Pro Perspectives 6/4/21

June 4, 2021

Like last month, the jobs report this morning continues to show a labor shortage, as employers are unable to compete with the wages paid by the Federal government (through the unemployment subsidy).

These two charts tell the story …  

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 its because employers are unable to fill open jobs …
There are about a million more job openings today than there were in February of last year (pre-pandemic).  But there are 3.4 million more unemployed. 

As about half of the states in the country begin rejecting the additional federal unemployment compensation, we'll see in the months ahead how this shakes out. 

 

For now, markets see the jobs numbers as: 1) giving the Fed justification to continue its aggressive policy, and 2) giving the administration the cover it needs to push through another big spending package.  

With that, yields remain tame at 1.55% as we end the week, and stocks are going out this week near record highs again.
 

Pro Perspectives 6/3/21

June 3, 2021

Yesterday we talked about the Fed's announcement that they would be exiting the corporate bond market (i.e. selling their corporate bonds).
  
Again, this was the most extreme of the Fed's emergency policy moves made last year — where the Fed intervened via the stock market, buying corporate bond ETFs.  And again, this recent decision to exit is a signal of the beginning of the end of these emergency policies — the policies that have been underpinning/promoting risk taking and the persistent rise in asset prices. 
 
But don't worry, the unwinding will be slow and methodical.  The next move will be scaling back treasury and mortgage purchases.  And finally, they will move interest rates off of the zero-line. The timeline on rates moving is a year out, if not years out (if we were to believe the Fed's guidance). 
 
Meanwhile, we are just a month away from seeing Q2 data that will blow away, both the expectations, and the comparable data of a year ago (economic data and corporate earnings).  And inflation data is already moving at a pace not seen, in some cases, in over forty years. 
 
So, the point is, the Fed is already behind the curve — well behind. 
 
Add to this, starting next week and carrying on through the next four weeks, nearly half of U.S. states will voluntarily end the federal unemployment subsidy.  With that, we've yet to see how dramatic the upward reset in wages will be, when employers are finally able to fill jobs. 
 
To be sure, soon employers will be passing along higher employment costs to consumers.  That "wage component" will be like pouring gasoline on the inflation data fire — already stoked by pent-up demand meeting supply chain bottlenecks.    
 
So, despite the pull back today in commodities and most global stock markets, on the premise of the Fed's baby step toward the emergency policy exit doors is somehow bad for the “risk environment”, the policy stance will continue to highly accommodative. 
 
Real interest rates (inflation minus nominal rates) will continue to negative for some time (likely on path to go more negative).  That promotes spending, not saving.  And in this environment, we've seen (in some asset classes) that the spending behaviors are turning into competitively chasing prices higher and higher.    

Pro Perspectives 6/2/21

June 2, 2021

The Fed said this afternoon that it will begin selling its portfolio of corporate bonds.

Let's talk about what that means … 

Back in March of last year, the Fed's response to the pandemic started with some massive action on a Sunday night, where they slashed rates to zero and started a big bond buying program (Treasuries and Mortgages). 

But they didn't address the troubled corporate bond market.  And that threat was rattling markets and the economy.  Stocks were continuing to plunge, and the Fed was losing control of the Treasury market. 

With that, a week later, they backstopped the corporate bond market. 

They made the announcement on March 23rd, that they would move beyond the Treasury and MBS market, and start buying corporate bonds, namely bond ETFs.  That was the relief valve for markets, which was a big deal.  But the message from this action was maybe even more significant.  It was the explicit signal to markets that they will do "whatever it takes" and they will backstop everything, if they have to.

So, with the addition of bond ETFs, the Fed had crossed the Rubicon.  They were now explicitly in the stock market.  Stocks bottomed that day …  

And for the reasons described above, any dip in stocks, thereafter, was a buy.  Why?  The Fed had told us they would do whatever it takes, and losing the stock market would have been an undoing of all of the rescue and emergency policies.  If needed, they would have bought stocks. And that threat/promise continues. 

Interestingly, as we learned from the European Central Bank's similar tactic in 2012, when Mario Draghi vowed to do "whatever it takes" to save the sovereign debt market in Europe, when the central banks make these promises, they don't have to deliver on them.  Just the threat of their presence in a market is enough to get lenders lending again, buyers buying again.  In this case, within months of the announcement, even crippled airline companies were able to issue billions of dollars of bonds.  All told, the Fed only had to buy $13.8 billion worth of corporate bonds – a tiny fraction of the total market. 

What's the takeaway from this move today?  It symbolizes the first move in unwinding emergency policies (though they say it doesn't).  

Pro Perspectives 5/28/21

May 28, 2021

As we’ve discussed here in my daily Pro Perspectives notes, we are entering a period where we could very well see a huge spike in inflation (maybe double-digits).

Yesterday, we looked at the inflation component of Q1 GDP, and we talked about the prospects of a double-digit number when the Q2 data arrives.

Today the report on the Fed’s favored inflation guage, core PCE, showed a spike to 3.1%.

