#993 - Is the Gold Rally For Real? | with Warren Pies

0:00Join 5 ,000 attendees for the largest AI event in Asia at SuperAI Singapore 5 and 6 June 2024. Raoul Powell hit the stage with Edward Snowden, Benedict Evans, Balaji Srinivasan, and over 150 others joining the industry's most influential to explore and unveil the next wave of transformative AI technologies. With 5 ,000 attendees and a diverse range of side events, Singapore will become a vibrant AI hub for a full week from the 3rd to the 9th of June. Visit realvision.com forward slash super AI to register and get 20 % off tickets with the code realvision. Link in the description.

0:53Is the gold rally for real? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Warren Pies, founder of 314 Research. Hey, Warren, it's great to see you. Good to be here, Maggie. Thanks for having me. So we are in what looks like a little bit of a holding pattern, at least for US markets. We had a slight pullback in NVIDIA that put some pressure on the NASDAQ today. Down S &P, we're kind of very range bound. The 10-year yield up slightly, but same thing. Looked like everyone was kind of just holding in place until we get a little bit more information. And I think part of what's on people's minds, Warren, is that so many people we talked to who are really worried that tech is in this bubble waiting to burst, right?

1:35We have those who own NVIDIA wondering if they should take profits, and those who are on the sideline worried about buying in the top. But, you know, it's hard to argue with the momentum. I'm just wondering how you're thinking about those mega cap tech stocks right here. Yeah, it's a tricky part of the market. When we came into the year, so going back to November of last year, We started and been on Real Vision as often. I can't remember the last time, but we basically made a pivot and said, OK, it looks like the upside to this market is really opening up as the Fed did embarked on its verbal pivot.

2:13And we thought that the base case flipped to a soft landing that point. and that put a, I mean, it was crazy at the time when we said it in late November, but it put a target of 5 ,200 on the S &P 500 by May 1st, as that was what we thought the first Fed cut would be. So that's just giving you kind of like where we came from and how we see it. And so now we're here today and I think everyone's trying, I believe this is a hated rally, despite the fact that a lot of people want to call it a bubble. I think it is a hated rally. and usually at the top of a bubble, you don't have so many people who are so paranoid about the bubble.

2:53So I'm not ready to say this at the exact top, but if I look at it, we have to compare kind of the 1990s. I think that's the comparison we get forced into. And I see elements from different parts of the 1990s in this rally. Just really quickly, I think market structure does look like the top and we can talk about that. the market structure underlying the S &P 500. I think valuations put us somewhere more like 1998. And then the macro backdrop with the Fed poised to cut rates and probably engineer at least optically a soft landing, it looks more like 1995. So I think it's kind of, from one angle, it's a mashup of the late 1990s.

3:36What about 2000 and the dot-com bubble bursting? because I don't know about you, but like we are getting so many, every time I flip on anything, I see people talking about, especially Cisco. There's like an obsession with comparing NVIDIA to Cisco, which seems flawed, at least in some ways. But I think just generally, and I don't know if it's actually, it's interesting to me that they keep picking Cisco, but it seems that there's just that fear of getting caught in this, you know, getting caught out and losing it. Everyone's looking at their portfolio. If you've been in NVIDIA or overweight tech, it's been fantastic.

4:16But people just seem riddled with fear that history is going to repeat itself, and we're going to see this. Dotcom blow up. This time it's AI blow up, and everyone's going to lose their shirt. I don't know. Is it the fear that's driving it, or are there real comparisons that people keep pulling into? There's definitely an element of – there's things that ring familiar. You know, and I think NVIDIA and Cisco is a logical kind of analogy. You know, the world is chaotic. The future is unpredictable. And the way we deal with that as human beings is we look to the past. And then when we take it really far, we try to find these analogs that fit this period of time.

