Pro Perspectives 1/25/21

January 25, 2021

We have a big earnings week.  As we discussed on Friday, the numbers are already coming in better than expected for Q4.  And we should expect that to continue. 

Remember, companies are reporting on a quarter that the economy grew at an annualized rate between 4% (Reuters Poll) and 7% (Atlanta Fed Model projection).  And these earnings numbers are being measured against a very low bar — the expectations that companies (and Wall Street) dialed down dramatically, to take advantage of a tumultuous environment.

So we have earnings that should continue to beat expectations, and overall, may turn out to show growth (instead of contraction) on a quarter-over-quarter basis, by the time the earnings season is over.  Positive surprises are fuel for stocks.  And the table has been set for positive earnings surprises — not just for the last quarter of 2020, but throughout 2021. 

Another very important spot to watch for the week:  The World Economic Forum.

That kicked off this morning.  This event, typically held in Davos, is held as a virtual meeting this year.  Remember, this is where the global elites told us last year, exactly what they envisioned for the world: The end of Trump.
 

As we've discussed, Trump represented an existential threat 1) to the Chinese Communist Party, 2) to the global climate action plan, and 3) to the careers of entrenched politicians. 
 

Solving that problem became priority, above all else, around this time last year.  It dominated the Davos meetings in 2020.  They didn’t hide it.  It was all about Trump (anti-Trump).  Not the global economy. Not even climate change. 

Now with Trump out, China has been transformed from a position of vulnerability (following years of Trump ordered sanctions and a debilitating trade deal) to the position of strength on the world stage.  In fact, as we've discussed here in my daily notes, with Biden's plan to "normalize relations" with China, the path has been cleared for China to overtake the United States as the global economic superpower.  

With that, who is the keynote speaker for this year's event? 

The Chinese Communist Party leader, President Xi. 

He spoke this morning, calling for coordination and collaboration, emphasizing the globalist way forward for the world (in dealing with the global economy, crises and equal rights), and rejecting the "American first" type of ideology (an implied repudiation of Trump).  

As the week progresses through the World Economic Forum agenda, expect to hear more reporting about the role of China in the world (in reverence), the Global Reset ideology (learn more here), and, of course, the rollout of the climate action plan.  The U.S. election result has become the greenlight for all of this.   

 

Pro Perspectives 1/22/21

January 22, 2021

There are members of Congress questioning why they should approve a $1.9 trillion aid package, when they just approved a $900 billion package that has yet to be deployed.

They're right, especially with an economy that will have, as of the end of this quarter, returned to new record highs in economic output.  

With that, Biden is on a doom and gloom campaign, trying to convince us that they are "beginning from scratch on the vaccine distribution" and that "we are entering the toughest and deadliest period of the virus." 

Meanwhile, the states that have held their economies hostage, in effort to get bailout money from a democratic led Congress, are magically opening up.  They know the money is coming (with a Democrat controlled Senate and House), despite whatever push back there might be for grandstanding purposes. 

This push to get the $1.9 trillion approved will come, over the next couple of weeks, alongside Q4 earnings season, which should continue the trend we've seen this week – i.e. big earnings beats. 

Thus far, 86% of S&P 500 companies have reported better than expected earnings.  And the expectation of a big 9% earnings decline for the quarter is quickly eroding.  We may very well see earnings GROWTH in the fourth quarter of 2020 (compared to Q4 2019).  This all doesn't jibe with the doom and gloom economic picture being painted by the new administration.  So, the Biden team will be in a race (against improving economic data) to get the $1.9 trillion aid approved, and then will have to find a way to justify another massive trillion-dollar plus package to fund his "clean energy" plan. 

Again, as we’ve discussed, this disconnect between (egregious) fiscal profligation and a solid economic recovery (supported by a vaccine in distribution) is a recipe for an ugly spike in inflation.  And remember, the Fed has told us that they will sit back and watch inflation until they deem it to be sustainably above their target.  That means they will be behind the curve, and chasing it.

On a related note, yesterday we talked about the outlook for much higher oil prices (given the policy headwinds on the fossil fuels industry).  What is key in the inflation picture?  Oil prices. Though the central banks like to say they look at inflation excluding food and energy, their actions speak louder than their words.  When oil prices are on the move, the Fed goes on high alert, and tends to act.  
 

Pro Perspectives 1/21/21

January 21, 2021

Biden has gone to work undoing Trump policies.  Among them, reversing policies that led to U.S. energy independence.

