WARREN PIES: Welcome to the Real Vision Daily Briefing. It's Tuesday, March 8th, 2022. I'm Warren Pies, founder of 3Fourteen Research. I'm joined today by Tony Greer of TG Macro and the editor of The Morning Navigator. Tony, how are you doing today?
TONY GREER: I'm great, Warren, trying to try to keep track but doing just fine. How are you doing?
WARREN PIES: I'm good. It's the first day for me doing the Daily Briefing. And it's one of those fun first days trial by fire. The quote that came to mind today, for me, watching market action is there are decades when nothing happens, and there are weeks where decades happen by Lenin. It feels like today was a month jammed into a trading session.
Looks like we're closing a little bit above the lows, but still 100 points off the highs we saw. The big story I saw today was the Zelensky press conference basically arguing that Ukraine didn't have to become part of NATO. And that was a big concession. It felt like that's what the market was trading off of. I thought we could start there and get your impressions of that. And more importantly, how the markets traded around that news.
TONY GREER: Yeah, well, I'll tell you, Warren, it's a good question. It seems like the Ukraine story that Ukraine headline was relevant in that it probably, I don't know, maybe it neutralized the situation just a little bit. And it was a move back toward-- I feel like it could have been a step off of volatility. And it didn't really pan out that way.
I don't think, I'm trying to just look at the markets and the markets are still very much in shock today from having been recently shoved into the next dimension in terms of price and magnitude. We're seeing things happen that we're seeing consecutive multi-sigma breakaway rallies to new highs across jet fuel, heating oil. We've got gold breaking out now, nickel is gone, they put the LME gone fishing sign up, because they had the whole LME trading.
This is where the Bloomberg commodity sector has begun trading like a meme stock. And I don't know if people understand how serious this is, and how long this could go on. Because the duration to me seems permanent, like we're breaking through to a new paradigm at some level, trying to handle all of these commodities simultaneously going berserk, because that's something that I haven't seen before.
WARREN PIES: I would totally agree with you about the new paradigm. I think the canary in the coal mine today was oil. Even though we had this announcement, and there was a bit of a risk off, the counterbid's risk on, and maybe some short covering, honestly when we got that announcement, but oil still didn't give back the gains that we've seen. I think that that's two things.
Number one the announcement is not-- it's a good step, but it doesn't get us towards a resolution of the conflict that's been driving markets here. And I think more importantly, we've jumped off a cliff with the sanctions in the moves we've made globally that we can't go back. We can't go back to just two weeks ago. That was a dividing line for history, and I think that's what the price of oil was telling us and so maybe that's a good place for us to dig in.
And it's first time for me over here talking to you, so what is your view just from the intraday on oil and then maybe broaden it out? What are you seeing crude oil markets?
TONY GREER: Let's do that exactly, Warren, because the dynamic that I've been jumping on as a price performance and price action junkie is that a lot of the time, the intraday rotation now-- in this year especially, the intraday rotation matches the weekly rotation matches the monthly rotation matches the performance on the year.
To just unpack that a little bit, today, we've got a rally that's a countertrend. There's a few sectors in countertrend rally mode, and those have been the junk that's down the biggest on the year, solar, airlines, and retail. Also, today, we saw a rally in oil services, semiconductors, though so the energy sector is strong as could be and semiconductors are just a retracement rally.
While it's been all over the place, the general theme out of the great rotation is natural resources up into the right, everything technology is getting repriced and that's the key to the different paradigm that we're in now, that's the key to the uphill battle that portfolios are going to have run into trying to pivot to what's going on now in a sensible fashion. And that's creating this volatility.
I think we've got a situation in markets where there's a little bit of money coming in that's very "get me this exposure on now, because I don't have it in the energy metals and mining, grain space, things like that", and indiscriminate selling of technology, because we know if rates are going higher, growth stocks are not going to be able to sustain the trajectories that they've sustained.
That's why this is the whole dynamic here that we're pivoting into. And I still think the world is way behind pivoting their portfolios into this type of price action. That's how I'm trying to play it, Warren. It's really, really difficult, but you got to pick your spots and be patient.
WARREN PIES: Yeah, it's funny, because you and I didn't get a chance to talk really before this, so I didn't know how you're going to come at it. But we've been saying the same thing at 3Fourteen, is basically, energy sector is less than 4% of S&P market cap and so you get this rotation from all these sectors that make up a huge percentage of market cap that needs get into the energy space. That's a lot of [?] through a small doorway.
And there are not that many stocks, there's not that many pieces of spaces on the chessboard that you can go to really. That's why you're seeing everything from oilfield services to the integrates. Chevron was up 6% today. It's a rush to get exposure. And it doesn't surprise me. Thing we were showing, even before the Russia-Ukraine crisis, the thing we were pointing towards for our clients was that the energy sector had a negative correlation to every single other sector in the market.
