This week will be a huge week for markets. Stocks continue to hover around record highs. Rates (the 10 year yield) sit at the highest level in three years.
This snapshot alone suggests a world that continues to believe that pro-growth policies “trump” all of the risks ahead. At the very least, it’s pricing in a world without disruptions. But disruptions look likely.
Here’s a look at stocks as we enter the week. Still in a 45 degree uptrend since the election.
But if we take a longer term look, this trendline looks pretty vulnerable to any surprise.
Let’s take a look at the disruptions risks:
There was a chance that the official execution of Brexit may have come as soon as tomorrow — the UK leaving the European Union by triggering Article 50 of the Treaty of Lisbon. That looks unlikely now, but could come in the coming weeks. To this point the Bank of England has done a good job of responding and promoting stability which has led to financial markets pricing in an optimistic outcome.
We have the Fed on Wednesday. They will hike for the third time in the post-financial crisis era. We don’t know at what point higher interest rates, in this environment, might choke off growth that is coming from the fiscal side.
This next chart looks like rates might run to 3% on the 10-year. That would do a number on housing, IF tax reform and an infrastructure spend out of the White House come later than originally anticipated (which is the way it looks).
We also have the Bank of Japan and Bank of England meeting on rates this week. Let’s hope they have a very boring, staying the path, message. That would mean extremely stimulative policies for the foreseeable future 1) in the case of Japan, to continue to promote global liquidity and anchor global yields, and 2) in the case of the UK, to continue to promote stability in the face of uncertainty surrounding Brexit.
Keep this in mind: The Bank of Japan’s big QE launch in 2013 is a huge reason the Fed was able to end QE in the first place, and start its path of normalization. The BOJ launched in April of 2013. Bernanke telegraphed “tapering” a month later. The Fed officially ended tapering on October 29, 2014. Stocks fell 10% into that official ending of Fed QE. On October 31, 2014 (two days later), the BOJ surprised the world with bigger, bolder QE (a QE2). Stocks rallied.
Finally, to end the week, we have a G-20 finance ministers meeting. This is where all of the trade and dollar rhetoric from the new administration will be front and center. So the news/event outlook looks like some waves should be ahead. But any dip in stocks would be a great buying opportunity.
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With today marking eight years from the bottom in the stock market, let’s talk about why it bottomed. And then take look at the run up in stocks since 2008.
First, why did stocks (the S&P 500) turn at 666 on March 9th, 2009?
Policymakers were scrambling to stop the bleeding in banks, trying to unfreeze global credit, and stop the dominos from continuing to fall.
The Fed had already launched a program a few months earlier to buy up mortgage back securities, to push down mortgage rates and stop the implosion in housing. Global central banks had already slashed interest rates in attempt to stimulate the economy. The U.S. had announced a $787 fiscal stimulus package a few weeks earlier. And then finance ministers and central bankers from the top 20 countries in the world met in London on March 14.
Here’s what they said in the opening of their communique: “We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored.”
The key words here are “coordinated” and “whatever action is necessary.”
The Fed met four days later and rolled out bigger purchases of mortgages, and for the first time announced they would be buying government debt. This was full bore QE. And it was with the full support of global counterparts, which later followed that lead.
What wasn’t known to that point, was to what extent policymakers were willing to intervene to avert disaster. This statement by G20 finance heads and the action by the Fed let it be known that all options are on the table (devaluation, monetization, etc) — and they were all-in and all together in the fight to stave off an apocalypse. With that, the asset reflation period started. And it started with QE.
With that said, let’s take a look at the chart on stocks and the impact QE has had along the way.
The baton has now been passed to fiscal stimulus in the U.S. But we have the benefit of QE still full bore in Europe and Japan. The question is, can that continue to anchor interest rates in the U.S. and keep that variable from stifling the impact of growth policies.
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One of the best investors on the planet, David Tepper, was on CNBC this morning. Let’s talk about how he sees the world and how he is positioned.
What I appreciate about Tepper: He’s a common sense guy.
