Are We Still Headed for a Recession?

0:00People are going to lose their minds. This is a moment in history unlike anything humanity he's gone through. It's a very different world for humans to come. Take a step back and see the broad picture, which is the way all these technologies are interlinked. Because this is all about exponentiality and humans can't think in exponential terms. How consequential do you want to say machine intelligence is? It's almost certainly as consequential as writing. How long did writing take to disseminate through the human population? You know, hundreds, thousands of years and we're dealing with it now on a scale of months.

0:33But in this kind of world, you're compounding 100 % growth every year and the numbers become astronomical. AI is going to spot patterns in the world that were just completely invisible to us. Even if you think that the AI and the robots are your demise, you might as well bloody invest in them and make some money out of it. If not, you're just going to be angry man shaking your fists at the clouds.

1:09CPI tomorrow and risk of recession. Welcome to Real Vision Daily Briefing. It's Monday, November 13, 2023. I'm Ash Bennington. I'm joined today by Jared Dillian, editor of the Daily Dirtnap and author of No Worries, How to Live a Stress-Free Financial Life. Jared, welcome back to the show. Always a pleasure to be with you, man. Thanks, Ash. It's going to be a good one. So, Jared, we're having kind of a boring kind of unchy day out there today. 50 ,000 foot overview. Where do you see us right now? Well, like you said, CPI tomorrow. You know, Friday was kind of a rough day in the rates market because we got some inflation expectations that were a little hot.

1:53In spite of some really weak consumer sentiment data. So I think going into CPI, I think people are positioned a little short in both stocks and bonds. I think people are expecting CPI to come in a little hot. I mean, I don't have any edge on economic data. I don't know where CPI is going to be. but I can tell you that if it comes in, if the headline comes in at 3.2, 3.1, you're probably going to get a pretty big squeeze in bonds again, like we did in payrolls a couple of weeks ago. So, you know, it's kind of tough being short. You know, the lead article on Bloomberg Terminal today is about the divergence in rate paths that big Wall Street investment banks come from this perspective with.

2:46They're talking about the whipsaw in US Treasury markets as a consequence of that. Where do you stand on all this? How does it play into your perception of CPI tomorrow? What do you mean by rate paths? Well, apparently, the major banks have some significant divergences between where they think the 2025 rate is going to be the implications and where they have forecast unemployment and rate of growth. There's like a huge swing between, I think, UBS on one extreme and Goldman on the other, Goldman being the most bearish of the major banks. That's kind of what the article is about. And the idea is the perception of CPI and all the macro variables being colored through that lens.

3:25Well, it's kind of interesting. Now that you mentioned it, I have observed that sort of forecasts for inflation and growth are all over the map. You know, the one thing I will say is that usually when there's consensus on a direction for the economy, that ends up being wrong. Now we have the opposite of consensus. So somebody is going to be wrong and somebody is going to be right. I'm kind of well known as a recessionista, I guess, as of, you know, the last couple of months. I've got a big position in two year notes. You know, I'm just going to tell you what everybody already knows. Unemployment is trending higher.

4:07It's going above moving averages. The claims numbers are getting a little bit weaker. Not markedly so. It's not as if the labor market is crashing, but it is trending a little bit worse. Yeah, I mean, right now, the first rate cut is priced in around May or June. I think it happens earlier. I think it happens around March. But these are small differences. But basically, if you're looking at the front end of the curve, if you're looking at twos, in order for twos to make sense, you need the Fed to cut faster. You need them to cut earlier, and you need them to cut more. And I saw something earlier today where somebody said, yeah, they're going to cut in June and they're going to do 25 basis point cuts for the rest of the year.

5:00I can assure you that if the Fed does start cutting, they're not going to do it 25 basis points at a time. They'll probably do it faster. It's generally what they do. So by recessionista, you're a recessionista and you also mean that you're dovish on the rate outlook that you see more cuts than the consensus. Yeah, I mean, I'm dovish on the front end of the curve. We've had some pretty sloppy auctions in bonds, and the one in tens wasn't all that great either. It's really tough for the back end of the curve to digest this supply. And really, until we get political change, that's not going to change.

