#953 - Is it Time to Adjust Fed Expectations? With Jared Dillian

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0:34Is it time to rethink Fed expectations? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jared Dillian, editor of the Daily Dirt Nap newsletter and author of the book No Worries, How to Live a Stress-Free Financial Life, which releases next week. We can't even say hits the bookstores next week. Hits the digital bookstores, your Kindles, all that kind of good stuff. It does. It actually hits the bookstores. It'll be in the bookstores. Yeah, it'll be in the airports and everything. Awesome. Jared, congratulations. You are so prolific. congratulations on this latest book.

1:07Thank you. Yeah. Actually, I have another one in the works for about a year from now. Oh, my goodness. It's already written, ready to go. We all need to be as productive as you are, that's for sure. But we're excited about this one. And just so you all know, Jared and I actually taped a conversation about the book and really how to have a healthy relationship with money that's going to air as part of our personal finance education week later this month, which we are super, super excited about. We're going to have a host of conversations. And I think they're great. I certainly got a lot out of it.

1:41So it's going to be fantastic. So we're going to have some more fun stuff coming up at the book, but you'll have to wait for that. Just a teaser. So Jared, let's talk markets though. Let's talk a little institutional finance. And we had a sell-off in stocks, a backup in bond yields. When you look across the sort of action today as we kick off the week, of course, coming off a holiday here in the U.S. What changed today? Why did the sentiment seem to shift today? Well, it's all about rates. Gosh, I don't even remember what happened last Friday. We had inflation, didn't we? It was PPI, yeah. So we had a soft PPI number on Friday, and two-year yields just got rocked.

2:29And then, you know, we had a long weekend. Futures opened up on Sunday, and bonds were down. You know, I had a large position in two-year notes, and I kind of got the sense that it was fully priced. I mean, basically, the Fed on their dot plot says that they're going to cut three times in 2024. As of Friday, the market was pricing in eight cuts. So people have been saying for weeks that the market was getting ahead of itself. And my response to that has always been, yeah, but the market always gets ahead of itself and just shut up. And like, if you're not on the right side of the trade, just stop complaining about it and like get on the right side of the trade.

3:14But so today, while we were talking earlier, Waller came out and said basically that there was no need to rush the rate cuts and bonds gap lower and stocks gap lower and gold gap lower. And it was a pretty terrible day all around. Some of the charts are looking broken here. If you look at a chart of stocks, you got a little bit of a double top and we're rolling over for a second time. I'm short stocks. I've been building a short position over the last couple of weeks. I'm expecting at least at least a six to eight percent correction. We'll see what it turns into. I think yields have bottomed for the short term and are probably going to bounce, probably going to retrace half the move, honestly.

4:02I mean, you could see tens get to four and a half percent. So I'm looking for that. And I think, I think, unfortunately, I think gold probably broke today, at least for the short term. I don't think we're going to make up a run up to the highs anytime soon. So basically, like, like, you know, yields are going to be going up and it's going to things are going to get difficult over the next couple of months. Yeah. So do you feel like this is, you know, we came a long way, didn't we, from November? Is this just part of a consolidation process or part of, you know, recalibrating? Or is there something else going on more fundamentally that you're looking at?

4:45Did we just overshoot in the near term? Or are we in an environment where rates had no business being that low and we're kind of still worried about growth, worried about inflation, whatever that, you know, that camp? Well, the thing I'd like to point out, I'm looking at this right now, 2's 10s are at negative 16 basis points. So the curve is still inverted, but it's inverted by a lot less than it was before. And it's in the process of uninverting very fast, right? So the conventional wisdom around this is, you know, usually a yield curve inversion like pre-sage is a recession that you actually get the recession when the yield curve unabverts.

5:24So if the yield curve goes positive, if twos, tens goes positive, that should kick off the recession, which means you definitely don't want to be long stocks. But I mean, just what I'm looking for is for stock bond correlation to go negative again. Right. Like if let's say we have a vicious correction, 10, 15, 20 percent, and the Fed starts actually cutting. then you should see stock bond correlation go back to being negative. You should see stocks go down and bonds go up. So that's kind of what I'm looking for. Basically, my whole trading philosophy is centered around waiting for correlations to break down.

6:11Most people trade in such a way that they are more comfortable when correlations are stable. Usually when correlations break down is when people get run over. So I like to be on the right side of that. So it's interesting. I think it's interesting to point out, we've been talking a lot about this, about you have your framework, you have your whatever those guidelines are that you look at. And you mentioned that bond trade. You were, I don't want to say you were early, but it was not popular opinion when you were talking about bond yields having peaked and getting into that bond trade. How do you know to get out?

