September 4, 2019
Stocks continue to look well supported, with a path toward new record highs — maybe very soon.
Remember, we've talked about the significance of the President and Treasury Secretary's emergency call with the heads of the big banks in mid-August.
Since that call, despite more grim rhetoric surrounding U.S./China trade relations, heightened tensions in Hong Kong, an inverted U.S. yield curve, stocks have been unbreakable.
Now we head into an ECB and Fed meeting over the next two weeks that should offer more support for global stocks.
While most have been worried about recession, and a market swoon, the higher probability for stocks is probably a melt-up (maybe even without a China deal).
We've talked about the prospects that the ECB may start outright buying European stocks as a strategy to reduce the risk premium in stocks — to drive investment and ultimately demand.
Let's revisit the case made by Blackrock's Larry Fink back in July, for the ECB to turn to the stock market.
He argued that negative rates haven't worked in Europe, because the policies aren't forcing savers into higher risk assets, because it's not in their culture to buy stocks ("they don't have an equity culture").
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Here's a look at the Euro Stoxx 50 (Europe's leading blue-chip index) over the past 10-years compared to the S&P 500. The S&P is up 181%. The Euro Stoxx 50 is up 22%. Fink thinks the equity culture in the U.S. has been the advantage for the U.S. relative to Europe and Japan, coming out of the Great Recession. We know Japan is already outright buying stocks (trying to change the culture). Will Europe follow their lead? From commentary last month, we know an ECB council member (Ollie Rehn) has already floated the idea. Learn more about my premium stock-selection and portfolio service here.
September 3, 2019 We start the month of September with another record low in German yields.
It will cost you almost three-quarters of a percent to lend your money to the German government for 10-years.
Not only is the 10-year yield negative in Germany, the entire yield curve is negative. In August, Germany sold almost a billion dollars worth of 30-year government bonds at a negative yield.
You buy these bonds if you think paying the government to park your money is the best alternative you have (and the highest probability of seeing your money again, less the interest). Or, you buy these bonds if you think the yields are going even deeper into negative territory (seeking a capital gain).
With this signal of fear about the future, the ECB is under pressure to restart QE at their meeting next Thursday.
Remember, they just quit QE back in December. Arguably, that move, in combination with another Fed rate hike just six days later (which included the Fed's verbal commitment to QT), is what crushed stocks in December, and sent global bond yields into a death spiral. That one-two punch from the ECB and the Fed, sent a clear message/reality check to markets that the more than $14 trillion in global liquidity that the big three central banks have pumped into the world–which promoted stability and little to no inflation–was getting sucked out.
Given the state of global government bond yields, the world has made the judgement that the central banks made a mistake exiting emergency policies.
With that, the Fed has already reversed course of rates and the ECB is on deck to respond. They already launched a trial balloon to prepare markets for more stimulus in the middle of last month. Today "sources" are saying a new package is coming, to include a rate cut, guidance for "lower for longer" rates, assistance for banks to deal with negative rates, and maybe more/new asset purchases (i.e. QE).
We've talked about the prospects of the ECB following the lead of Japan and launching a plan to outright buy stocks. That would be the last bold move before Draghi (the architect of Europe's QE program and economic crisis management) passes the baton to Christine Lagarde in November. August 30, 2019 As we head into the holiday weekend, let's revisit the China story (briefly). Then I have two must-watch interviews for you.
As we know, China has used a weak currency to leapfrog almost the entire world over the past 30+ years, capturing 15% of the global economic market share and rising to an economic power. They've gone from a $350 billion economy in the early 90s, to a $13 trillion economy today (ascending from the eleventh largest country in the world to the second largest economy in the world). That's 37 times bigger. Over the same period, the U.S. economy has grown by 3x. How has China done it? By undercutting the global export market on price, collecting our dollars, then offering our dollars back to us in the form of credit, so that we can buy more from China. As long as China can maintain a cheap currency, this cycle continues, and so does the cycle of global credit booms and busts. Meanwhile China stockpiles/sucks foreign currency (most importantly, dollars) from the rest of the world.
