#992 - What’s Driving the Relentless Tech Rally? | with Sven Henrich

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0:57What's driving the relentless tech rally? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Sven Heinrich, founder of Northman Trader. Hi, Sven. Hi, Maggie. How are you? I'm doing well, thanks. And it seems like so are tech stocks. Again, if we look across the U.S. market action today, we had the consumer price date out. Everyone was waiting for that big inflation read, but it didn't seem to make much of an impact. Instead, we just had this relentless move, NVIDIA dragging tech stocks higher again. We had most of the major indices higher, although the Russell seemed like it was a laggard.

1:30What do you make of this market action? Well, it's actually kind of the same trick pony. We've seen all year. The data points actually don't seem to really matter. As bizarre as this sound, I had a tweet out earlier today just highlighting that a lot of the correlations that we saw last year, for example, no longer seem to matter. You know, when we had higher yields, it used to matter. It doesn't. So markets go up no matter what the news is. Same with whether the dollar rises or goes down. The dollar went up quite a bit early part of the year, so the yields didn't matter. Same thing now with inflation data or rate cut expectations.

2:12Initial rally was, oh, they're going to cut seven, eight times. Now it's kind of dwindled at two or three. And still markets keep acting the same way. It's fascinating, completely irrelevant. So what you have to do looking at this from a trading perspective is what is relevant? And that's the big hunt here. Well, there's been a couple of really key consistent factors amid all these inconsistent data points that produce the same reaction. And what is the consistency? One is simply easing financial conditions driven by still massive liquidity flowing into this market. And a lot, not all, but a lot has to do with this incredible fiscal deficit that was part of the equation in 2023 and is part of the equation in 2024.

3:08And it continues to be this year or perhaps even next year and the year after and the year after because they can't stop. In fact, when we're seeing, obviously, rates holding higher now, even for longer, this has a mathematical implication. Not only do we have continuous spending, but we also have continued financing of the spending with ever higher interest payments. The government is kind of stuck in a doom loop here because they have to refinance the debt. They have to pay the interest on the debt. We also have over$10 trillion in maturities coming to markets this year, where debt that was previously financed at much lower rates have to be refinanced at higher rates.

3:53And by doing so, you're increasing even more the interest payments that are due, and therefore, you're going to have an even bigger deficit. Right. So this this is the era of what is now called fiscal dominance, which kind of mutes the Fed's efforts on or perceived efforts on tightening. Now, you also have still that liquidity facility reverse repo that is draining. Still got about 450, 460 billion dollars left in the tank. And all this liquidity I submit to everyone has found its way into risk assets, easing financial conditions, lots of liquidity in the system, and it goes into financial assets.

4:38And in part of the financial asset structure, the most attractive place is momentum. And AI offers the perfect momentum story and has for obviously the last year and a half. And so you have this continuous chase. So you find yourself all of a sudden in this really bizarre situation where you have some individual stocks just absolutely, you look at it from a technical perspective and just scratch your head. I mean, the markets go through phases like this where they are rewarding recklessness and they're punishing discipline. defensively because, you know, a disciplined person may say, well, this is just not a good risk reward.

5:24And in any other market setting, you would get your head chopped off chasing this. But in an environment such as this, it continues to drive dramatically. And then I should add one more factor before I close this part off. There's also a real issue structurally in terms of how the market's been operating by very few cap tech stocks, high cap tech stocks, leading the advance by sheer force of their market cap expansions, i.e. NVIDIA, you know, adding a trillion dollars in market cap in a couple of months. Unheard of. Never ever seen before. Okay. What that implies is that asset managers, by definitions, are lagging because asset managers are not all heavily exposed to just those few stocks.

6:17They have a much broader exposure. So they're, by definition, lagging, and they continue to be forced to chase in one form or another. And so the chase is kind of, that's how you get these momentum moves, because it just, you know, it's not something maybe that they want to do, but that they're forced to do. That's why you see a lot of month-end markups and so forth, right? So it's an uncomfortable situation. And, you know, you mentioned small caps at the outset. Yeah, small caps, for example, would get maybe pressured more by inflation remaining stickier. And so, again, you have that divergence in the market.

6:55But for now, it continues to tick as clean as it possibly can be. I'm actually impressed with some of the action that we've seen in stocks like NVIDIA and many others that are just vastly overbought, if you would look at it in a standard metric. We're talking weekly RSI indexes in the 90s. When do you see that, i.e. never? And yet the S &P is tracking as clean as a whistle in its channel. It has virtually no pullbacks. We haven't seen a 2 % pullback all year at all. And you've got to be impressed by how clean it is. you have to be, I guess, a bit worried about how narrow it is. But at the same time, you know, you, as long as the trend doesn't break, you know, it can continue to go higher.

