Is Wall Street ignoring the true risk in markets? Michael Gayed joins Maggie Lake to explain why investors are watching the wrong risk signals by focusing on Trump’s tariffs and why small caps, Japan, and junk debt may hold the real clues to what happens next.
In this in-depth conversation, Michael breaks down:
- Why small caps are halfway through a lost decade
- How Japan’s monetary policy and the reverse carry trade could trigger a global credit event
- The dangerous disconnect between small caps and junk debt spreads
- Why passive flows into mega-cap stocks are masking real economic weakness
- How a bullish or bearish tail event could resolve these market distortions
- And why gold may not behave like a safe haven in the next crisis
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Michael Gayed 0:00
The market being defined by a large cap, market cap waiting risk being defined by Trump and tariffs. I think it’s the opposite. I think the market is small caps, and I think the risk is Japan.
Maggie Lake 0:16
Hello and welcome to wealthion. I’m Maggie Lake, and today I’m joined by Michael guyad, Portfolio Manager and publisher of the lead lag report. Hey, Michael, thanks for being with us. I
Michael Gayed 0:25
always like talking to Maggie only because I have no one else to talk to during the
Maggie Lake 0:30
day. I find that very hard to believe, Michael. I see you going back and forth with tons of people. And the thing I love about it, and why I’m looking forward to this conversation, is that you are someone who is not afraid to have a point of view and not afraid to push back or buck the consensus or group think out there. So I thought that would be great framework, right? Let’s talk about where you think in this what you think or where you think investors are missing the point when it comes to both risk and opportunity. So we’ll start with the risk side of things, I think, because it feels like that’s what everyone’s talking about. And we’ve seen a lot of angst, especially around tariffs. Equity markets have been under pressure or coming suffering from bouts of selling sentiment. Numbers are starting to head south, both consumer and in the sort of C suite and CEOs, and the common reason we hear is tariffs. Are you concerned that tariffs are going to deliver a hit to growth and earnings? Well,
Michael Gayed 1:32
first of all, let’s let’s talk about the crowd for a second, and let’s be very clear, the crowd is right on average, but wrong in the extreme. And I’d argue there is an extreme in the idea that the stock market has been in a bull market. Last I checked, the majority of the stock market, in terms of the number of stocks, is small cap. And I’ve been on this theme for the last year and a half, two years. And I don’t know if anybody’s noticed, but small caps are halfway through a lost decade. They’ve gone nowhere, if you look across 2000 right? Obviously, the S, p5, 100 and market cap waiting has had very different experience in this run. But it’s like I keep saying small caps hold the key for a reason, because this is supposed to be what’s really reflective of the true state and health of the US economy, because these are the small businesses that drive economic growth, that drive economic activity, that drive labor, and the market’s clearly saying small caps suck. That seems like a big risk nobody’s paying attention to. I’ve been hammering it for the last again, year and a half, two years and hasn’t mattered, right? At least not yet. Smoke. Apps have been doing that before tariffs, right? Like so I get it. A lot of people are seeing the tariff volatility and then seeing that translate into equity volatility. Is there a connection? Yes, sure, but that doesn’t explain the huge divergence in concentration among the top names versus everything else, because that’s been an ongoing process pre Trump. That’s number one. Number two. I find it funny that everyone’s focusing on tariffs, and if you look at the end all right, which I talk about, ad nauseam, because of that reverse carry trade thesis that I continue to believe is is still very real. The Yen started rallying early January. If the yen keeps rallying, that tends to mean that there’s a disinfect or deleveraging that can happen as money repatriates from the borrowed capital from Japan that goes into risk on assets and the currency side now impacts those returns. So is it really tariffs, or is there maybe a stealth reverse carry trade starting to take place? It’s just a deleveraging because the Yen is strengthening, and some money that’s been borrowing from Japan is worried about the currency conversion. They’re hurting them as the yen improves, right? So the point of me saying all this is that, again, the crowd is right, on average, not the at the extremes. I think there is an extreme view on what defines the market, and there’s an extreme view on what defines risk. The market being defined by a large cap, market cap waiting risk being defined by Trump and terrorists. I think it’s the opposite. I think the market is small caps, and I think the risk is Japan,
Maggie Lake 4:21
okay, so on small caps, you are right that you know, when we talk about the real economy versus the market economy or the financial economy, that certainly was represented by small caps, do you feel like there are just some zombie Small caps out there? Is this a cyclical small cap stuck and maybe reflective of some economic malaise we haven’t identified, or is this just a new game where you’re not really having that same sort of representation in the economy to some of these small caps? Is is it different now?
