Latest | Billionaire's Portfolio

Pro Perspectives 6/11/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 11, 2024

With the May CPI report due tomorrow morning, let's revisit the two hot spots in the report.

As we've discussed here in my daily notes, both auto insurance and owner's equivalent rent make up about 30% of the CPI. Both have been hot, and have been propping up the overall index, and the Fed's current restrictive interest rate policy is powerless to bring them down.

Here's a visual on why …

Above is motor vehicle insurance. This has risen at a 20% year-over-year rate for five consecutive months (the actual data is represented by the blue bars).

Even if this auto insurance index were to flat-line from this point (i.e. zero month-to-month change in this insurance price index), it would still take seven months for the year-over-year measure to fall below double-digits (that scenario represented by the orange bars).

So, even if the insurance hikes are over, this year-over-year measure will continue to put upward pressure on the inflation data for months to come.

Next is the heavier weighted component that's been propping up CPI: Owners' Equivalent Rent (which is also influenced by the sharp rise in insurance rates).

This makes up 27% of the consumer price index. And you can see in this chart below, it has directly contributed at least 1.5 percentage points to the year-over-year change in CPI for 22 consecutive months. The streak will likely continue in tomorrow's report. The orange bars represent the path IF this component were to flat-line over the coming months (zero monthly change).

This too, will continue to put upward pressure on CPI for the months ahead.

What does it mean? The year-over-year computation of these two components is creating the illusion that inflation is "sticky" at higher levels.

Pro Perspectives 6/10/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 10, 2024

Last week, we discussed the easing cycle that is underway in developed market economies.

And as we’ve discussed, we should expect the easing cycle to be coordinated among the major central banks (excluding Japan), just as it has been in the post-global financial crisis era.

If we needed any clues, just look at the shared language they use to describe policy decisions. The most recent has been the need for more “confidence” that inflation is coming down.

The Fed started using this “confidence” condition in its policy statement in January of this year: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

The Bank of Canada cut last week. And said, “If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”

The European Central Bank cut, on the condition of “confidence.” Here’s what ECB President (Lagarde) said about it in the press conference last week: “What we wanted before making that decision was collectively to increase our confidence level that the path ahead was on its disinflationary rhythm that we needed in order to make our decision.”

What else looks carefully coordinated?

The way both the BOC and ECB described the rate cut last week.

As we discussed in my Thursday note, Lagarde made a clear effort to shape opinion on the cut, as “moderating restriction” on the economy, rather than stimulating the economy. So, she wanted everyone to know that they are still in an inflation fighting stance.

The Bank of Canada Governor, similarly, focused on removing restriction: “We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target.”

So, with all of this in mind, we’ll hear from the Fed on Wednesday. And also on Wednesday, we’ll get May CPI.

The market is now pricing in just one cut by end of year, and CPI is being propped up by two components that restrictive interest rate policy is powerless to bring down (for at least a few more months).

With that, when the Fed presents its update projections on Wednesday, the market will be prepared to see ticks higher in the inflation forecast for this year, and a higher Fed funds rate projection by year end (adjustments UP in the highlighted areas below).

So, given that set of expectations, a negative surprise for markets on Wednesday seems unlikely. And given the actions taken last week by the Fed’s counterparts, there’s a better chance that they (the Fed) telegraph more and sooner cuts than the market is expecting, of course, just to “remove some restriction.”

We will see.

On CPI, remember we looked at this chart last month on what CPI would look like if we stripped out auto insurance and owners’ equivalent rent?

Both auto insurance and owners’ equivalent rent make up about 30% of the CPI. And both of these CPI components are lagging features of an asset price boom.

Pro Perspectives 6/6/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 06, 2024

This morning, the European Central Bank became the fourth G10 central bank to cut rates.

Let's talk about the nuance Lagarde (ECB President) used to insist that they are still in the inflation fighting stance (headline below).

In September, euro zone inflation was running 2.9%.

The ECB's policy rate was 4%. That's 110 basis points ABOVE the inflation rate (i.e. the "real" interest rate).

Today, AFTER the cut, the real rate is 115 basis points. So, as she said, policy is tighter today, even after the rate cut.

This is what we've been discussing along the path of the fall in inflation in the U.S. Once the annual rate-of-change in prices fell below the Fed's policy rate (effective rate of 5.33%), the Fed's stance has only become tighter and tighter as inflation has declined.

Here's what that looks like …

So, the Fed is currently 268 basis points above the rate of inflation. That's historically very restrictive monetary policy. Similar to the ECB, they could cut rates right now, and still be left with a tighter policy stance than they had last October (which, coincidentally, is when Jay Powell signaled the end of the tightening cycle).

