The "Dragon" Stock Market Crash is Starting

[00:00:00] Speaker 1: Wow, what a wipeout in the stock market. We need to talk about what's going on and specifically the Bank of America Red Dragon warning, really the dragon warning. It's just often called a red dragon because, well, it means stocks end up going red. We're going to talk about that. We're going to break down exactly what's going on with this liquidity issue coming from SpaceX, Google, and the timing around these. Very important. Some miscellaneous other news in addition to what's going on with Micron Wednesday. We already have a full breakdown video on that. Then we'll be moving into the Bank of America Dragon warning. And then, of course, we'll talk about the Federal Reserve and something that's really contributing to some of the pain that we're seeing today. So let's get some of the simpler news out of the way first. Of course, you've probably already seen it at this point. SpaceX is refinancing about $20 billion of their debt that was really due within the next year. So it makes sense they're trying to get rid of that debt. But the problem is they're already going back to the market after raising $75 billion plus another $10 billion green shoe. And now they're hitting up bankers for even more money. It is a suck of liquidity. There's only so much to go around. And so, unsurprisingly, that momentum that SpaceX had been experiencing with just 4.2-ish percent of the stock available to trade that really helped propel the stock up well over $200 up to like $217 per share after IPO has now completely reversed as that initial lack of access for shares. And momentum trading has turned into a downward trending disaster. The stock now down 16.4% just on the day. This is not a surprise. This is what we expected going through the company's fundamentals, although I will say it happened about a week earlier than I expected. I thought we'd have at least until that NASDAQ 100 inclusion before we'd start seeing SpaceX fall. It started falling before that. And, you know, usually the market is forward-looking, so maybe that's not a terrible surprise. But, as a result, the NASDAQ is also going down in part because of SpaceX, because even though SpaceX isn't part of NASDAQ, the NASDAQ 100, we expect it will be within 15 days of trading. And so, therefore, when SpaceX plummets, people start selling off the index as a whole, which then indiscriminately sells everything. So, that's not great at the same time as you have liquidity concerns. Look at, for example, what's happening over at Google. We had already previously heard about the $80 billion stock sale, but the timing of that $80 billion stock sale actually really matters. See, Berkshire Hathaway underwrote about a $10 billion private placement, and they got a discount for doing that of about 7%, which I personally thought was not enough. They should really be trying to go for, like, a reinvest-style 20% discount like we do on real estate. So, I think this was a little surprising. I think Greg Abel kind of needed to show he was able to do a deal and get a discount. But it certainly wasn't what we're used to when it comes to Buffett-style negotiated discounts. So, a 7% discount has already basically been evaporated in the market. And the issue with that is what's going on with the other $70 billion that Google is trying to move into the market with their stock sale, $30 billion of which are expected to hit the market as soon as the end of June. So, that means between June and July and August, we're expecting to see $30 billion of Google stock dump so Google can raise money for their artificial intelligence endeavors. But on top of that, their at-the-money $40 billion portion begins in the third quarter as well, which is July, August, September. So, you potentially have this overlapping $70 billion of selling pressure for Google. And so, it's no surprise that right now the stock is down about 12% off all-time highs. Still, obviously, a great company. Still doing really well. It's up 33% year-to-date. So, you can't really, you know, slate them here for wanting to raise money. But the point is, it's happening at the same time as SpaceX is raising money, at the same time companies are starting to go, it's getting a little more expensive and harder to raise money at the same time as yields keep rising following Walsh. Now, we're going to talk a lot about that because, obviously, yields have been rising. If we actually look at the bond market, we can see the 10-year is up about six basis points today, the two-year as well. So, the entire yield curve just moved in the bearish direction. We didn't really get any kind of flattening or steepening. We just went straight bearish where, basically, both the 10 and the two are going up aggressively in the same direction. Not ideal. And, eventually, it becomes a longer-term risk for the stock