All Eyes on Tomorrow's CPI Print

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

1:35What should you expect from tomorrow's inflation data? Welcome to Real Vision Daily Briefing. It's Tuesday, April 11, 2023. I'm Ash Bennington. I'm joined today by Mike Alford, founder and managing partner of Alpine Fox. Mike, welcome back. Hey, Ash. Good to be back again. Always a pleasure to have you here. Mike, lots going on. We were talking a little bit of chatter. You were just trading right into the close. What are you looking at? Well, I've been layering into an SPY hedge short. You know, a lot of guys like to use put options. I like to just short the SPY right now because the brokers are giving you 4.3 % returns on the cash proceeds when you short.

2:12And you can use it like an accordion, right? Like I build it up over time. And then when the market falls, if it falls because of some sudden shock, let's say the inflation data is surprisingly bad, tomorrow it'll drop and I just buy back, right? Take that cash, put it in my pocket and go back and layer back and do it again. And it only costs 40 bps right now to borrow. So you're getting a nice spread by shorting the SPY. So I was just continuing to layer into that position right now, just as an overlay over my long positions. Well, I teased into that at the top of the show, Mike, obviously CPI data out tomorrow.

2:44Consensus seems to be for 5.2 % on an annualized basis down from 6 % in February. What are your thoughts? What are your expectations and where are we relative to expectations in your view? Yeah. So it's obviously tricky because there's so many cross currents in this market. We've talked about this before over the last six months, but it does feel like inflation is coming down. The market seems to think that inflation's coming down. I'd be surprised if this print tomorrow is particularly important, to be honest. The market's sort of behaving like, hey, if it's worse than 5.2%, the Fed's going to raise 25 bps.

3:23If it's better than 5.2%, then the Fed's going to raise 25 bps. And so as long as there's no banking crisis, which is the real issue, then I don't think it's going to be particularly eventful. And I think the Fed and the Swiss National Bank and the ECB and the Japanese Central Bank have all essentially said, we're not going to let any banks fail at this point. And if they look like they're going to fail, we're going to force a bailout. We're going to align resources is to make sure these banks don't go down. And so in that type of environment, it's not just a implied put on the entire market, it's an explicit put.

3:57And so for that reason, I don't think it actually matters that much. I know that's a contrarian view, but unless you're trading duration instruments, you're trading inflation sensitive instruments on a daily basis, I don't think you should care. I think inflation is broadly going to come down over the next few quarters. And I think the market more or less knows that and it's priced up. Hey, so what's the thesis on that S &P short then? It's not really a thesis. I view the S &P right now, again, there's a bunch of overvalued names in my opinion, large cap tech in particular, that are still trading evaluations that I don't think are reasonable relative to where earnings are going.

4:33And so I view it as a dumb index, right? I wanna have longs that are idiosyncratic and value oriented. And then I wanna have dumb shorts. I don't wanna be too smart for the market. I'm not gonna try to short Tesla here because even though it's wildly overvalued, It could actually go up 50%, right? And just confound the skeptics. The S &P can't do that, right? Because it's a broad market index. It's got more than 500 stocks and a big chunk of those stocks in my view are overvalued. And so what tends to happen is it tends to trade as a proxy on global dollar liquidity, right? It's not really a proxy on valuation, in my opinion.

5:04It's just a proxy on global dollar liquidity. So when liquidity goes up, as it has very recently, again, in part because of these bailouts. What are your metrics for dollar liquidity? So if you look at all of the research that folks have put out recently, right? There was one I was just looking at the other day that basically said, look, look at the Fed's balance sheet, right? Look at all the other balance sheets together and then look at all the lending that private lenders are doing. And I think what people might be missing is if you're just looking at the central bank balance sheets, it looks like they were trying to start sort of tapering down, right?

5:39Starting to tighten around the edges. And that whole process was paused essentially by this banking crisis in mid-March. And in the meantime, liquidity has sort of gone back up as evidenced by the S &P. You just draw a line on a chart of sort of global liquidity and you draw the S &P over it, it tends to follow it pretty closely. As of right now, it appears that the S &P is sort of fairly valued at these levels. I just don't see how it can go down much more unless the Fed shrinks its balance sheet. So let's talk a little bit about Fed policy action and the implications of inflation data coming out tomorrow.

6:17There's a story out earlier today talking about Federal Reserve Bank of New York President John Williams said it basically essentially that the Fed has more to do in its fight to bring down inflation. And he says that one more interest rate hike this year is, quote, a reasonable place to start. Thoughts about that? It sounds as though he's saying we got one more hike in us. Yeah, look, they've been very consistent, right? The Fed said for a while they're going to raise and they're going to keep raising until inflation comes down to 2%. The only question I have is whether they'll eventually pivot and say 3 % or 4 % is okay, right?

