ANDREAS STENO LARSEN: Good afternoon, everyone and welcome to the Real Vision Daily Briefing. I'm Andreas Steno, live on air from Copenhagen, Denmark. And this is Tuesday, June 21st. Finally, guys, we are on air with a bit of good news with stocks off on the day after a terrible week just last week. And with me to discuss the price action today, I have Tony Greer, the founder of TG Macro, and the editor of The Morning Navigator. Tony, my friend, how are you today?
TONY GREER: Andreas, what's happening, man? Thanks for getting together. What's cooking?
ANDREAS STENO LARSEN: Well, what a day in stocks basically, we had a rebound finally. Tesla is rebounding like crazy after some news from Elon Musk, and stocks are generally up. So, what do you make of the price action today, my friend?
TONY GREER: Yeah, it feels like we're finally exiting that TICK index Godzilla season where we saw a nine out of 10 days where the Dow Jones Industrial Average registered massive downside extremes and the TICK index, which is the uptick minus downtick index on the NYSC. Those large magnitude prints on the downside indicate that everybody is hitting bids simultaneously, there's indiscriminate selling going on. And that's what we saw for nine out of 10 days that rearranged the S&P from 4200, down to 3600.
And I guess, not sure what made this smoke settle or anything like that. But we've settled in today, and we've got a little 2% or 3% bounce in the S&, 2.5%. About the same in the NASDAQ, and there's finally a reprieve. And it really just looks like a little bit of a relief rally in the leadership today. We've got oil services and energy once again, but there's also some technology with some of the big, larger cap technology stocks rallying.
So, what's happened is we've just adjusted inflation expectations dramatically lower in the wake of that 75-basis-point Fed rate hike. We still got the curve warning recession with 2s 10s converging around 3.2%, around flat, obviously going inverted, and everybody in the markets is going to start talking about a recession. But we're into some of those big technical support zones for those breakevens. And I think they'll hold because you can't put away the money supply growth of 25% in 2020 and 12% last year, and you can't put away $9 trillion of Fed balance sheet that simply.
That's what I think is probably causing a lot of the inflation that we're seeing. So, I don't think that genie is going to go back in the bottle very simply or very quickly. But obviously, the Fed is going to have some kind of an effect on markets when they come out with a larger than expected rate hike. So, I think we're just grappling, and this is what you have to navigate, which looks like a little bit of an extended bear market for stocks.
I think it's all basically due to that story that I've been trying to get traders to buy into is that we're in a great rotation where everybody's going to have to buy a lot of technology and into natural resources, as commodity strength really stays with us based on fundamentals, and interest rates rise due to commodity inflation. So, that still fits in with my picture, we just saw a little bit of a pullback with all the damage on the screen that shook up everything. But I think that will come sooner rather than later now that sentiment has ticked into the fear level.
The CNN fear and greed index has been in the teens for the last several days indicating massive fear, which is what I would expect after that Godzilla-like selloff. So, Andreas, really, we're just rolling with the punches here. We're rolling with a lot of volatility, the VIX is still mysteriously 30 bid today, even as stocks recover. So, it's saying that we're not out of the woods yet.
And I guess it's probably going to take a while for the markets to digest what just happened to them. And I think we'll probably at some point, be led out of this dip by a resurgence in commodities, because their underlying strength seems to be fairly strong despite the Federal Reserve and everyone in the media is starting to bark about a pending recession. That's my take.
ANDREAS STENO LARSEN: So, let's assume for a second that this is a bounce within a bear market. What would you look for as triggers to sell again?
TONY GREER: Great question. So, what I would look for is leadership in retracements by the sectors that are performing worst on the year, like software and internet stocks and social media, and even Fang stocks, I would look for all of them to show leadership in the S&P and probably outperform a lot of the other sectors for a little while, as it drives the NASDAQ into moving average resistance levels that it's just pulled so far away from that we're probably in very oversold territory.
And so, I think when we see that leadership into resistance, Andreas, that's where I really want to turn my book around and put some shorts out in the technology space, and hopefully, hold on to my natural resources longs through that.
ANDREAS STENO LARSEN: Yeah, it's been a bit of a quiet day if we look at the economic calendar. So, let's discuss the commodity markets in depth instead, because everybody's watching the oil price currently, even Jay Powell is probably watching it on a day-by-day basis. I know you follow these markets very, very [?], Tony. If we look at the oil price action since last week when you were on this show on Tuesday, we had a bit of a dip in the oil price, but it bounced a bit back today. What do you make of the price action lately in the oil price?
TONY GREER: It fits right in with the de-risking that we've seen, Andreas. It seems like it was a steep and a late pullback because it's like the bears got to the commodity sector last because the commodity sector was putting up such a good fight for such a long time while the bears were having their way with the stock market. And so, I think eventually, we'll look back at this little episode here where crude oil pulls back into moving average support around 110 as just a dip to the 50-day moving average within a secular uptrend, and it may break this level, it may trade a bit lower from here, I don't really know.
