June 28, 2017, 4:00 pm EST                                                                               Invest Alongside Billionaires For $297/Qtr

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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February 13, 2017, 4:00pm EST

Today we heard from Janet Yellen in the first part of her semi-annual testimony to Congress.  She gave prepared remarks to the Senate today and took questions.  Tomorrow it will be the House.  The prepared statement will be the same, with maybe a few different questions.

Remember, just four months ago, the most important actor in the global economy was the Fed.  Central banks were in control (as they have been for the better part of 10 years), with the Fed leading the way.

The Fed was the ultimate puppet master.  By keeping rates ultra-low and standing ready to act against anything that might destabilize the global economy and threaten to kill the dangerously slow recovery, they (along with the help other major central banks) restored confidence, and created the stability and incentives to drive hiring, investing and spending — which created economic recovery.

When Greece bubbled up again, when oil threatened to shake the financial system, when China’s slowdown created uncertainty, central banks were quick to step in with more easing, bigger QE, promises of low rates for a very long time, etc..  And in some cases, they outright intervened, like when the ECB averted disaster in Italy and Spain by promising to buy unlimited amounts of Italian and Spanish government bonds to stop speculators from inciting a bond market collapse and a collapse of the euro and European Union.

This dynamic of central bank activism has changed.  The Fed, and central bank intervention in general, is no longer the only game in town. We have fiscal stimulus coming and structural change underway that has the chance to finally mend the decade long slump of the global economy.  That’s why today’s speech by the Fed Chair was no longer the biggest event of the week — not even the day.

The scripts has flipped. Where the Fed had been driver of recovery, they now have become the threat to recovery. So the interest in Fedwatching today is only to the extent that they may screw things up.

Moving too fast on interest rate hikes has the potential weaken or even undo the gains that stand to come from the pro-growth policies efforts from the new administration.

Remember, the Fed told us in December that they projected THREE hikes this year.  But keep in mind, they projected FOUR in December of 2015, for 2016, and we only got one. And that was only AFTER the election, and the swing in sentiment regarding the prospects of pro-growth policies.

Remember, Bernanke himself has criticized the Fed for stalling momentum in the recovery by showing too much tightening (i.e. over optimism) in their forecasts.  And he argued that the Fed should give the economy some room to run and sustain momentum, fighting inflation from behind.

On that note, the Fed has now witnessed the bumpy path that the new administration is dealing with, and will be traveling, in implementing policy.  I would think they would be less aggressive now in their view on rate hikes UNTIL they see evidence of policy execution, and a lot more evidence in the data.  Let’s hope that’s the case.

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August 22, 2016, 4:30pm EST

As we head into the end of August, people continue to parse every word and move the Fed makes.  Yellen gives a speech later this week at Jackson Hole (at an economic conference hosted by the Kansas City Fed), where her predecessor Bernanke once lit a fire under asset prices by telegraphing another round of QE.

Still, a quarter point hike (or not) from a level that remains near zero, shouldn’t be top on everyone’s mind.  Keep in mind a huge chunk of the developed world’s sovereign bond market is in negative yield territory.  And just two weeks ago Bernanke himself, intimated, not only should the Fed not raise rates soon, but could do everyone a favor — including the economy — by dialing down market expectations of such.

But the point we’ve been focused on is U.S. market and economic performance.  Is the landscape favorable or unfavorable?

The narrative in the media (and for much of Wall Street) would have you think unfavorable.   And given that largely pessimistic view of what lies ahead, expectations are low.  When expectations are low (or skewed either direction) you get the opportunity to surprise.  And positive surprises, with respect to the economy, can be a self-reinforcing events.

The reality is, we have a fundamental backdrop that provides fertile ground for good economic activity.

For perspective, let’s take a look at a few charts.

We have unemployment under 5%.  Relative to history, it’s clearly in territory to fuel solid growth, but still far from a tight labor market.

What about the “real” unemployment rate all of the bears often refer to.  When you add in “marginally attached” or discouraged job seekers and those working part-time for economic reasons (working part time but would like full time jobs) the rate is higher. But as you can see in the chart below that rate (the blue line) is returning to pre-crisis levels.

In the next chart, as we know, mortgage rates are at record lows – a 30 year fixed mortgage for about 3.5%.

Car loans are near record lows.  This Fed chart shows near record lows.  Take a look at your local credit union or car dealer and you’ll find used car loans going for 2%-3% and new car loans going for 0%-1%.

What about gas?  In the chart below, you can see that gas is cheap relative to the past fifteen years, and after adjusted for inflation it’s near the cheapest levels ever.

Add to that, household balance sheets are in the best shape in a very long time.  This chart goes back more than three decades and shows household debt service payments as a percent of disposable personal income.

As we’ve discussed before, the central banks have have pinned down interest rates that have warded off a deflationary spiral — and they’ve created the framework of incentives to hire, spend and invest.  You can see a lot of that work reflected in the charts above.

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Intervention has been the common theme we’ve discussed for the better part of the past two months.  And this week, that theme is heating up.

We’ve explained why oil at $30 has posed a threat to the global financial system and global economy. And we explained the parallels of the systemically threatening (current) oil price bust and the 2007-2008 housing bust.   But we also noted the key differences, and why and how this “cheap oil” problem could be easily solved, unlike the housing bust.

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