MAGGIE LAKE: Hello and welcome to the Real Vision Daily Briefing. It's Friday, January 21st, 2022. I'm Maggie Lake, here with Jared Dillian, editor of The Daily Dirt Nap newsletter. Hi there, Jared. Great to see you.
JARED DILLIAN: Hey, great to be back.
MAGGIE LAKE: Thanks so much for taking the time. Pretty volatile week, end of week trade with risk assets really taking it on the chin, the NASDAQ down over 2%. It's selling off so quickly, we have to check where it settles, but it looked about 2.5% last I checked, well below 1400. Cryptocurrencies also slammed lower, Bitcoin down 10% below 40k, Ethereum down 14%. It's pretty ugly out there. Before we dive in with you, Real Vision co-founder Raoul Pal has been watching the market action in the crypto space and sent this update. Let's have a listen.
RAOUL PAL: A little quick update for Real Vision Daily Briefing. Obviously, crypto markets are going well today to the downside. This has been going on for a while. How I try and put this in perspective is that we're trading a 70-volatility asset class, you're going to see 50% drawdowns yearly, maybe even two times a year. Really, it's been over the last four or five years, it's been every year we see one of these.
It feels like that is now a normal function. And I also noticed how little people are freaked out by it, which I think is a really good thing. I think people are starting to understand not using leverage, not having too much size, and understanding the long-term time horizon. We are seeing liquidation, and a lot of this is based around the thesis that the Fed are going to tighten, and therefore risk assets are going to fall.
I went back and tested that hypothesis, and really, when you go back and look at the 2010 period to 2016, the Fed stopped QE, the balance sheet ran off for a bit, then it had to restart QE again, because the economy takes a while to get traction, I think that's going to be the case this time around as well. But even when they do hike rates, and even when they started tapering, generally what happens is the markets get a little unsettled at first, but then resumed back to normal.
Because basically, if they're tightening, it means that growth is decent. If growth is decent, equities do fine. That's I think crypto is going part of that whole risk cycle. I think we're at the juncture where we're going to start to see economic growth and inflation starting to slow. I think we're at the transition point, and that's upsetting markets as well, because they're really struggling to try and figure out, okay, what the hell is this all about? What is going on?
My view is that markets continue to be volatile for a bit, there's some more downside to come. If we go back and look at the NASDAQ or Amazon and stuff over that period, we will see these 20% drawdowns, 15% drawdowns, and then the market explodes higher again as the central bank starts realizing they can't raise rates as fast the market does, and then everything stabilizes yet again, and things move forward. That's my base hypothesis here.
Could we have further downside? Could we be forming a head and shoulders top in the NASDAQ? Could that knock through to Bitcoin? Sure. I've said for a while now, the Bitcoin downside is probably 30,000. I think we're in the biozone, I'm certainly looking at adding ETH myself here in this area between 2800 and 2600. I'm starting to see DeMark weekly counts on Bitcoin last week, on Ethereum this week, still missing the daily nine counts.
I like to see these technical indicators stacking over different time horizons. The daily one would come in maybe on Monday, Tuesday, something like that. I've got my head really focused on this. It's pretty normal. I think people, as I said, people are getting used to this. Anyway, good luck, nothing to freak out about. Interest rate rises, almost never negative for the market.
What's negative for the market was when the yield curve inverts, and we hit recession. That's when markets go down and stay down for an extended period of time. We're nowhere near that yet. The yield curve is, however, starting to flatten every day, which is suggesting that the Fed can't really raise rates, certainly, maybe not past June. Let's wait and see. The rates markets are pricing in something different in let's say, Eurodollars, but the yield curve itself is showing something different.
Confusing, but important so keep an eye on all of this, the yield curve, crypto markets, looking for your entry points, where you want to add to those positions. Let's have a look at equities, see what happens. If equities start falling further. The Fed put always feels like it's about 15%, so maybe 15% to 20%, that's the downside, so maybe some more pain to come. And then we'll see from there.
My view is 2022 is a year of weaker growth, lower inflation, and that tends to be good for risk assets, particularly growth stocks. I'm even looking at entry points for things like Ark which are falling every day. And we're now two standard deviations oversold versus the logarithmic trend. It's getting really interesting to me, but always pull many triggers, and I just wants to give you a quick update. I hope that helps.
MAGGIE LAKE: A whole lot of great stuff to unpack there. I just want to bring everyone up to date in case you're listening to this remotely and you're not in front of a screen, just to update where we stand as we close here and then we'll dive in. Crypto as we mentioned and NASDAQ suffered some of the worst declines, NASDAQ looks like it's settling around down 2.72%, so a really, really tough ending for the week for NASDAQ.
But all the major US equity markets, the indices were down. Interestingly, energy and commodities got pulled down. They had been outperforming, they were pulled lower in this. US government bonds, one of the few areas to benefit, we saw the yields on the 10 Year back down to 1.75%. One last mentioned, the VIX, which is known as The Fear Index, the volatility index, that really flew higher today, up 13%. Midday, it was at 25 creeping right up to the doorstep of 30.
