We had a jobs report this past Friday. The unemployment rate is at 4.1%. We’re adding about 172k jobs a month on average, over the past twelve months. These are great looking numbers (and have been for quite some time). Yet employees, broadly speaking, still haven’t been able to command higher wages. Wage growth continues to be on the soft side.
With little leverage in the job market, consumers tend not to chase prices in goods and services higher — and they tend not to take much risk. This tells you something about the health of the job market (beneath the headline numbers) and about the robustness of the economy. And this lack of wage growth plays into the weak inflation surprise that has perplexed the Fed. And the weak growth that has perplexed all policy makers (post-crisis). That’s why fiscal stimulus is needed!
And this could all change with the impending corporate tax cut. The biggest winners in a corporate tax cut are workers. The Tax Foundation thinks a cut in the corporate tax rate would double the current annual change in wages.
As I’ve said, I think we’re in the cusp of an economic boom period — one that we’ve desperately needed, following a decade of global deleveraging. And today is the first time I’ve heard the talking heads in the financial media discuss this possibility — that we may be entering an economic boom.
Now, we’ve talked quite a bit about the run in the big tech giants through the post-crisis era — driven by a formula of favor from the Obama administration, which included regulatory advantages and outright government funding (in the case of Tesla). And we’ve talked about the risk that this run could be coming to an end, courtesy of tighter regulation.
Uber has already run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users (that would be a game changer). And we now know that Trump is considering that Amazon might be a monopoly and harmful to the economy.
With this in mind, and with fiscal stimulus in store for next year, 2018 may be the year of the bounce back in the industries that have been crushed by the “winner takes all” platform that these internet giants have benefited from over the past decade.
That’s probably not great for the FAANG stocks, but very good for beaten down survivors in retail, energy, media (to name a few).
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
With all that’s going on in the world, the biggest news of the day has been Bitcoin.
People love to watch bubbles build. And then the emotion of “fear of missing out” kicks in. And this appears to be one.
Bitcoin traded above $16,000 this morning. In one “market” it traded above $18,000 (which simply means some poor soul was shown a price 11% above the real market and paid it).
As we’ve discussed, there is no way to value bitcoin. There is no intrinsic value. To this point, it has been bought by people purely on the expectation that someone will pay them more for it, at some point. So it’s speculation on human psychology.
Let’s take a look at what some of the most sophisticated and successful investors of our time think about it…
Billionaire Carl Icahn, the legendary activist investor that has the longest and best track record in the world (yes, better than Warren Buffett): “I don’t understand it… If you read history books about all of these bubbles…this is what this is.”
Billionaire Warren Buffett, the best value investor of all-time: “Stay away from it. It’s a mirage… the idea that it has some huge intrinsic value is a joke. It’s a way of transmitting money.”
Billionaire Jamie Dimon, head of one of the biggest global money center banks in the world: “It’s not a real thing. It’s a fraud.”
Billionaire Ray Dalio, founder of one of the biggest hedge funds in the world: “Bitcoin is a bubble… It’s speculative people, thinking they can sell it at a higher price…and so, it’s a bubble.”
Billionaire investor Leon Cooperman: “I have no money in bitcoin. There’s euphoria in bitcoin.”
Billionaire distressed debt and special situations investor, Marc Lasry: “I should have bought bitcoin when it was $300. I don’t understand it. It might make sense to try to participate in it, but I can’t give you any analysis as to why it makes sense or not. I think it’s real, as it coming into the mainstream.”
Billionaire hedge funder Ken Griffin: “It’s not the future of currency. I wouldn’t call it a fraud either. Bitcoin has many of the elements of the Tulip bulb mania.”
Now, these are all Wall Streeters. And they haven’t participated. But this all started as another disruptive technology venture. So what do billionaire tech investors think about it…
Billionaire Jerry Yang, founder of Yahoo: “Bitcoin as a digital currency is not quite there yet. I personally am a believer that digital currency can play a role in our society, but for now it seems to be driven by the hype of investing and getting a return, as opposed to transactions.”
Mark Cuban: He first called it a “bubble.” He now is invested in a cryptocurrency hedge fund but calls it a “Hail Mary.”
