Pro Perspectives 11/5/24

 

 
 

 

 

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November 05, 2024

The markets seemed to be pricing in the probability of a Trump win today, and early indications in poll activity support that view.

We will see.

Yesterday, we talked about the prospects that, in the case of a Trump win, the DC bureaucracy could work to thwart his agenda as they did in his first term.

And, on that front, we talked about the warnings to the Trump team from former UK Prime Minister Liz Truss.  Her government was taken down by “financial establishment”/UK administrative state.

What do Truss and Trump have in common?  Cut taxes.  Frack.  Deregulate.  They both represent[ed] threats to the globalist, energy transformation agenda.

We talked about this here in my daily notes, as we headed into the 2020 U.S. election.  The global climate action initiative was clear and globally coordinated, involving the most powerful governments and companies in the world. And the financial backing was nearly unlimited.

A group called Climate Action 100+, composed of the most powerful investors in the world (representing $32 trillion in assets under management), had been dictating how major energy companies deployed capital on new projects since, at least, 2017 — forcing the pivot to climate responsible initiatives. And every major global government entity/cooperative behind the activist movement had been feeding the effort with cash and subsidies.

Trump was an existential threat to this global initiative.

No surprise, there were powerful forces at work to remove him — not just domestically, but globally.

So, when the democrat party regained the White House in 2021, and the Georgia Senate run-off gave the administration an aligned Congress, it was crystal clear that the climate agenda would be fully funded, and fully executed (with full extravagance).

Indeed, that Georgia Senate run-off resulted in over $4 trillion of fiscal profligacy.

All of that said, the coordinated globalist agenda, surrounding the transformation of the world’s energy paradigm, has now been funded with trillions of dollars globally.  It has been legislated in many ways.

Trump, again, represents an existential threat to this agenda.  No surprise, they’ve done anything and everything to stop him.

With Trump, the result of a policy swing, from the globalist agenda to a more nationalist agenda, would mean that the massive deficits and record indebtedness pursued to fund a radical energy transformation would be abandoned.  And any unspent funding would likely be clawed back or redirected.

 

 

Pro Perspectives 11/4/24

 

 

 

 

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November 05, 2024

As we head into tomorrow's very high stakes election, the betting markets have narrowed in recent days, but remain in favor of Trump.  
 
Let's take a look at the bond market.  
 
 
As you can see, despite a larger than expected rate cut by the Fed back in September, and Fed forecasts of another 50 basis points before year end, and another 100 basis point next year, the market has taken interest rates UP, not down.
 
And as we discussed last week, the narrative on this move in the 10-year yield has been developed through claims from the media and select "experts" that a Trump administration 2.0 would be inflationary.
 
And you can see it in the trajectory of yields as the probability of a Trump win has risen over the past month.  
 
 
But as we've discussed, the move in rates has been global.  
 
 
As you can see in this chart above, yields on UK gilts have risen even more aggressively than the rise in US Treasury yields since mid-September.
 
Interestingly, this move in UK yields comes with a new budget proposal under the new Prime Minister Keir Starmer, which increases taxes, regulations and borrowing in an economy that's barely growing. 
 
Remember it was September 2022, under a new UK Prime Minister Liz Truss, when her new pro-growth budget proposal led to a sharp spike in interest rates. UK stocks fell about 10%.  The pound fell by 11%.  The UK government bond market broke, and required a rescue from the Bank of England.
 
They ran Liz Truss out of office by the end of October, due to "severe economic consequences of her policies."
 
Conversely, while Starmer's new low growth/high spending budget has had criticism, and rates have risen sharply, back to those unsustainable September 2022 levels, there has been no such call for Starmer's resignation.
 
