Pro Perspectives 8/19/22

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August 18, 2022

On Monday, we looked at this chart of the S&P …
As we discussed, the June low was marked by a central bank moment.  And we headed into this big technical level this week, with a central bank moment on the calendar — the July Fed minutes. 
 
This technical level proved to be a powerful one.  Stocks traded perfectly into the trendline from the all-time highs (the yellow line), and the 200-day moving average (the purple line) — and the positive momentum failed. 
 
But as we also discussed earlier in the week, the big central bank moment is next week. 
 
The Fed Chair, Jerome Powell, will give a prepared speech at Kansas City Fed's economic symposium in Jackson Hole, Wyoming.  This event is well attended by the world's most powerful central bankers and finance officials, and has a history of signaling policy adjustments. 
 
To this point, the biggest central banks in the world have been all bark and little bite.  
 
Inflation hit double digits in the UK this week.  And yet the Bank of England has rates set at just 1.75%.  
 
In Germany, July producer prices jumped 37% from a year ago.  This is the economic engine of the euro zone. 
 
Where are rates?  Remember, they surprised markets with a 50 basis point hike (market was expecting a quarter point).  That took the benchmark short-term lending rate in Europe to a whopping zero percent.  They had negative interest rates before that move, despite record inflation. 
 
Here's a look at the German PPI chart …  
   
Remember, all of this, and the media, corporate America and Wall Street are all constantly parsing the next words uttered from the Fed and other central bankers for clues on what's next in their alleged anti-inflation plans, all while completely ignoring the constant deficit spending binge on Capitol Hill (which is highly inflationary).
 
"Look over here, don't look over there." 
 
This formula is a "debasing" of the currency/devaluing sovereign debt.    
 
With this in mind, its a fair bet that the conversation at Jackson Hole next week, will be about Central Bank Digital Currencies (i.e. a new currency system).  
 
That might be why the cryptocurrency markets were crushed today – losing roughly 10% of value, on average, across the crypto currency universe.  
 
As we've discussed here in my daily notes, the politicians have made clear that they will regulate away private money (i.e. they will maintain their monopoly on money). 
 
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Pro Perspectives 8/18/22

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August 18, 2022

The WSJ wrote a lengthy piece today on the topic we’ve been discussing here in my daily notes. 
 
Here’s the headline of the journal story …  
This is the Fed lamenting the disconnect between the markets, and the narrative the Fed wants the markets to follow (and using the journal as the mouthpiece). 
 
The narrative:  The Fed is working to expeditiously bring inflation down. That implies rapidly rising rates and much tighter financial conditions (more expensive money and tougher to come by). 
 
The markets: The 10-year yield has fallen back from 3.5% down to 2.88%.  Stocks have rallied 17% off of the lows.  All of this in the past two months. 
 
Translation:  The market has stopped believing the Fed's hype.  
 
And for good reason. They have been bluffing!
 
Remember, the former Fed Chair, Ben Bernanke, once said that the Fed can raise rates in 15 minutes to deal with inflation, if needed. 
 
Well, the current Fed has certainly made it clear that the present inflation situation is a significant threat.  So, have they done a one-off, large scale emergency interest rate hike, to recalibrate economic activity and consumer exuberance?  No.
 
First, they watched the clear formula for inflation, as it was launched back in March of 2020 through the Cares Act.  Free money was literally dropped into the hands of consumers and businesses — with expectations of more to come.  
 
Next, they had clear evidence of the resulting inflation more than a year ago, as the core inflation rate sustainably spiked to double the level of their target rate of 2%. 
 
Did they act? 
 
No. They watched and even denied the durability of inflation (despite the clear formula of cash handouts, otherwise known in the central bank biz as "helicopter money"). 
 
And then, after they verbally pivoted and promised an outright attack on the inflation problem, they continued to execute their QE program for another five months (i.e. they continued to juice the economy and fuel the very inflation they were promising to attack). 
 
Fast forward to today, and here we are with inflation at 8.5%, and the Fed Funds rate at just 2.5%.
 
Remember, historically, to beat inflation, short-term rates need to rise above the rate of inflation.  The Fed is not close. 
 
Add to that, after telling us they would aggressively drain the liquidity they have added to the financial system over the past two years, they have done just a tiny fraction of their scheduled plan, thus far.
 