6:52How do you not get locked into the narrative? Because we know that there are people who are like, inflation, we're going to be higher for longer. This is an inflationary period. It's going to be like the 70s. And they just hang on to that. And you just talked about really watching the markets and looking for signals, feeling like that sentiment turned, and then getting out. Getting out while the getting out was good. You feel like you made enough money. How do you have the discipline to do that and not get married to the narrative? Uh, it's, it's like you said, it's really getting to the point where you made enough money.

7:23Um, like we were talking earlier about infinity or zero, right? This whole concept of infinity or zero. And what 97 % of people do is they're in a winning trade and it goes their direction, which is like positive feedback. And they like the positive feedback. So they stay in the trade and they keep getting positive feedback and they get the most excited about the trade when it's the worst time to be in the trade. You know what I mean? So I, I like, I am a profit taker. Like I, I often take profits too early, but I take profits and there's, you know, there's, there's a whole bunch of people that have put on a trade and it went their way and they didn't take profits.

8:07And then it went back the other way and they got killed. So. Yeah. That's, we taught, this is, this is one of the questions that come up all the time. That's why I asked you about it. It comes up when we do sessions with Denise. It's like people have a hard time at the timing, you know, how to know when to get out, how to know when to just enough's enough and not chase it, not regret the last move that you missed because that's part of it, right? You've got to be okay with missing if it continues to move in that direction, the last leg of the move and trying not to time the top, so to speak. Well, people are governed by fear of future regret, right?

8:49Like the idea of leaving money on the table is actually worse than losing money. Like missing out on additional gains is worse than losing money. And that doesn't make any sense. For most people, that's danger. Yeah. Yeah. Yeah. I don't adhere to that, but that tells you something about my risk profile. We have a question. I just want to circle back because it was on the gold comment you made. Is This It is asking, can we get Jared's read on gold sentiment? He just said it's selling off, but wouldn't that flip to a buy if rate cuts actually occur? I mean, academically, sure, that's what should happen.

9:30The problem is that you have to think about what's priced in. And we have now seven out of three rate cuts priced in. So if the Fed actually cut rates, does that do anything? Like basically things would have to get materially worse and the Fed would have to cut or communicate that they will cut more than is priced in in the market. Just like the Fed cutting rates on schedule isn't going to get gold to go up. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try?

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11:09Right. That's already priced in more than priced in is the problem we're dealing with right now. If, if the dot plot says three and I, do you think we are going to get a recession? Yeah, I do. Um, and that was, you know, if, if you rewind three or four months ago, you know, to my beef with the higher for longer people, like, like my, my point is, you know, the yield curve as, as an indicator is the undisputed heavyweight champion. It's never, it's always right. You always get a recession when it inverts, you've never gotten a false positive. Like, and this comes around every recession, including during the pandemic.

11:51Like this happened like right before the pandemic to the yield curve inverted. And everyone's like, well, this time is different. And then we got the pandemic and there was a recession, right? So fast forward to today and like higher for longer and everybody thinks that the business cycle has been eliminated. I should also point out that the empire manufacturing number today came in at minus 43.7, right? That's terrible. That almost sounds like an average. I mean, that is. But this has been the tricky thing. I'm glad you brought that up, D.R., because this has been the tricky thing about this economy.

12:34We've had pockets of really weak readings, but then there's strength elsewhere. It's been like it has been uneven. So you haven't had all of those signals coming together. There's been kind of this rotating, or Lisanne Saunders would say rolling recession in some areas. And so the timing of it, figuring out, is it really recession? Or as that sector comes out, does another one go? So you don't get that sort of washout feeling of a recession. It's made it a little tricky to figure out what's happening. Yeah. And also every recession is different. I think people, when they think of a recession, they think of 2008.

13:13And they think of something that's close to a depression and you actually have deflation and stock markets down 50 % and the real estate market's crashing, like not all recessions are like that. You know, like, I don't know if you remember, but I think it was 2022, we actually had two quarters of negative growth. And they said, well, this really isn't a recession because of X, Y, and Z, but we actually did have two quarters of negative growth. So, you know, if we have a recession this time, it's going to be different from 2008, which is going to be different from 2001, which is going to be different from 1991.

