End of an Empire

25:08So we're 9 % higher than where we bottomed before tariff pause. And I think that probably, I would guess most people expect at least a retest, if not to cut right through it. One of the things that worries me, two things. Number one, valuation. It's a consensus worry. We're not exactly cheap. Number two, and more worrisome, are analyst estimates for companies going forward. So Mike Sicardi, I saw him tweet this morning. We've got 48 companies so far, mostly financials. So take this with a grain of salt. 48 companies have reported Q1 results so far, 71 % beat rate, 7.5 % blended growth rate. That's on the high end.

25:39That surprised me. You've got a killer chart showing what happens around earnings per share that become corrections, recessions or without. And this is stark as hell. So what are we looking at? Yeah, this is, again, going back to the vertical line is you're down 10 % on the market. And then we again, going back to these recession versus non recession and how much of a difference you see in downside and recessionary versus non recessionary cases. So we're trying to figure out, OK, what what's some of these real time indicators that will tell us? Are we tracking with the recession case or non-recession?

26:13And forward EPS is a is a is a really good tell. Obviously, the blue line is the recessionary cases. Track how EPS evolves around these recession corrections. And the purple line is non-recession. So if we were tracking a non-recessionary case, which is where we were at until like a couple of weeks ago, a few weeks ago, maybe, maybe two. We were tracking right online with this non-recessionary case. No forward earnings weren't getting dented at all, but we've started to hook lower. And so it's concerning. You know, if I was going to we have basically a three pronged approach to trying to delineate, you know, are we going to have one of these recessionary cases or non-recessionary?

26:53I think our number one is we're going to look at our we'll talk about this, but some of our econ cyclical indicators, what's happening in the housing market that we think leads overall in employment. And we're seeing some things there that are concerning, but that's a slow moving set of data that we could be late. So I think we need to watch credit spreads and how forward EPS evolves. And then third, which we don't have a chart on here, but we have one in our services, how the market is treating firms that beat earnings versus firms that miss earnings. But that might not even matter this time because it's going to be all about guidance.

27:25Nobody cares what happened in the last 90 days. That's true. I mean, but I think that that shows up. So it tells us there's a character change in what's priced in, too. So like if you get a gut, if you beat earnings and, you know, we'll probably have to parse the guidance in some way. But I still think that what we saw early this year helped us to downgrade equities. In addition to the tariff thing, we highlighted a bunch of stuff. And one of them was, you know, all last year, companies that missed earnings, you'd see them sell off for like a couple of weeks. And they'd be back to pre-earnings level within three, four weeks of their earnings announcement.

28:01And then stocks that companies that beat earnings were flying every time. And so coming through Q4 earnings season, we saw that totally change where you beat earnings. You barely saw a bump in your stock. You missed earnings. You got brutally punished. And so I do think it's important to see how the market's reacting to to to that. Those earnings with a little bit of caveat that, yeah, the guidance is going to be important. But look, none of us know what's happening. So it's going to be, I think you're going to look for signs from the market and signs for that path of forward EPS and credit spreads.

28:34Where's the red line coming from? That's just bottoms up consensus estimates for - Yeah, that's analyst estimates next 12 months, next 12 month analyst estimates. All right. So what do you do about situations like, for example, I think United Airlines gave two different forecasts. They said, here's our recession guidance. Here's our non-recession guidance. what do you do if a hundred S &P companies look at that and say, that's a great idea? Then what's your, what's the actual forward earnings per share? Well, it's still, that's going to be a problem for the analysts that we roll up, you know, because we're taking their, they still have to choose.

29:10Right. Yeah. They have to pick one. They'll have to come up with it. I think that's where you want to blend a few things together though, in this situation. Like we also are, we have a whole framework for judging our credit spreads, getting out of control too. I think if you start seeing the debt market right now, Now the debt market's tracking the non-recessionary case, even though we've seen spreads blow out. It's tracking along the path that we would expect if we're just having equity weakness and a little bit of a widening commensurate with that. So you want to see those things confirm and then obviously the data that you watch too.

29:43Warren, I think it's what's interesting about this current episode in the market, much like COVID, is the speed of the decline. In 2022, it was more of a gradual sell-off. There were sharp bounces and sell-offs in between, but we just had another really swift decline. And how do you think about that within the framework of how much damage has been done, how much we've erased of the rally? So you've got this killer chart showing that we just took back 242 days in the market. In other words, the last 242 days, so going back to almost a year ago, has been removed, erased. How does that compare with historical bear markets?

