WARREN PIES: Welcome to the Real Vision Daily Briefing. It's Friday, May 13th, 2022. I'm Warren Pies, founder and strategist at 3Fourteen Research. I'm joined today by Tony Greer. How are you doing, Tony? Friday the 13th.

TONY GREER: Warren Eskimo Pies. I'm happy to be here, man. It's good to do the briefing on Friday, so we can encapsulate the week's action, right?

WARREN PIES: Yeah, absolutely. Looking forward to getting your thoughts, haven't spoken for a few weeks. Today was somewhat of a bounce for the markets. We saw yields go up today, but on the week, down. Sectors, the most beaten-up sectors leading the way today, tech and consumer discretionary, the leaders.

When I zoom out, just before I get your take on market action, when I zoom out, I see from the beginning of April to yesterday's close about a 15% drawdown in the S&P 500. And obviously, there are pockets where it was much worse. It's been persistent downward pressure. One day does not a rally make, but there's always a question of whether this will be the beginning of a trend change if we've gotten enough pain discounted in the prices.

What do you see? You mentioned yields to me, if you want to start there, or wherever you want to go, what did you see this week?

TONY GREER: I guess, Warren, the outstanding factor this week is that we got fresh CPI data. We got more Daisy cutters and inflation on the tape. We're at 8.3% year over year CPI, 11% year over year PPI. And with that, we had a potential reversal in the Treasury market this week, which as you know, has been trading offered only.

With yields potentially carving a high and looks like they may have an outside reversal, if not a reversal week, it looks like they may trend lower. And maybe that's the move that you'd expect after another big CPI number where the Treasury market would be a buy the rally, sell the fact kind of thing. But I still see signs of the great rotation as this market, technology weighs on the tape, because it's a bigger proportion of the S&P than the energy markets and the commodity markets. And this week, we've pretty much got a selloff across the board in pretty much every sector of the S&P.

It's a blood red week, where there's no escape. This week, we happen to have a big pullback in metals, we had a small pullback in energy, a 5%, big pullback in metals, off 10% in GDX. But we also had that weakness in technology that's persisted. Those just happen to be the sectors that are short covering into the close today.

But when I look at the S&P on a weekly basis, it hasn't done anything to show me that it's reversal mode yet, even though sentiment, I would say is a little bit negative on the downside, it still doesn't seem like we found a bottom yet. I feel like there could be more selling due to more inflation and still potentially higher yields down the road.

WARREN PIES: Yeah, that all makes sense. And what we did for clients, just to give you how we're viewing things, is we laid out a 10-factor checklist that we're looking for to get crossed off, or at least some of these things need to get crossed off before we could recommend getting back into the market. Chart that we saw, like close to enough damage or bearish sentiment to get us interested, or at least have the discussion is what we call our Dumb Money indicator. We're looking at the percentage of ETF volume made up by inverse ETF flow. We call this-- it's a retail type of trade.

We wanted to hit 60%. And honestly, going back to like 2010 when these things came into the market structure, there's always been a big rally in the year following this number hitting 60%. We're at 57%, so we're within a whisker of that number. Not quite there yet. And that's the story that I see is that we're just not quite there yet across the board on any of the things we're looking at. But we've seen progress.

This seemed like a week and the last couple of weeks taken together, where there has been real sentiment change and we're moving away from just a run of the mill correction and people are starting to panic a little bit, which is what you need to be at if you're going to get a tradable bottom. Do you see a similar thing?

TONY GREER: Yeah, we could be getting close. We've gotten that cluster of TICK index extremes that I was looking for prior to the damage of the carbon low this week. We finally got a cluster of TICK extremes bigger than minus 1500 on the downside. We got it punctuated by nearly a negative 2000 TICK extreme on the downside on Monday. Yeah, it looked like there was some selling that was definitely exhausted and gotten out of the way this week for sure.

I'm not willing to make a bet yet that the upside is really worth chasing here even though we know that bear market rallies are generally pretty significant, I'm comfortable the way my book is positioned here, Warren. I don't feel like I need to make too many adjustments either way. And the reason I say that is because as you know, I'm a clocker and a hunter of the great rotation trades, as I've been calling it, where natural resources outperform technology.

And when you cleared the smoke out this week, it was another advance of about 1% of the BCOM over the QQQ. And that's the rotation. That's key for me under the hood for that to be continuing no matter what goes on in the broader market, that's helped me sticking to my guns on that trade.

WARREN PIES: Yeah, you've killed it on that trade. And it's been fun to talk to you about it and watch it happen. I ran into a few people on Twitter, social media and a few clients asking questions about I think, you're starting to see just maybe, but I think it's premature, the early stages of a reversal of this negative correlation between oil in the markets.

