Edward Dowd: Three Risks The U.S. Can’t Stop – That Will Crash the Markets

0:00And we're now founder of finance technology and co-host of the signal versus noise podcast. Welcome to the competent investor. Thanks for joining me. Thanks, Tom. Great to be here. So Ed, the biggest themes as you guys have presented in your 2026 U.S. economic outlook are a white swan housing crisis, possibly coming for the U.S. The stock market AI bubble beginning to crack and China entering the acute phase of its real estate and demographic crisis. I'd like to touch on all of these with you today, but I'd like to start with getting your thoughts on if war with Iran distracts or accelerates these factors. So the war with Iran, the biggest risk from the war with Iran that I see is that if the streets of Hormuz get closed and oil stays above 80 for any length of time, that's this is going to be hard for people to understand.

1:02But at this point in the credit site, when you have an oil shock and if it sustains, it has to sustain itself for like a month or so. It's actually deflationaries because the consumer is already tapped. The job market is rolling over and credit card defaults are going up, mortgages are under pressure, card loans are defaults are going up. So this would be the death knell for the consumer. People may not remember this. Everyone talks about the housing crisis, but there was an oil price spike, there was a lot of speculation. It was peak oil and oil in 2008 accelerated very fast up to $140 per barrel, peaked in June of 2008 and then started collapsing. That kind of was the last nail in the coffin for the consumer than the housing crisis really began in earnest. So the biggest risk from the Iran situation is the sustained oil price above 80, which would ultimately be deflationary. So that adds an element of risk to the situation, but the case we presented in our outlook in

2:05January, those fundamentals are in motion and nothing can derail them because it's, you know, this is just being dodged in a cycle to the economy and to the credit cycle. And when I was starting to see cracks in private credit, which, you know, began this a series of feedback loops. So there's so many things to touch on there, obviously, Ed. But let's start with the housing crisis, you know, you, you guys said, and the last time I interviewed you, you were, you were saying it was starting last year and it's only going to accelerate. Is this driven primarily by, let's say, the weakness of the US consumer or does it have, you know, what are the other factors that have to do with it that really propel it forward? So yeah. So we pretended, you know, a tremendous amount of money during COVID and then the Fed also bought 1.5 trillion in mortgage-backed securities off banks, balance sheets. So that freed up a lot of capital for banks to land and there was a housing, a mini housing

3:08boom. We had some golden going on and then we also had the illegal alien situation during the bi administration, which plopped about 20 million people into the country. So we had a multifamily housing boom. Those of all peaked in our role and no, and we also have the policies under the bi administration are going the other way, meaning the borders closed. So there's no new net inflow of people putting pressure on rents. I'm not necessarily saying that, you know, illegals were buying homes or that did occur, but it's mostly supporting the housing market through the rental market. That's all the indicators are rolling over. New permits for housing peaked in 2022. And we should have already seen a housing correction, but what kept that going was a multi-family housing bill, which takes longer than a year to build those units. Usually a single family home gets built in a year. As those projects are in process, there's construction, there's economic activity, but that's all coming to an end. And the housing, it's, I call it a white swan because it should be apparent to anybody

4:14with eyes and ears. The data is all going south, the affordability crisis is there, and it's manifesting itself in this time series that we track called the homes for sale versus home sale. And if you look at the long-term chart, those two times there's generally track each other. Since 2023, there has been homes for sales been going up, and homes sold has been going down. So there's this big gap. So the housing and new home, new home pending sales is out in all time low. So what's going on? The market's frozen, and the seller still have unrealistic price expectations. And so there's no market activity. And that primarily it's due to affordability. The during COVID and the inflation, property taxes have gone up. The cost of instructors has gone up. You know, more defaults, more slowing in the economic activity, meaning household formation is going to slow. And that's in process. If you take a look at the chart, a lumber lumber is, I think plumbing, lumber chart looks awful.

5:19So this is a slow rolling thing, and then it'll accelerate at the end. If you remember in the OA crisis, you know, it was already, it was started on winding, you know, seven. And the real estate professionals and the fixed income professionals that held a bunch of these subprime bombs, set up bonds, set everything was fine. And the real estate market's not an auction market. It's not traded daily. So once it hits the headlines and the mainstream media declares that there's a housing problem and a crisis, you were closer to the end when then we were at the beginning. So it's in motion and it's going to affect, you know, 20% of the consumer economy is homes. And so that's a big chunk of the economy. So that's one pressure point that is slowly unwinding. The jobs are going the wrong way. We've basically had last month a non-form payroll revision down of about a million jobs. So we had that in 24 revised down to about 800,000 and then a million in 25. So the job creation that everybody was touting really wasn't there.