With that and the "clean" energy agenda well telegraphed, the coveted stocks by Wall Street have been anything "green," and the shunned stocks have been anything fossil fuels.  But guess what stocks have been booming since election day.  The same stocks in the industry that Biden promises to end.  

Exxon is up 45% since election day.   Chevron is up 30%. Conocophillips is up 48%. Phillips 66 is up 55%.  EOG resources is up 57%. 

Why are these stocks booming?  As I said in my November 10 note, until we're all driving Teslas, and the energy grid has been completely "green" transformed, we will still be using a lot of oil.  We'll just be paying a lot more for it. 

And with the biggest investors in the world (i.e. Climate Action 100+) coordinating to withhold fresh investment in new oil exploration projects, the existing producers will just get more business, and sell production at higher and higher prices.   

Since election day, the price of a barrel of oil has gone from $37 to $53.  That's up 43%.  And its going higher — much higher. 

Pro Perspectives 1/20/21

January 20, 2021

We now have a new President. In his inauguration speech, he mentioned China exactly zero times. 

In contrast, the Trump administration (Pompeo) spent the past six months calling the Chinese Communist Party "the greatest threat to democracy and freedom worldwide." That's a very clear statement on a very big issue.  

But we should expect the Biden administration to walk back on it.  Biden has said himself he will "normalize relations with China."  And even though his Secretary of State nominee said yesterday that "China poses the the most significant challenge of any nation to the United States" — the language is softer, and actions will be even (much) softer.

With that, China is positioned to be a big winner, as we discussed earlier this month.  China goes back to the business that got them so close (pre-Trump) to becoming the global economic superpower — ramping up the global supply chain and manipulating the currency to ensure they maintain global dominance in exporting.  That means as the trillions of dollars in U.S. stimulus becomes U.S. consumption, a lot of those dollars will be sent to China for stuff.

This all puts China back on the path of 7%+ growth.  They haven't seen it since the first half of 2017 (when Trump entered office).  The IMF expects it (7%+ growth) this year. 

And that growth is fuel for Chinese stocks, which are bumping up against the Trump-era highs.  As U.S. stocks are at record highs and valuations continue to rise, Chinese stocks remain 30% off of 2015 highs.

Pro Perspectives 1/19/21

January 19, 2021

Fourth quarter earnings has kicked off with the big banks.  We heard from JP Morgan, Citi and Wells Fargo on Friday.  And today we heard from Bank of America and Goldman Sachs.

Were the numbers good?  Yes.  All beat earnings estimates.  Goldman had record revenues.  JP Morgan had record profits in the quarter.

Will the numbers get much better as we step through 2021, yes.  

Remember, if we look at the economic contraction of last year, the maximum drawdown in economic output, based on the Fed's quarterly readings, was $2.2 trillion.  During the same period, the Fed's balance sheet has expanded by $3.2 trillion.  And the Federal government doled out $2.2 trillion, with another $2.4 trillion coming down the pike (about $0.5 trillion of which is new money from the December aid, along with Biden's latest $1.9 trillion ask — which will all likely followed by another $1 trillion+). 

So, the easy math tells you, the response has far outweighed the damage. 

And no coincidence, the value of annualized GDP will have, by the end of this quarter, fully recovered all of the pandemic-induced losses. 

With the above in mind, the banks are big winners on a number fronts. 

 

First, the Fed's early and aggressive response to the economic lockdown addressed the stability of the banks immediately.  The banks were de-risked, as the Fed became the lender of last resort (the backstop).  Credit risks, worn by the banks, were transferred to the Fed.  Moreover, the Fed encouraged, if not forced, the banks keep liquidity flowing (make loans). 

So while the economy was in various stages of lockdown, business at the banks was good.  Deposits soared, mortgages and trading was hot and the banks made millions of ppp loans.  But as all of corporate America does, when things get broadly bad for the economy, you take any losses you can and you dial down expectations. In my July Pro Perspectives note, just ahead of Q2 bank earnings, we talked about this …

"We should expect all of corporate America to take this opportunity, in their Q2 earnings reports, to put all of the bad news they can muster on the table. 

In a widespread economic crisis, this is their chance to write down the value of anything they can justify, take loss provisions on as much as they can, and set the bar as low as they can, so that in the quarters ahead, they can outperform expectations… 

We'll see the kitchen sink of loan loss provisions (i.e. guesses on what losses may materialize in the future) in these reports.  They will put these out there, because they can.  But remember, the Fed, Treasury and Congress have already pumped trillions of dollars into the economy to keep consumers and businesses solvent. That's a direct backstop (protection) against these ‘provisional loan losses.’   

