MAGGIE LAKE: Hi, everyone. Welcome to the Real Vision Daily Briefing. It's Monday, May ninth, 2022. I'm Maggie Lake, and here with me today is Jared Dillian, editor of The Daily Dirtnap Newsletter. Hi there, Jared.
JARED DILLIAN: Hey. How are you doing?
MAGGIE LAKE: I'm doing as best as can be expected, I guess, as we're looking to this at the beginning of what is a really rough start to the week. It's a gruesome picture. US equities deep in the red, and the selling seems to be intensifying into the close with tech and small caps bearing the brunt of the selling. The NASDAQ off. Where are we right now? 4 and 1/4%.
We've got the S&P 500 down 3 and change below 4,000. The Russell down 4 and 1/4. The yields on the 10-year climb to 3.17% before retracing. Now that's at about 3.03, and it's one of these days where there's lots of stuff down.
It's not just equities. Gold's down. Oil down 6%. Crypto's getting hit really hard. Bitcoin down 11%. Ethereum down 12%. One of the few things that's up, the VIX, the volatility index, that trading up 15% as we head into the close. When we look across the board here, Jared, what do you make of the market action?
JARED DILLIAN: I'm actually getting pretty bullish. I mean, stuff is getting down to levels that is pretty attractive. Now, having said that, me personally, I'm pretty fully invested as it is. So I don't have a lot of ammo, but the stuff I'm looking at is biotech. Biotech is down 70% from the highs. The XBI is trading at 65. People thought it was a big deal when it traded below 100.
Two weeks ago, I saw that 20% of the XBI was trading for less than cash on the balance sheet. That was two weeks ago. It's got to be 30% or 40% now. Reminds me of 2002 when you saw a lot of the dotcom stocks were trading for less than cash. That was pretty close to an opportunity in July of 2002, so we're--
The S&P's down about 17% at this point. I think we're getting down to tag ends, and I think we're going to get a rally in the next couple of days.
MAGGIE LAKE: Wow, so you feel like we're at that capitulation point? Because people have been looking for that. I know biotech, some people have been feeling that way. I don't if you do about some of the Ark names, not the Ark fund itself, but that tech play. But every time they've tried to step in, they're going to get their face ripped off.
JARED DILLIAN: Yeah. I mean, capitulation-- everybody likes to look for capitulation. It's elusive. I don't know if we'll get the ultimate capitulation in the next couple of days, but I think we'll get a tradable bounce probably tomorrow or the day after. I think it's going to be a pretty impulsive move. This is just my Spidey sense for trading the markets for a while.
The Ark fund is-- what is it down from the highs? Like 70%, 80%? Something like that? It's pretty close. So yeah. I mean, I think there's some opportunities here. One of the things I like to do in times like this is to sell puts because volatility is jacked. You get a lot for selling puts.
You pick a strike that's 20% down, and that's a good way to make money in this environment. So yeah, markets like this don't really bother me a lot. I don't really get emotional about it. I mean, there's no way anybody's making money. Let's put it that way. I'm losing money. A lot of people are losing money, but I think this is-- I think it's temporary.
MAGGIE LAKE: So I think something that's really important-- and by the way, one of the things I love about the show is that we get to talk live and interact with the audience. And I think a lot of people are really looking for help as they try to understand these markets because they have been so volatile. And like you said, so many of us are watching our--
Whether it be a 401 or our active daily trading account just have these swings and really get hit to the downside. It makes a lot of people nervous. So if you're listening, and you have questions, go ahead and drop them in the chat. I'm going to try to get to as many of them as I can on a day like today.
But Jared, do you-- I think time horizon is really important here. So you just said something before where there is a tradable bounce. So if you're looking at nibbling at some of this stuff, is this in your short-term trading? And you have to be really nimble, and you might get out of them? Or are you looking at some of these opportunities as maybe a longer term investing opportunity for names that haven't been this low in a long time?
JARED DILLIAN: Yeah, I mean, both. Kind of both. I mean, for example, biotech. I think if you bought biotech here and held it for three years, I think there's almost no chance you would be down. So I mean, it's really at distressed levels. And when you're talking about names that are distressed, like, yeah. I mean, these are really good opportunities.
I mean, the one thing I want to mention-- this is very important. So we're in a bear market. These spoos are down 17%. 20% is a bear market. So the question you have to ask yourself is, is this going to be a great bear market like '29, and '74, and '01, and '08 where stocks are down 50%? Or is this just going to be a garden variety bear market where we're down 15% or 20%?
And we've had a bunch of those over the years. And I think this is just a garden variety bear market, and I think the Fed here is going to ease off at some point in the near future. I think you're going to hear some dovish noises out of the Fed because they're going to get political pressure about stocks going down as much as they are going to get political pressure about inflation.
So the front end of the yield curve is already pricing this in. Twos, threes, and fives are rallying. They're telling you that the Fed is going to ease off, so I think that's what's going to happen.
