Right now the market is mainly worried about a recession in the economy. Lower income consumers are tapped out. Mortgage rates 6%. Prices are up crazy % amounts since 2019. It’s tough out there.
You’d imagine that’s what the data is reflecting.
No, it’s actually showing resilient. The economy is outperforming right now and Fed officials expect that to continue. The labor market is booming. Consumer data is booming!
It’s weird to go from saying times are tough and then at the same time the data is proving resilient.
Let me introduce you to the k-shaped economy. This is where different parts of the economy are behaving differently. Right now the “amazing spending” we see in the economy is coming from: The higher income consumers & businesses
- Ai (with debt or circular capital arrangements)
- Wealthy households, who own a lot of the stock market, which the stock markets recent bull market came on the ai revolution.
Even the labor market is booming but it’s very centralized:
- Medical
- Public service
- Construction (shout out ai data centers)
So with how the data is looking the Fed doesn’t want to cut rates. Inflation is above target and the jobs market is fine right now.
Kevin Warsh (Trump’s Fed Chair Nominee) has views that support shrinking the feds balance sheet, less Fed intervention, no more Fed come bail out markets every little scare, let markets figure it out. In return he supports cutting rates.
Markets hear that and think about:
- How overly leveraged they are (margin, loans, debt, derivative, speculative positions, yolo bets, etc) and start adjusting portfolios due to liquidity concerns: Deleveraging. This is risk off, take some chips off of the table kind of views for markets.
- Ai is stupid expensive and we don’t even know that it’ll be as good as we think. Companies are lighting cash on fire (kinda like the EV story. Most of those companies stopped making ev’s by the way LOL… I am a bit more optimistic on ai but as far as timelines.. it’s very tough to tell a “when?”. Right now Amazon, Meta, Microsoft, Nvidia, and Google are spending hundreds of billions of dollars on their ai related capex. But what happens if funding dries up? What if it never proves profitable or it takes a lot longer than previously thought? Well ai stocks may be overvalued in that case. So far, AI has been what’s pushing the market to where it is now… oh yeah that’s also in turn caused the wealth effect for wealthy people to continue spending.
It appears that is the wall of worry right now: Liquidity & Risk. Leading to Deleveraging.
It’s never a bad time to:
- Lighten the load of riskier trades
- get out of debt
- Build savings
- learn new skills
- If you are going to own stocks then to own stocks with solid fundamentals with a 10-20 year holding period. That doesn’t mean they’ll go up in a straight line though.
As just some random guy who isn’t a licensed financial advisor, not giving financial advice, and not making ANY recommendations.
This could be risk for crypto in my opinion. Especially some of the riskier plays out side of Bitcoin. I think of Bitcoin as the “base crypto play”. Everything else in my opinion is like a leveraged Bitcoin play. Bitcoin and Ethereum are some potential’s on my watchlist but everything beyond those two cryptos I look at as too risky in this environment. You see how fast things can move right now, Crypto is the Wild West. Unregulated. Much easier to manipulate. What happens if MicroStrategy gets margin called?? Bitcoin would likely tank… but that’s only the base crypto play. As the saying goes “A rising tide lifts all ships” and so that in reverse is also true.
This commentary is for informational purposes only and contains my personal opinions that can be wrong.