We talked yesterday about run up in bitcoin. The price of bitcoin jumped another 14% today before falling back.
As I said yesterday, it looks like Chinese money is finding it’s way out of China (despite the capital controls) and finding a home in bitcoin (among other global assets). If you own it, be careful. The last time the price of bitcoin ran wild, was 2013. It took about 11 days to triple, and about 18 days to give it all back. This time around, it’s taken two months to triple (as of today).
If you’re looking for a warning signal on why it might not be sustainable (this bitcoin move), just look at the behavior across global markets. It’s not exactly an environment that would inspire confidence.
Gold is flat. Interest rates are soft. Stocks are constantly climbing. Commodities are quiet, except for oil — which fell back below $50 today on news that OPEC did indeed agree to extend its production cuts out to March of next year (bullish, though oil went south).
When the story is confusing, conviction levels go down, and cash levels go up (i.e. people de-risk). And maybe for good reason.
In looking at the bitcoin chart today, I thought back to the run up in Chinese stocks in early 2015. Here’s a look at the two charts side by side, possibly influenced by a lot of the same money.
The crash in Chinese stocks took global markets with it. It’s often hard to predict that catalyst that might prick a bubble and even harder to see the links that might lead to broader market instability. In this case, though, there are plenty of signs across markets that things are a little weird.
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Stocks continue to bounce back today. But the technical breakdown of the Trump Trend on Wednesday
still looks intact. As I said on Wednesday, this looks like a technical correction in stocks (even considering today’s bounce), not a fundamental crisis-driven sell-off.
With that in mind, let’s take a look at the charts on key markets as we head into the weekend.
Here’s a look at the S&P 500 chart….
For technicians, this is a classic “break-comeback” … where the previous trendline support becomes resistance. That means today’s highs were a great spot to sell against, as it bumped up against this trendline.
Very much like the chart above, the dollar had a big trend break on Wednesday, and then aggressively reversed Thursday, only to follow through on the trend break to end the week, closing on the lows.
On that note, the biggest contributor to the weakness in the dollar index, is the strength in the euro (next chart).
The euro had everything including the kitchen sink thrown at it and it still could muster a run toward parity. If it can’t go lower with an onslaught of events that kept threatening the existence of the euro, then any sign of that clearing, it will go higher. With the French elections past, and optimism that U.S. growth initiatives will spur global growth (namely recovery in Europe), then the European Central Bank’s next move will likely be toward exit of QE and extraordinary monetary policies, not going deeper. With that, the euro looks like it can go much higher. That means a lower dollar. And it means, European stocks look like, maybe, the best buy in global stocks.
A lower dollar should be good for gold. As I’ve said, if Trump policies come to fruition, inflation could get a pop. And that’s bullish for gold. If Trump policies don’t come to fruition, the U.S. and global growth looks grim, as does the post-financial crisis recovery in general. That’s bullish for gold.
This big trendline in gold continues to look like a break is coming and higher gold prices are coming.
With all of the above, the most important chart of the week is probably this one …
The 10 year yield has come all the way back to 2.20%. The best reason to wish for a technical correction in stocks, is not to buy the dip (which is a good one), but so that the pressure comes out of the interest rate market (and off of the Fed). The run in the stock market has clearly had an effect on Fed policy. And the Fed has been walking rates up to a point that could choke off the existing economic recovery momentum and, worse, neutralize the impact of any fiscal stimulus to come. Stable, low rates are key to get the full punch out of pro-growth policies, given the 10 year economic malaise we’re coming out of.Invitation to my daily readers: Join my premium service members at Billionaire’s Portfolio to hear more of my big picture analysis and get my hand-selected, diverse portfolio of the most high potential stocks.
Yesterday, following the slide in stocks, we looked at some charts on stocks, gold and the dollar. We talked about the media and Wall Street’s need to fit price action to a story. And we asked if the story did indeed warrant fitting it to the price action. Was a crisis beginning or just a correction for stocks?The answer: It still looks like a market that values fiscal stimulus and structural change over political mudslinging and scandal. For stocks, the news may have been the catalyst to start a healthy technical correction.