Jared, just first of all, tell me what you make of all this. What is top of mind as you look at all of the action we've seen?
JARED DILLIAN: Yeah, this really feels like 2000 all over again. I lived through that. The tech bubble, the initial dotcom bubble. And one of the things I noticed about declines like this is that sentiment gets a little bit extreme, people get beer muscles. They say, it's free money, I can short these stocks, they always go down and people get limit short at the bottom. I actually did this. This was like in January of 2000.
And I was a super bear, and I shorted like four or five dotcom stocks. And I picked the stupidest ones I could find. I shorted them, and they never saw an uptick. They went down. And I was feeling pretty smart. I don't remember the exact day in January, but it was the day of the first rate cut out of the Fed. And the Dow went from being down 500 on the day to up 500 on the day, it was a 10% swing.
MAGGIE LAKE: Yeah, back then that was a lot.
JARED DILLIAN: Yeah. And I got squeezed out of all these shorts. What we're seeing right now is, if you look at some technical indicators, like for example, ETF volume is now 40% of stock market volume. And if you look at that over time, this is the highest it's been since March of 2000. I actually tweeted before we came on the air, I'm like, I don't want to go out long this weekend but I also don't want to go out short. I mean we could open up like four or 5% on Monday, like we're getting to extreme sentiment levels, and this is really dangerous.
MAGGIE LAKE: Yeah. And we've seen some of the moves in what were market darlings. We saw the Peloton story earlier. Netflix was hammered today down 22%. Do you feel like this is just-- what's driving it? Is it just that people feel like valuations were extreme? Is it more that they are worried about this macro environment and rising interest rates? Is it a combination? What do you feel is driving this?
JARED DILLIAN: Well, I think a lot of people frame it as the growth versus value debate. We saw Cathie Wood say yesterday that value stocks are in a bubble. It's okay, like value stocks are not in a bubble but she thinks that. A lot of people say this is growth versus value, but if you look at the stocks that are really getting hit the worst, they were the pandemic stocks, they were the work from home stocks, like Peloton and Zoom and stuff like.
Those are the stocks that are getting-- and they're going to do the round trip. Peloton already has done the round trip. It's more than just growth versus value. It's more than just the macro stuff. This unwind of the pandemic trade is going to be complete, we're going to complete this unwind of the pandemic trade.
MAGGIE LAKE: Does that make you less nervous than some broader flight from risk? We're gearing up for some major issues with financial markets. I was glad you said by the way, 2000 and 2008 because that felt a lot different. Both had a lot of pain in them, but one seems so much more systemic.
JARED DILLIAN: Yeah, I do think that this is less about the absolute level of the market and getting back to growth versus value, I think that this is going to unwind over the course of several years. If you were to just naively buy a value ETF and short a growth ETF and leave this on for five years, I think you'd be pretty happy with the result. And a lot of this is a function of rising rates. When real rates go higher, value stocks tend to do better.
One of the things 've been doing is digging around in the value indexes and just looking for big, ugly stocks with single digit PEs that pay 6% dividends, and they're out there. There's cheap stocks out there. The other thing that's interesting about value is that if you open up the value index, which is 250 stocks, there's a lot of stocks, and they're not really value, like I bet you didn't know that Pay Pal is a value stock. It is.
It's in the value index. And there's a lot of stocks like that in the value index. That's why I don't really want to buy a value ETF. I want to dig down and find the really cheap stuff.
MAGGIE LAKE: More individual stocks, individual names.
JARED DILLIAN: Yeah.
MAGGIE LAKE: Raoul said a couple of interesting things there that I think we have to talk about. And he brought this up when we did the Daily Briefing, Raoul and I did the daily briefing last week. And especially around interest rates and the Fed, he's got a very different view.
The market is pricing in some pretty aggressive Fed action. We have a Fed meeting next week. Where do you stand? What is your outlook for what they can do, what they need to do when it comes to increasing interest rates?
JARED DILLIAN: It's a very hard question. I do disagree with Raoul. I think the market is correctly pricing in the rate hikes, I think. I think four is probably the right number. I don't think they're going to stop in June. Having said that, if they cause enough pain, and the market goes down 30%, they might stop. But the fact that is underappreciated is how much political pressure is on the Fed to do something about inflation.
I've seen several articles about how Democratic lawmakers and congressmen have approached the Fed and say, you guys need to do something about inflation because I'm not going to get reelected, because inflation is getting pinned on the Democrats rightly or wrongly. Now, it's become a political concern. I think that that's actually a bigger concern.
And also, just to get into the personality dynamics of it, Jay Powell, he just got nominated for a second term. He's pretty much bulletproof at this point, he can't be fired. And I don't think he wants to be the Fed chairman, where inflation went from 1% to 7% while he was Fed chair, and he didn't do anything about it. I think that he has a personal stake in this.
I agree with the market. I agree with the Eurodollar curve. I think it's correctly priced. I don't think it's underpriced. I wouldn't place any bets on five or six rate hikes, I don't think you're getting implied odds for that.
