ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Thursday, February 17th, 2022. I'm Ash Bennington joined today by Jared Dillian of The Daily Dirt Nap. Let's take a look at US equity markets right off the bat. Not a good day across the board, looks like S&P 500 bouncing around a little bit, closing out down 2.12%. That's down to 4,380 right now. Big loser of the day, the biggest loser of the day I should say, NASDAQ Composite off 2.88%, nearly 3%, closing out the day at 13,716. Dow Jones Industrial Average also off significantly, minus 1.78% on the day closing out at 34,311.
Gold price on the day, I think it's up about 1.5% close looking at it right now like 1898, $1,898 per ounce on gold. Geopolitics once again in the headlines, US Secretary of State Antony Blinken saying the risk of Russian attack in Ukraine remains "very high". Secretary of State offering a meeting to his counterpart Sergey Lazarov. Lots to talk about, lots of speculation about inflation and rate hikes. I couldn't be happier to have Jared Dillian with us today to talk about it all. Jared, welcome to Real Vision Daily Briefing.
JARED DILLIAN: How's it going?
ASH BENNINGTON: It's going great, man. It's great to be back with you, dude. I missed you and the shows with you. We haven't done these for a couple of weeks at least. Jared, what's on your radar in terms of the big picture 50,000-foot overview of what's happening in these markets right now?
JARED DILLIAN: I spent a lot of time looking at charts today. And this is what I think is going to happen over the next couple of weeks. I think we have a lot more downside in stocks. I think bond yields have topped. I think bonds are going to rip from here. We priced in too many rate hikes, we priced in seven rate hikes. About half of those are going to get taken back.
I think oil is going to correct significantly. And I think gold is going to continue up until about 1920, runs into some resistance in 1920. But once you get through 1920, the next stop is 2060, the previous highs. And then after that, who knows?
ASH BENNINGTON: What's your time horizon for that outlook, Jared, as you talked about and think about gold?
JARED DILLIAN: I would say over the next six months. Once we get to the previous highs, it's going to be like a hot knife going through butter. The next stop I really think is 2500 an ounce. And I think we can get there this year. I think that's very possible.
ASH BENNINGTON: That's quite a call, 2500 an ounce on gold this year. It's interesting, Jared, if someone had given you the inflation data points that we've seen, a print over the last call it 60 days and told you that gold would still be under 1900, that would be a bit of a paradox. How do you think about that, and how markets are pricing this inflation data, which has been pretty significant?
JARED DILLIAN: Yeah, I've been watching gold for a long time. And it didn't really respond to-- even though it went up a little bit during the pandemic, and it didn't really respond to inflation. People got to a point where you just had this-- they threw in the towel on gold. They said it's useless. If inflation is 7.5%, gold's not going up, what am I holding this thing for?
But what you've seen in the past couple of weeks is a big reversal between crypto and gold. Gold has gone straight up and crypto has gone straight down. I don't know if it's the last couple of weeks, maybe it's this week. But I think that's going to continue in the future. And the thing about gold is that it really, I would say more than any other asset, it follows the charts. It really follows the charts. Like if you look at-- people look at money supply, they look at interest rates, negative interest rates, the budget deficit.
And all this stuff has been screaming buy gold for the last two years, and it hasn't worked. Well, it's going to work when it works. And you just got to wait for the chart to play out. And now that it has, this wedge pattern that gold has done over the last two and a half years is one of the longest strongest consolidations in any chart I've ever seen, which means that the next move higher is going to be very impulsive.
ASH BENNINGTON: Yeah. Let me ask you also about these geopolitical tensions that we're seeing in Ukraine right now. How do you factor that into your models? How do you think about it and how do you process it in terms of its implications for markets?
JARED DILLIAN: Well, in terms of the playbook I just gave you with stocks going down and bonds going up and gold going up, all that, the charts are telling me that there will be an invasion. And I don't know how serious it's going to be. I don't know if Ukraine is going to fight back or how many people are going to get killed. I really don't know. But I do think there's going to be an invasion.
And I think that it was not going to happen during the Olympics because the Olympics are a time of piece. I think it's going to have to happen after the Olympics. The end of the Olympics is on Sunday. I think perhaps it could happen next week. That's what I'm thinking.
ASH BENNINGTON: Yeah. You mentioned cryptocurrency, digital assets. Let's review a couple of these numbers here, particularly Bitcoin, trading right now at $40,993. On a trailing 24-hour basis, that's minus 7.2%. Ethereum trading at 2909, 2,909, 24-hour basis off 7.9% as well. It looks like that what we're seeing here is stocks correlated with digital assets rather than the safe haven play, which is something that you were alluding to earlier, Jared.
JARED DILLIAN: I think you mean crypto correlated-- do you mean crypto?
ASH BENNINGTON: Crypto and stocks, yeah, crypto trading basically relative to stocks rather than as a safe haven play like gold.
JARED DILLIAN: Yeah. NASDAQ's down 3% today. It's the same stuff that's been happening for the last couple of months ever since we put in the top in stocks. It's been all the unprofitable tech that's getting killed today. Yeah, I take a long-term view on crypto. I hold some crypto. I have a portfolio of it. I have a bunch of different stuff. And I used to sweat about it. When I first bought it, I was checking it like every five minutes, but honestly, I don't even really look at it anymore. I'll check it in five years.