market because one of the things that keeps the stock market moving is the fact that there's been relatively cheap access to capital. But, SpaceX, because its fundamentals are kind of crappy, is having to raise at higher interest rates than people expected, especially now with the stock falling. You're probably going to see even more of a premium for SpaceX-level bonds. It just means the entire artificial intelligence capital stack has to pay more money in interest than they could spend on hardware or otherwise. That said, we still had decent movement today on stocks like Micron or SanDisk. Micron today was up 6.8%, which is great. Marvell was pretty much flat today. SanDisk was up 4%. A lot of this is anticipation around not only earnings for Micron on Wednesday, but they also had this really weird, which I thought was just sort of a pump announcement. This morning, Micron announced basically nothing right before earnings, but it got a lot of news attention where Micron announced that they are partnering with Anthropic to optimize systems for workloads and secure the supply that Anthropic needs. And so, then when I actually got to, like, okay, cool, so what does this mean? Like, you guys are going to make a chip together? Are you guys going to, like, invest in a fad together? No, it literally says, Micron and Anthropic are basically agreeing to, quote, will, I should rephrase the grammar here, but I'll just quote it here. Micron and Anthropic, quote, will analyze how memories and storage subsystems perform across various workloads and interact across the full infrastructure stack. Like, what? Wait, so you guys announced this crazy multi-year partnership to analyze how things are going. And, you know, to me, that helped pump those stocks today because pretty much everything else sold off. You know, in this morning's Alpha report, a few things happened. We correctly identified that software was still going to be bearish for the next three to six months. This is not a very hard estimate to make, but we did correctly say, like, be careful. We also did correctly say that SpaceX, we maintain our bearishness on it. And if you actually look at SpaceX this morning in the pre-market, and mind you, I'm in Hawaii, so the time zone is crazy, but in the pre-market, SpaceX was actually okay. It was down, like, a percent or two. And in our Alpha report, we're, like, super bearish on SpaceX, but they frickin' tanked another 14%. So the Alpha hit it there. Where it did not hit, though, was, you know, I should have seen this coming. It's hard to be bearish SpaceX and bullish on the Qs, and that was my fault. Last week, I was optimistic on us getting over 740, regaining an easy 735 on the NASDAQ, and breaking through 740. That's what happened last week. Today, I was bullish that we'd be able to push further and through those levels. Unfortunately, I didn't reconcile that if SpaceX tanks, even though it's not in the index, it's also potentially going to take the market with it a little bit. Now, the market only went down 25 basis points on the Qs, so NASDAQ 100 isn't really down that much. And news out of Iran was pretty much just embarrassing and didn't really move any needles this weekend. We've got oil flowing in the Strait of Hormuz. We know that we've given up a lot to Iran. Iran has a lot of strength that they didn't have previously. Iran not only able to likely monetize the Strait of Hormuz, but frankly, they might not even need a bomb to exert their leverage. They have a new bomb called the Strait of Hormuz. Iran is keeping their missiles. They're gaining leverage over Donald Trump. At the same time, Trump is undermining Israel in their fight in Lebanon. So it really seems like, as the economist puts it, that Iran is going to get their yellow cake and eat it, too. Which is, of course, a reference to highly enriched uranium. Anyway, so, you know, none of that really ideal. Some of these negotiations with Vance, you know, there were some moments over the weekend about what was going on. But so far, most of this ended up relatively bullish. The problem that really hit markets, in my opinion, is this liquidity issue with SpaceX and Google, those Google shares starting to hit the market, but also the warning around what Bank of America calls the dragon. Now, the dragon is basically an instance where all of a sudden you see the CPI rate go above the unemployment rate. And that's a concern where the unemployment rate is low, you know, 4.3-ish percent right now. And the expectation is that CPI inflation in the United States could exceed that 4.3 percent. Right now, in the last 12 months, ending May of 2026, it was at 4.2 percent. Now, of course, we expect that's going to roll over. Well, at least I do. But because of the near-term damage that does to the economy by keeping rates higher for longer, you could actually be intentionally keeping