Are More Rate Hikes Coming? with Jared Dillian

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

1:40Are more rate hikes coming? 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, how you doing? I'm doing okay. So all about the Fed, it seems like today, Jerome Powell delivered a speech at the Fed's annual retreat in Jackson Hole, Wyoming. They It appeared, if you listen in real time, that he kind of offered something for everyone. He said inflation was too high and that they were prepared to do more, but also said that inflation was decelerating, which gave the Fed room to proceed carefully. Those were his words.

2:14But the bond market, as you looked at the reaction now here through sort of past the mid-session of the U.S. trading day, it seems like the bond market leaned into the more hawkish statements. We saw the two-year and 10-year yield both moving higher. I mean, they weren't rocketing up, but they did edge higher. What did you make of the whole thing? Well, twos are down a little bit, tens are onch, and the long ends up a little bit. Oh, okay. So that's been shifting because when I look before, it looked like it was up. It's a little bit of a twist. I thought it was a very dovish speech. And like you said, there's something for everybody.

2:50And I think people are going to look at the speech and they're going to believe what they're going to believe based on their priors, right? and I have my priors. So I'm focusing on basically two statements. One, which you mentioned, they said we will proceed carefully on whether to hike again. Super important. We will proceed carefully on whether to hike again. But the other more important statement, I thought it says real rates positive well above most neutral estimates. And this is really the first acknowledgement out of the Fed about real rates, how we've gone from negative real rates in the 2010s to positive real rates today.

3:31And we really do have real rates of about 2 % right now, which we are in restrictive territory. This is the first time that the Fed has acknowledged that we are in restrictive territory. So you take those two statements combined and just the overall tone of the speech, and I interpret it as very dovish, the initial reaction out of the market, You saw bonds rally. You saw gold rally. It was it was the reaction that I expected. Then you had a reversion. And now everything's about on the day. I think as time passes and people digest this over the weekend, I think it's I think it's bullish for, you know, for at least bonds of gold going forward.

4:16So that's interesting. And right to point that out about real rates. And he also said, I think at some point he also said, it's kind of impossible to know where neutral is. I think at some point I heard him say that. So, yeah, I mean, you put all those things together. This often happens, by the way. You know, people have that knee-jerk reaction, and then they really go through the fine-tooth comb, and, you know, everybody gets a chance to kind of digest it. So not surprising that we're swinging around on a summer Friday, I guess. So let's, like, sort of set the table a little bit on bonds. First of all, so we you talked about it when you were last on, which we're going to unpack in a minute.

4:54But everyone who's been coming on has really been focused on this bond trade because it's important. It's going to influence a lot of other things in the market. And it's been, frankly, really frustrating. So this is what folks that were on the daily briefing the last week had to say. Let's have a listen. The markets, they have a habit of rallying on Fed, especially when they've priced in higher yields. They've already had their kind of hawkish mood. right? It's kind of like the anticipation builds and builds and builds, and then they don't come out as hawkish as they need to, then what the market's priced, and then it calms down.

5:29So I just think that that could happen this time around. I don't believe the Fed has to raise rates again. And certainly it's unlikely that they're going to by September, because it's unlikely that we're going to see anything in the development of adverse wage, adverse labor, adverse inflation data, materially adverse relative to the current state of the condition condition of the data between now and then for them to raise interest rates. And I think the further you go in time, the more likely the Fed just gets comfortable with how much time this process is taking. Working models for the last 25 years mostly revolved around demand.

6:01And, you know, if you can measure demand, then you know what the jobs market's going to do, you know what inflation is going to do. And now it's obviously much more supply oriented in 21 and 22. And then now we're kind of like, okay, you basically had this like earthquake. And now we're looking around and all the buildings are like half fallen over. And we're trying to like, in terms of economic models, not the economy. And you look at all these models of how things work, and none of them work. What we're likely to see is the Fed going, oh my God, sorry, we've undershot, which gives them the cover to cut rates, which they need to do, because they cannot pay the interest and the debt at these levels ongoing.

6:40They've got about 13 trillion of debt to roll over plus new issuance. And they need to then monetize the interest payments. That's part of the everything code thesis. I love sort of seeing the progression throughout the week. And by the way, that's just a taste of the kinds of conversations that we have on the platform and within our network and in the chats. For those of you who are on them, you know, if you are not a member, already a member, scan the QR code and jump on the waiting list so you can fully plug in and participate. So Jared, Raoul has been talking all week or for the better part of the week that he's had to rethink and close out of his bond position all because of some short term issues.

