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A doomer who predicted the 2008 financial crisis thanks to the complex financial products over the housing market is now predicting that our next financial crisis could be even worse and around the corner specifically because of the interplay of the four things that I wrote down on this whiteboard. We're going to keep this a straightforward and break this all down for you.
Remember, meetkevin.com coupon expires in two days. Okay, let's first jump in over here. Mark Zandi from Moody's. This is not our bear porn guy today. This is just something else related to the bear porn we're going to talk about. Mark Zandi over at Moody's says a recession is once again a serious threat even before the disconcerting events in the Middle East.
Our machine learning based LEI leading economic indicator model put the probability of recession starting in the next 12 months at an uncomfortably high of 49%. Behind the recent jump are primarily the weak labor market numbers. So, in other words, when these bad labor market numbers came out, this algorithmic LEI device spiked, which we hadn't seen seen since Liberation Day.
So, basically according to this leading economic indicator model at the highs of Liberation Day for essentially the odds of a recession, which we had not seen since COVID when we had a recession, 2008 when we had a recession, the early 2000s when we had a recession. Here's 1995 where we had a soft landing, never really spiked.
90s when we had a recession, double recession over here. And you can see its track record has been basically pretty damn good. But you can see how long and frustrating the climb has been here like through '22, '3, '4, Liberation, all that, right? It's not just that though that I want to point out. It's also Yardeni.
Ed Yardeni says there's a chance it might not be the time to buy the dip. Take a look at this. Yardini warns contrarian buy signal may fail, and that's because we have the largest skew in basically put options in the S&P 500 that we've seen since 2021. So, the highest relative number of put options compared to call options in the last 5 years.
Uh that's pretty wild, and Yardini is arguing that the current war with Iran is potentially underpriced by markets in terms of how long it's going especially since Trump isn't getting a lot of help with the Strait of Hormuz from others, which of course Trump is chiding others for. But, suggests that things might actually end up getting worse, and these puts put purchasers might actually end up being correct.
But anyway, for now, let's get into this bear porn. The title is, and it's in our all our favorites, the New York Times here. But anyway, it doesn't really matter where it's published. It's that this Richard Bookstaber guy writes, "I predicted the 2008 financial crisis, what may be coming what what is coming what is coming may be worse." This was published today, and basically, he combines these four issues.
I'm going to give you an overview, then we'll go back to the article he just to save you time. And remember, if you like my time-saving and distillation, make sure to subscribe to the channel. And then of course, if you want more fundamental analysis or daily technical analysis like our calls on oil this morning in terms of the direction and how that was going to move the market, you join those over at meetkevin.com to get the Alpha Report.
So, here are the four things. What what's really happening per this guy's article is all of these are ironically related. So, private credit, he says, is what's fueling artificial intelligence. And he doesn't mention this, but he's not wrong. Remember, Blue Owl is the firm that put together Meta's original $28 billion financing deal to hold that private credit deal off books, so Meta can utilize that data center capacity without putting those longer-term leases on their balance sheet because they have special cancellation rights.
Some people think maybe what's going on with Enphase sounds very similar where Meta is protecting themselves with cancellation rights and early termination options should the growth in artificial intelligence sort of peter out, which to some extent we you know heard this morning on our live stream. We saw a clip where Sam Altman's talking about hey LLMs are going to lead to AGI.
We need a new breakthrough to get to artificial general intelligence. What a surprise. This is what we've been saying for years that we're not going to get to AGI. This is going to be an S curve. And even at the top of the S curve when we start petering out in terms of innovation, there's still plenty of ways we can make money with artificial intelligence.
I mean, look at what we're doing with HouseHack. Within the next 3 months, we expect to be able to and and we're already seeing this on the back end. It's pretty remarkable. We just bought a deal. We think we're going to be up $700,000 on using our software. That's over at househack.com. But I mean, we're generating software that lets us determine not just the condition of properties throughout the entire country, but rank them based on how much if we buy them our net worth would go up with just AI looking at the data and the photos, the imagery, and the context of the properties, the location, and whether they're under a highway, this out, or whatever, any red flags, right?