13:47They're all different. I mean, maybe it's possible that we have negative growth and the labor market doesn't move yet, right? We don't get significant unemployment. Maybe unemployment goes to like four and a half percent and that's it. That's entirely possible. So people just don't have a lot of imagination about this stuff. Yeah, they don't have a lot of imagination. I think we all are suffering from recency bias as well, that the moves, we expect them to be so severe. And that's fair. I mean, 2008 was extraordinary. And then the pandemic had its own huge moves. So it's kind of hard to see through that and then throw technology in and not all the models sync up the way they used to.

14:30So it's left things very confusing. We have, you guys are on fire today. We have so many good questions in the chat. I'm just going to start going through some of them because they're so good. So, um, by the way, Thomas is saying Bernard Baruch, I think is who he's quoting. How do you get rich by selling too early? Um, that's a good one, Thomas. Thank you for that. A lot of wisdom in this group. Um, so Doug asking where could you see DXY top out? Uh, gosh, I don't have DXY on my screen. I don't really know where the numbers are. I, what I, dollar got a lot stronger today. And I mean, it's just, it's just kind of common sense.

15:10Like if, if tens go to four to four and a half, like we're going to have a period of dollar strength. I just, I don't, I don't have the chart up, so I don't know where it's going to go, but we're going to retrace some of this dollar weakness for sure. Yeah. Well, it's going to move in lockstep with rates, right? If we're going to see rates come back, maybe half of the move, you'd expect there to be a move on the dollar in lockstep with that. Todd, joining from LinkedIn. Hi, Todd. We always get comments on LinkedIn. Happy to have you here. He's asking, correct to assume some dry powder on the sidelines for the next six to eight months might be rewarded with a dig lower for S &P 500?

15:55trade? Yeah, for sure.

16:03The S &P is the hardest thing to trade in the world. It's absolutely the hardest. I think if you took prisoners in Guantanamo Bay and you made them trade S &P futures, and if you gave them an electric shock when they lost money, I think that would be the worst form of torture on earth. Hardest thing in the world to do is trade the S &P. So when I said earlier, like I'm looking for a six to 8 % correction. Like it's very hard to trade big moves in the stock market because it's so mean reverting, right? So we could sell off 8 % and rally 7 % and then sell off 20%. And it's impossible. Like you have to trade those micro moves because otherwise it's just impossible to hold on to a position, you know?

16:55Yeah. Yeah. I think this is related to this in a way, and it's a great question. By the way, I like Todd asking about dry powder because, you know, we talk often that it's a great idea, especially when you're not sure what the future holds, to be sitting on some dry powder. You can do that so that when you feel more conviction that you have some money to make a move. Mark asking, Jared, are you rebalancing to cash or is there another safe haven? Well, I want to get back to the previous question first. I just want to say it's a little too early to be thinking about buying stocks. I mean, it's always good to have cash.

17:37And I say you should have 20 % cash all the time. And right now that's great because you can earn 5.5 % on cash and there's really no penalty for doing that. but way too early to be thinking about buying stocks. Like that's, you know, ask me again, like four months from now, you know? That's super helpful on timing. Also, it's really good to look at the psychology that you're super ready to, right? Patience is hard. So let's get back to the question. Are you rebalancing to cash or is there another safe haven? um you know i'm looking at my screen today and you know i have a portfolio and everything's red um i don't really feel like putting money into a market where everything is red like i'm very happy to just be in cash um so no i'm not redeploying that into into anything else i actually spent some time today um looking at some charts um looking for opportunities I think the ags are starting to look interesting here.

18:47Corn, soybeans, not so much wheat, but corn and beans are starting to look interesting. The charts are just a mess. They're like totally breaking down. And I get the sense that sentiment is very, very bearish there. So look, like if the Fed actually starts cutting rates and we go into a recession, it should be good for commodities. That would be the next natural place to look. It's funny that you say that because Theo just asked, may you kindly ask Jared if you think sugar and cocoa will continue upwards? He's looking at some different commodities. Yeah, I don't know about sugar. I didn't look at that today, but I looked at cocoa, and cocoa has been on a run for like a year and a half, and it looks like it's topping.

19:36believe it or not I actually called to put it in order to short it today at like 132 I missed the close by two minutes so I was going to take a shot in the short side with like a small position but so that's your answer on Coco I wanted to get in your thoughts on on Bitcoin because obviously we had all that news. But before we do that, as you know, as we've been talking about, January is education month here, and we've been having different theme weeks. And this week is crypto, given what's going on, in addition to the Crypto Academy, which always lives on the website and is updated. Ash has been having some really great conversations in light of what's been going on about how to think about this, how to approach it, how to be smart, smarter, this cycle.