And his common sense view of the world happens to be in alignment with the view and themes we discuss here every day. So he agrees with me – another thing I appreciate about him.
As you know, Wall Street and the media are always good at overcomplicating the investment environment with their day-to-day hyper analysis. Because of that, they tend to forge a path that moves further and further away from the simple realities of the big picture. That’s actually good. Because it creates opportunity for those that can avoid those distractions.
Right now, as we’ve discussed, the big picture is straight forward. We have a President that wants deregulation, tax cuts and a big infrastructure spend. And we have a Congress in place that can approve it. And this all comes at a time when the world has been in a decade long economic slog following the global financial crisis – in desperate need of growth. With that, we have a Fed that still has rates at very, very low levels. And the ECB and BOJ are still priming the pump with QE.
This is precisely Tepper’s view. He says the bowl is still full, i.e. the stimulus from the monetary policy side is still full, and now we get stimulus coming in from the fiscal side. What more could you ask for (my words) to pump up growth and asset prices, which will likely spill over into a pop in global growth. Still, people are underestimating it. And as he says, the Fed is underestimating it.
Are there risks? Yes. But the probability of growth, with the above in mind, well outweighs the probable downside scenarios. What about execution risk? Even if tax reform and infrastructure are slow to come, Tepper says deregulation is a done deal. It drives earnings and “animal spirits.”
He likes stocks. He likes European stocks. And I think he really likes Japanese stocks, but he stopped short of talking about it (my deduction).
Among the risks: Inflation picking up too fast, which would require the Fed to move faster, which could choke off growth (undo or neutralize fiscal stimulus).
This is why, among other reasons, Tepper’s favorite trade is short bonds. – i.e. higher interest rates. If he’s right and economic growth has a big pop, he wins. If the risk of hotter inflation materializes and rates move faster, he wins.
For context, this is the guy that literally changed global investing sentiment in late 2010 when he sat in front of a camera on CNBC, in a rare high profile TV interview (maybe first), when investing sentiment was all but destroyed by the global financial crisis and the various landmines that kept popping up. Tepper said in a very confident voice that the Fed, by telegraphing a second round of QE, had just given us all a free put on stocks (i.e. the Fed is protected the downside, it’s a greenlight to buy stocks). For all of the market jockeys that were constantly focusing on the many problems in the world, that commentary from Tepper, for some reason, woke them up.
For perspective on Tepper: Here’s a guy that is probably the best investor in the modern era. He’s returned between 35%-40% annualized (before fees) for more than 20 years. He made $7.5 billion in 2009 betting on financial stocks that most people thought were going bankrupt. And he was telling everyone that what the Fed is doing will make ‘everything’ go up. It sparked, in 2010, what is known as the “Tepper rally” in stocks.
When Tepper speaks it’s often smart to listen. And he likes the Trump effect!
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and we’ll send you our recently recorded portfolio review that steps through every stock in our portfolio, and the opportunities in each.
Since going public last week, Snap has had a valuation north of $30 billion. It’s been getting hammered from the highs over the past couple of days. A big component to the rise of Internet 2.0 was the election of Barack Obama. With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over? And is Snap the first sign?
Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.
In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.
Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S.
When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new “could be” unicorns (i.e. billion dollar startups).
Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more than three times the size of Avis, Hertz and Enterprise combined.
Will money keep chasing these companies without the wind any longer at their backs? The favor in the new administration looks more likely to go toward industrials and energy. That would leave the pumped up valuations in some of these internet businesses, that operate with no real plan on how to make money, with a long way to fall.
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and we’ll send you our recently recorded portfolio review that steps through every stock in our portfolio, and the opportunities in each.
It’s jobs week. Thanks to 1) Trump’s reminder to the country in his address to Congress last week that big economic stimulus was coming, and 2) Yellen’s remarks last week that all but promised a rate hike this month, the market is about as close to fully pricing in a rate hike as possible for March 15.
The last data point for everyone to obsess about going into next week’s Fed meeting will be this Friday’s jobs report.
