Is the Worst Case Priced into Tech?

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

1:34Is the bad news already priced into tech? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jeremy Schwartz, global CIO of WisdomTree. Hi, Jeremy. Great to be with you, Maggie. Pleasure to be here. Great to see you again. Yeah, we got a little bit of a quiet day today, but there's a lot of stuff going on sort of around the markets and a lot of reports that people are anticipating. So let's start with the macro picture, because we do have everyone in a holding pattern for the big inflation reports. We know how much they matter to the Fed and everyone's trying to figure out what the next move is and if we're done.

2:07Consumer prices are out Wednesday, producer prices Thursday. Do you think that the readings are going to create a problem for the Fed? Well, we think they've already created their own problem because we've been saying they're too tight and they should not be so hawkish that things are trending well for them. They're looking at some of the wrong data. But I think that they are, you know, based on what they are looking at and what they're communicating, that, you know, this is it was sort of their last hike that the bar to raise or lower is quite high that, you know, that that they need to. And you're seeing a little bit more commentary.

2:42I sort of Goolsby was on the wires quoted as the vibes. Yeah, I love that. First time I heard the governor talk about the vibes that were being sent. We were hoping he would dissent and that he'd come out stronger. He didn't dissent, but you could tell the message is going that the bank lending, we've been saying, could be as much as three or four hikes. You've got people like Torsten Slott, who says six hikes. Torsten's been saying, he's a chief of commerce from Apollo, saying that the tightness in lending standards, and Apollo knows something about lending. I mean, they do lending. And he says it's 150 basis points, so six hikes.

3:18We say maybe three, maybe four, and some of the Fed were saying one. So we definitely see what's going to happen in bank lending acting as another mitigating factor. Plus, we see the data. We've been talking a lot about the lag data in housing, that that's going to feed into much lower inflation. If they used updated data, they'd actually see they're right at their 2 % target. I mean, I can't wait to update. We have an alt inflation series compared to the Fed in the BLS official inflation series. And my projections are showing that the core rate would be below two on my data. So it'll be interesting to see what we get tomorrow.

3:58But we don't think they're going to move in one way or another in the short term, but they should be cutting, really. So that's so interesting. So you run a separate series pulling in things that the Fed's not looking at. So you think they're measuring inflation incorrectly? Yeah. And, you know, in normal times, you know, you could say it didn't matter in many ways. But recently, you know, when what happened with the pandemic and housing prices went up 40 percent, the way they measure housing inflation uses owner's equivalent rent and then a lagged way of even getting rental data. So housing is a real-time indicator.

4:36You see what's happening in the housing market every day. And you could use things like the Case-Shiller Housing Index, which is a very good index for home prices. You can use Zillow Rent. There's all sorts of other rental indexes that are more real-time than the way the Fed surveys this. and it just takes a very long time for what happened in reality to show up. And like the, as an example, the Case-Shiller next was up 40 % and the CPI for housing was up 10%. I mean, it was like so lagged in terms of reflecting reality. And so that's come down, it's coming way down. And if you would use the deflation that you're seeing, I mean, it's not just slower price increases, the housing are coming down.

5:15And so if you factor that into the CPI, You know, we've been showing nine months in a row, like basically the last nine months average deflation in both course in core CPI. And so that's a, you know, and so really we're relying on inflation months and months ago, a year ago to say that we're sort of still too hawkish. So I do think my number will show around 2 % or below tomorrow. And so it's extraordinary that they are pursuing this policy if that's really what's going on in the ground. I mean, basically, they're just overdoing it, if that's true. That is definitely our take. Our take is they're definitely overdoing it.

5:56Plus, you get this additional bank tightening that's going to be occurring. It just hasn't fully been reflected. I mean, it's still pretty early after the SVB fallout. And, you know, we still call it, not that there's a bank run for safety fears, like that you've got to, if you have deposit over 250 above the FDIC insurance, have to worry about that. No. But do you have to be kise it that you can now get 5 % plus in treasuries? Yes. I mean, who's not looking that, you know, we have an ETF, USFR that has 5.3 as the yield today. I mean, it's got one week duration. So it's basically a cash-like alternative.