7:53And that's, that's where one has to be very careful. You know, you got to respect the strength, but also know when things have changed. That's kind of. Yeah. I think that, that there's so much to unpack there, but it's such a perfect explanation. But I think what you really put your finger on is why it feels so uncomfortable. Because we sort of, everyone kind of knows that not only does it not sort of correlate with the traditional, you know, what we would have traditionally seen or come to expect, or maybe in some cases, the traditional framework you might have used to make a decision. I love that observation that this kind of market rewards recklessness and punishes discipline because we were taught to try to have some discipline when we're looking at things.

8:39And that recklessness, it never ends well, right? So then everyone's kind of forced to stay in this. It's like being on a runaway train. You know something horrible is going to happen, but you can't let go or get off, or a lot of people are afraid to. So I just think that was such a great explanation. So we already have some questions coming in, and I will get to them. But since you bring this up in this doom loop of this fiscal dominance, it's such a perfect segue because we are looking at that all week as part of this two-week series we're doing, How to Unfuck Your Future. And this week is a real focus on exactly that, exactly these huge levels of debt.

9:20Raoul kicked it off talking about debt, demographics, and deflation, and the havoc that's wreaking in some places, and what it means, some of the outcomes and some of the challenges setting up. And one of the things that we talked about today in the second episode is the geopolitical. There's a lot of political outcomes or it's influencing a lot of what's happening around the world in terms of how people are feeling, some of the rise in populism that we're seeing. What this means is feeling a volatility and uncertainty. I want to play a little clip from something D. Smith and Jacob Shapiro had the conversation.

9:58Let's play a clip from Jacob and then we'll talk on the other side. and i'll also just say i'll date myself as somebody i'm a geriatric millennial i'm sort of in that elder millennial generation and it's we're angry at um our politicians and that older generations precisely because they're borrowing from the future to pay for the things that they want right now it's not because we're not angry because the price of avocado toast has increased by two or three times we're angry because we see all the debt that's being racked up expecting that when we get to the age that the boomers and others are right now, that there's going to be nothing left for us because we've already borrowed everything.

10:34So at least on that level, it reigns home. 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. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024. Raoul Pal, Benedict Evans, Balaji Srinivasan, Edward Snowden, and over 150 others will join the industry's most influential to explore and unveil the next wave of transformative AI technologies. Singapore will become a vibrant AI hub for a week from June 3rd through June 9th with over 150 side events that will make for unparalleled networking opportunities.

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12:38This was such a fantastic conversation. It was a very smart conversation about what's happening. and Jacob came out swinging as an optimist out of the gate, but then he had sort of found a lot of agreement in the middle, but it was really interesting to hear their slightly different takes on things. And we pushed a little bit ahead about what's happening in the future. You can see the whole thing on the website and we have a special deal going on, 14 days of RV plus for just$1, nothing inflationary about that. So take advantage of it and watch these shows. They're amazing. We're going to have a big sort of finale at the end, but we want to hear your commentary.

13:16So jump in the comments section. And there is a channel dedicated to the series, an event channel. You can look for it on the website in the top right when you go to the homepage, or if you go to the globe on the bottom right, you'll see it. So jump in and share your thoughts. We're going to pull them for a conversation Raoul and I have next week. So Sven, I thought it was such an interesting conversation. We know people are really mad about inflation. We know this has been an issue as we head certainly into the elections here in the US. but everywhere. But it's not just the inflation. It's just this general feeling that, as you say, we're kind of trapped in this unsustainable situation with all of this fiscal spending and the interest payments getting higher.

13:56And does it feel like, I mean, what are your thoughts about that? Does it feel like that is going to continue to drive what's happening in financial markets? And how does anybody figure out what's going on if that's the case? We haven't really been here before, have we? No, we have not. I mean, for example, last year we had debt spending out of GDP about 6.3%. It's not been the most drastic spending that we've seen. Certainly COVID that year was worse. Even the global financial crisis was a little bit worse, but it is by far, and I mean really by far, the most dramatic deficit spending vis-a-vis the economy that we've ever seen not being in a recession.

14:43This is the type of response you would expect to see if you are in a recession. And the reason you see this type of spending in a recession is twofold. One, obviously, complete revenue fall off from the drop in economic activity. But the second, obviously, is stimulative spending. And for them to do that in this type of environment, I think everybody has to be super clear. The growth numbers we see in the economy, because last year, everybody's talking about recession, recession, recession. Well, maybe the counter question is, can you even have a recession when you have that much fiscal stimulus in the system?

