Pro Perspectives 2/15/23

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

 
February 15, 2023
 
Remember, going back to 1950, there has never been a 12-month period, following a midterm election, in which stocks were down. And the average one-year return following the eighteen midterm elections of the past seventy years was 15% (about double the long-term average return of the S&P 500).
 
That said, we came into the year with a lot of negative expectations priced into markets (from the rate path, to earnings erosion, to recession).
 
On the rate path, Jay Powell has since signaled in recent weeks that the end is near, if not here.  On earnings, we're about three-quarters of the way through fourth quarter earnings, and 69% of companies have beat estimates (not far from the 10-year average), and the contraction in S&P 500 earnings overall is in-line with expectations.  As for recession, the consensus view coming into the year questioned not "if," but "how severe" it will be.  So far, no signs of the economy faltering (quite the opposite). 
 
And keep in mind, we've already had a technical recession (in Q1 and Q2 of last year), in reaction to high inflation, and in anticipation of higher interest rates.  We've since had a 3.2% annualized growth quarter in Q3, a 2.9% quarter in Q4, and thus far, the Atlanta Fed model is projecting 2.4% for Q1 of this year. 
 
And as we discussed in my January 26th note (here), we are in a hot economy, where demand has been throttled by the Fed.  It's a not a sputtering economy with a demand problem.  Today's retail sales number supports that:  up 3% on the month.  Excluding the covid period, that is the hottest month in over 20 years.
 
As I've said, the Fed is holding the beach ball under water.  As they back off, we need the economy to boom, and for the wage level-to-price level gap to start closing (to restore standard of living).  

Pro Perspectives 2/14/23

Pro Perspectives 2/14/23

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

 
February 14, 2023
 
We had the January inflation report this morning.  Prices rose at the hottest rate in several months, from December to January.  But the year-over-year inflation number came down. 
 
Remember, this inflation report has caused extraordinary swings in stocks for the better part of the past six months.  What happened today?  Nothing extraordinary.
 
Why? 
 
As we discussed yesterday: 
 
1) The headline inflation number is still high, but it doesn't reflect the current price pressures, because it's a calculation that measures the January CPI index against the very low base of January 2022.  We should expect the number to be high for a few more months. 
 
2) The Fed has already taken short term rates ABOVE the its favored inflation gauge (core PCE, which measures what consumers are actually paying for goods and services, less food and energy).  This "positive real rate" dynamic (where interest rates are above inflation) has historically proven to contain inflation and produce macroeconomic stability. 
 
3) The Fed has already built in market expectations for a few more hikes, so there was little-to-no risk of a change in that view, after seeing today's report.
 
Bottom line:  The Fed has been THE burden on the economy for the better part of the past year.  But Jerome Powell has given us plenty of signals the past two weeks, that the Fed has finished the job on the inflation fight (if not finished, then very near).  Nothing in this January inflation report should alter that position.  

Pro Perspectives 2/13/23

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

 
February 13, 2023
 
We get the January inflation report tomorrow.  
 
Remember, these have been huge events for the stock market … 
 
>For four consecutive months (Sept – Dec), the inflation report induced a trading range in stocks, on the day, of about 5% (on average).
 
>It was the inflation report on October 13th, that marked the low of the bear market in stocks.
 
>And, arguably, it was the weak inflation report on January 12th that cleared the way for the break above the 200-day moving average, and the break of the big technical downtrend in stocks (chart below).
Of course, the reaction in stocks is predicated on what the inflation arc means for Fed policy. 
 
So, what should we expect for tomorrow?
 
The bad news:  The monthly change in prices is expected to be the hottest in four months.
 
The good news:  The market will likely ignore it, for a couple of reasons…
 
Reason #1: Expect the market to focus on the year-over-year number.
 
Remember, we’ve looked at this chart over the past several months …
You can see in the chart, inflation over the past seven months, on this headline index, has already leveled off.  The rate-of-change in prices (inflation) has clearly been curtailed.  That’s good!
 
Even if tomorrow’s report shows that inflation in the month of January was hotter than the past few months, when measured against the base of twelve months ago, the headline inflation number the media will tout will still show a decline (“inflation moving in the right direction” – lower).    
 
That said, even if the monthly number tomorrow is surprisingly weak, the headline year-over-year number will still be a big number, relative to the inflation that the Fed is targeting (2%).  
 
Bottom line, the year-over-year headline inflation is still likely running  around 6%.  And, it will continue to measure at historically high levels in the months ahead, regardless of what’s really happening with current inflation.  Why?  Base effects.  Because of the aggressive rate-of-change in prices twelve months ago, the most recent CPI Index reading will continue to be measured against a very low base.
 
