A Tale of 2 Economies with Jared Dillian

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1:24And now to the top analysis of today's markets.

1:34Is this a tale of two economies? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jared Dillian, editor of the Daily Dirtknapp newsletter and newly minted MFA. Hi, Jared. Hey, how are you doing? Congratulations on the additional degree. It's fantastic. Thanks. Yeah, I've only heard of one other person that has both an MBA and an MFA. I think I'm only the second person to do that. That's amazing. Well, you might be really sort of predicting the future with this. I'm trying to find the right word, not foreshadowing because we're living in it, but we're going to dive into AI as we've been doing all week in a moment because that combination of the creative and the finance may be what we all need to kind of turn ourselves into if we're going to survive this.

2:23But before we get there, though, just wanted to kind of start broadly with the markets because it's been interesting to watch. We started by asking, is it a tale of two economies? I think you could say the same thing about the market because we have the Dow, S &P, NASDAQ all up again, NASDAQ up 1%, but you have the Russell down, the VIX below 14, crypto's down, oil's down. What do you make of what's going on? Well, I think what's happened in the last week or two is that we've really had, for the first time, we've had a return of risk appetite. and I can't remember if it was Tuesday or Monday, but there was a day earlier this week where the Russell was up big and emerging markets were up big.

3:06And I said, you know, that's the first time we've seen that in a while. But also I would say going back three or four weeks with the AI stuff with Nvidia and stuff like that. Like I would say in the last month, you've seen a return to risk appetite that you haven't, you know, We've had this rally off the lows since October 13th, and it's been climbing a wall of worry the entire way. And it's just in the last couple of weeks that we've had something resembling speculation. So I think in sentiment terms, we flipped from bearish to bullish. And I think people have picked up on that. And I think a lot of people have, you know, instinctively have said, oh, maybe it's time to get short.

3:58Maybe it's, you know, maybe the S &P is at the top. Maybe, you know, I think, you know, once you flip into bullish sentiment, that sentiment can persist for a very long time. So I don't think this is anywhere close to being over. Right now, I mean, we're almost at 4 ,300 in the S &P, you know. So back October 13th of last year, when we were at 3 ,500, a lot of people would not have said this was possible. Absolutely. Absolutely. I mean, this seems to be important if sentiment shifted, but it's also, I think, going to confuse people because all we keep hearing about is heading into potentially another Fed rate hike, although the market keeps going back and forth on that.

4:46But the Fed's certainly trying to convince us higher for longer, maybe a skip, not a pause. Everyone talking about recession. Everyone worried about, you know, there's a lot of things to worry about. Is it unusual to see sentiment turn like this? How do we need to marry those two ideas? You know, I think if you said last year that the Fed was going to hike rates to 5 % and openly have open discussions of hiking rates to 6%, and the market would continue to rally about 23 % off the lows, a lot of people would have said that that's impossible. You know, since this is the daily briefing, we should talk about what happened today.

5:26And today we had a claims number that was a little bit scary for the first time in a while. That's the main reason why stocks were up today, because it dials back Fed expectations a little bit. You know, one of the things I've been saying in my newsletter is that this market is absolutely starved for any dovish data that comes out. Any number that comes out that's a little bit soft, stocks rally, gold rallies, bond rally, like it's the market is just starved for dovish data. I mean, this is just a tiny data point. This is a claims number. If you think about this, the market was up 1 % on a claims number.

6:06What do you think is going to happen if we have a payroll number like next month and jobs come in at 100 ,000, zero, negative? Like this market is going to be up 4 % or 5 % in a day. Yeah, so it's just looking for a reason to go higher. It's ignoring everything that suggests there could be any kind of trouble ahead, or is it seeing past it? Have we gotten past that? That's a good way of putting it. It is looking for a reason to go higher. Yeah. I mean, because what could you really say at this point that would make the market go down significantly? Like maybe if we had a 50 basis point rate hike, like a surprise rate hike or something like that.

6:49But I don't even think that would do it, you know, from a sentiment standpoint. I don't think that would do it. And it's interesting because as it continues to go higher, everyone is feeling like, should I book those profits? This can't continue. There is a there's a it seems to be there's a skepticism about that. Yeah. And, you know, if you remember, just just go back two months ago when Silicon Valley Bank blew up. Right. And if you remember what people were talking about back then, they were saying, you know, commercial real estate is hosed. You have all this commercial real estate on regional bank balance sheets.

