MAGGIE LAKE: Hi, there. Welcome to the Real Vision Daily Briefing. It's Tuesday, December 21st, 2021. I'm Maggie Lake, here with Tony Greer, Editor of The Morning Navigator. Hi, Tony.
TONY GREER: Maggie, how are you doing today?
MAGGIE LAKE: I'm doing all right. It's funny, today's almost a mirror opposite of what we saw yesterday. We have a rebound across the board in US equities, the VIX down, oil up, the 10 Year Yield finally creeping up at about 1.48%. It's really almost the exact opposite. What did you make of the market action, does it feel constructive to you?
TONY GREER: Yeah, today is finally, for the first time since we broke through the 4700 flat top in the S&P after the FOMC meeting, I forgot what day it was, but we broke out up to about 4740, markets couldn't have looked better, and then we went into a series of donkey price action sessions. And that's what I call when you're playing things from the bull side like me, you get excited that you've got to break out new high looking like we're about to extend through to 4800.
And next thing you know, everything gets crushed. We've got Omicron variant fears. We had a steep bond market rally yesterday. What happened, to me, it looks like it's just part of the ebb and flow of this bull market, Maggie, quite honestly. We're obviously having a little bit of friction here pivoting into a tightening cycle of some sort by the Federal Reserve, which seems quite rational, finally, to deal with a lot of the commodity inflation that we're seeing, and I think the price action today is really constructive.
I was saying to my clients last week, we saw a lot of selling, and we saw a couple of TICK index prints that weren't really extreme in nature, so it was smooth, orderly selling last week. And then we came out yesterday and everybody had to be out of the stock market from news over the weekend, from a potential Omicron scare, etc., etc. And we got that 1800 TICK index extreme yesterday, on the downside. To me, that might have been the culmination that finally, that was the real selloff that the market needed to get out from under it.
And all we did, if you look at the S&P, we broke down below the 50-day for a session, we got close to the 100-day moving average down at the lows never touched it. And today, you look around and you say, okay, the market's going to be okay with what Powell is going to do. We're going to rally a little bit here behind the huge natural resources rally today. Base metals are very quietly crawling away from support levels.
Today, the XME, industrial metals and mining are up 4%, looking like they're going to stage another attempt at rallying. Today, Maggie, to me, is a typical story of what I think we're going to see looking forward in the stock market where natural resources are just going to bubble up to the top, when the market sellers least expect it and the deriskers least expect it, and the stock market bears least expect it.
And next thing you know, you're going to have aluminum breaking back up above moving average resistance and rallying 3% like we saw today, and some of the aluminum names like Century Aluminum, Alcoa and industrial metals and mining having a really good day behind that. I think that this is part and parcel of maybe it's shades of next year, where the markets can be sideways, but we're going to see strength in natural resources, and things like that. It's taking on a different type of rotation look here to me going forward, but I still think that we're in secular bull market run territory, and everything looks just fine.
MAGGIE LAKE: I want to ask you about the natural resources in a minute, but if we say on the S&P 500, it does feel-- the year-to-date gains are still good on a lot of this. But if you look at the short term, you can see why there's been some anxiety and I think we have a shorter term chart up and you've got these ups and downs.
And just over the last week, the swings felt pretty significant, so do you feel like if we're still in that bull mode, can we push back or above those record highs? What does the conviction feel like to you, or is it just too early to tell? Because we are going into next year with a lot of unknowns.
TONY GREER: Yeah. To me, I agree with that 100%. I think next year is going to be very rocky for the stock market. I was saying to my clients this morning, I think we had three episodes of the VIX into the 30s this year and if I was a betting man, which I am, I would say that we'll have more than that next year. I still feel like there's a lot of uncertainty.
Even after the precedent today, there's a lot of uncertainty looking ahead into the New Year, mostly with how the Fed is going to try to get right suited for the amount of inflation that we're seeing now and get control the markets. But I think that everything is going fine, Maggie, hearing three rate hikes next year out of an FOMC is certainly going to make portfolio managers adjust. And that's something that should slow down maybe to commodity rally a little bit, maybe it takes a little bit of air out of the energy rallies, etc., etc., that we're seeing.
But we're going to see fundamental strength bubble up underneath the commodity markets like we've seen all year. I think that's something where we'll see basic materials and miners and energy drive markets next year. And if we managed to have a bond market that can stay in this range in terms of yields, and not have too many big rallies in yields to contend with, then I think technology can go along for the ride. And we have it really smooth here on the upside.
If rates continue to press the upper bounds because of the inflation that we're seeing, and the Fed's got to constantly be taming things, then I think the market's going to struggle quite a bit. It's going to be difficult. December is always a nightmare month for me to try to figure out how to trade and this December was no different. I literally got my face burned buying that post-FOMC rally, and had to hold on quite tightly, to be honest with you, over the last couple of days. But I refuse to get out at the moment because there's been no breakdown.
