ANDREAS STENO LARSEN: Hi, everyone, and welcome to the Real Vision Daily Briefing. I'm Andreas Steno from Real Vision, sending to you live, Tuesday, September 13th, after another inflation shocker. It's been a day of great volatility in inequities. My own portfolio is bleeding. But I'm looking forward to debate whether the Federal Reserve will need to hike by 100 basis points at the next FOMC meeting with my guest of the next 30 minutes, namely Tony Greer. Good to see you again, Tony.
TONY GREER: Andreas, how are you doing, man?
ANDREAS STENO LARSEN: Not too bad. But honestly, my portfolio is bleeding today, Tony. Give us a brief overview of the market action today after this inflation shocker.
TONY GREER: Yeah, the inflation shocker was toast or getting thrown into the bathtub without a doubt. We thought that with all of the media and Fed official commentary about recession slowing economy, we thought that we were going to have some kind of reversal coming. The market was convinced that expectations of inflation had gotten way far ahead of itself, and we thought that we were going to come in and see a change lower in inflation and a change in some of the trends that we've been seeing. And we wound up seeing a continuation of the strong dollar trend, the rising yields trend, the interest rate sensitive sectors of the market getting clubbed trend.
We got 2Y yields today vaulting to 3% and 3.25%, that's a new high, 10Y yields right to the May peak at 3.5%. We even got five-year breakevens bounce up to 2.62%. And we have an equity bloodbath and the amount that you bled out determined by how sensitive your business is to interest rates, quite honestly. We've got all of the interest rate sensitive stuff on the bottom off 6% or more today, as we speak, Andreas. Cannabis, social media, software, cloud storage, homebuilders and retail.
Perhaps the most interest rate sensitive stocks in the market off 5% or more, the NASDAQ, cybersecurity, consumer discretionary, gold miners. They're getting to everything today, they're just getting to natural resources a little bit less with the Bloomberg commodity index managing to eke out a 50-basis point loss today, which was a day that there was, if it wasn't the dollar trading, it was an all-asset class selloff.
I think that can continue, I think the strength in commodities can continue. I don't think that the market is set up to break down, to implode to a new low or really get going much on the upside. I think we're in for a lot of volatility for the rest of the year, fits and starts trying to make sense of the curve, the breakevens, of interest rates, the energy markets, and I just don't think that's going to lead to a trending S&P in either direction. That's my take on it as of now, Andreas. What do you think?
ANDREAS STENO LARSEN: Well, I find it tricky. My portfolio is currently made up by a long in the S&P 500 versus a short in the German DAX. It's made by a long position in long bonds, very tricky position to hold these days, and then a short in the commodity space. The overall package has done pretty well in recent weeks. But not today, to be honest. But I wanted to show you our tweet of the day, Tony, because both Jonathan Farrow from Bloomberg, but also Nick Timiraos from the Wall Street Journal retweeted a comment from Nomura Research right after this inflation print hinting at a 100-basis points interest rate hike at the next Fed Reserve meeting. What do you make of that debate, is 100 basis points on the table now?
TONY GREER: I suppose it has to be, Andreas. I tried to be a spectator in the bond market debates and just see who's developing more and more merit. It seemed to me like everyone that was arguing that a recession was about to happen, that rates had to come off. I didn't feel like they had a lot of economic data to stand on. We come in today with inflation better than expected. We'd likely get PPI maybe better than expected, putting even more pressure on the Fed.
And yeah, it sounds like no more interest rate hikes rather than less for longer, which is more important from my book, in seeing that this inflation issue is not going to go away. It seems to me like the bond markets and the rates markets seem to be not flinching by either the Federal Reserve or the government media rhetoric that's coming out that we're going to have to slow down the economy to cool off this inflation. It seems to me like the bond market is paying closer attention to the Treasury who was writing stimulus act after stimulus act with a different name and call it loan forgiveness.
And then we're going to send you a check, and we're going to write a check to reimburse these guys. And we're going to shift the energy profits over to you. And the Treasury market is seeing right through all of that and saying everything that this administration is doing to fight inflation is inflationary. And as yields are going to prove, they are not backing off. Yeah, if we're going to price in a tighter Fed, that would not shock me at all, Andreas.
ANDREAS STENO LARSEN: If we look at the headlines today, one of the top stories I've noticed is that the Biden administration apparently mulls buying back oil at levels just below $80 a barrel. You've been playing this energy space from the long side most of this year, Tony. By the way, spot on. But what do you make of this headline? Is it even possible for the Biden administration to play this long game in oil in any case?
TONY GREER: Well, two things. First of all, you made a great call yourself, Andreas. And that was you were bearish energy at the highs and that was fairly astute, especially the natural gas call. It does look like the pressure has been taken off a Europe. It looks like they're doing better than the markets expected on storage. Cheers to you on that call.
