Is The Fed's Plan Finally Working?

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0:54Is the Fed's plan finally working? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Gio Chen, author of Fidenza Macro Research. Hi, Gio. Welcome back. Hey, Maggie. Thanks. It's great to see you. So if we look at the action today, the stock rally that roared through November has kind of stalled here this first week of December. The Dow in S &P, a little bit lower today. NASDAQ a little bit higher at last check. But no real moves, Russell down. And that despite the fact that the Treasury yield dipped below 4.2%, and then Bitcoin really stealing the show, continuing to charge higher, briefly topping 44 ,000 before settling back.

1:38So a lot to unpack here. Let's start with the economy. The move lower in Treasury yields, partly triggered by headlines that cross that job openings fell by more than expected in October. We seem to be getting this sort of steady drumbeat now of accelerating weakness, if you could say that, at least in some indicators. What's your assessment of the US economy, Gio, has the Fed managed to get that slow down, to slow things down and get inflation moving lower? Yeah, it definitely seems like we've reached an inflection point in the economy where the numbers are getting consistently softer, especially in employment, which is what the Fed wants to see.

2:21And we have seen the Fed speakers come out and almost pat themselves in the back and acknowledge the softer numbers and say that their goals in inflation are being met. And we're actually going to be below the Fed's September projections on inflation, well, likely going to be below coming into December. So they're ahead of schedule. And it definitely feels like they are the pilot seat. They're in control of the economy. And I think it's going to remain that way for a while as inflation continues to trend over. So the market sentiment has been the minute they see that, they kind of immediately go to cuts.

3:08And they've priced in quite a few for 2024. We're going to get a Fed meeting in December where they're going to have a chance to be able to kind of think about their messaging. Um, okay. So things are slowing and that's great, but are they, does it look like they're going to be able to hit that soft landing or sort of moderate slowing or are we headed for something steeper and potentially more painful that would warrant talk of rate cuts? Yeah, I do think that, um, we're very likely to get a recession. And the question is how deep and how long and whether the Fed is going to be able to put the bottom in and keep it from getting too deep.

3:59So for now, it seems like the Fed is in control. Like they have a lot of room to cut. And there's also a lot of dry powder out there in money market funds, about$6 trillion. It's gone up since COVID by about$1 trillion. So there's a lot of cash on the sidelines ready to buy the zip and risk assets and help keep sentiment supported. So as long as we don't get some kind of unexpected exogenous event like COVID, I think the recession is going to be pretty mild. And as long as the market believes the Fed is in control, bad news should continue to be good news for the market. Do you think the Fed is going to want to, AJ asking, do you think this Fed meeting could be a nothing burger?

4:50I mean, it kind of feels like that, especially as you get to this time of year, because as long as things are steady, nobody really wants to mess it up, right? But do you think the Fed's preference would be to really try to message that they want to stay here and keep their powder dry until they figure out what's going on? Because we still don't know the sort of lag effects of all the tightening. And on the flip side, the resilience of the US economy, everyone's kind of gotten that wrong. So would the Fed prefer that the market not get ahead of itself again on this idea of rate cuts? How do you think they're going to handle that balance?

5:30Yeah, that's a really good question. Of course, we have the dots coming up. And the last dots in September were really hawkish. and now the market is pricing in almost five rate cuts for 2024. And it's hard to see the dots getting to that level to go from 50 basis points all the way down to 100 or 125 basis points. So that's a risk for the market. that could certainly trigger a bit of a pullback. But on the other hand, the fact that the Fed is ahead of schedule in getting inflation down, that's positive. And we've had a bunch of Fed speakers come out and speak out on the dovish side. I don't think that would have happened without Powell's endorsement.

6:34So we could get a combination of maybe hawkish dots that are not really moving down to meet the market, but some pretty mild or dovish sentiment and dovish enough to keep the market going. Yeah, kind of split that difference, right? And then we're all laughing around. Do we listen to what they say or do we look at the dots to see which is going to come out on top? So in this environment now where the Fed's done, everyone seems convinced, now it's a question of when do they ease, not that concern about interest rates, which really plagued the market through 23. So in terms of this investment landscape, let's walk through how you're thinking about some of these assets.

7:21And I'm curious in this disinflationary regime now, how you think about bonds. Would you be buying bonds here? I mean, this is the trade that killed everyone in 23, right? Trying to time that bond trade and then rates ratcheted back up again. People got their face handed to them. So there's, I think, probably a little bit of reticence or there's a little fear in there. But would you be buying bonds here? And if so, what kind of duration are you looking at? Yeah, you know, earlier this year, I was bearish of bonds due to just to hire for longer. regime and all the supply that was coming on. And since then, they've reversed pretty dramatically, both the long end and the short end.

