This morning Mnuchin was interviewed by CNBC. He was the headline of the day, despite saying nothing new.
When trade talks broke down in early May, the Trump administration said they were 90% of the way to a deal. But China balked and reneged on concessions. Mnuchin said the same thing today (we were 90% there), and the media presented it as if he said progress was made this week, heading into the meetings. That’s not what he said.
Let’s talk about the backdrop heading into the weekend negotiations. Remember, Trump is in the driver’s seat in this negotiation. He can’t force a good deal, but he can claim victory on the trade front just by doing ‘a’deal.
With that in mind, as we’ve discussed over the past month, he seems to be attempting to surgically optimize the economy heading into next year’s election. He’s been fighting for a Fed rate cut, and through introducing heightened risks of a standstill on trade, he’s gotten what looks like Fed compliance coming down the pike (for a July cut).
The timeline set up perfectly for a June rate cut, and then for Trump to settle on a China deal at the G20 meeting. The economy would have launched like a rocket-ship. The Fed didn’t comply.
With that, at this weekends Trump/Xi meeting, let’s see if Trump extends the timeline on new tariffs, to get through the July Fed meeting (in hopes of getting his Fed fuel for the economy). At this point, the market has backed the Fed into the corner, with high expectations of not just 25 bps, but a 50 bps cut. Without an extension of trade uncertainty, those expectations will sustain if not grow.
Now, we’ve discussed over the past month, the prospects for this trade war with China ending with a grand and coordinated currency agreement — perhaps a big depreciation of the dollar, similar to the 80s “Plaza Accord.”
As I said a couple of weeks ago, we may wake up one day and find a similar agreement has been made between the U.S. and major global trading partners (which may include China, or not). It might be a deal between the U.S. and China to “revalue” the yuan (i.e. strengthen it). Or it may exclude China (just G3 economies). An interesting takeaway from this morning’s interview with Mnuchin: Mnuchin did make a point to emphasize that they look forward to many bi-lateral meetings at the G-20 — not just with China.
How do you position for a dollar devaluation? Buy commodities. Is that what the move in gold is telling us (and Bitcoin)? Maybe.
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The Fed held the line on rates today, passing up an opportunity to surprise markets with a cut. The economy seems to be in position to easily absorb it, with soft inflation.
Not surprisingly, they did make plenty of efforts to massage market sentiment. They stayed on message that they are prepared to act to sustain the economic expansion. And half of the Fed Presidents now see at least a cut by the end of the year.
What is clear, coming from the Fed Chair’s press conference, is that this is all about the China trade deal. If it drags out, sentiment continues to erode. When sentiment erodes, the economic momentum will erode. If that’s the case, they will be reactive, with stimulus (rate cuts and/or slowing the runoff of Treasuries on the Fed balance sheet).
On the other hand, if we get a deal on trade, the Fed is off the hook — no rate cut.
And they seem to be comfortable, at the moment, holding their fire as long as economic conditions are still holding solid.
The question now is, will they be tested? Sure a deterioration in sentiment can show up with consumer activity or business confidence. But more likely/ more immediately it would be in financial markets.
With stocks just a percent off of highs, they aren’t being tested at the moment. However, a sharp move lower in stocks and I suspect we would see the Fed step in, and quickly. The other spot that could test them is the yield curve.
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We talked about the potential bottom in stocks on Monday, based on this big trendline we had been watching. That, of course, also coincided with a similar line in the Dow, which represented a 10% correction on the nose.
That indeed does look like the bottom.
You can see in the chart of the S&P 500 above, this big line dating back to the oil price crash lows of 2016 held beautifully, and we are now up more than 5% from just Monday of this week.
And today we have this …
We’re getting a break of this sharp downtrend of the past month (circled).
And we have a very similar pattern in Japanese stocks (the Nikkei).
Most importantly, the biggest mover of the day in global stock indices (and nearly all markets) was emerging market stocks. The MSCI Emerging Markets Index was up 3.3% today. And the strength in emerging markets was well underway before the news today that the U.S. (Trump) and China (Xi) has some constructive talks on trade.
What gets hit first and hardest when global risk elevates? Emerging markets. EM was down 21% on the year earlier this week. But this is also where the biggest gains can come as the dust settles, and people realize that a hotter U.S. economy, will translate into hotter growth in emerging markets. As I’ve said, this market decline has been a gift to get involved.
Stocks continue to swing around today. But I think we may have a bottom coming in.
Remember, we looked at some key charts on Friday. Among them, we had this chart of the Dow, where a touch of this big trendline from the 2016 lows would give us a 10% correction on the nose.
As you can see in the updated chart, we hit that level today, traded below it, but bounced back aggressively into the close.
So we now have an official correction in the Dow (down 10%) and we have an official bear market in the FANG stocks (down more than 20%). These labels have significance because it the plays into market psychology and price behavior.
