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September 30, 2021

We've talked a lot about the globally coordinated climate agenda for the better part of the past year.

Remember, almost four years ago, a group called Climate Action 100+ was formed. This group is comprised of every major asset manager and pension fund on the planet. And the agenda of the group is/has been very clear: defund fossil fuels and force energy transformation.

With that, all of the oil giants have been ordered to transform to renewables. Fall in line, or be shut-out of the capital markets (frozen out from new investment).

What happens when you choke off investment in new production in traditional energy sources, in favor of building the "next generation" of energy? You guarantee yourself a supply/demand imbalance — at least until" new energy" infrastructure is developed to the extent that it can balance the market. That won't be anytime soon. And with that, the climate actioners have guaranteed us an energy crisis. It's coming.

Let's take a look at the price of energy inputs since Biden was elected, which cleared the impediment (i.e. Trump) for the global energy transformation.

The price of coal has more than tripled…

Crude oil has doubled and looks like it can double again …

Natural gas is up 87% and on 7 year highs. The last time natural gas prices were here, oil was $100 …

So, these prices are reflecting the storm that is brewing: a combination of the war on fossil fuels, meeting supply chain bottlenecks and a global ramping of demand (coming out of the depths of the pandemic).

We're seeing it in China. Consumption is outpacing coal inventories and production. They've having blackouts. European power prices are at record highs. In the UK, we're seeing images of gas lines. As I said in my June note, get ready for $6 gas.

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Pro Perspectives 9/29/21

September 29, 2021

The Fed spent much of the year telling us that inflation is "transitory." This was clearly intended to mean "temporary."

This, despite the $5 trillion growth in money supply, and despite the nearly $10 trillion in fiscal stimulus (either disbursed, in the process of being disbursed or on the table for Congressional approval). And within these policies, wages were artificially reset higher by government subsidized unemployment. And wages are a key driver in inflation formula.

With that, now that the Fed has changed its tune and is prepping for an end of emergency policies, we should expect markets to question the Fed's judgement (too soon?). With that, we've had the knee jerk selling in stocks.

But as we've discussed throughout the year, the Fed's "transitory" tune was clearly a campaign to manipulate inflation expectations (lower). The Fed was singing a tune that was in complete contradiction to the inflationary data and the underlying drivers of inflation. With that, as we've discussed in my daily notes, there's a very good chance that we will see double-digit inflation over the next year, and a Fed that ends up behind the curve and ultimately chasing inflation higher (with aggressive rate hikes).

We're already seeing it in Brazil. The Brazilian central bank hiked rates by 100 basis points last week. That's 425 basis points since March. And they are doing so, because of this chart …

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Pro Perspectives 9/28/21

September 28, 2021

Last week, we had a big technical breakdown in stocks, and we discussed the reasons to believe there may be some more pain ahead. That seems to be playing out.

That "pain" catalyst is mostly driven by the breakout (up) in interest rates. After all, as we also discussed last week, a change in the direction of monetary policy (from easing to tightening direction) is historically bad for stocks.

But in the current case, given that the Fed is moving away from emergency level policies, the policy stance will remain highly stimulative for quite some time (even as they taper, and even as they begin raising rates from the zero line). That stimulative monetary stance will ultimately continue to promote higher asset prices.

For the moment though, the combination of: 1) a Fed change in direction, 2) concern about the Chinese financial system and 3) a potential U.S. government shutdown, has been enough to trigger what looks like a technical correction for stocks.

Let's take a look at an updated technical picture …

We observed the break of this big trendline last week. This is an important line. It represents the 40% climb from election day, on anticipation of a massive fiscal spend. Now this line is broken, and we have a peak-to-trough decline thus far has been 5%.

After retracing back to the trend break, it looks like we could test the lows of last week (maybe in the coming days). A break of those lows would open up the scenario of a deeper decline toward the 200-day moving average (the purple line). That comes in just shy of a 10% correction. And as I've said, it will be a dip to buy.

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Pro Perspectives 9/27/21

September 27, 2021

We’ve talked quite a bit about the relationship between interest rates and small cap value stocks.

Specifically, when rates are rising, as a result of an economy recovering from recession, small cap value stocks tend to outperform larger cap growth. And that outperformance, coming out of recession, has historically held for the decade forward.