5:42So it's tough to say you should be long tens, twenties, or bonds because there's just unlimited supply coming down the pike. and unless you think there's going to be unlimited demand to meet that supply, it's going to continue to be ugly. So I really have the same viewpoint as Druckenmiller. If you saw the Druckenmiller interview with Paul Tudor Jones, he said, look, I'm net long duration, but it's all in twos, and he says I'm actually short bonds. So he has twos, 30s on, he has a steepener, and it's quite possible that he will win on both legs of the trade. Yeah, I was chuckling earlier when you said when you get divergence, it often means that everybody is wrong.

6:27And when you get convergence, excuse me, it means that often everybody is wrong. And when you get divergence, it means that somebody's got to be wrong and somebody's got to be right. Well, maybe somebody can be obviously clearly has to be wrong, but do they have to be right? I don't know. I guess markets, particularly when you have these whipsawing type of periods, regimes, maybe everybody is wrong. Let me ask you about this, because for me, this is one of the things that's at the core of what's happening right now in US equity markets. It's been this strange concentration that we see S &P 500 year to date right now, close of business today, up 15.3 % on a year to date basis, S &P 500 equal weight, S &P 500 down 50 bps year to date.

7:09So you see this pretty stark, nearly 16 percentage point delta between S &P 500 and equal weight, S &P 100. And by the way, if you wanted to double click on that and put an underscore under it, NASDAQ 100 year to date up nearly 43 percent. That's the divergence story in U.S. equities. What do you make of that? How does it tie in with what you see in bond markets? Well, I think you'd be a fool to take a stand and say, OK, this is the end for mega cap tech and this is the time to buy small caps. But having said that, you know, I usually get reversals in trends when the chatter and the volume around that trend just picks up to like unsustainable levels.

7:57And if you go on Twitter, it's pretty much all anybody talks about. They talk about the Magnificent Seven. They talk about the underperformance of small caps. So I kind of wonder, I actually put this in my newsletter today. You know, I'm like I said, I wonder if we're near an inflection point. Like what if you took IJS, which is the small cap value ETF, and bought that? And what if you shorted IVW, which is the large cap growth ETF, and you just put it like in the back book? Like you didn't look at it for 10 years. Like I think you'd be pretty happy in 10 years. You know, one thing we know about markets is nothing goes on forever.

8:36Nothing goes on forever. Fang didn't go on forever. Like anytime you get some kind of a trend in markets, it doesn't go on forever. but it's just, it's kind of pointless to try to stand a thwart the trend and say, stop, like this is as far as it's going. Like, cause you know, stupid gets stupider all the time. Can we pull quote that stupid gets stupider all the time? I want that on a t-shirt. Uh, Russell 2000 off about two and a half percent year to date. yeah yeah i mean i you know it's funny because i saw a chart of uh large cap small cap uh under performance this was a couple of weeks ago and basically you haven't had small cap out performance except for a couple of brief periods here and there you haven't had small cap out performance in 20 years, 20 years.

9:34So obviously, there's some forces at work here that which we don't fully understand, whether it's big corporations becoming more enmeshed with government, whether it's just reflexivity and the big getting bigger. But that's a long time for a style box trade to work, 20 years. Yeah, I mean, it's essentially the entire lifetime of a lot of folks who have been watching this show in terms of their time on Wall Street. We make this point all the time when we talk about 10-year treasury yields peaking in 1982 and essentially being a generation-long bull market. Yeah, I don't know what to say. I don't know what to say.

10:19I don't think the answer is to go buy up a bunch of small caps and hope for the best. Look, the thing with these style box trades is that it kind of demonstrates how cross correlations in the equity market really break down over long periods of time. Like if you buy 20 stocks, you might think you have market exposure. But if you buy 20 small cap stocks or 20 value stocks, you really don't. You know what I mean? And I'm just going to say something which is obvious and everybody knows. But in an environment where only seven stocks are working and you have to own the seven stocks, like it becomes reflexive because if you're just XYZ growth mutual fund manager in Kansas City, like you have to own Amazon and Apple and Meta and Tesla because if you don't, you're going to underperform and you're going to get fired.