Michael Novagratz, former Wall Streeter and hedge fund manager. He once was a billionaire and may be again at this point, thanks to bitcoin: “The whole market cap of all of the cryptocurrencies is $300 billion. That’s nothing. This is global. I have a sense this can go a lot further.” He equates it to an alternative to, or replacement for, the value of holding gold – which is an $8 trillion market… “over the medium term, this thing is going to go a lot higher.” But he acknowledges it shouldn’t be more than 1% to 3% of an average persons net worth.
Now with all of this in mind, billionaire Thomas Peterffy, one of the richest men in the country and founder of the largest electronic broker in the U.S., Interactive Brokers, has warned against creating exchange traded contracts on bitcoin. He says a large move in the price could destabilize the clearing organizations (the big futures exchanges) which could destabilize the real economy.
With that, futures launch on Bitcoin on Sunday at the Chicago Mercantile Exchange. This is about to get very interesting.
It’s hard to predict the catalyst that might prick a market bubble. And there always tends to be an interconnectedness across the economy to bubbles, that aren’t clear before it’s pricked (i.e. some sort of domino effect).
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
It looks like we’ll get tax cuts approved before year end! And that will give us two of the four pillars of Trumponomics underway in the first year of the new administration.
What a difference four months makes.
Remember, we entered the year with prospects of a big corporate tax cut, a huge infrastructure spend, deregulation and incentives to bring trillions of U.S. corporate money home.
By this summer, the ability to execute on these policies, given the political gridlock and mudslinging, was beginning to look questionable.
The game changer was the hurricanes.
In my note on August 29th, I said: “I think it’s fair to say the optimism toward the President, the administration and Washington policy making has been waning with the lack of policy execution. And from the optics of it all, sentiment couldn’t go much lower. But in markets, turning points (bottoms and tops) in the prevailing trend are often triggered by a catalyst (big trend changes, by some sort of intervention).
With that, the hurricane will likely have little negative impact on overall growth, but it may do something positive for policy making (maybe a turning point).
Given the mess of the political landscape, and an economy that remains vulnerable and in need of fiscal stimulus and structural reform, the crisis in Texas might serve as a needed catalyst: 1) to offer an opportunity for Trump to show leadership in a time of crisis, an opportunity to earn support and approval, and 2) to engage support for rebuilding, not just in Texas but throughout the U.S. (i.e. the much needed economic catalyst of infrastructure spend)…
National crises tend to be unifying. And in the face of national crisis, the barriers to get government spending going get broken down.
So, as we discussed last week, it may be the hurricanes that become the excuse for lawmakers to stamp more spending projects which can ultimately become that big infrastructure spend. And the easing of social tensions and political gridlock on policy making would all be highly positive for the global economic outlook.”
Of course that was followed by the big hurricane in Florida, and then in Puerto Rico. All told, the damages are north of $250 billion.
Congress has approved, to this point, about $60 billion in aid for hurricanes and wildfires (as far as I can track). And that number will likely go much higher — well into nine figure territory (probably more like a quarter of a trillion dollars). For Katrina, the ultimate federal aid disbursed was $120 billion.
On that momentum the first tranche of aid passed back in September, Trump went right to tax cuts. Three months later, and tax cuts are coming.
So, quickly, the policy execution pendulum has swung. This should pop growth nicely next year (and in Q4), which we desperately need to break out of the post-crisis rut of weak demand, slow growth and low inflation.
What about the $20 trillion debt load the media loves to talk about? It’s a big number. So is the size of our economy – about $19 trillion. Sovereign debt isn’t about the absolute number. It’s about the size of debt relative to the size of the economy. With that, it’s about our ability to service that debt at sustainable interest rates. The choice of austerity in this environment, where the economy is fragile and growth has been sluggish for the better part of ten years, would send the U.S. economy back into recession (as it did in Europe). And the outlook for re-emerging would be grim. That would make our debt/gdp far inferior to current levels — and our ability to service the debt, far inferior.
On the other hand, with fiscal stimulus underway, don’t underestimate the value of confidence in the outlook (“animal spirits) to drive economic growth higher than the number crunchers in Washington can imagine (the same one’s that couldn’t project the credit bubble, and didn’t project the sluggish 10 years that have followed).
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn
The Dow is now up 23% on the year. The index that measures the broader market, the S&P 500, is up 18%. This is more than double the performance of the long run compounded average growth rate for the stock market.