Michael Gayed 4:58
Is it different this time? Yeah, fame of
Maggie Lake 4:59
the four. Famous question, and it never is, but it’s always worth asking. You know,
Michael Gayed 5:04
there used to be this saying that a rising tide lifts all boats. I don’t know what happened to that. I’ve said repeatedly again I’ve been wrong, because the market just hasn’t cared about it. The market being the S and p5 100 most people’s eyes. I’ve been saying, when a rising tide does not lift all boats. Everybody drowns, and I get accused of being a perma bear because I’m saying that, but it’s clear as day that you’re talking about two totally different markets. Now you can argue that that’s a feature, not a bug of market cap waiting. I think it’s actually very much a bug, because that that ends up kind of self correcting, because as more and more concentration gets driven by a select number of companies, the Pareto Principle within the Pareto Principle, 8020 within the 8020 it actually creates a hell of a lot of systemic risk, because then the entire in quotes wealth effect is being driven by idiosyncratic dynamics with a select number of large companies, which means the moment the S, p5 100 goes down, 1520, 25, 30% and it forces the Fed to pivot. Who is the Fed saving? Is the Fed saving the stock market or the drivers of the market capital weighted averages, meaning they’re just saving individual companies at the very top while everyone else largely struggles. Now, having said that, I do believe that let’s talk about the positives for a second. I do believe that deregulation is ultimately going to be beneficial towards small caps. I do believe that tariffs, you can argue, should benefit small caps, because it’s about trying to force some money into the domestic economy from international exports, right? Yes, it’s inflationary, sure. But at the same time, I do think that there’s a, there’s a longer term argument for small, mid value, non tech, to be sort of the next leader in under the Trump administration. But clearly it hasn’t happened yet. So
Maggie Lake 6:55
when you’re talking about, so for folks listening just to, just to clarify a couple of those points. When you’re talking about, okay, small caps represent the US economy. They’re thinking, Oh, well, the S p5 100, 500 biggest companies. But you’re saying because of market weight, that’s kind of an illusion. And actually, the same drivers of the NASDAQ are in the S P of 100 and all of the concentration, yes, there are 500 companies, but really, everybody’s jammed in Mega tech, right?
Michael Gayed 7:22
And Bill, you see that even from international allocations, it’s like, it’s not just us flow that’s going to the top names. It’s a lot of sovereign governments,
Maggie Lake 7:32
right? And that’s the other point that, that the rally you’re sort of making with this argument is that the rally we’ve seen, while some people say, well, stock market’s doing great. So the US is doing great. So the US economy is doing great, not necessarily it’s more reflection of that’s where the capital flows have been, right, and the returns have been good for that capital. But it doesn’t that’s not necessarily reflective of the real economy, even when you’re looking at the S, p5, 100, no. And you’d argue
Michael Gayed 7:57
that the, I mean, the stock market never really reflects the real economy until it’s too late. I mean, that’s the stock market. The stock market is supposed to be a leading indicator. But I go back to how do you define the stock market? I would argue, if you know, small caps are much more important and and powerful leading indicator to the state of the economy than large caps. Now this is it’s more than just sort of the tech versus everything else argument. So that large caps do have the benefit of these passive flows, which have nothing to do with the market being a discounting mechanism the future. It’s just mechanic small caps don’t get the same benefit, which why I go back to I think small caps are much cleaner signal of what’s actually really happening. Again. I’m not saying that as perma bear. I want to see small caps lead on the upside, because I think that’s that would really confirm that. Yeah, you know what? There’s some big catch up potential us. Economy is gonna be great, and, you know it’s gonna be a phenomenal next several years. But again, we’re halfway through a lost decade for small caps. Yeah, it’s
Maggie Lake 8:52
been, it’s been so tough if you are specifically in small caps. So I like that you’re seeing opportunity there. And I want to get to that. So with the Japan, let’s talk a little bit about why, maybe Japan that’s the problem. So how do you see this playing out for people who are not I mean, I think anybody who kind of lived through that summer swoon we saw should have an idea. But what is that the reverse yen carry? What happens in that scenario? Spell that out for people who may not always be looking at currencies.
