MAGGIE LAKE: Hi, everyone, welcome to the Real Vision Daily Briefing. I'm Maggie Lake and here with me today is Tony Greer, editor of The Morning Navigator newsletter. Hi, Tony.
TONY GREER: How are you today?
MAGGIE LAKE: Doing okay. We had an interesting day as we watched a decline in US housing starts, a softness there. Gas prices finally cooling off at the pump. And we had US stocks take off putting in a strong rally. I don't have the closing numbers in front of me. But we were up like 2.5% on the Dow, 3% NASDAQ, 3.5% on the Russell 5000. As you look across this market action, what are you thinking about? How do you feel about it right now?
TONY GREER: It's pretty fascinating to me, Maggie. I think the market is finally reacting to last week's data. We got CPI and PPI data that was worse than expected. It looked to me like market-based inflation gauges like breakevens and the curve and maybe even just flat price yields have gotten way ahead of themselves pricing in a near depression, if not actual recession. And when you get that data that comes out whether inflation is still worse than expected, I think that caught the market off guard a little bit. And for me, this bounce in for example, five-year breakevens is something that is letting the market price in a little bit more risk right now.
Now, when you look across positioning, like there was a great Goldman Sachs prime broker chart that was floating around the internet that showed positioning across futures CTAs and risk parity was down to almost nothing. So, everybody has blown their brains out on the selloff and is probably gathering themselves and dusting themselves off and about to get on the exercise bike and figure out how they're going to get back in the game for the second half of the year.
And when I see today, Bitcoin and Ethereum leading the way in the risk complex, taking out the 50-day moving averages, those were the first things to take them out. And then today, we see the follow through in the equity market where check out this list, Maggie, the S&P semiconductors, QQQs, XLK, the big tech ETF, internet stocks, the worst performing sector on the planet, transports, the Russell 2000, homebuilders and retail, all notched closes back up above the 50-day moving average for the first time in months since the spill off started, excuse me, getting a little bit excited for the recovery rally.
So, as I see it, this is the beginning of, whoa, portfolio managers may have blown their brains out, gotten a little bit short into the hole here. They come out of this position squaring whirlwind with a little bit of career risk, where they're now down on the year, they're facing redemptions, they've got to figure out how to make the money back like I was been discussing on Twitter with my man, Kuppy. And now game theory comes into play, Maggie, because after they dust themselves off, and while they're on the exercise bike trying to figure out where they're going to get back in this market, they're saying, okay, let's start with this. What's up on the year still?
And that's a very simple answer. I don't even have to look anymore. There are only four or five sectors left standing on the year after that second Godzilla selloff in two years that we just saw. They're all natural resources, energy, metals and mining and that's it, and that's it, as in there are no other sectors left in the green on the year at all. If you're long Bitcoin, it's been halved. If you're long bonds, they're off 20%. Same with the S&P and so now, I think it's time for a retracement rally, Maggie, that's quite frankly what the screens are telling me.
MAGGIE LAKE: You know what, that's so interesting, Tony, and this is why I love to ask you that broad question because you have your trader hat on and you're not looking-- and we have some charts, we'll get to them in a second. But you're really now talking about the sort of animal behaviors of trading. When you're talking about the psychology that sets in, and it's important, it doesn't always rule the roost. But if we just break down what you said, why is that second half of the year so important?
And I love the fact that you say they're back on the exercise bike, maybe they're back on the Pelotons that are also worth like a fraction of what they were worth and the stock, which was one of the ones that's really beat up. But why is it so important when you talk about them now chasing performance into yearend?
TONY GREER: Well, Maggie, every fund manager out there, including several that I widely respect, massively respect and speak to on a regular basis, they're down on the year, and they're struggling with what to do next. We're at a very clear, pivotal moment on the year in my opinion, Maggie. We had this big market crash. We had the Godzilla TICK index print season where we had nine out of 10 days, we were registering these massive downside TICK index extremes.
We had the VIX living in the mid-30s, around 30 for several weeks on end, and everybody had to get ahead of this adjustment by the Federal Reserve. They're going to be more hawkish, they're going to have to fight inflation, they're putting their flag in the sand. And they seems like they did it by engineering a recession in the markets. And like we said, a couple of-- I guess it was over the last weekend, we just got that recession wave through the media.
And I think people came in on Monday morning, and maybe realize that they're a little bit late on that call, because markets are no longer following through on the downside. And now, people are back to looking to hedge inflation on the dip because all the hedges are 30% cheaper. And they realize that the only games in town that are working in terms of inflation hedges are carbon-based inflation hedges, like Jeff Curry said on our Grant Williams podcast maybe two weeks ago. The only inflation hedges that are working are the carbon-based inflation hedges, fossil fuels and food.