Bluffing. 
 
Why?  Unsustainable sovereign debt (not just in the U.S., but globally).
 
As you can see below, U.S. debt as a percent of GDP has doubled since the Great Financial Crisis.  If the Fed were to raise rates by the 600 basis points, to the level of current inflation, the annual interest we pay on our debt would balloon to over $1.5 trillion (from the current $400 billion).
 
And as we've discussed, even if the U.S. could handle it, the rest of the world couldn't.  It would set off a cascade of sovereign debt defaults.    
The strategy at work:  Inflate the denominator (growth), and inflate away debt relative to the size of the economy.
 
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Pro Perspectives 8/17/22

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August 17, 2022

The minutes from the July Fed meeting were released this afternoon. 
 
Stocks started the day lower, on speculation that some new (hawkish) information might be gleaned from the minutes.  But as we discussed on Monday, the meaningful takeaway from the July Fed meeting came from Jay Powell in the press conference (AFTER the meeting), where he said the newly set Fed Funds rate of 2.25%-2.5% was neutral (no longer accommodative)! 
 
And then he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data. 
 
To that point, dating back to March, their "guidance" had consisted of the threat to "expeditiously" bring inflation down. 
 
Where was inflation in July?  Exactly at the same level it was in March, when they claimed they would be "expeditious" in bringing it down. 
 
Still, in July, they proclaimed they had reached the neutral level for interest rates.  That tells us all we need to know about the appetite the Fed has for meaningfully higher interest rates (i.e. none). 
 
What's most interesting in witnessing the Wall Street and financial media's parsing of the Fed minutes today, is that there was little-to-no-mention of the massive fiscal spend that was greenlighted in the hours following that July 27th Fed meeting. 
 
Do they not think that a trillion dollars of fresh, mostly unexpected, fiscal spending will effect inflation, and the Fed's gameplan?  
 
More likely, they know the Fed couldn't fight the inflation battle that was in front of them already, much less one with even more deficit spending poured on top. 
 
How does it all play out, with a Fed that lets inflation run hot, and a government that rolls out bazooka funding for an economic transformation plan? 
 
You can get high inflation (still), but you also get hyper-growth.
 
Remember, earlier this year we looked at the early 1940s period as a potential analogue to the current period. 
 
Coming out of Depression, we had the New Deal (a huge government spending program), and war spending (World War 2). 
 
Growth boomed! 
 
Real economic growth (growth after inflation) averaged 14% per year from 1939 to 1943.

Pro Perspectives 8/16/22

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August 16, 2022

Yesterday we talked about the setup for Walmart, to positively surprise on earnings.  They did.  The stock was up 5% today. 
 
As we've discussed here in my daily notes many times, never underestimate the appetite of corporate America and Wall Street to set the bar low, so they can beat expectations. 
 
What's the perfect time to dial down expectations?  When the broad market is suffering, and broad confidence is low.  
 
Walmart used that playbook in late July, just two days ahead of a Fed meeting, where the Fed was expected to raise rates another 75 points, and was expected to continue hammering home the vision of "aggressive" rate hikes. 
 
What is the perception that comes with this Fed outlook?  Higher and higher rates => more restrictive economic activity and less risk taking => lower stock market. 
 
So, on July 25th, just three weeks before their scheduled Q2 earnings release, Walmart decided to "provide a business update," and "revise the outlook."
 
They blamed inflation (food and fuel costs), an easy culprit to place blame, for what they warned would be lower margins.  And they updated their guidance to an EPS decline of 8% to 9% for Q2 (compared to the same quarter last year).
 
The stock did this …
Again, this was on July 25th, two days before the Fed meeting.  
 
CNBC ran this headline on July 26th: "The Fed could surprise markets by sounding even more aggressive as economy teeters."
 
But as we know, July 27th didn't go according to the consensus view.
 
Instead, Jay Powell signaled the near end (if not the end) of the tightening cycle.
 
The S&P 500 has rallied 9% since.  And that brings us to today's Walmart earnings announcement. 
 
Just three weeks ago, they told us EPS would decline by 8-9% (yoy). 
 
Today, they reported 23% growth in EPS.
 
