254234053 - 1_ppog61ek - PID 1851201 Welcome to the real vision daily briefing. It's Friday, May 13th, 2020 to I'm Warren pies, founder and Strategist at 314 research. I'm joined today by Tony career or you don't Tony Friday the 13th, barn eskimo pie. So I'm happy to be here, man, it's good to do a briefing on Friday so we can sort of encapsulate the weeks actually, right? Yeah, absolutely. Looking forward to getting your thoughts. Haven't spoken for a few weeks. So, you know, today was kind of you a somewhat of a bounce for the markets. We saw yields come, go up today, but on the week down, sectors, kind of the most beaten up sectors leading the way today, tech and consumer discretionary meters. When I zoom out just before I get your take on market action, when I zoom out, I see from the beginning of April to yesterday's close about a 15 percent drawdown and the S and P 500. And obviously there are pockets where it was much worse. So it has been persistent downward pressure. One day does not orality make but is always a question of whether this will be the beginning of a trend change if we've got enough pain discounted in the prices. So what do you see, what you mentioned yields to me if you want to start there wherever you want to go, what did you see this week? Yeah, I guess for the outstanding factor this week is that we got fresh CPI data, right? We got more daisy cutters and inflation on tape. We're at a 0.3% year over year CPI, 11 percent year over year PPI. And width that we had a potential reversal in the treasury market this week, which as you know, has been trading offered only. So with yields potentially carving a high and it looks like they may have a sort of outside reversal, if not a reversal week. It looks like they may trend lower end. Maybe that's the move that you'd expect in after another big CPI number where the sort of Treasury market would be a by the rally sell, the fact kind of thing. But I still see signs of the grape rotation as this market technology ways on the tape because it's a bigger proportion of the S and P then the energy markets and the commodity markets. And this week we've pretty much got a sell off across the board in pretty much every sector or the S and P. So it's a blood red week where there's no escape. This week we happen to have a big pull back from metals. We have small pull back and energy of 5%, big pullback and then metals of 10 percent and GDX. But we also had that weakness and technology that's persisted. Those just happen to be the sectors that are sort of short covering into the close today. But when I look at the S and P on my sort of weekly basis, It hasn't done anything to show me that it's reversal mode yet. Even know sentiment I would say is a little bit negative on the downside. It still doesn't seem like we found a bottom yet. I feel like there could be more selling due to more inflation and still potentially higher yields down the road. Yeah, That all makes sense. And I mean, what we did for clients just to give you how we're viewing things as we laid out kind of a 10 Factor checklist that we're looking for to get crossed off, or at least some of these things need to get crossed off before could recommend getting back into the market. So chart that we saw close to enough damage or bearish sentiment to get us interested. Here, at least have the discussion is what we call our Don Money indicator. We're looking at the percentage of ETF volume made up by inverse ETF flows. So we kind of call this, it's a retail type of trade. We want it to hit 60 percent. And honestly said going back like 2010, when these things kinda came into the into the market structure. There's always been a big rally in the year following this number hitting 60 percent where it 57 percent sober within a whisker of that number. So not quite there yet. And that's kinda the story that I see is that we're just not quite there yet across the board on any of the things we're looking at, but we've seen progress. This seemed like a week in the last couple of weeks taken together where there's been real kind of a sentiment change. And we're moving away from just a run-of-the-mill correction and people are starting to panic a little bit, which is what you need to be at. If you're going to get a tradable bottom, you see a similar kind of thing. Yeah, yeah, We can begin close. We've gotten that cluster of tick index extremes that adult was kind of looking for prior to the damage of carbon to load this week, we finally got a cluster of two extremes bigger than minus 1500. On the downside, we got a punctuated by nearly 2000 negative 2000 tickets dream on the downside on Monday. So yeah, it looked like there was some selling that was definitely exhausted and gotten out of the way this week for sure. You know, I just I'm not willing to make a bet yet that the upside is really worth chasing here, even though we know that bear market rallies are generally pretty significant. I'm kind of comfortable the way my book exposition here. Why don't, I don't feel like I need to make too many adjustments either way. And the reason I say that is because as you know, I'm, I'm a clock or in a hunter of the great rotation trades as I've been calling it, where natural resources outperform technology. And when you start a clear the smoke out this week, it was another advance of about 1% of the become over the triple few. And that sort of irritation that's key for me under the hood for that to be continuing no matter what goes on in the broader