Why This Correction Is Worse Than Liberation Day

Transcript

Let's talk about what markets are doing here, because we've had the worst month in a year. Um, Ron, the S&P closed at what? 6,368-ish on Friday. It's the fifth straight weekly decline. That is the longest losing streak since 2022. Uh, the Dow was down 1.7% Nasdaq is down more than 10% from the October peak at this point. Year-to-date, I believe the S&P is down roughly 7%. Um, the VIX has continued to be elevated. And Moody's said their recession model is at a 50% probability.

Um, Goldman has raised recession odds to 30% and others like Wilmington Trust, et cetera, are following. Part of the problem here as well is when you have a supply shock, the standard monetary policy tools like we can change interest rates, but that does not create more oil. So, Ron, let me ask you as we're looking at all of this negative information coming out of the market, it appears to be pricing in a prolonged conflict. If things proceed sort of as you are predicting, what is the downstream impact? What should we be expecting from here?

Uh, yeah, the QQQ's are in correction territory now. I think the downside could be something like 6,000 6,200 in the S&P or 15% correction, something that pulls you back to the liberation day valuation lows. Um, you know, this is more serious than liberation day, though. Because you have factors outside control, such as the price of oil, which is inflation. 53% of the S&P market cap depends on that. You've got consumer spending that's pulling back. Consumer discretionary names uh will get hurt. And already you're seeing commodity prices like wheat, uh, corn, agriculture going higher, which creates more inflation at home.

So uh yeah, I think I think the first time I said there was a something burger was when this broke out like 5 weeks ago. Like this is a you know, war is highly inflationary. It's just not a good set of background conditions, you know. I'll reiterate what I said before, you know, you should stay small, have excess cash. This is not a market where you want to be a hero. What I see are continued deleveraging from institutions and retail investors. I also see a lot of denial and complacency on Twitter. I see people uh talking other people into buying these stocks that are down 40 to 50% and that they're trying to buy the dip. The dip keeps dipping. They're referencing

fear and greed indicators, which really don't have any relevance given the broader backdrop and structural forces and facts around the Strait of Hormuz. This is like a sentiment reflex kind of thing. These are legitimate issues. So, uh at the same time, there's starting to be some value emerging, you know. It's not back up the truck, but I got picked up uh Berkshire Hathaway last Friday. It's got a price to tangible book of 1.3. I picked up Microsoft. Uh I picked up Meta at 17 and 1/2 forward PE. So, I think there's a flight to safety to US assets.

I think names in large cap tech, but not all of them. Not all of them by any stretch. Uh Netflix is still expensive. Tesla's egregiously overpriced. Um but there are pockets, right? Look at Micron. Look at the leaders in the market that had the highest relative strength. They've rolled over. What is that? Micron, Lam Research, Bloom Energy. The industrials complex, which I have shorts on, that cracked today. Names like uh Caradine, Caterpillar, John Deere. That's a bubble. That whole category is a bubble. So, this bubble existed before the conflict and people were bold up on Goldilocks and now you have this torrent of negative information hitting markets. So people

are trying to adjust. They've got view up orders in and there's a just a simultaneous de-grossing. So that whenever you see a market rally, it gets sold off. You had a gap up today, it gets sold off. People are being trained to uh sell rips taking that advantage to to to de-gross. Biotech is rolling over. Emerging markets are getting whacked by stronger dollar. So I'm sorry guys. I wish I could be more bullish for you. I was bullish I think up until 5 weeks ago. But now I think it's just a very uh caustic environment for risk assets.

Yeah. I mean it's a flight to It's not a flight to safety. I mean it is, but it's also a flight to fundamentals and that's what I'm hearing. Right? For the for the right companies with the right fundamentals when sentiment is down, it actually is a pretty decent setup. So I think you just need to double down on fundamentals acknowledging that there's going to be some near-term macro stress. How do you feel Brahm about Bitcoin, right? Like Bitcoin's actually holding pretty well at 66K here compared to some of the carnage elsewhere in markets. It's kind of chopped sideways. You know, we I was going to say we talk about the equities market here, but from a crypto perspective, it's actually the one thing that's been holding up decently as this has started. Why do you think?

>> I think a lot of this crypto Yeah, crypto Bitcoin's held up quite well. It's it's it's really notable to say that. Uh I think a good chunk of that is just STRC flows. That's it. So Michael Saylor launched another product. It's being heavily marketed. We had a new client join today. Look at his portfolio. He's got STRC. He said market sell. We're getting out of that one. And you know, that's creating inflows to Bitcoin. This is not a healthy bid. So it's it's hard for you know, risk assets to run this. You know, when it comes to finding finding good names and with good fundamentals, it's just it's just very difficult to find those assets.

This is my day job. That's what I do. It's my night, weekend, all that like it's like Berkshire Hathaway is not bad. It's not a screaming bargain. You know, there are some opportunities here and there, but the the tides around these companies are under pressure. Like software, software you still got companies like MongoDB and Data Dog that have 50, 60 arm 60, 80 times earnings. It's hard to find that one nugget that can rise above when the entire theme is under pressure due to valuation re-rating because of higher interest rates.

So, if I'm hearing if I'm hearing you right, if we're talking like mag seven, you think now is when the chickens start to come home to roost for a lot of like the AI hyperscalers who have been spending a huge amount on CapEx, like impairing their forward cash flow, no longer doing buybacks, right? Like is the rubber meeting the >> Yeah, all of all that was a lot I mean, they were amongst the first to feel the pain. So, they took their lumps earlier. Uh and there's some value in some pockets of that category, but not across the board. You have to pick and choose your spots.

So, in the crypto space, is you know, crypto is very responsive to liquidity and gold has sucked out a lot of liquidity. Oil's now sucking out a lot of liquidity, but it's still been uh pretty resilient. And and again, when you step back, and we should talk a little bit about the Clarity Act, whether Clarity Act goes or not, I think if it does go, that's going to be a very, very nice tailwind for the asset class. But we couldn't imagine a better regulatory environment. I mean, I was at the Digital Asset Summit last week. The number of new faces coming into this space, coming from institutions who do care about fundamentals, um it was profound.

I think it was most sign-ups they've ever had, right? And so, yes, macro is is macro and liquidity, when you when you're a crypto investor, you have to be very mindful of. But, there are these underlying fundamentals that are and macro themes behind the scenes that are coming together very nicely. So, when when those black clouds lift, I think this asset class has shown that it's here to stay and that it's uh it's pretty well positioned coming out of this.