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VRA Investing Podcast: Market Turbulence and Inflation Data. Where is the flight to safety trade? – Tyler Herriage – February 13, 2024

In today's podcast, Tyler shares insights on this morning's inflation data, discussing the challenges faced in the financial markets, and the potential impact on the Federal Reserve's decisions. We also discuss the lack of flight- ...

Posted On February 13, 2024Episode 1323
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About This Episode

In today's podcast, Tyler shares insights on this morning's inflation data, discussing the challenges faced in the financial markets, and the potential impact on the Federal Reserve's decisions. We also discuss the lack of flight-to-safety trades, and what this means for our markets, emphasizing the importance of buying on dips.

Transcript

Don’t look back because the market is closed. Good Tuesday afternoon, everyone. Tyler Herriage with you for today’s VRA investing podcast. Hope you all had a great day out there today. Now, if you’re watching the markets, you know, it was a brutal, brutal day out there today. Our major indexes finishing lower across the board. But that really wasn’t as much of the brutal part. Neither was this morning’s inflation data.

The brutal part of today was the lack of liquidity, number one. And number two, the lack of a flight to safety trade. Typically on a day like today, when you have the major indexes down big, you have what has always been known as the flight to safety trade, whether it’s bonds, so people buying bonds, sending bond prices higher and yields lower. We got the opposite of that today. Bond yields were up on nearly three and a half percent, hitting their highest level since December. On the beginning of December for the ten year yield today, we also didn’t see a flight to safety trade in precious metals like you would expect to see, such as gold and silver. That was nowhere to be found today. Really.

[00:01:23]:
The only, I wouldn’t even call this a flight to safety trade if you somehow owned parts of the VIX, which a lot of those instruments to trade the VIX are garbage anyway. You can’t call that a flight to safety. There was nowhere out there that was safe during today’s market action today, which really is a what’s the word I’m looking for here? Kind of a dig at the Fed that they have messed up our financial system so badly that nothing works like it’s supposed to anymore when the Federal Reserve has become the buyer of first and last resort. These are the kind of days that you see as a consequence of that. It’s what we wrote about in our latest book, the Big Bribe. This is the financial engineering and the consequences of it as well. But you know, our view here, we remain long and strong even after days like today. Again, this is just a consequence of what happens in this heavily financial engineered world out there.

But that being said, there’s still a whole lot of money to be made in this market. And yes, we do remain very bullish going forward. A lot of people getting shaken out on a move like today tend to forget that we just hit all time highs yesterday. Now, some of our major indexes might have finished lower yesterday, but ahead of that, hit all time high. So the Dow Jones all time high yesterday SP might have finished lower, but hidden all time high yesterday. Nasdaq 52 week high yesterday. The list goes on and on. So when you’re this close still to 52 week highs and all time highs, no, we’re not getting bearish here.

We continue to look at this as an opportunity to buy dips here. Whether or not the dip is a one day thing like today, we’ll see. But the point remains here that if you continue to buy the dip, our view is that you’re going to continue to thank yourself going forward from here as we continue to hit all time highs and 52 week highs going forward. And what does an all time high really mean? It means that no one who’s ever bought that stock or index or sector has a loss. So even if you pay up a little bit for those picks now, you’ll think yourself in the future when we get back to all time highs. Now, this is a time we’ve started talking about this last week on the podcast as well. Our markets have been at overbought to extreme overbought levels. That is the time to be using patience again.

[00:04:10]:
We talked about this on the podcast last week, Kip and I both. So yes, we’ve alleviated some of that overbought pressure, but this is just one day’s action, not enough to get us anywhere near oversold territory. Now, in new bull markets like we are in right now, you rarely get the opportunity to buy at extreme oversold levels. So we may not get all the way back there either. So that’s why the point being, we want to wait for some of this overbought pressure to alleviate before we begin our monthly dollar cost averaging programs here. Again. That’s been a big view of ours from the very beginning. We talk about it here often on the podcast.

