How to Prepare For 'The End Of The World' | Neil Howe

Neil Howe · Hedgeye Risk ManagementBearish

Fund is short 20-year zero-coupon Treasuries, having profited, as long bonds suffer in inflationary crisis.

Howe says his fund is not a buyer of long-term bonds and oscillates between neutral and short. Right now it is short 20-year zero-coupon bonds, which he says has paid off. The logic is that a fixed 5% yield is a good hedge only until inflation reaches 10%, and fixed income has historically performed badly when the world is more exposed to crisis. The fund was built for a fourth-turning economy with inflation and upheaval, so long-dated zeros, which carry the most duration, are the exposure it shorts.

“Right now, we're actually short zeros... the twenty year zero bonds, and we've done very well with that.”at 39:22

Neil Howe · Hedgeye Risk ManagementBullish

Fund is long tech via XLK, though it trimmed that position recently and is short the weakest tech.

Howe says his long-short fund is long XLK, meaning it is long tech overall. The fund pared that position back the day before the interview, and it is short the weakest parts of tech, such as DRAM. The fund's overall tech exposure is therefore a net long that is being managed through hedges rather than a pure bet on the sector.

“while we are long XLK, we're long tech. Although I can just tell you yesterday, we pared back a little bit on that. We are short the weakest parts of tech.”at 47:11

Neil Howe · Hedgeye Risk Management

Long-duration fixed income has historically performed terribly during crisis-prone periods; avoid duration.

Howe argues that a 5% locked-in yield looks good only until inflation reaches 10%. He says fixed income debt has always performed badly when the world enters a phase more endangered by crisis, which he presents as a rule of history stretching back five centuries. As danger rises, the less one should hold duration, and he extends this to any long-term exposure as real interest rates rise. His fund is short long-dated bonds on this basis.

“Fixed income debt has always been terrible when the world enters a phase which is more endangered by crisis... That is the rule of history.”at 39:59

Neil Howe · Hedgeye Risk Management

Bond volatility is rising as savings become scarce and investors grow skeptical of government fixed income.

Howe says the MOVE index has risen sharply since the Biden administration, which he attributes to a greater skepticism about fixed income. This is not only about US public finances but about the political economy of high-income countries generally. He argues the world has moved from the post-Depression savings glut into a period of capital scarcity, so the bond market is repricing the risk. This structural shift is why bond volatility is high while equity volatility stays subdued.

“I think that's because that's one of the biggest changes we've seen is a greater skepticism about fixed income... I think we're in a period of capital scarcity.”at 41:08

Neil Howe · Hedgeye Risk Management

TIPS are not safe; real yields and term premium rise together with inflation, hurting them.

Howe says bonds are not safe, and inflation-protected Treasuries (TIPS) are not as safe as people assume. When inflation rises, real rates typically rise along with the term premium, which pushes TIPS prices down. He notes TIPS have been doing poorly recently, and that holders have felt pain. His conclusion is that investors should be out of bonds entirely.

“Everyone thinks bonds are safe. No. Bonds are not safe. And even tips are not as safe as they... because usually when inflation goes up, real rates go up and the term premium goes up at the same time.”at 53:34

Neil Howe · Hedgeye Risk Management

US stocks are extremely overvalued; a CAPE above 40 has historically meant negative ten-year equity returns.

Howe says the market has entered a period of extremely high valuations. He uses the real-return CAPE, cyclically adjusted P/E, which he says is over 40 and about 43 now. Since the late nineteenth century, starting from a CAPE above 40 has been followed by negative ten-year real returns on equities, so he calls the prognosis for the stock market very bad.

“We've entered a period of extremely high valuations... the real return cape... which is over 40... if you start out at a cape of over 40, which is where we are, I think we're now about 43, your ten year return on equities is negative.”at 34:46

Neil Howe · Hedgeye Risk Management

The fund must stay bullish and participate in equity gains, not just hold T-bills for protection.

Asked whether the fund is short-term bullish on the stock market and economic growth, Howe says yes, absolutely. If the only goal were to avoid drawdowns, one would buy T-bills. The fund instead aims to participate in equity gains while using a short side to limit losses. That mix of long equity and hedges is how it is built to handle a market that may still rise before a larger upheaval.

“We have to be bullish... if all you wanted to do is protect against drawdown, right, you'd just... You'd buy t bills. Right? That's not what our fund is.”at 46:47

Neil Howe · Hedgeye Risk Management

Chip producers are most vulnerable to any slowdown in data center growth, so they are leading the sell-off.

Howe argues that the AI boom is the segment most sensitive to changes in momentum. If growth in data centers even slows, chip producers face actual negative growth, since the second derivative hits hardest. He points to the recent weakness in Micron, SK Hynix and the South Korea trade as this effect already playing out.

“As soon as the growth in all these data centers even slows, that means going to actual negative for a lot of these chip producers. Right? That's the whip hand.”at 34:46

Neil Howe · Hedgeye Risk Management

Fund is short the most vulnerable chip stocks, including DRAM names, within its tech exposure.