ASH BENNINGTON: That's a very philosophical position. You mentioned the asset classes here, let's take a look at stocks here by GICS classification. Precisely to your point, Jared, big loser on the day, Information Technology minus 1.93%, so off nearly 2% on the tech stocks. On the flip side, energy up 4.7% on the day, so quite a dispersion there. After Information Technology, next biggest loser, communication services, minus 1.69%. And then consumer discretionary, minus 1.38% on the day, Jared.
JARED DILLIAN: Yeah, energy is due for a correction. It's had just a fantastic run. And I've talked to some people over the last couple of weeks and people who work in the energy industry, and they're telling me that oil is not done going up and they see $150 or $200 oil in the long term. But in the short term, I think you're going to get a pretty decent sized tradable correction. I think crude could go down to below 80 over the next couple of weeks, so we'll see.
ASH BENNINGTON: Yeah, let's take a look at crude prices right now trading at 91.61 a barrel on WTI, US benchmark price out of Cushing, Oklahoma. I'm curious what you think about the natural gas based, nat gas is something that we've been hearing about here in regard to the Ukraine situation. The United States is the first largest producer, the largest producer, second is Russia. Natural gas here on NYMEX trading NG1 at $4.52, off about 4% it looks like here on the day.
JARED DILLIAN: Yeah, I don't have any specific thoughts on that. But I will say that the whole energy complex is due for a correction. I think nat gas is going to go with oil in the short term, in the short term.
ASH BENNINGTON: And longer-term, Jared?
JARED DILLIAN: Yeah. One of the things I keep hearing is that there's really not a lot of investment in E&P even with oil prices at these levels. If you went back to 2014, and you had oil at $100, like you had so much money pouring into the space for investment, and it's actually not happening this time. And it's not happening because of ESG, and the cost of capital is high. I think the price has to go higher in order to attract that investment. Long term, I think it's actually scary with regard to oil. I think in the long term, it'd be pretty ugly.
ASH BENNINGTON: Yeah. Just to unpack some of the acronyms here for people who don't follow energy markets as closely as you do. E&P, of course, is exploration and production. This is the early-stage development of natural gas, oil and other assets in the resources space and ESG is environmental, social and governance, the trend that we've seen toward wanting to reduce the carbon footprint of the world.
You see these trends, precisely as you say, playing out with an absence of exploration and production funds being committed, resources being committed. Those are just simply not happening at the rate that you would expect, given this market due to the social pressure from the ESG side.
JARED DILLIAN: Yeah. ESG is, I would say probably about 60% responsible for the oil prices that we are enjoying today.
ASH BENNINGTON: Jared, how do you come up with that weighting by the way? What makes you say 60%?
JARED DILLIAN: I just pulled it out of my ass. I don't know.
ASH BENNINGTON: Sounded great. You just pull it out of your ass, Jared. This is years of watching the market, intuitions you've built up about this sector. Also, something that you said earlier about the Fed and rate hikes, boy, I think you're spot on there. And I wanted to actually take a look at a clip here that we ran on Real Vision today, a conversation between Alfonso Peccatiello and Jim Bianco talking about precisely that point. This is from a piece called, "Fed Rates, Inflation and Recession". Actually, I should say it ran yesterday on the Plus and Pro tier here at Real Vision. Let's take a look at that clip right now.
JIM BIANCO: In 2015, they started raising rates and all the way through the end of 2018, they raised rates to two and three eighths, broke the repo market in September of 2019. At every stage, it takes a lower and lower level to get to the point where you invert the yield curve, and you break something. When I look at the terminal funds rate at 1.75% or 2%, I get the argument, oh, this is a sign that inflation is going to come down, the Fed's going to be gradual, everything's going to be okay.
Stocks go to 300 while inflation is on its way down, and it's all going to be good. I look at it and say, what that means is six rate hikes this year, two more next year and you will be on breakage watch. That's all you're going to need to basically invert the curve and break something. And why? $30 trillion of debt, a highly levered economy, highly levered financial markets, I hear the Dudley's of the world saying, no, we might have to take funds rate way above the neutral rate to like 4% or 5%, we're never going to get the 4% or 5%.
We're going to have a complete mess on our hands long before we ever got to that kind of a rate. To try and rein in an accelerated inflation. We'll go to 2% and we'll break things. And then demand will slow, inflation will come down, the Fed will say, see, we fixed inflation. Yeah, you fixed inflation by causing a recession. That's my other analogy, and that was like I go to the doctor and say I've got an infection in my leg, and he pulls up the bone saw and says it works every time.
I was like, well, that's not the way I wanted you to fix my infection. Well, that's the way the Fed is. You want to get rid of inflation? We'll just crash the economy, there you go, no more inflation.
ASH BENNINGTON: Jim Bianco says it so well there. Talking about the balance of risk between inflation and recession, Jared, give us your sense on what's happening with the Federal funds rate, how the FOMC is thinking about this economy, and what that balance of risk looks like in your analysis and assessment.
