November 16, 2016, 4:00pm EST

Yesterday we talked about the missing piece in the pro-growth rally in markets.  It’s oil.  A pick-up in demand and growth, tends to also accelerate demand for oil.

But the market is holding out for the November 30 OPEC decision.  They’ve told us they plan to cut.  The inventories have jumped in recent weeks, suggesting producers are ramping up production into a cut (taking advantage while they can).  And Russia’s energy minister said today he thinks OPEC members will agree to terms on a production cut by the November 30 meeting.

With that, oil spiked this morning, but fell back from the highs — still hanging around the $45 area.

Today I want to talk about the performance of small caps over the past week compared to the broader market.  If we consider a Trump economy where regulation will be peeled back, a few areas come to mind as being among winners:

Banks:  Banks have been crushed by Dodd Frank, made into utility companies.  This is the legislation that responded to the global financial crisis — where banks had become hedge funds, taking massive-leveraged-speculative bets against their deposit base.  When the black swan event occurred, they became exposed and were bailed out to keep the financial system alive.  Those days should never return, but the pendulum swung too far in the other direction on Dodd Frank.  In a Trump economy, risk taking will almost certaintly return to the banking system again.  The XLF, bank ETF, is up 10% in the past week.

Energy:  The energy industry has been crushed under the weight of clean energy policies.  Billionaire Carl Icahn, one of Trump’s biggest advocates and once thought to be a candidate for Treasury Secretary, penned a letter to the EPA a few months ago saying their policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners. Icahn happens to own a controlling stake in one, CVR Energy (CVI).  The stock is up 30% in the past week.

Small caps:  The common theme in the above two industries is that all companies have been hurt, but the burden of increased regulation has been far a greater economic and financial cost to small companies.  That’s why the Russell 2000 (small cap index) is racing higher in the President elect Trump era.  The small cap index is outperforming the S&P 500 by 5 to 1 since Tuesday of last week.

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November 14, 2016, 4:45pm EST

We talked last week about the Trump effect on stocks.  With a new President promising aggressive growth polices and a supportive Congress in place to make it happen, the Trump plan is now being coined as Trumponomics.

As we discussed last week, the markets are reflecting this hand-off, from a Fed driven economy to a pro-growth government driven economy, positively — pricing in a period of hot growth.  And it couldn’t come at a better time — in fact, it may come at the perfect time.

The Fed has been able to manufacture stability but not demand and inflation.  Fiscal stimulus is designed to fill that void — to boost aggregate demand and inflation.  That’s why the bond market has shifted gears so dramatically, now reflecting a world with a trillion dollar infrastructure spend on the table, tax cuts, deregulation and incentives to get $2.5 trillion of U.S. corporate capital repatriated. Prior to last week, despite all of the best efforts from global central banks, and a Fed that was telegraphing a removal of emergency policies, the bond market was reflecting a world that was in depression, with the 10-year yield well below 2% in the U.S. and negative rates throughout much of the world. Today the U.S. 10 year traded above 2.25%, returning to levels we saw last December, when the Fed made its first post-crisis rate hike.

As we’ve discussed, growth has a way of solving a lot of problems, including our debt problem.  Politicians and economists love to scare people by emphasizing the enormity of our debt (close to $20 trillion). But our debt size is all relative — relative to the size of our economy, and relative to what’s going on in the rest of the world.

Take a look at this table…

Source: Billionaire’s Portfolio, TradingEconomics.com

You can see, in a major economic downturn, debt tends to rise. And it has for everyone. The downturn has been global.  And the rise in debt has been global.

The fears that a big debt load will lead to a dumping of the dollar, hyper-inflation and runaway interest rates don’t fit in this picture of a broadly weak recovery from a paralyzing global debt bust. Coming out of the worst global recession since World War II, inflation hasn’t been the problem. It’s been deflation. Inflation will be a concern when the structural issues are on the mend, employment is robust, confidence is high and the real economy is working. That hasn’t happened.  But an aggressive and targeted government spending plan can finally start changing that dynamic.

And the markets are telling us, an inflationary environment is welcomed – it comes with signs of life.

