Time for the Market to Turn? w/ Thomas Thornton

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1:34What's going on, guys? It's Ash Bennington. Welcome to Real Vision Daily Briefing. Before we get started with this show, every day this week, we're talking about our new platform, Real Vision 2.0. We talked about this earlier on the Crypto Daily Briefing, but I think it's worth mentioning again because it is quite important. Last week, we released a video called The Past, Present, and Future of Real Vision with Raoul Pal talking about what we're doing with this platform, the new direction the company is going. And as I said, we're all very excited yesterday. As I said yesterday, we're all very excited about this.

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4:56A lot happening there. We're going to continue to keep you updated on this as this platform begins to roll out on realvision.com. So much, much more to talk about there in the coming weeks and months. Okay. With all that said, time for the market to turn. Welcome to the Real Vision Daily Briefing. It's Tuesday, July 18, 2023. I'm Ash Bennington. I'm joined today by our old friend, Tom Thornton, founder of Hedge Fund Telemetry. Tom, welcome back. Ash, nice to be back. And that sounds very exciting for Real Vision 2.0. Goosebumps, as the first guy said. Yeah, it's pretty cool, man. There's a lot going on.

5:35And I've kind of played around with the beta releases. It's super fun. I really think that this is about becoming a true platform where you have tools and functionality as well as content and the ability of people to connect to each other. Just incredibly exciting, cool stuff. Cool. So, Tom, I've been hanging out in crypto land for the last few weeks. I've been keeping an eye on what folks in crypto call TradFi markets, what we call capital markets, U.S. equity markets, still on an absolutely enormous tear. Give us the big picture. What's the context? How are you thinking about it? Well, I think right now, whoever's watching can certainly, and I'm not going to take offense if they just say, oh, so what?

6:11Who cares? I'm kind of looking at things from a valuation point of view, looking at a lot of technical indicators, market sentiment as well. And truth be told, I had a great year the last couple of years. This year hasn't been very good. I'm actually down on the year, which I know everybody's going to be like, oh, my God. But I am, and the year's not over. But I do think that it's gotten just a little too weird right now. Valuations are stretched. Market sentiment has been sort of muted throughout the first five months out of the year. And then in June, it turned, actually turned and is now extreme, extreme overbought bearish.

6:58And for the first time since last year, we now have DeMarc upside exhaustion signals on the S &P 500. We haven't had that yet. We did have one on the NASDAQ a couple of weeks ago, and you had a little bit of sideways action. And then now you have a bit of a resurgence, residual momentum. But what's interesting is I'm seeing the most amount of upside DeMarc sell signals within the S &P in 18 months. And in 18 months ago, I was fairly bearish and cautious, and not many other people were, because everything was moving higher. That was around November, December 2021. And so we're seeing a very similar setup like that.

7:46And we've had the Magnificent Seven, which has been discussed numerous times everywhere, doing the majority of the heavy lifting in the markets. And quite frankly, I probably wouldn't have chased – I don't recommend chasing them now. I think selling them now makes a lot of sense. Maybe not short, but I think that it's just the valuations have gotten stretched. The market cap increases are absurd. That's just – and again, people can say, oh, so what? Who cares? They're going up and I don't really care. Well, you might eventually care because there's going to come a time when things just stop moving up in this torrid fashion.

8:34And as I – as you mentioned, you've been in crypto land. I don't know what that looks like. I mean, I'm assuming it looks like partly like the Barbie movie, like an NFT. I don't know what Cryptoland looks like. It sounds good. I mean, honestly. But even Bitcoin has stopped going up. And Bitcoin used to go up and was correlated with the NDX. So I think even the crypto guys in Bitcoin are blushing a little bit going, oh, my God. You know, NVIDIA's got, you know, a micron or two a day or every other day. And, I mean, Microsoft was the one today that went nuts. At 1130, they were doing a presentation regarding their AI product that they're going to put towards or mix in with Office, the Office suite.

9:23And they're going to charge$30 a person, which is very high. That's a high number for a monthly user. But the stock went up$150 billion within about a half hour in market cap. $150 billion in market cap. And someone on Twitter did a little calculation. I don't know who it was, but they said that that would be essentially 80 million users monthly at$30 would equate to about$150 billion over five years. Right. Yeah, five years. So it's getting crazy. And I have been looking at the earnings estimates. And usually earnings estimates go up with increases in stock prices. No, not here. Not this quarter.

