JACK FARLEY: Welcome to the Real Vision Daily Briefing. It is Monday, November 30th. I am joined by our managing editor Ed Harrison. Ed, how are you doing?
ED HARRISON: I am doing well, Jack. Welcome back from Thanksgiving to you.
JACK FARLEY: Yes, I hope you had a good one. In the market today, it had a little bit of a bearish tone to it. The Dow was down almost a point, S&P down a half point, just as we are closing now, and the NASDAQ relatively flat. I would say that it is a day that is an exit away from the rotation into value we have seen. Would you say that?
ED HARRISON: Yes, I would. I think, you and I, we were talking about this before, there are a lot of different themes that we can talk about. We are not going to talk about one big theme, but just cut through the markets in terms of a lot of different things that are happening. Bitcoin, politics, rotation, trade, et cetera. If I had to sum up the month of November, I would say-- I just saw it hitting the wires before we got on that the Dow closed down over 200 points, but it ended November up 12%. The markets in general, were up the most they have been up in one month since January 1987. That is 33 years. There are three themes associated with that.
One is that we got a vaccine, or we got three vaccines. In fact, the Moderna vaccine came out today saying they were looking for FDA approval. We also had a relatively uneventful post-election. There were lawsuits still ongoing, but I think it is not as chaotic as people perhaps thought it could be. Then finally, there is a lot of liquidity hitting the market that we still, if you think back to a conversation I had with Michael Howell, we are still benefiting to a certain degree from Central Bank largesse. Those three things might be the three themes that are pushing forward this 12% rise in the Dow and the best month for markets since 1987.
JACK FARLEY: It is interesting you talked about your interview with Michael Howell. He has a very bullish view on the liquidity that is coming into the market. I actually interviewed someone who has been on Real Vision before, Teddy Vallee, who has got a very different view. His view is actually that the month of October, November, as well as the next two to three months going into February of next year, are actually going to be very liquidity negative in that the amount of bills and bonds that are being issued by the Treasury, which they are issuing bonds and they are taking in money, that is actually going to exceed the amount of Treasurys that the Fed is buying per month. I want to have this discussion with you about Michael Howell as compared to Teddy Vallee's view. What are you seeing in that?
ED HARRISON: It is almost somewhat you could say a monetarist view. Michael Howell, he is saying that irrespective of the fundamentals, when you pump that much liquidity into the markets, when you look at asset prices writ large, that means not just stocks and bonds, but also we are talking about houses and other sorts of assets that he is looking at, it causes a bidding up of those assets, because that money goes somewhere, and it gets parked in those assets. It is interesting, it is an interesting theory in the sense that you suddenly have all this money that needs to be deployed, and it is not all going to sit in cash, it is going to go to assets.
That is not really how I look at the market myself. I am still toying with the idea as a potential way to look at markets, but I generally look at markets in terms of the real economy, and over a longer period of time having an impact on earnings, and those earnings, therefore having an impact on earnings per share, and prices. I believe that markets go up when earnings go up, and when multiples expand, but when the economy contracts, and you have a recession, then you get a double whammy of multiple contraction and earnings contraction. That is really when you have to watch out for outcomes. That is what we saw in March, and potentially, we could see that again in the next couple of months.
JACK FARLEY: Absolutely. It is interesting that you are a fundamentals guy focused on the earnings and that the market will react to that. I was born and raised a fundamentals person, but I have become a little bit of a flows guy. That is what working on Real Vision for a year will do to you, listening to the likes of Mike Green. Teddy Vallee, he said it was a net, the liquidity is going to be net negative. He had this fantastic chart that we can put up of just how the QE minus the Treasury issuance is very correlated to the DXY year over year, but I wanted to dig into that.
Over the weekend, I was just like, which statistics is Teddy using? I think I have finally found them, and it is the net cash raised by the Treasury per month. In the month of October, the Treasury issued 1.5 trillion of bonds, bills, notes, everything, and they retired, in terms of the notes were taken out of supply, just about 1.5. It is $62 billion of liquidity that was sucked out of the market. Now for October, I think the Fed put more money in, but I think what Teddy is saying is that we are at a point where going forward that the dynamic is going to reverse where the Fed is actually going to inject money, but the Treasury is going to suck up all that liquidity, and then some from the market.
It was released today, the Fed released their schedule of how much Treasury bills they are going to buy, bills, bonds, notes, everything, the whole nine yards for up until December 11, and it is like 2 billion here, 4 billion there. The estimate is it is going to be about 80 billion. If the Treasury raises a net cash amount of greater than 80 billion, then Teddy could be right, and then we could see liquidity coming out of the market. Now, I agree with you. It is not the entire story. There is also the earnings story, we are seeing some good news on there. What do you make of that?
