259707362 - 1_ial5ys7z - PID 1851201 Welcome to the revision daily briefing. It's Monday, June 30th, 2022. I mash Bennington, joined today by Jared Dylan, editor of the Daily dirt nap. And also later on we'll be joined by religion zone western and Nakamura for an update from Tokyo on the BAHA and JG be yields. Let's take a quick look at what's happening in markets. Not a good day to put it mildly, starting off with Asian Nikkei down 3% on the deck, your stocks 50 off 2.6%. So down day in both Europe and Asia, Nasdaq off on the day minus 4.68% S and P 500 off 3, looks like nearly 3.9% on the day. Russell 2000, Unfortunately the big loser the day here looks like off 5%. I want to bring in Jared Dylan. Obviously Jared, lots of market volatility going on. You were talking about the recession trade in your daily dirt nap newsletter. But I want to read from a tweet set by you around ten PM last night. I'm genuinely spooked and I don't spook easily. Jared, tell us, what are you seeing right now as you look out on these markets? Well, this is, this is a terrible day for me. I mean, it's terrible day in the markets, its tail at terrible day personally. **** is just raining down on me right now it is. It has been a bad day. Okay. But let's talk about what's going on. There is an incredible amount of stress in short-term rates, in incredible amount of stress. Twos, I mean, I'm looking at Bill's one-year bills are up 33 basis points in a day. Bill yields to your notes half a handle. Like I haven't. Usually you don't see moves like this on the upside in the front of the curve and yields usually seat on the downside. There's a lot of stress him rates markets problem here and let me jump in and just frame this out for people who may not yes, they were fixed income as you are obviously. So you're looking at the very short end of the curve. Bills are traded discount on face. These are very short-term instruments. You're talking about very large moves in terms of percent change in yield, rising, fall in price. What does that mean? Why does something like that happen? Well, basically, fed funds expectations ratcheted up significantly just in the last 24 hours. So I don't know if everybody saw, but there is a Wall Street Journal article, nick, tomorrow's basically the Fed leak that they're going to hike 75 basis points on Wednesday. It's not really a surprise. I'm pretty sure that's what they're going to do. If you look at where Fed funds futures are trading, where pricing in four per cent terminal Fed funds. And if you think about this in the context of what the Fed has said in the past. If you go back to the last meeting on their dotplot, the highest died, the highest stop was 3.5%. And the Fed funds futures are pricing and 4%. So I don't, I really, I don't think would the Fed is going to be able to hike to 4%. I think if you could just naively by these things and if you can't withstand the volatility, I think you do. Okay. But it's in liquidation mode is what's going on where liquidation mode. And let's talk a little bit about the drivers here for this, for this perception that the Fed is going to basically continue to normalize from the ultra accommodative monetary policy we've had now since 2007, 2008 regime period. The driver on this is inflation. We get another brutal print on CPI, 8.6%. Give us a little bit of a sense of what the tensions here are, what the dynamics are at the Fed, and why this is such a challenging meeting. Yeah, I mean, first of all, I want to say, I would be willing to bet my reputation that CPI does not go above 9%. In fact, I think the next print is probably going to be lower. They have successfully engineered a recession, okay? And what's going to happen on Wednesday when the Fed hike 75, the curve is going to massively invert the long into the curve should rally. And that will be pricing in a recession. I mean, if you look where mortgage rates are, mortgage rates went up to 5.85% is the average on a 30-year fixed rate mortgage. Like the economy is going to be slowing down massively. Let's talk a little bit about curve inversion. I think you're talking about 2s tens which inverted briefly very early hours of the morning. Then an inverted, I guess what positive spread now it looks like four basis points on my screen. 2s tens. What is the significance of that number? And why does it matter to people, particularly people who are in equity markets? You don't often think about the different tenors along the yield curve. I mean, you basically, the yield curve is a nearly foolproof resection indicator. So if short-term yields are higher than long-term yields, basically what it means is is that within that time span, you expect the economy to go in recession and your pricing in lower yields in the future. That's why it always worked. It's worked seven out of seven business cycles. The yield curve inverts, then you get a recession, an inverted for the first-time couple of months ago than it steepened a little bit. Now it's flat again, it's going, you know, one of the things I said at the macro experience on San Diego, it was my opinion that not only would the curve flattened, but it would invert massively that you could have 2-year yields at 3.5 to 4% and Tenure yields below 3%. Yeah, by the way, all of this, the perfect sort of context and segue to queue up our conversation with Western Nakamura who's been talking about precisely some of these points, particularly from the perspective of the BAHA and how