November 16, 2020

Stocks get another lift today on a second consecutive 7am, Monday morning vaccine announcement.  

Last week, bond yields spiked to nearly 1% on the vaccine news.  Today the move in the bond market was much more subdued. But the yield on the 10-year Treasury, at 90 basis points, at a moment when lockdowns are ramping up again, is very firm, and looking a bit concerning. 

As we discussed last week, we may have seen the catalyst to mark the end of a bull market in a very, very long trend in bond prices (specifically U.S. Treasuries).

That catalyst to kill the bond bull market might have been last Monday's vaccine announcement.  With visibility toward a "return to normal" coupled with record high savings rates and trillions of dollars of new money sloshing around the world, rising Treasury yields (lower bond prices) could be the signal of some hot inflation coming down the pike. 

On the other hand, the catalyst to kill the bond bull market might have been the election, and the related deteriorating global confidence in the U.S. government. 

Investment in U.S. Treasuries have always represented the safest parking place for global capital, in the world.  But now we have a environment in the United States that certainly doesn't look as safe and stable as it once did.    

As I said last week, that's a formula global Treasury investors to make their way to the exits.  On that note, tomorrow we get the report on net foreign purchases/sales of U.S. Treasuries.  The expectation is for more outflows in the month of September.  That will add to the more than half a trillion dollars in foreign outflows from our government bond market since May. 
 

November 12, 2020

As we end the week, the pieces seem to be falling in place for another lockdown scenario.
 
As we’ve discussed since prior to the election, with the prospects of a split Congress we should expect Biden to hold the economy hostage, through tighter virus mitigation, to put pressure on the Republican-led Senate to agree on a big second stimulus package.  And expect it to come from Democrat-led cities and states. 
 
So, we’ve since heard from Biden’s coronavirus advisor, telegraphing such a move — a four-to-six week lockdown. Chicago issued stay-at-home orders yesterday.  Today, the NYC mayor said to prepare for school closures thorough the end of November.  This afternoon, Andrew Cuomo said the Governors of six Northeast states will hold an emergency summit meeting, amid spiking cases.  And California, Oregon, and Washington issued an advisory urging the public to avoid all non-essential out of state travel today.  
 
It’s coming. 
 
This comes as stocks finish the day up 1.5% and near record highs. 

November 12, 2020

This daily note, which I've been writing for almost five years, is about connecting dots.  

I talk a lot about markets, geopolitics, economics and even psychology.  I do so, because without the understanding of how all of these things work together, it's impossible to have an accurate view on markets or the world.

I don't wait for the nightly news on a big network to tell me what's happening on these fronts.  I don't rely on CNBC or the Wall Street Journal.  I like to hear or see it directly from primary sources (press conferences, speeches, data, actions).  That, in combination with the information in the prices of markets, I get the real news.  

With that, I've talked a lot about China over the past five years, the rise and the related threat.  I've talked a lot about Trump, and his role as a necessary disrupter in an economy that was teetering on the edge of depression, following eight years of economic malaise and Fed intervention.  I've talked a lot about the Fed, and its role in keeping the economic patient alive, following the Global Financial Crisis.  I've talked a lot about big tech, and the threat the "disruption" represents to the economy and society.  I've talked a lot about the massive globally coordinated investment to fight climate change — the climate actioners.  I've talked a lot about the virus, and the propaganda surrounding it (from the selective reporting metrics to the imagery of Chinese officials welding Wuhan residents into their apartments).  And I've talked a lot about the battles on Capitol Hill, and the election. 

These are all dots that have created a pretty clear "big picture" along the way. 

It was all about structural reform — the important change needed so that the global economy could sustainably emerge from the damage of the global financial crisis.  Trump took the lead (globally) when he came into office, making a lot of tough and unpopular moves in that direction.  And with that, it quickly became all about Trump.

Why did the big picture become all about Trump? 

As we've discussed, Trump has 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.  It dominated the Davos meetings in January this year.  They didn’t hide it.  It was about Trump (anti-Trump).  Not the global economy. Not even climate change. 

To what extent would they go to, to get rid of him?  Whatever it takes. 

Again, if you connect the dots, we see a pretty clear picture.  We have a virus that has derailed a strong economy — an economy that was positioned to produce the best growth we've seen since the late 90s boom — heading into an election year.  

And we get a virus, from China, a little more than a month after Trump forces the Chinese Communist Party into a "fair-trade" agreement that would be economically game-changing (negatively) for China.  The WHO (Foreign Policy Journal calls it “China’s Coronavirus Accomplice”) was "boots on the ground" in China, evaluating a virus for more than two months, and watching it spread across the world before they finally relented and called it a pandemic (which sets into motion domestic government responses).  

And then we have U.S. government and agency infighting and contradictory messaging over basic facts about the virus — all along the way.  And despite finding clear and effective treatment protocols in New York in early April (as data showed in the declining intubation data in New York hospitals), the virus timeline was drawn-out, and became an effective political tool to leverage, which ultimately translated into massively altered election protocols (via mail-in voting).  So, not only did the virus influence the election indirectly (via the economy), it influenced the election directly.