market, that's helped me sticking to my guns on that on that trait. Yeah. I mean, you've killed it on that trade and it's been fun to talk to you about and watch it happen. You know, I, I've, I ran into a few people on Twitter, social media, and a few clients asking questions about, I think you're starting to see kind of it's just, uh, maybe I think, I think it's premature. The early stages of a reversal of this negative correlation between oil markets. And so the idea that, you know, will have weakening economic demand and that's going to flow through into oil right in that. So we'll get if we were to get oil down lower would be because of an economic weakness or whatever. And that this is kind of what we need to look for. I think it's a fundamental misunderstanding of what's happening though. I think that oil is moving because the supply constraints, it's not going to be responsive to the demands time around. And so, you know, my honest feeling is that the oil and energy actually keeps moving in the opposite direction of the broader market. It, you don't. Maybe that correlation to the intensity starts to dissipate a little bit. But overall, I don't see the dynamic is we're really dealing with supply issues over out of Russia, Ukraine that are, that are driving the ship right now across oil and energy and also the kind of broader commodity complex. I couldn't agree more worn I've been I've been trying to take my clients the task that are pushing back on my idea that the inflation tree or sort of commodity inflation trade is still in motion. They push back with water ideas that are along the lines of what about the demand destruction of stagflation? And while I can't really argue with that side of it, I can argue the supply side like you say, and say, you know, what's going to put oil or natural gas genie back in their bottle? Because right now the diesel market is so tight and so spare that they're there just is none. There's no elastic demand just yet everybody is still buying cargoes of jet fuel, everything that they need to, you know, whatever energy source that they need. So I don't know if the supply doesn't loosen up the prices and you're going to give in. So that's why my argument is still along the lines of even if we do have this economic setback in demand, I don't know that the markets are going to allow for pull back on that at all because I don't see how the supply is going to show up and satisfy the buyers. And maybe there'll be a small pull back, but it's still leads to the energy markets being higher for longer. And this week was a perfect example. We got another bounce off of that 6.5 level and natural gas back up to $8 and then sort of settled in 1765. But with the, with the attack that continues to rear its head on supply like this, we'd they canceled more leases in Alaska on federal land. So that's kicking the can for an oil recovery down the road significantly. And I think that's going to be the driving story once we shake out the CPI week. Yeah, exactly what you're describing is really creating a, I think a confusing signals across the mark. And so a couple of charts I think that that shows some of the confusion that's out there. That if you're looking at just typical factors and try and understand market stress that the energy strengthened oil and commodities strength are actually kind of tricking people, I think so the first chart I would have Brian pull up is the spread between the high-yield bond index and high yield bond energy. It's the next one. There you go. And so that, on that chart, what we've seen is like energy is over-represented high-yield index. And so over the last 10 years, eight years since really the 2014 collapse forward, you've seen energy push, high-yield credit spreads higher as a bigger influence. And so our calculations that typically Energy adds about 32 excess basis points to the high-yield spread over treasuries. And today, we're at a discount because of energy, because energy is trading so good and the outlook for oil and producers are so good. And so we're actually not seen the stress you would typically see in the high-yield credit spread space. And so I think it's making, its maybe tricking people into a false sense of security that the real economy is stronger than it really is, but it's actually energy strength. And you can see this one other chart, or when we look at high-yield credit spreads versus investment grade credit spreads. And so typically these, That's the scatter plot and near in typically these two series trade in a pretty tight linear correlation. And what we've seen is a lot more stress in the investment grade space. And so I think that should be worrisome as you saw kind of a negative GDP print a few weeks back. Q1. And obviously recession probability has gone up. And you and I have talked about the, the chances for stagflation rising. I think that this is a stagflation ary signal because investment grade, it doesn't have many of the commodity producers or energy, energy producers. You're looking at more of the core of the consumer economy, finance plus consumer stocks and those spreads are starting to really show trouble already. So I think that, you know, when you kind of dig under the surface, crosscurrents of oil and energy are, are kind of obscuring some of these messages and making it a difficult market for generalists to read. The, that kinda gives a, brings up the point for today's clip, which is our, What's the chances of a soft landing in I think that that's an