Today, the market behavior appears to support that view.
Now, with the idea that a technical correction is (I think) underway for stocks, and maybe for months, until we get a better handle on policy action, remember this: a correction in stocks is a buying opportunity.
Major asset classes, over time, will rise (stocks, bonds, real estate). The value of these core assets will grow faster than the value of cash.
That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.
With that said, as an average investor that is not leveraged, dips in stocks, particularly U.S. stocks—the largest economy in the world, with the deepest financial markets—should be bought, because in the simplest terms, over time, the broad stock market has an upward sloping trajectory. Instead, dips in stocks tend to create fear, and fear creates selling, at precisely the time we should be buying.
With this in mind, we’ve had a brief dip of about 4% in stocks within the “Trump trend” (the post–election rise in stocks). A typical correction is around 10%. But strong bull markets tend to have shallow retracements. A 6%–10% correction in stocks would take us back to the 200–day moving average (minimum), and maybe as low as 2,200 in the S&P 500.
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Yesterday we talked about the disconnect between the daily drama from the media in Washington (doom and gloom), and what the markets have been communicating (an economic expansion is underway). Today, you might think that connection is happening — the doom and gloom scenario is finally being realized in markets. Probably not.
For perspective: As of the close yesterday, the Nasdaq was up 18% year to date (just five months in). Gold was in the middle of a three year range. Market interest rates (the U.S. 10-year government bond yield) was just above the middle of the range of the past four years. The dollar was not far off its strongest levels in 15 years.
Today the media has explicitly printed the headline of impeachment for Trump (actually, they’ve run those headlines a various times over the past several months). Nonetheless, stocks (the S&P 500) today are off by 1.6%.
This gets the bears very excited. I saw the story about consumer debt, surpassing 2008 levels, floating all over the internet today. People tried to make the bubble connection — implying another debt crisis was coming.
The real story: Total household indebtedness finally surpassed the previous peak from 2008. That’s precisely what the Fed was attempting to do with zero interest rates. Make existing debt cheaper to manage, and at some point, break the psychology of the debt burden and get people borrowing (at ultra-cheap rates), investing and spending again. Otherwise, our economy and the world economy would have gone into a deflationary spiral.
That said, as I’ve found in my 20 years in this business, people tend to find a story to fit the price. The story hadn’t been fitting the price for much of the past six months. Today, it seems pretty easy. See the chart below of stocks ….
We had the first breakdown of the Trump trend in March, but all it could muster was about a 3% correction. This looks much more like a technical correction (a double top, and trend break today) – than a Trump impeachment trade. I suspect with the earnings catalyst behind us, this is the start of a deeper technical correction, which is healthy in a bull market. And it may take significant progress made in tax reform to see new highs in the broad stock indicies. We shall see.This next chart is the dollar index. This too had a significant trend break today. This translates into a higher euro, which would spell out a story where Europe is improving and the ECB is able in start discussing exit from QE.
What about the Trump/Comey saga? Aren’t people dumping dollars because of that? Not likely. If that were potentially destabilizing to the U.S., it would be destabilizing to the global economy, and people would buy dollars not sell them.
With that in mind, here’s gold. Gold sits on the brink of a big trend break (higher). When looking at gold and the dollar, it’s important to remember this: back in the heat of the crisis, gold and the dollar moved together, higher! That’s opposite of the traditional correlation. They moved higher together because people bought gold and they bought dollars (and dollar denominated assets, like Treasuries) as they viewed it the safest alternative in the world to park money – with the chance of getting it back.
With a break higher in gold looking imminent, and the dollar looking lower, it looks like a more traditional relationship. It’s not communicating crisis.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
The noise surrounding the Trump administration continues by the day, as the media tries desperately to prosecute the elected President at daily briefings.The chaos and dysfunction message is loud, but markets aren’t hearing it. The real story is very different. Stocks continue to surge. Stock market volatility continues to sit 10-year (pre-crisis) lows. The interest rate market is much higher than it was before the election, but now quiet and stable. Gold, the fear-of-the-unknown trade, is relatively quiet. This all looks very much like a world that believes a real economic expansion is underway, and that a long-term sustainable global economic recovery has supplanted the shaky post-crisis (central bank-driven) recovery that was teetering back toward recession.