10:17Microsoft, again, is up$700 billion in market cap. And their earnings haven't really gone up. And they'll beat numbers. Tesla. Tesla is up$250 billion in this quarter, and they report tomorrow. And I'm bearish on Tesla, and I've been wrong on Tesla this year. I covered it last year, adding it back. But let's just think about this. Tesla's earnings for 2023 are going to be down year over year. That's the estimates, okay? But they sold more cars. So there's some disconnect here in the sense that they sold more cars. Their margins are going to be hit. But, you know, deliveries for the bulls are more important than earnings, which I counter.

11:10That really doesn't make sense. But their earnings estimate for 2023, the sell-side bulls, it was like$650 not too long ago. Now it's$350. 50. And that's a material move lower. So what I'm kind of getting at is from a valuation point of view, the Magnificent Seven have an average PE now, because this has all been multiple expansion, PE multiples expanding. Earnings are not necessarily moving up. They probably will beat, you know, but they have an average multiple of those seven of 48 times earnings. Now, Now, a lot of people, the bearish strategists in the market will say, well, the S &P is trading at 20 times earnings and that's expensive.

11:55But if you take out the Magnificent Seven, the S &P is actually a lot less. It's a lot cheaper. And I'm actually not bearish on everything. I've been long. Last time I was on with Maggie, I said I liked energy stocks. The oil service sector is up 20 % since, and it's been working. And that's my favorite place for the second half. And there's going to be some volatility there. So that's kind of my thought. You've got sentiment very high. You've got boatloads of DeMarc signals that are, for the first time in a while, triggering. So again, everybody can say, oh, so what? They're going up. I don't care.

12:42You might one day. So, Tom, if I had to do a two-word summary of everything you just said, it would be narrow, narrow, and overbought. Those would be my two words.

13:01Overloved, overbought. That's it. And it doesn't mean – like when you get these signals, they start to develop. And one of the things about a FOMO market, which if this isn't a FOMO market, I don't know what is. But one of the problems is you get these very shallow pullbacks. And you get shallow pullbacks because you have so many fund managers that have missed the move. And they'll buy back a 2 % pullback like it's generational buying opportunity. And that's kind of what happens. And it happened towards the end of 2021 until a pullback was bought. It failed. Another pullback was bought. It failed.

13:42And you started to wear down those buy the dip people. We're not there yet. It'll take time. But I do think that the second half of this year is going to be a much different half than what we've just experienced. And again, some people can say, oh, so what? You know, I've made a ton this year. You know, I made a 10 last year. Who cares? So what? So what? Actually, that's the two words. So what? So what? Yeah. Listen, Tom, this is the reason why we have you on Real Vision. Decades of experience in watching markets, thinking the way people who run money think. And you make a really compelling case for this view of the shallowness of the pullbacks and then the constant upswing return that you see on the end of it.

14:26And of course, the Magnificent Seven concentration. I mean, by the way, I'm just looking at, by the way, for anyone who may not know, is Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla. But I wanted to talk, and I flipped screen so I don't have it here. So just to give you an idea of the concentration here, I mean, this is a really rough proxy. We could probably do equal weighted S &P. But S &P 500, having a banner year, it's up just a shade under year-to-date 19%. NDX, NASDAQ 100 up 45 % or thereabouts on the year 44 spot 81 YTD. I mean, the massive outperformance of NDX versus SPX, just huge.

15:09More than double. Yeah, well, that's, I mean, the NDX was, I think it was down 35 % last year and the S &P was down 19%. So, you know, you had a different year. And I think I have tracked attribution and the weightings and everything so closely for so many years. And now it's like very common that everybody's watching it. And that's good. But you should look at it from different timeframes as well. And that's what we'll see. And I put stuff on Twitter all the time about that. And we'll watch. But look, I think that when we look at a PE ratio, the price has moved up tremendously. Now we need to see some of the E happen.

16:00And to really justify the moves, you have to have incredible earnings growth going forward. I don't think the Fed's done. I think the Fed has a real problem on their hand because you've had inflation go down. And in the next couple of months, with base effects and with gasoline prices being lowered by the Biden administration with the SPR release, if you start to see an uptick in gasoline prices or fuel prices for airplanes, I mean, fuel prices for airplanes have been a sort of a tailwind for the airlines. And, you know, this month to date, it's up 8%. I mean, 8 % is 8%. But if you start to see that happen, I think you're going to see inflation start to reaccelerate.