With the above in mind, Liz Truss called out the UK "financial establishment" earlier this year, for colluding to bring down her government, by 1) the Bank of England selling 40 billion pounds worth of UK government bonds the night before her budget was revealed (which pushes bond prices down/rates up), 2) the Bank of England raised interest rates by 1/2 point that month, 3) the Office of Budget Responsibility (OBR) leaked a forecast on the Truss budget that inaccurately claimed a big financing shortfall, and 4) she said there were other leaks to the media on the budget.
 
This, all to say that Liz Truss has warned the Trump administration that the U.S. administrative state (which he wants to right size) could use the bond market (i.e. spike interest rates) to create economic chaos and thwart the execution of his agenda. 
 
 

Pro Perspectives 10/31/24

 

 

 

 

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October 31, 2024

We had no surprises in this morning's PCE report.  The Fed's favored inflation gauge has now fallen to a year-over-year rate of 2.1%. 
 
That's the lowest since early 2021, prior to the explosion of agenda spending by the Biden administration.
 
With that, the Fed has turned focus to the employment situation in recent months.  And we'll get the October jobs report tomorrow morning.
 
As a refresher, Jerome Powell made it clear in their September meeting that a negative surprise in the labor market was the condition to cut rates faster.
 
Two weeks later, the jobs data delivered a positive surprise.  And it's unlikely that the Fed would put much weight on tomorrow's report given that it will be distorted by the effects of the hurricanes and the port worker strike. 
 
That said, the revisions to last month's numbers will be the spot to watch.  As we know, the Biden Bureau of Labor Statistics (BLS) has consistently reported jobs data over the past four years, in a way that has led to very consequential misreads on the health of the economy by policymakers.
 
Assuming no material change in last month's view of the employment situation, the Fed should be on an easy path to deliver a quarter point cut at its meeting next week, and another quarter point cut in December.  That's in line with it's September projections, and in line with market expectations. 
 
And with inflation now very close to the Fed's target (the target headline PCE of 2%) and the effective Fed Funds rate still well above the rate of inflation (at 4.83%) the Fed has a lot ammunition to repond to any shock risks that may arise from any domestic or geopolitical event (the probability of which is not small).
 
On a related note (to shock risk), we get a bearish technical break in the stock market today.  In the chart below, you can see the break of the trendline that comes in from the August lows — lows which were induced by the carry trade unwind that shook global markets.  
 
 
This looks like positioning, ahead of what will likely be a chaotic period around election day on Tuesday.  We have a similar line (from the August lows) in German and Japanese stocks, both of which have given way (broken).
 

Pro Perspectives 10/30/24

 

 

 

 

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October 30, 2024

We heard from Tesla last week, Alphabet yesterday, and Meta and Microsoft after the close today.
 
And by the end of the day tomorrow, we will have heard from Apple and Amazon.  That will be six of the biggest spenders on AI infrastructure.
 
So, what's the state of the technology revolution?  Sundar Pichai (CEO of Alphabet) says it's still the "early days of a what is a powerful new technology."  
 
Remember Nvidia CEO, Jensen Huang, said in May of last year that the transition from general purpose computing to accelerated computing would require a "$1 trillion retooling" of the world's datacenters.
 
These six companies are on pace to spend about $200 billion this year.
 
Next year they will spend more.  And the next year they will spend more. 
 
Remember, Wall Street started scrutinizing the heavy capex commitment of these companies last quarter.  They wanted to see return on investment.  
 
With that, in these earnings calls, of the two biggest hyperscalers (i.e. those providing the AI compute services to external customers) both made it clear that this spending isn't a bet on the future, rather it's fulfilling "real demand." 
 
And that "real demand," as Sundar Pichai put it, is revenue derived from "inferencing" not model training.
 
They aren’t spending tens of billions of dollars to build out computing capacity just to resell it to startups training models that might never become viable businesses.
 
Instead, the demand is driven by established enterprises implementing AI models to transform their data into business value and efficiencies. This is real generative AI adoption. These tech giants know enterprise demand for inference will only increase, and they know AI model adoption is just beginning to scale globally.

