Is Inflation Really Cooling? w/ Mish Schneider

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1:24CPI drops. Is inflation really cooling? What's going on, guys? Welcome to the Real Vision Daily Briefing. It's Wednesday, July 12, 2023. I'm Ash Bennington. I'm joined today by Mish Schneider, Chief Strategist at MarketGage.com. Mish, welcome. Thank you, Ash. Good to see you. It's always good to see you. Always a pleasure to be with you on this show. Just a reminder that today is an extended version of the Daily Briefing. The second half of this show is available exclusively for Real Vision members. But the good news is you can sign up for free at the link in the description or scan the QR code on the screen.

2:00By the way, I should say top of the show, we have a special message from Rao Pal, our CEO and co-founder, of course. At the end of today's show, you will not want to miss that. So please stay tuned. Mish, obviously CPI Day today. Tell us what you think big picture is happening right now. Well, the CPI numbers, of course, are looking back, not necessarily forward. So that's something that we always have to keep in mind. Therefore, looking back, it wasn't a big surprise to see that it was softer than expected because one of the largest declines was in actually the energy space, which peaked out in June 2022.

2:39right so if you just look at the year over year that definitely has gone way lower the question is though since those cpis were produced and released today what's happening in the energy market going forward and that's certainly something we can talk about in terms of the other areas i thought there were a couple of surprises i was surprised month over month to see the drop in airline fares i rushed to book a bunch of trips thinking that fares might actually go higher so I'm like, darn, timing wasn't great. But also there was some other areas that I thought were interesting and no surprise, used cars going down.

3:16That was pretty obvious to me. Rents were slightly lower. So, you know, these were the kinds of areas and some of it in the services that were gaining, like in hospitals and new vehicles, clothes, and of course food, which that's always going to be my major concern right now because of everything going on. So I guess the lesson to be taken from CPI was that it was a great trade into it to anticipate this. And now the question is going to be, can it sustain from here? And that, of course, remains to be seen. Yeah, very well said, Mish, and a great overview. I want you to take a look at this chart.

3:54This is U.S. Consumer Price Index. This is looking at all items versus all items less food and energy, sometimes called headline versus core. What you can see there is the headline number spikes much more dramatically, then drops much more quickly. What we see here is interesting. The number that's being cited today around the cable news networks, of course, is the 3 % headline number. But if you look, X food and energy, also called core inflation, still more than double the target that the Fed is aiming at, 4.8%, 3%, of course, on all items. For those of you who are listening and can't see this chart, it's a good one.

4:31Misha, how do you think about all this? You mentioned the energy markets. I know there are a lot of things going on in this report, a lot of different numbers. We all look at different things. Talk a little bit about the energy markets particularly and the other internal dynamics that you saw in this report. Well, what's so interesting is that in this report, of course, again, going back year over year, core versus headline, none of the inflation that we had coming into June, of course, was related on the backs of what happened with COVID and just a return to normalization as far as the supply chain and particularly inventory that had to rebuild.

5:09So I'm not necessarily convinced that the headline is one that should give people too much complacency. And I'd say the core is probably more accurate. And I actually brought in a chart, Ash, based on some projections that this whole CPI number is really basically getting ready to bottom, if not the June number, then the June going into July number with projections, as you can see, of what are going to happen into 2024. And if you look at this chart, you can see that all of the projections are for higher consumer prices going into 2024. And I would probably, if I had to venture a guess, be in that camp.

5:48I anticipate that round two, and I know I've been saying this for a while, but round two is coming. And to answer your question on energy, I think And part of the reason is what we're seeing in the oil market right now. Right. Yeah. So we have to look there. Now, right now, we've just rallied. We've basically rallied to$75,$76 a barrel. That's key resistance. But why did we rally? Well, number one is we still obviously have issues geopolitically. And in fact, I was listening to Jeffrey Sachs, and he was saying he thinks the biggest obstacle that companies' bottom line will have going forward will continue to be geopolitics.

6:28And he mentions specifically Russia and China. And so that's one factor. We also had Russia cut production along with the Saudis, along with OPEC +, which comes to the tune of about 5 % of the global demand. But I think even more concerning is our own strategic reserves, which are really at lows, which means if the market in the oil continues to go higher, we don't have that much to release. And probably a major policy error did not buy back when we had the chance enough at around that$67 a barrel. So demand is increasing where everybody was assuming it was going to actually fall. And I never really understood that, especially as we're going into summit months.