As you can also see, the current real interest rate is more than 200 basis points higher than where the Fed projects the longer term real Fed Funds Rate ("the Fed's Projected Real Neutral Rate" … where they deem the rate to be neutral — not stimulative, nor restrictive).

Bottom line: The Fed could make the same case Lagarde made this morning, cutting rates but continuing the inflation fighting stance — given that real rates would continue to be very restrictive.

Lagarde may be the Fed's test subject on a way to start the easing cycle, without stoking much excitement in markets, consumers and businesses (which could translate into renewed inflation pressures).

Let's talk about Nvidia.

Nvidia will split at the close of business tomorrow (shareholders get 10 shares for every 1 share owned). As we discussed following the Nvidia earnings a couple of weeks ago, this split looks a lot like the 2014 Apple split.

Apple announced a 7-for-1 split when the stock was in the mid $500s, and ran up to around $700 by the time of the split. Nvidia has nearly replicated the pre-split premium (just shy of 30% added since the announcement).

As we also discussed, as with Apple, Nvidia's post-split lower share price creates an opportunity for inclusion into the Dow (DJIA).

That should turn market attention to the Dow, which has been lagging the Nasdaq, as you can see in the chart. Moreover, the Nasdaq has more than doubled the performance of the DJIA since the "Nvidia moment" in May of last year.

We get the May jobs report tomorrow morning.

Remember, the Fed has told us they are watching the job market "carefully" for "cracks" as a condition to start the easing cycle.

Pro Perspectives 6/5/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 05, 2024

Back in my March 21st note, we discussed the Swiss National Bank's surprise quarter point rate cut.

And I said, "if there were doubt on whether or not this easing cycle would materialize, there shouldn't be now."

The major central banks of the world had coordinated closely throughout the crises of the past 15 years. They all went to ultra-easy emergency level policies in response to the pandemic, and then all (exception Japan) took interest rates ABOVE the rate of inflation (restrictive territory).

And as we discussed back in that March note, we should expect them to all be cutting rates, in coordination, in the coming months, mostly to ensure that global liquidity doesn't become too tight, and (related) that their respective government bond yields (borrowing rates) don't run away (higher).

We've since had the beginning of the easing cycle in Sweden. And this morning, in Canada (with a quarter point cut from the Bank of Canada).

And tomorrow morning, the European Central Bank should be cutting rates, after taking rates up 450 basis points in fourteen months.

That leaves the Bank of England, which has perhaps the easiest case to make for cutting rates at its June 20 meeting.

And, of course, the Fed meets next Wednesday.

Is the market getting the message on the easing cycle?

Stocks are back on record highs.

The U.S. 10-year yield is down 36 basis points in five days!

As you can see in the chart, today it traded below the levels of the May 15th CPI report (April inflation).

And at 4.28% on the 10-year today, that's the lowest level since April 1st.

And April 1st is an interesting date. It's the Monday after the Good Friday PCE report (where the market re-opened to digest the report).

Both of those prior inflation reports took yields higher. And as you can also see in the chart, the recent PCE report has resulted in lower yields.

Pro Perspectives 6/4/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 04, 2024

As we discussed yesterday, the interest rate easing cycle is underway in the advanced economies (excluding Japan). And we should see more evidence of that this week (in Europe, and likely Canada).

As for the Fed, Jerome Powell has told us they are watching the job market "carefully" for "cracks" as a condition to start the easing cycle.

And this week, we get jobs data.

It started this morning with the report on job openings.

Let's talk about why this report is of particular interest.

If we look back to March 2022, when the Fed started the tightening cycle, they immediately made it known that they wanted to "bring demand down," and the sacrificial lamb would be jobs.

And Powell incessantly cited the job openings-to-job seekers ratio. At that time, there were two open jobs for every one job seeker. And he told us they intended to bring the ratio down one-to-one.

So, what was today's number?

The job openings fell to the lowest level since February of 2021.

That brings the ratio down to 1.24 job openings for every one job seeker. It's not one-to-one, but it's the lowest ratio since mid-2021.

More importantly, as you can see in the chart, that's in-line with pre-covid (2018-2019) levels.

Pro Perspectives 6/3/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

June 03, 2024

We have five major global central bank decisions over the next two weeks, which includes the Fed next Wednesday.

Remember, the easing cycle has already started for the "advanced economies." It started with a surprise rate cut from the Swiss National Bank in March. Then the Swedish central bank cut in May. The European Central Bank is expected to follow on Thursday, with its first rate cut after a 450 basis point tightening cycle.

The Bank of Canada will kick things off on Wednesday. The policy rate there is 230 basis points above the inflation rate. But rate cut expectations have diminished over past three weeks, from a 70% probability of a cut to just 36%.

