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March 29, 2022

Stocks rallied today (again). Oil and gold traded lower today (again). This has the appearance of a relief in the risk environment.

Is there reduced risk on the war front? Is there energy supply relief coming from the Iran negotiations? Are Covid lockdowns in China, foreshadowing another round of global pandemic restrictions?

We talked about the latter yesterday. But it now appears that none of the above are dictating the recent market activity.

With the behavior of the bond market the past two days, it does appear that the bond market is telling us something.

We talked about the prospects of a yield curve inversion earlier this month, and we looked at this chart below …

As a reminder, this is the spread between the 10-year and 2-year Treasury yields. This had declined to 23 basis points when we looked at it on March 8th. Today it's just 2 basis points (the 10-year yield is at 2.39%, and the 2-year yield is at 2.37%). Why does this matter? Each of the six recessions, dating back to 1955, were preceded by a yield curve inversion. Recession followed between 6 and 24 months.

Now, with that in mind, you would not be going out on a limb to call for a Fed-induced recession to come in the next 24 months (regardless of what this chart above tells you). After all, as we've discussed, the last time the Fed had to deal with an inflation problem like we're seeing now, they had to ramp rates ABOVE the rate of inflation, to bring inflation under control. That would be applying a heavy foot on the brakes of the economy.

But within this outlook, we should expect such a yield curve inversion to happen at much higher levels of interest rates. It would be reasonable to expect the inversion to take place because the 2-year yield is aggressively moving higher (along with the Fed Funds rate), not because the 10-year yield is stagnating at historically low levels, and then aggressively moving lower. That doesn't project a hot economy, where the Fed is just starting a tightening campaign (from emergency level rates).

So, what's happening to push the 10-year yield aggressively lower the past two days? It may have everything to do with Japan.

The Bank of Japan intervened twice yesterday in the Japanese government bond market — buying JGBs in "unlimited amounts" to put a lid on rising bond yields (at just 25 basis points on the 10-year).

This "yield curve control" is, and has been, explicitly part of the BOJ's game plan to promote economic activity in Japan. But what is becoming clear, is that policy change in the U.S. is pulling all global interest rates higher. It's unwelcome. The 10-year yield in Germany has swung from negative 10 basis points, to positive 74 basis points, just this month! The 10-year yield in Japan is at six year highs, the highest levels since they adopted the plan to outright suppress Japanese yields back in 2016.

With this in mind, and the actions by the Bank of Japan this week, the move in the U.S. 10-year yield today may be a signal that "yield curve control" could be coming to a central bank near you.

Remember, as we discussed last week, if we consider a 2% spread between mortgages and the (U.S.) 10-year … and a spread of about 2% between the 10-year and the Fed Funds rate … then we should expect the 10-year yield to be in the mid-4% area by year end (if the Fed gets back to neutral). And we should expect mortgage rates to be over 6%. But in anticipation, it's not crazy to think the 10-year yield (and therefore consumer rates, like mortgages, auto loans and credit cards) could reset to those levels very quickly (like a spike in rates).

An aggressive spike in market interest rates would be bad news for the major central banks of the world. How would they protect against that scenario? Yield curve control — to (attempt to) carefully manufacture a stable path to higher interest rates.

Pro Perspectives 3/28/22

March 28, 2022

Markets kick off the week digesting the inflammatory words from Biden over the weekend, about removing Putin.

And to add to the sentiment headwind, Biden was out pushing his 2023 budget today, which includes higher taxes and disincentives for investment (by taxing UNrealized gains!!).

I suspect it’s clear to anyone, an aspiration from the West for regime change in Russia would trigger a long, messy global war. Therefore, oil prices would go UP significantly, as the supply/demand imbalance would be compounded. And gold would go UP significantly, as global capital would move to relative safety.

That said, both (oil and gold) went down significantly today.

Meanwhile, tech stocks led the way, up — from very early in the day.

Neither Biden’s reckless foreign policy actions, nor his threats to curtail wealth at the top, could keep stocks down. Perhaps the White House policy news was overwhelmed by another factor: the return to lockdowns in China.

