Global markets have started the year behaving very well, supporting my view that we’re in the early innings of an economic boom, and we should get another big year for global stock markets.
But, as we discussed heading into the end of 2017, that view isn’t shared by Wall Street or the Fed. For 2018, the Fed is looking for just 2.5% growth. And Wall Street is looking for just 6% growth in stocks (according to this WSJ piece). That’s less than the long term average return on the S&P 500.
Both continue to, somehow, ignore (or underestimate) the influence of fiscal stimulus, which is hitting into an already fundamentally improving economy.
Wall Street was looking for 3% growth in stocks last year. We got almost 20% (better in the Dow). And the Fed was looking for 2.1% growth last year. It will be closer to 3% for full year 2017.
They thought Trump couldn’t get policies legislated. Now we have big tax cuts, meaningful deregulation, the beginnings of a government spending program (started by natural disaster aid), and a massive incentive for companies to repatriate trillions of dollars.
If we add that to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.
As we’ve discussed, we’ve yet to experience the explosive bounce in economic growth that is typical of post-recession environments. This is set up to be that kind of year — maybe something north of 4%, which should finally move the needle on inflation. If that’s the case, 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.
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.
We are off to what will be a very exciting year for markets and the economy.
Over the past two years I’ve written this daily piece, discussing the bigslow-moving themes that drive markets, the catalysts for change, and the probable outcomes. When we step back from all of the day to day noise that has distracted many throughout the time period, the big themes have been clear, and the case for higher stocks has been very clear. That continues to be the case as we head into the New Year.
As I’ve said, I think we’re in the early stages of an economic boom. And I suspect this year, we will feel it — Main Street will feel it, for the first time in a long time.
And I suspect we’ll see a 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 mis-trust of the system. All along the way, throughout the recovery period, and throughout a quadrupling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset has been tough. But with the likelihood of material wage growth coming this year (through a hotter economy and tax cuts), we may finally get it. And that gives way to a return of animal spirits, which haven’t been calibrated in all of the economic and stock market forecasts.
With this in mind, we should expect hotter demand and some hotter inflation this year (to finally indicate that the global economy has a pulse, that demand is hot enough to create some price pressures). With that formula, it’s not surprising that commodities have been on the move, into the year-end and continuing today (as the New Year opens). Oil is above $60. The CRB (broad commodities index) is up 8% over the past two weeks – and a big technical breakout is nearing.
This is where the big opportunities lie in stocks for the New Year. Remember, despite a very hot performance by the stock market last year, the energy sector finished DOWN on the year (-6%). Commodity stocks remain deeply discounted, even before we add the influence of higher commodities prices and hotter global demand. With that, it’s not surprising that the best billionaire investors have been spending time building positions in those areas.
This year is set up to handsomely reward the best stock pickers.
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.
Remember, this time last year, the biggest Wall Street investment banks told us stocks would do just 3% in 2017.
They were looking for about 2,300 on the S&P 500. The most aggressive forecast was 2,500 — coming from the Canadian bank, RBC (Royal Bank of Canada).
Here’s another look at the snapshot of those projections for 2017:
They undershot by a lot. The S&P finished just shy of 2,700 for the year. And S&P 500 earnings came in around $131. Wall Street was looking for $127.
But their big miss was underestimating the outlook for “multiple expansion.” The reason: They continue to underestimate the demand for stocks, in a world where ultra-low yields continue to incentivize people to reach for higher returns (i.e. opt for the choice of more risk for more return).
Investors will pay more for each dollar of future earnings if they expect to earn a higher future rate of return. And they have expected just that over the past few years, because 1) central banks promised to keep pumping up asset prices through QE and to continue warding off any shock risks that could derail the recovery for the economy and stocks, and 2) we’ve had the major shift away from austerity, which has promoted a weaker than typical recovery out of recession (and worse, stall speed growth) and toward big and bold fiscal stimulus (one that can potentially return the economy to a more normal, higher long term growth rate).
That’s why the P/E on stocks can and should rise well north of 20 times earnings in this environment, just as it has over the past three years.
The P/E on the S&P 500 was 20 in 2015, 22 in 2016 and 23 for 2017 (on trailing earnings). In each case, we came into the year, with the market undervaluing earnings — given what people have proven to be willing to pay up for them.
The market is now valuing the New Year’s earnings at 19 times earnings. And that ignores the probability that actual earnings can come in much better than estimates next year, given the corporate tax cut. That would ratchet down that “19 times” earnings valuation – making stocks cheaper.
For help building a high potential portfolio for 2018, follow me in TheBillionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 45% over the past two years. Join me here!
The Fed decided to hike interest rates by another quarter point yesterday. That was fully telegraphed and anticipated by markets. That’s the third rate hike this year, and the fifth in the post-crisis rate hiking cycle.
Still, the yield on the 10-year Treasury note (the benchmark market determined interest rate), moved lower today, not higher — and sits unchanged for the year.
We talked earlier in the week about the biggest central bank event of the month. It wasn’t the Fed, but it will be in Japan next week. Japan’s policy on pegging their 10-year yield at zero has been the anchor on global interest rates.
When they signal a change to that policy, that’s when rates will finally move.
With this divergence between what the Fed is doing (setting rates) and what market rates are doing (market-determined), people have become convinced that the interest rate market is foretelling a recession coming — i.e. short term rates have been rising, while longer term rates have been quiet, if not falling. For example, when the Fed made it’s first rate hike in December of 2015, the 30-year government bond yield was 3%. Today, after five rate hikes on the overnight Fed determined interest rate, the 30-year is just 2.72% (lower, not higher than when the Fed started).
This dynamic has created a flattening yield curve. That gets people’s attention, because historically, when the yield curve has inverted (short term rates rise above long term rates), recession has followed every time since 1950, with one exception in the late 60s.
