MAGGIE LAKE: Hi, everyone, welcome to the Real Vision Daily Briefing. It's Wednesday, May 11th. I'm Maggie Lake, and here with me is Darius Dale, founder and CEO of 42Macro. We are dealing with another choppy day and you're going to see Ash Bennington is with us again, but we're going to wait to get to him. I want to start with Darius and the inflation data.

Darius, were actually ending the US session for equities, they're heading into the lows again, which is pretty ugly looking, and the market seemed like it had a really hard time deciding how to digest this CPI number, the monthly CPI number we got. What are you watching what stood out to you?

DARIUS DALE: Yeah, there's a couple of things that stood out to me. And it's the same thing that's been standing out to me really for the past six months, which is the annualized momentum of the time series and all the various key components of the time series continue to trend in an adverse manner as it relates to the Fed's reaction function, and ultimately, the market's response to that.

I'll give you three quick numbers 7.5%, that's the annualized rate of change, the three-month momentum, in core services inflation that's taken the baton from goods inflation, which slowed to 0.8% on an annualized basis. That's the fastest number we've seen since August of 1990.

And then number two, I give you sticky CPI. That accelerated to 4.9% year-over-year, doesn't really matter. I don't care about the year-over-year. The three-month annualized barely slowed only 10 basis points, still tracking at about 6.5%.

Then median CPI slowed 20 basis points to 6.2% just off an all-time high. On an annualized basis, sticky CPI, median CPI, services, core services CPI, all the things that feed directly into core PCE, the Fed's preferred inflation metrics, are continuing to misbehave and run well above, orders of magnitude above the Fed's target.

MAGGIE LAKE: This is terrible sounding, Darius, even though you made it sound nice. Talk to me about why equities didn't tank right out of the gate, though. That was interesting. We bopped around for a while. Maybe the decide what does this mean and play out the scenario in terms of Fed policy? What did it feel like to you?

DARIUS DALE: I'll be frank, I don't feel anything. It's all math, and it's all data. The initial response to the print was really just the fact that it confirmed the anticipated slowdown. That's positive number one, we're now moving in the right direction as it relates to helping the Fed take its foot off the brake.

But then when you actually dig, do the math, do the numbers. It's not like the data comes out already manipulated into annualized time series and momentum, etc. Folks like myself have to actually go in there and take the raw data and manipulate it. I think once people like myself updated their models, updated their charts, it got worse throughout the day.

This is something we flagged a heading into the week. This week, it's very unusual to see such weakness in the equity market, and have it still persist with an implied volatility discount. And what I mean by that is the price, the implied volatility of the 30-day or near term put options relative to a near recent volatility. That's been the case.

That's been persistent all week, even though we've had such some big smackdowns from a price perspective. It tells you that investors are very sick, they were very sanguine, they're very complacent about this report. And obviously, the report did not behave in that manner.

MAGGIE LAKE: 10Y yields rose above 3% but turned right back around 2.91%.

DARIUS DALE: Yeah. Look, the bottom market is starting to sniff out really, and this is the first week we've really seen this price action. The bond market is starting to sniff out the transition from what we call inflation. That's where growth is decelerating and inflation is accelerating to where what we call deflation, that's where both growth and inflation are decelerating.

You typically have both a risk-off from the perspective of asset markets, but you typically have risk-off inverse covariance between stocks and bonds in the latter regime. Seem like we're on the precipice of that, and ultimately, the bond market is actually looking forward to the Fed keeping its foot on the brake for longer, slowing the economy faster and potentially transitioning from a soft-ish landing, to quote my friend JP last week, to something that looks like a not so soft landing.

And ultimately, I think we're headed for something that may look like a hard landing if the data continues to behave the way it is currently behaving.

MAGGIE LAKE: Yeah. And I heard a lot of people saying that this inflation read made that soft landing, which is hard anyway, and the Fed has a terrible track record at it, even harder now. It seemed to reduce the likelihood of that. Would you agree?

