ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Thursday, February 10th, 2022. I'm Ash Bennington. Today, I'm joined by Tom Thornton, founder of Hedge Fund Telemetry. It's a big day out there, markets in motion, US equity markets selling off. I'm looking at the closing numbers right now.
S&P 500 hovering just above the 45-handle, 4504, off on the day down 1.81%. NASDAQ down more than 2% on the day closing out the trading at 14,185. Dow Jones Industrial Average also off almost 1.5% closing at 35,241.
Tom, obviously a lot happening right now. Hot number coming in on the CPI print for last month, 7.5%, highest number in 40 years. So much going on, lots happening in the bond markets. How do you contextualize it all? How do you make sense of it?
TOM THORNTON: Today was this an extraordinary day. I think a lot of people started to price in a lighter CPI number, a few like this last week, I heard it from a lot of people that it might come in soft, but next month is going to be really high. But it came in very, very hot.
And so, 80% of the components were rising more than 3%. And then 65 other components rose more than 4%. The rest were 10%. That's just extraordinary. And bottom line is the Fed is clearly behind the curve. And I think we have a chart that we can show that it's pretty obvious, looking at the 2 Year and the Fed Funds Rate.
ASH BENNINGTON: Yeah. We should say we're talking about these on a year-over-year basis. Significant obviously, moves on a monthly basis as well. So, walk us through the chart, Tommy.
TOM THORNTON: Well, it's simple. It shows the 2 Year is in blue and the Fed Funds in yellow, and they've been correlated in the past. And now, the Fed is clearly behind the curve. And I think you can see that with base metals, grains, other commodities that are just going to the moon. And that is a problem. And that's why Bullard came out today, midday around lunch right before the 30-year auction.
Good timing. And said that he's for a 50-basis-point hike and basically 1%, being at 1% at least in June. And the odds which we can look on line of what the 50-basis-point hike look could be went up to 75%. It was around 25% this morning before the CPI, but this CPI is going to get even hotter next month. Because one of the components is gasoline, it's not crude. I always thought it was crude, but it's gasoline.
And gasoline futures have gone up, well, a lot since December. And that's why the January report we just had was higher because of Biden's SPR release of but now--
ASH BENNINGTON: The Strategic Petroleum Reserve.
TOM THORNTON: Yes. So, now we're going to see it even higher, and rents were going up a lot higher as well. And that, to me, is really concerning. And it's hitting every single consumer every single way. You can't really get away from any of-- the food prices went up, still car prices are still very, very high. Used car prices might be moderating. But still, if you look at the Manheim charts, they're just off. They're crazy. So, if you have a used car, sell it now.
So, I think right now the Fed is in a bit of a panic mode. And I called my note today a Bullard in a China Shop because basically, I was thinking to myself, with all the stuff that's going on, you have inflation that's run away, you have rates rising, you have equity volatility, and Fed Funds is still zero and they're still buying. QE is still happening up. There's some talk that there could be an intermeeting move. That would confirm my thesis that the Fed is completely in panic mode.
ASH BENNINGTON: Yeah, we have not seen a move on rates intermeeting for some time now. I should also point out looking at the numbers from this morning. Food costs up 7% year-over-year on a month-over-month basis, Tom. Up 0.9. In other words, they've been up nine tenths of 1% in a month? That is brutal.
TOM THORNTON: Yeah. Imagine if you are a restaurant and you have to buy those food products across the board, you're going to have to raise prices to your consumers, which Chipotle's CEO on their conference call said that he could raise prices on the burrito bowls and the tacos and everything like that. But seriously, it's going to come to a point where the demand starts to drop off because of the higher prices and that's how inflation works. You just start to see the slowing of various aspects of what the consumer is buying.
And, yeah, I just shudder to think where it could be in the next month. And remember Bill Ackman a while ago, probably a month ago, was saying the Fed needs to restore credibility and raise 50 basis points in March. And people laughed at his comments, but I thought he might be on to something. And now, 50 basis points is consensus. So, I think right now, we're going to have a really pretty difficult couple months until we get some more confirmation of what the Fed is going to do.
ASH BENNINGTON: Yeah. Let me just run through one other thing. We talked about the equity markets at the top of the show. I also want to talk about fixed income here. Right now, US Treasury yield up to 1.613%. I'm just eyeballing it, it looks like up about 14 basis point move in one day of trading, obviously, pretty considerable. Go ahead, Tom.
TOM THORNTON: Yeah, the 2 Year just with that chart that we had was crazy. I will say that I've had a 198 10-year target, and we achieved that. And we went over 2%. And I keep thinking it's just going through my head, the rob base, it takes two to make everything all right. No, it's not. It's not all right, because I think that's why tech stocks and small caps and others that are reliant on lower rates really start to sell off after Bullard's comments.