Monthly dollar cost averaging into your positions is the smart money move out there. Dollar cost averaging and buying the dip, especially in a new bull market, that nothing in that view has changed for us here. And we see that, you know, our call that Dow Jones is going to hit 100,000 by 2030. That view remains unchanged here. So all of that said, let’s take a look at this morning’s inflation data. The latest look here did come in hotter than expected. CPI coming in at 3.1% versus estimates for 2.9%. Shelter, a huge part of that, was up 6% year over year, contributing to roughly two thirds of that increase there.

What is a big effect on shelter? Higher yields, which we’ve seen so much of. Then taking a look at core, which is this is what the Fed likes to look at. For CPI, core means minus food and energy, because who needs to eat and who needs to power their homes, who needs to heat their homes, who needs to put gas in their car. Right? No clue why this is the metric they choose to look at. I guess it takes some of the volatility out. They have their reasons, they’re not very good, but they have them. So core CPI coming in at 0.4% versus estimates for 0.3% month over month. That is 3.9% year over year versus 3.7% the estimate year over year.

[00:06:27]:
Still much better than what we saw from last year’s readings. Obviously the year over year from last year to this year isn’t good, but last year at this time, we were at much, much higher levels. And we’ve said it from the very beginning, inflation was never going to go down in a straight line. So no concerns here for us at the VRA. The market showed a lot of worry about it today, but again, it was never going to be a straight line down. But on that news, the US dollar and bond yields jumped today as the Fed is now expected to continue their higher for longer theme for yields. This gives them a little bit of coverage to do it, although the lack of liquidity is concerning out there and I’m sure has gotten the Fed’s attention as well. Especially when you think about liquidity.

What did that do last year? We saw it in the regional bank blow up last year. Right, the Silicon Valley bank blow up. Lack of liquidity that is getting the Fed’s attention here, especially when you have KRE, the regional banking ETF, down over 4% on the day to day. Not a good look for the Fed. So going back again, we did see the dollar and yields jumping on the day. The dollar hitting its highest level since November of last year. The ten year yield hitting its highest level since the beginning of December. But overall, again, not sure.

The big freak out here on inflation, it was never going to go straight down. Well, maybe one area to look at here is the reckless spending that we continue to get as the Senate passed another 95 billion to Ukraine, Israel, anywhere but the United States, right? $0 for the border, $0 to help anywhere else here in the US. Now it’s still got to get through the Senate, which the Senate speaker has already said is not gonna happen. Bravo. We’ll see if it really happens. But at the end of the day, we know what this is. If you’ve been here with us for a while, you’ve heard us talk about it. It’s all part of this massive money laundering operation through one of the most corrupt countries in the world, which is Ukraine, that goes to special interest groups and finds its way back into us pockets here, finds its way back through the military industrial complex.

[00:08:58]:
They’re getting a massive payday. If this bill ends up going through, and we just have to deal with the consequences of inflation on the back end of this, it’s absolutely wild to think about. But January is historically a volatile month on economic data. And this is also a joke. It’s not a joke I’m making. It’s a joke about our system that these are all seasonally adjusted numbers, right? Would love to see what the real numbers look like instead. Maybe they were worse, who knows? But the seasonally adjusted never makes much sense. Just give us the raw data.

That’s all we’re looking for here. But in regards to the market’s reaction today, kind of going back to my point, in the beginning, we were at extreme overbought levels. That is when bad things tend to happen. So market watchers might say it has something to do with the inflation data today. Maybe we’re just due for a little bit of a pullback at extreme overbought readings. And if that’s the case, which we believe it is, we’ll continue to use this as a buying opportunity. It’s always best to be buying at lower prices, right, when you’re in a bull market. So, hey, we’ll take it as a gift from this market, and we’ll wait for that right opportunity here.

