January 22, 7:00 pm EST

We talked last week about the prospects of a government shutdown and the little-to-no impact it would likely have on markets.

Here we are, with a shutdown as we open the week, and stocks are on to new record highs.  Oil continues to trade at the highest levels of the past three years.  And benchmark global interest rates continue to tick higher.

As we look ahead for the week, fourth quarter earnings will start rolling in this week.  But the big events of the week will be the Bank of Japan and European Central Bank meetings. The Bank of Japan (the most important of the two) meets tonight.

Remember, we’ve talked about the disconnect we’ve had in government bond yields, relative to the recovering global economy and strong asset price growth (led by stocks).  And despite five Fed rate hikes, bond yields haven’t been tracking the moves made by the Fed either.  The U.S. 10-year government bond yield finished virtually unchanged for the year in 2017.

That’s because the monetary policy in Japan has been acting as an anchor to global interest rates.  Their policy of pegging their 10-year yield at zero, has created an open ended, unlimited QE program in Japan.  That means, as the forces on global interest rates pulls Japanese rates higher, away from zero, they will, and have been buying unlimited amounts of Japanese Government Bonds (JGBs) to force the yield back toward zero.  And they do it with freshly printed yen, which continues to prime the global economy with fresh liquidity.

So, as we’ve discussed, when the Bank of Japan finally signals a change to that policy, that’s when rates will finally move–and maybe very quickly.

If they choose, tonight, to signal an end of QE could be coming, even if it’s a year from now, the global interest rate picture will change immediately.  With that in mind, here’s a look at the U.S. ten year yields going in …

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January 22, 11:00 am EST

With a government shutdown over the weekend, today I want to revisit my note from last month (the last time we were facing a potential government shutdown) on the significance of the government debt load.

The debt load is an easy tool for politicians to use.  And it’s never discussed in context.  So the absolute number of $19 trillion is a guarantee to conjure up fear in people – fear that foreigners may dump our bonds, fear that we may have runaway inflation, fear that the economy is a house of cards.  So that fear is used to gain negotiating leverage by whatever party is in a position of weakness.  For the better part of the past decade, it was used by the Republican party to block policies.  And now it’s being used by the Democratic party to try to block policies.

Now, the federal debt is a big number.  But so is the size of our economy – both about $19 trillion.  And while our debt/GDP has grown over the past decade, the increase in sovereign debt relative to GDP, has been a global phenomenon, following the financial crisis.  Much of it has to do with the contraction in growth and the subsequent sluggish growth throughout the recovery (i.e. the GDP side of the ratio hasn’t been carrying its weight).

You can see in the chart below, the increasing debt situation isn’t specific to the U.S.

Now, we could choose to cut spending, suck it up, and pay down the debt.  That’s called austerity.  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.  Just ask Europe.  After the depths of the financial crisis, they went the path of tax hikes and spending cuts, and by 2012 found themselves back in recession and a near deflationary spiral – they crushed the weak recovery that the European Central Banks (and global central banks) had spent, backstopped and/or guaranteed trillions of dollars to create.

The problem, in this post-financial crisis environment:  if the major economies in the world sunk back into recession (especially the U.S.), it would certainly draw emerging markets (and the global economy, in general) back into recession.  And following a long period of unprecedented emergency monetary policies, the global central banks would have limited-to-no ammunition to fight a deflationary spiral this time around.

Now, all of this is precisely why the outlook for the U.S. and global economy changed on election night in 2016.  We now have an administration that is focused on growth, and an aligned Congress to overwhelm the political blocking.  That means we truly have the opportunity to improve our relative debt-load through growth.

In the meantime, despite all of the talk, our ability to service the debt load is as strong as it’s been in forty years (as you can see in the chart below).  And our ability to refinance debt is as strong as it’s been in sixty years.