Add to that, the Fed has created tremendous revenue opportunities for the banks. They've eliminated the reserve requirement for banks — taking the ratio from 10% to zero.  The banks are now incentivized to make an infinite amount of loans.  The Fed has also become a buyer of corporate bonds, reducing risk in the credit markets, which has driven record first half volume in new corporate debt issuance.  That drives investment banking business at the big banks. And the liquidity deluge from the Fed has created a broad stock market boom, which drives trading revenue. 

With all of this said, don't be surprised if the bank earnings (ignoring loan loss provisions) come in better, and maybe much better, than expected." 

The above has all played out.  The banks did indeed build a war chest of capital.  And the banks did indeed set a low bar of expectations, that they've been beating handily. And now, with a recovering economy and even more stimulus dollars to flood the economy, the banks are in position to begin turning "loan loss provisions" into earnings — at their sole discretion. 

As an example, Citi did $11 billion in net income for the full year.  That’s after while setting aside $10 billion for loan loss reserves.  So, much of that $10 billion will ultimately find it's way to its proper home — the bottom line of the income statement.   

Now, add this fuel to the fire: The investment banking business has been red hot with the proliferation of SPACs and IPOs over the past year.  But I suspect that's nothing, compared to what's coming.  With a multi-trillion dollar clean energy economic transformation plan coming, under Biden and the Dem Congress, the investment banking business is positioned to boom, for the banks. 
 

Pro Perspectives 1/15/21

 

January 15, 2021

Biden talked about his “American Rescue Plan” last night.  This is a proposed $1.9 trillion, in addition to the $900 billion that has yet to be spent from the late December aid package. 

And that does not include money for what he’s calling his “Build Back Better” recovery plan.  That’s the climate action economic transformation plan.  That will be another $1 trillion plus, probably $2 trillion.

Understand, this climate action plan is not a Biden aspiration, necessarily.  This is a global plan.  The U.S. is just now on board with it, with a new President.

In fact, a policy group in Canada wrote a paper back in June on a green energy economic plan for the Canadian government.  Guess what it was titled?  Building Back Better.

So, we have to wonder, what the consequences will be for the world that deficit spends its way to economic transformation, funded by central banks buying their own debt.  We know the early investors in the climate action initiative will get rich (the same ones that conceived, promoted and influenced the execution of these plans), but what will happen to the countries executing these plans?

This is the current picture of the U.S. Federal debt…

We should expect several trillion to be added to this $27 trillion. That’s against a $20 trillion economy.  But this plan, also in line with the initial covid policy response, is all about increasing the nominal value of the economy (inflating GDP through higher asset prices) and devaluing the debt (paying it back with less valuable dollars).  

With this fiscal and monetary strategy, the first assumption is that the currency gets punished.  But currencies are valued relative to other currencies.  With that, if everyone is doing it, the currencies look unscathed.

We can see that in the dollar.  It’s in a typical long-term bear cycle, but no extraordinary decline or volatility.
But as we know, the dollar has been punished relative to asset prices. The price of practically everything is going up, and will continue to.  And at some point, likely soon, we will begin seeing it in the Fed’s favored inflation measures.  Then the true test will come:  Will the massive investment in growth (and recovery), produce hot enough real growth (after adjusting for inflation). 

 

Pro Perspectives 1/14/21

 

January 14, 2021

Biden is set to unveil his stimulus plan tonight. 

This comes as Congress just passed $900 billion of aid in late December, about half a trillion of which was unspent from the original Cares Act from March.

Meanwhile, we have a vaccine in distribution.   The economy is nearly back to pre-pandemic economic output levels.  And even leaders of locked-down states and cities are changing their tune, pushing to open up.

So, one might ask, why do we need another multi-trillion dollar aid package?

We already have an exploding deficit and asset prices are ratcheting up day-in and day-out, eroding the buying power of the dollars in our pocket.  Why pour (more) gasoline on the fire?

Over the past 10 months, we’re now looking at three tranches of federal stimulus/aid, that total $4.5 trillion — all borrowed.  And there’s talk that he wants a separate/additional package to address his economic transformation/ clean energy plan.  With an aligned Congress, he will get it.