In fact, if we can read anything into the market behavior of today, it’s that the market considers the political appetite for more lockdowns to be greater, than the political appetite for global war.

These stocks that thrive in a lockdown were big performers on the day …

Amazon was up 2.5%. Zoom was up 3%. Roku was up almost 4%. Docusign was up 4%. Doordash was up 9%.

Pro Perspectives 3/25/22

March 25, 2022

Yesterday we talked about the coming food crisis. Suddenly, the Biden administration is sending warning signals on this eventuality.

Yesterday in Brussels, Biden said the food shortage "is going to be real." Today, Janet Yellen (Treasury Secretary) said she's "concerned about countries dependent on wheat" due to rising prices from the Ukraine situation.

Remember, yesterday we looked at the inflation-adjusted chart of food prices. We are now matching the record peak in inflation-adjusted prices from 1974. The significance of 1974? It was the period of the last major global food crisis.

With this in mind, an annual agriculture report from the Congressional Almanac gives seven reasons for the food crisis. Here are four of them:

> Apparent changes in the world climate, "which may have a catastrophic effect on food production." (this quote was from a Harvard nutritionist).

> The Russians' decision in 1972, after a poor crop year, to buy massive amounts of grain from the U.S. and Canada.

>Natural and political disasters, such as war in Bangladesh.

>The sudden drastic rise in oil prices in 1973, which impaired the ability of poor nations to obtain fertilizer.

So, fear (my interpretation) of climate change, hoarding of grains by one country, natural and political disasters, and an oil crisis.

Sound familiar?

On the hoarding front, guess who has been importing record amounts of grains (among many other commodities) over the past two years? China.

Guess who had the largest reserve of grains back in 1974, from which the world (while in crisis) received allowances? The United States.

Guess who has the largest reserve of grains now, to the tune of 50% of world supply? China.

Pro Perspectives 3/24/22

March 24, 2022

Yesterday we talked about the prospects of a gas subsidy. On cue, the governor of California presented ideas late yesterday for a number of transportation subsidies — including a $400 a month gas card.

As we discussed, a subsidy would only sustain the demand dynamic for oil. Apply that to a world that is undersupplied and underinvested in new supply, and the price of oil would continue to rise.

But it’s unlikely to stop there. Next up: bigger government handouts in the name of broad “inflation relief.” It’s already being proposed at the state government level and on Capitol Hill.

So, here we have the Fed raising rates, and as Powell said this week, they are doing so with the explicit intent of bringing down demand. And conversely, we have governments, which have broken supply through bad policy, looking to sustain demand through subsidies (more bad policy).

If you didn’t believe the inflation problem was going to get worse, these actions (if taken) ensure it will get worse.

Let’s talk about food…

Earlier this month, we talked about a coming food crisis. It was a topic at the NATO Summit today.

Here’s an updated look at the food price index, which is now on new record highs …

If we adjust this chart for inflation, current prices are at levels are matching the record highs of 1974.

That year might sound familiar because it was the last time we had a major global food crisis.

From the looks of this chart above, it appears that some saw this coming very early. Deere has quadrupled from the pandemic lows. And continues to make new record highs.

Pro Perspectives 3/23/22

March 23, 2022

With NATO leaders in Brussels tomorrow, the markets are reacting to a likely escalation in what looks like a Western proxy war with Russia.

Oil goes out today around $115. We should expect to see oil prices much higher (still). Remember, we've been talking about the construct for $100 oil, long before the Russia/Ukraine disruption.

Here's an excerpt from my note a year ago …

The globally coordinated ’Clean Energy Revolution’ promotes higher oil prices, not lower. That's the structural driver for oil prices. Funding for new exploration has been choked off. So, foreign oil producers (particularly from bad acting countries) will be in the driver’s seat. That movement is underway. And these producers will command/demand higher prices, especially in a less competitive, lower supply world.

As we discussed this dynamic back in February, I said 'get ready for $4 plus gas.' With the monetary and fiscal backdrop that has evolved, and the inflationary pressures already bubbling up, it will probably be more like $6 gas.

It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era).

