MAGGIE LAKE: Hello, welcome to the Real Vision Daily Briefing. It's Thursday, December 23rd, 2021. I'm Maggie Lake, and here with me today is Jared Dillian, editor of the Daily Dirt Nap. Hi, Jared. How are you?
JARED DILLIAN: What are we doing here?
MAGGIE LAKE: What are we doing here? It's the night before the night before. There has to be more [?]. Someone's got to do it.
JARED DILLIAN: My building is empty. That parking lot behind me is totally empty.
MAGGIE LAKE: Everyone's on the long travel. I'm grateful I'm here, not at an airport, though, I have to say. That would be challenging. If we take a look at the action today, starting to get quiet. But the stocks were able to continue that rally that we've seen. All the US indices higher by about a half to 1%, WTI crude also recovering a bit, $73 a barrel and the 10 Year old bond US Treasury holding steady at about 1.49%. Jared, it's been quite a month, as we look at the markets, how are you feeling about the markets, about the economy as we get ready to wrap up this year?
JARED DILLIAN: I'm not feeling really good about 2022. We were up I think 29% in 2020 and 20% this year. I don't really get the impression that that's sustainable. In terms of the price action, the last couple of days, it started with a turnaround Tuesday. We had a big turnaround Tuesday. The price action was very negative last week, but it's holding a balloon underwater. We've had three consecutive days of rallies. The week around Christmas and New Year's, we always tend to drift higher. It's going to be interesting to see what happens on January 2nd.
MAGGIE LAKE: Well, it would be hard to live up to some of the gains, especially in some stocks that we've seen. Is it just that year-over-year comparison, or is it going to be more challenging for other reasons?
JARED DILLIAN: Well, it's going to be challenging for a couple of reasons. There's three reasons really. The first one is the pandemic, and somebody told me this quote the other day, I heard it years ago, but I forgot it. But basically, you want to buy on the sound of the cannons, and you want to sell on the sound of the trumpets, which is really a metaphor for war. Just totally true, when a war starts usually, you want to buy stocks, and when it ends, you want to sell stocks.
And if you think about the pandemic all the stimulus that we got when the pandemic started, that was very bullish for stocks. And if you think, it look like though-- I think the Omicron variant is actually the best thing that could possibly happen, where everybody gets it, hardly anybody dies, and everybody gets free immunity. Now, there might be another variant, but it seems like the variants are getting less and less potent. Just pretend six months into 2022 and COVID is no longer a concern, and I think that's a sell the news event.
The second thing is the Fed. I think people are underestimating how hawkish the Fed is. I think people's expectations around the Fed are really centered around the last three or four years of experience where they're very dovish, but I think the Fed has realized their mistake and they're going to overcompensate to the upside. I do think they hike at least four times next year.
I think that the curve is going to invert sometime in the summer and then the clock starts on how long it is till we have a recession, which could be anytime in the next 12 to 18 months. And what was the third thing?
MAGGIE LAKE: I don't know, but let's unpack number two. I'm feeling bummed out from one and two. Great point, by the way, on buy with cannons and sell with the trumpets, because I feel like there's a lot of enthusiasm about the reopening trade and we're going to be gathering and all the stocks that are tied to it that haven't been able to perform. You bring up a contrary way to look at it, that those gains have already been had and that's priced in already it sounds like you're saying.
JARED DILLIAN: Well, if you look at the reopening trade as a factor, that factor might work in the first half of next year relative to the rest of the market. And the other counterpoint to this is that even though the index was up 20% this year, most of the stocks were down. It's been a very tough market for most of the market with the exception of a handful of stocks which dominate the index.
If you look back at 2021, it actually wasn't that great of a year unless you owned Apple, Microsoft, et cetera. I do think that the end of the pandemic is going to be-- I remember the third thing. The third thing is the election. And if the election were held today, the midterm elections, the Republicans would pick up 50 to 60 seats in the house, they're going to pick up some seats in the Senate, and what you're going to have is a repeat of 2010 and 1994 when Clinton Obama were president, and in the first midterm election, you had this big Republican swing, and then what you had for the rest of their terms was basically austerity.
Obama has a reputation for being a free spending president, but it was only in the first two years. And in the last six years, he had a deficit to GDP of about 2%. What could happen is that a lot of that fiscal stimulus up to 3 trillion just disappears. And we start running very small deficits, and GDP drops by a couple of percent. That could happen.
MAGGIE LAKE: Yeah, then you'd have enough situation, going back to your point two where you've got that happening at the same time that you've got the Fed aggressively chasing inflation?
JARED DILLIAN: Yeah, that's why I'm worried about 2022. You just picked up on it. Yeah.
MAGGIE LAKE: You're right that people are used to a different Fed, and that was a Fed that really watched what assets did. They don't say it's part of their mandate, but when you saw huge wobbles, they responded. Are we in a different environment now, where inflation is the priority? And they'll sacrifice the asset markets?