30:27Yeah, this is another way for us to track the pain. So we have like a huge table that we watch that we're publishing for clients that, you know, how's this bear market tracking with all the other historic bear markets? And this reset, how much you reset is kind of is important, I think, for investor psychology. It's like, OK, this is like just where we were, you know, half a year ago, a year ago. Right now, like you said, 242 days. These are market days. So we're almost back to where we were one full calendar year ago. That's kind of shallow for your typical bear market. So it tells me that, you know, a lot of people are hoping for this bottom to hold and for us to have kind of a more just we had a big move, rapid move down with a rapid move up.

31:13But when we say, where's the stimulus coming from? Listen to Powell yesterday, probably not coming from the Fed anytime soon. Trump, you know, maybe you could look at a tweet from Trump as stimulus, but I have a feeling that's going to fade as we move forward in this. So I think it's going to be a more protracted bottoming process. And that would also help this reset. So if you think we go forward three or four months and we shop around here, that reset is going to naturally expand. And the average bear market is about 400 days to reset. So you want to if we were to get back into like a historic norm, you would see this go back about a year and a half.

31:47400 days into what? Reclaiming the prior high or hitting the ultimate low? So what it is, this is a unique metric. So the market goes down and then you look back and say, where was the last time? How far back in history were we when we last saw this level? Oh, we need to retrace 400 days worth. So we need to get into 2023 levels of the S &P to hit the average historical bear market. But wait, but an important, really important distinction is that we were up 20 % back to back. So if you're talking about percent, like if you adjust for percentage gains prior, you know what I mean? Because if you have a sideways market, like if the market rolls sideways over, it would take a lot longer to take those days back versus up 20 % and only took 240 days to wipe that out.

32:37Yeah. I mean, and it's not like you have to have that, but we've never seen a recessionary. If we have a recession, you're definitely going back that far And non-recessionary, there's only been a few cases that have had this kind of a short reset. So 1998 is the shortest. If you think about that 1998 long-term capital management crisis, market collapses. We only erased like six months again, 120-something days of gains that time. And then I believe 2011 and 2010, those post-GFC short sell-offs, we were like around 200 days that we erased. But outside of that, every other bear market has been much longer than this.

33:18Neither of those two cases you just mentioned coincided with recession. 1998, the economy was hot as hell. It was event-driven. It was currency and Asian and a hedge fund blow up. And it just had nothing to do with the average person, working person's experience in the economy. It was completely market-driven. and then that 2010, 2011, that was an echo bear market. That was just PTSD from 08. Some shit was going wrong in Europe and then we had a debt ceiling fight in Congress and they acted like it was a double dip recession, but it wasn't in the data. This is not that. This is starting to tip over into something cyclical.

34:03I think it's a really important distinction that you raise. I want people to really understand what that means. Yeah, I totally agree with you. And plus, think about 98. Greenspan jumped in and cut big twice, like in succession. Off calendar. Yeah. I mean, it was exactly. He just popped in in the middle of the summer and was like, oh, hey, everyone. Here's a huge weight cut. Don't worry about Thailand. And this is exactly the point that I'm making. is like if you expect that 4892 level to hold and this to be one of the shortest bear markets on record, then you're betting on no recession, like you said.

34:41It's not spilling into the real economy. And you're kind of betting on policymakers, the Fed in particular, coming in and saving the day. And I think that all the signs are pointing to them being in reactive mode versus proactive mode. Well, they just told you yesterday they're not riding to the rescue. I think part of the reason the market threw in the towel at the end of the day is Powell spoke for an hour. They televised the whole thing on TV. And it was basically like the tariffs are really making it hard for us to do what we would need to do was the takeaway. Let's keep moving. Warren, we've used this chart.

35:15I think we were using it in 2022. You've got this wonderful chart showing the difference between EPS and strategist expectations, and they weren't budging. And finally, they capitulated towards the bottom. And now we're sort of at the mirror image of that where coming into 2025, they were in line and then they made this huge leap, as did the market in terms of what we were expecting, animal spirits, the IPO market, all sorts of deregulation. What are we looking at here? What's the interpretation? The Trump bump, exactly. Yeah, this is the median strategist forecast, Wall Street strategist forecast.

