Latest | Billionaire's Portfolio

May 11, 2021

One of the great macro-traders of all time, Stan Druckenmiller, wrote an op-ed in the Wall Street Journal yesterday.

When he shares his views, it's often a good idea to pay attention. He tends to understand the big picture as well or better than anyone, because 1) his view is shaped by global liquidity … and 2) he has a lot of influence.

For a guy that has made his fortune over the past forty years interpreting the impact of central bank policy, no time in his career has the environment been more in his wheelhouse. With that, he has grown his $5 billion dollar fortune by 50% over the past seventeen months.

So, what does he think now?

He thinks the Fed should be ending emergency policies, and making its first rate hike — now.

Instead, the Fed is telling us they won't raise rates for another two years.

They are still buying $40 billion worth of mortgage bonds each month, despite the fact that the housing market is booming and supply is tight.

They are still buying up $80 billion a month of Treasurys, depite the fact that the economy is growing at twice the long-term trend rate, and is on path to grow at double-digits in the second quarter.

Worse, by continuing to buy Treasurys, they are giving Congress the greenlight to continue rubber stamping yet another, and another, multi-trillion dollar spending program. As Druckenmiller says, the bond market is designed to be the arbiter of fiscal policymaking, as investors will vote with their feet (sell Treasurys), when the government is spending irresponsibly. In this case, the Fed bond buying is masking any signal of disapproval from bond market investors.

So, as Congress might be observing the bond market for any negative signals, the Fed is effectively giving them justification to be even more aggressive.

This policy stance (from the Fed and Congress), at this stage in the recovery, is toxic — and is leading to a massive debt service burden for the country, which in the view of Druckenmiller, will ultimately be resolved in a devaluation of the dollar and the loss of the world reserve currency status.

My view/summary: Unfortunately, when the line has been crossed, it has been crossed. The Fed has told us and shown us over the past 12 years that they will do 'whatever it takes' to maintain confidence and stability. With that message clear, the politicians can play them like a fiddle. On Capitol Hill, they can carry out destructive wish list spending and/or policy, knowing that the Fed will be there to keep everyone's head above water (until they can't). As Druckenmiller says, the dollar is the ultimate lynchpin. If/when foreign investors dump the dollar, that's when the real pain arrives. It won't be soon, but we are on the path.

Pro Perspectives 5/10/21

May 10, 2021

As we’ve discussed here in my daily Pro Perspectives notes, asset inflation is only a precursor for the inflation we will soon see in our day-to-day spending.

When you flood the world with money with no end in sight, the buying power of the money in your pocket gets destroyed. It’s that simple.

With the above in mind, the front page of the Wall Street Journal this morning reads “Shoppers Feel Bite As Prices Begin To Climb.”

This comes following earnings calls from major food companies the past few weeks, all singing the same tune about rising prices.

And the operating performance discussed in these calls by food companies is not including the huge spike in prices we’ve seen just in the past 40 days (since the quarter close) …

Corn futures: up 41%
Wheat futures: up 20%
Beans: up 12%

Here’s the way the CEO of Sysco (the world’s largest food distributor) describes what he’s seeing …

“Certainly, the economy is becoming more inflationary. Basic economics are at play here. We have significantly increasing demand, unfortunately, simultaneous with some supply challenges that are pretty well-known out there in the food industry.”

What’s the impact? They are passing prices along to the customers. Customers are paying a higher ticket. And in this environment, they are not getting pushback, yet.

With all of this, there is inflation data on the agenda this week. The U.S. CPI is reported Wednesday. PPI is on Thursday.

This inflation data should quickly counter the narrative that has been created out of Friday’s weak jobs report … the narrative that somehow the Fed is in a more comfortable position now, continuing with their pedal to the metal on emergency monetary policies.

As we discussed Friday, the weak jobs report is a clear outlier in the economic data, because it’s not depicting waning economic activity, rather it’s clearly demonstrating the destructive role that the government is playing in the labor market. The government is winning the competition (against employers) for labor, by paying them more to stay home, than they would make working.

Pro Perspectives 5/7/21

May 7, 2021

In this morning’s jobs report, the market was looking for nearly a million new jobs created in the month of April.

It came in at about one-quarter of that.

Was this a warning signal that the economy is actually slower and more vulnerable than is being spelled in the data and corporate earnings?

That’s precisely what the Biden administration wants us to believe. Because that justifies the additional $4 trillion in spending they have lined up to push through Congress. With that, the glide path to more, massive spending is a positive for markets. That’s why markets (stocks, commodities) were up today, across the board.

But is the jobs report really a signal that the economy isn’t so hot?

Or does the softer employment number from April simply represent the reality that the government is winning the competition for labor by paying people two to four times (depending on what state you live in) the minimum wage to stay at home?

Common sense (plus empirical and anecdotal evidence) would tell us the latter.

