ASH BENNINGTON: Welcome to Real Vision. It is Tuesday, January 5th, 2021, just after 2pm in New York. This is the Real Vision Daily Briefing. I am Ash Bennington. It is TG Tuesday. I am joined shortly by Tony Greer, but first with the day's stories, Haley Draznin.
HALEY DRAZNIN: Hey, Ash. Let us get to it. Tuesday is an important day for markets. It is Election Day in Georgia. Again, today's two runoff races will determine which party controls the US Senate and the markets are paying close attention. On Monday, equity suffered their worst start to a year since 2016, but today, stocks traded higher retracing some of yesterday's selloff. The question is, are the markets anticipating a divided Congress, so that means one Republican would have to win and we know historically, markets performed better in a divided Congress or when the two houses of Congress are occupied by different parties.
Right now, the GOP Senate margin is 50/40. If both Democrats win, something that has not been done in the Senate in two decades, it would shift the balance of power in the Senate to an even 50 seats for each party. Vice President Elect Kamala Harris would then serve as the tiebreaker once she is sworn in. Democrat Jon Ossoff is running against Republican Senator David Perdue and Democrat Raphael Warnock is running against GOP incumbent Kelly Lafleur. Republicans obviously did not expect the historically red seat to flip blue in the presidential race, but a win by Democrats in this runoff for the Senate would allow for more ambitious spending programs once President Elect Joe Biden enters the White House, like additional stimulus, which could potentially give equities another leg up.
It would also make corporate tax hikes more likely, and increase regulatory risks for banks, tech companies and the energy sector, which is also weighing on markets. We could see some aggressive selling. If there is this blue wave, markets could react negatively, but it hard to predict given they are up today. Financial narratives, of course, are fickle. Historically, as I noted, we see that a divided Congress is good for stocks, but the narrative before the election was the exact opposite. That a Republican senate victory would be like a doomsday scenario for stocks as no stimulus would get passed.
A blue wave narrative was booing stocks from late August until right before the election, and that is why we saw a crash after the election as well. I should note that Democrats taking the Senate could also mean a greater convergence of loose fiscal and monetary policy, which could have negative implications for US Treasurys and the dollar but then again, that would be good for stocks. Anyways, we will all be glued to our TVs tonight. Back to you, Ash.
ASH BENNINGTON: Thanks, Haley. Welcome back, Tony.
TONY GREER: Thanks, Ash. Great to be here today, man.
ASH BENNINGTON: Tony, the first day back of the new year, it is usually this like quiet thoughtful meditative look ahead. That is not going to be this one, too much happening.
TONY GREER: Too much going on, man. I can barely contain myself today, Ash. I am actually strapped into this chair right now. You cannot see it, but there is a lot going on. There is a lot going on outside our window.
ASH BENNINGTON: What are you looking at that has got you strapped down?
TONY GREER: Oh, dear. The inflation story that we have been discussing is transpiring in spades on our screen right now. It was super encouraging to me to walk in yesterday, first day of the year and see the Bloomberg commodities index breaking out through a long term descending trendline. Those are the kinds of things that traders like me salivate over. We started the year off with that.
Behind it, we had an oil rally and nickel rally, and big metals rally, gold coming back to life as an inflation hedge. That was the start of the week, and they ran face first into a little bit of equity liquidation. It looks like we came into the start of the year with the UK on lockdown, and the books had been marked for the last moment, and now everybody is just hitting those first cash bids that they see to lighten their books maybe, and I understand that, but what they are selling into is an absolute ferocious natural resources grab that is going on right now.
That is finally what we have been talking about in terms of these are going to be the ramifications of the dollar getting mangled and money supply exploding and all of these new events that we have had because of the lockdown response. They are finally translating into the markets, Ash, and commodities are coming up in spades every morning. You wake up, you turn on your screen, and at the top of my leaderboard is a three sigma rally and pick a commodity, corn, oil, soy beans, that is why it is most encouraging because it is all coming together as we speak right now.
ASH BENNINGTON: It is like Tony Greer's Greatest Hits out there. What are you looking at as your bellwethers to determine that on the commodity side?
TONY GREER: Good question, Ash. For my confirmations that I am always looking for, I am standing in the ring, looking around to make sure that the stimulus affecting the securities I am trading is confirming my biases and my beliefs. This morning, I was sitting here waiting for ISM manufacturing over a jelly doughnut and a nice iced coffee, and it comes out 60.7 versus 56.8 expected and I start spitting the donut out of my mouth just because that is what happens when you are like, oh, my God, they have no place to go now, but buy more commodities.
Now, we have got-- because of that number, and I think also because the ISM prices paid number at 77.6, that is not inflation is coming, Ash, that is inflation happened. They are paying the price for it, and that price is now going to get passed down the line. The ISM manufacturing number today is a key linchpin, like you say, to the backbone of my ideas. We have got manufacturing recovery in place. The Federal Reserve is still inflating assets at the pace of 120 billion a month. We have got the Dow Jones ripping through 30K and the Bitcoin ripping through 30K, so we have got an actual inflationary and liquidity bonanza on our hands right now.
