#973 - Will Inflation Put the Kibosh on Rate Cuts? | with Tom Thornton

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0:55Will inflation put the kibosh on rate cuts? Welcome to Real Vision Daily Briefing. It's Tuesday, February 13, 2024. I'm Ash Bennington, joined today by Tom Thornton, founder of Hedge Fund Telemetry. Tom, always a pleasure to do these shows with you. Man, it's great to be back. It's nice to see you, Ash, and always great to be back on the Daily Briefing. And especially great to have you back on a day where there's some market action. Look, we got a hot print on CPI today. Big picture, Tom, what's your thinking about these markets right now? Well, look, today was just an absolute nightmare for basically anybody.

1:33No place to hide type market. You saw the bond market go nuts. Rates spiked above a resistance level that I've been talking about as a risk that would actually pressure stocks, not necessarily just bonds, but stocks as well. It hit gold, It hit Bitcoin. It hit just about everything. And it was a market that just had no places to hide. Breath was horrible all day, even though we bounced. It remained pretty awful all day. Yeah. So, Tom, let's talk about some of those numbers here. Closing out the day, everything, a lot of red on the screen across the board. Every major U.S. equity index down. S &P 500 down below 5 ,000 off.

2:15Looks like call it 1.4 percent or thereabouts on the day. NASDAQ even worse, trading at 15 ,655 off approximately 1.8 % on the day. And you mentioned the spike in yields on the Treasury side, obviously decline in prices there. Pretty significant. You look at that chart, whatever it is, 15 or so basis points on the two-year yield. Just an ugly, ugly morning for equities, an ugly morning for bonds, just an ugly morning across the board. Yeah, the markets were really not set up for this. Everybody's been expecting inflation prints to trend lower, and this one obviously didn't. I think it's really difficult to get to that last mile, that 2 % Fed target.

2:58And I think Larry McDonald said something on Twitter today that I thought was pretty good. He said, if you're trying to lose 20 pounds, and I'm paraphrasing here, the first 10 is pretty easy, but getting that second 10 is really difficult. So I think the Fed has some work ahead of them. They're not cutting in March, as Powell said, in January. And now it looks like the May meeting is off the table as expectations drop pretty significantly. I still think June is possible. But look, I think the Fed typically cuts rates or starts a rate-cutting cycle after markets either dislocate, whether it's stocks or bonds.

3:42and we really haven't seen that much. Today is a one day. It's not a trend. And possibly if there is a liquidity problem, let's say if the regional banks have some big problem, maybe they'll step in front of that. Perhaps if there's some sort of event that I hope doesn't happen, like a war or terrorism, they'll be involved in that as well. But right now, I think they're just on pause. And I've been in that camp of the longer for higher for longer camp. And I think that's kind of where we are. Yeah. Tom, we're talking a little bit more about asset prices in just a second. But just to recap the news of the day on the CPI print to give folks a little bit of context about what this means.

4:26Year over year, we came in at 3.1 % over an expected 2.9. This is a decline from December's 3.4 % year over year print. But again, as you point out, still way too high. We've got some interesting charts to take a look at this, just to be a sense of visually what we're talking about here. Probably the most striking one is the cumulative price change since January 2016. You can see on this chart just this eight-year drift higher, essentially 30 % loss in terms of purchasing power, 30 % increase in the general level of prices, not evenly distributed. Certain folks are getting hit even harder. I mean, boy, that is just a really dispiriting chart.

5:08That's a gut punch. That tells you what's been happening here. And by the way, it's something that the trajectory, when you look at this chart, something that's really compelling, you see that 2020 recession bar there. Obviously, that's COVID. You see the decline when we had those significant disinflation. But man, this is a long-term trend, and it's a painful one for individuals. It's a painful one for corporates, painful one for governments. you're right and you know we have to remember prices are just going up slower than than they were previously they're still going up and that I think is going to continue to hit the consumer over time and you know you go back and look from pre-covid to to now prices are still remaining very, very high.

5:58And shelter is a big component. And there's a lot of people that have talked about how shelter will eventually come down. I'm not quite sure about that. It hasn't come down as fast as people want it. There are a lot of components in there that are dropping. Wages remain very sticky. I think the jobs data continues to show a very tight labor market. And that is a problem for the Fed. They would love to declare victory and cut rates, It's not necessarily an emergency cut, but perhaps like a maintenance cut to just sort of keep things going. And that's possible in May. And certainly if earnings start to deteriorate this quarter, yeah, maybe that'll be starting to get priced in a little bit more.