 

That’s why they’re confident in spending whatever it takes. The prohibitive cost of building this infrastructure further fortifies their market dominance.

 

At Microsoft, this business is already on a $10 billion revenue run rate—the fastest new business in company history to reach that mark.

 
As we've discussed over the past year, this is a new industrial revolution.  And we should expect it to grow the economic and stock market pie.
 
In an era that has already brought us multi-trillion dollar companies, more are coming.     
 
 

Pro Perspectives 10/29/24

 

 

 

 

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October 29, 2024

There is an abundance of economic, domestic political and geopolitical information for markets to digest over the next nine days.
 
What signals are markets giving? 
 
Bitcoin is back on record highs.  Gold posted the highest closing price on record today.  And global bond yields have sharply returned to levels of this past summer.
 
The optics here are "de-risking."  Global capital seeking store-of-value.  Devaluation of fiat currencies.  Signs of an overdue rebuke of overindebtedness and egregious fiscal behavior.    
 
With that, the same media and fiscal watch dogs that were unworried about multi-trillion dollar agenda spending over the past four years and record deficits that accompanied an already growing economy, are now pontificating about draconian debt and deficit outcomes from the next administration. 
 
It's a story that's fitting the price.
 
But is it the right story?
 
If we look at bond yields, the yield curve returned to a positive slope last month, after two years of inversion.  It has since steepened, and then shifted higher.   
 
This can be interpreted as a bond market signaling increasing confidence in economic growth expectations.
 
And we happen to have a significant economic growth catalyst at work.  It's not the Fed.  It's not the election outcome.  It's the ongoing industrial revolution, driven by generative AI.
 
With that, we heard from one of the tech giants working on the frontier of generative AI today.
 
Remember, in its earnings call over the summer Alphabet (Google) said:  1) the price to build generative AI computing capacity continues to go up, 2) the handful of companies that can afford to build it will spend whatever it takes on the infrastructure, 3) the AI model intelligence continues to rapidly advance, and 4) the stage of the technology revolution is still "early."
 
They reported on Q3 earnings today, and all of it still applies.  They had record revenues with near record operating margins.  And they will be investing even bigger in AI infrastructure in 2025.  And the spend, in the words of the CFO, is "based on the demand of customers."    

Pro Perspectives 10/28/24

 

 
 

 

 

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October 28, 2024

The betting markets have continued to widen in favor of a Trump win.

This pattern is similar across all of the top prediction platforms.

The Republicans are widely expected to win the Senate, and the betting markets are pricing in about a coin flips chance of a fully aligned government (a House win as well).

With that, small cap value stocks outperformed broader stocks today on this outlook of more business friendly, pro-growth policies.

If we look back at 2016, for those reasons, the Russell 2000 doubled the performance of the S&P in the two months following the Trump win (+17% vs. +8%).

This growing probability of a Trump win is bubbling up in a few other areas.

In media, the LA Times didn’t endorse a candidate.  Nor did the Washington Post.    

And Jeff Bezos just penned this opt-ed in his Washington Post … 

This sounds like a mea culpa on a failed influence campaign.

We will see.  

It’s a very high stakes election, with a binary outcome on policy path and governance.

On that note, I want to revisit my piece from election day in 2020.

Please take the time to watch the video at the end (foresight was 2020).    

November 3, 2020

Big day.  And global asset prices are soaring.

Are markets anticipating a Biden win, blue wave and, consequently, a $3 trillion slush fund coming down the pike?

Are markets anticipating a Biden win, and subsequent economic shutdown, for the purpose of forcing Congress to relent on a $3 trillion dollar “relief” package?

Are markets anticipating a Trump win, and the immediate removal of the political noose that has choked off the full reopening capacity of the U.S. economy?

Are markets simply anticipating the end of a very long period of uncertainty, which will ultimately, at minimum, give way to a recovering economy with trillions of dollars of monetary and fiscal stimulus still floating around?