7:25All the regional banks are going to zero. Guess what? KRE, the regional bank ETF, is up over 20 percent off the lows. right and these office reads that people are looking at like sl green which is in my portfolio for my newsletter you know sl green is up about 10 or 15 off the lows like and what one of the things i was saying at the time was i was like guys like we are not going to be talking about bank failures in a month we're just not going to be talking about this is going to pass and it has passed, right? It has passed. And now there is a return to risk appetite. So does it feel, you know, we had, and I, you know, I don't know how much you're looking at this, but for those who are members, there's been a very robust conversation about liquidity, right?

8:19And so the whole lead up to this debt ceiling, and then, you know, we're just on the other side of that, there's been this liquidity because of the treasury draining their general account. And now Now that they're going to start issuing a ton of bonds, and by ton, I mean somewhere north of a trillion dollars worth of bonds, there's going to be this huge sucking sound of liquidity coming out of the market. Is that something that worries you or does this feel, you know, I earlier we talked about a little bit about it yesterday, but Stan Druckenmiller was talking and saying around NVIDIA and just saying like, listen, I don't know that this feels like a three month thing or 10 month thing.

9:02This feels like maybe this is a trend where we're looking at for years. Those you know, that's a different dynamic than a than a sort of temporary liquidity dynamic. Well, let me answer your first question first. So I was riding into work this morning and I had the local radio station on. And every morning they do like a five or 10 minute segment with an Edward Jones guy in town. It's basically, it's kind of like the daily briefing. It's like a five minute daily briefing on like what's going on with the markets. The Edward Jones guy in Myrtle Beach, South Carolina is talking about the liquidity drain from T-bills.

9:43OK, so this isn't going to happen. It's not going to happen. You're not going to we're not going to issue a trillion in T-bills and spools are going to go down 15 percent. Like it's not going to happen. Like I understand the dynamics of how you soak up that liquidity if you have that much bond issuance. But it's not going to crash the market. Like if the Edward Jones guy in Myrtle Beach is talking about this, then it's not a thing. It's not a thing. Maybe the Edward Jones guys in Myrtle Beach watch his real vision. If you're out there, give us a call because we've been talking about it. So it's interesting.

10:20I think it was Cosmo the Wonder Dog made a comment into the chat saying, so AI has saved the market. Does it seem like a lot of what's happening is around the enthusiasm in this segment of the market? Yeah, I mean, I saw a chart recently of tech outperformance versus everything else. And you had a long-term chart, like a 25-year chart. And you had a pullback last year in 2022. And you've had this monster leg up in 2023. I mean, I think if you were an optimist and you were looking at this, you would not say that this is because duration. You would not say that this is because of bond yields. You would say that this is because of innovation and because tech has been the most innovative sector in the U.S.

11:12economy for the last 25 years. So, I mean, I really think that's all it is. Like, you know, people try to explain away the lack of breadth in the market in terms of whatever. And it's just a matter of this is a really cool technology. People are excited about it. And, you know, there's only five or six stocks that you can play it with. And that's what's going on. 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.

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12:53For now, right? For now. But we know that everyone, first of all, there is some of it, but I think we're talking about now the more advanced generative AI because everyone, a lot of companies have some form of AI already that they've been working with, but we know that everyone's rushing to adopt this, to look at these new technologies. Peter Diamandis was on earlier this week saying, basically, if you don't, you're going to go extinct. We had a very interesting, we've been having our Festival of Learning all week. It's going to happen again. It's going to continue next week. And today I chatted with Bhuva Shakti, who is the Chief Ethics and Culture Officer at Women in AI, who's really looking at the challenges and changes and the opportunities that this is going to bring to the workforce and our jobs as everyone piles in.

13:39Let's have a listen to that and we'll talk on the other side. That's exactly my focus on a day-to-day basis. It's not just ethical AI, but also cultural AI. What it means is building that cultural of ethical AI compliance, transparency, responsibility, oversight, and accountability across all team members rather than keeping it as a technical function. It is not the function of a CTO or a CIO or a CFO. Rather, it will be a dotted function to all these C-suite people, but directly reporting to the CEO, handling just privacy, innovation, and overall governance around these metrics. Really interesting point about building in some of those guardrails from the design point of view and the fact that even if you're not working in an IT department, this is going to impact you.