35:47That's the blue line and then S &P 500. And so the difference in the spread as it converted into percentage is below. And so you can see the average difference over time is about 5.8%. So that's the average. So you can think of it as this, the strategists on Wall Street, they like to stay about 6 % above the spot S &P on their year ahead outlook on their forecasts. So what we found, and we converted this to a trading strategy even, is when strategists are below the S &P or below, I think it's actually even below 5 % close to the S &P with their targets. You want to be long the S &P 500. Market outperforms.

36:31We saw this. You can see on this chart all throughout 2023, market above strategists. 2024, markets above the strategists. They can never catch them. And then finally, at the end of last year, strategists move way up with their targets. And they're like, OK, they capitulate to the bullish side. Same thing happened in 2021. The chart doesn't go back there. But 2021, strategists were behind the eight ball. They were below the S &P spot level. And at the end of the year, they pushed their targets way up. And then 2022 falls apart. Put the chart back up. This is hilarious. I mean, that's a – so it goes from it being an escalator to an elevator.

37:12I actually remember the moment it happened. It was a twofold move. First, they had to fire all the bearish strategists. they fired Kalonovic and they fired Mike Wilson at Goldman and Morgan Stanley, the two biggest investment banks on Wall Street. They both had guys that had been too negative for two years, and they got rid of them. That's how you get this elevator move. They just put bulls in the seats. You know what's funny? Strategists take the elevator up and the escalator down. It's like the opposite of the market. All right, so I want to talk about some investor behavior. Warren, you do great work on this.

37:46Balthunas tweeted, last week was the biggest ever for leveraged ETFs, more than double the norm. We're talking about flows. The crazy rallies, even if they are of the dead cat variety, are like chum in the water for the DGENs, more emboldened than ever to buy the dip and sell the rip. What Eric doesn't have in here though, which you break down beautifully, is it's not just levered long. So you've got a chart that shows the volume of the inverse ETF compared with the overall what's going on. And you say that 50 % inverse ETF volume marked the bottom in 2023. Where are we today? And how does this compare with historic norms?

38:22And I know we don't have a ton of history on levered ETFs, but. Yeah, we have this back to, I think, 2011 or so. So, you know, maybe 15 years of data almost. But yeah, so this is looking at percentage of inverse ETF volume as a percentage of the total, what we call speculative, which is inverse plus levered long. So, you know, 2x, 3x ETFs. Our theory here is that you're seeing like a lot of the speculation in the margin that on margin trading that, you know, people used to track back in the old days, move into this section of the ETF market. And it's been one of the best sentiment predictors or I'd say sentiment and positioning reflections that we've found in the market.

39:04And so, like you said, 50 percent was like kind of that line in the sand for us that we wanted to see. That's where we saw the market bottom out when it corrected by 10%, 12 % in 2023. So you need to at least get to 50%. We got up to 53 % during this last sell-off. 60 % is like the perfect – I know there's not a lot of history, but when you get up to 60 % on this indicator, the forward one-year returns have always been positive historically. Again, about 15 years of data, so take it with a grain of salt. but what stands out on that chart to me is in 2022 during the bear market we were above 50 % basically in the entire ride yeah yeah I mean it's it can stay up there I mean it can get up there and stay up there so you know this is one of the reasons like what we've sounded I don't think this I don't think this works because I don't think it's primarily retail so but like Having a lot of exposure to inverse ETFs might enable a hedge fund to be even longer in their long book because they have this as a hedge.

40:09So I don't know if this is definitely a signal of such intense bearishness the way you would expect it to be. I'm thinking about the way these are actually used in practice, and I don't think this is a replacement for put to call. I don't know. Warren, have you ever looked at the top holders of these inverse ETFs? I'd be curious. Is it hedge funds? I don't know who's the top. No, I haven't looked at the top holders. I mean, what I do is I basically just test it. Like, well, does it work over time as a way to check? Yeah, but here's the problem with that. Overlay market cap, that data from 2012, 2013, I just don't think it would hold the candle to now.