ongoing debate if you're going to get bullish at these levels like we talked about, you probably betting on a soft landing of some kind. But let's see what what Alex Gourevitch had to say when he sat down with Paul to talk about his outlook. I think this is potentially the largest monetary tightening it all history is how you think it inspires talk. And so I thought I was talking to, I was interviewing David Rothenberg a few weeks ago and I got good feedback from this. And generally, I'm somewhat aligned with him on, I tend to be at least partially aligned with your model this perfectly, but we tend to think a lot similar. I followed him for years and he's kind of giving it. He thinks recession. And that was before the negative print on cuan GDP in other sessions with schema. But he was given like a 20 percent chance of soft lending. And honestly, I see next to 0 chance of soft landing. Yeah, I don't see components that allow that. If we take into account what's happening in China, in Europe as well, the probability of a soft landing is got to be close to 0. Now, well, I'm thinking, you know, paradoxically, I think that there is almost like a binary outcome. And the reason is because fat took such a inflation fighting stamp, which is also with a caveat. Some people think that failure is way behind the curve, right? And some people think that there's still blowing bubbles because they're not breathing rates at 200 basis points for me to write. I kind of think that as some of the ridiculous new, but I have been in the past before myself. So there you have a Gourevitch calling for basically a 0 chance of a soft landing. Tony, what's your thoughts? You think we can, the Fed can pull rabbit out of its hat and navigate to a soft landing here? No, since Alex and I were on a panel at real vision and del Mar together, I decided decided to fade everything that Alex says now because that's what he did to me after I gave my market view and our real vision presentation and del Mar, I gave my whole worldview right there and Alex came out right after me and said, Yeah, I'll take the other side and pretty much everything Tony just said. So no, I do I don't get caught up as you guys know in the economic prognostication because I'm not a biologist or an economist, so I don't really know where we're heading towards recession, not recession. I like to lead to bond more good kind of guide me and then I get to react. So, you know, I think you probably makes a fair point, as it seems like the feds got a really difficult job right now. I just don't ever get terminally bearish on the US economy. There always seems like there's some sector of the economy that's like really on fire, That's kinda holding it over somehow. And I hate bad, not a recession happening anyway. So I'm playing this one down the middle one. Yeah, I hear you. It's it's kind of you can go in circles around that stuff for sure. So we try to be as quantifiable as possible. The trackers are calls and be transparent as well. So, but I still of course on the market junkie. So I get interesting stuff. I guess a question before we get into the viewer questions I have for you is we have probably since the last time we spoke and said, you know, 500, points out the S and P 500. I have some ideas we've been laying out for clients and how you get market exposure when the time comes, is there what are your favorite traits? Just to recap, I know you've been looking for the great rotation. Is there anything specific within that or anything else that you're seeing? It's popping off your screen. Yeah. I'm, I'm going to take this opportunity to, you know, I really liked the risk reward that's presenting itself in some of the natural resources sectors that had pulled back. So the trades that I'm looking at right now are sorted. For example, SME got beaten up pretty good this week. It looks like it was off about 8% by the time. Week has been over. Big draw down there, right into technical support though, right into the moving average support levels where at least I think the risk reward is okay, right? Everybody's gotten terminally bearish copper in this sort of 800 point being 800 dollar down-move on the LME from 10 thousand to 9200. I see. And really sturdy range bottom at 8800 and that's my sort of Mason-Dixon line for copper. So if I can, if it's okay, I can get copper on this diff because just as copper never broke out on the upside through 10 K, I feel like it's not going to really break down much on the downside below nine K and stay in this range. So with my idea that that's going to be the case with my idea that I want to buy aluminum on this huge pull back from the highs that it's seeing. To keep along that line of having metals and natural resources exposure exit me, just landed in my lap as a risk manager warn, you know, it's one of those swings that you can't afford not to take when you can try to make five to risk one. And so with that kind of risk reward, I'm looking there and I'm still really clock and the natural gas trade pretty hard because they're still going to be a serious demand issue and supply issue over the winter. So these Jan, spread is still really blown out in natural gas or that part of the curve. And so I'm kind of looking at trying to pick off some of the natural gas producers on a dip as they pull back into support. So that's it. You know, I'm sticking to my knitting. I'm looking to buy natural resources on the dip, maintaining my shorts in the sort of interest rate sensitive areas of the