With that in mind, today the 10-year yield traded above 1.5%. That’s nearly a quarter point higher than the levels of just two weeks ago. And while the broader market was down today (the S&P 500), small cap stocks were up 1.7% (the Russell 2000).

Let’s take a look at this small cap/rates relationship in a chart …

As you can see, coming out of recession, and with the catalyst of an election that telegraphed a massive fiscal spend, small caps (the orange line) aggressively followed the recovery of interest rates (the purple line) from near record low levels.

But rates rolled over in April, and small cap value stocks have since gone sideways.

So now, we’re nine months through the year, and in a hot economic recovery, yet small cap value is underperforming the S&P 500 for the year (15.5% versus 18.3%, respectively).

But rates are on the move again, and that’s driven by a change-in-the-direction of monetary policy (a big catalyst).

That should provide fuel for new record highs in the Russell 2000 into the end of the year, and a resumption of a very strong bull trend.

Not surprisingly, in relationship with the rising rates picture (on both the growth and inflation picture), oil and gas stocks were the best performing sector of the day — up better than 3%. And this a key constituent of the small cap value universe.

With that in mind, oil is closing in on the seven-year highs. And the path we’ve been talking about, to $100 oil, is getting closer. As I said in my note just after the election last year, with the Biden climate agenda well telegraphed, “until we’re all driving Teslas, and the energy grid has been completely ‘green’ transformed, we will still be using a lot of oil. We’ll just be paying a lot more for it.”

If you want to take full advantage of the tailwinds for small value stocks, join us in my Billionaire's Portfolio subscription service. You can invest alongside my portfolio, full of stocks with the potential to do multiples. You can learn more here.

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Pro Perspectives 9/24/21

September 24, 2021

Overnight the Chinese government declared all cryptocurrency activity is officially illegal.

Global governments have made it very clear that they have no interest in competing with a private digital monetary system. If we listen to them, we should have the expectation that they will regulate private cryptocurrencies out of existence.

Remember, over 60 global central banks (the BIS) are already at some stage of considering a central bank-backed digital currency. The Fed is due to issue a report this month on the viability of a digital dollar. Powell said this week, that it will be a government-wide decision. But we already know the majority vote in government will favor it.

The Chinese central bank has already announced a 2022 launch of a digital yuan.

Let's revisit an updated chart from one of my May notes, and take a look at how the chart of the bubble in Chinese stocks back in 2015 compares to the chart on bitcoin.

With this chart in mind, and with the declared ban in China on all crypto activity in mind, consider this: China accounts for 60% of global bitcoin mining … the largest trading volume in bitcoin comes from China … and third largest holders of bitcoin in the world are in China.

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Pro Perspectives 9/23/21

September 23, 2021

Yesterday, the Fed clearly communicated to us that they will begin exiting emergency level policies, likely at the next meeting in November.

As we've discussed a change in the direction of monetary policy (from the easing to tightening direction) is generally bad for stocks.

So, how did markets react? Yesterday, stocks were up. And today, stocks were up big.

In this case, as we've also discussed the past few days, even after the Fed tapers and even after the Fed starts raising rates (from zero), there is and will be plenty of tailwinds for stocks. Policy will remain stimulative for quite some time.

So, with today's aggressive pop in stocks, is the recent correction over? Many on Wall Street would like to believe so, and have probably proclaimed it to be over. My view: probably not.

Let's take a look at some reasons why we may seen a little more pain for stocks.

First, let's take a look at the chart on stocks …

Remember, we looked at this chart on Monday, when this big trendline broke. This trendline, drawn from election day, represents the anticipation of a Biden presidency that would bring about continued easy money and an unimaginably big fiscal spend.

Also notable in this chart, for those that appreciate technical analysis, you can see the gap down in stocks on the Sunday night open of the futures market. That gap was filled today. This "filling of the gap" is a technical pattern that tends to resolve in the direction of the break (i.e. lower).

Now, in addition to higher stocks today, we also had a strong surge in yields. That's to be expected, given the Fed's change of direction on monetary policy. And, importantly, as you can see in the chart, the benchmark interest rate market broke out of its two month range today.

But on a day where rates are moving higher, with the expectations that the U.S. will lead the major developed world in a rate hiking cycle, the dollar should have boomed. That didn't happen. The dollar traded down all day.

What else traded lower? Copper. This is another red flag for the resumption of the rise in stocks (at this stage). The Fed's plans to exit emergency level policies is a signal of confidence in the recovery and the sustainability of the recovery. What metal tends to reflect the view on the health of the economy? Copper.

