Is the Recession Beginning?!?!?!

Meet Kevin

75,672 views • yesterday Save 15 min 5 min read

Video Summary

Despite unexpectedly high producer price index (PPI) data, the 10-year Treasury yield is falling as investors flee to perceived safety. This counterintuitive move is driven by fears surrounding the AI trade and massive capital raises by tech giants like Oracle, which are creating market volatility and nervousness, particularly for highly leveraged investors.

While economic indicators like retail sales and manufacturing surveys show pockets of strength and modest growth, the underlying concern is a potential "suckening" – a sharp economic downturn similar to past events. This fear is pushing capital into the bond market, offering a 5% risk-free return, independent of inflationary pressures. The speaker suggests this flight to safety is a rational response to the perceived risks in the AI sector and the broader economy, even as companies like Anthropic report significant revenue growth.

Short Highlights

10-Year Treasury Yields Fall Amid Inflationary Data: Despite a "horrible" PPI report showing significantly higher-than-expected inflation, the 10-year Treasury yield has decreased, indicating a flight to safety.
AI Trade Fears Drive Investment Shift: Investors are reportedly fleeing the AI sector due to massive capital raises by companies like Oracle, creating market nervousness and volatility.
Retail Sales Show Consumer Weakness: While headline retail sales beat expectations, the control group and data excluding fuel and auto show signs of consumer spending weakening.
Manufacturing Data Mixed: The Empire State and Philadelphia Fed manufacturing surveys show modest growth but a slight moderation in future optimism.
Anthropic's Revenue Growth: AI company Anthropic reported significant quarterly revenue growth, though profitability remains a concern.
Bond Market as a Safe Haven: The 10-year Treasury, offering a "risk-free 5%," is seen as an attractive alternative to volatile tech stocks.
Potential for "Suckening" Event: The market is wary of a sharp economic downturn, similar to past "suckening" events, prompting a move towards safer assets.

Key Details

Data Discrepancies: PPI Soars, Yields Drop [0:15]

The latest Producer Price Index (PPI) report significantly exceeded expectations, with headline PPI at 1.3% (vs. 0.6% expected) and year-over-year at 6.3% (vs. 5.4% expected).
Despite this inflationary data, the 10-year Treasury yield has fallen to 5.06%, a move the speaker finds counterintuitive.

"So in other words, PPI across the board, way worse than expected."

The "Suckening" and AI Trade Fears [1:50]

Massive capital raises by companies like Oracle ($140 billion), SpaceX, and Broadcom are creating "nervousness" and volatility, particularly for leveraged investors.
This volatility is described as a "the suck," which can be aggressive and lead to hardware stock declines.

"And the people who were highly leveraged ended up getting destroyed, like Leofold. They ended up getting crushed because they couldn't survive the volatility of the suck."

Bond Market as a Refuge [2:50]

The 10-year Treasury yield, offering a "risk-free 5%," is attracting buyers due to fears surrounding the AI trade.
This buying pressure is independent of inflationary pressures, creating an awkward situation for the Federal Reserve.

"I believe what's starting to happen, we'll talk about how this hits the market, is because there is fear about the AI trade, people are fleeing to pick up a risk-free 5%."

Labor Market and Consumer Signals [5:15]

AI is impacting the labor market, preventing hiring in some areas while creating specialized jobs in others.
Retail sales data showed weakness in the control group (0.1% vs. 0.3% expected), indicating some consumer spending slowdown outside of fuel.

"The second canary in the coal mine here, well, these are the underwriters. So I'm just going to write down U-Dub. Okay."

Manufacturing Activity Remains Modest [7:00]

The Empire Manufacturing survey showed the highest activity reading since December 2021, with modest employment growth and rising work rates.
The Philadelphia Fed survey indicated firms expect overall growth but noted a decline in future indicators, though most remained positive.

"The firms continue to expect overall growth over the next six months, but future indicators declined."

Anthropic's Growth and AI Trade Outlook [9:00]

AI company Anthropic reported significant revenue growth, with annualized revenue increasing nearly 50% to $16.8 billion in Q2.
Despite rapid growth, profitability is questioned due to massive spending, suggesting the AI trade may not be over but faces future challenges.

"The Financial Times put this piece together suggesting that I want to say the exact percentage is their revenue grew 46% to $16.8 billion in the quarter in the second quarter."

Market Dynamics and Future Predictions [11:00]

The "suckening" is pushing money into the bond market, making the 10-year Treasury attractive.
A potential Iran deal, influenced by market performance, could further boost both stocks and bonds.

"The more the stock market falls, the more likely it is that Donald Trump signs a deal with Iran because he wants the bleeding to stop and you I would suspect should expect a rocket ship not only in stocks but also in bond values after that."