ED HARRISON: Well, it is all about the timeframes. Because obviously, if you are talking about a shorter term timeframe, maybe that has some applicability. That is the timeframe that he is talking about. What I think of what he said that is interesting is the dollar implications, because you and I, we were talking about the dollar, and the fact that I tweeted out earlier this morning that the dollar index hit a 52-week low, the euro index hit a 52-week high. I thought that was interesting, because what Teddy has to say does have implications for currencies. What was he making of the dollar? Where is that going to go under his scenario?
JACK FARLEY: He thinks that he is long term bearish, bearish is maybe a little bit of a dramatic word, but he does not have a good view of the risk reward of the dollar in the long term. For the next two to three months, he sees a tactical opportunity to go long the dollar because of this negative liquidity dynamic that markets are going to have, because there is going to be less money in the system, that is going to increase the value of the dollar. It is going to be pretty much a reversal of what we have seen over the past eight months where the Fed has flooded liquidity into the market, and that has pushed the dollar down. Now, maybe I am attributing too much cause to that.
Teddy is long term bearish on the dollar, but he sees opportunity to be long the dollar two to three months. Conversely, he thinks that real rates are going to increase, and this is something I want to pick your brains on. Because real rates are going to increase, he thinks that that makes Bitcoin and gold less attractive to hold-- and when I say less attractive, I do mean less attractive, because he is a long term bull on gold and Bitcoin and like many who have been on Real Vision, including Raoul, Teddy has been right on gold and Bitcoin, particularly Bitcoin, but he actually says that he is pumping the brakes a little bit.
The interview I filmed with him was filmed last week before the giant selloff and it is going to air tomorrow. We have had a little bit of a topsy turvy trade there. Did you see anything in the market for Bitcoin and gold? What are you seeing there?
ED HARRISON: We, I saw that gold and silver had been selling off a bit. Before the weekend happened, Bitcoin had been selling off and now, Bitcoin has come rallied back but I am looking at gold now at 1,778.80, silver at 2269. Those are potential entry levels are if you are a long term bull versus-- it is similar to the dollar. The question is in terms of reversals, obviously, if the dollar goes higher on the back of real rates going higher, then that is long term negative for gold and silver, because at the end of the day, you get a real return that is higher, and you get no real return from holding gold. From an opportunity cost perspective, you are foregoing more opportunity by holding precious metals, and that is generally speaking, considered to be negative for the precious metals.
If he is right, then that thesis makes sense. The problem I have with that thesis is, on the one hand, he is talking about the liquidity situation being tighter. On the other hand, he is talking about real rates rising, which would suggest that the economy is actually doing well, that we are getting out of a negative environment and that means that the longer end of the curve is going to steepen. That is where the real rates going higher comes from. Those two for me are, they are at odds with one another. I would love to find out how he resolves that problem.
JACK FARLEY: He is a believer maybe not in the reopening, but in reopening stocks, because real rates are going to increase and that is going to cause an economy of growth, where things are growing again. That actually makes growth stocks less attractive, because when growth is essentially zero, you will pay a ton for Zoom growing at a high price. If the cruise liners are reopening, and the economy as a whole is growing, you are not going to be willing to pay that.
I am someone who is not necessarily new to this, but these ideas have are forming in my mind about the correlation between real rates and growth. This is something when I was interviewing Teddy, it was going through my mind. You have been in the trenches of economics and finance for a long time. Can you explain to me in the viewers why when real rates rise, that indicates that growth is on the up and up?
ED HARRISON: Yes. If real rates are rising, and that is because rates themselves are rising faster than the rate of inflation. Inflation might go up or inflation expectations, but rates are going up more. The reason that rates would go up more in real terms is because people are frontrunning the Fed's operations. They believe that the Fed is going to be jacking up rates in the future and so, they are sending up those rates in anticipation of that rise. The only reason that the Fed is going to be increasing rates is because the economy is doing better.
A flattening of the yield curve is usually a sign that rates are going to go down over time. A steepening of the yield curve says that rates are going to go up over time if it is a real rate rise, meaning that rates are going up faster than the rate of inflation. It is because it can only be generally speaking, because things are happening that are good for the economy that is causing the Fed to step on the brakes. That is the interest rate lever. That is generally speaking, because the economy is doing well.
JACK FARLEY: Absolutely. That does make sense. Nuts and bolts, the interview with Teddy Vallee, it comes out tomorrow, please check it out. If you get a chance. Ed, what else is on your radar?
ED HARRISON: There is a ton. Let us start to tick off some of the boxes here. We started out talking about three narratives. We said liquidity, we said the election, and we also said the reopening i.e. vaccines. The counternarrative in terms of the vaccines is a short term economic pain associated with a rising COVID count. We have talked about this a number of times, Ash and I in particular, and on our Friday forecast while you were recovering from your turkey fest on Thursday, we were talking about the numbers being low.