4:54And so everyone's looking at the 1990s as the last period where we had this emergent technology with the Internet coming out. and if you're a bull you seize onto that 1995 comparison you call this a 1995 moment and you look out and you say like hey market we're destined for you know 10 ,000 plus on the S &P 500 and the next recession will occur until the year 2030 if you're bearish you're feeling negative you you look at 2000 you compare things to like Cisco and Nvidia you know at the top Cisco was like four and a half percent of the S &P 500 Nvidia is already at its peak over five percent of the S &P So from that perspective, NVIDIA has already kind of run and become a bigger share of the S &P than Cisco did at the very peak in 2000.

5:39And so it kind of tells me more about the person making that analogy than the actual data. I think every period is different. If we look at 2000, the things that concern me is that at the top, we saw the momentum factor in market cap, both moving, leading the market, which is what we're seeing today. And when we go back in history, you really only see that around periods of the market where you get either a pullback or some kind of consolidation correction. And so to me, I do think that you've had leadership stretched as far as it can go, and you're getting this road. You either get a correction or a consolidation, which kind of looks like churning, and then under the surface, you're rotating from some of those leaders like NVIDIA into other pockets of the market.

6:28And so I don't expect a big collapse here, but I do expect us to consolidate these gains. I mean, we've had 98th percentile type of returns over the last three months. And so the market, the history there is the market usually consolidates gains like that. But the other side of the coin is that there really are no cases where you get that kind of a massive run up in the market, and then you go right into a bear market. So the worst case fears are probably not going to come to fruition. It's such a smart way to look at it, Warren. And you're right. And it makes me think of two things. First of all, for those of you who are in the chat, we're doing a two-week series this week, as you know, How to Unfuck Your Future.

7:11And there's a chat channel going, an event channel for that. And you're talking about that chaos in the future, Warren. Someone asked, we had D. Smith and Jacob Shapiro on talking about VUCA, I think that's how they say, V-U-C-A, future. Someone asked what that meaning of that was, that acronym. And it's volatile, uncertain, complex, and ambiguous. and that's the kind of environment we're in. I think in some ways, not only geopolitically, but also from a macroeconomic point of view, that's the case. And you're right. So we're trying to find a narrative that fits that. And a lot of it is driven by fear of being on the wrong side of that trade.

7:50And you have to be careful with that because then you can kind of create connections and correlations where there aren't any. And next week, we are gonna have Denise Shul on with a couple of others. We're going to kind of dig into the psychology of trading. You know, we love to do that. So I think this is a great way to surface some of that fear because if you can understand why you're thinking that, you can kind of maybe avoid that pitfall. So I love that explanation and I love that you brought that up. Thank you for that. So we've got some questions coming in already. I'm going to get to them, but I want you to, so it's, so neither, there's not one easy fit to look back on.

8:25So when we do look ahead, what do you think is driving the rally? Is this liquidity coming into the system? Is it something more? Do we need to be watching the central banks? How are you thinking about equities here? I think that it's a tough one. We're not adjusting our positioning. I think all of the historic studies you do when you look at what just happened, the rally we just had off the lows in early November, in the pivot that the Fed made, I think it tells us that the momentum, you can't fade this momentum in this market. And so we're not adjusting our positioning. Like I said, there's a tendency for the market, if it believes we're going to have a soft landing, to price that in ahead of the first Fed cut.

9:13And that was really what the key was for us getting more constructive on the market back at the fourth quarter of last year is I think that's the kind of rally that we're in right now is the market's anticipating that first Fed cut that would be kind of ushering into soft landing. So that's what I think we're doing right now. So what can derail that would be if the Fed embarked on a wholesale change. And so a lot of people are worried the Fed is going to push cuts back and that's going to derail this rally. And I don't think so. I think what we had the pivot, the verbal pivot at the end of last year was basically the Fed going from where we're hiking to now we're waiting to see the optimal time to cut.