Gold not working. Bitcoin not working. Silver not working. So, I think now that we're going to shift back to demand for hard assets, again, a little bit more. There may even be alongside that a retracement rally just based on market dynamics and technology because they've all literally been sold so hard. So, I'm looking for definitely a broadly based stock recovery after that disastrous two months we just live through, and then we're going to see where it shakes out and take a fresh look.
But I think the risk now is, the risk now is that as portfolio managers game what sectors they can jump in on for the ride, they look around and they've got all these choices now. They've got all the technology stuff trying to attack its first moving average. And they've got natural resources from energy, metals and mining to even certain food ETFs and food processing stocks and fertilizer stocks, all of it has pulled back into massive 200 DMA support, massive trend support.
And if you ask me, if I had to make those decisions myself, those are the trades that I would take the market up on, especially when the market is offering a $3 backwardation carry trade in the oil markets staring me in the face. So, if I want to start off with something like a nice ground green dot ski slope, something easy, I can get into oil and say, okay, the worst-case scenario is I can make $3 a month rolling this thing out on the calendar. And if I can't figure out how to position myself into the flat price rally, then I really got a problem with that $3 to $6 carry handicap. So, the way I'm looking at it, Maggie, the tightness, the backwardation offers a lot of opportunity to investors that are starting off with a bit of a cleared-out pad.
MAGGIE LAKE: Yeah, we have a chart of WTI, West Texas Intermediate, as they call it, that you put up and you'd see it's been all over the place when you see this, what's been happening lately, which is everyone having their head spin. So, when you say you like that, first of all, you're getting that $3 because of the way the futures contract rollover, you're getting a premium because of that?
TONY GREER: Yep, that's the backwardated shape of the curve again, Maggie, where the front month is premium to the rest of the months behind it. So, as you're in the front month, I'd say $104 in August crude oil, and August is about to roll off the board, you're now rolling into a $101 contract. And with conditions remaining the same, you have to like your chances of that contract depreciating because that's what the curve does. It rolls off the highest price on the board every month.
So, that's something that any commodity investor can start off with and start at least with a positive carry trade. So, that should explain that for you. And I think the most important part of that scenario, just to bounce off of that chart, for example, spreads close the day today even tighter than they were when I made up that chart several hours ago. So, the big tell in the commodity markets was we had this massive selloff in oil from $120 down to $90, and the entire curve came down with it.
Front month spreads were still $3, the calendar is still $20 something and everybody in the physical markets is looking around and saying there are physical markets trading above Brent and WTI all over the place. So, the premiums is still there. Diesel markets are still tight and overwhelmingly bid. So, this is the stuff that works its way through the market, Maggie. And I really believe that we can see return to that great rotation when we start seeing natural resources outperform again.
MAGGIE LAKE: Okay, so this was a temporary pullback in an opportunity for you. By the way, headline out in the energy space that TC Energy had to reduce operations at Keystone Pipeline because of some power outages in South Dakota, which actually looks like it was intentional. But at the pumping station, Keystone, major pipeline, you and I have talked about the importance of pipelines, refining some of that, all of this adding that years of underinvestment adding to pressure in the market. Is that, first on that headline, is that a temporary situation? Or could that linger and put even more pressure on the supply side of the equation that you watch so closely?
TONY GREER: I have to read further into that, Maggie, and I'm assuming that has to do with this explosion at the Hoover Dam.
MAGGIE LAKE: Yeah. Well, it was South Dakota. Yeah, I think so. And I didn't read all the way into it. But I see Keystone Pipeline reducing it and give it all the pressure we see on supplies.
TONY GREER: Got it. that's a separate story. I would have to look that up.
MAGGIE LAKE: Okay, so then talk to me. So, we'll circle back on that. Talk to me about how you're thinking about the supply side versus the demand side, given the fact that we have all these concerns about recession?
TONY GREER: Well, we just priced demand to zero. We just priced demand to an economy literally stopping dead in its tracks and not moving. But we just priced in as well beyond a recession, because the recession is just a couple of negative quarters of GDP growth. Nobody stays home during a recession. Nobody stays home for vacation, nobody stays home from work, nobody cancels their trip. And everything just becomes a little bit more of a struggle. That's how I felt things before.
So, in as much as we're still going to continue with global gasoline demand that has been on the rise, as long as we're going to deal with tight markets, as long as we're going to deal with elevated crack spreads, which showed really elevated gasoline demand, that's going to tell the story, Maggie. And I don't believe that the story has ever been that we're going into a recession. The only thing that seems to say that is the yield curve, in my opinion.
There's no way that the economy change as fast as the rate of change on the screens that just happened. We just repriced oil 30% in about three or four weeks, I don't think the economy moves that fast. But the Fed needed the economy and the markets to feel like it was moving that fast to take the pressure off of the inflation gauge. Maggie, they're managing optics best they can. And maybe even if they use the President's Working Group to spill some crude oil out into the markets, you never, never know.
