The market is pricing perfection and disaster

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Good evening,

A lot of wishy-washy headlines calling AI a bubble that's popping. I figured I’d share my thoughts on that and overall big pic themes going on.

Right now market is telling two stories at once. Eventually, it’s going to pick one.

Lets dig in…

5 Big Picture Themes

Gold and Stocks Both Ripping

Gold hit $4,200. Silver broke $53. Dow made records. Same day.

Normally when stocks rally, gold falls. Investors pick one: risk-on (stocks) or risk-off (gold). Not both. When both rip together, something deeper could be breaking.

Investors don't trust the dollar anymore. They're buying stocks because they believe in corporate earnings growth. They're buying gold because they don't believe in the currency those earnings are measured in.

Ken Griffin (Citadel CEO) nailed it: gold is becoming the safe harbor the dollar used to be. For decades, when shit hit the fan, people bought Treasuries and dollars. Now? They're buying gold instead. Central banks bought 415 tons in the first half of this year alone - they're diversifying away from dollars. September saw $33 billion pour into gold ETFs, the biggest monthly inflow ever recorded.

This means the world is losing faith in the dollar as a store of value. Not because the economy is collapsing though… because they think we're printing too much money, running deficits too large, and debasing the currency.

Fed Flying Blind on Next Rate Cut (as of now)

The white House said today it could be gone. 

The Fed has never made a rate decision with a full month of missing data. Markets price 65% odds of a December cut.

No jobs report. No CPI. No retail sales. The Fed makes decisions based on what happened last month. Right now they're missing the entire picture and they have to decide anyway.

Markets are treating this like a temporary inconvenience. It's not… it's a setup for policy mistakes.

Junk is Beating Quality

The Russell 2000 is beating the S&P 600 by 8 points since April. Both track small-cap stocks, but the S&P 600 screens for profitability. The Russell doesn't.

The Russell has 40% unprofitable companies. The S&P 600 has around 22%. The index with more junk is winning.

When the worst companies outperform the best, fundamentals matter barely anymore - only momentum does. Investors are chasing volatility instead of earnings. That happens at market tops.

Nvidia's Moat is Leaking

Nvidia had near-total dominance in AI chips the past 5 years. That's changing.

AMD projecting $100B+ in AI chips by 2030 with double-digit market share, that comes directly from Nvidia's plate. SoftBank just dumped its entire $5.8B Nvidia stake to fund OpenAI instead.

The AI infrastructure spending is real, but the monopoly is fragmenting. More players competing means lower margins, more volatility, and harder to pick winners. The easy AI money (just buy Nvidia) is over.

Fed Will is Printing Again

The Fed spent the last few years draining cash from the banking system to fight inflation - selling bonds, shrinking reserves. Bank reserves are now at levels similar to right before the 2019 repo crisis.

In September 2019, overnight repo rates spiked to nearly 10% because the Fed drained too much. Banks stopped lending to each other. Credit markets froze. The Fed had to inject emergency liquidity.

We're back at those same reserve levels now. The New York Fed just announced they're restarting bond purchases in December to pump liquidity back in before something breaks.

Here's why this matters: banks use reserves to settle transactions and lend to each other overnight. When reserves drop too low, banks hoard cash instead of lending it. Overnight rates spike. Repo markets seize. Credit freezes across the economy.

Add the government shutdown disrupting normal Treasury issuance patterns, the usual predictable flow of bills and notes that keeps markets stable and you've got the same fragile plumbing that preceded both 2019 and 2008.

The Fed is fixing it quietly. Markets aren't pricing in how close we got to a repeat.

The Pattern

Paper wealth soaring. Real economy struggling. Gold and stocks both at records. Junk beating quality. Fed making rate decisions blind while quietly printing again.

The market is pricing perfection and hedging for disaster at the same time. That's the canary here.

Stay Curious

- John