a big issue because as credit cycles break

and banks start to look at, hey, do I want to deploy my capital

and lending hope to get it back?

Or do I want to go buy safety and security?

Well, then if they believe this economy is slowing down,

they choose safety and security.

They choose to buy government bonds.

We've seen the same thing happen in China.

You know, you look at Chinese government,

they're saying, banks, you need to lend, lend, lend, lend.

And I can't go buy some more bonds.

So they stop buying bonds.

You're going to get hammered here.

No, we're going to buy some more bonds.

But you're going to get hammered.

We don't care in the short-term.

Because we don't want to lend.

So I look at this and say, OK, in the short run

of maybe a couple of weeks since I've adjusted the hedge.

Am I wrong?

Well, yeah, obviously it went down.

Is the view that this inflation scare in the short run

going to turn into disinflation?

Yes, the only question is, how quick does it happen?

But at this point, I like to believe that every time

we've seen prices drop in this level,

somebody's been buying it, somebody's been buying it

by the drones.

And that's the large commercial bank.

So unless I start to see something that sees the banks

are selling, and the only reason they would do that,

John, is because they're lending.

And I don't see anything about the economy right now

that's going to tell the banks that they're going to go out

and lend, particularly as private credit breaks.

We're already seeing.

We heard JPM morning said, look, we're

rying down a net asset value.

We're cutting some credit lines.

Look, this is a real issue.

Because every time you see banks constrict credit,

what happens is interest rates go down.

It's a reaction of the economy.

Because you think about how the economy works.

It's debt-based.

So you need to create more debt to create economic growth.

So what happens when the money centers, the banks,

say, OK, we're going to constrict credit?

What is the reaction from the monetary system?

And I'm not saying how people are training it.

What would the reaction be to keep the system going?

Is rates have to go down?

So the logic here of adjusting the hedge

is when I felt the downside risk was somewhat limited.

And then the question is, is how quick

do we get a switch from, yes, there's

going to be inflation to maybe there's not.

Part of that was, there was this belief that this conflict

was going to be over pretty quick.

Obviously, since I made that adjustment two weeks ago,

that picture has changed quite a bit.

But nevertheless, there's quite a bit of biding

support under here.

There's been buying support.

So I'll say that I feel that my downside risk

is somewhat limited here.

So even, I really appreciate you coming

on the show, sharing these insights with our audience.

You know, your strategy is called portfolio shield.

I think a lot of us are looking for a shield right now

from on this uncertainty, volatility.

And you know, just like you said there,

things change very rapidly.

I've always appreciated how on top of the news

and the developments in the markets and economy you are.

So just, yeah, thanks for being on Milk Road,

Macro, sharing all this.

Where can we send people to find more of you

and your work online?

Yeah, thanks, Sean.

You can find me on YouTube.

You can find me on X or form a Nose Twitter under Atmeter

Stephen.

Various places I film with some other,

one of my buddies every Friday,

you're a dollar university.

But I think the key thing is here,

if you're bullish on anything,

then you should really be focused on why you're wrong.

And if you're bearish as I am on the markets

and I think they're coming down,

then every day I'm looking at why am I wrong.

And I think that's a real key.

If you take that approach,

I think that will really help you

whether you're investing or whether you're trading.

The problem, as I said earlier, John,

is everything starting to line up.

This is my bearish view is going to come into play

and in every sense, while I'm positioned for it,

it does scare me a lot.

Well, we can all be scared together.

Stephen, thank you so much for being on Milk Road macro.

I hope we can talk again soon and less scary times.

John, I'll look forward to it.

Thanks for having me on.

Thank you all for joining us.

I hope you all learned something today.

Don't get too scared out there.

But in the meantime, stay safe, stay educated, stay bullish,

and we will see you all on the next episode of Milk Road macro.

Thanks for being here, everyone.

Bye.

One insight to what's really moving markets

and how we're trading each event.

Subscribe to our channel,

then join the Milk Road macro and macro pro newsletters.

This show is for educational purposes only.

Nothing we say is financial advice.

Investing is risky, never invest more

than you can afford to lose.