September 19, 2019
Back in 2012, both Spain and Italy were the dumpster fires in Europe that nearly set off a cascade of sovereign debt defaults. Speculators were hammering away at the bond markets in these weak spots, sending yields screaming higher, to unsustainable-default watch levels.
It took Draghi ripping up the script of the EU and EMU to prevent it from happening. What did he do? He fought off bond market speculators by promising to become the buyer of unlimited government bonds in these weak spots of Europe. That was enough to scare off the speculators, and to reverse yields from the ticking time-bomb of 7%+, to (now) under 1%.
This ECB intervention salvaged the global economy from a spiral into the abyss. And the global economic recovery resumed.
Since that point, German stocks have outpaced Spanish stock by three-to-one. And while German stocks have gone on to new record highs in the past two years, stocks in Spain remain deeply depressed from peak value, despite a recovering economy.
As I said last week, this might be the best prospect for a big run in Europe. But this is investable (for non-euro investors) only if you think the euro rises from here — which I do. Remember, the ECB just announced a new round of QE. What did the euro when the ECB launched QE in 2015? It went down in anticipation of QE, and when they launched QE, it bottomed, and rose over the following four years.
What about the dollar?
Despite all of the talk about a "strong dollar", we've been in a bear cycle for the dollar for almost three years.
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We've looked at my dollar cycles chart above many times. If we mark the top of the most recent full cycle in early January of 2017, the bull cycle matched the longest cycle in duration (at 8.8 years) and came in just shy of the long-term average performance of the five complete cycles. This argues for a weaker dollar ahead, which aligns well with the desire of the Trump administration.
September 18, 2019 Nine months ago, the Fed raised rates for the ninth time, in its attempt to normalize interest rates. And Powell told journalists at the press conference that followed, that their program to shrink the balance sheet was on "auto-pilot."
The world was net raising rates in 2018, following the lead of the Fed. But the Fed led the world down the wrong path, tone deaf to the risks of an indefinite trade war. Today, the Fed cut rates for the second time in 49 days. A week ago, the European Central Bank restarted QE (after ending it last December). And along the path of the past nine months, there have been over 100 actions take by global central banks to lower interest rates. The world is now prepared for a worst case scenario on trade. That sets up a lopsided risk/reward for financial markets (i.e. asymmetrical outcomes). With central banks pointed in the direction of defense, and standing ready to act (as a preventer of bad outcomes, as they were throughout the post-financial crisis environment), the reward for investors on a U.S./China trade agreement far outweighs the downside of an indefinite trade war. That’s good for investors … very good! On that note, as I’ve said, we should pay close attention to the signals that Trump and his team are giving about the potential of a cut-down version of the trade deal. Remember last week, Trump said he would be open to an interim deal.
September 17, 2019 Markets head into tomorrow's Fed meeting relatively quiet — except for one market: the global market for short-term interbank dollar liquidity.
The cost (interest rate) for swapping euros for dollars (for one week) in the global interbank market doubled overnight. This sounds like 2008 stuff. To curtail the dollar shortage, the Fed had to step in for the first time in about a decade, injecting about $50 billion into the short term market for dollars. This is effectively emergency QE, and has people speculating that the Fed will be forced to return to balance sheet expansion (i.e. QE4) — to replenish the dollars they have sucked out of the system via their balance sheet "normalization." The repo bond market participants have explained away the squeeze in short term dollars as not a systemically threatening signal — just a confluence of events hitting at once (the Treasury raising dollars to fund budget shortfalls, and corporate tax payment date). A systemically threatening event would certainly spike the VIX (i.e. downside protection seeking by the investment community). That didn't happen. Instead, we head into tomorrow's Fed meeting (with expectation of a second quarter point cut for the year) with the VIX trading at a very tame level … |
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September 16, 2019 The Fed meets on Wednesday. On Friday the market was pricing in a 78% chance of a quarter point cut. Today it's pricing in a 63% chance?