Bottom line: Despite the big surge in stocks today, it wasn't a “risk-on” day across global markets. Given the event risks looming at the moment, these are probably clues to pay attention to.

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Pro Perspectives 9/22/21

September 22, 2021

The Fed left policy unchanged today, but Jerome Powell gave us plenty of information about what to expect in the coming months.

As we've been discussing, they did indeed telegraph the tapering of asset purchases.

What do these asset purchases do? As the Fed says in a 2020 paper, buying bonds tends to lower Treasury yields, tighten credit spreads, raise equity prices and increase bank lending.

With that in mind, Powell said they could start reducing the amount of bonds they buy at their next meeting (which is November). That shouldn't surprise too many people, but what was surprising is the pace he alluded to. He says they could be done by mid-next year.

So, if we consider what effect these bond purchases have on markets, how does the announcement of an aggressive timeline to end bond purchases send stock markets higher today?

As we discussed yesterday, there is five trillion of new money in the economy (excess liquidity). And both monetary and fiscal policies are still in a defensive position, against any destabilizing events. And both monetary and fiscal policies are still heavily promoting spending, not saving — even after the Fed tapers. And even after the Fed starts raising rates off of the zero line.

Bottom line: It will be a long while before monetary policy stops being accommodative and starts getting restrictive. Accommodation will continue to put upward pressure on asset prices.

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Pro Perspectives 9/21/21

September 21, 2021

Global markets recovered some today, after yesterday’s action.

But as we discussed yesterday, this correction (now 5% peak to trough) probably has some more downside.

The drama surrounding a failing property developer in China has conjured up some financial crisis speculation. The vaccine mandates have introduced a catalyst for an uptick in unemployment. And what has been extremely hot economic activity has softened some in Q3. As you can see Atlanta Fed models have nearly cut the GDP estimate for the quarter in half, since August.

These are all reasons to induce some profit taking in stocks, which we're seeing. But the most meaningful impediment to the asset price melt-up we've seen over the past eighteen months, is the Fed.

We have a change-in-policy-direction anticipated in tomorrow's Fed announcement. The knee-jerk reaction in markets when the Fed changes directions (from easing to tightening) is selling.

But, of course, this is a change of monetary policy direction with no reference points (not even the financial crisis). Beginning-the-end of QE, will still leave us with zero rates for quite some time. And, as we discussed, we have a fiscal bazooka ($4.7 trillion) that will be fired soon. And we have this …

There is five trillion dollars of new money in the economy. And both monetary and fiscal policies are still in a defensive position, against any destabilizing events. And both monetary and fiscal policies are still heavily promoting spending, not saving.

That makes the dip in stocks a gift to buy at lower prices.

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Pro Perspectives 9/20/21

This is a daily publication of global market perspectives from the founder of The Billionaire’s Portfolio.

Pro Perspectives 9/17/21

September 17, 2021

As we head into next week's Fed meeting, stocks have closed down eight of the last nine trading days.

And the 10-year yield (the benchmark interest rate market) is trading at the top of the range of the past two months.

This looks like a market showing respect for a change in the direction of monetary policy. That "change in direction" is what will happen next week when the Fed will/should announce plans to dial down asset purchases.

But the steps the Fed will likely be taking, early on, should do little to slow economic activity.

Most likely, they will just extract some of the fuel from the extremely hot housing market.

The Case Shiller Housing Price Index is up 22% from pre-pandemic levels (about 18 months ago). That's a much more aggressive pace of price appreciation than we even saw in the final stages of the early 2000s housing bubble (around 12% for an equivalent period, up to the peak in prices).

Despite this rapid rise in home prices, the Fed has continued to buy $40 billion worth of mortgage backed securities every month. In fact, if you include the front-loaded MBS purchases by the Fed during the worst period of the economic crisis (March-April 2020) and the Fed's reinvestment of MBS bonds that have matured, the Fed has bought more than a trillion dollars worth of mortgage bonds in response to the crisis.

This activity from the Fed has flooded the housing market with credit, and has pinned the 30-year fixed mortgage rate to around 3%. With a hot economy, household net worth at record highs, and an undersupplied labor market, bidding wars have dominated the housing market. Clearly housing is no longer in need of Fed intervention.

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