Hi, everyone. Welcome to the Real Vision Daily Briefing. It's Friday, May 6, 2022. I'm Maggie Lake and here with me today is Jeff Snider, Head of Global Research at Alhambra Investments. Hi, Jeff. It's great to see you.
JEFF SNIDER: Hi, Maggie.
MAGGIE LAKE: Wow, what a week this has been. Here's where we're ending up. We're just closing out the US session for equities, end the week. And it looked early in the day like US stocks were going to try to stabilize, but as Tony predicted yesterday, they couldn't quite hold on. I have to say, it looked like it was going to fall apart fast and be really ugly. It's moved off the bottom.
So we're down about only about a 0.25% on the DOW. NASDAQ is down 1.4%. The Russell is down almost 2%. S&P down a 0.5%. Doesn't look bad considering what we saw yesterday and what it was shaping up to be. Still though, you're not getting any of that stability. I think people had hoped for the yield on the 10 year is at 3.12%.
Oil was up again about 1.25 to 2%. Crypto down, again not heavy losses. Bitcoin hovering right below 36,000. Ethereum down about a 1/3 to 2,676 last time I checked, but that may be moving around a bit. And the US dollar continued its march higher against pretty much everything.
So Jeff, when you look at where we ended up here, awful lot to unpack but what's top of mind for you as we look across what happened in global markets this week?
JEFF SNIDER: Well as you said, this week has been a pretty interesting event filled week. It wasn't boring, that's for sure, I mean, especially the ups and downs and volatility over the last couple of days. One day, the stock market's happy. Jay Powell said, I guess, the right things. And the next day, apparently he didn't say the right things, who knows the way these things go in the short run. But it's amazing that overall I think the biggest story here is the US dollar.
US dollar has been not just higher for the last several months, but it's accelerated and its upward trend over the past month or six weeks or so. So I think the US dollar is probably the biggest story that's maybe shaking markets and getting people's attention, that maybe there's more going on in the world here than previously everybody thought.
MAGGIE LAKE: Yeah, and what does that tell you? What do you make of it?
JEFF SNIDER: When the dollar goes up, nothing good. It's not good for every-- I mean, we've gone through all the phases of the five phases of grief and acceptance here because it used to be that when the dollar went up, everybody thought, hey, that's a great thing. The US economy must be doing really well. Strong dollar, strong America. Then it was sort of, OK, well America is not really doing well so maybe the dollar is the cleanest dirty shirt. You got into that kind of rhetoric.
And now I think over the last four or five years, especially in the 2018, 2019 case, people have started to realize that when the dollar goes up, it's not good for anybody. And anybody in either the real economy or in financial marketplaces, the dollar is a wrecking ball and it really tells you that there's something really amiss in the global financial system, global economy, and global monetary system.
MAGGIE LAKE: Yeah, well why is we've heard that phrase over and over again from so many of the guests that I've been talking to on Real Vision this week. For folks, why is it a wrecking ball? Why is it so negative? What does it do or what does it destroy that creates so many problems for the global system?
JEFF SNIDER: Well, the dollar's exchange value itself is not the issue. It's a reflection or a symptom of what's really going on. And when the dollar goes up, what that tells you is that there's tightening in the global monetary system for a variety of reasons, usually self-reinforcing reasons.
But overall, the rising dollar is a key indication that money is becoming tight, financial markets are becoming very risk averse, and usually that correlates closely with negative real economy consequences, whether a substantial downturn here, elsewhere around the world, usually synchronize or perhaps worse than a downturn recession and more. So it's not the dollar's exchange value. It's what the exchange value represents.
MAGGIE LAKE: It's the signal and the signal is saying recession is a real possibility. And if I'm understanding you correctly, the fact that it's accelerating means the chances of a recession and maybe an ugly one are getting higher?
JEFF SNIDER: Yeah, they were pretty substantial to begin with and they're absolutely going up. And it's not just the dollar's exchange value. You can connect that with other marketplaces too that have been increasingly pessimistic for months now. Eurodollar futures curve inverted way back now on December 1 of last year. So we've had inversion of that curve for the last six months and then everything else that goes along with it, whether it's the swaps market the US Treasury yield curve, that the 210s inverted. The couple days in March. This is, the curve itself is still somewhat inverted, the little bit between the 7 and 10 year, as we speak. And other markets too.
For example, treasury bills, collateral. Real money in the system, all sorts of indications telling us that something is just not right there. Which, if you look at it in terms of a probability spectrum, the rising dollar, like the inversion and these various curves, tells you that the chances of something negative happening have been rising. And they have been rising relatively quickly over the last month or so.
MAGGIE LAKE: Which is, I think, interesting and perplexing to people. Because today, we had a US Jobs Report. The monthly jobs report showed a gain of 428,000 new jobs.
That looks good, on the surface. 3.8% unemployment rate. Average hourly earnings, a little lower than people expected. But still showing gains. Although obviously not keeping pace with inflation.