But as I’ve said for quite a while, the jobs data has been good enough in the Fed’s eyes for quite some time. Nonetheless, they’ve had many, many balks along the path of normalizing rates over the past couple of years. Here’s a look at a chart of the benchmark payrolls data we’ll be seeing Friday.
You can see in this chart, the twelve-month moving average is 195k. The three-month moving average is 182k. The six-month moving average is 182k. This is all fairly consistent with historical/pre-crisis levels.
So the numbers have been solid for quite some time, even meeting and exceeding the Fed’s targets, especially when it comes to the unemployment rate (4.7% last). However, when the Fed’s targets have been met, the Fed has moved the goal posts. When those goal posts were then exceeded, the Fed found new excuses to justify their decisions to avoid the path of aggressive hikes/normalization of rates that they had guided.
Among those excuses: When jobs were trending at 200k and unemployment breached 5%, the Fed started to acknowledge underemployment. Then the lack of wage growth became the focus. Then it was macro issues. To name a few: It’s been soft Chinese economic data, a Chinese currency move, Russian geopolitical tensions, collapsing oil prices, Brexit and weak productivity.
And just prior to the election last year, the Fed became, confusingly, less optimistic about the U.S. economic outlook, which was the justification to ratchet down the aggressive projected path for rates.
I suspected last year, when they did this that they were making a strategic pivot, to set expectations for a much easier path for rates, in hopes to keep people spending, borrowing and investing — instead of promoting a tighter path, which proved for the better part of two years (prior to the election) to create the opposite effect.
Remember, Bernanke (the former Fed Chair) even wrote a public piece on this last August, criticizing the Fed for being too optimistic in its projections for the path of interest rates. By showing the market/the world an expectation that rates will be dramatically higher in the coming months, quarters and years, Bernanke argued in his post that this “guidance” has had the opposite of the desired effect – it’s softened the economy.
A month later, in September, in Yellen’s post-FOMC press conference, she said this in response to why they didn’t raise rates: “the decision not to raise rates today and to wait for some further evidence that we’re continuing on this course is largely based on the judgment that we’re not seeing evidence that the economy is overheating.” Safe to argue, the economy isn’t overheating, still.
Again, as I said on Friday, the only difference between now and then, is the prospects of major fiscal stimulus, which is precisely what the Fed claims to be ignoring/leaving out of their forecasts – a believe it when I see it approach, allegedly.
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and we’ll send you our recently recorded portfolio review that steps through every stock in our portfolio, and the opportunities in each.
We closed last Friday with another new weekly record high on the Dow. But we closed with an all-time record low in the German 2-year bund. That development in Europe, weighed on U.S. yields, pulling yields down here from 2.5 to 2.31%.
So we had this divergence between what was happening in stocks and what the bond market was communicating. The bond market was telling us there was growing concern about danger to European economic stability, and therefore global economic stability, in the upcoming French elections. Stocks were telling us, growth is king – the ultimate problem solver, and growth is coming.
With that, Trump’s address to Congress on Tuesday night became a major sentiment gauge/the arbiter on which would win out, based on the perception of whether or not the Trump administration could execute on its economic plans.
The vote was “affirmative” for the growth story. Stocks gapped higher to new record highs (closing this week at another weekly record high). And the bond market turned on a dime, following Trump on Tuesday night, and have been climbing since. German yields have bounced. And U.S. yields have bounced. That leads us up to today’s speech from Janet Yellen.
There has been a tremendous shift in the past week in the expectations for a March rate hike. It’s gone from a 27% chance of a March 15 rate hike being priced in last Friday. By Wednesday morning, after Trump’s speech, it was 70%! And we close out the week with an 80% chance of a hike this month.
That additional bump came today on a speech and Q&A session from Janet Yellen today. Here’s the expectations bar she chose to set: She said the Fed would likely be moving faster than it had in 2015 and 2016. It should be said that they only hiked once in 2015 and 2016 because their forecasts proved grossly overly optimistic and they had to adjust on the fly. So they’ve already told us, back in December, that they think it will be three times this year. That’s faster than one. And today she reiterated that today.
