America Isn’t Ready for What’s Coming Next — Ed Dowd

[00:00:00] Speaker 1: We're probably already in a recession and the housing market really is just starting to crack. So this is just going to continue to manifest over the next six to 12 months. They are screwed. They have no good choices here. I think the next three to six months are going to be very intense from a news flow standpoint and a financial market standpoint. So when the government's telling you this, you should probably listen and you should probably prepare for the worst. Hope for the best. But don't be in fear. I mean, you know, look, you just don't want to be prepared and then go about your life. And don't, don't, don't, don't, don't, you know, focus on this and be in fear because that that doesn't do anybody any good. Yeah, look, you got to listen to the retailers. And the same thing happened in the great financial crisis. The consumer facing stocks in 07 got absolutely smoked. And there was a very narrow market. The only thing that was working where it was energy in China. That was the theme of 07. And consumer stocks were already fallen off a cliff in 07. They continue to fall off a cliff in 08. And that, and, you know, that's where we're headed. The consumer stocks have not been doing great. You know, McDonald's, you name it, Nike. The consumer is in deep, deep trouble. The only thing that's been pushing this, the overall equity indexes has been AI. It's, you know, at one point, I don't think it's 45% anymore, but at one point, AI and AI adjacent was 45% of the market. And that has to be squeezed out. And that'll, that'll do what tech did in the dot-com bubble. A lot of big retracement. NVIDIA, that stock is no longer the largest market cap stock in the index Apple is now. Apple's the anti-tech AI trade for the moment. Apple's going to miss numbers in the next six months because, you know, handset sales are going to fall off a cliff. But, you know, this is, this is, this is unfolding. And so there's two ways this can go. This can be like the 09 situation where it's fast, or it could be like the dot-com bubble where the markets kind of didn't really give up the ghost until September of 00, six months after the dot-com bubble burst. So, you know, the, the, the, the indices that we watched in the SP, the SPX and the Dow Jones could hang in there for a little bit longer before they give up the ghost. But the tech, the tech bubble, in my own opinion, has already burst. And now it's a process. And, you know, I can't tell you how fast this is going to go, but I think it's over. And, and, and, and again, I may be early calling this, but I think semis are the leading indicator of everything in tech. And they're telling you the AI bubbles burst. Now, whether or not the NASDAQ follows quickly or slowly, we don't know yet, but I think it's over. The S and P 500 could maybe, you know, go sideways, maybe it could go to a new all time high, but eventually it gives up the ghost where that's, that's, that's, that's where we are. You know, again, everyone looks at the dot-com bust in March of 00, the S and P 500 went basically sideways for six months and tried to double top in September, then it, then it fell apart. So that we're in this kind of this strange rotational market where people are selling their AI stocks and buying everything else, but that won't last much longer. [00:03:27] Speaker 2: Oh yeah. Buying industrials. [00:03:29] Speaker 1: Buying industrials, buying Apple, buying healthcare, you know, and we're doing, and look, we're already, we're probably already in a recession and that's, and the housing market really is just starting to crack. So this is just going to continue to manifest over the next six to 12 months. And then once, once we start to get a big headline miss in one of the AI companies, like, and I think Nvidia could be one of them, you know, bottom line, Nvidia was selling to the hyperscalers, which have, you know, up until recently had free cashflow, but now they're negative free cashflow. They're causing CapEx, the neoclouds can't finance themselves anymore. Uh, so they're, they're going to pull back on the chips and now you have the China question. So Nvidia is going to miss at some point in the next six months. It's not, you know, I, that's why, that's why the PE on Nvidia is so cheap on a forward earning basis. [00:04:27] Speaker 2: It's because no one believes the E a household can face higher bills while the investments meant to protect its future are falling. That is the squeeze Ed Dowd is warning about his argument connects three pressures, a struggling consumer, an AI boom dependent on financing and an energy shock that could complicate the Federal Reserve's response. For Americans, the stakes reach from everyday spending to retirement accounts and overseas conflict adds another layer pressure on energy supply chains and Washington's economic room to respond. These are Dowd's forecasts and their timing is uncertain, but his explanation deserves scrutiny. First, listen to why he believes trouble in the chip sector can spread beyond technology. Then we'll examine the policy trap he describes and his argument for preparing without letting fear take over. [00:05:22] Speaker 1: Nvidia, you know, was destined to, uh, you know, miss earnings eventually because the circular financing eventually blows up because the credit markets say no more. We're in the process of the credit market saying, this is a joke, no more spreads are widening and all the neoclouds. And, and, uh, the technicals of the semiconductor market have suggested to me that the AI bubble has officially burst. It burst last week because it technically, you and I talked about this before on some of your shows that, um, you know, I, I, I was, I, I wasn't ready to call the AI bubble burst, but I, I, I think it's over. And the semis are leading this the semis, uh, you