ASH BENNINGTON: Welcome to Real Vision. It's Tuesday, December 22, 2020. Just after 2:00 PM in New York. This is the Real Vision Daily Briefing. I'm Ash Bennington, joined shortly by Tony Greer. But first, with the day's stories, Jack Farley.
JACK FARLEY: Thanks, Ash. Equities drooped this morning before having a midday bounce with the NASDAQ leading the way, the S&P roughly flat, and the Dow Jones firmly in the red. Commodities had a rough day today. Copper was down 1.7% alongside oil, and gold was down almost a full point.
In other news, cryptocurrency Ripple Labs announced it will face a lawsuit from the SEC over whether the cryptocurrency it issued-- Ripple, or XRP-- is a quote, "Security that should have been registered with the agency." The currency, ripple, is the third largest cryptoasset by market cap. Now, I'm by no means an expert in the space, but I'm told that Ripple has prided itself on being one of the more highly-compliant cryptocurrencies in the wild West of crypto, something that's more legally blessed.
So this action by the SEC is, to say the least, a big deal. Particularly because ethereum and Bitcoin have been ruled by the SEC to not be securities. XRP dropped 10% today, which sounds like a lot, but it's actually not one of the biggest drawdowns this year. XRP is like many cryptocurrency. It's a highly volatile asset.
In other news, I've had some time today to comb through the stimulus bill passed last night. It's over 5,000 pages long. Let me just read you a few things. Some of the numbers may be familiar to you already-- $325 billion in small business assistance, $166 billion in direct checks, $120 in unemployment, $25 for rental assistance.
There's also $15 billion of assistance for airlines. And today, we saw United Airlines announcing its plans on hiring some of its workers back. However, they did add the caveat that those hires would be temporary unless there was a significant pickup in demand.
But what I have my eye on is these emergency lending programs. It's under-reported that of the $900 billion of relief in this bill, $420 billion of that was reappropriated from the Treasury for emergency lending programs that weren't used from the Care Act. Moreover, four of the emergency lending programs were extended until March 31, most notably the PPP lending facility.
However, what's absent is the term asset-backed lending facility, the municipal program, but most notably, the corporate credit facility. This was key in giving a psychological aid to the credit investor because they thought that the Fed would have their back. This can explain the very odd year that we've had in the credit markets. Look at the chart of default risk rising by the Bloomberg Default Risk estimate, and then the stock price rising at the exact same time. That is not normal. I just picked this cruise liner for example, but this is very typical of the year that we've had in credit.
So going forward, what will we have in 2021, when five of those programs are no longer there? We'll see. But we'll have to wait for 2021 for that one. Back to you, Ash.
ASH BENNINGTON: Thanks, Jack. Welcome back, Tony.
TONY GREER: Thanks, Ash. Good to be back, man. How are you doing?
ASH BENNINGTON: I'm doing well. Good to see you. Lots to talk about, let's dive right in.
$900 billion in COVID relief, $1.4 trillion omnibus spending bill-- a lot of money. What's it mean to you, Tony? And what's it mean to markets?
TONY GREER: Yeah, exactly. That's a great way to frame it, Ash, because you hear the number and you start saying, OK, that'll be enough to move the needle on helping some of the local businesses that I'm staring at as I drive around town that are struggling, and some of the people that I know that are trying to get their restaurant reopened. And you are seized with disappointment upon the first inspection of where the money is going. We're sending $700 million to Sudan and $250 million to Howard University with 6,500 students, and I could go down the list. We could talk about how much money the Kennedy Center is getting ad infinitum, and it's the same story.
Not enough is going to the American family here. That's where your heart breaks when reading down into the details. And when you look at the markets, there has been, I would say, a little bit of a sell the fact event with the stimulus actually hitting the tape. And I mean that in a very muted way.
We had the dollar bounce just a little bit earlier in this week. And so the dollar index bouncing just from 90 to 91 maybe put the risk appetite on its heels for a little bit in terms of just continuing to buy commodities and inflation hedges. But the tape seems to be taking it in stride, Ash. I think the big story coming into this was that we had that volatility yesterday from the UK lockdown story and their new mutation of the coronavirus, which is barely believable, and I think the markets are telling you that it's barely believable.
In that 100-point round trip, the S&P went 3,700 to 3,600 and essentially back, as of this morning, shrugging off that next leg of lockdown. And I guess we're going to sort out the stimulus bill and what it's going to mean for the markets. The reality of it is, after a Fed meeting last week and heading into the holiday markets, it's probably going to mean very little. I see very little having changed on the tape since it was announced, and I don't even see that much of what I thought might have been a real sell the fact event in the equity market.
And so the absence of that, and then the presence of a very small but visible bounce in the dollar countertrend. It feels like the non-linear path of the bull market, the same as it ever was, if I may. So that's how it feels to me right now, Ash. That's my initial inclination of post-stimulus bill hitting the tape.
