December 16, 2020

A few weeks ago, at a congressional testimony, Jay Powell talked of  "upside risks" to the medium-term outlook — meaning the economy could grow faster and inflation could be hotter than expected.

In today’s post-FOMC press conference, he didn't go there.  Even with a large fiscal package coming down the pike (now said to include direct payments to people), he focused on deflationary pressures.  

In line with that dovish message today, Powell has told us many times, throughout the year, that he (the Fed) would want to see sustained inflation above their target, before they consider ending emergency policies.  That is meant to set expectations that the Fed will be providing maximum support for years.  

With that, we can be assured that at some point the Fed will be forced out of their position, and will be chasing inflation

And it seems pretty clear, that's what they want. After fighting against the risk of a deflationary spiral for the better part of the past 11 years, they want to see inflation.  Inflation, they can ultimately tame.  Deflation is far more dangerous (potentially untamable). 

For markets, we can see this policy reflected in asset prices.  Global assets have been/ and continue to be repriced against the currencies that the Fed (and other global central banks) are printing.  

With the exception of bonds, as you can see below, there has been virtually no asset left behind.     

December 15, 2020

Stocks are up big today as it looks like Congress will agree on a stimulus package that strips our state and local government aid (better known as bailouts for the fiscally irresponsible).

If that's a go, the number is said to be around $700 billion.   

That's a fraction of Pelosi's $3+ trillion dollar initial proposal.  For the democrats to agree on a much smaller and very targeted package (to aid small businesses and extend the federal unemployment subsidy) they must be confident they can get another package done early next year (to address the Green New Deal agenda), which would indicate they are confident that Biden will be inaugurated AND they will get the Georgia senate seats. 

Clearly, getting aid into the hands of people and small businesses removes a huge risk to the economic recovery.  What's the state of the recovery?  Despite the ramped up restrictions in certain states, Q4 is running a lot hotter than economists have expected.  

As you can see in the chart below, the Atlanta Fed is projecting 11.2% annualized growth in Q4, with just a couple of weeks left in the quarter. 

Accelerating the bounceback in economic activity is most stimulating for small cap stocks.  Why?  Which stocks historically perform best coming out of recession?  Small cap value. 

In recessions, small cap value has a deeper decline than larger cap stocks, but that tends to be followed by an explosive bounce back, and a persistent outperformance over the next ten years (compared to large caps).  If we look at performance from the lows of this year, the Dow is up 70%.  The Russell 2000 is up more than 100%. 

On a final note, the Fed will decide on monetary policy tomorrow.  This comes a week after the ECB announced another $600 billion in QE.  With that, if they are confident that a U.S. fiscal package is getting done, and foresee the prospects of another package early next year, I suspect they will begin setting expectations for upside risks to inflation.  That would get market interest rates moving UP. 
 

December 14, 2020

State electoral votes are being cast today. 

And the Pfizer vaccine is being distributed.

Yet stocks finish down on the day.  Pfizer, finishes down almost 5%. 

But for Pfizer shareholders, this must just be profit taking, right? 

Not exactly.  If you were a Pfizer shareholder in late January, before it was known that latest coronavirus would become a global pandemic, you have made exactly nothing on your investment by the close of business today, despite having held shares in the first company in the world to inject a vaccine into the arm of a patient. 

dec 14 pfe

On that note, if you bought Gilead at the close on April 29, the day Fauci called Giliead’s new drug Remdesivir the new “standard of care” for treating covid, you  would be down 28% on your investment.  

So, despite winning the race, the shareholders of these giant drugmakers weren’t winners.  The real winners in the vaccine race were the tiny biotech companies that received 10-figure gifts from the federal government to pursue a vaccine. 

This is what happens to a stock when inject $1.6 billion dollars into an $18 million revenue company.  The market cap of NVAX has gone from $700 million to almost $8 billion …

dec 14 nvax 2

Moderna did $60 million in revenue in 2019.  The government gave them a billion dollars.  The market cap has gone from $6 billion to $61 billion. 
 

dec 14 mod

The lesson:  When government money is being deployed in stimulus or emergency aid, the big winners are the small early-stage companies.  This was also clear in the Great Financial Crisis (ex. Tesla).  

December 11, 2020

The media has given little coverage of the election dispute.  And the market has been giving little respect to the associated risk to market stability.  

That said, we enter the weekend with eighteen states supporting a lawsuit brought by Texas, against four swing states, and it sits with the Supreme Court.

Let's take a look at it …

This would be a narrow focus for the Supreme Court.  It would be about interpreting the constitutionality of state officials changing voting procedures, without going through the legally established protocols (without ratification by the state legislature).

