WARREN PIES: Welcome to the Real Vision Daily Briefing. It's Tuesday, April 12th, 2022. I'm Warren Pies, founder and strategist at 314 Research. Today, I'm joined by Tony Greer, founder of TG Macro. Good to be back with you, Tony. Big day. How have you been?
TONY GREER: I've been great, Warren. How have you been, man?
WARREN PIES: Good. Today, market's ultimately down. Bond market gets a little bit. Oil back above $100 a barrel. Obviously, the big story of the day is CPI and inflation. Everybody's wondering, with 8.5% increase year-over-year on the CPI, if this is the peak, where do we go from here? So much rides on how this inflation statistic comes turns out through the year. What's your initial take just on today's CPR report?
TONY GREER: Well, you look for it as a trader to be the beginning of a sell the fact event. Markets have been rallying in inflation mode, getting into this headline number. You would have expected and unwind of things today, but we didn't really get that. What we got was 8.5% year-over-year CPI, but really important underneath the hood is the food index, which was up by 8.8% more than like the largest 12 month increase since May 1981. We've reached historic levels here.
I heard there was a number like five or six Wall Street banks called this the peak of this inflation period right here. I'm sure you have your views. And my particular view on this is I'm wondering where the commodities are going to come from. That's the view of the Wall Street bank analysts that since we are on par with the highs that we've seen in the past, that this is probably where this peters out, and I have no idea where they're coming up with that type of scenario. What do you think?
WARREN PIES: You're dead on just looking at the food component, the energy component, the commodity drivers of this number. We have a chart. We prepared and updated the data from 314. I think it's a good one to take a look at and set the table for this discussion. It shows the big drivers of inflation of this print. So we're up 8.5% year-over-year on the CPI. Where did that come from? Well, you basically have to start with energy. We break out energy within home and autos. So, we're breaking out both those big segments.
Energy is about 29%, as accounting for 29% of the year-over-year increase. We're seeing this 8.5% number. Cars are the second biggest driver, 26% of the year-over-year increase is in cars. Housing is about 21%. So, you're seeing housing contribute 21% to this number. Food, 14%. Everything else is about 10 or a little under 10%. That's how it breaks down. You can see how energy can either be a big headwind or tailwind to the CPI numbers, as we've seen in the past.
And so, if it's a peak and if these Wall Street banks are saying it's the peak, then it means that oil prices are basically going to be more or less under control from here. And so, that's an implicit bet. It's something you and I have talked about quite a bit is that if you want to do macro in this environment, you better know the oil market. And so, if you don't have a view on oil, then really, you're just flailing around in the dark. Oil is going to drive CPI going forward, in my view.
We do have base effects, which is going to make it harder to get these really outsized numbers. But if we were to spike back up to 130 bucks a barrel on oil, I think we see 10% CPI within the next couple months. This is oils driving the bus. That's how I see it.
TONY GREER: Yeah, I can see that happening as well, Warren. I feel like there's some pretty decent tails on the tape. Recently, if you look at the spreads, the calendar spreads and WTI, for example, we had May, June trade of round trip from 50 cents out to $5 at its widest, and then come all the way back into 50 cents. If you notice crude oil did the same back off to $93, and then rally $10 again. It's amazing that the spreads have backed all the way into support and stayed there.
And yet, all of a sudden, we've got a $10 rally in flat price crude oil off of the lows. I think that that isn't it a little bit of a hint as to the direction that we're likely to follow. And similarly, we've got natural gas pressing the upside of its recent ranges, which is only putting more and more pressure on that food component of CPI, which is why I really don't trust the number of backing off from these levels right now.
WARREN PIES: Yeah, that's a great point. One of the things I think it's really important for everyone to understand is the extent of the lockdowns that are happening in China right now. And the fact that crude oil is shrugging this off, is a huge signal for what's going on in that market. We've seen some physical market deterioration, but you're talking about between 40 million Chinese lockdown right now. And that's it. That's two states of Florida.
The lockdowns, they're much more punitive than what you see in the United States. They are basically barricaded in their homes. When you're talking about more than double digits of the China's gross domestic product accounted for in the lockdowns that we're seeing right now, that's a demand outage. Russia was a supply outage. We're dealing in an abnormal market. We had supply outage. We missed maybe 3 million barrels a day from the Russia-Ukraine war.
Now we have a demand outage, which is swinging the pendulum back and forth. But if you go back to the Omicron scare, where we thought there could be some tepid lockdowns, the market fell apart. We have a huge with 40 million Chinese citizens under lockdown, and oil is above $100 a barrel. I think that the average generalist doesn't no idea what the signal there, they should be getting from this. You see it differently?
TONY GREER: No, that's a great point, Warren, as well. Taking all that demand offline, and still having WTI sticking its chest out $100 bid is definitely one of the causes of concern that I have for oil, not it's simply mean reverting to $80 anytime soon. If we can go to the equity market, the same thing is reflected, and the same thing continues to be reflected that we would call them the great rotation.
