MAGGIE LAKE: It's Monday, August 23rd, 2021. I'm Maggie Lake. Welcome to the Real Vision Daily Briefing. Today I'm joined by Dion Rabouin and 42Macro founder Darius Dale. Here's what we are looking at right now. The risk on trade return today pushing US equities higher. The S&P 500 advanced about 1%. The Dow gained over 1.5% led by tech and the Dow of three fourths of a percent. Bond yields edge to lower the tenure at 1.25%. And crude snapped its losing streak. US crude futures are up nearly 6%. And Brent also moved higher. Dion these moves came against a batch of pretty disappointing PMI numbers.
DION RABOUIN: Yeah, we got the numbers out of Europe and Japan last night. Today we got the US PMI missing expectations. Still positive though over 60. That was a lot more than we could say for Japan in the Eurozone and the UK missing really badly. Japan on the service sector side, the number was the lowest in about 15 months. So, really some pretty negative data in terms of the global growth story, but mega now you're looking at Bitcoin where the things are looking for a little bit more up.
MAGGIE LAKE: I think a lot of our viewers are looking at Bitcoin back over 50,000, today up 72% from that record low. That's right Darius. A record low in July. Taking out that level has a lot of people looking at the charts. Seen as a bullish sign and now predicting a run back at those all-time highs. Darius, we're going to get to all of that but first walk us through this market action that we're seeing today. What are your charts telling you?
DARIUS DALE: Not too hot, not too cold. It's Goldilocks, come on. So, in terms of the market responds to the disappointing PMI data and again, it was quite disappointing across the board. So, Australia, Japan, Germany, France, the Eurozone, UK and the US all released their data that today. And every single time series decelerated on a month-by-month basis, yet on manufacturing side, yet a 4-month low for the US, 5-month low for the UK, 6-months low for Japan, France, Germany, and Eurozone and in the 14-month low for Australia. On the services side and every single services PMI was lower than their manufacturing counterpart Delta variant. We had a 2-month low for Germany Eurozone. 4-month low for France. 6-month low for the UK. 8-month low for the US and a 15-month low for Australia and Japan. I say that to say this. What does it matter?
Well, it's telling you that you saw the market response today and there's two things really driving the market response. One, there's an expectation that tapering will be incrementally delayed at the margin relative to the expectations that we're baked into the cake coming into today. Then secondarily, we were joking about this prior to the show, but the borrowed lyric from our friend Britney Spears, I mean, it's oops, OpEx did it again.
Every single time we have these selloffs into monthly OpEx throughout this summer, you've seen a pretty meaningful rise in the week following. So, in May, we had a 1.2% rise in the S&P 500. June following that OpEx, we had 2.7% rise. In July, we had a 2% rise. So, guess what? This is the week following OpEx. Pretty much it doesn't matter what we get in data turns. But I would argue as we mark it all along that bad news is good news for US assets for the time being.
DION RABOUIN: Darius, it does seem like the market really isn't responding to this data the way you would normally think it would. But as you talk about OpEx, you talk about BTFD, Buy The F'ing Dip. Is the market just in the stance where anything can happen and we're still going to keep rocketing higher, or do you think we get to a point where tapering starts to matter, where some of this negative data starts to matter? Because I know you've been watching this for a while and some of your models have been saying that we really ought to expect the slowdown coming here.
DARIUS DALE: Yeah, we are firmly engaged in the slowdown. But by the month of September, most of the economies that we maintain models for will be dietsch displaying trending deceleration on the growth and inflation front. So, that we are definitely in that part of the process. However, when you back test it carefully as we've done in 42Macro, the speed with which were decelerating is not bearish for asset markets. So, if you want something to tank asset markets and risk assets, you need a much more negative catalyst than a tapering announcement that says we're going to start buying less bonds at the end of the year. Like that to me, it's really not the bearish catalyst that I think investors are hoping it is. Then when I say they're hoping it is, our analysis of the volatility and options markets continues to show an investor consensus that is incredibly bearish.
If you look at the relationship between implied 30-day at the money, put implied volatility relative to the local realized volatility regime that mean is around 30% something for the 33 main core ETF exposures that we track that we all traffic in. And so, that continues to suggest that as an investor consensus that's pretty well hedge from a net exposure perspective. Then when you look at some of the more idiosyncratic things to our signaling process, whether you look at our global macro risk matrix where half of the 42 indicators in the matrix are neutral. And you look at the total amount of total signals and coming out of that model, it's only in the 26% out of that time series going back to the start in 1998.
Those to me, if you combine those two signals with what I just said about the app is market, it screams that there's a buyside consensus out there. That's not over its key tips in terms of risk taking. And it's not out over its key tips in terms of its net exposure, which means you probably don't have the tinder that you need, the tingling that you need to have a meaningful correction in risk assets.