7:13Yeah, right now on my screen, CL1 New York Merck Oil WTI, August 2023 contracts. It's almost 76 bucks, 75.95 right now on my screen, up about one and a half percent on the day, talking to precisely that point. Mish, one of the things I always enjoy about our conversations is that you're so good at zooming the camera out and talking about the big picture. I want to talk a little bit about the big picture. These are numbers that people who watch the Real Vision Daily Briefings I host know that I hit all the time, which is the extraordinary performance of U.S. equities year to date. S &P 500 right now up about 16.5 % on the year, but that's the least of it.

7:50NASDAQ composite up basically 33 % year to date. NASDAQ 100 up, call it 40 % year to date. Red hot U.S. equities market. One of the reasons we care about inflation, other than the pain that it provides for wage earners, is what it means, what it portends about what the Fed may or may not do next. Talk a little bit about that. Give a little bit of context on how you think about the big picture, particularly in relationship to inflation, the Fed, and U.S. equity markets. Well, coming for the first six months to this point, again, was anticipated because of a few factors. One is that the sentiment around the country in particular was that the economy had contracted enough and definitely was ripe for growing.

8:40And one of the reasons for that was because it also seemed apparent that the Fed, at the very least, was going to slow down how fast and how many times they were going to raise rates. And they did that. So that was the second anticipation, that we would get to some ceiling in terms of the interest rates and the Fed funds rates. And certainly in looking at the mortgage rates, we're a little over 7 % maybe coming back down today. But nonetheless, 5 % to 7 % seems normal for interest rates for mortgages. And then, of course, the Fed fund rates at around 5.25 % seem relatively normal. People didn't think it was going to go much higher.

9:15Thirdly, even though tech typically does not rally in the face of high interest rates, It was so undervalued coming into this year that looking at the fact that the Fed was probably not going to go much higher, at least not for the first six months, of course, fueled the incredible tech rally that we saw. And AI, of course, as we know, also became the big buzzword. And so all of this has really helped, along with the fact that we still have a relatively strong housing market, considering how many people were calling for a real estate crash. not me. We also have a very strong labor market, maybe a little bit of signs that things could deteriorate a little bit in spite of the interest rate raises.

9:59So it seemed like the U.S. was going to get the pass on recession, number one, and again, in the face of even the inverted yield curve, and number two, possibly the soft landing. And that was all the optimism, and energy prices going down up until this point. All of this was the optimism coming to this point. What's so interesting about July is one of the indicators that we use at Market Gauge is our six-month calendar range, reset. So it resets in January. And in January, if you look back, NASDAQ took out that six-month calendar range high and basically even March, with a slight correction from the banks, took off.

10:43now as we're getting another reset it'll happen next week right into earnings season i think it's going to be very interesting to see if a all the reasons that we felt cheerful coming into this point continue to be cheerful number one and number two is what do the technical indicators say about the next six months vis-a-vis the six-month calendar range which isn't 100 percent of course, Ash, but it's very statistically important because if we see the Nasdaq, even if Nasdaq continues to go up from here, if next week when it resets, it doesn't take out that high and starts to come off a little bit, we haven't had that big a range since July has started.

11:24So anything can happen. And that's what I'm saying. That's the first part of that. And looking at Nasdaq. We'll talk about small caps after. Talking about the Fed, it seems to me that, first of all, the inverted yield curve, but the back end, the long bonds are saying a different story. So people have said, people way smarter than me in terms of economics, have said that yield curve inverted to this point, which is historical going back to 1983, generally points the recession, but not necessarily right away. So are we five months away, six months away, a year away? Of course, we don't know that.

12:04But what is interesting is that at least for us lay people, we can look at some of the relationships that we love to look at besides the six-month calendar range. We can look at the long bonds right now and ask, have they bottomed? And if they have bottomed, what does that mean? Are they going to outperform the SPY? And I did bring a chart on that. If they outperform the SPY, what does that mean? And this might give an indication of what the Fed is going to do, because if the Fed is looking at these long bonds and yields relaxing on the back end while the yield curve is so inverted, it could mean that they would at least be very, very non-aggressive going forward in terms of the yields raising them, because They're going to be starting to see signs of this recession.

12:52To what level is what they're kind of hoping for, right, to fight inflation? But it could all come back and haunt them because it could turn out to be more of that stagflation that we have feared for quite some time now. Did I answer all the parts of your question? I think you answered it and more. So great, great answer. I want to touch on something that you brought up here, which is the inversion of the yield curve right now. Something that anyone can take a look at. 2.10 spread right now upside down, 90 basis points minus 88 bps on my screen coming in a little bit today. This is obviously something that's available publicly for anyone with a web browser.