The idea is that we'll have weakening economic demand, and that's going to flow through into oil, and if we were to get oil down lower, it'd be because of an economic weakness or whatever, and that this is what we need to look for. I think it's a fundamental misunderstanding of what's happening, though. I think that oil is moving because of supply constraints. It's not going to be responsive to the demand side this time around.

My honest feeling is that oil and energy actually keeps moving in the opposite direction of the broader market. And maybe that correlation, the intensity starts to dissipate a little bit. But overall, I don't see the dynamic because we're really dealing with supply issues over Russia-Ukraine that are driving the ship right now across oil and energy, and also the broader commodity complex.

TONY GREER: I couldn't agree more, Warren. I've been trying to take my clients to task that are pushing back on my idea that the inflation trade or short the commodity inflation trade is still in motion. They push back with a lot of ideas that are along the lines of, what about the demand destruction of stagflation? And while I can't really argue with that side of it, I can argue the supply side, like you say, and say what's going to put oil or natural gas genie back in their bottle? Because right now, the diesel market is so tight, and so spare that there just is none.

There's no elastic demand just yet, everybody is still buying cargoes of jet fuel, everything that they need to-- whatever energy source that they need. I don't know. If the supply doesn't loosen up, the price isn't going to give in. That's why my argument is still along the lines of even if we do have this economic setback in demand, I don't know that the markets are going to allow for a pullback on that at all, because I don't see how the supply is going to show up and satisfy the buyers.

And maybe there'll be a small pullback, but it still leads to the energy markets being higher for longer. And this week was a perfect example, we got another bounce off of that 6.5 level on natural gas, back up to $8 and then settled at $7.65. But with the attack that continues to rear its head on supply, like this week, they canceled more leases in Alaska on federal lands. That's kicking the can for an oil recovery down the road significantly. And I think that's going to be the driving story once we shake out this CPI week.

WARREN PIES: Yeah, and exactly what you're describing is really creating, I think, confusing signals across the market. A couple charts, I think that shows some of the confusion that's out there, and if you're looking at just typical factors and trying to understand market stress that the energy strength and oil and commodity strength are actually tricking people, I think.

The first chart I would have Brian pull up is the spread between the high yield bond index and high yield bond x energy. That's the next one. There you go. On that chart, what we've seen is energy is over represented in high yield index. Over the last 10 years, eight years, since really the 2014 collapse forward, you've seen energy push high yield credit spreads higher as a bigger influence.

Our calculation is that typically, energy adds about 32 excess basis points to the high yield spread over Treasurys. And today, we're at a discount because of energy because energy is trading so good and the outlook for oil and producers is so good. We're actually not seeing the stress you would typically see in the high yield credit spreads space. I think it's maybe tricking people into a false sense of security that the real economy is stronger than it really is, but it's actually energy strength.

And you can see this, one other chart when we look at high yield credit spreads versus investment grade credit spreads. Typically, the scatterplot in here, and typically, these two series trade in a pretty tight linear correlation. And what we've seen is a lot more stress in the investment grade space. I think that should be worrisome as you saw a negative GDP print a few weeks back for Q1, and, obviously, recession probability has gone up.

And you and I have talked about the chances for stagflation rising, I think that this is a stagflationary signal, because investment grade, it doesn't have many of the commodity producers or any energy producers, you're looking at more of the core of the consumer economy, finance plus consumer stocks, and those spreads are starting to really show trouble already. I think that when you dig under the surface, the crosscurrents of oil and energy are obscuring some of these messages and making it a difficult market for generalists to read.

That gives a brings up the point for today's clip, which is what's the chances of a soft landing? And I think that that's an ongoing debate. If you're going to get bullish at these levels, like we talked about, you're probably betting on a soft landing of some kind. But let's see what Alex Gurevich had to say when he sat down with Raoul Pal to talk about his outlook.

RAOUL PAL: When I put those together, I think this is potentially the largest monetary tightening in all history. How do you think?

ALEX GUREVICH: It is very strong. I was interviewing David Rosenberg a few weeks ago and I got a little bit feedback from this. And generally, I am somewhat aligned with him, I tend to be at least partially aligned with him, not always perfectly, but we tend to think a lot similar. I followed him for years. And he's giving it-- he thinks recession, and that was before the negative print on Q1 GDP, and he thought recession was imminent. But he was giving I think a 20% chance of soft landing. And honestly, I see next to zero chance of soft landing.

RAOUL PAL: Yeah, I don't see components that allow that. If we take into account what's happening in China and Europe as well, the probability of a soft landing has got to be close to zero now.

ALEX GUREVICH: Well, paradoxically, I think that there is almost like a binary outcome. And the reason is because the Fed took such an inflation fighting stance, which is also with a caveat, some people think the Fed is way behind the curve. And some people think the Fed is still blowing bubbles, because they're not raising rates at 200 basis points per meeting. I think that it's somewhat a ridiculous view, but I have been ridiculously wrong in the past before myself.

