Pro Perspectives 10/9/24

 

 

 

 

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October 09, 2024

We talked about the interview with Jamie Dimon yesterday, and his expectation that we will see more episodes of volatility in the Treasury market, driven by the Fed's quantitative tightening (QT). 
 
The Fed's minutes were released today from its September meeting, where they decided to start the easing cycle with a larger than expected 50 basis point cut.  They said nothing to change the ongoing reduction of the Fed's balance sheet (QT).  
 
 
As you can see in the chart above, the Fed has reversed nearly $2 trillion of the securities it added to its balance sheet in the covid QE response. 
 
That said, in line with the commentary from Jamie Dimon yesterday, most of the major bank economists came into the year expecting the Fed to end QT between this past summer and the first quarter of 2025 — with the concern of doing so before any signs of stress emerge. 
 
So far, no signs of stress translates into record highs for stocks. 
 
With that, let's take a look at the divergence developing again between small caps (the Russell 2000) and the big tech led, cap-weighted S&P 500. 
 
 
If we look back at the last two months of 2023, when Jerome Powell signaled the end of the tightening cycle, the Russell 2000 (small caps) went on a tear — rising 24% by year end.
 
Now we have the easing cycle officially underway, and yet the underperformance between small caps and the S&P on the year is double-digits.  
 
  
 

Pro Perspectives 10/8/24

 

 

 

 

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October 08, 2024

The big banks will kick off Q3 earnings season on Friday.
 
And preceding that, today we heard from Jamie Dimon the CEO of JP Morgan.
 
No one has more information on the health and trends of consumer and business behavior than the head of the biggest bank in the country.  With that position of power, he also has a seat at the table with the Fed chair and White House economic advisors, as a member of the "President's Working Group on Financial Markets."  He has influence.
 
So, what did he say?  
 
His comments started hitting the wires a few minutes after the open of the stock market this morning.  
 
He said "AI is real."
 
Not coincidentally, the AI trade was dominant today.  Nvidia finished 4% higher.  The Nasdaq and S&P both had big days, led by big tech. 
 
With the technology revolution in mind, he talked about the backlog for IPOs.  
 
We talked about this IPO outlook earlier this year, in looking at the parallels between the current environment and the late 90s boom.
 
A technology revolution was underway in the late 90s, with the rapid adoption of the internet.  Productivity was high.  Growth was hot.  Inflation was low. And the Fed juiced it with rate cuts, starting in 1995.
 
Take a look at the volume of IPOs in the late 90s, the biggest of which came early, in 1996. 
 
Then the frenzied return chasing came in late 1999.
 
     
If history is our guide, we should expect a coming boom in IPOs. 
 
And the Wall Street kings of underwriting (the big banks) will be big beneficiaries.
 
What else did Jamie Dimon say today? 
 
He agreed with the Fed rate cut.
 
And he had another comment about monetary policy that is interesting, particularly ahead of tomorrow's release of the minutes from the last Fed meeting.
 
Remember, as of September, the Fed is now easing policy through interest rate cuts, but it continues to withdraw liquidity from the system (i.e. it's simultaneously tightening) via its quantitative tightening program.
 
On the latter, Jamie Dimon has said in the past, that "rate cuts relate to inflation," while "QT relates to volatility and liquidity in the Treasury market."
 
And in this interview this morning, he talked about the risk of volatility in the Treasury market. 
 
He complained that the banks have tons of excess cash but can't use it efficiently due to regulatory constraints.  It's affecting their ability to provide liquidity in the Treasury market, while the Fed is simultaneously extracting liquidity from the Treasury market.  
 
And with that, he implies that we will likely see another episode of big Treasury market volatility, caused by the Fed's quantitative tightening (he mis-spoke and said QE in the interview).
 
Jamie Dimon said the Fed should start "fixing" this "today."
 
Remember, back in 2019, the Fed's attempt at quantative tightening brought about this 300 basis point spike in the overnight lending market …
 
 
The Fed explained it as …  "strains in money market … against a backdrop of a declining level of reserves, due to the Fed's balance sheet normalization and heavy issuance of Treasury securities."

 

So, after a period of "balance sheet normalization" (QT), the Fed was forced to return to QE.

 

With all of the above in mind, we'll see in tomorrow's Fed minutes what the committee had to say about plans to end QT (if anything). 

Pro Perspectives 10/7/24

 

 

 

 

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October 07, 2024

We came into Friday's jobs report with the Fed projecting two additional quarter point cuts into the end of the year, with "unexpected weakness" in the labor market as an explicit condition that would prompt them to move faster.
 