Michael Gayed 9:23
So I’ll give you a good this is a true story. So I you know oftentimes on X, on that, lead, lag, report, persona, loudness, acts or not, I’ll notice that people are engaging positively on content I put out right. One of my clients said to me, I’m very good at making noise, and it’s better to be talked about than ignored in the game of trying to get attention for a business or whatever you’re trying to accomplish where career wise. So yeah, and notice people are engaging positively. And I’ll send usually, a direct message saying, Listen, I appreciate positive engagement. Usually I get a response back saying, you know you’re great. Love your work. Follow. For a while, and then always send a message back, saying, hey, you know, let’s chat. What’s your email, right? And I do that because I do believe, as a general philosophy, that every relationship in life is like a lottery ticket, like you don’t know if it’s going to pay off or not. You don’t know if it’s going to be helpful for business, personal, whatever. But develop relationships. I just have connections with people, so oftentimes these are anonymous accounts, like, I have no idea who these people are. I just get their email addresses. I do a random zoom with them. It’s like most, and it’s why I’m on calls all day long, right? I do 15 zoom meetings on average per day, which sounds crazy, but is the absolute honest God truth, which is which tells you I was lying about you being the
Maggie Lake 10:37
only person. Well, I know, I know you well enough to that, you know, exactly.
Michael Gayed 10:41
So, so I was talking to a guy. His video is a little grainy. He’s from Honduras, and he was in his mid 30s. I’m just, you know, we should pause engagement. We’re talking camera to camera. So I said, you know, so how’d you come across some my content? He said, You know, I followed you because of this reverse carry trade idea. So what do you mean? This is honest about truth. This is an exact conversation. I had with this guy, mid mid 30s. So he’s a real estate property developer. Owns a bunch of properties in Honduras. He said he’s been doing the carry trade himself on a small scale, literally going to Japan, literally borrowing yen, converting it to his home country in Honduras, okay, and using that to buy property. This is a very small example. It’s like, just says, and then it dawned on me, it’s like, when he was saying this. It’s so much bigger than people realize. It’s like, how many small players have been doing this for so long? It’s beyond the institutional flows and all this stuff. You hear the all these stories and all this data, it’s like, no, this is so much more pervasive than people realize. So the whole carry trade concept is you get super cheap financing from Japan, which had negative rates, which had negative rates, right? And for the longest time, it’s source of leverage, because money can go anywhere. You get it in yen, you have to convert it to your currency, and then you can deploy that very cheap capital anywhere else in the world. And the world to make a spread, very simple. Now, because you’re borrowing in yen, if the yen depreciates and weakens, you like that, because it means, when you pay back the loan in yen, you can do the, you know, with less yen, because your currency stronger, right, right? The debt load is
Maggie Lake 12:17
fixed, no interest, and you get the who
Michael Gayed 12:19
wouldn’t want that all day long. Where was I in that period? Oh, that’s right, I was too busy struggling with my own strategies in a cycle that favor passive, large cap. But, but the point is that it’s like, okay, so then what happens when the when the yen appreciates? Well, money starts to get nervous that if the yen starts to run away, now that fixed yen debt that you borrowed to deploy elsewhere across the globe. Well, now it’s actually a heavier load on you, right? So what do you start doing? You start selling your risk assets, where you deploy that borrowed Japanese capital and pay back, in case the yen would really appreciate and that’s what happened during the summer swoon, that August 3, August 5 scare, when I got all kinds of people saying, Oh, the reverse carrier trade. You were right all along. I don’t know when it would happen, right,
Maggie Lake 13:03
but you just saw the imbalance. This is very important, and for folks, we’re gonna get you. If you’re sitting there thinking, Well, I’m not going to Japan and borrowing in yen and buying real estate someplace, this doesn’t really impact me. It does because you gave a very specific example. But the scale of this, right, is enormous, and it’s been going on for a long time. This was like the corporations, institutional investors, massive amounts of capital, were doing this, right well, and
Michael Gayed 13:29
are still doing it. And this is sort of the comedy of all these narratives. It doesn’t make sense to me at all. People are like, Oh, the reverse carrier trade got resolved in two days.
Unknown Speaker 13:38
How can it be resolved if it’s still profitable.
Michael Gayed 13:42
By definition, if something is there’s an arbitrary if something’s profitable, it’s
Speaker 1 13:45
still going on. It’s still profitable, as long as the UN doesn’t,
Michael Gayed 13:49
doesn’t, doesn’t super spike, which is the risk. So
Maggie Lake 13:52
we just got a little taste of what happens if that reverses. Right?
Michael Gayed 13:56
So, so who’s to say it can’t happen again? And that’s what I’m saying. It’s funny timing that everyone’s looking at tariffs. And meanwhile, look at look at the end. It started. It was a it was appreciating before this against the dollar, right? So it’s like, who’s to say? It’s really just not that. Now, by the way you saw the headline, I think Trump said Japan can some of the only ones that Japan really should no longer depreciate his currency against the US dollar, right? Because he’s on this, this kick of of, you know, non market forces causing distortion in currency markets, which cause distortions in pricing for exports imports. It’s almost like he wants it to happen.