Now, with all of this in mind, we continue to connect the dots. 

So, coming into the election, I said "in the case of a Biden win, and split Congress, I suspect he may hold the economy hostage, through tighter virus mitigation, so that the Republican-led Senate will relent and do a second stimulus package (which will fund the clean energy plan).

Here we are.  Biden's coronavirus advisor talked yesterday about the strategy of a 4-6 week lockdown "to crush the virus."  Since the election, Massachusetts and New York have already ramped up restrictions.  And today, Chicago issued stay-at-home orders.  We should expect this to build, and very likely from Democrat-led cities and states.  The pressure will become intense, helped by the media, for the Republican-led Senate to fold to the demands of the Pelosi/Biden clean energy fund which is packaged as a "relief fund."  This isn’t a political view (save your emails).  This is a paying attention view.
 

November 11, 2020

The flood gates have opened on vaccines — after the election, predictably. 

Let's take a look at what this visibility, on a fully opening and functioning global economy, has done to some very beaten down European stock markets.

First, here's a look at Spain …

Spanish stocks are up 24% since the end of October.  But it would take another 30% rise just to get back to the Feb, pre-covid levels. 

Next, here's a look at Italy …

Italian stocks are up 19% since the end of October. It would take another 23% to regain pre-covid levels.  And as you can see in the chart, this stock market is (still) worth less than half of its pre-Global Financial Crisis value (mid 2007). 

Like U.S. stocks, these European stock markets are being juiced by a bazooka of monetary and fiscal stimulus.  An extra catalyst for European stocks, will be a falling dollar.  And as you can see in this next chart, the big trendline of the past nine years has broken. 
 

Add to this, since the failure of the Bretton-Woods system, the dollar has traded in six distinct cycles – spanning 7.6 years on average.  Based on the performance and duration of past cycles, the current bear cycle is more about four years in (with plenty of downside). 

If we see a break of 1.20 in the euro (more dollar weakness), that will be an invitation for global capital to plow into these European stock markets.  You win on the stocks, and you win on the currency. 

November 10, 2020

Let's take a look at oil.

Over the past week, the biggest mover in global markets, has been oil (+12%, and +23% from the lows of last Monday).

This comes as the media's presumed next President has vowed to kill the fossil fuels industry in the U.S., and realign under a global pact to substantially cut the use of fossil fuels around the world. 

Most would have thought oil would be heading toward zero. 

More likely, if Biden gets to inauguration day, oil is going back to Obama-era prices.  Think $75-$115 oil.

Why?  Biden will regulate the U.S. shale industry into extinction.  And OPEC will be in charge again.  

You can see in the chart below, what oil prices looked like under Obama. 

In the yellow area, that's OPEC manipulating an oil price crash, in effort to destroy the rising competitive U.S. shale industry (2014-2016).  It nearly worked (too well), over 100 shale related companies went bankrupt in that period, but the oil revenue dependent OPEC countries nearly went bankrupt too (near default).  So they had to reverse course, and start cutting production to get prices back up.  The shale industry survived and has continued threaten the future of OPEC.  

Under Biden, however, OPEC wouldn't have to worry about shale, he would do the job for them.    
 
So, until we're all driving Teslas, and the energy grid has been completely "green" transformed, we'll still be using a lot of oil.  We'll just be paying a lot more for it. 

November 9, 2020

As we open the week, markets are pricing in a high probability that Biden will get to inauguration day. 

Add that perception of relative certainty (right or wrong), to a very well placed announcement of vaccine success, and you get a glimpse of what asset prices and financial markets will look like, when trillion of dollars of new money around the world (from fiscal and monetary bazookas), meet visibility on a fully open and functioning global economy

The emergency fiscal and monetary policies around the world were an explicit devaluation of cash against asset prices.  And with that, we've already seen lift-off in prices over the past seven months.  And as we've seen today, the bull market in asset prices is still in the early days.  

But with today's news on a vaccine, we may have seen the catalyst to mark the end of a bull market in a very, very long trend in a very, very important asset class:  Bonds, specifically U.S. Treasuries. 

Investment in U.S. Treasuries has represented the safest parking place for global capital, in the world.  But now we have a environment in the United States that certainly doesn't look as safe and stable as it once did.  And we have a brew for inflation, with the clear risk that it may turn into very hot inflation.  

It's a formula for higher rates.  And we may see global treasury owners making their way to the exits.

November 6, 2020

As the hallmark of a Biden presidency would likey be the transformation of the U.S. economy, via the Green New Deal, let's take a look at some stocks that would benefit. 

As a spoiler, they've already benefited, dramatically.   Clearly there has been a lot of confidence, since the onset of covid, in the election outcome we are seeing. 

Here's a look at the charts on the top five constituents in the biggest clean energy ETF (ICLN):

The Biden Plan calls for a "100% clean energy economy" and "net-zero emissions no later than 2050."  He would need an aligned Congress to get funding for a such massive "change the economy" undertaking. 

And he might get it, given Georgia Senate races are going to a run-off.  

