MAGGIE LAKE: Hello and welcome to the Real Vision Daily Briefing. It's Monday, April 11th, 2022. I'm Maggie lake. Here with me today is Matt Peron, the Director of Research at Janus Henderson Investors, and my colleague, Ash Bennington, who is fresh off the Bitcoin Miami Conference. Matt, it's so great to have you here on Real Vision.
MATT PERON: Thanks for having me, Maggie.
MAGGIE LAKE: We're going to take a look at where we can find opportunity in this market. But we wanted to get a quick update on crypto because that space is really moving today with Ash, because we're once again down Bitcoin Etherium under pressure. Bitcoin down 7.5%. 9% For Ethereum. Moving in tandem with the risk assets as we've seen, as the NASDAQ off 2%. S&P 500 off about 1.5%. Dow off a percent. We had the VIX up 12% on the day. So perhaps not surprising.
Actually I'm so glad you're here. You and I crossed Coast last week. I was in San Diego at the Macro Experience, with the Real Vision macro crowd, and you were in Miami at the Bitcoin Conference. I'm curious, what were people there saying about what we're seeing with this price action?
ASH BENNINGTON: Maggie, the short answer is absolutely nothing. The first thing to say is this is a Bitcoin Conference, not a crypto conference. The folks down there are talking and thinking about Bitcoin, not over weeks and months, but over years and decades. This is especially true for Bitcoiners, who flew in from all over the world to attend. Look, it's a volatile asset class, minus 7% on the day, minus, I think 12.5% or thereabout on a trailing seven day basis. This is a volatile asset class. This isn't the thing that shakes people who are interested in rebuilding the financial system.
MAGGIE LAKE: Yeah, and we were just talking about before it came on air. It's huge. I can't imagine the changes you've seen since you first started going. It seemed like there were a lot of headlines, a lot of news coming out of it.
ASH BENNINGTON: Yeah. For me, the single biggest impact when you just walk on the conference floor and you see over 25,000 people, it has the feel of almost a music festival at this point. It's a huge number of young people who are incredibly passionate about effectively rebuilding, as I said, the world's financial system on Bitcoin rails. Also, I think it's fair to say, rebuilding the technical architecture of the web.
Many of the Bitcoiners who there will talk about the world, the web, that they believe we should have gotten not an intranet that's controlled by a very large Silicon Valley corporations worth hundreds of billions or even trillions of dollars. There is definitely an almost evangelical feel when you get down there and you and you hear the conversations on the ground. We were talking a little bit about price and how Bitcoiners are viewing this over a years or decades time rise.
Unfortunately, Maggie, you and I don't have that luxury. We look at price action on a relatively short time horizon. I'm looking at my screen now Bitcoin dipping below the 40,000 level. By the way, it depends on which indices you're looking at because these aggregations of price, there's no national best bid best offer on Bitcoin. So, you may see a different price on your screen, even though you're watching us live here. I'm seeing about a flatline of about 40,000 right now.
To your point earlier, this is basically a correlated risk off trade that we're seeing more broadly with US equity markets. NASDAQ off, I think, 2.2% or thereabout on the day. What we're seeing here is Bitcoin trading like a risk off asset. This probably isn't surprising when you look at what's happening. The cost of money is rising dramatically. This is really a macro story. Yields are up dramatically across tenors across time horizons in less than 40 days.
The 10 Year yield has risen 100 basis points, a whole percentage point. This is extraordinary. That rate of change is something that we just don't see in US Treasurys happening that quickly. What we're seeing here is across the board risk off trade. I wanted to take a look at a chart because this is a really interesting one. This is a chart of the correlation between Bitcoin price and the NASDAQ 100. As you can see on this chart, those fractional percentages of a whole of one represent basically percentages and what you can see is Bitcoin trading at basically a 60% correlation with the NASDAQ 100.
That's an extraordinary level of correlation. We should point out this is precisely the opposite of what Bitcoiners I believe will happen in the long run. They believe that this is going to be an off the grid asset, something that's not going to be correlated with traditional assets. Here we are, we're looking at Bitcoin trading like a high beta stock, Maggie.
MAGGIE LAKE: Yeah, that's the funny bit about it. But we always come back to this at Real Vision and it's a matter of time horizon. Actually, this is why no one was talking about at the conference in the very near term that is happening, but the folks you spent the week with have a very different time horizon. I think that's what we have to continue to think about as we talk about the direction of cryptocurrency. Ash, I can't even imagine the lack of sleep that you're suffering from having been down there. I saw some headlines coming out of that conference. We'll grill you about the fun part, later on off camera. But thanks so much for coming and giving us that update. We appreciate it.
ASH BENNINGTON: Thanks, Maggie. Pleasure to join you.
MAGGIE LAKE: So Matt, it's funny because we were going to start out by saying crypto is not really your area, but we're all paying attention to this now. We really are. This is an asset class that everyone's watching. But I think it's fair to say it's not your main focus. Before we jump on in on the cover, some of the other asset moves we saw, we did see big moves today. Maybe give us a little bit of an overview on what your focus is.