MAGGIE LAKE: Darius, it's interesting because we do see people still-- I mean, obviously, things are changing and everything, you can't move away because we've seen sentiment swing really sharply. But you've got these, some people are still holding on to this idea that growth is going to rebound. You'll hear them say that Delta is peaking. It's showing up now in these PMI reports. But we saw China reported zero net cases. There's a sense from even the health officials, Gottlieb was talking today. It's ugly in the South but maybe it's peaking. I mean, if you think growth is slowing on the back of that, what's to say we won't rebound, and we'll see some of those taper fears come back to the to the forefront.
DARIUS DALE: Yeah, we're very much likely to rebound and particularly in something like services PMIs in the month of September. You could almost take that to the bank. However, is that rebound, the start of a new trend higher in growth and a new trend higher inflation? Which I would argue are two very important dynamics that you need to have bond yields go up on trending basis. To have cyclical sectors and style factors lead the equity and credit markets higher on the trending basis. You can get a bounce. But these, are we talking about a new trend? Are we talking about a one month, a one-off blip on the radar? But what is very clearly emerging as a real obvious negative trend across most high frequency [?].
DION RABOUIN: And Darius, is I know you wrote about this in your morning note, the potential for us to go in one of two directions which is what you talked about that peak, or if we just find ways to function within the virus. Like it's just always here, but we're doing different things. Talk to me about what that tells us about policy because it does seem like the Fed can't do more to be accommodative here. At least, it seems like they can't. It seems like President Biden and the Democrats may be out of bullets in terms of big spending packages. So, how could maybe one of those two scenarios change the state of policy on both the fiscal side and the monetary side?
DARIUS DALE: So, let me answer that question in two ways. One, the pandemic is now an endemic. I think it's just a matter of time before everyone realizes that. I think I wouldn't consider myself one of them. But certainly, the smartest guys in the room that figured this out months ago, if not quarters ago, certainly have all gotten to that conclusion. And so, that likely means that whatever the Federal Reserve is, particularly the hawkish members, we have Kaplan, Bostic, Bullard and Clarida, and [?] George out there singing the praises of tapering. And I would argue very unnecessarily because it's very unlikely that we get back to anything that resembles 2019 services sector demand and output are anytime soon. We got to tackle the pandemic. And the reality is, it might not ever get tackled. It might just be something that we have to learn to live with as a society. So, that's my first statement on Fed policy. They don't need to be in a hurry.
My second statement is that, even if they're not in a hurry, and we just did have a September tapering announcement, and they start actually reducing the pace of actual purchase let's call it in November, December, January, you'll pick your poise in there. Their policy is actually going to get easier in the next two, three months from a net liquidity perspective anyway, because Secretary Yellen is that breaching those is about to bump up against the debt ceiling, and she's going to run out of the ability to actually incrementally issue new Treasury supply. The regards in Treasury supply I would argue, really, over the past couple of months has been a real boon for asset prices, particularly to the defensive sectors and style factors that have led the market higher since the early part June.
MAGGIE LAKE: I want to drill down a little bit into the data today, because we talked about it being disappointing. I thought it was really interesting details, especially coming from the UK. Both in the UK and here in the US, there's a lot of conversations about frustrations around labor. We know the supply chain has been hitting manufacturing. But when you're looking at labor shortages, this is an area that the Fed is so focused on when it comes to wage inflation and the inflation debate. So, key to what is going to happen here as to whether they think they could tape or not. I want to play you both a clip from Michelle Meyer. She's the head of US Economics of Bank of America. Listen to what she had to say about inflation.
MICHELLE MEYER: So, I think that people want to bucket into, you're transitory, you're in a persistent camp. And it's not one or the other to be honest. As you just said, you can't debate that there are a lot of components that have transitory inflation moves. And frankly, the report this week showed that. Think about rental car prices that skyrocket and now they're declining. Used car prices flattening back out.
Airline fares were down slightly, which I think is partly about COVID story as well. It's happening earlier for that category. But at all, you can make sense, or you just look at the amount that it increased. You could assume some mean reversion. And so, you should look past that. We're getting to the point where transitory inflation becomes transitory disinflation which might become transitory deflation. But that's not the real story. The story is what's happening under the hood which is whether or not more persistent inflation is building.
MAGGIE LAKE: And I just want to pick up on that. So, she goes on to say, I do think we're seeing some evidence of that. There is some broadening out of inflation pressures under their equivalent rent, for example. There's a big category that represents this. It's much stickier inflation. By the way, for viewers, you can see that full conversation available on Real Vision essential. But Darius I think it's interesting saying everybody wants to make it so black and white that it is, either you are the transitory camp, or you are in the idea that this is persistent, we're going to see a higher period of inflation. It's not that clear cut to most people watching. Maybe not folks in the Fed. I think, especially when you're looking at the near to medium term, longer-term, I think there's a really compelling deflations or disinflationary story. But shorter-term, medium-term, what are you tracking in terms of getting a handle on what the Feds going to do?