Fast forward to today, and add in further supply disruption (in Russian sanctions), plus what will likely a wartime surge in demand for oil, and we will very likely see a spiral higher in oil prices.

Now, in a normal world, high prices stimulate more investment in oil exploration and drilling. It won't happen this time, at least under the current global and domestic regime. They want substitution ("clean").

And that brings me to another probable outcome we've discussed for quite some time here in my daily notes: price controls. But as we've also discussed, a subsidy would only sustain the demand dynamic for oil. Apply that to a world that is undersupplied and underinvested in new supply, and the price of oil would continue to rise.

With that, what could be added to such a White House game plan? rationing.

Pro Perspectives 3/22/22

March 22, 2022

As we discussed yesterday, the Fed has now set expectations that they will aggressively take the Fed Funds rate back to neutral (where they are neither accommodative nor restrictive). After Jay Powell's comments on Monday, the market is now pricing in about a coin flips chance that the Fed determined benchmark interest rate will be there (neutral/mid 2% area) by the end of the year.

With that, the 10-year yield (the interest rate determined by the market) is starting to move. We are just in the early stages of seeing what the interest rate market will look like without the Fed's constant intervention (i.e. bond buying) of the past two years. Remember, as of this month, the Fed is officially out of the QE business. That's important to keep in mind, as the media continues to focus on the yield curve, which has been flattening and nearing inversion (a historical recession signal). Now that the Fed is out of the treasury market, so is the suppression on the longer-end of the yield curve. Translation: This potential "recession signal" being derived from the yield curve should be reversing.

With that, let's take a look at how the 10-year yield is behaving since the Fed meeting last week (it's UP, dramatically).

The 10-year yield started last Monday (Fed week), trading around 2%. Today it's close to 2.40%. That is pushing consumer rates higher, rapidly. The average 30-year fixed mortgage rate hit 4.7% today.

If we consider a 2% spread between mortgages and the 10-year … and a spread of about 2% between the 10-year and the Fed Funds rate … then we should expect the 10-year yield to be in the mid-4% area by year end (if the Fed gets back to neutral). And we should expect mortgage rates to be over 6%.

Add in $4+ gas, even with a strong labor market and higher wages, and we should be getting to a point (by year end) where the standard of living is sliding.

Pro Perspectives 3/21/22

Last week the Fed laid out a more aggressive path and destination for interest rates.

But the path they telegraphed still leaves them fueling the fire of a hot, high inflation economy through next year. With that, it didn’t sound (at all) like a Fed that was prepared to do “whatever it takes” to slay inflation.

Today Jay Powell may have corrected the mistake. In a prepared speech, he set the expectations for possible 50 bps increments (in rate hikes). And he made it made it clear that the Fed is no longer sitting back and waiting for supply disruptions to normalize. They are looking to bring demand down, to come in line with supply. This is a quite a stark contrast from the inflation-denying Fed of 2021.

In fact, all along the way, they have been telling us that the deflationary forces of the past three decades wouldn’t turn on a dime, and therefore wouldn’t expose us to a dangerous inflation scenario. That’s changed too. Today, Powell’s flip-flop was expressed like this: “it’s hard to say what the economy will look like post recent events, but no one is sitting around waiting for the old regime to come back.”

To be sure, they were (arrogantly sitting back and waiting). But hopefully not any longer.

So, what will it take to beat inflation? As we’ve discussed, in the 73-74 and early 80s inflation spikes, the Fed had to ratchet rates above the rate of inflation to finally get it under control. And if history is a guide, the past five tightening cycles (’87, ’94, ’99, ’04 and ’15), the Fed has averaged about 50 bps of hikes a quarter.

Pro Perspectives 3/18/22

March 18, 2022

Today I want to copy in an excerpt from my premium service, The Billionaire's Portfolio.

This bigger picture analysis from last month (before the Russian invasion of Ukraine), connects some dots and suggests an outcome that we seem to be quickly approaching: World War 3.

Excerpt from Billionaire's Portfolio, February 14 [in blue font] …

The Fed is beginning to telegraph a more aggressive rate path.

How aggressive will they become, and will they be able to tame inflation? We will see.