6:44But today, everything was priced out. Yeah. You know, I sometimes struggle to kind of express just how problematic and difficult this inflation environment can be. as you point out, price is still going up. And by the way, those are compounding numbers, right? So you're seeing those constant increases in pricing. That's how you wind up essentially getting a 30 % pay cut at your job against its purchasing power. You've done okay here. If you own assets, if you're someone who has got a large portfolio, they're rising faster than the price of goods and services. But boy, for a lot of families, this means just an incredible amount of pain.

7:17Let me just give you one other point here to talk to Tommy. Comex Gold, I'm reading right now, Wall Street Journal headline settles one and a quarter percent lower. One thousand nine hundred ninety two lost the two thousand handle there. Boy, to your point, talk about nowhere to hide. Yeah, nowhere to hide. It's it's really. Look, I think I think there's two two people that buy gold, those people that always buy gold. And I know some people that are extraordinarily rich by just always buying gold and they hold it and they'll never sell it. And then you have a lot of touristy type people that think the Fed's going to cut and that's going to help gold.

7:57And boom, that's what they want. So they're moving in and out of it. And today, I think that they were moving out of it. And I think that 2000 is sort of a significant big round number for gold. The dollar versus gold broke through that today. GDX just was murdered today as well. And that could continue to go even lower. So it's a difficult market. I mean, look, one day doesn't make a trend. I think that a lot of divergences have been happening with momentum indicators, sentiment indicators. Sentiment remains very, very bullish right now. And so I think the market was caught flat-footed by this print.

8:45And I think that, look, if we break today's lows over the next few days, the buy-the-dip crowd are going to feel a bit discouraged. And that's always the way tops are made. So it's not necessarily one day is it. And I'm cautious regarding saying, oh, here we go. We're going to have a 10 % pullback. The risk, I think, is next week when we have NVIDIA. And NVIDIA has been such a monster. It's, I think,$600 billion in market cap increase from the beginning of the year. And that's a little over six times 2025 total revenues. So six times revenues for 2025. And the last time, the last two reports that NVIDIA had that were AI focused, the stock sold off.

9:42And that I think is possible again. And just because you have so many people that are involved in this, and if it's not good enough, and I'm certainly not saying that it won't be good enough, I'm saying that it's going to be great. But sometimes, like we saw in the last two quarters, great isn't good enough and people take profits. 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. Whether you're a crypto newbie, an established investor or operating a business in Web3, tax season can be an absolute headache.

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12:25Tom, let's talk a little bit about those sentiment tailwinds that we've been seeing over several months now, over a year. I mean, S &P 500 on the year to date up about almost 4.5%, trailing 12 months up about 20%, trailing 12 months on S &P 500. NASDAQ 100 up on the year, over 6%, trailing 12 months up 40%. So to your point on the sentiment, some positives are earnings growth. What do you see there in terms of this? And you talked about NVIDIA as a potential bellwether here as something that could break that. But what have traders been thinking as we've seen this run up in U.S. equities? Well, it's hard for an active manager because you can't just put your money into the MAG-7 or the MAG-6 or the MAG-3, however many you want to count now that matter.

13:17Again, NVIDIA has been about 35 to almost 40 percent of the total gain this year within the S &P and NASDAQ. So it's just become more narrow. And a lot of people, we're all talking about it. It's very narrow. But you do have soldiers dying on the field and the generals are still leading. And that, I think, I'm not calling the top there with that. But I think that that's typically what happens. You have these mega cap names do all the work, and then you start to see sectors and things break down. And then those big cap names one by one fall by the wayside. And, you know, I've talked about Tesla.

13:59That's down hard this year. I still am short the stock. And I don't have a position in NVIDIA. I'll wait and watch how that plays out. But I think that right now it's very frustrating for those that are active managers. If you're just long the S &P or NASDAQ, that's your thing. Well, everything looks fine. But you have to ask yourself each day, would I buy it again today? That's something that a lot of people would probably say, no, I don't want to buy it here. I'm long already. So it's a challenge. And, you know, look, February is always a tricky month. The second half of February is the worst two weeks historically of the year, the worst two rolling period weeks of the year.

14:49So I think that there's risk to the downside. And again, NVIDIA, everything rides on NVIDIA for next week. And if they disappoint or let's just say they impress and the stock goes down, I think that's going to take the market down another leg. Tom, you mentioned some of your short positions there. Talk a little bit about what you're short, why you're short, and what it means for the broader market. Well, I'm looking at Airbnb and I have a small short in that and it's trading up 6%. So yay me. Not a big position, but every travel company's missed earnings and it's been a disaster. I didn't have a high amount of confidence going in on this one.