People continue to be surprised that policy execution is improving, and that tax cuts are actually coming. And they speculate on whether or not the stock market already has it all priced in. I think the steady rise in stocks is telling them it’s not.
As I’ve said, we remain in an ultra-low interest rate world, where incentives continue to push money into stocks (as the best alternative). And in ultra-low rate environments, historically, the multiple on stocks (the P/E) runs north of 20. It’s 18 right now, on the consensus estimate on next year’s earnings. So on a valuation basis, there’s room. This doesn’t take into account a corporate tax cut that will take the rate from 35% to 20%. That goes right to the bottom line for companies (earnings go UP). When earnings go up, the multiple stocks trade for goes down (stocks get cheaper).
Citibank thinks each 1% cut in corporate taxes will add roughly $2 in S&P 500 earnings. And Citibank says the effective tax rate across the S&P 500 is more like 27%. So a cut to 20% would mean a seven percentage point reduction. This would put next year’s S&P 500 earnings in the mid-$150s, which would put the multiple at 16 to 17 times next year’s earnings.
And don’t forget, we’re getting fiscal stimulus for a reason: to pop economic growth, which has been in a rut (post-crisis), running well south of the 3% long run average growth rate for the economy. The prospects for better growth, means prospects for better earnings. The outlook for better earnings, on a better economy, should also put downward pressure on valuations, making stocks more attractively valued.
In my January 2 note, I said: “there will be profound differences in the world this year, with the inauguration of a new, pro-growth U.S. president, at a time where the world desperately needs growth.” I think it’s safe to say that is playing out—albeit maybe slower and messier than expected.
I also said: “The element that economists and analysts can’t predict, and can’t quantify, is the return of ‘animal spirits.’ This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mistrust of the system. All along the way, throughout the recovery period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset appears to finally be underway. And that gives way to a return of animal spirits, which haven’t been calibrated in all of the forecasts for 2017 and beyond.”
The adoration for Bitcoin has been growing by the day, though no one understands how to value it.
CNBC went on “watch” the other day for Bitcoin $10,000. Today it traded above $11,000 and then fell as much as 21% from the highs.
Here’s a look at the chart.
I heard someone today say, everyone should have a small portion of their net worth in Bitcoin. That sounds an awful lot like the mantra for gold. Gold has been sold all along as an inflation hedge. But unless you have Weimar Republic-like hyperinflation, you’re unlikely to get the inflation-hedge value out owning it.
Remember, gold went on a tear from sub-$700 to above $1,900 following the onset of global QE (led by the Fed). Gold ran up as high as 182%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still, nine years after the Fed’s first round of QE and massive global responses, we’ve been able to muster just a little better than 1% annualized inflation. So gold is a speculative trade. It’s a fear trade. And it’s volatile.
If you bought gold at the top in 2011, the value of your “investment” was cut in half just four years later. That’s a lot of risk to take for the prospect of “hedging” against the loss of purchasing power in the paper money in your wallet.
Now, Bitcoin is becoming a pretty polarizing “asset class.” The gold bugs get very emotional if you argue against the value of owning gold. Those that own Bitcoin seem to have a similar reaction. But Bitcoin, like gold, is a tough one to value. You buy it because you hope someone is going to buy it from you at a higher price.
So is Bitcoin (cryptocurrencies) an investment? Sophisticated investors that are involved, likely see it as similar investment to a startup. It has traction. It has a lot of risks. It could go to zero. Or it could pay them multiples of what they pay for it. But they thrive on diversification. When they have a large portfolio of these types of bets, when a few payoff, they put up nice returns. Bitcoin may be one of the few, or it may not.
U.S. stocks printed new record highs again today, as numbers come in for the Black Friday period, which carries through Cyber Monday.
The National Retail Federation has projected about 4% growth in the number from last year, which is better than the past two years, but a bit softer than 2014, 2011 and 2010.
But it’s a safe bet we’ll see better than expected numbers before the shopping season is over. If we take the Atlanta Fed’s GDP forecast for the fourth quarter (which admittedly changes like the wind), we’re on pace to have the second hottest growth for the year, since the Great Recession. And, of course, consumers are in as healthy a position as they’ve been in a long time—housing prices are nearing pre–crisis levels, household net worth is on record highs, consumer credit is on record highs, but so is consumer credit worthiness.
