What Can Stop This Market Rally? With Jared Dillian

0:00If you've been considering futures trading, now might be the time to take a closer look. The futures market has seen increased activity recently, and Plus 500 Futures offers a straightforward entry point. The platform provides access to major instruments, including the S &P 500, NASDAQ, Bitcoin, natural gas, and other key markets across equity indices, energy, metals, forex, and crypto. Their interface is designed for accessibility. You can monitor and execute trades from your phone with a$100 minimum deposit. Once your account is open, potential trades can be executed in two clicks. For those who prefer to practice first, Plus500 offers an unlimited demo account with full charting and analytical tools.

0:45No risk involves while you familiarize yourself with the platform. The company has been operating in the trading space for over 20 years. Download the Plus500 app. Trading in futures involves the risk of loss. It is not suitable for everyone. Not all applicants will qualify. Hey, everyone. If you like this podcast, go behind the paywall to get privileged access to the smartest minds in finance. Visit realvision.com slash RVpod and use the promo code podcast10. That's podcast10 to get 10 % off our essential membership for the first year. Join the Real Vision community and learn how to become a better investor.

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

1:34What can stop this equity rally? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jared Dillian, editor of the Daily Dirtknapp Newsletter. Hey, Jared, how are you? Good, how are you? I'm doing good. It's Friday before a long holiday weekend, although it's one of those weird ones because July 4th falls on Tuesday. So Monday technically is not a holiday, but no one will be working. At least it's not one of those years where July 4th falls on a Wednesday. That's even worse. That just ruins everything. That does. That's even worse. But for all means and purposes, it's a long holiday weekend because there will be like non-existent volume on Monday.

2:12And it seems like everybody's going into the weekend feeling pretty upbeat, at least about U.S. equities. We had stocks on track to finish the week with a strong rally right now. Of course, they're still trading because we're doing this midday, sort of mid-session. But their gains of 1 % across the board, Apple and Meta leading the way, Apple hitting a $3 trillion market cap. What do you make of the market action? You know, I, you know, I keep looking for signs that we might be near a top. I guess, I guess the title of this is what's going to stop the market. And I guess the answer is nothing in the short term.

2:53You know, sentiment is still, you know, it's gotten bullish. I would say it's at least 50 % bullish now, but it's not stretched. Gunlock, I want to say about a week ago, said in an interview that stocks are in a mania. They're absolutely not in a mania. This is not a mania. I think there's a lot of enthusiasm for seven stocks in particular, but we're far from where we were in 2021. So I think the answer is you just got to play along and this is going to continue for a couple of weeks, a month, maybe two months, and we'll see. Yeah. It's interesting because you can kind of feel that people hate it because it's been, you know, so many people saying it's too narrow, it's too concentrated, it's too, I've noticed the last couple of days, the Russell's been trading up higher too.

3:47Yeah, I mean, here's the thing. The S &P 500 is decreasing in usefulness as an index because it's getting so concentrated. So Apple and Microsoft make up 14.4 % of the index. And Apple's about 8 % of the index. Apple at a$3 trillion market cap is bigger than five sectors. Apple alone is bigger than five S &P sectors. So the S &P 500 really is just turned into, you know, it's five or seven stocks that make up like 30 or 35 % of the market cap. And I think really, you know, it would not surprise me if this continues, if money managers start changing their benchmarks to the equal weight S &P or the Russell 1000 or something like that, to something that's a little bit more broad-based.

4:49That's so interesting. I always think we have to remember all of those dynamics. Anytime we talk about the benchmarking and managers, I always think of Mike Green because he has so many opinions about passive investing. But when you're saying that, it also reminds me, and I think you probably touched on this in one of your newsletters, We're also coming up to the end of the quarter, the end of the half. It's not just the end of the week. So there are a lot of people who weren't in some of these tech names who are playing catch up. People who hate the rally, think there's too much froth around AI.

5:22But, you know, you keep you look at some of these names and if you sold out earlier, you're you're behind. Right. Like, how is that whole dynamic play into it? Yeah, I mean, I think if you're, let's just say, a growth manager at XYZ Mutual Fund, and you have to own Microsoft. Like, if Microsoft is 7 % of your benchmark, like, if it's 5 % of your fund, you're behind, right? So it turns into this reflexive, self-reinforcing process where you get that concentrated performance in the index, and people have to chase it higher or else they're just going to be behind. That never ends well, though, does it?

6:08Because that's when we start to get into, especially if you get retail sucked into that. And I think they know that. I think that's why there's so much skepticism because they're like, hang on, I don't want to be the one buying at the top here. I mean, does it feel, there's two questions. Are we, I was going to ask you for overextended on tech, but that's not really, that doesn't make any sense to ask that. What you want to know is if you own it, should you sell it? Like if you have shares in this and do you certainly not buy it here probably, you know? Well, I don't think you should sell it here, but let's think about this for a minute.