6:57Because maybe it's just really, really hard to get back to 2 % because of structural reasons related to labor or capital flows, et cetera. Maybe they don't want to drive the unemployment rate up too far. Maybe it's politically unpopular to do that. And so they haven't been inconsistent in my view at all. They said in 2021, they were gonna start raising rates and then they were gonna shrink the balance sheet. They started raising rates. They raised rates very aggressively. Everybody said they couldn't do that. A lot of the macro commentators said if they do that, it'll break the government, it'll break the economy, right?

7:33It just won't work. And here we are at 5%, basically. And they say they're going to continue to raise. We're just under 5%, but they say they're going to keep raising. And I believe them this time. Yeah, just under 5 % on effective federal funds rate, upper limit right now, 5%, 475 to 500 basis points on the target. It looks like we closed out the day on S &P 500, 4108 spot 94 maybe off some fractional percentage point on my screen yeah it was it was interesting because right at the close it started to to sell off and my my hedge which was uh kind of red all day right red red red red which is the way it should be when your longs are going up uh in this type of structure and then all of a sudden it turned green at the end of the day so obviously people are people are concerned about what's going to happen tomorrow and if the print is really really bad like really surprisingly bad, then sure, the S &P could drop.

8:28And my target for - What's surprisingly bad mean? Is it six or above? Probably like in the five and a half to six range would be enough to spook people a little bit because then it would be clear that, because I think a lot of people don't believe the Fed, right? I just said, I believe the Fed. I believe they will raise. So I'm not going to be surprised, which is why I'm long value stocks, right? And in large part, I like value. I still like value here. I like healthcare and staples and energy. I like dividend pairs. because I think those stocks will actually do quite well, even in a higher rate environment.

8:59I think higher rates are generally healthy, but the market tends to overreact in the short term. And so it's possible that it sells off. And again, that's why I like to have a hedge on because I don't want to be hit hard by that type of move unnecessarily because it'll be temporary, but it's still annoying. And so I'd rather just have some sort of protection on, again, as long as you can get paid to have protection on your portfolio, it seems like a no-brainer right now. Yeah, also something we've got happening right now in Washington, D.C., of course, the IMF down for its annual meetings, lots of economists there putting out lots of papers, the official reports, WEO, GFSR, fiscal reporting, all of this stuff coming out.

9:39Here are some of the key points out today. So IMF has a call for global growth expected to be around 3%. This is the lowest forecast, I guess, in the medium term that the World Economic Outlook has predicted in over 30 years. That's pretty substantial. Short term, IMF expects growth of 2.8 % for the remainder of 2023. And finally, this is an interesting footnote. this idea that all of these forecasts, quote, assumes that the recent financial sector stresses are contained. In other words, assumes the banking system remains healthy. Thoughts on that? I know that this can get a little abstract when you're doing aggregate global growth projections that include both developed markets and emerging markets, but it certainly implies a deceleration, possibly because of the headwinds that we've seen around deglobalization and war in Ukraine, among other factors, Mike.

10:38Yeah, those are two important factors, but also just broadly demographics, right? People are having less children globally. And so, you know, like the Western world, like people don't want to have babies at all anymore. And so I think you just have to expect with a, what do we have, like 9 billion people? Is it 7, 8, 9 billion people now on the planet? There's a limit without a significant amount of technological advancement to how many people can sort of live comfortably on the surface of the planet, like if I just want to put it simply. And so it doesn't surprise me at all that growth should slow down.

11:14If you just extrapolate three or four or 5 % growth across several decades from here, you get to numbers that are just astronomical when you compound those numbers. And so I think people should expect growth to come down and broadly, but there still will be growth in certain subsectors. certain geographies, certain technological sectors like AI, for example, could see explosive growth in a world where broad global growth is quite low. And that might actually create a higher quality of life and standard of living for the average citizen anyway of the planet. Yeah. It doesn't worry me much, to be honest.

11:53We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing.

12:04Yeah, it's certainly an important point that you make there that these are not, that these are, in fact, the roll-ups. These are the aggregation and the mileage may vary. There could be areas of extremely high growth and, of course, conversely, areas of extremely low growth and challenges. But it is an aggregate number and it does give you a certain sense of where global growth is heading. I guess the other interesting point on that is the caveat about the banking system remaining healthy. I'm just skimming here through some summarized bullet points from CNBC. Look, no surprises here. I'm just going to read through this.

