MAGGIE LAKE:
Hi,
everyone.
Welcome
to
the
Real
Vision
Daily
Briefing.
It’s
Wednesday,
June
22nd,
2022.
I’m
Maggie
Lake
here
with
Darius
Dale,
founder
of
42Macro.
Hi
there,
Darius.
DARIUS DALE:
Hey,
Maggie,
it’s
good
to
see
you.
How
are
you?
MAGGIE LAKE:
I’m
doing
okay,
dude.
Okay.
I
think
everybody
are
watching
the
Fed
still,
we
had
Jay
Powell
testifying
in
front
of
Congress
again,
reiterating,
trying
to
be
as
hawkish
as
possible,
committed
on–
strongly
committed
to
inflation.
But
it
was
really
interesting
to
watch.
The
stock
market
seemed
like
it
was
ignoring
for
most
of
the
day,
we
had
what
looked
like
a
little
bit
of
a
rebound
going
on,
but
it
dropped
out
a
little
bit
at
the
end,
they
rolled
over
back
into
the
red,
nothing
huge
in
terms
of
selling
but
just
interesting
to
see
that
negative
sentiment
or
just
lack
of
buyers,
I
guess,
in
the
last
half
hour
trade.
10Y
bond
yield
down
to
3.15.
We
have
crude
prices
lower.
Of
course,
crypto
getting
shredded
again.
What
did
you
make
of
the
market
action
today?
DARIUS DALE:
Yeah,
the
market
action
today
was
pretty
interesting.
So,
it’s
in
the
context
of
what
we’re
observing
here
in
the
process
at
42Macro
as
a
potential
market
regime
transition
from
what
we
call
inflation,
which
is
where
the
market’s
pricing
in
an
accelerating
inflation
and
growth
slowing
to
what
we
call
a
deflation,
which
is
where
the
market
is
pricing
in
these
simultaneous
decelerations
in
both
of
those
factors.
We
saw
pretty
significant
selloff
in
crude
although
we
rallied
off
the
lows,
another
big
drawdown
in
energy
stocks,
a
big
drawdown
in
crypto,
you’re
seeing
emerging
markets
take
it
on
the
chin.
So,
separate
and
apart
from
this
intraday
rally
in
stocks,
which
it
may
itself
be
incrementally
fueled
by
the
post
opex
dynamics.
Don’t
forget,
we’re
two
days
after
a
pretty
chunky
opex,
removed
a
significant
chunk
of
negative
gamma.
I
think
this
market
is
starting
to
sniff
out
this
move
towards
deflation
which
we’ll
unpack.
MAGGIE LAKE:
Darius,
when
you
say
deflation,
because
there’s
this
huge
conversation,
and
it
came
up
today
during
the
testimony
around
inflation,
the
idea
that
they’re
trying
to
bring
it
down.
But
just
because
the
rate
is
lower
or
is
decelerating
or
there
was
smaller
increases,
however
you
want
to
categorize
that,
that
it’s
still
going
to
get
stuck
at
this
really
elevated
level.
That’s
when
people,
especially
those
in
the
inflation
camp,
are
really
concerned
about.
When
you’re
talking
about
deflation,
is
it
possible
the
way
you
look
at
it
that
it
can
be
lower
but
still
stuck
at
a
high
level,
or
do
you
see
this
thing
going
back
down?
DARIUS DALE:
Yeah,
so
just
in
terms
from
a
risk
management
perspective,
our
core
process
at
42Macro,
at
least
on
the
fundamental
forecasting
side,
really
anchors
on
the
rate
of
change
of
primary
economic
variables,
like
the
rate
of
change
of
growth
in
the
economy,
the
rate
of
change
of
inflation,
or
the
second
derivative
is
what
I
mean
by
the
rate
of
change.
So
yeah,
the
trend
it
change
in
those
time
series
will
have
an
important
influence
on
dispersion
across
asset
classes,
both
within
and
across
asset
classes
we’ve
backtested
the
six
ways
this
Sunday.
But
when
you
think
about
it
from
the
perspective
of
the
Fed,
there
are
actual
targets,
levels
that
they’re
concerned
about,
not
just
in
reported
statistics,
but
also
in
market-based
measures,
in
terms
of
expectations,
etc.,
which
Powell
outlined
last
week,
and
further
outlined
this
week,
happy
to
unpack
those
as
well.