6:43So the biggest stock in terms of market cap in 1980 was IBM. And as of 1987, IBM was no longer the biggest stock in terms of market cap. So I think Apple is kind of in the same place that IBM was in 1980. And if you were to ask me, like, you know, what are going to be the biggest stocks in 2030, I would say probably not Apple, probably not Microsoft. It'll probably be something else. I mean, it will decline in terms of relative performance over time. And the thing with Apple is, you know, I remember it wasn't that long ago. It was about 10 years ago when Apple was a pretty cheap stock. It was trading at like 10 or 12 times.

7:27Yes, it was. A lot of this, you know, increase in market cap has been valuation expansion. So I haven't looked at it in a while. The last time I looked at it, it was trading at like 35 times earnings. But I don't see where the growth is coming from. Like everybody who's going to own an iPhone already owns an iPhone. Maybe it's from the headsets. I don't know. But I don't see where the growth comes from. So I don't really want to pay 35 times earnings for a$3 trillion company. Like it just, you know, it just kind of doesn't make any sense. Yeah. And we were talking to Brent Donnelly yesterday, who was bringing up the same point about NVIDIA, which he said he kind of hates.

8:07But it's not because of anything the company actually does. It's just that when you look at the math, in order to justify the kind of valuation, it just gets impossible, at least from his perspective. So it's tricky, but a lot of people felt like that a hundred bucks ago. That's the problem, right? And yet here we are. So it's tough. What about the kind of reverse is happening with energy? So this is a conversation that comes up all the time, right? Is tech overextended? Are we too bearish on energy? Because there are two Two of them are diametrically opposed right now. How are you feeling about the energy complex from an equity point of view?

8:48You know, I got, I'm the sentiment guy. And I think we got a big sentiment data point with energy. Pierre Anderrand, who I don't really know, his fund was down 50%. His energy fund was down 50%. So when you start seeing, you know, big names in a space being down 50%, like being long oil, like, you know, we're pretty close to the lows. So one of the things that I've been thinking about recently, you know, we kind of have this quant factor regime where tech rallies every day and energy sells off every day. And that outperformance just gets bigger and bigger. What you really need is some kind of exogenous event where you have a piece of data or something happens that catches the quants off sides, and then you have a big reversal.

9:44So we have payrolls coming up next Friday. And the last I looked, expectations were for 200 ,000 jobs, which is pretty low. Well, I can tell you that if we miss expectations for the first time in 15 months, you're going to see a big reversal in these factors. You'll probably see tech down quite a bit, but that's just speculation. Why would that happen, though? Why would you have that reaction? um it's kind of like the cpi number a couple of months ago where two-year notes rallied like 60 basis points in two days caught everybody off sides like it's kind of hard to explain why it happens but why energy because i'm thinking like if you try to think we'll probably get questions about this if we miss and the economy looks weak doesn't that back the fed off but i don't which i which makes sense for some things.

10:42But if you have a less aggressive Fed, I would think - From a fundamental standpoint, it doesn't make any sense. But what it forces people to do is close out their positions and go there. Are we getting questions? Are people questioning me on this? No, no. I'm just trying to - No, I'm trying to just make sense of it myself. Because this is what sometimes gets confusing because we try to rationally think this out. So the rational, if I saw that headline, I think, oh, maybe people think the Fed won't have to hike rates or hike them consecutively because Jay Powell's been, you know, flapping around as hawkish as he can this week at that central bank forum saying maybe two consecutive now hikes.

11:24We're not done, you know. So if we have a bad payroll number, then maybe people think, well, maybe they don't have to be so hawkish, which I would think would be OK for tech and equities. But I don't know why oil rallies on that. So it would cause rates to go down significantly. So 10-year rates would go down like 20 basis points. The dollar would weaken, which would be bullish for commodities. 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?

12:02With 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? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments. S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere.

12:36Experience the fast, accessible futures trading you've been waiting for with Plus 500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus.

13:01Ah, okay. Thank you. That's the bit we need. So this is why currencies matter so much. And we don't always talk about them, because if you're just looking at the interest rate function, that's fine. You can make that make sense because that would be the demand side of the demand for oil. But oil is already low, already thinks demand stinks. So then you get the currency side, which is new and we'd move it, which is it's always a sort of multidimensional puzzle, which is why when we have folks like you on Real Vision, we're diving in two currencies, two commodities and trying to look at this on a three dimensional level.

13:38So thank you for that, Jared. That makes a lot of sense. And it's what people don't expect to your point. Right. Which is why I know you're paying attention to sentiment. It's a thing that's new that wasn't sort of on the radar or in line with expectations. Yeah, I mean, I think that after 14 beats in payrolls in a row, I think people probably expect another beat in payrolls. So we've had two claims numbers this month that were worse, 260, 270, something like that. And that's why I think the estimates are low. So I don't think payrolls need to miss by a lot. I think even if they come in like 180, 190, it's gonna set off the reversal.