13:29But I want to also talk about something that the pros use, which you probably don't have access to unless you have a Bloomberg terminal, because this is the way pros think about interest rates. This is an important point, I think. 0726, this is the next Fed meeting. Right now, the percentage hike cut is priced at 88.8%, implied rate increase of 0.222, meaning a very high probability we're gonna get a 25 basis point hike at the next meeting. Right now, the implied rate on that is about 5.3%, 5.298. Right now, we're at 500 to 525 bps, effective rate 5.08. You add that together with the 5.22, the 0.22 implied rate increase, and that's where you get this number from.

14:13This is obviously something that's been priced in based on the day-to-day. I think this is pretty much flat day over day in terms of the pricing on that. But very clear, just about everyone in these markets expecting a 25 basis point hike at the next meeting in July 7-26. Well, I certainly would be probably leaning towards the fact that they will for the very simple reason is you can look at all the number crunching that you just did. But just listen to Powell. And basically, Powell said that he was going to raise, again, another quarter percent. Of course, he always capitulates with data plots and economic statistics and all of that.

14:54But the jobs report and the PCE, which hasn't come out yet, are two of the biggest places that Powell will look. And both of those will indicate, I think, a rationale for him to do exactly what he said he's going to do. So if we believe him, he's going to raise. 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.

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16:19Nish, I love the way you framed that. And thank you for calling me out. I love the numbers. Sometimes I geek out on it. But the point is such an important one that you've just raised, which is ultimately this question of, you know, does the data come first or does the rationale come first? Do you kind of come up with the way that you want to do this? and then markets move in relationship to that. If the Fed chair wants to move rates, that's what the Fed chair is going to do. And one of the things we can say in favor of Powell is he's been kind of transparent about what he's going to do. We knew he was going to pause last month because he basically said, we're considering pausing.

16:56Once he says something like that, take him at face value. This time he has said something different. So I would say that he'll probably raise. What kind of impact that's going to have? Well, there's going to be one factor along with a few other factors. And that's what makes this market forever interesting and always means that as a trader, you have to be adaptable. Look what's happening in the face of that. The dollar, right? The dollar went down really hard in the last couple of days. And that obviously has given a boost to some equities because of dollar-denominated instruments that need to actually have a softer dollar, of course.

17:35But at the same token, when the yields go up, generally so does the dollar. And with the dollar falling like that, one has to wonder what's going on. Where is that relationship breaking apart? And what does it mean if the dollar continues to go south from here? And so that's also another area to be focusing on. And then, of course, earnings, which is also going to be very, very interesting. Again, backwards looking, but nonetheless, it's always about what they say going forward. and will they have experienced more layoffs? Will higher interest rates, especially if they raise as we consider they probably will, affect their bottom line going forward?

18:13What about inflation? Is it taking a break now, but still they're paying outrageous prices for things? There's so many interesting things to look at. That's why sometimes it's so much fun, Ash, to talk about all of this and conjecture what we think could happen based on this number versus that number. But I always find so much comfort in the chart. So. Yeah, very well said. Listen, talking about all of this, I want to take a look at something that's extremely relevant to exactly this point. This is a deep dive conversation. Is the business cycle rebounding? Christophe Olari with Andreas Steno-Larsen.

18:48Let's take a look at this because it addresses some of those very points that we were just talking about. I think that they're going to keep on repeating the same communication for longer. Again, the last paragraph of the RBNZ today was very crystal clear. First of all, they say we are confident that now the level of rates would be enough to bring back inflation within the 1 % to 3 % target range. Confident is one of the first times they are using that term, that some decent progress is made. But they say as well that we're going to stay there for an extended period of time. And I think that this is the second step.

19:34Okay, we pause, but for now, pause doesn't mean pivoting. Pause means we stay in restrictive territory for, I think, I don't think they're going to stay there for 2024, to be honest. But I think that the time frame is at least communicating until no cuts in 2023 for sure. All right. I love that clip because Christophe Olari does not mince words in it. No econo speak there. He ends at the end by saying no cuts in 2023 for sure. Obviously, this is about this weird market we find ourselves in where the expectation is that the Fed is going to hike and then have to cut as the U.S. enters recession.

20:17Really powerful statement there from Christoph Olari. Mish, what are your thoughts? Well, I was actually really happy to hear him speak because it was in line kind of with what I've been thinking. And it's always great for me when I'm putting thoughts together in my head and then someone so eloquently articulates it. And that's basically what he did. So, you know, just to recap, I mean, he said, right, there's no cuts happening in 2023. However, he also felt that there would be a pause. And here we're just talking about now the raise for July, but that may be the last raise. And I believe last time you and I spoke, Ash, we talked a lot about historically June, July often becomes the peak in terms of the interest rates.