Now, for Reason #2 (that the market will likely ignore a hot monthly inflation number tomorrow):  The Fed’s favored inflation gauge is core PCE.  And the effective Fed Funds Rate is now above core PCE. 
 
And as the Fed has reminded us, the inflation storms of the past have only been quelled when interest rates are taken ABOVE the rate of inflation.  Not only are they there, but they’ve built in expectations that they will do a couple more rate hikes, for good measure.
 
The hawkish expectation setting by the Fed, should reduce (if not eliminate) the potential for a negative surprise (and adverse market reaction) in tomorrow’s inflation report.  

Pro Perspectives 2/10/23

10Please add bryan@newsletter.billionairesportfolio.com to your safe senders list or address book to ensure delivery.  

 
February 10, 2023
 
We’ve talked about the oil situation this week, after Biden mistakenly admitted that U.S. producers have no incentive to invest profits in new production, given the administration’s (and Western world’s) war on oil.
 
As we’ve discussed the past two years here in my daily notes, the Western world’s war on oil has put OPEC and Russia in the driver’s seat to dictate supply, and therefore price. 
 
On that note, the world has been naively hoping that OPEC would increase production to help ease the global oil price crunch (namely, for Western consumers).  Not only have they rejected that notion, they have cut production since (last October).  Add to this, Russia announced a 5% production cut today. 
 
Just as oil revenue dependent companies will act in their best interest, so will oil revenue dependent countries. 
 
On the demand side, this all comes as China has scrapped its zero-covid policy, the IMF has upgraded its global growth forecast, and the U.S. will be replenishing its Strategic Petroleum Reserves.
 
We should expect triple-digit oil prices to return.  And higher oil prices would reverse what has been a falling rate-of-change in overall prices (i.e. inflation).  This fits with the scenario we’ve been discussing, of persistently higher than historically-average inflation. 
 
The good news:  With interest rates now normalized, persistently higher inflation can also be stable inflation. 
 
This dynamic in the energy sector is what led a Texas billionaire, that made his money in distressed real estate, to set up a company buying existing, cash flowing oil and gas assets, at a discount. He says it’s the biggest opportunity of his lifetime. 
 
We own his stock in our Billionaire’s Portfolio, along with two other stocks that give us the opportunity to see gains leveraged to the price of oil.  For details, subscribe to our Billionaire’s Portfolio here. 

 

Pro Perspectives 2/9/23

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

 
February 9, 2023
 
Yesterday, we talked about the President's use of the country's Strategic Petroleum Reserves, in effort manipulate oil prices lower (and therefore gas prices).
 
It started November 23, 2021, with the announcement of a 50 million barrel release over "several months" to address the "mismatch between demand [related to] exiting the pandemic, and supply."  The price of oil closed that day at $78.
 
Biden then announced on March 31, 2022, a plan to release 180 million barrels of oil, to address the significant global supply disruption caused by Putin's war on Ukraine."  The price of oil closed that day at $100.
 
Then in October of last year, he announced an end to the planned sale by December, BUT also said he would authorize significant additional sales in the coming months if required.  So far, he's done 26 million barrels more than the March plan.
 
The price of oil today is $77.  And the U.S. Strategic Petroleum Reserves is now nearly 40% leaner.  
As you can see in the chart, we are back to 1983 levels.
 
That said, the U.S. population is now 43% bigger than it was in 1983, and the economy is seven times bigger.
 
For national security, these barrels will have to be replenished.  The question is, at what price?
 
Likely much higher.  And the government will become a tailwind for oil prices.    
 

Pro Perspectives 2/8/23

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

 
February 8, 2023
 
Let’s talk about oil…
 
Last night, Biden, unwittingly, in off-script comments in his State of the Union address, made the case for precisely why oil and gas companies have no incentive (more like disincentive) to invest in new production, and every incentive to produce and return profits to shareholders, at higher and higher oil prices, driven by lower and lower supply.
 
This was Biden’s script:
 
“You may have noticed that Big Oil just reported record profits.  Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous.  They invested too little of that profit to increase domestic production and keep gas prices down.“
 
Here’s what he said off-script:  “When I talk to a couple of them [oil executives], they say ‘we’re afraid you’re going to shut down all of the oil wells and all of the oil refineries anyway, so why should we invest in them?‘   I said, we’re going to need oil at least another decade.“
 
Exactly.
 