But I do know that what was a standout feature was that the calendar spreads remained firm in crude oil, the crack spread, which has been in a 50 bid at $60 range for the last several weeks and remained in that range during the entire repricing of crude oil from 124 to 110. And so, that's a tell to me that that is the underlying strength in the market, and that is likely what is going to catch fire again and lead the markets out of this dip and get the market to embrace a little bit of risk again, and eventually, we'll have one of those large magnitude retracement days where you look around and the coast is clear.
And there's no fun blowing their brains out all over the tape. And next thing you know, there's really nobody standing around to sell any more stock because they've done so over the last 10 days in the 500-point slide. So, it feels like we're set for a moment of retracement. I don't know how far it's going to go today. Today wasn't a bad start, but it is what the type of slow start that I would expect personally after such a vicious move lower.
I wouldn't expect markets to just pick up and go again, I would imagine that there's residual selling all over the place and buyers are being as careful and as probably short-sighted right now as they can be, just trying to keep initial purchases together and seeing if things hold. So, I'm watching a couple levels in copper as well, if I could switch commodities on you, Andreas, 8800 in LME copper is the bottom of the range, the large range that copper has been in for two years.
We had a lot of false breakouts above 10k on the upside back in March and April when the commodity complex was firing. And now that we've adjusted inflation expectations lower and adjusted economic expectations lower, copper's fallen to the bottom of the range at 8800. So, it will be very relevant to me if we break this level and start to register a few closes below that level. If that's the case, it might start indicating to me that this natural resources pullback might have further to go.
If we hold these levels here, like we have in the past several years and buying materializes, then it's maybe a better chance that the commodity complex gets back on its horse again, and maybe retraces back to the middle or top of the range that it's been trading in. So, everything seems manageable here within the ebb and flow of the market dynamic, it's just a little bit risky at the moment.
ANDREAS STENO LARSEN: If we look at the crack spread, you mentioned that spread of, we can bring a chart on the screen with the reason price action in the 3-2-1 crack spread. Please unpack for the audience why it is such an important spread to watch.
TONY GREER: Yeah, that's a great question, Andreas. And what it is, is really the oil market's barometer for gasoline demand in an indirect way. What it really is, is the margin that refiners can earn when they buy three barrels of oil and crack them out into two barrels of gasoline and one barrel of diesel fuel. So, with that spread, when Trump was in office, which was a measly $6 or $7 spread for the refiners, what's happened that has blown out to around 50 or 60, between $50 and $60 right now, the reason being is gasoline demand has remained firm and WTI supplies have been thin and dear.
So, that's why the curve is backwardated. What happens in that scenario is refiners can buy crude oil at almost any price on the board, as you can see, and sell it out for massive profits. Not massive profits, but the market will bear those profits. Because the spread is so wide, and gasoline and jet fuel are still in high demand. So, we're still seeing despite these calls for an economic slowdown, the media has gone and gone berserk with it.
They love talking about a recession, they love talking about things like that. And, to me, it doesn't seem like we're really priced in that much weakness in the commodity markets just yet. The demand seems to be there. People following the markets have got steady demand. Numbers coming up in the next several quarters, the IEA just said demand through is going to exceed this year's.
So, we're talking about record gasoline demand in a period where we're turning the tables and changing the way we're going to be acquiring our energy. And so, that's made for a lot of ripples and a lot of tightness in various different places of the energy markets, if that's fair to say.
ANDREAS STENO LARSEN: Yeah, definitely. I'm personally a very avid watcher of the Federal Reserve. And I've noted lately that Jay Powell has started talking about the price at the pump, basically, as the best gauge of inflation, both Jay Powell and Joe Biden, they both want the price to come down now. But what will it take for them to succeed?
TONY GREER: You turn in policy, if you ask me. I'm pretty sure that that's the only thing. As a trader, I've been able to not leave my feet, meaning not get faked out on any moves lower in the crude oil markets. Because no matter what, the administration continues to step on the gas toward net zero. And when the ideas squeak out or leak out on how they're going to deal with the crisis of gasoline going to $5 and then soon, $7, they're going to come out with stimulus checks, they're going to come out with inflation aid checks, they're going to come out with a tax-free gasoline day, they're going to do everything, but reverse the policy that got us here.
So, no matter what, if we get back to, at any point, get back to driving gasoline demand, really robust gasoline demand, you can see prices go to $9 and $10 at the pump. And I'm pretty sure the administration won't take any blame or credit for that at all. And they'll still continue to cancel leases on federal lands, and they'll still continue to make it financially unviable to invest in new exploration. So as long as that's their case and their axe to grind, it makes it very easy for traders to stay in the energy bull market. It really does.