We said that we were basically going through an extended weekend. If you know the numbers for the case counts and the death counts, they go up and they stay high during the weekdays, but then they fall before they come back up during the weekdays again. During the weekends, that is when they fall, and that is because things are not reported, people are not going to be tested, et cetera. This is exactly what we have seen. In fact, the number of deaths from COVID in the past day was 118. The 14-day change is only 26% there. Case counts, 136,000, 14-day change only 8%. Those numbers are moderating.
That would make you think that things are on the up and up, but the reality is that we are going to see an acceleration there. Not only we are going to see an acceleration, because those numbers are artificially low given the long weekend, but we are going to see an even greater acceleration going forward when all of the people who contracted the virus due the movement that we saw during the Thanksgiving holiday, when those numbers start to come out, which will be within the next three weeks or so. The number that I am looking at, actually, Jack, is the hospitalization rate.
Because interestingly, that never lies because people are hospitalized at whatever rate they are, and that number is consistently going higher, at least at the same rate of increase, but slightly higher than it was before. 36% 14-day change, 93,265 people hospitalized in the United States. Recently, we have seen a lot of stories that have come out that have suggested that we are almost to the point in many areas where there is a hospital overload, that is to the point where the system cannot take any more patients, that elective surgeries, elective procedures have to be put off, et cetera. We are almost to that point. I believe we will get to that point perhaps in early to mid-December.
What that means is, is that we are going to have more rollbacks, more shutdowns and growth rolling over more than we have before, and that is what is causing people to take a bit of fright against the reopening, that is the vaccine trade. They think that before we get to the vaccine trade, there is still going to be some pain to be had, and that makes sense in pandemic sensitive stocks. That is your ledger, that is your hospitality stocks and things of that nature.
JACK FARLEY: That is interesting. Obviously, it is very sad, a real tragedy that hospitalizations continue to increase, and it looks not good at all in terms of what is around the corner. I want to ask you about how this is going to impact markets, because I know in your previous times that you have expressed your view on this, it has been all about lockdowns, and how increased cases are going to depress economic behavior because they are going to cause governments to enact lockdowns or actually-- and I am just remembering that people are going to by themselves up, be very cautious about how they act. They are not going to book that flight. They are not going to book that hotel. What is your outlook on that going forward based on everything that you just said?
ED HARRISON: I think that all that is true. That people, they automatically make adjustments to their behavior based upon the level of danger that is associated with the pandemic, and that will slightly retard growth. Then at the same time, governments, they react to that and they increase their measures, and that retards growth even more. The most pernicious part of it is when you get an overload of the system, because that is just the rolling overgrowth, that is just a retarding of growth. The real problem is when the system becomes so overloaded that you need to have shutdowns, lockdowns, not just slight rollbacks, but hardcore measures.
Here is a quote from someone who runs in a hospital system, he said, once you go over the case cliff, this is the number of patients that you are dealing with who are hospitalized, where you have so many cases that you overwhelm the system, basically at that point, when you fall off the case cliff, you are going to see mortality rates go up substantially. I shudder to imagine what things might be like in two weeks. This is what Michael Osterholm, who is the director of center for Infectious Disease Research and Policy at the University of Minnesota, told The New York Times. What he is saying basically is that it is not just that mortality stays constant. When you go over the cliff, it shifts up.
If you have say 1.9% mortality rate, you could go up to 2.5%, 3% suddenly overnight because the whole system breaks down. As a result of that, you get a massive increase. That is the point at which you get these lockdowns, these shutdowns. You also get the increase of consumer behavior negatively. I think that what he is saying from there is that we are going to get to that point by mid-December. He said this just recently, two weeks from now, those numbers are going to be very high.
Just to give you a sense just from the number of people who have died, the week before we went into Thanksgiving, we had 2200, 2300 deaths in a single day on three different occasions, the highest that we have ever had in the United States was on April the 15th, that was 2752. We are already within striking distance of that number, and that is not including an acceleration coming from Thanksgiving, or the overload that he is talking about. I think that you could see that the risks there are very high. This is coming from someone who is dealing with infectious diseases. I think that the risks are not just about rolling over of the economy, but actually a substantial rolling over to the point where a double dip recession is very much a distinct possibility.
JACK FARLEY: Interesting. Ed, I am going to play devil's advocate here. Ed, so interesting you say that, but what about the vaccine? What about the vaccines plural?
ED HARRISON: When you think about this from a stock perspective, it is really a waiting game. That is you have the companies that are not going to be affected too much by this delay, and the vaccines are already going to be starting to be