14:29You are going to be involved in this transition, which may be a little more hopeful on that jobs front because there's so much worry about being replaced. That full interview and the entire Festival of Learning AI edition is on our website. If you are not already registered for that, scan the QR code, find out how you can sign up. It's free. And we have some awesome stuff coming next week, including how to invest using AI, conversation with members who are using it to scale their businesses. One of them, Dominic, was in the chat this morning talking about it helping him achieve his moonshot, which is awesome and amazing.

15:00So we can't wait to hear all those stories. And hopefully it'll be pretty useful for you all. So, Jared, we have so many interesting comments, but I wanted to ask you when you were talking about technology and the enthusiasm around that. So, yeah, right now it's limited. There may be more stocks now that are going to fall under that umbrella. We know that we already see there's a lot of merger acquisition in that area. Wondering how you're feeling about some of those tech giants or their mega cap. Are they going to get in on it? Are we going to see this expand? Because we had Apple out with a VR headset.

15:34this week. It's not just always AI. Sometimes it's going to be where AI connects to some of these other trends that have been going on. And then we have no idea what's going to happen, but a lot of people are really excited about that. Do you think it's going to kind of spread out or do you see it staying quite narrow? Well, I'm not a futurist. I'm not Peter Diamandis. I don't spend a lot of time thinking about this stuff. I will say I'm pretty excited about the Apple VR headset. Obviously, I haven't tried one, but I've read some of the reviews, and it seems to be really terrific. And I think it's going to crush Facebook.

16:13And if you look sort of in the history of Apple product launches, people have always greeted Apple product launches with a great deal of skepticism. If you remember the iPad, Like everyone's like the iPad, like a pad. Is that like a tampon or something? Like, what is an iPad? And everyone said the iPhone 5 was going to be the top of Apple forever. And, you know, everyone is all bearish about these product launches and they go on to just do incredible things. So, you know, I mean, look, like Apple is 7.3 % of the S &P 500. It's bigger than IBM was back in the 80s relative to the rest of the S &P 500, but I wouldn't short it.

17:08Yeah. I covered all of those launches and every single time everyone said there's no purpose for this, which is the watch. Everybody dissed the watch when it came out. So yeah, there was a long track history of getting it wrong. On the flip side, people think, well, eventually they're going to stumble. So they're always looking for when they do. But yeah, there's some pretty cool stuff happening. I guess people are just trying to decide whether it's worth investing in or not. But when we're looking at, I just want to get to some of these comments. So we talked about tech. And then there's the rust of the market, right, which is holding up certainly the S &P.

17:43But people are kind of trying to figure out where we go from here. And I want to just throw a couple comments in here. So Colin's saying, I see a lot of people on Fintwit almost buying anything that hasn't moved year to date. Very complacent. And then Nelson, so what Jared's saying is the Fed needs to take policy rate to 7 % plus and sell MBS as part of QT. I don't know that you're saying that, but if we're not going down and the market's going to keep going up, does that create a problem for the Fed? You know, when you're a hammer, everything looks like a nail, right? And right now they're in rate hike mode.

18:26They're going to be in rate hike mode until you get – it's not just going to be one bad payroll report. It's going to have to be a few in a row. You're going to have to see the unemployment rate go at least above 4.5%, maybe 5%. I mean, if you think about how dense the Fed was about inflation and how it took like 12 CPI prints for them to figure out that inflation was not transitory, they're going to be equally dense on the other side about looking for signs of weakness in the economy and pausing rate hikes or cutting rates. So it's a long ways off. Yeah. Well, we've got Jake the Beard is feeling a little bit, is this the last melt up before the second Great Depression?

19:19Jake, I'm concerned out there. I'm buying stocks. I'm over here buying stocks.

19:29So when we're looking at – so the Fed, this has always been the worry, right, that they overextend and they cause so much more damage than they would have needed to. What about what's happening with banks and commercial real estate? You just said earlier, like, this is not going to – you're not going to see this wave and wave of bank failure. So do you think we're past all that? Do you think the Fed's not going to break something if they're kind of determined to keep going down this path? Well, if you think about like a python eating a pig, it takes a long time for the pig to pass through the python.

20:03OK, so there are problems in the banking sector, and they're only going to be realized after months and maybe over a year. So if you think about what happened in the financial crisis, you know, first you have like New Century that failed in the fall of 2007. And then Bear Stearns failed in March of 2008. And then Lehman failed in September of 2008. And then the market didn't bottom until March of 2009. So this whole process took like 21 months. And, yeah, there's problems in the banking sector, but it doesn't mean that you're not going to get a rally, that you can't trade, that people are going to forget about it.

