Is the Good News Already Priced In?

0:00People are going to lose their minds. This is a moment in history unlike anything humanity has 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.

1:08Is all the good news priced in? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jeremy Schwartz, Global Chief Investment Officer at WisdomTree. Hey, Jeremy, welcome back. Maggie, thank you so much for having me. So November was a huge month, and we started off December in similar fashion. We had a big rally in stocks, in bonds, the 10-year yield now at 4.22%. Gold was up. Crypto is up. Before we jump in and I get your thoughts, I just wanted to play some highlights from some conversations we've been having all week as we discuss what's driving this momentum. Let's have a listen.

1:44They have not achieved their inflation outcomes, but we are very much making progress towards that outcome from their perspective. And not only are we making progress towards that outcome from their perspective, they're going to have to revise down their 2022 inflation projections, which may, just from a base effect perspective, caused them to revise down their 24 and 25 inflation projections. You know, if you Powell, things look pretty good right now. I mean, you know, you've pulled out that soft landing. Unemployment is still very low. The stock market is almost a record high. Inflation has gone all the way from 9 % to 3.5%.

2:20Why would you mess things up? Why would you change? Just if you didn't broke it, don't fix it. So when the bond market sends signals that clearly that the trend is changing, I don't think anything. I just sit up in my chair and decide how fast I can drive the bus. You know, I mean, the S &P 10 % in four weeks got that message loud and clear. Positioning has changed. Sentiment has changed. The whole thing, you know, the gears are moving for a tactical trade higher. There's going to be an ebb and flow to this trade. But this trade is on like Donkey Kong into the end of the year. Bitcoin broke out two weeks.

2:55before the stock market bottom, broke out before yields turned, broke out before the dollar turned. So I think I now have a market, whether I trade or not, that is an early indicator of what the rest of risk is going to do. And it's been kind of moving sideways, losing momentum for the last week or so. And I wouldn't chase Bitcoin either. I think you'll have a chance to buy it at 30 grand.

3:30Yeah, it's very interesting. I mean, there has been that November move is really powerful, Jeremy. But to see December step right in with this month, what's your sense? Are you surprised to see investors coming out of the gates right away and resuming that rally in stocks and bonds? It's all been one trade in so many ways. It's all, you know, the bond market is driving so many things. So we all come back to the Fed and interest rates and how it's all taking shape. And I mean, today, unlike the full year, I mean, it's been a NASDAQ big seven led market. Today, you see the NASDAQ up by, I'm sure, just 20 base points right now.

4:07But the Russell 2000 up almost 3%, which is massive diversion. And again, it's the 10-year. Now, what's interesting about all the relationships, I think back to a decade ago in 2013, which was a big year for the markets. rates were going up. And as you think back then, often, rising rates is a symbol for the economy. Small caps are more cyclical. So you'd say small caps do well with rising rates, is one of the things you might have said back then. And today, it's like, well, now small caps are facing these funding pressures from the only ones who have bank loans. And so their rates reset with the Fed higher rates, the large caps, extended maturities.

4:47They're not facing the brunt of all these higher rates from the Fed, so only the small caps do it. So rates go down, small caps fly, which is basically what you started to see a little bit. But there could be a lot of catch up in small caps. They are definitely not, you hear everybody, the 493 versus the magnificent seven, the valuations are much more supportive to small caps. But the question is, will the economy hold up? Will we have earnings hold up next year for them? That's the big question. If you have a falling rate because the economy is slowing down, that's not as positive. Yeah, and I think that's really important.

5:27And right now, obviously, we're in this sweet spot because we did get GDP, still look strong, employment's holding in. So you've got that perfect kind of Goldilocks situation. The issue is, as you say, as we look out into 24, what happens? And can we sort of hit that soft landing where the economy is still supportive enough for businesses? Jay Powell was out talking today. The Fed really, from some recent comments, kind of got the ball rolling on this, even from the last meeting. And Jay Powell came out today, and he had a chance to sort of really strongly walk it back or try to. I mean, he did say talk of cutting rates was premature, but investors didn't seem to be buying it at all.

6:12what should we be expecting from the Fed and rates? I mean, is the market pricing in too many easings right now? I mean, they're disregarding verbally with the Fed saying, how do you see the rates and inflation situation? If you look out to December next year, Fed funds futures, you get a sense of how many cuts the market is starting to price in. And actually, if you just look at the pricing of the Fed fund futures, you'd say they're starting to think of five cuts for next year. Now, one of the things my mentor and senior economist at Wisdom Tree, Jeremy Siegel, often says is you can't just look at the rates because people buy these futures as a hedge on something bad happens.

