Markets are About to Do the Unexpected

Investor sentiment has rarely been as low as it is right now. Despite the fact that the stock market is basically back up to all-time highs, the fear and greed index is still reading extreme fear territories. And it's not for no reason. There are plenty of reasons to be pessimistic about the economy and the stock market right now. Everything from fears about an AI bubble about ready to crash, to the fact that the jobs market is starting to look very bleak with this being the first year with multiple negative months since 2020, and the fact that delinquencies on debt from student loans to credit cards to auto loans are spiking. Many people, rationally, are fearful about the near future, financially speaking. With that in mind, is there any reason to be bullish? Is there any data that makes the outlook optimistic? Because it's all fine and good to just say, be greedy when others are fearful, but what if the people are fearful correctly? Because it's very easy to say, be greedy when others are fearful, but if you're anything like me, you probably want a little bit of data going into that decision if you're going to act on it. So the first thing that you probably haven't seen in the news lately is that retail sales have increased about 4% over the past year, and that's despite the fact that consumer sentiment has dropped off a cliff during that period of time. This is why consumer sentiment, or even a retail investor sentiment for that matter, is often considered to be a contrarian indicator, because people are the most fearful or the most greedy at the absolute bottoms or the absolute tops, when in fact, the data showing what people are actually doing is showing that people are actually spending more. But oftentimes, individual behavior can be financially reckless, let's just say, for the least. It's not just individuals, though. It's not just retail sales. When we look at spending by large corporations, we see CapEx spending from tech and tech-related stocks is off the charts right now. And again, many people might look at this as a sign of a bubble, but typically, if a market is at the top of a bubble, you don't see Berkshire Hathaway taking a stake in one of the companies that is doing some of the most spending in that area. More often than not, Berkshire Hathaway taking a large stake in a company near the beginning of big bull markets, not at the end. But it's not just investor behavior. If we take a look at monetary policy, we now see that interest rate cuts by the Fed are now priced in at an 87% chance of happening at the next meeting. We're moving forward into an environment that is largely an easy money environment. For the past couple of years, things have been tight. Ever since they unleashed all that inflation from all the money printing, for a couple of years, they were trying to pull back on that. They didn't really do the best job, but they were raising interest rates. They were lowering their balance sheet, and they did drain quite a bit of liquidity out of the system. That has come to an end now. Come to a screeching halt. They have pivoted. They have reversed course their cutting rates and ending the tightening phase. Looking at the implementation notes from the last FOMC statement, we see that beginning on December 1st, Federal Reserve will roll over at auction all principal payments from the Fed's holdings of Treasury securities, which means any Treasuries that get paid back to the Fed, Fed will take that cash and just go out to the market and buy more Treasuries. They won't let them bleed off their balance sheet anymore. But it doesn't stop there, because again, just starting on December 1st, they will also be reinvesting all principal payments from the Fed holdings of agency mortgage-backed In other words, all the mortgage-backed securities, as they get paid off and bleed off the balance sheet of the Fed, they're going to take all that extra cash and also roll that into T-bills. This is taking liquidity from one area of the market, mortgage-backed securities, and injecting it into the broader economy overall through decreasing the cost of government borrowing, and therefore, the government can spend more money, print more money into existence easier. And it's not just the Federal Reserve doing this. Central banks all around the world have recently stopped raising rates or started cutting. So from a monetary policy standpoint around the world, we are entering into an easing cycle where liquidity is increasing. And if you've wondered why gold has skyrocketed like 100% over the last two years or so, it's because it front runs monetary policy. Or more accurately, it's because the people who are buying gold, driving the price high higher and higher, know that they are about to change monetary policy. Next up on the list, we have wages. There was a period of time where real wage growth was steeply negative, which is to be expected. This is how the Cantillon effect works. When new money gets printed, first it gets paid and goes to the hands of whoever is closest to the money printer. So it goes to the government first, then it goes to the politically connected. As that money gets spent the first couple of times from one person's bank account to the next, prices have not yet had the time to adjust. They haven't had the increased demand from the increased amount of money in order to get bid up. But as that money gets spent through the economy, filters its way down into the paychecks and the wages of individuals. Prices have now gotten bid up, which means by the time people get raises and get those wage increases, prices have already run away from them. And so when you adjust for that inflation, the real wage growth is negative. However, for 29 months now, real wage growth has been positive. Now again, here you have to trust that the official inflation numbers they're using to adjust nominal wages are accurate and that is very easy to contest. And I'm with you on that. But what is also true is that if you compare what's going on now to what was going on before, at least it is much better. So it's possible, maybe even probable, that wages are still not quite keeping up with inflation. But they're getting a lot closer now than they were a couple of years ago. Now, even though wage growth has been increasing, a lot of people are still concerned that everybody is still losing jobs. The problem with that is that initial jobless claims are actually moving down. They're at their lowest level right now since August, which means if everybody was actually getting laid off right now, this number would be moving up, not down. Now, the next big piece that a lot of people are mostly not going to look at is corporate bond sales, which so far in 2025 just hit a new record at about six trillion. It may not be apparent on the surface why that would be a bullish thing for the economy or for markets, but what are corporations going to do with money that they borrow? They're going to spend it. And corporations do not spend money the way that individuals do. Yeah, you might have some executives paying a little bit more for some private flights or first class upgrades or renovation in the corner office suite. But for the most part, corporations are looking for a positive ROI on their money. And when they borrow, they have to pay interest on that, which means they're planning to spend that money in a way that will make them more than what they owe as the entire point of running a business is called profit. And that's what businesses try and do, which means when you see corporate borrowing skyrocketing and hitting new records, it also means corporate spending on things that are planned to make more money is also going to go up. This means things like spending on R&D, on hiring, on building new factories, buying new properties, increasing production. These are signs that you see coming out of a recession or coming out of a difficult economic time. These are not things that you tend to see right at the beginning or at the top. At the beginning or at a top is when you start to see everybody pull back on spending, hunkering down for the hard times. And so while it may seem that everything is about ready to implode and collapse, it might just be your cognitive bias looking for evidence that matches what you think is true. I'm not making the claim here that everything is beautiful and hunky dory and bury your head in the sand and just pretend everything is going to be OK. I'm presenting evidence that maybe the near financial future might not actually look like a catastrophe. And here's the most important part. Markets climb a wall of worry. And so if you are expecting everything to implode and you have positioned yourself to only be able to profit if you are right, you are setting yourself up for failure because the mark of a good investor is not how many times you are right versus how many times you are wrong. It is all about how much you make when you are right versus how much you lose when you are wrong. So look at the evidence and invest according to what is happening, not what you think should be happening. That is at least as long as you actually want to make money, which at the end of the day is actually the goal of investing. As always, thank you so much for watching. Have a great day.