But his plan also says he would take Executive Action, day one, to ramp up regulations and efficiency standards.  Either way you look at it, the cost of living would go UP — prices going UP. 
 

November 5, 2020

Stocks are pricing in a Biden presidency, and a split Congress.  This is looking like a goldilocks scenario for stocks. 
 
Maybe the best gauge of this, is how the 10-year yield is behaving.
 
Coming into the election, as the odds makers were pricing in a "blue wave," interest rates started pricing in a hotter inflationary future (driven by big government spending/clean energy package).  With that, we had this aggressive move UP in in interest rates …

With the results of the past two days indicating a split Congress, yields have fallen back sharply.  

A split Congress means an increase in corporate taxes and capital gains taxes becomes unlikely (at least until mid-term elections).  It also means the big government spending package (i.e. funding for the clean energy transformation) becomes unlikely, with a Republican-led Senate.
 
Again, this is the "not too hot, not too cold" scenario:  a continued economic recovery, while reducing the risk that the Fed will have to choke it off (at some point) to deal with a spike in inflation. 

 

This scenario adds visibility and certainty. Stocks like both. 
 
That said, this view on Congress may be changing.  The Georgia Senate races, which have looked like wins for Republican incumbents, are now looking like they both may go to a run-off.  That would entail another vote to take place on January 5.  And that clearly puts the prospects of a continued Republican-led Senate in the jeopardy.

That would put the "higher inflation" scenario back into focus (and would be a cue for lift off in the interest rate market). 

November 4, 2020

Predictably, the election has become a drawn out process.  

And predictably, in a world where few things have made any sense over the past ten months, we are now seeing the Presidential election count paused in mid-action last night, held overnight, and flipped on its head today.

The predictable reason: ambiguous mail-in ballot discovery and counting. 

So, after an endless "whatever it takes" effort to get rid of Trump, over a four year period, the ultimate overthrow appears to be coming from a global pandemic-rationalized mail-in voting strategy, which entails dumping ballots on the doorstep of key toss-up states, in the middle of the night, to be counted after the known majority of Trump votes had been cast and counted. 

We will now see how the disputes play out. And there will likely be many states in the mix. 

That said, I suspect the media will be happy to call Michigan and Nevada for Biden and set Biden in motion for an acceptance speech.  Meanwhile as the Trump team is out fighting for justice, the pressure will build on him to step aside and allow the country to move forward, so that Biden can "get to work on the virus and the economy." That's my view. 

With a split Congress, as we've discussed, I would expect Biden to push for an economic shutdown, to contain the spread of the virus — following the lead of France, Germany and the UK. 

That would give him the purpose to turn to Congress and force a massive "relief" package.  And from there, he would be flush with, at least, a trillion dollars to plow into his clean energy economic transformation plan.  We will see how it all plays out. 

November 3, 2020

Big day.  And global asset prices are soaring.  

Are markets anticipating a Biden win, blue wave and, consequently, a $3 trillion slush fund coming down the pike?

Are markets anticipating a Biden win, and subsequent economic shutdown, for the purpose of forcing Congress to relent on a $3 trillion dollar "relief" package? 

Are markets anticipating a Trump win, and the immediate removal of the political noose that has choked off the full reopening capacity of the U.S. economy? 

Are markets simply anticipating the end of a very long period of uncertainty, which will ultimately, at minimum, give way to a recovering economy with trillions of dollars of monetary and fiscal stimulus still floating around? 

Any way you look at it, the common theme is that the election represents an unlocking of the liquidity deluge from the policy response earlier this year (and possibly even adding to it).  

The next question to ponder, just how much inflation is ahead? 

With the Fed openly willing to sit on zero interest rates until they see inflation run sustainably north of 2%, if Biden were to come in and pile on a multi-trillion government spending program, on  top of the this chart below, inflation would explode higher — and the Fed would be caught well behind, and chasing it.  As we've discussed for a long time, you don't want to hold cash in this environment, you want to be long asset prices

With that said, on the election outcome front, for the states that will determine the winner, the national polls have Biden up by only 2.3 points going in.  

Assuming there are no surprises in Florida and Texas, a win for Trump in Pennsylvania would probably get him over the finish line. And the three pollsters that correctly predicted his win in Pennsylvania in 2016 have him winning PA again (Big Data Poll, Susquehanna, and Trafalgar).  

On a final note, as we've discussed here in my daily notes, the stakes are extremely high in this election. China is on the doorstep of overtaking the United States as global economic superpower, and they won’t be looking to spread democracy – rather, they have a clear goal of world domination.

As we know, Trump has been a wrecking ball for the Chinese Communist Party’s grand plan. And with that, it’s safe to say they would do anything and everything to get rid of him.  We’ve seen just that.  On the other hand, Biden seems very likely to follow the “humble foreign policy path” that has enabled China’s ascent.   

With that above in mind, maybe the most articulate description of Trump’s role as a wrecking ball, what has taken place over the past four years, amplified in the past 10 months, and what is at stake with today's vote, is in this speech (from a prominent NY money manager).  It's worth taking the time to listen.