20:31And he spoke with David Duong, head of institutional research at Coinbase, to get his outlook on how the ETFs might impact Bitcoin. Let's have a listen to what he said, and we'll talk on the other side. So we think about it much more on the long term, because instead of being fixated on the short-term flows, which are going to be complicated in the beginning, I think that people up front need to understand that, because there's a lot of rebalancing going on, a lot of people who We couldn't get access to Bitcoin, so they used a lot of proxies. And that could be stocks that were heavily correlated to Bitcoin, for example.

21:09That could be funds that were not as efficient a vehicle for Bitcoin. And so we are seeing right now that there's a lot of movement inside of things. So looking at the pure volume numbers, even though it's great to see that the activity is there and that the excitement is there, I also wouldn't necessarily be fooled by that because there's a big unlock waiting to happen. That will probably come from the broader wealth management community, which probably has somewhere in the order of like$40 to$50 trillion, which, of course, won't 100 % be allocated to crypto. But I think that we're waiting for some of those, say, pension funds, for example, many of the banks and broker-dealers who will offer this to their clients to actually come to some reasonable due diligence on this.

21:57They haven't finished those processes yet. But once that's done, and that could take more time than the first week, definitely more time than that, before we'll see that. So that's where I would say the real inflection point in terms of flows is going to happen. And that full panel discussion can be found on our website. If you are not a member, go to realvision.com and become one so you don't miss out. Jared, we have a couple, JB and Oliver, both asking your thoughts on Bitcoin and the EF. effect on the crypto market. Are you looking at that? Are you in it? What have your thoughts been as it finally got approval?

22:36I'm not in it. I have no plans to be in it. A couple of years ago, somebody explained the bull case on crypto pretty succinctly. They said, look, if you look at all financial assets, all real estate, all hard assets, every asset in the world, it's$300 trillion. dollars. And at the time, crypto was about$1 trillion. Right now, I think it's about$600 billion. I think it's actually smaller. And if he said, look, could 1 % of all investable assets be in crypto? And if so, if crypto goes from$600 billion to$3 trillion, that's a 500 % return. You know, so what we have here are really the vehicles in which that makes it a lot easier to happen.

23:24You know what I mean? I don't think it was going to happen just by people going on Coinbase and buying lots of Bitcoin. But now with the ETFs, makes it available to institutional investors and sort of, I don't know the word that I'm looking for, but, you know, puts a veneer of respectability on it. Like it could absolutely happen. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:58But you're not in it. No, not at the moment. Might you be at one point? Or is it just like, I don't get it? Or I don't really? Somebody said something really interesting that there's a difficulty in trading it versus understanding maybe the long-term fundamental argument about it or thesis on it, which I thought was a really interesting way to put it because there is a certain amount of volatility. It doesn't trade like other assets. For some people, they like the story, but they're trying to figure out the trading part of it. I mean, I'm comfortable owning it. I've owned it in the past, but, you know, if you just own Bitcoin, you only own a small percentage of the investable crypto universe.

24:39And what crypto really needs is like a VTI for crypto, like a total crypto market index fund, market cap weighted index fund of all tokens. So you can buy an ETF and own 2000 different tokens. See, the whole purpose of indexing in the stock market is, well, you say to yourself, like, well, I can't really decide whether I should buy GE or Bank of America or Apple. Like, I'm just going to buy all the stocks, right? And that's really the product that we need from the crypto industry is like a total crypto market index ETF where you can just get exposed to the asset class. Yeah. Well, one has to think, and obviously, the message coming from David is be patient.

25:30These things take a while to sort of work their way through. And I think some people think that some progress on the ETF, some progress on the regulatory front is going to enable, like lay the groundwork for those kinds of innovations to happen. I mean, everybody thinks these things always existed, right? Things like gold ETFs and futures and options. Those were all financial innovations. They weren't always around. So it does take a while for that stuff to happen. But it's a great point. I think a lot of people would agree with you. They're just like a piece of all of it as opposed to having to decide.

26:04There was a question in here about, or was it on the chat, about, yeah, this is from Bo that we still have people worried about the banking system. So Bo's asking, can you see a scenario where raising, rising bond rates create a problem for banks that use the BTFP?

26:25You know, if rates are headed higher again, does that kind of renew pressure on some of those more challenges? I mean, I think, you know, I said earlier that I think yields are going to go up a bit, but I don't think they, I don't think they make new highs, at least not in the next couple of years. Like I don't see tens going to six or 7 % or anything like that. Like, I don't think that's going to happen. Um, I think we probably get a move higher to like four and a half and then maybe the recent, I mean, this is all conjecture, but maybe the recession hits and then tens go to three and a half or three.