know, tried to rally the new highs, failed, uh, in September, uh, or beginning of October. And then they took out the July lows with authority and then technically, uh, semis are in a bear market. And the, and the only way this gets fixed is it's technically they recover the trend line, which is a lot, uh, higher than where the semis are, are right now. And I think the news flow only gets worse from here and, and the fundamental misses are on, on the horizon people are blaming the blue team for the AI stocks going down. No, no, no, the credit markets are already telling you the charts were telling you the spreads were blown out. The credit markets have really ended this party. The power, um, bottleneck is ending the party. There's just not enough, you know, power to plug these things into. So the, all the whole AI complex was going to slow anyways, I think we're looking at peak CapEx in the third quarter. Uh, you've already seen indications from Microsoft and others that they're, you know, guiding CapEx to be flat, which is a second derivative slowdown. Um, so the, the, the whole thing was becoming, was coming unraveled before the elections. First rate hike, the 25 basis point rate, rate hike in September. If you remember, they came out, they did the 25 and they, and then they started to raise expectations of many more hikes into the end of the year. And within two weeks, they had to walk that back a little bit because the credit market started imploding, uh, triple C's went off the rails, uh, yields in Italy and France. Uh, you know, when the, when, when the world's interest rate moves, it has implications globally. Uh, there were problems there that then we had, um, uh, you know, the credit markets kind of seize a little bit and then they walked it back. And, uh, you know, there was this belief that AI and tech was not sensitive to rate increases while they were wrong on that. And that's, seeing as how the whole AI build out is predicated upon, uh, you know, credit bonds, not equity. So that, that, that, that, that started the, uh, if you're, if you remember about two weeks after the fed raised rates, that's when the, uh, semiconductors peaked in the first week of October. And then they started their slide down. So they're going to raise again and it's going to be very bad for equities. And I don't think the markets have really understood what, what just happened today. Uh, they're, they're down a little bit, but I think we're going to see, uh, you know, more destruction in the AI complex from a, from a valuation standpoint. Well, the, I'm going to go back to the 2008 financial crisis. Um, I expect inflation to accelerate a little bit here, headline inflation, core to go up a little bit, but this ultimately ends with the deflationary scare going into the financial crisis oil, uh, you know, went to 180 bucks or 170 something. Or 140, 140, 140, I can't remember, but it went up a lot, it had a huge move in the first six months of 08 inflation ripped into June of 08. And then when the great financial crisis came, the deflation, uh, that all just got smoked. Um, so the fed is the fed, let's talk about the fed for a second. For a second, they are screwed. They have, they have no good choices here. Uh, the numbers came out today. They didn't, uh, there was no headline year over year CPI or, or, uh, core because we had the government shutdown last year for October. So we had month over month and it was super hot. My partner and I talked this morning, he calculated, uh, you know, what, what the headline would have been, uh, if you make a couple adjustments, but you know, headline, according to our numbers came in at 4.0 to 4.1%, which is a disaster. So the fed is definitely probably going to hike in December, um, but they shouldn't, but they will. And it's only going to accelerate the deflationary collapse on the other side. Uh, and we're going to, this is the, the fed has no good choices here. This is a disaster for them. The long end of the curve is going to stop. The long end of the cover is going to start pricing in the growth scare and the deflationary scare that they'll, the yield curve in my humble opinion will start to flatten. I'm not that concerned about long rates. I think we may have put in a, uh, a top we'll see, uh, there may be one more push higher in yields, but we're close to the end of the, uh, of the yield cycle and it's going to, and yields are going to go a lot lower. Eventually once it's, once the, you know, the financial feedback loops get going. Um, but the fed, you know, they, you know, hiking into a supply, uh, shock, you know, they can't print more oil and this is the only tool they have. It's a blunt tool and it's, it's, it's going to result in what, what they should do is pause, but they're not going to, uh, you know, Stephen Warsh is hawkish. Uh, they're, they're, they're already coming out, uh, fed people are already coming out and that's where the rate, right now, the odds are going up. So they are really in a bad spot. They're going to induce, look, of the, of the, I, there was a stat once I heard from Dennis Statman who ran global macro of black rock. And he said that like 18 of the last 20 recessions were all fed induced. It's just, that's, that's how, that's how it happens. Um, it's a blunt instrument. They, they lower rates to create credit credit gets created. The boom comes price. We have a little bit of inflation, they start raising rates, they plateau, they, uh, and, and eventually they take away the punch bowl. Then credit has a deflationary problem. There's not enough credit being created. Then we go into a recession and then they, you know, the cycle starts anew. So that's where we are. [00:11:30] Speaker 2: The connection between those two sections is borrowing. Dowd argues that the AI expansion needs financing to keep building. If borrowing becomes more expensive