the baggage pen has effectively been putting this global yield curve control on. It appears as though we've had some change in that now Western. Yeah. Hey guys. Yeah. So basically, as you know, because you and I have discussed this for some time, but back in late January, early February of this year, I made a video on wheels called why global markets are addicted to the Bank of Japan. And the entire premise of this video was basically that there's basically two things. First of all, people are not paying enough attention to the Bank of Japan. It is the most consequential in terms of risk assets. And the reason is because they are the only central bank that is actively, major central bank that's actively easing at a time when global central banks are withdrawing accommodate policies after a decade of providing it all at once, leaving the DOJ to be the only one left doing so. And yield curve control, which keeps a lid, a loose one button the lid nonetheless, on global DNS overheat, we're talking about yield curve controls for people who don't really follow macro the way that you do. Let's talk a little bit about why yield curve controls are different from quantitative easing. The different points in the curve where the Bank of Japan is intervening, where the Fed and other goals central banks are not sure. So Brian, can you put up chart one please? So, you know, people who follow me on Twitter, you're very familiar with my putting up a chart of dollar yen versus the 10 year US treasury yield because they basically move right and add them. So this chart, this first chart is just very, very simply is just the tenure JD build in white or I'm sorry, in green. The 10 year US treasury yield and white. And that line that pertains only to that green. The green is the BJ's upper bound, the 25 base point by point upper bound. If GDB tens get to that level, the bank Japan step saying and conduct what's called a fixed rate operation in which they offered by an unlimited amount of tenure JBBs, such that the yield gets kept and they fall back down. And so they did that in February. But if you go to chart to actually, I've actually kind of mark these chart. So you can see wherever that, that green just gets up to that 25 basis point line. They conduct a fixed write operation. The offer to buy an unlimited amount of GDPs and GDB yields fall, and then treasury yields fall and bond yields fall. And this because if you're not getting yield at home and you know, you're going to send all this massive amount of Japanese capital overseas. And that kept US treasury yields and European yields and so on, so forth. And then that line is when b of j, the last be OJ meeting in which they basically effectively made fixed fixed rate operations permanent. So there's now a daily bid for unlimited GDB is at 25 basis points today or earlier or yesterday, rather. They were unable to hold that. And the premise of my video, as I was saying, was that if the Bank of Japan messes up with yield curve control, if they can't hold the line for whatever reason, you're going to see a massive spike in global sovereign yield and then that's going to kill risk assets. And well, here we are. Yeah, one of our regular viewers, CG, just pointed out that looks like Western dressed for funeral. At another one of our viewers has asked if the funeral is JPY. Let's talk real quick about the dollar yen pair, what you're seeing there, and what its signaling. So third chart is basically just the same as the last by just put w on top of it. So dollar yen did hit it's millennium, Neil Hi, except when yields start to pull back and JBBs started sell-off. During the cache session. Yesterday, dollar yen actually fell so that adult or strengthened against everything at basically every other currency pair except for the yen. Yen actually kinda like, well it wasn't bit up. And the reason that's happening is because either the Bank of Japan caps yields at 25 basis points and therefore the yen weakens. Or vice versa. They can't, you can't do both. And so in this case, when you're seeing the yen finally strengthen or gets short covered. What that is, is the markets who are betting on Fridays be OJ meeting to, for them to make a tweak in their policy to widen out the yield curve control band. And that's why you see that dynamic happening right now. Yeah. Really quick Western final point, significance. You've talked about this here before. The global transmission mechanism, this idea that the BAHA by y c, C is keeping a lid on rates globally. What's the transmission mechanism for people who are looking at their US equities portfolio trying to make the connection. It's simply that Japan has the largest net international investment position in the world. They deployed the most capital overseas. Much of it goes into fixed income because Pandas, cash, hoarding, deflation lists and very elderly. And so their need of yield and they're not getting any in Japan because of the O'Jays, your control. So let's, that's what BIG why CC does it. And indirectly caps yields globally and therefore leaves everything in sort of a low rate environment, even in a rising rate environment. And so with the removal of the BO j's yield curve control, that would be much. Now that's going to have much more of an impact on global risk assets than say the fat or the ECB. Because those things are well-known and more or less priced in the Bank of Japan, however, lifting rates, that's something that hasn't happened in