From year to date, the energy sector has gained more than 40% or about 40% at this point, every other sector is negative. These are unprecedented times for energy. And really, you can think about it, energy equity exposure is hedging many of the tailrisks, most of the tailrisk that you see out here in the market. Yeah, I see exactly what you're saying. I think you can definitely see it happening in the flows, in the data, in the correlation matrix too.
TONY GREER: Well, the flows are what's key, the flows in periods of with the VIX at 34, there are portfolio manager tire tracks all over the tape so it's fairly clear to see how the flow is going. And I love like you said, I love to zoom out to the year-to-date performance. We're not even a quarter into this year, and we've got oil-- for example, oil services up 57% on the year, XLE up 40%, the Bloomberg commodity sector up 30%.
And then everything that's below that that's up 20% or more is all natural resources. XME, natural resources, metals and mining, gold mines. And you look at the bottom of the performance on the year, and everything that's off more than 20% is a sector of technology, a homebuilder or cannabis. At the beginning, when I try to unpack, Warren, I'd love a jockey performance into yearend and see what sectors are going to finish the best and the worst.
And I'm trying to figure looking at this rotation now, what could reverse this? What could reverse this where the jaws that are widening now, where natural resource is going up and tech is going down, what makes that trade retrace? Because we're entering this new paradigm where the commodity exposure, you've got to have it. And we're entering the paradigm where guys have been long technology and getting fat on it for 15 years, and it's not going to perform, and they don't even know it yet.
I feel like that this could be a protracted long experience where by the end of the year, we might have energy sectors up 80%, 100% and might have some sectors of technology down 40%, 50% by the year is over. I don't see why not. That's going to be the battle that we're going to fight this year. And man, imagine being on the wrong side of your portfolio, it won't take too many years of this rotation to wipe you out. I think that's why the money flows are really critical to watch.
WARREN PIES: Right. You get to quarter end, you're going to have window dressing because nobody-- people want to own the stuff that's been working, so that is in a feedback loop. You've seen just anecdotally Occidental Petroleum up 90% year-to-date as Berkshire's building a position there. That's a good example. It's a large cap stock, but even the large cap stocks in energy sectors have been beaten up for 10 years.
They're not that big when you're moving huge pools of capital around. When you start moving those flows into the energy space, you have outsized moves. Yeah, this thing can run probably a lot farther than most people would imagine.
TONY GREER: I like that observation, Warren, just for a second into where we've got a high profile, a huge magnitude move into, like you said, a stock that was just left for dead really for the last several years just underperforming, underperforming, comes out, Warren Buffett is now rotating into OXY. We're going to have all the minions following him into OXY and into all the corollary names that they're going to get long so that they're not in the same name as Warren and they're diversified.
And yesterday, Tom Thornton points out on a great George noble space, he was like, big cap got shot today. And I went down the bottom of my loser board. And I was like, oh, my God, the list of individual large cap names with everything between a two- and three-sigma spill on the day. You know what I mean? Names like Starbucks, American Express, Cummins Engine, McDonald's. You know what I mean? Just like all these huge caps consumer stocks that literally all had massive, just everybody out.
And that's probably the smart money starting to get out of those names and get into, like you just pointed out, a lot of the energy and following that. That's why I still feel like it's early, despite the fact that we're so stretched, energy is stretched to the upside, sure, tech is stretched to the downside, sure. There'll be retracement rallies there, but this is the flow that's going to keep feeding its way into the markets.
And I don't see what changes that unless there's peace between Russia and Ukraine headline, there's a serious tightening headline out of the Federal Reserve, which we haven't seen much at all of yet. Just a lot of saber rattling about a 50-basis point hike and some balance sheet reduction. But we haven't had a negative month of balance sheet performance where we take actually securities off the balance sheet.
Every month, it's been higher and higher even during that jawboning. There's been no attempt to monetarily tame this beast that's flying out of the bottle now. And I'm concerned that it's going to fly so far out that it's going to change things permanently around the world. And I feel like that's what's going on right now.
WARREN PIES: I would agree with you. I had an interview with Maggie Lake on Real Vision last week, it just came out yesterday. I already felt like it was getting stale just for like a few days in this type of crazy environment. But we walked through our numbers for what's going to happen with the oil market going forward, and basically, we're at 1.5 million to 2 million barrel a day deficit, free all the Russia-Ukraine conflict. Just even with the most favorable assumptions, we're going to end up with about 4 million-barrel per day deficit that we're going to have to close as a market.
And we're talking about a market that's typically between like half a million to 1 million barrels a day in between supply and demand, so you can get demand of a quarter million barrel a day just from pricing. But the amount of demand destruction, and these are with favorable assumptions that we're making, the amount of demand destruction is going to need to happen in order to close that gap because really, the only precedent we have is COVID when we did full on lockdowns, where we saw that demand fall off.
