Markets Face A Double-Threat Today | Jim Iuorio

Jim Iuorio · TJM Institutional ServicesUncertain

Sold SMH outright and now uses options to cap downside on chip ETF exposure.

He sold all his SMH shares and rebuilt the position with near-the-money five-week calls, extra longer-dated calls, and a call spread about 5% above the market. This defines his maximum loss on the longs and costs him premium. He has already made money in Micron, AMD and SMH. He calls a 300% Micron rally in eight weeks abnormal, which is why he is protecting gains and will adjust his deltas if the market keeps moving.

“I'm 100% defining the most I can lose on my longs in SMH, and I'm paying money to do that”at 10:14

Jim Iuorio · TJM Institutional ServicesBullish

Healthcare is a defensive sector to own in a debasement trade; he is heavily invested in it.

With AI looking less attractive, Jim looked for other US equity sectors to hold in a debasement trade and chose health care. He says he is heavily invested there and began buying the XLV at about $11.50. He likes it because it looks defensive, and because AI may make health care more efficient, which could help it.

“I looked at things like health care, and I'm in pretty much up to my eyeballs in health care. We started buying... the XLV at about $11.50.”at 54:27

Jim Iuorio · TJM Institutional Services

Bond selling to finance deficits and conflicts is an underappreciated driver of rising 10-year yields.

He lists four reasons 10-year yields are rising. The most underappreciated is that the US is selling large amounts of bonds to finance deficits and conflicts that do not seem to end. He ranks inflation as secondary and argues that AI is competing with bonds for investment dollars.

“I think one of the underappreciated one is that we're selling a whole lot of bonds to finance deficits and to finance, finance conflicts that just don't seem to end.”at 4:43

Jim Iuorio · TJM Institutional Services

The 10-year yield is likely capped near 5.5% if the Fed or Treasury starts buying long bonds.

He is concerned yields could rise but says he does not really believe they will go much higher. The Fed could create money and buy long-end bonds, as it did with about $9 trillion of purchases. Treasury Secretary Bessent has repeatedly signalled he wants to hurt bond shorts. Investors are also buying at around 5.3%, and sovereigns and hedge funds may return, so a 5.5% ceiling is his base case. He calls Fed intervention a strong possibility but not a certainty.

“So I think in my mind that puts somewhat of a cap on long end ten year, let's call it 5.5 just because it's a nice round psychological number.”at 24:33

Jim Iuorio · TJM Institutional Services

In a foreign bond contagion, Treasury buying would push US yields lower.

Jim expects that in a bond-market blowup abroad, investors would move into US Treasuries as a safe haven, which would be good for the US. He expects the contagion would hurt equities but not bonds. He thinks US yields would go lower in that scenario. He also says he does not think bond yields are going higher overall.

“Oddly, I think that people would probably buy US treasuries... I don't think it will have a bad effect on the bond market. I think our yields will go lower.”at 1:03:55

Jim Iuorio · TJM Institutional Services

A low VIX signals complacency, so he is carrying about three times his usual put protection.

By his research, most corrections of 20% or more began when the VIX was below 20, typically around 15 or 16. He reads a low VIX as investors being cavalier and not protecting themselves against a move in either direction. In response he has bought more puts, carrying about three times the usual put size on his equity portfolio.

“people are not appreciating the fact that markets can move in two ways and they're not protecting themselves well enough”at 9:17

Jim Iuorio · TJM Institutional Services

Retail hasn't levered up as in 2000 or 2007, so the market may have room to run.

He recalls mom-and-pop investors leveraging up into the 2000 tech bubble and owning five or six homes before 2008. He has not yet seen that kind of retail leverage now, which he takes as a sign there may be more time before a top. He also says retail tools are now about twice as sophisticated as institutions had 20 years ago, so retail is no longer the dumb money it used to be.

“I haven't seen people leveraging up on the mom and pop level yet.”at 13:59

Jim Iuorio · TJM Institutional Services

Zero-day options add short-term volatility but pose no systemic risk and aid long-term market durability.

He sees the growth of zero-day-to-expiration options as a significant source of volatility, but only in the short term. He does not think a wave of wiped-out zero-day traders would create systemic risk. He argues that short-term moves exaggerated by these traders remind people of risk and clear out reckless players early, which makes the longer-term market more durable.