6:53And so if something bad happens, they're going to have to cut rates a lot more. And so the actual, if you say like, what does the market actually think the Fed's going to do? It's probably more like three to four. And then you have this other 25 base point that's sort of like this hedge for something going bad factor, that's sort of pushing those rate cuts higher just because it's a good hedge asset. But we'd say it's appropriate for them to be cutting. We've been talking about the disinflationary trends we see in our data. We've been calculating this alternative inflation metric that factors in some more real-time housing data.

7:28And one of the things is the headline inflation, when they were first saying inflation was much transitory in 2021. We got up to 8 % CPI. Our numbers were like 13.5 % because of just what was happening in housing. Then our numbers started crashing much faster than the official numbers. And you're hearing some people talk about, all right, well, what are we doing in this? We're just playing more real-time shelter. And you have people like Austin Goolsbee saying, hey, all of inflation boils down to what happens in housing and shelter. And that's what we're showing in this chart is how much lower.

8:03We got down to almost a zero handle on headlight inflation. The official numbers were 3-2. We're showing 2-2, which is right basically at the target. I think the trajectory, the path for the official numbers are to keep coming down. Although you'll notice my number hooked up a little bit. Yeah, what's up with that? It went off those. We have a chart on core inflation also, if we want to show that one. You know, this was showing, you know, we got up to 4%. You know, we're down to 4 % on core inflation. Our numbers are on 2.5%. You know, I think the dynamic is the shelter inflation, you know, what we're doing is we're substituting Case-Shiller housing data.

8:47And you got Case-Shiller housing data in again. And, you know, with 7%, 8 % mortgages, you might have expected more softness. There was a time we got seven months in a row of negative housing prints. And so we were showing much cooler numbers for the shelter inflation. Our number has hooked higher. So it's not quite as low. But we think the traditional metrics will come down. I mean, we do think that there is softening in housing. But that is one of the key things we're watching is, well, our number would keep going higher. because certainly off the lows from where our number was just a little time ago.

9:26Well, and I think that speaks to one of the concerns out there that people have had is, OK, the inflation's finally moving lower, but are we going to have this second wave of inflation that comes, especially if the economy stays somewhat robust? It's like that's the argument of the inflationistas out there, if you will. Well, and we're also saying do not stick to that narrative from the Fed. The Fed, that is one of the biggest risks to the market, is that the Fed sticks to we're going to have the stop and go inflation of the 70s. And what we call the false narrative of the 70s is, hey, we had these big issues where we loosened too quickly.

10:05Now, why do we say it's a false narrative? During the 70s, the money supply kept growing 10 % a year. When you think about what the money supply should grow, we like to think of 4 % to 5%, and really 5 % as the magic number for money supply to grow. And where do we come up with that? Money supply should be approximating equal to inflation plus real growth in the economy. So if you have 2 % to 3 % real growth, 2 % to 3 % inflation, that gets you to 5%. Why did we have the surge in inflation? Well, you had the money supply grow 40 % during the pandemic. All the efforts that the government did, they flooded the system with money, and the Fed gave the government the money.

10:52If the Fed didn't do all the buying of assets that they did, interest rates would have gone up much higher. And so in some ways, the Fed did accommodate. People started giving Powell credit for getting inflation back down. It's like, well, no, you crash into somebody, and then you take them to the hospital. They did create the inflation. And so yes, now it's coming down. But the above trend inflation was a reflection of the above trend money. Well, money supply started declining. And actually, earlier this year, we were really worried because money supply was sharply negative, as negative as it was since the Great Depression.

11:28You hadn't really seen declines. And you had to go back to the Great Depression to see declines in the money supply. And during the 70s, again, it's growing at 10 % a year. So that is not what we have today. It stopped declining. It hooked a little bit higher, but it's not growing at the 5 % rate we would like it to. So that is one of the deflationary factors in there that you can, if the Fed, this is part of the thing we think if the Fed needs to be patient, you need to let the data, particularly the shelter data, come their way next year. And again, the money supply is nothing like the 70s. Hey, everyone.