And now we can do that nation wide, which is just insane. And we don't need newer AI for that. But AGI, you know, Sam Altman is saying hey, we need a new transformation to make this happen. So obviously, you know, there are some slowdowns in artificial intelligence. At the same time, we're getting layoffs like what we just heard Meta potentially laying off up to 15,000 people.
And the very company private credit Blue Owl who's funding Meta's data centers is absolutely cratering, right? And we can see their stock has gone from $25 down to $8.73, which represents a decline of 65%. It's not great. You get grain days like today. I mean, Circle's taking off, but then again, this is not an AI play.
This is an undervalued play that we did a fundamental analysis on multiple times over here at the bottom orange line in the Alpha report. And we actually initiated a position on it because we thought it was so cheap and you know, it's it's basically doubled from that bottom. Which is pretty impressive.
But anyway, remember you can get that at mekevin.com. Now now he mentions that private credit fuels AI, but the Iran issues actually increase interest rates for private credit. We know what's happening in private credit, so you increase stress over here. If China invades Taiwan, which is more of a footnote in this article, I think we've heard this so many times before.
Obviously, this is related to artificial intelligence because it would essentially limit the iPhone production that we get at TSMC, as well as Nvidia chip production, Blackwell, Vera, Rubens, and everything that we get from TSMC. That would just get gated. And part of that could be because of Iran, where Donald Trump is now delaying the meeting with Xi Jinping.
And potentially a suggestion that Donald Trump might be going a little too far in terms of reaching across you know, geopolitical lines, if you will, to the point where China says, "All right, you guys are distracted over there. Here's our opportunity." Now, who knows? It's a crazy idea to say that all of these are related, but you could kind of see it a little bit.
In fact, I mean, we were reading this morning in the Wall Street Journal that helium, or maybe it was Bloomberg, but anyway, helium is produced from oil and natural gas refining, which is being disrupted by Iran, which limits production or potentially increases the cost of production of of you know, chips in Taiwan because helium's used in chip manufacturing, which of course makes artificial intelligence more expensive at the same time that we have these private credit redemptions and withdrawals.
A lot of people now talking about obviously these private credit exoduses. And it's not so much the worry that these rich people are going to lose money from private credit. The worry is that banks lent to them and banks lent to companies like Jefferies and Blue Owl who are lending to all these knucklehead firms who basically, you know, don't have a valuation or haven't had a valuation in years.
You know, I wrote this morning on our um uh Meet Kevin app. You can see these data points in the Meet Kevin app. I wrote this morning on it that the Apollo co-president warns of arrogance of private markets and suggests small to medium businesses may may return only 20 to 40 cents on the dollar. And I was trying to think a little bit like scenario-wise, how could that actually be true?
And I thought it was actually pretty simple. If a private credit company or you know, an asset manager invests into private credit and they invest into let's say $100 million into a $1 billion company, the asset manager has no incentive to actually go look under the hood to see what's that company worth.
Because if there's even a slight hunch that the company has gone down in value, their fees are going to drop. So of course it makes sense for them to just leave everything marked to market or not marked to market, marked to, you know, original purchase price because it means they don't have to realize that the value has come down which would then lower their fees.
See, an asset manager taking a 2% fee on $100 million earns $2 million in fees. If the value of these companies goes down 70%, they only earn $600,000. So literally $1.4 million leaves their pockets. So of course there's no desire to actually value these companies. Now that's all in addition to what's mentioned over here.
So he talks about how what's coming right now might actually be worth worse than the 2008 financial crisis. And it's not because of one thing, AI or private credit or Iran or Taiwan. It's actually all of them together. See, he says, "It's not the first time we've built a system that's basically this broken.
The crisis of 2008 is remembered as a story of homeowners gorging on excessive debt and a housing bubble fueled by speculation. But the housing bubble itself was not the reason the crunch became so destructive. The accelerant was pushed by that pushed the crisis to the depths was the financial system that had been constructed around the housing market." He's basically saying, "Remove the word housing where you had CLOs, you know, collateralized loan obligations or CDOs, collateralized debt obligations, and or credit default swaps, right, CDSs, where basically every trillion dollars in the housing market was engineered to really represent about 10 trillion dollars of capital value created out of thin air.