8:12You know, pretty recently, I think the conditions were met for durable bond recovery. There's a wide consensus that the Fed has now done, even though they haven't outright got out and said that they're done. But the economy is weakening enough for them to kind of just be on hold for a while and for the next move to be a cut. So I think bonds are going to do well over the course of the next year, because if inflation goes down to 2 % or even lower, I mean, we might even see a one-handle in inflation this coming year, then the Fed is going to have to cut in order to keep policy at the same level of tightness.

9:07So if employment is kind of ratcheting up to 4.5%, Do you really want to have Fed funds at, let's say, 300 basis points above inflation by mid-year, which is very well where it could end up? You don't want to be in that situation. So I think they're going to have to cut at some point. 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.

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10:48I know you're looking at the U.S. versus Europe. And this is something that's come up with others as well. Where is the U.S. slowdown versus Europe? And you have bunds on your radar. Talk to us about that. Yeah, that's right. Right. It's interesting because Europe and the German economy are kind of one to two quarters ahead of the US in terms of their journey on coming down from inflation and into disinflation. So inflation is coming down a lot faster. And what's interesting is that even though the Fed is still going to be, the Treasury is going to be spending a lot of money next year and supporting the economy.

11:37But Germany, they just discovered a$60 billion hole in their budget from a recent German constitutional court ruling saying that they can't,$60 billion that they thought they could spend can't actually be spent. So that's going to put a big hole in their fiscal spending, and that's going to slow the economy down a lot. And if you could see in slide one, Germany's fiscal deficit is going to actually get cut by a lot more. And they're actually going to be close to flat in terms of their deficit over the next few years. So that fiscal tailwind is probably the smallest in Germany than it is in other European countries, as well as the US.

12:30And that also means there's going to be less supply of bonds too, which as we know is pretty important. So you have this dual tailwind of not too much supply in boons, as well as slower growth due to fiscal headwinds. Do you think the ECB starts cutting before the Fed? Yeah, I think it's quite likely. They're a little bit more balanced in terms of their determination to fight inflation, more balanced than the Fed. So I think if given the opportunity, given the excuse to cut, they certainly will. Yeah, it's interesting because they have to sort of, this has always been the difficulty that managed so many different regional economies.

13:26So while they might want to cut based on what you just described in Germany, will they be able to based on the readings coming in from everywhere else? It's always the tricky thing for them. So great question from Dan. If yields, and we're back to talking US, if yields decline, which I think we've established, we expect that to happen because of a recession. Will that impact stocks negatively? Can stocks and bonds both rally? Well, they certainly have been. They have been, but can they continue? Because I think this is what everyone's saying. If yields are moving lower bond prices rallying, it's because there's a recession coming.

14:06But is that good for stocks? Yeah. Over the past year, we've had this back and forth between disinflation and stagflation. So stocks and bonds going up at the same time, and then stocks and bonds going down at the same time. I do think that now that we are a lot closer to the Fed's target, this period of disinflation can be a little bit more durable, especially now that the employment picture is at an inflection point. So to answer the question, I do think that they can keep going as long as the market believes that the Fed is still in control, that whatever happens, whatever weak data comes out can be, I guess, can be supported by further Fed easing.

15:04Mm-hmm. And if it's a shallow, this is why that soft landing is the unicorn, right? Because if it's a shallow recession, then the economy is still holding up, even though rates are going down. That's a good scenario for corporations, especially anyone who has to hit the capital markets again with those lower interest rates. So you could see how in that kind of environment, with a supportive Fed and an economy that's weakening but not falling out of bed, that could be a good scenario. So we've seen this sort of stalling of the rally, not surprising given how fast and far we came in November. I mean, it's such a powerful rally.

15:43Do you, and by the way, for those of you listening last week, you'll remember most of our analysts were warning of this sort of period of indigestion or consolidation based on the fact that things had kind of maybe overshot. Do you feel like the US equities can regain momentum here into your NGO? I think a lot is going to depend on the data coming up as well as the Fed meeting. So we have the employment number, the CPI, and the Fed meeting all within the space of a week or so. And that's going to determine the direction for the market. I do think, I believe the seasonals for equities start to turn quite positive in mid-December.

