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November 12, 2024

As we discussed in my note yesterday, the Trump agenda fueled a rise in bond yields following the 2016 election. 

And bond yields (market-determined interest rates) moved higher heading into the 2024 election as the prospects of a Trump presidency rose. 

Following the election last Wednesday, the benchmark 10-year yield jumped nearly 25 basis points.

So, we go into tomorrow’s October CPI report with yields testing this trendline from the 5% highs of last October.   

Remember, it was that 5% level in the 10-year yield a year ago that forced the hand of the Fed.  Jerome Powell signaled the end of the tightening cycle, concerned about the additional tightening effect that had taken place in bond yields (and the consequences for the economy).

Stocks were in a 10% correction when yields were at this 5% level back in October of last year.

The 10-year yield went on another run in April of this year, up to 4.74%.  It was driven by the escalation of attacks between Iran and Israel, and the prospects of global war.

Stocks were in a 6% drawdown when yields were trading at the highs of that period (4.74%).

And now we have another sharp move higher in yields, trading into this same trendline.  This time stocks are near record highs.

Over recent days, we’ve discussed the optimism surrounding the Trump agenda, which has reduced recession risk that has been priced into the bond market.  That’s good for stocks, and puts upward pressure on yields.

But there is another risk in the bond market, as we discussed last week.

We talked about the prospects that the DC bureaucracy could work to thwart Trump’s agenda, as they did in his first term.

After all, he’s vowed to end America’s participation in the globally coordinated economic and social agenda that has been executed under the guise of “climate action” — which has resulted in trillions of dollars of spending, and has ballooned the size of government.

And he’s vowed to clean up the DC bureaucracy.

We’ve 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 — using the bond market (spiking interest rates) to create economic chaos.

With that in mind, today Trump named his Treasury Secretary (correction: likely, but not formally named the nominee).

It’s hedge fund manager Scott Bessent.

And Bessent has talked openly about this bond market risk.

He predicted early this year in an investor letter, that Yellen (which he will now succeed) would dangerously “goose the economy” into the election “to aid Biden’s re-election.”

And last week, he said he’s now concerned that they’ve indeed taken the economy to a vulnerable place, and that they might “spike the cannon on the way out” — trigger an “economic problem” (like a spike in interest rates) to slow down the execution of the Trump agenda.

 

 

 

 

 

 

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November 11, 2024

As we’ve discussed throughout the year, small cap stocks have lagged the broader market.

The S&P 500, Nasdaq and Dow all surpassed the record highs of 2021 around the beginning of this year, and have carried on to much higher highs.  Meanwhile the Russell 2000 (small cap index) was still down almost 20% from its 2021 high just a couple of months ago.

 

But these underloved, if not left for dead stocks have ripped higher since election day, and the Russell 2000 is now back at record highs.

Remember, in my October 28th note, we looked back at the 2016 post-election performance of the Russell, in the two months following the Trump win.  It outperformed the S&P by more than 2 to 1 (+17% vs. +8%).  It’s on the path again.

And last week we talked about the 2016 election analogue in bonds, where the Trump agenda fueled a rise in the 10-year yield — on growth prospects, not inflation fears.

Likewise, in the 2024 election the 10-year yield went up as the probability of a Trump win went up, and it rose more sharply last Wednesday on the Trump victory (almost a quarter point).

And consider the sharp decline in the price of gold since election day – the historic inflation hedge.  It’s down 5% in four days, which seems to be expressing a view that the reckless fiscal policies are coming to an end.  That includes blank check foreign war funding, student loan forgiveness, and open-ended climate agenda spending.

Meanwhile, Bitcoin has traded to new highs, up 32% since election day.  Why?  It’s not fears of an inflationary Trump agenda.

Trump has floated the idea of holding bitcoin as a government reserve asset.  But far more important than that, Trump is simply not an existential threat to bitcoin, like the current administration.

In this prepared speech back in April of 2022, Biden’s Treasury Secretary, Janet Yellen, gave a clear warning for the “private crypto” market.  We talked about this in my daily notes a couple of years ago.

She said the history of money in the United States was littered with attempts at different forms of private money.  She said it (private money) didn’t work, and they regulated it away.

Their plan for bitcoin was to do the same, and strengthen their monopoly on money through a well telegraphed “central bank digital currency” (a digital dollar).  The Trump presidency changes that outlook.

What else is quickly pricing in an outlook where government regulators are no longer a predatory risk?

Tesla.

 

 

 

 

 

 

 

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November 11, 2024

With the election results, we now have a President-elect with a pro-growth, pro-business, pro-American economic agenda — and mandate from the people. 

More importantly, the new administration will abandon the globally coordinated radical agenda to transform global energy (the anti-fossil fuels agenda), which was designed to completely transform the global economy, and change the global balance of power.  It was self-sabotage. 

And with that, as we’ve discussed in my daily notes, the Biden administration’s adoption of anti-oil policies was a self-determined path to loss of reserve currency status of the dollar, and therefore a path to the destruction of wealth and loss of sovereignty (a recipe for a “new world order”).

The explicit regulations, policy goals and central planning around this energy transformation agenda both directly and indirectly signaled threats to the future of American businesses and industries.

As we’ve discussed in my daily notes, there has been a clear divergence over the past two years between the stock performance of a handful of tech giants and “the rest” of the stock market.  This past summer, that divergence was at historic extremes

And with the response of markets last Wednesday, it’s reasonable to believe that this divergence had something to do, if not a lot to do, with the democrat agenda of radical change.