40:49I think they're more widely in use now. The dollar amounts are bigger and it's more professionals and less punters. And I think having that inverse ETF exposure on might be enabling more risk-taking to the long side than we think, which would thereby negate this being a really powerful contrarian signal. Eventually, it'll end up being a contrarian signal. But to Michael's point, in 2022, that was like a layup trade. The market was falling almost every month. The NASDAQ was falling almost every month. It was like a great way to hedge a long equity strategy. So I think it's just too early to know how effective this is.

41:35The strategist one I like better, I guess is the way I would put it. I mean, that's all fair. I mean, that's why we look at a number of different things. I would say, this is like, again, we've sounded pretty bearish, I'd say, through the first part of the conversation. And I think the most bullish thing from my perspective is sentiment. I think sentiment is washed out. I know the strategies are behind the eight ball, but we're already seeing some of those start to come down. I do trust this. Like I said, if you gave me one sentiment indicator in this market, I would push back. I don't think when I talk to hedge funds, I just think they're levering up a short book and using their own leverage versus playing in stuff that has the time decay on it, like a inverse ETF or a leveraged ETF.

42:18Oh, to be longer term short, like to have a real head. Yeah. If you're really just like, yeah, if you're, I mean, and so to me, I still think at the margin where all these prices are set. And if, if there's anything, this number is going to get depressed because over the last year, the thing I worry about that's with this indicator, because I worry about like everything we look at, the thing I worry about is we had all these single stock leveraged ETFs come out and that's where like all the volume has been. So I worried that this is actually understating the bearishness that's in the market right now, because there's so much leveraged long volume in like the MicroStrategy and the NVIDIA single stock ETFs that came out over the last year.

42:57And so, yeah, I think that sentiment is pretty depressed. We look at some other things too, I think Michael will show, but that to me is the best. We've got two components to a market bottom. You need to get washed out sentiment and positioning. I think we have that. We need technical confirmation, which goes to your point about 2022. It's like, yeah, it was too early to buy in 2022, just because you saw depressed sentiment, you need to have technical confirmation too. And so that's the second part of the equation. And we haven't had that yet. You also need patience because a lot of these sentiment washout VIX spikes that we're looking at don't necessarily work over the next 30 or 60 days.

43:34But if you zoom out a year later, it gets much better. And I would say the point you just made about the bearish tone to this conversation is the tone that's being had around every market conversation across the world. And it's the reason why the max seven are down 28%. It's not as if like, it's like the market knows, right? So is all of it fully discounted? Obviously that's to debate, but the market is not exactly optimistic at the current environment. All right, next chart. This is, I'm not even, what are we looking at here, Warren? Chart 12, please, John. If you're a fund and like we model these funds out, this is a common way.

44:06Again, this is why we look at it multiple different ways. So I would take that ETF stuff and say, that's kind of a retail sentiment and positioning, positioning gauge. This is more of an institutional positioning gauge. We also do the same thing for CTA strategies, which I don't think I put that chart in here. So we have a number of ways to do this. Vol targeting here is if you're running a strategy and you're trying to target a certain, in this case, we're looking at 10 % trailing volatility for your overall portfolio, what level of equity exposure, and we blend this on a few different lookbacks, what level of equity exposure do you want to be running to hit your 10 % volatility target?

44:42And this is a very common way to run institutional portfolios. So when we model this out, we're down to 20 % equity exposure because equities have been so volatile. If you're a vol targeting fund, you've had to de-risk. So there's been a lot of de-risking just due to the extreme volatility that we've seen in markets over the last three weeks. So what we also do is we turn this into a strategy and say, OK, when do you buy? Again, this goes to like Josh's point. You want to look at you don't just want to get low. You want to get low and then wait for some reversal. Wait for volatility to start kind of calming down.

45:17And then you see this number creep up. And so that was the other chart you had up there. So this chart, if you pair it with the previous one, we're highlighting the very rare times, Only seven times where we've seen volatility targeted funds with a 10 % target get down below 25 % equity exposure. And then that exposure starts to rise back above 30%. All right, now that's a good signal. In general, it comes at market lows. And the six-month return from this signal firing is over 13 % historically. If only seen seven, it's very rare. But yeah, I mean, this goes back to 1980. And I think this way of managing risk has really proliferated.