Clearly, this story ends well for China, and no one else, if left unchecked. That's why it has become the top priority for Trump (and a critical piece of Trumponomics). Reforming the way the U.S. (and the world) deals with China is the root of the global structural reform that is necessary for the world to sustainably emerge from the global financial crisis era.
With the above in mind, there are two very important interviews everyone should see, regarding how this may ultimately play out with China … Interview #1) Like him or not, when Steve Bannon speaks it's a good idea to listen. Bannon clearly had a lot to do with Trump policies. And Trump policies are driving the global economy and represent the risks and opportunities from here. With that, Bannon has been vocal on the subject of China. Earlier this year, he said the "economic war is about to go to another level." He was right. In this interview (here) he lays out China's grand strategy. Interview #2) In this next interview (here), an exiled Chinese billionaire (close to Bannon) gives unique perspective on China, and describes the motivations of the Chinese Communist Party. Both interviews are conducted by Kyle Bass – and recently released on YouTube. Bass a well-respected hedge fund manager known for his research-based, theme-driven trades, which includes capitalizing on the sub-prime crisis. He's also a known China bear, for the reasons that are clear in the interview. August 29, 2019 Global stocks were up big today. Global yields were up, and commodities were up (with the exception of gold).
Why? As we've discussed, stocks set the tone for global sentiment in this environment (across financial markets, policymaking and economics). Global policymakers are well aware of this (from the Washington to Tokyo, from the Fed to the BOJ). With that in mind, we've talked in recent days about "plunge protection" that has appeared in stocks, since Trump and Mnuchin had an emergency call with the heads of the big banks. And the Bank of Japan (already of an outright buyer of global stocks), has also likely been a contributor to the cause (following a one-on-one meeting with Trump at the G7 meetings last weekend). So, as of Friday, the world was looking particularly chaotic, with Trump's verbal assault on the Fed, and an escalation of trade sanctions exchanged between the U.S. and China. Four business days later, and there have been few (if any) improvements to the situation. Moreover, for the doom and gloom crowd, we've had a deepening of the yield curve inversion this week. Still, stocks wouldn't/didn’t crack. As I've learned over 20+ years of macro trading, what can't go down, will go up. Stocks couldn't go down. And now we have a surge up today. That quickly influences the risk-mood. Believe it or not, we've now fully recovered the losses in stocks that were triggered by Trump's tweet on Friday. |
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And now we're approaching a big technical level in stocks.
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You can see the sharp decline that started August 1st, from the all-time highs, triggered by another Trump tweet (the announcement of tariffs on another $300 billion in Chinese imports). If we get above this key 2940 area in stocks (the yellow line in the chart above), we could see record highs again, soon.
Clearly, Trump has had little trouble manipulating both sides of the stock market. That (manipulation), along with global central banks back in aggressive easing mode, has been a greenlight to own gold. With that, gold traded near six-year highs again today. But we end the day with a sharp reversal. For technicians, gold put in a bearish technical reversal signal today (an outside day). With stocks and yields moving higher, gold may be in for a small retracement (which would be a buying opportunity). |
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August 28, 2019 It was reported today, that Trump said on a call with midwest farmers, that he could quickly claim victory on a China deal and be a hero and easily win the election.
This is what I've suspected to see him do since he forced the Fed's hand on a rate cut in July. But he hasn't done it, yet. And as time passes, he is losing leverage. He continued by saying, it would be the wrong deal (to concede). He said staying the course, is doing it "the right way," but it will take a little time. We continue to watch how it unfolds. In the meantime, the behavior of U.S. stocks sets the tone for global financial markets and global sentiment. And for the moment, hanging around 5% from the highs, the market is relatively stable. Remember, that appears thanks to an emergency call Mnuchin and Trump had with the heads for the country's big banks on August 14th – the worst day for stocks since 2019.Let's take a look a the chart to see how stocks have behaved since that call. |
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We had a huge bounce, for the days following the call. And stocks have continued to bounce back sharply when testing back below the 2850 level on the S&P futures. When is the last time Mnuchin made an emergency call to the big banks? Christmas Eve of last year. When stocks opened the day after Christmas, the bottom was in.
