The "Boringest Exciting Market" Ever? w/ Jared Dillian

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

1:35What to make, in the words of Jared Dillian, of the most exciting, boringest markets ever. Welcome to the Real Vision Daily Briefing. It's Thursday, May 11, 2023. I'm Ash Bennington. I'm joined today by Jared Dillian, editor of the Daily Dirtnap Newsletter. Jared, welcome back to the show. Always a pleasure, man. Thank you. Thanks for having me. So, Jared, big picture. Where are we? What do you see happening? What matters most right now? You know, it's funny. I wrote about this in my newsletter, how this is the boringest, excitingest markets of all time. We have all kinds of shit going on. We got banks blowing up.

2:11We got the debt ceiling. We got, I mean, you name it. There's all kinds of crazy stuff going on. And we have a realized volatility of zero. Like we're basically on every single day. and I've you know in my career I've had I've lived through periods where volatility was very low like 2005 2006 the market was moving like 10 20 basis points a day it was the most but it really was boring there was nothing going on at the time and now there's all kinds of things going on and there's this big divergence because the market isn't moving at least the stock market there's a little bit of excitement elsewhere.

2:48There's excitement in the bond market, but yeah. Yeah. Two stands right now, upside down 50 basis points. You made this point in your newsletter as well. The idea that the debt ceiling debacle has not yet been priced into markets. And you asked this theoretical hypothetical question, is this the calm before the storm in the S &P 500? I think so. First of all, stocks do all kinds of unpredictable things. Like in linear thinking usually gets you in trouble, okay? So linear thinking is the debt ceiling is coming up in three weeks, the US might default, stocks should go down. That's linear thinking.

3:25And usually linear thinking doesn't work. Having said that, I think, I mean, gosh, if we actually have a default or something, then yeah, I mean, stocks should be down a lot and nothing's going on. If you wanna talk about the debt ceiling for a little bit, But I've been pretty vocal on Twitter and elsewhere saying that the probability of a default is much, much higher than people think. I think the Republicans believe that they were elected to force this issue. I mean, not to get too much into politics, but if I were the Republican Party, I would vote to raise a debt ceiling because I don't think that the public really understands how the national debt affects their daily lives, even if it does.

4:14And we really haven't gotten to the point where there's enough pain about the debt that there's any political will to do anything about it. So I think this is kind of a political dead end for the Republicans. But I do believe they're going to force the issue. Trump last night in the CNN town hall said he would favor a default in order to force spending cuts. And I think that's what we're trending towards. I mean, McCarthy and Biden have met a couple of times. They've made absolutely no progress. It's three weeks to go. They're still miles apart. And I think this is, you know, look where four-week bills are trading.

4:51Four-week bills are at 544. You know, there's this huge, huge spike on the curve. Yeah, that's extremely well said, Jared. And you've made so many interesting points that we could talk for the whole 30 minutes about just what you said in the first two minutes of this show. I mean, first of all, I love this idea that linear thinking gets you into trouble. Systems thinking, I think, has been very influential for me in terms of seeing things, in terms of feedback loops when you have, for example, headwinds that you would think would push down the value of stock if it causes central banks to go in and take ultra accommodative monetary policy stances can actually drive the value of stocks up.

5:27George Soros has talked about this in the terms of reflexivity, but it's such an important point. On the debt ceiling here, I want to get a little bit more detail on this. And one of the challenges I think that people who are basically finance guys like you and me have when we look at these issues is that they're not rational, they're not logical, they're political, which is exactly what you said. I guess my question to you, if we could pretend the cameras weren't on for a second here and just like talk about it. When I look at this, I think, what's the incentive for the Republican Party to actually have a default on this?

5:56Isn't it more in their interest to keep the pressure maximal on the White House by just continuing to kick the can down the road with various extensions so that there isn't a default and they maintain that leverage? I don't know. They're just sort of my not a political guy thinking about it. And the other question I have, and I'm curious if you have any insight on this, is to what extent does Kevin McCarthy have the capacity to whip the votes in his own party to do his will? In other words, is this something that can be looked at through a rational actor model? Do the Republicans act as a unified party under the leader?

6:27Or is this something that it's a fractious majority to attempt to maintain? I don't know the answers to any of those questions. Yeah, I mean, look, like politics is a science and people study this in great detail. And I have some subscribers to my newsletter who live and work in DC and they live in this world and they understand the nuances of the Democratic position and the Republican position a lot better than I do. And, you know, would it be, is it more optimal for the Republicans to kick the can? And, you know, I mean, I don't really know the answer to that question. All I know is that, you know, U.S.

