Predictably, Trump extended the timeline on new tariffs in his meeting with China’s President Xi over the weekend.
This is kicking the trade war can down the road. That extends the timeline on the trade war and resets the opportunity to force the Fed’s hand this coming month–to get a rate cut at the July 30-31 Fed meeting.
As we’ve discussed, with a rate cut under his belt, this would clear the way for Trump to, then, claim victory on the China trade war by doing ‘a’ deal, giving himself enough runway into the 2020 elections to have a booming stock market and booming economy.
Since December, we’ve been talking about the parallels between the current period and the 1994-1995 period. It’s worth repeating again. The script continues to play out. In 1994, an overly aggressive Fed raised rates into a recovering, low inflation economy. By 1995, they were cutting. That led to a 36% rise in stocks in 1995. And it led to 4% growth in the economy through late 2000–18 consecutive quarters of more than 4% growth. Stocks tripled over the five-year period.
Think about that, and then remove the overhang of a trade war with the two biggest economies of the world and you can see the path to some very good times ahead. Moreover, if the above scenario plays out, Trump would then likely turn back to Congress and green-light a $2 trillion infrastructure plan.
While many have been predicting economic bust, this is a formula for an economic boom!
We end the week, month and quarter today. Stocks are up 17% year-to-date.
With the big Trump/Xi meeting coming over the weekend, let’s talk about how Fed policy has flipped from a headwind (adding to the risks), to a tailwind (backstopping against the risks – an implicit “put”).
And that’s why the chart on the S&P 500 looks like this …
Of course we’ve had big geopolitical risks along the timeline of this chart, that include an historic trade war (which continues) and potential sanctions against Saudi Arabia (late last year).
The geopolitics have consumed the markets attention. But maybe it’s all about the Fed, and their ability to interpret (or lack thereof) the impact of trade disputes and structural reform in the global economy – and position correctly.
If we look back at the timeline, the tops and bottoms in these V-shaped moves in the chart above all align perfectly with Fed speak.
Stocks topped on October 3rd and proceeded to drop 20% through the end of December. What happened on October 3rd? The Fed chair, Jay Powell, did a sit down interview with PBS, where he said, after raising rates three times for the year, that they remain far away from the ‘neutral’ rate. And he said they may go past neutral. Why? He thought tariffs and the uptick in wage growth would feed into inflation. He was wrong.
With that view of tighter and tighter monetary policy into a low inflation and recovering economy, with hurdles of trade reform in the path, the markets started signaling the contra-viewpoint: the trade war weighs on global growth, and within that context, rising U.S. rates are a killer for emerging market economies, and for the slow recovering developed markets.
Powell’s comments started the decline, which ultimately led to a big decline. Yet, the tone-deaf Fed raised rates in December, again, right into a falling stock market. Moreover, following the December Fed meeting, the Fed made it clear that they were prepared to mechanically keep raise rates — another four times in 2019.
When did it turn? It turned the day (January 4th) the Fed marched out Powell, Bernanke and Yellen, (tails between their legs) to tell the world ‘no more rate hikes/ the Fed is done.’
Stocks bottomed, on that day, and did a perfect ‘V’ back to the record highs over the following months.
When did it top again? May 1. What happened on May 1? The Fed met and Jay Powell had his post-meeting press conference. After months of running Fed officials out in the media to tell us the Fed’s got your back, Powell fumbled.
The interest rate market (10-year yields) had fallen 75 basis points from the highs of just six months prior, giving a very clear message to the Fed that, at the very least, the December hike was a policy mistake. But Powell was unwilling to show any leaning toward a rate cut. In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negotiations), have been largely improving. Again, the Fed was tone-deaf and unwilling to take a defensive stance against the unknowns of geopolitical risks. Stocks go down.
A few days later, U.S./China trade talks come to a standstill. Stocks continue on for a 7% decline.
When did stocks bottom? June 3rd. What happened? A voting Fed member, Jim Bullard said that a Fed cut may be “warranted soon” to “provide some insurance” in case of a sharper slowdown. That was a primer for a June 4th speech by Jay Powell. Powell came out of the gates, in a prepared speech that morning, telling us they “will act as appropriate to sustain the expansion.” That spurred the second “V-shaped recovery” on the above chart.
The conversation at the Fed has now, finally, turned to rate cuts. And the market is now expecting a 100% chance the Fed will cut at the July 31 meeting.
Perhaps now the Fed is in the right position, trade deal or no trade deal. And that should be very good for stocks.
Remember, the last time the Fed was in this position in 1994, they cut rates and that led to a huge year for stocks — and stocks and the economy boomed through the end of the nineties.
Bitcoin has had another huge move over the past three months — more than tripling. And then late yesterday afternoon, it collapsed 15% in just minutes. It lost 25% in value on the day.