decades and something that the world has not caused me to. And that's something that can create trillions of dollars of capital to flow around and reprice things. Western, very elegantly framed and concisely said, thank you so much for joining us. Thanks a lot. Thanks, flooded. So Jared, as Western points to lots of moving parts here today, this is obviously a global rate picture that Western brings up any thoughts or anything that you'd like. Add on those points in terms of what you're seeing here in US fixed income markets. Well, I want to say that, you know, if, if you go back in history for any downturn, if you're preparing for a downturn, what do you do? Well, you lighten up on stocks and you buy bonds, and you buy gold. And that playbook has not worked this time at all. It is, it has not worked at all. Everything is going down, the possible exception of energy. But even energy stocks were down 45 percent today. So there's I mean, that's, you know, a lot of the communication I'm getting from people. I get emails from subscribers all the time, and I must have gotten half a dozen emails like this sucks, everything sucks. This market blows. Like, I mean, every There's like everybody is feeling it like I don't. Usually there's some person on Twitter that is taking a victory lap. You know, they were in the one thing that went up. And it's not happening. Like it's it's it's hitting everybody. Yeah. I'm looking today. I here to WTI chart on the day closing looks like flat around 120 but bounced around earlier in the day? Yeah. Bounced around a bit. But yeah, oil is still launch. So yeah, basically launched on the day. Other asset classes, Jared, you bring it up. You mentioned gold. What are you seeing there? Well, I'm seeing the same thing that everybody else is seeing. You know, it's kind of, you know, on Friday gold was up a lot on the CPI print. You know, everybody shorted gold into the print overnight and then it ramped up to about 870 and it completely reversed and gave it all up today. If you look at a long-term China, so as 3% right to point, hate some odd percent of GDP down. If you look at a long-term charter, gold, it looks more attractive. It's a big cup and handle the uptrend still in place. But you know, a look like it to be fair. Gold is still up on the year. You know, it's really like one of the few assets. I mean, it's up like one or 2%, but it's still up on the year. Well, and it's especially up on a relative basis where we're thinking else has lost. Yeah. Yeah, that's the point. Yeah. Yeah. So Jared, how do you frame this? You were writing about the recession trade, as I mentioned earlier in daily dirt nap. How do you think about this? How do you process all of this? You've mentioned, mentioned this notion that the historical correlations are breaking down here. It's just ugly across the board. How do you begin to think about what you do? You ask the question, what works in a recession? So what does work in a recession? And is that where we're headed? The problem, I think one of my problems is just sort of in general is I think too far ahead, you know, like I'm several months ahead. So, you know, we as of Friday, as of the CPI print, we went into the recession trait. Okay, and that was exacerbated today. In a recession, long-term yield should come down, okay? I think if you bought, bought bonds and just if you could withstand the volatility six months from now, you'd be happy, okay, That's what I think equities are going to struggle. But at some point, you know, it's interesting. I'm looking at Twitter right now on my other screen, there's a, there's a Tweet, White House watching stock market closely. So that's very important because there's two competing interests here. One we're trying to get rid of and fit with the inflation. The Fed is trying to get rid of inflation. But if there's a threat to financial stability, the Fed will step in just as they have stepped in at every point in history. That the White House and the Fed doesn't want the stock market down 50 percent. This is a welcome decline in asset prices. They're happy to see this, but if it gets more disorderly, Sure, Absolutely. Bill pause rate hikes or cut or hiked 20 fiber, you know, stuff like that. Yeah. You know, we talked about it here on the show before this. The Scylla and Charybdis are trying to steer between these two very unappealing alternatives. This intense inflation, we see a handle on the one hand, and I know it's our favorite drinking game, say silicon cribbed is you have to drink. And also this contraction of the economy were not in recession yet. I'm not officially according to NBER, but we have seen one-quarter of growth contraction. How do they weigh that out? How do you weigh those? There's the balance of terror there between those two extremely unappealing options. And what implications does that have for markets? I think inflation's going to go down. I really do. There was I, one of the most fascinating things I've read about economics was now that we have the CPI, which is computed by the Bureau of Labor Statistics. But we also have the Google price index. And we have something called the MIT billion prices index, k. So it back in the financial crisis, September 15th, the day that Lehman went bankrupt, prices started to come down online within hours. Within hours of the Lehman bankruptcy prices started to come down, that deflation was already happening, right? So it's, it's my belief that the shock that