15:28I would argue with you that if we didn't have that high deficit, that growth numbers wouldn't be anywhere near where they are. So we're all walking kind of through rose-colored glasses in terms of what's actually going on in the real economy. And perhaps the clip you just referenced gives you a sense that maybe what's going on is you have the paper economy that looks so good, but you have the experience of people that is very different in terms of how they are actually faring in that economy. It's probably pretty rough, I would say, psychologically. You keep seeing headlines of new market highs and billionaires getting ever richer and the top 1 % doing ever better.

16:18While you see your rent keep increasing, which is the largest line item in any family's budget, when your cost of living is so much higher than it was before COVID. And let's not kid ourselves when they talk about getting inflation down to 2%. They're not talking about prices coming anywhere near close to where they were. It's just the rate of change over time. And so everybody, myself included, and you, everybody is stuck with permanently higher prices. And unless you own assets, which I hate to say most people don't, because 90 % of financial assets are owned by the top 10 percent okay and then trickles off rather dramatically and so what what you have is this vast wealth inequality curve that has been expanding from cycle to cycle to cycle and it keeps getting worse to the point that the middle class has actually really been shrinking for the last 30 years.

17:28And it breeds ever more discontentment. Discontentment may not be aware of the specific mechanics of how the powers that be work the financial system, but it filters itself throughout the political discourse. I would argue, in general, we see globally, not only in the United States, we see ever more fragmentation of the electorate to extremes, to the right and to the left. And it makes actually political consensus ever more difficult. Okay. And so when you never get a proper cleansing, and unfortunately, now we're in the point where the cleansing would actually hurt again, the middle class, the poorest and the poor.

18:17But you cannot deny that what we've been seeing even here in the last four years is dramatic in terms of how that is now, again, getting to the point where the middle class is struggling with the real costs. They're struggling with the high rates that are in the system, while the asset owners are benefiting from loosening financial conditions, from all this liquidity that is going in. And so you're looking, and I'm sure when we're going to get the data again after the first quarter and the second quarter, you're going to see the top 0.1%. They were already over$20 trillion in wealth among just 136 ,000 households.

19:07It's actually stunning the numbers. it's it's it's hard to imagine and i it you know d smith said something so poignant and so true right after we actually stopped rolling so i'll just share this with all of you but we were talking about it he's got grandkids i have teenagers and we were just sort of you know um empathizing with each other and and the future you know this uncertain future and he said we're in the same canoe we're all in the same canoe and i don't think he chose that boat reference lightly because it's very precarious and tippy, but it's true. So I know a lot of people don't want to hear about wealth inequality, but man, it's going to come for you at some point.

19:47When I first started covering economics and finance a million years ago, I'm not going to say when, but a very smart economist was talking about demographics and talking about generational warfare, right? Generational strains like we haven't seen. And everyone kind of thought it was completely, And I think about that conversation I have with him all the time right now. This is stuff that this is why one of the D's Ryle talked about is demographics in this series. So and you're right, Sven, most people can't really put their finger on why they feel horrible or why the system's not working for them anymore.

20:21Again, part of what we're trying to do with this series, because we care about education, is help focus people's minds on what's really going on. lift the cover back, because if you at least can understand the challenge, you can start to think about some solutions and a way forward. Speaking of that, we have a question from Bob. It's an easy one. How do you see the doom loop resolving? Gold revaluation is getting a lot of talk lately. It's an awful big question. Maybe another way to phrase it is, what's sort of top of mind as you see this playing out? You know, a few years ago, I was of the view that, you know, the best way to solve all this, you know, after they kept intervening with QE 1, 2, 3, and 4 of the financial crisis, you know, I was getting concerned about these asset price disconnects and asset bubbles.

21:15And I was concerned at some point, we're going to see something significant in terms of or right-sizing, which I thought actually would be helpful in the sense that once you have a cleansing and you can have a proper discussion about maybe how to restructure things in a better way. But it also became clear to me then in the follow-through on COVID that they were never going to let that happen uh the size of interventions uh that we've seen since then and the clever way and how the so-called bear market of 22 was managed and i use that word on purpose because what you should have seen after this this insane money printing of following covet you should have seen some proper cleansing in terms of volatility and in terms of everything yes we saw individual stocks drop hard we saw some of that but we we we saw the most controlled bear market in history in that anytime we got just so close to a break of actual technical significance it was averted and it was averted by none other than mrs yellen yeah i you know jokingly referred to it as kind of the yellen factor um being concerned we saw that in october of 22 when she came out she was concerned about liquidity in treasury market we saw it in march when the banking crisis when she was concerned and guess what every time she came out It was the end of the VIX.