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government shutdown, washington, wall street, economy

January 22, 9:00 am EST

Last week we talked about the big adjustment we should expect to come in the inflation picture. With oil above $60 and looking like much higher prices are coming, and with corporate tax cuts set to fuel the first material growth in wages we’ve seen in a long time (if not three decades), this chart (inflation expectations) should start moving higher…

And with that, market interest rates should finally make a move. As we discussed last week, we will likely have a 10-year yield with a “3” in front of it before long.

Yields have already popped nearly a quarter point since the beginning of the year. But that’s just (finally) reflecting the December Fed rate hike. What hasn’t been reflected in rates, as it has in stocks, is the different growth and wage pressure outlook this year, thanks to the tax cut. Last year, people could argue it wasn’t going to happen. This year, it’s in motion. And the impact is already showing up. We should expect it to show in the inflation data, sooner rather than later.

With that, today we’re knocking on the door of a big breakout in rates (as you can see in the chart below) — which comes in at 2.65%…

As we’ve discussed, the anchor for the benchmark U.S. 10-year yield (and for global rates), even in the face of a more optimistic global economic growth outlook, has been Japan’s unlimited QE (driven by its policy to peg its 10-year at a yield of zero). On that note, last week, the former head of the central bank in India, Raghuram Rajan (a highly respected former central banker), said he thinks both Europe and Japan will exit emergency policies sooner than people think. That’s a positive statement on the global economy and a warning that global rates should finally start moving.

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January 16, 4:00 pm EST

Stocks reversed after a hot opening today.  With a quiet data week ahead, the focus is on the prospects of a government shutdown.

If this sounds familiar to you, it should.  Government debt is the, often played, go-to political football.

It was only last month that we were facing a similar threat.  But with some policy-making tailwinds on one side of the aisle, the fight was politically less palatable in December.  With that, Congress passed a temporary funding bill to kick the can to this month.

And just three months prior to that, in September, we had the same showdown, same result.  The “government shutdown” card was being played aggressively until the hurricanes rolled through. From that point, politicians had major political risk in trying to fight hurricane aid.  They kicked the can to December to approve that funding.

Now, the Democrats feel like they have some leverage, and their using the threat of a government shutdown to make gains on their policy agenda.  So, how concerned should we be about a government shutdown (which could come on Friday)? Would it derail stocks?

If you recall, there was a lot of fuss and draconian warnings about an impending government shutdown back in 2013.  The government was shutdown for 16 days.  Stocks went up about 2%.    Before that was 1995-1996 (stocks were flat), and 1990 (stocks were flat).

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January 12, 4:00 pm EST

Stocks have now opened the year up 4%.  Global interest rates are on the move, with the U.S. 2-year Treasury trading above 2% for the first time since 2008.  Oil is trading in the mid $60s.  And base metals are trading toward the highest levels of the young, two-year bull market in commodities.

This all looks like a market that’s beginning to confirm a real, sustainable economic recovery – anticipating much better growth than what we’ve experienced over the past decade.

If that’s the case, we should expect a big adjustment coming in inflation readings.  And with that, we should expect a big adjustment coming for global interest rates.  We’ll likely have a 10-year yield with a “3” in front of it before long. And that will have a meaningful impact on key consumer borrowing rates (especially mortgages).

On the inflation note, we’ve talked this week about the impact of higher oil prices on inflation and the impact it may have on the path of central bank policies (most importantly, the speed at which QE may be coming to an end in Europe and Japan).

You can see in this chart, the very tight relationship of oil prices and inflation expectations.

Now remember, one of the best research-driven commodities investors (Leigh Goehring) thinks we may see triple-digit oil prices — this year! This has been a very contrarian viewpoint, but beginning to look more and more likely.  He predicted a surge in global oil demand (which has happened) and a drawdown on supplies (which has been happening at “the fastest rate ever experienced”).  He says, with the OPEC production cuts (from November 2016), we’re “traveling down the same road” as 2006, which drove oil prices to $147 barrel by 2008.

Bottom line, this is an inflationary tale.  If we had to search for a market that might be telling us this story (i.e. inflation is finally leaving the station), the first place people might look is the price of gold. What has gold been doing?  It has been on a tear.  Gold is up 8.3% over the past month.