12:05We'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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13:17One of the things when people look at housing is this concern that you're only going to get so much easing off in prices because there's a shortage of supply. And it'll, you know, there's a longer lag in terms of trying to catch up with supply on that. Is that worrisome or is that it's really that rate of decline that matters for, and there may be a floor, you're not going to see it collapse, but that you're not going to see that feed into inflation. Yeah. Interestingly, coincidence is you saw the money supply go from March 2020, March 22, 40 % higher. The Case-Shiller Index went up 40 % from that period.

13:54And so that was an interesting coincidence of people looking at shelters, one of those nice inflation hedges over the long run, and people were buying the demographics seem to be supportive for housing. We would have thought with 78 % mortgage, you would have gotten a deeper correction. You really didn't. But it has cooled down considerably. And some of the anecdotes that we hear is that it's continuing to cool down. But yes, that supply constraint is what you hear all the time when people are trying to justify price. And people say, oh, they know they're going to refinance eventually, so they don't care about paying the 7 % mortgage.

14:26And there's some truth to that. If I was advising friends to say, yeah, the mortgage rates, you're probably going to get a chance to refinance much lower. So you don't have to be overly concerned. And so all that narrative does make sense. We didn't think you had to erase all the gains in housing. But you would have thought you might come down 10 % off the highs. You didn't quite get there. We'll see how that goes. But I think that the The official data that Powell looks at is going to get better throughout the course of the year. And I think, you know, the official CPI statistics will come their way.

15:00It gets better, but does that mean they've got to cut? I mean, there's, you know, like, and you even have Ackman saying he thinks he's even ahead of the market. Bill Ackman coming out and saying he thinks, so clearly he's concerned of a more serious slowdown. So maybe the question isn't do they cut is where's the risk that things slow down markedly from here? Well, it does come back to the sort of question of what is the right neutral rate? You know, Powell uses the word overly we are in well into restrictive territory in a well into restrictive territory was a quote you kept hearing. And if they have 5.30 as their rate, and inflation is really coming back to 2 % to 3%, their real rate is, even if it was 3%, if you just took headline inflation today at 3%, their real rates, call it 2%.

15:52If it actually gets down to 2%, the trend actually gets to CPI of 2%. Now their real rate is 3%. The long-term neutral may be 1.5 % to 2%. So they're very restricted. Right. So when the real rate gets much above what is sort of neutral, where they're not too aggressive, not too they're not too tightening and they're not too loose. Where is that neutral rate stand out? And so I do think there's going to be some concern that they just drive more unemployment than is necessary. Do you really want to kick out a million to two million workers from their jobs because you're at two and a half percent percent inflation like in an election season?

16:32So I think that is the thing. We think there's going to be a lot of pressure. Powell's going to want to keep his job. So I think he's not going to want to overly throw us into a recession, cause all this extra unemployment because they're keeping rates too high if the actual inflation is going to come their way. They do have to mention they missed it in terms of inflation getting away from them. They want to make an error on the downside as well of getting that timing wrong. ISM came out today, speaking of where weakness is, and it was subdued again. It was the 13th month, I think, below 50. It seems like we keep saying, when's there a recession?

17:15Some people might point to manufacturing and saying we're already in one. Right. There's signs of the slowdown. There are signs. And the higher they stay above five, the more risk they create. So that's why we think they should be talking about it. In some of their previous quotes, they're like, we're not even talking about talking about lowering rates. We do think they should start talking about it. And how quickly they do it will obviously be dependent on the official inflation data and how much more unemployment starts to pick up. But you're coming into the year-end budgeting season, planning season.

17:50People will be focused on margins and how they manage their cost bases going forward. You'll see where it does unemployment go over the coming months. And I think if there's more signs of weakness, obviously, the chance of rate cuts come in sooner. Yeah. Should we worry that the ISM number is a sign of what's to come for the rest of the economy? Are they leading, showing us that things are starting to crater? Or do you think that sector is working on its own dynamics? AJ asking what you make of that number. It's just one of the signs of weaknesses. I mean, there's absolutely, it's one of the signs.

18:31China certainly, you say, when you think about the global economy, Europe is definitely showing more sluggish signs of recession. They're battled in the war. They've got all sorts of issues in Europe, but not a lot of strong growth in Europe. You have China, who's dealing with its real estate crisis. They are not an engine of global growth at the moment. They're not showing people keep calling for, well, when will they actually stimulate and help reignite excitement about their ramification spillover across the rest of emerging markets. That's not coming. We don't see any signs of that. She keeps talking about high quality growth, which is that we're not going to really overstimulate.

