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September 16, 2021

Retail sales numbers came in much hotter than expected this morning.

This continues the unprecedented performance of retail sales coming out of recession. Remember we talked about this last June, on the back on comments from the great macro trader Stanley Druckenmiller.

Druckenmiller had pointed out that the speed at which the pandemic-induced losses in retail sales were recovered were something "we've never seen" before. It took only five months to recover. By comparison, it took almost four years to recover the retail sales losses from the Great Financial Crisis.

Moreover, not only did retail sales quickly recover losses, but the index continues to run well above trend growth (extrapolated out from pre-pandemic levels).

Simply put, the consumer is consuming at well above trend levels. And the August data is yet another point to confirm that strength.

With the above in mind, the markets are coming to grips with the reality that the Fed will indeed begin the end of emergency policies. That means the timeline to announce the taper of asset purchases is/should be well intact. They should announce the plan at next week's meeting (September 22nd).

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Pro Perspectives 9/15/21

September 15, 2021

Stocks came back aggressively today. Rates are higher, and commodities are broadly up.

The media gave (relatively) little attention to the California recall vote. But it’s fair to say that this vote represented a proxy on the democrat agenda — and therefore, the Biden administration. It was a very big deal.

With that, with the Newsom win, any perception that there could be friction for the Biden agenda ahead, has been disabused.

So, perhaps this was a greenlight today for markets.

If we were looking for clues on this view of the fortification of the Biden agenda, we could see clues in the energy sector.

As we’ve said all along, the vow to kill fossil fuels in the name of climate action, only builds a moat around the existing producers. And that ensures much, much higher oil prices.

With that, let’s take a look at the chart on oil …

As you can see, with the climate action agenda well telegraphed, oil prices took off from election day. With the outlook for U.S. production-driven supply constraints and a return of power to OPEC, the price of oil doubled in eight months. We’ve since had a nearly 20% correction over about two months. And now the bull market in oil appears to be resuming with this technical breakout of the past two days. Today oil was up 3%.

Also winning on the climate action front (for different reasons) is natural gas. The price of natural gas has soared in the past few weeks – up over 40%…

Not surprisingly, the best performing sector of the day in stocks was energy.

Nine of the top ten performers in the S&P 500, on the day, were energy stocks (most of them U.S. shale oil and gas producers). And as you can see, with these stocks you’re getting levered returns to the performance of the underlying commodity.

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Pro Perspectives 9/14/21

September 14, 2021

The inflation data this morning came in softer than expected.

But if we look a little closer, within the report, we can clearly see the hottest inflation we've seen in many decades.

Below is the percent change in the CPI index components over the past year. You'll notice a lot of big numbers …

And the housing component in the report doesn't accurately represent the spike in housing prices we've seen across the country. The S&P/Case Shiller U.S. National Home Price Index is up 18% from the same period last year (the report shows it up 3.6%).

Bottom line, today's data will/should do nothing to change the Fed's course of beginning the removal of the punch bowl.

That said, as we discussed yesterday, if a "risk" to the stability of markets should arise, as the Fed begins the wind-down of its big QE program, we should expect them to quickly abandon the taper plan. The history of the past 13 years has shown us that the Fed will do whatever it takes to maintain stability in financial markets.

So we asked the question yesterday, will they be able to complete the wind-down of their asset purchase program – or will something derail it?

With that, let's talk about some potential risks looming.

First, as we discussed yesterday, we have the risk that the employment picture could worsen from here, as the recent Biden vaccine mandates trigger firings and walkouts in the coming months. Importantly, a jump in unemployment on this basis would come without the accommodation of healthy unemployment compensation. Clearly, that would damage the growth picture.

Risk number two, and perhaps considered a more immediate risk: The Chinese financial system.

A huge property developer in China, Evergrande, is reportedly in default. With $305 billion in liabilities there is speculation that it could melt the financial system in China (like a Lehman moment). While this is getting attention on Wall Street, it seems very unlikely. China is in a position of strength globally, coming out the pandemic, and the Chinese Communist Party is nationalizing parts of the economy (taking more control). Intervening and controlling outcomes is what they do.

So it’s unlikely that they will let a catalyst like Evergrande trigger a real estate bust. Better bet, they will prevent it.

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Pro Perspectives 9/13/21

September 13, 2021

We are nine days away from a Fed meeting. And the expectations are that the Fed will lay out a game plan to begin dialing down QE.

The consensus seems to be building for a November taper. But the question is, will they be able to complete the taper?

Tomorrow, we'll see the inflation report. Core CPI is running more than double the Fed's target for inflation. If we look at the past four monthly changes in headline inflation (including food and energy prices), prices are rising at a double-digit annual run rate. So, from the inflation picture, plenty of reason to end the ultra-easy money madness.

That's the "price stability" side of the Fed's responsibilities.