JARED DILLIAN: Absolutely, I think so. I don't know if I mentioned that when we were on before, but I've said this in other venues. The Fed is a government entity, and they have a P&L, but they don't care about the P&L. What they care about is saving face and not being embarrassed. And they've been very embarrassed by this transitory call, they were forced to admit that it was incorrect and so they made one type of error and now they've completely done a 180, and they're going to make the other type of error.
They're going to tighten too much, and the curve couldn't invert by 50 basis points, they're going to get aggressive. It's priced in in the Fed Funds market. It's pricing in like three and a half rate hikes. But what you hear out of a lot of people is that they're like, no, that's too aggressive. The Fed's going to hike one time two times. I don't think that's the case.
MAGGIE LAKE: Does that mean you think inflation is here to stay? Because that's what they're responding to.
JARED DILLIAN: If the Fed is successful in inverting the yield curve, and engineering recession, which could happen 2023 maybe, then growth is going to go negative and inflation is going to drop. You could see CPI go from 6% to 4%. I don't think it goes much below 4% or 5% because I think we've had this change in psychology around inflation, I think people expect higher prices, but you could see inflation moderate next year. A lot of these inflation trades, which, by the way, haven't really been working in the last three or four months anyway, they might not work in 2022, either.
MAGGIE LAKE: What do you see that's not working? Is it energy? What do you think about the energy complex?
JARED DILLIAN: Yeah, energy is a big part of it. Now, the funny thing about energy is that it's turned into a little bit of a cult trade. And I'm going to piss off some people by saying this, but there's a lot of people on Twitter who are just big time energy bulls, and they were caught max long when WTI was at 85. And then it traded down to 63. I was part of that trade. I was long energy for a good part of that, and I sold out of it.
I'm looking to get back involved in 2022. I think we could see $100 oil in 2022, but I would do it cautiously. I think selling puts on XLE or OIH, selling puts on the energy names, the ball is pretty high. It's a pretty good way to get into these positions. If it goes down by 10%, you own it, and you're happy.
MAGGIE LAKE: It's interesting. If you think oil is going to go up, I wonder what your take is on the electric vehicle space because we saw a lot of news in that area today. Once again, Tesla was back up but that has its own dynamic with Elon Musk. But we saw Nikola, that stock take off after they tweeted they sold their first or they delivered rather their first vehicle to a customer. Talk about cult trades. I thought you'd like that. There've been a lot of comments on that. But if you talk about cult trade, people have really strong feelings about this space.
JARED DILLIAN: Yeah, I've talked about Ford before on the show. I own Ford. It's one of my favorite trades. It's got a beautiful chart. It's really one of the best charts out there. It's consolidating right now. They got 200,000 orders for the F 150 Lightning. And they capped it. They capped it at 200,000. They bet the entire company on electric. When I look at this and I say, well, I can buy Tesla at a trillion market cap, or I can buy Ford at an 80 billion market cap. It seems pretty obvious.
MAGGIE LAKE: Yeah. Can those trades do well, and oil go to $100 a barrel? Can those two things happen at the same time?
JARED DILLIAN: I don't think that's mutually exclusive. I think they can both happen. Yeah.
MAGGIE LAKE: What do you think can drive oil that high? Is it just the under investment? Or why so bullish on that call?
JARED DILLIAN: Yeah, it's a continuation of what happened last year. A lot of it's ESG. The whole constraints trade which I've talked about before. We've starved the entire sector of capital. They have to borrow at 10%, 11%, 12% for these projects. ESG is continuing, it hasn't really slowed down. There's a little bit less chatter about it, but it hasn't slowed down. I think that's a big part of it.
MAGGIE LAKE: It's interesting. It's interesting to hear you talk about the culture, we've seen so much of that this year. Jason Buck had a really fascinating conversation today with Euan Sinclair, who's an expert in options trading and volatility. And they talked about the mentality around trading. Let's have a listen to that short clip.
EUAN SINCLAIR: Trading is punk rock. There are no rules about you can do this, you can't do this. And I think a lot of people from the fundamental camp are like, well, this is ridiculous, you can't do this, you can't add a value factor to it. And I'm like, really? Watch me, that's just what I did. A lot of the time series guys are going to be like, oh, no, you need a [?] model, blah, blah, blah. I'm like, well, I think that's priced in, I think we're done with that.
I'm going to just apply this other stuff, and if a lot of people say it's the wrong thing to do, then that's fine. Because I don't need their permission and I think there's probably a much bigger chance of there being more explored edge doing it this way. And it seems to be. It seems to be working pretty well. I think all that time series stuff just picked over.
And there's nothing-- I say right at the start of one of my books, if you're a trader, you're not a philosopher. Things don't have to be logically consistent. They don't even have to be in a scientific sense, true. They just have to work.
MAGGIE LAKE: Fascinating conversation. And as I mentioned, that full interview drops today and it is available for Plus and Pro members. Jared, we get a lot of questions about how to think about some trades, you just mentioned that you got out of energy, but you're looking to get back in. How do how to time that?