MAGGIE LAKE: Yeah. It's interesting, though, because they've like-- I don't want to say boxed themselves into the corner, but they are so tied into the political situation around inflation. And whether it's coming-- criticism coming from politicians or from former Federal Reserve officials. Whether it's Bill Dudley, or Lawrence Summers, or economists.
I mean, there's this whole chorus of critics everywhere talking about how behind the curve they are, and now, they really got to make up that ground. What is it going to take for them to switch off the inflation narrative and onto the fact that, uh oh. We're slowing down faster than we expected. The whole argument from some people is that it's not-- they're not going to do it this time, but you think they will?
JARED DILLIAN: Yeah. I mean, you have to watch unemployment. I mean, that's what they care about the most. So the unemployment rate is 3.6%. I think if you had a couple of ugly payroll numbers, if you saw the rate tick up to 3.84.0%, if the jobs picture starts to get worse.
You see, this Fed still cares way more about recession and unemployment than it does about inflation. If they have to choose between the two, they will try to stop a recession. Right now, the Fed, in their own words, has said, they're looking for the soft landing. They're trying to slow down inflation without causing a recession.
They cause a recession, they are-- I think there's almost no chance they get Fed funds up to 3%, and that's what's priced in for March of 2023. March Fed funds is at 3%. I think there's no chance they get there.
MAGGIE LAKE: Yeah. So Kyle asking on the RV site, have treasuries bottomed?
JARED DILLIAN: I believe they have. I bought Treasuries two weeks ago. A little bit early, but I'm not down all that much. Treasuries, stocks, and gold are all the same trade at this point. They're all correlated. It's all the same trade, and it's all about what the Fed is going to do. So yeah, I think that Treasuries have either bottomed or are in the process of bottoming.
MAGGIE LAKE: Max Runkle is asking from the RV site. This speaks to your-- the pivot that you're expecting from the Fed. What breaks for the Fed to reverse? Is it high yield? CDs? What are you watching?
JARED DILLIAN: It's going to be a couple of things. It's going to be a deterioration of the economic data. So ISM peaked at about 62. It's now at 55 and coming down. Take a look at durable goods orders, and construction spending, and stuff like that. That is peaking and is going to roll over.
Look. I mean, the Fed saw the inflation data for months and just totally ignored it. They're not going to ignore the recession data, but it's really about-- it's about the narrative, and it's about political pressure. I was on Twitter today, and you know that little what's happening box on the right? Where Twitter puts in articles?
So one of the things it puts in there was Jim Jordan, who's the representative from Ohio that never puts his jacket on. He's in these committee hearings in his shirt all the time. So he said, don't you wish Trump was President for your 401(k)? Or something like that.
And that's the beginning. That's the beginning of the political pressure on the Fed because as much as they want to stop inflation, if people lose 20, 30% of their net worth of their retirement savings, that is going to add to the political pressure.
MAGGIE LAKE: Yeah, absolutely. Great spot and great call, Jared. Because I don't see how-- I mean, just we know anecdotally from talking. I'm sure this is what we're all talking about. Everyone's freaked out about that, and how do you recover from that drawdown? To your point and to that question about if the Fed goes too much in the pressure, if we start to see deterioration.
Raoul sat down with Pierre Andurand in the latest installment of our special series on the risk of a global recession. We rolled it out last week. We're doing it again this week. More interviews coming, and Pierre, for those who don't know, is the chief investment officer at Andurand Capital, one of the world's really most well-respected commodity experts. He had some really interesting and worrying things to say about the risks to the financial system itself. Let's have a listen to that clip.
RAOUL PAL: You've talked a few times. You've dropped the word global financial crisis. Do you think that is the risk here? I mean, the financial crisis changed the backdrop for commodities last time around because China changed its role, and then we rolled into the EU crisis. And we were stuck with lower demand for a period of time. Do you think we're going into a financial crisis because of what's going on? Because this is a tightening of financial conditions, and people are going to blow up?
PIERRE ANDURAND: I think we'll have to. I mean, it's hard to know the timing of it, but it's hard to have a soft landing when we get-- when there's so much geopolitical risk and supply risks in commodities. And even when everything's going well, we get the supply growth is going to be less than potential demand growth.
So in general, the way I understand the world a little bit that it follows the financial market where we think everything is fine, and things go up. Everything looks fine until it's not, and then it gets worse and worse. And then we panic, and then it brings us to a collapse.
So it's hard to get just some [INAUDIBLE] It's actually a lot of things need to go right to just have a mild recession. So generally, the market stays bullish for too long, and we get asset prices disconnecting from reality, becoming way too high. And eventually, you get a repricing, and then the panic that brings us much lower. And then eventually, hopefully a recovery.
But it's going to be unstable. I think the kind of market moves we've had in commodities over the last few months is not only due to Russia. It's going to be very volatile for a long time and eventually have an impact on equities as well.
MAGGIE LAKE: And that full interview is available on our website to all essential plus and pro members. And there'll be information, I hope, in the chat where you can find that entire series if you're not a member, and you want to be able to check it out. Jared is this something we should be worried about? Not just that we see a bear market or further losses in stocks?