The jobs report came in unexpectedly strong.
 
Remember, this follows the recent upward revisions that were made to Q2 economic output, personal incomes, consumer spending and the personal savings rate.  And in the words of Jerome Powell, that removed what the Fed perceived to be "a downside risk to the economy."
 
So, with this good jobs report, we have more new information that suggests the economy (maybe) isn't as fragile as many have feared, including the Fed.
 
Does that mean the Fed's September cut was a mistake?  Is inflation coming back?
 
Let's revisit my chart from my May 7th piece, where we looked at the relationship between the change in money supply, and inflation.
 
 
As you can see, we had a growth shock in money supply (the blue line), from the 2020-2021 policy response to the pandemic.  
 
That was the inflation catalyst.
 
And you can see the lagging effect on inflation (orange line), as it peaked 16 months after the peak of money supply growth.  
 
We've since had the disinflationary effect (falling inflation) from the decline in money supply growth.  And not only has money supply growth dramatically declined, it contracted for sixteen consecutive months.  Contracting money supply is historically deflationary.
 
From this, we should expect the pressure on prices to continue to be downward.
 
With that in mind, let's take a look at a few comments made today by the Chicago Fed President (and voting member) Austan Goolsbee.
 
He said, he's "extremely happy with the jobs report."  But he wanted to make clear that the "large majority of Fed policymakers feel rates are going to come down a lot over the next year to 18 months."
 
And he said, "there are some signs that inflation might undershoot target." 
 

Pro Perspectives 10/3/24

 

 

 

 

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October 03, 2024

We get the big September jobs report tomorrow.
 
As we've discussed here in my daily notes, the Fed has made the employment situation the central focus. 
 
Specifically, it's "unexpected weakness" (in the words of Jerome Powell) in the unemployment rate that would trigger a faster pace of rate cuts.
 
The last reading was 4.2%. As you can see in the chart below, it's a low unemployment rate, relative to history.  Even if we pull out recession periods over the 60+ year history of this chart, the average unemployment rate is in the high 5s.  
 
 
So, it's not the level of unemployment rate, but the speed of change that has worried the Fed.  It's consistent with past recessions. 
 
And the Fed made clear following its September meeting, where they surprised markets with a large 50 basis point cut to kick off the easing cycle, that they wanted to signal that the they are on high alert to protect the economy.
 
That said, we've had some significant new information since that Fed meeting.
 
Remember, Jerome Powell spoke on Monday at the NABE in Nashville (National Association of Business Economics).  
 
And he talked about the September 26th revisions on economic growth made by the government's Bureau of Economic Analysis (BEA).
 
Specifically, he pointed to the significant revision made to second quarter Gross Domestic Income (GDI).  
 
He said, "there is research that says GDI gives a better real-time reading (than GDP).  And for the last year and a half or so, GDI has been quite low relative to GDP."
 
In fact, the last reading had GDP at 3% and GDI at just 1.3%. 
 
That's a huge gap. 
 
He said the Fed has been concerned that GDP would be revised DOWN to GDI.  "That's been a downside risk we've been monitoring."
 
Good news:  The revision came in the other way. 
 
GDI was revised UP from 1.3% to 3.4%.  The Fed Chair called it a "very large" adjustment that now "removes a downside risk to the economy."
 
With that, if we listen to Jerome Powell, we should expect the Fed to be less sensitive to a tenth of a tick here or there in the unemployment rate tomorrow. 
 
And factoring in these BEA revisions, which included revisions higher to personal incomes, consumer spending and the personal savings rate, the market should be less sensitive to whether the Fed cuts 50 or 75 basis points into the end of the year. 
 
For perspective, we know the direction of rates is lower.  The Fed is "guiding" a path to neutral territory, which mean large rate cuts through next year.  The economic growth is tracking 2.5% for Q3.  And earnings growth is expected to be mid-teens in the fourth quarter.
 
This is a positive formula for stocks.  
 
Add to this, a risk to the rate path and economic stability was removed late today with the postponement of the port strike. 
 

Pro Perspectives 10/2/24

 

 

 

 

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October 02, 2024

Let's take a look at the behavior of copper prices the last time the Middle East was on a "knife edge," back in April of this year.
 
 
Copper is a proxy on economic activity and an essential commodity in warfare.  With that, we have a couple of drivers behind the spike in copper prices this past April/May.  And we have clear parallels with the current environment.
 
As you can see in the chart, copper prices spiked higher earlier this year on concerns that an escalation of conflict between Israel and Iran could lead to a global war.  
 
