Latest | Billionaire's Portfolio

July 6, 2021

We open the week with some swings in markets.

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 …

Is the 10-year yield telling us that the bond market knows something?

Remember, the Fed continues to gobble up $80 billion of Treasuries each month. With that, the market isn't dictating the direction and level of yields (interest rates), the Fed is. The Fed is explicitly manipulating the interest rate market.

Now, with yields sliding today, and stocks and commodities selling off earlier in the session, the financial media went through its list of things to worry about: the virus variants, tough talk from China, cyberattacks …

But again, the Fed is in charge of the bond market. And perhaps the Fed is indeed pricing in some risk to the recovery story. If so, it probably has everything to do with the prospects of $100 oil.

Oil producing countries are at an impasse on negotiating oil supply (namely, UAE is in disagreement with the 23 other members). That brings about three scenarios, two of which spell out a path toward $100+ oil…

Scenario 1: Opec+ agrees to a deal to add 400k barrels a day between August and December. That's expected. As we discussed last week, similar to its gradual bump to supply in June, it doesn't meet surging demand — prices go higher.

Scenario 2: Opec+ doesn't agree. They do nothing. Oil prices scream higher.

Scenario 3: UAE exits OPEC and (ultimately starts pumping). That creates cracks in the Opec armor and global economic uncertainty. This could go either way for oil prices in the very short term, but to be sure, all parties are motivated by higher prices/higher oil revenues.

Pro Perspectives 7/2/21

July 2, 2021

The jobs report this morning came with no big surprises. As we discussed yesterday, the job growth will really kick in this month (the July report), as more than half the states push the unemployed back into the job market, by ending the federal unemployment subsidy.

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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Pro Perspectives 7/1/21

July 1, 2021

We get the June jobs report tomorrow.

The inflation data in this report is probably more important than the jobs numbers. With 20 states pulling the plug on the federal unemployment subsidies just over the past two weeks, and another six states expected to in the weeks ahead, it will be the July jobs report that will show a re-employment boom.

In tomorrow’s report, the number to watch will be wage growth. The six month average wage growth has been 3.7%. That’s well above the average annual wage growth of the past ten years.

If we add evidence of sustainably higher wages to higher oil prices, the Fed’s inflation outlook becomes increasingly more wrong-footed. That’s why we’ve heard the change of language coming from the recent Fed meeting. And its why we are hearing Fed officials making the media rounds on a daily basis, planting the seeds/creating the expectations of change to the bottomless monetary policy punch bowl.

Given the market response, with stocks at record highs, it’s pretty clear that the markets deem the greater risk of policy error at this point, as being too easy for too long. So the more hawkish chatter has been well received. With that, hotter inflation data at this point shouldn’t weigh on stocks. But it should be fuel for commodities prices.

Pro Perspectives 6/30/21

June 30, 2021

Today ends the month, and first half of the year.

We entered the year with what I called a set up for “a replay of the late 90s boom” for stocks and the economy.

With that in mind, we’ve had a 14% gain in the S&P 500 for the first half of 2021. That’s well above the long-term average appreciation of stocks, which is 8% per annum.

So is this the exhaustion point for stocks — at least for the year?

Unlikely. Remember we have 30%+ growth in money supply over the past sixteen month. That’s a lot of excess “money chasing too few assets.” Add to that the fiscal and monetary stimulus continues to run full-throttle.

This is akin to opening the spigot on a water hose and filling up a bunch of buckets. Some buckets start to overflow, and that pushes money into buckets that have the capacity to accept water. This is analogous to what happens to money (over) flowing into good assets, and then being pushed to lower quality assets. Before you know it, all of the buckets are over flowing, while the water continues to flow.

Of course, this is a recipe for inflation — likely rapid inflation. But until the Fed first stops fueling it, starts chasing it, and then controls it, the asset boom will continue.

With that in mind, keeping with my comparison to the late 90s boom, here’s how the first six-months and last six-months played out during that 90s boom period…

1995 first six months = +19%, last six months =+13%.
1996 first six months = +9%, last six months =+11%.
1997 first six months = +20%, last six months =+10%.
1998 first six months = +17%, last six months =+8%.
1999 first six months = +12%, last six months =+7%.

As you can see, a big second half followed a big first half, in all five years.

What would drive this kind of performance for the remaining of 2021? Q2 data.

