WARREN PIES: Welcome to the Real Vision Daily Briefing. It's Tuesday, March 15th , 2022. I'm Warren Pies, founder and strategist at 3Fourteen Research. Joined today by Tony Greer, editor of the Morning Navigator. Tony, how are you doing?

TONY GREER: Great, Warren. How are you doing today?

WARREN PIES: Good. We have a lot to talk about. So, let's get to it. Topics that I saw bouncing today and really catching my eye. PPI hitting 10% level. Fed day tomorrow, obviously, oil retracing that huge move from 130 back below 100. Obviously, some ancillary issues like the rumors that Saudi Arabia is going to diversify out of US dollars, or the oil they sell. Life figure we could start with oil since our last conversation ended there. What do you make of this big retracement we've seen?

TONY GREER: Warren, I think this is the opportunity like I wrote about this morning to fill our boots. And that's a term that we've always used in commodities on the floor, etc., etc., when something's coming to you, and you get a chance to bid for it and buy it because there's actually selling around. There's selling around because last week, a lot of commodity markets seem to have met their Icarus print, as we say, in commodity trading, where they fly too close to the sun.

Usually their path gets too vertical, their wings melt, and they fall back to Earth. And we saw all that start last week in the physical commodity space. But the great rotation was still on where equity traders were still buying natural resources and just unloading technology. What we're seeing this week is they're finally getting to some of the Natural Resources stocks, since the commodities have backed all the way off the highs.

That's where I'm looking to fill my boots with commodity stocks on this dip. And I'm still looking to stay out of the way of technology as the NASDAQ heads into a bear market territory here. And I think that that's what we're going to see more of this year, Warren. That's my plan anyways for this great rotation to really continue and to snowball in a couple of different directions.

WARREN PIES: I would agree with you personally at 3Fourteen has been our take as well. One thing I especially like the high quality oil producers here. And so, we've been looking-- I'd brought this up in our last conversation to the high quality. Canadian producers, when you back it out and look at the energy sector at large, what we did last week was we did an oil adjusted valuation.

If you watch valuations in the energy space, traditionally you'll see multiples expanding contract with the price of oil, which is basically might be a little counterintuitive for people who don't follow cyclical stock sector. When you get oil prices going up, you actually have multiples expanding. They look most-- or contracting, sorry. They look the cheapest oil is at the top. And you see this the exact opposite behavior as oil sells off. And so, you have to adjust for oil price.

When we adjust for oil price during this last five year period of just fossil fuel divestment, and really just a Zeitgeist to move away from the hope, to move away from fossil fuels. You've seen oil adjusted energy valuations really plummet. And so, we think there's a 40% rerating in this group, as we just go back to normal, back to what we were in the previous 25 years, I think that the empathies on energy security coming out of the Russia-Ukraine conflict, it's not going away in one week, just retracing $30. Back to trend doesn't change really much. I think there's a lot of technical factors, just like you said, driving that move. That's what we see, is that line up with you?

TONY GREER: Yeah, I tend to agree with that, Warren. It makes sense that the oil price here is going to change the calculus for a lot of calculations. And it comes up in spades for the big oil companies myself, and they're what I'm zeroing in on this pullback to see if this pullback gets steep enough to buy them at fair, or shouldn't say fair, at a better price technically, so that we can attach a sensible risk reward, should they go wrong.

But it seems you're on the right track. They're adjusting everything for the price of oil. It's been extremely difficult in this particular commodity cycle because this has been the first time in my career that I've seen all three subsectors of commodities go batshit crazy all at once, from energy to metals to grains. And I think that that's what's propelling us through to this new dimension in commodity trading. I feel like that's what the credit markets have been reflecting.

We just saw the two year yields, the bad six I call it, ramp up to 190 at the highs. We just saw 10 Year yields north of 2%. We're probably going to be pushing two and a quarter now. And five year breakevens just jump out of bed from a long time consolidation around 3% to 360. That's what gets me to open up my mind and look back on the charts and say what did rates look like the last time inflation was here?

I came up with-- last time inflation was here in the 1970s, we had 10% CPI or PPI. We had 8% to 10% yields in five years. So, to say that the Fed is behind the curve going into tomorrow is a massive understatement, that's why I'm hoping quite honestly that they do the adult thing and actually make their first move toward addressing the inflation by raising rates 50 basis points. And maybe some hawkish terminology after that, we'll see.

That's where I think we're heading, Warren. I think we're going to see more natural resources are going to pull into support here, and hard assets are still going to be coveted in this age of mass monetization that we're in, despite the fact that the Fed is in a pickle right now and has to figure out how they're going to adjust to it. It's a very tricky trade. There's a lot of volatility, but I think we're in a solid opportunity week right now, if that's fair.