Why is the messaging so different? Remember, the financial media and Wall Street are easily distractible. Not only do they have short attention spans, but they’ve been trained throughout their careers to find new stories to obsess about. They need to interpret, pontificate, strategize to feel valued. Approaching their jobs with the idea that a slow moving dominant theme is at work is just too boring.
This is the disconnect between markets and the narrative. We have major central banks around the world that continue to print money. These central banks buy assets with that freshly printed money. That means, stocks, bonds, commodities go higher. And now we have everyone’s fate (the global economy) tied to the outcome of new policies from the leading economy in the world – efforts to restore sustainable growth through structural reform and fiscal stimulus. That hopeful outlook does nothing but underpin the rise in asset prices (stocks, bonds, commodities, real estate).
Yesterday we got a look under the hood of the portfolios of the biggest money managers in the world, via their 13F filings (required quarterly portfolio disclosures to the SEC). It’s been clear that the biggest and best, embrace this big theme, and have been aggressively positioning to take advantage of the very bullish proposed policy tailwinds for stocks, which are: 1) a corporate tax rate cut, which will go right to the bottom line for profitable companies. Not surprisingly, which stocks have been leading the way in the climb in the indicies? The one’s that make a lot of money (Apple, Microsoft, Google). 2) a repatriation tax holiday that will bring back trillions of dollars onshore, to be paid back to shareholders and put to work in the economy through investment and projects. 3) a trillion dollar infrastructure spend that, regardless of how difficult it may be to legislate, should happen in one form or another.
Among the reports on portfolio holdings yesterday, we heard from the Swiss National Bank. As I said above, don’t forget there are still central banks deeply entrenched in QE and, beyond local government bonds, are buying foreign assets (in large amounts). Switzerland’s central bank has more freshly printed money to put to work every quarter, and has been increasing their allocation to equities dramatically – $80 billion of which is now (as of the end of Q1) in U.S. stocks! That’s a 29% bigger stake than they had at the end of 2016. The SNB is the world’s eighth biggest public investor.
So keep this big theme in mind: Central banks remain involved, but the baton has been passed, from a central bank-driven recovery to a fiscal stimulus-driven recovery. And everyone needs it to work.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As for oil: From the depths of the oil price crash last year, remember, we discussed the prospects for a huge bounce. Oil prices at $26 were threatening to undo the trillions of dollars of work central banks and governments had done to stabilize the global economy. Central banks couldn’t let it happen. After a series of coordinated responses (from the BOJ, China, ECB and the Fed), oil bottomed and quickly doubled.
Also at that time, two of the best oil traders in the world were calling the bottom and calling for $70-$80 oil by this year (Pierre Andurand and Andy Hall). Another commodities king that called the bottom: Leigh Goehring.
Goehring, one of the best commodities investors on the planet, has also laid out the case for $100 oil by next year. He says he’s “wildly bullish” oil in his recent quarterly investor letter at his new fund, Goehring & Rozencwajg.
Goehring argues that the IEA inventory numbers are flawed. He thinks oil the market is already over-supplied and is in a draw, as of May of last year. With that, he thinks the OPEC cuts will ultimately exacerbate the deficit and send prices aggressively higher. He says “we remain ‘wildly’ bullish and believe that there is a very high probability of oil prices reaching triple digits in the first half of 2018.”
Follow This Billionaire To A 172% WinnerIn our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
As we ended this past week, stocks remain resilient, hovering near highs. The Nasdaq had a visit to the 200-day moving average intraweek for a slide of a whopping (less than) 1%, and quickly it bounced back.It’s a Washington/Trump policies-driven market now, and while the media carries on with narratives about Russia and the FBI, the market cares about getting health care done (which there was progress made last week), getting tax reform underway, and getting the discussion moving on an infrastructure spend.We looked at oil and commodities yesterday. Chinese stocks look a lot like the chart on broader commodities. With that, the news overnight about some cooperation between the Trump team and China on trade has Chinese stocks looking interesting as we head into the weekend.