So, both domestic and global anti-oil policies are ensuring structural oil supply deficits, into perpetuity.  And energy companies are doing the right thing by their owners (shareholders), by maximizing profitability on existing production (while they can) — and then returning loads of cash flow to the owners.
 
With this model, energy earnings are proving to be levered to the performance of oil.  The average price of oil in Q4 of 2022 was up 7% compared to Q4 of 2021.  During the same period, the reports from the energy sector thus far, show earnings growth of 58% year-over-year.
 
And keep in mind, those earnings are generated from oil prices that were trading in the lowest quintile of the range of the past year.  With the lack of incentive to invest in new supply (globally), prices will be going higher, much higher.
 
This comes as the President has drained 40% of the country’s Strategic Petroleum Reserves, in an explicit effort to manipulate oil prices lower.  It has worked.  But it’s temporary.  And they will be forced to restock those reserves as prices are moving higher, which will exacerbate the rise.
 
With oil prices now in the high $70s, this is a second chance to get involved. 
 
This dynamic in the energy sector is what led a Texas billionaire, that made his money in distressed real estate, to set up a company buying existing, cash flowing oil and gas assets, at a discount. He says it’s the biggest opportunity of his lifetime. 
 
We own his stock in our Billionaire’s Portfolio, along with two other stocks that give us the opportunity to see gains leveraged to the price of oil.  For details, subscribe to our Billionaire’s Portfolio here. 

Pro Perspectives 2/7/23

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

 
February 7, 2023
 
We heard from Jerome Powell (again) today, just days after his post-FOMC press conference. 
 
There was anticipation that he might use today’s Q&A session at the Washington Economic Club to address Friday’s hot jobs report.
 
Let’s talk about what happened …
 
Remember, on Wednesday, despite telegraphing a continued, but slower, rise in interest rates toward the low 5% area, he did nothing to push back against a stock market that has been on a tear since the beginning of the year, and an interest rate market that has been pricing in rate CUTS by the end of the year.   
 
As we discussed last week, this mix of higher equity prices and cheaper borrowing costs (based on benchmark market interest rates) is stimulative to the very economy that Powell and company have been trying to suffocate for the past ten months (in effort to bring inflation down). 
 
So, did he use today’s platform as a second chance to tighten the grip on financial conditions (to talk down stocks and bonds)?  He didn’t. 
 
Why?
 
As we also discussed last week, this recent Fed rate hike now puts the Fed Funds rate ABOVE the Fed’s favored gauge of inflation (core PCE).
 
That’s historically where the Fed has gone to get inflation under control. So it’s sensible to think the Fed should be satisfied and ready to step back and watch from here (i.e. pause).
 
But what about this 2% inflation target they keep going on about?  The Fed’s favored gauge of inflation is still at 4.4% – quite a distance away.
 
Let’s address that by revisiting a very important keynote speech Jerome Powell gave back in 2020 at the annual global economic symposium in Jackson Hole.
 
It was in that speech, that Powell made it official policy, that the Fed was changing the way it evaluates its 2% inflation target.
 
Here’s the important part of his speech:  “Our new statement indicates that we will seek to achieve inflation that averages 2% over time.  Therefore following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.” 
 
Translation:  Inflation has been too low for too long (at the time of this speech in 2020).  And with this policy change, Powell told us he would let inflation run hot, to bring inflation back to 2% on average over time.
 
In that respect, he is (still) delivering. 
 
Let’s take a look at what this “average” looks like dating back to the ultra-low inflation era of the post-financial crisis, and into this pandemic era. 
As can see, inflation ran below the Fed’s 2% target for the better part of thirteen years.  And for the past two years, it has run well above target. 
 
On average, inflation over the fifteen-year period remains below target.
 
This policy objective for the Fed, argues that they should be happy with stable, but higher than target inflation for a while longer.  
 
And this aligns with what we discussed in my note yesterday:  We need a period of hot growth, rising wages, and stable (but higher than average) inflation (to inflate away debt).  
 
PS:  If you know someone that might like to receive my daily notes, they can sign up by clicking below …
 

Pro Perspectives 2/6/23

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

 
February 6, 2023
 
After another round of rate hikes last week, we ended the week with a hot jobs report.
 
That said, the wage component of the jobs report continued the trend lower, from the March peak. 
 
Following the jobs numbers on Friday, the January report on economic activity in the services sector was strong.  It showed a return to growth, after a dip in December.
 
Meanwhile, the price component of the services report showed the slowest rise in prices in nine months (on a steady trend of slowing). 
 