And it turns out, this “flattening of the yield curve” indicator, historically (and ultimate inversion, when it happens), is typically driven by monetary policy (i.e. rate hikes — check). In these cases, the market anticipates the Fed killing growth and eventually leading rate cuts! They find more certainty and stability in owning longer term bonds (leaving short term bonds pushing those rates up and moving into long term bonds, pushing those rates down — inverting the curve).
The question, is that the case this time? Or is this time different. It’s rarely a good idea in markets to think this time is different than the past. But in this case, following trillions of dollars of central bank intervention and a near implosion in the global economy, it’s probably safe to say that this time is certainly different than past recessions. Though the Fed is in a hiking cycle, rates remain well below long term averages. And, as we know, we have unconventional monetary policies at work in other key areas of the world — stoking liquidity, growth and skewing demand for U.S. Treasuries (which suppresses those long term interest rates).
So the flattening yield curve fears are probably misplaced, especially given big fiscal stimulus is coming. And when Japan moves off of its “zero yield policy,” the U.S. yield curve may steepen more quickly than people think is possible.
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.
This morning we got a report that smallbusiness optimism hit the second highest level in the 44-year history of the index.
Here’s a look at that history …
optimism
Remember, last year, following the election, this index that measures the outlook from the small business community had the biggest jump since 1980 (as you can see in the chart).
Why were they so excited? For most of them, they had dealt with a decade long crisis in their business, where they had credit lines pulled, demand for their products and services were crushed, healthcare costs were up and their workforce had been slashed. If they survived that storm and were still around, any sign that there could be a radical change coming in the environment was a good sign.
A year ago, with a new administration coming in, half of the smallbusiness owners surveyed, expected the economy to improve. That was the largest agreement of that view in 15 years.
They’ve been right.
Now with an economy that will do close to 3% growth this year, still, about half of small business owners expect the economy to improve further from here.
No surprise, they are more than pleased with the tax cuts coming down the pike. They’ve seen regulatory relief over the past year. And, according the chief economist for the National Federation of Independent Businesses, small business owners see the incoming Fed Chair (Powell) as more favorable toward business (and market determined decisions) than Yellen. And he says, “as long as Congress and the President follow through on tax reform, 2018 is shaping up to be a great year for small business, workers, and the economy.”
This reflects the theme we’ve talked about all year: the importance of fiscal stimulus to bridge the gap between the weak economic recovery that the Fed has manufactured, and a robust sustainable economic recovery necessary to escape the crisis era. This small business survey tends to correlate highly with consumer confidence. Consumer confidence drives consumption. And consumption contributes about two-thirds of GDP. So, by restoring confidence, the stimulative policy actions (and the anticipation of them) has been self-reinforcing.
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 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.
With the potential government shutdown looming, let’s look at some perspective on government debt.
As we discussed early in the week, the policy execution pendulum for the Trump administration has swung over the past four months, from winless to potentially two big wins by the year end.
As I’ve said, with a massive corporate tax cut coming and big incentives for companies to build, invest and bring money back home (from overseas), we should be entering an economic boom period — one we have desperately needed, post-recession, but haven’t gotten.
Still, there are people that hate the tax cut idea. They think the economy is fine shape. And that debt is the problem. The Joint Committee on Taxation is the go to study for those that oppose the tax cuts. The study shows not a lot of growth, and disputes the case that the tax cuts will pay for themselves through growth.
What the headlines that cite this study don’t say, is that the study has huge assumptions that drive their conclusions. Among them, that creating incentives to repatriate $3 trillion in offshore corporate money will only contribute about a fifth of the taxable value of that amount of money. And they assume that the Fed will hike rates at a pace to precisely nullify any gains in economic activity (which wouldn’t be smart, unless they want to go revisit another decade of QE).
Now, with this study in mind, people are fearing the debt implications, on what is already a large debt load. And they fear that global investors might start dumping our Treasuries, as a result.
This has been a misguided fear throughout much of the post-financial crisis environment. Conversely, international investors have flocked into our Treasuries (lending us money), as the safest parking place for their capital. Why?
For perspective on the debt load and the fiscal stimulus decision, as we discussed earlier this week: “The national debt is a big number. But 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.”
Add to this, 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 it’s weight).
You can see in the chart above, the increasing debt situation isn’t specific to the U.S.
The euro zone tried the path of austerity back in 2011, and quickly found themselves back in recession, only re-emerging by promising to backstop the failing countries in the monetary union, and launching a massive QE program.
What about the government shutdown threats? Would it derail stocks? Stocks went up about 2% the last time the government shutdown in 2013. Before that was 1995-96 (stocks were flat) – and 1990 (stocks were flat).
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.
As we continue to creep toward the December 13th Fed meeting, the Fed funds futures are pricing in a 90% chance the Fed will hike by another quarter point.
And now we have a big tax cut package coming. Stocks are up big for the year. Industrial metals are up big for the year. But the benchmark 10 year treasury remains flat.
This has been great news for borrowers. It’s kept the housing market on it’s hot trajectory. It’s kept auto demand going. But the flattening yield curve sends a cautionary message to markets. For those that have been nervous about valuations and the “what could go wrong” scenarios, they lean on the yield curve to support their view, assuming it may be indicating an ultimate inversion (and therefore, recession).
But if we look across the behavior in yields in Europe and the policy actions in Japan, it looks more like a global bpmd market that is being anchored by Japan’s explicit policy to keep the the Japanese 10 year yield at zero.
But in this environment, things can change with the utterance of a few words. And this dislocation in the interest rate market can change quickly — yields can move very aggressively. We’ve already seen this whipsaw, this year…
Yields bounced off of the bottom nearly a quarter of a point in five days.
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