JARED DILLIAN: Well, one thing you have to remember is that the Fed is not unanimous in calling for rate hikes. There's a lot of Fed members that are dovish. We saw Mary Daly, I don't know if it was this week or last week, but she wanted to hike 25 and then pause. And there's other people on the Fed who don't want to hike 50 and I really, look, this is my call. I think the Fed's going to hike 25 in March, I don't think they're going to do 50. I really don't.
Look, I was a big proponent, this was months ago, I said the Fed is behind the curve. They're embarrassed. I was talking about Fed embarrassment. I said they'd been embarrassed by this inflation, they're going to hike a bunch of times to catch up. Powell was concerned about his legacy. But at the end of the day, it's not unanimous within the Fed, and I don't think they're going to do it. I think at most, we might get four rate hikes this year, maybe less than that. I've totally changed my tune just in the last week or two.
ASH BENNINGTON: Yeah. And does that suggest, Jared, this perception that markets simply cannot handle 50 basis points, the US economy simply cannot handle 50 basis points?
JARED DILLIAN: No, I think that perception exists. It absolutely exists. But I don't think it's true. I think the market can handle it just fine. Really, the only time in recent history, and when I say recent history, the last 50 years, that a Fed rate hike cycle crashed the market and caused a recession was in the early 1980s. And like every other time, even in 1994, the Fed started hiking in February of 1994, they hiked about 2% or 3%. I don't remember the exact number.
It caused a lot of problems in the bond market, but stocks really didn't go down that much. The market can absolutely handle a 50-basis point rate hike, can't handle a lot of them. But we have this perception that it can.
ASH BENNINGTON: Yeah, it's interesting, basis for comparison, you're talking about a period when I think September 1981, 10 Year Treasury yields were at over 15.5%. Imagine that.
JARED DILLIAN: Yeah. In the short term, I think bonds are going to do very well, let's put it that way. I think it's going to surprise a lot of people. I think you could get 10s back to 1.6% by the middle of March. I think that could happen.
ASH BENNINGTON: Hey, Jared, do me a favor, unpack that logic, that reason for people who are relatively new to the fixed income space, who are just thinking about this in terms of equity markets. That's a pretty striking call, US 10 Year Treasury yield at 1.6%. Give us a sense of what that means and how you're getting there.
JARED DILLIAN: Well, really, how I'm getting there is with sentiment. The Treasury market operates on sentiment just like stocks do. A lot of people think bonds are rational, they're mathematical, nothing could be further from the truth. Here with 10s at around 2%, people think, okay, like, rates are going to go to 2.5%, mortgages are going to go above 4%, it's going to choke off the economy. People are telling these stories. And just when everybody goes to one side of the boat, then they go the other way. This is just a short-term call. This is just over the next two to four weeks.
ASH BENNINGTON: Yeah. If you ever spent a Thursday night out with bond traders, you know that they're not math professors. I'm looking at the comments here. I just saw Matt Hayes wrote, there's no gold like gold. And that really is the sentiment we're seeing being priced into markets today with gold and the relative differential in terms of daily trade action on cryptocurrency.
JARED DILLIAN: Yeah. Look, I've greatly increased my gold holdings. It's my biggest position. And I have I have that much conviction on it. It's funny because I have a portfolio full of Crap. I have a bunch of stocks that I don't really have strong feelings about. But this chart in gold, this breakout is one of the most powerful breakouts I've ever seen.
And the interesting thing about it is that as I read through the comments on Twitter, not that many people believe it. They're like, oh, I'm just going to wait for another opportunity to short it. I'm like, guys, have you seen the chart? Have you seen the chart? It's a thing of beauty.
ASH BENNINGTON: Yeah. Lots of questions coming in right now to us, Jared. Any other topics you want to hit on before we switch over to questions?
JARED DILLIAN: No, let's do questions.
ASH BENNINGTON: Great. Here's a question from Ralph Humphrey. This is a fun one. I don't know about this. I'm curious to get your thoughts on it, it's from the RV site. Can Jared elaborate on his thought that Warren Buffett tells people to do the opposite of what he preaches?
JARED DILLIAN: Yeah, I tweeted that out a couple days ago. I guess Buffett has invested in a Bitcoin exchange startup. I can't remember the details. But of course.
ASH BENNINGTON: A Brazilian neo bank.
JARED DILLIAN: Something like that, yeah. But Buffett he says everybody should be in index funds and hedge funds suck, and he runs the biggest hedge fund in the world. He said for 20 years that airlines were terrible, that they should have shot down Orville and Wilbur Wright, and then he invests in airlines. By the way, three years too late, he did it in 2016, he should have done it in 2013. But he does this all the time, so don't listen to what Buffett says, watch what he does. Watch what he does.
ASH BENNINGTON: Here's a question that comes to us from Achilleas from The Exchange. This is Real Vision's internal social network. And the question for you, Jared, is what sectors are you bullish on for 2022?
JARED DILLIAN: For the whole year, it's hard to look out that far. I said energy is going to have a pretty big correction, but I think energy still could be the top performer for 2022. Although I will say, I will say that over the next couple of weeks I think we have about 10% downside