What was interesting to me was that last week was the first full week of trading in April, and in the month of April, in the new quarter, and then the new month, and that was evidence of the great rotation where we saw natural resources rally and tech back off. Then you look at the tape today, and you've got a 6.5% rally in WTI leading the charge. You've got metals and mining, oil services, Bloomberg commodities, all up over 2%. Energy, oil and gas and silver natural resources, all on the plus side of the tape.
On the negative side of the tape, which is netting a net loss for the S&P, you've got social media, financials, healthcare, internet, biotech, software, solar, all of the same stuff that's down on the year. I think the more we see and the more we get confirmation that headline inflation is going to be with us for a while, the more of this rotation. This what I call the great rotation where natural resources lead, the more that gets rolling in motion, and I think we're going to see some eye popping numbers by the time we get to the end of this year.
WARREN PIES: Yeah, energy up 1.7% the last I checked today. Everything else was flat to down on the sector basis, like you said, and that's just a continuation of what we've seen this year. Energy just lapping the rest of the sectors out there and up versus everything else negative, up 40% versus everything else negative. I have to give you credit.
A couple of weeks back when we were talking, you flagged a few natural gas stocks that were basically breaking out of a long term consolidation in southwestern energy was one, for instance. And now we've had nat gas spiking. You were on to something when you found those charts. There's been a huge rally just within the last couple of weeks. I would guess that you're writing that still. This is not the upside you're looking for this group, but I wanted to get an update on that from you.
TONY GREER: Yeah, thank you for noticing, Warren. That trade has been really, really as difficult as it's been to follow and stay involved in. It has been telegraphed quite clearly by the fact that nobody in Europe or the US is backing off any of the carbon neutral plans. As we continue to see prices spiral out of control this way, we're going to continue to see elevated CPI numbers, and then we're going to eventually end up in some event humanitarian crisis.
Now, this is the offshoot of the natural gas trade because natural gas is driving all this. The higher natural gas goes, or the longer it stays elevated. The higher the ammonia price goes, the farmer has to change their plans, the more that goes into the calculus between whether they're planting corn and wheat or planting more soybeans, and this is going to change the calculus of the inflation print, our food inflation data, and how the farms wind up outputting different agriculture products.
I'm still looking for a lot of stress to be caused by the commodity sector. In the fact that it continues to rally. I just don't see any of these low inventory scenarios getting cleaned up anytime soon. And just to speak to natural gas, we're going to go through this summer where everybody is going to be an accumulation of winter month mode. Then we're going to get to a point where the indexers are going to be buying the winter months.
We've got a potentially toxic upside cocktail in natural gas. I know that we're nine months away from these natural gas, or eight months away, but this is when you have to start plotting into that trade, because there's already a very significant bend in the curve where these natural gas is a big three or $4 premium over the entire curve. That's going to be the way to manage or at least keep an eye on this trade.
The other way is going to be to keep an eye on Dutch TTF natural gas over in Europe, to see if they're able to keep it under control, as they expand their inventories as best as they can with this issue that they've got with Russia in production now. As long as the Russia-Ukraine war keeps pressure on Europe to be accumulating natural gas, I'm concerned that we're still going to see upside in that commodity. For sure through the summer more, and it just seems like we've got the momentum and flywheel going in the right direction.
WARREN PIES: Yeah, I think the big theme you could sum up for today, you could sum up for the whole year is the value of energy has to rise over overtime coming out of this conflict. You're going to have to see the world leaders in the economy, the whole financial apparatus putting a higher value on energy. And so, this leads in today's clip. Luke Gromen was going through a very similar thought process. Let's take a listen to what they talked about, and come back and get our thoughts.
LUKE GROMEN: Look, I think in the last month with what we've seen and what particularly we're seeing in Europe, we're seeing that whatever valuation the free markets are putting on energy and raw materials, their importance, the difference between energy price and energy value is wildly mismarked in the Western investing public's mind. We can see that by virtue of the reaction to Russia, Russian sanctions. When Russia invaded, it's all we're going to cut Russia off. Look, there's ruble. Rubles collapsed. Russia has no power, and then Russia says I won't be taking ruble for the dollar, we're only taking rubles for our gas.
And the West goes, wait a second. And the ruble goes from 140 to 85, like that. And so, my point is that the Russian invasion, the sanctions, and the responses of both parties, and the fears of outright shortages of energy in Europe, rightfully so, I think may represent a catalyst for a collective recognition that the gap between the price of energy and commodities and metals, and the value that those assets bring to the real economy have been allowed to rise to record wides, if not all-time, record wides.