In the next few weeks we will see Q2 earnings that will blow away the earnings from the same period a year ago (at the depths of the crisis and the extreme of the economic restrictions). Not only will the earnings growth be huge, but the expectations bar has been set very low (despite the upward revisions). That means huge positive earnings surprises are coming in July.

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Pro Perspectives 6/29/21

June 29, 2021

A month ago we were talking about the set-up for a spike in oil prices heading into Memorial Day. We've had it. Oil prices have risen as much as 20% in a little more than a month.

Now we're heading into July 4th weekend. Remember, this has been a date/holiday the administration has touted as a "turning the page" on the virus celebration. Travel will boom. This comes with the national average gas price at $3.10 — up 42% from a year ago. And that number will probably rise as we head into the weekend. There are already reports circulating about gas shortages at stations, as the supply/demand mismatch in oil is getting exposed.

As we've discussed, the Biden administration is regulating away domestic oil supply. That puts OPEC back in the position to dictate global oil prices. And it's a safe bet that they want prices higher, not lower. With that, OPEC (plus Russia) meets on Thursday to discuss potential output increases in the months ahead.

They bumped output gradually higher in June. Oil prices went up, not down.

And don't expect them to make a material move on Thursday, with the cover of "the unpredictable foe and vicious mutations" of COVID as a threat/excuse — in the words of the OPEC Secretary-General. A “nothing material” outcome from OPEC+ should continue to underpin the oil market (i.e. higher prices).

As we've discussed here in my daily notes, the focus in the oil market has been all about future demand — meaning less demand, driven by the fantasy of rapid change to ubiquitous electric vehicles and wind farms. Thus, they have underestimated oil demand, and therefore they have underestimated the economic impact that is coming down the pike from regulating away supply (from the climate activist movement).

Some are now waking up to this reality, as the forecasts for $100+ oil have emerged from a few big institutional oil trading houses and investment banks over the past few weeks. As I've said, get ready for $6 gas.

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Pro Perspectives 6/28/21

June 28, 2021

We talked last week about the building chatter about central bank backed digital currency (CBDC).

The Fed told us last month that they would be publishing a report this summer on the prospects of a digital dollar. Earlier this month, the topic of CBDCs was addressed at the G7 meetings. Two weeks ago the Senate Banking committee held a hearing, with expert witnesses arguing the benefits of CBDCs.

And over the weekend, the head of the Bank for International Settlements (the BIS, a consortium of the world’s top central banks) presented the case to American economists. In fact, the BIS has become the promoter of CBDCs as “the future of the monetary system.”

So, what would it mean to you and me?

It would mean a cashless society.

As the BIS report acknowledges, at the wholesale (or institutional) level, digital currency already exists. So the disrupted parties in this new digital monetary system would be small business and “retail” (i.e. the people).

Perhaps the biggest negative is that every transaction in your daily life would be recorded and traceable. I suspect most would not find this so appealing — but it looks like it’s coming.

Keep in mind, the BIS consists of 63 central banks around the world (including every major central bank). And they say that almost 90% of them are having discussions on a digital currency regime.

Pro Perspectives 6/25/21

June 25, 2021

There was news of a bipartisan deal on an infrastructure package late yesterday. Though today, the bipartisan agreement seems less clear. What is clear, and has been since the Georgia Senate run-off, is that the Biden administration will get whatever spending package they want across the finish line.

Whether or not they seek any support from the minority party in Congress will only serve to create perception that they tried.

The important takeaway for markets, is that the wheels on the infrastructure bill are moving. And it would be smart for the administration to get it done before Q2 data starts rolling in — in just a couple of weeks. When that data hits, and displays some eye-popping economic activity, and related inflationary pressures, the case for another $1 trillion plus spending package will be impossible to justify (assuming it were possible now).

On that note, expect the urgency to step up on getting a bill through Congress, and signed.

With the inflation data already telling a clear story, and with the catalysts of a massive infrastructure spend and Q2 data directly ahead of us, stocks go out this week on new record highs.

Meanwhile the historically favored inflation trade, gold, has given everyone a second chance to get involved. After a run-up to $1900 earlier this month, the price of gold is now 7% lower. That leaves it down 6% year-to-date, and flat over the past twelve months. It’s a buy.

Within this inflation price regime, value stocks are outperformers. With that dynamic at work, our Billionaire’s Portfolio has been in the sweet spot (+20% ytd). You can join us, and get my full portfolio of billionaire-owned value stocks — become a member here.