Let’s take at the chart…
While the agreements out of China were said not to touch on steel and industrial metals, the first steps of cooperation could put a bottom in the slide in metals like copper and iron ore. These are two commodities that should be direct beneficiaries in a world with better growth prospects, especially with prospects of a $1 trillion infrastructure spend in the U.S. With that, they had a nice run up following the election but have backed off in the past couple of months, as the infrastructure spend appeared not to be coming anytime soon.
Here’s copper and the S&P 500…
Trump policies are bullish for both. Same said for iron ore…
This is right in the wheelhouse of Wilbur Ross, Trump’s Secretary of Commerce. He’s made it clear that he will fight China’s dumping of steel on the U.S. markets, which has driven steel prices down and threatened the livelihood of U.S. steel producers. Keep an eye on these metals next week, and the stocks of producers.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
As we’ve discussed, we’re in a world where the baton has been passed from a central bank driven economy (post-financial crisis) to a fiscal and public policy driven economy (Trumponomics).One of the pillars of the Trump plan is deregulation. On that note, there’s been plenty of carnage across industries since the financial crisis, but no area has been crushed more and been crushed more by regulation more than Wall Street. And under the Trump administration, those regulations look like they are going to be slashed.Dodd-Frank and the fiduciary rule are bubbling up toward the top of the administrations confrontation list. With a former Goldman president heading the economic team for the President and a former Goldman guy running Treasury, I suspect they will give proprietary risk taking back to banks. The bank’s trading businesses will be back on-line and it will be restoring a huge profit engine.
Those that oppose it warn that it will lead to another financial crisis. On that note, I want to revisit my take from earlier this year on the cause of the crisis that almost destroyed the global economy.
“With all of the complexities of the housing bubble and the subsequent global financial crisis, it can seem like a web of deceit. But it all boils down to one simple actor. It wasn’t Wall Street. It wasn’t hedge funds. It wasn’t mortgage brokers. These entities were operating, in large part, from the natural force of economics: incentives.
It wasn’t even the government’s initiative to promote home ownership that led to the proliferation of mortgages being given to those that couldn’t afford them.
So who was the culprit?
It was the ratingsagencies.
Housing prices were driven sky high by the availability of mortgages. Mortgages were made easily available because the demand to invest in mortgages, to fund those mortgages, was sky high.
But what drove that demand to such high levels?
When the mortgages were combined together in a package (securitized as a mix of good mortgages, and a lot of bad/higher yielding mortgages), they were bought, hand over fist, by the massive multi-trillion dollar pension industry, banks and insurance companies. Yes, the guys that are managing your pension funds, deposit accounts and insurance policies were gobbling up these mortgage securities as fast as they could, but ONLY because the ratings agencies were stamping them all with a top AAA rating. Who would encourage such a thing? Congress. In 1984 they passed a law making it okay for banks, pension funds and insurance companies to buy/treat high rated secondary mortgages like they would U.S. Treasuries.
So as investment managers, in the business of building the best performing risk-adjusted portfolio possible, and in direct competition with their peers, they couldn’t afford NOT to buy these securities. They came with the safest ratings, and with juicy returns. If you don’t buy these, you’re fired.
To put it all very simply, if these securities were not AAA rated, the pension funds would not have touched them (certainly not to the extent). With that, if the there’s no appetite to fund the mortgages (no money chasing it), then the ultra-easy lending practices never happen, and housing prices never skyrocket on unwarranted and unsustainable demand. The housing bubble doesn’t build, doesn’t bust, and the financial crisis doesn’t happen.
That begs the question: Why did the ratings agencies give a top rating to a security that should have received a lower rating, if not much lower?
First, it’s important to understand that the ratings agencies get paid on the products they rate BY the institutions that create them. That’s right. That’s their revenue model. And only a group of these agencies are endorsed by the government, so that, in many cases, regulatory compliance on a financial product requires a rating from one of these endorsed agencies.”
