Fed To Trigger ‘1987’ Market Crash This Week? | David Woo

Overview

The video discusses rising oil prices and bond yields as potential catalysts for a broader market downturn—possibly resembling the setup before the 1987 crash. It also argues that the so-called “AI trade” is the key underlying vulnerability.

---

Macro Setup: Oil and Long-End Yields Pushing Markets

US Treasury yields

• The 10-year yield is described as reaching ~5%, the highest since 2023.
• Markets are selling off due to higher yields alongside higher oil.

Rate-hike expectations

• With oil above $100 and inflation risk resurfacing, the discussion suggests markets are pricing a very high probability of a Fed rate hike imminently.

Core claim

• Oil and yields may be feeding each other through expectations of synchronized monetary tightening across major central banks.
• This dynamic increases pressure on risk assets.

---

“Chicken and Egg”: Which Matters Most?

• The guest argues oil is the primary driver:
  • If oil collapses, rates likely fall more quickly.
• However, rising oil is also described as forcing central banks toward tighter policy, which then pressures stocks—especially growth/tech.

---

Oil Thesis: Why the Upside May Persist (and How High It Could Go)

Trading position

• The guest states he is long oil using options:
  • specifically, a call spread on December WTI, structured around a bullish-but-timed window.

Political timing around US midterms

• The guest argues oil has the highest upside until after the midterm election.
• Rationale: Iran may be able to pressure US policy before political constraints ease.

Middle East shipping disruption

The oil strength is linked to tightening physical supply, including:

• attacks and regional developments affecting shipping lanes (including Hormuz/Red Sea dynamics),
• widening spreads (Brent vs. WTI-style measures) as evidence of real-time physical tightness.

Demand/inventory considerations

• The guest argues that Asian demand and inventory tightness are not fully buffered by government reserves.
  • Even if countries like China have reserves, they may not fully offset disruptions.
• Japan and India are mentioned as particularly sensitive to higher oil via currency and inflation effects.

---

Why This Could Hit Equities Harder: The “AI Trade” as the Keystone

The guest argues the US equity market is dependent on the AI trade, so stocks may struggle if:

• long-term rates keep rising, increasing financing costs and crowding out spending, or
• investors conclude the AI investment cycle is unsustainable.

Additional points raised:

• Bond-market reaction is partly tied to AI capex-related debt issuance.
• Attempts to cap long-term rates (often discussed as financial repression) may not be enough.

---

Possible Trigger for a Bigger Selloff

Equity “pressure valve”

• The guest suggests the market may need to fall about ~10% for political pressure to force change.
• This implies oil could keep rising until that equity downside threshold opens the “pressure valve.”

Other tail risks

• Escalation risks, including Iran/Houthi-related shipping concerns.
• Japan and potential yen weakness, translating into pressure on US Treasuries.
• Most importantly: US–China AI competition dynamics.

---

US–China AI Escalation as a Major Equity Risk

A major theme is that the biggest non-oil, non-rates scenario could be the end of the fragile US–China AI détente.

• The guest speculates the US may ban Chinese AI models.
• He argues that could trigger retaliation, potentially including threats related to critical minerals/“earth card” dynamics—damaging the broader industrial and stock-market complex.
• The discussion includes a security framing:
  • claims that China can distill US models at industrial scale, providing justification for restrictions.

---

Trading Stance and Expectations

The guest indicates he is:

• short stocks (e.g., QQQ put spreads), and
• long oil (via a call spread).

Timing expectations:

• Markets may become most unstable around the period leading up to / around the midterms.
• He also flags a possible China-related summit window as another key timing risk that the market may be pricing.

Rates level referenced:

• Long-term yields might only need to rise to roughly 5.25%–5.30% (rather than 6%) for parts of the “AI bubble/risk complex” to deteriorate.

---

Presenters / Contributors

• David Woo (founder and CEO of David Woo and Bound; PhD economics; former roles at Barclays and Bank of America)