MAGGIE LAKE:
Yeah,
what
jumped
out
at
you?
We’re
hearing
this
similar
message
over
and
over
again,
I
know
everybody
parses
everything
they
say
to
look
for
any
changes.
Is
there
anything
that
jumped
out
at
you
today
from
the
testimony?
DARIUS DALE:
Yeah.
So,
from
the
testimony
specifically,
no.
I
thought
he
reiterated
everything
that
quite
frankly,
I
live
tweeted
about
during
last
Wednesday’s
FOMC
press
conference,
which
is,
this
is
a
Federal
Reserve
that
is
content
with
sending
the
economy
into
what
it
hopes
would
be
a
mild
recession
in
order
to
tackle
what
I
consider
and
I
think
Jay
Powell
himself
considers
to
be
an
inflation
disease,
it’s
willing
to
amputate
its
arm
or
its
leg
in
order
to
save
the
whole
body,
if
you
will,
from
the
spoils
of
inflation.
So,
I
think
he
did
a
decent
enough
job
reiterating
that
amidst
a
sea
of
nonsensical–
political
nonsense
around
gas
prices
and
regulation,
etc.,
etc.
These
semiannual
testimonies
are
always
fraught
with
politics.
But
when
you
read
through
the
tea
leaves,
there
wasn’t
actually
much
substance
in
terms
of
incremental
information
relative
to
what
we
heard
from
last
Wednesday.
MAGGIE LAKE:
Yeah.
And
it’s
been
interesting
to
watch
the
data
because
as
you
said,
this
conversation’s
really
turned
very
quickly
and
everyone’s
talking
about
recession,
because
we
saw,
as
many
had
been
predicting,
those
of
you
who’ve
been
worried
about
the
economy,
we’re
starting
to
see
some
of
those
early
warning
signs,
those
more
forward-looking
indicators,
whether
it’s
some
of
the
manufacturing
indicators,
or
some
of
the
early
housing
start
to
turn
really
in
the
last
week.
I
know
that’s
got
everyone
thinking
about
inflation.
I
want
to
play
a
clip
right
now
because
as
we’ve
been
discussing
the
Fed
and
how
behind
the
curve
they
may
or
may
not
be,
Tian
Yang
weighed
in
on
this
subject
in
a
recent
Expert
View
he
did
for
us
here
at
Real
Vision.
Let’s
listen
to
a
clip
of
that
and
then
we’ll
talk
on
the
other
side.
TIAN YANG:
Right
now,
the
market
narrative
is
very
much
that
yes,
the
Fed
is
behind
the
curve.
But
in
terms
of
how
fixed
income
markets
should
be
behaving
in
a
“normal”
hiking
cycle,
I
would
say
the
behavior
is
not
that
bad,
right?
Yield
curves
generally
bear
flatten
in
terms
of
this
hiking
cycle,
which
is
typically
what
you
would
expect.
If
you
look
at
some
of
the
longer-term
things
like
5Y
5Y,
if
you
look
at
term
premium,
these
things
haven’t
really
gone
to
crazy
levels,
so
for
sure,
there
has
been
a
lot
of
adjustment,
clearly,
bond
yields
need
to
reset.
But
you’re
not
seeing
the
typical
panic
that
you
will
see
at
the
federal
level.
If
they
truly
weren’t,
you
will
probably
see
term
premium
rise
a
lot
more,
you
actually
probably
see
a
curve
steepening
in
response
to
Fed
policy
action,
because
generally,
you
see
a
flattening
trend,
it
shows
that
at
least
the
market
is
going
to
give
the
Fed
some
credibility
that
the
Fed
is
serious
about
fighting
inflation,
to
the
extent
that
they
may
be
willing
to
engineer
a
recession,
hence,
you
get
the
curve
flattening.
As
of
right
now,
again,
these
are
things
that
we
want
to
watch
for
in
terms
of
whether
that’s
truly
a
change,
but
the
Fed
still
is
credible,
in
my
view,
because
they
might
be
behind
the
curve,
but
they’re
still
doing
things
to
address
it
and
the
market
is
giving
them
some
credit
for
it.
MAGGIE LAKE:
And
that
full
Expert
View
is
available
to
Essential
Plus
and
Pro
members
on
our
website.
So,
people
taking
the
Fed
at
face
value,
I
suppose
that
they’re
more
serious
about
it.
