The "Dragon" Stock Market Crash is Starting

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 or really the dragon warning. It's just often called a red dragon because well it means stocks end up going red. We're gonna talk about that. We're gonna 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 dollars 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 dollar 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 there's like 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. That's not great at the same time as you have liquidity concerns. Look at for example what's happening over at Google. We'd already previously heard about the 80 billion dollar stock sale but the timing of it of that 80 billion dollar stock sale actually really matters. See Berkshire Hathaway underwrote about a 10 billion dollar 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 dollars that Google is trying to move into the market with their stock sale. 30 billion dollars 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 dollars of Google stock dump so Google can raise money for their artificial intelligence endeavors. But on top of that they're at the money 40 billion dollar portion of begins in the third quarter as well which is July August September. So you potentially have this overlapping 70 billion dollars 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 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 gonna 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 2 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 gonna see even more of a premium for SpaceX level bonds and 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 from 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 can make a chip together you guys gonna 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 memory 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 the thing freaking tanks 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 Q's 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 Q's 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 advanced 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. Now 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. 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. Anthropic 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 a little more 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 Sharzer probably screwed that name up. Sorry. But anyway he just left Google to join OpenAI. 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 Walsh gets appointed. It signals the top for gold the top for some commodities. But it also hosts the Iran war ceasefire at the beginning of April. What do we get. We start getting a bear flattening. Remember on. 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. OK. Iran war starts. That sucker goes all the way up to point seven one which is like well in shock territory. It's often the market starting to say crap. We're possibly going to have to print money because we're going to get driven into a recession with the close straight of our nose 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 there's still obviously up from where we have them. We look at oil prices right now 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 when we dropped to like 59 there we kind of dragged 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 percent 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 A.I. spending isn't stopping yet because A.I. 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. Look at what's happening with SpaceX. Now again you get bailed out of this by oil falling and ideally A.I. 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 re-inverted 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 going to try to simplify this. Just to send this point home okay. Go to me Kevin.com join the courses on building your wealth. Use coupon code Pope. You could see the 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 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 in 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 gonna 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 but knowledgeably. Let's make sure this is still recording. Yeah we're still recording. Okay good. Knowledgeably about what the heck is is going on out there. So to simplify this and then we're gonna get into a little bit more data and 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 got Satya Nadella going yeah go ahead open AI go 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 gonna flip. And the beauty about when that flips is Microsoft's all of a sudden gonna look really profitable again. Now that's not the case now. Microsoft stock was down like another 3% today. That's okay because right now they're still spending. Yeah down 3.18%. But what'll happen in the future is companies like Meta and Microsoft will actually turn around be like look at how much money we make and people are gonna be like wait I thought you were blowing all your money on CapEx. And then people are gonna go or Microsoft and Meta are gonna go not anymore we actually just make money through advertising and providing services you know productized services. Great that's that's a cool long-term investment thesis for advertising plays or software plays. That's gonna 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 a 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 gonna consult five different tasks for task forces. And you know I think it's gonna take them until the end of the year to really give me guidance on what's going on out there. So we're just gonna be patient and take some time. Well that time gives him the luxury of saying to Donald Trump as soon as the task forces get back we'll work on lowering rates. But between now and then he could actually make sure oil prices come down. He could make sure AI disinflation starts coming. Maybe some of the crazy CapEx investments start 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 TS 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 gonna 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 Warsh 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 Warsh 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 you 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 nine point two. This is a very high level. This is an extreme bull positioning. Their cell trigger triggered last month and of their last 17 cell signals since 2002 the average loss for global stocks over the next two to three months was two to three percent with a hit ratio of 60 percent and a max drawdown of 20 percent. 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 OK 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 at the same time as a meme like SpaceX rolls 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 percent or more. It'll be down like 30 percent 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 all like there's so much hope on this company that one little thing they say wrong in that stock tanks and it will take 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 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 one point one peg which is very cheap. But what it requires to stay that cheap. All of that is in the other video. So that is more than a micron video. That is like your AI market video and I highly encourage you 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 real me Kevin. And yeah no no no that's right. Instagram is me Kevin. X is at real me Kevin. Yeah gold's down again over here. And yeah consider sharing the video. Yeah gold's really peaked out right there when we said it would after that Kevin Wars 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 the next one. Goodbye. Good luck and enjoy your day.