we've had and the rates markets is going to have ripple effects across the economy. It's going to happen very fast. People, as we speak, are being priced out of mortgages today. It is happening. It almost happened to me. I locked in my rates the day before the payroll report. I got four and a quarter percent on a 10-year arm. That would be five and a quarter percent today. So it's, you know, it's happening by big move under this poison on a mortgage rates material. Yeah. Yeah. I mean, I I I you know, I would be one of those people at the margin. I probably wouldn't be able to do it. So let's talk also places where we're seeing a lot of pain today. In crypto, obviously, It's been, just been a brutal and ugly period. Bitcoin now, trading at 23,453, theorem at 1249. Just some, some, some, some perspective here. Bitcoin on a 24 hour trailing basis off nearly 15 percent, seven day basis off over 25 percent. It Theorem off 15 percent, 24 hour trailing, seven days off, 33, just under 33 percent. Call it. You mentioned on Twitter, Jared, everyone seems to be sick of crypto. You don't want to see it on your screen any longer. Give us the 30-second version of y? No, I mean, ever everybody has a good crypto like, like I, you know, you get to this point, you're so, you're so unhappy or so demoralized. I mean, look, most people own a little bit of crypto. And everybody at this point is what do they say? They're like, I'm not looking at it. I don't even log into the app. I don't look at it and I'm just going to pretend it's not there. If people don't want to hear about it, they don't want to see tweets, they don't want to see videos. They don't want to see these commercials for the exchanges. It's just, we are in the revulsion stage where people just hate it. And after the revulsion stage comes a period of neglect where nothing happens, which was the period of 201819. That was the neglect phase where it Bitcoin was 3000, that it didn't move and people left it alone. And that was the best time to accumulate a position. So that's what's in the future. Yeah, this so-called quick crypto winter, something we've experienced before, by the way, fascinating thing for someone who's in the news business who covers both crypto and macro slash capital markets. The fascinating thing about crypto is precisely what you just said. When prices decline and crypto, people don't want to hear about it when there's chaos in traditional capital markets, people tune in even more intensely. It's a strange function and I think it's related to precisely the point you made about how people, most people, most individuals, people who aren't in the crypto space, relatively small positions in it. When it declines, they get disgusted and they don't want to hear about. Yeah, I will say I will say that there have been a couple of times in my career where you got to that revulsion stage with stocks. 2002 was a pretty good example. You got to that revulsion stage. Nobody wanted to hear about a.com, anything at that point in history. Right? And and by the way, and by the way, I was working on Wall Street in those days as I know you were. And when we had that.com winter to coin something ex post, it didn't mean the building stopped. It didn't mean the development stop the infrastructure, the branch that continue to go. I mean. We saw this incredible build out to wherever they do what we're doing right now, talking to each other on opposite sides of the country remotely via video broadcasting to the entire world on YouTube, on Twitter, on the religion platform. The work continued, the functionality continue to develop even though the prices were brutal. Listen, if you bought Amazon stock at its peak in 1999, I believe you are underwater for like 7.5 years. Yeah. And the other thing is, is that with crypto, it's there, there are these investment booms and busts. You know what I mean? Like it was funny because one of the things I was trying to do in my newsletter is I was trying to get a VC to write a piece for my newsletter about Web three. And I asked my subscribers, this was like December of last year. I was like, who wants to hear about Web three? Who wants to read this? And I got like dozens of e-mail replies. If I asked the same question now, like nobody crickets, crickets, nobody cares, pay talking of which one final point on this. I hosted a conversation earlier today on religion called Celsius bind as freezes adds to crypto is, was, this was a conversation with Dan Robert, Sergio Silva, and Francis hun. I wanted to take a look at a short clip from that today. You also appoints its relation with equity indices. He's absolutely spot on Head and Shoulders on the indices and the tech bubble. If we were to have a 55 percent like the COVID equivalence or any of the others. There's still a lot more to come on that. So it's very, very hard to be the frame that gives you bullish news. I'm going to tell you what I see, not what you want to hear, but the accumulation points would be 17 to 18. This 15 k comes out of this blue head and shoulders there. That would be a pretty nasty downturn. There is a bear flag, that target right down there, a little bit less strong on Bear Flag target that's down at 12 and a full round trip will take you back to our funnel that eight to 10 K. Jared, He's got the lowest the lowest resistance levels, their support levels, I should say, positioned at eight to 10 thousand on Bitcoin? Yeah. I don't know that I have a strong opinion about