It sets up for a surprise. The Canadian economy has grown less than 1% over the past four quarters, and just undershot expectations on Q1 growth in a report this past Friday.

The Bank of England decision comes on June 20. Of all the central banks mentioned, with the plunge in the recent inflation reading to 2.3%, the Bank of England now has the tightest policy (i.e. the highest real interest rate). Not surprisingly, the economy is growing at sub-1%. They should be cutting.

With all of the above in mind, as we've discussed often in my daily notes, we should expect the closely coordinated policies of the past fifteen years by major central banks to continue in this easing cycle.

But as we've also discussed often, the pendulum of rate expectations in the U.S. has swung from one extreme to the other over the past five months.

The current extreme is represented in this cover of Barron's over the weekend …

This, as the Fed has the second tightest policy of the central banks discussed, and with Q1 growth having just been revised down to just 1.3%.

We should expect more and sooner action from the Fed than the market has priced in.

Pro Perspectives 5/30/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

May 31, 2024

We get the Fed's favored inflation gauge tomorrow morning — personal consumption expenditures (PCE).

For the month of April, the market consensus is for 0.3% m/m and 2.7% y/y, which would be a continuation of this leveling off under 3% (but above the Fed's target).

That said, it may have become a less important event for markets after the guilty verdict of the President's political opponent was announced this afternoon.

We won't know if Trump will be jailed until July 11th, conveniently four days before the Republican National Convention, where delegates of the party will officially select the party's nominee for president.

As we discussed in my note yesterday, the potential jailing of a U.S. presidential candidate driven by partisan lawfare should raise concerns for every investor about America’s role in the world as the reliable anchor of law, fairness, and stability.

As we've also discussed, this has the potential to be a tipping point for trust in the historical global safe haven role of the U.S. Treasury market and the dollar. Will we see selling/ capital flight?

With that, this chart will be an important one to watch. Yields have been climbing back toward this trendline – a break of which (higher) would bring about risk of another visit to the 5% area, a level the Fed wasn't comfortable with back in October.

As for the dollar, we sit on this trendline …

For more perspective, let's revisit the long-term dollar cycles, which we've kept an eye on throughout the history of my daily note.

Since the failure of the Bretton-Woods system through the onset of the Global Financial Crisis, the dollar traded in five distinct cycles – spanning 7.4 years on average. And the average change in the value of the dollar (in those five cycles), from extreme to extreme was greater than 50%.

As you can see, the era of quantitative easing (QE) has seemingly distorted this last bull cycle.

The top was in late 2022, just after the Fed started QT (quantitative tightening/reversing QE).

And now we're early into a dollar bear cycle, as the dollar's world reserve currency status is being opportunistically challenged by, primarily, China. And as the vulnerabilities created by U.S. fiscal profligacy are being exacerbated by the potential erosion of trust in the U.S government.

Interestingly, both Chinese and Hong Kong stocks (indices) gapped higher on the open tonight, following the news of the trial verdict in the U.S.

Pro Perspectives 5/29/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

May 29, 2024

Last Thursday, following another huge earnings event from Nvidia, the S&P futures put in a technical reversal signal (an outside day). So did the Nasdaq.

And the Russell 2000 (small caps) moved sharply lower, breaking the trend of the past month that described 11% bounce from the April lows.

So, stocks shrugged off the Nvidia news, and all of the related insider insight into the new industrial revolution.

With that market behavior in mind, we stepped through some notable geopolitical and domestic risks that were bubbling up:

1) The U.S. Treasury Secretary had just made public comments prior to the G7 Finance Ministers meeting in Italy, where she took some provocative shots at both Russia and China, signaling coordination among G7 partners to transfer ownership of seized Russian assets.

2) Adding to that, she vowed a “wall of opposition” to China’s trade practices.

3) And then, as we also discussed yesterday, the date for closing arguments was set in the Trump trial in New York, which put a timeline on a potential conviction.

With all of this, as we discussed last Thursday, the market seemed to be underpricing the rising geopolitical and domestic news risk, if not shock risk — as you can see in the chart of the VIX.

So fast forward to today, and the Trump trial has now moved to the jury deliberation stage. Markets were down across the board (stocks, bonds, commodities).

Is this trial “noise” or “signal” for markets?

If it alters (and maybe permanently) market psychology and perception, it’s signal.

In this case, the potential jailing of a U.S. presidential candidate driven by partisan lawfare should raise concerns for every investor about America’s role in the world as the reliable anchor of law, fairness, and stability.

Add that to the threat of confiscating Russian assets, and it’s not hard to imagine the erosion of trust in the “full faith and credit” which underpins the U.S. Treasury market. And the dollar (and fiat currencies, in general) works only with trust and credibility of the issuing government.