7:07one-year CDS are pricing in basically a 4 % probability of default, which is the highest basically ever in history and you know there's where we're completely at an impasse here so and with regard to your question about you know whether they can whip the republicans i mean the 206 votes like i think it is possible that if you get down to the wire on the debt ceiling it is possible that some republicans could cross over and vote to raise the debt ceiling rather than cause either a government shutdown or default or something like that. I mean, there, there's a lot of, one of the things that's really interesting to me is that there's so many different ways this can play out.

7:50There's so much unknown. There's so much uncertainty and I'm looking in stocks are on day after day after day. And it really, it just makes no sense at all. Like after Trump's comments on the town hall last night, I thought we'd wake up down like 30 or 40 handles in the spoons. Nope. So, yeah, by the way, we should also point out, this is not the first debt ceiling crisis we've been through. 1995, 2011, 2013. We've seen this movie before. We've seen this movie before, but I would say this is the first time we've gone through the crisis where the sides are so far apart. I mean, basically, we have, you know, Biden's budget has a$2 trillion deficit on$6 trillion in revenue.

8:37It's absolutely enormous. and the Republicans are, you know, the other side and they're just so far apart. But there's also the animosity. I mean, if you think about, you know, Biden, his tweets, he calls them MAGA Republicans. There was a press conference where he called Peter Doocy from Fox News. He called him a stupid son of a bitch. Like there's like there's a lot of animosity here. You're talking about people that really have no interest in cooperating and genuinely dislike each other. And this is the backdrop for which they're supposed to have this negotiation. So, yeah. You know, one thing we don't do here on Real Vision Daily Briefing is express our own political preferences.

9:20But we do talk about what the potential implications of varying policy options are. Who loses more if there is a default? I mean, my gut is that the administration gets blamed just because, you know, that's the way Washington works. when you're in power, you get blamed. Fairly or unfairly, mostly unfairly, I would say. We should spend some time talking. I mean, you and I together, we should sort of like work this out because I've really spent the last two weeks trying to like strategize about what actually would happen if there were a default. So let's say, you know, we get to June 1st, we're technically in default and four-week bills that are supposed to mature the day later are now no longer trading at par.

10:06They're trading at some discount to par. And then money market funds across the country break the buck. But rather than break the buck like they did in 2008, what I think will happen is that they will gate redemptions. Like you won't be able to get your money out. And we're talking about government money market funds, not Prime or CP or stuff like that. So I think it is possible that the whole money market industry, and look, if the Treasury is not having conversations with money market funds at this point about what to do in this scenario, they're nuts. I think they'll probably gate redemptions.

10:45I think that's probably the most likely scenario. 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.

11:00literally while you were speaking i got a text message that popped up on my screen from a buddy of mine in finance who spends a lot more time in washington dc than i do and he says i think they can keep paying treasury interest and principal while they stop paying vendors so i mean to me there's just a lot of uncertainty here oh yeah in uncharted waters we don't know what remedial action the administration might take to try and stave off a collapse in the potential value of U.S. Treasury. I can't even believe I'm saying those words. It sounds weird. The other funny thing about this, and it's not funny, but I find humor in this, is that in the last six months or so, retail investors have just piled into T-bills because, number one, they earn more than bank accounts.

11:47Number two, the stock market was a mess. They didn't want to invest in stocks. stocks they wanted to invest in something safe so they piled into these safe t-bills and now these safe t-bills are probably the riskiest thing out there so i mean that what a through the looking glass world jared to say t-bills are the riskiest thing i mean it's it's it's hard to even get your head around it's like bizarro world yeah so jared what else are you looking at in markets, what's caught your eye?

12:20Gosh, what has caught my eye? Well, you know, a lot of this, a lot of the stuff, a lot of my ideas from, you know, I was on probably three weeks ago. A lot of my ideas are still sort of in progress. You know, I'm bullish on energy. You know, I think that a lot of people are spending a lot of time looking at commodities and looking for a bounce of commodities, including oil. And I don't think you're going to get that bounce until we have some kind of inflationary impulse. So when I say inflationary impulse, I mean like, you know, kind of like what we had during the pandemic when we were basically handing out free money, That was an inflationary impulse.

13:08So what would happen this time around that would cause that? Maybe the debt ceiling. Maybe the Fed directly monetizes T-bills. Maybe they print money to pay off short-term government debt. I'm just doing like a Monte Carlo simulation here, but that would be an inflationary impulse. So, you know, I like investing in commodities. I like investing in commodities from the long side. I find it easier to be in the long side and the short side. And I've been waiting to do this. And until you get that inflationary impulse, it just doesn't really work. So, boy, direct unsterilized intervention by the central bank directly in the debt would certainly be inflationary.