market like home builders and retail and tech. And so far I haven't really moved my feet on that type of positioning yet. All that makes sense, especially as a trend follower, I think that the taking a shot at industrial metals with if you have a long enough time horizon, it's hard to see how that doesn't work out for you if you buy it right. For our clients, what we're starting to outline is kind of a portfolio approach. And obviously we're a little more quantitative in broad basket approach, but we're looking at quality stocks that we want to pair with energy. So energy typically doesn't make it into equality screen. And so we're screening out the, the S and P 500. That's kinda the core of our what we call our full cycle trends system at 314. And you want to you have to manually plug your energy and pressure that you're in industrial metals and commodity producers into that strategy. And we're looking at a period like 2000 to 2005. I don't think it's a perfect analog, but it's similar to what's happening. So we had the, the end of the last tech bubble and then the beginning of the next secular, last secular bull market in commodities. And this kind of a strategy, S and P 500 was, was negative from 2005, whereas this strategy did pretty well double digit returns annually. This is the kind of thing we're looking at. So this is this is how we're advising our clients. So the one thing you did say which we aren't finished with our work, but if I don't know, I would love to hear your thoughts on the bond market because I think if you're, if you think that yields have topped here, what do you buy? My mind, we haven't officially made this recommendation, but I've set it to some clients as we're looking at home builders, I think that the the actual actually, when you go out there, you can thereby tech junk or home builders that are pretty cheap with I think, structurally tight housing market United States. So if I was, if I, if you told me for sure, rates are going to be lower in the next 612 months. That's the the the play that I would pile into. What do you what do you think? I know you're shorting him. He said, Yeah, but, you know, that's the one that I am probably the most cautious about. The short or sort of I keep my stop really, really tied to the markets because I don't want to get that burned on a turn. The reason that I can maybe see your point in home builders because they were, they were the sector that kinda nose go first. You know, as race really got out of the gate, it was home builders down first, even before technology started getting beat up. So as they've gone down first, they've sort of consolidated quite a bit as yields have sort of found this potential reversal pattern. So if, you know as outside reversal week and yields does play out. And it certainly looks like that setup is perfect and the 30-year we could see yields pulled back and yeah, that would cause a short covered Rally. What's good about your idea and home builders now, why is that a very, very shallow, short covering rally only would start precedent up through moving averages and probably starts from short covering there. So you'd have that when they yourselves. Yeah. That's I'm glad to hear. You're you're kind of on the same page. That's when we what we do is we do kinda like a factor analysis of home builders in they've become a pure interest rate trade at this point in time is what it looks like. So the market, I think it's a fundamentally strong market in the United States. I think we're under supplied since the financial crisis. So the market is kinda for getting the fundamentals and just moving it on a macro rates trade right now. So I think if you spot me rates that we're going to be good to go there. And it's banned. Anyway. Let's move on to some lot of people want to get your thoughts specifically on gold. We're going to sell off here. What's the word, the chances of a rally? You look, you're talking to a guy that just got burned. Again, being long gold for inflationary reasons. I have a really bad taste in my mouth about gold and it because I hate losing money. And when I look at my line item P and L in 2022 so far, gold is that the bottom of it? Right, with a negative number where I can't, I can't get it right. Playing it from the long side has been painful. For me. I've tried gold and gold stocks, but enough about me. Gold is a **** inflation hedge. Fret. Let's just say that right now it didn't really sore when inflation was taking to its eyes. We've got inflation ticking at its highs and we've really got no outlet for the inflation to come back down, right? Because the Fed is behind on rates and we've still got tight commodity markets and gold is getting hold, utterly pummeled. So my, my view on gold is that you should probably leave it as the currency hedge locked up in your vault where it belongs and probably not on your trading pad. If you've managed to fade all of the moves that you've seen and gold, both when it rallies on inflation and sells off on, I guess a bit of stagflation story in the markets now, your genius and you should keep doing what you're doing. Goal for me has gone back to being something that I want in my safe so that I can sleep at night in case my currency implodes and nothing else worn. It's really just, it's really disappointing that there was no follow through on the upside there. And this collapse has been just the price action disaster. Yeah, Unfortunately, I've got similar but we were watching that 950 level who was trained