Any way you look at it, the common theme is that the election represents an unlocking of the liquidity deluge from the policy response earlier this year (and possibly even adding to it).

The next question to ponder, just how much inflation is ahead?

With the Fed openly willing to sit on zero interest rates until they see inflation run sustainably north of 2%, if Biden were to come in and pile on a multi-trillion government spending program, on  top of the this chart below, inflation would explode higher — and the Fed would be caught well behind, and chasing it.  As we’ve discussed for a long time, you don’t want to hold cash in this environment, you want to be long asset prices. 

With that said, on the election outcome front, for the states that will determine the winner, the national polls have Biden up by only 2.3 points going in. 

Assuming there are no surprises in Florida and Texas, a win for Trump in Pennsylvania would probably get him over the finish line. And the three pollsters that correctly predicted his win in Pennsylvania in 2016 have him winning PA again (Big Data Poll, Susquehanna, and Trafalgar).

On a final note, as we’ve discussed here in my daily notes, the stakes are extremely high in this election. China is on the doorstep of overtaking the United States as global economic superpower, and they won’t be looking to spread democracy – rather, they have a clear goal of world domination.

As we know, Trump has been a wrecking ball for the Chinese Communist Party’s grand plan. And with that, it’s safe to say they would do anything and everything to get rid of him.  We’ve seen just that.  On the other hand, Biden seems very likely to follow the “humble foreign policy path” that has enabled China’s ascent.

With that above in mind, maybe the most articulate description of – Trump’s role as a wrecking ball, what has taken place over the past four years and amplified in the past 10 months, and what is at stake with today’s vote – is in this speech (click here to view).  It’s from a prominent NY money manager, and worth the time. 
Pro Perspectives 10/24/24

 

 

 

 

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October 24, 2024

We've talked this week about the sharp move higher in bond yields. 
 
The market has effectively reversed the Fed's September interest rate cut.  And as we observed in my note yesterday, the futures market positioning is at extreme levels (leaning heavily toward the view of even higher yields).
 
Is the market right?  Has the Fed miscalibrated with its September cut and the projected easing cycle?
 
Let's take a look at a leading indicator for the 10-year Treasury yield.  It's the copper-gold ratio.  
 
The ratio of copper prices-to-gold prices tends to trade tightly with the 10-year yield.  And historically divergence between the two has resolved with the 10-year yield closing the gap (i.e. following the path of the copper-gold ratio). 
 
That said, we get the November Fed decision in two weeks, just following the election.  The expectations are for the Fed to follow its half point rate cut in September with a less aggressive quarter point cut in November.
 
But the level of rates remain in highly restrictive territory (putting downward pressure on the economy) and this sharp rise in bond yields has effectively tightened financial conditions since the last meeting.   

Pro Perspectives 10/23/24

 

 

 

 

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October 23, 2024

Yesterday we talked about the sharp rise in bond yields.  And we talked about similar moves in yields that took place last April and last October (a year ago).
 
In both cases, the catalyst was an escalation of the war in the Middle East, which raised the specter of global war.
 
Why would yields rise?  Because in a wartime scenario, the government would respond with (a lot) more spending.  And the debt problem would multiply.
 
And with that, the Fed would likely facilitate a wartime fiscal expansion, by a return to "extraordinary measures." 
 
How did the Fed do it in World War 2?  Yield curve control.
 
They financed war debt by pegging short term rates at a fixed rate, and by capping rates on longer term Treasuries.
 
As for the Fed's current policy path:  The Fed is now dealing with an interest rate market that has reversed its September 50 basis point rate cut.  The 2-year yield was 3.60% on September 18th.  Today it traded as high as 4.08%. 
 
And remember, it was the sharp move higher in bond yields a year ago (last October) that led Jerome Powell to signal the end of the tightening cycle, citing the tightening of financial conditions that had taken place in bond yields.
 
That was the top in yields (at 5% in the 10-year). 
 
