Pro Perspectives 1/5/21

January 5, 2021

As we discussed yesterday, a democrat sweep in today’s Georgia Senate race would likely lead to a multi-trillion dollar government spend on a clean energy plan, under a Biden presidency and aligned Congress. 

That’s the bet being placed today across financial markets.  A big government spend would add even more fuel to the asset price fire, putting “inflation risk” (and maybe hot inflation) in the crosshairs. 

With that “hot inflation” scenario in play, commodities are up big today.  The dollar is down.  And rates are on the move, up. 

The 10-year yield will be the spot to watch in the first half of the year as the market begins to project this scenario where the Fed, for the first time in a long time, will be caught behind the curve on inflation. 

But despite the big move in gold yesterday, and the despite the follow through today of this 2021 inflation theme, I suspect we can take very little information from the first two trading days of the year, at this point.  That is, unless tomorrow’s joint session of Congress produces no drama.  Every indication points to the opposite.   

Yet, with a VIX today at 25, the markets continue to underprice the risk of chaos surrounding the Electoral College count tomorrow.

 
The likely scenario is for the session to play out beyond tomorrow (to follow objection procedures), with the potential that the six states that sent competing slates of delegates be asked to clarify which should be counted (which could open the door to a special session in those states and an investigation).  Bottom line, it’s unlikely to be a quick and tidy stamp for Biden.  Markets won’t like that, and we should see “risk off.”  Perhaps the market that has been giving us that signal the clearest, since election day:  Bitcoin.  

Pro Perspectives 1/4/21

January 4, 2021

Happy New Year!  This time last year, we were talking about the prospects another late-90s type of boom for the economy and for stocks, as the Fed was forced to reverse course on overly tight monetary policy (making 2019 similar to 1995).   

We also entered 2020 with the introduction of 5G on the agenda, the end to the trade war, and global fiscal stimulus underway (beginning with Japan).

With this economic-boom cocktail, it looked like another "roaring twenties" was ahead.  Instead we kicked off the new decade with a global pandemic.  But the ingredients remain in place for another roaring twenties. 

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), the 2020s will be defined by innovation (omnipresent connectivity via 5G).   Add to that, we now have trillions of dollars of new money floating around to fund this next wave of the information revolution. 

Now, we also had economic shock risks as we entered last year (even prior to the virus), with an escalation of U.S./Iran tensions. 

This new year, we have plenty of risks to consider.  

Tomorrow we get the state senate runoff in Georgia.  A democrat sweep would open up a scenario of a Biden presidency and aligned Congress, which would likely lead to a multi-trillion dollar clean energy spend.  That would add even more fuel to the asset price fire, putting "inflation risk" (and more likely hot inflation) in the crosshairs.  We saw some of that view materialize in markets earlier today with gold and broad commodities higher, the dollar lower.   Going into tomorrow's election, both the oddsmakers and the polls have the edge going toward both democrat candidates.

On January 6th, Congress will formally count the electoral college votes.  The expectation is that it will be objected by members of the Senate and the House.  It should be a wild day — and stocks have just started pricing-in some of that risk today.  

Pro Perspectives 12/23/20

December 23, 2020

It’s been an eventful year, and I hope you’ve gained some valuable bigger picture perspectives on markets, the economy and geopolitics.
 
On that note, next year promises to be even more eventful and full of huge opportunities in a year that will be transformative in a number of ways.  We have trillions of dollars in global monetary and fiscal tailwinds meeting the adoption of 5G, which Qualcomm’s CEO calls the most revolutionary technological advancement since electricity. 
 
We’ve had another great year in my private, members-only service, the Billionaire’s Portfolio — and with the dynamic I’ve just mentioned above, I expect to do even better next year.
 
With that, if you’ve found my daily notes useful over the years, I hope you’ll join me by becoming a member for the new year.
 
It’s a great deal for the money. And I think you’ll find it extremely valuable as we enter a huge year for the economy and what I think will be another big year for the stock market.
 
Here’s what long-time subscribers have to say about it …
 
Returns, returns, returns: "The most valuable aspect of this newsletter is the returns" … "The stocks keep going up" … "Many advisory newsletters claim 'big' returns, to date, Billionaire's Portfolio has delivered on its goal to generate 20%–30% annual returns" … "Actual returns" … "Beating the market."

The Logic: "I wanted to learn from the richest people in the world"… "I love the basic premise of following the billionaire investors, with triggers."