7:22Although long term, he's still, I think, holding the same narrative. I think it's fair to say. So how are you thinking about the whole thing? Because last time you were on, you felt pretty confident that we'd seen the yield, the peak in yields, but obviously the 10-year anyway, and that didn't happen. We saw yields go higher. So what you're thinking around the trade, what are you doing and what's going on that maybe you didn't anticipate? Yeah. I mean, 10-year yields are about 10 or 20 basis points higher, nothing egregious. The reason this trade is so interesting is because the two possible outcomes are so polarized.

8:00So a couple of days ago, you saw Larry Summers tweet out this chart, this analog chart of inflation during the 1970s and inflation today. And you can see that it's tracking pretty closely. And you had one wave of inflation and then you have like another wave of inflation that's coming. So and he's not the first person to show this chart. And Andreas has been all over this. He's been tweeting this out for like a year. And the thinking is, is that, you know, we'll have a period of low inflation and then we'll have higher inflation at some point in the future. So the other so there's a lot of people who believe that we're going to have a second wave of inflation.

8:43On the other hand, you have what is arguably a deflationary depression in China. And we've seen how China has the ability to export inflation to the rest of the world. and how they have the ability to export deflation to the rest of the world. It's the second biggest economy. So what I think is interesting is that the two outcomes are so polarized. I mean, I think you have people that think that 10-year yields should be at 8 % and you have people who think that 10-year yields should be a 1 % and there's not really a lot of in between. And when I look at 10s at 4.2%, I'm like, all right, this is kind of the average of the two outcomes.

9:26But it's such a hot topic because, like, the two possibilities are so polarized, you know? Yeah. No, I think that's right. And I think that's what's made it. It's why it's such a difficult environment. I really loved Brent's comment because I thought it was really honest. And he said, you know, before that, for those who watched on Wednesday and stuck around for the extended, he basically said, like, listen, no one knows what's going on. Anybody who tells you with any conviction that they actually understand what's going on right now is lying to you because there are these difficulties in teasing out what was a result of some extraordinary exogenous shocks, what is or will be structural changes, what the time lags are if they're just stretched out because of it.

10:18It's just really hard to tell. Even for the Fed, there's a feeling the Fed doesn't really know. But you do have these really loud voices in the room. I think Bill Dudley is one of them, right, who think that we're just in a in a new higher interest rate environment. So it's been super difficult. So just just just to sort of bring it back to the short term. So what have you done with your bond position? Did you are you riding through the pain because they did go up? Are you out and waiting for another day? How did you approach this? So I cut it in half two days ago and I can't say what I'm going to do in the future, but I'm, you know, I kind of like Raul.

10:57I still I still believe in the trade. Looking at some charts before I came on air, like I still I still think it has merit. It's, you know, trading is hard. Like the only time trading isn't hard is if your entry points are perfect. if your entry points are perfect, then you never have to experience a drawdown. You never have to experience any pain. You don't have people questioning your thesis on Real Vision. Like it's like - And you are not human. You do not exist. Sorry, you don't exist. Every once in a while, that might happen, but it's really - So wait, let's fill this in because there is, you know, basically, and I'm not speaking directly about you, but I'm just saying in general, people who are brave enough to share their thoughts and their trade ideas come under withering attack.

11:55Should anything go astray? We see this with, you know, Raul has experienced this probably more than any other person. So, but when you trade, when you talk to people, and I encourage everyone to go through the academy, go through those masterclasses, go listen to Peter Brandt's interviews, people who trade and invest for a living will tell you that they get it wrong all the time, right? Like this is failure is something that you have to be really comfortable with. It's part of the job. But how do you, when something doesn't go your way, like what is your thought process? Because I think this is where there's a big learning for people who are going to find themselves on the wrong side of a trade at some point.

12:34So what do you do? Do you say like, what's my risk profile? How much can I afford to lose? Cut your loss? Do you hedge so that you're protected? How do you approach that? All those things. But really, I think about the arrival of new information, right? You're constantly getting new information. And I check the information to see whether it confirms my thesis or disproves my thesis. And today we got new information and I think it actually confirms my thesis. Um, the, the Jackson hole speech that I expected was more like what we got last year where Powell just laid waste to the market. Uh, it was incredibly hawkish.

13:14It was pain ahead. There will be pain ahead, right? That was that. And, and we didn't, we didn't get that this year. In fact, you know, we got some, we got some dovish nuggets. 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.

13:36So you don't know what you're going to do, though. You halved your position and you're on the sideline now. Well, I do know what I'm going to do. I just can't say because it's going to go in the newsletter. Oh, okay. Yeah, okay. You're a man with a plan. So the dollar also strengthened a little bit on the back, but that may have also come back. This is another one where I feel like much like the bond trade, people feel two different ways about it. And there have been a lot of people who are kind of been wrong and having to readjust. I think Brent's comments about the models being broken are super interesting because if I told you two years ago that we were going to raise rates 550 basis points and GDP would still be positive and unemployment would be at 3.5%, you would say we were nuts.

