2027 Market Bloodbath: Worse Than 2022's Bear Market | Keith McCullough

Keith McCullough (0:00)

Q2 of next year is going to be nasty.

2027 is 2022, but potentially a lot worse, because we have a lot more bubbles, and the Fed's going to make a major policy mistake, invert the yield curve and then have to cut interest rates. I expect parts of the market to be crashing before you get a full blown one like 2022

David Lin (0:18)

It's Thursday, September 24th, and the US 10-year Treasury yield has reached 5.13%. It's highest again since 2007 While the 30 year is now at around 5.44%, it's highest since 2004 Our next guest is going to explain why Q2 2027 is going to be nasty, in his words, if this continues, and why 2027 may be worse than the 2022 market downturn, and accordingly, how a defensive asset allocation strategy looks like in 2027

The Fed may even need to issue an emergency rate cut and he's going to explain why. A lot of what's cracking underneath the surface has to do with rising yields. Right now, on Cauchy, traders are pricing in a 42% chance that the 10-year treasury yield will finish the year above 5.5%.

If you agree, a $50 trade could yield $102 as a payout. Our next guest will give us his prediction, so stay tuned. This video is sponsored by Cauchy, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events, from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below. We'll scan the QR code here and use my code LINLIN. New users can get $25 in app credits when they trade $25.

Cauchy is CFTC approved and available in all 50 states, including California and Texas. Keith McCullough joins us now. He's a founder and CEO of Hedgeye Risk Management and Hedgeye Asset Management. Prior to founding Hedgeye in 2008, Keith has had a multi-decade career as a fund manager, including at Carlisle Blue Wave Partners. He leads Hedgeye's global macro research team right now. Keith, welcome back to the show. Good to see you as always.

Keith McCullough (1:56)

Yeah, good to see you, David. I appreciate it. Just a little bit to talk about when you look at markets across asset classes. Just a little bit.

David Lin (2:05)

Seems like we can talk an hour on each specific asset class, but we'll truncate your entire thesis into 30 minutes. Let's start with this is a good visual to illustrate the positioning that you currently have in the model that Hedgeye uses. This is a quadrant, and within each quadrant are different strategies. So where are we right now?

Keith McCullough (2:28)

We're in Quad 2, and solidly so. So Quad 2 is when the rate of change of both growth and inflation are accelerating at the same time. So that's actually, and always should be, the Quad that bond yields ripped to the upside fastest. This has happened before. We've called this before because we've been in Quad 2 before. I just don't think the street really expected us to stay in Quad 2 for as long as we have.

David Lin (2:54)

I'm a little bit surprised we're not in Quad 3 And here's my rationale, is that several reporters have asked Kevin Warsh at the FOMC, what are you going to do? Because this is not, this inflation that we're seeing right now is not really caused by accelerating economic growth. I mean, there is economic growth, don't get me wrong, but it's more or less caused by a supply shock in the oil energy markets in the Middle East from the Strait of Hormuz closing, right? And so the question becomes, and the Chicago Fed president, Austin Goolsbee, actually wrote about this.

What does the Fed do during a supply shock? And that will be what Quad 3 represents, I guess, is inflation going up, but it's not really growth, but it's a supply side equation. Anyway, I'll let you comment on that.

Keith McCullough (3:42)

Yeah, that would be a narrative. That's not the reported rate of change numbers. You are quite correct on the inflation component, but on the growth component, I think most people just are either oblivious or they just don't read the numbers. But even if you look at yesterday's PMI number, I mean, it was white hot. It was a 58 versus 56.4 last month.

That's a month over month Quad 2 So that's growth accelerating. If you want to look at our GDP now cast, which again, the Atlanta Fed tends to chase us a bit on a lag, but we're both between 3.5% and 4% growth. I mean, that's one of the best sequential quarters of GDP growth since the pandemic. So it is a rate of change growth acceleration. It is a rate of change growth acceleration that is certainly augmented by a lot of AI spending, but we don't back out the AI spending. You know, that is actually happening. It is a bubble, by the way. That's a big point of ours that we continue to make. If it wasn't a bubble, it wouldn't keep going up, and the spending wouldn't either.