Howe says the fund's short side in tech targets the weakest parts of the sector. He points to DRAM, a memory chip category where the fund has a definite short. He says the most vulnerable chip stocks are where the fund is shortest. This is a hedge within a net long tech book, reflecting a view that some semiconductor names are more exposed than the broader sector.

“If you go in and look at, like, DRAM or something like that, you'll see definitely a short position there... is in the most vulnerable chip stocks is where we're shortest.”at 47:23

Neil Howe · Hedgeye Risk Management

VIX is lowest on the way up and rises near market peaks as investors buy downside protection.

Howe says that across market booms, the VIX tends to be lowest on the way up and then rises as the market approaches its peak. At extreme valuations, investors who are still long begin buying puts and insuring against downside. He notes that the market has barely dipped in the past two years, and that volatility was unusually low (around 10 to 12) in 2018-2019 and before COVID, when protection was very cheap. The implication is that elevated valuations with low VIX are a late-cycle warning sign.

“...the VIX tends to be its lowest on the way up, not at the peak. At the peak, it begins to rise again.”at 42:13

Neil Howe · Hedgeye Risk Management

Market leverage and speculative risk-taking are excessive, enabled by looser SEC rules and 3x ETFs.

Howe points to incredible valuations and incredible leverage in markets, citing South Korea's leverage and the SEC's moves to allow more leveraged products. He notes that investors can now buy 3x leveraged long and inverse ETFs on individual tickers, while a 1930s rule still caps borrowing to buy stock at 50%. He says this allows risk-taking that would have been unthinkable a decade ago, and that the current administration and SEC leadership tolerate it. He ties this to a Minsky-style build-up of risk during stable times.

“We have these incredible valuations. We have this incredible leverage going on.”at 45:26

Neil Howe · Hedgeye Risk Management

Fed survey shows household wealth gains for older Americans and losses for under-35s, which he says is unsustainable.

Howe cites the Fed's Survey of Consumer Finances, which he calls the gold standard for household net worth, from the 2025 data released recently. Households age 75 and over had a 33% real increase in net worth, further gains on earlier periods. Those under 35 were down over 20%, and he says the same pattern appears by income. He calls this one breaking sign of the current situation and does not think it is sustainable.

“age 75 showed an increase in household net worth of 33% in real terms... Younger people 35 were down over 20%... I don't think that's sustainable.”at 8:26

Neil Howe · Hedgeye Risk Management

China has planted Volt Typhoon malware in US infrastructure, and Iran has tried to disrupt dams.

Howe argues the countries allied against the US have already been planting malware in its infrastructure. He cites reports that Iran tried to disrupt dam flows in several US counties and says China's Volt Typhoon malware is inserted into the SCADA systems of US infrastructure. He says that, according to the director, the FBI and CIA are waiting for the right time to pull the switch. He expects the homeland to be involved in any great-power conflict, with attacks on infrastructure.

“But we know what China has Volt Typhoon, which is malware inserted into the SCADA systems of all of the infrastructure in The United States. And according to the director, the FBI and the CIA are just basically waiting for the right time to pull the switch.”at 14:38

Neil Howe · Hedgeye Risk Management

AI is making legacy US weapon systems obsolete faster, and missile offense has the advantage over defense.

Howe argues that AI sharply speeds up the rate at which legacy weapon systems become obsolete. Technological revolutions always make big defense investments stop working, as with battleships and torpedo planes. He says the US is struggling with its legacy investments in carriers and tanks. He also argues this revolution favors offense over defense in missiles, since an interceptor is much harder to build than an offensive missile, which pushes toward ground operations against the launch sites.

“What AI does is hugely increases the speed at which all of our legacy weapon systems become obsolete... Technological revolutions always increase the rate at which everything you've invested in with regard to defense no longer works.”at 16:50

Neil Howe · Hedgeye Risk Management

Iran's buried missiles and drones can only be eliminated by a ground operation, which is Trump's problem.

Howe says the offense now advances faster than the defense in missiles, so the choice is to compel the country diplomatically or to go in on the ground and take out the archers, not the arrows. He says Iran's ballistic missiles and drone assets are all buried underground and cannot be reached from the air, so if the US does not go in on the ground it will never get them. He calls this one of the big problems Trump is having with Iran.

“I think that's one of the big problems Trump is having now with Iran. You know, all these all these ballistic missiles and all of their drone assets are underground... if we don't go in on the ground, we'll never get them.”at 20:07

Neil Howe · Hedgeye Risk Management

AI depends on a large physical plant, which makes it vulnerable to cable and power disruption in a conflict.

Howe says that in a conflict environment, the first things to go are interconnectivity on undersea cables and electricity generation, which are the easiest to take out. He points to Russia's actions in Ukraine and asks what that would do to AI. He argues people forget AI depends on a huge industrial plant that needs an enormous interconnected network of cables, not just wireless, so it could be the first thing disrupted.