Here’s a good summary of that from the Texas/Trump filing…

If the Supreme Court takes the case, and finds the states to be in violation of the constitution, it would give the state legislatures in these defendant states (all republican-majority) the confirmation of “irregularities” in the vote, and therefore, confirm their mandate to choose the electors to send to the Electoral College.

That would be a path for a Trump win.  If, after such a Supreme Court determination, neither candidate were to achieve the necessary 270 electoral votes, the vote would go to the House of Representatives, where each state would represent one vote. The U.S. State House delegation has a republican majority.

We may hear from the Supreme Court later today.  We may hear something over the weekend. 

 

Again, the market has been assigning virtually zero probability of disruption. The odds aren’t high, but I suspect greater than zero.  That said, the clock is ticking, as the Electoral College appointees are due to vote on Monday.     

December 10, 2020

This morning the European Central Bank added more fuel to the fire. 

They extended their QE program another nine months and and added another $600 billion.  That brings Europe's total monetary response to the pandemic at $2.2 trillion.  

Meanwhile, they have a $2 trillion fiscal stimulus package on the table, orginally agreed to in July, but has been held up by opposition from Hungary and Poland.  

With that, the heavy lifting, to keep the euro zone economy alive, has been left to the ECB — as it was after the wreckage of the Global Financial Crisis.  

The question is, will the ECB follow the lead of Japan at some point, and begin outright buying European stocks?  Even the Fed has entered the stock market this year, outright buying corporate bond ETFs.  

You can see in the charts below, the impact of the BOJ on Japanese stocks.

Japan started buying ETFs back in 2013, as part of their QE program.  They went on to triple the initial amount, and then double that amount. The Nikkei did this (below)along the way.  And then the BOJ doubled its annual target for ETF purchases in March, in response to the Pandemic — stocks go up!
 

Not coincidently, when the Fed announced it would become a buyer of bond ETFs on March 23rd, this year, that was the bottom in broad stock market.  Stocks are up 69% since.  And you can see what the biggest corporate bond market ETF has done …
 

With the above in mind, in a world of inflating stock markets, there remains good value in European stocks.  The broad European stock market remains 11% from the record highs.

Moreover, if the ECB were to broaden the asset purchase scope to include stocks, they would likely follow the path they have for government debt — the weak spots.  With that, as you can see, the Italian stock market could use some help.   

December 9, 2020

There are now seventeen states that have joined Texas in the lawsuit that sits with the Supreme Court, and attempts to delay the Electoral College vote and prevent four states (Georgia, Michigan, Pennsylvania and Wisconsin) from casting their Electoral College votes for Biden.  

The Supreme Court has given the defendants (the four states) a deadline of Thursday at 3pm to respond. 

As a result, we are getting a tick up in the VIX today, and a slide in stocks. 

What would be the first stock to sell if the election outlook were to grow murkier if not overturn?  Telsa.

Tesla has made a huge run since the Pandemic was globally recognized back in early March.  As of this morning, the stock was up 12x from the lows of mid March. 

Why?  If you believed that the Pandemic would derail a Trump re-election, and clear the path for the Green New Deal, then Tesla represented the global climate action cooperation trade — the anti-oil trade.  As such, money has plowed into the stock, from around the world, seemingly indiscriminately. 

Tesla is priced like it is designed to destroy the auto industry.  At the close today, the market value of Tesla is equivalent to Toyota, Volkswagen, Daimler, GM, BMW, Honda and Ford combined.

That has made Elon Musk the second richest person in the world. 

How did he get there?

The Obama administration loaned $465 million to the broke electric vehicle company (at the time) back in 2009, at the depths of the financial crisis (under the strategy of "investing in emerging technology").  Tesla had a new CEO (Elon), was burning cash and amassing liabilities, and had yet to produce a consumer viable car.  The government money changed the game.  When the government money hit, big institutional money aggressively followed it. 

Fast forward eleven years, and we now have the auto industry killer, in Tesla.  

That era also spawned Facebook, the killer of traditional media.  Uber, the killer of the rental car and taxi industry.  Airbnb, the aspiring killer of the hotel industry.  It ignited Amazon, the killer of the retail industry.  And now, with the IPO of Doordash today, we have a company that looks like a partner for restaurants, but more likely designed to be the killer of restaurants.  Doordash in its public trading debut today is valued at $72 billion (worth more than Chipotle, Dunkin Brands, Outback Steakhouse and Darden Restaurants combined).  
 

December 8, 2020

The negotiations continue over a second Covid relief package.  While both sides have shown optimism in getting a deal done, it seems like "smaller" is the likely outcome.  

McConnell seems to be dug in and confident that the Democrats are coming to his number, which won't include state and local government money. 

With that, the stock market has probably well priced in another half-a-trillion dollar bridge to get consumers and small businesses through the next few months.