45:58These are funds that want to be much longer when volatility is low and much less long when volatility is high. And it's like a self-preservation mechanism. So you're looking for these moments where they've all gone risk off to the highest degree possible. And then at that moment, it's like, okay, they have de-risked completely. There's nobody on the other side of the boat. If you look at it and say, the first one is like, so we had strategists, that's more sentiment. Then you have retail and the ETFs, you can believe it or not, but like somebody is long those inverse ETFs. And we're looking at that as saying, okay, bearish positioning.

46:37You can then say institutional vol targeters, they've totally de-risked because of this. And then we could go to CTAs, which we don't have the chart in here, but CTAs have also flipped net short. So it creates the type of environment you see at bottom. So everybody's kind of bearish. All right. So we're about a third of the way through the charts and two thirds of the way through the show. So let's keep it moving. All right. We already spoke about this chart 13. Chart 13 shows a divergence between the dollar and interest rates. But I want to look at the next chart, which shows, so you're asking like, is this the end of American exceptionalism, capital moving away from the United States?

47:14But it's really important for some context here. So Warren, talk us through the foreign holdings of both treasuries and U.S. equities. Yeah, this is what we were talking about at the beginning of the program is like this has been a, you know, this is the other side of the current account deficit, the trade deficit that the U.S. has run. So we buy goods and foreign countries buy our paper and they invest that in our markets ultimately, you know, and that's what we're seeing here. So foreign holdings, and this is the total value, foreign holdings of U.S. stocks, the blue line, has exploded post-COVID.

47:51So up like$7 trillion. I think we have six on this chart, but it's really$7 trillion since COVID. It's almost a double in foreign holdings of U.S. equities. And that's a huge number. It's like$16 trillion of foreign holdings of U.S. equities, about$9 trillion of foreign holdings of U.S. treasuries. And there's not on this chart you see corporates and stuff. So like foreign holders of US assets is like$30 trillion at present. And most of that's in the equity market. So if we were to actually kill the trade deficit with all these countries, like kind of implied by Trump's poster board on Liberation Day, the flow from these governments into our capital markets would shut off.

48:34So that's our biggest export. It's our stock market. Essentially, yeah. You can think of it that way. It is the exorbitant privilege, I suppose, of being the world's global reserve currency is part of it. Josh, this economist thing. John, chart 17, please. So this is Carl Quintanilla posting something that is, I mean, just absolutely perfect. One of our recurring guests, JC Peretz, loves these economist covers. So on the left side, you can see six months ago, literally, the Economist cover was the envy of the world. And it was$100 bill rolled up. Is that cocaine? What is going on with that? Oh, it's a rocket.

49:25Okay. It was unclear. But it looked like a rolled up$100 bill with somebody in mid-snort. But I guess it's a rocket ship taking off. And it was just like the most bullish you've ever seen them be on the dollar. And then six months later today, how a dollar crisis would unfold. And it's Edvard Munch, the artist, painting The Scream. And it's basically an upside down money bag with a dollar bill on it instead of the head of the person screaming, who I'm told is actually a self-portrait of the artist. But anyway, quite a difference six months makes. Your thoughts, other than The Economist effectively being a European noise machine as a publication?

50:09Anything to add to that? I think it's a perfect summation of sentiment, like we're saying. There's the old phrase, you can only bet on the end of the world once and get it right. So as investors, I think it's best for us to really adhere to technicals and sentiment right now and not get caught into the narrative. All right. So the good news is the economy is also rolling over. So let's do some of your economic stuff. John, chart 20, please. Yeah, I mean, we can go through these fast. This is just before all the tariff stuff, the underlying economy, our view is that rates have been restrictive and restricting cyclical areas of the economy.

50:48And so you've seen that. Payrolls have started to weaken and out X healthcare. This is payroll growth, X government and healthcare jobs. We've got a lot of news about this and it's down to basically flat. And that's kind of what you see around recessions. Same with the percentage of jobs, percentage of industries growing jobs on a year over year basis. It's fallen to recessionary levels. And this was there before the tariff crisis. You can keep rolling if you want. So Warren, this is the chart that I saw. And I said, this freaking guy, you and Fernando, chart 22, please, John, marrying the economy with the stock market.

51:24For the listener, what are we looking at here? This is that same chart on the bottom clip. It's the percentage of industries with year-over-year job gains. And we basically said, okay, when that falls below 60%, you get out of the market historically. And then just as a rule, test it. You get back. Once you go below 40 % and then back above it, it would be recessionary levels, obviously. What percentage of industries right now have payroll growth? So only 57 % of all industries in this study have job growth, which means that the other 43 % of industries either have no growth or are actively laying people off.