WARREN PIES: There you have it. Gurevich calling for basically a zero chance of a soft landing. Tony, what's your thoughts? Do you think the Fed can pull a rabbit out of its hat and navigate a soft landing here?

TONY GREER: No, since Alex and I were on a panel at Real Vision in Del Mar together, I decided to fade everything that Alex says. Now, because that's what he did to me after I gave my market view. In our Real Vision presentation in Del Mar, I gave my whole worldview right there. And Alex came out right after me and said, I'll take the other side in pretty much everything Tony just said.

No, I don't get caught up, as you guys know, in the economic prognostication, because I'm not a biologist or an economist. I don't really know where we're heading towards recession, not recession, I like to let the bond market guide me and then I get to react. I think he probably makes a fair point as it seems like the Fed's got a really difficult job right now. I just don't ever get terminally bearish on the US economy.

There always seems like there's some sector of the economy that's like really on fire that's holding it over somehow. And I hate betting on a recession happening anyway. I'm playing this one down the middle, Warren.

WARREN PIES: Yeah, I hear you. You can go in circles around that stuff, for sure. We try to be as quantifiable as possible to track our calls and be transparent as well. But of course, I'm a market junkie, so I get interested in that stuff. I guess a question before we get into the viewer questions, I have for you is we have, probably since the last time we spoken, shed 500 points off the S&P 500. I have some ideas we've been laying out for clients and how you get market exposure when the time comes. What are your favorite trades, just to recap? I know you've been looking for the great rotation. Is there anything specific within that or anything else that you're seeing that's popping off your screen?

TONY GREER: Yeah, I'm going to take this opportunity to-- I really liked the risk reward that's presenting itself in some of the natural resources sectors that have pulled back. The trades that I'm looking at right now are, for example, SME got beaten up pretty good this week. It looks like it was off about 8% by the time the week has been over, big drawdown there, right into technical support, though, right into the moving average support levels where at least, I think the risk reward is okay.

Everybody's gotten terminally bearish copper in this $800 down move on the LME from $10,000 to $9200. I see a really sturdy range bottom at $8800. And that's my Mason Dixon Line for copper. If it's okay, I can get copper on this dip, because just as copper never broke out on the upside through 10k, I feel like it's not going to really break down much on the downside below 9k and stay in this range.

With my idea that that's going to be the case, with my idea that I want to buy aluminum on this huge pullback from the highs that it seemed to keep along that line of having metals and natural resources exposure, XME just lands in my lap as a risk manager, Warren. It's one of those swings that you can't afford not to take when you can try to make five to risk one.

With that kind of risk reward, I'm looking there, and I'm still really clocking the natural gas trade pretty hard because there's still going to be a serious demand issue and supply issue over the winter. The [?] spread is still really blown out in natural gas, or that part of the curve, and so I'm looking at trying to pick off some of the natural gas producers on the dip as they pull back into support. That's it.

I'm sticking to my knitting, I'm looking to buy natural resources on the dip, maintaining my shorts in the interest rate sensitive areas of the market like homebuilders and retail, and tech. And so far, I haven't really moved my feet on that type of positioning.

WARREN PIES: Yeah, all that makes sense, especially as a trend follower, I think that taking a shot at industrial metals if you have a long enough time horizon, it's hard to see how that doesn't work out for you if you buy it right. For our clients, what we're starting to outline is a portfolio approach. And obviously, we're a little more quantitative in broad basket approach, but we're looking at quality stocks that we want to pair with energy.

Energy typically doesn't make it into a quality screen. We're screening out the S&P 500. That's the core of what we call our full cycle trend system at 3Fourteen. You have to manually plug your energy and your industrial metals and commodity producers into that strategy. And we're looking at a period like 2000 to 2005. I don't think it's a perfect analog, but it's similar to what's happening.

We had the end of the last tech bubble and then the beginning of the last secular bull market in commodities. And this a strategy, the S&P 500 was negative from 2000 to 2005. Whereas this strategy did pretty well, double digit returns annually. This is the kind of thing we're looking at. This is how we're advising our clients.

The one thing you did say which we aren't finished with our work, but we'd love to hear your thoughts on the bond market, because I think if you think that yields have topped here, what do you buy? In my mind, we haven't officially made this recommendation, but I've said it to some clients is we're looking at home builders. I think that actual actually, when you go out there, you can either buy tech junk or home builders that are pretty cheap with I think structurally tight housing market in the United States.

If you told me for sure rates are going to be lower in the next 6, 12 months, that's the play that I would pile into. What do you think I know you're shorting this?

TONY GREER: Yeah, that's the one that I'm probably the most cautious about the short or where I keep my stop really tied to the markets because I