And it came in a bond market where speculators were net short treasury futures (i.e. betting on higher yields) at record levels. 
 
Such extremes in market position tend to be contrarian indicators. 
 
Indeed, those bets against bond prices last October were wrong.  It was the turning point for the interest rate market. 
 
Guess what?  The net short position in treasury futures is even more extreme short right now (chart below). 
 
 

Pro Perspectives 10/22/24

 

 
 

 

 

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October 22, 2024

Let’s take a look at the bond market.

This is the U.S. 30-year yield …

This has moved 48 basis points in 16 days.  The chart of the 10-year yield looks similar.  It’s moved 52 basis points since the beginning of the month.

Why?

Is the market suddenly becoming concerned with overindebtedness?  Related to that, are the bond market vigilantes finally showing up to punish the egregious deficit spending and government handouts in an economy that’s running at “above trend” growth.

Is it a bet that inflation will reignite under the policies of the next administration?

The sharp rise in yields isn’t specific to the U.S.  It’s global.  But then again, so is the overindebtedness problem.

But, if we look at these three points denoted on the chart above, each has a commonality:  The Israel-Hamas War.

The Yom Kippur War started on October 6, 1973.  It began by a surprise attack on Israel by Egypt and Syria.

Almost 50 years to the day (50 years and one day), Hamas launched a surprise attack on Israel last October.

That’s point number 1 on the chart.

And with that attack on Israel, suddenly there was risk that retaliation could devolve into direct confrontation with Iran, and ultimately a global war.  It was a global war flashpoint.

Where does capital tend to flow in times of heightened risk?  U.S. Treasuries (bond prices up, yields down).

In this case, it went the opposite way.

Over seven days, the 10-year yield went UP 50 basis points, crossing the 5% threshold.  It fell only when the Fed relented and signaled the end of the tightening cycle, because a 5% 10-year yield had tightened financial conditions — unwelcomed by the Fed.

How did other markets respond to the attack in October?  Gold went up 11% in ten days. The S&P 500 went down 5%, before bottoming on the Fed signal.  Oil went up 10% and then down 10%.

Let’s look at point number 2 on the chart.  It’s April.

What happened in April?

Escalation.  Israel conducted an airstrike on the Iranian consulate in Syria killing the leader of the Iranian Revolutionary Guard.

    

Stocks  fell 6% in fourteen days.  Gold went to new record highs, up 9% in ten days.  Oil went up, then down.  Once again, the 10-year yield went UP, not down — from 4.19% to 4.73% in nineteen days.

Fast forward to today, and we have another sharp move higher in yields, of a magnitude similar to these two periods we discussed above. And we have escalation again — which may, at this point, become a full-blown war between Israel and Iran. 

Gold is up almost 6% in eight days.  But stocks haven’t done much.  And oil, the first move has been down.

So, given the discussion above, why would U.S. Treasury yields move higher if the risk of global war was heightened — and at a time when global capital should be flowing into the relative safety of U.S. Treasuries (demand that would put downward pressure on yields)?

Why higher?  In a wartime scenario, there would be no global government fiscal restraint – quite the opposite.  

 

Pro Perspectives 10/21/24

 

 

 

 

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October 21, 2024

With gold continuing to print new record highs, let's take a look at historical extremes in the ratio of gold prices to two key asset prices. 
 
Here's a look at gold prices relative to crude oil (WTI) …
 
 
As you can see to the far right in the chart, we are at an historic extreme, where the price of gold is 39 times the price of a barrel of WTI crude oil.  
 
If we look back over 75 years of data, these extremes in the ratio were resolved (i.e. turning point in the ratio) in each case by a sharp rise in the price of crude oil. 
 
Next is the S&P 500 to gold …  
 
  
The S&P is currently 2.2 times the price of gold.  Notice that the extreme of the late 90s tech bubble, which was ultimately resolved with a crash in stock prices, began at a much higher multiple of gold prices.