“I don't think there's a systemic risk if a bunch of zero day expiration traders get wiped out. ... I think that's one of the reasons we have a more durable long term market”at 18:38

Jim Iuorio · TJM Institutional Services

The AI trade is a mania and a bubble, though its timing can't be known.

He compares today with 2001 and 2008 and argues the AI trade is a mania that is driving both economic activity and share prices. He points to poor breadth, with only about 25% of stocks above their 50-day moving average, as a sign of the excess. He adds that being right that it is a bubble means little, because bubbles can keep inflating for years after they are recognised.

“I argue that this is a bubble, which, by the way, that opinion means nothing because you can identify a bubble as it's inflating and still be three years too early”at 3:17

Jim Iuorio · TJM Institutional Services

AI stocks are the main downside risk; the trade may not last, though AI firms now earn profits.

Jim compares the AI equity trade with the 2001 dot-com collapse, when internet stocks went to zero. He says today's AI companies were already making money and are earning more because of AI, unlike the early internet firms that only added a .com to their names. He still says nobody knows when the trade will end. He has trimmed his AI exposure and says he no longer loves being all in on AI. The main thing he worries about owning is AI names that have run up sharply.

“The only thing I'm worried about owning that has a really significant potential downside is these, you know, AI names that have been bitten through the roof.”at 59:23

Jim Iuorio · TJM Institutional Services

Market leadership is unprecedentedly concentrated in a few mega-cap stocks, with poor breadth.

He says seven stocks made up about 35% of S&P 500 market cap in May, which he calls unprecedented. The closest precedent is the 1980s, when the top seven were about 25-26% of the index. He treats this lopsidedness, together with poor breadth, as a warning sign and a reason to hedge.

“Seven stocks back in May made up 35[%] of the S and P market cap. That's never happened before.”at 12:35

Jim Iuorio · TJM Institutional Services

A bond-market contagion would likely trigger risk-off selling in US stocks, since global investors hold them.

Jim says confusion and market disruption push investors to pull back from risk. US stocks are not owned only by domestic buyers, so if bond markets in Japan and Europe come apart, global investors would pull money out of risk assets. He thinks that would hurt the US stock market. He does not expect it to hurt the Treasury market.

“I think it could be bad for us on the equity end of it because any sort of confusion and market disruption tends for people to take in risk.”at 1:03:55

Jim Iuorio · TJM Institutional Services

If the Fed starts buying long bonds, gold and silver become the place to be.

If the Fed starts buying long-end bonds, the debasement trade comes back. Gold has had growing pains, with central banks selling it to buy oil or defend currencies. He still expects gold, silver, platinum, real estate and farmland to benefit if the debasement trade returns. He says this is not a high-conviction call, but it is enough for him to hold those assets.

“I think gold and silver are gonna be the place to be.”at 25:26

Jim Iuorio · TJM Institutional Services

Gold has a debasement tailwind; he trimmed after January's blow-off and plans to buy back.

Jim says he has distrusted the stewardship of the currency for eight to ten years and sees a debasement trade. He cites central bank buying and de-dollarization as supports, though he thinks de-dollarization may not be long-lived. He sold 20 to 30% of his gold and silver positions in January after a huge run-up, because he believes things that rise crazily tend to fall crazily. He is now looking for places to get back into gold and silver.

“I'm just focusing on the tailwind, and I have started probably about eight, nine, ten years ago when I realized that the stewardship of our currency, I don't have that much trust in it, and I believe the debasing trade...”at 53:57

Jim Iuorio · TJM Institutional Services

Warsh is sincere about discipline, but the Fed would likely intervene after a severe selloff.

Warsh hiked 25 basis points into a supply-shock inflation problem, which he thinks will do little, but the hike let him look serious while the Atlanta Fed GDP nowcast showed 5.1%. He believes Warsh means what he says, though people often change their tune under pressure. He estimates the threshold for a Fed reversal is a 10-year yield near 5.5%, the Nasdaq down about 35%, the S&P down 25%, and a narrative that the economy is weakening.