Apparently, the Biden administration is day trading the SPR as far as I can tell. They're making sales in the low 60s. They made last week the biggest SPR sale in history as reported by Zero Hedge of 8.4 million barrels. When I calculate the average price roughly of last week in oil, it was about $85 a barrel. If we sold 8 million barrels of the SPR into that, and the oil market comes back $87.5 bid, I'm going to say that the SPR sales keeping the market down is unsustainable.
And now, they've gone already and admitted, for what reason I don't know, that they might be a buyer at lower prices so I would be shocked to see them get filled in on a bid below $80 or anything like that. I feel like they're posturing for when they empty the SPR and then have to come and buy it back at higher prices. And they can say, well, we wanted to buy it back at $80 but the market's not letting us. I think that's what that headline is all about.
ANDREAS STENO LARSEN: In terms of getting involved directly in the crude oil market, Tony, do you consider this $80 handle a new bottom basically after this headline?
TONY GREER: Well, yeah. Now, I'm $81 bid for life. I don't think oil is going to trade $80 in our lifetime. No, I'm kidding. But I think it'll be difficult just given market structure to get down to that price. My book's a little bit lighter. I'm out of oil, the commodity, Andreas, in terms of like all the stuff that I bought, during lockdown, sold some of during the Russian invasion of Ukraine and war, the rest, quite frankly, until about last week.
I'm out of oil, the commodity. I wanted to free up my mind to be able to observe and see what was going to happen going into winter. I've remained long the energy stocks and I will continue to as long as they are performing the way they have. You can even see on days like today, Andreas, I'm a big proponent of what I call the great rotation, where I think commodities are going to outperform technology and certainly, equities.
And you can see even on down days, the great rotation has a huge day on the upside, where everything technology gets killed for 5% and 6% and your natural resources portfolio is down between 2% and 2.5% depending on what sector you look at. For me, that's me being able to say, okay, I'm surviving this equity selloff. If the broader market is off 5% and my sector is off 2%, I haven't done that badly. And hopefully, I'll get the upside back in a rally.
But I think that we're still in that phase where commodity inflation is going to force the hand of the Federal Reserve. The bond market is going to continue to force the hand of the Federal Reserve and pushing yields higher and interest rate sensitive sectors of the market are going to get bludgeoned, Andreas. They've been puffed up for too long. Now, they're technically on their back and I feel like we can really come after them.
ANDREAS STENO LARSEN: How do you risk manage such a position in natural resources, Tony? Do you always trade it directionally or do you trade it in spreads versus other sectors?
TONY GREER: Yeah, I trade them all. I tried to keep all these trades as their own merit, Andreas. It looks like an equity long short path right now. But there have been plenty of times when I'm happy to be long only. I haven't been short only in a long, long time. But we may get to that if natural resources curl over and the equity market keeps tumbling.
What I tried to do, Andreas, is get ahead of the market coming off with some shorts on the pad, which we put on weeks ago, which are now in the black. And if we have to get out of all of our market length on the way down, what we'll be left with will be a set of shorts that will be performing. That's the way I try to manage it. It doesn't always work out perfectly. But I feel it gives me a little bit of leeway in terms of being able to trade the natural resources strength versus the tech weakness. You know what I'm saying?
ANDREAS STENO LARSEN: Yeah. Tony, how important is the ongoing ESG trend for your view on natural resources?
TONY GREER: Great point, Andreas, it's everything. It's everything. And I've seen so much propaganda in the news wires about how did ESG get caught up in America's culture wars? And I saw that article come out of the NPR, and I've seen some other articles in the USA Today warning about how ESG is getting this unfair treatment because of not really accounting for what it's done in the markets. And you really upset American culture when you go and double the price of gas at the pump and quadruple the price of natural gas at the spigot.
That's upsetting culture. That is like Larry Fink likes to say, that is affecting outcomes and changing behaviors. As long as that's going to be the case, as long as we've got the blueprint across the pond for what could happen if things go wrong, I think politicians are going to continue to-- I think that they're financially incentivized, but I think that they're going to continue to push the whole thing, they continue to push it through the media. And until I see them say, okay, go ahead and start drilling on some federal lands, I'm going to expect the oil price to be biased to the upside, because we're still--
OPEC just reported, they expect global demand, gasoline demand-- sorry, they expect global oil demand to grow by 3 million barrels a day in 2022, and another 2.7 million barrels a day and 2023. Gasoline demand, oil demand isn't going away, we're just trying to shift the power source to a different source. That's way more profitable and beneficial to China. And it seems like that's what is going to be the system here in the United States until something breaks.
ANDREAS STENO LARSEN: Yeah. The only caveat to that view, Tony, is that the new prime minister in the UK, Liz Truss, actually launched a new oil and gas licensing round as one of her first initiatives in office. I think there is a glimpse of hope in terms of a better strategy in Europe right now. Basically, the markets are forcing the Europeans into that view.
