I Saw This Stock Market Pattern Before: 2022 is Repeating And Most Are Not Prepared

[00:00:00] Speaker 1: as gold drops to reset fat expectations and stock protection costs hit a one-year wall despite looming tighter conditions there is one set of data connecting it all and by the end of this video you will see it let's start with why the fed is being forced to act core pc their preferred inflation gog is moving higher not lower this is the number that drives every decision they make and it is putting enormous pressure on the committee right now the market has responded the odds of a rate hike by september are now rising sooner than almost anyone expected six months ago and by december the probability climbs even further this is not a higher for longer situation anymore this is a higher and getting higher situation which is broadly speaking not what you want to see when markets are priced for everything going perfectly and one of the reasons inflation is not cooperating it is oil despite recent developments we had higher oil prices through most of april may and june which i was warning would directly reflect in costs as a delayed effect not immediately inventories are sitting at record walls higher oil feeds directly into the core pc number which feeds directly into the feds calculus this is not a temporary supply blip it is a structural input pressure that the fed cannot talk away now gold is highly sensitive to real yields when the federal reserve hikes and real yields rise gold falls in the short term that is exactly the dynamic we're in right now and that is why goldman sachs just swashed their gold forecast they cut their target by 500 dollars six months ago they were telling you gold would hit five thousand and four hundred dollars by year end now they're walking that back the reason is simple the fat isn't cutting and it may be rising in my analysis this shaded zone on the chart defines the maximum probable downside the precise real where i expect gold to establish a floor of a structural support my base case is that as long as the fed maintains its tightening cycle this year gold will face near-term headwinds however my assessment of the underlying data tells me this weakness is strictly temporary and keep that word in mind temporary because it becomes the foundation of the entire argument in about two minutes because gold imports globally are not slowing down central banks are still buying and geopolitical hedging continues and in the longer arc gold still has a much higher role to play the short-term pressure is real but the structural bit underneath is not going anywhere before we dive into what this means for stocks if you are finding this data-driven breakdown helpful hit the subscribe button we do this every week no noise just the charts now let's move to stocks the cost of protection on stocks is extremely low investors are not hedging and this is happening as global liquidity is rolling over this leading indicator pushed forward six months is now negative and falling the federal reserves own treasury operations have dropped from 40 billion per month to just 10 billion that is a quiet but aggressive acceleration of tightening meanwhile retail is not slowing down option activity is breaking to new highs and this may be precisely why the federal reserve wants to sound hawkish to cool down speculation that is getting out of hand finnreal margin depth continues to increase in absolute terms and relative to m2 money supply it just hit 6.19 percent a level that has only been exceeded twice in history march 2000 and october 2007 past results are not indicative of future performance but the historical pattern deserves attention so we have falling liquidity retail speculation and historic margin depth what exactly is holding the entire market up one theme ai the situation has gotten so inflated that the us government is now mulling buying equity stakes in a ai companies essentially to make sure the stock market continues to function so take a moment to absorb that semiconductor valuations are in a territory that is generally considered not sustainable without exponential earnings growth materializing very quickly and beneath the surface the disconnect is staggering look at the free cash flow projection for the major hyperscalers over the next 12 months free cash flow is projected to absolutely crater as they spend billions upon billions on ai infrastructure yet as their cash flow falls off a cliff the s p 500 continues to grind higher the biggest companies are bleeding cash to build ai and the market is pricing them as if those investments have already paid off in full why is the market ignoring this near-term cash burn because wall street is looking at projections like this one after the next 12 months estimates have hyperscaler free cash flow absolutely skyrocketing reaching well over 600 billion dollars by 2030 the market is pricing in perfection for this ai best four years into the future but between now and 2030 there is a lot of room for disappointment and volatility the bank of america investment clock which maps economic regimes to asset class performance shows the cycle rotating from boom towards inflation the yield curve is bears flattening rates are rising and historically this mid-cycle shift has preceded corrections of 10 to 57 percent within six months however if the market falls 20 percent this will be exactly the point where the federal reserve may be forced to act add to that a massive stock rebalancing is expected into month end which could induce additional volatility on top of an already fragile setup here is where everything connects when the unemployment rate sits below cpi as it does now history shows the yield curve steepens aggressively it is the market's way of realizing the fed is trapped between slowing growth and sticky inflation we have moved from inversion last year to steepening and this is similar to the 2022-2023 playbook a hawkish fat a strong dollar got under pressure and equities vulnerable the measured move pattern in s&p 500 which i have shown in previous videos both the larger and the smaller structure is still technically valid until invalidated it remains in play supported by every fundamental we just walked through so what are we probably looking at not a recession but a correction in my own view uncomfortable potentially 10 to 20 percent and probably affecting portfolio locations across equities commodities and bonds simultaneously gold drops or stay flowed in the short term but remember the world from earlier temporary central bank buying and geopolitical demand have not disappeared the long-term trajectory remains upward the two data prints to watch core pc on june 27th and the september flmc decision if core pc comes in above 3.5 percent the probability of a september hike approaches near certainty if it comes in below 3 percent the entire framework eases substantially the fed is the strongest gravitational force in markets right now and that force is pulling in one direction but i'm sure it will be fine if you found this useful make sure you subscribe see you in the next video