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January 11, 4:00 pm EST

Yesterday we talked about the move underway in interest rates.  And we talked about the media’s (and Wall Street’s) desperate need to fit a story to the price.

On that note, they had been attributing rising U.S. rates to a vaguely attributed report from Bloomberg that suggested China might find our bonds less attractive.  As I said, that type of speculation and chatter isn’t new (i.e. not news).  Not only was it not news, China called it “fake news” today.

But as we discussed yesterday, rates are on the move for some very simple fundamental reasons. It’s the increasing probability that we will have the hottest U.S. and global growth in the post-crisis era, this year — underpinned by fiscal stimulus.  And that’s inflationary.  That’s bullish for interest rates (bearish for bonds).

So, again, money may just be in the early stages of moving OUT of bonds and cash, and BACK into stocks.

But, as we’ve also discussed, the real catalyst that will unshackle market interest rates from (still) near record low levels (globally) is the end of global QE.

And that will be determined by the central banks in Europe and Japan.  On that note, the European Central Bank has already reduced its monthly asset purchases (announced last October), and they’ve announced a potential end date for QEin September of 2018.  This morning, we heard the minutes from the most recent ECB meeting.  And the overwhelming focus, was on stepping up the communication about the exit (the end of emergency policies).  And don’t be surprised if European governments follow the lead of the U.S. with tax cuts to accompany the exit of QE.

In support of this outlook, the World Bank just stepped up growth expectations for the global economy for 2018 to 3.1%, saying 2018 is on track to be the first year since the financial crisis that the global economy will be operating at full capacity.

With the above in mind, you can see in this next chart just how disconnected the interest rate market is from the economic developments.

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January 9, 4:00 pm EST

Interest rates are on the move today. So is oil. And the latter has a lot to do with the former.

For much of the past quarter we’ve talked about how disconnected the interest rate market has been from the stock market and the economy.

With stocks putting up 20% last year, the economy growing at close to 3% and unemployment at 4%, and with FIVE Fed rate hikes now in this tightening cycle, the yield on the 10-year Treasury has defied logic.

But as we’ve discussed, we should expect that logic to be a little warped when we’re coming out of an unprecedented global economic crisis that was combatted by an unprecedented and globally coordinated monetary policy. And that continues to create dislocations in financial markets. Specifically, when global central banks continue to print money, and indiscriminately buy U.S. Treasurys with that freshly printed money (i.e. the dollars the trade for it), they will keep market rates pinned down. And they have done just that. Of course, that helps fuel the U.S. and global recovery, as it keeps borrowing and service rates cheap for things like mortgages, consumer loans, corporate debt and sovereign debt.

But last month, we talked about where the real anchor now exists for global interest rates. It’s in Japan. As long as Japan is pegging the yield on the 10-year Japanese government bond at zero, they will have license to print unlimited yen, and buy unlimited global government bonds, and anchor rates.

What would move Japan off of that policy? That’s the question. When they do abandon that policy (pegging JGB yields at zero), it will signal the end of QE in Japan and the end of global QE. Rates will go on a tear.

With that the architect of the stimulus program in Japan, Shinzo Abe, said today that he would keep the pedal to the metal, but indicated a possibility that they could achieve their goal of beating deflation this year.

That sent global rates moving. The benchmark 10-year yield jumped to 2.54% today, the highest since March of last year.

Another big influence on rates is, and will be, the price of oil. As we’ve discussed, the price of oil has played a huge role in the Fed’s view toward inflation. And that influence (of oil prices) on the inflation view is shared at other major central banks.

On that note, oil broke above $63 today, the highest levels since 2014.

Remember we looked at this chart for oil back in November, which projected a move toward $80.

January 8, 4:00 pm EST

Heading into the end of last year, we talked about the regulatory scrutiny starting to emerge toward the big tech giants (Facebook, Apple, Amazon, Netflix, Google… Tesla, Uber, Airbnb…) – and the risk that the very hot run they’ve had “could be coming to an end.”