But on the news today, the CME Fed watch tool saw another big drop in chances for a rate cut in March. Just one month ago, the market was anticipating a 77% chance that the Fed would cut rates in March. Today, that number has fallen to just a seven and a half percent chance, with a 92 and a half percent chance the Fed will stay put. May similar with the chances of a rate cut falling now from 52%, expected now to just 36. And you have to go out to June to find the majority view of a rate cut there. That number actually did increase this morning, rising from a 42% chance. Now the majority view a 51% chance of the market looking for a rate cut. Now, Kip and I were just talking before this podcast, and we differed a little bit on whether or not the Fed would cut rates in March.

[00:11:15]:
My view was a little bit of the Fed wants to stay out of looking political, but if they telegraphic far enough in advance that they’re going to be cutting rates, then it doesn’t look as political. Leading up to an election year. Of course, we know that the Federal Reserve Board is made up of like 80% democrats, so no way that you’re going to get a fair shake from that group, but just trying to take the politics out of it a little bit. There is one factor here, like I was talking about with liquidity. If liquidity does look like it’s drying up, the Fed might have to cut rates in March after all. Now, that could really panic the market. We’ll see what happens here. But this is not normal trading.

Again, no flight to safety trade today is just another example of how the Fed has messed up this financial system by becoming the buyer of first and last resort. Now, we got two options, which we’ll take a little bit of both. We can take advantage of it knowing that they’re going to prop up this stock market, especially headed into an important election this year. And that might be a little bit of sounding like my conspiracy theory hat on, but it is the case. And the other factor, we can choose to fight the Fed, which we never want to do here either. And now that they are the buyer of first and last resort, we’ll just wait around for them to make a move here. But again, weird day today with no flight to safety trade. But kind of going back to my main point here, our view does remain unchanged.

That we want to continue to buy on pullbacks doesn’t mean we might not see a little bit of a pause here. We do need to alleviate a little bit more of these overbought conditions. But the point remains, buy the dip remains our call here. And remember, from 1995 to 2000, the.com melt up where the Nasdaq rallied 575%, there were five pullbacks of 10% or more in one bear market during that time. And yet the theme there remained as well. It’s harder to do in the moment because your emotions get involved. Right? Hindsight is always 2020. But if we do see this, which we do as a 1995 2000 type of scenario here, then we have no choice but to buy the dip.

[00:13:42]:
And even if you don’t get the, if you don’t call the low, you’re going to be very happy with your purchases going forward. Our view remains unchanged on that. So let’s take a look now at our market action on the day today. As I mentioned earlier, we did finish lower across the board. The Dow Jones was our leader on the day, if you want to call it that, after hitting an all time high yesterday, was down 524 points today, or 1.35% to 38,272 after that. The S and P 500 down 1.37% on the day. Back below 5000 here at 4953. After that, the Nasdaq down 1.8% to 15,655.

And finally, small caps, our biggest loser on the day today, down nearly 4% to 1964 for the Russell 2000. I will point out here, the VIX was up in a big way today, although it finished well off of its highs of the day, still up over 13%. What was good to see was that the VIX, like I said, finished well off the highs of the day. But we did actually get a decent smart money hour for all of our major indexes to finish off of their lows of the day today, which we do like to see here. Next up, looking at our internals on the day, not pretty. Numbers declining stocks beating out, advancing stocks for both the NYSE and the Nasdaq. Almost no advancing stocks on the NYSE, just 235 to 2600 declining stocks. So roughly eleven to one negative on the day.

A little bit better on the Nasdaq. Still nearly five to one negative on the day today. 52 week highs to lows. Also negative here, but not by too much. I mean, I’m sure if you saw another day like today, it’d be much bigger because this is a bit of a lagging indicator. When you have a lot of stocks near 52 week highs, you’re obviously not going to see a whole lot of 52 week lows. That’s why it’s a lagging indicator. But was negative for both the NYSE and the Nasdaq.