Add to that: The stock market is at record highs. The unemployment rate is 4.1%. Inflation is low. Gas is cheap ($2.38), and stable. Mortgage rates are under 4%, and stable. And you can borrow money for five years at 2% to buy a car.
And then there’s the confidence the economy is improving and that a raise is coming (through tax cuts and a corporate tax cut which should ultimately drive wages higher). Here’s a look at the Conference Board’s Consumer Confidence Index—at 17–year highs…
Later in the week we’ll hear from OPEC on their plans to extend their production cuts to keep the upward pressure on oil prices. We’ve talked about the case for an explosive move higher in oil prices, given the impact the oil price crash of last year has had on supply. Meanwhile demand has picked up, and OPEC has been cutting production into this scenario. As we sit about 20% higher in oil prices since OPEC announced its first production cut in eight years (last November), there are now some building voices for much higher oil prices as we head into this week’s meeting.
We talked last week about what may be the bottom in the “decline of the retail store” story.
Walmart may be leading the way back for traditional retail. And it’s doing so, in part, by pouring money into e-commerce to fight back against Amazon.
Just as the energy industry has been beaten down by the rise of electric vehicles and clean energy, the bricks and mortar retail industry has been beaten down by the rise of Amazon. But those energy and retail companies that have survived the storm may have magnificent comebacks. They’re getting fiscal stimulus, which will lower their tax rates and should pop consumer demand. And they may be getting help with the competition. The regulatory game may be changing for the Internet giants that have nearly put them out of business.
Over the past decade, the Internet giants of today have had a confluence of advantages. They’ve played by a different rule book (one with practically no rules in it). And many of the giants that have emerged as dominant powers today, did so through direct government funding or through favor with the Obama administration.
One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007. In 2008, the DNC convention in Denver gave birth to Airbnb. 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. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation.
The U.K.’s Guardian has a very good piece (here) on what this has turned into, and the power that has come with it, calling it “winner takes all capitalism.”
This all makes today’s decision to repeal “net neutrality” very interesting. Is this the event that will ultimately lead to the reigning in the powerful tech giants? For the big platforms like Google, Twitter, Facebook and Uber, will it lead to transparency of their practices and accountability for the actions of its users? If so, the business models change and the Wild West days of the Internet may be coming to an end.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click hereto learn more.
As we head into the Thanksgiving day weekend, let’s talk about oil and Saudi Arabia.
On Thanksgiving night three years ago oil was trading around $73, when the Saudis blocked a vote on an OPEC production cut. Oil dropped 10% that night, and that set off a massive oil price bust that ultimately bottomed out early last year at $26.
The goal of the Saudis was to put the emerging, competitive U.S. shale industry out of business–to force oil prices lower so that these shale companies couldn’t product profitably. The plan: They go away, and Saudi Arabia retains its power on global oil. It nearly worked. Shale companies started dropping like flies, with more than 100 bankruptcies between 2015 and 2016.
But cheap oil had broader implications for the global economy, following the Great Recession. It exposed the global banks that had lent the shale industry hundreds of billions of dollars.
Additionally, collapsing oil prices directly weighed on inflation measures and the inflation expectations. That was bad news for the central banks that had committed trillions of dollars to avert a deflationary spiral and promote a normalization of inflation. High inflation is bad. Deflation is worse. Once a deflationary mindset takes hold, it feeds into more deflation. Central banks can raise rates to kill inflation. They have few tools to fight deflation (especially after the financial crisis).
So cheap oil became bad news for the fragile global economic recovery. With that, central banks stepped in early last year and responded with coordinated easing (which included direct asset purchases, which likely included outright oil and oil-related ETFs). Oil bottomed the day the Bank of Japan intervened in the currency market, and prices jumped 50% in a month as other major central banks followed with intervention.
Now, the other piece of this story: cheap oil damaged the shale industry and the global economy, but it also damaged the same folks that set the collapse into motion–Saudi Arabia and other oil producing countries. These countries, which are heavily reliant on oil revenues, have seen their budget deficits balloon. So, with all of the above in mind, in November of last year, the oil producing countries (led by Saudi Arabia) reversed course on their plan, by promising the first production cuts since 2008.
