MAGGIE LAKE: Hi there, everyone. Welcome to the Real Vision Daily Briefing. It's Tuesday, April 26th, 2022. I'm Maggie Lake, here with Steve Van Metre, founder of Steve Van Metre Financial, on what is an ugly looking trading day here. We are closing, if not at, very close to the lows of the day. Seeing that selling pressure as we exit, which is never a good sign when we're looking at stocks.

NASDAQ down, it's been moving around, but at last check in excess of-- oh, now it's 500 points. This is getting really bad, Steve. Around 514, we'll see where we settle, that's a loss of almost 4%. Taking out the previous low from March of this year. S&P 500 down 120, about 2.8% and the Dow down 810 points, 2.38%. You can really get a sense of what the sentiment is in stocks.

VIX is up 20% at its high of the day here heading into the close. And as we pointed out, bonds have been maybe the bright spot, but we'll dig into that. The 10Y is at 275. Remember just a few days ago, it's knocking at 3% for the yield.

And finally, crypto as you can imagine, within this risk-off atmosphere, getting hit, but not nearly the selling we're seeing in stocks. Down about 4% on Bitcoin, maybe 5%, 5.5% on ETH. That's where we are, Steve. What's going on? Why are we seeing this severe selling in the equity market?

STEVEN VAN METRE: Well, yeah, it's interesting. There's clearly a lack of buyers and people are headed to the door. We have the Fed. We know what the Fed's going to do next week, there's going to be a minimal 50 basis point hike. There's some rumors now that that's 75 basis points. And that's got some big investors, institutional investors spooked, and for good reason.

The Fed tightens into recessions and are we seeing perhaps a peak at the markets already in? Usually when the yield curve inverts, you've gotten another year, year and a half of strong equity gains, a lot of retail investors have exited the bond market to buy into stocks. But yet when I look back at curve inversions, the market is already trending down, then usually it's an open and the peak is already in. Maybe the peak is in.

MAGGIE LAKE: Yeah, peak in terms of what?

STEVEN VAN METRE: This equity market. Maybe we are in the very early stages of a bear market. And granted a lot of people still think we're in the early stages in a long-term bull market, but when you start factoring in Fed policy and inverted yield curve, it tells you things are wrong. And usually, when things are wrong, stocks eventually react. Maybe this time, they're reacting earlier than expected.

MAGGIE LAKE: Yeah. But they've been reacting. And it's been a horrible April. April alone has been super ugly. And certainly, the selling goes back to that. And it's interesting, some days, we're seeing everything sell off too, which I think has people concerned. I want to play a clip, actually, because you mentioned recession, and I think this is really this overarching discussion that's going on.

And the thing that has people most unnerved, and Evan Lorenz had a conversation with Harley Bassman who's a managing partner at Simplify Asset Management. And Harley was, I think, expressing the concern that many share about the Fed achieving a so-called soft landing. Let's have a listen to that.

HARLEY BASSMAN: I do think that what you've seen is this money has been printed, created. And initially, until recently, it could not find its way into the economy. Maybe it sat on bank balance sheets or whatever, but I think it found its way into the asset market. This is the relationship between global stocks and bonds and balance sheets.

The notion that the Fed or central banks cannot create inflation is just bogus. They can create inflation, what they can't do, or is difficult to do, was to create 2% or 3% inflation as opposed to zero or 10. Trying to go and land the economy on 20% inflation is landing a jumbo jet in the baseball field. It's difficult to do.

But we've had massive inflation in all assets, housing, art, gold, it's all up. The Fed created inflation, the plan was to create inflation, but in wages, not in assets. And now, we're seeing the inflation in wages, which is a public policy good. Unfortunately, we now have what we call a bubble, but we certainly have elevated asset prices that will probably not be as happy if rates rise, and the Fed removes the balance sheet. That's a double barrel shotgun coming at the market theoretically.

MAGGIE LAKE: And that full interview is available for Essential Plus and Pro members on our website. And Steve, I think that are we going to get a recession? How much is priced in? Is the equation everyone's trying to think about, and it looks like bonds had been thinking about that a lot earlier and some people are making the argument equities hadn't really caught up. I don't know, maybe that's what we're seeing.

And if I just throw in a couple of datapoints that came in today, and I'm sure you've probably looked at these, just look at housing. We had Case Shiller reporting home prices jumped nearly 20% in February, but Freddie Mac, so sales of new homes, dropping to their lowest level in four months. That really lays out the potential dilemma for the Fed, doesn't it? Growth may slow, but if inflation remains elevated, that's a tough scenario to have a soft landing in.

STEVEN VAN METRE: Well, yeah, considering the Fed doesn't know how to do soft landings as I think Harley pointed out. Historically, they've never been able to achieve it. And then in the brief time that it appears that they have, they turned around and crashed it anyways, just for good measure. You have to look at the fact that the yield curve is really telling us everything we need to know.

