Will Powell Be the Grinch Who Stalled the Rally?

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0:54Will Powell be the Grinch that stalled the rally? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today, not one, but two, Tony Greer, founder of TG Macro and editor of The Morning navigator and Jared Dillian, editor of the Daily Dirt Knob newsletter. Hey, guys. So fun to have you both on. Maggie, what's happening? What's up? How you doing, JD? I got my JD bobblehead doll here. Looking good. Yeah, right? Looking good. I love it. I tap his head whenever I make money. He's nodding in agreement. We thought it would be really fun to have you both on today, in all seriousness, because we're kind of at this interesting juncture.

1:30Markets had that big move in November turning into December. I've talked about it with both of you on air. And then we've kind of been in this holding pattern for the better part of the last week is everyone was waiting for the inflation data, but really more importantly for the Fed to see what they have to say. I just want to start with both of you. What's top of mind? And we're really running into the final stretch of the year as well. So what's top of mind for you both. And Tony, let's start with you. Okay. Today is kind of like, sorry, a great example of kind of the way that I'm thinking. The CPI data came out, it was pretty benign, kind of a basis point, either way of expectations.

2:18And that is a trigger for tech stocks to rally to me under these kind of conditions. And so today, this is kind of what's top of mind is seeing, making sure inflation is still in check, making sure there's no dislocations in the bond market. I mean, we're kind of past that already. But I think the more certainty that the stock market can have in that, the better it's going to perform. And like, you know, you started off saying, is Powell going to be the Grinch? Man, I mean, he doesn't tend to top rallies over very often. So I'm going to take the other side and think that he's going to deliver the Santa rally.

2:53That's my opinion. That's what I'm looking for, Maggie. Awesome. Jerry, what about you? How are you feeling about the market and kind of how it's positioned going into this Fed meeting? Well, I think, you know, CPI today was kind of interesting. It's kind of bottoming out. I mean, if you look at the true inflation data, it's also at 3.1%. So I don't expect that we're going to get any lower inflation prints. The question is, you know, we've heard a lot of chatter out of Fed officials about rate cuts. And I'm getting a lot of pushback from people that, you know, people are saying, well, the Fed is not going to cut rates unless there's an accident or a crash or a meaningful rollover in the economy.

3:32And I disagree. I think the Fed's going to cut 100 basis points regardless, because they've over-tightened. They've over-tightened, and real interest rates are over 3%. And they're going to take back some of that tightening. So that's the base case. That's kind of where two-year notes are priced right now. We're pricing in about 125 basis points of cuts. So whether we get more cuts is really a function of what happens going forward. I think that the stock market is peaking sometime in the next week or two. I think stocks are going to peak. I'm not really sure what's going to happen, but I'm the sentiment guy and seeing some, not not Tony, not Tony, but I'm seeing some victory laps on stocks.

4:20We've seen the AAII data blow out to extreme levels. People are saying it's safe to go back in the pool. So, you know, I think we're I think we're close to a top. And the other thing is the other thing I get pushed back on is people say, well, how can we have a meaningful sell off in stocks in December, like towards the end of the year? I'm like, I don't know. It can happen. Like there's, you know, there's precedent for everything. So I think it's, I think it's possible. So the point is I'm not waiting until the new year to get short. Okay. Um, it's funny if I correct Tony last time we talked, you, we, you, we definitely talked about you nailing the rally in November.

5:02I feel like you got a little bit more balanced and you were a little bit more cautious. A lot of people were talking about a little bit of like consolidation or congestion in the beginning of December, and then just waiting to see what would happen from there. So yeah, I don't know. Talk to me a little bit about this, the idea that seasonally, I feel like even though everyone's expecting a Santa Claus rally and everybody says this is seasonally strong time of the year, and to Jared, your point, they push back on you. I also feel like everybody hates this stock rally, too. Everybody thinks it's overdone.

5:40Everybody thinks that they've been worried about it the whole way up, I feel like. I don't know. What are you hearing anecdotally from people? I feel I kind of agree with you, Maggie, where I sense things where I feel like Fintwit is more balanced, where I do agree with Jared. I mean, the AAII bull index is right to the high. CTA positioning is definitely long. I try not to get too wrapped up in that because it could always be one of those situations where people are long and right for a period of time. So I'm definitely taking the sort of, I did sort of balance my bullish view off of the lows.

6:27We had 100 and change point S &P runs. So I had to kind of temper that. And I would say that we may be due for a waterfall, and I'm talking about a shallow one. And I kind of feel like we're coming out of a spin cycle where the market couldn't get a handle on which way it was going to trend, which way it was going to break up or break down. And now we've got some technical tailwinds that I think we're at a resistance level in the S &P. But I feel like if we can clear another 30 or 40 points, that there could be a breakout to trade. So I'm looking at it a little bit differently than Jared. I just don't think that while I do agree that there may be a 50-point, 100-point S &P pullback or something like that, I don't think that those are going to be where the real money is for the next several months.