rates higher to fight down CPI like Kevin Walsh said he was going to do, especially when CPI exceeds the unemployment rate. Now you have to stay high for even longer, more aggressive with those rates, which means you squeeze AI liquidity even more at a time when it might not be that capable of absorbing any more of that squeeze. I mean, Satya Nadella literally just started talking about the commoditization of artificial intelligence, which, you know, it's not great when they start talking about this. We started talking about this, I mean, we started warning about this years ago, but more recently, Google's I.O. really told us the commoditization is starting, where we're starting to see the growth rates in token usage on a second derivative fall. That's scary. Basically, we grew token usage 50x from 24 to 25 on a one-month period, and then from 25 to 26, we grew at 6.7x. And so the growth rate is negative on token usage. At the same time, we've got more efficient models, more efficient chips. And so that value per token is starting to fade. It's probably also why we're starting to see stocks like Google fall, because Google had really been crushing it with their Gemini model in November of last year. Anthropoc really took the lead here in the spring, but now you're actually seeing a little bit, this is me saying this early, a little bit of a chat GPT resurgence. I hate to say it, but they're, you know, all of them are close, but I'm seeing a little bit of an edge ahead in chat right now. And maybe that's why there's no surprise that you've actually got one of the co-leads of Gemini and a VP of engineering. Noam Charzier probably screwed that name up, sorry. But anyway, he just left Google to join OpenAI. And it had only been there for like two years or whatever, but whatever, you know? So all of this kind of comes together. So what is the dragon warning? Well, the dragon is basically the Fed keeping rates too high for too long, and then what you end up with is what is called a bear flattener. A bear flattener is basically when we cyclically go from a boom, commodities are winning, like gold earlier this year, stocks are booming, everything's booming. Kevin Warsh gets appointed, it signals the top for gold, the top for some commodities, but it also, post the Iran war ceasefire at the beginning of April, quote unquote ceasefire, what do we get? We start getting a bear flattening. Remember on, okay, let me explain this because I know this one's a little complicated and convoluted. Basically, there's this line called the spread between the two-year yield and the 10-year yield. And if you chart the difference between the two, you get a curve, which is a fancy mathematical way of calling a line something that goes up and down, okay? Iran war starts, that sucker goes all the way up to 0.71, which is like well in shock territory. It's often the market's starting to say, crap, we're possibly going to have to print money because we're going to get driven into a recession with a closed strait of Hormuz. When we get ceasefire and now we're starting to see a recovery post that or have seen that in the stock market, what do we actually have? We have a very low spread between the two. In fact, we are at the lowest levels in all of Donald Trump's second term. And we are at the lowest levels that we have seen since right before his term, about December of 2024. That is a sign that that curve is flattening. The number is going down. When the number goes down, it means it's flattening. And it's bearish because while the spread is shrinking or flattening, yields are going up. And that, Bank of America says, usually means we are moving into an era of stagflation where cash is more desirable. Now, the only way we can really get bailed out of this is if inflation rolls over. So we get oil prices fall more than they already have, right? Because even though oil prices are down, they're still obviously up from where we have been. If we look at oil prices right now, we're at 78 on Brent. At the beginning of the year, we were at like 60 bucks a barrel. So we're well above where we were at the beginning of the year. I mean, we dropped to like 59 there. We're kind of dragging along the anchor, if you will, along the floor of 60 bucks there on Brent. So we're still quite a bit higher. I mean, that's about 30% higher still on Brent, even though oil has come down. So we're still more expensive on oil. Yields are rising because people are like, oh, AI spending isn't stopping. Yet, because AI spenders are spending and borrowing like crazy at the same time as yields are going up, people are going, man, there's actually not going to be as much money left because you're going to spend more on higher interest rates looking at what's happening with SpaceX. Now, again, you get bailed out of this by oil falling and ideally AI disinflation and a tariff rollover. So