How High Will U.S. Yields Fly? With Mish Schneider

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

1:40How high will U.S. yields go? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Mish Schneider, Chief Strategist at Market Gauge. Hi, Mish. It's great to see you. Hi, Maggie. Great to see you and the crew behind you. Exactly. Brian and Nick are in the house today, as always. So some very interesting action. It's been an interesting week, really, but we saw it's kind of been the trend. We once again had global sell-off and government bonds, the U.S. 10-year climbing above 4.30 for a short period. That was the highest level since about October 2022. U.S. stocks in the red again today.

2:24And once again, it looks like they're ending. They're sort of selling into the close. They're ending at the weakest points. The Philly Fed Index show an uptick in manufacturing activity in August. Weekly jobless claims fell. And those Fed minutes, which I think got things going here in the afternoon, show the central bank still concerned about inflation. So when you look at all of the things you track, Mish, where are we in terms of growth and inflation? Well, great question. I mean, obviously, the rates are the first thing to talk about. So this move that we've had since 2022, if we look at it in terms of cycles of two years, in the end of 2019, it was pretty obvious that with the rates being so close to zero, and then of course, COVID, and then going to zero, that it might take a couple of years to see the impact of that type of loose economic policy, which of course went back 40 years, but more recently.

3:25And then that's what we saw in 2021 was a huge spike of inflation with it peaking in 2022. So when the Fed got super aggressive in 2022 in raising the rates, and here we are now in 2023, entering the second half of the year, I would say that regardless of whether we're near the top or we have a little bit more to go, we don't really know yet what the economic impact of that is going to be. And if we put it logically with sort of a two-year cycle, we may not necessarily really know that impact into 2024. So as far as the markets are concerned and inflation, even though we can certainly support, and there are plenty of people out there thinking deflation, and they may at some point be right.

4:14But at this point, the emergence or what we're calling the wave three of inflation is here, not in all pockets. And the big question in terms of inflation going forward is if we had some kind of a huge inflationary spike from here, it would probably be because of something really devastating. So apart from some level of devastation, whether it be natural or geopolitical or what have you, we have to assume that we have kind of peaked in inflation. We don't know, although we're still inflationary and we'll talk about that more. We have to assume that in terms of economic growth, some of the impact and the growth that we've seen lately might be a little bit lagging and how much is going to happen now once things really sink into the rates.

5:02And then, of course, what happens from here in terms of the job market, which is still so strong, as you mentioned, the housing market, which everybody's expected a crash hasn't happened. And, you know, in terms of the overall market, it's probably the least to do with the economy than anything. It got overbought and now we'll see whether or not it's nearing support getting oversold. Yeah, it's interesting you say that. We're going to talk about some of the sort of market mechanisms in a minute. You mentioned wages. So this has been interesting because as we've been making our way through the summer news cycle, we're facing a potential auto strike.

5:42We know that there was a Teamsters, you know, you've seen some union action. We keep seeing tight labor markets. I know you're looking at wages. What's going on there? Because we know the Fed's watching that as well. Well, again, from a logical standpoint, you have to wonder, even though there's still supposedly a lot of money around and another new source of money has been people who have so much equity in their homes, whether or not they decide to actually take some of that equity out for cash remains to be seen. But we know credit card debt is high. So you've got inflation still really high, particularly in the two areas that people need more than anything, which is food and energy.

6:22And we can put shelter in that. And at the same time, we have interest rates and mortgage rates at also real high levels. And you have to say, how much money are people willing to do in terms of work if they cannot make wages that keep somewhat in line with the cost of inflation? So that's why you're starting to see a lot of unrest and a lot of strike talk. Obviously, the UPS strike was something that we heard about a couple of weeks ago and it got resolved. But UPS drivers, or was that FedEx drivers? I think one of the drivers, it was UPS. Yeah. Yeah. One hundred and seventy thousand dollars a year for a UPS driver.

6:59And that is no judgment. That is just, you know, a rich salary. So we'll see what happens with the car makers. But how much does it trickle going forward? I think is certainly something we have to keep an eye on. And how much can you squeeze people if they're feeling it from two ways, from rates and also from inflation and feeling the government is spending a lot of money, but not necessarily on them. So do you feel like wages have peaked or because people are getting hit with inflation and with higher rates, we're going to see that upward pressure stay in terms of what they're asking for? I mean, whether layoffs change that or not, what are you seeing in terms of the price pressures from wages?

7:39Well, I think in some areas they may have peaked. And this is where the whole conversation of automation and AI come into play, where there could be an efficiency factor there going forward. But other areas where you absolutely need people to work, I don't think that wages have peaked there because these companies are desperate for people to work these jobs. And people are getting paid more and more for some jobs that, you know, a few years ago, even in the more entertainment and restaurant business than would have ever been imagined a few years ago. So it's complicated like everything else. But what's I think the more important takeaway is not necessarily where wages might rise, where I may become more efficient for the working place.