Meanwhile, today is 'Safe Harbor' deadline for the election.  This is the final day to resolve election disputes, assuming the Electoral College would vote six days from now.  But the election challenges have now (as of today) been elevated to the Federal Supreme Court — one from Pennsylvania republicans, and the other, a lawsuit filed by the state of Texas, attempting to delay the Electoral College vote and prevent four states (Georgia, Michigan, Pennsylvania and Wisconsin) from casting their Electoral College votes for Biden.  Scotus has put the Texas suit on the docket. 

This is an event that markets have been ignoring and assigning virtually zero risk to.  The chances of an election overturn at the Federal Supreme Court may not be high.  But it's not zero.  

Meanwhile, the VIX ends the day near the pandemic-era lows. 

December 7, 2020

Back in the depths of the Global Financial Crisis, while the world was suffering and asset prices were collapsing, China began stockpiling cheap commodities.  With about $1.7 trillion of U.S. dollar reserves, they went on a commodities buying binge, picking up the world's most valuable natural resources on the cheap. 

That led to charts like these …

Crude oil tripled from the 2009 bottom, in less than a year. 

And copper had a V-shaped recovery in 2009. 
 

China's inventory of base metals doubled in 2009.  Their copper inventory went up four-fold.  The binge included food (corn, pork, soybeans).  

Was this a power play?  It appeared that way.  China was doing well, while major developed market economies were suffering.  And not only did they stockpile key commodities, but they forced key commodity prices much higher, creating an greater burden for economic recovery for the rest of the world.  

But it didn't last.  Soon, it became clear that the Chinese economy couldn't sustain, without healthy global trading partners.  The Chinese economy ultimately plunged, and commodity prices plunged with it.

This time around, with a new global economic crisis, China appears to be on another commodities binge.  And this time they have a bigger war chest of dollars to work with, and they are leading the world in economic activity coming out of the global recession.  We should expect them to continue stockpiling key commodities, and driving prices much higher. 
 

December 4, 2020

The jobs report this morning had few surprises. 

However, it is being positioned as a "dire" report, as a political tactic to gain more leverage in stimulus talks.

Let's look at the facts …

The new jobs added in November came in lower than expected, but still well above the average pre-pandemic monthly job gains.  Slower job growth shouldn't be too surprising given that certain states went back into economic restriction mode over the past month.  

The unemployment rate ticked down to 6.7% (the lowest post-Pandemic level).  Wage growth came in at 4.4% in November, a bit better than expected.  That's good news. 

The labor force participation rate has been steady since June. 

And the underemployment rate continued to tick down, for the seventh consecutive month.
Now, given the context of a vaccine coming around the corner, this jobs report proves the recovery has been good and remains in a good place.

In fact, with the addition of the economic data of the past week, the Atlanta Fed's GDP model is now projecting 11.2% annualized fourth quarter growth. If that were to hold, we would have a down 5% Q1, a down 31.4% Q2, an up 33.1% Q3 and an up 11.2% Q4 (all annualized numbers). 

 

That would reflect a recovery of all of the economic output losses from the Pandemic — inside of one calendar year

That's thanks to the effectiveness of the policy response (both monetary and fiscal).  And from this policy response, despite the hardships, the personal savings rate (at 14%) remains elevated, at the highest levels since the mid-70s.  Liquidity remains plentiful.  That's why asset prices continue to float higher and higher. 

December 2, 2020

Yesterday we talked more about the set-up for inflated economic growth next year, inflated prices and higher wages.  

With that, let's talk about tomorrow's jobs report, which will include a read on wages.

First, unemployment is expected to continue the move lower.   

Within the jobs report we will get November average hourly earnings (wages). 

This is an important number.  Remember, this (wage growth) was one of the missing pieces in the decade-long slow economic recovery from the Global Financial Crisis. Despite what looked like a hot jobs recovery, it did not come with wage pressures. That was a reflection of underemployment issues (the barista and gig economy) and a structurally flawed economy (driven by the damage from global trade imbalance).  With that backdrop, we got sluggish growth and weak inflation — an unusually weak recovery from a recession.

This time around, in the recovery from the Global Health Crisis, wages will have to reset, higher.  The monetary and fiscal response this time was bigger, bolder and with major inflation ramifications (maybe extreme). We're already seeing it in asset prices.  And it's early days in the reset of commodities prices.  To keep up with higher cost of living, wages will have to go higher. 

The good news:  We're already seeing it.  As you can see in the chart below, thanks to hazard/essential worker pay increases and Federal unemployment subsidies, wages have spiked.  But, importantly, as the unemployment rate comes down, people going back to work are commanding higher wages.  Wages are sustaining in the 4%+ area (well above the wage growth of the past decade).  The expectation from the report tomorrow is for 4.3% yoy wage growth in the month of November.