Keep this in mind as the fear mongering over the talk of repeal of rework of Dodd Frank heats up.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
Over the past few days, some of the most influential investors in the world have publicly shared views on some of their best ideas.First, over the weekend, it was Buffett at his annual shareholders meeting. The take away, as I said yesterday, “stocks are dirt cheap” if you think rates will stay low for longer (i.e. below long term averages). His assumption in that statement is that the Fed’s benchmark rate goes to 3ish% and done – well below the long run average neutral rate of 5%.
In addition, he was quite vocal on Apple, a stake he picked up as others were selling in fear in the first half of last year (i.e. being greedy when others are fearful). And he doubled his stake earlier this year, now holding north of $20 billion worth of the stock. The analyst community thinks Apple is a juggling act, with balls that will drop if they don’t come up with another revolutionary product every quarter. Buffett thinks Apple is cheap even if they don’t have another single new invention in the future. Why? Because they’ve developed a services business around their hardware that has quickly become one of the biggest and fastest growing businesses in the world.
Remember, back on February 1, I made the case for why Apple could double. You can see that here. It’s gone from a $560 billion company to an $800 billion company since we added it in our Billionaire’s Portfolio early last year. Even at $154 a share (today’s levels) if we strip out the quarter of a trillion dollars in cash, we get the existing business for 12 times earnings.
Now, let’s talk about one of the big ideas presented yesterday at the annual Sohn Conference in New York, where many of top billionaire investors and hedge fund managers give their outlook on the stock market, the economy and talk about their favorite long and/or short picks.
Billionaire investor Jeff Gundlach, who oversees the world’s largest bond fund likes selling the S&P 500 against emerging market stocks. He thinks value is distorted relative to global GDP. But it’s more a view on undervaluation of EM, rather than overvaluation of U.S. stocks. He took to Twitter to defend that view…
Assuming a stable to improving world economy, emerging market stocks have lagged and offer a great opportunity to catch up with the strength in the U.S. stock market. It also requires that emerging market currencies are a good bet against the dollar, if policy makers around the world are able to follow the lead of the Fed, where rising interest rate cycles follow. This is a very similar view to the one we discussed yesterday, where Spanish stocks (supported by a stronger euro) present a big catch up trade opportunity (to the tune of about 40% to revisit the 2007 highs), with the destabilization risk of the French elections in the rear-view mirror.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
For the skeptics on the bull market in stocks and the broader economy, the reasons to worry continue to get scratched off of the list.
Brexit. Russia. Trump’s protectionist threats. Trump’s inability to get policies legislated. The French election.
The bears, those looking for a recession around the corner and big slide in stocks, are losing ammunition for the story.
With the threat of instability from the French election now passed, these are two of the more intriguing catch-up trades.
In the chart above, the green line is Spanish stocks (the IBEX). U.S., German and UK stocks have not only recovered the 2007 pre-crisis highs but blown past them — sitting on or near (in the case of UK stocks) record highs. Not only does the French vote punctuate the break of this nine year downtrend, but it has about 45% left in it to revisit the 2007 highs. And the euro, in purple, could have a dramatic recovery with the cloud of French elections lifted, which was an imminent threat to the future of the single currency.Next … Japanese stocks. While the attention over the past five months has been diverted toward U.S. politics and policies, the Bank of Japan has continued with unlimited QE. As U.S. rates crawl higher, it pulls Japanese government bond yields with it, moving the Japanese market interest rate above and away from the zero line. Remember, that’s where the BOJ has pegged the target for it’s 10 year yield – zero. That means they buy unlimited bonds to push the yield back down. That means they print more and more yen, which buys more and more Japanese stocks.