JARED DILLIAN: I recommend that most people don't try to time it. I recommend that they just get long and stay long. Because you can really miss out on some gains if you try to time it. I'm a trader, and this is what I do, and sometimes I do it unsuccessfully.
MAGGIE LAKE: What, if any, adjustments should people make as they think about their portfolios heading into 2022? You just mentioned that you have a lot of things you're worried about. Is it going to be a lot different? Are we in a different trading environment? How should people think about it this year?
JARED DILLIAN: Well, in a high inflation environment, it's not a perfect analog but the obvious analog is 1970s. And if you think about what worked and didn't work in the 1970s, stocks did not work and bonds did not work, but commodities degrade. And if you just took that dumb concept, and you applied it to the 2020s, I think that's going to work. I'm kicking myself for not having a commodity basket, just index exposure, but a lot of stuff looks really interesting.
If you look at agriculture, there's big shortages of ammonia, fertilizer, there's going to be less acres planted, yields are going to be down so agriculture is, I expect to be bid in 2022. And we were just talking about the EVs, and people focus on lithium and cobalt, but also, there's a lot of copper that goes into EVs, and copper hasn't been doing great lately.
But if you just do the math on the amount of copper that's required to make the millions of electric vehicles that we're going to be producing, we're going to need a lot more copper. I think there's some real opportunities in the commodity space.
MAGGIE LAKE: Yeah. And that was a question Vass had about the opinion on commodities. They were asking for the next three years. Do you even look at something with that time horizon?
JARED DILLIAN: Yeah, absolutely. You look at it from a standpoint of asset allocation. The asset allocation that I like is I call it the awesome portfolio. But it's 20% stocks, bonds, cash, gold and real estate. And gold, I think we talked about this before, but you can substitute gold for commodities. And I think if you just made some tiny adjustments in those weights, if you had 30% commodities and 10% bonds, that's going to have a big impact on your returns.
MAGGIE LAKE: You mentioned gold, a lot of people coming on, we've been getting asked about it, but also saying, gosh, if gold can't get going now, when? Have you been frustrated by that? Is that something that you still have in your portfolio, or you're still positioned in?
JARED DILLIAN: I had somebody asked me recently, this is a guy who is really heavy into gold, it might even be 100% of his portfolio. And he's all pissed off. And he texted me. And he said, what level of inflation do we need to get gold up? And I said, 4%. And he says, is that a joke? Are you making fun of me? I'm like, no, actually, that's real. Gold did better when inflation was just beginning to ramp but before the Fed started to take action
Inflation at 4% is actually better for gold than inflation at 9%. That's what we're facing. But having said that, the way I look at it is gold performs I don't want to say poorly, because it actually didn't do that bad, but mediocre while inflation was ramping. I think the Fed could tighten, I think gold could go up. Just in that clip, we talked about being a philosopher instead of a trader.
And you get stuck to this philosophy like two contrary things can happen at the same time. You have to be able to hold two opposing ideas in your head at the same time. You have to be able to believe that the Fed can tighten and gold can go up, that is possible.
MAGGIE LAKE: Yeah. It's great to point that out. And that's why I asked you about EV and oil, too, because I think people get it that it has to be a binary choice between one or the other. And as you point out, it doesn't always specially for some markets that are so crosscurrent. We have a question from Oliver. Don't you think the Fed is aware of the past history and consequences of Fed rate hikes bringing on a recession, as well as the increase in cost of debt payments? In other words, they can't possibly make the mistake because they've seen what happens?
JARED DILLIAN: Obviously, they know the history, but I think their thinking is a little bit more short term. And what happened is that inflation became a political concern. When inflation got high enough, representatives were hearing from their constituents about inflation, you started seeing these polls that inflation was the number one concern, so you have lawmakers who are going to get voted out of office because they are perceived as causing this inflation.
There's direct communication between Congress and the Fed. In the short term, they're focused on the political concerns and doing something about inflation. I don't think they're thinking that far ahead.
MAGGIE LAKE: Yeah, someone also pointed out recently, in terms of if you're looking at economic growth, absolutely. But if you're looking at asset prices, well, let me ask you a question, and I'll bring up that point. This is another question from Anthony related to this. Does the Fed have an uncle point for a decline in capital markets? I just don't see them continuing to tighten and hike if the markets are falling?
JARED DILLIAN: Yeah, that's the $100,000 question for sure. I don't know the answer to that. I can guess that Jay Powell does not have the will to tighten like Volcker did, I just don't think he does. If stocks go down 20%, do they panic and stop? Maybe. I really don't know what that number is.
MAGGIE LAKE: Yeah, I think it is unknowable. The point I was going to make before is that someone brought up the fact that when you look at stock ownership, yes, a lot more people's money through 401k is in stocks, but it's not as wide as you might think. But if you look at inflation, and people needing to fill up their cars and going to the food store and seeing those huge prices, that affects everyone.
If you have to take those two things into consideration, I think the suggestion