And then copper had another leg higher on optimism that Chinese stimulus measures would boost the Chinese economy, and add fuel to the global economy.  However, when that stimulus ultimately hit the market judged it as underwhelming, and copper prices sold off.
 
Fast forward to today, and we have both of these factors at play again, but with greater intensity.  And copper prices are again rising.
 
With the above in mind, take a look at this chart … 
 
 
 
This is the most recent electricity generation data from the U.S. Energy Information Administration (EIA).  It looks like it's breaking out. 
 
What signal can be taken from that?  Is it a signal on the economy (strength)?  The most obvious conclusion is the ramp in energy requirements to power generative AI.   
 
And copper is critical in electricity generation and distribution.
 
We have a healthy allocation to both copper and gold producers in our Billionaire's Portfolio.  This gives us leveraged exposure to the price outlook in these key metals.  If you're not a member already, you can join us today (here), and get all of the details on these stocks.
 

Pro Perspectives 10/1/24

 

 

 

 

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October 01, 2024

Yesterday, we talked about the upward revisions that were made on the economy by the government's Bureau of Economic Analysis (on the five-year period through this first quarter of this year).
 
It was good enough to assuage some of the concerns Jerome Powell has had on the growth data he and the Fed have made policy decisions around. 
 
With that, markets closed out the third quarter with the S&P near record highs and with tailwinds of a Fed easing cycle underway.
 
Today, we start the first day of the fourth quarter with an Iranian attack on Israel (and related global war threat escalation) and a supply disruption from a port worker strike which is compounded by already stressed logistics and supply issues from Hurricane Helene.
 
Markets went into risk aversion mode. 
 
Where does capital flow in times of global risk aversion?  U.S. Treasuries.  Gold.  The dollar.
 
All were up today.  Stocks were down. 
 
It started with this headline just after the market opened this morning …
 
 
Stocks did this …
 
 
So, clearly the big geopolitical risk here is that it pulls in Western allies of Israel, namely the United States, and a global war erupts.
 
That said, this risk was also contemplated back in April. 
 
And it happened to be right at the open of the quarter.
 
Let's revisit that timeline. 
 
Israel bombed the Iranian embassy in Syria on April 1st.  Stocks topped.   
 
Iran retaliated with strikes inside of Israel on April 13th.
 
It de-escalated on April 19th after Israel attacked targets in Iran.  Iran said it wouldn't retaliate. 
 
That was the turning point for markets, after a 7% decline in stocks, and 9% rise in gold (over 15 trading days).
 
In the current case, we should expect, at the very least, escalation from this morning's attack.  
 
That should keep markets in de-risking mode and provide more fuel for the commodities bull market.

Pro Perspectives 9/30/24

 

 

 

 

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September 30, 2024

We heard from Jerome Powell today for the first time since the September 18th post-FOMC press conference.
 
This comes at the end of a month for stocks that started down 5% and ended up over 2%. 
 
And this swing was largely driven by the expectations and outcome surrounding the September Fed meeting.  
 
Remember, in that September press conference he told us exactly what he wanted to signal to markets.  He wanted the "strong move" of the 50 basis point cut, to be "a sign of [their] commitment not to get behind the curve."
 
But the cracks in the labor market clearly had the Fed worried that maybe they had indeed fallen behind (waited too long).
 
With that, Powell made it clear that a negative surprise in the labor market was the condition to cut faster. 
 
So, speed and depth of rate cuts from here is all about the employment situation.  And we get the September jobs report on Friday.
 
Let's talk about what Powell said today. 
 
He was in Nashville at the NABE (National Association for Business Economics) where he delivered some prepared remarks and did some Q&A.
 
Anything new? 
 
He was clearly more confident on the economy. 
 
Did it have anything to do with the recent stimulus measures coming out of China, and the related boost it will give to the global economy?  Probably, in part.  But there was no mention of it. 
 
What he did discuss, intentionally, was the revisions of economic growth published last Thursday by the BEA (Bureau of Economic Analysis). 
 
This report updated economic output data from the first quarter of 2019 to the first quarter of 2024.
 
It was all revised UP.
 
These revisions add another $650 billion of inflation-adjusted dollars to total output over the five year period. 
 
The report also revised personal incomes up, consumer spending up and with a higher personal savings rate — and estimated higher productivity.
 
From this report, the Fed Chair said some "downside risks" to the economy they were concerned about have been "removed."  
 

Pro Perspectives 9/26/24

 

 

 

 

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September 26, 2024

We've talked about the outlook for a weaker dollar, driven by the recent Fed rate cut and the likelihood of a dramatic decline in U.S. real rates over the next year.
 
And as we've also discussed, a weak dollar tends to be fuel for commodities prices. 
 