Actionable, step–by–step instructions: "Easy to follow game plan" … "I do not have to try to figure out when to buy or sell. He tells me." … "Specific stock recommendations along with the specific catalyst or reason that the stock price should rise, and the approximate time it will take, and approximate return to expect."

Expert On Your Side: "With Bryan, it's like having a portfolio managed by an industry professional."

 
Many of these members have been in the service from inception – for eight years, and span the gamut, from novice investors to experienced investors … from those early in their careers to those accomplished and retired … from financial advisors to high profile institutional investors.

Our members are a discerning group: young professionals, entrepreneurs, C-suite executives, investment bankers, doctors, lawyers, professional investors, academics, engineers – you name it.

They all have one thing in common: they understand the value of having an edge in investing.   
 
You can join them, by clicking here to subscribe. When you do, you will get immediate online access to see my full portfolio of billionaire-owned stocks, all primed to capitalize on a changing economy in 2021. And you will see every recommendation, past, present and future, in the portfolio.
 
I look forward to welcoming you aboard, and navigating together through the new year! 

Thanks very much for being a loyal reader of my daily Billionaire’s Pro Perspectives.
 
I'll be taking off the remainder of the week and next week to spend time with my family. So this will be my last note for the year.
 
My best wishes to you and your family for a Happy Holiday and a profitable New Year!

Pro Perspectives 12/22/20

December 22, 2020

We have another $900 billion added to the policy response this year. 

That gives us a total of $3.3 trillion in fiscal stimulus/aid.  And we have about $3 trillion from the Fed. That's about a third of annual U.S. GDP.  

How much did we lose?  The economy peaked in Q4 GDP at $21.7 trillion (in economic output).  The trough was in Q2 at $19.5 trillion.

The simple math on that is a $2.2 trillion contraction (the gap).  And policymakers have plugged that gap with $6.3 trillion.  That's a lot of excess money.  

This is the dynamic we've been talking about in this daily note since this summer.  Assuming the economy continued to open up and recover, the response was going to be far greater than the damage.  And the result we've been discussing along the way has been:  A global reset of asset prices. 

We've seen it.  And it's still in the early stages.  People are still hoarding cash.  The last time the savings rate was this high was 1975.  Personal savings is $1.2 trillion higher than it was last year this time. 

That's why this chart has continued to plunge.   

This is the velocity of money. This is the rate at which money circulates through the economy.  And you can see to the far right of the chart, it hasn’t been fast over the past decade (therefore, no inflation). 

We get inflation, only if the recipients of the money, spend it (if it circulates).  That didn't happen coming out of the global financial crisis.  Banks used cheap/free money from the Fed to recapitalize, not to lend. 

In the current case, by design, money is being dropped directly into the hands of consumers (for the second time).  But confidence in the future, job security and earning potential has been damaged by varying virus mitigation policies around the country. 

As that clears, and confidence is restored, that savings hoard will be spent.  Prices will go higher.  Asset prices will continue to go higher. 

Pro Perspectives 12/21/20

December 21, 2020

A year ago, as we were approaching a new year, we talked about the prospects of seeing another late 90s type of boom for the economy and the stock market. 

The big theme that paralleled the late 90s boom: An overly aggressive Fed that was tightening into a low inflation, slowly recovering economy. 

That's what we had in 1994.  That's what we had in 2018.  

What happened in '95?  The Fed was forced to do an about-face, and by July they were cutting rates.  Same thing in 2019, to the month, the Fed was forced to stop tightening and start aggressively easing again. 

What happened to stocks, and the economy in 1995.  Stocks went crazy, up north of 36% (including dividends).  And within three quarters of the Fed's first cut back in '95, the economy was printing above 4% growth.   

Similarly, in 2019, stocks had a huge year, finishing up 31.5% (with dividends).  And the economy was fundamentally strong, and set up for a big year, coming into 2020.  The consumer was in a very strong position.  Unemployment was at record lows.  Wages were at 11 year highs. Household net worth was at record levels.  Consumer credit worthiness was at record levels.  The amount of money required for consumers to service debt every month, relative to their disposable income, was near record lows (debt service ratio). And companies were producing record profits.  

Despite that setup, instead of having the first hot year for the economy in a long time, we've had the deepest economic contraction in history.

But, now we have visibility toward a fully reopened economy again.  And we have a massively stimulative fiscal and monetary backdrop.  Meanwhile, household net worth has already recovered to new record highs.  The debt-service ratio for consumers remains near record lows.  And as more people get back to work, we have a formula for a big 2021. 