I'm not saying that that's where we're going necessarily, but you have to try and put in perspective that that's the amount of demand we have to kill in order to balance the market in that scenario. It now includes maybe SPR releases and other things, but when I think of that, when I stepped back and that's the picture we're dealing with, which is a huge deficit, even under the most favorable assumptions, China taking more Russian oil, Iranian oil coming back to market, Saudi Arabian increasing production, UAE increasing production, shale increasing production, we're still at a 4-million-barrel deficit.
We have higher prices even in the face of a slowdown because we could slow down for a while and still have that that gap, which that sounds like stagflation to me. And I haven't been this inflationary, stagflationary person over these years. I have been very patient, and data driven in how we at 3Fourteen see the inflation narrative unfolding. But it's hard to escape when you start doing the numbers, the very basic numbers for these commodities, major commodities to prices globally.
Stagflation seems to be the outcome because even as we kill demand, we're going to have higher prices. Energy stocks, energy, anything that hedges that outcome, which seems probable to me at this point in time is a good place for your portfolio.
TONY GREER: Yeah, the light bulb, Warren, just went off for me. I hadn't been a believer in either stagflation yet, or in the gold rally yet. And this week has done a lot to change that, the last week and a half actually has done a lot to change that because I feel like, like we were talking about, commodities are busting through to a new paradigm now. And with everything going up at once, I agree with you, man, stagflation seems imminent.
And because if there's going to be destructive pricing in the energy space, that's going to destroy some level of demand this summer. I think the read through that's important is Saudi Arabia doesn't have the excess capacity that they've always had, nor do they seem entirely likely to put the brakes on this rally at any point. But nor have they. Look at the last turn of events that's jumped out, in my mind, is number one, Biden pivoting to say, oh you know what, we're going to go ask Saudi Arabia, potentially, for some oil from them for output.
And the next headline that I saw was Saudi Arabia raises prices to an all-time high record for all Asian clients. Essentially, just pushing the market away from the US energy consumer that's looking to cover this deficit, and so that makes me even more bullish. And I finally got my head screwed on right in gold, by realizing that gold is rallying due to the stagflation that we're pricing in, that you and I see, and maybe also due to the civil unrest that I think is going to be hitting the screens at some point.
I don't know in the next two to three or four quarters, because we push the price of grains away from a large swath of the impoverished population and that's where we start leading toward that Doomberg starvation diet type of theme, where prices have just moved too far away from the poor in our country to feed them. We're going to have that crisis, and gold does well in that scenario.
Finally, the light bulb went on that maybe this gold move wasn't just a knee jerk to a short-term Russia-Ukraine conflict, rather, a more secular move breaking out of the range, because the market is now acknowledging stagflation, potential civil unrest, and this new paradigm with all higher commodity prices. Gold has been the thing that I've gotten wrong, but I've had to come around to, but now that I think I understand it, I feel like there's plenty of time to get on board on those trades, I still think it's early innings of that branch of natural resources, appreciating versus say, the broader S&P or something like that.
WARREN PIES: Yeah. Our models have been bullish gold for a few months now. I've basically been in the wait and see type of camp because we had this 1680 to 1950 range in gold that we've carved out for about a year and a half now. And obviously, if you've watched charts, you know that when you have these long consolidations, whichever direction you end up breaking through, you usually get a pretty big move there.
And to me, what we hypothesized coming into the year was that 2018 was an analogue for 2022. And in 2018, we saw Fed tightening, my thesis has been a little out consensus and probably different than yours, that this economy is to asset price dependent and can't really handle higher interest rates from the Fed, so these cycles are compressing. I feel like in 2018, everything was down, but gold did start to rally in the middle of the year, and then it was at 1200 and it started its rise, its two or three years rise up like 2000 to an all-time high.
I think you see a similar development taking place right now. I think gold was looking through all this hawkish chatter about the Fed and realize that if the Fed does move t hat hock into that extent, that there's going to be a commensurate loosening on the other side of that, and so in my view, gold was starting to look through that stuff. Now you throw all this instability, we said when we made our big piece on gold, that gold is basically a reflection of political and policy uncertainty.
And I think you've thrown the most uncertain backdrop now into that mix on top of what we saw coming already. You have to have, I think you have to have gold exposure in this market. One thing I was going to-- this is obviously a new thing for me, but I wanted to-- before we left the topic of energy causing a recession, I wanted to get this clip from Peter Boockvar and Maggie Lake where Peter was basically laying out his case, which sounds like it agrees with you and I about the high probability or the increasing odds that this spike in oil and energy prices more broadly, is going to lead to a recession.
MAGGIE LAKE: What are your views on the impact on consumer confidence in Europe and the drop of disposable income due to the higher energy inflation in Europe? Can this tip and already slowing economy into a global recession?