When I say price versus value, I could summarize it by a comment I made to you on Twitter, which was listen that Western finance people tend to look at commodities for the price, oils price hasn't risen in 15 years. There's 150 in a way, that's 120 now. If you want to understand the difference between price and value of oil, I said to you, I said listen, instead of taking a jet back to Scotland next time, take a rowboat, and you'll about an hour into that you'll understand the value of energy relative to the price of energy.
WARREN PIES: So there you have it. We're going to need to see energy as a commodity and as a strategic asset, it's going to have to rise in value. I think one chart before we pivot off the energy stuff and move on to some other assets, I wanted to just make sure we get up on the screen is our chart of CPI versus the Feds 2% target on the top clip.
What we have here is CPI, and then we have this linear extrapolation of what the Fed wants 2% inflation forever. Then on the bottom of that, we have oil. I think the important point of this chart is that when we had the shale revolution in oil fell apart in that 2014-2015 timeframe, that's when the Fed kept or the CPI kept perpetually undershooting the Feds target. It goes back to the little micro thing we started this whole conversation with, which is that oil is going to dictate the direction of CPI today, this year going forward, in many years in the future, potentially.
We could turn from a tailwind for disinflation to a headwind that becomes inflationary on these energy commodity. It's a theme we're going to always go back to on these Daily Briefings. For now, let's move on to a couple other assets that are important that we should talk about, specifically inflation safe haven, or really centerstage assets. The dollar strong today. Bitcoin started out strong and faded. Gold continuing to plot higher. What do you see here, Tony? What's your thoughts?
TONY GREER: Luckily, I've got an explanation for all of this one.
WARREN PIES: Well, let's hear it. It doesn't mean that [?].
TONY GREER: No, [?]. Take it one at a time. Let's start with the dollar as in the dollar index, just to round it off. DXY making a new high above 100 today. That has been part and parcel of this entire commodity inflation rally, as you know is that the dollar index has been rallying alongside rally in commodities, which is counter to what we've seen in the past, but not counter to the situation that we are in right now, where we've got the Fed pivoting to a rate hiking regime, and the dollar just isn't done gaining value on that proposition yet.
I think that explains or partially explains the dollar strength, Warren. When I look at Bitcoin just sinking like a stone over the last couple of days, while that's really hard to get a handle on, the only thing that I noticed was that it clearly perked up and rallied sharply when there was this war on money rights flashing across the tape from Trudeau shutting down the truckers finances, flipping to the US cutting Russia out of the SWIFT system.
It seemed like when there was a pressure on who was allowed to spend what money that Bitcoin went bid for a little while. Then just to remain a technician [?] that said on 200 day moving average resistance up at 50k, and has now fallen $10,000. That's just the nature of Bitcoin to me. What are your thoughts on their, Warren? Do you think I'm on the right track, or am I out of my mind?
WARREN PIES: No, I think you're on the right track. I think the dollar is the least dirty shirt thing right now. You're basically versus the Euro and the yen. It makes a lot of sense to see dollar strength and also make sense for gold to be stronger than everything. The big takeaway I saw coming out of the initial invasion of Ukraine by Russia was that interestingly, that's where the flows went. Bitcoin jumped by 20% on the back of that invasion?
Bitcoin is a volatile asset, and there can be strongly held opinions on both sides. But the one use case that we identified early on was that this is the 21st century version of a wealth transfer device. Whether you're talking about like a rare books, or diamonds, or art from centuries ago, Bitcoin is the way to transfer cross jurisdictional large sums of wealth. I think the reaction to the invasion into the sanctions on the back of the invasion confirmed its place in that. So, I think you have to have all these things make sense in what you're saying, and I think it also makes sense. What do you think?
TONY GREER: Yeah, that's a good explanation as well for Bitcoins. It's definitely some sentiment driven alongside like you said, the sanctions headlines and things like that. We definitely run into positioning issues where it starts looking good, and the laser eye guys probably get long, and not realizing because they're not technicians that it bangs its head on the 200 day moving average at 50k, and then has every reason to back off.
If I may, let's switch over to gold, just as the clock's ticking here, Warren. To me, this is eerily reminiscent of the Arab Spring in the early 2010s. Around 2010 if you remember, that's where we had food shortages in the Middle East, those headlines, and that visual content was all over the screens. At the time, gold was on a frozen rope higher toward eventually its peak in 2019 around to UK.
I'm trying to be cognizant that with protests in Sri Lanka and Peru and spreading around the world now, somewhat related to either inflation, or food costs, or the like, it makes sense very much for me for gold to be rallying under that scenario. If you take a step back and look at the chart from 30,000 feet up, it looks like it consolidated for a really long time and is now going to take a really long time getting into rally mode, but still looks really good to me, and I'm sure a lot of other players out there.
WARREN PIES: Yeah, we're overweight gold in our models. We've been waiting patiently for that 16, 18, 19, 50 range to be resolved. I think it was resolved to the upside, and so gold breaking out. We said to about gold when we first did our big model a couple of things is that it's a reflection of