October 30, 2017, 4:00pm EST                                           Invest Alongside Billionaires For $297/Qtr

Since the election, almost a year ago, we’ve talked about the great passing of the torch, from a monetary policy-driven global economic recovery (which proved dangerously weak and shallow) to a fiscal stimulus-driven recovery (which finally gives us a chance to return to trend growth).

Now, almost a year in, policy execution on the fiscal stimulus front is moving. The Fed has hiked rates three times. In the past week, the ECB has signaled the end of QE in Europe is coming. And this Thursday the Bank of England is expected to raise rates for the first time in a decade.

Again, if you can block out the day-to-day noise, this is all confirming the exit of the post-crisis deleveraging era of the past decade – it’s all playing out fairly close to script.

With that, I want to revisit my note from early January of this year, which argues the case for this “passing of the torch” and emphasizes the value of having some bigger picture perspective…

From my Market Perspectives piece: JANUARY 18, 2017

“Two weeks ago, in my daily Market Perspectives note, I talked about the five reasons, even at Dow 20,000, that stocks look extraordinarily cheap as we head into 2017.

Today I want to talk a bit more about the idea that the timing is right for a pop in economic growth.

For the past ten years, we’ve heard experts pontificate about ‘what inning we’re in,’ during the crisis era. I think there are good reasons to believe the game is over, and it was ended on election night–that was the catalyst.The policy responses and regime shift have more to do with the evolution of the global financial crisis and human psychology, than it does with the character behind it all.

I want to focus on a study from Carmen Reinhart and Kenneth Rogoff – the two economists that laid out the script, back in 2008, for precisely what the world has experienced over the past ten years. Fortunately, Bernanke was a believer in it. That’s why the Fed kept its foot on the gas, even in the face of a lot of scrutiny from people that blamed the Fed on extending the crisis.

Reinhart and Rogoff studied eight centuries of financial crises and they found striking commonalities in the aftermath. They found that financial crises tend to lead to sovereign debt crises. And sovereign debt crises tend to be contagious. Clearly, we’ve seen it.

Reinhart went on to look at the 15 severe financial crises since World War II and found that they were typically driven by credit bubbles. Check.

Importantly, they found that the credit bubble typically took as long to unwind (or de-lever) as it took to build. And the deleveraging period tends to mean ultra-slow economic activity as consumers, businesses and governments are paying down debt, not spending. And because of this, the research suggested that throughout this ten-year deleveraging period we should expect: 1) economic growth will trend at lower levels than pre-crisis growth, 2) housing prices will remain anywhere from 20% to 50% below peak levels and 3) unemployment will hover around 5% higher than pre-crisis levels. Check, check and check.

In the current case, Reinhart and Rogoff said the credit bubble was built over about a decade. That means we all should all have expected a decade long deleveraging period.

Now, with that, you can mark the top in the bubble as the 2006 housing top, or in 2007 when we the first big mortgage company and Bear Stearns hedge fund failed, or 2008, when consumer credit peaked. We’re somewhere in the middle of this window now and major turning points in markets tend to come with significant events. It’s a fair argument to make that the Trump election was a significant event for the world. With that, we may find that the crisis period officially ended with the election, when the history books look back on this current period of time.’

So that was my take back in January. It’s not easy to watch the process play out. It can be slow and ugly. But we’re seeing the reaction in stocks to this thesis – now at 23k in the DJIA. And we’re getting some momentum building on the policy making side that further supports this structural turning point is here (or has been here).

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October 20, 2017, 4:00 pm EST

Interest rates and stocks are on the move today (higher), following the vote last night in the Senate to pass the budget.  This opens the way for an approval on the tax plan.

​As stocks continue to print new record highs, so does policy execution for the Trump administration (the latter the cause, the former the effect).

​So we’re seeing more and more of the pro-growth plan fall into place.  Markets have been telling us this (betting on this) for a while.

​Remember, we talked about the prospects that hurricane aid could kickstart the Trump infrastructure plan (proposed at $1 trillion over 10 years). There’smore progress on that front in the past week.

Among the pillars of Trump’s growth plan, this one (infrastructure/government spending) looked to be among the long shots given the politicians can always play the debt card to fight it.  But then the hurricanes hit.

After Irma rolled through Florida the estimated damages for both Harvey and Irma were estimated at $200 billion.  Then Hurricane Maria decimated Puerto Rico.  Estimated damages there are now $95 billion.  I’ve thought we’ll ultimately see a 12-figure package out of Congress in response to the hurricanes.  The ultimate federal aid on Katrina was $120 billion.

