As we’ve discussed, these earnings numbers will be big.  The positive surprises will be big.  

And the inflation data we’ll see tomorrow, from the month of June, will likely be hot. 

This, and the data that will follow over the coming weeks (from the second quarter), should all make clear that the Fed’s QE bazooka should be ended, immediately.  And these data should make clear that there is no need for continued fiscal support:  no more unemployment subsidies, no more direct payments, no more “stimulus” (which will next come packaged as a multi-trillion dollar spend on “infrastructure”).  

However, to be sure, the Fed will continue doing what it’s doing.  And the administration (with the help of an aligned Congress) will continue along it’s path of fiscal profligacy. 

Why?  The virus.  The variant will give them plenty of justification to stay put on red alert/emergency policies.   And the media will certainly stoke the uncertainty.  We should see plenty of these headlines coming, like Bloomberg ran today:  ” US Cases Soar.” 

Let’s take a look at how that translates, with some perspective on the history of the past 16 months.

And the Fed and global central banks continue to pump liquidity into the system.  So, just that quickly, we have new record highs in stocks again. 

Earnings will kick off next week.  And the numbers will be big.  The S&P 500 earnings growth is expected to come in at 64% growth.  That sounds unimaginably huge for an index that represents a broad swath of the market.

Of course, that measures against a very low base, of a relatively shut down economy.  But I suspect even this massive growth estimate will be crushed when the reports start rolling in next week.  That means positive surprises.  And positive surprises are fuel for stock prices. 

As we know, corporate and Wall Street estimates are made to be beaten.  In fact, according to FactSet, analysts typically (i.e. almost always) reduce estimates over the course of a quarter.  In the case of the this past quarter, they increased estimates as the quarter moved along for the first time since Q4 of 2009.  Still, safe to assume they have set a low bar. 

Higher than expected earnings would only drive down the valuation on stocks.  At the moment, on current estimates the S&P 500 is trading at 22 times earnings.  A higher denominator will move that lower.  And remember, in low rate environments, stocks historically tend to trade north of 20 times earnings.  We are in the extreme of low rate environments.  This all telegraphs a continued higher path for stocks. 
 

The U.S. 10-year yield has been unexplainably declining, trading as low as 1.25% this morning.  And China and Europe are both posturing toward easier monetary policy. 

Is there something they are seeing that's not showing up in the data?  Is it related to the virus, and concerns that the variant will ramp up cases again?  On that note, Japan has decided not to allow spectators at the Olympics under its declared state of emergency. 

We all know that it continues to be an unstable world.  That's not news.

But for markets, what matters most is intervention.  

We've had plenty of intervention over the past year.  And we will have more by central banks and governments, if needed to maintain stability and promote growth. 

For stocks, liquidity is king.  And there is a tsunami of liquidity from global policymakers.  Declines will happen.  And the history of the post-financial crisis/QE world tells us the declines can be quick.  But the recoveries can also be quick.  We've had three 5% declines since the election — and several 3%ish declines.  Each has been recovered inside of a month.   So, knowing that the Fed remains on red alert, any dip in broad stocks will continue to be bought.  

They are methodically and delicately informing us that the punch bowl will not always have an unlimited bottom.

But telegraphing a bottom/end in their QE forever program is far from hawkish, considering they see an economy growing  at 7% this year, unemployment falling to 4.5% (historically a level consider to be "full employment"), and inflation running at 3.4% (right around the long-term average).

With this view, they should be ending emergency policies, if not raising rates today, yet they continue to have the pedal to the metal on monetary policy. 

As such, the Fed continues to look like a tool of the White House.

The White House and Congress continue to plan and roll out fiscal extravagance (unabashedly growing the debt).  And the Fed continues to inflate the nominal price of everything, and inflate away the value of debt.

We know a multi-trillion dollar infrastructure spend is coming.  That will only further inflate the nominal growth of the economy, and further tighten the labor market.  Still, Biden is out today pitching his "Build Back Better" plan which includes many more "relief" handouts.  

He called today for an extension of "child tax credits" through 2025!  This means a family earning around the median income will end up paying no federal income tax.  And it's not really a credit.  It's a direct payment. It’s cash.  And it's not really a "tax" credit, as those that do not pay taxes, receive and will continue to receive direct payments. 

Bottom line, the direct payment "stimulus" has been masked as covid relief, but has always been a strategic play to ram through universal income.  This will continue to push wages higher, create labor shortages and inflation. 
 

Despite a Fed that has been sending signals of an end to emergency policies sooner than the very conservative timeline they had been projecting, the 10-year yield has been moving lower, not higher. 

Today, the 10-year traded back down to 1.35%.  We sit on this very important technical trendline, which represents the economic recovery period …

In a undersupplied labor market that is overwhelmed with demand, these workers will be commanding higher wages.  And higher wages will feed into an already hot inflationary environment. 

With this backdrop, we'll kick off Q2 earnings season when bank earnings start rolling in, the week after next.  Q2 earnings are going to be huge, especially compared to the same period a year ago — in a locked down economy. 

In sum, the month of July will probably be the realization (in the data) of a boom-time economy.  But it will also come with the realization that we are entering a period where we could very well see double-digit inflation by next year.  

These are the moments when wealth can be destroyed, by holding cash — and wealth can be created in key asset classes.

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