ALFONSO PECCATIELLO: Welcome to the Real Vision Daily Briefing. It's Tuesday, 25th of Jan 2022. This is Alf speaking and I'm here with the one and only Tony Greer, the editor of The Morning Navigator. How're you doing, Tony?

TONY GREER: Alfonso, tremendous. How are you today?

ALFONSO PECCATIELLO: Well, you're tremendous, man, I can't match that. Let's say I'm good. Let's say I'm good. But let's talk about markets. Let's kick it off immediately. Today, but not only today, yesterday's moves have been all over the place one can say. We can even argue we will do it later on that there is a macro into that, but there is also some flows and some liquidity and some book degrossing into that. But what do you see today on the screen? What impress you the most, Tony?

TONY GREER: Yeah, Alf, I see a tale of two markets when I look at my screens. And I see at the end of last week, when I do my tallies, the equity market was bombarded. Everything in equity is in the red, everything commodity is in the black, and I'm very big on keeping an eye on year-to-date performance throughout the year, it just happens to be easier in the beginning of the year when we remember where everything started.

But the screen today is the perfect example of something that we spoke about last time. Energy on top, Bloomberg commodities in the green, for example, like today, and everything in the red is technology. When you read from the bottom of the screen up by order of magnitude, it tells the whole entire story right here.

We've got Bitcoin and cryptocurrency off 20%, 30% year-to-date, technology sector's off 12% to 15% year-to-date, and energy in the plus column, 10%, 15%, 20% depending on what sector you decide to choose. I think that this is something that we're going to see a lot of this year.

ALFONSO PECCATIELLO: Yeah. And, Tony, the geopolitical tensions are obviously driving some of the price action in markets and in commodities, especially in the Russia, Ukraine thing has been quite an interesting development. As you're an expert in commodities, we all would love to hear your opinion on that.

TONY GREER: Alf, I believe that probably the Russia, Ukraine thing is important to keep an eye on obviously, geopolitically. I do believe that it could be behind some of the gold buying that we've seen in a flight to a safe asset just in case. And I don't know the probabilities of this becoming a more entrenched or prolonged operation. In fact, we don't know where we stand yet on the US military side, I think it's very much up in the air.

But yeah, this is driving markets, this is the broad-brush isolationism that we've seen, I think, where nations have a little bit of a standoffish tone toward each other. And there's still an underlying grab of hard assets. We ran into, unfortunately, the big rate regime change with the Federal Reserve taking the punchbowl away to simplify it. And that has taken us way back from the highs in equities and taken a little bit of risk out of the markets. But we could carve it up however you want, Alf, there's a lot going on under the hood.

ALFONSO PECCATIELLO: Yeah. Before we jump into gold, the Fed and bonds and stocks, etc., let's give the audience for a second as well the opportunity to listen to what Dr. Pippa Malmgren had to say with Samuel Burke on Real Vision about Russia and Ukraine. Let's see what they have to say.

PIPPA MALMGREN: We're seeing a lot of Russian amphibious vessels in the Baltic Sea now. They are around the critical islands that are at the mouth where you transfer from the Baltic into the North Sea. And those are literally amphibious landing vessels so they can rock up with a battalion of troops, let's call it 500 special ops people in minutes. Yeah, ground hard, not hard, this is not the point.

The second thing is this is a little bit like-- and I'm going to make the analogy for the Real Vision audience. We make fun of people who are tradfi because we're all defi. Now, I'm going to make fun of people who think in traditional military terms that there are going to be tanks that roll over a border. Not necessarily. his is a world where militaries everywhere have pushed a lot of their operations off balance sheet. Both the US and Russia have now got privatized armies.

In the US, we have Academy which used to be known as Blackwater. In Russia, not that they're exactly the same thing, because they're not, but in Russia, you have the Wagner Group. Again, when you start counting how many troops, how many Russian troops are on the Ukrainian border, I'm like, how many Russian military officials are already in the West somewhere, but they're not wearing a uniform?

That doesn't mean they don't work for a boss. It's basically Putin's private army. This business of thinking about how a military incursion will look is so old-fashioned.

ALFONSO PECCATIELLO: Some cool stuff from Dr. Pippa Mangrum. This interview is free on every platform, YouTube, the Real Vision website. If you want to know more, just go and check it out. But Tony, we heard as well, your opinion on the geopolitical stuff, which is driving market action, as you said, to a certain extent. My two cents on this, if I'm talking about geopolitical stuff in Russia and Ukraine, you're talking about Russia and Ukraine, everybody else is worried about Russia and Ukraine, shall we argue it's at least partially priced in?

TONY GREER: Yeah, I think we can settle along that. There hasn't been a complete cataclysmic event that we can point to as a direct result of this, so yeah, agree.