If you were to look at that, you'd say the US economy looks pretty good. And we have the Fed, saying we've got to hike rates because we got to slow this thing down. We have too much inflation. So we need to do something.
You're saying, what are you looking at? You mentioned ISM. That has come up a lot as well.
When you look at that, why should we pay some attention to something like the ISM, maybe more than a jobs report? Why is that a more accurate reflection? And why have you been looking at that to signal that things are weakening? And why isn't the Fed looking at that? Surely they about it.
JEFF SNIDER: Yeah, why is the Fed doing what it's doing, right?
MAGGIE LAKE: Yeah.
JEFF SNIDER: Because that's the real question here. As you said, it seems like there's a disconnect here between some of the economic data. Certainly most of the marketplace is the US dollar, prominently.
And what the Fed is doing, and I think we talked about this last time I was on the show here with you, that the Fed is maybe doing things more politically than necessarily because of economic factors. The White House and Congress, and everybody in Washington, knocking down their door saying you're the guys that are supposed to be doing something about inflation. So get doing something about inflation, regardless of what's actually going on in the real economy.
I think that's part of the reason why the Fed is acting, and acting so aggressively. And I think that message was reinforced at, to me, cringe-worthy, embarrassing press conference that Jay Powell conducted on Wednesday, where he basically went full Bill Clinton, and said, "I feel your pain," talking directly to consumers. I'm like, that's not a central bank.
That's not a central banker. That's not how they're supposed to operate. So I think in one sense, the Fed is sort of on autopilot for rate hikes for reasons that have little to do with the actual economic situation. Then you look at the actual economic situation and Maggie, I'm going to disagree with it a little bit today. I think the payroll report was kind of bad.
MAGGIE LAKE: OK, why? What were you looking at? Labor per [---]?
JEFF SNIDER: The establishment survey was fine. It was a little bit lower end of the range. Remember, they smoothed the establishment survey out, so it's not going to vary.
It's not going to show much variation. The household survey actually declined by 350,000. Which is their first decline since 2020. Now, a household survey is notoriously volatile.
A single month, you don't pay attention to a single month. But a decline of that magnitude suggests maybe there's something else there that we need to watch going forward. As well as not just to the household survey of employed, but also the labor force number too, which dropped for the first time in some time as well.
So there is a one month. And you don't want to pay attention to put too much stock on one month. But just one month on the CPS side, rather than the CS side, of the BLS report that said maybe there is a little more weakness than the establishment survey certainly makes it seem. But it's not just the payroll report. I mean, we just went through the GDP number, which was negative.
MAGGIE LAKE: Yes, yes.
JEFF SNIDER: Everybody's "Oh, let's write that off, because it was inventory, it was imports, it was all this stuff." even if you do account for inventory, there still would have been a negative in the first quarter. And it would have erased the big gain in the fourth quarter so it's not just one quarter of a negative GDP. It's actually three consecutive quarters of at least low GDP across not just the overall headline, but also some of the more meaningful numbers, like final sales.
Real final sales of domestic products. Three straight quarters of really low, almost zero numbers. That was negative in the first quarter too. So it's not just the payroll report. It's not just one month. You mentioned the ISM
MAGGIE LAKE: Yeah, we've got a chart of that too. Let's put that up, because this is something that, I know that you guys are so in the weeds on all the data and really looking through it all to try to get a run on what's forward, the forward indicators.
JEFF SNIDER: Yeah.
MAGGIE LAKE: Because some are more reflective of future activity than others. So what are we seeing with the ISM because I know Raul's mentioned it as well. It's coming up a lot.
JEFF SNIDER: As you said, ISM is much more forward looking. The labor numbers are at best coincident, possibly lagging. So labor can be doing one thing while the leading edge of the economy starts to do another.
Whereas, the ISM numbers do tend to correlate closely with forward looking and future indications. Especially the new-orders component. Because as it would seem, if new orders are growing at a slower rate or actually contracting as they are in China, then that's an indication that several months forward, things are not going to be going well in the economy. The ISM is, of course, the longstanding one. It's the granddaddy of all purchasing manager indexes.
Has a very long track record in history. When you look at the latest numbers, again, it's not just the latest month or just this year. The ISM has been in a slowdown for a very long time already.
It's gotten to the point where you look at where the was in April, and compare that to where the ISM was in 2019. It's interesting to note that where the numbers were in 2019, the Fed was actually cutting rates. So here they are. It's basically the same level of the ISM.
The ISM number's moving in the same direction, which is lower. And this time, the Fed is aggressively hiking rates, whereas, last time they had already panicked into cutting rates. Again, it reinforces the disconnect between the Fed doing things for one reason and the real economy maybe behaving differently.
MAGGIE LAKE: Yeah, that makes absolutely no sense at all. You mentioned China. So if the US economy is, there are reasons to be worried about it, what about China? And is the strong dollar having an impact there as well?