14:26Yeah, that's interesting. It would also be really out of step with everything else we're hearing about the economy, right? Because we've been hearing that not only are things resilient is the word everyone's using, but a couple of people pointed out this week, it looks like things are re-accelerating in some places, including housing. Yeah. I mean, housing is kind of its own story. Basically, what happened was rates went up and you have a lot of people who have two and a half, three, three and a half percent mortgages. And they're like, I can't move because if I were to buy a new house, I would have a six and a half percent mortgage and I wouldn't be able to afford the payment.

15:08So nobody's moving and there's no inventory. I think we have the lowest inventory of houses for sale in a really long time, like 10 or 20 years. So prices keep going up. I mean, you know, even in my neighborhood in like my neighborhood currently, which is probably about two or 300 houses, there's not one house for sale. There's been two transactions in the last couple of months and they sold in 24 hours. Well, you do live in a hot area, but I get your point. There's no movement, which there always is, especially in the States. I think that's a, it's not the case everywhere in the world, but certainly in the States, people move and pick up for jobs.

15:52And there's a lot of, there traditionally has been a lot of labor mobility and just general mobility. People don't think anything of moving across the country, which is not always the case everywhere. So that would be a weaker or slightly weaker jobs number would kind of be out of step with a lot of other things that we're hearing. When we're talking about energy, so I was asking whether tech feels like it's kind of getting toppy or overextended. Should people sell? Sort of same question for energy. You mentioned that Pierre Anderon's fund is down. He's somebody who's been on Real Vision. We'll have to, if he'll talk right now, it's hard to talk when there's pain, but maybe we'll try to get him back on.

16:34Is it time to start nibbling at energy? Are you looking at it? Or do you need to see more confirmation? Do you still see downside? No, I don't. You know, I think that now is a good time to be accumulating a position. I think the downside is very limited. You know, one big reason is because there's always that persistent threat that the government's going to start re-adding to the SPR, which they said is around this level, around$70 in oil. So we seem to have found a floor in the price of oil. So you really have like a great low risk setup to just, you know, sort of nibble at a position, just accumulate it over time.

17:15And yeah, hopefully it works. I mentioned J-PAL before and that, you know, central bankers, all of the central bankers were on stage this week talking. We've been talking about it all week because there was a lot of headlines that came out from it. But do you sort of buy what Jay Powell's saying, that they're going to have to be aggressive? Do you think he's just jawboning and that they're really going to just look at the data that comes in? Does it worry you? How are you thinking about that? I have a lot of thoughts about this. Share them. Share them, Jared. So I think that the Fed has lost sight of its inflation mandate.

17:54And what I mean by that is, you know, the last CPI reading was four. But if you look at some of the private real-time measures, we're into the twos. So inflation is really into, you know, it's 2.4%. If you look at Truflation, which I trust. And if you think about this, they're threatening to take Fed funds up to 5.75 or 6%. If you have 2 % inflation and 6 % Fed funds, you have 4 % positive real rates, which is overly restrictive. It's massively restrictive. 4 % positive real rates is nuts. It's just as nuts as the negative real rates that we had throughout the 2010s. When you have interest rates that are out of equilibrium, what happens is it causes misallocations of capital.

18:49So in the 2010s, we had a massive misallocation of capital into housing, into tech, into crypto, stuff like that. And now we're having a misallocation of capital into CDs, into money market funds, into T-bills. That's the consequence of this monetary policy. And I think what they've done is they're focusing on the labor market to the exclusion of everything else. They think that they can't stop inflation until the labor market weakens. My guess is you could get inflation down to 2%. And if unemployment is still 3.7, they're still going to be raising rates. I don't even think they care about inflation anymore.

19:31I literally just think they're trying to get people to lose jobs. Which would be bizarre since that's kind of their other mandate is full employment, price stability and full employment. We know that there's no absolute on what that level is. So do you think they're looking at the wrong, they're backward looking with inflation? They're looking at the wrong gauges. Why do they think inflation? Because he's been very clear inflation is still running too hot. It's really not though. That's the thing. It's weird. Like the CPI is lagging, right? And they know this. Like the next reading in CPI is gonna be in the threes.

20:09It's gonna be in the mid to low threes. We're getting pretty close to the target. They're making the same error that they did four or five years ago when inflation was below the target, CPI was at 1.7%, and they said, we're gonna keep doing quantitative easing until we get it to 2%. They have this obsessive focus on the target, the 2 % target, and it's okay to be close to the target, right? But for some reason, they're just super focused on it. Yeah. I like the way you talked about the misallocation of capital. And when that happens, there's usually bad consequences from that. So we saw what happened when everyone was piling into casino-like activity.