DARIUS DALE: Yeah. One quick stat for you. I got this from either Lisa Shalett at Morgan Stanley or Kathy Jones at Schwab. My apologies to both of you. The 14 tightening cycles we've had in the post-war era, 11 of them have ended in recession.

The last time we've seen a soft landing got to go way back nearly 25, 30 years to 1994. Employment rate was 6.5% at the beginning of that hiking cycle. Employment rate was 10.5% at the beginning of the 1984 tightening cycle. Those are the last two soft landings. We started this tightening cycle at a three-handle on the unemployment rate.

It was a pipe dream at best to think that we were going to get a soft landing. And I think the data, which is what we specialize in at 42Macro, analyzing and projecting the data, the data continues to tell us that the probability is actually shrinking, not improving.

MAGGIE LAKE: Yeah. I want to bring Ash in. We're dealing with volatility, big story developing on inflation. At the same time layered on that, Ash, we continue to see this story about Terra reverberate through the crypto community. What's the latest there?

ASH BENNINGTON: Yeah, we sure do. The latest is that-- Terra is an ecosystem. There are multiple parts of it and we'll talk a little bit about that. But here's your headline, which is TerraUSD, sometimes called UST. This is a so-called algorithmic stablecoin, the peg has broken, the price has blown out.

It's extremely volatile, this was trading as low as 30 cents on the dollar earlier. Looks like now, we're up a little bit about 66 cents on the dollar. But this is supposed to remain pegged at $1, so any decline on this that goes below that breaks the buck is considered a significant and in fact, ugly event.

MAGGIE LAKE: Ash, why is it such a big deal? Because we know they're all these different coins, and for a lot of people who may be listening, they might have a little money in some of them, probably most of it's in Bitcoin or ETH. But this just seemed like some of the headlines and articles that we're reading, there's a great level of concern. Why is this a bigger deal than maybe just that particular stablecoin?

ASH BENNINGTON: Yeah, that's really the key question that you just hit on there, Maggie. And the answer is because this is meant to be pegged. This is meant to be fixed, and it shows that there are weaknesses, potentially in the market. I mentioned this yesterday, I think it was trading at about 90 cents when I said that it was a science experiment, and the test tubes were blowing up. Sometimes you just get lucky.

Look, the reality here is there's fear of liquidation of Bitcoin. Now, to date, we haven't seen anything that looks catastrophic in Bitcoin. I'm looking right now on my monitor, 29,311 on Bitcoin. If you look at that over a one-day chart, yeah, it's down about, well, call it 6.5% on a price basis.

Reality is this is a very volatile asset class, 6.5%, not catastrophic. But the fear is that there might have been some liquidation to cover the cost essentially to try and rebalance this peg. We haven't seen panic selling yet in Bitcoin, but it is something that of course, we are watching.

MAGGIE LAKE: It begs the question, it has to, whether you were talking about something happening in the crypto world, if it was a fund blowing up in the traditional finance world, we would be saying, well, if it happened to them, who next? Could it be someone else next? And what does that mean? That's always the fear, isn't it? That contagion fear.

I know that in some of the articles we've been sharing around, people are bringing this up, asking, is this crypto's Lehman moment? Is it their Bear Stearns moment? And I know, there are very strong opinions on both sides of that. But that's the level of discussion that's happening, at least in some places. What about regulators? They've got to be seeing this. What are we seeing on that front?

ASH BENNINGTON: Exactly. This is something that Janet Yellen brought up in testimony before the Senate Banking Committee yesterday. We're hearing rumblings out of the European regulators that there's potential regulation around stablecoins. I was just hitting those, headlines coming in.

What's coming out of Europe sounds much more expensive in terms of the regulatory push that we might be seeing in the Euro area, in the EU in terms of the push to regulate stablecoins. Look, ultimately, I suspect that we do get some regulation. Because look, these really look like, look, feel, smell, tastes like banking products, right? If you're depositing something and you're expecting to get it back at par, that sounds a lot like a banking product.

