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September 16, 2021
Retail sales numbers came in much hotter than expected this morning.
This continues the unprecedented performance of retail sales coming out of recession. Remember we talked about this last June, on the back on comments from the great macro trader Stanley Druckenmiller.
Druckenmiller had pointed out that the speed at which the pandemic-induced losses in retail sales were recovered were something "we've never seen" before. It took only five months to recover. By comparison, it took almost four years to recover the retail sales losses from the Great Financial Crisis.
Moreover, not only did retail sales quickly recover losses, but the index continues to run well above trend growth (extrapolated out from pre-pandemic levels).
Simply put, the consumer is consuming at well above trend levels. And the August data is yet another point to confirm that strength.
With the above in mind, the markets are coming to grips with the reality that the Fed will indeed begin the end of emergency policies. That means the timeline to announce the taper of asset purchases is/should be well intact. They should announce the plan at next week's meeting (September 22nd).
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September 15, 2021
Stocks came back aggressively today. Rates are higher, and commodities are broadly up.
The media gave (relatively) little attention to the California recall vote. But it’s fair to say that this vote represented a proxy on the democrat agenda — and therefore, the Biden administration. It was a very big deal.
With that, with the Newsom win, any perception that there could be friction for the Biden agenda ahead, has been disabused.
So, perhaps this was a greenlight today for markets.
If we were looking for clues on this view of the fortification of the Biden agenda, we could see clues in the energy sector.
As we’ve said all along, the vow to kill fossil fuels in the name of climate action, only builds a moat around the existing producers. And that ensures much, much higher oil prices.
With that, let’s take a look at the chart on oil …
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As you can see, with the climate action agenda well telegraphed, oil prices took off from election day. With the outlook for U.S. production-driven supply constraints and a return of power to OPEC, the price of oil doubled in eight months. We’ve since had a nearly 20% correction over about two months. And now the bull market in oil appears to be resuming with this technical breakout of the past two days. Today oil was up 3%. Also winning on the climate action front (for different reasons) is natural gas. The price of natural gas has soared in the past few weeks – up over 40%… |
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Not surprisingly, the best performing sector of the day in stocks was energy. Nine of the top ten performers in the S&P 500, on the day, were energy stocks (most of them U.S. shale oil and gas producers). And as you can see, with these stocks you’re getting levered returns to the performance of the underlying commodity. |
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September 14, 2021
The inflation data this morning came in softer than expected.
But if we look a little closer, within the report, we can clearly see the hottest inflation we've seen in many decades.
Below is the percent change in the CPI index components over the past year. You'll notice a lot of big numbers …
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And the housing component in the report doesn't accurately represent the spike in housing prices we've seen across the country. The S&P/Case Shiller U.S. National Home Price Index is up 18% from the same period last year (the report shows it up 3.6%).
Bottom line, today's data will/should do nothing to change the Fed's course of beginning the removal of the punch bowl. That said, as we discussed yesterday, if a "risk" to the stability of markets should arise, as the Fed begins the wind-down of its big QE program, we should expect them to quickly abandon the taper plan. The history of the past 13 years has shown us that the Fed will do whatever it takes to maintain stability in financial markets. So we asked the question yesterday, will they be able to complete the wind-down of their asset purchase program – or will something derail it?
With that, let's talk about some potential risks looming. First, as we discussed yesterday, we have the risk that the employment picture could worsen from here, as the recent Biden vaccine mandates trigger firings and walkouts in the coming months. Importantly, a jump in unemployment on this basis would come without the accommodation of healthy unemployment compensation. Clearly, that would damage the growth picture. Risk number two, and perhaps considered a more immediate risk: The Chinese financial system. A huge property developer in China, Evergrande, is reportedly in default. With $305 billion in liabilities there is speculation that it could melt the financial system in China (like a Lehman moment). While this is getting attention on Wall Street, it seems very unlikely. China is in a position of strength globally, coming out the pandemic, and the Chinese Communist Party is nationalizing parts of the economy (taking more control). Intervening and controlling outcomes is what they do. So it’s unlikely that they will let a catalyst like Evergrande trigger a real estate bust. Better bet, they will prevent it.
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September 13, 2021
The consensus seems to be building for a November taper. But the question is, will they be able to complete the taper?
Tomorrow, we'll see the inflation report. Core CPI is running more than double the Fed's target for inflation. If we look at the past four monthly changes in headline inflation (including food and energy prices), prices are rising at a double-digit annual run rate. So, from the inflation picture, plenty of reason to end the ultra-easy money madness.
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That's the "price stability" side of the Fed's responsibilities.
What about employment?
The employment recovery has looked very good (at a 5.2% unemployment rate) — getting closer to the long-term average unemployment rate. Add to that, the unemployed in half of U.S. states have now lost additional federal unemployment pay, and should be moving back into the work force — likely to be represented in the September data. That means lower unemployment.
So, the Fed’s dual mandate of price stability and full employment clearly doesn’t justify emergency level policies.
That said, we may find that the recent vaccine mandates will trigger firings and walkouts. And that could reverse this trend in unemployment …
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If that's the case, we should expect the Fed to react, justified or not (i.e. they won't be tapering for long). |
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September 10, 2021
Yesterday's speech by the President laid out a plan to raise the vaccination level.