And at the same time, they will probably have to go out and buy that back. They're going to continue to release the SPR. There's going to be continual attempts that the Biden admin is trying to take credit for lowering the price of gasoline. I know that gas at the pump finally ticked a little bit lower to $4.50 a gallon. So, that's a positive tailwind for the economy in the markets right now, I think, because we just priced in all this economic disruption.
And so, I feel like the market has got several weeks of retracement on the upside, and it may retrace half of this entire slide. That's the way bear market rallies often go. But I am pretty much positioned now for that rally, and I'll be looking to get out of it as soon as we head towards resistance levels, Maggie. I'm here to trade this thing, not [?].
MAGGIE LAKE: That's a great point, Tony. And I know that your perspective is that arbitrator, so important to put that in there. You've just brought up a really, really great point, though, about recession. We haven't had them in a while, we haven't been talking about them. And so, what they look like, and the idea that everything goes to absolute zero that like maybe we are mixing it in with what it felt like when we're in lockdown, and is that accurate?
There's a lot of debate that there's a macro tug of war, I think, over whether there will be a recession, but maybe more importantly, how deep it'll be and what that means for inflation. Marko Papic caught up with Chen Zhao, the chief global strategist at Alpine Macro. And here's where he landed on the recession question, and he addressed this very thing we're talking about. Let's have a listen.
CHEN ZHAO: By observing where the real income is, it's almost inevitable that you're going to have a period of pretty weak consumer spending. I don't know when. I don't want to pretend that I know. I think it's sometimes next year. So, I think we will go into a recession. But I don't think it's a financial crisis driven recession, probably more of a run of the mill recession, because the rates had been lifted too high, the income growth is not going to be there. And people tend to save a little more and spend a little less and then you got to have a contraction in economic activity.
MAGGIE LAKE: That full interview is available to all our members on the website, and they talk a lot about China as well. Really, really interesting discussion. So, Tony, how deep is it going to be? What does it look like? You pointed out that a lot of the recession talk has come up around the behavior of bonds, of the yield curve. Let's put that chart, you mentioned it briefly, about the breakeven 5Y. For those who may not be familiar with this, why are you watching this closely? What is this telling you?
TONY GREER: So, the breakeven 5Y is a measurement of inflation expectations. There are breakevens across the curve, 2s, 5s, 10s, everything. What it tells you is how much inflation the market is expecting. It is the yield plus the inflation rate for that period. It looks to me like we sold them off from 3.8% to a low of 2.4%. That is a massive chop in that interest rate.
So, at this point, if you chart it, you get to levels where you say, okay, this thing looks oversold. It's into really, really long-standing support. This looks like where we may level off in terms of inflation expectations. And if you remember that the 5Y breakeven is really that security that for me, was driving the bus during the whole lockdown recovery rally and retracement rally from the bottom of March 2020, as the market realized that there was going to be more potential than maybe the politicians were leading on to about the coming out of the lockdown and the restart of the economy.
So, now, I just feel like it's a similar situation where market-based inflation expectations got priced to depression, the economy's not really there, we come out and get inflation readings that are worse than anybody expected. So, we haven't reached a high watermark on our inflation readings yet, and that may still be ahead of us. So, I think that market players are looking at it like, okay, I've already gotten out of all of my stocks that I was long, I'm sitting here waiting for this recession to happen. And now, all of a sudden, energy prices ran into massive support level, and structure is firm, and they're rallying.
So, maybe the economy really isn't that bad, there has to be some demand driving that structure of the crude oil markets. And so, I think that that's what's just shining through, it's definitely getting some help from the dollar. The dollar index is backed off quite a bit. The Euro had a psychological oversold bounce off of par, that Jared Dillian called really nicely, I think, as the czar of sentiment, but sentiment gets negative down there, you run into a massive psychological support level, and everybody tries shorting it for the follow through into the 90s. You don't get that follow through. And then there's a short covering rally.
So, that's at least breathing a little bit of life back into base metals. And I think the bond markets are seeing that, that base metals finally stopped going down, breakeven stopped going down, the curve seems to have stopped going down. And all of this trade lower was such a steep reaction to the Fed that I really believe that the retracement spike out of here is going to be pretty steep across the risk complex, Maggie.
MAGGIE LAKE: Yeah, it's going to be interesting, because the stronger it is, the longer it lasts, and we're going into that Fed meeting next week. And yeah, as you said, it's that and if it gains momentum, runs counter to what the Feds trying to do, which is going to take some of that steam out. I want to get to a question, Tony, John K asking, can you chat about grains and ags? So, you're bullish on the commodities and on the rotation, how do you feel about grains and agricultural commodities? Do we carve those out at all? When you say commodities, are you thinking just oil and energy?
TONY GREER: No, I want to stay bullish grains. It's a lot