#975 - Is the Most Hated Sector Finally Getting Some Love? with Jesse Felder

0:00Whether you're a crypto newbie, an established investor, or operating a business in Web3, tax season can be an absolute headache, but it doesn't have to be a nightmare. That's where Crypto Tax Calculator comes in, the software platform founded in 2018 by brothers Shane and Tim Burnett, crypto fanatics who were fed up with the complexity of doing their taxes. As Coinbase's official global tax partner, CTC focuses on simplifying complex transactions, supporting over 300 ,000 currencies across Ethereum, Arbitrum, Optimism, as well as 1 ,000 other integrations. Sign up at realvision.com forward slash CTC and get an exclusive 30 % discount with the code RV30 at checkout.

0:46out.

0:55Is the most hated sector finally getting some love? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jesse Felder, founder of Felder Investment Research. Hey, Jesse. Welcome back. Hey, Maggie. How you doing? I'm okay. I'm okay. It's great to see you. So we just finished the U.S. session for stocks, and we saw them continue to rebound. Actually, it's a Russell that had the biggest gains, up 2%. The others were modest, sort of hanging in there at the close. We saw bond yields, meanwhile, edge a little bit lower as investors there focused on a weaker than expected retail sales report.

1:33And I feel like we're kind of stuck in this pattern, Jesse, where we keep getting conflicting signals, or at least off the surface, it seems to be conflicting, weaker than expected retail sales. But then, yeah, we get some pretty good earnings. So what's your sense of what's going on with the US economy? Well, I think we are getting conflicting signals. That's exactly what we're seeing. And I think that we have to talk about what's priced into the markets versus what is likely to happen. And I think right now, I mean, we've heard so much talk about a soft landing for months, the last couple of quarters, I really think we've gotten to the point where we've priced in a no landing for the economy, where the inflation is going to come back down to the Fed's target, and the economy is just going to keep powering along.

2:19And that looks to me, that's kind of what's priced into markets. Now, when the data starts to contradict that narrative is when we start seeing some interesting things play out in the market. So if it starts to look like, you know, we get a retail sales number that maybe hints that, you know, maybe a hard landing isn't off the table, or you get the CPI report that suggests, well, maybe inflation isn't coming back down to the Fed's target. It starts to do damage to that soft landing or no landing narrative. And the markets are going to have to start reacting to that. And I think that that's a trend that is going to continue or even grow over the next several months or a couple quarters, is we're going to continue to get data that contradicts that narrative, that maybe inflation stays a little hotter than expected and growth comes in a little bit weaker than expected.

3:06Which is not a good combo, right? I mean, at least if growth is going to be weaker than expected, you would hope to see inflation moving in the same direction so that the Fed can cut rates. That's what sparked everything in November. But you're right. It seems like they're both moving in an undesirable direction. Let's talk about inflation for a second. I mean, we really thought that was buttoned up, that it was moving into a disinflationary situation. It was looking really well-behaved. What's going on with inflation? What do you see happening? Is this a temporary sort of punch higher in some areas, or is this something more worrying?

3:47I think John authors wrote an interesting piece this week for Bloomberg where he pointed out that you know, when inflation really started to take off, the worry was that goods inflation was going to force employees to ask for wage increases in order to meet the growing cost of living. And those wage increases were going to create some type of a positive feedback loop, which would support demand and then support goods prices. And you get this wage price spiral. And the latest CPI report suggests that that could be exactly what we're seeing right now, which is that if you look at that super core inflation, which is essentially the Fed points at as being representative of those wage forces underlying inflation, it's suggesting that there's a huge jump there.

4:35And so I'm interested to see, do people start worrying again about this wage price spiral? Because it looks like that's still a major risk. And I think, you know, you have to pay attention to what are these the longer term drivers of that, too. It's not just I think so many people are focused on the pandemic and the supply chain shortages and things. But I think when you look at things like deglobalization and the stress that that puts on the labor force here in the United States, that's an important dynamic. And pair that with demographics. Right. We've seen the baby boom generation really start to retire in waves.

5:14And especially when the stock market does well, they say, great, my retirement account is through the roof. I can now afford to retire. And so you have a shrinking workforce relative to the overall size of the population. At the same time, you're trying to reshore all this production. That is a really important inflationary force supportive of wages and a really hot labor market. So I think those longer term dynamics are kind of not going away, right? They've only gotten more significant. And, you know, so there's not just kind of cyclical forces at work. They're those longer term dynamics that are, I think, are important to keep an eye on as well.

5:53Yeah. It's so important to talk about that backdrop, some of these big issues underneath. You know, I think what's confusing for people, and I think about this all the time, is we sort of understand that, especially when you're talking about reshoring, right? That's a big change that even if it's not deglobalization, it's sort of changing spheres of influence or just making sure your supply chain has redundancy and isn't as stretched and vulnerable to even geopolitical events. however you want to phrase that, seems to really make sense. And then yet you see so many headlines about layoffs. Companies are just very quick and willing to lay people off.