And when you see these inverted curves, where short rates are running right up near long rates, and in some cases, running higher then they cause an inversion, it's a sign that there's something wrong in the economy, it shouldn't be this way. There shouldn't be a nice steep curve where short rates are lower than long rates, and lower than the intermediate part of the curve.

When we see this, it tells us something's wrong. And the problem is that, as you mentioned, is the Fed has really no latitude here, because inflation has become so political. And this is something that a lot of people really just don't understand. It is extremely political. Because in history, when inflation runs hot, whatever party is in power, doesn't matter if you're Republican or Democrat is irrelevant to what you what you believe in and what you support.

Is that it leads to that party getting voted out. We have the midterms coming. We do know that obviously, Powell was reappointed by President Biden, h e's a Democrat, the ruling party is Democrat. You have this big election coming, and there's going to likely be an exodus. Because when the average American family sits down and looks in their budget and realizes that their wages and their lifestyle is not keeping up with inflation, and they can't do anything about it, they vote people out.

Powell has no choice, he's got to pull the reins back on this. But it's a huge, huge gamble, because he is threading a needle unlike any other Fed Chair has had to deal with. And odds are, he's going to wreck the whole thing.

MAGGIE LAKE: Yeah. And we're not just talking about-- well, it's connected, but we've got inflation coming from multiple-- and we have this legacy of this extraordinary measures that were put into place, which a lot of people forget. This is unprecedented. There's no playbook for this. It's not like we can study the business cycle and see how this works.

Getting themselves out of that is difficult. They tried before and it didn't work. And now, they're doing it in this environment where we have supply chain issues, geopolitical concerns, on top of the problems that were baked into the economy because of that extraordinary combination. It's a really, really tough scenario.

Those nerves are now playing out. They've been on display. When you see this kind of selloff in the equity market, and it starts to feed on itself, and would you normally expect to see people then move back to bonds in that environment, Steve, as they try to figure out to protect their portfolio?

STEVEN VAN METRE: Yeah. Well, I'm going to want to mention this as an impossible scenario. The popular view, we heard the clip from Harley Bassman, the Fed can print money, but the Fed can't print money. And that's what's really interesting about this is we're using monetary policy to solve a supply chain problem, and the monetary policy was never designed to do it.

Why did we get all this inflation? It's because we pumped all this fiscal stimulus, and we cleared the shelves out. And now, we have supply chain issues that are really the cause of inflation, and the Fed can't fix it. It's not possible. It just doesn't work. You start looking at the equity market. Well, what does it need? It needs flows, and it needs money coming in.

Well, what are households dealing with? Well, during the pandemic, the government gave them all this money. They bought equities, they bought goods and services, they bought anything they can get their hands on. Now, because inflation is so hot, wages aren't keeping up with it, and all of a sudden, the money that could be going into the market is now being directed to basic necessities, housing, rent, food, fuel, all these things.

All of a sudden, this weakness in the equity market, does it start to make sense? Yeah, it does. But from the Fed's perspective, they look at these money market accounts, and they see, wow, there's over a trillion dollars of dry powder sitting there. Well, you don't see anybody really jump in to pull the trigger and put that money in. Why? Because they're really afraid of inflation and where this is going.

When inflation goes up and your wages don't keep up with it, well, then you obviously have to look to your savings, and people will put more there and look away from the equity market. And as it goes down, what do investors do? What did they do to the bond market? They sold when the curve is inverted, which is the time you should be buying. And what did they do? They bought equities, now, they're going to turn around and sell those too.

MAGGIE LAKE: Yeah, and by the way, we've got the big earnings-- tech, in particular, some of the losses in technology shares have been staggering, or we'll call them technology, some of the FANG. Netflix is just that chart, it's just brutal to look at that. We've got them coming out, I'm just looking at my screens as they pass and as we keep talking, but it looks like Alphabet missing on both earnings and revenue.

Any news coming out of earnings is likely to pile on here. When you look at this environment, Steve, what do people do? First of all, there's two strategies. If you're more sophisticated, presumably, there may be some protection you can find in the options market, correct?

STEVEN VAN METRE: Yeah, but that's not something the average person wants to do. If you're going to go play with dynamite, you better be prepared to get your face blown off. And a lot of average investors should not be touching the options market, even though there's so many people trading options today that the equity market is frankly a derivative of it.

And ultimately, we know how that will end with a lot of pain and losses. But we've talked about this on the show before, Maggie, where people need to hedge and what do average investors do, what do retail investors do? They sell at the bottom. When rates were rising, all they did was compounded by selling more than bonds when they really should just be holding their positions and realizing that, hey, rates can't sustainably go up. There's no mechanism for that.

Instead, they do what they always do. They sell at the bottom, they bought stocks and sigh of relief, this was going to go up. And now, all of the sudden, it's going down and they look around. They look at the last year, where do you go? We talked about this before the show. What is up? Everything keeps going down and all of a sudden, then selling begets more selling.