ASH BENNINGTON: Tony, I know this is a tough question, but how do you parse that in terms of understanding what percent is asset inflation, and what is being driven by organic consumption?
TONY GREER: Well, asset inflation, put it this way, let me translate this a little bit into my terms, if I will. I am going to look for headline inflation. I am going to look for the headline CPI, PPI numbers to start showing up closer to 2%, and maybe through there very quickly, because this is a let the genie out of the bottle and then you have got to keep a close eye on it because you cannot put the genie back in the bottle. I am looking for headline inflation to creep up toward 2%. It was interesting today, just while we are on this topic, side note, we had Morgan Stanley come around from seeing roughly no inflation to warning their clients on headline inflation in the last 24 hours or so.
That was encouraging for me to see. Perhaps most importantly, though, Ash, the Bloomberg Commodity Index is the thing that is sending off the alarms to me, the commodity sector is taking turns rallying for different reasons whether it is oil rallying because of, for example, today, what is going on with OPEC, where OPEC reaches a deal to keep the last production cuts, excuse me, last hikes in place. Then Saudi Arabia turns around and does a production cut of their own cutting a million barrels a day. We have got that pushing oil up to $50 today.
On other days, you have got monetization stories that just have portfolio managers grabbing for base metals and precious metals. You will wake up and you will see copper leading that morning, and you will see Freeport-McMoRan have a monster day, then you will see iron ore breakout, and you will see the steel stocks bounce. I am trying to angle my portfolio now to get a little bit more of a hold on that inflation trade as it translates into specific securities and specific sectors of the commodity markets.
For me, Ash, that is what I am always trying to true up. I want to see the CPI and PPI numbers start to catch up to the commodity rally that I am seeing. I think that once you get a number like 77.6 ISM prices paid, that is alluding to the fact that end producers are happy to pay up for their input commodities right now.
ASH BENNINGTON: I have got whiplash here. WTI trading above 50 bucks a barrel. What was it? Six, eight months ago, we had negative prints on this. It is dizzying. It is like the time of COVID has accelerated our time horizons that we do not even bat an eyelash to think about swings like this. It is extraordinary.
TONY GREER: Ash, we can we can put it in one perspective and say oil is almost up $100 from the March lockdown low print of minus 47 or whatever that crazy print was that day. Oil has traversed the $100 range. It has had naysayers all the way which for me, has made it all the more exciting to be long when everybody is piling into the, Tan Solar ETF and the PBW alternative energy ETF and most recently into that. ARK is a disruptive innovation, ETF ARKK it may be, but these to me are the tech sectors that falling, that are getting the last bits of capital chasing their political plays. Then what is happening is the reality is that the natural resources market is actually what is percolating right now for a number of reasons.
ASH BENNINGTON: Yes. ARKK, Ark Innovation ETF. Tony, you anticipated my next question, which is with that as prologue, how are you positioning yourself right now to play this?
TONY GREER: Well, I will be honest with you, I think that 2021, we are heading into a year where we are going to have a change in value, that the market is going to really exhibit a change in what it values. It is going to value tech stocks a lot less than it did last year because of the lockdown, and because the market is going to look past the lockdown eventually this year. We are in a turning where technology is going to be out of favor, and natural resources are going to be in favor.
What is wild to me, Ash, is that even after this huge commodity rally that we have seen, I keep saying to myself, it just got started and as I go over last year's data in some of my reports even after that huge commodity bounce off the bottom, the Bloomberg Commodity Index ended the year down like 4%. We are due to have a year this year, I am guessing, where the Bloomberg Commodity Index is up 25%, and it is led by oil and base metals and gold and now, grains.
You want to talk about grains for a minute, Ash. This is a market that I have held off really from trading since I was manning the Goldman Sachs commodities index book, because grains are very difficult to trade. They are very risky, and they are very volatile. If you are not a specialist, you are likely to get run over. From a macro perspective, you have come off an eight-year stretch where the grains index, Bloomberg commodities grain index, if you will, has settled in negative territory and sometimes very deeply. We just came out of it with the grain settling up 18% on the year, we are cruising along above all the moving averages, we have got problems with the next crop that is coming out, and we have got massive international demand.
I am trying to guess if this is a 10-year turning point in grains, where from getting beaten up over the last eight years where they start rallying as the trade tables around the world start to change, and grain suppliers start selling to different people and demand starts coming from different places. If that is part of the commodity trade, I want to figure out how to latch on to more soft commodities. As I think I have blown my brains out being an oil bull, I am tired of telling people that I have been bullish for $20 now, and base metals, we have been there.