WARREN PIES: Yeah. So, Fed Day tomorrow. We've all been waiting for it. We've gone from pricing in max hawkishness in my view. Some investment banks are calling for nine straight hikes all the way up through March of next year. Basically, we had 50 basis points priced in as a certainty just before the Russia-Ukraine conflict, maybe a month ago was more or less a certainty in the futures market. Now we're back to the pretty consensus that we're going to get one hike tomorrow at 25 basis points.

From our view, the Fed is supposed to be data dependent on price stability and full employment, and as the dual mandate. From our view, we think that if you study history, there's actually a lot that the Fed considers when they look to make a decision. We look at equity market drawdowns or rallies. We look at credit spreads, high yield credit spreads, in particular, breakeven inflation is another one and the yield curve.

Specifically, the yield curve and credit spreads are things that the Fed has called out in some of their whitepapers and memos, saying that these are some of the best markets based predictors of economic growth in the six to nine months out. When we look at all that stuff, the Feds in a bind, in my view, in our view. You see today, just that close yesterday, high yield credit spreads 408 basis points. We've only seen 7.5% of all Fed rate hikes come when credit spreads were at or above 400 basis points, truly rarefied air.

If we're going to get a hike tomorrow, it's going to be one of those rare 7% cases where we get in the face of blown out spreads. Same with equity markets, very rare to see a 10% or greater drawdown where the Feds hiking into that's what we're getting. The yield curve flattening to sub 30 basis points. Again, it's rare to see the Fed hike in the face of all this, but like you mentioned, on the other side, breakeven inflation has just shot up.

We look at the two years as the transitory inflation, and so that's been skyrocketing. Even the 10 Year breakeven has gone up and has challenged 3% here recently. We were looking for that. To get that Fed put to kick in, we would like to see that go down to 2%, and that doesn't look like it's coming anytime soon. That's what we're looking at. Is that make sense to you?

TONY GREER: Very much. We're in lockstep, Warren. It feels to me like credit markets, and I'm not a bond expert at all, but the Treasury market seems to be making the move for the Federal Reserve. Dare I say, it looks it's acting like a little bit of vigilantism now finally, because the commodity markets have backed off their highs, but I feel the Treasury market is still adjusting to this commodity world that is dramatically changing and very permanently changing right before our eyes.

I think they're looking past maybe even this Fed meeting towards longer lasting and way more serious inflation. I haven't seen a five year breakevens leap out of bed like they did last week since the beginning of this move. It feels very much like a new inflationary leg to me. Maybe it's a bit of a delayed reaction to all of the Icarus prints, the actual high prints and commodities that we saw last week, but I feel those prints are just a sign of things to come.

That's when markets are banging out their new range on the top side, and they'll fall back into that range, find the low end of the range. Then we're going to continue where we're going in this upward path for commodities. To me, that's what the bond market is reacting to. I'm sure it obviously has a lot to do with what's going to happen tomorrow. I feel like no matter what, if we got 25 basis points tomorrow, we know that there's got to be more on the way.

If we get only 25 basis points tomorrow, man, you're setting up for an even more inflationary scenario, and that's what scares me. Commodities could take another leg up from there. I think that's the risk that you have, and there's much less risk of them falling back to Earth, because that would be a lot more comfortable for a billion people for commodities to fall right back to where they came, for gas to go back to $3 or $2, for copper to go back to aka elemi, or back below a buck and a half on the COMEX. And I just don't see that happening right now.

WARREN PIES: I think that the point you're making about the commodity moves the same really, in our view. Before the Russia-Ukraine conflict, we saw a path to a moderating CPI through year end. With a couple very realistic assumptions, we could have seen CPI get to 3% or below year over year, by the end of the year, especially if the car market started to unfreeze basically, which you have to admit that's a supply chain based situation. Those were some of the assumptions we're making.

Then with the Russia-Ukraine conflict, we had to rerun a lot of our numbers. We had basically put in a plug in our model for food CPI to continue going up at the rate it had been, but with what's happened in the grains mark, specifically in the wheat market, we started rerunning those numbers. What we find is that the food and beverage CPI generally is follows grain prices and wheat prices by about seven months. When we get a spike in wheat prices today, that flows into that part of the CPI in about seven months, that's the lead lag relationship that we find.

Oil is also so correlated to the energy component CPI that we broke apart, whether it's from the energy related cost of living stuff in housing, or in your transportation segment. That was about 24% of the total access that we've seen in this most recent 7.5% CPI that we saw. We rerun that with a boosted oil price, and I think you have to expect oil prices to be sustainably higher going through this conflict, as we pointed out last week.