or lenders pull back. Spending can slow before the technology itself stops improving. His next argument makes that more dangerous. An energy shock can raise costs while weaker demand pulls the economy in the opposite direction. In that scenario, the Fed faces competing pressures. Higher rates might restrain spending while also intensifying financial stress. For an American household, that raises an uncomfortable possibility. Falling markets would not necessarily bring immediate relief at the gas pump or on monthly bills. But an important distinction remains. His reading of credit conditions is an argument for vulnerability. It does not establish the date or severity of crash. The next clips show how he connects that financial vulnerability to conflict overseas and why his approach to gold includes limits. [00:12:33] Speaker 1: Yeah, it's not good. And, you know, look, we've got peace, you know, like Trump's talking peace all of a sudden. But, you know, the assets of the U.S. military continue to be, you know, moving towards Iran. So, like, we've got this, you know, we're moving, moving towards more, more, but the talk is now we're going to be fine. So, my opinion on the Iran war is, you know, to your point, they're trying to talk peace right now. I think that's to prop up the markets. But the reality is the hardware and the troops continue to move and gather steam towards the Middle East. So, you know, it seems like this is going to escalate, in my humble opinion, unfortunately. Wages haven't improved. Inflation has only gotten worse from the Iran war. And it's the economy, stupid. It's that simple. So, we're going to see these swings back and forth because the Democrats aren't going to deliver. They're going to think this is a mandate. They're going to do their crazy things. And we'll see what happens in 28. But, you know, we're in a generational fourth turning. The economy has been hollowed out over decades of outsourcing and manufacturing in China. And this is where we are. Silver is an industrial commodity. That will get hurt. Gold, gold has already taken a nice shellacking. You know, I think eventually those are going to be fine because we know what's coming. It's going to be a massive print on the other side of this. So, you know, I'm not a big fan of trading gold. I look at it as a long-term hold and it should never be more than 5% to 10% of your portfolio. But long-term, I'm a bull. Short-term, you know, not trying to make a call on that. But if it goes lower, I stack more if it goes lower. Yeah, it's funny you mention that. I've been waiting and thinking and trying to figure this out. I'm going to write a substack on this. And basically, I think it's pretty simple. It's the governments of the world, you know, have intelligence agencies. They see the troop movements and they are preparing for a global, you know, escalation in the different theaters. The Ukraine, Iran, and then potentially Taiwan. So when the governments are telling you this, you should probably listen and you should probably prepare for the worst, hope for the best. But don't be in fear. I mean, you know, look, you just don't want to, you know, be prepared and then go about your life. And don't, you know, focus on this and be in fear because that doesn't do anybody any good. So the secondary reason could be AI, cyber attacks, but let's call them both. That would be a theater of war. So let's wrap it all into war. I think this is just a simple, the governments of the world are telling you war's coming and you should listen and then hope that it doesn't come. But that's what, that's what all this, this to me is, is that global conflict is only going to get worse. And, you know, when you do, when war, war, war planning takes a lot of time and there's a lot of things that need to be done logistically before. And these governments are seeing that. So that's what they're telling their citizens. Well, obviously they do in a war, you know, in World War II, I mean, you know, we had austerity measures. There were rash, there was rationing. This is not unprecedented. So this is what they're telling us. It's, I don't think it's that conspiratorial. I think we can see the global situations getting worse, not better. And just be prepared, prepare for the worst, hope for the best, but don't focus on it. Don't get any fear. Don't, you know, don't, don't let, let, let it rob you of your joy in your daily life. I mean, you can't sit out in the, if you're sitting out in the future, worried to death about what's coming, you'll just, you'll, you'll wreck your mental health and your physical health. That's, that, that, that's what I took a long time. There were a lot of crazy conspiracy theories when this first started happening, and I just wanted to pause and think, and my only conclusion is that this kind of level of coordination is not that they're, you know, they're all talking to each other. They see what's going on on the ground, and they're making their own assessments, and they're telling their citizens to get ready. [00:16:59] Speaker 2: Dowd ends with two warnings worth holding together. He expects financial stress and sees a risk of wider conflict, but he also says fear can damage daily life. His interpretation of government preparedness messages remains his interpretation. Those messages alone do not prove that war is imminent. The practical takeaway from his interview is to consider how a disruption would affect your own household. Income, essential bills, access to supplies, and investments exposed to the same economic risks. His goal comments also include a limit, rather than a promise that one asset solves everything. Which part of his argument concerns you most? The AI financing problem, pressure on household spending, or energy disruption? Tell us below. Subscribe for more interviews examined through what they mean for American households.