52:07They're contracting, yeah. But the composition has to matter to you, Warren, right? Like is it construction jobs? Is it? Okay. We look at that. We look at that too. But this is more of just like a zoom out macro picture. What's the breadth going on? What it is, there is a narrative out there that is like government, healthcare, education has been the backbone of the job growth we've seen. And I think there's some truth to that. There's truth to that, that the cyclical areas of the economy have suffered. So we've got this chart next. But before we show that, hold on, John. That previous chart, Warren, and John, you can leave this off screen.

52:39That is like the ultimate, the stock market is not the economy buster. It jives pretty good, right? There's one coming up later that's even better, which is the percentage of household wealth in stocks. John, chart 23, please. This is the decomposition of job cuts. Warren, concerning? Very concerning. I mean, I think it's, look, when you pile all, one of these things is probably fine, but when you pile everything on together that we're going to look at, I think that the risk of recession is like at least a coin flip right now. I think there's, you know, the good thing you can say about the economy is we're still running a massive fiscal deficit, which is we've never seen the economy enter a recession with a deficit this large.

53:17We're going to test that theory. But at the other side, you have rates that are restricting cyclical areas. You have this tariff stuff. You now have a wealth shock we're going to talk about. And what you're seeing here is you're starting to see government layoffs via Doge and things like that. This is challenger layoff announcements. And we had a big spike across both private and government in February. But now in March, we've seen really government layoffs really spike. That's the gray bar. And you can see it's very rare. We haven't seen that any government layoffs really to speak of going back over these last few years.

53:50The supply side economists and the Milton Friedman wing of the Republican Party would tell you these government job losses, they're nonproductive jobs. Number one, they're dead in consumption. They're not production. Number one. And number two, they would say they're actually crowding out hiring in the private sector. So I guess we're going to test that too. um i sort of agree with that to be told that doctrine my my my base case is that i i have a sympathy for that but i but it's on a very cyclical level those people also spend money into the economy so if you cut a bunch of government jobs it's going to be felt in the data all right let's go to this next one this is important to me you talked about this the last time you were on uh like as as construction jobs go so goes the economy more so than any other industry group.

54:46And you believe that that's a better signal for what's about to happen in the economy than workers and other segments. Yeah, this is our source of truth, our economic source of truth. And we always look for leading indicators. And you have to have like a, I think a way you view the economy. And our view is that these cyclical areas and specifically housing, construction jobs lead the rest of the economy. It's very, you can see it in the chart, shaded recessions, you start seeing drawdowns in these payrolls, layoffs in residential construction, employment, and about six months before every modern recession, you take COVID out of it.

55:23But you get about an 8 % to 10 % drawdown in these payrolls every time. And we're looking for a similar kind of signal this time. You don't have it yet, to be clear. No. I mean, we see a lot of problems. Like our work, we focus on the housing market because we to work backwards to this, but we're still at cycle highs on residential construction payrolls. But our view is that the work is just not there to support this level of employment indefinitely. Warren, over the last two years, we've known that - Sorry, Michael. D.R. Horton reported this morning, stock is actually rallying, but it was not a good report.

55:58And I think it speaks to your point, Warren. There's just not enough business to support the current level of employment in that segment of the market. I don't know how important residential housing is in the scheme of all construction jobs. You probably do. But I think that's kind of – It's half. Okay. So the home builders, which were the darling of the 23 and 24, as the existing home market was frozen, it was all about new construction. So D.R. Horton bouncing a little bit after being almost cut in half is not, I guess, terribly surprising. So it was all about new construction, new construction.

56:34These homes were getting sold immediately. And the problem now is you have this great chart showing D.R. Horton's completed home that are unsold over six months is spiking to what looks to me like alarming levels. Yeah, this is so Josh's point is a good one. We watched D.R. Horton specifically is largest builder in the in the country. And we really like to watch what they're doing because they kind of they're a bellwether for industry trends. And so they've seen their inventory spike, their completed home inventories. This is their stale inventory that's been sitting on the market for more than six months.