If we look back to the early 80s period of high inflation, here is what stock returns looked like (the first column in the table below)…

Now, also notice the impact inflation had on the real (after adjusted for inflation) rate of return in stocks (the third column).

And through a four-year period, where inflation averaged nearly 10% per year, you can see, in the far two columns, what it looked like for those that remained invested in stocks, relative to those that went to cash.

The takeaway: 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.

This supports the theme we've been discussing since the onset of the pandemic response. In this environment, you have to be long asset prices.

Now, on a related note, I want to revisit some of my analysis of the long-term path of the stock market and the long-term path of GDP.

As you may recall, we've looked at these charts many times over the past five years (+).

This chart shows us what it would take to put us back on path of 8% annualized growth in the S&P 500.

The blue line represents what the S&P 500 would have looked like, had it continued to grow at its long-run annualized rate of 8%, from the 2007 pre-Great Financial Crisis peak.

The orange line is the actual path of stocks (which includes the deep financial crisis decline and the subsequent recovery).

Through the years of looking at this chart above, there has been plenty of chatter along the way about the huge performance of the stock market — plenty of bubble and overvaluation talk. But the reality is, we were knocked off of the path of the long-term trajectory of stocks (the orange line). And that path of a long-term 8% annualized appreciation has never been regained (the blue line).

What can we attribute this gap to?

Post-recession economic recoveries in stocks are typically driven by an aggressive bounce-back in growth, to return the economy to "trend growth."

We didn't get it. Instead, the post-Great Recession growth environment was dangerously shallow and slow.

In this next chart, the blue line is the path of real GDP if it had continued growing at the long-term average rate of 3.2%, from the pre-financial crisis level.

The orange line is actual real GDP.

The growth trajectory, too, was knocked off path fifteen years ago. And because of the very sluggish recovery spanning more than a decade following the Great Recession, we are still well off of trend.

This explains the big and bold monetary and fiscal response to the Covid shutdown. It was deliberate, and it was done to inflate growth and inflate away debt (not just domestically, but globally).

We've seen the outcome of the policy response in stocks (and broad assets). Values have inflated.

Importantly, the Fed has done nothing to stop the inflation. This is intentional. They told us along the way that they would let inflation sustainably overshoot their target of 2% before even thinking about removing emergency level policies.

As such, we are finally seeing the gap (between the orange line and the blue line) in stocks, close. Another 13% from current levels in the S&P 500 will put us on the path of the long-term trend.

But just as the Fed has (intentionally) let inflation overshoot, we should expect asset prices to overshoot as well. We're seeing it in some prices (some commodities, housing, used cars). For stocks, this means the orange line in the first chart (above) would shoot north of the blue line, and maybe for a considerable period of time. That would argue for new, higher highs in the broad stock market.

Now, this is where it gets, maybe, more interesting.

What would it take to get GDP back to trend by the next Presidential election?

It would take 10% annualized real growth.

Sound crazy?

The last time we had that kind of growth was the early 40s. This was the economy coming out of the depression, as you can see here…

What were the drivers of 14% average annual growth over these 5 years? In part, the New Deal (government spending program), and in larger part, World War 2.

Probably no coincidence, what's a growing likelihood today? World War 3, which would be leverage for the White House to get it's Green New Deal ("Build Back Better") government spending blowout approved.

This early 40s period may be a good analogue for what's coming.

With all of the above said, subscribers to my Billionaire's Portfolio are positioned well for this global war and "wartime spending package" scenario.

While the broad stock market has had one of the worst starts to the year on record, our portfolio is UP on the year, beating the market by better than 10 percentage points.

This outperformance is driven by a tactical theme-driven allocation. What does that mean? The portfolio is designed to win from a rising interest rate environment (value stocks), inflation (and a related commodities price boom), 5G (and related cyber security demand) and the "clean" energy agenda (the planned supply disruption).

Add to this, in a world of increasing cyber attack risks (if not, "cyber pandemic"), we've recently added a stock to the portfolio that gives us, not only a powerful hedge, but the opportunity to win big in the event of a negative cyber event for the stock market.