I
think
it’s
an
open
question
still
there,
is
how
much
they
can
actually
influence
what’s
going
on.
They’re
targeting
the
demand
side,
we
know
there
is
some
supply
side
issues
involved
here.
Where
do
you
come
down
on
this?
And
I
guess
the
question
is,
where
are
we
with
the
bond
market?
The
bond
markets
giving
them
some
credit,
but
is
the
Fed
leading
the
bond
market?
Or
is
the
bond
market
leading
the
Fed?
DARIUS DALE:
So,
right
now,
that’s
a
phenomenal
question.
And
by
the
way,
I
generally
agree
with
Tian’s
view,
he’s
another
data
driven
investor,
I
tend
to
side
with
a
lot
of
data
driven
macro
risk
managers.
But
just
going
back
to
your
question,
I
think
what
Powell’s
most
concerned
about,
and
he
articulated
this
several
times
particularly
in
the
last
week
or
so,
which
is
very
concerned
about
long
term
inflation
expectations,
and
the
volatility
associated
with
them
becoming
“unmoored”,
if
you
will,
to
borrow
a
phrase
from
our
friend
Jim
Bullard
yesterday.
Brian,
I
sent
you
a
chart
from
one
of
our
decks
that
says
Powell
is
fighting
to
maintain
control
over
the
bond
market.
And
what
this
chart
shows
in
the
top
panel
is
just
the
10Y
3M
yield
spread.
That’s
a
proxy
for
the
growth
expectation
of
the
economy,
if
you
will.
Powell
has
really
got
growth
expectations
at
least
still
reasonably
anchored,
because
we
have
not
seen
a
significant
flattening
of
that
curve
generally
via
bull
flattening,
if
you
will,
which
you
typically
see
into
a
recession.
But
on
the
bottom,
I
think
that’s
the
more
important
part–
or
sorry,
the
middle
panel
is
actually
the
more
important
chart,
which
shows
the
term
premium,
which
is
a
very
wonky
academic
measure
that
really
is
just
trying
to
assess
how
much
premium
investors
demand
for
holding
longer
term
maturities.
Once
you
X
out
things
like
the
expected
growth
rate,
the
expected
inflation
rate,
the
inflation
risk
premium,
etc.,
etc.,
what
you’re
left
with
is
the
term
premium.
And
right
now,
at
minus
six
basis
points,
we’re
only
in
the
eighth
percentile
of
that
on
all
daily
observations
going
back
to
the
early
1960s
on
this
metric.
And
so,
what
that’s
telling
you
is
that
the
bond
market
believes
the
Fed
still
has
credibility
with
the
bond
market
in
terms
of
its
inflation
forecast,
its
growth
forecasts,
and
ultimately,
its
desire
to
maintain
that
control
by
effectively
quashing
out
inflation
really
quickly
and
really
effectively.
Now,
if
at
any
point
in
time,
as
you
can
see
from
the
chart
going
back
to
the
mid
to
late
1970s
all
the
way
through
the
early
1980s,
the
Fed,
starting
with
Arthur
Burns,
really
lost
control,
Arthur
Burns
was
the
Fed
chair
back
in
the
1970s
who
really
let
the
inflation
genie
out
of
the
bottle,
which
obviously
Powell
is
trying
to
avoid.
He
really
let
that
genie
out
of
the
bottle,
and
you
saw
the
term
premium
widened
to
just
under
500
basis
points
over.
So,
if
you
think
about
just
without
any
change
in
growth
or
inflation
expectations,
you
could
have
the
10Y
Treasury
yield
gallop
three,
four
or
500
basis–
not
three,
four
or
five,
but
more
like
200
to
300
basis
points
higher
just
on
a
revision
to
the
term
premium,
which
again,
is
the
bond
market
pricing
in
the
uncertainty
around
Fed
policy.
This
is
what
Powell
is
hyper
concerned
about
because
again,
if
you
let
the
inflation
genie
in
the
bottle,
it’s
really
hard
to
get
that
back
in.
MAGGIE LAKE:
Yeah.
And
that
is
why
that
is
one
of
the
pillars
of
their
mandate,
price
stability.