The first rise and fall in Bitcoin, from $1,000 to $19,000 and back to $3,000, took place from early 2017 to early 2018. Most of the move was over just four months.
Here’s a look at the chart. You can see the first run-up and this most recent run-up …
Remember, this first run-up had everything money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption.
In late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China. That’s when the government stepped UP capital controls — better policing movement of capital out of China, from transfers to foreign investment (individuals can move just $50,000 out of the country a year).
Of course, resourceful Chinese still found ways to move money. Among them, buying Bitcoin. And that’s when Bitcoin started to really move (from sub-$1,000). China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. Capital flows were confused with Silicon Valley genius.
But in September of last year China crackdown on Bitcoin – with a total ban. 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. And a few months later it was worth 1/6th of its value at the top.
Is this time different? Is this real traction for Bitcoin, or is this just Chinese capital flows looking for a parking place, again? Likely, the latter. It’s probably no coincidence that as the prospects of a ‘no deal’ with China have elevated in recent months, Bitcoin has again been on the move. As we’ve discussed, if Trump holds firm on his demands, it seems impossible that China can do his deal. It’s political suicide for the Chinese Communist Party. With that, they fight tariffs with a devaluation of the yuan.
With those prospects, if you have money in China, you have been getting it out! While cryptocurrency exchanges have been banned in China, owning and buying Bitcoin in China is not banned. The Bitcoin futures market and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens to respond to potential devaluation in the yuan.
With the above in mind, this round of Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal (which seems unlikely until, at least, we get past the July Fed meeting).
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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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Remember, last year was the first year since 1994 that cash was the best producing asset class (among stocks, real estate, bonds, gold).
This year, as it did in 1995, the pendulum has swung.
Stocks are up 16% year-to-date. The Dow Jones Real Estate Index is up 19%. Gold is up 11%.
As you can see below, there is a lot of green on the year for global asset prices …
As we’ve discussed for much of the year, what else is similar between the current and 1994-1995 period? We had an overly aggressive Fed, that tightened into a low inflation, recovering economy. In 1995, they did an about face, cutting rates at their July meeting. And now we head into the July Fed meeting with expectations of a 50bps cut.
On that note, we heard from the Fed just days ago, signaling that they were ready to act if conditions deteriorated. And as I said following the meeting: “What is clear, from Powell’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).”
Today, Jerome Powell was again on a stage talking about monetary policy, at a conference on the Economic Outlook and Monetary Policy at the Council on Foreign Relations. He had a prepared speech and did a Q&A. So what message was he trying to send to markets?
He did a lot of talking. But I suspect his posturing doesn’t matter at this point. This less about him, or the economy, and more about Trump. If Trump were to back off the hardline demands and signal a deal with China over the weekend, the Fed would be off the hook — no rate cut. If the meeting comes and goes, and it’s a clear kick the can down the road, or no deal –we get a cut by the Fed come July (whatever size and scope is necessary).
Let’s take a look at gold as we head into the Trump/Xi meeting scheduled to take place at the end of the week’s G20 meeting.
Gold has been sold all along as an “inflation hedge.” But unless you have Weimar Republic-like hyperinflation, you’re unlikely to get the inflation-hedge value out owning it.
Remember, gold went on a tear from sub-$700 to above $1,900 following the onset of global QE (led by the Fed). Gold ran up as high as 182%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still, ten years after the Fed’s first round of QE and massive global responses, we’ve been able to muster just a little better than 1% annualized inflation.
If you bought gold at the top in 2011, the value of your “investment” was cut in half just four years later. That’s a lot of risk to take for the prospect of “hedging” against the loss of purchasing power in the paper money in your wallet.
So, gold isn’t a hedge against inflation, it’s a hedge against the worst-case scenario. It’s for sovereign wealth and anyone else that can take delivery, own and control the storage. For almost everyone else, it’s a speculative trade.
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As we end the week, any questions on whether or not the central banks have your back, have been answered.
Just as they have for the better part of a decade, they have no choice but to respond to any shocks that might knock the global economic recovery off path. And as I said yesterday, the major central banks of the world have lined up, because they are unable to predict what Trump will do on trade. To maintain market confidence, they have to posture as if they assume the trade war will go on indefinitely.
On that note, it seems to be priced into the global treasury markets and the gold market that China can’t accept Trump’s deal (or at least can’t deliver on the current demands of the deal). It’s politically unpalatable and an existential threat to the Chinese Communist Party. So, the question is, will Trump end the trade dispute with more bark than bite? Will he do a deal (not the deal) and remove the overhang of uncertainty from the global economy, and an election coming next year. Next week should be interesting, as we await the Trump/Xi meeting at the G20 (scheduled for Friday 6/28 and Saturday 6/29).