23:05They, I don't think any party, because this larger asset disallocation has gotten so large that perhaps a cleansing is no longer possible without a larger catastrophe in terms of the economy. Everything is now so dependent. Look, markets used to be smaller than the economy. 80s was like 60 80 percent of GDP we had the tech bubble in 2000 that's when things got crazy why did by the way why did things go crazy in 2000 not only because of the great internet story but part of it was because Greenspan and the Fed were worried about Y2K right the computers were supposed to blow up so guess what they did they added a bunch of liquidity into the system in advance, right?

23:56And it just helped propel everything to just extreme measures, which at the time was about 140, 150 % market cap to GDP. It was unheard of before. And then when did it crash? When they removed the liquidity, very simple. And then the crash produced a recession. After COVID, we got to 200 % market cap to GDP. It was just never seen before. Yes, you can make arguments about big cap tech stocks being global and therefore maybe deserve a higher market cap to GDP vis-a-vis the US economy. Fair enough. But 200 % is so dramatic that it used to be that markets reacted to the economy. Now the economy reacts to markets.

24:46If you have a major, major drawdown in markets with everything been financialized, with all 401ks and everybody long and everything just collateralized through the same thing, you're going to feel an immediate reaction in the economy, right? Because spending goes down, consumer confidence goes down, everything is intertwined. So you got this massive market beast that you gotta, if you're a policymaker and the Fed will never admit this, The Fed will never admit this because they don't want to be perceived to being in the business of managing markets. But because the market is so large vis-a-vis the economy, and it is again, it's like 185 % market capital GDP again.

25:36We're right. The 2000 tech bubble peak was the bottom in October 22, literally in terms of market capital GDP. So we are, by definition, in uncharted territory here. And again, the reaction on how they managed the 22 bear market tells me that they did not want things to really get crazy. We saw that with an ever lower high in the VIX. Volatility was very controlled. So now we're finding ourselves, and this is all tying back to debt, because all growth at the end of the day is debt finance. If you were on a balanced budget right now, we'd be having a full-blown recession. We're going to take another quick break to hear a word from our partners.

26:21We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

26:29So what do we – so we have some people asking thoughts on gold, on silver, on copper. What about bonds? So what do you do against that backdrop? How are you thinking about it? If it looks like a cleansing isn't going to resolve it, is there anything that you like, see opportunity in, or feel safe in? Well, I got marked pretty hard when I turned bullish on Bitcoin a couple of years ago. I guess you're feeling all right now. Yeah, we had the initial 50 % drop. It went to the 30s, low 30s. And Michael Salem and I had a discussion and I came out bullish for all the arguments. And the view was to buy weakness in Bitcoin as a bear market would unfold.

27:15And that was one of the strategies we employed. The other one is just to be consistently practical with regards to asset classes in the stock market. And, you know, I've been bullish all of last year and continue to be bullish, but also being very practical in terms of risk reward, because, you know, now things are getting obviously extremely stretched. and and i want to highlight something here for you which i thought might be of interest because the rally we're seeing currently um is one of the longest we've seen in over 50 years it's very unusual by definition not only the angle and the descent and the narrowness of it all but there's only been literally a couple of occasions where we've seen something like that so being mammals looking pattern-seeking mammals, always want to look at some precedences for that.

28:14And one of which is of interest here is 2017. And I wanted to, if you have that chart, if you can pull that up, the comparison. First general comments, I call them super rallies. And we've seen them a number of times over the years. And one of the key indicators I use for those in terms of assessing control is the weekly 5 EMA exponential moving average. And when you have these super rallies, basically, every time it gets dinged, it holds its support. And as long as that is the case, the rally is intact. In fact, it's not until you break the weekly five EMA on a weekly close and it becomes resistance, then you're in a bare face.

29:03And the bare face may last just two or three weeks or may last a bit longer. That is always dependent on each market segment. But to see a rally this long, staying above the weekly five EMA without any correction, is highly unusual. And so basically our strategy has been simply being, you know, every five-year-old attack, you buy. And by the way, if you can't tell which one of these is which. It tells you what you need to know. It tells you what you need to know. And it's fascinating because if you look at the two chart comparisons, they're acting almost identical. Now, no year is exactly alike, but in terms of the structure, we're seeing the same thing.