7:14I think that's going to be shallow. You might be able to catch it if you're really good and cover on the lows. But I think that there are people in line to get into this market because they feel like they missed that pivot into from tightening to easing because it wasn't really clear there. There were some mixed signals from the Fed and mixed signals in interest rate projections. The one thing that's been kind of a steady indicator has been the curve for me. In 2s, 10s, as long as it's kind of stable right now and not jarring out of the inflation data, I can live with any kind of a pullback that I can trade higher and still look for higher prices in stocks.

7:50I wonder if you so one of the things that's been so critical for stocks is treasuries, right? Everything's going to kind of depend has been depending on the direction of treasury yields. And I think this is why people are really anticipating this Fed meeting tomorrow. Because not only are we going to get a presser, but we get the dot plot and the expectations, the economic forecasts and all of that. We had Jim Bianco on yesterday and he said something really interesting and I think a little bit contrarian. contrarian, and he thinks that inflation has bottomed and is not shooting higher, but will be persistently a problem and sticky.

8:29And he thinks treasury yields are headed higher. 5.5 is where he thinks they could hit somewhere in 2024. That's pretty aggressive. And it's not something I've heard a lot of. How important is the direction of treasuries here? And does it feel like we've spent this whole year running from one side of the ship to the other, especially in the wake of those Fed meetings. Does it feel like those kind of big swings in bonds are still what we're in for, Jared? Yeah. I mean, first, let me point out that the yield curve has now been inverted the longest in history. This is the longest that the yield curve has ever been inverted.

9:04And in order for my thesis to play out, you need the yield curve to bull steep it very rapidly. You need short-term rates to come down. The pattern for the last few Fed meetings is that you get a pretty dovish directive, and then Powell just starts crapping all over the press conference. Throwing bombs. Throwing bombs got out hawkish, and he's not Arthur Burns. He is Paul Voker, right? Like that's the, that's been the script. So I, I mean, I think that could happen tomorrow. Like, honestly, you know, I think where, I think yields are kind of in the middle of the range. I mean, I'm not going to say that 10 years aren't going to five and a half next year, but you know, Jim Bianco is, you know, he's been bearish on bonds at least for the last year plus.

9:58So, I mean, he, it's like, it's his hobby horse. So, but in order for rates to go meaningfully lower, we need some progress on the labor market. Like we need weak payroll prints. And the last one wasn't strong, but it was strong enough that, you know, yields went up about 10, 12 basis points across the curve. So really every claims number is important. Every payroll number is important. The manufacturing surveys don't really mean much at this point. We know that we're in a manufacturing recession. The one thing I will say, and I know Tony's going to pipe in on this, but the direction of the housing market is going to have a lot of influence on the economy here.

10:43And I think the housing market is slowing meaningfully. You're starting to see prices flatline. You're starting to see offers come down. Here in Myrtle Beach, which is the number one highest growth area in the country, you You have builders like Lenar and Dr. Horton that are offering huge incentives to move inventory, and the inventory isn't really moving. So things are definitely slowing down. And I don't see how you could be bullish on home builders with the NEHB survey at 34. You know, when the home builders themselves are telling you that business is not good. Hey, everyone. We're going to take a quick break right now to hear a word from our partners.

11:26We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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12:35David was asking you both to weigh in on home builders because he believes that you are a bull, Tony. Do you have a different view than Jared when it comes to home builders? I have a—we have completely opposite views. That's what I mean. Yeah, we have totally opposite views. And we sort of timed it differently, though, right, JD? Like, I jumped in on the long side before you got bearish. Like I bought them 20 % ago, right? I'm 20 % in the money on that trade. So just want to point out, this is so important because timeframe means everything, right? Like this is often where we say, oh, you have completely polar views.

13:08Well, it depends if those timeframes line up. But if you were already riding a 20 % gain as a bull, then - So, you know, Maggie, the way that I approach this is very sensibly. You know, I don't go and look to lock horns with Jared and need to beat my chest and, you know, get up here and shout that I won or anything like that. Like when I'm in a trade and I'm looking for things that tell me to exit, I have my ears wide open. When Jared says something like, I think these are short, then I'm sitting up in my chair, like wondering if I have to hit the ejector seat. So that's very helpful to me to have him come along with me 18%, 20 % in the money in a position ready to sell half on anything that scares me.

13:54And he shows up and says, I think these things are going to run out of room. So I hear him on the NAHB that that's interesting. And I think what that is is the market reacting to seeing this violent move in interest rates. So we saw the violent move higher. And we haven't I don't think that home buyers have had the chance to adjust to the dip in rates much yet. You know, I mean, this has been fairly recent. So I'm going to see if, you know, rates kind of sort of level off here and we get more activity back in that sector. And maybe it's just a sector that saw a ghost and finally realizes that rates are going to pivot.