“People forget that AI depends on a huge industrial plant to keep it going. An enormous interconnectivity involving cables, you know, not just wireless. That could be the first thing to be disrupted.”at 24:03

Neil Howe · Hedgeye Risk Management

Inflation is the almost-certain endpoint of a crisis, so the next decade will trend toward inflation.

Howe argues that in a real crisis the state must quickly move resources to those who need them, and taking them from creditors via inflation has always been the way nations do this. Holders of fixed nominal debt such as Treasuries lose purchasing power, which he calls financial repression. He points to the pattern of the Fed and Treasury responding to every market drop and unemployment rise since 1987 and to the roughly 30% rise in national debt to GDP during COVID. He thinks the trust in government and the political polarization make restraint unlikely. Periods of disinflation are possible, but the general trend over the next ten years will be toward inflation.

“Inflation is the is the almost certain endpoint of the crisis. Right? Because in a in a real crisis, right, where you have to suddenly summon up... the country.”at 26:17

Neil Howe · Hedgeye Risk Management

The Fed may hike again this year, but it will reverse course and support markets if unemployment rises.

Howe says the Fed may hike at least once more before the end of the year. He argues the Fed is still very sensitive to the economy and markets. If unemployment rises, the market will fall first, and then the Fed will reverse course. He says that if the S&P fell 30%, the Treasury and Fed would focus on bailing everyone out rather than on inflation.

“The Fed may hike again before the before the year is over, but I think still they're very sensitive both to the economy and the market. I guarantee you, if unemployment starts to go up, the first thing that's gonna go is the market's gonna go down.”at 32:02

Neil Howe · Hedgeye Risk Management

The AI boom is drawing global capital into the US and keeping the dollar high.

Howe says the AI boom is one of the things keeping the dollar high. It draws in capital from all over the world from people who want to participate, because nothing else like it is going on. He notes the dollar fell about 0.4% today, which he calls large for recent moves, after steadily rising day to day.

“the AI boom, which is also, by the way, one of the things that's keeping the dollar high because it's drawing in capital all over the world of people who wanna participate.”at 34:46

Neil Howe · Hedgeye Risk Management

The 'this time is different' AI argument for high valuations is a familiar pattern that ends in a market drop.

Howe describes the debate as those who say the market is overvalued versus those who say AI is so transformative that the economy can absorb extreme valuations. He says the second argument recurs through history and it always ends with the market falling, though timing is unknowable. He treats tech underperforming the broad market for several days as an early warning. He adds that AI will change society, but that does not prevent a boom-bust cycle, which he expects to be painful.

“This time it's different with regard to AI... because we've got something so amazing that our economy is gonna be able to absorb these these extreme high valuations, and it always ends the same way.”at 34:46

Neil Howe · Hedgeye Risk Management

Commodities and precious metals are a deliberate anti-inflation hedge in the fund for this economic regime.

Howe says the fund is multi-strategy, with an anti-inflation component made up of commodity futures and precious metals. The fund also has a component to limit large drawdowns and takes some share of the rising market. He says it was designed for the economy and fourth-turning scenario he expects, in which inflation is a risk. Real assets like commodities are therefore central to his approach, as opposed to long-dated bonds.

“there's an anti inflation component, which involves, you know, commodity futures and precious metals and so forth as part of the fund.”at 38:44

Neil Howe · Hedgeye Risk Management

Long stability breeds risk-taking, so the system is primed to break; recessions need a systemic shock.

David Lin observes that since the 2008 crisis, the economy has needed a huge shock like COVID to enter recession, even though the tech-bubble burst did not. Howe links this to Minsky's insight that macroeconomic stability breeds risk-taking, so the more stable the system, the more risk people take until it falls over. He argues that the long stretch without recession has led to high valuations and heavy leverage, which means the system is set up for a sharp break once stability ends.

“Macroeconomic stability breeds risk taking. Right? People automatically will take more risks up to the point when the system goes over.”at 44:53

Neil Howe · Hedgeye Risk Management

Private equity is among the most vulnerable areas, so the fund is short it.

When asked about shorts in KKR, Xenia Hotels and Apollo, Howe answers that private equity and chip stocks are where the fund is most vulnerable and where it is shortest. He gives no detailed mechanism, but the statement puts private equity alongside the weakest parts of tech as a short. This reflects the view that leveraged, illiquid private-market exposure would suffer in the upheaval he expects.

“I'd say private equity and chip stocks is in the most vulnerable chip stocks is where we're shortest.”at 47:36

Neil Howe · Hedgeye Risk Management

The US electricity grid is highly vulnerable; cheap missiles, drones or sabotage could take it down.

Howe says the biggest threat to the US homeland is attacks on infrastructure, especially the electricity grid. China's Dongfeng-27 missile, which has a hypersonic warhead and high accuracy, can reach the West Coast and can take out individual transformers or power stations. Cruise missiles, drones, or insiders could also do this. He says the US grid is old and antiquated with many vulnerable spots, so it does not take much to bring it down.

“I would say the biggest threat of those is putting out our electricity grid. You can do that surprisingly easily.”at 51:28