Gold is the widely-loved inflation hedge.  And gold isn’t rising out of concerns of overindebtedness.  It’s falling hard in the past week, in favor of growth.

With this in mind, we may very well be entering an incredible era for investing – after a long slog. And an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade, or more.  For help, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio is up 16% this year.  That’s 2.5 times the performance of the broader stock market. Join me here.

November 8, 2016, 4:00pm EST

As we head into the election, everyone involved in markets is trying to predict how stocks will perform on the results.  When the Clinton email scandal bubbled up again, the stock market lost ground for nine straight days, the longest losing streak since 1980.  Since the probe has allegedly ended, stocks have been up.

Does it mean Clinton is good for stocks and Trump is bad for stocks?  Not likely.

Big institutional money managers think they have a better understanding of what the world will look like under Clinton than Trump, and therefore feel more compelled to go on with business as usual heading into the event (i.e. allocating capital across the stock market) with the expectation of a Clinton win, and conversely, they’re not as compelled to do so with the expectation that Trump might win (i.e. they sit tight and watch).

When they sit on their hands, liquidity in markets shrinks, and speculators can push the stock market around.

With that, is there any predictive value in the either moves in stocks of the past two weeks?  Not likely. No matter what the outcome, your 401k money will continue to flow to Wall Street, and stocks will be bought with that money.  Moreover, central banks have been in control and remain in control. They’ve been responsible for the global economic recovery of the past nine years, and for creating and maintaining relative economic stability. And stable to higher stocks play a big role in the coordinated strategies of the world’s biggest central banks.  Neither the economic recovery, nor the stock market recovery can be credited much to politicians.

If anything, politicians (both parties) have been a drag on recovery, which has lead to the threatening “stagnation forever” malaise that is saddling economies across the globe.  From mis-spending early fiscal stimulus, to ignoring central banks cries for much needed targeted spending programs, they’ve proven to be an impediment in the economic recovery.

In this environment, in the long run, the value of the new President for stocks will prove out only if there’s structural change.  And structural change can only come when the economy is strong enough to withstand the pain.  And getting the economy to that point will likely only come from some big and successfully executed fiscal stimulus.

Now, as we head into tonight’s results, as we’ve been told, a Clinton win remains the clear favorite (a known quantity).  And Trump has always represented the vote that the unknown is better than the known.

This vote for some time has looked very much like the Brexit vote (the UK’s vote to leave the European Union), and the Grexit vote (Greece’s vote against austerity). As with the Trump vote, the buildup to both Grexit and Brexit were accompanied by threats from trusted officials of draconian outcomes for the people.  But as we know, the Greek and British shocked the world by voting for the unknown, over the known.

Let’s take a look at how things looked going into those votes and how it compares to today’s election…

As we headed into the Greek vote in July of last year. It was thought to be a done deal that the Greek people would vote in favor of another bailout package from the European Union (and accept more austerity for fear of an apocalyptic outcome from voting no). The bookmakers put the “yes” vote at 71% chance of occurring. A UK bookmaker paid out those voting “yes” four days before the vote.  The “no” vote won, shocking the world with 61% of the vote.

And then there was Brexit …

The UK vote was about trade, immigration, ability to work and live in other EU countries — perhaps mostly about control and politics.

The bookmakers had the chances of a “leave” vote as slim (at about 70/30 favoring the ‘stay’ camp).  When voting day arrived, the chances of a “leave” vote had dropped to just 25%.  But the British people shocked the world, voting to leave by 52% to 48%.

Going into today’s vote, the chances they’re giving Trump are spot on with the Brexit odds going into the day of the referendum.  Of course, it’s not a popular vote.  The electoral vote creates a bigger hurdle for voting the candidate of the “unkown” in this case.

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November 4, 2016, 4:00pm EST

It was a rough week for global markets.  Across the markets, there was clear evidence of big investors reducing exposure.  The theme was persistently risk-off (which means some money moving out of stocks and into bonds, out of broader commodities and into gold).

Unusually, it had nothing to do with economic data or central banks.

It had everything to with politics.

