ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Friday, March 18th, 2022. I'm Ash Bennington, joined today by Jim Bianco, President of Bianco Research. There's no one I'd rather talk to today than you, Jim. We were talking a little bit off camera, lots going on. Fed finally lifts off with a 25-basis-point rate hike. We've got a war in Ukraine that seems to continue to get worse. Upward moves in equity markets, curve inversion, a lot of moving parts out there, Jim. Big picture, how are you thinking about what's happening in markets right now?

JIM BIANCO: I think it's really going to be a cross push/pull here. Stock market has had its best rally, probably since the January high in the S&P and the November high in the NASDAQ. At the same time, if you took the stock market out of the equation, and you look at all of the other markets, with rising short rates, a flattening yield curve, the rebound in energy prices that we've seen off the lows set on Wednesday, the still elevated commodity markets, you'd think a whole lot hasn't changed from say, the beginning of the week or last week.

But the stock market seems to be selling you a completely different story right now. And that divergence is probably going to be the thing that everybody's going to focus on. I'll tend to lean towards the other markets as being the tell here and less on the stock market. We could discuss that through the rest of the interview.

ASH BENNINGTON: Yeah, let's talk about that. I should say index performance, I'm looking at a weekly chart here, NASDAQ Composite up over 7% on the week. S&P 500, a smidge below 4% on the week. Dow Jones Industrial Average up about it looks like 3.6%, 3.7% on the week. These are pretty significant moves. How do you reconcile that? How do you square that with exactly what you mentioned, other markets, particularly commodities and fixed income?

JIM BIANCO: Well, I'd also mention, too, that if we were here one week ago, we would have been talking about the biggest weekly decline since the middle of 2020 for the S&P, and for the NASDAQ and for the Russell and for the rest of them. What was the low day of the entire move down since the November high? It was Monday. It was four trading days ago, is what the low day was.

I would tend to think that there's two things going on here. The first one, I think, is just a good old-fashioned short cover that really kicked off with the Fed meeting on Wednesday afternoon. Remember that for a brief moment there after the Fed announcement, we were down on the day. We weren't very much off the lows. That was 48 hours ago, and then we got that relentless surge in the market that has continued.

And that was coupled with the announcement out of China two days ago that the Chinese government after bludgeoning their technology companies, and most of their companies for the last year has finally called it off, that they are going to at least now back off, and we saw an enormous short squeeze. Some numbers that you'd only see in the crypto space, the Golden Dragon Index, the Chinese ADR Index is up 30% for the week, and that's after being down 13% on Monday.

These are altcoin type of moves that we're seeing in that space as well, too. I think for the moment, it looks like a short cover. Now whether or not that meanders into managers are going to say, given everything I see, I want to commit new money to the market, or the public says I want to commit new money to the market. We will find that out next week. But for now, it does look like a short cover.

ASH BENNINGTON: Jim, you said it. You know I can't resist biting when you throw it out there. Crypto up, let me just read some of these numbers to you. Bitcoin trading right now at 42,195, up 3.125% on a 24-hour basis. Trailing seven days up almost 9%, 8.69%. Ethereum trading at 2,973. A hair's breadth below that key psychological level of 3,000, 24- hour trailing basis up 5.3%, seven-day trailing basis up over 16%.

JIM BIANCO: Yeah. It's interesting because these sound like big numbers for crypto, but if you look at a bar chart of Bitcoin or Ethereum, they've actually been fairly tame throughout all of the volatility that we've seen. Now, keeping in mind, a 3% or 4% move and cryptos is [?] day for that market, where it's not in the rest of the markets as well, too.

They've been fairly tamed. They have not broken out or shown any signs of breaking up. Neither have the S&P or the NASDAQ, they're still working on retracements right now and we'll see whether or not they break out. And Ash, by the way of crypto, maybe we could talk about it later, but Vitalik Buterin, the cover of Time magazine today as well, too. All of a sudden, the adoption and the attention that crypto is getting has been unparalleled.

ASH BENNINGTON: Yeah, it is really interesting. Let me just it take a step further what you said about how markets were not moving on the digital assets side. I'll take it a step further. They were down sleepy going into the Fed meeting. If you look at that chart from, say the 11th through the 15th, it was basically a horizontal line, you almost never see that in Bitcoin.

JIM BIANCO: You could almost make the case that going into this explosion higher following the Fed meeting that the store of value was crypto. It seemed like everything else was blowing your mind. But then crypto, for what crypto is supposed to be, was sitting there doing nothing during this whole period. They're starting to move up as well.

I think they've done a fairly good job of holding together throughout the invasion, and all of the noise that we've seen in traditional markets. It may be a sign that that high correlation to the stock market or to unprofitable tech companies is maybe on the verge of breaking down.

ASH BENNINGTON: Yeah, and just to add a little color on your earlier point about Vitalik Buterin being on the cover,not just that, but it's also the first ever full magazine dedicated to NFT and blockchain from Time Magazine if I read that headline correctly earlier.