With this in mind, if you are a regular reader of my daily notes, you’ll know we’ve talked about the big disconnect between the performance of the tech giants, relative to the Dow for much of the year. The FANG stocks were UP as much as 50% at one point this year (equal weighted). Meanwhile, the Dow has dramatically lagged all along the path of the post-correction recovery of earlier this year.
This was a market pricing the tech giants like monopolies that would destroy all industries, despite the clear threats that were coming from Trump and from Europe (i.e. promising to ramp up regulation on those that have gained advantages from the lack of regulation).
The great proxy for this trade, as we’ve been discussing for the better part of the past six months, has been Amazon versus Walmart.
Remember, we looked at this chart several times earlier this year …
This chart clearly represents the regulatory favor that has been given to the tech giants. The regulatory favor has not only disrupted industries, it has nearly destroyed them, and created monopolies in the process.
But with regulation coming, I’ve expected the “jaws to close” on this chart, and for money to start moving back into value stocks and back into the industries that have been nearly destroyed by the tech giants.
We now have this … the jaws have closed.
This violent repricing of the tech giants, and now bear market, is finally signaling the outlook for a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks.
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We ended the week with the jobs report today. The headline payroll number itself is less important. It’s been plenty good for the past seven years, and has averaged over 200,000 new jobs over the past twelve months.
Remember, the missing piece in this report, that has NOT confirmed a hot job market, has been wage growth. Throughout much of the post-Great Recession environment, despite the low headline unemployment number that central banks were able to manufacture, workers had little leverage in the job market to maximize potential, much less command higher wages. That means mid-level managers were happy to have a job and keep it, and college graduates were (have been) relegated to a career as a barista. That’s not a sign of a hot economy.
That said, wage growth has been on the move, but slowly. Today’s report of the September average weekly hourly wages was up 2.8% (compared to last year this time). Here’s what the history of that number looks like:
So wages are on the rise, but not fast. And that explains why inflation is on the rise, but not fast.
That should comfort those who think the interest rate market is about to run away. Remember, the Fed hiked by another 25 basis points last month, and contrary to what we’ve seen throughout the Fed’s three-year tightening cycle, the bond markets are finally beginning to price some of it in.
For perspective, the Fed went by another 25 basis points in September, and the 10-year yield has since risen by 20 basis points.
As you can see in the chart, we’ve had 200 basis points of Fed tightening since December of 2015. But the 10-year yield, since the Fed began “normalizing” policy three years ago, has risen less than half of that (<100 basis). It’s far from a runaway train in the market-determined interest rate market.
As I said yesterday, the move in rates is a growth story, not a crisis (or end of growth) story. With the optimism of economic momentum supported by fiscal stimulus and structural reform, the interest rate market is finally pricing OUT the risks of slow growth forever and post-Great Recession crises.
The market is typically pretty good at pricing in what is known. And it has been pretty clear that Trump has seen trade imbalances as a key piece of his structural reform plan. And the strategy on correcting those imbalances has been to fight trade barriers with trade barriers.
While it has created plenty of fodder for political and economic debates, the markets seem to like it.
As we’ve discussed, any movement on trade, from a U.S. perspective, is success. He has said as much with this statement on China:
Given the position of U.S. stocks (at or near record highs) relative to global trading partner stock markets (largely, negative on the year), the market seems to be fairly comfortably betting that movement will occur, given the position of strength from which Trump is negotiating (i.e. the biggest and most powerful economy behind him).
Now, this is the effort to level the playing field internationally. We’ve also talked about the ‘domestic’ leveling of the playing field on the Trump agenda. And that has everything to do with the tech giants. And it has most to do with Amazon.
With that, we’ve talked about the case for breaking up Amazon. As I’ve said
“At 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries. That’s a bad bet. Much like China undercut the competition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business. That tipping point (on retail) has well passed. And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed. But Amazon is now moving aggressively into almost every industry. This company has to be/will be broken up.”
Amazon was a big loser on the day today. Why? Break-up speculation.
A Citibank internet analyst today called for the split of Amazon’s ecommerce and cloud computing business (AWS). But the analyst recommended the company split itself to avoid regulators doing it for them. That sounds like a recommendation for a pre-emptive strike in an effort to maintain the euphoric investor sentiment in the stock.
When we look back, the trillion-dollar valuation threshold in Amazon may have been curse. On September 4th, it hit a trillion dollars. And that has been the dead top.
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The best investing advice over much of the past decade has been “don’t fight the Fed.” The Fed needed stocks higher (to restore confidence and wealth — at least paper wealth). And the Fed forced stocks higher.
They did it through ultra-low interest rates and through a committment to backstop against any shock risks. With that, despite the many threats along the path of the the global economic recovery, stocks went up.What’s the best investing advice of the post-election environment?