6:23And now we're seeing layoffs of current. And so it says this is classic cycle. The income of the consumers to low, they're strapped. And eventually it's going to affect the economy and the stock market at some point. That's just that that's just one risk factor. So so that's why we would we would get a problem with just that one factor. Then add on the AI bubble and and record stock market valuations and then throw in China. So we're potentially a dot com smushed together with the housing problem. And then throw in China turmoil. That's going to affect, you know, Asia, which a lot of feedback loops into the US. Well, before we before we move on to the other two there Ed, how do you think that the let's say the effect or the the job of mainstream media to highlight a problem like housing crisis has changed over time. You know, we've seen not only let's say mainstream media, but also the the jobs number

7:27reporting, for example, non farm payrolls or CPI as being pointed to as being, you know, numbers that don't represent reality. So is it possible that, you know, media isn't covering a housing crisis that would shake consumer confidence in the same way as you put? There's been a concerted effort. This is the great financial crisis to not create panic because a lot of I think during the great financial crisis there was a lot of panic on TV. And after that there was a concert concerted effort not to talk negatively about the economy really ever. And if you look at CNBC, it's a, it's a true, they're true readers through everything. And, and, you know, I get it, but that, you know, if you're, if you're a professional investor, you, you know, it's kind of worthless to you. Let's talk about the non-form payroll numbers. Number is a monthly estimate. And it's done through a survey of 600,000 businesses. The actual numbers called the quarterly census earnings and wages, which is done

8:28in a rears. It usually comes out nine months after. And that's the actual number. That's the real hiring and wages and what really happened that's collected from, you know, the 16 million lawyers. So that's reality. And in my, in my professional life, most of us in the, in the investing world didn't even know what the QCW was. It was, it didn't matter because it was, you know, what book report that showed what, what we already happened, because the non-form payroll number used to basically estimate close enough to what reality was over time. They're always revisions, statistically, how bad for it missed reality, actual reality by forced-and-er deviations. And then 2025, it missed by eight standard deviations. The last two years, the numbers been virtually worthless in, in predicting reality. What that says to me is that there's a lot of capital that's been following that number,

9:32and maybe starting to wake up to the fact that it's not the number that we need to look at. And everybody, in my humble opinion, is well, is very overweight, equities on an asset allocation basis versus bonds. And if, if the US economy is slowing, and once this realization kind of gets into the mainstream mindset, and it will eventually, there's going to be a very quick repositioning, and you're going to see what I think is going to be a fairly, fairly fast, you know, reallocation from stocks to bonds, the US Treasury bonds and notes. And when that happens, is anyone's guess, but it's closer now that it has been in a long, long time. A lot of people point to the stock market and say, oh, it's been hitting you all time highs, but if you look at the chart, it's gone nowhere since October. Enterment in the market is gone. There's clearly a rotation into other stocks suggesting that, oh, while Trump's plan is working, well, is it? I mean, the manufacturing jobs aren't coming at.

10:34The tariffs just got, you know, the Supreme Court ruled against the tariffs. So there's a lot of uncertainty, and the employment numbers are certainly not showing that manufacturing is taking off. So there's going to be a valley at some point, and it's coming. And when people point to the stock market, it's literally gone nowhere since October of last year. So it has been pointed to that due for an ugly stock market correction, and with being pointed out, being caused by the AI bubble, why do you think that that actually comes to ahead this year, or like, what is the catalyst for it? Well, I think the cracks are already beginning. There was a lot of startup companies that were funded with junk bonds, and the credit markets realized that started to question the growth rates of the revenues, and the revenues never came for a lot of these telecom companies that put up that paused the financing, which paused the CAPX, which then eventually fed into

11:35the Cisco's and Nortel's and loosens up the world, which are highly overvalued to begin with. Just to, you know, if you bought Cisco at the top in the .com bubble in 2000, you just got back to break even if you held on to that stock. The stock just finally went to where it was, you know, 25 years, 26 years later. So that's a long time to wait. And let's look at the AI situation. We're starting to see people questioning the time to revenue for these AI startups, especially open AI and others. And yes, they have phenomenal growth rates, but they also have phenomenal amounts of CAPX. So the credit markets are asking, oh, what's the ROI on this? Maybe the adoption rate is in as fast as I thought. This is a lot of capital, and the return might not be there. So you've seen deals downsized, you've seen credit default swaps on Oracle bonds,