We've seen Omicron scare over Thanksgiving weekend, there was no breakdown, there was a pullback. We had an FOMC meeting that we talked about rate hikes and tapering, and we saw an adjustment, but we saw no breakdown. For me, I haven't got a single reason, I haven't come up with a single reason to give up on being bullish the stock market, just understanding that the rotation that I think we're in for could be pretty dramatic and I don't know what direction it's going to shake out for the S&P, if that's fair to say.
MAGGIE LAKE: Yeah. When I heard you say the VIX could hit above 30 more times this year, when there's volatility, it can be good. There can be a lot of opportunity in there.
TONY GREER: Yeah, this was a great year, Maggie. If you look back on it, the S&P in 2020, it's up 20-something-percent. Historically, that's a great year. I look at the chart. I see that it went from the bottom left hand side of my screen to the top right hand side of my screen. I checked my P&L. I'm a good bull market trader. Things went okay this year.
The market didn't break down at all. We had those volatile episodes like you said, where if we stuck to our plan and woke up bullish and decided as traders that breakouts win and as scary as they are sometimes, you got to trade the breakouts and trade the right risk reward. This was a pretty fantastic year, Maggie. If we did this for the next 10, I'd be sitting pretty.
MAGGIE LAKE: A lot of people would love to see that. Tony, how closely are you watching? You had a good year. We know from reports if they're true that not all hedge funds did, a lot of people got caught up with the bond market, had some short term bets that didn't go their way. How closely are you watching that?
Because we did see that yield curve start to steepen. A few of the guests we had on had been saying, listen, it's really flat. I don't like how flat it looks but I'm thinking there's a lag and that we will start to see it steepen, so I know that's something that they're watching for next year. How important is it for you, especially in relation to some of the other trades you're making?
TONY GREER: Great question, Maggie. I have become a lot more of a spectator in the bond market than a trader, to be totally honest with you. I love watching rates trade and Treasury bonds trade, but I like to use them as a barometer and to tell me that, oh, okay, that's going to be good for this sector.
The sector might struggle. For example, when we saw that yield curve flattened dramatically in the last several weeks, it was pretty obvious that financials for example, XLF was churning at this higher price that it had gotten to. There was a lot of distribution. There was stock changing hands, volume trading in financials and you look up at the end of the day and they didn't go anywhere. And you're like, wow, maybe this is telling me something, and so when the financials turned over and broke down a little bit below moving averages, Goldman Sachs broke down, Morgan Stanley finally cracked off of its highs.
You can look at the chart and say that was very intuitive that the yield curve flattened quite bit and financials went from rally mode to stuck in the mud mode. I think that the yield curve plays more into the rotation, if I may, and I'm not claiming that this is 100% correct. For me, it plays more into how the rotation is going to go than whether or not the bull market is still intact. I'm hinging on, really, as long as the breakeven 5 Year and 10 Year are still upward sloping despite the volatility that we just saw, as long as those kinds of trades are still in shape, I know that we've got this inflation trade by the tail, and that the commodities are going to continue to bubble up underneath.
MAGGIE LAKE: Yeah, we actually have a question that's related to that. It's a two-part, I'm just going to ask the first part first, though. He's saying actually, this is a she, Angela is saying, hi, Tony, of commodities have peaked which you can tell us whether you think that's true, and inflation has peaked, again, let us know whether you think that's true, as we move into a disinflationary period in Q1. Let's just ask, do you think that's true? Have both of those peaked?
TONY GREER: I think we should ask the people in the Netherlands if inflation has peaked, because they're currently paying 170 Euro per megawatt hour and that's how they're quoting their natural gas over there. Over here, we're quoting in British Thermal Units. But the story is that there's not enough supply for Europeans to keep warm this [winter]. Their inventories are at historically low levels.
They're depending on the Nord Stream II pipeline from Putin. They're facing pushbacks from the environmental agencies, and it's not going to be a pretty scene there over the winter. Energy prices have got power generation behind them in natural gas, and I think that's what's fueling the rally in Europe. It spills over a little bit here to the US where, by proxy, natural gas won't sell off as long as that's going on over there, even though we really can't directly export LNG to the Europeans.
That's one of the stories in the commodity market that's not going to go away. And that's why it's still in fact, going vertical. The price of Netherlands natural gas is still going vertical, and we haven't gotten to winter yet. And I think that needs to dawn on a lot of people that we're not sitting here in minus five degrees with the windchill factor just yet, trying to heat your home several degrees warmer than that.
When we get to that situation, I shudder to think about what people would be willing to pay for power generation, therefore natural gas, therefore, we may reignite a nuclear conversation at some point. That's just the natural gas problem. I understand that. In the fossil fuel world over here, we just had a little bit of a dip in the markets, and we come back 72 bid in WTI crude oil. Even after the Omicron scare, the smart investment banks, in my opinion, they were smart.