6:33That was a big change. There's no such thing as job security anymore. They'll take you from being staff to being contract to cut costs. So it doesn't feel like there's any kind of bargaining, that workers have that much ability to be able to really push for those wages. Is that just because it feels that way and it's changing and it hasn't gotten around to everyone yet? Or is it a sort of divide on what part of the economy that you touch and that you're working in? Yeah, I think that's a really important point. And I do think it really is what part of the economy are you talking about? Because if you're talking about health care, you know, the demand for labor and health care is huge.

7:15And you have to have people who are trained to do certain things. And it's difficult to source that labor right now. You look at even just, you know, people coming out of college with accounting degrees, right? There's the Wall Street Journal has done several articles about this and how CPAs are really struggling to keep up with, you know, the demand for bookkeeping and tax work and stuff when there's nobody wants to get an accounting degree. And so, you know, I think you have a lot of these areas of the economy where people and, you know, even just in the construction, you know, section of the labor market.

7:50Right. We've I've heard a lot of talk about, you know, yes, home building has slowed down to a degree. But with all the infrastructure spending, those people might not be building houses, but they're being put to work building other things. And there's only so many of those people in the economy that are equipped and willing to do that work. And so I think in those specific areas where the labor demand is still, I mean, we talked about the demographic trend with baby boomers aging, retiring, putting a demand on the healthcare system, greater demand on the healthcare system at a time when those people working within the healthcare system are shrinking as a percentage of the overall population.

8:29And so I think those are areas, I mean, you can look at, there's a number of them where you need people that are skilled in certain areas. And there's just, we're just not, we just don't have enough of them. And that creates those wage pressures that we're seeing that are kind of rippling through the economy. 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, but it doesn't have to be a nightmare.

9:04That's where CryptoTaxCalculator comes in. The software platform founded in 2018 by brothers Shane and Tim Brunette, crypto fanatics who were fed up with the complexity of doing their taxes. As Coinbase's official global tax partner, CryptoTaxCalculator focuses on simplifying complex transactions, supporting over 300 ,000 currencies across Ethereum, Arbitrum, Optimism, as well as 1 ,000 other integrations. It's as simple as connecting your wallet, pulling in all your transactions, and following the automated suggestions to quickly and accurately calculate your tax obligations. Finally, 2024 is a year when crypto investors can do their taxes with speed and confidence.

9:50Make taxes this year easy and affordable with Crypto Tax Calculator. Sign up at realvision.com forward slash CTC and get a 30 % discount with the code RV30 at checkout. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments.

10:32S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus500, it's trading with a plus.

11:06Yeah, it's so interesting because it's, you know, whenever you're in transition, because we think about, you know, automation and robots and what that means doing, it's hard to know. It's just hard to figure out what's happening here. So I think it leads to some of that conflicting data. You know, my colleague, Andreas, dropped his latest steno signal on our platform today. Check it out if you haven't, everybody. And I think you were tweeting about that. And Andreas also warning about the risk of reacceleration of inflationary pressures. And he's focused on liquidity. And we know how important that is.

11:40Where is this pressure? So you mentioned wages. Where else is this pressure coming from? because Bo just asked a question, and there's some great ones. I'll get to them, guys. Jesse, I read Great Britain and Japan have fallen into recession with China and Germany already weak. How does this affect US markets? So what are you watching sort of globally that is either feeding or will help with inflation? Well, I think one of the dynamics that people maybe don't talk enough about is the weakness in the Chinese economy, right? The Chinese economy has struggled. mightily for a couple of years now. And that's been an important disinflationary force, right, that's helped us keep prices down and see prices disinflate here in the United States.

12:27You know, if the Chinese economy begins to start to show signs of life again and take off again and demand for commodities and all these things start to take off, you know, that could be a real problem for, you know, for the Fed, if, you know, if, you know, five and a half percent Fed funds rate is not enough to bring the, you know, core PCE, their target back down to 2 % in a sustainable way, then you get, you know, the Chinese economy starting to take off again. I, you know, I look at the commodities generally, commodities markets, and you see gas prices starting to go up again over the last few weeks pretty significantly in a strong way.

13:09Oil price looks to me like it's bottoming and could head higher. The supply and demand dynamics, demand keeps hitting record highs for oil, right? There's this narrative out there, which is why I think there's so much bearishness around the energy sector that demand is going to be a problem. But all signs suggest demand is hitting record highs at the same time as supplies just aren't keeping pace. And so if you start to see a turnaround in the commodity sector and prices for these big, important commodities start to take off again, that could exacerbate this reflation problem that could be potentially brewing.