15:37We'll see if it fades from here. But certainly, I think travel is starting to slow. Other shorts, what do I want to mention that I'm short that people will rag on me about?

15:55I'd rather not say. Actually, I'm short regional banks. I'm short KRE. And I think that, look, if interest rates go up, that's going to weigh on the banks. And of course, commercial real estate, that's awful for them. I read today that the average office property in New York City is down around 25 to 30 percent. That's a lot. And that, I think, when you have a lot of refinancing, higher rates, lower prices, it's just going to make it really challenging for them. And there's a lot of banks that are lugging a lot of commercial real estate loans. So there's that risk. It just stays out there. And it hasn't necessarily blown up.

16:40But I think that it's just going to weigh on the banks, especially the regional banks, for a while. Well, if you're short KRE, this is the Spider S &P Regional Banking ETF. You're doing quite well. Off 11 % year to date on a trailing 12-month basis, off nearly 26%, down nearly 26 % trailing 12 months. yeah it's it's it's it's challenging out there and and trust me i i'm i i have all sorts of challenges uh trying to find ideas to short and it's it it certainly hasn't been an easy year uh i look i'm i didn't have i had a tiny bit of meta covered that super quick um that that was a very small position.

17:25But look, they executed beautifully. They have a lot of levers to pull. Companies like Microsoft, I'm sort of skeptical about. There was a nasty Wall Street Journal report today saying that their co-pilot is not, the uptake is not that great. And I've heard some other stories that people are saying that it's just like, well, why do I need to pay$30 to have dumb AI written for me when I can have a dumb employee write it for me? That's actually a true story. Somebody wrote to me that in my chat room today. To what extent is this rally that we've seen? Obviously, we talked about the narrow breath of it predicated on this AI thesis.

18:08Obviously, so much of it in terms of the large cap tech that has exposure to this being priced. How do you think about that when you put these bets on? So I have some very smart clients. And one who was a former institutional investor, telecom analyst, wrote it very succinctly to about, let's compare the dot-com bubble. And he was right in the forefront of that. And he said that there are companies that are going to build out the AI infrastructure. and companies that built out the internet infrastructure were making a lot of money. Cisco, Sienna, Juniper Networks, a few others, Nortel, they're no longer with us.

18:56And then there were the ones that were the telecom companies, the Celex and phone companies that were selling the internet access to people. and they were buying tons of routers from Cisco and such. And then at the bottom half, which we didn't really know at the time, were the ones that were going to take advantage of the internet and really capitalize and monetize the internet. So going backwards, looking at now, we have NVIDIA, AMD, some others that are just, you know, They can't fill the orders that they have for all their AI chipsets. And they're just going nuts. Just a very similar looking chart to Cisco and a few others back then.

19:49And they made money back then as well. But then they started to fall off as the internet was fully built out. And we're not there yet, obviously, with AI. and the ones in the middle that are selling it are the AWS and the Azure, the cloud service companies that are buying all that chip stuff. And then we really don't know in AI which companies are going to monetize it and show the massive gains of profitability because that hasn't really occurred yet. You really didn't see profitability in Microsoft for their AI co-pilot. They didn't really talk about it that much on their call. I think Alphabet will monetize it, but they're going to give it away for free.

20:34That's one thing that they're able to do. They'll probably have some way of monetizing it, but sometimes when you give it away for free, you get more eyeballs and more customers, and they did that successfully towards the end of the dot-com bubble. So I think that there are these companies out there that maybe we don't know about that I'm on the alert for. I mean, and a couple other companies that are, you know, AI plays, Adobe, Oracle, those companies really didn't show any true AI profits on their last earnings call. They have all this, you know, these new products that they're going to do and they talk about it, but it's not really translating into profits yet.

21:20So I think it's still early with AI of who's going to be the big winners and who's going to monetize it. So I think, look, NVIDIA is monetizing it right now. But going back, it's very similar to the way Cisco was. Tom, this is why we love having you on the show, because these metaphors, these analogies are very powerful. I mean, this great sort of question, do you know whether you own Cisco or Amazon? If you look at those charts, I mean, I remember back when I was one of the young guys on Wall Street in 2000, you know, Amazon lost 95 % of its value between December of 1999 and September of 2001.

