Pro Perspectives 7/20/21

July 20, 2021

We had a big bounce back in markets today. 

By midday, stocks had fully recovered the slide of yesterday.

And, importantly, the big trendline from the lockdown-induced low of last year, has held in the benchmark S&P 500.

Let's take a look at the updated chart from my note yesterday …

Interestingly, following the declines of yesterday, driven by news of rising covid cases and increasing global restrictions, the big movers of today's bounce back (within the S&P 500) were some of the most vulnerable to a lockdown environment:  cruise lines, airlines, retail and restaurants.  

My takeaway:  That shows confidence from the investment community that the environment for stocks and the economy will continue to run full-tilt (no hiccups).  

Another interesting chart, with a significant trend that remained intact through the broad declines of yesterday:  Oil. 
The news from OPEC+ on Sunday that a standoff between the Saudis and UAE has ended, adds to the bullish outlook for oil (still a supply/demand mismatch).  With that, this knee-jerk decline yesterday on concerns about global lockdowns, presents a buying opportunity for oil and oil and gas stocks.
 

Pro Perspectives 7/19/21

July 19, 2021

Last Monday we talked about the foreseeable "spiking case" narrative, as cover for the Fed and for the government to maintain their ultra-aggressive policy stance.  

Indeed, in the face of hot inflation data last Tuesday and booming earnings reported throughout the week, the Senate democrats announced a $3.5 trillion stimulus plan (with the creative label of "budget agreement").  Then Biden called on Congress for another $1 trillion for infrastructure.  And then Jerome Powell visited Capitol Hill, confusingly continuing with his "inflation is transitory" drumbeat.  

After today, the "pedal to the metal" policies perhaps get a degree of validation (a  "shot in the arm”).  

The headlines are now kicking in, to drive the "soaring case" narrative. 

 

Though, like the inflation data, the case narrative comes with considerable "base effects."  Cases, driven by the variant, are rising, but compared to very low levels, as you can see in the chart below. 

Still, Australia has locked down two of its biggest states.  And the chance of the U.S. administration returning to a lockdown is not zero.  With that, markets reacted today. 

Stocks traded below, but closed back above this very important trendline (see the chart below). 

 

This line represents the rise from the lockdown-induced lows of last year — the bottom of which was marked by the Fed's announcement that it would start buying corporate bonds. 
 
To be sure, this trendline will be key to watch.  A break would likely bring about a deeper, and likely quick decline. 
 

But as we've discussed, these declines in the post-financial crisis world, where the Fed is already aggressively engaging in intervention, tend to be short-lived (i.e. fully recovered inside of one month, in the majority of cases — and on to new record highs). 
 

Pro Perspectives 7/16/21

July 16, 2021

Both Jay Powell and Janet Yellen publicly promoted the "transitory" case for inflation this week.  They will not flinch in the face of obvious data and real world observations of rising prices. 

They continue to dismiss on the grounds of "base effects" and "bottlenecks."  They say price data only looks high because it's measured against a very low base of last year, when the economy was virtually shut down ("base effects").  And then they go to the supply chain "bottlenecks" argument.  The disruption in the supply chain will normalize.  All reasonable. 

But they never talk about the 30% growth in money supply.  There is 30% more money in the economy, chasing a relatively fixed (more like smaller) amount of services and goods.  That's inflationary. 

Meanwhile, both Powell and Yellen (the Fed and Treasury), can't see any reason to be concerned about expanding the money supply even further, with additional multi-trillion dollar deficit spending packages. They support it.  Yellen promotes it (not surprisingly, as part of the administration).  

What they both continue to talk about is this concept of  "inflation expectations."  In normal times, if the Fed can do a good job manipulating consumer confidence in a way that produces a perception of stability, for consumers, then they can manage behaviors, and therefore prices, to achieve their desired outcome (stable prices).  At least they strive to do that.  That's why they fear moves in inflation expectations more than the inflation data itself. 

In this case, things aren't exactly normal.  We have an economy that's on fire, and we have excess money sloshing around, with more coming. 

Still, they seem to think they can manipulate perception, to get their desired outcome.  As far as they see it, as long as you don't think prices are going to run away, you'll behave normally in your consumption (i.e. you won't spend hastily to save against higher prices and you won't big UP prices in bidding wars). 

So they are constantly telling us that these rising prices are temporary — no need to rush out and buy that widget now.  

In addition, the Fed seems to be using a tool that is in their complete control of right now, to send a message to people.  It's the Treasury market.  They have pinned the yield on the 10-year Treasury note back down to 1.3%, in the face of an economy running at better than 7% growth and in the face of prices (on a month-over-month basis) rising at a double-digit annualized rate.  

This chart has the institutional community confused and becoming manipulated into believing there is no inflation problem.  They think market forces, in this chart, are giving them a message.  More likely, the Fed is giving them a direct message: "promote a tame inflation outlook."   With that, a July fund manager survey says 70% of fund managers think inflation is temporary.  

Pro Perspectives 7/15/21

July 15, 2021

We talked last month about the building conversations in Washington about a central bank-backed digital currency (CBDC). 

The Fed Chair just spent two days on Capitol Hill giving testimony on the state of the economy.  And the digital currency topic was addressed both days.