16:56And that's the worst case scenario for the Fed. So that may be the, you know, some people said on Twitter, oh, what's the catalyst? Well, maybe that's it. Maybe earnings fall short. I don't know. But I think that we're going to run out of buyers. And that's generally what happens when you start to see DeMarc exhaustion signals play up. The other thing is I like to see a lot of them happen together. And when you mentioned equal weight, the S &P equal weight finally caught up. It had a buy countdown 13, which is a buy signal in June. And now you have a sell signal. It's the same thing with the NASDAQ equal weight.

17:33Now you have a sell signal in that. So you've just across the board, the VTI, the total market cap ETF from Vanguard, that has it. The Russell 3000 has upside exhaustion signals. We have a couple that we're still waiting on. But when you start to see that, you should probably start, you should see rule of thumb of reversal within the next 10 days, two weeks, start to develop. And again, tops are hard, and you'll have to have that pattern of the failed dip. Yeah. By the way, since you mentioned Microsoft, something that I've been thinking about here, a conversation that Raoul had with Julian Brigden, hosted by Harriet Melandry, out yesterday, I believe, on the Real Vision platform.

18:17This is an insider talks where he talks about Microsoft and AI. Let's take a look at that. Michael from Canada's question. So he does do fundamental analysis. And he was having a look at price to free cash flow ratios for some of the big cap stocks. So we've got Google, for example, that oscillates in a 30 to 35 range. It's dipped to less than 20 times and now it's down to 25. So he doesn't think it's expensive. But Microsoft is at 44 times. Given what he argues is low liquidity in a high rate environment, shouldn't these discrepancies is correct aren't these valuations the issue is with microsoft is we don't know how to value the ai component they've just done right so is the market overvaluing undervalued i have literally no idea sure i mean you'll find that a month or so right i don't even think that's too early i mean at least initially mate at least initially it's gonna really take until next year or the year after to figure out have they just let a stallion out of the stables here or is this a narrative that is fine within Microsoft's overall context, but they're such a big company.

19:28Is this driving it? We just don't know. You know, that's interesting, Tom. I heard Raul saying essentially it's almost impossible to quantify how to value the AI component. I think he was sort of expressing almost this like Knightian uncertainty view around the near-term earnings potential. We know that Raul is very bullish on AI as a thesis, as a technology, But in terms of near-term earning potential, how do you know? Kind of similar to your point. Right. Look, I think, of course, they're going to have an earnings boost because of AI. And I think that there's a lot of stuff that, well, again, the market cap on their pricing, their office suite with AI, went up$150 billion today.

20:18and the market cap is up$700 billion in the last quarter. That's not going to be realized in earnings, in valuation terms for decades, perhaps. Maybe I'm wrong. Maybe I'm wrong and everybody's going to have this and you're going to just be a slave to it. I just think that it's overhyped versus the market cap of the moves that we've seen. And valuation makes no sense. I'm looking at my screen right now, 37 and a half times earnings from Microsoft right now after today's move. That's, you know, this before the COVID, it was trading at around 23 times earnings. And that people said that that was expensive.

21:05I just don't think that it makes any sense at this level here. No sense. So, and again, people can say, so what? It's going up and it's making me money. God bless you. I hope everybody makes money. I just want people to be cognizant of some of the risk. Well, you ask a really interesting question, which is how long does it take you to recognize that$700 billion increase in market capitalization and earnings? Over what time horizon? I mean, how do you get there, right? How do you get there? Well, look, I think people, I mean, this is an irrational market where you've seen these moves that are just absurd in so many ways.

21:47I mean, it's a new paradigm. I mean, I lived through and traded through the dot-com bubble burst, and it took 10 years for Microsoft to regain its old high. And it wouldn't surprise me to see a lot of stocks go through that same situation. And, I mean, NVIDIA is a great company. It's incredibly overvalued. They're going to blow away numbers. They're the best at hype. You know, they've also had maybe the largest insider selling ever this last quarter. You know, what do they know? I don't know. But obviously, some of the long-term holders internally in the company are saying, thank you very much, and taking the game and not waiting around for the AI spoils.

22:42Yeah, you mentioned the dot-com era. I was one of the young kids on Wall Street at that point. I was working on the tech side. Listen, I don't know what these statistics mean. Let me just throw this out there. These are just numbers. You interpret them as you wish, right? So December 1999, Amazon trading split adjusted$5.34. September 2001, trading at$0.29. 95 % loss in value, peak to trough, underwater for 94 months. Seven years, 10 months. Nearly 3 ,000 days underwater. Well, did you just get that from Chad GBT? Did you just type that in? I mean, that's good. That's good. I might pay for that.