MAGGIE LAKE: Yeah. And there was even talks starting to spring up about 50 basis points at the March meeting, which also seemed like that would be very aggressive to go from having done nothing for so long to 250 basis points right out of the gate.
JARED DILLIAN: Well, Bill Ackman wants them to do that, and my guess is he short junior dollars, so it's fun.
MAGGIE LAKE: So he's talking really loudly. Yeah. Raoul and Julian discussed the idea of the Fed not only raising rates but reducing their balance sheet, unwinding those extraordinary measures they took to support the economy. People refer to it as quantitative tightening instead of quantitative easing. And maybe the risks that this big pivot in policy not only on the rate front, but also on that front might create. Let's have a listen to that clip.
JULIAN BRIGDEN: And as I said, I'm playing with this idea, the 2020 theory, the first will become last and the last will become first. Stuff that's performed up until now, we are now at an inflection point. The inflection point is the Fed's tightening. What I don't know at this point is how that correction occurs. Is it nice, gradual, as we discussed, US stocks performing quite as well, dollar gradually weakens, money gradually leaves the US equity market and goes into other equity markets?
Or does it ultimately definitionally have to turn nasty because the US equity market is so horribly overvalued and so enormous relative to everything else that it's impossible to get that nice, gradual, I take $1 out of the NASDAQ, and I put it in Euro Stoxx without throwing the baby out with the bathwater. That, I am not sure, and I'm looking for things as I know you are looking for things.
But I do think this is a period where when the policymakers, and this is what you and I talked about last month, mate, the policymakers start to remove the accommodation that things become much more dangerous. This is not a time to be running max risk. I've got very, very little risk. I've got HYG short, okay, MI guys, and I've got TIPS. Just basically a risk-off lower inflation trade or high-end real yields straight.
RAOUL PAL: Yeah, but they're not racy either.
MAGGIE LAKE: And I believe at the end of that, just for those listening, Julian was referring to TIPS which of course is Treasury inflation protected securities, and HYG, high yield bond ETF. Jared, to that point, Oliver has a question on The Exchange, which I think is related.
Jared, do you believe the downside market reaction to the Fed tightening will mirror the same level of craziness we experienced to the upside when money was free and stimulus checks were being sent out during the start of COVID? It seems we live in a world of exaggerated moves, but curious on your view. I think that's the question that Julian was pondering as well.
JARED DILLIAN: Yeah. Julian was talking about whether this process would be gradual, and I think it is gradual at this point. It doesn't feel like it. NASDAQ's down 2.5% on the day, but that's pretty orderly and there hasn't really been a lot of panic selling. It's been pretty orderly. If you want to talk about disorderly, then look at March of 2020. That was a completely different story.
The question is, will we ever get to that point? And I think that's a function of the Fed. Just for the sake of example, I think if the Fed did hike 50 in March, then you might see a very severe reaction. I think that's possible. But if we stick to the market price rate hikes, then I think it's going to be ugly, but it's going to be orderly over time.
MAGGIE LAKE: And it's an important distinction to make. And as you say, in terms of orderly by the way, when we were looking at-- and several people have been bringing this up, when you look at the corporate bond market, for example, you're not seeing spreads blowout, you're seeing calm action elsewhere. Yes, if you're in FANG stocks, it felt horrible. But elsewhere, there is relative calm. Do you think there's still a Fed put, Jared?
We heard Raoul say that he thought maybe 15%, but other people have been saying, listen, with inflation high, the Fed doesn't have the room to have that put anymore, at least if they want to hang on to any sense of legitimacy.
JARED DILLIAN: The Fed is totally trapped, because if they do nothing about inflation, they don't have legitimacy. And if they do too much about inflation, then they don't have legitimacy. They're totally trapped. If we get to a point where the market is down 30%, and by the way, my favorite financial newspaper is the USA Today.
USA Today is the best financial newspaper of all time. If you see headlines in the USA Today about how the stocks are crashing, and the Fed should do something about it, that's your buy signal. We'll get there over time. We'll get there, but we're just at the beginning of this, we're still in early stages.
MAGGIE LAKE: And I know you always follow, rightly so, what's happening in the real economy. Like in people's wallets, and what they're talking about. And before, there's a lot made of the wealth effect. When we see those numbers on the nightly news, the NASDAQ down, and it's very alarmist, people tend to feel that things aren't going well.
But now, we've got inflation and we had the same headline screaming the other direction. Price at the pump, food shelves, the grocery bills going up and does one outweigh the other when it comes to the US' ability, the economy's ability to grow and consumers' ability to support that?
JARED DILLIAN: Well, the wealth effect is real. The wealth effect is absolutely real. And you saw it not just in stocks, but also in crypto. And it really fueled the purchase of a lot of big-ticket items like houses and expensive cars and stuff like that. If you get stocks down another 10%, you're going to see activity in some of those big-ticket consumer items start to drop off.
By the way, talking about inflation, I don't know if it's the minority view, but I do think that inflation is going to moderate this year. I think that it could go