What about employment?

The employment recovery has looked very good (at a 5.2% unemployment rate) — getting closer to the long-term average unemployment rate. Add to that, the unemployed in half of U.S. states have now lost additional federal unemployment pay, and should be moving back into the work force — likely to be represented in the September data. That means lower unemployment.

So, the Fed’s dual mandate of price stability and full employment clearly doesn’t justify emergency level policies.

That said, we may find that the recent vaccine mandates will trigger firings and walkouts. And that could reverse this trend in unemployment …

If that's the case, we should expect the Fed to react, justified or not (i.e. they won't be tapering for long).

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Pro Perspectives 9/10/21

September 10, 2021

Yesterday's speech by the President laid out a plan to raise the vaccination level.

As we discussed, vaccine mandates for government and the healthcare industry, pose a threat to the employment situation. We already have a labor shortage, driven by federal income subsidies and debt moratoriums. Now we may see the labor shortage exacerbated by firings and walkouts.

With that, on the private employer front, for employers that would be forced to comply with either vaccine or testing mandates, we may find the return to office plans get pushed out even farther.

That probably doesn't bode well for the office stocks. Let's take a look at a couple of those …

First, here's SL Green Realty Corp. (symbol SLG). This is a REIT that primarily invests in office buildings and shopping centers in New York City. As you can see in the chart, as of June, this stock had retraced more than 80% of the losses from the pandemic-induced restrictions. Today it was down 3.8%, the biggest down day since February 25th.

Next is Boston Properties (symbol BXP). This REIT invests in office buildings in big U.S. markets like Boston, New York, San Franciso, Los Angeles and DC. The stock also had retraced over 80% of the pandemic losses. It was down 3% today.

What was UP, in a down market? Maybe one of the favorite "work from home" stocks: Zoom. Zoom was up almost 2%. Perhaps a dip to buy in this chart…

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Pro Perspectives 9/9/21

September 9, 2021

On Tuesday we talked about the interest rate market, as a spot to watch.

The Fed meets in less than two weeks, and if we believe what they've been telling us, we should expect them to announce the schedule to dial down their QE program (beginning as early as October).

With that, on Tuesday, rates were technically sitting on levels for a potential breakout.– trading around the 1.39% area on the benchmark 10-year government bond yield. Of course, that would represent a Fed finally moving away from emergency level policies, and it would (related) represent confidence in the sustainability of recovery and reopening.

As you can see in the chart above, the breakout in rates didn't happen. It's gone the other way. Today, the 10-year traded back below 1.30%.

This comes as stocks have four consecutive days of losses (albeit only 1.1% in total for the S&P 500).

We may be seeing some uncertainty in markets heading into a prepared speech from Biden after the close today. There have been a few hints on what it will cover, but the headline has suggested that he will present a plan on virus mitigation, which will include ramping up mandates to raise the population vaccination level.

So far the leaks point to mandatory vaccination of government workers and healthcare workers that participate in government healthcare programs (Medicare and Medicaid). The risk here, is to the employment situation.

Pro Perspectives 9/8/21

September 8, 2021

As we discussed yesterday, there is report due from the Fed this month on the viability of a central bank digital currency (CBDC/digital dollar).

I suspect this will determine whether or not the Fed Chair, Jay Powell, keeps his job.

My view: If this report favors the adoption of a digital dollar, he keeps his job. If it doesn't, the Biden administration will appoint someone that does.

On cue, the Wall Street Journal ran a piece today setting the table for a close call on Powell's future — saying there's an intraparty rift on the topic.

What's the big deal about a digital dollar? Isn't money already digitized?

Digitization of money is indeed already well adopted, at the wholesale (or institutional) level — digital currency already exists.

So there are plenty of questions as to why the government and the central bank are looking into a CBDC. In fact, one Fed governor has called it “a solution in search of a problem.”

While the problems it solves are questionable, it can certainly create problems. For one, it would take us a step closer to a cashless society. That means the disrupted parties in this new digital monetary system would be small business and "retail" (i.e. the people). The privacy of a cash transaction goes away.

With that, bitcoin looks like the bastion of wealth security and transaction anonymity. But this CBDC concept could allow governments and central banks to regain control on that front.

With that, as for the future of private crypto currency, don’t underestimate the rule makers appetite to change the rules when it fits their interest. We’ve already seen government encroachment on crypto accounts. I suspect the government wants to, and can regulate private crypto out of existence.

But haven't some of the very wealthy and sophisticated investors come out in favor of bitcoin and crypto?

Yes. But allocating 1%-2% of their wealth as a hedge against an extreme outcome (ex: Bitcoin widely adopted) is a way to preserve their wealth relative to the rest of society. They win, in both scenarios. They win more if their 1%-2% allocation goes to zero (i.e. the private crypto markets go away).