Add to that, don't forget we have a very big "boom catalyst" ahead. 

Remember, the year 2020 was supposed to be the year that 5G (high-speed, omnipresent wireless internet) went mainstream. 

 
How big of a deal is 5G?  The CEO of Qualcomm said it will have a similar impact to the introduction of electricity. This is expected to dwarf the lifestyle changes we've seen in the first two phases of the internet.
 
It's a full-blown fourth industrial revolution.  Yet, while the global focus has been the pandemic, the 5G rollout has been, relatively quietly, underway.  The next two years are expected to be transformative for the global economy. 

This all sets up for something that still looks like a replay of the late 90s boom, when stocks did this …

Remember, that period too, was abound with economic shockwaves (Asian Crisis, Russian Default, the blow up of Long Term Capital Management).  

Pro Perspectives 12/18/20

December 18, 2020

We're nearing the finish of a chaotic year at (or near) some important round numbers in key markets.  The S&P 500 is around 3,700.  Oil near $50.  The 10-year yield nearing 1%.  And the dollar index is at 90. 

Translation:  Stocks are on record highs. Interest rates are near record lows.  The dollar is weak.  And energy is relatively cheap. 

If you just had that information to go on, you would probably say the outlook looks very good for economic activity. 

As we end the week, let's take a look at some key charts …

First, let's take a look at stocks.

As we discussed earlier this week, small cap stocks historically perform best coming out of recession. And you can see in this next chart, that dynamic has really kicked in over the past six weeks.  

 

Now, we've talked about the repricing of global assets, thanks to the explicit devaluation of money by global central banks.  And as you can see in this chart of broad commodities, it's still in the very early stages.  
 
And with most commodities priced in dollars, the outlook for a continued bear market for the dollar (and maybe acceleration of the decline) is fuel for the young bull market in commodities. 

Pro Perspectives 12/17/20

December 17, 2020

What’s going on with bitcoin?

Since yesterday morning, the value of bitcoin has ripped by almost 25%, to nearly $24,000 (at the highs today). 

That’s  a quadrupling in value since March, when global central banks, led by the Fed, pulled out the monetary policy bazooka (an explicit devaluation of money).  

So, bitcoin offers a disruptive currency alternative.  It also offers an inflation hedge.  And as an asset with little to no correlation with major asset classes, it offers some diversification.  

These are legitimate reasons to buy bitcoin.  With the above in mind, we’ve heard many influential investors come off of the fence, in recent months, in support of the case for bitcoin.

Does that warrant this chart? 

Does anyone think the events of the past three months warrant a view that we’re going to see 144% inflation?  The Fed doesn’t think we’re going to see anything over 2% inflation in “the long run.” 

Paul Tudor Jones, one of the great macro traders of all-time, made the comparison of bitcoin to gold and the Swiss franc. 

Interestingly, both gold and the swiss franc have historically been safe-havens — a parking place for money when global investors become uncertainty about global risk (including geopolitical risk). 

On the health care crisis front, with a vaccine in distribution the world is a lot less uncertain today, than it was nine months ago.  If we believe the election is done deal, then the world today is much less uncertain than it was in September.  Yet, bitcoin has more than doubled since September. 

What gives?

Part of this safe-haven value in bitcoin, is “hiding.”  Back in 2017 bitcoin soared as Chinese citizens circumvented government ramped enforcement of government capital controls, which restricts individuals from moving more then $50,000 out of the country in a year.  The Chinese (especially the wealthy) looked to bitcoin as a way to get money out of China.  In fact, China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. 

Then the Chinese government responded with a total ban on crypto trading activities in China.  A few months later, bitcoin futures launched, which gave hedge funds a liquid way to short the madness.  Bitcoin topped the day the futures contract launched.  A few months later, it was worth 1/6th of its value at the top.

Now we have a new high in bitcoin (three years later).  And we discussed the rational reasons for buying bitcoin.  But I suspect the furious recent rise might have something to do with money looking for a safe parking place/hiding place.  The Department of National Intelligence is due to share its report on foreign election interference to Trump and to Congress any day now.  And under a national emergency declaration Trump signed back in 2018 (here — and renewed in September of this year), if any foreign entity is found to be interfering or undermining a U.S. election, or if any American is found to be aiding a foreign entity, assets can be frozen by the Secretary of Treasury. 
 

Pro Perspectives 12/16/20

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.     

Pro Perspectives 12/15/20

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. 
 

Pro Perspectives 12/14/20

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).