57:06I think my analyst ran this chart for me this morning and updated with the numbers from today's earnings report. And it came down very slightly. So DR Wharton is what they're doing is they're slowing down on starts to try to normalize their inventory because they don't like seeing inventories up here. And because their inventories across the board completed home inventories have spiked. So when you get a slowdown, you get a slowdown in starts from DR Wharton, and you're going to see that they're, like I said, a bellwether. They lead this industry. You're going to see that flow into the other smaller builders, mid-tier builders.

57:39And I think it spreads out to the economy. The other piece of data we got this morning was home housing starts, single family housing starts, which is where that drives the vast majority of the employment we just looked at. Single family housing starts hit their second lowest level in the last two years in March. of this year. So again, this is before all the tariff, wealth shock, stuff like that that we're going to talk about. Let's do this credit card delinquencies one quickly. Yeah, this is basic message. We're seeing credit card delinquencies rise. We talked about this last time I was on the show.

58:14It was one of the things that had us a little bit nervous about the underlying economy. And it's gotten worse. It's getting worse. It's not getting better. I know it's surging, but off extremely low levels. Is it really just so far still normalizing? Or is this like a legitimate surge? I think it's a legitimate surge. Yeah, especially when you start breaking down lower tier versus higher tier. And that goes to the again to the wealth shock is like we've had this the upper strata really carrying this economy. And you're seeing the pain already in the lower strata. And I think that's part of the angst that's out there that brought Trump into office and things like that.

58:51So no, it's real. It's just it's still concentrated in the lower strata. Let's hit this deficit. The economy has never entered a recession with deficits this high. Just give people the number. Deficit is a percent of GDP at the start of a recession. This is like completely uncharted territory. Yeah, this is a seven. We're running about a 7 % deficit as a percentage of GDP. And I haven't seen, we track the deficit on a daily basis from fiscal flows. and we have not seen, despite kind of the rhetoric and the Doge rhetoric, we haven't seen a decline in the deficit. In fact, it's kind of increased through the first part of this year, which you'd expect as the overall GDP and economy increases too.

59:34But the bottom line is this is a very supportive factor for the economy. And this is like, you know, at an annual pace of six or seven percent a year, we're creating new money that's just getting spit out into the bank accounts of savers and into the economy. It's very difficult to have a recession. This is what the fiscal spending of the last few years should have taught us all. It's very difficult to have a recession when this dynamic is in place. So despite all the cyclical factors - You fired the bullets already. Normally, you would do deficit spending to ease the pain of a recession. Now what?

1:00:07And the big concern, I think, is if we do go into a recession, never had one at this high of a deficit, what happens to the deficit in the middle of a recession? because they always blow out. In recession, tax receipts fall. So what happens there and what happens to interest rates? I mean, that's kind of another scary side of all that. You want to finish with this wealth shock chart, Michael? Let's do it. Warren, we've been using the shit out of this. So we've got the horse. Let's hear it from your mouth. Yeah, I mean, I updated this one for you guys. So when you have a US population, households that are more overweight stocks today than they've ever been in history, I think 43 % of US household net worth is held in the stock market at this point in time.

1:00:47And then you bring that in conjunction with the bear market, basically 20 % down, you get a massive decline in household net worth. And so that chart's not up to date. You can see that's only through March. We had a$4 trillion hit to household net worth. I think it's at the lows, I think we doubled that. So it was like an$8 trillion hit to household net worth. Two things on this. If you get a V-shape recovery, nobody's going to care. We'll go back to business as usual. The airlines will report record bookings. It'll be like nothing ever happened. If you don't get a V-shape or it takes six months before this thing finds its ultimate bottom, that's it.

1:01:29You can't tell me the stock market isn't the economy at this stage in American-style capitalism. we have effectively based the entirety of the way society is organized around who owns what assets in the stock market. I just don't see a way around it. And I'm not saying that because I want it to be the case. I know what drives spending decisions. What is my house worth? How good does my 401k look? Okay, let's stop for dessert after dinner. Okay, let's buy, let's splurge on another shopping trip. I agree. The only thing that I would add to that That is, Josh is 100 % right, but you don't have high levels of household net worth, high levels of stock market without a supportive economy.