Why? Oil prices. With the Iranian attack on Saudi oil supply on Saturday, oil prices popped as much as 15% when futures markets opened last night. While the Fed likes to say they exclude volatile energy prices from their assessment of inflation, their behavior says otherwise. When oil prices move sharply, they tend to react. With that, we have a shock to global oil supply, and that has some predicting much higher oil prices. If that were to play out, we should expect the Fed to get nervous about inflation. But I suspect we'll see oil prices, first, go the other way. This all looks like the timeline is setting up for a rate cut, a cut-down China deal, and then the U.S. greenlighting an attack on Iran. What happened to oil prices when we invaded Iraq in 2003. Prices first went down, big. Here's a look at the 2003-2004 crude oil chart … |
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What went up on the Iraq war catalyst?
Gold went up 25% over the next year … |
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And stocks went up 45% over the next year …
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September 13, 2019 As we discussed yesterday, Trump seems to be setting the table for an agreement on a cut-down version of the trade deal … AFTER the Fed cuts rates next week.
That would unshackle the U.S. economy and unleash a boom, especially if he turns to the next pillar in Trumponomics — an infrastructure spend. With that, the biggest winners over the next twelve months could be commodities. Copper is the commodity known to be an early indicator of turning points in the economy. And if we look at markets today, copper is signaling this scenario. Let's take a look at the charts on copper and the broader commodities index. |
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Copper has moved 10% in the past nine trading days! But as you can see in the chart above, it remains more than 40% off of the post-global financial crisis highs.
Here's a look at broader commodities … |
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You can see in this chart above, the commodities market has been telling us the world has been in depression (only artificially kept moving by global central bank life support). With some structural reform on the trade front (assuming a cut-down deal), and aggressive fiscal stimulus in the U.S. (already in motion, and likely to be followed in Europe), we should see commodities finally reflect a real, sustainable recovery (i.e. a big recovery in broad commodities prices).
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September 12, 2019 The ECB restarted QE today, just nine months after ending their nearly four-year stimulus program.
So, they are back at it. And it's open-ended (no expiration). The Fed had it's QE infinity (which ran for more than two-years). This is the ECB's version of QE infinity. For the moment they have not changed the asset mix from their past asset purchases, which consists of corporate and sovereign bonds. Adding European equities would be the "bazooka." They didn't do it, yet. Instead, Draghi and company are pushing politicians hard to back them up with fiscal stimulus. It hasn't worked to this point. But with Lagarde taking over in November, the idea is that she will have more influence over the EU bureaucrats. Bottom line: We now officially have the Fed pointing south on monetary policy and the ECB and BOJ pumping liquidity into the global economy. And to be clear, this is all about managing the downside risk of an indefinite trade war! With this in mind, we've continued to talk about the reality that Trump is in the position of strength in the China negotiations, and therefore, he can make any concessions necessary to get 'a' deal done, claim victory, and remove the overhang of uncertainty on the global economy. Now, by his design, he has monetary policy tailwinds. That will only add fuel to the fire, following a China deal, of what would become a booming economy into next year's election.
Today, Trump may be setting the table. We had some positive headlines on the trade front – a goodwill offering from Trump to the Chinese. But the bigger news of the day: A Bloomberg report cited White House sources as saying a "limited trade agreement" is in the works. Could this be his "claim victory" move, to come AFTER next week's Fed rate cut?
Get a deal done. Get re-elected, and spend the next four years going after the big, meaningful demands on China.
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September 10, 2019 With the ECB expected to restart QE on Thursday, we've talked about the prospects that they may start buying stocks, as a better transmission mechanism for promoting demand in the European economy.