11:20So like I said, it's reflexivity at work. Yeah, it's reflexivity. And it's also just the weighting of passive indexation is something you've talked about before, which is just you own the index. So you have to own the individual stocks and or you're owning the index and you're seeing that appreciation there. Yeah. And a lot of people have talked about how indexation works, because if you buy a market cap index, most of your money is going to the larger cap stocks in the index, which makes them even more larger cap and it just perpetuates. We'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.

12:16ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments, S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone.

12:51Not all applicants will qualify. Plus 500, it's trading with a plus.

13:00Yeah, so feedback loops everywhere as far as the eye can see. Let's switch gears here and talk about something else that I know you've been writing about in the Daily Dirt now, which is what's going on with oil. Give us the big picture there from a price perspective and also what you think about in terms of the macroeconomic framework that it implies in terms of aggregate demand. Well, I look at oil today. Oil was up a little bit. I would say that the price action today was not inspiring. Seems to be a little bit of a corrective bounce. I'm bearish on oil for economic reasons. I mean, you mentioned aggregate demand.

13:39I'm going to let the The anecdotes do the talking here, but flew to New York last week, flew up on Wednesday, flew back on Saturday. The airports were emptier than I've seen before the pandemic. Flights were full. The flights were full, but the airports were empty, reasonably empty. So, you know, I think - What's that mean? Well, I think what we're seeing from some of this, you know, sentiment data is that, People are frustrated by inflation, and they are starting to curtail consumption. Not dramatically, but they're starting to curtail consumption. They're starting to pull back. Gosh, I mean, 2021, 2022, if I went to my favorite restaurant on Pauly's Island, it was full on a Monday night.

14:31And now it's tumbleweed. So you're seeing signs of this. It's happening slowly, but people are cutting back consumption. I think that's right, Jared. And it sort of matches my own lived experience. I mean, inflation is many things, but it's also very much kind of a slow, painful grind. It's something that you don't necessarily have. It's not like losing your job. It's just this sort of dramatic change in the price of the general level of goods. And it really impairs lifestyles over time. Well, and the other thing is, you know, Fed Governor Lisa Cook pointed this out. I saw this in a tweet, which if you talk to financial people, if you talk to Wall Street people, when they think about inflation, they think about the rate of inflation.

15:19Right. So now inflation is 3 percent. So the rate of inflation is 3 percent. Prices are still rising, but they're rising less than they used to. When the average person thinks about inflation, they think, when I go to the grocery store, it costs$300. It used to cost$170. And now it costs$300. And I have this, not recency bias, I don't know what to call it, but I have this memory of what things used to cost. And now it's much more expensive. Therefore, I think that there's inflation, even though the rate of inflation is lower. And this is the thing that I think is starting to curb consumption. Yeah, I'll point out something else that's obvious in a way that I think, in terms of experience, the way that we experience it, you mentioned that economists look at inflation as a rate.

16:09Absolutely correct. You know what else is a rate? Speed. Speed is a rate. But when you're measuring a distance between two places that you go at a given speed, it's speed, the rate, times time. And so we've had this period of sustained inflation where the numbers, for example, now are getting closer to the 2 % target. But it's been this sustained period of inflation month after month, year after year. And the cost of living just keeps increasing over time. And the experience that you have is one of sustained higher prices. And that impairs people's lifestyles in a very real way. You know, I broke it down today.

16:44I went to the Truflation site, and I started breaking it down by category. And I wanted to see if food inflation was still high because people are bitching about food prices all the time. And, you know, food inflation is 3%. It's basically the same as CPI. Like, we do not have persistent food inflation. Like, food inflation has come down. I looked at housing. Housing is a little higher. It's closer to 4%, but that's coming down. Rents are starting to come down in New York City, which you probably heard. So yeah, like it's not as if that we still have food inflation of 20 % and everybody is getting killed.