With the perception that the gap has closed on the presidential race this week, the uncertainty surrounding the outcome has elevated.  And that’s being reflected in some skittishness across markets.  And all we hear from Wall Streeters is that they don’t like uncertainty, and can’t calibrate properly on the potential outcomes on the presidential race might bring — as if they’ve been operating with such certainty and precision for the past eight years.

The reality:  As we’ve seen over and over, throughout the crisis period, the global political environment has been anything but predictable. The economic environment has been anything but predictable.

If we think about all of the events along the way, over the past eight years: we’ve had the near global economic apocalypse, there was Cypress, Greece, the near defaults of Italy and Spain, the debt ceiling sagas, government shutdowns, Russia/Ukraine, threats from North Korea, the Ebola scare, an oil price crash, Brexit, and more.

Each has brought a potential shock to a global environment that was already on very shaky and uncertain footing, within which some semblance of stability and recovery was only present because it was being manufactured and managed carefully by the world’s biggest central banks.

With that, little, if any, credit can be given to the current President for the economic recovery. And it’s unlikely that the next Presidency will move the needle much either, unless it can come with a supportive Congress, to approve big and bold fiscal stimulus.

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September 27, 2016, 4:30pm EST

The debate last night was entertaining.  It’s sad to see how the media manipulates facts and cherry picks quotes to fit their narrative.

But that’s what they do and it ultimately shapes views for voters, unfortunately.

Today, I want to focus on China and Trump’s comments on China’s currency manipulation.  Everyone knows the U.S. has lost jobs to China.  Everyone knows China has become the world’s manufacturer.  But not everyone knows how they did it.

Is it just because the labor is so cheap?  Or is there more to it?

There’s more to it.  A lot more.

China’s biggest and most effective tool is and always has been its currency. China ascended to the second largest economy in the world over the past two decades by massively devaluing its currency, and then pegging it at ultra–cheap levels.

Take a look at this chart …

In this chart, the rising line represents a weaker Chinese yuan and a stronger U.S. dollar.  You can see from the early 80s to the mid 90s, the value of the yuan declined dramatically, an 82% decline against the dollar.  They trashed their currency for economic advantage – and it worked, big time.  And it worked because the rest of the world stood by and let it happen.

For the next decade, the Chinese pegged their currency against the dollar at 8.29 yuan per dollar (a dollar buys 8.29 yuan).

With the massive devaluation of the 80s into the early 90s, and then the peg through 2005, the Chinese economy exploded in size.  It enabled China to corner the world’s export market, and suck jobs and foreign currency out of the developed world.  This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”
Their economy went from $350 billion to $3.5 trillion through 2005, making it the third largest economy in the world.

This next chart is U.S. GDP during the same period.  You can see the incredible ground gained by the Chinese on the U.S. through this period of mass currency manipulation.

And because they’ve undercut the world on price, they’ve become the world’s Wal-Mart (sellers to everyone) and have accumulated a mountain for foreign currency as a result.  China is the holder of the largest foreign currency reserves in the world, at over $3 trillion dollars (mostly U.S. dollars).  What do they do with those dollars?  They buy U.S. Treasuries, keeping rates low, so that U.S. consumers can borrow cheap and buy more of their goods – adding to their mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth (and the cycle continues).

The U.S. woke up in 2005, and started threatening tariffs against Chinese goods unless they abandoned their cheap currency policies.  China finally conceded (sort of).  They agreed to abandon the peg to the dollar, and to start appreciating their currency.

They allowed the currency to strengthen by about 4.5% a year from 2005 through 2013.  That might sound good, but that was a drop in the bucket compared to the double digit pace the Chinese economy was growing at through most of that period.  Still, the U.S. passively threatened along the way, but allowed it to continue.

With that, the Chinese economy has ascended to the second largest economy in the world now – on pace to the biggest soon (though it still has just an eight of the per capita GDP as the U.S.).  But China’s currency is a bigger threat, at this stage, than just the emergence of China as an economic power.   The G-20 (the group of the world’s top 20 economies) has had China’s weak currency policy at the top of its list of concerns for a reason.

The current global imbalances are the underlying cause of the global financial crisis, and China’s currency is at the heart of it.

