Latest | Billionaire's Portfolio

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.

Pro Perspectives 6/21/21

June 21, 2021

With asset prices booming, and a Fed that has continued to feed the fire, there have been many that have feared a repeat of the 2013 “taper tantrum.”

Let’s take a look at that analogue …

In 2013, just a few months into QE3, the Fed began setting the table for reducing the size of its emergency bond buying program, and telegraphing an exit strategy.

What happened? Rates went crazy.

In four months, the 10-year Treasury traded from 1.6% up to 3%. In June of 2013, mortgage rates jumped a half a percentage point in a week (the biggest one week move since 1987). That shook a very, very fragile housing market. And it shook the fragile stock market. Stocks first had an 8% drawdown, and then a 5% drawdown, all within those four months.

Lesson learned. Fast forward to last week …

The Fed came clean and acknowledged what everyone already knows — the economy is booming, and inflation is hot. And with that, they started the very subtle process of shaping market expectations, by planting the seed that the liquidity deluge (that is their bond buying program) will indeed be wound down, if the recovery continues on this trajectory. That’s common sense. But markets need to hear the Fed admit it, which they did.

So, will rates go crazy, and scream to 3%, as they did in 2013? Not likely. In fact, today the 10-year yield traded to the lowest level since February (back down, as low as 1.35%).

Why this market reaction? As I’ve said before, from the lessons learned observing the past thirteen years of central bank intervention, we don’t have to wonder if/when the Fed might respond to a destabilizing force. We know they are on red alert and will do anything/everything to maintain confidence and stability.

With that, we have a Fed that already controls the Treasury market — explicitly. That’s why rates have traded down, not up since the Fed meeting. We should expect them to keep rates pegged precisely where they think confidence and stability is maintained. This will continue to promote the asset price boom. And with that, as we discussed on Thursday, this continues to be a “buy everything” market.

Pro Perspectives 6/17/21

June 17, 2021

We talked yesterday about the Fed meeting. Remember, this is a meeting that the legendary investor Paul Tudor Jones said would be the most important meeting in Jay Powell's career.

Jones was concerned that the Fed would stick to its mantra, ignoring the obvious inflationary signals and risks – which would give way to even crazier (and dangerous) speculation and even more inflated asset prices.

The good news: The Fed did indeed acknowledge the higher growth and inflation environment.

But as we discussed yesterday, unless they are acting now (which they aren't), by ending the emergency policies and beginning the process of taming the madness (of screaming asset prices and speculation), they are too late. They have already done the damage to their "price-stability" mandate.

Common sense should tell us that growing the money supply by better than 30% over the past year is going to create hotter inflation than we've seen in a very long time, as more money chases a relatively finite supply of goods. And, at this stage, our observations are confirming the common sense.

That said, markets today behaved in a way that signaled some approval of the Fed's message yesterday: The dollar was up, commodities were down big, and value stocks were down big, while big tech growth had a good day.

Does this response in the dollar mean that global investors are betting on some monetary policy divergence, coming sooner than expected (i.e. the Fed tightening money, while the rest of the world continues to ease)? Probably.

Does the response in commodities mean that investors think the Fed is signaling that they will be less rigid, and therefore might actually be able to quell a hyper-inflation scenario? Maybe.

Does the response in stocks mean that the rotation of money into value is over and the next big run in tech stocks is coming? Probably not.

What does seem to be happening today, is some profit taking on the trends of the past three months. With that said, we have only a couple of weeks until the market will be presented with monster catalysts for the inflation trade — we will get Q2 economic data and Q2 earnings data, which will be mind-blowingly big.

Add to this, expect the Biden monster "infrastructure"/clean energy bill to start working its way through a party-aligned Congress. The inflation trade is, and will be, alive and well.

Pro Perspectives 6/16/21

June 16, 2021

Let's talk about the Fed meeting today …

The Fed now sees growth this year coming in at 7%. It sees unemployment falling to 4.5% (historically a level considered to be "full employment"). And it sees inflation running at 3.4% (right around the long-term average).

All of this, and Jay Powell wasn't once questioned today on why the Fed is still (right now) running an emergency monetary policy program. This program is explicitly structured to promote lending and investing. Thanks to these policies, both investing and lending are at record levels. Goals achieved.