So, what kind of messaging are we hearing from the banks that are represented on these calls? JP Morgan (the biggest bank in the country) has been putting out bullish stock market notes. On August 19th, JP Morgan said they "don't think the current pullback will extend for longer than the May one did" (which was a 7.6% decline over 23 day — 13 days to fully recover the losses), and they said they think "stocks will make new all-time highs into the first half of 2020." Yesterday, they said the time to buy stocks is approaching and still think the market will advance into year-end. At this point, stocks have fallen 6.8% and have been in drawdown for 23 days.
August 27, 2019 Yesterday, we talked about the two key spots to watch, as we step through the week: the Chinese yuan and the yield curve.
Today, both continued to disrupt any sense of calm that might have developed following the weekend's G7 meetings. The Chinese walked the yuan lower, again, overnight. The yuan is 4.2% weaker relative to the dollar, since the beginning of this month! |
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As you can see in the chart, the yuan is the weakest since 2008 (the orange line going up represents a weaker yuan, stronger U.S. dollar). At this pace, by year-end we would see a return to the value of the peg (8.27 yuan/dollar). The peg held from 1997-2005.
The yield curve Remember, we've had an inversion of the 3-month treasury to 10-year treasury since May. But the markets didn't go haywire until the 2-year/10-year spread briefly went negative on August 14th. Yesterday was the first day, it spent considerable time "inverted." And today, it plunged as low as negative five basis points. Bottom line, the "recession signal" that sends fear is now clearly flashing. Still, unlike past yield curve inversions, we have global central banks that have pinned down the long-end of the curve (i.e. distortion). People in this business don't like to say "this time is different." But that makes, this time different. What the yield curve is doing, however, is exposing the Fed for bad policy — for aggressively moving short term rates UP, while the world is still dealing with post-crisis deflationary forces (which is why the central banks are still involved in the long-end of the curve).
August 26, 2019 As we entered the weekend, it appeared that global tensions and uncertainty had reached a boiling point.
But by Monday afternoon, things are looking relatively calm. What happened? The news of the day, attributed to the calmer tone, was some ambiguous commentary on China trade negotiations. But it probably had as much to do with the call out to the banks that the President and Treasury Secretary made about 10 days ago (to “assure normal market operations”). And with a meeting that Trump had with Abe over the weekend, the leader of Japan and the commander of biggest and boldest QE program left in existence (within which, is a mandate to outright buy stocks). With that, both the U.S. banks and the Bank of Japan were likely the stewards of global financial market stability overnight (i.e. the plunge protection team). Of course, U.S. stocks remain an important barometer of global economic sentiment. And, on that note, we start the week with what seems to be a healthier head-space than we ended last week (with stocks about 5% off of all-time highs, despite some very ugly risks). But two spots will be key to watch, for signals on whether the mood might be calming: 1) The Chinese yuan traded to another 11-year low overnight. The weaker the PBOC sets the yuan, the more aggressive retaliation signal they send to Trump. And 2) The U.S. yield curve (10-year/2-year) inverted just briefly a couple of weeks ago (fueling recession talk). Today, it was inverted much of the trading day.
August 23, 2019 China escalated the trade war this morning, just before Jay Powell was due to make a very important speech on Fed policy.
It didn't seem to alter the message. It was a very carefully crafted speech, but not exactly what the market was hoping to force. In his 12-page speech, the Fed did NOT give the market (nor the President) the signal that they were planning the type of easing assault we are seeing at other central banks in the world. But he did make the comparison to the 1994-1995 period. We've been talking about this scenario all year, here in my Pro Perspectives notes. In 1995, the Fed was forced to reverse course, after a period of overly aggressive period of tightening, into a low inflation, recovering economy. As we've discussed, things worked out very well. The stock market and economy boomed over the next five years.