Very often, some of the yield forming products look like attempted at generating interest bearing accounts, I suspect that we're going to see regulators, just not a prediction, but this is something to look for, looking to regulators to say, hey, look, if you're creating things that look like banking products, they feel like banking products, why aren't they being regulated like banking products? Not saying I agree or disagree, but I think that is the direction that this is going, Maggie.

MAGGIE LAKE: Yeah, and the question will be, is that conversation accelerated now that we see what's going on? We have seen a little bit of spillover because we know some FinTech names, some exposure to blockchain have been down. Coinbase has been getting hit, they've had to come out. And they came out with an interesting headline as well, didn't they, about people who have accounts? What do we know there?

ASH BENNINGTON: Yeah. Basically, this story that was a statement by Coinbase, saying, in the event of a bankruptcy, the customers may become general creditors, that is not something you want to hear if you're a customer. If you are a customer of a traditional broker dealer, there's something called SIPC. That's a protection in the case of insolvency of the broker dealer and you get your money back from the securities.

Effectively, the statement, at least as I read it, as people I think are talking about it and thinking about it is the fear that people who have their accounts may become general creditors in a bankruptcy proceeding. That's something that nobody ever wants to hear.

MAGGIE LAKE: Right, and again, will no doubt spark that conversation around regulation. So much developing on this story, and I think it's so important. Ash, you're going to be doing a Twitter Spaces at 4:30, at the bottom of the hour all about this if I'm not mistaken, right?

ASH BENNINGTON: Yeah, that's right. That's going to be the deep dive. That's going to be the nerd fest. We've got Jim Bianco, Santiago Velez, and Mike Rogers, who were scheduled to join us at 4:30pm Eastern time, immediately following the conclusion of Real Vision Daily Briefing today, Maggie.

MAGGIE LAKE: All right, fantastic. If any of you have crypto in your portfolio, if it's something you're watching, something you're concerned about, as soon as we wrap up here, you can pop over to Twitter and check that out with Ash. Ash, thank you for popping in again. Appreciate it, and we know you're going to be all over this.

ASH BENNINGTON: Thanks, Maggie, and come in and say hello, everyone.

DARIUS DALE: I'm definitely going to join you, man. This is the biggest story on the tape right now.

ASH BENNINGTON: Darius, you're welcome as well. You too, Maggie.

MAGGIE LAKE: I will. Thanks, Ash. Appreciate it. Thanks so much. We got to dive back in here, because Darius, I think these things tend to happen-- it's not helpful when it's already a volatile situation, people are already getting killed on other things in their portfolio. And then you see this area that people were feeling good about, there was innovation. And now, something like this happens. Does that just feed into the feeling of uncertainty? Are you worried about contagion spillover?

DARIUS DALE: No, I wouldn't say worried. We're sitting pretty here at 42Macro from a portfolio construction perspective, but I am concerned about the spillover to broader financial markets from just investors taking their ball and going home. We've seen this in the active management community gearing up for this slowdown.

You saw it in the sector and style factor dispersion for months, defensive, defensive, defensive, defensive, very clear indication that hedge funds and active managers in the mutual fund space were effectively gearing up for this behavior. And I'm not sure that the average investor, unfortunately, in the digital asset ecosystem space really had a process to see this coming.

It's not that you can predict the one-off events with Coinbase taking everyone's money and going bankrupt, potentially, or breaking the buck, Tether and Luna and all that stuff. It's hard to understand this. But what you do know is when growth is slowing, and financial market volatility is high, this is where you start to uncover the bodies. This is when the bodies start washing to shore.

We're going to see more of this, we're not yet at the point in the growth and liquidity cycle where it makes sense for large scale capital allocation into these types of assets, into these types of products. The likelihood that we actually see more sloppiness, more negative headlines, more volatility is high over the medium term.