But I do think that you could have a little bit of a reprieve in the rates market. I think the 10 Year on the daily timeframe, if we can throw that up there, it is getting a bit exhausted with the DeMark indicators. We've got the sequential, the combo, and we're at the upside Wave 5 price objective. There's the chart there, and the other thing is, if we're going to have a back off in rates and we see rates come back down under, let's say under 190 on the 10 Year, I think the intermediate term target that I have on the weekly chart, and there are still upside DeMark countdowns in progress, that's looking at 2.45% on the 10 Year.
So, it could be a bit of a risk-off, go to bonds, in the next week if the equity markets, break to new lows, which I think is entirely possible, especially since the way a lot of stocks have traded recently.
ASH BENNINGTON: Yeah, 10 Year US Treasury right now, price to yield, 2.05, call it 205 basis points. Also, we should point out 2s 10s spread on the day. Give me a second, I lost that screen. But it is significantly. Yeah, obviously some significant compression here on that flattening of the curve. Something that suggests, again, the exact point that you've been making since the top of the show, Tommy, Fed behind the curve.
TOM THORNTON: And the thing that's really probably the most concerning thing with the rates market is the rate of change is so rapid, and it's just running over traders and to think about how much issuance in the high yield and the investment grade has been issued with the ultra-low rates in the last couple of years, it's staggering. Everybody used to talk about like, oh my God, the credit markets are just so firm and there's so much demand.
But those are starting to waver and the credit spreads in Europe and in the US are starting to blow out, the CDX spreads are starting to blow out and they're not at necessarily any levels that I could say match up to what we saw in March of 2020, but they're starting to look a similar way to the fourth quarter of 2018. And that was we had a 20% pullback in the equity market, and I still think we could see 20% lower, or 20% from the top, maybe, I mean maybe. I don't know. It feels pretty awful.
ASH BENNINGTON: Yeah. By the way, as we talk about the broader macro context, I wanted to take a look at a clip from today. This is a conversation I had with Sri-Kumar, called, No Way Out, Are We Headed To Stagflation? This is something that's running on the platform right now on all tiers, Essential, Pro, and Plus. I wanted to take a look at this clip, because I think it speaks to precisely some of the points that we've been discussing here. Let's take a look.
KOMAL SRI-KUMAR: You do not have the political will to withdraw support. And I don't think we have the political will. Because you can see that given a chance, the Biden administration will rewind to Build Back Better and spend another $1.9 trillion to provide childcare, medical benefit, spend on climate change all of that in the coming years. It's only the gridlock in the Senate that's preventing that from happening.
So, the political will does not exist in the administration to do anything different from before. So, what happens? Whatever happens with this Thursday number overall, I think inflation is headed upward. And then you reach a stage when the Federal Reserve and the Treasury have no leeway, but to tighten, and that is called tightening into a recession.
So, when the high interest rates have already caused the economy to turn down, which I think is what we are headed toward, the Federal Reserve will be increasing interest rates. They will make it worse.
ASH BENNINGTON: Sobering thoughts from Sri-Kumar, absence of political will of the Fed, tightening into a recession, and obviously, Sri called it on inflation. This was recorded three days ago, he completely nailed it. Tom, what are your thoughts about this broader context?
TOM THORNTON: Well, look, the Fed's going to raise rates, I think the stock market's going to go lower, because that's generally what happens. And I know the Fed from the people that I talked to that have connections and one of Raoul's good friends, the Fed is fine. Use that word fine. With the equity market dropping some more. That does some of the work for them if the equity market drops, and we've seen a lot of people when the Fed put is a lot lower, Bridgewater is at 3500 on the S&P, Bank of America is at 3800 on the S&P. I think we could get a 3-handle on the S&P, I think it can happen maybe in the next few weeks.
ASH BENNINGTON: We're still up on the year, S&P, I believe-- No, we're not, I think, looking at the charts here. Go ahead. You say it.
TOM THORNTON: You got to turn your monitor the other way. I know you do that with Bitcoin sometimes.
ASH BENNINGTON: Yeah, maybe it's my Bitcoin optimism as we're flipping through charts here. Look, what is the potential floor for this? I think this is the point that you were making in terms of the Fed and their reaction. To what point the equity markets give them so much [?] that they need to step in. That's really the question here, isn't it?
TOM THORNTON: I think the Fed is not as focused on the equity markets as they are to controlling inflation. And that's a mandate by President Biden, that was the first thing he said in that press conference a month ago. We've got to fight inflation and the Fed's going to do it. And he renominated Powell, and I'm sure he gave him a wink saying, I'm going to renominate you, but you got to get inflation down before the midterm elections.
So, I think that they can allow the stock market to drift. You've had two incredible strong years, 10 incredible strong years. And if they allow it to moderate, it does some of the work for them. And one thing I've been noticing, you have a lot of stocks that are down, some of these high-flying tech stocks and consumer stocks down 50% or more. And they get these the buy the dip, people come in, and then they break even lower, and Facebook was a good example of that.
