Pro Perspectives 12/2/20

December 2, 2020

Powell and Mnuchin have been on Capitol Hill the past two days.

Yesterday, the Fed chair said that "in the medium term there is upside risk."

"Upside risk" to the economy means, hotter growth … driving hot inflation. 

This is what you get when trillions of dollars in government and Fed stimulus meets the prospects of a 'return to normal' (via a vaccine). 

We've seen inflation in asset prices already.   We're going to see (more, and persistent) inflation in daily living expenses.  And to maintain the standard of living, we will have to see wage inflation (higher wages). 

This backdrop means higher market interest rates are coming.  And the government bond market is beginning to reflect it. As you can see in the chart below, the ten-year yield is threatening the break of a multi-year downtrend. This would support the thesis we discussed last month, that the vaccine announcement may have been the catalyst to end of the nearly forty-year bull market in bonds (bond prices go lower, interest rates go higher).

This theme is also very positive for gold.  And gold has given us a gift over the past few months, to buy into an 18% correction.  That correction looks like it's over now. With that, here is another look at the upside target for gold we discussed last week ($2,700) …

Pro Perspectives 12/1/20

December 1, 2020

Stocks were up big today on news that the Senate had a bi-partisan proposal for a second relief/stimulus package.

The number was $908 billion.  That's far short of what Pelosi has looking for.  And, if deployed prior to January 20th, that's far short of what Biden would need to implement the big clean energy/economic transformation plan.

So, as we've been discussing, it's unlikely to happen.  What today's proposal could do, is open the door for Trump to repurpose the nearly half a trillion-dollars in unused funds from the original Cares Act, and deploy it by Executive Order. 

The prospect of a second stimulus package, bridging the economy to a vaccine, is yet more fuel for the fire under asset prices.  With U.S. stocks on record highs, there is money searching for value. 

With that, let's take a look at a couple of charts (outside of the U.S.) that look like there is plenty of room to run, in a world where cash is being devalued against asset prices …

Pro Perspectives 11/30/20

November 30, 2020

The broad stock market (S&P 500) finishes the month of November up 11%.  

Among the biggest movers for the month have been those companies that would benefit from the Biden economic plan, which outlines a wholesale transformation of the economy, to clean energy.

Within that bunch of clean energy stocks, electric vehicle stocks have been the favored bet.  None have been more favored than Tesla.  Telsa was up as much as 52% for the month.   At the close today, the stock is up 584% on the year. 

Let's take a look at six publicly traded electric vehicle companies that are fighting for market share.  

Lordstown …

Nikola …

Fisker …

Nio Inc. …

Li Auto …

X Peng …

As you can see, these stocks have all soared since election day.  That’s on the underlying bet that Biden will make good on regulating away the oil industry.

But given these charts, I think it’s fair to say, the risk to the presumed election outcome is being priced at zero (zero risk).  I suspect it’s higher than that – maybe a lot.  

With that, Tesla has a key reversal signal today (an outside day, circled below). That’s worth paying attention to …

Pro Perspectives 11/25/20

November 25, 2020

Stocks have aggressively moved higher from the lows of March.
 
The crash in stocks was fierce, but the recovery has been even more fierce — up 66% now, from the March 23rd lows. 

And we are just beginning to see what asset prices look like when the visibility on a “return to normal” meets an unprecedented sea of global liquidity. 

 
Just how big is the sea (of liquidity)?  Remember, not only has the Fed and other global central banks flooded the world with trillions and trillions of new money, but the Fed removed the reserve requirement ratio for banks.  It's now zero.  At a zero reserve requirement ratio, the stock of money could increase infinitely.

Translation:  The value of money has been destroyed, which means the price of assets go up!

 
Cash is the worst place to be.  Be long asset prices.  
 
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Pro Perspectives 11/24/20

November 24, 2020

Stocks are back at record highs. 

Real estate prices are at record highs.

Bond prices, are (still) near record highs. 

Copper, an industrial metal that tends to be an early signal of an economic turning point, is nearing a breakout to a seven-year high.