It
was
last
of
the
four
because
of
the
disinflationary
slash
deflationary
period
we
were
in
but
question
on
bonds,
Gary
from
the
RV
site,
the
10Y
Treasury
rate
peaked
right
at
the
top
of
the
stock
market
in
early
2000
and
mid-2007,
per
the
title
of
this
interview,
why
do
you
think
rates
will
keep
going
higher
this
time?
I
would
say,
do
you
think
we’ve
seen
the
peak?
And
if
not,
what’s
going
to
keep
them
elevated?
Or
what’s
different
this
time
around?
DARIUS DALE:
Yeah,
I
think
that’s
a
difficult
question
to
answer
in
this
particular
juncture,
the
first
part
of
the
question,
which
is,
have
we
seen
the
peak
in
rates?
We’re
going
to
see
new
highs
in
rates
if
inflation
continues
to
misbehave.
We’ve
been
talking
about
this
for
the
past
month
or
so
about
the
potentiality
for
inflation
misbehaving.
It
did
misbehave
in
the
May
inflation
reading,
we
did
see
a
step
function
increase
in
terminal
Fed
Funds
Rate
expectations
and
policy
rate
expectations
across
the
curve.
And
ultimately,
that
big
shock
higher
in
the
UMich
five-year
forward
inflation
expectation,
which
really
spooked
the
Fed
is
obviously
filtering
its
way
into
the
bond
market.
So,
we
could
continue
on
in
this
process.
I
don’t
need
to
go
into
the
details
on
the
inflation
statistics,
that
will
tell
you
that
that
risk
is
still
very
much
on
the
table.
We
saw
a
broadening
out
of
inflation
data
or
inflation
pressure
in
the
most
recent
meeting,
the
May
reading
just
to
get
those
statistics
at
three-month
annualized
median
CPI,
which
is
everything
in
the
CPI
basket
on
the
median
basis,
accelerated
to
6.4%
on
a
three-month
annualized
basis,
fastest
rate
ever.
So,
the
broad
basis
of
inflation
is
a
real
issue
and
has
not
been
tamed
yet,
at
least
not
according
to
the
data.
As
it
relates
to
the
bond
market,
have
we
seen
the
highs
in
yields?
I
think
that’s
a
50/50
toss
up
right
now,
it’s
difficult
to
ascertain
that
at
the
present
juncture.
And
generally
speaking,
just
to
take
a
step
back
from
a
risk
management
perspective,
it’s
always
difficult
to
catch
falling
knives
in
any
market,
obviously,
catching
the
falling
knife
in
bond
crisis
here
so
just
be
careful
with
these
types
of
questions.
What’s
more
important
is
understanding
the
change,
the
potential
change
in
the
regime
that
could
be
potentially
favorable
for
the
bond
market.
And
that’s
something
we
do
on
a
daily
basis
at
42Macro.
Brian,
if
you
bring
up
that
chart,
deflation
is
now
the
second
most
probable
regime,
so
going
consistent
with
our
GRID
framework,
which
we
use
the
rates
of
change
of
growth
and
inflation
to
identify
what
regime
the
economy
is
in,
we’re
actually
using
market
signals,
core
market
signals
across
42
different
markets,
all
different
asset
classes,
to
nowcast
what
regime
the
market
is
in,
what
is
the
market
pricing
in,
and
it’s
been
consistently
pricing
in
inflation
has
been
the
highest,
most
probable
regime.
And
oh,
by
the
way,
there’s
504
unique
datapoints
that
go
into
that
process
every
day
to
determine
what
that
market
regime
is.
And
now,
what
we’re
starting
to
observe
is
that
deflation
is
now
the
second
most
probable
regime,
which
is
actually
consistent
with
our
forecasts,
which
are
calling
for
a
phase
transition
in
the
economy
to
deflation,
again,
growth
slowing,
inflation
slowing
by
mid
to
late
Q3.
And
so,
to
answer
the
question
just
very
succinctly,
if
we’ve
seen
the
highs
in
bond
yields,
it’s
coming
right
on
time.
I’m
not
certainly
seeing
the
highs
in
bond
yields
because
I
see
a
scenario
where
inflation
continues
to
surprise
to
the
upside
over
the
next
month
or
two.
And
if
that
happens,
we’re
going
to
see
another
step
function
increase
in
terminal
Fed
Funds
Rate
pricing.
But
if
we
don’t
see
inflation
surprise
to
the
upside,
then
it’s
very
likely
we
have
seen
the
highs
in
bond
yields.