ASH BENNINGTON: The country-- obviously more politicized than most of us have ever seen it. A lot of these events are a Rorschach test for people, politically. But what I hear you saying, fundamentally, is underneath all of the storm and stress, not a whole lot changes.
TONY GREER: Yeah, it doesn't feel like it. We heard from the Federal Reserve last week, and it sounds like-- from the fact that the market was able to get through last week's Fed meeting without a sell the fact event-- that was also really, really important for me. I mean, it was more of the same of, we're going to have Jerome Powell and Janet Yellen right there at the Fed and the Treasury to provide any stimulus necessary. The market tends to buy into that story, and I think the rebound after yesterday's sell-off is part and parcel of that, right?
The market's trying to convince you that it's going to look past the lockdowns, it's going to look past whatever Boris Johnson is doing in the UK, it's going to look past this, check your vaccine pass at the border thing, and work toward a reopening. And I think that that's widely supported by where commodities have been since we came out with the vaccine and President Joe Biden. Ash, I'm still keying off of that date that back on Miracle Monday. That rotation has still been very much in effect.
ASH BENNINGTON: Let's take a look at the COVID hospitalization charts-- two looks at the same data series. First up, the month of December. What you see here is slowly edging higher on the rate of hospitalization, or I should say the absolute case count on hospitalization. But when you zoom the camera back and look at the full data series, what you see are the first two peaks, significantly lower than that top peak, where we are sitting right now, around 115,000. Sobering numbers.
Obviously vaccines on the way, but at the same time, still very high hospitalization rate. Higher than during the first two peaks of this crisis. How does that play into sentiment and how does it play into your outlook of the market?
TONY GREER: I feel like the reality sentiment is one of concern. If this disease, if this pandemic hasn't left us and we're coming up on a year now, it's definitely a concern that numbers are rising. I checked out on following it case-for-case a while ago now. And I can't do it anymore. I'm just trying to be smart, wear a mask, be good to my neighbor, kind of thing.
In terms of the markets, it just seems to be that this move is in motion, if I may, Ash. It feels like the S&P is very much on its way to a higher price. I think a lot of that has to do with our original premise that the Fed is inflating assets. It probably has to do a little bit of getting the help of Janet Yellen at some point during this whole project, or at least having her standing at the ready. And as long as things aren't changing with that rotation since then, I'm going to go with what the market's telling me, and the market is still telling me that we're trying to look past the lockdown.
It's been pretty cool to see, though, that the exact rotation memory comes back when optics become talking about lockdowns. Over the weekend-- Sunday-- we had Boris Johnson talking about locking down the UK in a couple of different forms. And the market went right back to that, tech in the lead, energy fall behind kind of rotation.
So while there are some other stories shaking out, like in the banking sector, that we have to talk about-- the market right now is still in that balance between trying to look past coronavirus and being held back by these authoritarian governors that have got no proof of the new mutation. They've got no proof that the lockdowns that they've been imposing are tremendously effective. They just keep going back to them as the answer and the economic divide is getting wider and wider because of that, therefore probably increasing the need for the stimulus response again, sometime down the road. As we already discussed, it doesn't look like a lot of this money is making it to Main Street.
ASH BENNINGTON: As we often say, Tony, there are lots of people in this economy who aren't able to make their living on Zoom the way you and I can. And there are people out there who are hurting. I have friends in the restaurant business. It is a very, very difficult time. And also, I think the viability of cities-- the livability of cities is probably a better way of saying it-- the risk of retail, Main Street, High Street, depending upon whether you're a British or American speaker. It is an ugly, ugly season coming and it may be yet to shake out.
Other side of the same coin-- unprecedented, uncharted waters here going into the holiday season. With hospitalization infection at the rates that they're at right now, we just don't know where that's going to shake out. Something we can follow, something we can watch, but ultimately almost impossible to make accurate predictions about the future. So too with the mutation of the virus, the danger level of that, the mortality rate still unknown, and the increase in transmissibility still technically unknown. We're just going to have to keep watching that and see, and we're going to keep a close eye on it here.
You said something else, Tony, that I really wanted to touch on. You mentioned the connection between the dollar and US equity markets. You mentioned it a couple of times in passing, obviously something that's very significant for people who are newer to this space. Explain exactly why that relationship matters, what it signifies, and why you watch it so closely.
TONY GREER: Sure, Ash. A great place to start-- if we're going to talk about how the Federal Reserve is going to embark on their plan of inflating assets-- we've got to consider that the modus operandi that they're going to use to get that done is going to be a weaker dollar. They're going to try to, as they've mentioned, get to 2% headline inflation. They're going to continue using all the tools in their arsenal until they get there.