The president and his treasury secretary told us today that it’s the former, and moreover they told us that enhanced unemployment benefits have nothing to do with keeping people from returning to work.

But the data doesn’t lie. It’s a labor shortage issue. And it’s a labor shortage issue because employers can’t compete with the government on wages.

That’s why existing workers are having to work longer hours in attempt to satisfy hot demand, especially in the industry that was hardest hit in the pandemic (leisure and hospitality) …

And that’s why employers are desperately looking to add staff. As you can see in the chart below, job openings on Indeed, the online job board, are up 24% from the pre-pandemic levels.

Back in February 2020, the unemployment rate was 3.5%, near the tightest employment on record. The current unemployment rate is 6.1% (far higher), yet the market for talent looks even tighter than it was pre-pandemic.

This will all translate into higher wages, as employers are forced to raise wages to compete with the government. And wage inflation feeds price inflation.

The wage inflation manufactured by the government (through subsidized unemployment) has already led to record savings levels, hot consumer spending and asset inflation. Big inflation in everyday consumer prices is next.

Keep buying assets (as an inflation hedge). And as we discussed yesterday, among the options to protect buying power, gold is a relative bargain.

Pro Perspectives 5/6/21

May 6, 2021

We should expect a hot jobs report tomorrow to continue the steady creep of inflation concerns.

It's the job of Jay Powell and the Fed to manage the expectations of people about price pressures. As Bernanke once said, monetary policy is 98% talk. And Powell and company have been doing a lot of talking.

But it's not easy to talk down the price increases that are right in front of our noses everyday. And beyond the supply/demand dynamics that are putting upward pressure on prices, it's perception that can lead to behavior, and behaviors (related to inflation) are what can lead a dangerous spiral. For that reason, the Fed worries about perception.

If you’re buying today, at any prices, because you think price will be higher tomorrow, that's a recipe for an inflationary spiral. The current housing market is a perfect example.

At this stage in the game, I'm not telling you anything you don't know. We all clearly see the move in asset prices.

What hasn't participated, and has been written off as a "has been" trade, is gold. Despite being THE asset that has historically been most favored in times of inflation, gold is actually DOWN year-to-date (down 4%).

Is that a signal that we are wrong about the sustainability of the inflation we're seeing? Unlikely.

What gives with gold, then? It is believed, by many, that gold has been supplanted by cryptocurrency (namely, Bitcoin) — as the new, improved way to hedge against inflation. If that's the case, we are in for some very serious inflation. Bitcoin is up 93% year-to-date.

The people buying bitcoin as an inflation hedge clearly think "this time is different" — that a digital currency will protect their buying power better than gold in a persistently high, if not hyper-inflation scenario. In my 25 years of investing and trading experience, it's often a bad idea to position for "this time is different."

Even so, surely gold should be benefiting from at least some global capital flows on this inflation perception. Remember, it's down year-to-date.

Clearly gold has been a dislocated asset in this market and economic environment.

But that creates an opportunity to see that dislocation corrected.

And we may have seen the signal for gold to start its big catch-up move today.

Gold broke out of an trading range today, trading above $1,800 for the first time since February. This is an important day for anyone that trades gold or gold stocks.

Two observations to note in this chart above: 1) the break above $1,800 and 2) the longer-term trend is UP.

In a world where asset prices are making new highs by the day, you can buy a dip in gold.

For gold, fundamentally, the outlook is strong given the explicit devaluation of cash through unlimited Fed QE and seemingly unlimited deficit spending.

So is the longer-term technical outlook…

This is a classic C-wave (from Elliott Wave theory) here in gold. This technical pattern projects a move up to $2,700.

How do you play it? Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD.

Full disclosure, we are long (gold miner) Barrick Gold in our Billionaire's Portfolio.

Pro Perspectives 5/5/21

Yesterday we talked about the catalysts and technical set up for the extension of this move higher in oil prices.

Today, of the top twenty performers in the S&P 500, eleven of the top twenty were oil and gas companies. These stocks were up anywhere from four to eight percent. And this is not an aberration (this year). Energy is the leading performing sector year-to-date in the index, up 34%.

And it’s still a buy.

Remember, we are in the early stages of economic growth boom — at least a nominal growth boom. And also remember, until the climate actioners/central planners can destroy the fossil fuel industries and create a scalable enough alternative energy industry, we will be using a lot of oil.

That has put the surviving oil and gas companies in the driver’s seat, to enjoy the rain of cash flow, as higher prices will continue to drive wider and wider profit margins, in an environment where the market share of these surviving companies has been protected by the climate action agenda (which has removed threats of new competition and new supply).

Often in markets, the pendulum tends to swing too far (to an extreme) in directions. We’ve seen it in the energy sector.