All of this, while oil, the most highly traded commodity in the world, remains more than 30% lower than the highs of just this year. 

But oil is on the move.  

The day before the election, oil made a low of $33.64 a barrel.  It's now up 34% from that level. 

And as you can see in the chart below, the yellow line is the highest price traded in the crude oil market in the past eight months.  That was broken today. 

What's most interesting, is that this move in oil comes as money is pouring into electric vehicle related stocks (the anti-oil trade). 
 

This demand for electric vehicle stocks is, of course, driven by the clean energy/Biden plan.   And with a presumed next President that has vowed to kill the fossil fuels industry in the U.S., most would expect oil prices to be heading toward zero. 

But as we discussed earlier this month, 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 11/23/20

November 23, 2020

In the face of broadly rising asset prices today, gold was down 2%. 

As we discussed on Friday, this looks like the market is anticipating a lower probability of a big, multi-trillion-dollar stimulus package.  

Remember, last week the Treasury Secretary went to the Fed and requested the return of nearly half a trillion-dollars of unused funds from the original Cares Act.  The gameplan is to repurpose that money as targeted COVID relief for small businesses and federal unemployment checks.  

This can get money into the hands of people sooner.  The Democrat-led House would surely reject the smaller package.  But it may not require approval from Congress.  Congress has exclusive control of the purse.  But once they've appropriated funds (which they have through the Cares Act), "the President and executive branch enjoy considerable discretions as to how those funds are spent" (paper on Presidential Spending Discretion and Congressional Controls, here).

So, a more modest fiscal response is less inflationary, which leads to the dialing back on some inflation hedges. 

Of course, gold is the favored inflation hedge — and it has been sliding.     

Let's take a look at the chart …

Gold prices peaked on August 7th, and are down 11% since.  And today, we get a little technical break (down) in the chart. 

But this is likely just a shallow correction in a very strong bull market in gold. The longer-term inflationary damage is done, from the massive global monetary and fiscal response earlier this year.  That makes this dip in gold a buy. 

Remember, we looked at this chart back in early March.
For those that appreciate the value of technical analysis, the ABC pattern (from Elliott Wave theory) projects a move to $2,700.   

Pro Perspectives 11/20/20

November 20, 2020

We've talked for months about the posturing between the Democrats and the Trump administration on a second relief package.

Pelosi thought she had enough leverage back in July, with the July 31 expiration of the federal unemployment subsidy looming, to force Trump and the Republican Senate into a huge second package — one that would address the Democrats wish list of state bailouts, (most importantly, at the time) voter reform/mail-in voting legislation and multi-trillion dollar funding for the New Green Deal.

Trump circumvented Pelosi's leverage, by extending the federal unemployment benefits through Executive Order.   

Pelosi and company then circumvented Trump by just mass mailing mail-in ballots. 

Now, as we've discussed post-election, the Democrats have tried to conjure up new leverage, pushing the "raging virus" narrative, and consequently going back into lockdowns in Democrat-led states.  That has been an effort to force the Republican-led Senate to relent on a massive second package (for state bailouts and the New Green Deal).  

Trump has sidestepped it again.  Yesterday, Mnuchin went to the Fed and requested the return of nearly half a trillion-dollars of unused funds from the original Cares Act.  This will likely be repurposed for actual relief/aid to businesses and people. With this, the Democrats would no longer be able to use a "lack of aid" as a call for Senate change, as it relates to the two Georgia Senate run-offs coming in January. 

This reduces the likelihood of a Senate flip.  And it reduces the likelihood of the implementation of the economically transformative energy overhaul.  With this, we end the week with the biggest clean energy ETF trading near record highs.   …​

Pro Perspectives 11/19/20

November 19, 2020

As we’ve discussed in recent days, the markets continue to underprice the risk of more chaos surrounding the election. 

The VIX today continues to trade at the lowest post-Pandemic levels. 

And, as I said yesterday, with the timeline narrowing on December 8th deadline for resolving election disputes, we should expect the Trump legal team to become more and more vocal — taking their case to the American people.