Going back through monthly core PCE data to 1960, this 1.2 percentage monthly change in the YOY Core PCE number is the biggest on record.

Now, let’s juxtapose this to the personal savings rate at 15%.  That remains near pre-pandemic record levels, thanks to government subsidies.

So, the policies that have driven record levels savings are now destroying the buying power of those savings. That’s why, despite easy access to money, and despite rising stock and housing prices, and despite a tightening labor market, this type of economy is not a “feel good” economy. In an inflationary economy consumers feel like they are sprinting on a treadmill just to maintain status quo.

That’s why consumer confidence tends to plunge in high inflation times, as you can see in the chart from the early 70s and early 80s.

These are the moments when wealth can be destroyed, by holding cash — and wealth can be created in key asset classes.

With that in mind, I do my best to navigate the path in my daily Pro Perspectives notes.  If you have family and friends in mind that might benefit from reading my daily Pro Perspectives notes, please forward along this link, and we’ll get them added to the distribution list.

Have a great holiday!

Pro Perspectives 5/27/21

May 27, 2021

The second reading on Q1 GDP came in this morning.  The economy grew at a 6.4% annual rate.

The inflation data in the report came in hotter than in the first estimate.  

 

Here's a look at the chart …

In this chart, you can see the measure of inflation in the prices of goods and services produced in the U.S. for the period. 
 

It's as hot as we've seen over the past forty years. 

But when the Q2 data starts rolling in (in early July), the right side of this chart will look more like the big spikes from the early 70s and 80s.

The Q2 GDP will be double-digits, or close to it (right now the Atlanta Fed is projecting 9.1% growth).  And the inflation data may be double-digits, or close to it, as well. 

If the Fed has had a hard time defending its position in the face of Q1 data, they will lose the inflation expectations battle when the Q2 data hits.  

With that in mind, with only a month left in Q2, we have a 10-year yield that, as of yesterday, was trading as low as 1.55%.  It's higher today on the hotter inflation data.  And this bump in yields today may be the start of the next leg higher in yields.  As you can see in the chart below, big picture, we've yet to see the trend change on this 40-year bear market in rates (bull market in bonds).  But when it happens it may be ugly.   
 
How can you profit from a trend change?  Below is the chart of an ETF that gives you two-times exposure to a decline in bond prices (and rise in yields). So for every one percent decline in bond prices with maturity of 20-years or more, this ETF should rise by 2%.   
 

Pro Perspectives 5/26/21

May 26, 2021

The clean energy agenda landed three heavy punches on the chin of the fossil fuels industry today. 

Punch #1: A Dutch court ruled that the oil giant Shell has to cut emissions on a much more aggressive timeline than they had projected.  This is a big deal.  A Dutch judge is enforcing a company to comply with the Paris Climate Agreement.

 

Punch #2:  At its annual meeting, Chevron shareholders voted in favor "aligning its strategy with emission levels compatible with the goal of the Paris Climate Agreement."  This campaign to persuade shareholders on this resolution was run by an activist group called Follow This.  Follow This also had similar wins with ConocoPhillips and Phillips 66 shareholders earlier this month. 

All of this isn't too surprising, as the big oil giants have already been given the marching orders to transform to renewables, dating back to 2017. 

 

In December of 2017 a group called Climate Action 100+ was formed.  This group is comprised of every major asset manager and pension fund on the planet.  The group’s slogan describes the agenda very clearly: "Global Investors Driving Business Transition."  To put it even more simply, this is a coordinated initiative to defund fossil fuels and force energy transformation. 

With that, facing the prospects of be frozen out of the capital markets, the industry has been falling into line. 

The big holdout has been Exxon.  They weren't playing ball.  But that is punch #3:  Today, in a proxy vote, shareholders (influenced by a full-on assault by the climate activist powers) voted to shake up the board, placing two members on the board that will push the Paris Climate compliance agenda. 

This all sounds like the global energy transformation is going according to (central planners) plan, which it is.  But as we've discussed, as global investment in new exploration continues to evaporate under this agenda, there will be considerable pain. We will continue to consume a lot of oil for the foreseeable future, we will just be consuming it at higher and higher prices.

Pro Perspectives 5/25/21

May 25, 2021

There have been reports going around the past couple of days that Chinese government is cracking down on commodities speculation. 

They blame speculators (like futures traders) for the soaring prices in key commodities. 

But it's the Chinese government that has a record of driving up global commodities prices in the wake of a global crisis, stockpiling and hoarding to take advantage of beaten down prices. 

We talked about this back in February. 

Both the Chinese government and Chinese companies imported record volumes of crude oil, copper, iron ore and coal in 2020.  They also imported a record amount of corn, wheat and soybeans. 

This is all a replay of the post-financial crisis playbook, as you can see in the chart of corn prices …  
 

Coming out of the financial crisis, the Chinese economy looked fairly unscathed.  The developed market world was suffering, but China's economy was still putting up double-digit growth. 