ANDREAS STENO LARSEN: I have to agree on that assessment. If we look at the current oil production, it's still clearly below pre-pandemic levels in the US. And obviously, it's one of the charts I'm watching right now, whether they can actually bring up the oil production to pre-pandemic levels at all. They're currently also releasing strategic reserves based on decisions taken in the White House. Is it at all a politically feasible scenario to bring oil production back to pre-pandemic levels or even higher?
TONY GREER: I don't think so. Where are we right now? We are at roughly 12 million barrels a day. So, that's still a million barrels per day shy of the production level that we got to at the end of Trump's term. And so, there's still a lot-- that's a lot of production, by the way, a million barrels a day. Unless we're going to get back to that level, we're not going to put a dent in gasoline or prices at the pump at all.
And I don't think that we can get back to that level without a reversal of some of the policy. And there's now talk about they're managing the political optics by saying, okay, we've got a trip out to Saudi Arabia, and it looks very much like Mohammed bin Salman said I'll pass on the trip when Biden said he was going last time, because the next headline that came out was, they raise prices to their Asian clients to a new record.
And so, I feel like he was sticking it right in the President's eye there saying not only am I not taking a meeting with you to provide more oil, I'm actually raising prices. That's the reality of what's going on right now. And so, until I see Joe Biden standing around an orb with Mohammed bin Salman having a laugh, I'm not going to believe that that meeting is going to take place, and I am not going to believe that Saudi Arabia is going to have any interest in trying to generate lower oil prices, I really don't see it happening.
So, we still got that. Well, that plus the Russia-Ukraine situation to deal with, that seems like it's going to be with us through Biden's entire term. And as we can see with the situation in Europe, they're coming to, out of desperation, the need to find a solution to getting gas from Vladimir Putin. So, they started off getting 40% of their total gas from Russia. As it turns out, after a couple of fields and a few natural gas fires, only 60% of that gas is coming over.
So, the shortfall is now getting mathematically desperate. And I think there was a German Energy Finance-- energy minister or something that finally admitted if we were in winter months right now, this would be a major crisis, and he's talking about in terms of generating baseload power. So that's where we know that they have not filled their storage tanks to capacity, that there's probably still an underlying bid in natural gas market with Europe and the US probably trying to add to storage ahead of this winter, especially on this dip that we just saw from $9 down to $6.50, $6.75 less.
So, with energy into support, I think that that's going to be the leading risk-- those will be the leading sectors that will lead us to taking a bit more risk and out of this hole in the S&P for a certain period of time. And then we'll see, Andreas.
ANDREAS STENO LARSEN: Yeah, I can even add that Germany has taken a decision to restart a couple of coal-based power plants as a consequence of what's going on in the natural gas space. And guess where they buy most of that coal right now? Yes, Russia.
TONY GREER: Don't tell me it's Russia.
ANDREAS STENO LARSEN: It's actually true. So, you cannot make this shit up to be brutally honest. That was a lot of debate on the supply side, Tony, I also wanted to touch a bit upon the demand side, because obviously, if we see material demand destruction, which is something that could alter the picture, and I wanted to play a clip for you. Jared Dillian spoke to Michael Howell on the Real Vision platform earlier this week on the risk of a global recession. So, let's have a look at that clip and debate the demand side after that.
MICHAEL HOWELL: I think they're going to get nowhere near the expectations that the market has. I just don't think they can push rate increases through faster aggressively enough without derailing the economy, because what you've got to remember at the same time is they're actually shrinking the balance sheet. And the balance sheet shrinkage means a lot, lot more in terms of stability of the financial system as well. So, these two factors combined, you're going to start to see a very significant recession unfolding, and the Federal Reserve will get spooked.
So, inflation may well come down. But I think people are asking, with all due respect, the wrong question or inflation. It's not when inflation peaks that is the key thing. It's when inflation comes back to a sustainable level. And what we've got now is a lot of persistence in the inflation rate. If you do very simple calculations of US inflation, you'll see the past through from month to month is up at the same clip that it was at when Volcker came into the Fed in 1978.
He came in to kill inflation. And he did that. But you got to remember that Volcker created two recessions and three years to get there. Jay, Powell is probably not a Volcker, but he's treading a similar path. But the Fed is going to try and break the system. That's what it typically does, needs to get inflation down. It can't act on supply, it can only act on demand. And that's what it's focused on.
And I'm absolutely sure you're going to get a recession in the US. But believe me, the recession in the rest of the world may well be a lot worse. Because the dollar is going up at the same time. That's not good for international borrowers.
ANDREAS STENO LARSEN: The full interview is available on the Real Vision platform for users with an Essential subscription. But back to the topic, Tony, a global recession, is that something that could alter your view on energy if we get such one?
TONY GREER: Yes, it'll be something that I'll be on guard for and if Michael Howell is predicting one, I'm certainly not going to argue with that guy. So, if that is his base case and I have to