MAGGIE LAKE: Hello, and welcome to the Real Vision Daily Briefing. It's Monday, March 28, 2022. I'm Maggie Lake, here with Jared Dillian, editor of the Daily Dirtnap. Hi, Jared. How are you?

JARED DILLIAN: Hey, what's up?

MAGGIE LAKE: Not too much. It's good to see you. If we take a look, it's been a little while since you and I've talked. I'm really curious to hear what your thinking is around these markets. If we take a look at the beginning of a new trading weekend, it looked like it was going to start out to be a pretty quiet day. But we actually had some action here, especially when we look at oil down really sharply 9% on the day. We saw a bid back into risk assets. The NASDAQ picking up steam as we headed into the close here, more than a percent. We saw Bitcoin and Ethereum, both up sharply.

Prior to that, it looked like the action was really overseas. We saw in Japan, the yen hit a six year low as the Bank of Japan intervened to keep yields down there. On the US Treasury, it looks like it was maybe more the quiet market today with the 10 Year yield anchored right around 2.46%. It seems like everyone's trying to figure out what happens from here. What's top of mind for you, Jared? What are you looking at?

JARED DILLIAN: Well, I'm in between things right now. When the S&P was down about 12%, and sentiment was really negative, in my newsletter, I made a pretty bullish call to play for a bounce in tech stocks in particular. I exited that call on Friday. And now I'm just in between ideas. You mentioned oil being down, I should never trade oil. Me trading oil is like the guy that walks up to the poker table and just gets busted out every time.

I'm not going to make any predictions on oil, but I will say that it wasn't just oil, a lot of commodities were down across the board today. And today's rally towards the end of the day was a really big ball crashing rally. VIX almost got into the 19 handle. The bounce in stocks seems to be continuing. I'm agnostic as to whether it will or not, but that's where I am right now.

MAGGIE LAKE: Yeah, it's interesting, because it's you think about what's really changed here over. We still have so much uncertainty when it comes to geopolitics. And so, do you get the feeling that that may be the lows we're in and there's something fundamental going on? Or does it seem to seem like price action? Just things got over done, but there's not really a lot of conviction as to where we go from here.

JARED DILLIAN: Well, one thing that I'm looking at, and I'm spending some time thinking about is the yen. Dollar yen today got up to 125, which was the highs during the whole Abenomics Period. It broke out two weeks ago from 116. It's moved 10% in a week and a half. That's an incredible move. I don't think a lot of people are talking about it.

There's big macro implications to that, and I'm not really sure what they are. I don't know if this means that the dollar is going to continue to rally. I really don't know what it means. In my newsletter, what I've been saying for a long time is that FX is boring and it's a waste of time, and we're starting to get some really multi standard deviation moves in FX. And I don't know if this is a trend or not.

MAGGIE LAKE: Yeah. Gosh, if oil is hard to trade, I think currencies are even harder, just because there are so many things to take into consideration when you're looking at that market. If you're going to try to think about the macro implications of that, where do you even start? What would be the things that you'd be concerned about that would impact your investments or ideas that you'd want to maybe put on as a result of this?

JARED DILLIAN: Well, you have to go back 10 years ago to when Shinzo Ave was elected prime minister in 2012. He had his three pillars for restoring Japanese economic growth. Between Ave and the Bank of Japan, they devalue the yen a lot. If you remember DXJ, the ETF was launched in 2012, just this Abenomics was starting, and the Nikkei went from about 8000 to 20,000. There was this big reflation in the Japanese economy, but that was also concurrent with the dollar getting a lot stronger relative to all G10 currencies. The Canadian dollar really sold off during that time period.

Currencies, you said that they're hard to trade. I would say that they're hard to trade 90% at the time when you don't really have an underlying trend, but when they trend, they really trend. That's a Stan Druckenmiller quote. He said the old timers know when the yen trends, the yen trends. Raoul posted on Twitter today. He posted a chart of dollar yen going back about 50 years or so, and it's on the verge of breaking out of resistance, and there could be some fireworks if it does.

MAGGIE LAKE: Yeah, he was talking to Lynn Alton about that. In their conversation, really interesting things came up. I encourage you all if you've got access to it to go check it out. But yeah, the feeling that something big is brewing there. I wonder, there's also a huge moves in bonds. I think the worst quarter ever, at least bond some record keeping.

We see parts of the yield curve inverting. I know a lot of people are thinking about this, does that. Historically that signals warning signs that increases the odds of recession. The short end response to the fact that the Fed is going to be more aggressive but the long end doesn't buy it and thinks that the economy's going to weaken as a result of that, so you see that happen? Are you concerned about that? Is that something you're watching? What do you make of the bond action?

JARED DILLIAN: I'm watching it for sure. It's very slow moving. Let's talk about the yield curve first. 5/30s is just about flat right here. 2s10s, I want to guess is about 20 basis points. If you're really using the yield curve, as a metric for timing recessions, you really have to look at three month bills in 10 years, which actually, I don't know where that is off the top of my head, but it's steeper than 2s10s.