9:53And that just flows into the rate structure that really matters, which is the long end interest rates. It knocks down rate volatility and basically tells the bond market the next move is going to be a cut one way or another. And it tells risk assets that the Fed has your back. If something bad were to happen, these worst case fears about what if we have a 10 % sell-off or a 12 % sell off or what if NVIDIA is a bubble? The Fed has your back right now. And that's the bottom line and why I think you don't want to sell out of this market right here. I'm not over my skis in stocks either, but I'm much more overweight stocks than bonds.

10:32And that's been the posture for quite some time. And that's how we're funding our cash position is through our bond underweight. And I want to basically wait to see what opportunities the market gives me to deploy some of the cash that we have. But for now, you can't be underweight the market, the underweight stock market here. 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 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, the 5th and 6th of June, 2024.

11:07Raoul Powell hit the stage with Edward Snowden, Benedict Evans, Balaji Srinivasan, and over 150 others joining the industry's most influential to explore and unveil the next wave of transformative AI technologies. With 5 ,000 attendees and a diverse range of side events, Singapore will become a vibrant AI hub for a full week from the 3rd to the 9th of June. Visit realvision.com forward slash super AI to register and get 20 % off tickets with the code realvision. Link in the description. 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.

11:52With 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. S &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.

12:25With over 20 years of experience, Plus 500 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. Plus 500. It's trading with a plus.

12:45Now, that's so interesting. So we do have some data points out because coming up when it comes to thinking about we've got the Fed, first of all, coming up, but we also have retail sales and PPI. before that. And there's been a lot of conversation about what's happening. We got a question from AJ, will the market care if the Fed stays higher for longer? It doesn't sound like you think they're going to stay higher for longer. No, I don't. I don't think the Fed's going to stay higher for longer. And if the Fed were to come out, so here's the way I would make the distinction. If the Fed were to come out and say, we don't know what the next move is going to be, we're back to this square one where we could hike, we could stay on pause indefinitely.

13:31We don't know. That would be, I think, really difficult for the market to digest. And I think that would cause the longer end of the yield curve to back up. So like say the 10-year would sell off there. And I think that would pressure risk assets across the board. We kind of just undo a lot of the rally we've seen so far over the last five months. I just don't expect that. I think that what the Fed's been signaling is just like, when's the right time to cut rates? And when I zoom out, there's a really big election going on this year. The Fed, there's three Fed meetings, May, June, and July. And then you basically don't get another Fed meeting until I believe September and then November.

14:13If they're going to start cutting, they don't want to start cutting late in the year. I think they want to cut at one of those three meetings, May, June, or July for political reasons. And I do think they, They don't want to be seen as political, but they are political at the same time. And so all of that's in the mix. Our big call has been that one of those meetings they're going to cut. Right now, the market's saying June. I think that May cuts underpriced. I think there's a chance they cut at May, maybe a coin flip. But one way or another, that's all kind of details. If the Fed were to come back and say, we're now back to maybe we will hike again, it would undo a lot of this rally, I think.

14:49But there's very low chance of that happening. Yeah, that's really interesting. And traditionally, that has been the case when we talk about the Fed being political. They like to stay out of it and not get involved in hiking right around an election unless there's something going on. But you're right. If they can, they like to steer clear of that so they can maintain. To be clear, the Fed wants to appear non-political, but they are political. So you have to be able to hold these two things kind of in your mind simultaneously, that the Fed wants to appear as though they're not political. And so that means they don't want to start the cut cycle if they can very close to the left.

15:29Right on it. Yeah, exactly. The optics are bad. Let's put it that way. That's a better way of putting it. They don't like the optics of doing that. And that's been the case no matter who's been chairman and for as long as we've been watching the Fed. That has always been the sort of operating preference of the Fed is to stay away from that. But at the same time, they're very aware there's an election this year and they want to be easing ahead of that election. That's how I see it. Yeah. So as we think about that and the kind of posture and what we might hear from the Fed, since it does carry weight right now, Andrei sat down with Dario Perkins, the managing director of T.S.