Oil prices have now recovered to the mid-$50s. And since OPEC announced production cuts last year at this time, U.S. petroleum supply has drawn down 5%. Meanwhile, global demand is running far hotter than forecasts of last year. Yet, OPEC is extending their production cuts into this market and may get even bolder next week at their November meeting. Why? Because now it suits them. Remember, Saudi Arabia’s next king has been cleaning house over the past two weeks, in the process of seizing hundreds of billions of dollars from his political foes. Higher oil prices help his efforts to reshape the Saudi economy.
As liquidity dries up into the end of year and holidays, we may see oil find its way back up toward those November 2014 levels (low $70s)–where the whole price-bust debacle started.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click hereto learn more.
Yesterday we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon, and to challenge the idea that Amazon will crush everyone.
It’s beginning to look like the “decline of the retail store” may have bottomed too.
And it so happens that it may have bottomed precisely when a new ETF launched to capitalize on that story. ProShares launched it yesterday, and that is the name of it –ProShares Decline Of The Retail Store ETF. It gives you short exposure to bricks and mortar retailers.
It’s off to a bad start–down 3% in the first day of trading.
For retail, the week started with a big earnings beat for Advance Auto Parts (the stock was up as much as 20% on Tuesday). Then it was Wal-Mart. And today we had earnings beats in Foot Locker and Abercrombie and Fitch.
With this, while the Dow and S&P 500 were down on the day, the small-cap (Russell 2000) was up nicely. Here’s why …
As bad as retail has been, the energy sector remains the worst performing for the year–down 11% year-to-date as a sector and the only sector in the red. This, as oil has reversed from down 22% on the year, to up around 5%, with a very bullish outlook.
This sets up for a big year ahead for energy stocks. And if you believe the worst of the economic challenges are behind us, the survivors in retail could have quite a revival–especially if Amazon begins to see more regulatory scrutiny.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click hereto learn more.
After some broad selling across markets yesterday, stocks bounced back today. With that, you might expect interest rates to push up and commodities to be rising too. That was not the case, which continues the trend of the past week (or so) of odd market behavior.
About a tenth of the strength in the S&P 500 can be attributed to Wal-Mart. Wal-Mart had a big earnings beat today with the best sales growth since before the financial crisis.
With that, let’s take a look at how Amazon’s war on traditional retail has affected Wal-Mart.
It wasn’t long ago that Wal-Mart was the biggest company in the world. It topped the Fortune 500 list from 2002 through 2005, and then again in 2007 (with a more than $300 billion market cap). At that time, Amazon was a $25 billion company. And then the financial crisis hit. Wal Mart was almost put out of business because of the global credit freeze. And then we had massive intervention to get credit moving again and to save the economy. With that intervention came a massive fiscal stimulus package. A huge chunk of it flooded into Silicon Valley (pension money followed it).
And, since then, although Amazon was a decade old company at the time, Amazon has had a trajectory similar to the other big tech giants of today. It’s more than 20 times as big today.
For perspective, in 2006, Wal-Mart was a $315 billion company. Today, the U.S. economy is 34% bigger than it was in 2006 (about $5 trillion bigger). And Wal-Mart is 15% smaller than it was in 2006 (at a market cap of $268 billion).
But Wal-Mart has finally started fighting for its life.
They bought a controlling stake in JD.com in the middle of last year to access the growing middle class in China. JD.com is the number two e-commerce site in China, but is rapidly closing the gap between itself and Alibaba (number 1). And JD has competitive advantages over Alibaba, in that, like Amazon, it owns its distribution centers and has control over quality (unlike an ebay and Alibaba). They’ve since upped the stake to 20% and may ultimately buy all of it. And Wal-Mart bought the startup Jet.com in the U.S. in August of last year. If they continue to win share in China through JD.com, this gap between Amazon and Wal-Mart may begin to start closing.
Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.
We talked last week about what may be the bottom in the “decline of the retail store” story.
As we head into the Thanksgiving day weekend, let’s talk about oil and Saudi Arabia.
Yesterday we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon, and to challenge the idea that Amazon will crush everyone.
After some broad selling across markets yesterday, stocks bounced back today. With that, you might expect interest rates to push up and commodities to be rising too. That was not the case, which continues the trend of the past week (or so) of odd market behavior.