16:33So that could be a tailwind. So we'll see. Yeah, AJ, I think that answers your number. Yes, non-farm payrolls will be very important. And everything now, it's not just directionally, it's how much things are either weakening or surprising. the upside that I think is going to matter, especially in the run up to the Fed. So I wanted to make sure that we touched on Bitcoin, because this is also on your radar. I mean, it's on everyone's radar, because it's been rallying so strongly, especially at a time when we've seen some sideways action in a lot of these other markets. We've seen Bitcoin really breaking out.

17:17What do you make of this? And what are you watching there? Yeah. Sentiment really got bombed out this year to the point where it just couldn't go down, regardless of a lot of negative events for crypto. And now we have this BlackRock ETF, the speculation that it's going to go through. Andrew, everyone I've spoken to and a lot of the research I've done seems to point in that direction. And just today, it looks like BlackRock filed an amendment in their S1 with the SEC, which seems to signal that the process is moving along. So that's going to be a catalyst and a bit of an upside magnet for Bitcoin.

18:08And then we have the halving coming up as well in the first half of next year. So we have these two really positive catalysts for Bitcoin coming up. And on top of all that, the global macro conditions for Bitcoin and crypto in general to go up have been restored in the sense that we really needed the Fed to stop tightening and we needed some kind of clarity on when the tightening cycle was going to end. So now we're finally getting that. So the pace of financial conditions has gone from accelerated tightening to almost accelerated loosening over the course of the last couple of months. Yeah. In your mind, does Bitcoin trade in correlation with risk assets still?

19:03Or is it sort of taking on a new dynamic, especially with that ETF coming? Yeah. So I wrote a piece in my blog kind of comparing gold to Bitcoin. And gold actually leads Bitcoin by anywhere from like one to seven months. And that's because gold tends to be a lot more sensitive to financial conditions. So as we know, gold is now close to the highs, trading very strongly. And based on seasonals, you can see here in the first column, it could very well continue higher into January and into mid-Feb. And that's a strong signal for Bitcoin. It's telling the market that the conditions are right for Bitcoin to keep going.

20:00So what I was saying is that monetary conditions kind of create the green light for Bitcoin. And then it's the market's predictions of further adoption and the size, the growth of the network that drives the bull market higher. So we have the conditions and then we have the upcoming approval of the ETF, which is going to drive adoption to hire and kind of solidify Bitcoin as an institutional asset. So we have all the ingredients for a new bull bargain. Yeah. So interesting. We had Peter Brandt on the platform. I mentioned it yesterday. I'm just going to reiterate it for those who didn't catch that.

20:56He is on our show, Three Ideas, and one of his picks is Bitcoin. He made some very bullish calls. As you know, Peter is a really, really longtime veteran technician. He walks through his different charts to underscore his reasoning behind that. If you have not watched the episode, I highly recommend you do. If you are on YouTube and you are not a full Real Vision member, go to the website and jump on one of our offers so you can see that Peter interview as well as take advantage of the crypto academy that we just launched to help educate everyone around this new cycle. It's learn the mistakes of the past and be smart about it this time.

21:34And Gio, one of the things that Peter pointed out is this is an asset that moves unlike other assets, like parabolic moves. We also know based on what happens in the past that there's volatility around this. So do you approach this differently than other asset classes? Do you look for protection? How do you think about that? Yeah, absolutely. That was a great episode. I think Peter has some great insights of the market. I also follow him as well. The cyclical nature of crypto is extremely powerful because when people get in at the bottom of the cycle, the returns are just unlike any other asset.

22:23But then if you get in at the top of the cycle, it can be completely, I mean, you can just get completely wrecked. And I believe it's cyclical because it's a very psychological asset class. It just it trades very emotionally and and and humans just go through you know all the cycles of of like you know euphoria down to despair and and back again but what what underlies the cycle is the constant growth and development that that happens you know in crypto uh in in bitcoin And that's what kind of makes every cycle reach a new, like a higher high and higher low. Yeah. No, that's really well put. And it's important to sort of arm yourself with information and learn about this.

23:17One of the things I love Peter talking about is the fact that, you know, Raoul actually introduced him to it and he looked at it. But, you know, we have a lot of people who just say, I don't understand that stuff. But he dove in and was paying attention and experimenting and really trying to wrap his head around it. And it is different. Listen, some commodities move like this as well. So and it's a brand new market, right? So we're all on a learning curve. But it's really fascinating and wild. So I hope that everyone keeps an open mind and dives in, as we all do, to try to watch this really sort of interesting development.