Maggie Lake 14:33
Well, they do. The Trump administration wants a weaker dollar, doesn’t it?
Michael Gayed 14:39
Arguably, yes, but you gotta be careful what you
Maggie Lake 14:41
wish for other reasons, right there is, this is why it’s so complicated right now, because that knock on effect is, even though it may help in other areas that they’re focused on, it may have the effect of, that’s your concern, I suppose that. Yeah, I
Michael Gayed 14:55
think so, right? And it’s And now, of course, if you have that, that reverse carry trade dynamic, you’re gonna have you. Will drop this thing too. It’s like part of the thesis around the Earth carry trade, which is why I kept on showing the on X every time I show the the Japan flag with the Phoenix and then the Doctor Strange, holding the one outcome, pointing finger. I’m like, I’m ridiculously annoying almost every day, putting that out there that people have branded me as Doctor Strange on that. Why? What’s the whole Phoenix? Which I also wear right as part of my own gimmick, the Phoenix is the flight to safety trade. It’s the inverse correlation of treasuries to equities, which, by the way, if you haven’t noticed suddenly came back August 3, August 5, in that first reverse carry trade scare. If you haven’t noticed for the last four or five weeks, that correlation is acting inverse again, meaning when stocks drop and volatility rises, yields drop when stocks rise and volatility falls. Yields rise on equities, which is classic risk on, risk off, which has been lacking for the last several years. And part of the thesis is always that the reverse carry trade would spark that return. So again, I go back to is it tariffs, or is it behaviorally more about Japan, right? Right.
Maggie Lake 16:00
So the SO, LET’S so if, if, the if this happens again in Japan, is the catalyst? First of all, what’s what is the cause? Is it $1 devaluation or depreciation, maybe intentionally by the Trump administration? Is that the catalyst that creates that reverse yen carry trade or the Unwind? Is probably a better way to put it right. The unwind of the yen carry trade. Is that the catalyst? Or you’re looking for one. You just see it as a risk. You’re not sure what, what lights the fire? No, I
Michael Gayed 16:30
think, I think what really lights the fire, which is why I keep saying Japan will panic. I’ve been saying that also repeatedly. And if you have noticed the way that two year yields on Japan are rising most I think there are, oh, eight levels, which is ominous, by the way, because the reverse carrier tutor was one of the reasons that you had Lehman. There have been studies on this, right? It’s the deleveraging impact all that money, not my opinion. That’s just fact the if oil were to suddenly pick up aggressively, this has always been part of the thesis that becomes a very severe catalyst. Japan’s already faced with significant inflationary pressure. Is way behind on the monetary policy side of things. You know, it’s like if you were to mark to market, Japan’s entire financial system to their ggbs. I can promise you the the entire country of Japan is insolvent mark to market. It’s no different than during the regional bank crisis, when everyone was saying that regional banks are insolvent because of treasury yields and the speed with which they rose, no different than, Oh, wait, when suddenly there was a fear of the mark to market rule causing a panic, because everyone said, wow, these banks don’t have safe collateral, right and against their leverage, right? Same thing with Japan, but probably far worse, given how much debt they have as a system. So I think oil is a, still a very meaningful catalyst for risk, but it could be anything at this point that.
Maggie Lake 17:46
So what does Japan do when you when you say, they panic, what do
Michael Gayed 17:50
they do? I think so if, okay, so the whole thesis all along was that Japan imports all this oil full stop after Fukushima, they don’t really have much on the on the nuclear side, and they have to power the country, right? So it’s oil. Oil is denominated in dollars, so they have to convert yen to dollars to buy them back right on the Japan side. So if oil were to rise in dollar terms, and yen keeps weakening, oil priced in yen becomes much more expensive, because now it’s not just oil rising, but it’s the currency depreciation to have to buy more barrels. So it’s a double whammy right now, Japan cannot control the price of oil rising in dollars. They can’t Well price of oil. They can’t control the price of yen by supporting and causing a spike in the currency, which makes oil priced in yen at least, you know, maybe fall or rise slower, right? So I think the panic is that they’re going to have to raise rates very aggressively. I think that can break the the system for a moment. It’s the global margin goal. It isn’t a risk. It’s all credit event thesis, which I’ve been I was two years early. And I know people say, Oh, two years early is wrong. Okay, Michael Burr was two years early and wrong too, until he was right. What matters is not being wrong. It’s the magnitude of being right period in this game. That’s why it doesn’t follow a normal distribution. So everyone is so stuck on frequency versus magnitude, you can slow down entering a storm, driving you are wrong repeatedly until the one time you’re right, and it saves your
Maggie Lake 19:12
life. It’s a great way to look at it. So they raise rates aggressively at the same time, maybe you have the US devaluing the dollar, maybe, maybe not, but that’s possible. And that sparks a capital flight back to Japan,
Michael Gayed 19:28
right? And that sparks a which, what you saw in the August 3, August 5, you know, fear trade, right? That sparks a forced selling of assets that are overly levered. Now, where it becomes problematic is where the leverage is in illiquid areas. And the illiquid areas tend to be private credit, tend to be high yield, junk debt tend to be spreads, right? And that’s where I think, and that’s why part of the thesis is that Japan would spark that spread widening of us. Junk debt, which has been stubbornly tight, saying there’s no default risk, while unemployment is rising at a pretty meaningful pace, and while small caps, going back to that being a real tell on the consumer and the economy, are clearly worried about default risk, right? It’s I’ve never seen such a talk about crowd mentality. I’ve never seen a complete refusal to even acknowledge the possibility that small caps are the real Canary. And small caps do matter, because it is the system. It is small businesses, it is the backbone.