ALFONSO PECCATIELLO: And the other thing to say is that with tail risks, it's always difficult to price them in correctly, because in markets, guys, it's always about future probabilistic events, nobody knows what's going to happen. You have a scenario in front of you, then you have a tail risk scenario on the right, and on the left normally are a bunch of those, and you have to attach probabilities to those.

And in this case, obviously, war would be a super tail event with major impact on market prices, which is very difficult to price. But it can hardly be considered the base case, or at least we all hope it's not the base case to be priced in here. Nevertheless, it's driving some price action. You talked about gold, and you tweeted something also very interesting about gold flows, Tony. Do you want to tell us a bit more about that?

TONY GREER: Yeah, gold has been really interesting, especially on Twitter. The other day, I tweeted something, and I don't judge tweets by their number of likes, I really don't. But this hit me. I said that I could warm up to gold a little bit because I saw real rates rifling higher, and I see crypto markets look like they are, in my opinion, could be in for further derisking, so I tweeted that I'm warming up to gold because of this because gold could see those inflows.

Alfonso, the tweet got 1200 likes which is like, I've never even put out a piece of content that got 1200 likes in my life, so I don't know this experience. But it makes you think it's like, wow, there's a lot of people that want gold to go up, they're rooting for gold, they're rooting for that to be the right call. Then I start looking around in the markets as always and come across a factoid today where $1.6 billion went into the GLD ETF.

I think it was in the last day. And I'm looking at GLD, and I'm looking at gold, and I'm saying all of this capital is coming into this ETF and gold is still an 1800 or 1850 item. I love that it looks better, and I'm going to root for it. But I can't get as excited knowing that there's this much length once again ploughing in above 180, hoping for the next follow through leg. And personally, if we don't see a bear market in the dollar, I don't know if we're going to get a bull leg in gold. That's how I'm looking at the world.

ALFONSO PECCATIELLO: And Tony, the gold move year-to-date has been pretty interesting, especially in my opinion, as the underlying driver for gold, which is the cost opportunity of placing your money in something else that actually yields something and it's risk-free or considered to be risk free, that's Treasury bonds normally, has gone up and in real terms, has also moved a lot.

At The Macro Compass, in my latest newsletter piece, I pulled the chart to show how fast and strong has been the move in real yields year-to-date. We have this chart as well to show to the audience today, and for people who cannot see and they're listening on the podcast instead, basically what I did is I ranked every bi-weekly move we have had in real yields in the US over the last 10 years. I just ranked them in a distribution, and I stacked it out.

And then I looked at January 3 to January 17, basically the first two weeks of the year, and how real yields move this year. And that move of 40 basis points up in only two weeks, look at where it stuck in distribution, far right tail. It was a 2% percentile move, something pretty rare, which was only beaten in terms of higher real yields move so fast, so quick only six times over the last rolling two weeks 10 Year. That's 520 times, so only seven out of 520 times, we have a more vicious move in real yields than we had over the first two weeks of this year.

And nevertheless, gold went nowhere. Generally, when real yields go up that fast, gold gets flushed. And one could say the same on the other way around, which is real yields last year also dropped very aggressively at some point that gold also didn't rally. It seems that it's decoupling a bit from what is considered to be is main underlying driver, isn't it?

TONY GREER: Yeah, exactly. No, that's a little bit of the point, Alfonso. It's like between the real rate's move that could have been a counter move to gold, between all the money coming in, for me, gold is something like I said. We're talking about something that I have a view on that is a no-touch for me this year. Gold to me is doing what I would love it to do, stay the same price.

I would love nothing more than for the coins that I own, the physical that I own to hedge the fiat currency to be worth this price when I die. I'd be fine with that. That's for me where gold is, so I don't have a big driver for the move right now, especially since it's failing litmus tests left and right for what should be driving it either way. This is when I take my hands off of that wheel and let other people drive, Alf.

ALFONSO PECCATIELLO: Very interesting. At The Macro Compass, I also put investment ideas out. And what I did is I will short gold at the beginning of the year, playing the higher real yield story, the higher real yield story unfolded. Luckily, I was short TIPS too, so that worked, but the proxy trade of being short gold didn't. What I did is I just closed it because honestly, it's not trading as it should be. It becomes a no-touch, and you just get out of the trade.

It's a very difficult animal to handle, so we are here trying to unpack what's going on in gold. And I think the move in real yields, Tony, also was very important for the tech move. The first chart we showed to our audience and for people who are listening again, showed the year-to-date strongest moves when adjusted for the normal volatility of an asset class. If bonds move 5%, that's a very large move compared to crypto, which is a much more volatile asset.

We adjusted for the underlying volatility of the asset class and there, the worst performers adjusted for volatility are Korean equities and then the broad technology indices or the high market cap weighted indices like the S&P 500. You cannot avoid linking at least part of that to the fact that real yields have moved up so quick, so that companies that basically do not generate cash flows today, but rather they promise to generate cash flows far away in the future, and therefore, the discounting factor for these companies matters much more, get hammered the most and also assets which are very high beta, very sensitive to risk taking, they also get hammered more. Point in case, Bitcoin, I would say, or do you have a different macro explanation for the move in Bitcoin?