MAGGIE LAKE: Yeah, and that is the worry. We've got some great questions. Casey, Paul, Michele, JoJo in the house. We're going to get to them all in a second, but I wanted to run a little clip. As we've been having the global recession series, Raoul spoke to Gene Munster, Head of Research at Loup, about the outlook for technology. I was really interested to hear this because Gene, for those who don't know him, is a longtime technology watcher, very familiar with managements across this space.

They were talking about this pull and push between some of the short-term pain we're seeing, and some of the more longer-term trends they believe are still intact. Let's have a listen to the clip.

GENE MUNSTER: You have to take into effect the macro. And it's not my violin concerto, but I have to take into effect. And now, we'll just maybe draw a line between unapologetically just supporting these tech growth companies no matter how much they're down. That has not been our approach over the last six months at Loup, we've been pretty heavy in cash. We're 70% in cash coming into the beginning of this year, now we're 50% in cash. We've put money to work, and that money has not--

RAOUL PAL: Hold on, what made you go 70% cash, because that's a hell of a ballsy call?

GENE MUNSTER: It felt like things weren't lining up ahead, there was aspects that we saw in how these stocks were moving that reminded me of what happened around 2000, 2001 and it felt like we were in a bubble. And I would just describe it as that companies were just not going up, the valuations weren't going up in lockstep to what was changing the fundamentals.

And we have a process called reverse DCF, where we basically calculate what is implied in the growth rate for these companies. And what we're finding is that many of these tech companies were trading at valuations that would imply 40%, 50% growth for the next decade. And the probability of that actually happening, this year, there's like 10 companies in tech out of the 3000 tech companies, 10 of them that actually achieved that.

But in this case, we had 100-plus type of those companies that were out there. That's what got us there, was this I would describe it as a view of the future, but a discipline around valuation. And it was, by the way, it did not go well at first.

RAOUL PAL: No, this is one of these career moves. If you're not careful and you get that wrong, everyone's-- you're going to get fired. And if you get it right, you're a hero. Well, until they forget, which they always do.

MAGGIE LAKE: And you can see that full interview on our website. And that's part of the series as well. Darius, being disciplined about valuation in tech, that wasn't something we were seeing a lot of, as Jim points out.

DARIUS DALE: Yeah, absolutely. And I have a great chart on quantifying valuation from a macro investor's perspective because I don't necessarily disagree with the longer-term conclusions. Although I will say that we are not yet at that point in the process where valuation should be a motivating factor for making new capital allocation decisions. Brian, if you don't mind putting up that chart, financial conditions, it's the title of the chart, financial conditions remain uncomfortably loose. And here's why.

The red line in this chart shows the Goldman Sachs Financial Conditions Index without regurgitating the white paper. It's really just a deviation of all the things that matter from a capitalization standpoint if you think about companies trying to raise money, so what's the deviation in the dollar or credit spread, the earnings yield or cost of capital, etc., etc.? It's correlated to volatility, it's inversely correlated to the price of the stock market, price of crypto, etc.

Right now, at the current level, we are as loose from a financial conditions perspective, meaning the Fed is still as easy as we were at the peak of the dotcom bubble. We haven't seen anything yet as it relates to the ultimate amount of financial tightening we need to see before the Fed is comfortable that it's done enough damage to the markets and the economy to tame inflation.

The black line in this chart shows the S&P 500 earnings yield, the next 12 months earnings yield. What's the analysts' estimate, the consensus estimate for earnings for the market and then divide that by the price of the market. As you can see, we're right around where we are from a financial conditions standpoint. We're nowhere where we were in terms of the peak earnings yield, the peak cheapness, the peak valuation of the market relative to that last non-recessionary slowdowns.

The last two we got are 2015 -2016 and 2018. You just look at the levels of where that those dotted lines are, we have a