Full Signal Podcast: "This is how the bull market ends"

Guest: Michael Gayed (Lead Lag Report)
Host: Phil Rosen
Date: February 5, 2026

Episode Overview

In this episode, Phil Rosen interviews Michael Gayed, the influential market analyst behind The Lead Lag Report, to dissect critical but under-discussed risks in today’s financial markets. Centering on the Japanese carry trade as a potential catalyst for global dislocation, Michael also dives into AI-fueled market trends, the complex relationship between small and large caps, and where investors should watch for the next tail event. Throughout, Michael challenges consensus narratives and encourages listeners to recognize the hidden interconnections shaping present-day risk.

Key Discussion Points & Insights

1. The Japanese Carry Trade: Hidden Global Risk

• Why Japan?
  Michael has warned for years that the Japanese carry trade could trigger a major credit event due to Japan's longstanding ultra-loose monetary policy, immense system leverage, and its vulnerability to currency shifts.

  “No country has enabled leverage more than Japan has... Japan has had zero to negative rates for the longest time. They have the last to raise rates post Covid and had the most debt in the system.” — Michael Gayed [03:30]

• How It Works:
  Investors borrow cheaply in yen and funnel that capital into global assets. A weak yen makes the trade more profitable; a strengthening yen, by contrast, forces forced selling—triggering "cascading margin calls" around the world ([03:30–05:17]).

• The True Catalyst: Oil Prices
  Japan imports all its oil, priced in dollars. If oil prices spike and the yen weakens, Japan faces a crisis, pushing it to intervene to strengthen the yen (often by selling U.S. Treasuries—impacting global yields):

  “The catalyst to all this is not about the yen, it's oil price in yen...” — Michael Gayed [05:42]

• August 2024 Flash Crash:
  Michael describes a brief but sharp market event last year as an example of how these risks can manifest suddenly.

  “You saw glimpses of that August 3rd, August 5th in 2024... when the markets collapsed... but only lasted two days.” [02:30–02:58]

2. Are Flash Crashes Just Buy-The-Dip Opportunities?

• Interventions & Backstops:
  Michael nuances that while previous dislocations were quickly reversed (often with policy intervention), future events can be longer, more persistent, especially if oil is the main driver ([05:17–07:08]).

  “Could it be a buy the dip opportunity? Yes. I do believe that the carry trade reversal... is probably going to come in pulses... every time it happens, there's going to be some intervention.” [06:47]

3. Hedging Strategies for the Reverse Carry Trade

• Traditional Hedges Faltering:
  The reliability of Treasuries as a hedge is challenged due to changes in their correlation with equities. Michael notes his bias (as a fund manager) but acknowledges reality:

  “Treasuries used to be a hedge. I still think they’re going to be a hedge… but the last few years have been brutal… gold has replaced Treasuries for a moment in time as a safe haven.” [08:00]

• Asset Allocation for Tail Events:
  Michael sees a hedging mix for oil spikes: oil, Treasuries (for eventual flight to safety), gold, long/strong yen, select equities, and possibly crypto.

  "I think if you're going to position for a reverse carry trade, it's an asset allocation question. Oil will be the play… Treasuries… yields would spike and then come back in... gold would be part of that... long the yen..." [09:14]

• Crypto as Canary:
  Michael worries that leverage and recent reversals in the crypto space are early-warning signs of systemic risk.

  “Every crash is preceded by leverage and there is still a lot of leverage in the crypto space... another tail event... could spill over into equities.” [09:50]

4. Oil’s Central Role and Geopolitical Wildcards

• Oil Prices Benign (For Now):
  With oil down since President Trump’s return and U.S. supply robust, the Japan carry trade risk has been delayed. Only a geopolitical super-spike in oil would set off the chain Michael worries about ([10:09–11:26]).