Pro Perspectives 9/7/21

September 7, 2021

We ended last week discussing a jobs report that showed weaker job growth, but hotter wage growth.

As we discussed, a return to stronger job growth will likely come this month, as incentives have shifted in favor of promoting a return to work, for the unemployed (as opposed to saying home). And the wage growth, which has already trended hot for many months, we should expect to continue to trend "hot."

With that, we had a move in the interest rate market today, in anticipation of the Fed 'beginning the end' of QE, maybe as early as next month.

As you can see in the chart above, we closed today testing the highs of the past month on rates. This will be key to watch in the coming days for a potential break higher. That would be, at least short-term, positive for the dollar, and likely negative for commodities. We've seen this manifestation today.

Another big mover today: Bitcoin.

After climbing back to $50,000 over the past month, Bitcoin declined as much as 17% today.

Was the decline influenced by rising rates? Was it influnced by the news that a third world country (El Salvador) would be the first to adopt bitcoin as its national currency? Don't know.

What is a risk to bitcoin, which is coming down the pike (soon), is the Fed's report on whether or not they see a viable path toward adopting a digital dollar (i.e. a central bank digital currency). That report was promised by Jerome Powell, to be published and made public this month.

Remember, we've talked about this over the past few months. The Senate Banking Committee held a hearing on the prospects of a digital dollar back in June, where Elizabeth Warren described a central bank-backed digital dollar as "legitimate digital public money that could help drive out bogus digital private money (bitcoin, stablecoins, etc), while improving financial inclusion, efficiency, and the safety of our financial system."

It's no secret that a consortium of 63 global central banks (the BIS – which includes every major central bank), has already promoted CBDCs as the "future of the monetary system."

With that, expect some fireworks surrounding this report when it's released (again, sometime this month). It's probably a good time to be long gold.

Pro Perspectives 9/3/21

September 3, 2021

The jobs report this morning showed just 235,000 jobs added in August. That was well below expectations.

But as we've discussed the past two days, the conditions for job growth will only improve in the coming months. For at least half of the country, we'll see the unemployed re-enter the workforce, as the additional unemployment compensation from the federal government has ended.

More important than the jobs number this morning, was the wage number.

The change in wages from July to August was 0.6%. That's an annualized rate of more than 7%!

This "wage component" is like pouring gasoline on the inflation fire. This is where the Fed's case for "transitory" inflation breaks down. Sure the supply chain issues will ultimately work out, and relieve those price pressures. But wages are sticky. The government has reset the "living wage" through its federal unemployment subsidy. And it's much, much higher. The genie is out of the bottle.

We know all of this. We've been talking about this for a long time. Now we're seeing it sustained and feeding into the inflation data. It has led to higher input costs for employers, and those higher costs are being passed onto consumers (without hesitation) in the form of higher prices. I've spoken to executives that raised prices not just once, but two and three times, already.

So we should expect the Fed to execute on an exit of QE, beginning maybe as early as October. And then the big question will be, how soon will the Fed be forced to start hiking rates? If we look at the quarterly annualized inflation rate running at close to 7%, with the prospects of hotter economic activity in front of us (not behind us), the Fed may be looking at double-digit (trailing twelve month) inflation, or close to it, by the end of Q1 next year.

Bottom line, our cash continues to be devalued. And that promotes the reset of asset prices we've been talking about for 17-months. The price of stuff, relative to the money in your pocket, will continue to rise for the foreseeable future.

Have a great Labor Day weekend! As a loyal reader of my daily Pro Perspectives notes, I'd like to invite you to join me in my premium advisory service, where you can get all of my in-depth analysis on the bigger picture — and get exclusive access to my top stock ideas. You can get started here.

Pro Perspectives 9/2/21

September 2, 2021

The big jobs report comes in tomorrow morning.

As we discussed yesterday, things set up for a disappointing number. We have clues from the ADP data that we could see not only a weaker than expected nonfarm payroll number, but also a downward revision to last month's number.

Supportive of that, the employment component of the recent ISM Manufacturing report dipped back into contractionary territory for the first time since November.

And as we discussed earlier in the month, the consumer sentiment reading from the University of Michigan hit a 10-year low in July.

So these are meaningful signals to acknowledge.

The question is: Will a weak number tomorrow be enough to shake the boom in asset prices, particularly stocks? Likely.

But as the dust settles, the realization should set in that weak jobs data only give the Fed cover to stay "easier for longer." That's positive for stocks.

Conversely, a strong jobs number tomorrow, means recovery is stronger. That too is positive for stocks.

With all of this said, tomorrow's report on August employment means very little in the bigger picture. We all know that employment has been encumbered by policy disincentives. And those disincentives have ended for half of the country, as of this month. So the employment situation should only improve from here (from September on), and that will strengthen already hot economic growth (but also underpin inflation).