23:50What about traditional gold? So your bullish Bitcoin, what about traditional gold? Do you feel like that's going to break out because it had that moment? And then now, I think sitting at this resistance level, everybody wants to see if it can make that run higher now. Yeah, it's been an interesting week for gold. It kind of painted an ugly candle on Monday, having broken out to an all-time high and then reversed pretty violently back. But what's interesting now is that it tends to follow real yields. And right now, it's trading pretty cheap relative to real yields. Real yields right now are at the low for the cycle, whereas gold is well off the highs.

24:32So I do think that gold is going to kind of find a bottom soon. And the next time it reaches that 2070 level spot, I do think it's going to run. So the seasonals also start to turn very positive in mid-December. So I'm looking at that. As long as the numbers and the Fed kind of play ball, then I think gold is going to keep rallying. 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.

25:20We've got some great questions in here, so I want to make sure I get to them. And of course, a lot of our viewers know that you join us from Singapore. So they're very curious to get your thoughts on China. Moody's cut China's credit outlook to negative today. I mean, it's a rating agency. Some people wonder whether that really matters. But OK, they did it. But there does seem to be growing concern about the government's policies in terms of dealing with the debt and slowing economy. We have Paul Hodges on yesterday. He was very bearish about the situation in China. What are you seeing? What's the talk over there, Gio?

25:53Ched asking, can you give us any insight into when you think China might trigger the expecting massive liquidity pump to mitigate their economic crisis? Will they come in and stimulate? With the US dollar drifting lower, it seems like an opportunity for China to do more cowbell with crashing yuan and help pump things up, maybe pump crypto. I'm not sure of that connection. But anyway, give us your thoughts on what that's all about. Yeah, China has been really hitting that cowbell, but nobody's listening. The market's not listening. That's worrying.

26:36Yeah. What's interesting is that the data has been surprising to the upside as well. So I think there's a disconnect between the stimulus and the economic data in the market. And I think at some point, that disconnect is going to resolve itself to the upside in the market. Now, I've heard that there's probably a lot of tax loss selling going through, which could be why it's depressing the market so much. But if Chinese indices suddenly rip in the new year, I would not be surprised. So this is something I've been looking at for my own portfolio. Very interesting. So that answers your question, OTDE Dijen, because he's asking, will China ever be a buy?

27:28The HSI is in free fall. So you think China is stronger than people think, or you just think that the Chinese are willing to pump liquidity and to see if they can make a difference?

27:43I think China is not as weak as sentiment says it is. and yeah, so I think there's the stabilization of the data, which is a good sign, and it's not being priced into the market. I think sentiment is more bombed out than I've ever seen it in my career. Yeah, which when that's the case, you always sit up and take notice. Very interesting. So I want to squeeze another one in here. What's your view? TrillianX asking, what's your view on euro dollar and dollar yen? Yeah. So euro dollar is interesting because you have, as I said earlier, the European economy is probably slowing faster than the US. So because of that, that should be bearish for Euro.

28:45But at the same time, And the disinflationary trend in the US is going to have a pretty powerful effect on the dollar too. So I do think that what's going to end up happening is that the effect on the US dollar is going to slightly outweigh. And we're going to have probably a grind higher in euro dollar. As for dollar-yen, that mostly follows US yields. So if inflation does go down like I believe it will, and if the Fed cuts, then dollar-yen should be lower next year. Yeah, that's so interesting that you said that about the euro, because if I'm not mistaken, and Dell, we had Dell Pinkerton, I believe, is the one who pointed out the same thing.

29:40It's just the momentum for the dollar bear trade is going to be stronger. Stronger euro, not good for Germany or not good for Europe, whose economy is weakening and any attempt to sort of help out on the export front. That's potentially an added negative for Europe, isn't it? Yeah, it certainly is weakening. And if you look at my slide three, unemployment in Germany is closer to the post-COVID high than it is to the cycle low, which is quite striking. And, you know, it's not going to get better until we see the global economy trough and the ECB cuts rates and comes to the rescue. So I do think that, you know, the scenario we might see is that euro weakens on the FX crosses, but strengthens against the dollar.

30:46Mm-hmm. Yeah, interesting. So if we wrap things up, Gio, what do you feel most convicted about here as you're looking at this turn into 24? Yeah. So I've mostly been looking at right tail trades, betting on disinflation. And because crypto cycles could be quite powerful. I'm positive on both crypto and equities, but I do think that the juice really is in crypto right now. So I've been looking at calls on crypto-related equities as kind of those right-tail, like lottery ticket style return profiles. It tells everybody everything they need to know about whether it's right for their risk profile.