Are Bonds in the Driver's Seat? with Jared Dillian

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

1:40our bonds in the driver's seat hi everyone welcome to the real vision daily briefing with me today is jared dillian editor of the daily dirt nap newsletter hi jared hey i got my uh daily dirt nap t-shirt on today oh nice so i didn't know you were i didn't know you had swag yeah this is for my conference next year oh nice all right well we want one I know you got to plan these things ahead, right? Awesome. I love it. So we are midway through the US trading day. Well, a little bit more than midway. And wow, looks like stocks are going to finish strong here on the back of some pretty good earnings, especially Amazon's a monster.

2:27It's And we had a payroll report that showed payrolls grew, but a little bit less than estimated. So it wasn't a blowout number. Wages came in a little hotter. But overall, it looks like sentiment sort of leaning the way of equities again. But it's been a really interesting week when we've been on this kind of roller coaster of sentiment. We want to take a little bit of a look back and get some sound from some of the great folks we had on. Let's have a listen to that first. The risk reward of owning public equities right now, especially when you're talking about the mega caps, is horrible. I think the market is sensitive to yield spiking from here.

3:11I don't think people are positioned for it. I think people assumed it was impossible. Jay Powell, if you're not going to deal with the inflation problem, I don't want to own your 10-year note. I just don't believe the statement that there is going to be no recession. after we have had so much of an expansion of monetary and fiscal measures, we have to pay the price.

3:36I mean, I think that does a pretty good job of tracking it. And I think Michael and Harry and Jim kind of identified the feeling that was coming in the beginning of the week where everybody was kind of rethinking the economy and a lot of people starting to talk about, wait a minute, No landing. It's too strong. The Fed's going to have to do more. Rates are not priced accurately. And then it kind of swung back again as we got to the end of the week. So what's going on? What's your sense of what's happening? Just from looking at that clip, it seems like a lot of people don't like bonds. It certainly, I will say SRI is maybe the exception there.

4:18But there was a lot of concern coming up that the bond market had it wrong. Yeah, the bond, this, you know, today is the reversal for the bond market. Like, yields peaked today and are heading lower. And I think that 10-year yields are going to be lower than 3 % in three to six months, for sure. Today was the peak in yields. So what you had today was, and not like the fundamentals really matter, but we'll talk about the fundamentals. We've had two-week payroll reports in a row after we had 14 strong ones in a row. So 14 strong ones and two weak ones. So we have a little bit of a trend here. And the Fed's going to look at this and say, OK, I mean, Tom Barkin said this earlier this week.

5:08He said the rate hikes that we did last year should be starting to take effect this year. And that's the way the Fed's going to interpret it. And you're going to see dovish comments out of the Fed over the next couple of weeks. But that doesn't really matter. What matters is positioning and sentiment. And you have Ackman piling on with a 5 ,000-word tweet. And interest rates are making the news. And positioning, I've seen readings of positioning in the bond market. like i've never seen it more short like a hundred percent consensus like everybody's short so you know the payroll number came out today it was a little weaker than expected not materially and if you looked at the intraday price action people sold on the number it didn't go down and there's been short covering all day long so this this is the reversal that you know that i've been waiting for.

6:08So it now seems like there's two camps. We were sort of having people think, oh, we've got a soft landing or there's a recession. Now it seemed like people were kind of moved to, wait a minute, the economy is way stronger than we anticipated. We're not going to land at all. And inflation is going to come swinging back. And then the people who are like, yeah, the economy is really strong. That's true. Rates may go higher, but that's going to cause the recession. But you're not, how are you thinking about this? So you think rates are going down. You think there's a recession? Is that why? I think we're going to get a mild recession.

6:49I mean, look, the yield curve has been inverted for over a year. It just started steepening again. It's been steepening for the last three or four days. People haven't really talked about it. Earlier this week, we had a bear steepening. Today, we have a bull steepening. And when the curve starts steepening again, when it becomes uninverted, that's when you get the recession. So the yield curve inversion predicts the recession, and the recession actually happens when the curve starts steepening again. And these steepening trades, these bull steepening trades, are some of the easiest trades in finance, right?

7:26Because what happens is that the Fed gets dovish, they start cutting and they don't cut once or twice. They're going to cut like 300 basis points and twos are going to rally massively and the backend is going to rally, but not as much. It's a super easy trade and it literally just got kicked off today. So you think this is the beginning of what is going to be? Should we be paying attention to if bonds are the trade, what does it mean for equities? Equities are going to go down. So what you saw as of a couple of days ago was really a peak in the differential between stock bond sentiment. People were max bullish on stocks.