As we discussed, vaccine mandates for government and the healthcare industry, pose a threat to the employment situation. We already have a labor shortage, driven by federal income subsidies and debt moratoriums. Now we may see the labor shortage exacerbated by firings and walkouts.
With that, on the private employer front, for employers that would be forced to comply with either vaccine or testing mandates, we may find the return to office plans get pushed out even farther.
That probably doesn't bode well for the office stocks. Let's take a look at a couple of those …
First, here's SL Green Realty Corp. (symbol SLG). This is a REIT that primarily invests in office buildings and shopping centers in New York City. As you can see in the chart, as of June, this stock had retraced more than 80% of the losses from the pandemic-induced restrictions. Today it was down 3.8%, the biggest down day since February 25th.
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Next is Boston Properties (symbol BXP). This REIT invests in office buildings in big U.S. markets like Boston, New York, San Franciso, Los Angeles and DC. The stock also had retraced over 80% of the pandemic losses. It was down 3% today. |
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What was UP, in a down market? Maybe one of the favorite "work from home" stocks: Zoom. Zoom was up almost 2%. Perhaps a dip to buy in this chart… |
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September 9, 2021
On Tuesday we talked about the interest rate market, as a spot to watch.
The Fed meets in less than two weeks, and if we believe what they've been telling us, we should expect them to announce the schedule to dial down their QE program (beginning as early as October).
With that, on Tuesday, rates were technically sitting on levels for a potential breakout.– trading around the 1.39% area on the benchmark 10-year government bond yield. Of course, that would represent a Fed finally moving away from emergency level policies, and it would (related) represent confidence in the sustainability of recovery and reopening.
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As you can see in the chart above, the breakout in rates didn't happen. It's gone the other way. Today, the 10-year traded back below 1.30%.
This comes as stocks have four consecutive days of losses (albeit only 1.1% in total for the S&P 500). We may be seeing some uncertainty in markets heading into a prepared speech from Biden after the close today. There have been a few hints on what it will cover, but the headline has suggested that he will present a plan on virus mitigation, which will include ramping up mandates to raise the population vaccination level. So far the leaks point to mandatory vaccination of government workers and healthcare workers that participate in government healthcare programs (Medicare and Medicaid). The risk here, is to the employment situation. |
September 8, 2021
I suspect this will determine whether or not the Fed Chair, Jay Powell, keeps his job.
My view: If this report favors the adoption of a digital dollar, he keeps his job. If it doesn't, the Biden administration will appoint someone that does.
On cue, the Wall Street Journal ran a piece today setting the table for a close call on Powell's future — saying there's an intraparty rift on the topic.
Digitization of money is indeed already well adopted, at the wholesale (or institutional) level — digital currency already exists.
So there are plenty of questions as to why the government and the central bank are looking into a CBDC. In fact, one Fed governor has called it “a solution in search of a problem.”
With that, bitcoin looks like the bastion of wealth security and transaction anonymity. But this CBDC concept could allow governments and central banks to regain control on that front.
With that, as for the future of private crypto currency, don’t underestimate the rule makers appetite to change the rules when it fits their interest. We’ve already seen government encroachment on crypto accounts. I suspect the government wants to, and can regulate private crypto out of existence.
But haven't some of the very wealthy and sophisticated investors come out in favor of bitcoin and crypto?
September 7, 2021
We ended last week discussing a jobs report that showed weaker job growth, but hotter wage growth.
As we discussed, a return to stronger job growth will likely come this month, as incentives have shifted in favor of promoting a return to work, for the unemployed (as opposed to saying home). And the wage growth, which has already trended hot for many months, we should expect to continue to trend "hot."
With that, we had a move in the interest rate market today, in anticipation of the Fed 'beginning the end' of QE, maybe as early as next month.
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As you can see in the chart above, we closed today testing the highs of the past month on rates. This will be key to watch in the coming days for a potential break higher. That would be, at least short-term, positive for the dollar, and likely negative for commodities. We've seen this manifestation today.
Another big mover today: Bitcoin. |
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After climbing back to $50,000 over the past month, Bitcoin declined as much as 17% today.
Was the decline influenced by rising rates? Was it influnced by the news that a third world country (El Salvador) would be the first to adopt bitcoin as its national currency? Don't know. What is a risk to bitcoin, which is coming down the pike (soon), is the Fed's report on whether or not they see a viable path toward adopting a digital dollar (i.e. a central bank digital currency). That report was promised by Jerome Powell, to be published and made public this month. Remember, we've talked about this over the past few months. The Senate Banking Committee held a hearing on the prospects of a digital dollar back in June, where Elizabeth Warren described a central bank-backed digital dollar as "legitimate digital public money that could help drive out bogus digital private money (bitcoin, stablecoins, etc), while improving financial inclusion, efficiency, and the safety of our financial system." It's no secret that a consortium of 63 global central banks (the BIS – which includes every major central bank), has already promoted CBDCs as the "future of the monetary system." With that, expect some fireworks surrounding this report when it's released (again, sometime this month). It's probably a good time to be long gold.
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