13:53Talking of which, I want to bring up a clip from Steno Signals. Will inflation allow central banks to ease? This is exactly the point that we've been discussing here. This, of course, is Andreas Steno-Larsen. On today's show, May 11th, let's take a look at the clip. The 2020s year, and that is why I've made this chart where I've overlaid the current inflation picture with the inflation picture from the 1970s. So if you compare today to the 1970s, almost a picture-perfect overlay chart right now. The decline in inflation follows the decline in inflation that you saw through the 70s when M2 started to decline.

14:35But buckle up because we may have another wave ahead if this analogy to the 1970s works. What could drive this? Well, as soon as inflation disappears over the next few quarters, which I find very likely, we may get that exact political response from the pandemic again. Fiscal stimulus, direct transfers, checks to each and every household if the recession hits. And then we're back to expanding the money base at a pace that is basically out of control. Sobering words from Andreas Steno-Larsen and that chart that he showed sort of lining up the current period with the 1970s, I thought was quite sobering.

15:17Now, I know people are going to say, look, you're overfitting the data. You're finding an arbitrary start point to align so that the curves align. But the reality is, for me, the most important takeaway from that chart isn't the exact fit of the data. It's the fact that you got a double dip on this inflation. You had the rise, the drop, and then the rise again to a higher point than the first peak. That, to me, I think is Andreas' biggest takeaway there, and it's sobering one, Jared. Yeah, he's – I mean, that's kind of his hobby horse. Like I like Andreas, and I actually agree with him on a lot of stuff.

15:49And I do believe that we're going to have a second inflationary impulse. I think it's going to happen, and I think the Fed will have to respond. And I think, you know, and look, this is not, you know, imminently, uh, maybe 2025, maybe 2026, but at some point in the future, we're going to have 10 % on tenure notes. Like that's going to happen. Um, 10 % on tenure. Yeah. Yeah. In the next couple of years. Yeah. So, I mean, right now we're having this disinflationary impulse. Um, but what, you know, I get sick of saying it because I say it all the time. But inflation is really about psychology. Okay.

16:32And we haven't killed the inflation psychology. We haven't squashed it yet. Like, look, I went to Chipotle today for lunch. Actually, it's funny because I haven't been to Chipotle in like six months. I got, not that anybody cares about what I eat for lunch, but I got a bowl with double chicken and queso in a large drink for$19.40. And this is in Myrtle Beach. This is the lowest cost of living area in the country, like$20 for Chipotle. People expect price increases. Even though inflation is slowed down, people still have that inflationary mindset. They still expect price increases. And that's why we're going to have another wave of inflation in the future.

17:18Right, because it becomes a feedback loop. It gets priced in. You start the expectation, and the expectation becomes reality. Hey, listen, this work table that I use for my desk is six feet long. When I moved into this apartment, I have a little less space in this room than I did where I had it last time. So I decided to get the five-foot version of this desk, just ordered it from Home Depot. This desk was$103, six feet long. The new desk, five feet long, was$225. Exact same desk from the exact same vendor. It's doubled since I bought it whatever it was, five, six years ago, right before the pandemic.

17:49I mean, you see this everywhere. You see this, and I was talking with Brian, our producer here. I went to order a chicken salad with a Greek chicken salad with a grilled chicken over the top, right? $31 with delivery fees. I was like, I'm not ordering that. I'm just going to go out and scrounge in the neighborhood to see what I can find cheaper. I mean, the price of food has just been insanely, insanely accelerating. Yeah. Yeah, I mean, it's funny. Like, I have a decent amount of money. There's really no reason for me to worry about the cost of food. Like, it doesn't affect my life that much. But I find myself economizing, like, because it's so expensive.

18:26Like, I used to go out to, I'd go out to a restaurant for lunch, and it would be like between$15 and$20. And now if I go out, it's like$25 to$30. So there's like a bagel shop in town, and I go to the bagel shop, and I get a bagel for$8. And I do that like four times a week because it's cheaper than, you know, spending$25,$30 on lunch every day, which I just, I can't bring myself to do. So it's also interesting, the way that we measure it, the kind of month over month, like, for example, today, wholesale prices up for the month of April 0.2 percent. You know, it sounds like a relatively moderate increase, but the problem is their compounding effects.

19:06And when you see the price rise, you know, when you have these uncontrolled bouts of inflation, seven, eight, nine percent, it starts to become a cumulative effect. And then it squeaks through the system at the varying steps. And by the way, food costs, particularly prepared foods, you have not just the underlying value of the inputs, but you also have the labor pushing prices higher. Yeah. We haven't even talked about real estate. I don't know if you want to talk about real estate on the daily briefing today, but I got to tell you, you know, I sort of went to war with some people on Twitter. This was like four months ago.