6:40You just can't spend off of it. Now we're working on ways to do that in the future. But the ETF, you get 5.3. The day my bonus check cleared, I moved it over and bought the ETF. Because why keep it in zero? And the banks are not competitive. And so that's a real issue for the banks. A lot of us have been calling it the bank walk. My colleague, Jeff Winogar, I think was one of the original who coined the term. But I see a lot of people talk about it. And, you know, so this bank walk towards higher yielding treasuries is happening. So you see this, do you see continued problems in the banking sector because of that?

7:18Well, there's going to be for sure problems on profitability because there are going to be more and more competition over the long run and the short run. I mean, that people will continue to see I can get 5 % plus in treasuries, more conversations about what are you doing in your checking account? friends saying, have you done it yet? How are you managing your cash? And so there's definitely a huge amount that's still earning zero. And you go to these investor relation decks for the banks and they talk about why their clients don't care about earning zero. I think that's a bad business model. By the way, I'm getting solicited.

7:54This is sort of interesting because we see that we know that people are moving for safety reasons to the bigger banks. I was solicited by a major, you know, big institution to switch my money over to get a higher yield. I mean, you know, it's, they're also taking advantage from a competitive point of view. I don't say taking advantage is the right word, taking advantage of the operation, the situation to, you know, do what they do. So that's added pressure. If you weren't aware of it already, you just have to open your email box to figure it out. And now on your phone, Apple is offering 4 % savings accounts.

8:28And then the first four days they got like a billion dollars that went into the Apple Saves got 4%. And that's still 100 basis points below what you could get in that ETF I talked about, USFRs in the fives, 530, still 100. Apple and Goldman are basically taking 100 basis points. So you can do better than that. So how does this play out then? Because presumably, even though it's slow motion, this is just gonna continue until either the Fed eases, which will start to bring it, but that's a long way to go to get down to where they are is still going to be a differential? Or do you think that the regulators step in somehow or the Fed step in or something happens on that front?

9:09Well, it's going to be fascinating how it all, this walk that we're talking about is going to take a long time to play out, I think. I mean, I don't think it's just an overnight type of thing. It takes time for people to continue to hear the pressure and for them to move. So that takes time. A lot of the, you know, so far, the trouble with the banks has been, just this treasury and duration management and the deposit moving and then having to mark down the assets because they do have to sort of sell them when they have to pay the deposits. So that's a different issue than sort of a credit event that we had in this last real banking dynamic.

9:43And so it's interesting though that we've had a lot of pressure just through treasuries and duration and not any credit cycles. So we haven't really seen the slowdown. And so if you say, hey, we've got another four hikes that come from the tightness in lending, you know, you can have more sort of credit stuff taking out over time also. So there is definitely a risk. You know, you want to be careful because there's a lot of bearishness out there. And I think, you know, a lot of people say the bull case is that there's so much bearishness out there. And I want to be careful from being overly cautious.

10:15But there is definitely a lot of reasons to be cautious now from the Fed being too tight. 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. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready?

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11:22Not all applicants will qualify. Plus500. It's trading with a plus.

11:33Hi, Andre from Portugal. We have people rolling in from all over the place, which we appreciate. I just want to go back to inflation for a second, Jeremy, because I'm so interested in this. If the real read is so much lower, I know we're going to see in the comments right now in the chat, but I feel it, right? I feel it in my grocery bill. I feel like it's still running high. Why is it just still a product of some of the ag prices being up? Why do we still feel like we're paying so much more if the Fed's wrong and you're right that it's come down a lot? Well, the trend is certainly rolling over.

12:11Now, they're not going to go back to where they were pre-pandemic. So we had a 40 % increase in the money supply. And in general, prices were going to go above trend. But now the impulse is down. So their goods prices have rolled over. Commodity prices have generally rolled over. I showed a chart showing how commodity prices were up, and now they've been coming back down. The trend in commodities are generally down. And that's reflected in goods prices. And even Powell talked about it. Hey, we had some declining goods prices. Now, what I'm saying about, which is 48 % of core CPI, is housing. that housing is coming down.

12:51And it should, because mortgage rates are high, much higher than they were before. And we had really an unsustainable boom in housing. And you saw some crazy bidding, people looking at documents or making bids without even seeing houses. I hear all sorts of crazy stories. Now, you hear, hey, maybe housing's not gonna really come down. We thought it could come down 10, 15 % because of the higher rates. But you also hear stories that there's just not a lot of supply. And so, you know, maybe it doesn't really come down as much as we think it should, like the 10 percent. But the housing is definitely deflating in some ways.