Don’t fight Trump.
Remember, we’ve talked about the “great handoff” on election night. Trump finally represented an end to an era, where the global economy was surviving on central bank life support. It was the handoff from a monetary policy-driven recovery, to a fiscal stimulus and structural reform-driven recovery. And that handoff gave us a chance to get to a sustainable recovery — to escape post-recession stall-speed growth.
So no wonder, the influence of Trump on markets and global stability, is much like the influence of the central banks of the past decade.
Trump wants a booming economy.
We need a booming economy to escape the stall-speed growth of the post-global recession world. So we have major economic and geopolitical undertakings in play to achieve a booming economy. And just as the central banks wouldn’t let shocks undo the trillions of dollar they had committed to the recovery, Trump won’t either. The central banks intervened often, either verbally, or through policy. And Trump has intervened often. Also, a lot of verbal, and plenty of policy responses.
The dollar and the Fed are the latest examples. And today, we saw the influence and the outcome. Trump has hand-selected the Fed Chair that is continuing the program of gradual rate hikes. But Trump he sees higher rates, uncessarily threatening to curtail the growth picture, he’s “intervening.”
Below is some of his jawboning against higher rates …
And today, we heard from the Fed Chair at Jackson Hole. People were looking for any indication that the Fed Chair might be influenced by Trump’s comments.
And here are the money headlines from his speech…
The Fed explicitly said under Yellen one time, that they opted against a rate hike because they were no signs that the economy was overheating. That makes the second comment above very interest, regarding the expectations on the Fed’s movees for the remainder of the year. And if they don’t see inflation accelerating above 2% (the first comment) then why raise rates again.
The market seemed to agree with that interpretation today. The prospects of steady rates is a recipe for higher stocks, higher commodities and a lower dollar. And that’s what we had today. I expect it will continue. And this may have finally been the catalyst to get commodities moving again.
Have a great weekend!
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We talked yesterday about the building pressure in emerging markets, driven by weakening currencies and rising dollar-denominated oil prices.
With that bubbling up as a potential shock risk, gold hasn’t exactly been telling the story of elevated risks.
You can see in this chart above, since the tax cuts were passed in late 2017, rates have been rising (the purple line). This is a hotter economy, pick-up in inflation story. And, as it should, gold stepped higher with rates all along–until the last few weeks. You can see the divergence in the chart above.
I suspect we’ll see gold snap back to reflect some increasing market risks, and especially to reflect a world where central banks are beginning to finally see inflation pressures build. The gold bugs loved gold when inflation was dead. And now that it’s building, they are surprisingly very quiet.
Yields continue to grind higher toward 3%. That has put some pressure on stocks, despite what continues to be a phenomenal earnings season. This creates another dip to buy.
Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%. [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014. Yields soared, and stocks had a series of slides.
My rebuttal: The domestic and global economies are fundamentally stronger and much more stable. But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment. We have fiscal stimulus doing a lot of heavy lifting.
Let’s look at a couple of other reasons people are concerned about stocks as yields climb:
[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?
My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.
[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).
My Rebuttal: In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior. If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade. If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road. Coming out of a zero-interest rate world, bond prices are going lower/not higher.
Remember this chart …
The bond market has become a high risk-low reward investment. Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper. That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.
Yesterday we talked about the commodities bull market and the move underway in natural gas.
That all continued today, thanks in part to a comment by the U.S. Treasury Secretary, saying “obviously a weaker dollar is good for us.” When the dollar goes down, commodities prices tend to go up, since they are largely priced in dollars. As such, commodities were the top performers of the day – beginning to gain more momentum at multi-year highs.
But as we’ve seen from this chart, this recovery in commodities, which has dramatically lagged in the reflation trade, has a long way to go.
While the markets reacted as if Mnuchin, the Treasury Secretary, was talking down the dollar, the dollar is already in a long-term bear market cycle.
Remember, we looked at this chart (below) of the long-term dollar cycles back in June…
And I said, “if we mark the top of the most recent cycle in early January, this bull cycle has matched the longest cycle in duration (at 8.8 years) and comes in just shy of the long-term average performance of the five complete cycles. The most recent bull cycle added 47%. The average change over a long-term cycle has been 56%. This all argues that the dollar bull cycle is over. And a weaker dollar is ahead. That should go over very well with the Trump administration.”
The dollar is down about 8% since then and is breaking down technically now.
The dollar index is now down 14% in this new bear cycle. And these are the early innings. Based on the dollar cycle, it has a long way to go, and should last for another 5 to 7 years.
So, this dollar outlook is further support for the case for a big run in commodities we’ve been discussing. And as we observed yesterday, in the case of Chesapeake Energy (CHK), the second largest producer of natural gas in the country, the commodities stocks are still extremely underpriced if this scenario for commodities plays out.
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