13:48Yeah. And Nixie, I think that was your question. XLE was up 2.75. Is this the forewarning that the market will start pricing in higher than expected inflation numbers ahead, CPI and PPI? It sounds like maybe you are watching that space, Jesse, for that. Yeah, well, well before the CPI report came out, we saw break-evens across different timeframes. Break-evens have been rising pretty strongly, suggesting that the markets have been expecting that inflation is probably going to head higher over the next. You know, I mean, I'm talking specifically, I wrote a report last weekend highlighting the two year break even, which suggests that, you know, it's closer to two and a half than to two, suggesting that the Fed is going to have a difficult time, you know, bringing inflation back down to target.

14:38So I think you have a number of markets that have been pointing to this risk of reflation. And it's something that investors haven't been paying close enough attention to. Because I do think, you know, if you are pricing in, you know, if you are investing based on a soft landing narrative, based on a no landing narrative, you're going back to that pre-pandemic paradigm of what worked in an era of ultra low interest rates. Well, tech stocks and, you know, all these types of things. that really suffer from higher discount rates, higher growth names, and these types of things. If rates aren't going to go back down and we aren't going to see that pre-pandemic paradigm, then you're going to have to invest in a different way.

15:21And that probably points to things like energy, precious metals, and even things like Chinese equities. I thought it was really interesting to see Warren Buffett start to sell down, And Berkshire Hathaway sell down some Apple. And the only thing that Berkshire is buying, Occidental Petroleum and Chevron, right? Stan Druckenmiller, Duquesne, what's he doing? He sold all of his Apple, Amazon. What's he buying? He's buying Barrick and Newmont Mining, gold miners. So you see some of the smart investors, I think, smartest guys on the planet adopting this. OK, the next bull market is maybe not going to be focused on the same names that drove the last one.

16:05Yeah, that's so interesting. And that's why we started out talking about it. As you pointed out in your fantastic research pieces, the sectors that are the most hated are starting to get some love from, you know, these giants in the investment business. So, you know, I mean, they have different decision making calculations than we do. Certainly, they're playing with a lot more money than we have. And they can change their mind, you know, I mean, he can change his mind at any moment. Exactly. Exactly. So we do have to be careful. But still, that's really interesting. So Doug has a really great point.

16:44And I want to bring this up. And it's not weird. And it's actually a really smart question that we don't ask enough. He said, this may sound weird, but what's wrong with 3 % to 4 % inflation? It seems like in the past, industrial build-out, i.e. unshoring, had inflation above 2 % and was positive for the economy and the market. Can inflation run? We had this sort of, we were more worried for all these years about deflation, disinflationary tendencies. Can inflation run at 3 % to 4 %? Can the US economy handle something like that? Well, I mean, I'm not an economist, but I would just point out that I think the assumption behind that is the Fed would maybe not, maybe they'll have a difficult time sustaining a 2 % target, but maybe they could sustain a 3%, 4 % target.

17:37But I think the history of inflation throughout time, through the United States, through other major economies, is that it's very difficult to target it. Right. And as soon as you raise your inflation target from two to three to four, right, that and I think this is why the Fed is really reluctant to even discuss this is because it changes inflation expectations. Right. And if you change inflation expectations and people start saying, OK, the Fed is no longer committed to bringing it down to two. I need to change the way I do business, the way I manage inventories, the way I purchase things. And that inflationary mindset could, on its own, create a chain reaction through the economy where you stimulate demand in a way that inflation doesn't just rise from 2 to 3.

18:26It rises from 2 to 3 to 5 to 7 to 8. And so that inflationary psychology, I think, is maybe the most important piece to think about in terms of that. And I think it's why the Fed is most reluctant to even discuss a higher inflation target. Yeah, no, absolutely. But it's really interesting, Doug, and it's a point that we'll come back to because we're also coming out of this extraordinary period, right, where we had zero interest rates and we were more worried about deflation. So, you know, people have to kind of adjust to this if it is a new reality. And so we're not really sure how much of the old model transfers and how much doesn't.

19:02And some of the unintended consequences or knock-on effects of just a higher inflation, higher interest rate environment, even if it's moderately higher. So it's a really, really smart question. So what are you speaking of interest rates? Do you think the bond market has a big adjustment to do here? Jesse, we saw that we saw yields certainly come up, back up a lot from where they were, the lows they hit when everybody was pricing in seven rate cuts or six rate cuts. We've seen them come up and they're kind of now hovering right around, you know, four and a quarter. But do you think that we have to go a lot higher?

19:42They're going to revisit something much higher in order to wrap our head around the idea that inflation may pick up again? Or how do you see the direction of yields? Where do you see them going? I think, you know, I've been for nine months now or so, I've been telling my readers that the 10-year Treasury yield is the most important chart in the world, right? This is the one everybody needs to be watching because it's still in an uptrend. I don't see any reason to believe that rates have topped out and are ready to go down in a way that bond bulls would really get excited about. You look at momentum.