The inflation data in these reports should be well received by the Fed. 
 
Remember, the massive monetary and fiscal response to the pandemic (plus the subsequent Democrat agenda spending binge) ramped the money supply by 40% in just two years.  That was ten years worth of money supply growth (on an absolute basis), dumped onto the economy over just two years.
 
With that, we expected the price of everything to reset higher.  We've seen it.
 
Now, what we don't want, is to see the level of prices decline. 
 
Deflation would kill growth, and leave us with trillions-of-dollars of fiscal bullets fired, with no growth to show for it (only the massive increase in debt, with no growth offset).  
 
What matters now is rate-of-change in prices (i.e. slower). 
 
Inflation is slowing.  
 
And, importantly, it seems to be happening without destroying the economic firepower of six-trillion dollars of new money floating around.  That's good news. 
 
Growth solves a lot of problems. 
 
We need a period of hot growth, rising wages, and stable (but higher than average) inflation (to inflate away debt).  
 
PS:  If you know someone that might like to receive my daily notes, they can sign up by clicking below …

Pro Perspectives 2/2/23

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

 
February 2, 2023
 
The central banks in the UK and euro zone did as expected this morning, raising rates another half a point, respectively. 
 
With the Fed’s move yesterday, we now have the Fed at 4.75%, the Bank of England at 4% and the European Central Bank at 3%.
 
As we discussed yesterday, Jerome Powell gave plenty of signals that the Fed has finished the job on the inflation fight.  After all, the Fed has now successfully raised rates ABOVE the rate of inflation (above core PCE). 
 
On that front, the BOE and ECB still have a ways to go.
 
But both have this chart working in their favor …
Gas prices in Europe have collapsed since August, down more than 80%!  With that, we've seen three consecutive months of falling prices (month-to-month) in the euro zone.  It's a matter of time until that feeds into the year-over-year inflation number. 
 
With perhaps a sense of deflationary forces lurking, market-determined interest rates (10-year government bond yields) are signaling that these three central banks won't be able to follow through with their pledge to hold rates "higher for longer."
 
Yields moved lower, not higher, in each respective government bond market, following the central bank rate hikes of the past two days.
 
That signal from the bond market, is a welcome one for stocks … 
PS:  If you know someone that might like to receive my daily notes, they can sign up by clicking below …

Pro Perspectives 2/1/23

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

 
February 1, 2023
 
The Fed meeting came and went today with another quarter point hike. 
 
As we’ve discussed in recent days, that puts the Fed Funds rate ABOVE the Fed’s favored gauge of inflation (core PCE).  
 
That’s where, historically, the Fed has gone to quell inflation, so it’s sensible to think the Fed should be satisfied and ready to step back and watch from here (i.e. pause).
 
Today, Jerome Powell maintained the mantra of “finishing the job” on inflation, but he spent far more time making the case that the job is done.
 
He’s spent the past year telling us they have “more ground to cover.”  Today he said they’ve “covered a lot of ground.”
 
He’s told us “we’ll want to reach real positive rates.”  Today he said, “real rates are positive.”
 
In the December press conference, Powell used the word disinflation (falling inflation) zero times.  Today, he used it a lot!
 
But, what’s the one thing the Fed has been targeting for the past ten months?  Jobs.  Specifically, Powell has talked endlessly about the mismatch between the number of job seekers and the number of job openings. 
 
Ten months ago, when the Fed started the tightening campaign, there were two jobs for every one job seeker.    
 
The concern?  With leverage in the job market, job seekers and employees can command higher wages.  With that, the Fed has feared an upward spiral in wages, where wages feed into higher prices (inflation), which feeds into higher wages … and so the self-reinforcing cycle goes.
 
So, the latest “job openings” data came in this morning.  It’s virtually unchanged from ten months ago, no progress. 
 
So what did Jerome Powell say about today’s job openings report, when asked? 
 
Dismissively, he said “it’s been quite volatile.” 
 
“I do think, it’s probably an important indicator.” 
 
“It’s an indicator.”  Ha!       
 
Perhaps the biggest clue that the Fed has changed its stance:  Powell said nothing today to push back against a stock market that has been on a tear since the beginning of the year, and an interest rate market that has been pricing in rate CUTS by the end of the year (which includes a 10-year government bond yield that’s now trading 225 basis points lower than the historical average, relative to the Fed Funds rate). 
 
Of course, this mix of higher equity prices and cheaper borrowing costs (based on benchmark market interest rates) is stimulative to the very economy that Powell and company have been trying to suffocate for the past ten months.