The thing about using the yield curve to time recessions, now, all recessions are preceded by the real yield curve reversion, but the amount of time it takes really varies. It can take anywhere from six weeks to 18 months from the time of inversion. So really, once that yield curve inverts the clock starts ticking, but it could be well into 2023 before we actually have negative GDP.

MAGGIE LAKE: You get the sense that people-- let me back up a minute. Do you think the Fed is going to be able to pull off all the rate increases that they're signaling? Do you think they can be as aggressive as they say they want to be without causing damage to the economy? Can the US economy take those level of higher rates?

JARED DILLIAN: They're not really being aggressive. In the context that we're--

MAGGIE LAKE: Well, you're right. If they go--

JARED DILLIAN: In the context of inflation 8%, getting us to 2% Fed Funds isn't really aggressive. They would have to do a lot more than that. If they really want to do something about inflation, they have to hike Fed Funds above where inflation is, which means Fed Funds of 8%, which they're totally not willing to do. If you look at their economic projections, they predict that CPI will be at 2.6% in 2024. I don't know how they're going to get CPI down to 2% in 2024, unless some recession just exogenously happens. They're not being aggressive enough they could do more. It seems like they're being aggressive, but they're really not.

MAGGIE LAKE: Yeah, relative to doing nothing. That aggressive relative to what they were doing. You're absolutely right. Historically, these are really low rates. What more should they be doing? What do you think they should be doing?

JARED DILLIAN: Well, first of all, not Monday morning quarterback this, but they should have started hiking in early 2021, because we had signs that inflation was ticking up back then. I think I've said on the Daily Briefing before that they waited to hike until it was politically convenient for them to do so when inflation had already started. They should have started a lot earlier. But now given the situation that we're in, if I were Jay Powell, I would do 750 basis point hikes going into the end of the year. I would get Fed funds up to 3.75%, 4%. And that would be a pretty good start.

You would invert the yield curve. You would engineer a recession, and that will get inflation down. But what the Fed, what they want is they don't want door number one. They don't want door number two. They want door number three, which is they want to bring inflation down without causing recession, which is why you hear all this talk about a soft landing. There's absolutely no scenario here where you can get a soft landing, either you're going to have a recession or you're going to have CPI printing above 10%.

MAGGIE LAKE: Yeah. It's the Holy Grail, isn't it? But it's hard to see how that ever happens. They always want to try to do a soft landing. And inevitably, something happens. It might be recession, but the other side of that, of course, is asset prices as a stock market, there's been a lot of conversation around that about maybe this is different this time. They're not going to worry.

Would you expect to see the same reaction that we saw in the past? We've already seen a big decline in stocks. Do you think that there is that that same possibility that as they raise rates are going to see a deterioration in stocks, again, that's going to cause the Fed to have concern? Or is it feel different this time, especially because we've seen a big sell off already?

JARED DILLIAN: Well, I think everybody's always expecting the next big bear market we had. We were down 35% during COVID. We were down 57% during the great financial crisis. We were down 50% during the Dotcom Bust. So, everybody's on the lookout for these really big bear markets. But more commonly, the market will be down 15% to 20%, and that happened in 2011 and it happened in 2012.

In 2011, you had the European debt crisis. In 2012, you had the S&P debt downgrade. They were a crisis, but they were a minor crisis. Everybody thinks this is a big deal. It's different this time. We have the war in Ukraine, stuff like that. But it's really hard to get stocks down more than 20% unless you have some kind of leverage issue or a big exogenous shock.

MAGGIE LAKE: That's interesting. That sounds like you think we've bottomed.

JARED DILLIAN: Well, I don't put words in my mouth.

MAGGIE LAKE: Let me rephrase that, Jared? Do you think we've bottomed?

JARED DILLIAN: I don't know. I really don't know. When I said that I'm in between ideas right now, I'm actually I was being serious. I think new highs and new lows are equal probability at this point. And aside from a handful of long term fundamental bets, I have an individual stocks. I don't have a position in the market right now.

MAGGIE LAKE: I think that's it. You just brought up something really important, though, because-- and by the way, I think this feeling of not being sure, just not being sure what the trade is, and feeling like there's equal risks on both sides. I think that that's really commonly held right now for a lot of good reasons. You make a really important distinction to between the short term and long term. There are some long--

Are you looking at stocks that have sold off that you like for the long term and nibbling at them, or taking positions because you've come well off those highs? And what do you like, what areas? Is it the things that are really beaten down? Is it tech? Is it value? What do you think is attractive on a longer term horizon?

JARED DILLIAN: Well, I'll give you my number one favorite idea which is Airbnb. Airbnb just is an incredible story, and it just gets cheaper and cheaper and cheaper. If you think of the fact that the global travel wallet is about 2 or 3 trillion, and Airbnb at this point gets about 1% of that and in fact, gets up to 5%. Just the economics of that are just astounding. A lot of people view this as a tech stock. It's not really a tech stock.