14:30And that's why, by the way, the home construction ETF just broke out to a new 52 week high. So I've got the technical tailwinds and I've got sentiment and positioning maybe working against me. So, you know, my eyes, my ears are wide open here, but I haven't made a trade yet to lighten up or anything like that. I'm just paying close attention when smart guys get bearish. You know, that's the way I'm looking at it. And Jared, are you actually shorting the home builders or you just have it on your kind of watch list because you're getting concerned about them? It's on my radar and it's very close on my radar.

15:02Let's put it that way. So the one thing I'll point out is that Toll Brothers, I think it was yesterday, reported like blowout earnings, like, you know, which is, you know, to be contrarian. I mean, it's usually it's usually the types of stuff that you see around the highs. So I'm curious when you it's because you watch the housing market and either of you can weigh in on this if you want. I'm not sure who's but do we've had it's been so discussed about the fact that the Fed may be easing and the bond market moves. rapidly these days, right? So people saw that big leg down in November. If you're in the market to buy a home and you're hearing interest rates are going even lower, does that sort of ice things for a while, Jared, while people say, well, I have the time to wait three months, maybe three months from now, they're going to be even lower.

15:53So I'm going to hold out. How do rate expectations factor into that activity? Well, you know, rates came down 70, 80 basis points from the highs, 10-year rates, mortgage rates. And I mean, I think that was welcome, but I haven't seen a noticeable pickup in activity since rates came down, which means a couple of things. It means one, maybe people think rates are coming down more and they're waiting, or two, they haven't come down meaningfully enough to really make a difference in a monthly payment and they need rates to come down much more. So either it hasn't been enough or people are just waiting.

16:34The other thing is, is that, you know, in home buying world, like this is a traditionally slow time of the year, like, you know, November, December are very slow around here. Things will pick up again in January and things will really pick up in March. So we kind of don't have enough information yet to like just really make a call and say, the housing market is going down or collapsing. Yeah. But worth pointing out that it's on both of your watch lists for different reasons. Related to bonds, question from Jens. VIX at its lowest for over one year, bond volatility high, which will mean reversed first?

17:17I would say the VIX. I would say the VIX. um if you know if if if we top out next week or the week after like the technicals are telling me it's going to happen um you'll see you'll see a pickup in the vix to 16 or 18 or 20 or something like that um i think somebody sent me an email today i actually wasn't in front of the screens after like 12 o 'clock today but the vix is close to the 11 handle which is a five-year low like That's significant. Yeah. Can we watch the VIX like we used to, Tony? I think there's some question about that. Yeah. It's still a useful indicator for sure. It's very useful to see it respond to different things in the market.

18:02Definitely interesting watching it respond to the bond market in the curve. I would say, though, that literally after the last two CPI data that came out and then watching the commodity market spill, I feel like the chances of a bond market dislocation lower in this bear market, which would be a spike in volatility, are like zero now. So I feel like that it's definitely the VIX that will pick its head up first. And I don't think that the bond market is going to be scared of an inflation number. Everything is going to be taken with a grain of salt now because we saw the turn. Yeah. Question from Ralph.

18:40So you just mentioned commodities, which we need to talk about. But question from Ralph. For Tony, how low can that gas go? Don't ask me, man. You know, natural gas is its own beast. You know, it's going to settle back into a range somewhere between two and a half and last sale after breaking down below three. And, you know, we just got we got hit with literally a string of above normal temperatures across the whole blanketing the whole entire country. So that's like if there's enough natural gas supply out there, the price is just going to keep grinding lower. until something changes. And I don't have no skin in the game whatsoever.

19:18I'm watching crude oil much closer. That's a really interesting sort of forbidden fruit trade, where the security looks like it's going to pull back to the previous range, except it keeps going. And so there's a little bit of risk in crude oil there. And I'm kind of watching out for that, more so than following NatGas. I just feel like NatGas doesn't have, I don't think that it has tremendous downside from here. You wouldn't find me piling into a short trade below$3. So at some point, it'll level off and just be boring again, I reckon. Yeah. Does it seem like commodities are basing at all here, or do they all feel vulnerable to the decline continuing?

20:00Tony? Oh, I'm sorry. I was making sure that was for me. Put it this way. This will be the second or third week in a row of pretty steep commodity declines. I think oil is potential to be off like six weeks in a row now. So I don't really like to jump in front of these freight trains. You know, I'm still we just broke through 70 like, you know, shit through a goose. And we got to test the bottom of the range now, which is probably in the mid to low 60s. And, you know, that's a really tempting buy the first time down. And if you get that wrong, you lose ten dollars, you know, so it's kind of gets a little bit slippery down there at the bottom of the range because you'll have CTAs piling in on the short side.