There is classic "earnings management" and there is outright earnings manipulation.  This looks like the latter.
 
If we were to take a signal from this, it could be that Walmart shares in our interpretation that both the July Fed meeting and the bazooka of fiscal stimulus that has followed, gave the greenlight for a resumption of a hot economy and the rise in asset prices. 

Pro Perspectives 8/15/22

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August 15, 2022

Stocks start the week shrugging off some negative news data out of China.
 
Tomorrow, we’ll get Walmart and Home Depot earnings.  Remember, Walmart “pre-announced” late last month, cutting the profit outlook, and setting a low bar.  This sets up for, if anything, a positive surprise for markets. 
 
Now, with that in mind, let’s take a look at the technical picture on the broader market as we also head into two important Fed events coming over the next ten days.
 
Remember, we looked at this chart last week of the S&P 500.  
As we discussed, the stock market decline in the first half had everything to do with the fear of draconian global central bank action (led by the Fed), as they threatened to crush inflation with aggressive interest rate hikes.
 
And now stocks have made an 18% run in just two months, triggered by:  central bank inaction. 
 
The bark was far worse than the bite.  After a lot of talk, the Fed Funds rate sits 600 basis points under the rate of inflation.  They were bluffing.
 
As you can see in the chart, these central bank moments have clearly been catalysts for stocks on the way up. 
 
And here we are again, heading into another central bank moment with the Fed minutes coming on Wednesday — just as stocks are running into a big trendline, and the 200-day moving average.  Both the yellow line (the trendline from the all-time highs) and the 200-day moving average (the purple line) come in around 4,325 — just above today's highs.
 
That said, the minutes of the July Fed meeting shouldn't mean much for markets.  It was comments made by Jay Powell, in the post–meeting press conference, that carried all of the weight.  He let the genie out of the bottle. 
 
Remember, he called the new Fed Funds rate of 2.25%-2.5% neutral (no longer accommodative)! 
 
And he said they would no longer "guide" on policy, but rather take things meeting by meeting, depending on the data.
 
Again, this is revealing.  If they had any intention on containing inflation with interest rates, they would have done it by now.  They haven't.  Powell admitted as much (that it's near the end of the cycle) with the above statements.
 
This sets up for another big central bank moment next week. 
 
The most powerful central bankers in the world gather in Jackson Hole, Wyoming at the annual Kansas City Fed's Global Economic Symposium.
 
Jay Powell will be the show.  He will deliver a prepared speech, and a Fed insider at Reuters has suggested he will talk about the Fed's balance sheet (the quantitative tightening program).
 
Remember, the short history of central banks reversing quantitative easing (QE) hasn't been a good one.  Things tend to break in the financial system, and central banks tend to find themselves back in the business of QE.  
 
To this point, Jay Powell and company have suggested that the plan they are executing to shrink the balance sheet is "on track."  Yet their own reports (as of the last Fed meeting) show they've sold just a third of the assets they had planned to at this point in the program.
 
So, even as the Bank of Japan has continued its unlimited QE, as the provider of global liquidity to the world, the ECB has still had to resurrect a plan to backstop eurozone sovereign debt markets, and the Fed has only been able to do a fraction of its planned "liquidity extraction."
 
With this in mind, there's a decent chance that Powell could use this speech at Jackson Hole, to reset expectations on the entire QT plan.
 
That would, of course, be very bullish for asset prices.
 
 

Pro Perspectives 8/12/22

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August 12, 2022

Stocks had a big day, to complete a fourth consecutive week of higher highs, with higher closes.
 
As we discussed back in my July 28th note:  The one-two punch of monetary policy adjustment (the Fed stating it had reached "neutral" on rates) and fiscal policy adjustment (not one, not two, but three new massive government spending packages), was "a green light for a resumption of the rise in asset prices." 
 
We're seeing it. 
 
If we step back a bit and look at the bigger picture, we had about a six-month period where markets priced in a world where central banks would attack inflation. 
 
But now it's becoming increasingly clear that both global QE and low rates are "you can never leave" scenarios.  In this post financial crisis (and post-pandemic) world, the financial system is too fragile to extract global liquidity, and sovereign debt is too fragile to raise interest rates.
 
With that, the policymakers are now back to flooding the economy with money.
 