we want a lot of disinflation. If we get disinflation, then we could go back to bullishness where yields come down. That would be really, really good. We want that. What we don't want is yields to come down, and then we go back into a reinverted yield curve because the Fed was too late, and then we end up triggering a recession. Now, that's moving way too far down the curve, and I'm sorry to talk, you know, like I feel like I'm speaking in tongue about this. So I'm just going to try to simplify this just to send this point home, okay? Go to meetkevin.com, join the courses on building your wealth, use coupon code POPE. You can see the POPE's nod, I almost said COPE, POPE, POPE's nod on Instagram. You can follow me there or on Twitter. You can see some pictures on Instagram from Hawaii. But anyway, let's focus for a moment on rephrasing that and get into some of the other data here. That coupon, by the way, we've got another, like, week and a bit before that comes to expire. So there's no major rush. But if you want to join the Alpha membership and see what we're talking about every day and what stocks we're looking at, you can always do that over at meetkevin.com. Now, and keep in mind, you know, I'm not always perfect. I mean, I think the SpaceX calls were great. The calls on AMD and Marvell and all of that in the near term were great. The last, like, I feel like five QQQ price targets we've had, we've hit them all. Just got a little too excited over this last week here without recognizing that SpaceX was going to drag the QQQ calls down. So we missed that by about nine bucks on the QQQ for our near term target. A little bummed about that. But that's also why I like studying what's going on in the market so we could talk knowledgeably. Let's make sure this is still recording. Yeah, we're still recording. Like, okay, I got knowledgeably about what the heck is going on out there. So to simplify this, and then we're going to get into a little bit more data and look at this from another point of view. Basically, the money vacuum is going on, right? You've got a lot of companies spending a lot of money chasing tokens when we don't actually really need that many more tokens. We're kind of plateauing out with the usage of artificial intelligence in terms of what it's good for. Yes, it's fantastic for coding. Yes, it's fantastic for cybersecurity. But beyond that, we sort of cap out. And even in coding, there's going to be a cap out. There are only so many databases every engineer can make. And eventually, those have to have a usage and they have to prove profitability. And when you've got Satya Nadella going, yeah, go ahead, open AI. Go to anyone else. What you really have is companies like Microsoft saying, hmm, all this crap is commoditizing so fast that we just need to be the one who actually profits from AI rather than goes all in on all of this CapEx. Now, they're still spending money and blowing money on CapEx, but that's going to flip. And the beauty about when that flips is Microsoft's all of a sudden going to look really profitable again. Now, that's not the case now. Microsoft's stock was down like another 3% today. That's okay because right now they're still spending. Yeah, down 3.18%. But what will happen in the future is companies like Meta and Microsoft will actually turn around and be like, look at how much money we make. And people are going to be like, wait, I thought you were blowing all your money on CapEx. And then people are going to go, or Microsoft and Meta are going to go, not anymore. We actually just make money through advertising and providing services, you know, productized services. Great. That's a cool long-term investment thesis for advertising plays or software plays. That's going to take time to play out though. In the near term, what we're most worried about is this dragon warning because Kevin Warsh is taking this approach of, yeah, I need to distance myself from Donald Trump pressuring me to cut rates. So what's the easiest way to do that? Oh, let me just look at the clock over here. Oh, I know. I'll buy time. Now, how is Kevin Warsh going to possibly buy time if he just says, oh, yeah, JK, I don't want to cut rates. Donald Trump will just harp on him. Not that that necessarily should matter. Oh, Kevin Warsh could just end up being another Jerome Powell where you just take it. Or you pull what Kevin Warsh did and you do a, we're going to consult five different task forces. And, you know, I think it's going to take them until the end of the year to really give me guidance on what's going on out there. So we're just going to be patient and take some time. Well, that time gives him the luxury of saying to Donald Trump, hey, as soon as the task forces get back, we'll work on lowering rates. But between now and then, you can actually make sure oil prices come down. You can make sure AI disinflation