So, given the Fed's own projections on the economy for this year, and given the achievement of its goals on lending and investing, it should be exiting these emergency policies. Not in 2023. Not in 2022. But now.

So what did the Fed do today? They did nothing on the policy front. Of course, that is no surprise. But the consensus takeaway from the meeting and Jay Powell's press conference today was considered "somewhat hawkish."

My takeaway, "somewhat hawkish" doesn't cut it. This meeting only pours gasoline on the asset price fire. Given the economic scoreboard we listed above, every day that goes by that the Fed continues to keep the throttle wide open, the further the Fed gets behind on what will become an ugly fight against inflation.

With that, it has been a "buy everything" market since the Fed and Capitol Hill went all-in last year — flooding the economy with money, to inflate asset prices and deflate debt. The "buy everything" market continues.

Pro Perspectives 6/15/21

June 15, 2021

The conclusion of a big Fed meeting comes tomorrow afternoon.

Billionaire Paul Tudor Jones, one of the great global macro traders of all-time, called it the most important Fed meeting in Jay Powell's career.

Why? Because the Fed has been ignoring economic data and ignoring market signals. So, for an institution that supposed to be data-dependent, instead of responding the data (clearly high growth and inflationary data), the Fed seems to be anticipating an alternative outcome — and making policy based on that anticipation.

The last time the Fed did something like this was in December of 2018. Paul Tudor Jones drew the parallel between this 2018 meeting and tomorrow's Fed decision.

With that, we talked about this December 2018 meeting quite a bit in my notes. Let's revisit what took place …

Going into that meeting the Fed had hiked rates three times that year. And they had systematically hiked seven times since the 2016 election. This was all despite tame inflation, and despite a slow moving economic recovery (an economy still mired by the effects of the Great Financial Crisis).

Both stocks and oil prices had already been in a sharp decline heading into that 2018 meeting, signalling fear in the markets that the Fed had already gone too far (i.e. was choking-off economic momentum). The Fed ignored the signals and mechanically raised rates again.

The bottom fell out in stocks. By December 26th, the S&P 500 was down 18% for the month of December. That led to a response from the U.S. Treasury (i.e. intervention). Mnuchin (Treasury Secretary) called out to major banks and the President's Working Group on Financial Markets (which includes the Fed) to "coordinate efforts to assure normal market operations."

That was the turning point. That put a bottom in stocks.

Within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed's rate path — signaling a pause.

So, we have the opposite environment this time. We have signals of complete madness and speculation in markets, runaway prices in some markets, and yet the Fed has assured us that they are holding the line (that the price madness is all temporary).

As Paul Tudor Jones said, they seem to be valuing their perceived consistency and predictability over making the right policy moves. With that, we should expect them to keep singing the same tune tomorrow. And that should only pour gasoline on the fire of asset prices.

What will the ultimate outcome be? It seems very likely that the Fed will ultimately have to chase prices higher, with a very aggressive tightening campaign that will crush the economy (at some point).

Pro Perspectives 6/14/21

June 14, 2021

The G7 leaders wrapped up their meeting on Sunday. In my last note, we talked about the significance of these meetings, especially in crisis periods (if you didn’t see that note, you can find it here).

So, what did we learn from the G7 communique that could impact markets?

We learned that the G7 leaders are all-in on the climate and equality movement. With the global economy coming out of one of the worst crises in history, the communique mentioned the economy only 17 times. It mentioned equality 22 times. And it mentioned either climate or “green” 51 times.

Additionally, it had just four carefully positioned unprovocative mentions of China.

What does it all mean for markets? As I said on Friday, if there was any doubt that there is coordination and agreement among global leaders on the social and environmental agenda, there is no doubt now.

So, while the global leaders in each of these major developed market countries have indeed vowed to continue supporting the economy, it will be following the gameplan of “future growth,” not crisis response (in their words).

What does that tell us? It tells us that they will allow some economic pain (a continuation of, if not newly established pain), in the name of future growth. We can get a glimpse of what that looks like through the treatment of the fossil fuels industry. Jobs have been lost and prices have soared, all in the name of future growth (i.e. a complete transformation of global energy).

With this in mind, let’s consider what the Fed has been telling us about inflation. It’s “transitory,” they say. They may be right, if policy makers are planning to tear down, in order to “build back better.”