13:26And that's offsetting. If you factor the real time housing data, that would further offset it. And then what's left there is some lagging service inflation that Powell's talking about. And some of that is just much slower moving and eventually will trend down. But the housing is a big offset towards what's happening. They reflected real data that's showing declines versus sort of the lagged increases from way long time ago. Yeah, that's so important. And Paul asking, did Warren Buffett or Charlie Munger say anything about Powell and the current CPI and interest rate situation? So I thought there were a few.

14:06I spent the five hours on Saturday. My family was out there doing stuff, and I stayed home watching the thing. Riveting TV. But a few different things. A few things struck me. One is, I mean, on the banks that we just talked about, a lot of people were expecting Buffett to come in and buy the banks he did in the financial crisis. And, you know, what's fascinating, I mean, I learned something from that segment of the of the show where he basically talked about in 1969, he was buying some small banks. And actually, at the time, he had as much banks as an insurance and he wanted to buy more banks.

14:43And it was the Bank Holding Company Act of 1970 that sort of stopped him in his tracks from buying more banks. There was a chance that he could have been a large bank, but they basically forced him to go down the path of being a large insurance company because he loved getting the float. He would do the insurance operations. People would pay their premiums. He would then go invest the premiums. He could have been a bank with leverage and been doing the same type of thing, but they stopped him because of this bank holding company act. So all these people wanting Buffett to get back and save the regional banks, if they got rid of the bank holding company act, I almost guarantee you he would get back involved.

15:21And even sort of some people talk about the Clayton Homes, which he owns this segment of Clayton Homes. And they have mortgages for people who buy those homes. So they have a mini little division, but they don't have a real bank. And you could see them expanding. They've never had any credit problems at their bank. But you could see him doing more if they got rid of this bank holding company. I suppose interesting history of how he could have been a larger bank. Now, he defends Powell. He keeps saying Powell knows the right thing. I think he's been overly positive on Powell. if we had a disagreement there.

15:52I mean, he says he's not really a macro guy. I mean, they do talk about profits being down across their businesses this year. So that's one of the signs you have a little bit of an earnings recession and other slowdowns in things. So that was probably the biggest economic-oriented thing is saying, hey, we see profits declining across our businesses. But the bank comments were quite interesting. Yeah, they were. Paul also, by the way, asking, did you give a ticker on an ETF? I think he was talking about the ETF that you were mentioning that yields. Yeah. Yeah, what is as a wisdom tree ETF, right?

16:30USFR, US Floating Rate, Floating Rate Treasury. So the rates reset every week. So right now, when you go to our website and you pull up the USFR detail page, you'll see an embedded income yield. As of today, it was 533, which is fascinating because again, that's higher than the Fed funds rate. And you say, well, why is there a 533? It resets with the weekly table auction. The latest auction was 514. There's also a spread that they issue on top of that. And so you get this 19 basis point spread on top of that. And actually where you are in the Fed cycle, that spread is now positive. When people are, when they're sharply rising rates, because this rate resets every week, people might pay a little bit of access to get that.

17:18But the spread is now positive at 533 because they're not expecting much faster rate increases. So you get a nice positive spread above things. Again, it resets every week. So the principal volatility is quite low because of, you know, it really doesn't really move with much prices. You're just collecting that 533 with the weekly resets. Bo asking, do you think looking out, it's looking more like deflation or stagflation? Well, we think we're coming back towards the 2 % to 3%. We're not overly concerned that you have a 4 % to 5 % inflation forever. So our view is the more correct data shows inflation is contained.

18:02There's definitely people who worry that the new supply chains, the geopolitical tensions with China, going away from, you know, China was a big deflationary force for the last two decades that, hey, bringing supply chains back to the U.S. We're going to increase costs. And the energy dynamic, that was another thing from the Buffett meeting. He talked a lot about oil. And you could say, you know, of the things he talked positively about, oil was one of them. He could say, hey, this is one of the commodities that could have an upward thrust for inflation. That is a risk, you know, to our view that inflation is coming down.