And today she also said that if the data continued to improve as they forecast, they can hike this month.
Now, they have a post-FOMC meeting press conference scheduled FOUR more times this year (March, June, September and December). Despite what they suggest, that they could hike at any meeting and just call an impromptu press conference, they would be crazy to introduce such a surprise in markets. Stability and confidence work in their favor. Surprises threaten stability and confidence.
So if they indeed hike three times, they have a narrow window. And if they think they need to hike faster, because perhaps fiscal policy accelerates growth and inflation, they may need to keep the December meeting open for a fourth hike.
But, Yellen and company have recently gone out of their way to tell us that they are not even factoring in fiscal stimulus and deregulation (growth policies) into their view on the economy. They’ll believe when they see it and take that information as it comes, which puts them in an even more vulnerable position to needing more tightening this year, if you take them at their word and trust their forecasting abilities.
So with that in mind, why has the Fed become so bulled up on interest rate picture since December? Is it because the inflation and jobs data has gotten that much better? The unemployment rate has been below 6% (the Fed’s original target) since September of 2014 and below 5% for the past year. And the core inflation rate has been above 2% since November of 2015, which includes all year last year, when the Fed was reversing course on its promises for a big tightening year. That’s near normal employment in the Fed’s eyes and above its target for inflation – a clear signal to normalize interest rates. But they’ve barely budged.
Why? Because last year the global economy looked vulnerable. With that, they threw every other guiding data point out the window and went back to playing defense. And as recent as August of last year, the Fed messaging was quite dovish. What’s the biggest difference between now and then? The prospects of major fiscal stimulus – precisely what they say they are leaving out of their forecasts for now.
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and we’ll send you our recently recorded portfolio review that steps through every stock in our portfolio, and the opportunities in each.
As we discussed last week, the Presidential address to the joint sessions of Congress last night was a big market event. And as I discussed yesterday, growth and fiscal stimulus needed to be moved to the front burner of the daily narrative. The President delivered last night.
After he began speaking, one of the early headlines on my Reuters feed last night: TRUMP SAYS HE WILL BE ASKING CONGRESS TO APPROVE LEGISLATION THAT PRODUCES $1 TRILLION INVESTING IN INFRASTRUCTURE FINANCED THROUGH BOTH PUBLIC AND PRIVATE CAPITAL.
Bingo! There’s a lot of talk about the inspiration of the speech, but growth is king in this environment, after 10 years of malaise and no improvement in sight. And the focus has shifted to growth. Stocks have had a huge day. Meanwhile, yields have been up but relatively tame. Gold has been down, but relatively tame. And the dollar has been up, but relatively tame.
German 2 year yields, which have been the sour spot, as they’ve slipped toward -1% in the past week, were up bouncing nicely today.
It’s not uncommon to see big global market participants ignore all else in key market moments, and just focus on one spot. That has been the case. And that spot is the stock market. The U.S. stock market is where the impact of a trillion dollar infrastructure spend, a massive tax cut, and broad deregulation can be most directly influenced and, as importantly, stocks are capable to absorbing large, large amounts of capital.
Now, it’s time to revisit some great catch up trades I’ve discussed for a while: German and Japanese stocks. A better U.S. is better for everyone, make no mistake. Hotter growth here, will mean hotter global growth, and it gives Europe and Japan a shot at recovery, especially with their central banks priming the pump with big QE, still.
On that note, let’s take a look at the charts …
So you can see the same period here for U.S., German and Japanese stocks, dating back to 2012, when the European Central Bank stepped in with intervention in the European sovereign bond market (at least promised to do so), that turned global economic sentiment and then then Japan came in months later with promises of a huge stimulus program. All stocks went up.
But you can see, stocks in Europe and Japan have yet to regain highs of 2015, after the oil price crash induced correction.
These stock markets look like a big catch up trade is coming, and it may be quick, following the catalyst of last nights U.S. Presidential address.
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Markets are quiet as we head into President Trump’s address to Congress tonight. As we’ve discussed over the past week or so, the markets seem to have run the course on the outlook of fiscal stimulus and regulatory reform within an environment of a gradual rise in interest rates.