that. I mean, look like anything's possible, but I would I would certainly be a buyer at 10 thousand. Let's put it that way. That would get me off the off the bleachers. So yeah, I mean, look, the only thing that I have a strong opinion about is that it's interesting to hear people talking about eight to 10 thousand even as even as I was sort of a bottom level for potential support, I should say. He also talks about these humiliation points at significantly higher, at 17 to 18 thousand. Interesting, probably a conversation that's best viewed in its full context to get a sense of what crypto sniper Francis was talking about in that conversation. But something interesting to put on folks radar screens. Jared. And not surprisingly, as you might imagine, we have lots of questions pouring in any final points before we jump to those questions. Now let's go to the questions. Okay, here's one that comes just from Paul II, from the exchanges, religions, internal social network. And the question is, Jared, during your interview with Dave Floyd talking about discipline, you said sometimes you let even your losers run. Don't use stops. How do you decide when to sell? An interesting comment today. Well, you don't see here's the thing with stops. Like I sort of have, i'm, I'm opposed to stops because stops have a tendency to get elected. When just for random reasons like there's a flash crash, something happens, your stop gets triggered and then near stuck. So I don't like to put in hard stops just because they don't have stops doesn't mean I don't have discipline. But I do have less discipline than other people. I freely admit that because I like to give trades a time to work because my entry points are not always perfect. You know, if you, if you think fit your entry points are perfect, then you can have really, really strong discipline. But if you don't, then you have to give trades time to work. Yeah. This one comes to us from cargo G also from the exchange Jared weeks ago, you said the sentiment about rate hikes was very high and that at some point there'll be political pressure about 401 k drawdowns. You still have this view or did you turned bearish on stocks again? Also, our rate hikes, a good way to fight supply side scarcity for this is exactly the point that you were raising before about this balancing act. Now that the Fed has to play right now, between the pain of inflation and the pain of seeing 401 K's contracting. How do you think about that? And and to his specific point, where are you right now on stocks? You know, I trimmed a little bit about two weeks ago. I cut some stuff. I'm unfortunately I'm going to be cutting some more positions tomorrow. Not really an ideal levels. And that's gonna get me down to a core portfolio of about six or seven stocks that I'm just not going to sell. I'm holding, I'm holding for the next cycle or for ten years or whatever their long-term holds. So i'm, I'm pretty close to like a core portfolio here in stocks, but it represents a pretty small percentage of my assets. So that's why this daily briefing, we've spent most of our time talking about the bond market. That's now that's really something that's more interesting, you know. So I, I just I really, I'm close to home on stocks right here. By the way, speaking of which question about the bond market? This comes from nitrate or from the real vision website. I'm Jared. What are your thoughts on TLT? We should say TLT is the iShares 20 plus year treasury bond, ETF. You know, I, here's what I think. I think the Fed's going to go 75 on Wednesday. I think they're gonna hike 75 basis points. I think the curve's going to massively invert, I think the long and it's going to rally. So that's, that's basically it. If you think that we're going into recession, equilibrium, 10-year rates are not 3.5% or 2.5, two and a quarter. That's ultimately where they're going next, what I believe. Yeah. Here's a question for Western who's not with us, but I just wanted to read it. The question for whether it is WTF question mark, obviously, lots of people trying to process what's happening back to the feed throughs globally. Jared, I know you've had a miserable day, but it's been a great conversation. You crush some really great insights. Hearing the way that you're thinking about this very challenging day in markets across the board as we come to the conclusion of this conversation, final thoughts, key takeaways are made. All this noise that you'd like to leave our audience with. Well, key takeaways is, you know, I was very spooked last night. As the day progressed, I became a little bit more constructive. I think we're gonna get some, I think the Fed is going to actually help the market. They're going to hike 75 and that'll help the stock market. But I just want to say, look, you don't hear many financial pundits say this. I was wrong, right? I was dead wrong about the bond market. If you go back over my last daily briefings, over the last like three or four weeks, I was very bullish on bonds. And especially from a chart standpoint, you know, the chart setup was beautiful and I just got host. So this is, this is a mea culpa for me. I got it wrong and it sucks. But you know what, there's always another trade. There's always another trade. Got a rub dirt on it and get back in the game. It's great to hear people say that Jerry, and we really appreciate your candor, your insight. Thank you so much for joining us. Thanks. Thanks for watching everyone.