If you're interested in getting the details on this latest addition to our Billionaire's Portfolio, you can click here to subscribe. I'll send you all of the details … plus you'll get members-only access to see our full portfolio of big-opportunity stocks, all owned by some of the most influential investors in the world.

Have a great weekend.

Best,

Bryan

Pro Perspectives 3/17/22

March 17, 2022

We've talked about the irony of the Fed rate liftoff as a signal to buy stocks.

Remember, with the market valued at less than 19 times the twelve-month forward-earnings estimate, stocks are not expensive. Not when the Fed Funds rate is, and will be, under the "neutral rate" for at least the next year (projected). And not when the nominal price of everything is rising. That includes financial assets/stocks.

With that, let's take a look at some related technical signals …

After a 14.6% correction in the S&P 500, we get a technical break of this big downtrend.

Same with the nasdaq …

Small caps (Russell 2000) and the Dow are approaching similar breaks …

What has led the way?

Curiously, the rebound in global stocks started in Europe, early last week. Take a look at German stocks …

German stocks are up 16% since last Monday. Italian stocks too (a far weaker and more fragile economy relative to Germany).

This, just as the world is cutting off Russia, and the European bank exposure to Russian debt has yet to be fully evaluated. Not to mention, the European economy is the most vulnerable in the world to the Russia/Ukraine war impact, yet the ECB telegraphed a rate liftoff to respond to inflation.

So, what is this behavior in European stocks telegraphing?

Perhaps, global war (and wartime fiscal spending).

Pro Perspectives 3/16/22

The Fed started the liftoff in interest rates today, as expected.

In normal times, an interest rate tightening cycle is intended to cool an economy that’s running hot, to safeguard against a good economy turning into an inflation problem.

In this case, the Fed is just beginning to normalize policy, from emergency/crisis levels (i.e. zero interest rates, plus QE). Ideally, coming out of crisis, they would want to get rates back to the “neutral level” (which means neither accommodative nor restrictive … 2.5%-3.5%, historically), before having to deal with the challenge of cooling an economy.

But they’ve waited too long, in this case. They are already dealing with a hot economy and an inflation problem.

With that, for the first time ever the Fed is starting 8 percentage points in the hole, against inflation.

As we discussed in these notes, if we look back at the inflation bouts of the 70s and early 80s, both times the Fed had to ratchet up the Fed Funds rate, to above the rate of inflation to finally win the battle.

They have a long way to go.

With that, the Fed started making steps today, setting expectations for a more aggressive path, with a higher ending point (now projecting close to 3%). That puts the Fed closer to what the interest rate market expects for the path of rates.

What does that mean? The market was pricing in seven, quarter point rate hikes this year. Now the Fed is too.

So, if the difference between the Fed projections (coming into today) and the market projections represented the market’s view that the Fed was making a policy mistake — then the closing of this gap, should represent a reduced risk of a policy mistake.

Is that why stocks rallied this afternoon? Maybe.

As we discussed yesterday, coming into this big Fed meeting things were setting up for a “sell the rumor (assume the worst), buy the fact (rational)” scenario. This appears to be playing out.

But, we also had a very big catalyst for markets this morning: China.

Remember, late last year, the Chinese government waged a war against its own technology giants, and (maybe more so) against U.S. regulators of U.S.-listed Chinese stocks.

It started with the Chinese ride hailing company, Didi. It went public last June, as one of the biggest Chinese share offerings in the U.S., ever. Immediately, the Chinese government started harassing the company for a number of alleged violations.

But with over $1 trillion of Chinese companies on U.S. exchanges, it seemed to be more of a “shot across the bow,” related to the U.S. SEC’s new effort to crackdown on the lack of reporting accountability from Chinese companies.

By November, Didi asked to delist from the NYSE (with plans to move the listing to Hong Kong). Coincidently, the tech-heavy Nasdaq topped just three days prior …

The future of Chinese companies trading on U.S. exchanges has since been in question. That includes some of the hottest technology stocks in the world (Alibaba, JD.com …).

But overnight, we had some news out of China that may have marked an end to the Chinese government saber-rattling. China “vowed to keep its stock market stable and support overseas share listings.” Alibaba ended the day up 36%.