with 950000 1680 for a long time break out on the Russian invasion of Ukraine and you expect it to two. We have some closes over 950, the next level BY make a new all-time high and it's kind of the kind of petered out. Now the only thing I can say is that we've seen such dollar strength. It's kind of unreasonable to expect gold to really catch a huge rally when the dollar has been just like on fire, like it has. And so we did some analysis that actually Gold's been pretty strong when you account for help with what's gone on with the dollar. So maybe if we get a break and then the dollar rally, you can see gold start to resume its move above 950 and then challenge the all-time highs. I don't think it's going to challenge anything than last year we saw the dollar rally 5% and the Bloomberg commodities index was up 30% where it was gold. Nowhere, right? Yeah, so I mean, the dollar is a fair argument. I hear you, but the rest of the commodity complex is on phase. The rest of the metals complex has largely been on phase throughout this whole secular rally. Goal to me man, you're looking for trouble if you're wading into that as a trading vehicle right now? Yeah. I mean, it's a tricky one for sure. But your point is a good one that we've had dollar strength in commodities. Certain commodities are strong anyways, and I've always kinda push back against the idea that the dollar is really dictate and oil traits way more off supply and demand, but the fact that oil is higher and this leads to another question that we're getting near. The fact that oil is higher right now with Chinese lockdowns in dollar strength. I mean, I think if you're a generalist, you're looking at this last week for oil and it's been kind of arrange or flat. But the truth is, under the surface, there has been a massive battle between supply outages, demand outages, currency moves that are crazy off the charts and we're still hanging in there. I think this is a really bullish type a week for oil actually, what do you think? Yeah, to that point worn at the, it's really important to follow what's going on in the crack spreads, right? Which is if you follow the 321 crack spread where the refinery takes in three barrels of oil and spits out two barrels of gasoline and one barrel of diesel, right? That spread is blown out from about $10 to $50. And I think that's probably the big driver behind the strength in the market. The calendar spreads in crude are very sort of range bound but holding their backward aided levels. But what's just amazing is that you've got flat price taken off to 1.510 because the product inventories continue to draw. So there's nowhere to go to get the products, but to start off at the head of the spear, bind WTI, and cracking it. And that's why you're seeing the refiners go on a run through their old highs like this rally just got started. And it may have because it looks better for the refiners now. They look there's the situation is better for the refiners now than it was six months ago at 50% of the price where they are now. So we're at a really, really huge inflection point where the refiners can just continue rallying from here just because of the tightness, the lack of supply in the product market. So it's really, really hairy situation. I think that that alone is going to drive crude oil to a very, very shocking price on the upside in the near future. Yeah. And if you think about Golf coast refiners, they're producing more like a 2, 11 crack spread. So there are like 50 percent diesel. So even more money, given that the fact or middle distalless, I should say to be more accurate. So they're making even more money down on the Gulf Coast where we have so many independent refiners like Bolero and Philips. And Marathon has some places, some facilities there too. So I mean, yeah, I think refiners or are in good shape for sure. I mean, crack crack spreads are crazy high. I like the integrated also because I think there's going to be just an uplift across the board, whether you're to my crew or refined product. There's a lot of, there's some room for that spread to narrow I think. And so you kinda want to integrate ads are back in the driver's seat right now. But you can almost throw a dart and the energy space, I think at the moment, to be honest, you could kind of off the beaten path, but question for you about cannabis stocks and MS. Os. This is an area I've really no thoughts on, but it's directed towards you. What do you think? You can't touch them with a ten-foot pole unfortunately, right. I mean, I'm I'm a momentum guys, you know, worn and they have shown no signs of picking their head up when they've shown the most modest sign and pick their head up. Technically and challenging a moving average. It's like whack-a-mole and they're making a new low. I just commented to some guys in my Slack channel while they're still carrying out generals. In the cannabis market. Down here. You don't mean as in like firms like Aurora, Cannabis and canopy, our legging lower in large magnitude moves to new low prices that they have never seen before. That's me as bullish is, I can get the space and as excited as I can get about the valuation that we're treating, 334 times forward earnings. I can't step in there and buy any of this until the market decides it's found a level that it's willing to pay for Canvas. But right now, I mean, you can't give these stops away if you walk into a reggae concert with certificates in your end. So I'm going to take a pass right now. Man. Yeah. That