Maggie Lake 20:39
So you see people deleveraging, risk off, spreads widening, possible defaults rising. Does that cascade throughout the entire market?
Michael Gayed 20:54
Probably, and it would probably result in gold selling off.
Maggie Lake 20:57
Gold selling off. Explain why? Because a lot of people this is really important, because I’ve had a bunch of people talking to me about the virtues of gold and that as a place that is non correlated to any of the other trouble in the global economy, and the place to park your money, I have
Michael Gayed 21:13
been saying gold is sending a warning since October of 2023 and the warning has not been heated, but gold’s outperformed, and I’ve been very bullish on gold up Until very recently. So there’s two things. One is that I think this is the first time in the last month I’ve noticed that there’s actually some a degree for you, an overconfidence in gold, right? So, and this is what you’d expect after a pretty extended move, nobody was excited about gold. A year ago, I was one of the few guys talking about it, right? And that’s just on the record on my lead lag report research on podcasts I’ve hosted on podcasts I’ve been on for all talk about me being a perma bear, it’s clearly not true, because that trade was right now in behavioral finance, there’s this concept called the disposition effect. Okay, so disposition effect, basically, is this very real phenomenon that when investors are faced with uncertainty, they don’t sell their losers because they want to get back to break even in their portfolio, they sell their winners. There aren’t that many winners. Gold is one of them. I mean, tech peaks out in June.
Maggie Lake 22:13
For the most part, some people are sitting on some really big gains in tech, though,
Michael Gayed 22:17
that’s true, and you can argue that there’s still but I think you need to break the AI is, is such a game changer mentality, I think, for that to kind of unleash. But the point is that the disposition effect would argue that there’s still, there’s, there’s a delayed self coming in gold, because it’s one of the few winners in the last
Maggie Lake 22:33
Yeah, and there’ll be a bid for it. Importantly, yeah.
Michael Gayed 22:36
And now, to be clear, I don’t think that means like 2011 that’s the end of the end of the bull market for gold. I just think it’s going to be a correction, right? Because I do believe that gold, gold has been a beneficiary. And this is just the logical fact. Has beneficiary has been a risk off, beneficiary of scared capital that has been nervous about treasuries, right? It’s like, I always go back to the four horsemen of the risk off trade, our utilities as a equity sector, the dollar, gold, and then long duration treasuries. Long duration treasuries have obviously been horrible, which explains my own hell for my own funds, because they rely on long duration treasuries mechanically to be risk off. That seems to be changing, which I’m thankful for, because it’s been a nasty cycle. But at some point, I keep saying treasuries will stand alone. If you get a real panic scare, gold is not a big enough market to absorb scared capital. It will go back into long duration. Treasuries,
Maggie Lake 23:30
even with the even with the very tricky debt levels that the US has. Because, I mean, we’re talking about Japan, if they mark to market being insolvent there, a lot of people feel like the US is not that far behind that given all the borrowing we just had. The
Michael Gayed 23:45
difference is we have a military and the right to bear arms, right, and the government has more arms than us individuals. I guess my point is saying that is, as long as the US has its tentacles everywhere in the world, Treasuries are going to almost always be the default safe haven asset. You
Maggie Lake 24:03
don’t see that changing because it’s because this is very interesting. I think that part of what’s worrying people who would normally be looking to bonds is the debt level that we’re facing, the move to a more multipolar world that you have a lot of people talking about the end of US dominance and exceptional is exceptionalism. You know, maybe you see asset flows that are moving back to different countries. All of those people are invested not only in Mega tech, all those international investors and sovereign wealth funds, but they’re also heavily invested in treasuries and dollar assets in general. You don’t worry about that.