JIM BIANCO: Yes. If you're not familiar with Vitalik and want to know the quick TLDR on his backstory, I thought the article was very good. I thought it was a very balanced article. Yeah, it mentioned the old tropes, too much energy, and it's all crime, and stuff like that and cryptos, but then they offset that later on in the article too. I thought it was well worth to read, if you're not familiar with who he is, or want to learn more about him.

ASH BENNINGTON: Yeah, and we should say Vitalik doing his part obviously. Ethereum is switching over to Ethereum 2.0. We're talking about this merge coming up later this year, perhaps. And we're going to move from proof of work to proof of stake, obviously, much more environmentally friendly.

JIM BIANCO: Yeah, and just to complete the thought with Vitalik, if you're more of a traditional financial person, the picture of him on the stage at ETHDenver giving a presentation in his pajamas, in his Shiba Inu pajamas, that tells you a lot about the culture of the crypto space.

ASH BENNINGTON: Jim, you're not going to wear your pajamas to the latest Real Vision Macro Conference?

JIM BIANCO: Unless you want me to. If you think that's going to be it, I'll be there April 5th and 6th or 4th to the 6th in San Diego. And if you'd like me to, I'd be more than happy to wear my pajamas.

ASH BENNINGTON: We teed up that shameless plug perfectly seamlessly. Hey, listen, Jim, I'm going to pull us out of the crypto rabbit hole because there's so much happening in the macro space, and I could talk about it all day. But I also wanted to talk a little bit about what you see happening in fixed income, US Treasurys.

Another yield curve inversion today. Yesterday, I thought it was 2s, 5s, now it's 3s, 5s now inverted, meaning the short end of the curve a little bit above the slightly longer end, right in the belly of the curve between 3 and 5 Years. What does that suggest to you? Is this a recession indicator?

JIM BIANCO: This is going to be the biggest story that everyone's talking about aside from the rally in the stock market over the last three days. You've seen the yield curve continued to invert. Now, what I mean by that is how does a yield curve invert? I used the phrase it inverts inside out. It usually starts in the middle of the yield curve. The difference between the 7 Year and the 10 Year yields, the 7 Year yield goes above the 10 Year yield. That actually happened earlier this week.

Then the 5 Year, 10 Year yield, that hit zero and actually was intraday negative a little bit this week. Then you get things like the 3 Year, 5 Year, the 3 Year, 10 Year, those are essentially zero as well too. And it works its way out to the 10 Year, 2 Year spread. And eventually, you'll get all the way out to the 30 Year Fed Funds spread.

What we're seeing is exactly the way a yield curve inverts. It looks like at this point, we're almost so far down the pike with this, that eventually the yield curve will invert. It would actually be a bolder call to say that it won't. Now it doesn't mean it's going to happen next week. It might be in two weeks. It might be in six months. But I think eventually, the yield curve will invert.

Now what does it mean? There is a wide range of opinions on what the yield curve means. Historically, we know that when the extremes of the yield curve, say the 10 Year, 3 Month, 3 Month bill, 10 Year yield curve inverts, 3 Month bills trade at a higher yield than the 10 Year or the 2 Year, 10 Year curve inverts. It has a 100% track record of leading a recession back to the 1960s. I've also joked there is a 100% track record of every time the yield curve is inverted since the 1980s that everybody comes out and says this time it won't work. And it always does seem to work.

I tend to think of the yield curve. I saw a Real Vision Daily Briefing yesterday with the Fed guy, Joseph Wang, and I'm going to follow in some of his comments. I tend to think it is a signaling device that there is stress in the financial system when the short-term interest rates go above the long-term interest rates. That stress the day you invert the curve may not be obvious. It may not be obvious for months, or it may be obvious the day that the yield curve inverts. But I do definitely think that it is a sign of stress.

Now, let me preface that by reminding us, it's not inverted yet. I'm talking about the 10 Year, 2 Year curve, the 7/10s, the 5/10s, that's always the first ones to go along the way until you get to that stress indicator. We'll see when it does it. If it does, it also has to be persistent. It just doesn't invert for one day for a couple of basis points. It needs to stay there week after week, and then you say there is a problem in the market.

Now, if that happens, what is it that it's signaling? And let me tie that in with the stock market rally. A lot of people have said, oh, the stock market rally is telling you that maybe we're seeing the end of the war, or resolution of the war, there's peace talks going on, possibly ceasefire talks going on. And I've said yes. And let's revert back to the world of February 23rd, the day before the invasion, what was that world? Slowing economy, high inflation, booming commodity prices.

This stuff did not start February 24th, the day of the war. This has been ongoing for a long time. If we're going to revert back to that pre-war world, remember, the stock market had already corrected 10% before the war began on the worries of supply chain problems, inflation problems, commodity price problems. And what can we throw in there that isn't war related? COVID shutdowns in China are going to become big. Maersk, one of the big shipping companies has already instituted alternative plans for shipping.