And everybody thought they had all this money. But when the original one trail went, you saw these 99% losses in a lot of these underlying instruments, which might be why so many people are rushing for the exits at private credit because they think they might just be in some form of complex crazy product and people don't even know the extent as to how bad it could actually be.
It's part of potentially the reason why I think Elon Musk is trying to rapidly IPO SpaceX, you know, before the poopy doopy hits the fan. Remember that Zandi quote or chart is recession probability over the next 12 months for the beginning of a recession. So, in other words, the beginning of recession could still be, you know, March of 2027.
We don't know. It's very hard to time. So far, the bond market is not pricing in recession. If the bond market were pricing in a recession, we would see a plummeting on the short end of the curve, the two two-year Treasury yield would plummet. Which right now, the 10-year is actually dropping more, leading those spreads to tighten a little bit.
In other words, the bond market's not freaking out right now about a recession risk. It's more worried about inflation. But anyway, going on to this, he says, "Novel and complex financial instruments obscured the risk. Intertwined balance sheets across the financial system and eliminated the buffers that once absorbed shocks.
When the housing market tanked, the instruments nearly took down our financial system with it." So, the date this time the danger isn't just financial engineering. It's that the financial system has attached itself to the vulnerabilities of our physical world, power grids, water, land, supply chains, and hazards that the market has no framework to analyze.
In other words, the CAPEX boom, all of the AI infrastructure spending, combined with the risks of Iran and Taiwan and private credit. All of those together are what make this a scary situation. Now, that's his doomerism. Uh you know, I personally, and this is my opinion on this. I know this is sort of like a sexy topic for you know, the bears to talk about.
But I really think that Taiwan thing is a little overblown. You know, I think China really wants money and economic growth, and they realize that would crush both of those. Uh I I do hope I hope I hope I hope that Iran is a short-term issue. If Iran lasts more than 6 months, we're probably going into a recession.
But I wouldn't be surprised that this ends, you know, within the next 30 days. So, I'm going to be 60/40 on that. I'll say 60% chance this ends quickly. Uh and then we're really just left with artificial intelligence and private credit and what that could do to the banking sector. And then of course, layoffs, which he doesn't talk about.
But as long as we get rid of the Iran issue, hopefully people just continue to spend as they have been, and we continue to see growth in the economy. Uh I do think, you know, somebody asked me this morning, they're like, "Hey Kevin, this was in our course member livestream." People ask me questions and of course I interact with you all all the time.
So, they said, "Hey Kevin, you know, with like people at the mall are still spending like crazy, you know, how could there be a recession?" And it's important to remember that is the a unfortunately it's a backwards way to look at it. People stop going to the mall when they lose their job and they don't have any money left in the bank.
That happens in and in the latter half of a recession. So, for example, if let's say a recession's going to be, you know, this Christmas, okay, of 2026. You're not going to see the mall empty until probably March of next year when people actually have lost their jobs and spending has plummeted and everybody's scared, right?
Because they're like, "Oh my gosh, we're in a recession." People typically spend right up to the moment of recession. And that's why for so many times, even including in our Daily Wealth, which is a free thing you could get in the Meet Kevin app if you want, download it in the App Store, Apple, Android.
Uh I wrote this yesterday, I thought it was very useful. Anxiety is temporary. Market anxiety is almost always temporary. Just stay out of bad risky moves. Too much debt, too many options, too much risk, too little income. If you find yourself anxious, you have too much of one of the above. Income is changed with new skills, providing more value, learning a trade on top of being a realtor, being a lender and an accountant, being a lawyer and a real estate agent, being a software engineer and an agent, etc.
Uh the others are also choices, right? You have the choice of debt or margin or options or risk, right? What kind of investments you're making, those are your choices. So, if you find yourself worried or anxious, ask yourself, can you find a way to fix one of these? That was the Daily Wealth yesterday.
You could get the Daily Wealth every day basically in the Meet Kevin app, totally free. There's no paywall for that. Uh so, you could enjoy that along with the news notes. Uh so, anyway, a little bit of a doomer update for you uh and sort of my opinion around this. I think some of this is overblown uh but uh if you find yourself anxious, limit your risk.
and go to meetkevin.com for that coupon expires Monday. Yeah, Wednesday evening. Two days. Today's Monday. O'Leary right .
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