Michael Gayed 24:42
When Bitcoin worries about it, I’ll worry about it, because Bitcoin is not at the levels everyone is claiming it should be, given the impact on treasuries. Look, I think, and maybe this is, this is part of my own communication strategy. So it could be. Purposeful, intense, nudge nudge. I like to look for disconnects and narratives. It’s not about being contrarian. I just like to see I like looking for divergences, because in theory, from intermarket analysis perspective, there should be consistent reasons for why certain asset classes move the same way, and the moment you have one asset class, giving you a different message of another asset class, something gets resolved at some point, right? Just maybe with a lag. Okay, so if that narrative is true about treasuries, then why isn’t Bitcoin at a million already? I, I don’t it doesn’t make sense to me that Treasuries are no longer the pristine asset when the entire system is still built on, built on the risk free rate. Yeah, I think what’s what’s thrown everybody off, me included, candidly, is the fact that we just went through the fastest rate high cycle in history. Treasuries totally failed as a safe haven play as credit spreads kept on tightening, because Yellen was playing games with issuances, the Fed was taking liquidity away with one end, and Treasury is putting it in with another. I mean, they they manipulated the ever living crap out of the stuff, out of out of bonds and liquidity, right? So you can only play that play that game so long and as long as the US government can tax. I’m pretty sure that if US credit quality is terrible, all of us are terrible. They own us through taxation. Stop like this. This narrative is so silly to me that treasures are no longer pristine, as it’s Tax Day is coming up. I don’t care that Trump is laying off all these IRS workers. We’re still gonna pay the man.
Maggie Lake 26:36
What is it do you what are you seeing for the US economy? I mean, are you watching economic growth? Does this factor into where you see opportunity? Are you more looking at this, these sort of dynamics between markets as what, as what is the sort of most important thing to keep your eye on? Yeah,
Michael Gayed 26:51
I think it’s more the dynamics. I mean, I’m not to be a conspiracy theorist, which I know conspiracy theorists will say, you know, it’s like, does anybody really believe any government data?
Maggie Lake 27:04
You must think the economy sucks because small caps are weak. Well, that’s
Michael Gayed 27:08
my point. Yes, of course. And by the way, if you ask small businesses that not publicly, this is small let’s say yeah, they haven’t done meaning any headway. It’s more than just the argument of the K shaped economy, like something is fundamentally
Maggie Lake 27:23
broken voter anger, right? I mean, I think that they’re exactly
Michael Gayed 27:25
right. I mean, you can see that it was obvious that Trump would win, just from that perspective. It’s like, goes back to rising tide that does not lift all boats. Everybody drowns, okay? So in that case, if it was the Democrats that drowned in the election, yeah, yeah. But, but, you know, unless something dramatically, and again, I go back to, I think deregulation has a shot at changing something. At changing some of these dynamics, because it has been very one sided towards, you know, the big players.
Maggie Lake 27:47
So what are you doing? How are you playing that? If you, if you see that as an opportunity, and a lot, it’s very tough, right? It’s, it’s the sequence of all this matters. Because I think that there are some plans which I think people see as an as a welcome disruption, but there seems like it seems like that’s more of like a medium term to longer term issue, and maybe some of the risks are a little more front loaded. I think that’s the worry when, when the administration and be center are trying to pull off the 333 but how would you think about positioning for deregulation, and do you think it’s something that we’ll see sooner rather than later? Yeah,
Michael Gayed 28:25
well, that’s partially my own bet, because I’m there will be news on that soon. I do believe deregulation is a very powerful theme, and one that I am hoping to create a different type of product around. Oh, interesting. That’s a whole different conversation for another show, okay? But the we’ll put a
Maggie Lake 28:42
pin in that and come back to you when you do, yeah, tell us about it. That will be targeted toward the beneficiaries of deregulation. Yeah,
Michael Gayed 28:50
that would be the argument, right? So it’s because it should be more small, mid ish beneficiaries, from that perspective, and a lot of historical evidence suggests that, I don’t know, you know, it’s like, the other part of this front loading is that, you know, you see all these people showing these charts, it’s like Trump came in and messed up one of the greatest bull markets in history. No, Trump came in at one of the most expensive stock markets in history. Like, give me a break. People stop like, this is just silly. The guy came in to a very distorted large cap valuation starting point. It’s not going to be his fault. It’s not going to be his credit, okay? It’s just, it’s cycles.