I remember when Tesla first started to rally and everybody said, well, it's worth more than Ford and GM and all these other carmakers combined. How is that? Well, it's a growth business. And someday people are going to say the same thing about Airbnb. They're going to say it's worth all the hotel stocks combined, and they're not going to be able to figure it out. I'm really bullish on Airbnb. It's funny that you mentioned the nibbling on stocks. When the market was down about 12%, I was nibbling on Airbnb, adding to a longer term core position.

MAGGIE LAKE: Interesting stuff. You make a really good point about understanding. We're in an environment now where-- It seems like we're an environment where you've got to know what you're investing in. You just said an interesting comment about Airbnb not really being a tech stock and do you feel like we're in a period where you have to be a lot more specific on knowing the company, understanding the fundamentals as opposed to just buying the sector which is frankly what a lot of people did.

You throw your money in tech, and it was going to win, it was straight up. Are you being a lot more discerning? Are you looking sector plays? Are you looking at individual stocks more in this environment? You might haven't done. You may have always looked at individual stocks.

JARED DILLIAN: I'm not a very good stock picker. Remember, I was an ETF trader, so I am used to trading sectors and asset classes. I don't consider myself to be the best stock picker. I think this is a pretty good environment for stock picking for sure, but it's also a good environment for trading sectors. If you just naively bought energy and sold tech six months ago, that's been a pretty good trade. It might get tougher going forward, but there are still opportunities like that out there.

MAGGIE LAKE: We've got a couple questions on the housing market from Half-- sorry, not from Half, from Daniel Diaz from RV. Any concerns on the housing market given what we're seeing in rates?

JARED DILLIAN: Yeah. I think people tend to make a big deal about mortgage rates. Mortgage rates are getting close to 5%. They're in the upper fours now. They're 5% in a couple of places. That doesn't seem to be putting a big dent into housing demand.

Where I live, it's really interesting. I'm friends with a number of real estate agents and appraisers, and they say that their business is getting killed. It's getting killed because there's no transaction volume. Because there's no supply. There's literally no houses available on the market. There's enormous amounts of demand, but there's no supply. So, there's just not a lot of transactions. I think the housing market is still strong.

I think you'd have to get rates up more, I don't know how much more, to really make a dent in that demand. My first mortgage that I got, I was 24 years old in 1999, my first mortgage was 7.25%. I didn't think that was egregious, and I was able to afford it. As rates go higher, it'll get rid of the some of these people at the margins, but demand is still very robust.

MAGGIE LAKE: Yeah, great point about supply. Same thing pretty much everywhere when I talk to people. I know your area is very hot. It's probably even more extreme there. But it just seems like we have that structural under supply that they're still working through, and plenty of people still looking to buy homes. That's going to carry over even as we enter a different rate environment.

I want to ask you about another issue that's come up, and its liquidity. Ash Bennington spoke with Michael Howell, managing director at Crossborder Capital. He expressed concern about liquidity in the market. Let's listen to a clip of that first not get your thoughts on the other side.

MICHAEL HOWELL: I think the main takeaways buy the dip, but this is a big dip. It may be a 30% drop from peak to low in the indexes. I think you've got to be cognizant that the central banks have got to come back in. What we live in is a world, a financial world which is a refinancing world. A debt has to be refinanced, and the only way to do that is essentially by using liquidity.

Liquidity is now increasingly under the control of central banks. So, central banks have got to come back in at some stage. The whole idea that central bank balance sheets will shrink back to zero, or whatever it may be, or their traditional pre-2008 levels is fanciful. Central banks are a major player in the world now and you've got to watch them. Watch the Federal Reserve, and watch the People's Bank of China.

MAGGIE LAKE: Jared, is that something you're worried about? Should we be concerned about liquidity issues?

JARED DILLIAN: We should have been worried about it for a while. I know a lot about liquidity being a sell side trader. It's very difficult to transfer risk in this environment. There's some measures of it. Bond market liquidity is pretty much at an all-time low. S&P Eminis liquidity are at an all-time low. It's a function of a number of things. It's a function of central banks. As you raise rates, liquidity will evaporate, and volatility will go up.

It's a function of regulation and capital requirements. The more regulation and more capital requirements will dry up liquidity. It's also a function of some market microstructure issues, which are very easy to fix. There's no reason that NASDAQ futures need to trade in quarter ticks when the NASDAQ is at 14,000. That type of stuff doesn't make any sense. And there's reasons for that that I really don't want to get into today. It just pisses me off.

MAGGIE LAKE: What do we need to worry about if we're facing-- what would a negative outcome due to liquidity issues mean? What should we be concerned about or watching for?

JARED DILLIAN: Well, there's negative outcomes and there's positive outcomes. Charlie Munger actually touched on this. Recently, he was being interviewed. He basically said that he wished liquidity was zero, because nobody would ever trade, and people would just hold stuff forever. So, that's one view. But people do need to trade and when liquidity goes away, then it increases transactions costs, which affects all of us seen.