The supply chain crisis by all measures is going to get worse because of what's happening in China. And if you're not familiar with what's happening in China, they've got a surge of COVID cases that only the Wuhan lockdowns of two years ago is comparable to right now. And they have zero COVID policy. They're basically shutting things down left and right. What they have been shutting down is a lot of their ports. And a lot of their ports, without those, then the supply chain is really going to suffer.

ASH BENNINGTON: Yeah, and there's been some chirping about potentially the Chinese vaccine not being as effective as the ones that we have here in the West. And talking of which in terms of commentary, Jay Powell actually pointing out, I believe not just China but also the Russia situation as being something that would create an impact on global supply chains.

He mentioned that in their forecast, their previous forecast, they had actually a resolution of global supply chain issues beginning, we were supposed to be past peak now with Russia. And as you point out with China, very much up in the air, very much an open question.

JIM BIANCO: Let me give you another shameless plug since we're on Real Vision Daily Briefing. I recorded a series of interviews called Real Visionaries about the economy. One of them was with a supply chain shipping expert, Selma Conegliano. It's going to be out the week of March 28th. And we talked about this exact subject about the idea of what does Russia mean for the supply chain. He said 3% of all container ships are traveling in and out of Russia. It doesn't sound like a lot.

Remember that the system is running at capacity. What happens with those 3% of ships? They probably have a bunch of containers on those ships, and they've got nowhere to go now. They can't deliver them to Russia. They're Russian goods, so they don't want to deliver them to a Western port because they might be sanctioned. They're literally loitering around in the ocean waiting for somebody to tell them what to do.

If you've taken 3% of shipping out of the system, and a system that was already capacity constrained, that's just going to worsen the situation. And that's just container ships. You talk about cargo ships that have to ship grain. If you talk about tanker ships that have to ship oil. It's getting more and more difficult to do that. And the raw materials end of the supply chain continued to exacerbate it. Yes, the Russian situation, although it doesn't sound like a lot, it is actually going to be a material impact when there's no excess capacity in shipping right now.

ASH BENNINGTON: Well, that's fascinating. Some of my favorite interviews on Real Vision are the ones where we talk to people who aren't finance guys and gals, but people who are actually out there doing things where they see the real world and not just numbers on a screen. I'm really looking forward to that interview with Selma. That sounds fantastic.

JIM BIANCO: Yeah, he's very, very good at breaking it down and making everybody understand what's happening in the shipping industry.

ASH BENNINGTON: By the way, we should say, you mentioned 2s, 10s spreads, which is the benchmark that we use where most of the data as at least about those curve inversions. You made that great point. It's not just a 24-hour inversion, typically it has to stay inverted. But let's just talk a little bit, I want to read through the numbers now. Right now, we're at it looks like 20 basis points on 2s, 10s. Really, really narrow. And all five basis points on the day, I think we were down as low as about 18 bps on that spread. And by the way, that's a 20% move, five basis points on 20 basis points. These are very large moves as a percentage right now of that spread.

JIM BIANCO: Yes. What's also happening with that spread is today we've seen another one of these unusual moves, unusual before this cycle, but not this cycle. And that is, the 2 Year yield was up today, and the 10 Year yield was down. And one point about five basis points, they're moving in the opposite direction. That doesn't happen that often to see those types of moves in that direction.

What's going on? If you go and you look at the Fed Fund futures market or the Eurodollar futures market, it's getting more aggressive. It has eight rate hikes priced in for this year. That means that one of them, at least one of them has to be a 50-basis-point hike. It's got 40% chance the Fed's going to hike 50 basis points in May. It's actually got a 1/3 chance they're both the May and the June meeting. Those are the two next meetings, the Fed's going to hike 50 and 50.

We had Jim Bullard come out today and say he would have been in favor of a 50- or 75-basis-point hike this week and would like to see the Funds rate at 3% at the end of the week. Now, most people listening to this are going to scoff at this and go, no way, absolutely not. What the market's pricing is a lot closer to Jim Bullard than the crowd that's saying no way right now. And it's creeping in that direction.

If the market is giving us a signal, that signal is the Fed is going to get really aggressive. I'm going to respond back to some Twitter comments again. I think the Fed is going to become very slow. I think the Fed is going to move three or four times, is what I hear all the time on Twitter. I always ask, I always respond back with the same question, why? Why do you think the Fed has raised rates? And why do you think they're going to go slow?

The reason they're raising rates is they want to get rid of inflation. Well, how does the Fed get rid of inflation? They make your life miserable. I'm not going to mince words here. They're going to slow the economy. Chairman Powell said on Wednesday, it would be appropriate for financial conditions to tighten. That is code word for you need to lose money. If the market wants to rally in the face of that, I think that greenlights the Fed to go 50 every meeting.

They're not going to say, well, we got an inflation problem, but now that the stock market's going up, I guess the problem is fixed. That's not the way they're going to look at it.