Maggie Lake 29:30
Yeah, right. Every president inherits a very complicated economic but everybody likes to blame they were the last guy. Everybody blames them when the midterms come. But it’s much more complex on that. I think it’s,
Michael Gayed 29:40
of course, which goes back to the crowd does not know how to define things at the, you know, at the extreme. So
Maggie Lake 29:45
you’re positive about deregulation. You think there’s some opportunity there in the small to mid cap space, and we will watch that space with whatever you come up with. What about oil? Because that’s one of the pillars they really want to get those oil prices down. Yeah. Yeah, you don’t, you don’t you see that as much more, I don’t know.
Michael Gayed 30:04
No, I mean, well, I think in general, there we put parts of the energy sector that benefit from deregulation, right? Because, you know, the drilling side get permits, maybe coming out faster, and, you know, pulling oil out of the ground quicker. I just don’t know that that would would fully counter a real economic slowdown where energy usage plummets, like you typically see as a warning signal prior to recessions. So it’s like, is the lower oil price because of suddenly more supply, or is it because demand just got crushed? Yeah, I don’t know, right? I mean, the reason matters, right, right? Of course, yeah, the reason very much matters. So yeah, I don’t. I don’t I don’t really have kind of a strong opinion on what happens very short term to oil, which goes back to, you know, that can still be a catalyst for Japan before we know oil does plummet, in which case it saves Japan some more time from panicking. But again, all this stuff is interconnected, right? So
Maggie Lake 30:54
when you’re looking at equities, do you see, obviously, there’s the risk, and if the Japan scenario plays out, that’s a risk that can pull certainly seems like very bearish for stocks, and it seems widespread, and no one’s really spared if you’re getting margin calls, if you are bearish on large cap and Some of these widely held names. Is there a scenario where you see not a sharp decline or a bear market in stocks, but a rotation out of those? Is that your sort of bull scenario, that we see some of the mega cap weakness continue there, but it doesn’t necessarily flee out of the US. We actually see a sort of return to some kind of diversification in some other sectors that have been left in the dust, getting getting some capital allocated. So
Michael Gayed 31:50
I think in general, when you look at value versus growth, value looks like it wants to bleed, right? It had this. If you look at a ratio of Russell, 1000 value divided by rust, 1000 growth, it looks like a double bottom, and values outperforming growth, which is really, you know, everything, but tech versus tech, really, versus growth, is possible. I think history suggests that rotations tend to occur in bear markets. Like, if you get new leaders, it tends to
Maggie Lake 32:14
happen into, okay, so there’s going to be pain, but what comes out of it might be, yeah,
Michael Gayed 32:17
I think that’s probably right. I mean, you know, I made that argument before it’s like the circle of life. You need to have a recession, you need to have maybe a stock market crash. You need to have some kind of tail event to force the flight to safety into treasury bonds, to force yields lower. That then saves small caps after refinance, and now they normally feel higher for longer. So as much as painful, it solves the refinancing issue in that moment of fear and and then small caps come back. And, you know, it’s a circle of life. It’s like, in order to, if you, if you, if you crash stocks, to save bonds, then saving bonds means you’re saving small caps. So
Maggie Lake 32:52
you see small caps, you see opportunity equally in small caps and bonds. Yeah, because
Michael Gayed 32:56
I think, I mean, it’s very clear. They’re, I think they’re, they’re very interconnected, right? I mean, the more that yields rise, the more small caps fuel heat, the more they fall, the more likely small caps have a chance of survival, at least the zombie companies.
Maggie Lake 33:09
If you is it too early to be in that trade? Do you feel like that’s an opportunity now? Because obviously, if you’re early, you get a good price. You know, as we’ve seen for the last two years, this cycle has a weird way of continuing longer than anybody thought it was going to 100%
Michael Gayed 33:23
Yeah, i Your guess is as good as mine on that. I mean, I think if you’re going to dollar cost average, it probably makes some sense to keep tilting there, be it high quality, small, just in case. And then, yeah, in a real bull market, all the garbage also runs like crazy, which means that the zombie companies would have massive moves right on the speculative fervor, which maybe is an argument for why you still have one more surge right where it’s that junky stuff, which really starts to finally work, and zombie companies are driving small caps, which causes another media run. But I think fundamentals will ultimately catch up. In that case, does
Maggie Lake 33:57
your investment thesis work if the Trump administration does not achieve its economic agenda, and we don’t see the deregulation, and they don’t get the sequence sequence right, and strike that balance between devaluing and trying to get rates lower, but not sort of, you know, throw a wrench in the global system where we see some large event that has all sorts of counterparty risk, do they have to get it right for you to be right?