These companies have benefited from a formula of favor from the Obama administration, which included regulatory advantages and outright government funding (in the case of Tesla). That created a “winner takes all” environment where this group of startups and loss-laden ventures, some with questionable business models, were able to amass war chests of capital, sidestep enduring laws, and operate without the constraints of liabilities (including taxes, in some cases) that burdened its competitors.

With the screws now beginning to tighten, under a new administration, and with the tailwinds of economic stimulus heading into the new year, I thought 2018 may be the year of the bounce back in the industries that have been crushed by the internet giants.

Among the worst hit, and left for dead industry, has been retail.

Last year, retail stocks looked a lot like energy did in the middle of 2016. If you were an energy company and survived the crash in oil prices to see it double off of the bottom, you were looking at a massive rebound. Some of those stocks have gone up three-fold, five-fold, even ten-fold in the past 18 months.

Similarly, if you’re a big-brand bricks and mortar retailer, and you’ve survived the collapse in global demand–and a decade long stagnation in the global economy–to see prospects of a 4% growth economy on the horizon, there’s a clear asymmetry in the upside versus the downside in these stocks. These are stocks that can have magnificent comebacks.

Remember, back in November we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon (you can see that again, here). In support of that thesis, the earnings numbers that came in for retail for the third quarter were strong. And now we’re getting a glimpse of what the fourth quarter will look like, as several retailers this morning reported strong holiday sales, and upped guidance on the fourth quarter.

Just flipping through a number of charts on retail stocks, the bottom appears to be in on retail – with many bottoming out in the September-November period last year. Since then, to name a few, Ralph Lauren is up 26%, Michael Kors is up 36%, Under Armour is up 42% and Footlocker is up 64%. The survivors have been comebacks as they’ve weathered the storm and now are blending their physical presence with an online presence.

By the time you get a ETF designed to bet against the survival of bricks and mortar retail, the bottom is probably in. That ETF, the Decline Of The Retail Store (EMTY), launched on November 17 and has gone straight down since.

For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years.  And 25% of our portfolio is in commodities stocks. You can join me here and get positioned for a big 2018.

January 5, 4:00 pm EST

We’ve talked this week about the potential for hotter demand and hotter economic growth for 2018.

Now, what’s been a big drag on this goal of achieving a hotter economy, has been wage growth.  That has been the glaring indicator, throughout the past decade, that the economy has been sluggish and vulnerable – and in need of fiscal stimulus.

Though the data on job additions and unemployment have been strong, workers have had little-to-no leverage in commanding higher wages.  We had more evidence of that in this morning’s job report. December wages came in at just a 2.5% annual change.

You can see in the chart above, the weak wage pressures coming out of the depths of the crisis.  That’s despite an unemployment rate that has fallen from 10% to 4% – what appears to be a tight job market. In a tight job market, employees should be able to command higher wages.  That hasn’t been the case.  That’s because the job market has been riddled with underemployment.  And underemployment has been driven, by both job seekers and job producers, from low confidence in business conditions and in the economic outlook.

This is where the new tax bill comes in.

The Tax Foundation has said the corporate tax rate cut should double the current annual change in wages. And since the tax bill has been signed, we’ve already seen huge companies cut bonus checks to employees.  If it does indeed, finally, create upward pressure in wages, then the inflation picture (which has been dead) becomes a big focus for the year.

The latest inflation reading (the Fed’s favored core PCE) is still well below the Fed’s 2% target.  Wage pressures will get inflation moving.  And among the biggest beneficiaries in this scenario will be commodities.

Remember, we looked at this chart of broad commodities earlier this week…​

And if inflation starts moving this year, this is another chart that has a big move in store (bonds)…

As I said earlier this week, despite the quadrupling of the stock market from the 2009 bottom, money may just be in the early stages of moving out of bonds and cash, and back into stocks.