And then of course, that's where the bottom falls out. Particularly as we see the VIX now back into a zone where if it doesn't get in control, then it could just shoot higher and cause a massive unwind in equities.

MAGGIE LAKE: Yeah, I think the problem is that-- there have been so much skepticism and so many questions being asked about whether that 60/40, and we can talk about different levels of numbers, but part of your portfolio is in stocks, part in bonds, that didn't seem to be working. I just got a research note from another regular guest that's on often saying $7 trillion of bond market value was wiped out with the 60/40 portfolio. You can understand why people are having a hard time trying to figure out what to do here, Steve.

STEVEN VAN METRE: Yeah. Because as soon as it goes down, they start selling. Again, it's always the retail investors, do they do the wrong thing at the wrong time. You hear people say I'm a long-term investor, but really, people aren't. They might have money invested for decades, but they're very short sighted in their positioning.

A lot of people only will hold positions for a few months or a couple quarters. And if it doesn't go up, they're out. And then if it keeps going down, they'll sell more and sell more. You started stepping back and you say why do people get this wrong? It's because they don't understand.

And that's one of the great things about platforms like Real Vision is you bring experts on to educate people who say, wait a minute, maybe you shouldn't be selling bonds, or maybe you should be buying them. And people are like, why will I do that? They're going down?

Well, when stocks go down, you bought the dip. When crypto went down, you bought the dip. When gold went down, you bought the dip. When bonds go down, you sold everything. And it doesn't make any sense, because a really simple story of the bond market. There's all these factors we all look at. But there's one thing that people need to understand, it's the supply and demand component.

If there is a demand for loans at higher rates, then rates can come up. If there's not and there isn't, as rates go up, demand for loans is declining. We can see that in the weekly refinance data, we can see that in other places too, that when it goes down, rates cannot sustainably rise.

When you see that happening, you shouldn't be thinking sell bonds, you should be like, maybe I should start buying more and buy the dip because what have we seen for the last 40 years? When rates go up and lending demand goes away, they have to go down and they tend to make new all-time low. Seems like the easiest thing to do, but everyone gets it wrong.

MAGGIE LAKE: Is now a time, if people hadn't been, should people be buying bonds now if they don't hold them and where, what bonds?

STEVEN VAN METRE: Well, yeah, if you look at inverted yield curves, history show knows that as soon as 2Y yields start to come down, the long end will follow. It's almost a layup trade. Inverted yield curves lead to higher bond prices and lower yields. Why wouldn't you do that? But again, this all comes back to investor sentiment, how they view the markets, and if something, they just look at their portfolio, if somebody's down, they will sell it and buy what's hot.

Now, the problem is bonds are down, they're sold, and they don't want to go back because they're afraid. They believe that inflation leads to higher interest rates, which it doesn't. And now, they're in equities. Where are they going to go next? They're going to go to cash.

And I suspect we're going to see even more of a blowout in the money market and reverse repo. The only question is, can the Fed keep control of it? Not sure.

MAGGIE LAKE: Yeah. I'm glad you brought that up. Because I think this is a point that a lot of experienced market watchers are very worried about. When you see these big moves in many markets, and they're happening quickly, the market's not really built for that movement. And I'm not just talking about equities. We've had extreme moves in bonds, we've got extreme moves in the yen.

And there's that old saying the Fed is going to move and be aggressive until they break something. And there's a fear of what does that look like? Do you think that we're getting to the point where there-- are there liquidity concerns out there that you're worried about, or parts of the market that you see that seemed like they're under strain or not functioning properly?

STEVEN VAN METRE: Yeah, I think the equity market is telling us that exactly, because what starts to happen is you start to see the yield curve collapse. As interest rates go up, people are [?], oh, man, I got to get out of my bond, sell bonds, bonds are over, and all the stories about how interest rates are going to go to infinity come back.

And then they start looking around their portfolio. And all of a sudden, Asian equities, foreign equities start to go down. And why is that? Because when the global economy starts to slow, it starts there first. Then they say, oh, man, emerging markets and foreign stocks are all going down. What do they do? They sell those and where are they cramming all their money? They cram into US equities.

And that's why we see, usually when the curve inverts, we seem to see one to one and a half years of equity growth, because people are just cramming into the US equity market, and then all of a sudden, boom, it blows out. And you mentioned earnings, which is great, because look at the reaction. I want people to think, look at the reaction to Netflix and Facebook over what are not major deals in the earnings world.

Look back to the Great Financial Crisis, which people have forgotten about, and you won't see bad earnings go back and look then. What do you think's going to happen in equities next quarter and the quarter after when this only gets worse without fiscal stimulus and high inflation? Yeah, the equity market is a dangerous place. Everything's dangerous but where will be the flight to safety? Will it be dollars, bonds, gold crypto? We'll find out.

MAGGIE LAKE: Yeah. And we were seeing, I