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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 …

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 here.

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.

Pro Perspectives 4/27/21

April 27, 2021

Goldman Sachs has called copper "the new oil."

Let's talk about why …

In a world where global powers have come together and committed to transform global energy, by supplanting fossil fuels with "clean" energy, there are clearly winners and losers.

We've talked a lot about what it means for fossil fuels: long-term a loser, short-term we will see much higher prices.

What about the price outlook on the key inputs for "renewables?"

Same outlook: Higher prices!

Among the most important commodities in the clean energy movement is copper.

With that, as the pandemic and economic crash of last year telegraphed a Biden presidency (which assured a climate action agenda), here's what has happened to the price of copper (it's gone straight up) …

Expect this trajectory to continue for copper. Why? This metal plays a key role in everything from solar energy, to wind energy, to electric vehicles.

Consider this: Conventional cars use 18-49 pounds of copper. Battery electric vehicles use 183 pounds of copper. So 4 to 5 times the amount of copper will be needed battery cars.

For the above reasons, the head of the biggest copper pruducer in the world says we will see "meaningfully higher copper prices," in a world where "the outlook for copper has never been better."

How do you play it? Join my premium service (here) and I'll send you all of the details on the stock that gives you leveraged performance to the price of copper.

Best,

Bryan

Pro Perspectives 4/26/21

April 26, 2021

Stocks trade on record highs as we enter a big week for earnings.

With a quarter of S&P 500 companies already reported for Q1, 84% have reported positive surprises, and earnings growth is running +34% on average.

These are big numbers, and expect this to be the trend for the quarter and for the year — big numbers and big positive surprises, both in earnings and in the economic data.

That said, the big tech stocks will report this week, and they will have a hard time competing with the eye-popping earnings beats of the more "traditional economy" stocks. Why? The big tech numbers will be compared to a much higher base of a year ago. Remember, when the economy was in various forms of shutdown, these companies (Facebook, Apple, Amazon, Google) did even better. With that, we may find that these stocks get some tough love from investors this week, on less exciting numbers (and maybe some profit taking).

Let's take a look at the charts on big tech…

Google (Alphabet) heads into earnings on record highs.

Microsoft heads into earnings on record highs.

Apple heads into earnings about 8% off of record highs.

Facebook heads into earnings 4% off of record highs.

And Amazon heads into earnings about 4% off of record highs.

In an investing world where investors are searching for pockets of value, it’s the earnings surprises outside of big tech that are providing some opportunities. And we are unlikely to see something equally exciting materialize in big tech. Add to that, these stocks are all priced as monopoly powers, and the political scrutiny has plenty of reasons to check that power in the coming months.

With the above in mind, I like big tech stocks lower on earnings this week.

Pro Perspectives 4/23/21

April 23, 2021

The Biden Climate Summit of the past two days has looked a lot like the World Economic Forum of the past several years.

The cast of characters is the same, including Bill Gates, who was a featured speaker today.

As we discussed in my note yesterday, as the world leaders and influencers have been working to sell the climate action initiative over the past two days, the stocks in the industry they are trying to kill (fossil fuels) can be catalyzed by the growing attention to this theme.

Why? Because people realize that the strong-arm of government can curtail supply easier than they can curtail demand. And until the clean energy initiative can produce viable energy alternatives at scale, we will still be using a lot of oil — even as it gets more and more expensive.

With that, since this movement was well telegraphed with the Biden election, it has been oil and gas stocks that have been the big movers.

The biggest energy ETF (symbol XLE) is up 61% since election day. The biggest clean energy ETF (ICLN) is up only 22% over the same period.

Exxon is up 68% since election day. Chevron is up 40%. ConocoPhillips is up 63%. Phillips 66 is up 62%. EOG resources is up 103%. Still, as we discussed yesterday, many of these oil and gas stocks have dipped in recent months. That dip is a buying opportunity.