MAGGIE LAKE:
Yeah,
and
that’s
what’s
so
hard,
because
this
is
you’re
trying
to
gauge
the
supply
chain
issues
in
some
way,
not
the
demand,
which
was
a
little
bit
clear.
It’s
hard
to
forecast
if
China
is
going
to
close
down
because
of
COVID.
These
are
the
things
that
keep
roiling
us,
I
think,
when
it
comes
to
trying
to
get
a
handle
on
that
and
why
so
many
have
gotten
the
timing
on
bonds
wrong.
There
are
people
who
think
bonds
are
a
good
buy
here,
but
it’s
just
so
hard
to
plug
in
the
timing
part
and
not
matter.
I
think
just
echoing
Darius’
sentiment,
be
careful
in
this
environment,
it’s
just
a
really,
really
difficult
one.
So,
the
same
question
we
get
all
the
time
as
you
know,
Darius,
when
it
comes
to
stocks,
it’s
that
same
feeling.
Are
we
through
the
worst
of
it?
Is
it
time
to
start
buying?
And
the
way
Galan
put
it
in
a
question
here
from
the
RV
site,
I
hope
I’m
saying
your
name
right,
Galan.
The
average
recession
has
roughly
25%
decline
in
S&P
earnings,
S&P
earnings
are
$204
as
far
as
I
can
see,
these
are
the
numbers
he’s
using
or
she’s
using.
The
average
multiple
on
the
S&P
500
is
15
times
over
time,
I
think.
So,
assuming
the
multiple
doesn’t
overshoot,
that’s
a
2300
on
the
S&P.
Do
you
think
this
is
worthwhile
thinking?
Thank
you
for
walking
through
your
thinking,
by
the
way,
so
we
can
understand
where
you’re
coming
from
with
that
question.
And
I
think
the
way
I
want
to
put
it
to
Darius
is
people
are
looking
at
this
decline
from
the
top
and
obviously
Galan
also
plugging
in
some
earnings
to
that.
But
I’ve
had
people
on
the
program
say
I
don’t
care
what
the
decline
is
from
the
trough
to
the
bottom
now
because
that’s
not
all
the
information
I
need
to
see
whether–
maybe
it’s
not
going
to
go
back
to
that
level.
You
got
to
plug
a
lot
of
other
data
in,
so
what
are
you
thinking
about,
Darius,
as
you
try
to
figure
out
their
trajectory
here
and
the
timing
for
the
S&P
or
for
stocks?
DARIUS DALE:
Absolutely.
So,
if
I
get
fired
from
my
day
job
of
helping
professional
and
retail
investors
manage
macro
risk,
I’ll
be
a
professor
somewhere
maybe
back
New
Haven
where
I
got
my
degree.
But
I
think
this
is
a
perfect
question
and
a
phenomenal
question,
Galan,
if
we’re
saying
your
name
right,
I
apologize
if
we
aren’t,
to
unpack
a
few
things.
I’ll
start
by
just
really
quickly,
S&P
earnings
on
a
next
12-month
forward
basis
which
you
should
be
using
to
help
value
the
market
on
a
forward-looking
basis,
are
currently
at
$220
per
share.
That’s
a
new
high,
we’ve
trended
higher,
we’ve
not
seen
any
significant
earnings
revisions,
and
we
continue
to
trend
higher
on
an
earnings
per
share
basis.
So,
that’s
an
issue
if
you
think
about
the
significant
growth
slowdown
that
we’re
likely
to–
that
we’ve
already
accumulated
in
terms
of
the
financial
tightening
we’re
seeing,
but
we’re
likely
to
experience
in
realized
terms
over
the
next
few
months.
A
couple
of
more
things
that
I’d
highlight
that–
again,
this
is
a
fantastic
question,
great
teaching
opportunity
here.
They
mentioned
the
word
average
several
times
in
that,
average
drawdown,
average
earnings,
average
multiple,
average,
average,
average.
Average
is
the
most
dangerous
word
in
finance,
write
this
down,
average
is
the
most
dangerous
word
in
finance.
And
the
reason
it’s
so
dangerous
is
because
most
time
series
spend
very
little
time
at
their
average,
the
average
itself
is
just
a
statistical
concept.
We
don’t
live
in
a
world
of
apparently
observed
averages,
we
live
in