Pretty much every important commodity in the world (food, energy, metals) is priced in U.S. dollars.  As such, the value of the dollar tends to have an inverse relationship with the price of commodities.  That inverse correlation gives stability to global buying power.
 
And remember, this comes as the bull cycle for commodities is young, and commodities prices still remain at historically extreme cheap levels relative to stocks.
 
Add to this, commodities have gotten another tailwind this week out of China.
 
On Monday, the Chinese central bank unveiled the most aggressive monetary stimulus since the pandemic.  It included rate cuts, support for the real estate market and direct support for the stock market. 
 
And then last night, the Chinese government followed that with a comprehensive plan to boost the Chinese economy.  It includes about a quarter of a trillion-dollars in fiscal stimulus.
So, this is clear big and bold action by the Chinese government to boost the economy, reverse deflationary pressures and appeal to foreign capital.
 
In a world where most major global stock markets are sitting on record highs, China becomes a "value with a catalyst" alternative.  And that catalyst, is the Chinese government explicitly supporting the stock market.
 
   
And this is liquidity that will spill over into global markets, and stimulate global growth. 
 
What commodity is the proxy on global growth?  Copper.  
 
What's the biggest mover on the week in global markets?  Copper.
 
As for commodities more broadly, China has a history of stockpiling commodities during periods of fiscal stimulus. 

Pro Perspectives 9/25/24

 

 

 

 

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September 25, 2024

We talked about both the technical and fundamental case for a weaker dollar yesterday.  
 
The outlook for lower real interest rates is clearly dollar negative.  And it plays into the long-term dollar cycles, which are in the early stages of a bear cycle.
 
That said, the dollar ripped higher today at 10am (EST).  
 
And it was driven by the safe-haven feature of the dollar. 
 
And this was the catalyst …
 
 
Zelensky took the stage at the UN and said Russia was planning attacks on Ukraine nuclear plants.
 
Forty-five minutes later, it was reported that the head of the Israeli army said they were preparing for a ground offensive in Lebanon.   
 
And hours later, Putin was on the wires announcing that Russia is expanding "the category of states and military alliances subject to nuclear deterrence."  If they get reliable information of an attack, aided by nuclear powers (Western world military alliance), he says they reserve the right to use nuclear weapons.
 
With the above in mind, we also talked about gold prices in my note yesterday.
 
It printed another new all-time high today.  And even at record highs, the reasons to own gold continue to build:  Falling real interest rates, fiscal and monetary policy profligacy, and now the dialing up of war rhetoric, which fuels safe have demand for gold. 
 

Pro Perspectives 9/24/24

 

 
 

 

 

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September 24, 2024

Let’s take a look at the dollar.

As we said last week, following the Fed action, the bigger 50 basis point cut was clearly dollar negative.  While the first move was up, the direction has since been down.

And as you can see in the chart, it looks like it’s breaking down technically …

And as we’ve discussed, the Fed has kept real interest rates (Fed Funds Rates minus the inflation rate) at historically high levels, and now that real rate is coming down, and has a lot of room to continue coming down before the Fed gets rates to what they consider “neutral” (neither restrictive nor stimulative to economic activity).

And the dollar tends to follow the direction of real rates.

For more perspective, let’s revisit the long-term dollar cycles, which we’ve kept an eye on throughout the history of my daily note.

Since the failure of the Bretton-Woods system through the onset of the Global Financial Crisis, the dollar traded in five distinct cycles – spanning 7.4 years on average.  And the average change in the value of the dollar (in those five cycles), from extreme to extreme was greater than 50%.

As you can see, the era of quantitative easing (QE) has seemingly distorted this last bull cycle.

The top was in late 2022, just after the Fed started QT (quantitative tightening/reversing QE). 

And now we’re in a dollar bear cycle.  And that aligns with the outlook for the bull market in commodity prices (lower dollar, higher commodities prices).  

With that, we’ve seen it reflected in gold.

We’ve often looked at this longer term chart of gold over the years, since it was trading in the $1,600s in March of 2020.  Spot gold is now closing in on this $2,700 level that we’ve been projecting from the technical analysis (Elliott Wave Theory).   

With this chart above in mind, gold tends to trade inversely to real interest rates.  And as we discussed above real rates are just beginning to decline and have a ways to continue lower.  And it happens to be as gold is already on record highs, driven by the U.S. fiscal profligacy of the past few years, global money printing, seizure of Russian assets and geopolitical risks.

So gold still has room to run. And the commodities bull cycle in general is young.  Broad commodities prices remain at historically extreme cheap levels relative to stocks.