And without a more fairly valued yuan, repairing those imbalances — those lopsided economies too dependent upon either exports or imports — isn’t going to happen.  It’s a recipe for more cycles of booms and busts … and with greater frequency.

Are big tariffs the answer?  Historically that’s a recipe for disaster, economically and geopolitically.

What’s the solution?  I’ve thought that the Bank of Japan will ultimately crush the value of the yen, as the answer to Japan’s multi-decade economic malaise and as an answer to the stagnant global economic recovery.  It’s an answer for everyone, except China.  A much weaker yen could crush the China threat, by displacing China as the world’s exporter.

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September 26, 2016, 3:45pm EST

All eyes are on the Presidential debate/face-off tonight.  Heading into the event, stocks are lower, yields are lower and the dollar is lower — all a “risk-off” tone.

And the VIX (implied S&P 500 vol/an indicator of uncertainty) has popped higher from the very low levels it had returned to as of Friday.  Speculators are out today making bets on a political firework show tonight, and thus betting on more uncertainty in the outcome and in post-election policy making.

If we step back a bit though, given the difficulties in getting through the legislative process, the biggest potential market influence from the election may be more about the prospects of getting a fiscal stimulus package done, rather than the many promises that are made on an campaign trail.  Both candidates have been out promising a spending package to boost the economy.  And on the heals of a package from Japan, and the unknown risks from Brexit, the idea is becoming more politically palatable.

As we discussed on Friday, the Fed has taken a strategically more pessimistic public view on the economy, in effort to underpin the current economic drivers in place (stability, low rates and incentives to reach for risk).

Following the Fed and BOJ events last week, the 10-year yield is back in the 1.50s and sitting in a big technical level.  This will be an important chart to keep an eye on tomorrow.

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People continue to blame softness in global markets on China. For years, there has been fear and speculation of “hard landing” for the Chinese economy.

When we talk about China, it’s all relative. China was growing at double digit pace for the better part of the past 25 years. Now Chinese growth has dropped to below 7%. That’s recession-like territory for the Chinese economy.

But the Chinese have powerful tools to promote growth. And we expect them to use those tools, sooner rather than later.

As we know their biggest and most effective tool is their currency. They ascended to the second largest economy in the world over the past two decades by massively devaluing their currency, and then pegging it at ultra-cheap levels. It allowed them to corner the world’s export market, sucking jobs and valuable foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”

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Interestingly though, it’s China, most recently, that has been getting hurt by currency. Over the past four years, the Bank of Japan has devalued their currency against the dollar by nearly 40%. And other export-driven emerging market economies have had massive declines in their currencies (Brazil, Mexico, Argentina, Russia). Given that China has actually been appreciating its currency against the dollar for the past 10 years (albeit gradually), they’ve given back a lot of ground on their export advantage.

Source: Reuters, Billionaire’s Portfolio

In the chart above, you can see the yen weakening dramatically against the dollar (the purple line moving higher = stronger dollar, weaker yen). The orange line is the dollar vs. the Chinese yuan. You can see the relative advantage that the BOJ’s QE program has created (the gap between the purple and orange lines). With that, the orange line rising, since 2014, represents China backing off of its pledge to appreciate its currency. They are fighting to preserve their export advantage by weakening the yuan again.

In August, they devalued by less than 2% in a day and global markets went haywire. That move is nothing extreme in currencies, especially an emerging market currency. But given China’s currency history and their policy stance, since 2005, to allow their currency to appreciate under a “managed float” (managing a daily range for the currency), it has markets confused. When people are confused, they “de-risk” or sell.

Now, China will likely continue this path. Our bet is that markets will finally realize that, in the shorter term, this will be good for global growth and good for the health and stability of global financial markets. Better growth in China, at this stage, is good.

Among their other tools to stimulate growth, China has interest rates. While most of the world is pegged at zero rates (or close to it, if not negative) China’s benchmark interest rate is still 4.35%. And their inflation rate is running 1.5%, well below their target of 3%. That’s a recipe for aggressive rate cuts, which would be a boon for the Chinese economy and for the global economy.

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