They came out with very bullish stories in oil, saying, we understand there's a dip on the screen today. We get it, but the story really paints a picture of bullish price action to follow. These guys are putting Brent targets up in the hundreds, because they know that the supply is tight, the backwardation is there in the curve, and people are still going to be buying oil as long as we have this recovery, economic movement in motion, and we're not locking anybody down.
I'm not a believer that inflation is done. I do see a lot of bullish stories in the commodity complex and even across the base metal complex. And then if we're talking about bullish energy and bullish base metals, it's hard to be bearish grains if energy and metals and fertilizer and ammonia prices are going through the roof, because they're going to need that to pull the grain out of the ground and we're going to pay for it. I think that we're really in the first or second or first couple of innings of the inflation trade.
And I don't mean to tell Angie that she's wrong, and that inflation is going to continue, but maybe I can urge her to open her mind and listen to some more people like Grant Williams who have been bringing people on that are just making you think about your portfolio and if it will do as well in periods of inflation.
MAGGIE LAKE: Yeah, I think she's asking if they've peaked. I think she is also trying to figure this out. That's a great framework to think about it. There's another piece of that I'll get to in a second, but just to pick up on something you just said. Do you agree with those forecasts? I think Goldman was at least one of them that came out and talked about $100 a barrel of oil. Does that seem feasible?
TONY GREER: Yeah, Bank of America as well. They're watching very closely that managing the price of oil is about how much excess capacity Saudi Arabia has and OPEC has. Part of the Bank of America report that came out that was so bullish Brent said quite clearly that they think that Saudis are going to have maybe 2 million barrels per day of extra spare capacity, which is down from 4.5 million to 5 million barrels a day, so that puts a little bit of a clutch on their ability to control the markets.
I have a feeling that as long as we head into this natural gas issue, it's going to attach itself to a fossil fuel issue and the energy complex is going to go up in unison, because people that can't buy natural gas are going to go ahead and buy jet fuel oil, they're going to buy something in the energy complex to have this exposure. And even though they may not go chase natural gas, they're going to buy something because the picture continues to represent itself as a bullish picture with falling inventories in a tight market.
MAGGIE LAKE: Thomas is asking, Saxo says global credit impulse is turning negative, does this imperil commodities and other inflation trades? I think it's speaking to the demand side of the equation if I understand him correctly.
TONY GREER: Yeah, I'm not sure. I didn't hear the question that perfectly, Maggie. I'm not sure what that was.
MAGGIE LAKE: Yeah, I think he's referring to something, global credit impulses turning negative. Does that imperil commodities and other inflation trades?
TONY GREER: I don't know what that means global?
MAGGIE LAKE: Yeah. Well, let me phrase it a different way. I'm not sure if I'm going to paraphrase this correctly. But there are people, anytime you're looking at some of these energy prices stay really high, then there's always a question of what does it do to economic demand? Did the prices get high enough that they kill off demand?
How much of the pricing that we're seeing, especially in oil, is going to be dictated by demand? And how much is it related to these supply issues, and the underinvestment that they've seen and all these other themes that you and so many others have been talking about coming home to roost right now?
TONY GREER: Yeah. Before the week of Thanksgiving, we saw a world record gasoline demand data point, and I thought that that was really interesting. It gave us the confidence to buy the dip into the Omicron scare over Thanksgiving weekend. Of course, oil got hit again with the post-FOMC derisking, and then it bounced back $7 off of the lows.
I don't see us being at a point here with $4 gas in the US and 7 Euro overseas as being a point where people aren't going to use their car. You know what I mean? I think that the price point is much higher here in the US. And now that inflation is getting socialized, I saw a stat today where the average grocery bill that was $113 is now $144. While that is a tremendous, tremendous percent increase, it's a silent killer right now.
Where people are like, okay, I'll get the wallet out for this, it hurts a little bit. It's going to take away from my discretionary spending, but I'm going to go to the grocery store, to the gas station, to whichever store on the way home and that's not slowing anybody down, I don't think just yet. I still think that we can get to a point where we get actual sticker shock. And I don't think that we're there until you get to north of $5 or $6 gasoline here in the US.
And I think once it becomes a little bit more obvious to people that they're spending more every time they go to the grocery store, I don't think we're there yet.
MAGGIE LAKE: Yeah. We know some of the price actions also revolve around the supply chain. And now with this latest variant and varying degrees, different countries are dealing with it, do you think that these supply chain problems linger further out into next year than we anticipate?
TONY GREER: I would imagine that they're going to. It seems like there's going to be more pressure to vaccine-mandate more people. And there'll probably be more groups of people that splinter away from that for whatever reason, and there'll be some labor reset in the