20:22There's another chart that I've shared, which is basically just the price relative to the 40-week moving average. Same thing as a 200-day moving average. And for a few years now, momentum has bottomed in a very clear range. And we've touched that range again recently, and rates turned higher again. And so as long as momentum is going to remain above that level, I think the uptrend is intact. And I think really, you know, it's interesting to me to see some, you know, really successful, you know, financial reporters kind of make fun of the idea that supply and demand is really important to this market.

21:00But supply and demand is maybe the most important fundamental for any market. And with some treasury supplies growing so dramatically and natural demand, you know, has limits. Right. It's it's I think where we've seen a lot of extra demand come from is from the basis trade. Right. Hedge funds, you know, borrowing the, you know, repo to buy, you know, bonds in mass, massive leverage and essentially arbitraging the difference between cash and futures. You know, I can't even begin to imagine where Treasury yields would be without the basis trade right now. And as long as, you know, we have that basis trade without, you know, any kind of interruption, you know, it's going to be difficult, I think, for rates to go up, you know, rapidly.

21:53That said, with so much supply coming on market, I think it is reasonable to be concerned about where does the demand come from? And can these hedge funds soak it all up? Are households going to have to buy a lot more treasuries and things like they have been through money market funds, which buy T-bills and all this kind of stuff? So I think this is maybe the most important thing to pay attention to with the federal deficit, you know, so, so wide, right? We've really never seen outside of, you know, World War II, a time when the deficit was so wide during an economic expansion. It's really unprecedented.

22:35And so the amount of debt is growing at a really rapid rate, the supply. And I think that so long as this yield, the 10-year yield uptrend remains intact from a technical standpoint, you have to be looking for higher highs. 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.

23:01Yeah, which is going to really worry a lot of people and put some strain on the system. And I want to talk about where you might see the worry. but we have a great question. Let me see if I can find it, which was from one of your notes. Again, such a great, great point. And I think Paul picked up on this. Jessie, can you comment on some of the Mag7 companies investing in their own customers who buy products from them and how that may be kind of influencing what's going on? You made this great point about so-called vendor financing. Can you talk to us a little bit about that? Yeah, I think it's part of a bigger trend.

23:42I think what we're seeing, if you look at the earnings in the MAG7 companies, I think we're seeing some late cycle trends, right? You're seeing that, you know, what do companies do when demand starts to wane? I think in this case, they've said, okay, we're going to cut, we're going to start layoffs, right? Because we need to protect profit margins. But we also need to try and find ways to goose the top line. And I think that a lot of this AI narrative was driven by a slowdown in the cloud business and companies like Microsoft and Alphabet and Amazon needing to drive cloud revenue and some type of a narrative to hype something to drive cloud revenue.

24:26So we get the AI narrative and tons of spending there. But at the same time, in order to protect profits, they're also extending the life of their servers. These are accounting games that they're playing in order to make profits look better. And it's boosted the MAG7 profits. I've been 10 to 20 billion over the last couple of quarters. It's not insignificant. You always see these types of accounting games late cycle. Another thing that they're doing, and NVIDIA may be the most guilty of this, is saying, okay, we need more people to buy, you know, in order to sustain the price of these$60 ,000 semiconductors, we need to, you know, create demand.

25:06How do we create demand? We're going to invest whatever it is, $2 billion into this startup and tell them, we'll give you this 2 billion if you turn around and buy chips, you know, from a spend that 2 billion on chips. Microsoft is doing this with OpenAI. We'll invest$10 billion in you if you invest it right back into, you know, our cloud business. And so I think you see a lot of this kind of vendor financing, which is a way to boost the top line and create demand that wouldn't naturally be there. And so I think you have a lot of these different dynamics, whether it's vendor financing to support demand, accounting games to boost profits, and then layoffs to try and protect profit margin.

25:50All these types of things are late cycle dynamics for the earnings in these companies. And I think it's important to kind of recognize that. Yeah, I think that's such a great point. Such a great point. Wonderful research work there because it's not something that we paid attention for. But you're right. We've seen versions of this throughout history when we get to this point in this cycle. But it's super important because you're seeing these flashes and these revenues. And of course, you think the stock's flying. So let's go back to this idea of interest rates hitting higher highs and the sort of knock-on consequences from that.

26:27How are you thinking about commercial real estate here? Because it was the big worry, the big sort of ticking time bomb, and then it kind of fell off everyone's radar. But just anecdotally, I'd say in the last few weeks, we've had a lot of people coming on our air and talking about being concerned about it, sort of still worried about the regional banks. And yes, they don't necessarily say it's systemic. Can the central bank ring fence issues with it? Yeah, probably. But the idea that it's just this slow-moving train wreck that's just going to continue to cause a drag. And if you're talking about interest rates being higher, presumably that'll put even more pressure on that sector.