12:36go up on CoreWeve bonds, go up, private credits have been instrumental in funding a lot out of this AI, and private credits under assault. There's a lot of run on so-called run on the bank, these public funds, and now they're gating those funds. So I think the credit markets are already starting to revolve. Question of when that all pauses in the CAPX cycle, and at some point in video is going to announce that they missed their earnings for some reason, and then the stock will get hit. So I think it's in motion. We're just waiting for people to realize that you mentioned private credit a couple times here, and I want to dig in a little bit more on, let's say making it easier for the the average listener to understand the difference between private credit and that credit cycle and the credit cycle or the public credit cycle that we normally talk about. Yeah, so after the great financial crisis, there's a lot of banking regulations, and so banks didn't really want to lend to a lot of the companies out there. So a way of financing,

13:42growth, and businesses that maybe a bank didn't want to lend to directly, and they did a lot of creative deals, a lot of creative financing, and like anything, the good the good deals were already picked over early on, but the sector has grown from a tiny amount to it's globally now. People estimate it's between three and four trillion globally in the US, it's at least two trillion, and the last two years has seen tremendous growth. A lot of the commercial bank lending the last two years from JP Morgan's and the Bank of America's has been to what's called non-depository financial institutions. So the banks are lending money to these guys that then do their financial engineering and then do deals and then place these deals in insurance companies, pension funds, their own private credit funds, and the biggest problem with the private credit is not it's not necessarily a point in the cycle where the excesses occur, and that's where we are right now,

14:44and the problem with private credit is it's very opaque. These are diverse portfolios, what's the collateral, what's the deal look like, as opposed to the the subprime crisis and the mortgage crisis in the great financial situation, at least the underlying collateral was a home. Yes, there was a lot of fraud then, but at least it was a marginous asset that people could basically figure out and there's a lot of opportunities and people could price those. I suspect as we go through this cycle, it's going to be more difficult in the bid-ass spreads as we unwind this problem are going to be much higher because everyone's going to have to go into each deal and bond specifically to require a lot of work and effort as opposed to homes you can kind of figure out what homes worth. A lot of studies that have already been done on homes, mortgage, ageing, regional where the bonds are located, I mean where the homes are located, so remains to be seen whether the banks can absorb these write-offs. I'm not worried about the private

15:45credit guys because they are what they are, they'll blow off and they'll have their problems, but they're not systemic. You have to worry about the blowback to the banks. What's going to happen when a $2 trillion dollar market gets into problems, it creates feedback so credit starts to tighten, people don't make loans, people start, rather than doing new deals and credit is a lifeblood of the economy, they start looking to shore up the losses and so there's kind of a credit contraction and credit freezes and that's kind of where we're at. That's exactly what I wanted to ask you about is, you know, redemptions on a lot of those funds have been halted. So does that, you know, that is let's say the first piece of that puzzle that starts those feedback loops, right? Bonds are an over-the-counter market and they usually sit in portfolios and there's not a problem until the end of the credit cycle when a lot of these bonds start to, you know, some of them are percentage of them start to default and a lot

16:46of those bonds were bought on leverage, so then it starts to, I'm lying, so people need liquidity, they want to sell these bonds, but they can't because they're, you know, the bid-ass spreads too wide, it takes a while for these, you know, you just don't click a button and hit the eject, you have to have another buyer on the other side and we call those bonds the trade by appointment only, so it's liquidity problem and so when the liquidity problem hits and people are over-levered and market calls begin, they then sell what they can, not what they want, so it's spreads to other assets like the equity markets, spreads to even gold and silver, people sell what they can, the Fed is way too tight, the Fed is behind the curve on this and real interest rates are still 1%, which means the Fed is well above neutral, so money is tight in the economy and it's something in the economy is doing well, it means the economy is rolling over, so I expect the Fed

17:47to play ketchup at some point, so Ed, all of these factors taken together, does that present a disinflationary environment for, let's say, the short to medium term followed by another out of printing and another injection of liquidity, which lights inflation again? Yeah, so here's the trick, we're going to get a disinflationary slash deflationary scare, risk assets will sell off the federal act, but it takes time for that liquidity to work its way into the system, so that's why if you look at the charts from 2000 and 2008, the Fed was cutting all the way down to zero and asset prices still continue to drop because it takes 18 months for that to start to work its way into the economy, so there'll be this deflationary scare, which presents the opportunity if you're prepared, meaning like you have cash, dry powder cash in your portfolio, and then you take advantage of these opportunities,