18:36and so we can talk more about that oil in a second. But I generally think we're not overly worried about elevated inflation and we're more worried about the slowdown at the moment. I mean, we think there's definitely a bigger chance of a slowdown because of all that's happening. Interestingly, I think you had sent an email to me. He was the only other, there was only other one thing he was kind of positive about And it was Japan? Oil and Japan. So let's stay on oil for a second, just because it's inflation theme, then we'll get to Japan. He's obviously been a big buyer of Occidental. He's also held Chevron in a pretty large weight.

19:17And Occidental, he owns almost a quarter of it. And people were saying, well, is he going to go for control? And it sort of sold off on Monday a little bit when oil was up, maybe on fears of not going for control. But the energy itself, he told a really great story about Charlie who bought a royalty for$1 ,000 and is getting these$70 ,000 royalties 50 years later from this oil well that's still printing out oil. And he said the Permian, where a lot of these things are, where the U.S. has been a big swing producer and we're producing all this more oil. So that's helped the global supply. And the wells for that are not the same as Charlie's well that's printing his$70 ,000 checks for$1 ,000 investment.

20:00Those wells run dry much quicker. And so where we added our 5 million barrels of oil from recent drilling, call it half decade, those wells may dry up very, very quickly. And so part of his thesis, I think, on oil is that, hey, we're continuing to need oil for the foreseeable future as much as we want to go to EVs and other things. We're going to still be using a lot of global oil. And if you had a few million barrels come off because the investment hasn't been there or it just doesn't – the oils don't produce as long as you hope, then that could be a bullish oil scenario. And I hear a lot of people who are constructively bullish oil.

20:41Now, it's also one of the cheapest sectors in the market. As a whole, it's about a 10 PE, which is a 10 % earnings yield. It's a high dividend sector. So in our high dividend strategies, we have about 20 % in energy. And at the bottom, it was only 3 % of the S &P 500. It's back to 5 % after a big move last year. But I like oil. And one of your co-hosts on some of these shows, Warren Pies, he comes on a lot of these Real Vision briefings. He wrote some very interesting research talking about energy as a sector is one of the best diversifiers to the S &P, one of the only negatively correlated sectors.

21:19It's got this inflation hedge built into it. So if I'm wrong, that inflation is sort of trending down. Energy is a great sector to offset that, acting like sort of bonds as diversifiers. I love Buffett's energy story, and I'm also constructive on it. 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.

21:45I'm going to I'm going to I want to you mentioned Warren Pies. It's interesting. We've got a question about that because our audience is familiar with Warren's work. And this is from Saul. Warren pointed out this would be the first time equities have cyclically bottomed in the yield curve inversion. How can equities retest October lows if sentiment is already expecting this outcome? And Saul, that's sort of why we asked, has tech priced in all of the negativity already? Because a lot of people are asking that question. What do you think, Jeremy? Yeah, no, so I'm definitely a big follower of Warren's work.

22:19And he's definitely a little bit on the bearish side, I'd say. I mean, the yield curve inversion has been a very good predictor of recession. Coming back to my fear of the Fed being too tight, that the yield curve is one of the single best predictors of recessions. And so that is the risk in the short run. Now, people get overly bearish on recession because earnings, and I know you have a chart on some of our earnings of what's happening. The earnings are declining this year. They declined last year. Now, earnings came in better than people expected. Interestingly enough, now the question is how much can they stay better than expected throughout the course of the year?

23:05I was surprised how much small caps came out better. Yeah, I think, is this the dashboard? Should we put the dashboard up? So I love that you, because I think when we're looking at earnings, sometimes you want to pull out and say, what is this telling us? So if we look at that, it might be a little hard to see. We'll drop it in the chat if we can as well, everyone. So is this something that people can find on the website? Is this accessible? Yeah, this is a new, this is hot off the press. You're going to see more of this, but all the data from this comes, something we have something called our earnings path tool.

23:34So every morning, particularly during earnings season, we're refreshing our earnings path tool. This came directly from that. I format it a little differently in this summary here, but we're going to make this another daily dashboard. But you can go through index by index and get a sense of how many companies are reporting, what's their average beat, what's the overall season. And the far left is the companies who've reported and what's estimated. The middle box is what's been reported. And the right is, did they come in hotter or weaker than expected? And you see a lot of green on the right. And you see the small caps are coming in better than the large caps.