TONY GREER: So maybe, Andreas, the pendulum has swung far enough politically, where they sense all the pressure with midterms coming up, and that Party is trying to make some an adjustment so that they can show the people that they have an attitude that at least is nonzero, causing effect to the high energy prices. If they're willing to at least have some flexibility, then maybe that's how ESG can live through this. But certainly with no flexibility, trying to go carbon neutral by 2030, that's a nonstarter bet. If that's the case, then you have to look for the ESG blow up bets, in my opinion.
ANDREAS STENO LARSEN: One thing that is noteworthy in relation to this debate on ESG is the carbon emission futures market, Tony. We had a brief debate before we went on air on this market, because we've actually seen a pretty sharp decline over the course of August and September in the price of carbon emissions. I think we can bring up Chart 2, Claire, with the price development in the European carbon emission future market. But, Tony, you had a great point in terms of the structural setup in this market, it seems as if it's built to rally. Please explain.
TONY GREER: Yeah. Andreas, I feel like until every industry that's emitting carbon into the atmosphere has a carbon hedge on then there's still a buyer of carbon credits. Until the last carbon emitting business has a hedge on or has their credits neutralized-- or excuse me, their emissions neutralized with credits, there will always be an incremental buyer. As long as the global economy is expanding, we should be expanding our emissions which creates a more of a buyer.
So as long as the economy is in ok shape and the ESG policies are going along according to schedule, it seems like there'll be a perpetual buyer of KRBN in the carbon futures market. And at the same time, I feel like now we've just seen a strict pullback, which I suppose coincides with the steep pullback in economic expectations, the slight pullback in gasoline demand that we've seen in the last couple of weeks.
That makes sense to me, but otherwise, I feel that that market sends off some conflicting signals sometimes that make it very difficult for me to trade quite honestly. And I haven't traded it at all yet. I'm still in the spectator seat if that's all right.
ANDREAS STENO LARSEN: Yeah, I haven't traded it either. But to me, it works at least that's a decent short-term gauge of whether the gasoline demand is on the rise, or vice versa. But interesting to follow that market, because you're absolutely right. I think it is structurally built to rally at least until everybody is aboard the train, so to speak.
But, Tony, in relation to these rising energy costs, I also wanted to pick your brain on the spillovers to the equity market, because when I look across the board in Europe, SMEs are faced with electricity bills at probably four times the level of 2021. At some point, that has to lead to lower margins for-- What's your take on that?
TONY GREER: Yeah, that's why I've got a homebuilders short and an internet stock short on my pad is because I am expecting the economic weakness to come out in the earnings. And I'm not to say those specific sectors, although I think the homebuilders sector is probably doomed for some bad news given the rate move that we're seeing now, given that rates have been higher for longer, given that rates seem to be sustainably higher for longer, I'm going to expect that there's no way that homebuilders can pick up the pace that they can be on.
Obviously, with the ramifications in the mortgage markets. But as long as there are that many interest rate sensitive sectors to the market, there's no other way to try to play the S&P backing off to me than to try to get out ahead of those sectors as a short play so that if anything else that you're in the market gets taken out, that you're at least left short something within the S&P.
If the interest rate sectors are all off today, it's an obvious day where rates are flying higher. And I would imagine that there might be a bigger test on the downside. I just feel like the sentiment in the equity market is so negative and so short that there'll be buyers on the way down to the recent low and it may be not as steep as people think. That's my view at the moment, Andreas.
ANDREAS STENO LARSEN: In relation to this debate on energy costs and the spillovers to equities, I wanted to play a soundbite for you from a debate I had with Peter Boockvar a couple of days ago. His point is that we should expect these energy costs to have broad-based ramifications for the US equity market as well. Let's listen to Peter here and get back to that discussion.
PETER BOOCKVAR: It is shocking the extent at which we've seen in Europe right now, the rise, not just the extent of the rise, but the rapidity of the rise. It's a shock, like anything else. I know governments are trying to mitigate it as much as they can, where they started out with price caps and subsidies for consumers and households. And now, they're trying to figure out how do we save small and medium sized businesses, particularly in the UK with the new prime minister, and they're talking about a cost of well over 100 billion pounds to give money to small medium and sized businesses to get through this energy winter.
And that, of course, has a direct impact on overall economic activity, and flows through earnings of everybody. And again, also small companies. And I mentioned a bunch of US tech companies, most businesses in Europe are customers of US big cap tech companies. So again, no one is immune to this. It's just what you are going to look like as we work through this, whether you're going to stay in business or not, or you're lucky enough and all you're going to have to deal with is an earnings hit. But with market valuations very high, it flows through in many different ways.
ANDREAS STENO LARSEN: The entire interview with Peter Boockvar is already available at the Real Vision platform for essential subscribers. But back to you, Tony, one of the points that Peter makes here is that the SMEs are faced with higher electricity costs and energy costs. And that we should remember that SMEs are also clients of large cap companies so that the spillover from SMEs to large caps takes a while but ultimately we will also see these rising energy costs hit the large cap sectors. What's your take on that