20:56And then when that reverses, whether it's meme stocks or crypto, wherever you were seeing it, no judgment on those underlying, by the way. We're just talking about the crazy money. What happens when there's a misallocation into money markets? What's the negative consequence of that? Well, I mean, the consequences is that you have 3 ,000 bank CEOs like every day that are watching their net interest margin on a daily basis. You know what I mean? Like, and it gets worse and worse and worse. So that's really - It hurts the banking system. It's causing that bank wall that Bianco and others talk about.

21:37And I think the last time I was on, I talked about this concept of the pig passing through the Python. You remember that? You know, like. Yes, yes, I do. So, but. Your lovely visual. I would be surprised. As we all maybe eat lunch. I would be surprised if they do get Fed funds up two more times. I'd be surprised if they get two more rate hikes. But if they do, 100%, you're going to see more bank failures, without a doubt. Absolutely without a doubt. No doubt in my mind. And the Fed's taken this stance, like, I'm paraphrasing, like, it's not really our problem. It's like bank mismanagement, interest rate mismanagement.

22:16It's not really our problem, which I find interesting. But as long as they're not systemic, I guess you'll just see consolidation. Yeah, it's forcing consolidation is what it's doing. 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.

22:40Jared has a skeptical look on his face because it's the famous last word of any central banker is that's not for me to worry about before all hell breaks loose. And so on that point, JP Morgan today reversing their bullish call on treasuries. We have had a couple of things happening. We've had everyone pushing out their recession forecast and then people capitulating basically on their bond bull calls, you know, just like, or, or, or just not sure there's just Now there's uncertainty about what's happening. We had a question. Let me see if I can find it. Did you say that JP Morgan? Pivots. JP ditched its bullish view on treasuries.

23:17They're now unwinding their long position in five-year notes, saying they can no longer justify their long duration view. That's awesome. I love to hear that. Why? I love to hear that. Oh, I'm bullish on bonds. Absolutely. Yeah. Why? Because I think the data, I mean, look at the data we had today. I'm going to look over my screen. I'm going to pull it up. So Chicago PMI missed massively again for the second month in a row. But what about people who say that's the good side of the economy? That is in recession, but the rest of the economy is not. And we're two-thirds services. Yeah, but even the services PMI has come.

23:57I don't remember the last reading, but I think the services PMI is below 50 now. And the PCE today was out as well, and that was three-tenths down from four-tenths in the previous month. The yearly change, it's edging down. It's not falling like a rock, but it is moving in that direction slowly. Peter asking, any way you would play the inverted curve two-year, 10-year? Yeah, there's a bunch of ways to do it. And the cleanest and simplest way to do it is with Eyeball, which I own. I own Eyeball. It's basically a curve steepening ETF. Nancy Davis, quadratic, right? Yeah, we've had, for those of you who are members, we had Nancy on, which was the timing, I'm going to say, was more luck because we admire Nancy's work, more luck than anything else.

24:54But it literally was right before the bond volatility blow up. But in that, she just lays out her thinking and importantly, how you can use derivatives as a tool to handle this kind of stuff. So you can go track that down on the website for those of you who have not had a chance to look at that. I can't remember, it was a couple of months ago, but if you search up her name on the website, it'll come up as well as our fabulous My Life in Four Trades, which if you haven't watched, you should. Nancy is amazing and she has a great story. Anyway, so iVol is one way to play it, Jared. Yeah, and if you want to do it with lots and lots of leverage, you can do it in futures.

25:35You can do it with two-year-note futures and 10-year-note futures. So you're basically buying twos and selling tens, and you have to get the ratio right. I don't know the ratio off the top of my head, but you have to duration weight it so you don't have any net duration on the trade. How else can you do it? But there used to be a couple of Barclays used to have a couple of ETNs for the curve, but they were 10 year notes. And I think they rolled off and I don't think they exist anymore. But really, the cleanest way to do it is with eyeball. Yeah, you can go to quadratic and look at that their website as well to understand a little bit more on how that works.

26:18and by the way, and if anyone has any daughters or nieces or granddaughters who are thinking about a career in finance, you have to have them listen to that podcast because she's a real sort of pioneer. I mean, there's some funny stories about her, her voyage into the world of derivatives, which is not, she spoke at my conference. Oh, she did? Yeah. Yeah. Yeah. She's, she's fantastic, but really accessible too, because derivatives can sort of be intimidating for people. And I think Nancy really sort of talks about it in a way that you can understand. This is a really interesting question. Mike, I'm not, maybe Jared understands it a little bit more than me.

26:57I'm not sure I understand this question, but Mike asking, does Jared think Apple might be the new TLT and NVIDIA might be the next Apple?