16:11Lombard, earlier today for part of our series. And Dario talked about what he thinks the central banks are most concerned about right now. Let's have a listen. All you can really do is look for evidence that the economy isn't responding to interest rates in the way that you expected. And so I think the critical thing here will be labour markets. Because if you start to see a re-tightening in labour markets, I think that might convince central banks that actually policy isn't as tight as they thought and maybe not tight enough. And as far as I can see, that's the only thing that is really going to get central banks hiking interest rates again.

16:48they start to see a retightening because they had these big labor market imbalances 18 months ago. They convinced themselves that it was their policy tightening that got rid of those imbalances. And you had this rebalancing all of these sort of DM labor markets. If that progress was to start to reverse, then I think they'd have to have a serious discussion about our start. That full conversation is available on the website. It's part of our special series, How to Unfuck Your Future. And we have a special offer, 14 days of RV Plus for just$1. So take advantage of it. There's a link on the screen or in the description.

17:25Take advantage of it and go so you can see these amazing conversations. And they had very interesting things to say about Japan and demographics at the end, a little bit of a contrary view, which I think is going to get a lot of attention. And it was very interesting. So Warren, do you think that the focus, it's been so much on inflation. Do you think it's going to shift a little bit? Are we going to be paying more attention to what's happening with that employment part of the picture when we're trying to figure out maybe even the timing of the rate cuts? Yeah, absolutely. I mean, I kind of, we wrote a report titled Narrow Passage, like maybe a month ago.

18:04And the idea is that we're trying to navigate these two big risks on each side of us, inflation on one side and the demand or the labor market on the other side. And so, yeah, they're constantly, the Fed is constantly trying to balance those two competing risks. And so I think that when I look at the labor market, I think there's kind of this narrative when you look at the inflation data, the January super core, February super core, some of the oddities of shelter inflation, which we've gone over with the fine tooth comb. So you look at that, and I think the impulse is to say inflation is reaccelerating.

18:42There's definitely some elements of that. But when I look at the labor market, you have to remember the Fed lives in a Phillips curve world where they take the labor market and they say that the future inflation and the pipeline is all coming through the labor market. When I look at the labor market, you see job openings falling. You see quits rates falling, revisions, negative payroll revisions consistently. So to me, I think the labor market is loosening. And the Fed's going to take that as they're going to tie these two things together. And they're going to say the pipeline of inflation, forget the data.

19:13And this goes back to the political thing. They can ignore some of the data right off the January effect and other things. And I'm not here making a normative statement on how you should measure inflation. I'm saying how the Fed will measure inflation. and the Fed's going to say shelter inflation is stale, January effect is real, we just had insurance rates reset and things like that. And that's all kind of causing it to look stickier than it really is. But when we look at the labor market, we see disinflationary ability in the pipeline. Whether you think that's right or wrong doesn't matter. That's the Fed's framework, and that's the cover they're going to have to cut rates.

19:49Now, if the labor market were to reaccelerate, we saw job openings climb, quits rates climb, revisions change to positive. You know, private sector payrolls, for instance, are growing much slower than government payrolls. If we saw things like that, then maybe the Fed would start to worry about within their Phillips curve frame of the world that inflation was with pressures were building. But I don't see that. I haven't seen that in any of the jobs reports we review so far this year. 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.

20:27And we also, again, if you sort of pull the lens out, we also have to think about what's happening around us. And, you know, there was just a big to-do. I had to travel a lot the last few weeks. And so, you know, you go in and order off a kiosk. You definitely don't talk to a human. And Chick-fil-A just opened up a store in New York. It's like opening stores this week that doesn't have one. You don't do anything. You just pick up your food. You order on a mobile app. You pick up the food. There's nobody in the front of that store. I'm not saying that's everywhere, but we know technology and automation play a huge role, too.