In 2010, the energy sector represented 10% of the S&P 500. Today its just 2%. And energy is the only sector in the S&P 500 that’s down over the past five years — down 21%.

Here’s a look at the year-to-date performance of the constituents of the energy sector in the S&P 500 …

If you like betting on laggards, there are two stocks that are still underperforming the broad market index (COG and BKR).

Pro Perspectives 5/4/21

We are more than halfway through Q1 earnings season, and S&P 500 earnings compared to Q1 of last year are running at a 45% growth clip. And if you think that’s big, wait until you see Q2 earnings growth.

For the economy overall, first quarter growth came in at a sizzling 6.4%. And second quarter is projecting north of 13% GDP growth.

With this story unfolding, we are finally seeing cracks in the Fed’s inflation denial campaign.

The President of the Dallas Fed said today that it would make sense to start discussing how they would go about tapering QE. And then, Yellen (former Fed Chair and now Treasury Secretary) spoke out of school, saying that “interest rates will have to rise somewhat to make sure that out economy doesn’t overheat.”

Wow! That combo punch is good enough to hit the stock market. And it did.

But don’t worry, the walk-back will follow. Already, Yellen has appeared on the schedule to be alongside the White House Press Secretary for the Friday press conference.

Why will this admission by policymakers, to the obvious inflationary forces that are being seen and felt all around us, be walked back?

Because the administration still has another $4 trillion of spending programs to get through Congress. And Congress has been using the excuse, to support more profligate spending, by saying that the experts at the Fed don’t see inflation risks.

Live Update: This just in, as I write, Yellen has already walked it back, saying that she doesn’t think there will be an inflationary problem.

Let’s talk about oil …

A couple of weeks ago, Biden hosted the virtual Climate Summit with over 30 world leaders in attendance. We looked at the chart of crude oil, after Biden’s said this: “I see workers capping hundreds and thousands of oil and gas wells” around the country.

As we discussed, despite the intent of the message, to promote/telegraph the move to “clean energy,” this was more likely to be a catalyst for higher oil prices, as they can remove supply, but demand isn’t going away anytime soon.

Sure enough, here’s a look at the chart from my April 22 note, after day 1 of the Climate Summit…

And here’s a look now …

Crude oil is up 7% on that catalyst of the Climate Summit. And now, a new catalyst has entered: The prospect of war.

Just when you thought it couldn’t get more chaotic, with the frenzy policy directives in DC, the China threat has become a point of focus.

The Sydney Morning Herald in Australia ran a headline today quoting a general saying “War with China is likely.” The U.S. media has officially done a flip-flop on China, with a NY Times headline “Is there a war coming between China and the U.S.? And 60 Minutes interviewed the Secretary of State on Sunday night, where he talked tough on China. This is all just over the course of a few days. Add to this, the G7 foreign ministers are meeting in the UK, where China relations has been the big focus.

So, with the specter of a China confrontation being introduced, expect the move in commodities to kick into another gear, especially oil prices.

Pro Perspectives 5/3/21

May 3, 2021

As we’ve discussed, the inflation evidence continues to appear, with soaring key asset prices (like stocks, real estate, collectibles, commodities). But the strategists, economists and politicians continue to debate it. Much of the debate is driven by the Fed’s unwillingness to publicly acknowledge it.

With that, we had another hot inflation data point this morning: The prices paid component of the ISM manufacturing report was the highest since 2008.

As we’ve discussed, to counter the rising prices, we will have to see higher wages. The government has already created the glide path for it, by subsidizing unemployment checks over the past year with Federal money. With that, the government established a new living wage. Depending on which state you live in, that federally subsidized living wage is now between $18 and $27 an hour. That’s significantly above the $7.25 current federal minimum wage.

So wages are going higher. And it will be broad based. But will quality of life follow suit (higher)?

For now, people are feeling richer, with bigger paychecks (bigger bank accounts) and rising asset values. But as Warren Buffet said back in his 1980 investor letter, when inflation was running at double-digits, “you may feel richer, but you won’t eat richer.”

Here’s how he described the inflation impact for investors in 1980: “High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners. This ‘hurdle rate’ the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners – has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.”

What do you do now to win the race against the inflation escalator?

Be long inflation assets: commodities, real estate, Treasury Inflation Protected securities, EAFA (developed market international stocks), US Banks, Value stocks …

Within the stock market, in this inflation price regime, value stocks are outperformers. With that dynamic at work, our Billionaire’s Portfolio has been in the sweet spot. You can join us, and get my full portfolio of billionaire-owned value stocks — become a member here.

Pro Perspectives 4/30/21

April 30, 2021

As we head into the weekend, let’s gain some perspective on the growth and inflation picture.

The President says we desperately need growth, and that justifies transforming the economy through top-down central planning, and spending trillions of dollars we don’t have to do it. Despite this explicit intent to inflate the size of the economy, the Fed says it sees no inflation — and no inflation risks.