It had already been down significantly, and then they just booted their earnings, and everything just fell apart. And then even after the big down move, the down day, it went even lower. And you're seeing stocks like a firm today, that was just a mess, where on social media, they reported earnings, or their social media reported earnings, but I think they were wrong. And they had to revise and then the stock was halted like three times. And it's just continued lower.
And I'm embarrassed to say that I was short the stock at 150, and I covered it at a profit, but way too early, because I think it's in-- yeah, it's $58 right now.
ASH BENNINGTON: Tom, let me play a little devil's advocate here. Let's look at the numbers here for year-to-date on major US equity indices. S&P 500 off 5.5%, Dow Jones Industrial Average off almost exactly 3%, NASDAQ composite and NASDAQ 100 both off between 9.33% and 9.89% respectively. These are not significant losses on a year-to-date basis. If you look at them on a one-year basis, obviously, up considerably, 15.2% up on S&P 500, up 12% on Dow Jones Industrial Average.
So, this idea that the Fed is not in the business of intervening to support US equity markets, it's easy to say that when you're only off 5% on the year and you're up 15% on a trailing 12-month basis. What happens when those numbers go negative? Do we have the political will to sustain a correction and even a bear market?
TOM THORNTON: I'll go back to this. The main importance for the Fed right now is to control inflation. That's it. And yeah, they'll come back in and give some sobering or soft comments about the equity markets and that they're there. But they've got to get the Fed Funds Rate higher, and they've got to slow things. So, that's really the big important thing. It's granted, we've got a cat in a tree, I'm sure. You hear the sounds.
ASH BENNINGTON: That's the point of that chart you showed, showing the Federal Funds Rate versus the 2 Year and that mismatch, there's just no choice, it seems. But again, it gives this point that perhaps we are in this between a rock and a hard place situation where what happens if the Fed does begin to hike and hike aggressively? Looking something like Mr. Bullard suggested today, 100 basis points between now and July, and you start to see equity markets sell off. I just don't know if there's the political will, and it seems like they're just left without a good option here.
TOM THORNTON: Well, they painted themselves into a corner. So, they have no good option at all. But the option that they have to take is to control inflation, because inflation, it can be out of control and slowing inflation, one of the ways they can do it is to raise rates, make it difficult to borrow, put pressure on corporate earnings, and the stock market comes down to maybe a more reasonable level. And remember, the stock market is not cheap at this level here.
The valuation is not cheap. And the mega cap stocks that have been holding this market up, those aren't necessarily bargains either at these levels. So, yeah, we've had the market down, not so bad. But the rest of the market has been an absolute nightmare. So, if you go to the S&P chart that I think we have on here, it's a little messy, but I can explain pretty simply. Okay. So, this is the S&P, and we had this first move down in January, and we had a DeMark by setup nine.
And this is an indicator that Tom DeMark created. And essentially, it told us that we were going to have a bounce and we had set up nines across the board and we even had a setup nine in Bitcoin, Ethereum. And so, everything has bounced, but my call has been that we would make a lower high Wave 2. So, essentially, the first move down from the highs, that was Wave 1, we'll make a lower high, Wave 2. And remember in Wave 2, this is when everybody thinks that everything's going to be fine, and we keep buying and everything's good.
But the problem is if we break the recent lows in January, we could be in for a deeper move. And I think my target is on there, just over 4,000. It could go even lower. That's just the mechanical target that we use with the DeMark indicators. But the bottom line is that we reversed down and start to lose the recent lows. I think that the market could be down easily 10% from here.
ASH BENNINGTON: 10% from here?
TOM THORNTON: Actually, 10% from the lows, let's go from there. It could be a 2- to 3-handle on the S&P.
ASH BENNINGTON: Yeah. Tom, you were mentioning a little bit during the break what you're seeing in short interest numbers coming out yesterday, give us a little bit of context on that.
TOM THORNTON: Okay, one of the things that was really interesting, the first few days of the year, when we-- it started actually the last two days of last year and then the first three days of this new year. All the prime brokerages, Goldman Sachs, Morgan Stanley, all the reports said that they're seeing the largest amount of selling of technology stocks in their clients.
So, basically, their institutional clients, they can track how much Apple they have, or how much Micron technology they have. And they can see those sales. And so, that was a first clue that basically smart money was trying to liquidate long positions. But as we move down at the lows, and it was, well, I think short interest was about 15 days ago when it was calculated. People were starting to short a lot more. And the NASDAQ short interest was up 5% for the last two-week period.
So, what happens is that two-week lag time, and this bounce that we've seen off the lows has seen up on the short baskets that I look at live from Goldman Sachs, Credit Suisse, those have been up significantly. In other words, all we've seen in this bounce is short covering. So, when you see shorts go down, they cover, and then if there's any more bad news with the absence of those shorts, there could be a vacuum lower because you don't have a natural buyer of the short covering.
And so, that to me is a bit of a concern. We do a bi-weekly webinar. And if you go on my Twitter, you can sign up for it. We're doing it tomorrow at 10:30 in the morning. And we'll explain a little bit more of what we're seeing. I think there's more large