1:02:14Right? Yeah, I think they're intertwined. One is not always causal of the other. It's back and forth. It's like ping pong. You know what I mean? It's like sometimes the economy bails out the stock market. Sometimes the stock market bails out the economy. Would anyone argue with me? No. That the stock market gains of 2023 bailed out the economy? No. I also think that - The AI thing saved everyone's bacon. It kept people spending. CFOs kept spending because their stock price was rising. 100%. What's going to keep people spending, I think right now, if we could boil it down to one thing, and of course we can't, but it's all about the labor market.

1:02:53As long as people have their jobs, I don't care how scared they are. If people have their jobs, their spending habits might change on the margin. In fact, they probably will. but spending will be supported by people having jobs. You like that as the last word, Warren? Oh, I mean, I like this discussion. I'm just listening. I think I agree with you both. And I mean, it's like, this is a huge factor and it hasn't always been like this. That's why we try and normalize it against GDP and adjust it for like the holdings. And you can see that this is the fourth worst wealth shock in history, even though this is not, this is far from the fourth worst decline in stock prices we've seen.

1:03:26But as far as the household net worth is concerned in the United States, fourth worst. As a percentage of GDP, not in aggregate dollar terms, versus the economy. That's real. It's the fourth worst we've ever seen. We normally end the show asking people what they're looking forward to. Rather than have everybody log off of this podcast and just want to eat a bullet, why don't we go around and say, what's the silver lining or what could go right? I'm going to start. I don't believe this 4.5%, 5 % 10-year treasury yield. I think it's total bullshit. I think it's market mechanic driven. Maybe it's foreign flows.

1:04:03Maybe it's a little bit emotional. I think inflation is absolutely coming down. And if you're really worried about the job market, you ain't going to have to worry about prices in the economy because demand is going to crater. And before that goes too far, I think the Fed will be forced to act. Rates will come down, and that will ease some of the tightness in financial conditions. And I think that that's maybe the way that things might turn out okay. Not saying, like you're saying a recession's a coin toss. That's what everyone pretty much thinks at this point, including me. Wall Street's like, we've raised our recession forecast probability from 32 % to 41%.

1:04:44It's hilarious. It's a coin toss for everyone. But that's maybe the silver lining is the Fed is too tight. Trump might actually be right about that. And I think that rip higher in bond yields is a total head fake. So that's what I think could go right. Michael, what do you think could, what's the silver lining or what could go right? Yeah, a lot of things. So the risks are well-documented. We just spent an hour talking about them. But Josh, I think you're 100 % right about rates. I call bullshit also. I do think a deal is coming. I don't think this is going to go on for that much longer. And I do think that once we have some sort of clarity, corporate America will adjust very quickly.

1:05:19I also think that we had the sentiment and the hysteria washout. I don't think we're going to see VIX at 60 again. So I think there are a lot of things that can go right. And I hope that they do. Warren, would you like to leave us with a silver lining? Yeah, for sure. I'm all about, I'm a very sunny guy. Yeah, no, I'm with you. And I think, I do think we're overweight bonds. I think yields are coming down. I think the 10 year is coming down. I think the Fed's going to cut four, if not more times this year. The underlying economy is not, this is not a four and a half percent Fed funds rate economy.

1:05:53I think there's a really unpalatable negative feedback loop that will hit the White House and that ultimately I don't think Trump's going to burn the entire country down because he'll spend all of his political capital. Whatever you think of the guy as a survivor, he is I just don't think he's going to totally shoot himself in the foot like that and just keep going with it. And and finally, you know, sentiment is totally washed out. It is like we said, we are at a sentiment low. You need the technical confirmation. We're on the offensive, though. I mean, I'm looking for a bottom to buy. I'm not looking to de-risk anymore down here.

1:06:25And so, yeah, I lean to the optimistic side at this point in time, actually. All right. I think that's a great place to leave it. I think we were pretty explicit about all the things that don't look great. But here are some outs. And I think that's a very realistic assessment. Warren, you did not disappoint. You're one of our favorite guests. I think this is your fourth appearance on The Compound and Friends. Hope to have you back soon. Thank you so much for your charts. and your insight. Tell people where they can learn more about 314 Research and the work that you do. 314 Research, go to our website, number three, then 14research.com.

1:07:03You can check me out on Twitter, check our ETFs out as well, which you can find on our website. So thank you for having me, guys. I always love talking to you. You're the man. Thanks, everyone, for listening. We appreciate you. Like and subscribe, and we'll see you soon. Have a great weekend. Thank you.