Now, we have been there, and we are trading, and we are expressing that in our note. Ash, for me, it is confirmation that this inflation is really, really happening, that banks are coming around to it and that is going to drive investment in inflation hedges, if not flat out commodity grabs, and trying to fill in the spaces of the commodity space that I have no exposure to yet. Grains is next on my list. I am patiently waiting for a dip and right now plotting out how I am going to get into that. Just in case this is a 10-year trend change, I am going to be there.
ASH BENNINGTON: Tony, you are talking about nothing short than a major regime shift, something that we have not seen now since the end of the Great Financial Crisis. The run up that we have seen, obviously, central banks pouring out the liquidity, expanding their balance sheets, fiscal policy acting to stimulate, you say inflation is here.
TONY GREER: Yes, and it has been easy to call as a commodity. I am a perpetual commodity bull. I have just raised my hand and confess that right now. I do not like getting caught short commodity, so I look to play them from the long side. My point is we just spent a year chasing technology stocks up a flagpole because of the lockdown, because of the position that they were in during the lockdown. All five Fang companies plus Microsoft and several others, Zoom, Peloton, were all built for success during the lockdown.
We are eventually going to get to the end of that. The UK has now slapped a lockdown on until February, and I just do not know that this is going to battle. I think that that would last here. For example, if we tried to throw a national lockdown mandate on, we are too close to the other side. If we are going to get through that, and, Ash, when I look at the fact that money supply has been growing at a single digit percentage for the last 10 years, and it just grew for 25% last year, I am going to bet that the ramifications of that have not fully made their way through the markets yet.
Yes, and that is where I am getting confidence now that this inflation trade that we position for, it has just started. We have got copper going up through 8K, we have got gold testing 2K, Bitcoin going berserk. This is inflation hedge paradise right now.
ASH BENNINGTON: I would add to that, it is interesting. Obviously, the counter case for that is always when people talk about the expansion of the money supply, the counter case that someone always raises is that there has not been a commensurate rise in the velocity of the M2 money stock. Right now, I am looking at the chart from Fred. It is the M2 V series. It is still below 1.2. The longer term average is close to 2%. All in, it looks like since 1960, I am just doing the rough math in my head. That trend is actually accelerating, it is changing. There is a pivot moving upward now on velocity suggesting potentially that maybe this might be a precursor of something else to come.
TONY GREER: That is right. My read, and I could be wrong because I am not an economist, my read on the velocity of money slowing down is because of the economic lockdown that is going on and people do not really have a place to go to spend their money. Travel and entertainment largely shut down. Makes sense to me that the velocity of money is going lower for the moment, but you are going to still have to explain that 60.7 manufacturing PMI print that went on this morning that says that the industries are-- they have moved on, they are filling their tanks, filling the railroad cars with commodities, and shipping them off to the people that ordered them.
I am going to-- no disrespect to the Fred charts or anything like that, but my velocity of money measurements are out there in the market. When I look at Tesla up 700% last year, and Bitcoin up 300%, you put any of the history books in front of me you want, that is a measure of the velocity of money for my purposes right there.
ASH BENNINGTON: Extremely, extremely well said, and like I said, that has inverted direction. It is moving up now. We are going to have to keep an eye on that, too soon to tell. You are absolutely right. What we are seeing in asset markets clearly belies some of the charts that we are seeing from macro-economic standpoint.
TONY GREER: Absolutely, man. You want to just go over their tale the tape today. We have a four sigma rally. We have a seven sigma rally in oil. This is not something that goes on every day where oil goes up 10%. This is Saudi Arabia, blasting it through $50 if you ask me. We have a four sigma rally in soybeans and the Bloomberg Commodity Index, three sigma rallies in lumber, Brent crude oil, heating oil and gasoline, two sigma rallies in platinum and corn and the Aussie dollar, and a two sigma rally making new highs providing tail winds along the way. This is velocity of money right here, man.
ASH BENNINGTON: Obviously, this is something I did not know off the top of my head. I am just Googling this as you are talking, but Saudi oil production exports. It looks like it is about-- the numbers I am seeing are between 11 and 12 million barrels per day. You are talking about nearly a 12% haircut here. That is a substantial, substantial reduction in export capacity.
TONY GREER: Absolutely. This speaks to what I said, Ash, when OPEC gets oil on the run, they do not necessarily show up with supply. Sometimes they will tighten supply because that will get oil to the next level, through the next technical level, through the next psychological barrier. It was hard up until this moment for portfolio managers to conceive even buying oil for anything other than covering a short below $50. Now, we are going to see it sit above $50 is my guess, for several days and maybe keep traveling right through that price.
All of a sudden, it adjusts everybody's psyche to, oh, okay, well, maybe I was wrong about oil going back to $25 because of lockdowns or because of coronavirus or something educational, or no, something intellectually lazy like that. Let us look at what is actually going on. Oil, China demand is increasing. Saudi Arabia is trying to tighten up the taps and they are trying to get the