18:50understanding that the Fed is going to print and there'll be a recovery and there'll be another inflationary problem, that's what I suspect is going to happen, but to think that the Fed can save us, it's not how the game works, the credit is going to get destroyed, pretty quickly, then the Fed has to create new credit, then it takes a while to work its way into the economy, so stock prices eventually, given the valuations and given what we see fundamentally, we think the US stock could get a nice 30 to 50% draw it out, and anywhere between 30 to 50%, you start nibbling and reallocating some of the cash, if you have cash, if you're a higher percent equities, you probably don't believe a word I'm saying, and good luck to you because my humble opinion, you mentioned the idea that when stress hits the system that everything gets sold no matter what to cover margin calls, I've also heard you say that you think that gold and silver are

19:54kind of due for a consolidation period here, what is your longer term outlook on the metals, is that a place that you see as being still a safe haven in times of stress like this? Gold and silver had tremendous moves leading up to this, which I think we're kind of discounting what we're seeing is that there's a credit event coming, gold and silver were discounting a little bit of that, and then they had tremendous moves, and now they're consolidating. In a lenient type event, which we're not calling, gold and silver could get sold, I would do that as a tremendous buying opportunity, I view gold and silver not as trading, they should be 5% to 10% of any of the ones portfolio, physical, the gold and silver, buy on the dips, long term we think gold is going to 10,000 by 2030, silver much higher, and the reason being that there is it going to be, and this has been discussed by not myself, but just about everybody in the financial community, a new monetary system is coming at some point, and gold has become

20:552-1 capital at banks, again, where they can create money from the gold. Gold was downgraded to a tier 3 capital after the petro dollar was introduced, so watch what the banks are doing, it's going to be part of the amount, whatever that looks like, don't know, but gold and silver will be a part of it. So long term, I like them, but if someone said, hey, I've got 500,000 dollars, I want to go buy gold today, and silver jazz, hey, look, take that 500,000, and my dollar cost average it over a year, it's already had a huge move, and for me personally, I'd love to see it consolidate, because that would be healthy, and kind of go sideways for six to 12 months, if it has another parabolic move, like the one we just saw last year, that would be concerning, that means something really bad is coming, and that might be an ending move for gold and silver in the short term. But right now, I like the price of the healthy long term for the technicals and the fundamentals, what you don't want to see is a, you don't want to see gold run to 9,000

21:59in three months, that would, you know, that that would be a take some profits signal in my humble opinion. Right. I've also been considering this idea that gold becomes part of this new monetary system, would it serve all of those that are holding lots of gold, like all of these central banks, to have it as high as possible, in order to increase the, let's say, the amount of wealth, when they are ready to move to that new system. I think so, but that will be determined by market forces and what's going on with fiat currency at the time. It's been a lot of negative talk on the US and the dollar, the dollar is the cleats, short in the dirty laundry, the bottom during the great financial crisis, and it's been in a stealth full market since then, with higher highs and higher lows. It broke the trend line recently, and everyone's suggested the dollar was going to fall apart. I, what I think happened is the dollar has about what we call a four-year cycle from,

23:01from one load at the next low, and this four-year cycle has been bullish, meaning the four-year cycle low is lower than the next four-year cycle low. So it's been, it's been higher highs, higher lows. I think we just saw potentially what we call an extended four-year cycle low in the dollar that we just put in recently. The dollar is rallying, and I think the dollar is going to be one of the best currencies to be in the next six to 12 months, just, just do cycles and, and what's going to happen globally. And you know, look, if this Iran situation continues and, and there's an oil problem, it's going to hurt the emerging markets worse than it does the US for sure. And as we talk about this new new system, new, you know, monetary system, you have a unique perspective as somebody that has previously worked at BlackRock. Do you think that the move towards tokenization of assets is something that is misunderstood as being a big threat to the average person, or does it serve a particular purpose for the system, let's say, to transact in a more

24:05efficient manner? The ability to abuse the tokenization is the thing I don't like. You know, everything's, there's no privacy, how it's controlled, who controls it, who benefits from it. There's definitely talk of the CBDCs, everybody kind of understands that that is a potential debt on arrival because of the control issues, stable coins, which they're pushing. And I think the UN is going to, you know, it'll be the JP Morgan coin, Bank of America coin. And the problem we have with that is that we indirectly controlled by the government through the back door. And it'll give the government the excuse, these are private institutions, they can do what they want. Just like they did with the censorship model. Remember, the US government was basically censored people with NGOs and Google and putting pressure on Facebook to do what they wanted. And then claiming, well, it's not really censorship from the government. And this is these private institutions.