14:32That's not supposed to happen. You would say, okay, unemployment is going to be 6 % to 8%. We're going to have negative GDP. And like, so like all the models that people are using are just not working. You know what I mean? So when you say that Powell really doesn't know what the hell is going on, like, that's absolutely true. Like they were just in uncharted territory. So, yeah, I, I, I, and that's why I thought that was such a thoughtful and smart comment that he made and a super honest one, because let's face it, lots of people peddle their business and you see this all over Wall Street and all over CNBC and Bloomberg, their job is to get up and say things with conviction.

15:10Mike Wilson from Morgan Stanley today said the fact that Nvidia, the market didn't rally on video means the rally's over. Well, OK, but he was wrong earlier on stocks, too. So nobody says like, listen, none of us know what's going on. But I think that there's a lot of truth in that, which means I guess that you have to stay nimble and open minded. Right. So what do you rely on if the old models don't work? I mean, you know what I rely on. Sentiment, yeah. I mean, with regard to stocks, you know, I am short. I've been short for about a month and haven't gotten, I mean, it's worked, but I haven't gotten a huge amount of satisfaction out of it.

15:51And there seems to be some support. I think if, I mean, look, like the Nvidia earnings was what, you know, what Tony Greer calls the Icarus print. I don't know if you ever heard him say that before, but it's one of my favorite things that he says. He calls it the Icarus print. And, you know, a stock that goes down on good news and all that stuff, like, it's pretty bearish. But, you know, just looking at the price action, I think we're going to have a tough time getting below 4 ,300 in the S &P. So I'm a little itchy about that short position. Right, okay. So you see some, yeah, I think Imran also was sort of saying, you know, you're going to back and fill maybe, but is this, so you can say, okay, well, it's not going to rally anymore, but what happens next?

16:38That's what people want to know, right? Are we going to see some kind of correction or revisitation to the lows, or do we kind of bounce around in a range where we back and fill? And, you know, that's what a lot of people are trying to figure out. Because if it's going to go all the way down, people don't want to experience that kind of drawdown. It's scary. Yeah. Yeah. But you don't, but you're not sure, huh? I'm not sure. I'm not sure. Yeah. When we're talking about the models working and stuff, I just want to flag to everyone, if you haven't had a chance yet, because I know it's summer and we're all running around trying to soak up the last of it, at least in the northern hemisphere here.

17:14Raoul had a conversation with Gerard Minnick. We ran a clip from it earlier this week. It's a great conversation. They talk about cracking the code to this economic cycle. And Gerard, this is the kind of conversation that I'm talking about when I say we dive deep. He talks about some things that he does think have structurally changed. And this is, we're at this really interesting juncture. And I think it's really important to pay attention to that. Brent talked about some stuff about going from a, you know, a demand led models to supply led models. And Gerard talks a little bit about that, but, but really fills in a lot of nuance.

17:53So I just want to give everyone a heads up. If you haven't had a chance to, to check that out. Please do. So what are you thinking about the dollar here, Jared, and how important is getting that right? I mean, it's, it's all the same trade, dollar, gold, bonds, all the same trade. It's a blob. Uh, I like it's an important blob though. You know, I, like, I started like back when I was younger, when I was at Lehman, I was, you know, I would notice that certain asset classes would move together with all like a marching band, like back then, back in the mid 2000s, the dollar was very weak. So you would look at the euro and you would look at XLB, which was like metals and materials and stuff.

18:35And it was like, you know, it was, it was a hundred percent correlated. So I started calling it the blob. So now we have a blob that's bonds, gold, and the dollar. And it's, it all comes down to, if you can, it's really hard. If you can predict what the Fed's going to do, then you are going to get bonds, gold, and the dollar right. Now, how to predict what the Fed's going to do requires you to predict what the data is going to do. You know what I mean? Because the Fed is, I think, at this point, data dependent. That's something they used to say in the past. They're not really saying it right now, but they are data dependent.

19:14If the next paywall print came in negative and we had like 3.8 % unemployment, that definitely changes the path of future Fed funds. You know what I mean? So it's just, you know, I find myself in a position where I have risk on and all these assets and like I'm data dependent, like I'm watching, you know, I would say 90 % of the time I pay no attention to the economic data. And now like I watch it every single day, you know? Yeah. Yeah. So is this it was asking him when you can we get your thoughts, Jared's thoughts on gold moving forward? Will it finally break the triple top in his view? I think you just answered that, right?