8:29It's more like at what point I always wonder at what point do people just say they're fed up. And I think we've been relatively complacent in this country, although we see ways that people revolt in other areas like not necessarily going to work, you know, like obviously a lot of the violence, the theft, which has been out of control. Walmart reported their earnings, great earnings. They said, I forget what the number is, but insane amount of theft going on. And that's prevalent everywhere. So there's quiet underpinnings of social unrest. And I keep my eye on that. That would not necessarily affect my trading decisions.

9:08But it's just something just from a human being living in this country. I watch while other countries have already experienced a lot of social unrest. Yeah, absolutely. And people have been talking about this. Great to point it out because it's something that does tend to go on the back burner. But we're going to talk about a lot more as we enter an election cycle here, the rise of populism, the sense of disenfranchisement. If you didn't get a chance, all of you, to catch the Twitter spaces the other night, this is exactly the kind of topic they touched on, this social fragmentation and the dangers and risks at that intersection of macroeconomics, geopolitics, and AI.

9:46Fascinating. And weather. And weather. And weather, yes. As Mish is suffering with no air conditioning as she joins us today, she's literally on the hot seat. No, but seriously, the heat and the persistence of the heat is also an impact on people's personalities and emotions. So another factor. Yeah. And they can become market factors. So it's right for us to pay attention to that. So you mentioned, in addition to all of these sort of issues on the economy, some of the other things that may be going on market-wise that are feeding into these moves we've seen. And this has been a common theme coming up this week, and we so appreciate all of you surfacing it because it's the kind of thing that you all watch with all of your charts and dashboards that maybe isn't always obvious to the rest of us.

10:36And a lot of concern being expressed this week on the daily briefing that there's risk lurking underneath this market. Let's have a listen to some of the worries. On the 10s and the 30s, it's becoming a bit of a crowded trade. So it doesn't mean it can't go further, this short positioning by the hedge fund and the fast money community. But then, you know, inevitably, if it flashes out to those kind of levels, you know, 10s and 30s going out to 4.5%, it could really then come back just as viciously. And then we see a reversal back down to lower yields. We don't like for the equity markets, we have this giant CTA long exposure.

11:16CTAs are just basically big trend following quant funds starting to get to levels in the lower 4 ,400 level where they would turn seller. And if we have a two standard deviation move on the downside, that flips about$250 billion for them to start selling. And they're just systematic. That will create some real downside. So, you know, we're not there yet, but that's a risk. The most liquid markets, CMBS and CLO markets, are starting to hear that bid-ask spreads are ginormous and that you can't even negotiate prices from those big players that want to sell. That's an alarm bell because it means the most liquid parts of the commercial real estate markets.

11:57They're not so liquid and that could create all the negative consequences that we're familiar with. The banking crisis where it forces revaluation to take place. Therefore, you have write downs, funding difficulties that lead to fire sales, which lead to losses, which lead to all the negative consequences. So, yeah, we need to be very concerned about the banking system, but it has nothing to do with rate hikes. It has everything to do with the economy.

12:24Hey, 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.

12:36What a great synopsis. We really made all of us stand up and take notice. And also, they're talking about stocks and bonds, vulnerabilities everywhere, it seems, Mish. Well, let's take a moment to talk about that, and I'll comment on what they said, because I have thoughts on all of that. But in terms of the stocks and bonds, there's two interesting areas to be watching. In terms of our own risk gauges, we look at the performance of the long bonds through the TLTs versus the SPI, versus the junk bonds. And we look, of course, at gold versus the SPI. We also look at utilities versus SPI and also wood versus gold.

13:22And yet, so if you look at them all right now, they're still saying risk on. And that's incredible to me. But part of the reason is because you have the SPIs and the bonds dropping together, which is not a good situation. So I would say that in terms of the risk factors right now, as long as we continue to see the S &P outperforming the TLTs or outperforming the gold or the junk bonds, even though they sold off a lot today, are still so well outperforming the long bonds. we can call this a technical correction because even though we've broken down under the 50-day moving averages in all of the indices, we have calendar ranges and we'll get to that.

14:10I brought a lot of charts. But let's look at what the three gentlemen said. I mean, the first conversation about the banking crisis, yeah. I mean, the banking crisis sort of came and went March, right? And then at that point, by the way, the risk gauges were still positive as everybody was saying the market was going to crash. And of course, everything came back. That's why I like to use those risk gauges. I think, do we have that? Is that that chart you sent over the risk? I do. I do. Let's check. If you could put that up, Ryan, while we're talking. Yeah. And I just want to, while you're doing that, take a sip of water, Mish, because you're literally roasting with us.