20:38and they will take the piss out of the price. That's for sure. So I want to make sure that I'm not wrong-footed in crude oil. I have no risk on in this sector at all, but I wake up with my eyes open every day. I don't know where you get these sayings, Tony, but they're always new, too. You have an endless supply. I read a lot.

21:00I love it. What about, J.D.? What do you think of commodities? Oil.

21:08I mean, it's in a downtrend. You know what I mean? Like, it's just – I mean, it sounds like a dumb thing to say, and it's like really simplistic, but it's in a downtrend. And my thesis on oil back up around 80 or 90 was that I'm sort of the recession guy, and I thought we would get a recession and oil prices would go down. Well, the interesting thing is that the economy is still strong and oil prices went down anyway, which means this is really more of a supply story than a demand story. And let me frame that for you. Like if this turns into a demand destruction event too for energy, like I mean I think the bottom is potentially much lower than we thought.

21:50I mean I think most people thought the bottom in oil could be high 50s, low 60s, something like that. But, you know, if we were in a recession tomorrow, I mean, it could be, you know, 30, 40. I mean, it could, you know, use your imagination. I don't think there's enough. I don't think there's a shortage of inventory. And I mean, I don't think there's enough inventory around to let it get it that low. But yeah, I do think it's vulnerable as well. 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.

22:24do you guys think there's a recession coming i i think there is a mild recession coming i think there is a mild recession coming that's you know a lot of people when they think of a recession they think of 2008 because that's like the last real recession that we had so they think of 10 unemployment and bank failures and job losses armageddon like yeah like it's Like, all recessions are, and if you remember back in 2021, we had two quarters of negative GDP, which was a technical recession. And the NBER said, no, it's not really a recession. We're going to change the rules and not call this a recession.

23:03Remember that? We actually were in recession for a short period of time. Exactly. And, J.D., remember, that's when we had the negative sentiment bubble in the stock market, right? and the stock market was down around 3 ,600 or 3 ,700. And we had that plunge to 3 ,500 and back in the same day. And that was the end of the sell-off. And I think you were bullish down there because the negative sentiment bubble could not have been bigger. You know, like, no, it was. It was one of the biggest bearish sentiment bubbles we ever saw. So it was just, you know, it was amazing to see it come out of that. And, well, we'll see what happens now.

23:37So. So G Blackburn asking, T-bills still attractive? Question mark. Why not stay liquid and short? Either of you. T-bills still attractive. Why not stay liquid? Short stocks? Is that what he's talking about? Yes, I assume. I mean, T-bills are more attractive than ever, right? If you can get one-year bills at wherever they are, like 5.1 % or something like that, like rates are, Fed funds are coming down. Rates are coming down. If you can lock in one-year money at 5%, you should absolutely do that right now. For sure. You know, like even even twos at like 450 or 460 or something like that. Like that makes sense.

24:19So it's going to take a while. What is it going to take to move people off the sort of out of that market, I guess, for rates to come down? Right. I mean, if they start easing, is that what's going to finally move? And presumably that benefits stocks. No, because I was just going to say or or or stocks to start performing and igniting animal spirits. And then you'll start seeing some of that money that is actually, I believe, is on the sidelines. I mean, everybody that I know has stuffed a little money in the two-year note at 5 % or a lot of it. And if stocks start soaring and the NASDAQ is up 25 % on the year and is up 5%, 6 % in the next quarter, man, I mean, that'll be way more attractive than 5 % over two years or something like that.

25:03So that's something that I'm looking forward to happen where the stock market can pick up a little bit of tailwind into next year. When we're talking about the stock market, Tony, Lena asking, what about the tech sector, which keeps pushing higher even as it looks like it's topping? When we're talking stocks, do we expect more of a broad-based advance like we saw in the beginning of November, or does this narrow out again? And is it really that sort of MAG7 pushing everything again? It's probably MAG7 pushing everything again, Maggie. I feel like if rates are going to be at least range bound to lower, or at least that we've seen the high in yields, and they're not going to go higher in the next six months, three to six months, or even be projected to be raised in God knows how long.

25:51That's just the environment that sets up for them to perform well. Whether we like it or not, those stocks do very well in low, steady interest rate environments. And as much as I can hate on a couple of them, I just can't come up with a thesis to be short them. or certainly put money the opposite direction against those stocks if we're not going to be raising rates. I mean, that was the thing that was so obvious about last year when the Nasdaq got killed, right? Inflation reared its head, rates went higher, and money flowed into hard assets, and it came out of tech. But if that dynamic is not going to be reconstructed, it doesn't have to come out of tech.