8:07They were max bullish on bonds. That's going to unwind. If you bought TLT and sold SPY and just left it on for three months and didn't look at it, you would make money. This is a very easy trade. so why doesn't it feel that way for people why is there so much doesn't it feel that way yeah like you have so you just mentioned you have Ackman you have other people who've been coming out and they're negative on bonds right yeah I mean Bill Gross is one right uh and then the other side you have Buffett yeah and on the other side I mean if if you have Bill Dudley and Bill Gross and Ackman on one side and you have Buffett on the other side, who are you going to go with?

8:51I'm going to go with Buffett. I mean, think about Buffett like out of the whole universe of things that he could buy, like any stock that he could buy says, no, I'm actually not going to buy stocks. I'm going to buy tenure notes like that to him is the most undervalued security on the planet. So what do you make? What do you make of stocks rallying today? Well, it's a little bit of a relief rally on payrolls. So I'm actually short stocks and long bonds. And I got short the S &P a little bit below 4 ,600 and been kind of sneaking into a bond position. But yeah, a little bit of relief rally. But I think by the end of next week, I think the S &P will be at like 4 ,400 or something like that.

9:45Oh, really? So you see this move for stocks and bonds sort of accelerating? Yeah, yeah. Interesting.

9:57So Christopher is saying, I'll take the opposite side of Jared's reversal call for reasons that are too numerous to recap here. I'll keep busting you up all day long. Like I've been doing this on real vision daily briefings for years. Yeah. You know, go ahead, take the other side. Yeah. But it is, um, it is, it is a little split though, isn't it? You know? Um, and I know that, I know what you're talking about in terms of sentiment, but, um, what do you, what do you make of the argument? So first of all, are you just looking at it from a, from a, I'm thinking in real time here, people, it's Friday, bear with me.

10:37What do you make? Are you basing this on sentiment, just the way people are positioned? Or are you also looking at fundamentals, Jared? Pretty much like 90 % sentiment. 90 % sentiment. OK. So how much do you think this is going to run in terms of yields? We've seen a lot of bond volatility, right? We saw it again this week. They were on course of their worst week in the year, I think. We saw a big move in yields. So what do you see on the reverse side? Are we also going to see that kind of volatility with yields moving lower? How quickly? Or is this kind of a more of a grind lower as people start to see data points come in or as sentiment starts to swing the other way?

11:18It depends on the data. It depends a lot on the data. It depends a lot on Fed speakers. What I think the yield curve will look like in six months, maybe nine months, let's say nine months is you'll have twos at two, two and a half percent and tens at three percent. That's what I think. That's what I think the yield curve is going to look like. So I think the front end is going to come down dramatically. So and you think that the inflation narrative is going to allow the Fed to is the Fed done? The Fed probably doesn't know that they're done, but they might be done. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

12:01We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

12:10And you think the inflation data is going to behave well enough for them to allow them to do that? I do. We do have CPI next week. And that's been a market mover. Yeah, I should actually pull it up and see what's estimated. So it's estimated to go up to 3.3. So we'll see. But ultimately, I think CPI gets down to about 2.5, somewhere around there. So I think the inflation data is going to cooperate. So you would not be pricing out the easing that the Fed, you know, because that was the, that was, everyone's got those rate cuts still in the forecast. They've been pushing them out a little bit, but still in the forecast.

12:56And then people are kind of looking at some of that data coming in and going, hang on a second. Maybe, you know, we're well, I mean, there's some rate cuts priced in, but really the way you have to look at the Fed funds curve is it's not like it's not like you're pricing in 100 percent chance of 75 basis points of cuts. It's like you're pricing in a 50 percent chance of no cuts and a 50 percent chance of 200 basis points of cuts. Like if the Fed cuts, they're not going to cut once or twice. They're going to cut 10 times. So that's really the piece that people are missing. They look at the front end of the yield curve.

13:34They look where twos are. They look where Fed funds are. And they say, oh, we're pricing in a bunch of rate cuts. But the reality is that if the Fed starts cutting, they're going to cut way more than what's priced into the front end of the yield curve. So what's the economy look like if the Fed is in that position? uh i mean i mean is it a severe is it a a mild recession is it is something breaking that's going to cause bonds to do so well and and the fed to be cutting or ultimately it comes down to the labor market right because that's that's the one piece of data that has political significance for the Fed.