Clearly these are scenarios we don’t want to see play out. The vulnerabilities are already well known, particularly after the ramp in debt and deficits in recent years. Introducing a catalyst becomes very dangerous.

This all strengthens the case for the continuation of the trend in this chart (and commodities, in general — up!) …

We’ve often looked at this longer term chart of gold over the years.

This is a classic C-wave (from Elliott Wave theory). This technical pattern projects a move up to $2,700ish. The price of gold has continued to make progress along that path.

How do you play it?

Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD.

Full disclosure, we are long gold miners, including Barrick Gold in our Billionaire’s Portfolio.

Pro Perspectives 5/28/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

May 28, 2024

We get inflation data this week (in Australia, Europe, Japan and the U.S.).

And then over the next three weeks, major central bank meetings are on the calendar. Remember, the easing cycle has already started in Switzerland and Sweden. And the European Central Bank is expected to follow next week. And there's about a coin flips chance of a cut coming from the Bank of Canda next Wednesday.

As for the Fed, the market is now pricing in a little less than one cut by year end. Again, this is the pendulum swinging from one extreme (as many as seven cuts projected earlier this year), to (now) less than one.

As we've discussed, the Fed tends to be more comfortable adjusting policy reactively, rather than proactively.

What could put the Fed in the position of reactive easing? Losing control of the bond market.

And we have a potential catalyst.

Closing arguments started today in the Trump case in New York. If the political opponent to the President of the United States of America is jailed, that might be the final straw for the bond market and the dollar.

We could see capital flight from the historic global safe havens (U.S. Treasuries and the dollar).

Pro Perspectives 5/23/24

Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.

May 23, 2024

We talked about Nvidia’s big earnings report yesterday. It was good for new record highs in the stock today.

Adding to the earnings and outlook fuel, was the 10-for-1 stock split that was announced — to take place at the close on June 7. The split will expand the universe of potential Nvidia shareholders by bringing the cost to own a share down to around $100 a share.

This looks like the 2014 Apple split. Apple announced a 7-for-1 split when the stock was in the mid-$500s.

It was around $700 by the time of the split. The stock was bought pre-split in anticipation of 1) an increased appetite for Apple shares at a lower price (broader investor base), and 2) the potential for Apple’s inclusion in the Dow (DJIA), made possible by the lower share price (for a price-weighted index).

Nvidia may see a similar path.

Now, while Nvidia had a good day, almost nothing else did.

Broad stocks were down on the day. Commodities were down. Bonds were down.

Let’s take a look at stocks …

Last month, after a nearly 30% rise in five months, the S&P futures put in a technical reversal signal (an outside day). That signal predicted a 7% technical correction.

We’ve since traded back to new highs, and we get another reversal signal today. Same said for the Nasdaq.

Did Jensen Huang’s insider view on the new industrial revolution impact the market’s outlook on interest rates? Was it just a hot PMI report this morning that triggered broad selling across markets?

Or was it something else that may be raising the global risk temperature?

Perhaps it’s the U.S. Treasury Secretary in Italy, meeting with G7 Finance Ministers, that stated an agenda this morning that includes transferring ownership of seized Russian assets, and presenting a “wall of opposition” to China’s trade practices.

Or perhaps it’s the prospects of the United States President’s political opponent being jailed by the end of next week.

Last month, after a nearly 30% rise in five months, the S&P futures put in a technical reversal signal (an outside day). That signal predicted a 7% technical correction.

We’ve since traded back to new highs, and we get another reversal signal today. Same said for the Nasdaq.

Or was it something else that may be raising the global risk temperature?

Or perhaps it’s the prospects of the United States President’s political opponent being jailed by the end of next week.

As we discussed in early April — when the U.S. administration spent a day recklessly mixing geopolitical signals that ranged from policy confusion on Israel and Taiwan, to threatening Russia with Ukrainian membership in NATO — markets will ignore domestic political infighting and geopolitical posturing until they don’t.

It’s fair to say that there is greater geopolitical and domestic news risk in the world, if not shock risk, than is being reflected in this chart …

The VIX tracks the implied volatility of S&P 500 index options. This reflects the level of certainty that market makers have, or don’t have, about the future.

To put it simply, if you are an options market maker, and you think the risk of a sharp market decline is rising, then you will charge more to sell downside protection (ex: puts on the S&P) to another market participant — just as an insurance company would charge a client more for a homeowner’s policy in an area more likely to see hurricanes.

An “uncertainty premium” would translate into the spikes (or higher levels) in the VIX.

Again, as you can see in the far right of the chart, we haven’t had it.