Pro Perspectives 6/24/21

June 24, 2021

Last month the great macro trader, Stanley Druckenmiller, criticized the Fed in an interview.

This is not unusual for him. But while arguing his case for why the Fed should not only stop its emergency stimulus program, but should be tightening now, he brought up the recovery in retail sales.

With that, let's take a look at the point he was making.

He said, the recovery in retail sales is "nothing we've ever seen," comparing the speed at which the losses were recovered in this crisis, to the Great Financial Crisis.

Let's take a look at that chart …

Now, we can see in the chart, the retail sales index peaked in November of 2007. It recovered to peak levels in July of 2011. That’s a little less than four years.

Just recovering the losses is one thing, but getting back on “trend” (trend growth) is another. To recover to trend, if we compound the growth in retail sales by the long-term monthly average, my calculations show that we still have not recovered to pre-Great Financial Crisis trend (but getting close to doing so, now).

That said, this time around, the pandemic induced losses were fully recovered AND back on trend in just five months.

Here’s the bigger point made by Druckenmiller: If we just look at the growth rate applied to the pre-pandemic highs in retail sales (January of 2020), the retail sales data is well above trend. It’s running exceptionally hot.

In this case, low inventories and strong sales, will present the opportunity to raise prices. And with that, this sharp retail sales recovery will likely predict hot inflation.

And given the Fed has told us they will let inflation run hot, above their target until they deem it to be sustainable, we will likely see a similar chart in the inflation data in the coming months (i.e. overshoot).

Pro Perspectives 6/23/21

June 23, 2021

Yesterday we talked about the prospects of a digital dollar coming down the pike.

It seems clear that global governments will not allow non-sovereign forms of money to continue to proliferate.

The Senate Banking committee’s hearing on the digital dollar two weeks ago was not only a public exploration and introduction to the concept a central bank-backed digital currency, the hearing was also used as a platform to publicly assassinate the viability of the private (“bogus” in the words of Senator Warren) cryptocurrency market (bitcoin, stablecoins …).

With this in mind, the Chinese government has continually tightened control over the crypto market in China, most recently cracking down on cryptocurrency mining in the country. The U.S. Justice Department announced a few weeks ago that it “recovered” $2.3 million in cryptocurrency of the ransom collected from the Colonial Pipeline hack. And today, it was reported that South Korea seized almost $50 million of crypto assets from citizens accused of tax evasion.

So the benefits of the private cryptocurrency market are being deconstructed by governments. Add to that, even after gaining traction, the private crypto market continues to be used primarily as a tool of corruption and speculation. With that, this chart set up argues for a typical bubble outcome (crash).

Pro Perspectives 6/22/21

June 22, 2021

We looked at three "bubble markets" last month: Lumber, Bitcoin and Tesla. All of which multiplied in value after the November election.

But lumber has now plunged nearly 50% from the record highs of just a month ago.

Bitcoin plunged today below the key 30k level. That too has more than halved in value since hitting a record high — in this case, just two months ago.

As for Tesla, while 30% off of the January record highs, it continues to look like air is in the early stages of coming out of the Tesla bubble (a stock that soared 13-fold in less than a year, as the market's primary expression of the bet on a global energy transformation). Now the Tesla business/operating performance is finally coming under scrutiny, plus it's beginning to look like electric vehicles will be a hyper-competitive space.

So these all continue to look like, and behave like, tools of excessive speculation (if not manipulation) on the path for a typical bubble outcome.

On that note, bitcoin has an additional threat lurking. The discussions of a digital currency regime have been underway at almost 90% of the central banks around the world, according to the Bank for International Settlements (BIS). If fact, the democrats attempted to ram through the adoption of their grand plan on a central bank-backed digital dollar last year, as part of the covid relief bill (to deliver stimulus money). It was blocked, but the plan has continued to gain momentum. The Senate Banking committee held a hearing just two weeks ago on this topic.

In her opening statement for this hearing, Elizabeth Warren described a central bank-backed digital dollar as "legitimate digital public money that could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system."

If we consider that this has been on the democrat wish list (worthy of trying to leverage a crisis to try to deploy) and that we now have a party-aligned Congress and White House, it's safe to assume the digital dollar is coming. Add to that, it all appears to be in agreement, if not coordination, with other central banks and governments (given the BIS survey).

This means two likely outcomes: 1) governments will regulate away bitcoin/"bogus digital private money," and 2) a cashless society is coming.