25:07So I worry about a lot of these things. That's why we have to think about privacy. And I don't know if you've noticed, but you know, Bitcoin's had quite a sell off since October. What's out performed is privacy coins have been doing better than general crypto market. So there seems to be this, you know, shift back to privacy again, which my partner wrote a paper on there. He's more the Bitcoin crypto act than I am. The system are turning on like a Bitcoin and then consumers and everybody else has privacy coins, you know, kind of a hybrid system. And when, you know, as we're talking about the US dollar being strong and the idea of that you've presented that you think that bonds are going to be one of the better performing assets here. How does that? How do we basically think about that in the context of this war? You know,

26:07there is an idea that the US needs to dramatically resupply all of their armaments and that this is going to cost a lot of money. War is inherently very expensive. How do you think those two forces balance out within the bond market here? Well, the bond market cares about two things and two things only growth expectations and inflation expectations. If we're right, our economic call including China growth expectations are going to climb on market trades on. So that'll that'll there'll be a bid to the long end as the Sun folds and rates will go lower and risk assets will sell up and crowd into bonds. So counterintuitively, I expect deficits to widen into this next economic downturn. Counterintuitively bonds will be fine because there'll be a flight to safety and the US government's not going bankrupt anytime soon. And yes, the deficit may widen, but inflation is

27:10going the wrong way into deflation and the growth is slowing, which we believe it is. That's going to be the best place to be in our humble opinion. And by the way, everybody's not there. Once this begins, this trade begins, if we're correct, which I believe we will be, it'll happen fairly quickly and you're going to be kind of positioned for it. You can't chase it. You mentioned China again, and that's the one major factor we didn't kind of go through yet. Again, their entrance into this acute phase of their real estate and demographic crisis is something that you're pointing to as the reason for them being not a threat to the US, but you know, contributing to a major correction here. Why are those problems centered in China such a risk factor to the US? Yeah, so it's going to be contagion effect through their trading partner. So this will affect South Korea and Japan. And Japan already has a problem

28:15with their currency and their interest rates and their inflation and their deficits. China is Japan's largest trading partner in both exports and the exports and imports. The US is number two. So anything that happens to China is going to affect those two, which will have feedback loops to the US, the global economy, which will only add to the contagion. The real estate crisis started in 2020 when their demographics peaked and new permits are down 70 percent, which is huge. When keeping their economy, now their internal consumption has been plummeting, but they've had long-lived construction projects that are now starting to roll over. And that's manifesting into net fixed investment, which is now year-rear growth rate at zero. Other than the COVID blip, which was temporary, that's the first time it's happened since we've been tracking the data. Their GDP last quarter was 4.5 percent below us in the last three years.

29:19And their electricity consumption is approaching potentially year-rear growth. The internal wheels of China are slowing, but what do we have now? We have trade wars. There's a reason we have trade wars because since 2020, to make up for the slowing of their internal economy, they've been ramping up the exports. That's how they've kept GDP growth around 5 percent. So now with China and Trump and trade wars, they're under pressure, tremendous pressure. And so they're going into the key phase of their crisis. The good news is the China is in that creditor nation, so there won't be a situation where there's a currency crisis in China and foreign investors start exiting. They can fund this crisis internally, but it'll be very painful for them and more painful for their partners. So you won't be hearing about China collapsing or anything like that, but you're going to be hearing about what's happening to their trading partners.

30:19Okay. So Ed, as we mentioned earlier, quality information is difficult to find. What do you keep an eye on on a daily basis in order to try to get a more accurate picture of markets of data of what's happening in the world? In our research, we look at a lot of leading indicators and they're not, you know, you can't trade on them, but you can see where the winds are going to blow eventually in position yourself correctly. We're not short-term day traders with more opportunities and weight and patience, but if you really want to, you know, if you're if you're trying to get an idea of what's going on in the world, watch three months T-bills in a two-year, and if three-month T-bills start to run ahead of the Fed or the two-year starts to go down and yields very quickly, that means something is around the corner. So I wake up the first thing I check is yields. I don't even care about what the stock market is doing. I check yields, yield curve, I check what the dollar is doing, and then then then then move over to, you know,

31:22the equity markets and then the news. Look, cycles are cycles and demographics are very powerful and China has a demographic problem, so they're in a deflationary desk borrowed. They're like a much like Japan with the last two decades. That's what they're entering and they're hitting the key face. When countries like China get into problems like this, it has geopolitical consequences. Excellent, Ed. Well, I want to thank you very much for your time today. Of course, your guys' reports are available at financetechnologies.com, but that's about with a pH. I-N-A-N-C-E technologies.com, and of course, on X at Dowd Edward. Thanks so much for your time today. I'd always a pleasure. Thanks, Tom. Great to be here.