[00:15:49]:
We’ll keep an eye on that here. Lastly, volume coming in sharply negative as well, over a 91.8% downside volume day on the NYSE, which obviously is bad, but certainly not the worst. The recent worst was 97.9% downside volume on June 13 of 2022. Where I will point out, over the short term, the market went on to rally significantly over the next couple of months. But I’d be lying if I told you that was the full story. If you’ve been with us here for a while, you know that’s not the full story because we called the 2022 low of October 13. We called it here, the VRA, to the day. You can go find the update on our website if you’re not already a member.

We’ve got a 14 day free trial right now. Check it out@vraletter.com. So the market did fall, obviously, into the 97% downside volume day on June 13. Got a nice rally, and then we went on to make new lows from there, but led to the October 13 lows and a nice rally into the year end from there. So we’ll see if this downside volume day might mark a low as well at these overbought levels. Tough to say, but we’ll continue to report on that here as well. Nasdaq slightly better on volume, still 80% downside volume day for the Nasdaq today. Next up here, let’s take a look at our sectors on the day today about what you would expect.

All eleven sectors finishing lower on the day today. Again, clear evidence, no flight to safety trade out there. Our leaders on that, if you want to call it that, are only sectors down less than 1%. Healthcare and consumer staples, while our laggards on the day, consumer discretionary real estate and utilities makes sense. Utilities up there with yields up big on the day today. Finally for today, our VRA commodity watch. Decent amount of red on the screen here today. Gold nearing its lows of the day right now.

[00:17:59]:
Down 1.3% to $2,005 an ounce. Silver down as well. Bigger 2.6% to $22.16 an ounce. Copper down a little less by four tenths of 1% to $3.70 a pound. And I guess you could say there was one slight flight to safety trade on the day. While the energy sector didn’t do it, oil prices were up 1.18% to $77.83 a barrel. But there’s one factor I would really like to point out here, and that is the exposure to the energy sector is very low. Bank of America’s monthly global fund manager survey showed that fund managers allocation to energy stocks was cut by another four percentage points in February from January, taking the position to a net 13% underweight.

Now, those numbers, out of context, might not mean anything to you, but here’s a little context. This is the largest underweight position in energy and energy stocks since December of 2020. Remember what happened to energy stocks in 2020? Oil briefly went negative during 2020 at the peak of coronavirus insanity. Here’s what energy stocks based off of XLE, the energy sector ETF. Last time fund managers were this bearish. The 18 month gains going forward were 248%. Massive, massive gains there. So we’ll look at this as another opportunity for energy stocks here, which have been underperformers as of late.

They had back to back years after 2020 of phenomenal outperformance. It took a little break there. Now it could be back time to rotate into energy stocks here. We do remain bullish on the group as well as we have for some time. Finally here for today, bitcoin now well off its lows of the day. Today, still lower by seven tenths of 1%, hit a low of today of roughly 48,400. Now at 49,500. Another group, we do remain very bullish on here as we each day brings us closer to the having, which has been historically very bullish for bitcoin.

[00:20:25]:
We remain long and strong bitcoin here as well in the VRA portfolio, folks. That is all that we have time for here today. Please be sure to subscribe to receive our podcast every day at the market close. You can sign up@vraletter.com click the podcast link at the top. We’d love to have you with us. You can check out our transcripts there as well. So thanks again for tuning in. Until next time, we’ll see you back here tomorrow for the close.

Podcast Newsletter

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Time Stamps

00:00 Market tumult reflects flawed financial engineering consequences.
03:13 Opportunity to buy dips, use patience. Thank yourself.
07:59 Inflation, reckless spending, money laundering, Ukraine.
10:16 CME Fed watch tool predicts lower rate cut.
14:27 Stock market down, VIX up, internals bad.
16:37 Free trial available now, market fluctuations discussed.
19:45 2020 saw phenomenal outperformance, now bullish on energy and bitcoin.

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