sounds about right. Probably last question. It's a great one. Ended on I think for you is to to Tony. Do you see the market hitting all-time highs this year or the early part of next year. And if yes, then what do you think will be the catalyst to drive the market up? Because every where is, everyone is bearish. So isn't that contrarians? So I mean, it's just kind of like a nice little bow to wrap this conversation up. You know, what do you think all-time highs in the next 12 months? No shot. I think no shot. I think that if you study the Nasdaq and study sort of nasdaq history, you know, you, you, you learn that all of these stocks have the staying the same storyline over a different period of time or a different sector in a different shape. And when I look at the Nasdaq chart now, I feel like we're witnessing something that is actually breaking for really good reasons at a massive, massive inflection point in both history and markets. So with, with that combination, I just think that this commodity inflation, supply chain issues and the need for portfolio managers to cling to hard assets in the markets. And the move away from, as you can see, electronic bits in the sky like crypto currency and software, and internet stocks and all those sectors that are still the worst performers on the year. Those are still in bear market territory right now, the nasdaq is off 20 something percent year to date. It's dangling at a new low even though there's been a, you know, a little tiny bounce off the lower the move. Broadly speaking, I think that that is one way traffic for the rest of the year, right? We shot three generals. We shoud Facebook, netflix, Amazon. We just had a huge trend line. Break. An apple. Apple had a 5% down day last week, this week for the first time in two years. I mean, they are showing signs of erosion. And I think with the leadership that's that massive apart of the, of the equity indices getting really technically beat up and removed from its bullish trend. I do not think that we're going to see a new high and the nasdaq this year because that's my big barrier sector. And I don't think that the S and P can obviously rally if Big Tech is gonna go down. So the only shot that we have is for natural resources to be incredibly strong and provide some kind of counterbalance. Otherwise, we're going to have a, a serious, serious selling pressure before the end of the year at some point. So I'm, I'm a little bit bearish. I understand that it's a contrary and call, but until somebody can show me what's going to push inflation down, I can't, I can't really adjust my sales right now because everything was good. Yeah. I mean, I think that's a good guideline for the year by two senses. It's when you kind of get a little closer to what's happening right now, one of the reasons why I'm not a huge hurry to go out and buy the market, even though we saw 38 something yesterday at the LOS, is that you need enough meat on the bones to get that next kind of bear market rally and have it be meaningful to you guys if we bounce up to 43, 44 hundred-year, only thing you get is a signal to Jerome Powell that basically you can keep moving aggressively against these markets. So I think the rallies at this point are kind of self-defeating. So what if you get, maybe we get back to 4444 on a bear market rally. It's like so what do you want to buy at the market up there? I mean, why? It doesn't make it doesn't make a lot of sense to me. Yeah. And we're going to need another something else. I think that's something else will be a reversal, of course, from the Federal Reserve and we're not there yet. I also think you need to get behind the midterm elections, probably, to be honest. So that's great read who aren't. I like it. Awesome on the same page. Well, I appreciate good talking to you again. It's been a couple of weeks and tomorrow or Monday. The Eric Johnston will be here. So thanks again to everybody out there for watching the real vision daily briefing, more and pies, midtone gray, great job worn. Have a good weekend. Yeah, you too, man. It's a really complicated world out there. We've got massive inflation, recession, phase, war in Europe, COVID, China or issues. What the ****'s happening? Everyone's got opinion. Who's right, who's wrong? As co-founder of real vision? I've got my own view, but maybe I'm wrong too. And I want to go and find out more from real experts, real in-depth analysis. And I've had chosen my experts for this two-week journey of discovery in global recession. Is everyone wrong? I've chosen people like pizza Xi'an to talk to him about geopolitics. David Rosenberg about the economy and peer Andra and the world's most famous energy trader about how to navigate the oil markets and where it's all going. This starts on May the second. And I'm going to learn so much about what really is going on and how to best navigate it. Yes, Not everybody is going to be saying the same thing, but it's going to allow me to piece together an investment framework to navigate these complicated times. Now normally we'd give you seven-day trial for $1. But because this is so important for all of you, and I think it's one of the most important piece of content we've ever done. We're extending that free trial for two weeks for $1. You get the entire campaign of all of these great minds. And it's only $1 for all of this. So just get a revision.com forward slash global recession to find out more and join me as I try and figure out what the ****'s going on.