What does the data say?

The first reading on Q1 GDP yesterday was 6.4% growth. That’s about three times the pre-pandemic pace, and double the long-term U.S. average economic growth rate. Add to that, the Atlanta Fed model is now projecting 10.4% growth for Q2.

Growth is already inflated.

What about prices? The government tells us that inflation is running 2.6%. That’s under the longer-term inflation rate of 3%.

Yet, housing prices are soaring. Redfin says the median house price in the U.S. rose 20.5% from pre-pandemic levels.

Car prices are soaring. The Manheim Used Car Value index is up 33.5% from pre-pandemic levels.

Food prices are soaring. The FAO food index is up 24% from pre-pandemic levels.

The national average gas price is up 16% from pre-pandemic levels.

Add to all of this, in the March survey of manufacturing companies, when the participants were asked which commodities (inputs in their manufacturing) were up in price and which were down. The answer: Up = all of them. Down = none.

So, inflation is here. It’s just not in the government numbers, yet. Let’s hope the official government data eventually reflect the reality.

Remember, as we discussed last month, you offset this by being long inflation assets: commodities, real estate, Treasury Inflation Protected securities, EAFA (developed market international stocks), US Banks, Value stocks …

Pro Perspectives 4/29/21

April 29, 2021

With the Amazon earnings report after the close today, we've now heard from the tech giants on Q1.

The numbers were huge. And with Facebook, Apple, Amazon, Google and Microsoft making up more than 21% of the value of the S&P 500, we close today with a new record high in the index.

It's well known that big tech was the big winner of the "stay-at-home" economy. Not only did they enjoy advantage over their competition, but that advantage was met with consumer spending that was bolstered by federally subsidized unemployment checks and direct government checks to households.

Let's take a look at what that looked like …

Revenue growth compared a year ago was 52% at Facebook, 34% at Google, 55% at Apple, 44% at Amazon and 20% at Microsoft.

If we take the average y-o-y growth rate of the five, these are the biggest companies in the world, growing at 17 times the pre-Pandemic growth rate of the U.S. economy (Q4 2019 GDP grew at 2.4% annualized rate).

With that above in mind, this consumption effect that has driven big tech, reflected in a big Q1 GDP number reported this morning. The first reading on Q1 growth was +6.4%.

Consumption is 70% of GDP. And that component was big. Aside from the sharp bounceback last year, it was the biggest since 1965.

This fits nicely into the inflation theme we’ve been discussing: strong appetite to consume, meeting supply shortages.

Pro Perspectives 4/28/21

April 28, 2021

We heard from the Fed today.

What is the market looking for from the Fed? Any admission that they are worried about inflation.

Once again, they didn't get it.

This has boggled the minds of many, even experienced Wall Streeters.

We have unabashed massive deficit spending, that seems to have no limits when you have a President looking to wholesale change an economy, and an aligned Congress ready to rubber-stamp anything coming from the President's desk. If $3 trillion of fiscal stimulus wasn't enough last year to plug the gap of economic losses from the pandemic (the simple math says, it easily was), we have another $1.9 trillion in process, over $2.3 trillion being drawn up for "infrastructure, and now $1.8 trillion proposed "for families."

Add to that, the Fed itself has created money out of thin air to buy a variety of assets and stuff bank balance sheets.

This is increasing the quantity of money and the ease of access to money, and it’s all far beyond what is necessary to respond to an emergency economic situation. It’s all a recipe for making the money in your pocket worth less.

We've seen that translate into much higher prices for homes, cars, metals, lumber, food…you name it.

But the Fed has maintained that they don't see inflation as a problem. They do admit, that in the near term we will see some inflation that runs above their target of 2%. But they want us to believe, that they believe it will be temporary.

And they can explain it away, as Jay Powell did today. He says, the inflation numbers are going to be big against last year's shutdown economy, from the "base effects." He's right. The numbers will look huge, in a "re-opening economy" when compared to a virtually closed economy of a year ago. He says there are "bottleneck effects" from the supply disruption. He’s right. It will cause higher prices, but will normalize as the the supply constraints ease. Short term!

Okay, we can buy that. But what about the trillions of dollars of excess spending being dumped on the country? That's the inflation question people want answered from Jay Powell. It was asked in today's press conference. Powell didn't answer it.

This tells us all we need to know. The Fed knows the inflation tsunami is coming, but telling everyone about it, at this stage, isn't going to help — but it could harm.

As Bernanke once said, "monetary policy is 98 percent talk and only two percent action.” The Fed is doing a lot of talking, trying maintain a stable recovery. They know the big test is ahead (in the not too distant future) when they will have to chase inflation, and try to carefully thread the needle, hiking rates to get inflation under control, while trying to avoid crushing the economy.