• Investor (and Media) Blindspot:
  Phil notes the lack of mainstream discussion about hedging for oil spikes:

  "I almost never see anyone talking about… what to do in your portfolio against rising crude. That’s not a headline, it’s not a conversation.” — Phil Rosen [12:44]

5. Japanese Solvency and the Value of Collateral

• Are Japanese Banks Insolvent?
  Michael draws a provocative analogy to the U.S. regional bank crisis; because underlying collateral (JGBs) weakens as yields rise, Japanese banks face solvency concerns:

  “Are you suggesting Japan’s insolvent?” — Phil Rosen
  “Yeah, of course. How could it not be? With the sheer amount of debt they have and the fact that yields have to keep rising...” — Michael Gayed [14:39–14:44]

• Japanese Equity Bull Run: Not About Macro Risk
  Michael draws a line between structural deregulation (which has buoyed Japanese equities) and the acute risks presented by the carry trade unwind ([14:44–16:15]).

6. Systemic Correlation in Global Markets

• Tail Events Correlate Everything:

  “Everything correlates to one in a tail event. Except historically treasuries...” — Michael Gayed [16:37]
  All global markets, especially Japanese equities, would feel the pain if the yen/carry trade reverses.

7. AI Boom: From Bull Market Driver to Risk

• AI’s Double-Edged Sword:
  The AI trade—formerly the market’s main bull case—could reverse if mass layoffs and societal disruption trigger backlash:

  “AI went from the reason for the bull market to the reason for a bear market.” — Michael Gayed [17:55]

• Why Small Caps Matter:
  If AI truly drives productivity, small caps should benefit. Their continued lag suggests the liquidity is not as broad or effective as headlines suggest:

  "If you're bullish on AI, you have to be bullish on small caps... So how can you be bullish on AI and not on small caps?" [18:55]

8. Timeframes & Societal Pushback

• Integration Will Take Longer:
  Michael believes markets (and investors) underestimate the lag in seeing real-world impact from AI—they confuse “fast narrative” with “fast transformation”:

  “The human mind is very bad at estimating time… it’s going to take longer than people think.” [20:40]

• Political and Social Ripple Effects:
  Pushback against AI’s effects could become a potent political force:

  “If you want to win the midterms… all you have to do is be anti-AI.” [22:29]

  “The political winds shifting towards more socialist aspects is a push towards more government to protect us from AI. Government’s got to pay us, got to give us UBI…” [23:01]

9. Private Credit as the Next “Subprime” Risk

• Michael worries that the huge flow of private credit into AI comes at the expense of other sectors, setting up for blow-ups reminiscent of past cycles:

  “Private credit is this cycle’s subprime... all this private capital has gone towards anything that says AI... you’re going to have some blow ups.” [24:10–25:37]

10. Consensus Overconfidence

• Crowded Trades:
  With almost universal bullishness on AI and asset prices, Michael sees a classic risk of “everyone on the same side of the boat”:

  “The crowd is right on average, but wrong at the extremes... Overconfidence leads to leverage, leverage leads to crashes.” [27:26]

Notable Quotes & Memorable Moments

• On predicting disasters:

  “I’m not bearish on stocks. I’m just bullish on a tail event.” — Michael Gayed [02:55, 14:54]

• On intervention:

  “Policymakers are very creative at preventing creative destruction, so they will find a way.” [07:16]

• On preparation:

  “I don’t need to know the mile marker that my car might crash. I just need to slow down and prepare for it.” [15:54]

• On differentiation:

  “I have to stand out… I have to be able to express ideas in ways that nobody else is able to express and then hopefully have products to benefit from that.” [26:00]

Timestamps for Key Segments

• 00:40–05:17: Japan carry trade mechanics, oil, and flash crash risk
• 07:51–10:09: How to hedge for a tail event and crypto’s role
• 14:39–15:54: On Japanese solvency and the lessons from bank collateralization
• 17:55–20:13: AI’s role in markets, small caps as the true litmus test
• 22:29–23:37: Societal/political ramifications of AI adoption
• 24:10–25:37: Is private credit the next subprime?
• 27:01–28:25: Dangers of consensus and overconfidence

Conclusion

Michael Gayed delivers a thought-provoking and nuanced perspective on hidden market risks, arguing that Japan’s carry trade and tail events rooted in global leverage can upend the current bullish consensus. He insists that investors remain flexible, vigilant, and diversified—especially as AI, oil, and credit markets reshape the global financial landscape. The conversation stands out for its depth, with actionable frameworks for risk and a willingness to challenge market orthodoxy.