19:56You're not sure because it depends on what the Fed does. It depends on what the Fed does. But, you know, technically speaking, there aren't supposed to be such things as triple tops. I mean, I think, you know, the basic TA books will tell you that, you know, certainly not quadruple tops. And one thing that I mentioned in one of my newsletters that I sent to you guys, you know, gold, like this drawdown has one thing I noticed about gold, it spends more time going down than it does going up. But when it goes up, it goes up more than it goes down, right? So time is very important. A lot of technical analysts believe that price is everything, but time also matters.

20:42We've had a drawdown in gold that has only been about eight or 9%, but has lasted almost two months, right? And it's that time without a higher high, without confirmation that gets people really, really frustrated. So that's kind of the way I think about that. 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.

21:10Yeah, I think we've got some people talking about that. And Michael's saying until gold drops below a year ago, price long duration is a train wreck. So I think that, you know, kind of echoing the I thought that time really matters. I wanted to talk a little bit about banking because I think this is, you know, we talk so much about it. It kind of went to the back burner, but I've noticed a lot of people talking about Citigroup stock. How are you thinking about the financials? Yeah, not so good. So, you know, I'm building a house and I've made friends with people in the new neighborhood. And one of the guys that I made friends with, he's an older guy, he's in his 70s.

21:54Uh, he used to run a small regional bank in South Carolina and now he's, he's still on the board of directors. Um, but he, you know, I was talking to him the other day and he's like, every bank CFO or treasurer in the world is watching their net interest margin on a daily basis. Like they're just staring at it constantly. Like this, the, the yield curve inversion is death. like it is really, really tough on banks. And, you know, we were both of the opinion that this is unsustainable. Something is going to fail soon. I don't really have because I mean, this is not a small regional bank. This is a systemically important bank.

22:38Like this is a kind of fits in the too big to fail massive consumer presence. So the fact that people have been problem. So are you surprised that I mean, you know, there's there's a difference, of course, between your stock looking like ass, as you say, which I love. And there being something more scary going on underneath the hood. So I don't want to suggest that there's anything going on there. I think we have to be super careful about that. But I think one of the reasons that people have been bringing up Citigroup is because, I mean, this is not a small regional bank. This is a systemically important bank.

23:10Like this is a kind of fits in the too big to fail, massive consumer presence. So the fact that people have been talking about that or kind of looking at it nervously, is interesting to me. But once again, we didn't have the Fed mention anything about the financial system or banking sector at all. It's like there's no problem there if you listen to them. They don't bring it up at all. Yeah, actually, now that you mention that, that's super interesting. I didn't think about that. I mean, obviously, the Fed is the biggest bank regulator. And the regional bank presidents really have, they have a really good sense for what's going on with the banks in their district.

23:48so especially because they didn't get it right on Silicon Valley Bank you would think that they'd send everybody double down to figure out make sure they've got the finger on the pulse so they've got to know what's going on are they going to say we're really concerned about banking of course they're not but you would think that their comments would take into consideration that there's still enormous strain on the system I don't know do you buy the idea Because the narrative after the first freak out with Silicon Valley, and I think someone said all those S banks, is that, OK, this could. And then it kind of was like, oh, it's contained.

24:26The Fed doesn't mind if regionals fail. They'll ring fence them. They'll do one at a time. And it's all good. Do you buy that? No, not really. I mean, I think there's a lot of inputs into Fed decision making that go above and beyond the economic data. Right. So one of the things that Raul was talking about in that clip was interest expense on the federal government. Right. Now, that's not part of the Fed's mandate. They're not supposed to consider that. And they would never say that they're considering that. But for sure, they are thinking about it for sure. that is being talked about, right? They're absolutely thinking about it.

25:09And just like they would never mention anything about, you know, contagion or weakness in the financials, like for sure they are thinking about it. So, you know, when they, when, when Powell, I mean, when he puts this speech together with the help of whoever, like all of those things come into consideration. So when you see these dovish comments, like when he says that real rates are positive, well above most neutral estimates, like that's put there deliberately. And so is proceed with caution, right? Like that really turns out at me. No, nothing's there by accident. As somebody who had to be in those lockups, nothing's there by accident.

25:50They're very careful about what they say. So maybe we'll have a rethink next week as people start to look at the comparison to last year. And so do you think they go in September? We actually posed that question at the top and we haven't answered it. I think it's 50-50. I think it's 50-50. I don't think that's really the right question to ask though. What's the question? I think the right question to ask is, has the Fed done enough? Like one more rate hike, 25 basis point rate hike really doesn't matter. Like the question is, have they done enough and are they close to a pivot and how long will they keep rates at five and a half percent?