When you do all that, our analysis shows that we should expect about a 10% CPI reading in the next three or four months, and that we get through the year, we will moderate because of base effects. Even under I'd say just baseline assumptions, we'll probably be at about a 5% CPI one more or another when we get out of 2022. It's made the Feds job much, much more difficult. That's how we see in, and CPI be in 10%, it's just an appetizer for what's coming in the CPI if our analysis holds.

TONY GREER: It makes a lot of sense, Warren. I feel the Federal Reserve is putting off the inevitable a little bit if they're going to slow walk their rate hikes. I tell you it sounds your view rhymes a little bit with Raoul Pal, who has been really spot on where he's watching-- what he calls the 10 Year the chart of truth, the 10 Year yield. That's the chart where if you dial back and look at it from 30,000 feet up, 10 Year yields rally and make a lower high and then fade and continue lower.

I'm a nominee camp that things are different this time, and that yields are going to keep going higher. The reason that I'm in a different camp this time is that we haven't had attack on commodity supply before. I think we might have discussed this in the last Daily Briefing, but it's always been in commodities, the answer to higher prices is high prices when you can pivot to the commodity producer and say, okay, at this price, open up the tops and let him have it, whether it's across metals, grains or energy.

At this point, we don't have anything to let him have. And at this point when we are facing a humanitarian crisis that I think we are facing, that to me is going to be irreversible and that will be when we see the white their eyes in inflation, meaning the Feds eyes, and what they're going to do. This is semantics and probably due to the Fed perpetually catering to the equity market. And the BlackRock's and the JP Morgan's that are long all these funds, in equities, etc., etc., maybe delaying higher rates for longer in hopes that the equity market will stay on its feet.

This time, it feels the rotation out of technology is a foregone conclusion. I don't think that we've scratched the surface of the amount of rotating out of that sector that we are going to see. I still continue to feel calls from concerned investors, from the retail straight up to the fund investor that says, you've been pretty spot on, you're short tech here when you think. For example, some retail people calling up saying, you know, I'm on Facebook for a really long time. I'm down a lot from where I was, and what do you think?

You tell people, but I think text finished and they always hang up the phone and say, that guy is crazy, they always say text finished. They feel very comfortable with all the technology that they own. I look at the prices on the screen, and I still see social media lead tech destruction everywhere I look. I feel like we're due for a moment where that retail group is underwater, and they don't really know how to react to the stock price that they're seeing.

Remember that stocks crash when they're oversold, and keep going down. I'm not saying that we're going to see a crash, I just feel the technology sector is well set up for a much steeper slide into support from where we are. That's maybe where our views different and we can hash that out a little.

WARREN PIES: I hear you. I would say, I can understand that if rates keep going up, we've been calling tech long duration for a while and basically looking at your equity exposure, and you need to as a mapping the bond duration concept over under the equity markets. I feel a number of strategies have fallen on. They're starting to do that. It makes sense that rates are going up and text getting killed, but there's so much, here's our thought, there's so much of the economy.

There is this idea that could hike rates, and the economy is not the market. This is what I heard earlier in the year before Russia-Ukraine stole headlines, was that the economy's not the market. You saw everybody pointing to credit spreads, as the market was falling apart and saying see, look at this, credit spreads haven't really blown out even though the markets falling apart. Yeah, we're no longer in this dynamic where the market is the economy.

What we said is if you look at history, it's not a linear relationship between equity markets sell offs and credit spreads, for instance, that usually you get to about a 10% sell off, and then you'd get a parabolic move up in credit spreads. And that's exactly what we're seeing. I think, actually, the reverse is true, that the economy and the markets are more tied together than they've ever been. And that this is going to create a compressed cycle effect.

The Fed can only go so far before they induce a true crash, economic crash. The household net worth, 41% of household net worth is in equities right now. That is by far an all-time high. One of the things we've been looking at is that a spike in net worth is what preceded this consumption boom that we're now joined as an economy and it flows into all the economists look at and say, hey, the economy is very strong. Well, the wealth effect works both ways.

If you have so much of the economy and as our asset price dependent, so much of the economy is consumption dependent, and so much consumption is asset price dependent, what happens when these assets start falling apart like they are right now? I think what it does is it compresses cycles, the feedback loop to the Fed gets really strong, and they aren't going to be able to go anywhere near these seven hikes this year. I don't see that happening.

I go back to the playbook in my mind is to look at to look through the hawkishness right now. Keep your eyes on this Fed pressure scorecard that we laid out. All these different kinds of forensics that we can check in the market to determine when is the Fed going to reverse course? When did that Fed put come into play? I still think that's the framework we're applying so we're going to wait until this will start and stop faster than the consensus believes, that's my in our belief.

I'd say it's different in the final point I make, and you can address this. There is a huge part of the inflation that we're seeing right now, that isn't on addressable by Fed policy really. What we're seeing come out of the geopolitical situation, they can't really do anything about that. They're trying to do surgery with a machete.