They started that process today, with a noon press conference.  Not suprisingly the majority of the media did not cover it.  

For those that didn’t see it, you can see a replay on C-Span (click here) …​

They alleged a broadbase domestic and foreign conspiracy to fix the election.  Let me repeat this:  They alleged a broadbase domestic and foreign conspiracy to fix the election.

What about the evidence?  They claim to have signed affidavits from election workers from key counties and precincts.  They have expert analysis on statistical anomalies (with congruent patterns) in key swing states. Moreover, they connect the dots to a large scale corruption scheme with the voting systems and software. 

The validity of it all, of course, will be for a court to decide.  But, again, they will continue to take the case to the American people.  And we should expect the profile of this dispute to only increase.  And if the evidence grows, the mainstreet media will have a very hard time ignoring and discrediting it. 

Again, this comes as markets are broadly in a very complacent mode.  This should raise the specter of risk — if not put everyone on alert. 

Pro Perspectives 11/18/20

November 18, 2020

We now have three vaccines that claim better than 90% efficacy.

For what is considered to be such an insidious disease, it's interesting that the scientists honed in on just the right protein and formulated a nearly flawless vaccine in nine months (or less).  And all three happened to complete studies just days after the election. 

For perspective, let's take a look at the CDC's chart on annual flu vaccine efficacy. 

So, we have a 90%+ efficacy COVID vaccine.  And the flu vaccine last year was just 29% effective.  I guess they were right. It's not the flu. 

As some areas of the country continue to ramp up stay-at-home orders, the Republicans have said they would favor a targeted $500 billion relief package.  But Pelosi, predictably, has no interest.  As we've discussed all along, the lockdowns are about applying pressure to the Senate to get funding for the Biden agenda — namely, a multi-trillion dollar spend to transform the American economy.

A reader asked early this week (my paraphrase), what's so wrong with giving in on an extra trillion dollars in stimulus, added to what is already a mountain of debt, deficit spending and Fed money printing?  You get money to people that need it.  Stocks go up.  You avert social unrest.  

My view:  That's exactly the mindset Pelosi has been angling for (i.e. holding the economy hostage for) since August.  It would unleash the money that would make irreversible change to the economy.  And that would not come through deliberate action by elected officials, it would come as a ransom payment to get suffering people relief. 

Now, stocks plunged into the close and continued to slide, post-close, in the futures market.  Importantly, the Dow put in this outside day — a technical reversal signal.  
 
These signals don't always work, but they have a good record of being present at historical tops and bottoms. 

In this case, as we discussed yesterday, the markets seem to be underpricing the risk of some chaos surrounding the election.  With that, the Trump legal team has been gathering evidence to present a fraud case.  That case will have to be made to the American people first, and the question is, will it be of scale and will there be irrefutable (large scale) evidence in the eyes of the American people?  We will see.  What's likely is that they will become more and more vocal, sooner rather than later.  And that alone should raise the specter of risk in markets. 
 

Pro Perspectives 11/17/20

November 17, 2020

Stocks traded lower today, but remain near record highs.  The VIX, a reflection of the market's perception of risk, is near the lowest levels since the onset of the health and economic crisis.   

With an election that the media wants us to believe is 100% done and delivered, it seems like the market is underpricing the risk of more chaos. 

A place that might be sending a signal, is Bitcoin. 

Sure, we've talked about the pressure that new lockdowns will put on the Senate to relent on a massive stimulus relief package.  That would be very inflationary.  And with that, we would expect to see asset prices running wild.  Stocks might fit that description.  But commodities aren't running quite as hot.  And gold (the market's favored inflation hedge) has traded lower, not higher, in the past week. 

So, what is Bitcoin telling us?  Is it displacing the role of gold as the favored inflation hedge?  Probably not.  

What we do know about Bitcoin:  In its short history, it has a record of being a tool of corruption and money laundering. 
 
Does the rise in Bitcoin reflect corruption in the recent election? At the very least, it may reflect the rising perception of corruption (domestically and globally).