As we head into this weekend, markets hang around big levels: record highs in stocks, the big 1,400 level in gold, just above 2% on the 10-year, and closing in on 10k in Bitcoin (a haven for Chinese capital flight).
With oil above $70, today I want to revisit my note from February where we looked at billionaire-owned energy stocks that have the potential to double on higher oil prices (that note is below with updates or you can see it published here).
As I wrote that note, crude oil was trading at $63. This morning it traded close to $72. And more importantly, with the supply disruption (in the renewed Iran sanctions) combined with an already undersupplied market, we now have the recipe for a melt-UP in oil prices. That creates big opportunities in oil exploration, production and services companies (still).
FRIDAY, FEBRUARY 23, 2018
We’ve talked quite a bit over the past year about this $100 oil thesis from the research-driven commodities investors Goehring and Rozencwajg.
As they said in their recent letter, “we remain firmly convinced that oil-related investments will offer phenomenal investment returns. It’s the buying opportunity of a lifetime.”
With that, let’s take a look at some favorite energy stocks of the most informed and influential billionaire investors:
David Einhorn of Greenlight Capital has about 5% of his fund in Consol Energy (CNX). Mason Hawkins of Southeastern Asset Management is also in CNX. He has 9% of his fund in the stock, his third largest position. The last time oil was $100, CNX was a $36 stock. That’s more than a double from current levels. [Update: this is still a potential double, last price in CNX is $15.70.]
Carl Icahn’s biggest position is in energy. He has 12% of his fund in CVR Energy (CVI), which is 82% of the company. The last time oil was $100, CVI was $49. That’s 58% higher than current levels. [Update: last price on CVI is $40.60, driven higher by Icahn’s influence on a favorable EPA ruling.]
Paul Singer of Elliott Management’s third largest position is an oil play: Hess Corp. (HESS). It’s a billion-dollar stake, and the stock was twice as valuable the last time oil prices were $100. [Update: last price on Hess is $63, up significantly from my Feb note, but Hess was a $100+ stock the last time crude oil was traded at $100.]
Andreas Halvorsen of Viking Global Investors has the biggest position in his $16-billion fund in EnCana Corp. (ECA). The stock was around $25 last time oil was $100. It currently trades at $14. [Update: last price on ECA is $17.]
Yesterday we talked about the Draghi remarks (head of the European Central Bank) that were intended to set expectations that the ECB might be moving toward the exit doors on QE and zero interest rate policy. That bottomed out global rates — which popped U.S. rates further today. The Bank of England piled on today, talking about rate normalization soon.
We’ve gone from 2.12% in the U.S. ten year yield to 2.25% in about 24 hours. These are big swings in the interest rate market – a big bounce and, as I’ve said, the bottom appears to be in for rates.
As importantly, this prepared speech by Draghi could very well cement the top in the dollar. It begins to tighten a very wide interest rate spread between the U.S. and global rates. We entered the year with the Fed going one way (tightening) while the rest of the world was going the other way (easing). That’s a recipe for capital to storm into U.S. assets — into the dollar. And now that may be over.
I’ve been researching long-term cycles in the dollar for a very long time and throughout the global financial crisis period, it these cycles in the world’s reserve currency have been my guidepost for drawing a lot of conclusions on markets and the outlook for capital flows over the past several years.
Despite the choppiness in the dollar for much of the crisis, if we look back at the cycles following the failure of the Bretton Woods system, we were able, very early on, to determine the dollar was in a bull cycle.
This view came in the face of all of the negative global sentiment toward the dollar in 2010. Foreign leaders were taking shots at the Fed, accusing the Fed of trying to destroy the dollar. People were calling for the end of the dollar as the world’s reserve currency. All the while, the dollar held firm and ultimately made an aggressive climb.
Take a look below at my chart on the long term dollar cycles…
I’ve watched this chart for quite some time, defining the five complete dollar cycles over the past nearly 40 years, and the most recent bull cycle.
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.
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Oil has been on the move the past few days. Was this recent dip a gift to buy?The oil inventory report yesterday showed a big drawdown on oil inventories. The market expectation was for about a drawdown of 1.5 million barrels. It came in at 5 million.
That has oil on a big bounce for the week. It’s trading about 8% higher than it was at the lows of last Friday. But we still sit below the 200 day moving average and below the key $50 level (the comfort zone for those producers, namely the shale industry, to fire back up idle capacity).
The weakness in oil has a lot to do with weakness across broader commodities. And broader commodities typically correlates well with what Chinese stocks are doing.
You can see in the chart above, how closely the two track. This bottom in commodities has/had everything to do with the outlook for a big infrastructure spend out of the Trump administration. It’s yet to bubble up toward the top of the action list. With that, the momentum has either stalled on this trade, or it’s a pause before another leg higher in this early stage multi-year rebound. My bet is on the latter. Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