14:17And I think that the Fed has been obsessed with the labor market for the last year, trying to cause job losses to slow down the economy. But I don't think they really want to cause job losses, like not going into an election year. So I think, look, two bad payroll reports in a row, we get one more. And like you said, I don't think the Fed knows that they're done, but they might be pretty close to being done. Michael was asking, do you like short duration bonds, say one year treasuries versus zeros or TLT? Well, I mean, so the way you have to think about this is if you play the front end of the curve, there's not a lot of duration.

15:08So even if you get twos right, you'll make 2 % best case scenario. and then you have refinancing risk, right? Like you, so you're going to take a 5 % two-year note and you're going to roll it into a 3 % two-year note. So usually in these situations, that makes sense to play the long end of the curve just by tens and get the duration and lock in, you know, where are tens right now? 4.1%, like lock in 4.1%. So. We also have people asking about oil. So. Are you looking at that? Because I think the folks who are in the camp that the economy is stronger than expected and it's going to put upward pressure on rates in the Fed, look at oil and say, that bottom's likely in and we're going to see upward pressure on oil.

16:07That's going to send some of those inflation numbers higher again. Are you watching the oil space? I mean, oil just broke over 83 before we came on the air. You know, like it's up two bucks today. So I got long at 75. And I think oil has a long way to go. I don't study the fundamentals of oil. I study charts and sentiment like I do everything else. And we had a nice big rounded base, bottomed around the high 60s, had a base that lasted about six months, broke through the downtrend. And once we broke above 75, it's been a straight shot to 83. And I think it continues for a while. So in terms of oil sending inflation higher, that'll take some time to feed through the data.

16:56That will happen. But ultimately, I think we're going into 2024, an election year, with the labor market getting worse, oil prices going up, and the Fed really not be able to do anything about any of it. A bill is saying in central Pennsylvania, we are already in a recession. Depends on where you are sitting. You know, that's going to determine, I guess, how you're feeling about the economy. Thank you for that, Bill. We always like to get reports from the real world. But it certainly doesn't seem like that if you look at the stock market. I mean, I guess this is the difference between the financial economy and the real economy, Jared.

17:36Yeah, it's not a recession where I live. Like here, it's a food fight. Like it's an absolute food fight. Like it's just, it's the hottest economy you'll ever see. And it still feels that way. Yeah, it still feels that way. Yeah. So there's regional differences. I mean, I've been to central Pennsylvania, right? Like it, yeah, it's been in recession since 1994. So yeah, yeah. Feel free to weigh in, Bill, but that is a good point. Right. I also saw that it depends evidently where the hot concerts are this summer, because I did not realize that Taylor Swift made it into the Fed's Beige Book, I think, because of the economic.

18:16Yeah, I think I saw I was multitasking, but I think I saw it at the corner of my eye because of the halo effect. And of course, she's not the only one there. Beyonce and Sharon, there's a lot of big concerts. And when they're coming in, they're lifting local economies. So people are still spending on that. They're still spending on services. If you think that we're going to have the sustained bond move, Jared, what's the catalyst? Where is that going to feed through first? Is it employment? Is it that CPI number? Where's the evidence going to come to support that sentiment? I don't know. People ask me what the catalyst is all the time.

18:50All I know is that the sentiment's maxed out, positioning's maxed out, charts are maxed out. I mean, what, you know, nobody predicted a couple of days ago that Fitch was going to downgrade the U S you know, so there's a catalyst for you. We didn't, nobody saw that coming. So yeah, just, you just never know. Yeah, I know most people, Larry Summers is really mad about that. Somebody point, I think Sri pointed that out yesterday or someone or Jim Bianco, actually. But Larry Summers, he's still making headlines. But that didn't really have much of a market bearing, did it? Do you think that has any lingering effect, that Fitch downgrade?

19:30I think it does. I mean, look, we've been through a downgrade before back in 2011. And, you know, I traded during that downgrade and it was very perplexing. because you would think that if US debt gets downgraded, then yields go higher. But back in 2011, yields actually went lower. And everybody got it completely ass backwards. Like it totally ripped faces off of people. It was nuts. But in 2011, stocks were down about 20 % from the highs. There was about a 20 % correction. So I do think it had sort of a one-day effect on the equity market, for sure. So if bonds are, you like bonds here, and stocks are going to correct, what do you see happening there?