12:32This is from Jenny Reid out earlier today. Banks are facing higher costs and losses on assets, putting them in a more precarious situation that's in quotes, quote, more precarious situation, close quote, and potentially leading to a pullback in lending. IMF chief economist Pierre-Olivier Garrachis told CNBC. This is something that we know about well. We've covered it here on Real Vision Daily Briefing. higher costs, certainly from rising rates and losses on assets, particularly in the fixed income side. As you see rates rise, prices decline. It's a function of the mechanics of the way fixed income trades.

13:06What are your thoughts about this? I saw earlier that chief economist at IMF also modeled a worst case scenario, or I guess less rosy scenario where these issues that we're seeing in the banking sector are not contained. What are your thoughts about the relationship between the financial system in the U.S. and abroad and the relationship to asset prices, particularly here in the U.S., whether it's fixed income on the bond side or U.S. equities, Mike? Yeah, so look, banking is usually a pretty reliable, simple business, or at least it should be. What we've experienced over the last three months or so is the result of an unprecedented increase in rates in a very short period, which just caught a lot of people flat-footed and offsides, right?

13:54Particularly Silicon Valley Bank is a good example, right? I'm not sure that that's a broader problem, right? I tend to agree with the commentators I've seen that say, hey, look, this is going to be pretty well-contained. What I'm more concerned about is the disruption that I see further out from fintech itself, right? I just don't think banking is going to be a great business relative to other technologically oriented businesses that touch finance from the fintech side. I think fintech could actually disrupt a big chunk of the banking system. And one example of that, believe it or not, is CBDCs.

14:27When you really think about what a CBDC is, if a central bank rolls out their own CBDC, in some ways they're going to disintermediate the private banks and the commercial banks from the financial system because that government can go directly to the end consumer, the end citizen and say, here, I'm going to issue you this instrument, this loan denominated in the CBDC directly. And so right now the Fed really needs and the treasury really needs the banking system, like the commercial banks in order to run their playbook, right? To run the financial system. I'm not sure that's the case in 10 years or 20 years.

15:03And again, separate from all that, there's just traditional disruption from fintech. And so look, I don't want to be long banks. I don't want to own banks. I'm not interested in the banking business. I hope no more large banks go down. But again, I think there's a huge put on the entire system in the short term anyway. So I think it's basically a nothing burger. Mike, you and I, of all people, managed to do what we want, 12 minutes without talking about Bitcoin, without talking about digital assets. Let's break open the keg and chat a little bit about what's happening in Bitcoin right now. Lots of price action, lots of focus.

15:36Bitcoin over 30 ,000, 30 ,148 on my screen right now. Market cap above half a trillion dollars, up some 80 % year to date this year. It's been something of a breakout. Mike, give us what your thoughts are. I know you spend a lot of time focusing on this space, as I do. Give us your thoughts. Look, at a high level, this is completely to be expected, right? Bitcoin, in my view, is going to be worth a lot more by 2025. just looking at the cycle dynamics, right? Looking at the halving, Bitcoin's going to become more scarce about a year from now, maybe a little less. If you look at the underlying energy costs from the mining side, right?

16:16The Bitcoin has to get more expensive. Otherwise the mining business is going to fail. And if the mining business fails, then there's sort of no Bitcoin. The analogy for that is the server farm business, right? The traditional internet data center business, 2002, 2003, a lot of people got burned by internet stocks and they said, hey, I'm giving up on the internet. Why would I ever invest in an internet data center? And it turns out that was a really bad decision because you should have been buying internet data center stocks at that time because they all did phenomenally well. The same thing I think is sort of playing out now, right?

16:47Like Bitcoin is a tough asset for most people to get their arms around because it's digital and they can't hold it in their hand. It doesn't look and feel like anything else. But once you understand the relative scarcity of Bitcoin compared to the dollar, it's probably gonna go up in dollar terms unless it fails. And again, I don't see it failing unless the Bitcoin data center, Bitcoin mining business fails. So in the absence of that, the price will probably march higher over the next few years. And I think you want to be long. Yeah, it's also an incredibly volatile asset for people who have experienced backgrounds in traditional finance space.

17:23The mood swings are pretty wild. 80 plus percent drawdowns, 90 plus percent turnarounds. This volatility, if you look at it over a very long time horizon, the actual max drawdowns have been decreasing. They've been dampening. But still relative to anything that we see here in the traditional finance sector in U.S. equities, big cap U.S. equities, the moves are just extreme. That's true. And actually, I think owning Bitcoin over the last six years or so has made me a better equity investor. because I don't find the volatility, earnings-related volatility, for example, or news-related volatility, headline risk.

18:01Volatility and equities no longer cause me any consternation or stress at all. I don't lose any sleep over my equities because Bitcoin's already beaten that out of me over the last six years. Because one of the things you learn as a Bitcoin holder is once you understand it fundamentally, you just have to put it in your portfolio at some level, right? 1%, 3%. You don't have to be a genius. Just choose a level, put it in there and basically let it go for four or five years. And if you do that, historically, it's worked quite well. Again, that's a type of mindset when applied to equities also works well.