In September Congress approved $15 billion in aid for hurricane victims.  They just approved another $35 billion!   This quiet government spending piece, that will substantially grow from here, may turn out to be the most powerful in terms of driving wage growth and economic growth.

​So tax reform and infrastructure, two big pillars of Trumponomics continue to progress.  And on the deregulation front, Trump has already been aggressively peeling back regulations that have crushed some industries, while ramping UP regulatory scrutiny on Silicon Valley, as we discussed yesterday.

​Some of the top venture capitalists in Silicon Valley said this week that they expect to see some failures this year of startups once valued north of a billion-dollar. That’s a result of less money flowing that direction, less government favor, and more money flowing back into publicly traded stocks.

​​With that in mind, let’s take a look at the chart on Amazon to finish the week …

​We talked about Amazon’s miss on earnings back on July 27th as the catalyst to take profit on the FAANG trade (the loved tech giants).  The top continues to hold in Amazon.

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By Bryan Rich 

October 16, 2017, 4:00 pm EST

On Friday we talked about the biggest market movers: oil, copper and iron ore.

​Oil was up 5.3% on the week.  Copper was up 4%.  And iron ore reversed sharply on Friday to jump 6%.

​All were stronger again today.

​Remember, China is the world’s largest consumer of commodities.  And the import data late last week out of China showed hotter imports in copper and copper products (26.5% growth, year over year), iron ore (record high imports, up 10% from a year earlier), and crude oil imports hit the second highest level on record (up 12% year over year).

​This leaves us wondering:  Is China’s economy doing better than most think?  And/or is this China hoarding commodities again?

At the depths of the financial crisis, China opportunistically stepped in and started gobbling up global commodities on the cheap (at the time).

By Bryan Rich 

October 13, 2017, 3:30 pm EST

Yesterday we talked about the case for commodities and the opportunity for a rotation into commodities stocks.

The valuation of commodities relative to stocks has only been this disconnected (stocks strong, commodities weak) twice, historically over the past 100 years: at the depths of the Great Depression in the early 30s and toward the end of the Bretton Woods currency system.

​That supports the case that we’re in the early days of a bull market in commodities, especially considering where we stand in the global economic recovery, underpinned by the “reflation” focus at both the monetary and fiscal policy levels.  It’s a recipe for hotter demand for commodities.

With that, let’s take a look at a few charts as we close the week.

Copper

​We talked about copper yesterday.  This continues to ring the bell, alerting us that better economic growth is coming – maybe a boom.

​Copper is up 6.5% in the past two weeks, back of $3 and closing in on the highs of the year – which is a three year high.  And remember, we looked at the potential break of this big six-year downtrend back in August. That has broken, retested and confirms the trend change.

Crude Oil

​We talked about the fundamental case for oil this week.  And we looked at the technical case, as it made a brief test of the 200 day moving average and quickly bounced back.  It’s up about 4% on the week.  

We have this inverse head and shoulder (in the chart below) that projects a move back to the low $80s.  And as part of that technical picture, we’re setting up for a break of a big two-year trendline that should open the doors to a move back into the $70+ oil area. 

​​Iron Ore

​Iron ore was the biggest mover of the day – up 6% today.  This has been a deeply depressed market through the post-financial crisis era.  In addition to the broad commodities weakness, iron ore prices have suffered from the dumping of poor quailty iron ore by Chinese producers. Those times seem to be changing.

​This week there was a fraud claim on a big Japanese steel maker for fudging it’s quality data.  Keep an eye on this one as it could lead to more, and could lead to a supply disruption in industrial metals.

Then today we had Chinese data that showed record imports of iron ore.  This is a signal that there’s both an envirionmental movement and an anti-dumping movement against low grade iron ore that has been influencing supply and prices (and crushing producers).  This big Chinese data point is also in line with the message copper is sending: perhaps the Chinese economy is doing better than most think.

With that, let’s take a look at a few charts as we close the week. The valuation of commodities relative to stocks has only been this disconnected (stocks strong, commodities weak) twice, historically over the past 100 years: at the depths of the Great Depression in the early 30s and toward the end of the Bretton Woods currency system.

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October 10, 2017, 3:00 pm EST

Crude oil was the biggest mover of the day across global markets, up almost 3%, and back above the $50 level.

Though oil has been stuck, oscillating around this $50 mark for some time, we’ve talked about the prospects for much higher oil prices.  So, when?