starts coming. Maybe some of the crazy CapEx investment starts slowing down. In that case, he's going to have a free license to cut rates. The problem with the dragon warning is how long can the economy sustain rates basically high while CPI is at the same level as the unemployment rate or higher, basically in the same spot right now. And then you end up crushing the economy. Now, not everybody thinks this way. You have the Hawks over at T.S. Lombard who are actually pro a potential rate hike. They think inflation is going to last years. I think they're totally wrong. Now, in fairness, I know there are some of you right now that are like, no, Kevin, I think you're wrong. But, Kevin, inflation is going to stay higher for longer. That's fine. I respect that. I highly disagree with that. I highly think we are going to see massive deflation. And the biggest concern that I have is that we have a Kevin Walsh who doesn't help pump us out of that because we will be in the dumps for years. I hope that doesn't happen. Now, the argument that the inflation Hawks have is basically, oh, this is good. Kevin Walsh taking his time and not rushing to cut rates is great. We were worried he was going to be too dovish, especially at a time where tech companies are taking on more leverage. And what we need to do is keep rates high to prevent them from levering up too quickly. That's why we need to raise rates to constrain AI spending. Now, that's fair. I get it. Like, if it keeps going like drunken sailor-style spending, sure. But if at the same time you stay hawkish on rates and the companies themselves start spending less money, then you get pressure down on pressure down, and you really rapidly U-turn the economy down. So, there are arguments here on both sides. The Dragon just says we're in an aggressive time. In addition to what the Dragon article says is that they talk about that right now the Bank of America bull bear indicator is sitting at a 9.2. And of their last 17 sell signals since 2002, the average loss for global stocks over the next two to three months was 2% to 3%, with a hit ratio of 60% and a max drawdown of 20%. So, you know, I personally don't think any of that is scary enough to run for the exits. But I do think it is enough information to say, okay, maybe we have to be careful betting on this short-term, everybody's going to believe in the disinflation narrative, and the stock market's going to keep going to the moon. And at the same time as a meme like SpaceX rules over, those probably don't align. Probably going to need some more patience. And the big thing that's next is Micron earnings. Now, if Micron misses on anything, one little thing, the stock will be down 16% or more. It'll be down like 30% overnight. There's no, like, and I don't play earnings, so I'm not making this bet here. I'm just saying, if I were a betting man, there's no way in hell I would buy calls for Micron. Now, famous last words, it could skyrocket the next day. Fine. I actually think Micron is relatively cheap. But, like, there's so much hope on this company that one little thing they say wrong, and that stock tanks. And it'll tank really fast. Now, keep in mind, I have a full Micron video that I made at the end of last week. I highly encourage you to watch it. It was basically in the same setting here. And, you know, it made it very clear what the expectations are for the company. At the same time that Microsoft, Meta, and Walmart are starting to limit their artificial intelligence usage. We talked about that. We also talked about the core components of why Micron is making so much money right now. Why they're sitting at a 1.1 peg, which is very cheap. But what it requires to stay that cheap. All of that is in the other videos. So, that is more than a Micron video. So, that is, like, your AI market video. And I highly encourage you to watch it. Rest in peace to Alan Greenspan. This is like losing a Jerome Powell of the prior generation. So, a little sad. The guy was in, I mean, he was 100. So, you know, good for him on that side. But, you know, he was, if I have it correct, he was in his chairmanship from 1987 through 2006. So, the guy saw some stuff over at the Fed. But, anyway, that's what I got. So, thank you so much for watching. Consider subscribing to the YouTube channel. Follow me on Instagram at me, Kevin. Follow me on, actually, Instagram is at realmekevin. And, yeah, no, no, no, that's right. Instagram is me, Kevin. X is at realmekevin. Yeah, gold's down again over here. And, yeah, consider sharing the video. Ah, yeah, gold really peaked out right there when we said it would after that Kevin Worsh confirmation. That was a good call. But, I can't get them all. My goal is just to be right more than I'm wrong. As everybody, right? Thank you so much for watching. We'll see you in the next one. Goodbye, good luck, and enjoy your day.