21:01So that would support that. And then he said they'll be higher for longer, right? So that definitely means that he's thinking the way we're thinking, which is the Fed will have to keep the pedal on because of inflation, essentially. Inflation is going to continue to drive Fed policy. And then he said, finally, maybe in 2024, the cut, which also supports what we just talked about in the beginning, which is the fact that at some point, the inflation or even the stagflation narrative can become more recessionary if the Fed becomes too aggressive in terms of the raising of the rates. And we start to see some real issues with labor and, of course, even with just industrial output.

21:46Misha, let's talk a little bit about with that framework, with that thesis you have, how that trickles down, how that pushes out into various sectors. Obviously, we were talking earlier, tech is just red hot on the year. I'm looking at XLK, the technology select sector spider fund up about 41 % year to date. Talk a little bit about the dynamics of how you see different sectors being impacted by your longer range thesis. Well, the whole idea of the tech space as its own living and breathing animal, I think we still don't really understand fully what the impact of AI is going to be. And again, a lot of speculation on what it does to the labor market, but yet what it also does in terms of efficiency and how much reliance there's going to be just in terms of being able to produce things much faster.

22:38I mean, on a personal level, I know that it definitely helps me because when I go and ask a question now to chat GBT about something, I get an answer so fast it's blinding to me how fast the answer is. And that's just on an individual basis. Obviously, it's being used all over. And of course, we know that during COVID, the area that went up as we were during COVID was tech because it's something that people can use at home. And I think that's also another big factor. We can get into the whole sociological aspects of tech and how we've become more and more of a society that depends on the virtual experience more than the actual experience.

23:24And of course, that's why Zuckerberg and Meta stock has gone ballistic on top of the threads thing with social media, but that's not a conversation we need to have right now. So to get back to your question on how does not only the fact that the interest rates could possibly go up, but it may not necessarily control the type of inflation that we can see coming because demand is much stronger than anybody anticipated. And the consumer is much stronger than what anybody anticipated at this point. I think what could start to happen is that people will get a little bit more panicked and pull back in some of that discretionary spending even more, although we haven't seen it lately.

24:08I think that that could be a factor. But I also think from a more, rather than take a more negative bent to look at things in terms of opportunity, because that's obviously what we're all about is trading opportunity. I think it really gives a lot of opportunity in terms of some of the commodities that have fallen hard, which is the nature of commodities and other commodities that haven't fallen that hard, like gold. People thought gold was going to really drop and dive, and instead it just went from 1900, in essence, back up to around 1965. And that was just in the last few days. So if the economy is recovering so greatly and inflation has been beat and the Fed's going to raise one more time and that might drive us eventually into a recession, gold is certainly having something else to say about it.

24:55Well, that's such an interesting point. And you never know, obviously what's inside the collective minds of traders, but it does seem as though all the points that you made earlier about the social, cultural, sociological changes that we're going to see with the work from home, AI, what's going to happen to the labor market, gold may look like a real risk-off hedge in that context. Exactly. And everything is a great point, Ash, because everything right now, if you look at the ratios between the things that we like to look at, like Like the junk bonds versus the long bonds, one of my favorite, or gold versus spy, or long bonds versus spy.

25:34They've been in a risk-on situation to this point. As the market is rattling, though, we're starting to see some shifts. And I know I brought some of those charts in on the relationships. HYG, which I like to use for the junk bonds, is still well outperforming the TLTs. That's risk-on, right? You want people to be interested in buying high-yield debt. But it's turning lower, as you can see in that middle chart there that I pointed out. It's actually in the relationship turning lower. So that's something to watch out for. But that's still risk on. But if you look at the TLT versus the SPY, let's put that chart up, Brian.

26:12What you can see here is that, again, the TLTs have been underperforming the SPY. But you want to keep your eyes on that. And I don't know if I brought the gold versus the SPY. Can you put up the gold chart? Because this is the one concern that we're seeing.

26:32Let's see. I think they're looking for that right now. So look at that. Ash, look at that. So if you look at the middle chart, right, that is our real motion. I mean, excuse me, that is our triple play leadership indicator. And look what's happening. The blue line would be the ratio against the red line against the SPY. And look what gold is doing. It's starting to go on par with the SPY. And if gold starts to outperform here, then I would say that would be a lead indicator to maybe some risk off happening as we continue into the summer, which of course would also be in a line with the six-month calendar range reset and a possible rate hike that people don't really want to see, which would then lead to maybe some more weakness in the labor market, et cetera, et cetera, et cetera.