The Nikkei has been one of the biggest movers over the past couple of weeks (up almost 10%) since it was evident that the high probability outcome in the French election was a Macron win.Again, German, U.S., and UK stocks are at or near record highs. The Nikkei has been trailing behind and looks to make another run now, with 25,000 in sight.If you need more convincing that stocks can go much higher, Warren Buffett reiterated over the weekend that this low interest rate environment and outlook makes stocks “dirt cheap.” Last year he made the point that when interest rates were 15% [in the early 1980s], there was enormous pull on all assets, not just stocks. Investors have a lot of choices at 15% rates. It’s very different when rates are zero (or still near zero). He said, in a world where investors knew interest rates would be zero “forever,” stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return.
Buffett essentially said at zero interest rates into perpetuity, the upside on the stock market (and any alternative asset class with return) is essentially infinite, as people are forced to find return by taking risk. Why you would buy a treasury bond that has no growth, and little-to-no yield and the same or worse balance sheet than high quality dividend stock.
This “forcing of the hand” (pushing investors into return producing assets) is an explicit objective by the interest rate policies of the Fed and the other major central banks of the world. They need us to buy stocks. They need us to spend money. They need economic growth.
If you have an brokerage account, and can read a weekly note from me, you can position yourself with the smartest investors in the world. Join us in The Billionaire’s Portfolio.
Yesterday, following the slide in stocks, we looked at some charts on stocks, gold and the dollar. We talked about the media and Wall Street’s need to fit price action to a story. And we asked if the story did indeed warrant fitting it to the price action. Was a crisis beginning or just a correction for stocks?The answer: It still looks like a market that values fiscal stimulus and structural change over political mudslinging and scandal. For stocks, the news may have been the catalyst to start a healthy technical correction.
Yesterday we talked about the disconnect between the daily drama from the media in Washington (doom and gloom), and what the markets have been communicating (an economic expansion is underway). Today, you might think that connection is happening — the doom and gloom scenario is finally being realized in markets. Probably not.
The noise surrounding the Trump administration continues by the day, as the media tries desperately to prosecute the elected President at daily briefings.The chaos and dysfunction message is loud, but markets aren’t hearing it. The real story is very different. Stocks continue to surge. Stock market volatility continues to sit 10-year (pre-crisis) lows. The interest rate market is much higher than it was before the election, but now quiet and stable. Gold, the fear-of-the-unknown trade, is relatively quiet. This all looks very much like a world that believes a real economic expansion is underway, and that a long-term sustainable global economic recovery has supplanted the shaky post-crisis (central bank-driven) recovery that was teetering back toward recession.
Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As we ended this past week, stocks remain resilient, hovering near highs. The Nasdaq had a visit to the 200-day moving average intraweek for a slide of a whopping (less than) 1%, and quickly it bounced back.It’s a Washington/Trump policies-driven market now, and while the media carries on with narratives about Russia and the FBI, the market cares about getting health care done (which there was progress made last week), getting tax reform underway, and getting the discussion moving on an infrastructure spend.We looked at oil and commodities yesterday. Chinese stocks look a lot like the chart on broader commodities. With that, the news overnight about some cooperation between the Trump team and China on trade has Chinese stocks looking interesting as we head into the weekend.
As we’ve discussed, we’re in a world where the baton has been passed from a central bank driven economy (post-financial crisis) to a fiscal and public policy driven economy (Trumponomics).One of the pillars of the Trump plan is deregulation. On that note, there’s been plenty of carnage across industries since the financial crisis, but no area has been crushed more and been crushed more by regulation more than Wall Street. And under the Trump administration, those regulations look like they are going to be slashed.Dodd-Frank and the fiduciary rule are bubbling up toward the top of the administrations confrontation list. With a former Goldman president heading the economic team for the President and a former Goldman guy running Treasury, I suspect they will give proprietary risk taking back to banks. The bank’s trading businesses will be back on-line and it will be restoring a huge profit engine.
Over the past few days, some of the most influential investors in the world have publicly shared views on some of their best ideas.First, over the weekend, it was Buffett at his annual shareholders meeting. The take away, as I said yesterday, “stocks are dirt cheap” if you think rates will stay low for longer (i.e. below long term averages). His assumption in that statement is that the Fed’s benchmark rate goes to 3ish% and done – well below the long run average neutral rate of 5%.