DARIUS DALE: That's a great, excellent question. And so, before I even answer the question, let me take a step back and remind viewers. When we have conversations about economic data, what's been reported, where it's going, cyclical versus secular, there's always two camps that investors fall into. And I think it's really important for everyone to understand that the level of the data is not the same thing as the rate of change of the data. And so, we're going to your question, specifically, I do believe that both parts of the question are correct. And since that the rate of change of the data is transitory. It's peaking and it's about to decelerate pretty sharply over the next 12 months.
However, it's not going to decelerate to a level that is consistent with the previous, cycles and in terms of inflation. The stationary mean of most inflation time series in the US economy has transposed itself higher. And what I mean by that is we're going to be oscillating around levels, for say, headline CPI for instance. Stationary mean was somewhere around 1.5% in the post-crisis era. That's probably closer to 2.5% to 3% now. And so, that is a big deal in terms of the level of inflation that investors have to price in and ultimately spread that risk across asset classes is going to be higher over the long term.
However, from the perspective of-- our process is born at a rate of change. It really anchors on the training rates of change of growth and inflation to predict asset returns. And the reality is we're as cyclical peak and inflation. And when you look at things like Trimmed Mean PCE Inflation, and then the tools, you look at median CPI on annualized basis, and still looks [?] three. Core PCE is decelerating on annualized basis. There's so many things that are telling you that the rate of change of inflation is about the peak and roll or it is peaking [?].
DION RABOUIN: That's super interesting Darius. Because I think that gets lost so much when we have this conversation about, is inflation transitory, is it not? And you talk about it. Inflation may be transitory at 5% but we get back down to 3%. And maybe that's more where we're staying at. If you could talk to me a little bit about a 3% inflationary world, because that's something we haven't seen here in the US and what 25 years?
DARIUS DALE: Yeah, not [?]. And core PCE, it's yeah, you're absolutely right. Almost 30 years. And so that to me is a big deal. Now, the core PCE inflation that we're currently observing is being largely driven by tradable goods prices that themselves are a function of the supply demand imbalance from COVID. It's all the usual suspects that loaded the rehash that. However, we are starting to see, if you look at the things like the NFIB job openings, hard to fill time series, the Jones Dow, the Jobs Data, the spread between something like employee compensation relative to the capital [?] expenditures. All these things are pointing you in the direction of the US economy that is likely to be more inflationary than it has been.
Now, they'll say that to say this, the secular drivers of disinflation in the US have not gone anywhere, in terms of globalization, in terms of the low labor force participation rate, the low velocity of money, all those things are still there. What's new now is this lurching left in fiscal policy that is now accompanying that persistent monetary easing that we've received the post-crisis era. That I believe is it has as a tail too.
MAGGIE LAKE: Dion, I'm glad you mentioned that we haven't seen this in a long time. We often talk about the fact that we have an investor class that has never known anything but easy money. We also have consumers who have never known anything but really, really low prices, cheaper prices all over. So, when you're seeing any kind of inflation come through. I mean, it's just not something that anyone is used to. Darius, we have some questions coming in from our viewers. And one of them asked, can you talk about liquidity in the Treasury market?
DARIUS DALE: What do you mean, can we talk about liquidity and Treasury-- oh, sorry yes. And so, the Treasury is likely to breach the statutory debt ceiling or that we believe they breach it on September 30. The government runs out of financing on September 30th which means they need to ask me to 10 Year resolution to keep the government finance. It's very likely that the Treasury will bump up against the debt ceiling sometime between late September and early October. Yellen is probably got I don't know six weeks of playing around with the numbers and playing around with the various facilities to keep the government functioning through let's call it mid to late November. But beyond that, there's we obviously have to see a resolution on the debt ceiling front and obviously on a continuing resolution front. All that's it's going to be messy.
But the reality is in terms of how it's likely to impact asset markets it's actually a net positive, because again, you have the Federal Reserve still gobbling up $120 billion in paper. $80 billion of which is the most pristine collateral out there from a hedge fund leverage perspective And so, that really does force investors down and out on the risk spectrum at the margins or at the bare minimum into the Fed's money into the overnight repo market. Some of that cash has obviously gone in equity, some of that cash has obviously gone into bonds but the reality is the world is awash with liquidity. And were not slowing and fast in that for that matter. If we start to really slow down, then it'll actually matter to the downside for risk assets. But for now, it's again, it's Goldilocks. That's what our market regime now casting process has been saying And that's exactly what the markets have been telling you for the past couple of months. And I think what's really fascinating too,
DION RABOUIN: is this move that we've gotten over the past month or so in Bitcoin pushing it back above that $50,000 level. I mean, I think a lot of folks saw Bitcoin as a hedge when inflation was running out of control or as a potential hedge for volatility in the market. And now, we're seeing even in this Goldilocks environment that you've talked about, we're still seeing Bitcoin rise and really take off. With the 10 Year Treasury at 1.25%, with the NASDAQ, I believe the S&P at all-time highs, Bitcoin still sky and higher. What does that tell you about