This is a resumption of the big theme of the past two years. 
 
The theme:  You have to be long asset prices, to hedge against the broad rising cost of living.
 
If we look back at the early 80s period of inflation, where inflation averaged nearly 10% per year over a four-year period, being long stocks not only gave you a hedge, but increased your buying power by 30% over the period. Going to cash destroyed your buying power by 33% over the period. 
 
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Pro Perspectives 8/11/22

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August 11, 2022

As we discussed yesterday, the monetary policy fuel for stocks doesn't seem to be going away.
 
This is becoming even more clear, as the Democrat controlled Congress has been, at breakneck speed, blowing out even more massive deficit spending.  Just in a couple of weeks, we have $280 billion for the Chips Act.  We have $400 billion for the PACT Act.  And by Friday, we will have $740 signed into law for Build Back Better (laughably framed as "inflation reduction").
 
This, as it has become increasingly clear that both global QE and low rates are a "you can never leave" scenario.  The financial system is too fragile to extract global liquidity, and sovereign debt is too fragile to raise interest rates.  They are being exposed as having no tools to fight inflation in this environment, just as Congress is blatantly pouring more fuel on the fire.  
 
The combination of the above has consequences.  And if history is our guide, the outcome will be a new currency system and a global restructuring of debt.  That's the eventuality. 
 
What likely will come first, are the consequences. 
 
Expect the continued devaluation of currencies, relative to real assets (eroding buying power, and lower quality of life).   
 
Another (related) consequence, which has been a looming threat, for a long time:  Capital flight from the world's most liquid and trusted government bond market in the world (U.S. Treasuries).
 
Who owns nearly a trillion dollars of U.S. Treasuries, and has just watched the U.S. (and allies) freeze Russian assets (including its currency reserves)?  China.
 
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Pro Perspectives 8/10/22

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August 10, 2022

The fall in gas prices in July was telegraphing a cooler inflation number coming into this morning’s report.  That’s indeed what we got. 
 
And as we discussed yesterday, given Jerome Powell’s most recent statement that the Fed had reached a neutral level on the Fed Funds rate, a softer inflation number this morning would be a green light for stocks.  It was. 
 
Let’s take a look at the S&P 500 chart.     
Stocks closed on the highs today, breaking the June highs, and now trading 16% off of the lows of just two months ago.
 
Keep in mind, this decline of the first half, and the trajectory going forward for stocks (and investable asset prices), has everything to do with monetary policy (central banks).   
 
The central banks (led by the Fed) threatened to crush inflation with high rates.  Stocks went down.  They were bluffing.  And now, the market is pricing in the near end of tightening (if not the end).
 
With that in mind, what marked the low for stocks in June? 
 
Central banks. 
 
That June low (chart above) came as the Fed, Swiss National Bank, Australia, the Bank of England and Canada all raised rates and talked tough.  Meanwhile, as we discussed in my June 16 note, the biggest central banks in the world were responding to an average inflation across these countries of 6%, with an average central bank benchmark rate of just +0.6%.  It looked like all talk, little action. 
 
The tell-tale sign came the next day.  There was speculation that the Bank of Japan might begin to exit QE and emergency policies, as inflation has been reaching levels only seen a few times in the past forty years.  They didn't.  They doubled down — on being a (continued) unlimited buyer of assets (domestic and global).
 
This was a clue (if not proof) that the global financial system can't withstand the removal of liquidity.  The Bank of Japan had to stand pat, as a provider of global liquidity (they had to keep printing). 
 
Also, very importantly, despite talking tough about rates too, the ECB, just days earlier, had an emergency meeting where they determined a new plan (same as the old) to buy government bonds of the fiscally weaker eurozone countries.  The ended QE, and then created a new plan to restart it.  
 
The confluence of these central banks events was the bottom for stocks.
 
And as you can also see in the chart above, the bullish break of the down trend in the S&P 500 (the world's proxy for broad stocks), came with another central bank moment. 
 
It came on the day of this past Fed meeting, after Jerome Powell said they had reached the neutral level for interest rates (neither accommodative, nor restrictive to economic activity).
 