22:00Obviously, significant recovery. I mean, if you look at that chart, it's just off the charts. Yeah, wait, hold on. They were up 6 ,300%. Okay, so that's a big number. And I traded back then, and it was just insane. It was very similar, the types of moves that we're seeing now. It's just the market cap of what these companies now are going up is just so much more significant than back then. And that, I think, is just extraordinary. I mean, to go up$600 billion in six weeks, that is incredible. And again, more power to you if you're long NVIDIA. Congratulations. Don't forget to ring the register along the way.

22:49Just makes sense to do that. Just because these things, everything will fall back to earth. And, you know, again, next week's earnings are going to be just incredible. And we'll see, you know, where their guidance is. I mean, there was a, you know, super micro. I mean, this one, I mean, I put out a tweet today saying, or X, Twix, what do you call it? But anyway, I put it out today saying, you know, level one CFA, never short a stock that has super in its name. I mean, that, you know, that's level one. You know that. I mean, come on. Don't short super. Nothing. No. So it just keeps going up. People keep upping their price targets to one up each other.

23:31And that's very similar to the dotcom bubble as well. I mean, we had, you know, going back to the telecom analyst, we had all these, you know, people putting wild price targets on things. Qualcomm was one. I mean, it took Qualcomm, I think, 15 years to get back to its old high. 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.

23:59I mean, Amazon itself was underwater for 100 months. But you bring something up that's really interesting. Cisco still is, and so is Intel. Yeah, Cisco never regained its whatever it was, May 2000 highs. To date, here we are having this conversation 25 years later. Yeah, and they make boatloads of money. Right. But that gets into the question that you were teasing, which is when you see a stock that's going up on a percentage basis, and it's as mature as these stocks are, and they're making as much money, Where do you find the next half a trillion dollars in incremental revenue? I mean, it's the future, Ash.

24:37Don't ask questions and, you know, burst people's bubble here. I don't know. But look, growth is growth. And, you know, you mentioned it earlier that, you know, where's the growth coming from? Apple's not growing. Tesla's definitely not growing. They're declining. I look, I think that people are chasing growth. And that is the play of the play of the day and it trade it until it stops working. And that's kind of how it how the dot com bubble ended as well. All right, let me ask you this as someone who's been looking at this literally for decades, what are some of the potential early warning signs that you see that there might be exhaustion in some of the price action on these equities that are being priced for massive up rip and growth.

25:26What are some of the things that might happen before the collapse that people who are watching this show can put as a dashboard gauge on their screen? Well, besides me buying it, that is, you know, that's the obvious one. Look, I think that the risk is that you make a new high, it goes down and it fails to make another new high and that's sort of the the way the buy the dip people lose faith in in what they're doing because they buy every dip it goes up makes a new high this is an easy game but it's when that stops working and that's why like today was a you know an absolute bloodbath of a day.

26:14And you'll probably have the market bounce back up on, I don't know what, but it'll bounce back up. But if it doesn't make a new high, and then it fails to make a high and the buy the dip people kind of get caught out, we make a new low. That's just kind of what I want to see. Tops are processes. They're not necessarily, you know, one indicator that's going to do it. But again, we've seen tons of divergences that have started to really show up. And I'm pulling out my hair looking at them going, oh my God, I'm just watching the S &P and the Qs go up. And I'm just amazed. And look, every market is different.

26:54But generally speaking, those indicators tend to work and preview sort of weakness ahead. On the other hand, I would be thrilled to see the market down because I'd like to be a buyer. And this has been a market over the last year where it just hasn't afforded anybody really great, durable buying opportunities. And part of that is because portfolio managers that are underweight these things will buy every dip because they have to keep up with the indices. And that is what's happening. So well said. We've got lots of questions coming in from Mr. Thornton. Tom, I don't know if we have time to do all these.

27:34What do you say? I want to do a quick speed round just so you can get some of these addressed because there are a lot of my Airbnb is only up 2 % so I can eat tonight. It's not going to kill me.

27:45Macro Butler wants to know, Tommy, what's your view on the USD in the context of the return of the inflation boomerang? Did we see new highs H1 2024? The dollar. Well, you know, I on my notes, I've been talking about a stronger dollar. It's been starting to materialize. It happened, you know, really sort of showed up today. But we've also seen higher rates. And so I think that the dollar could go up. And I watched dollar yen. And that is, yeah, we're at 150.79. I think the Bank of Japan has a problem with the weaker yen. And so I still have to mark countdowns that are continuing higher for the dollar and the yen weakening.