Michael Gayed 34:27
Um, good question. I think the end point has to be right. I think to your point, the sequence, I always go back to the path matters more the prediction, which is the sequence point, right? It’s like, we can all agree that the end point may be this or that, but how you get there is all that matters for investors, right? I think there’s probably some element of truth to that, but I have no idea how that’s gonna play out. I don’t know when you know it’s this has already been a a weird year from a lot of perspectives, right? Yeah. So anyway, March, and even even this decline is odd in the sense that it’s, you know. It like I’m a little bit skeptical that this is, in quotes, the big one, because I see a lot of people saying you’re about to get your credit event you’re about to end could very well be the case. And I only say that I’m skeptical because it’s odd to me that junk that still is not selling off in any spreads are just staying tight. So this is the biggest distortion going on right now, and the thing that everyone has to be paying attention to, it’s the message of junk debt against the message of small caps.
Maggie Lake 35:24
Watch that. Watch Japan. What about geopolitics? Because there’s a huge narrative out there, as I mentioned earlier, that you better start upping your international allocation in for 15 years of the US doing nothing. And this is the time for international which has underperformed you. Are you increasing your exposure? Do you buy into that?
Michael Gayed 35:48
I think part of that’s related very much the growth versus value dynamic. All right, so international tends to have a lot less tech, which it means by composition of these averages, it tilts value just automatically, right? So I think it’s more question of, Do you believe the next 15 years tech is going to lag? Because if you believe tech is going to lag, then the US is going to lag. Large caps are going to lag. Small caps International is going to lead, right? So it’s all, it’s all the one question, what happens to tech, and tech is expensive,
Maggie Lake 36:18
what is, what is something that would change your mind about like I said, You’re not afraid to have a point of view. You’re very convicted. You You know that the timing has been a little off, but you’re sticking, sticking to your guns on this what would cause you to step back and say, Wait, I gotta, I gotta go back to the drawing board.
Michael Gayed 36:37
I mean, you see my shirt, right? I will not relent. Thing. I will not relent. Yes, I wear that at conferences because I know people will recognize me because I say that on X all the time. It goes back to you. The only way the two messages which are at odds to each other, small caps and junk, that gets resolved is either small caps run like hell, in which case credit spreads are right. There’s no default risks. Zombie companies will survive. Companies will survive, or credit spreads are wrong. Small caps have been right this whole time, and you get a disruption, right? So one’s very bullish, one’s very bearish, right? So it’s my thesis is not about markets going down. My thesis is that the disconnect has to be resolved with an extreme which do I keep saying? And it’s not a play on words. It’s not that I’m bearish on stocks. It’s that I’m bullish on a tail event. Now, tail event doesn’t have to be negative. You could have a positive tail event with small caps running like crazy, like they did coming out of COVID crash, especially during the election, as Biden gets reelected, any of the vaccine used, and small caps have this vertical outperformance run. It just didn’t last, right? But that was like a tail event to some extent. In a very short period of time, we have to be in it before it happened very quickly. So I think we are due for an extreme. It’s just not clear if it’s gonna be a bullish extreme or
Maggie Lake 37:55
bearish extreme. Yeah. And if we see, if we see small caps, the event that small caps are running, then presumably that means the economy some of Trump’s plans, perhaps, or, you know for whatever reason, that the economy is doing well, that we get through this wobble patch, that the labor market doesn’t collapse, and that the economy is achieving that growth rate that they’re looking for,
Michael Gayed 38:14
in which case we may have a third term.
Maggie Lake 38:19
Michael, it’s always fantastic to catch up with you. Thank you so much. I love the way you played out all the scenarios for us and that you’re not afraid to put it out there. Appreciate you will not relent. It’s
Michael Gayed 38:30
my gimmick. He’s my gimmick. Yeah, everyone’s gonna have a stick. I work for a family office. Once in the patriarch of the family office was $2 billion family of the patriarch once came up to me and said, You gotta have a shtick in life, and he happened to be Egyptian himself. But I’m
Maggie Lake 38:45
gonna challenge you on that, because I feel like you don’t relent, and that you are very hard working, and we know you’ve, like, completely transformed your physical health. So I don’t know. I think that that’s less a stick and more who you are. I’m gonna, yeah, but
Michael Gayed 39:00
I think, I think the, I always go back to the, you know, very public about this. I mean, the last several years have been hellish for me as Portfolio Manager, yeah, following rules based strategies in a nasty cycle where I never thought you’d have treasuries enter the worst bear market in history, just as I launched my two ETFs, and it’s, it’s a cycle issue, the macro helps you just thrive. The micro helps you to survive, and that’s why you can’t relent. You got to survive long enough, hopefully the cycle to come your way. We’ll see if it
Maggie Lake 39:30
does. Yeah, I love it. Michael, thank you so much. We appreciate you. Appreciate it.