With that, we know the Fed has successfully promoted stability and growth throughout the post-Great Recession era, by creating incentives for people to buy stocks. If Europe, in this next iteration of QE, were to overtly promote equity investing in Europe (reducing the risk-premium to attract capital), it may be a greenlight to buy the weakest stock markets in Europe. Remember, when Draghi stepped in with the promise of preventing a default in Europe's most vulnerable bond markets (namely Italy and Spain) back in 2012, those bond markets went on a tear. It may be time for the stock markets to catch up. If we look at Spanish stocks since July of 2012 (when Draghi said he would do "whatever it takes" to save the euro), the IBEX is up just 28%. Italian stocks (MIB index) are up 53% for the same period. Meanwhile, German stocks have done +92%. Moreover, while German stocks have gone on, to new record highs in the past two years, stocks in Spain and Italy remain deeply depressed from peak value. You can see the IBEX in this chart, peaked in 2007 … |
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And the FTSE MIB index (Italy) peaked in 2000, shortly after the launch of the euro …
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With the above in mind, if you had to choose between Italian and Spanish stocks, Spain (the IBEX) looks like the top prospect. Since Draghi's 2012 rescue of Italy and Spain, the Spanish economy has grown by 15%. The Italian economy has grown by just 3%.
The indicies on these ETFs are priced in Euros. So, what did the euro when the ECB launched QE in 2015? It went down in anticipation of QE, and when they launched QE, it bottomed, and rose over the following four years. Learn more about my premium stock-selection and portfolio service here.
September 9, 2019 The big event of the week (and maybe the month) will be the ECB meeting on Thursday.
The expectation is that the ECB will restart QE. Remember, last month we talked about the correlation of the death spiral in global bnod yields, with the peak in the aggregate balance sheet of the big three central banks in the world (the Fed, the ECB and the BOJ). Interpretation: The global bond market has sent a very clear message that the central banks made a mistake trying to normalize policy too soon, in a world still on the mend from the global economic crisis. With that, the Fed has since stopped its quantitative tightening strategy. And the ECB is set to turn the liquidity spigot back on. Let's take a look at how the balance sheets of these three major central banks look, from the failure of Lehman (late 2008)-to-date. Here's the Fed… |
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As you can see, through multiple rounds of QE, the Fed expanded it's balance sheet 5x. And beginning in 2018, they attempted to start "normalizing" the balance sheet, sucking close to three-quarters of a trillion-dollars out of the economy. Things seemed to be going okay, so long as massive fiscal stimulus was being executed in the U.S., AND so long as the ECB and BOJ were offsetting the Fed's balance sheet reduction with QE.
But then the European Central Bank quit QE last December. And that was the tipping point for markets … |
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The lone shock absorber has been the Bank of Japan, but it has been clear that they can't do it alone.
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With that, until the rest of the world (namely Europe) follows the lead of the U.S. with aggressive fiscal stimulus, stability in the global economy is still dependent upon ultra-low rates and a nearly $15 trillion balance sheet of the big three central banks. Learn more about my premium stock-selection and portfolio service here.
September 6, 2019 The jobs report today continues to show a very healthy job market. And wages continue to grow at over 3% annualized.
This 3%+ annualized growth in wages is the best since the pre-crisis era, and has sustained for a full year now. That’s good news for consumers – good news for the economy.
So, let’s regroup on the state of the economy (after the noise of recession calls the past few weeks), and then I have a chart that adds some perspective as we head into the weekend.
We have continue to have record low unemployment. We have consumers sitting on record high household net worth, and record low debt service ratios. U.S. companies reported record profits in the second quarter.
Yet, all we hear about is looming recession.
The bond market, has of course, given signals of recession, finally providing some evidence for the economic and stock market bears.
But, unlike past yield curve inversions, we have global central banks that have pinned down the long-end of the curve now for the past decade (i.e. distortion). That makes for a hard comparison … “this time is different.”
So what is driving this persistent gloomy messaging? As I’ve said over the past year, I suspect we are seeing plenty of people make the mistake of letting politics cloud their judgement on the economy and the outlook for stocks.
With that, this chart from Pew Research appears to have this bifurcated view, we hear from the media and Wall Street, nailed.
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September 5, 2019 In the past few weeks, we've talked about the important signal to be taken from stocks. Despite the weight of bad news, stocks held steady, and ultimately that can turn the tide of sentiment.
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