“I believe that Kevin [Warsh] is serious when he says it, and I believe there is a significant chance that he means every word of it.”at 30:21

Jim Iuorio · TJM Institutional Services

Fed rate hikes are a mistake; the Fed will start cutting rates around four or five months into 2027.

Jim thinks the Fed will be slow to react: it tends to hike rates four months into an inflation episode after inflation starts broadening, and rate effects take eight to fourteen months. He calls a Fed rate hike silly because disinflationary forces from AI and recession are already beginning to win. He does not think it is his job to tell the Fed what to do, only to react to its actions. He expects it to start lowering rates about four or five months into 2027.

“And what I think is they will be lowering rates probably by about four or five months into 2027.”at 50:34

Jim Iuorio · TJM Institutional Services

Companies cut hiring on AI expectations; real AI productivity gains are only now beginning.

Earlier, companies held back hiring because they expected AI to make them more productive, not because it already had. He thinks this is shifting and that productivity gains are beginning. He cites domestic productivity data, saying the biggest boost since early 2023 is comparable only to 1997.

“Now I think it's shifted a little bit. I do think it's beginning.”at 35:06

Jim Iuorio · TJM Institutional Services

AI productivity gains are weighing on the labor market now; displacement is rocky but workers adapt.

Jim believes corporate America is seeing AI productivity gains, that these will grow, and that they are probably already weighing on the labor market. He compares this to past technologies, which destroyed some jobs in the short to medium term before creating new ones that take a long time to appear. He expects the medium term to be rocky and says that displacement could be painful within about two years. He argues that people and the economy adapt faster than expected, citing how quickly oil supply chains were rerouted.

“productivity gains and that will likely increase in the future. I believe it. And I think it is probably weighing on the labor market right now.”at 37:02

Jim Iuorio · TJM Institutional Services

Equity wealth from AI gains drives the economy, so an AI correction would hit growth hard.

Over the last six years, rising asset prices have been a major driver of economic activity through the wealth effect. He argues that separating the stock market from the economy is ridiculous right now. If the AI trade corrects materially, the wealth effect would shake economic activity and could force the Fed to act.

“over the last six years, the wealth effect created by assets going through the roof has been an enormous, enormous driver of economic activity.”at 30:21

Jim Iuorio · TJM Institutional Services

AI is a massive disruptive force that will last a long time, with productivity gains beyond the internet boom.

Jim says he has come around to seeing AI as a massive, long-lasting disruptive force. His evidence is that US productivity has been rising since the start of 2023, and the only comparable boost was the 1997–2003 internet adoption period. He adds that current productivity increases are larger than that internet-era gain. He still expects the AI equity trade to be volatile and does not expect it to last forever.

“I've I've become... I've come around to thinking that AI really is this massive, massive disruptive force that's going to be here for a long, long time.”at 35:29

Jim Iuorio · TJM Institutional Services

Oil-shock inflation will turn to disinflation in about ten months as recession and rate effects bite.

Jim says oil supply shocks have occurred about 10 times in the past 60 to 70 years. They are first inflationary as an input cost, especially diesel, then become recessionary after eight to fourteen months as money leaves the economy through pump and other prices. Recessions are disinflationary. He argues the Fed tends to lag, starts hiking after inflation broadens, and that rate-hike effects take eight to fourteen months to show. He expects the two effects to hit together around Q3 2027. He also says that if oil falls sharply after an Iran settlement, disinflation could come sooner.

“I believe that disinflation is going to be what we're talking about in probably ten months time.”at 48:10

Jim Iuorio · TJM Institutional Services

Oil could fall sharply after an Iran settlement, helped by UAE leaving OPEC and Venezuelan supply.

Jim says oil could suddenly fall a lot if the Iran conflict is settled. He cites the UAE leaving OPEC so it can produce 3 million extra barrels a day, which it is already doing, and Venezuela coming back online. He says that if oil falls another $10 to $15, the economy could really hit on all cylinders. He also says the world has adapted to oil supply disruptions much faster than oil analysts expected.

“But now what else could happen is that oil could all of a sudden go extremely lower because we settled this thing in Iran.”at 49:34

Jim Iuorio · TJM Institutional Services

AI data center buildout is inflationary now, creating hundreds of thousands of jobs, but its build-out will slow.