19:10So you don't see China taking the growth baton. Europe's not taking the growth baton. U.S., we've got these higher rates. So you can see the sort of global sluggishness that is there. 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.

19:33Ralph asking, do you have any thoughts on the direction of the yuan? Actually, before we get to that, let's talk about the dollar. The dollar, so everything's rattling. The dollar's not. The dollar has been falling substantially as the market prices in these rate cuts. Does that feel like that's going to continue to be the trend? There's some pretty bearish predictions for the dollar out there. Well, I think a lot of what you see today, again, I come back to this all one trade. It's like what's happening to the 10-year is coming into all these markets. So you got the Japanese yen, you're getting to 151, 152.

20:08When the 10-year was approaching 5%, we've come off 80 basis points. So there's just less of that carry trade in treasuries versus their own local market. The euro at 108, I mean, I've talked to some people who think the euro should be fair value at 90 cents. And so I don't know if the euro can keep rallying just off of the weakness from the Fed. I mean, you definitely see gold as one of those hedges against the dollar doing very well. But again, I think that's tied to the low rate phenomena, that there's less of a competition for gold with some of these things. So it all comes back to what happens to this 10-year is going to drive these other markets.

20:49It could pressure stocks. It could pressure. The dollar could go back in the other direction if the 10-year were to start rising again. Which has really been the case all year, right? I mean, that's where the volatility has been, and that's what's been leading. So you sent over some interesting charts, a sort of scorecard of 80 ETFs. I think this is really interesting because one of the questions we get is, okay, so if we're in a new regime now, what's going to work as we head into 2024, right? Like where do we want to be positioned or what do we want our portfolios to look like? So what is this telling you in terms of performance and what that might indicate for 2024?

21:31So I showed sort of top and bottom, top five and bottom five. We can look at both of them. But in terms of what was at the leaderboard this year, it was AI-driven stocks, so things like a cybersecurity ETF or cyber, then US quality growth. This is where you're positioned the Magnificent Seven stocks at, QGRW, sort of quality growth selection, had all the Magnificent Seven as their top weights, the way we select for profitability and growth rates got all seven of them. But then you get Japan, actually two Japan funds trading like AI stocks. You have value investors like Buffett who's been buying Japan.

22:08I still think Japan is one of the cheapest markets globally. I think it's benefiting from moving away from China. I actually think Japan and India, if you're a global investor, are benefiting from the pivot away from China. But I do joke that you get these value stocks in Japan trading like AI, because the other three ETFs on this list is one is a pure AI fund, and one is cyber tied to all this tech world, and then one is Magnificent Seven that's benefiting from all AI. I'd say if anything, I'm bullish on Japan on the what's continuing leaderboard. I think the valuations are the most supportive for the future.

22:47If I go to what's not been working, you have high dividend US stocks on the list. That's DHS, the traditional value has been down when you saw those AI quality growth up 40. So just a huge dispersion from value versus quality growth. I like the value stocks is a little bit more, well, certainly more reasonably priced or 10 PEs on that high dividend basket. To me, that's, I think, for people playing a little bit of the long-term value rotation, mean reversion, that's, to me, one of my favorite ways of expressing that, even though it was negative this year. I think that's part of the reason I look at it for next year.

23:24China was on the negative side, big negative this year. I'm not buying the value trade on that one per se. I think that I do a podcast every week called Behind the Markets on Sirius XM 132. I'll be actually right after we get off at 5 o 'clock again, if you're on Sirius. But we talked with a woman, Liza Tobin. She's from a group called scsp.ai, Special Competitive Studies Project. It was funded by Eric Schmidt. And they focus a lot on AI and the competition with China. They want to see, can they bring back high tech to the US and try to make the US as competitive as possible in this global competition, but particularly with respect to China, particularly respect to AI.

24:09And it just feels like the tension with China is going to be there for a long time. And so you have their own economic issues, you have the geopolitical side. I think we're going to go from talking about all Fed to all talking about geopolitics as we look ahead over the coming years. So I think China is not quite one that I'm buying the value side, but on that list was biotech. I think biotech is one of the unloved beneficiaries of AI. I'm reading a book now by Jamie Metzl. I know Jamie Metzl. Do you know Jamie? Yeah. He's a great, great guy. He's got a new book coming out. He's a really interesting character.