MATT PERON: Sure. Well, maybe I'll start with what our firm does at Janus Henderson Investors. We're a $400 billion asset manager global in scope, across really all asset classes, most EQUITY asset classes, as well as fixed income, and multi-asset, etc. We're really a broad diversified firm. We have the whole gamut from real estate to value strategies. We also are very well known for our growth, meaning our innovation focused strategies as well.
MAGGIE LAKE: It's so important and fantastic that you are looking for cross asset because there have been big moves as Ash pointed out. Where are we in this cycle? When you look at what's happened with bonds, when you look at some of the concerns with equities, where do you think we are in this cycle?
MATT PERON: Our base cases that we're coming up to mid-cycle, and you're starting to see mid-cycle type of behavior and the handoff between the early cycle acceleration to what should be moderation. This cycle is a little bit more complex because of the massive monetary stimulus during the pandemic, and that's distorting a lot of inflation sensitive sectors, etc., so it's creating an extra challenge, if you will, for the Fed. This cycle is rhyming with prior cycles, but it has some important differences that we're grappling with now.
MAGGIE LAKE: What is that difference? What's the main difference as far as you can say?
MATT PERON: Well, the main difference is just really the inflation being so high, and the Fed being behind the curve. More so than usual, that usually gets accused of that, and I'm sympathetic to their plight. However, last year was probably when they should have started some of the tightening of monetary policy. And so, they're getting a late start on that. As a result, they're going a little faster, and that makes their path that they have to walk narrower and the risk of recession higher. It's a bit more challenging than a typical cycle where the handoff is a bit smoother.
MAGGIE LAKE: We have been seeing that play out, because we certainly have had a lot of the regulars that come on here, and some really big thought leaders and money managers, and fund managers, some of them have started to change their thinking. Some of them, because of what we're seeing on inflation and the action of central banks, maybe moving away from some long held beliefs. Others are not convinced that we are in a different regime. I want to, before we pick up play a little bit of a clip of a conversation that Raoul had with Eric Basmajian, founder and editor of EPB Macro Research, on this very point, the business cycle and the secular trend. Let's have a listen.
ERIC BASMAJIAN: I think that if we look forward 12 to 18 months, I think that that chart of truth that you always point, it'll continue to prove true where that decline will still be in place. I don't think that bond yields breakout to out of that channel and rise on a secular basis. Because as the yield curve is suggesting, as some of my forward looking indicators are suggesting, we're going to have a continuation of this downturn in the growth rate cycle. And that's going to lead to what looks like to be recessionary conditions. And we know recessions kill inflation.
I do think that once the cycle fully turns lower and recessionary conditions proved to be evident, we'll see those curve inversions deepen until the Fed is forced to pivot, not because of higher inflation, but they're going to have an employment problem to deal with also. When we look at growth versus inflation, when real growth declines and moves negative, Raoul, then employments at risk. Even if inflation stays high, so the Fed does have a dual mandate that they have to deal with here.
As far as [?] we break to new secular lows, I do think eventually we will because these long term structural forces are still very much in place, and I think that they're going to continue getting worse. They're going to get worse because economic conditions on the ground continue to deteriorate. It's causing a larger downturn in the fertility rate. I think all of these secular demographic forces are going to continue getting worse, where we may move sideways is on the Federal Reserve's decision on whether they adopt negative interest rates or not.
MAGGIE LAKE: So Matt, how does that fit in with what you're thinking? What are you expecting in terms of interest rates and the Fed in? Does that mean that we are going to see a recession?
MATT PERON: There's a number of things to unpack there. There are some cyclical factors next, call it 12 months, maybe two years, and then there's some secular forces that Eric referred to. To your question, our base case is that this is a more of a mid-cycle slowdown. As I mentioned, the margin of safety there, though, is very thin. We're watching it. What we need to see is inflation peak, and start to come down as financial conditions tighten somewhat.
Most economists that we talked to our own forecasts think that inflation will start to roll over. Tomorrow's inflation print can be pretty jarring, so be prepared for that. As we move into the second quarter and third quarter, inflation should start to come down. Some of these near term cyclical forces will have abated. If we can exit the year with a path to more normalized inflation, call it 3%, then I think the Fed will have to walk back some of their policy as your guest mentioned, and we'll have a more conducive monetary policy backdrop. That's our base case.
Certainly the risk case, Maggie, is that inflation stays persistent near term, putting aside the secular forces that he spoke about with that inflation stays persistent, in which case, the Fed will have to be more aggressive, and that will be problematic for the economy and for risk assets.
MAGGIE LAKE: Yeah. Speaking of those risk assets, we saw stocks get back up [?] saw that VIX up [?] should just continue to I think, work through some of the concerns, especially the NASDAQ, that was the leader down. We are entering earnings. What's your sense of what we are going to see in terms of who can pass through those costs increase and who can't? What happens to profit margins in this environment?