21:03That's a huge sort of big picture force on the labor market as well. So it's going to be interesting to see how this goes. So in the context of this, we have Andrew asking about oil, Bitcoin, and the 10-year. But I want to make sure we touch on gold, too, because we asked at the top if this gold rally is real. because we have been seeing both Bitcoin, which some people, not everyone, but some people consider a form of digital gold and real gold, both on the rise. So let's talk about the real gold before we get to some of those other areas. Are you watching it? Do you like that as an investment against the backdrop of what we're seeing?

21:43Yeah, absolutely. So our call was for$2 ,500 an ounce gold this year. That was in our year ahead outlook. and I've said it a few times, we had kind of three false breakouts for gold. And then the phrase I've been saying is that there's no such thing as a quadruple top. You end up breaking through that resistance once you hit that time. So that's kind of what we've seen here. I think this is a real breakout. It's happened. Unlike the other breakouts we've seen, GLD flows in the GLD turn negative during the wild gold's making new all-time highs, which I think is interesting from a sentiment perspective.

22:23The big pushback I get is that real rates have not or in order for us to hit the target that we're calling for gold, we need to see real rates collapse. That's the pushback or the framework that clients present us with. And it's really not true. When you study the history of gold, there isn't one indicator that you can say, well, this thing has to happen in order for gold to rally or to fall apart. Real rates have a mild connection to gold. But for instance, if you go back to 1998, the advent of the tips market, and you look at 10-year tips yields, they fall by 25 basis points on average when gold has a 20 % rally in six months.

23:11So an explosive upside rally. When you go and look at the five-year tips yield, you get like a 50 basis point decline. So a little bit more connection there. But in neither case is this some collapse in real yields. And there are plenty of cases. There's 2003, 2005, 2009, where gold had huge rallies while real rates rose. And then finally, when we mash real rates up with gold since the end of last year, there's a pretty tight relationship. And during this breakout, gold's really gotten away from that connection with real rates. So when we add it all up, I think that there's something else about gold.

23:48There's a trust factor, an intangible factor that's very difficult to model. And that's what, so it's a, you have to kind of let price lead you in these situations. And I would guess that we're looking at, we're off the map when it comes to fiscal deficits. That's why I can't get behind the 90s comparison in any event, because really the defining moment here, it's as much as we want to talk about AI in the kiosks and things like that and productivity, the real defining moment of this market in the macro backdrop right now is the fact that we've added so much debt and we're running pro cyclical fiscal deficits at 7 % of GDP while unemployment is below 4%.

24:32We've never really done that. It's an all out macro fiscal experiment. It makes sense for flows to move into gold, despite whatever real rates are doing at this moment. I love that, Warren. And it's so true in every conversation we've been having. And that's a big part of the challenge that Rao laid out, the challenges that we're facing and why everyone feels like we're potentially screwed is because it is this massive experiment. And there are lots of ways to think about it going wrong. We're also trying of look for the opportunity, as you say, in that, and we're going to be doing that a lot in week two, that's a really, really great way to put it because fiscal dominance has come up in every single conversation we're having, every single one.

25:13It's been the defining moment or the defining trend that everyone's trying to figure out how to operate in and also partly why so many of the models don't work because it's hard. We're kind of in uncharted territory, I think Dee said. So you're so right about that. So against that backdrop, how are you thinking about Bitcoin? I mean, I do kind of look at, as you said, Bitcoin as digital gold. I think we've been thinking that the ETFs are a big deal. I think that became a debate whether the ETF approvals would be a driver for Bitcoin or not. And we've come down on the position that this is going to be a major driver.

25:54It's going to open up markets that weren't available before. I'm not some kind of Bitcoin maximalist or something like that. I'm not a crypto, dynamical crypto person, but I think that for the same reasons, gold makes sense, Bitcoin makes sense. I've also, we've written for years at 314 about Bitcoin's use cases. And the number one use case I come back to is the cross-border transfer of wealth for Bitcoin. And so that's the use case. How you value it is another factor. But the flows right now, because of the ETF story to me, are powerful. I think I won't go you can always piss people off when you start going and saying too much about Bitcoin.