This commodities binge looked like a power play. Buy up the world's most valuable resources at a discount, drive prices higher, and further hamper the already struggling major economies of the world.  It appeared to be working, as many of the world's influencers were convinced that this period represented a passing of the torch of economic leadership — from the developed world, to China.  But it soon became clear that if China's consumers were suffering (the U.S./developed world) then China would also suffer.  Thus, with weak global growth, China's growth and power play ultimately waned. 

So, is this time different?  

Like a decade ago, China's economy is in a position of relative strength over the developed market world.  And like a decade ago, China has stockpiled key global commodities at bargain prices. And like a decade ago, this power play has resulted in soaring commodities prices. 

 

The difference?  This time, China's consumers (namely the U.S.) are awash with money, with a U.S. central bank and U.S. government that is willing to continue underwriting consumption, even at higher and higher prices.  This U.S. debt-financed consumption (which includes buying back commodities we once sold to China for cheaper prices) looks like the recipe to get China to the global economic superpower finish line. 

Pro Perspectives 5/24/21

May 24, 2021

We talked about the correction in oil prices last week, as an opportunity to buy the dip in energy.

Here's an excerpt from my Thursday note …

"This dip in the energy/oil and gas sector is a buy.

 
The globally coordinated ’Clean Energy Revolution’ promotes higher oil prices, not lower.  That's the structural driver for oil prices.  Funding for new exploration has been choked off.  So, foreign oil producers (particularly from bad acting countries) will be in the driver’s seat.  That movement is underway.  And these producers will command/demand higher prices, especially in a less competitive, lower supply world. 
 
As we discussed this dynamic back in February, I said 'get ready for $4 plus gas.'  With the monetary and fiscal backdrop that has evolved, and the inflationary pressures already bubbling up, it will probably be more like $6 gas. 
 
It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era)."

Today, oil prices roared back — up almost 4% on the day (the biggest mover in global markets). 

 
Last year this time, heading into Memorial Day weekend, the national average price on gas was $1.87.  Heading into this Memorial Day weekend, it's $3.04.  I suspect it will be higher by the time we get to the weekend. 

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 demand, and therefore they have underestimated the economic impact that is coming down the pike from regulating away supply (from the climate activist movement). 

Here we are, just getting to the point of a boom in economic activity, following the CDC's recent guidance changes, and oil prices are already back above pre-pandemic levels, and the estimates from the expert community on oil demand are just now being revised UP.  As we've discussed, this "energy transformation" dynamic continues to plot the path toward another $100+ oil price environment. 

 
Best,
Bryan
 

Pro Perspectives 5/21/21

May 21, 2021

As we've discussed here in my daily Pro Perspectives notes, we are entering a period where we could very well see a huge spike in inflation (maybe double-digits).  

These are the moments when wealth can be destroyed, by holding cash — and wealth can be created in key asset classes. It takes action, and I want to make sure you are acting, not watching from the sidelines.

With that, as you’re enjoying your family over the weekend, take a moment to sign up for my premium advisory service.

Sign up today and look through my entire portfolio of stocks, all of which are vetted and owned by the best billionaire investors in the world.  Listen to my recorded "Live Monthly Portfolio Reviews."  Read all of my past notes to my subscribers. Take it all in.  If you find that it doesn't suit you, just email me within 30 days and I will refund your money in full immediately.

Frankly, I know when people join this service, they don't leave.  In fact, they refer their friends.  If you can read a weekly note from me, I can help you position yourself to make money, in a good market or a tough market.  

You can get your risk-free access by signing up here.

Have a great weekend!

 
Best,
Bryan
 

Pro Perspectives 5/20/21

May 20, 2021

The Fed minutes yesterday indicated that they continue to view the risks to the economy as skewed to the downside.  That was a greenlight for stocks.  As such, stocks have roared back 2.5% from yesterday's lows.  

What's taking a breather in the past week, is commodities (excluding gold) 

The CRB Index which tracks a broad basket of commodities is down about 5% from a week ago.  Among the high flyers in commodities, copper is down 7.5% from a week ago.  And oil has been the hardest hit.  

Let's take a look at the chart on oil …

After a near double from election day, oil has been unable to break the big $67-$68 area.  But with that huge move, energy stocks have been the biggest winners on the year, from a sector perspective. 

Today, the energy sector (XLE) was the only sector in the red in the S&P 500. 

Why?  The news of the week has been negative for oil prices.  And it's been supply related.  First, there were rumors early in the week that the U.S. may lift sanctions on Iranian oil exports.  Then Biden waived sanctions on a Russian pipeline company working in Europe. 

This dip in the energy/oil and gas sector is a buy.  

The globally coordinated "Clean Energy Revolution" promotes higher oil prices, not lower.  That's the structural driver for oil prices.  Funding for new exploration has been choked off.  So, foreign oil producers (particularly from bad acting countries) will be in the driver’s seat.  That movement is underway.  And these producers will command/demand higher prices, especially in a less competitive, lower supply world. 

As we discussed this dynamic back in February, I said "get ready for $4 plus gas."  With the monetary and fiscal backdrop that has evolved, and the inflationary pressures already bubbling up, it will probably be more like $6 gas. 

It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era).