TONY GREER: No, I'm with you, Alf. The boom in Bitcoin, first of all, it's so sentimentally driven. When we started off in the last rally towards 60k with the laser eyes, and then we had the last bounce towards the highs where we had NFL football players getting paid in crypto, we had the mayor of New York being requested to be paid in crypto. And as we know, that has been the kiss of death in currency markets.

Sentimentally, you saw all of this positive energy in Bitcoin and it had a failure to advance, quite honestly. Then we turned the calendar into the new year, and we run into this rate regime change frying pan, and everybody says, oh, I see. If the 2 Year is going to yield 1%, that means there's going to be less of a need for people to pile into cryptocurrency for whatever happens to my money happen in this thing.

I think the crypto traders are getting a little bit of a lesson that less liquidity means less of a driver behind cryptocurrency. And hopefully, we'll see where it shakes out. I think that it stands a chance unless, Alf, we get into a situation where commodities keep rallying, and the Fed has to play a much more aggressive game to keep the inflation genie in the bottle if it can.

I think if that's the case where 10 Year yields start rallying towards 2.5%, 3%, 3.5%, I think you're going to see even more money come out of cryptocurrency on the premise that you said where money goes where it's treated best, and suddenly, versus what we've been looking at, 3% or something in the 10 Year will be attractive to a certain class of investors, especially not having seen that price or that yield for a long time.

I'm trying to wait, I believe in Bitcoin, I'd love to see it survive. It's on the ropes here, though. And if rates continue higher, I'm expecting it to remain on the ropes.

ALFONSO PECCATIELLO: Guys, take note, Tony said something so important. Money goes where it's treated best, and I agree 101%. It's always about the risk reward of where you put your money. What are you rewarded for? What is the risk you're taking? And what people tend to forget most of the time is that investors always have a cost opportunity choice so they can decide to keep money in safe risk-free instruments, but then they get a certain reward.

But they're also missing out on the opportunity to rather invest in risk premiums, which means being exposed to risk in different asset classes and expected a return which is higher than the one they generally get in cash. Now, in this market environment, there are very few places to hide and arguably, increasing your cash allocation was actually the right place where your money was treated well as the expectation for short term real yields went up.

It's not always the case. But generally, money goes where money is treated the best. I agree with Tony 101%. And Tony, you talked about flows. And I just want to touch upon it before we jump to questions because the audience is shooting plenty of those. The moves we have seen, we always try to make sense from a macro perspective of what's driving what, but I've been on the asset management side, and you also have your hands very dirty with running trades, etc.

And you teach me, and you teach the audience as well that flows and liquidity can actually overwhelm macro for quite some time. Do you think this is what's happening now? Or can you make full macro sense of what's going on?

TONY GREER: Well, I can never make full macro sense of what's going on, Alf. I only try my best and then cover one eye and see if it still makes sense. That's how I do it. The flows are important. To me, the biggest standout in flows has been the flow out of the equity markets, the flows out of the technology stocks, out of the QQQs if as we say, money is going to go where it's treated best, higher yields means we're probably going to pull some of the money out of the high-flying growth stocks and transfer into some of the slower moving value stocks as a general premise as these portfolios shift right now.

But what's really intense to me is that as we walked into this rate hike regime change where we went very quickly from pricing in one or two rate hikes in this calendar year to four, we've seen tremendous selling in equities. And one of the indicators that I watch is the TICK Index which measures the number of upticks or downticks on the NYSC. We have just seen a seven-day cluster of downside extremes in the TICK Index that I hadn't seen since I've been monitoring it.

It's interesting that as we pivot to this higher yields regime change, we are seeing full scale, unabashed, unsensitive bid hitting to get people out of the equity market. And that's really, really relevant. Just to look at this TICK Index, for example, we would have a pullback into the moving averages in 2021. And during that time, you would see maybe one or two downside TICK Index extremes between 1500 and 2000. In the last seven days, first, we saw four extremes around 1500 and then in the last three sessions, Alf, we have seen-- excuse me, four sessions now, we've seen four extremes near 1900 negative on the downside.

This is matching the Godzilla selloff from March of 2020 in terms of some of the magnitude readings, and so that's why before I go sticking a bid into the equity market, I want to be cognizant that a lot of this stock is going to be digested, a lot of this stock is going to change hands now. There was just an indiscriminate portfolio adjustment that took place in the markets, and the markets got to breathe a little bit.

That's what I'm looking for, Alf, to see how it shakes out on this end of the equity damage control as we pull back from the highs. And what I expect is that we will at some point, at some point, return to secular bull market type of price action, but it's going to be difficult and it's going to be nonlinear, and it's going to be via a lot of periods of high volatility like we just saw, so a very different year than we saw last year I think we're in for.