Jim says the money spent on AI and the people building data centers, which he says has created hundreds of thousands of jobs across the country, is inflationary right now. He argues that AI's disinflationary effect comes later, as the technology replaces jobs and makes workers more productive. He thinks these forces are roughly offsetting now but that the disinflationary side will eventually win. Adam adds that the build-out will slow and need fewer hires, and Jim agrees.

“The money spent on AI and the people building data centers and all the jobs created, which are literally hundreds and hundreds of thousands of jobs around the country... that's inflationary.”at 50:01

Jim Iuorio · TJM Institutional Services

Trump has not restrained federal spending; the government is still spending like a drunken sailor.

Jim says that when Trump was elected, voters were promised fiscal restraint, but he has not seen any. He thinks Trump is deregulating and pushing the economy forward but is not slowing spending, and is hoping economic growth will shrink deficits. He says the government is still spending like a drunken sailor and that Trump keeps promising checks, such as $5,000 payments. He also says the president is willing to cut checks and support things.

“When we elected Donald Trump as president, we thought it'd be some fiscal restraint... I have not seen that yet at all.”at 55:16

Jim Iuorio · TJM Institutional Services

Illinois bonds trade with an implicit federal backing, which he thinks is genuinely true.

Jim says he told an Illinois talk show that Illinois bonds trade with an implicit federal backing. He says the president likes to save things and be the savior. Despite the Republican president, he thinks the market is pricing this in and that the bonds genuinely trade with that backing. He gives no quantitative evidence.

“I believe that Illinois bonds trade with an implicit federal backing... I think they genuinely are.”at 56:36

Jim Iuorio · TJM Institutional Services

New tax laws, deregulation and foreign investment could help the economy hit on all cylinders.

Jim lists favorable policies in place: the new tax laws, particularly expensing for small businesses, deregulation, and foreign direct investment. He thinks these, along with oil prices falling another $10 to $15, could let the economy hit on all cylinders. He says there are a lot of good things in place.

“the new tax laws particularly expensing for small businesses. The deregulation and the foreign direct investment.”at 57:19

Jim Iuorio · TJM Institutional Services

Reshoring is beginning and manufacturing data look strong, a possible benefit of tariffs despite his free-trade stance.

Jim is a free trader and opposes tariffs. He says tariffs can still have positive downstream effects. If companies are truly reshoring to the US, that would be good for the domestic economy, and he says the beginnings are visible. He says manufacturing numbers are very strong right now, and he is not sure whether tariffs are the cause.

“And if people are really reshoring here, that could be a good thing for our domestic economy. And I actually... We're starting to see the beginnings of that.”at 57:54

Jim Iuorio · TJM Institutional Services

The dollar is being debased, and Fed bond buying hurts the currency and lifts hard assets.

Jim describes a debasement trade in which the dollar loses value. He says that if the Fed buys bonds, that will have a damaging effect on the currency and push up the prices of other assets. He lists US stocks, gold, silver, real estate and farmland as beneficiaries. He has little trust in how the currency is managed, and says the Trump administration has not restrained spending.

“if the Fed's buying bonds and they're... That's gonna have a deleterious effect on the currency, then all those other things are gonna go up in price too.”at 58:38

Jim Iuorio · TJM Institutional Services

French bond yields are surging, and he worries France's bond stress could spread to other markets.

Jim says French yields are going through the roof. He is worried France could join Japan in a bond-market problem. He sees this as part of a contagion risk, starting with the August episode in Japan. He says this is a con on his pros-and-cons whiteboard and that Europe should be watched closely.

“I think yields in France are going through the roof. I don't know if you've noticed that.”at 1:01:40

Jim Iuorio · TJM Institutional Services

Japanese bond yields are rising and could cause problems; Japan's situation is a different animal.

Jim says Japanese yields are rising like France's, but that Japan is a different animal. He believes the Bank of Japan is supporting the yen, and says the bond and yen shorts that began in August are a concern. He thinks problems could come from Japan and Europe, and these worries put him on the con side of his pros-and-cons list.

“Yields in Japan are as well but Japan's a different animal. I think that there's a lot of problems that could come from there.”at 1:01:40