14:43But Oliver, I just want to go back and watch Jeff's. Oliver's saying, is there anyone that doesn't know CRE has issues? I know Mitch is going to touch on that, but go back and listen to what Jeff said. Everybody knows there's issues. He's not just talking about loan issues, problems with loans. He's talking about liquidity in certain parts of the market. And I believe his point was that he's worried that those liquidity issues carry more contagion than just individual players in the CRE market. I'm not putting words in his mouth, but go back and listen a little more closely to what he said, because I think he was flagging something a little bit different in that.

15:19Okay, Mish, go ahead. Oh, yeah. And let's face it, that is a legitimate the concern. I mean, there's a couple of things even beyond that, which is considering our debt situation, high interest rates are not great for paying off that debt. All the corporations that were borrowing and now have to refinance, refinancing at much higher interest rates, of course, that in some ways is a little bit of a relief because these are big corporations, but it does exactly that, give you concern about liquidity problems for companies that don't have have the staying power with all of that. And all of these things are major concerns.

15:56One point that he did make, though, that I thought was interesting was everybody's looking for this commercial real estate crash. So I just kind of had this crazy idea. Keith and I were on a little mini break the last few days and walking around thinking with AI as definitely the future and shelter has been a rising cost with rents going up and housing shortages are still there. Supply is definitely a factor because who the hell wants to sell their house now, especially if they're locked in between three and four percent? And food, of course, being the other thing that people absolutely have to have.

16:34What if some of this commercial real estate actually, and of course it would have to be more corporate controlled, but hello, so is everything, turn that more into residential type rental places. And, you know, maybe, you know, why do they say necessity is the mother of invention? And so are companies that own these big commercial spaces are just going to allow them to sit? You know, for a while there was this, let's make retail shopping an experience. Well, it didn't really go anywhere. Yeah, Harry, you've been talking about the trampoline parks. every retail that now has a trimpli part or a pickleball part right i mean there was a thing with north shrimps you would you're going to get a juice you're going to get a coffee you're going to sit they're going to do fashion shows for you well none of that happened so but but it is possible that the commercial real estate can actually come to a bit of a rescue in terms of at least for rental units at this point i mean i just wanted to say that it some of them there are some uh as someone who has a few engineers in the family, there are some issues about retooling some of them in terms of the actual mechanics of the building, I think.

17:45So some of them, yes, some of them, no, but you're right. There's an incentive for them to figure something out. It's possible. I'm not saying it's a given. It's just kind of a thought. As far as the whole, I thought Tommy Thornton was interesting because he's a mean reversion guy and he's a contrarian because of the mean reversion. And he was looking at the bonds saying, basically, can they go more? And as viciously as they've come down, they can viciously turn. And I think that's really interesting. And so what I saw today was a chart of the bonds versus the gold and that divergence between the gold prices, which, yes, have sold off nine days in a row, which is the longest drop in gold in quite some time, which, of course, people would say gold is finished and maybe it is.

18:32Who knows? But the point is, is that with the bonds down here and the gold up here, when you get those rubber band ratios, you know something is going to give. So to Tommy Thorne's point, it is possible that it'll be the bonds, which means that we're nearing the top of the yields, which means the bonds could come up. And the gold may not necessarily react positively to that because the gold might not react because of higher inflation as a result of yields falling, but more like, well, that means that everybody's worried and there could be more recession around the corner. Or it could be that gold just falls and the bonds stay the same and you're with a higher for longer.

19:12We don't know. But I thought keeping your eye on bonds, especially as we talked about all these risk charts that I showed you here, is super important. And August is not a great time to push anyway. I just really should have started off by saying that. I rarely remember a good August. You're absolutely right. Slow, volatility picks up on the lower volume, people are away. So there's that. Now, the other point that I thought was really interesting that was made was about, and maybe this was Tommy Thornton, I don't remember which one who said what now, was about the idea that there's been so much buying in this market that these levels that are being taken out could create a liquidity or liquidation of these huge firms that bought on the way from 440 or 4400 up to 4600.

20:12And now we're under 4400 at what point? So I think it would be good to really look at the technicals here because there's something that we do that you don't hear a lot of talking about. One was the 23 month, which I was all about the 23 month for the first six months of the year. And that turned out to be great. Hughes took it out. Semiconductors took it out. Gold had already been above it, as did silver. And I definitely want to have a moment to talk about silver. Russell's were the last to go. And the Russell's finally took it out. And now they are the only index right now that, or the Russell's are the only index, I say they because you always think in terms of people that are back under the 23 month.