It’s an agenda that prioritized climate over nearly everything else, which became an existential threat to some businesses, put a finite existence on others, and resulted in a consolidation of power into the hands of a few companies.

Again, if we look at the market response last Wednesday, the broadening of stock market performance, particularly to the benefit of smaller cap stocks, indicates that a Trump administration would restore the long-term livelihood of American businesses, by: 1) lifting restrictions on American energy production, and 2) terminating the Green New Deal initiatives within the Inflation Reduction Act.

We may very well be embarking on a golden era for America.  And a golden era for investing in America. 

The transition to a pro-growth government under Trump and his team, which includes Elon Musk, is more than just a political shift.  

It’s a strategic realignment towards sustainable economic prosperity

Just as in 2016, when business optimism skyrocketed, and markets followed, the focus on structural change (domestic manufacturing, energy independence, fiscal responsibility, and corporate repatriation) dramatically changes the outlook — not just in America, but around the world.  

A better U.S. economy can mean a better global economy.  A better global economy is good for everyone.

Add to all of this, we’re in the early stages of an industrial revolution.

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), with generative AI we have the formula for another “roaring 20s.” 

 

 

 

 

 

 

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November 07, 2024

The Fed cut rates by a quarter point today, as expected.

And Jerome Powell didn’t offer much new information about the policy outlook.

If we look back at their September projections, they saw another quarter point lower from here by year end, and another 100 basis points lower for rates next year.

At that time, it was clear that they wanted to get rates down aggressively to what they consider “neutral,” where policy is neither restrictive nor stimulative to economic activity (most importantly, no longer restrictive).

And the commentary from Jerome Powell in that September post-meeting press conference, and other Fed officials over subsequent days, sounded like they knew they were behind the curve, but they didn’t want to give that signal to markets.

The “cracks” in the labor market clearly had the Fed worried that they had indeed waited too long (held rates too high for too long, damaging the economy).

But if we fast forward to today, there have been three significant changes that have entered the Fed’s calculus.

Change #1:  A week after that September meeting, the BEA (Bureau of Economic Analysis) published revisions to economic output data from the first quarter of 2019 to the first quarter of 2024.

It was all revised UP.

The report also revised personal incomes upconsumer spending up and with a higher personal savings rate — and estimated higher productivity.

From this report, the Fed Chair clearly found relief on the economic picture.  In a Q&A event, he specifically addressed the report, and said that some “downside risks” to the economy they were concerned about had been “removed.”

Change #2:  The Fed has now moved rates down 75 basis points since September.  But bond yields, interest rates determined by markets, have moved UP by about the same amount.

The bond market (arguably) neutralized the Fed’s attempt to ease financial conditions.  Mortgage rates have reversed, from 6.1% back to 6.8% (levels of last July).

Remember, it was the sharp move higher in bond yields a year ago (last October) that led to a reaction from the Fed.  Jerome Powell signaled the end of the tightening cycle, citing the tightening of financial conditions that had taken place in bond yields.

With that, Jerome Powell was asked today about this recent big, adverse move in bond yields.

He seemed unworried.

Why?  Likely because of what is detailed in “Change #1” (above), and “Change #3.”

On that note, Change #3:  The election.  The Trump presidency brings with it a pro-growth agenda.  Remember, we looked at my chart on Monday (here) that showed the 10-year yield rising alongside the rise in the probability of a Trump win.

If we look back at 2016, we saw a similar Trump influence on bond yields …

Is the bond market behavior pricing in growth or inflation concerns?

For the three years prior to covid, the Trump economy grew at an average of 2.7% annualized (the best three-year average growth since 2007), with an average of just 1.7% inflation (PCE), and while the Fed mechanically raised rates throughout the period from 0.5% to 2.25%.

 

 

 

 

 

 

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November 06, 2024

The Trump win comes with Republican control of the Senate and possibly control of the House (yet to be determined).   
 
The Republicans need just 12 wins of the remaining 39 races to retain control of the House and give Trump an aligned Congress.  That appears to have happened, but has yet to be officially called. 
 
This means we'll have a pro-growth, pro-business, pro-American administration.
 
And it means the end of America's participation in the globally coordinated radical economic and social agenda that has been executed under the guise of "climate action."
 
Related to that, the Trump economic policy platform includes:  1) lifting restrictions on American energy production, 2) terminating the Green New Deal initiatives within the Inflation Reduction Act, and 3) opposing the creation of a central bank digital currency. 
 
And as we discussed last month, a big part of the return to embracing oil is preserving the world reserve currency status of the dollar
 
With all of this, stocks had a huge day, led by the undervalued, underloved broader part of the stock market.
 
We've talked about the divergence between small caps (the Russell 2000) and the big tech led, cap-weighted S&P 500.  That narrowed aggressively today.   
 
  
 
Oil stocks were up big, as suddenly oil and gas assets will need to reflect higher economic value given the likely removal of regulatory burdens (higher profitability and longer useful life).  Financial stocks were up bigger, on the prospects of the removal of the regulatory noose, and a hotter business environment. 
 
All of this said, we talked about the likelihood of the administrative state creating headwinds for policy execution.  It happened in Trump's first term.  And with a Trump team, this time, looking to root out waste and inefficiencies in the DC bureaucracy, we should expect the interference in Trump's second term will be even more severe. 
 
And we should expect the road to inauguration day to be bumpy.    
 

 

 

 

 

 

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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.

 

 

 

 

 

 

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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. 
 
 

 

 

 

 

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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).
 

 

 

 

 

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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.     
 
 

 

 

 

 

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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."