If that type of deficit spending doesn’t sound like something you would like to be a creditor too, you’re not alone.

And that’s why global investors are selling U.S. Treasuries, and those willing to buy (lend) are commanding higher compensation (higher yields).  And with that, it’s early days in a new long-term bear market for U.S. government bonds.  That means higher rates.  It’s a matter of how high, and how fast they move.

Pro Perspectives 1/13/21

January 13, 2021

The Washington Post ran a story at noon on January 20, 2017 with the headline, The campaign to impeach President Trump has begun. 

While much of the the next three years was under the cloud of impeachment threats, the actual impeachment vote in the House didn't come until December 19, 2019.  The Senate trial started on January 22nd, 2020 — and it ended on February 5th in acquittal.   

So, just a year later, and they have voted on a second impeachment.  But its reported that the Senate won't reconvene (prior to the inauguration) to hold a trial. 

So it’s not about removal.  Among the motivations of the democrats is to disqualify Trump from running for President again (as Pelosi admitted in her recent 60-Minutes interview).  With that, the Senate may try this after Trump is out. 

Importantly, this political chaos in the U.S. has weakened the U.S. economically, not just in this pandemic recovery, but over the course of the four-year term.  And it has opened the door for China to emerge as the global economic superpower. 

Remember, we looked at this China superpower scenario prior to the election.

As I asked then, what rational person thinks it's a good idea for a communist country to become the global economic superpower?  I suspect they won't be promoting democracy. 

And you can see in this survey we looked at last October (from Pew Research) China is nearly there already, i.e. global economic superpower …

This is a sample population survey, asking people around the world who they believe to be the leading economic power in the world.  This results of this study demonstrate where China has been buying influence (on that front, many gains were made in the global financial crisis) and how China’s neighbors feel about the prospects of a world led by China (i.e. not so fond of the idea).
 
With this in mind, while most of the world continues the pursue an exit from pandemic-induced recession, China is set to do the hottest growth (better than 7%), in four years (since Trump got entered office).  
 

Pro Perspectives 1/12/21

January 12, 2021

Global assets have been repricing over the past ten months, driven by the Fed's decision to go all-in to support the economy back on March 23rd. 

But oil has been a laggard, still about 20% off of the highs of last year. 

Remember, last year the May oil futures contract traded negative, deeply negative (as low as -$41/bbl).    

Why?  The largest oil ETF didn't factor in a scenario where the global economy would lockdown, and then two of the most powerful oil producers would collude to flood the world with oil supply.  

 
That created a situation where there was little-to-no storage around the world for oil.   And when this large ETF was forced to roll its May contract (i.e. sell it to move into the new front-month contract), there were no buyers.  Prices went negative. 

So, this was technical issue.  I suspect you were never paid to gas up the car.  And the price of oil has since made its way back to as high as $53 today. 

 
But this oil price recovery is in the face of structural headwinds for the oil industry.  
 
Remember, the money that has been pouring into the electric vehicle stocks (e.g. Tesla), has represented the anti-oil trade. 

The Biden clean energy plan vows to kill the fossil fuels industry in the U.S.

With that, most would expect oil prices to be heading toward zero.

As you can see in the chart, that's not the case.  In fact, since the election, it's risen alongside Tesla. 

Why?  If Biden regulates the U.S. shale industry into extinction, OPEC will be back in charge.  And oil prices will go much higher, even in a world that’s transitioning to cleaner alternatives to oil. 
 

Pro Perspectives 1/11/21

January 11, 2021

We talked about the push higher in yields last week. 

That continues today.  The 10-year yield is now trading up to 1.14%.  That’s still very low.  But the rate of change is huge.  That's a rise of 25 basis points in a week, against a very low base. 

This is a potential disruptor to keep an eye on, for stocks. 

Remember the taper tantrum? 

In 2013, just a few months into QE3, the Fed began setting the table for reducing the size of its bond buying program, and telegraphing a QE exit strategy.  Rates went crazy.  In four months the 10-year traded up to 3% from 1.6%.   As a result, in June of 2013, mortgage rates jumped a half a percentage point in a week (the biggest one week move since 1987).  And that was in a very, very fragile housing market.  Stocks had an 8% drawdown and then a 5% drawdown within those four months.  

So it created volatility, but stocks ended the year up big in 2013.  

This time around, a sharp move higher in rates would be painful for confidence, especially if it involved foreign selling of U.S. Treasuries.  But importantly, 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 — even if it means outright buying stocks.