17:26And it's just – it's really not that bad. Yeah, I have some friends in the restaurant business who might beg to disagree with you if you see what's happening here in New York City. And again, I think it really is the rate times the time. It's just this constant sustained inflation month after month, year over year, which makes things far less affordable and impairs people's desire to spend because the cost of living just gets higher and higher over time. It's been just a just a painful, painful period. I mean, I see it in my own life, right? Like I typically I'm a bachelor. I want to work as much as I possibly can, order in food, work at the desk.

18:02And, you know, you get a sandwich delivered to your apartment. It's 26 bucks. I mean, it's just like ludicrous. When you take the amount of time you figure you save by doing it and the cost. And by the way, one of the places that you see it most is prepared food because you have the price of the labor that goes into it all along the supply chain. And then you have the cost of the input cost rising as well. Hey, Jared, something I mentioned at the top of the show we haven't had a chance to talk about yet. No worries. How to lead a stress-free financial life. Boy, if ever there were a time for a book like that, it's today.

18:34There it is right on the screen. No worries. Talk a little bit about the book. Why did you write it? So, this book is kind of the antithesis of all of the personal finance books. When you think of personal finance books, you think of The Millionaire Next Door, Rich Dad, Poor Dad, Total Money Makeover by Dave Ramsey. And maybe not Rich Dad, Poor Dad, but definitely The Millionaire Next Door. A lot of these books have an obsessive focus on small expenses. You know, the famous, most famous one being the coffee. Like if you gave up buying coffee every day, you could be a millionaire. All right, we can do the math on that.

19:13So I stop at Dunkin' Donuts every day. It's$3.70. I do that 225 days a year. That's$900. If I gave up coffee for 40 years, it would be$36 ,000. And if I invested that at some 12 % rate of return, which is what these people say you get, then you have$200 ,000. So if you give up coffee, if you give up coffee for the rest of your life, you will have$200 ,000 at retirement. So what's wrong with this? Well, what's wrong with this is if you don't drink coffee, you can't take a dump, right? That's why people drink coffee, so they can go to the bathroom. And I'm not going to sign up for a program where I can't take a dump for 40 years.

20:00Like, you're just miserable. Like this is like so I'm joking around, but it's actually serious because what these people try to do is they try to get you to give up a small daily luxury in pursuit of a larger goal that you're not going to realize for decades from now. And people can't sustain this program. And the people who can sustain this program are miserable their entire lives. So the focus of the book is how to live a stress-free financial life. And what a lot of the personal finance wisdom out there tells people is that in the pursuit of having a comfortable retirement, you have to live in deprivation throughout your entire career, which is not a stress-free life.

20:50So in the book, I talk about debt, right? You want to minimize your debt. That is a big source of financial stress. And I talk about risk in terms of financial markets risk, which is another big source of financial stress. If you minimize those two things, then you'll be happy. Jared, I love this because I think that's spot on. I've always been extremely skeptical of the Starbucks scolds who tell you if you just give up Starbucks here. I mean, it is the big things. It's the big structural questions. And it's so great that you've written a book and you've thought this through. Yeah, I mean, really, for the average person, if you do three things right, you can drink as much coffee as you want, right?

21:31So if you buy a reasonably priced house, right? And think of it in terms of this way. If you buy a house that is$100 ,000 more expensive, you will spend$120 ,000 in interest over the life of the loan, which is like 100 years of coffee, right? If you get an$80 ,000 BMW and you finance the whole thing, you will spend$30 ,000 in interest, which is almost a lifetime of coffee. If you go to an expensive school and get$300 ,000 in student loans, that's like five lifetimes of coffee. If you get those three things right, then you don't have to worry about the small expenses. It's that we live in a culture and a society where people think it's the little things that matter.

22:22If you make your bed every morning, that's what matters. Screw making your bed. It doesn't have anything to do with anything. Like it's the big thing. It's actually the big things that matter, not the small things. I love it. Spot on. Totally agree with it. Ralph Humphrey says speed is also an option Greek. It's a third order option Greek. My brain doesn't go that high. 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.