JEFF SNIDER: Yeah. If you're worried about the US economy, and I think you should be, you're triple, quadruple, quintuple worried about the Chinese economy. Even after what Xi Jinping said last week, which I think was misinterpreted-- sometimes on purpose, but misinterpreted last week-- the latest economic numbers all year have been pretty bad, especially after the January, February Golden Week holiday. And they've only gotten worse.
As I think we would all expect, given the fact that Shanghai was locked down. Now there's all sorts of additional restrictions being imposed all throughout China. So it's not exactly unexpected that the Chinese economy would suffer. But I think it's part of a larger, bigger structural picture, where it's not just about these zero COVID policies, or the lockdowns in individual cities.
It goes back much further than that. Not just last year, but even going back to the 19th Party Congress in 2017, with the Chinese have basically accepted that they're not going to prioritize economic growth over everything else. Where that, it becomes a real big problem, is in 2022, where I think a lot of Western expectations are set on China being at least some kind of pillar of support, at least a pillar of stability, the Chinese economy is certainly not behaving in that way. Nor is the reaction to it.
Because what Xi Jinping actually announced last week wasn't this massive neo-Keynesian fiscal stimulus package. What he said was, we're going to support those industries that are being hard hit by his COVID policies. But by and large, this massive government spending is going to be targeted at national security.
Which is sort of a ominous, here comes the ominous music playing into him saying, yeah, the economy is probably going to get worse. We're not going to do much about it except increase our capacity for monitoring and policing dissent inside China, as well as, hopefully not, building up further the Chinese military to maybe do some adventuring outside of China.
MAGGIE LAKE: Yeah. That is ominous, indeed. We joked beforehand, I said I needed some sound effects. Now I think I really do.
That is ominous. But it's also very important. Because there are some people who I think are looking at the COVID situation and perhaps anticipating that when those restrictions come off-- OK, they lasted longer than anyone thought-- we're going to see a rebound.
Which would help the global economy. But this is much bigger. And much more long lasting. And as you say, structural, which really changes the scenario. What about the yuan? Are we, are you expecting any change there, vis a vis what's happening with currencies?
JEFF SNIDER: Yeah, it's being impacted by the rising dollar. At least, the global monetary system. The problems in it that are behind the yuan's sudden decline.
Which isn't really all that sudden. It goes back to the same time as we saw all those financial fireworks across all sorts of markets at the end of February, into early March. I think those got lost in the whole Russia-Ukraine thing.
Which was really the global monetary system, the global marketplace, saying there's more going on here than just Russia and Ukraine. It has to do with the Chinese economy. As you just said, Maggie, I think there was a lot of belief that even if the Chinese do suffer zero COVID policies, they shut down Shanghai, and things like that, as soon as the lockdowns are removed, like a cork it'll just pop back up.
When as we've seen over time, that these lows keep getting lower. The highs keep getting lower too. So even though there's individual idiosyncratic variations, in terms of depth and degree of whatever economic part you're talking about, over time it keeps getting lower and lower and lower so that economic growth potential itself, the long-run stuff, is actually falling down.
I think that's starting to make its way into certainly the Chinese currency, as well as certain marketplace and market expectations as well. Specifically with the Chinese yuan, though. What you're really seeing is a huge degree of sudden risk aversion. Specifically about China. Again, I don't think it's particularly about the zero COVID policy as much as it is the long-run implications of after we're done with these things.
After the Chinese are over with COVID and zero COVID and lockdowns, what did she really mean when he said national security? How is that going to play out in the financial markets and the economy? I think the marketplace is starting to react very negatively, as you can see. Chinese yuan has absolutely tanked over the last week or so.
MAGGIE LAKE: I think what's so important about the work you do, Jeff, is that you've pointed out many times that there are things going on underneath the market. Then there are events layered on top of it. They sometimes get associated or attributed to that.
That would be much more temporary. Instead, there is this larger move that's missed because people confuse what happened at the time. They made a link with either Fed policy or geopolitics. Because you just said something both about COVID and also about the Ukraine situation masking what's going on underneath the hood.
This is why we're running a series, a special series all this week, asking the very question, are we headed for a global recession? What does it mean for markets? And importantly, what are the factors that are temporary, due to geopolitics? Or what's something that's much more, should be much more, part of your larger structural framework that you're taking into consideration.
But geopolitics plays a really important role in that. And Dee Smith sat down with Peter Zeihan, who's extremely concerned about the future. Let's listen to a clip from that.
PETER ZEIHAN: When capital is cheap, when liquidity is high, high-frequency trading and broad indexes make sense. Because there's enough money for everybody to do everything, no matter how odd it might be. That is among other things, subprime and Enron, and cryptocurrency.
You remove the liquidity, those just go away. All of a sudden, when capital is dear and limited in supply, value add for investors become everything. Because rates of return, of a sudden, are front of mind. Instead of anyone can invest in anything and petpsychotherapy.com does really well.
We're very close to that world. And in that world, broad indexes are a suicide pact. Right now, if you want to invest in a broad agricultural index, you will get exposure to the Midwest and Brazil, and Ukraine.
Ukraine will never be an oil or a food exporter ever again. But that's