Importantly, Powell described the mid-90s Fed cuts as a “response to threats to growth,” but not a change in the rate cycle. This almost looks like a double-down on his “mid-cycle” cut comment in July. That didn’t go over well. Still, even if the economic situation remains solid, he's given us the roadmap for another couple of cuts.
Bottom line: They will keep tactically cutting rates until the geopolitical risks pass (namely the trade war). Now, with China's retaliatory threats this morning, and a Fed that didn't brandish a monetary policy bazooka, Trump wasn't happy. He responded with this … |
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The question everyone should be asking: Is this tweet, threatening to deal with "a very strong dollar," a signal that a dollar devaluation is coming?
Remember, we talked about the prospects of a Plaza Accord 2.0 earlier this summer. Here's an excerpt from my June note … "There are a lot of similarities between the U.S/China standoff and that of U.S. and Japan in the 1980s. That was ended with the "Plaza Accord" — an agreement between the U.S., Japan, Germany, England and France. The Plaza Accord was a plan to balance global trade, through a 50% depreciation of the dollar (vs. the yen and d-mark).
… we may wake up one day and find a similar agreement has been made between the U.S. and major global trading partners (which may include China, or not). It might be a deal between the U.S. and China to “revalue” the yuan (i.e. strengthen it). Or it may exclude China (just G3 economies). With the behavior in markets the past few days, it smells like something is cooking."
So, what happened to stocks, following the '85 currency agreement? Stocks rallied about 15% into the end of the year in 1985, following the deal. Stocks were up 16% in 1986, and rose as much as 40% year-to-date in 1087, prior to the October crash. Gold rose close to 60% of the next two years.
August 23, 2019 Throughout the post-financial crisis era, there have been some major policy signals given from the Fed at the Kansas City Fed's annual economic symposium in Jackson Hole.
Tomorrow will be another big one. Jay Powell will need to deliver a message that shows a clear willingness to ease more aggressively, even if it appears to be a pre-emptive strike on an economy that is currently doing fine. Inflation is soft. And we have growing prospects (in the past month) of an indefinite U.S./China trade war. The Fed has room (the interest rate market thinks a lot of room) to be positioned more aggressively. If we get these signals from Powell tomorrow, stocks should be on their way to a very big year (similar to 1995). And with the aggressive positioning from global central banks in the past month, including signals from the ECB that they will restart QE next month, gold should (continue to) be among the biggest winners by year end. As we head into tomorrow's big event the S&P 500 is up 16.5% year-to-date. Gold is up almost 18% (ytd).
August 21, 2019 That stock market fallout in December, led to a response from the U.S. Treasury. Mnuchin (Treasury Secretary) called out to major banks and the President's Working Group on Financial Markets (which includes the Fed) to "coordinate efforts to assure normal market operations."
That was the turning point. That put a bottom in stocks. Within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed's rate path — signaling a pause. The Fed's pivot fueled a V-shaped recovery in stocks, and by July stocks were on new record highs. But then we had another mis-step by the Fed (calling the July rate cut, just a "mid-cycle adjustment"). And, shortly thereafter, Trump escalated the trade war with China, sending the signal that China has turned its back on the prospects of a deal, opting to wait it out until the 2020 elections. Yields plunged. More global government bond yields have gone negative. The yield curve inverted. And the chatter recession and crisis has quickly returned. With that, last Wednesday morning, stocks were having the worst day of 2019, and the set-up across global financial markets was beginning to look very vulnerable to a melt-down. Once again, the major banks were summoned. Mnuchin and the President had what appears to be an emergency call with the heads of the top three banks (Citibank, JP Morgan and Bank of America). By the afternoon, stocks had stabilized. And any selling pressure in the major U.S. stock indices, have since been met with a persistent bid (i.e. large indiscriminate buying). The “Plunge Protection Team” appears to be at work. This sets up for the Fed to do a repeat of the early January repentance. On Friday, Jay Powell will be making a speech at the Kansas City Fed’s annual economic policy symposium at Jackson Hole. If he does indeed telegraph the aggressive easing that the markets are asking for (if not forcing), stocks should take off (i.e. a resumption of what has been a big year for stocks).
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