23:19But, you know, the thing is with Amazon and you could say, well, if you would just held on, you know, they always put those stats on TV where they say, well, if you had bought Amazon at the IPO, you would have X amount today. Well, that's great. But let's just remember, it went up 6 ,400 % twice, like 50 % pullbacks and then a drawdown of 95%, as you mentioned. There's no fund manager that could have said, you know what, I'm just going to sit here. I know I'm getting paid for my performance, but I'm going to allow it to go down 95%. That's part of the plan. maybe the buy and hold people can can do that but i think if i had a 6400 percent gain and then i gave back 95 i'd be in a mental hospital i mean i i mean i maybe i don't know maybe i mean that that hurt that would hurt wouldn't it like oh man i should have sold that hindsight our friend mark yusko has a great line about this he said the only two people who held the stock were Jeff and Jeff's mom.

24:26Yeah. Yeah, that's true. I mean, insiders sold it and, you know, that's one of the things to watch in this type of bubble when insiders were selling every share they possibly could in the run up. And it was a new paradigm and didn't matter, but it did. I think my mom might sell if I were down 95%. I think she'd be like, you know i need to cut some losses here yeah yeah like i'm gonna i'm gonna i'm gonna sell this uh here it's time time to sell but you know i love you you're my back later yeah i know i i i used to have a couple family members that were good contrary indicators um they would say i you know i think this i think this is gonna be a good thing this cisco here and i'm like we've been long Cisco for eight years, I sold it, you know, never saw the highs again.

25:22Another one was the Pfizer. I think this Viagra is going to be good. Sold that one right when that hit. But yeah, he's not around anymore. So I can't get my better indicator. But anyway, I just think that right now the market is in this um irrational type of stampede uh it's not easy uh from being a long short fund manager that standpoint is very hard it's hard to be a long only fund manager because you're going to underperform because you can't be just long seven stocks and people keep chasing them and look there's things that are starting to broaden out that financials had a good day energy had a great day today i think industrials are getting a little over overextended here but i i really like to see the market see some of the irrational bubble burst here and you know maybe it's going to be the fed maybe the fed's going to you know tighten again in september i think that's a possibility and that would probably spook a lot of people and if anything they're not cutting rates.

26:31I mean, let's remember that. They're not cutting rates because they're still doing QT. Maybe they need to increase QT. Maybe. Maybe they're not going to cut rates because they're doing QT and they're going to hold rates steady. And you're not going to see a rate cut happen with three and a half percent unemployment. That just is impossible. And you're not going to see unemployment until stock prices go down. We saw all these tech companies laying people off last year because their stocks were down. They're not going to cut people with stocks higher. So the Fed's got a dilemma there. It's a tough thing.

27:12I think the soft landing narrative, you go back in history, I'll put it on Twitter, all the 70s, 80s, 90s, 2000s, everybody, all the economists said, oh, we're going to have a soft landing. Even Paul Krugman last week said, we're going to have a soft landing. The soft landings only happen once. Did he send that prediction? Did he send that prediction out by fax machine? Yeah, his, you know, the internet's going to, you know, be dominated by the fax machine. I forgot exactly what he said there. But, you know, look, everybody wants a soft landing. It's happened once in 94, 95. I don't see that happening at this stage, I don't see that.

27:56It's always a soft landing, and then it becomes a hard landing, and who knew? But, I mean, honestly, it's a soft landing, and then, you know, it gets worse. It doesn't get better. So, look, I think people will blame the Fed. Like, I think inflation is a much more difficult thing to control, And I don't think people realize that because we've really never had an inflation problem like what we've had. So it's going to take time. Well, not since the Arthur Burns era, and it didn't end well. And I think that Chair Powell is very much aware of that. Listen, I want to hit a couple of questions here, at least get one in.

28:37Devin Van Curran is thinking very much in the way that I am right now. He wants to know what will be the catalyst for the next pullback. And I would add to that question, what will be the catalyst for the next pullback? And what will you be watching in terms of the metrics on your dashboard to see if it's happening? Again, I think that there's earnings risk with some companies. We've had this, I mean, this is the near-term catalyst, I think. You've had this big run. Apple is not growing this quarter. They're not going to grow this quarter. They didn't grow last quarter. And year over year, their earnings are going to be down.