19:42You had some people on Twitter that were posting all this housing doom stuff because interest rates went up. and they thought the housing market was going to crash. Not only is it not crashed, it is on fire. Like here in Myrtle Beach, but also in New Jersey or in the New York area, lots of places in the country, real estate is still, even with mortgage rates at 6%, 6.5%, 7%, real estate is still strong. We're going to take another quick break and be right back with more of the day's top analysis on the real vision daily briefing

20:21yeah you know there's there's so many factors here this is not a normal cyclically driven market at least in my view we're seeing significant secular changes happen the nature of work i worry a lot about cre commercial real estate particularly on the office space side i know most of the of the cmbs is in the form of multi-family housing but you know the nature of work has changed very dramatically since before the pandemic. I wonder if to a certain extent, the red hot housing market we see might not be people spending larger portions of their income because they need work from home space. These things are very, very difficult to gauge while you're going through them.

20:56Yeah, I do think the commercial real estate issue is a little overblown. It's also in terms of my knowledge, like I know a little bit about a lot of things, but I don't really know very much about commercial real estate, but I am old enough and we're about the same age. You know, I remember in 1990, 1991, that there was a bubble in commercial real estate in office space. Like if you were driving anywhere in suburban America, you would see a five or six story office tower that just went up. Like there was a huge amount of over construction. And then you had the SNL crisis. and that's what caused the recession of 1990, 1991.

21:41I don't think what's happening today in commercial real estate is anything on the scale of what happened back then. Yeah, I remember that period because my dad was doing some building, some development during that time and it was absolutely brutal. Let me throw this one other wild card out there that I wanted to get your view on, talking about secular shifts in the nature of the economy. I wanna talk a little bit about AI. Is there a risk, Jared, that we see commodities-driven price inflation while simultaneously deflation in the labor markets. I read this article in the Wall Street Journal today.

22:10I'm not sure if you saw it about law firms. There was a Google study that showed that AI over the next, I forget what the time horizon was, five to 10 years, could reduce the amount of labor required in the legal profession by 44%. Now, even if that number is wildly overstated and it's half that, my God, can you imagine what's going to happen to the career destruction in that space? And believe me, it's coming to others. We're looking at version 0.0.1 here. Yeah, I'm just trying to figure out how to make money off of it. Like, there's, I think AI is as significant of an innovation as the internet was in the late 90s.

22:52And the internet in the late 90s obviously sparked one of the biggest investment booms of all time. and what I've been trying to figure out is how, what is the best way to play this? And, you know, I think the recent outperformance of some of the FAANG names are kind of, excuse me, are kind of being caused by AI, but - Meaning market perception that they're going to be leaders in the space. Yeah, yeah, yeah. Yeah, sorry about that. I just kind of - You know, the one big difference, at least for right now, in terms of what I've seen versus the, you know, the 2000.com era, which I was working on Wall Street as one of the young guys back in those days.

23:34And this is that these large language models require massive investment. It's the Googles of the world. It's the companies like Microsoft that are going to have the ability to have the resources to do it. It may be very good for Sam Altman. In those days, the idea was that anyone with a good idea, maybe like a halfway decent idea and a dream, two or three of their buddies could pile in, create a new company, spin it up and try and do something with it. I don't know if the maybe it's just the back end of the large language models. Maybe there are service providers that can be built on top of that to have those businesses.

24:08But I just don't know what the future looks like. Well, it should be another productivity increase like we had in the late 90s. And we had a massive increase in productivity back then, which was deflationary. So maybe that helps. um you know i can tell you that uh i was a professor from 2013 to 2018 and i'm starting up again in the fall and i used to give written assignments and now i'm kind of stuck like you know how do i deal with this right oh right yeah i guess the question is who gets those productivity gains uh do the productivity gains kind of accrue uh to the uh the shareholders of google and Microsoft?

24:50Or are they things that, you know, you and I can start our own AI startup and, you know, build a business with very little capital, very little investment? I don't know. I do have a question for you. And I've always kind of wondered this. So you can go into chat GPT and ask it to write a demand letter, right? Yeah. But ultimately, you still need the letterhead, like you still need the letterhead of a law firm, don't you? Like, it's kind of useless unless unless it's an actual attorney sending a demand letter. Yeah, I think that's true. And I think that the idea is that most people who are looking at this think that there's going to be tremendous cost savings, for example.