That “expectation” backdrop seems to be pretty well priced in. Now, it’s a matter of detail and timing, and that puts the new President squarely in focus for tonight.
We’ve already heard from his Treasury Secretary last week that tax reform wouldn’t be coming until August-ish. And he said we shouldn’t expect that big growth bump from Trumponomics until 2018. That’s been the first real downward management of the expectations that have been set over the past three months.
What hasn’t been discussed much is the big infrastructure spend, which is really at the core of the pro-growth policies of the Trump administration. For years, the Fed has been begging Congress for help in stabilizing the economy and stimulating growth in it — from the FISCAL side.
Given the wounds of the debt crisis, it was politically unpalatable for Congress. They ignored the calls. And as a result, just six months ago we (and the rest of the world) were dangerously close to slipping back into crisis. Only this time, the central banks would not have had the ammunition to fight it.
So now we have Congress with the will and position to act. It’s a matter of detailing a plan and getting it moving. Of the many positive things that could come from tonight’s speech by President Trump, details and timeline on fiscal stimulus would be the biggest and most meaningful.
The bickering about deficits and debt will continue, but a big stimulus package will happen — it has to happen. A government spending led growth pop is, at this stage, the only chance we have of returning to a sustainable path of growth and ultimately reducing the debt load down the line, which now is about 100% of GDP. A move back to 80% of GDP would make the U.S. debt load, relative to the rest of the world, a non-issue.
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The big event of the week will be President Trump’s speech to Congress tomorrow. We know the pro-growth agenda of the Trump administration. We know the framework is in place to make it happen (with a Republican controlled Congress). That alone has led to a “clear shift in the environment” as Ray Dalio has called it (head of the biggest hedge fund in the world) – I agree.
But we’re at a point now, with European elections approaching and political risk rising there, and with the reality setting in that execution on fiscal stimulus from Trumponomics won’t be coming quickly, markets are calming down a bit. As we discussed last week, yields are falling back, following the lead of record level lows set in the German 2-year bund yield (in deeply negative territory). That dislocation in the German government bond market, as other key market barometers have been pricing in bliss, has come as a warning signal.
Another event of interest: Warren Buffett’s annual letter was released over the weekend, and he was on CNBC for a long interview this morning.
First, I want to revisit his letter from last year: Last year, in the face of an oil price crash, and a stock market that had opened the year with the worse decline on record, Buffett addressed the fears and uncertainty in markets. He said the growth trajectory for America has been and will continue to be UP. “America’s economic magic remains alive and well.”
And the growth trajectory has to do with two key factors: Improvements in productivity and innovation.
On productivity, he said:“America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children. All families in my upper middle–class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. Transportation, entertainment, communication or medical services.”
On innovation, he said:“A long–employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option. When low–cost competition drove shoe production to Asia, our once–prosperous Dexter operation folded, putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace. The same scenario unfolded in slow–motion at our original New England textile operation, which struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke Portuguese and knew little, if any, English. They had no Plan B. The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever–increasing prosperity for the great majority of Americans should not be penury for the unfortunate.”
And, finally on stocks, he said (my paraphrase): Overtime, with the above growth dynamic in mind, stocks go up.“In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average — an index fund of sorts — soared from 66 to 11,497, with its component companies all the while paying ever–increasing dividends.”
What a difference a year makes. This time, he releases his letter into a stock market that’s UP 6% on the year already. And there’s new leadership and policy change underway.
So all of this in the above was written a year ago, what does he think now? In his letter released over the weekend, Buffett AGAIN addresses the fears and uncertainties in markets.
We discussed on Friday the stages of a bull market which slowly moves from the state of broad pessimism, to skepticism to optimism and finally to euphoria, which tends to end the bull market. But as Paul Tudor Jones says (one of the great macro investors), the “last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic” (i.e. euphoria can last for a while).
The fact that Buffett is still addressing concerns about valuations and the future of the American economy, is more evidence that we’re far from euphoria (bubble-like territory that some like to often talk about) and were probably more like the area between skepticism to optimism.