20:44Like it takes time for the pig to pass through the Python. So you're not saying there will not be any trouble. You're just saying that we're on a stretch here where this sentiment is just going to drive this market higher, along with some innovation coming from tech. Yeah, exactly. DD asking, do you think unemployment numbers will jump anytime soon? I don't know about jump. I mean, I don't know. I don't really have – I don't have an answer to that question. I'm not, you know, just locally, I don't see any signs of labor market weakness. We're not getting any big, scary layoff announcements out of S &P 500 companies.

21:27Like, I mean, the answer is probably not. Which is interesting since everyone says we're headed toward recession or maybe we're in it already. Yeah. I don't think we're in a recession. I saw an interesting piece. One of my subscribers, who's a very smart guy, wrote up kind of like a white paper, and he talked about the fact that GDP has been printing like 2.6 percent when economists have expected about 1.3 percent and payrolls have beaten for 14 months in a row. I mean, this is the economy is just a lot stronger than people give it credit for. We're going to take another quick break to hear a word from our partners.

22:12We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:21Yeah. Oliver has an interesting, it's more of a sort of an observation or question, I guess. He says, this reminds me of COVID when no one knew how long the virus would last, but they knew work from home was a given, so the stocks rocketed. Now no one is sure what to buy since macro is so confusing, but they know AI is here to say. Therefore, buy those stocks. Yeah, I would agree with that. Yeah.

22:50RJH, you're asking, I don't think, Jared, he's saying, how does he know AI will crush Facebook? He wasn't saying that. I think you were saying the headset is much better, right, Apple? Yeah. Yeah. Um, have people been getting this by people, meaning hedge funds, some of the professionals, have they been getting this right this year, Jared? DD's asking, how are the hedge funds doing? Weren't they really bearish entering the year? Um, have people gotten hurt by that? And I know a lot of people have been trying to play volatility and that's been hard. Um, how, how generally, how do you think sentiment is in the professional realm of things?

23:24I mean, you just kind of named three things that have just, you know, made it really hard for hedge funds this year. I mean, first of all, like you said, it really started off the year bearish. You know, 2023 was going to be a repeat of 2022. to. I saw a tweet or a headline recently that this is the worst year for active managers in a really, really long time. I don't remember how long, but like 20 years or something like that. If you remember what 2017 was like, when the only stocks that were going up were the FAANG stocks, and if you didn't own Fang, then you were underperforming. This is kind of similar.

24:09And a lot of people are expecting that this is short-lived, but it probably isn't. The one thing that I will say is that sentiment around AI has probably reached a local peak. OK, so I do think that there is going to be a retracement or a correction in this AI trade over the next couple of weeks. But, you know, in terms of a long term investing thesis, you know, I think it's going to be around for years. Yeah, I think the challenge might be defining what AI is or really understanding it in this respect. I think there's a lot of differences and we've heard people lay out the differences they see with dot com.

24:51But there wasn't a point when things got exuberant where anything with dot-com people were buying, and then you had to sort through who actually had a business strategy and who didn't. This feels different for many reasons, including the established companies that are playing here. But there runs a risk of everyone just talking about AI on their earnings call and then trying to figure out who's really using it properly and productively and beating out their competition and those people who are just sort of saying that they're doing it. I think Christopher just brought up a great point in the chat.

25:20Wall Street will manufacture the merchandise to feed the AI hunger as it does for anything popular. Oh, yeah, absolutely. And I mean, I traded during the dot-com bubble. And you mentioned Stan Druckenmiller earlier. And he said that he shorted$200 million worth of dot-com stocks in March of 1999. He covered two months later with a$600 million loss. And all of those companies eventually went bankrupt. So if you want to talk about this AI phenomenon in terms of where it is, is it a bubble or not? We are very, very far from a bubble. This is the top of the first inning, nobody out, nobody on base.

26:03That's amazing. I heard that comment too. And first of all, I love that he shared that because that's a really painful trade. But it goes to that old adage, right? That the market could be irrational longer than you can say solvent. So it wasn't that he was wrong, but it's all about the timing. But it says a lot about how you want to deal with this. If you're skeptical, you don't have to buy them. That's very different than shorting them. Yeah, yeah. I have nothing to add. That's absolutely true. I've just recently, I think he said he doesn't, he stopped shorting, I think he said. And it's like the third person.