22:55Hey, Jared, talking about these questions, we got some good ones coming in. Let's jump in. Trillion X macro. Jared, how are you positioned on the retailers ahead of the start of their earnings release this week? You know, it's funny you ask because I would like to be short and I just haven't done the homework yet. You know, I have a saying, which is you should invest, then investigate. Right. Once you put once you put the position on, then you will do the research. OK, but if you wait to put the position on until you do the research and you will miss the trade. Anyway, I want to be short the retailers.

23:37I actually I was going to schedule a call with one of my retail expert friends of mine, and I just haven't done it yet. But, man, I think I totally think you should be short retailers in this environment. It's just a matter of picking the right ones. Do you see any common themes along those sort of the axis of what the worst retailers look like? What leaps out at you? I don't know. Just haven't done the work. OK, next question. Is this it? Is the questioner. And the question is, the uranium bulls are very loud nowadays. Does Jared have any updated opinions on that space? He has commented on them before, as this it says.

24:17Yeah, we went through the whole uranium assholes thing and stuff like that, which was awesome. Actually, I mean, you know, I think the trade is working. It's in an uptrend. Like, I wouldn't overthink it. Just hang on to the position. I'm still bullish. I'm bullish on uranium. So. Yeah, by the way, how are you going to do a job that involves spreadsheets without coffee? I mean, good luck with pivot tables without coffee.

24:47OMYT asks, why is the 10-year trading lower than the 5-year but the 20-year and the 30-year at higher yields? What is so special about the 10-year that attracts a bid? Boy, that's a great question about the shape of the yield curve. Yeah, I'm trying to think back to my bond classes. There's something called market segmentation theory, which basically says that every point on the yield curve is a reflection of supply and demand for that particular security, right? So the 20 is the highest point on the yield curve. And when Treasury issued 20s, they thought there would be a lot of demand for 20s, but it ended up being kind of an orphan.

25:25And there's not a lot of demand for 20s, so it's at a higher yield. 10s, 10s are the benchmark. Everybody wants 10s, so 10s traded a premium. But that's really what it is. It's market segmentation theory. So the simple answer is it's just about organic supply and demand for the particular tenor of the security. Yep, that's right. All right. Next question. Paul English, is Jared back in the markets and trading again or still out working on the new house? No, that's a fair question. Like, I actually am kind of sneaking into stuff now slowly. Added an international position, I guess, last week or the week before.

26:04I think it was the week before. So, yeah, I'm sneaking back into trading. Actually, I don't I'm just I'm not seeing a lot of opportunity in stocks. I mean, like we said at the beginning of the show, like you got seven winners and 493 losers, and that doesn't seem to really be changing. So what the hell do you do? So I think there's bigger opportunities in rates, in gold, in commodities. I think that's what you should be trading right now. Next question, Jason Yoakum. The discussion on oil solely focused on demand due to individual consumption. Why is supply not being considered with equal weight?

26:41Fair question. I think everybody considers supply. It's weird. Like, you know, I mean, that's like two months ago. That's all everybody was talking about was supply constraints. That's true. You know, so I think the conversation has shifted. I think people are now starting to focus on demand, especially after this$20 sell-off in the last three weeks. But, yeah, I mean, go back two months ago. Like, that's all anybody was talking about was supply. Quite true. Andrew Sun, would Jared share his view on oil and gold? You talked a little bit about oil. How about gold? Man, gold is, gold is, here's the thing.

27:27There is, the longer we are dealing with debt and deficits, the window in which we have time to do something about them is closing. The longer this goes on. We are almost in checkmate fiscally. We are almost in fiscal checkmate. And once we are in checkmate, I mean, any zero hedge reader knows this. The only end game is direct monetization of the debt in order to keep yields down. Right. So unless we elect Rand Paul or God, who knows, Nikki Haley or some deficit hawk like and we we get the deficit down to one or two percent of GDP like it's it's checkmate and gold is going to work at some point in the future.