The Fed is due to deliver a report in early September, Powell says, on the risks and benefits of adopting a CBDC.  As we discussed in June, this looks like it's coming.  It was a hot topic at the G7 meetings last month.  The Senate Banking committee held a hearing on it last month, with expert witnesses arguing the benefits of CBDCs.  And the Bank for International Settlements (the BIS, a consortium of the world's top central banks) has promoted CBDCs as "the future of the monetary system." 

This issue will probably be the determining factor on whether or not Jay Powell is reappointed.  If he's for it, he probably stays Fed Chair.

Just as the "build back better" and clean energy transformation is an agenda highly coordinated by major global economic powers, so is the concept of CBDCs.  The BIS consists of 63 global central banks, and nearly 90% of them are having conversations about adopting a CBDC.  

 

Among the many risks of global central banks going to digital money: privacy and consumer protections.  It’s a good time to own some gold. 

Pro Perspectives 7/14/21

July 14, 2021

After a few weeks of theater on Capitol Hill, as the Biden administration acted as if they were seriously pursuing an infrastructure package that both parties would support, they have now revealed the extent of extravagance they will ram through Congress, with the power of a democrat controlled Senate (+ the VP) and House. 

That number?  $3.5 trillion. 

But if that weren't obnoxious enough, they still want and expect to tack on the minimum package that Senate Republicans proposed back in May — another trillion dollars in the name of infrastructure.

As we know, this is not about covid relief.  It's about transforming the economy and the country in the globalist vision.
 

That was clear at the G7 leaders meeting last month.  The most powerful developed market countries are all-in on the climate and equality movement.  While they told us last month that they would continue supporting the economy, they also told us that they will do so with the focus on “future growth,” not crisis response (in their words, you can read their communique here). 

That's why the "response" has been far bigger than the damage (from the global healthcare crisis).  It's about transformation, not relief.  And that's why the administration keeps pouring gasoline on the fire. 

The damage done:  The U.S. economy contracted $2.2 trillion in 2020, from Q1 through Q2.  In response, if you pile on the spending plans above, we're now looking at $9.1 trillion in deficit spending.  Clearly that's more than enough to plug a $2.2 trillion gap. 

 

That's why economic growth and prices are on fire. 

Again, this is all about the global agenda of "building back better," not restoring the economy to growth.  With that, not only do they not seem to care about inflation, they are intentionally inflating (i.e. devaluing money and devaluing debt).  And the global powers are all-in.  That's why there isn't a devaluation of currencies, relative to each other.  There is a devaluation of currencies relative to the price of stuff.  And it's far from over.   

Pro Perspectives 7/13/21

July 13, 2021

As expected earnings season has kicked off with a bang. 

JP Morgan crushed earnings expectations, nearly tripling the earnings from last year.  Goldman Sachs earned almost 50% more than the Wall Street estimates – more than doubling the earnings from a year ago. 

Don't forget, the banks have a war chest of loan loss reserves that they will continue to move to the bottom line at their discretion.  That means they have a large inventory of positive earnings surprises they will present to us for several quarters to come.

So these big beats are no surprise.  But in addition to the position of strength they have in managing earnings, business is booming.  Deposits at JP Morgan are up 25% from the same period last year.  And the value of investment assets are up 36%. 

That's all, in large part, thanks to the four-trillion-dollar growth in the country's money supply over the past year. Banks benefit, directly! 

With that, we hear from Citi, Bank of America and Wells Fargo tomorrow. 

The cheapest of the big four banks is Citi.  JP Morgan has a book value of $84.  The stock trades at $155.  Citi has a book value of $88.  The stock trades at $68. We own Citi in our Billionaire's Portfolio (my member's-only premium subscription service). 

Now, yesterday we also discussed the prospects for a hot inflation number in today's economic reports.  We got it. 

By now the media has been trained by the Fed to explain away hot inflation data as "transitory," based on the argument that the data is/will continue to be measured against very low comparable of a year ago (when the economy was in lock down).  They want us to focus on the year-over-year change in prices. 

But the real information is glaring in the month-over-month data.  Inflation in June (both nominal and core) soared almost 1%.  That's for the month of June! 

Moreover, that's three consecutive months of a monthly increase in the measure of prices near 1% (April +0/9%, May 0.7% and June 0.9%). 

Forget the comparisons to last year.  Extrapolate this monthly data out, and we are already seeing clear evidence of double-digit annual inflation.
 

Pro Perspectives 7/12/21

July 12, 2021

As we kick off earnings season this week, stocks are new record highs, again. 

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.

 

The CDC says the Delta variant was found in the United States in March.  As you can see, the case trajectory from there, is lower. 

 

And as you can see below, the trajectory of deaths, related to covid, has continued to decline.
Still, with all the above in mind, hot earnings and economic data, combined with the impetus to see fiscal and monetary policy to continue at full-throttle, we should have the recipe for even higher asset prices. 
 

Pro Perspectives 7/9/21

July 9, 2021

Markets came roaring back today.  Again, as we discussed yesterday, liquidity is king. 

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. 
 

Pro Perspectives 7/8/21

July 8, 2021

Markets started shaky this morning, on concerns that maybe there are some early signals of a lull in the global economic recovery. 

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.  

Pro Perspectives 7/7/21

July 7, 2021

The minutes from the last Fed meeting came in today with no surprises. 

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.