18:31It's very similar to what Buffett does. He'll buy stock in the 1980s and never sell it, right? And here we are 40 plus years later and he's still holding most of the shares of Coca-Cola and American Express that he bought 40 or 50 years ago. That strategy works well. And we know it works well because he's one of the wealthiest people in the world. But for whatever reason, maybe it's the talking heads on CNBC and the 24-7 news cycle, people believe they've got to trade a lot more than they actually do. I think Bitcoin's great for teaching people about volatility being different than risk. The real risk here is permanent loss of capital, whether that's because you're trading stupidly, right?

19:08You're buying high and selling low or you're using leverage and blowing yourself up or you're letting your money be degraded by inflation, right? If inflation's running at five or 6 % and you're not at least keeping up to that, your purchasing power is going down. And so again, if Bitcoin can teach you one thing, it's how to hold on to a high quality asset and hold it for long periods and ignore the volatility. Hey, talking of which Bitcoin and price, I wanted to take a look at a clip from a conversation that I had with Francis Hunt. This is a deep dive called An Upcoming Trend Contraction in the Broader Energy Complex.

19:40But we talk about Bitcoin specifically. This is out right now on the essential tier. Let's take a look. We think Bitcoin's going at least for a 40 to 42 and a half K run following a major reversal. I'm going to just switch the lights out on all the lines there, but so that it's easy to spot this, but 25 K as such a key level for a chart on such as Bitcoin. So many people have spoken of a hundred thousand and obviously 50 ,000. And for us, this, this constituted, and I'll go with a fat Koki here, a left shoulder here. That was a bit of a rising wedge. We fell. further. This was the FTX additional event that was November of last year.

20:25And then we have the right shoulder here. So I want to give a bit of good news to your crypto audience. We've been bears and boring bears because we've stuck with it for an extended period. So we are turning. These flags have all played out to targets. There was, in fact, a head and shoulder we discussed before over there that called literally the bottom that ran 15 and a half that was a target down there so i got a lot of lines that will overwhelm everybody on this big time frame so a little bit of spinning tops and tightness here you could have a short dip towards the neckline but we see a return back into where these flag zones were and that neckline of that head and shoulder runs at 42 and a half and you've got the midpoint of this big bear flag i think you get a bit of heavy traffic there, might run into a bit of bottleneck and churn a little bit.

21:14But that's a nice move. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:28So, Mike, the headline number there from Francis Hunt, 40 ,000 to 42 ,500 based on technical factors. Mike, do you look at technical factors when you evaluate Bitcoin or is this just something that you're a long-term investor in? And if not, what do you think of what those price levels suggest? Yes. So I try not to, to be honest. I raz the technical guys on Twitter quite frequently and maybe poke a little bit too much fun at the traders. But look, I think 40 to 50 ,000 is the right level for next spring, Q1, Q2 anyway, just based on the fundamentals of the price that's required in order to support the growth of the hash rate that's already built into the price at this point.

22:12And so I think we're in alignment. I think, I don't know, I don't think he gave, Francis didn't give a timeframe there, but I think that 40 to 50K level is to be expected within the next 12 months. All right. Lots of questions percolating in from YouTube and on the Real Vision platform, both. Let's just jump in and take some of these questions because we've got some really good ones here. The first one comes to us from No One Knows Thyself. Does the sell off in the last 30 minutes of the S &P and NASDAQ indicate markets indecision around CPI numbers, Mike? I think it's just, I don't know if it's an indecision in so much as it's just a general fear of any, you know, any sort of surprise event.

22:53And we saw that last month, like all of the volatility that was priced in the market was priced in, in like three or four trading days in advance, right? Everybody was buying puts around the CPI prints around the the Fed meeting, et cetera. And so people are just hyper-focused on any event right now, any catalyst for downside. And I think the other thing to keep in mind is that the sentiment has been so amazingly bearish. If you look at the AAII sentiment survey, if you look at just the general views on Twitter, if you listen to the talking heads and some of the top Wall Street analysts, et cetera, they've been really bearish.

23:29So I think there are a lot of people that are positioned negatively. In fact, I saw some data showing that put option buying is near all-time highs recently. So I just think there's a lot of people positioned for downside and they might continue to be frustrated if there's not a negative surprise here. Here comes another one from Joseph Leone about what's happening in the trad side space. Mike, you mentioned value. What is, excuse me, you mentioned what value is consumer stables and healthcare represent value to you? I'm a long only manager. Yeah. So what's the question though? I think the question is what constitutes value to you in consumer staples in healthcare?