About Valuation: As we’ve discussed many times here my daily Pro Perspectives piece, when rates are low, historically, valuations run higher than normal (a P/E of 20 or better). At a ten year yielding at 2.4% and fed funds at 75 basis points (well below the long run average) the forward P/E on the S&P is just 17.8x. That’s still cheap, relative to the alternative of owning bonds. That incentivizes money to continue to flow into stocks. And if we apply a 20 P/E earnings estimates for the next twelve months, we get about 12% higher on the S&P 500.
Now, let’s hear from the legend himself on the topic: Buffett said this morning, “We’re not in bubble territory, if interest rates were 7% or 8% then these prices would look exceptionally high, but you measure everything against interest rates, measured against interest rates, stocks are on the cheap side compared to historic valuations.”
By the way, on that “valuation note” for stocks, as you may recall I made the case early this month for why Apple (the largest component of the S&P 500) was cheap (Is Apple A Double From Here?). What does Buffett think? Buffett disclosed that he’s doubled his position in Apple since the beginning of the year. It’s now his second largest position at $17 billion. He thinks Apple will be the first trillion dollar company. Full disclosure: We own Apple in our Billionaire’s Portfolio along with Buffett and his fellow billionaire investor David Einhorn. We’re up 30% since adding it in March of last year.
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Yesterday we talked about the warning signal flashing from the German bond market. That continues today.
While global stocks and commodities are reflecting broad optimism about the new pro-growth government in the U.S., the yield on 2-year German government bonds is sending a negative message — it hit record lows yesterday, and again today — trading to negative 90 basis points. You pay almost 1% to loan the German government money for two years.
Here’s a longer term look at German yields, for perspective…
And here’s the divergence since the election between German and U.S. 2 year yields…
This divergence is partially driven by rising U.S. yields on optimism about the outlook, about inflationary policies, and about the Fed’s response. On the other hand, German yields have gone the other way because 1) the ECB is still outright buying government bonds through its QE program (bond prices go up, yields go down), and 2) capital flows into bonds, in search of safety, because a Trump win makes another populist vote in Europe more likely when the French elections role around in May.
So that bleed to new lows in the German 2-year yield sends a warning signal to global markets. Today we have a few more reasons to think this could be a signal that the optimism being priced into U.S. markets at the moment could take a breather here.
Trump’s Secretary of Treasury, Mnuchin, was doing his first rounds on financial TV this morning and gave us some guidance on a timeline for policies and impact. Most importantly, he says we’ll see limited impact from Trump policies in 2017, and that the growth impact won’t come until 2018.
Let’s consider how that can impact where the Fed stands on their forecasts for monetary policy.
Remember, they spent the better part of 2016 walking back on the promises they had made for 4 rate hikes last year. And then, when they finally moved for thefirst time this past December, following the election and a rallying stock market, they reversed course on all of the dovish talk of the past months, and re-upped on another big rate hiking plan for 2017.
Though they don’t like to admit it, we can only assume that when they considered a massive fiscal stimulus package coming, like any human would, they became more bullish on the economy and more hawkish on the inflation outlook.
So now as Mnuchin tells us not to expect a growth impact from Trump policies until next year, maybe the Fed lays off the tightening rhetoric for a while.
With all of this in mind, another interesting dynamic in markets today, the Dow shrugged off some weakness early on to trade higher most of the day, posting another new record high. Meanwhile small caps diverged, trading weaker all day. And gold traded to the highest level since November 11. Remember this chart we’ve looked at, which looks like higher gold to come (a lower purple line), and lower yields.
This would all project a calming for the inflation outlook, which would be good for the health of markets. Among the biggest risk to Trumponomics is hot inflation, too fast, and a race higher in interest rates to chase it.
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It’s jobs week. Thanks to 1) Trump’s reminder to the country in his address to Congress last week that big economic stimulus was coming, and 2) Yellen’s remarks last week that all but promised a rate hike this month, the market is about as close to fully pricing in a rate hike as possible for March 15.