And I think that all the talk of all the stimulus and this free money going out to all different countries all over the place that are supposed to be attached to the US recovery effort-- all of that speaks to the waning purchase power of the dollar and an incredibly inflationary scenario here in the US. Speaking of which, that's the scenario that the Federal Reserve is still trying to retain, as you can see with the stock market carving new highs regularly, with the price of oil rebounding significantly, with Bitcoin going through the roof. They're still talking about employing all of the tools in their arsenal necessary to get that 2% headline inflation.
So if you've been following the headline CPI and PPI, you know that we're nowhere close. So then the Fed is going to have to stay on some type of program where they continue-- as we learned at the last FOMC meeting-- they're going to continue to buy assets. 120 billion a month, it looks like, on the same pace that it's been. And that is weakening the dollar, creating a more inflationary scenario. It's perking up inflation expectations in the bond market, which is where we can look to and say that this inflationary story isn't just theory anymore, the bond market is pricing it in.
So as long as we've got a weakening dollar, Ash, that is based on what the Federal Reserve is doing, and we've got the bond market giving the same signals all along that it's been giving during the recovery-- steeper yield curve, breakevens, trading higher-- we're finally creating the market where the market is anticipating that kind of inflation, right? A weaker dollar directly speaks to commodities rallying their prices in the US dollar. If the US dollar rallies, the other side of the equation is going to get bigger.
And so that sparks the huge rally that we've seen in LME Copper and iron ore, and oil, and gas. So I think that the commodity markets are signaling that there is commodity inflation going on due to the weakness in the dollar. And now I think we're waiting on it to get through to the marquee inflation data, like CPI and PPI, and then maybe once we've attained 2% for some stretch of time, then the Federal Reserve will have to consider raising rates or changing policy some other way.
So that's the drill-down, if I may. And it seems to still be working with the stock market, as well. The weaker dollar has got stocks did and it's along the same scenario of strengthening commodities and strengthening the sectors behind all those commodities.
ASH BENNINGTON: Such important points, Tony. Tying the macro back to the micro, such an important way of understanding what's happening right now. To come back to the Fed on Friday, the Fed clearing banks to start buying back their own shares, the shares rallied. No shock there. Give us some insight into how you see that particular trade playing out.
TONY GREER: It's a huge development if you work at Goldman Sachs and Morgan Stanley, right? We saw three SIGMA rallies in both of those names on that headline yesterday. That is taking something and putting an extreme power back in the hands of the financials in being able to buy their own stock back. They're going to be buying back a much healthier stock, having shored up their balance sheets.
It probably leads market participants to want to be a little bit long on financials. It becomes one of those baton-pass sectors where we've had either natural resources leading the market, or technology leading the market. And now all of a sudden you've got banks joining the rally, where they had been sort of sitting there like a bump on a log all year. So if they decide that Goldman Sachs and Morgan Stanley are going to trade at even higher valuations, because they're going to probably push it to a higher valuation by buying their stock back, then I'm going to say that trade is going to get some attention now. Within the recovery, I would think that there is ample opportunity for the banks to dig in and start becoming more profitable, especially if we can get yields to rise and the curve to widen out.
So hopefully that speaks to a continuation of the financial story for the bullishness base in the market.
ASH BENNINGTON: Obviously, the potential there to increase the net interest margins-- they're driving profits on lending.
TONY GREER: Exactly, and we had the money center banks participate yesterday. Bank of America, JPMorgan, Capital One Financial all broke out of a sleepy, sleepy range. And after they have been quiet and in a range for so long, I'm going to doubt that breakout lasts just a day. I got a feeling that's something that just started and it's likely to be with us for some time now.
ASH BENNINGTON: Tony, I believe this is going to be your last appearance of 2020. I'm curious-- as you look forward and think about the next few weeks, as we do some holiday things, tell us a little bit about what your broader outlook is, what you're going to be paying attention to, and how it potentially impacts your thesis.
TONY GREER: Sure, Ash. There's a lot of moving parts to the equity market, as you know-- Tesla being one of them. The recent Tesla inclusion to the S&P was adding the largest market cap stock by value into the S&P in history.
Also, I think that's going to have its ramifications in how is Tesla traded very bizarrely into the inclusion, where it was selling off the day of and then rallied into the close like they didn't buy enough stock, or if there was something else going on. And so there seemed to be residual buyers after the fact. If that buying seems to dry up and the Tesla path backs off, it'll probably take a little bit of the luster off the tech rally. And I'm looking in terms of the next couple of weeks, meaning into the end of the year and how to get position to be opened on January 4th of 2021.
I'm drawn to a much bigger proportion of cash. I am trying to only let my high conviction trades roll through the turn of the year. I always raise a little bit of cash at the end of every year to make sure that I've got some available in case something batshit crazy happens to the tape, and I feel like I'm prepared for that as well.
And we have to take a lesson from yesterday in the hundred-point S&P down-and-back. A lesson that these lockdowns, like I thought, are not going to be as widely accepted as these authoritarian governors think they might be and the pushback has finally begun. So I think that that's why the market is partially trying to look past all these lockdowns.
So what we want to do is have some dry powder