20:25Is it the whole market? Is it a portion of the market? And how do you see that playing out? Is it how sharp of a correction? Is it a quick one? How do you see that? Well, I don't really know. I mean, my gut tells me that you'll have a rotation out of tech and into everything else. And probably I should be short NASDAQ instead of S &P, but I just hate trading the NASDAQ. And as I said the last time I was on, the S &P is kind of a tech index anyway, so it's good enough. I just have a lot more experience trading the S &P. So, yeah, I mean, it should be tech. You should get a rotation. It should help value.

21:09It should help small cap, but I don't know. 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.

21:24I mean, the rate, if we see rates start to move down, doesn't that reaccelerate things? You know, doesn't that kind of work against the Fed? I think it depends on why rates come down. You know what I mean? Like, if rates come down because of a risk-off event, then I don't think that necessarily re-accelerates things. So I think it really depends on the reason. Yeah, Alex is saying there will be no cuts until something breaks. Are we still thinking that something has to break for the Fed to make a move? or that the lag effects of all of these rate hikes that we've seen already and the higher rates will cause trouble somewhere?

22:14Yeah, that's very possible. I've been saying for a little while that I do think we're going to get more bank failures. I do think that's going to happen. Which is interesting because I don't think that's where sentiment is right now. That sort of seems like it's in the rearview mirror. Do you think we're being too complacent about that? Yes, absolutely. Yeah. Yeah. Why? What do you think? It's just a matter of time? Yeah, it is a matter of time. I mean, if you think back to 2007, right, you know, we hiked rates up to, I want to say, five and a half percent. Then all the mortgage lenders started to croak.

22:57Then Bear Stearns croaked. Then the GSEs croaked. then Lehman croaked. And the market didn't really bottom until March of 2009. So that was like a 21-month process of everything falling apart after we hiked rates to 5.5%. Like it just, you know, we hiked rates a bunch, and Silicon Valley Bank blew up and a couple other banks. But we're going to get round two and round three and round four. That is going to happen. So one of the, yeah, it's interesting because, you know, we were talking about the, the, not the bank run, but the bank walk, right? And the fact that why would you keep your money in a bank when you can get that yield on a T-bill or get that?

23:41Nothing's changed with that, right? So is suddenly the deposit situation more stable? You can still park your money and get a decent rate. You have an option, but no one's talking about that anymore. Yeah. But I'm not sure why. I'm not sure what changed. Just the panic. The panic was over that momentary. Yeah, safe to go back in the pool for sure.

24:13I love that. Ralph saying, when is Larry Summers ever happy? Well, that might be fair. Are you watching the issuance coming, Jared? We have a lot of, that was another, there was a lot of news this week and everyone's paying attention to earnings and we had the downgrade from Fitch and a lot of economic data. But we do know that they're going to be issuing a lot of, they're going to have to issue a lot of bonds. Is that a problem at all absorbing them? Does that impact your call on bonds? So a little history. So back in, back during the financial crisis in 2008, 2009, you know, we spent 700 billion on TARP, 780 billion.

24:56And the government was spending money like crazy. And the Treasury was doing these huge auctions, lots of issuance. And I was looking at these$30,$40,$50 billion bond auctions. And I'm like, who's going to show up to the auction? We're going to have a failed auction. So I started doing a lot of research on what happens when an auction fails. And if it ever happened again, and I wrote a lot about it in my newsletter. Well, the thing I didn't take into account was the demand side. You know, when we were in the biggest risk-off event of all time, the stock market was down 57%, and people didn't want stocks.

25:33They wanted the safety of bonds, and those auctions were just gobbled up by demand. So we tend, you know, when you look at the bond market, a lot of people look at the supply side, and they say, oh, you know, we have all the supply. We have these big auctions. but you know just on you know just like on the flip of a hat like we we might be in a risk-off environment and the demand shows up to those auctions like i've never seen in my career i've never it's i've seen one or two week auctions where like the bid to cover is like below two like significantly below two but i you know it's just never been my experience that we've had just an overwhelming supply of bonds at an auction, and it's just a disaster.

26:20It never happens. Yeah, that's a great point. And when you look around the globe, you definitely have stresses and strains. I mean, we only need to look at the UK and Europe for some of the weakness and recessionary issues there. So really great to underline that demand side of things. It always, for all the issues you always think of, it's like the cleanest shirt in the dirty laundry or the cleanest dirty shirt or whatever that saying is. It looks more attractive than even other issues than other places. Sarah asking, what are the implications of Jared's view for US dollar versus the pound, British pound in particular?