MATT PERON: Certainly, you're going to have the haves and the have nots in the market on who can pass on those costs and who can't. Some of the more commodity sensitive in terms of input, prices, and input costs will certainly get squeezed on the margin line, and that's going to be a problem in those that can't pass it on ultimately to the consumers. You definitely want to stay with the inflation beneficiaries for now.
I think keep a bit of a defensive nature, because I think we've got some time before this situation result resolves. We'll have some choppy trading. We came into this year feeling very cautious about the near term market dynamic. We don't think we're out of the woods on that yet. So, I would hold on. It's going to be about their outlook, though. I think the guidance is going to be especially important.
MAGGIE LAKE: Yeah, and this is where things get interesting. The very, very dire Stark tone that the Restoration Hardware CEO had, I think caught many people by surprise. It made a lot of headlines. It made a lot of news. Hard to tell if it was sector related because of this space they're in or not, but I think that's the concern. If we start to see a lot of similar comments, look, listen, prices are going up everywhere. We haven't even begun to bake that in. What's you're feeling about equities? Does it feel like there's any support here? Are you concerned about another leg down, especially if we're looking at something like the NASDAQ?
MATT PERON: Yeah, I think I would be concerned about it. We're not out right bearish, but I think we're more cautious in the near term, because of some of the dynamics you mentioned, a bunch of crosscurrents. We have these inflation costs. We also have crosscurrents between reopening and preferences shifting for consumers from goods to services, etc. That's causing some noise. You've got geopolitical concerns. You've got many different crosscurrents.
Our base case is that we'll see some slowdown. We're already seeing it. We'll see some more during earnings, and inflation we've got is still hot. Near term, things are going to be pretty cloudy, pretty bumpy. We're not sounding all clear yet. Hopefully, as we get into the second quarter, as I mentioned, we get some visibility on the second half inflation picture. And demand, we'll have a smoother backdrop from which we can hopefully build some confidence in the market.
MAGGIE LAKE: It sounds like be defensive. It sounds like maybe you're leading value. What about dividend? I know you focus on this. You have a report that you put out. Is that something should people should be taken into consideration here? Are those dividends vulnerable, profit margins start to get squeezed?
MATT PERON: You're not in the near term, we think dividends are pretty safe for a while, especially dividend payers are typically higher quality, etc. Backing up, you mentioned, we do put out a quarterly report at Janus Henderson Global Dividend Index, that's on our website, every quarter we update it. Dividends are very strong globally. The US stayed strong during the pandemic. It didn't really affect them. They cut their buybacks, instead of dividends globally.
Outside the US, there was a big cut of dividends to preserve capital. Those have more or less been restored. It looks like we're going to power to new highs because even though all the things we mentioned in the near term earnings are going to grow. Dividends typically grow with earnings. Dividend payers are generally the strongest balance sheet. We feel good that that's one way to play defense is to stay with dividend and then you can go back on offense into other sectors. And that is something that we've talked about in our album piece.
MAGGIE LAKE: What about technology? It's hard. It's interesting when you listen to the to the clip we played, and if you believe that we're still in that larger trend. We've seen some of these technology names get beaten down. Do you try to pick them up here, when you have this inflationary rising rate environment, which is going to really punish companies that rely on future earnings that need that capital now? How are you thinking around technology?
MATT PERON: Technology, we think long term is interesting for a number of reasons, given their innovation which is really the best way to earn excess returns over a long period of time. We like it from that perspective. Also, because of that secular trend of the declining rates. I'm not sure, though, that I completely agree that we'll have that secular downtrend completely intact. I think directionally, I would agree, there are also some offsetting forces in the next five years or so that could stabilize that.
In general, we do agree that both the environment, the backdrop, which is the rate backdrop, as well as the power of innovation in terms of their business models, etc., will power technology ahead in the coming years. But short term, I would remain tactical because there still was an upward pressure on rates, even though we've moved up so far, so fast, as Ash mentioned, we're still really below where we were, or around the same levels we were in 2019. We're not high on any normalized basis here.
There's probably rate and room for rates to move up a little bit, and so I think that could pressure technology multiples in the short term. But again, long term tech, in particular biotech, looks very interesting here. You're paying low multiple on their R&D pipelines, etc., so that's also looking very attractive in the medium to longer term.
MAGGIE LAKE: That's interesting because it is an area that people look at. It is an area that's been beat up. We've seen that whole area take a hit. I think there's some concern about it being considered a risk asset and getting swamped if we see concerns enter the market. Do you think it's going to start trading on fundamentals? How's the best way to play that? Is it individuals to do a group of funds to cover yourself?
MATT PERON: Yeah. Again, tactically, I would remain a little cautious. To your point, I think that's a great point. We have to let the rates situation stabilize. I think when that dust settles, and again, we've been calling for that. We expected turbulence in the beginning of the year here, in the first half of the year. Let's just say all goes according to plan. The second half, we see some stabilization in the inflation picture and hence the rate picture.
I think that will be a really good time to look at some of these innovative sectors, biotech in particular, parts of technology, etc., where you can pick them up cheap for what is the secular theme of growth and innovation. Something to watch for sure.