20:55But the Russells are the only one that's above this six month calendar range. So if we can take a look, put up the chart that's of Qs. I think it's Qs and a couple of the IWM. Yeah. So I think if we want to get some kind of a technical sense of where we're at, we should probably be looking here at these two vertical lines. One is green and one is red. Anyway, if we look at this chart, in terms of the January reset, we had everything clear that January calendar range high and we had this beautiful run for the first six months. It was not really weird to me that it was starting to peak out in June and July as we got into the new reset.

21:38So if you look at that first top chart, just looking at the queues, it got through the January calendar range high, but it never really quite clear. And today, it's not completely updated because I sent these charts to you a few hours ago. It's actually below the July now six-month low. That's significant because that's exactly back to the point of that clip, which is if big institutional investors or even retail investors are looking at this and they've been hanging on waiting for some rebound and we don't get it, we don't get back through, say, around that 360 or 360. to in the queues, this could send it much lower.

22:20And that's just from a technical standpoint right there. You know, it's interesting. Let's talk about biotech for a second, because it's been like totally sideways, right? And it is still above the six-month calendar range. And a lot of people think that the next direction of AI is really going to be in the biotech state, but that's not really the interesting one. To me, the more interesting one is the one that's the T-bonds, which you can see the TLTs. Look how that never cleared the six months. You know what? This is really bad because I cannot see this. We're going to take another quick break to hear a word from our partners.

22:54We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:03Don't worry, Mish. Don't worry. We'll put them all out. Let me jump into some questions. Okay. Why don't we do that? And I can bring this up on my own. Yeah. Bring it up on your thing. So we're going to jump around a little bit here, but so someone asking about the dollar. So I want to make sure, because I want to make sure we get to the dollar, silver. So definitely you're worried about things breaking. The NASDAQ possibly did the downside. We already know you lightened up on that. Sounds like you think that treasuries could take a move higher, but watch out because the market's kind of primed for a fast move from positioning.

23:42What about the dollar? What do you think is going to happen with the dollar? Well, the dollar, again, has been somewhat of a flight to safety and had a really good bounce off of its critical lows. And right now, the dollar is showing remarkable strength above 102.50 and it closed at 103.50. So I think that the dollar, to me, of all the factors, I know people think commodities, the dollar, but there are certain commodities that don't really care very much about what the dollar is doing right now because of other factors. And some of them, just to read, are even though corn and wheat's lower and gold's lower, soybeans are near the highs.

24:26Sugar is still in a range on the higher end. Cotton, cocoa, live cattle, all still strong. Obviously oil, still very strong in the energy space. Orange just continues to fly to new highs. So I don't know if I care so much about the dollar as I would if there wasn't really so many other things to think about right now. I'm much more concerned about the impact of the rates, And I'm much more concerned about the fact that if this Fed policy that was so behind the curve in terms of curbing inflation is now over aggressive in terms of controlling inflation, where some inflation might actually be good, particularly as we're talking about, as we mentioned before, the debt, and maybe runs the risk of some of these commodities running higher.

25:15But at the same time, really, I keep going back to stagflation. And to me, the dollar may be a bit a part of that in the stagnating part, but it's not really doing what I would expect it to do yet to be a factor in inflation and in terms of bricks. I mean, that conversation is still out there, but nothing has really happened yet. So until we really start to see more of a trend, like particularly with petrodollars in that direction, I think the dollar is strong because it's - Another game in town. Yeah, exactly. Yeah. So Leon's asking what commodity market sector has the best fundamentals moving into 2024?

25:57So you just mentioned how high everything is. you have been sticking with DBA, are you still sticking with it? And is there one commodity sector in particular that you're keen on? Wonderful question. So right now, we are long DBA because of some of these instruments that we just talked about, some of these raw materials we talked about, like live cattle and cotton and OJ and cocoa and sugar. These are soft commodities and some commodities that are in the DBA. And even though DBA got back over 2 ,200 again, and now it's back down at 2 ,100, that's the nature of these things, right? And what really kind of, and by the way, if we go back to history in the 70s, after all the commodities peaked in 76, and then the Fed got a little bit more relaxed, that's when we saw a second round.

26:51So if we did see too much easing too fast, that could be a factor. But I'm looking at these things just because we still have supply chain issues. We still have drought issues. We still have some level of labor issues in that in a lot of these jobs, people don't really want to work them. And we're still seeing these high prices. Clearly, that's a factor. And we can get into China a little bit later, too. The other area, besides natural gas got beaten to a pulp, by the way. And one of the reasons why it got beaten to a pulp was because Europe had a much milder winter than expected, and they were able to increase their stockpiles of natural gas.