That we see the potential for growth slowdown? Could it be something more serious that something starts to break under the weight of these higher interest rates?
JARED DILLIAN: Probably not. I don't think.
MAGGIE LAKE: Because rates have peaked.
JARED DILLIAN: I mean, let's look at it this way. It'll only happen if there's a deleveraging. So the government's not in danger of deleveraging. Households are not really leveraged. The corporate sector is very leveraged. So really, the only reason you would have some kind of disorderly deleveraging is if we did go into a deep recession, and you had a lot of corporate defaults. And spreads blew out on corporate bonds. That's where a lot of the leverage is, but I don't think we're going to get to that point.
MAGGIE LAKE: Well, that's reassuring. To that issue, Max also asking-- I think this is really good. He was the one who asked before where it shows up. But I just want to do this follow-up part of the question. Is there counterparty dealer risk that could be systemic in Bitcoin's collapse?
Let's just remind everyone that, as I mentioned really quickly at the top, we saw big losses again in cryptocurrency. We know they're trading like a risk asset. They're a little bit off their lows actually now. It's down about-- I'm looking 8 and change, 9 and change for Bitcoin and Ethereum. But that issue of counterparty risk is really interesting.
JARED DILLIAN: I don't know the answer to that question because I don't know a lot about the derivatives market for crypto. I don't really know the structure of that market. I only pay attention to spot. I pay attention to spot Bitcoin, spot Ethereum. But I don't really know what kind of derivative exposure there is out there, and where that exposure lives. So I can't really say.
MAGGIE LAKE: Yeah. I fear that maybe a lot of people don't. That's the worry with the new-ish market. So hopefully, we don't find out the hard way. Paul English on the exchange, saying, what the bleep is going on with gold, silver, copper, uranium, lithium recently, including today?
JARED DILLIAN: Yeah. I mean, I'll just talk about gold specifically. So you know I'm a big investor in gold, and-- I mean, for all the panic about gold, let's just put this in perspective. So back in 2008 when Bear Stearns collapsed, gold was at $1,000 an ounce.
And then fast forward seven or eight months later. During the financial crisis, it was a $700 an ounce. So gold took a 30% drawdown, and everybody in the middle of the financial crisis was saying, why the hell is gold not going up? It's down 30%. That was a 30% drawdown.
Gold does this all the time. You have these situations where gold should be going up. It's not. The drawdown that gold has right now is pretty benign. It's only about 13%, and it's still above the point from where it broke out above the wedge pattern. So look. I'm not going to be really worried until it gets below $1,800.
MAGGIE LAKE: So do you feel like it could still go higher and be a safe haven for people who are looking for protection? Despite the fact that we've seen these periods where when you think it should initially go up, it doesn't?
JARED DILLIAN: I mean, it's outperforming stocks. You know what's funny is gold people, they're not glass half-full people. They're not glass half-empty people. They're glass tipped over people, the most pessimistic people in the world. So I really think it's going to be OK.
MAGGIE LAKE: I love that. We have a question about cash as well because that's been the other thing. I mean, I know people have been talking about this. But Kyle on the RV site, saying, how much cash do we hold at this point?
JARED DILLIAN: Well, I think the amount of cash you should hold is pretty constant in all market environments. I think it's about 20%. That's what I keep all the time, give or take, and that's what I have in my awesome portfolio allocation.
You hold cash for a bunch of different reasons, and one of the reasons you hold cash is to take advantage of opportunities. As we talked about earlier in the segment, I think we're getting close to the point where there's some opportunities out there.
So if you're fully invested, and you don't have any cash, you're going to miss out on these opportunities. This is why you have cash. So I'm never too concerned about what inflation is, or how much you're losing if you hold cash. You always have to hold some.
MAGGIE LAKE: Kyle had a follow-up. If you're fully invested, how much insurance do you like to keep here?
JARED DILLIAN: Well, the interesting thing is is that, I don't have any insurance at this point. So literally when the S&P was on the highs in December, I bought quite a few S&P puts. And then during the first sell off when the market was down about 10%, I sold those puts.
See, that's the problem with having a hedge because you have to decide when to monetize the hedge, and once you monetize the hedge, then you don't have a hedge anymore. So I made the decision to do that a couple of months ago, and now, I don't have a hedge.
Having said that, the VIX-- what is it right now? 35 or something like that? But volatility has not really gone up a lot, and if you have a hedge in the S&P, or the NASDAQ, or something like that, you don't make a lot of money on the Delta. What you really make a lot of money is on the Vega.
So when volatility explodes, that's when a hedge really becomes valuable. And that hasn't happened yet, and I think it's not going to happen.
MAGGIE LAKE: Yeah, that's a great point. Is there a level where you would say, OK, we're getting to that point at the VIX. It's been going higher. Obviously, today, it's up some 15. It's at 34.75. So 50% is a big move in a day, but some people are saying, listen. It's not at 40. So I'm not that worried about it. Is there