This all supports the point we've made all along:  QE is like Hotel California.  "You can check out, but you can never leave."  And after governments ballooned global sovereign debt over the past fourteen years, amplified by the post-covid response, low rates also appear to be a "never leave" scenario.  
 
The markets seem to have come around to that conclusion. 
 
Bottom line: The monetary policy fuel for stocks doesn't seem to be going away.   
 
What will be the ultimate relief valve for this continued unsustainable path?  The currency (a devaluation).
 
With that, let's take a look at the dollar …    
The dollar broke down today (broke the uptrend).  But this is more about paper currencies relative to real assets.  A lower dollar, means the resumption of higher prices in real assets (particularly commodities).  
 
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Pro Perspectives 8/9/22

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August 9, 2022

With the big July inflation report coming tomorrow morning, let's take a look at what we know about a key input into the CPI calculation…  
 
Gas prices have about a 1/5th weighting in the consumer price index.
 
Remember, last month we looked at this chart of a 10-year period that shows how closely gas prices and the consumer price index track.       
So, what did gas prices do in July? 
 
The Energy Information Administration (EIA) does a weekly survey of gas stations across the country.  Those survey results show a fall in gas prices of 7% during the month.
 
Let’s take a look at how this number has correlated with the month-to-month change in the CPI this year. 
As you can see in this above table, the sharp monthly rise in gas prices has resulted in big monthly changes in CPI.  And for perspective, these monthly CPI changes of around 1% mean that prices in the economy are increasing at a double-digit annualized rate. 
 
Conversely, the April decline in gas prices, gave us what would be a very welcomed (by the Fed) inflation number.
 
Now, it was the big jump in gas prices in June (of 11%), that gave us reason to believe a hot number was coming last month (and it did). 
 
We head into this CPI number tomorrow, with decline in gas prices.  
 
That's good news, and signals what should be a cooler inflation number.
 
Add to this, if we get a fourth consecutive lower Core CPI reading (i.e. excluding food and energy … chart below), the stock market should take off.  It would build market confidence in the Fed's recent assessment that they have reached the neutral level for interest rates. 

Pro Perspectives 8/8/22

August 8, 2022

We have the big July inflation report coming on Wednesday. 

Remember, the report last month was hot, at 9.1%.  Moreover, the month-to-month change was 1.3%.  That, annualized, would put inflation in the mid-teens.

With that, the general view in the market, is that another hot number will unleash the real inflation fighter in the Fed. 

Don’t make them angry. 

As if they’ve just been waiting for that next big cue.  The first 900 basis point spike in inflation wasn’t enough to make them blink.  But if this next number is hot, watch out!

You may detect some sarcasm. 

The reality is, they’ve watched this unfold very clearly in front of them (trillions upon trillions of dollars added to the money supply), with their own complicity, and have responded with no meaningful action.

Now we have another $280 billion (in the Chips Act), of which only $52 billion is going to chip making companies.  And we have the $740 billion bill passed in the Senate yesterday (better known as “Build Back Better”).  It’s fuzzy math.  For now, we should consider it all fresh spending (despite the appropriations to revenue raising strategies in the longer run).

Again, it’s safe to assume that the Fed was privy to this trillion-dollar spending deluge when they last met, yet the Fed Chair said that their current interest rates stance (at 2.25%-2.5%) should be considered “neutral.”

Why?  As we discussed on Friday, this is inflation by design.

The intent?  To inflate away unsustainable sovereign debt (globally).

What’s coming?  The eventuality of a reset of global debt, and a new monetary system has been well telegraphed.

We’ve talked about this quite a bit here in my daily notes.  The central bankers and politicians have been telegraphing a monetary system that includes a move to a digital dollar (“central bank digital currencies,” in global coordination).

And, don’t worry, they won’t compete with the likes of Bitcoin.  They have told us that they will destroy it.   

Remember, back in April, Janet Yellen gave a clear warning for the private crypto market.  She said the history of money in the United States was littered with attempts at different forms of private money.  It didn’t work, and they regulated it away. 

The government will regulate it away, and strengthen their monopoly on money through a “central bank digital currency.” 

Not so coincidentally, what’s bubbled up over the past week in the Senate?  Legislation on regulating private crypto through the Commodity Futures Trading Commission.

With all of the above in mind, it’s looking like the right time to own some gold.