Remember, back in May I spoke with one of the best research-driven commodities funds on the planet, led by the star commodities investor Leigh Goehring and his long-time research head Adam Rozencwajg.  They do some of the most thorough supply/demand work on oil and broader commodities.

Earlier this year, they were pounding the table on the fundamental case for $100 oil again.  Since then, as oil prices haven’t complied.  With that, we’ve seen Andy Hall’s departure from the market, of one of the biggest oil bulls, and one of the best and most successful tactical traders of oil in the world.

Meanwhile, the fundamentals have continued to build in favor of much
higher oil prices.  We’ve seen supply drawdown for the better part of the past seven months – to the tune of more than $60 million barrels of oil taken out of the market.

I checked back in with Goehring and Rozencwajg and they are now more bullish than before.  They say demand is raging, supply is faltering, and the world has overestimated what the shale industry is capable of producing – and the market is leaning, heavily, the wrong way (i.e. “maximum bearishness”).  They think we’ve now hit the tipping point for prices – where we will see the price of oil accelerate.

They’re calling for $75-$110 oil by early next year, based on their historical analysis of price and inventory levels.

We’ll talk more about their work on the oil market in the coming days, and their very interesting work on the broader commodities markets – both of which support the themes we’ve been discussing in recent months.

September 19, 2017, 6:00 pm EST              Invest Alongside Billionaires For $297/Qtr

With a Fed decision queued up for tomorrow, let’s take a look at how the rates picture has evolved this year.

The Fed has continued to act like speculators, placing bets on the prospects of fiscal stimulus and hotter growth. And they’ve proven not to be very good.

​Remember, they finally kicked off their rate “normalization” plan in December of 2015.  With things relatively stable globally, the slow U.S. recovery still on path, and with U.S. stocks near the record highs, they pulled the trigger on a 25 basis point hike in late 2015.  And they projected at that time to hike another four times over the coming year (2016).

​Stocks proceeded to slide by 13% over the next month.  Market interest rates (the 10 year yield) went down, not up, following the hike — and not by a little, but by a lot.  The 10 year yield fell from 2.33% to 1.53% over the next two months.  And by April, the Fed walked back on their big promises for a tightening campaign.  And the messaging began turning dark.  The Fed went from talking about four hikes in a year, to talking about the prospects of going to negative interest rates.

​That was until the U.S. elections.  Suddenly, the outlook for the global economy changed, with the idea that big fiscal stimulus could be coming.  So without any data justification for changing gears (for an institution that constantly beats the drum of “data dependence”), the Fed went right back to its hawkish mantra/ tightening game plan.

​With that, they hit the reset button in December, and went back to the old game plan.  They hiked in December.  They told us more were coming this year.  And, so far, they’ve hiked in March and June.

​Below is how the interest rate market has responded.  Rates have gone lower after each hike.  Just in the past couple of days have, however, we returned to levels (and slightly above) where we stood going into the June hike.

But if you believe in the growing prospects of policy execution, which we’ve been discussing, you have to think this behavior in market rates (going lower) are coming to an end (i.e. higher rates).

As I said, the Hurricanes represented a crisis that May Be The Turning Point For Trump.  This was an opportunity for the President to show leadership in a time people were looking for leadership.  And it was a chance for the public perception to begin to shift.  And it did. The bottom was marked in Trump pessimism.  And much needed policy execution has been kickstarted by the need for Congress to come together to get the debt ceiling raised and hurricane aid approved.  And I suspect that Trump’s address to the U.N. today will add further support to this building momentum of sentiment turnaround for the administration. With this, I would expect to hear a hawkish Fed tomorrow.

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September 18, 2017, 4:30 pm EST              Invest Alongside Billionaires For $297/Qtr

As I said on Friday, people continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.

We constantly hear about how the fundamentals don’t support the move in stocks.  Yet, we’ve looked at plenty of fundamental reasons to believe that view (the gloom view) just doesn’t match the facts.

Remember, the two primary sources that carry the megahorn to feed the public’s appetite for market information both live in economic depression, relative to the pre-crisis days.  That’s 1) traditional media, and 2) Wall Street.

As we know, the traditional media business, has been made more and more obsolete. And both the media, and Wall Street, continue to suffer from what I call “bubble bias.”  Not the bubble of excess, but the bubble surrounding them that prevents them from understanding the real world and the real economy.

As I’ve said before, the Wall Street bubble for a very long time was a fat and happy one. But the for the past ten years, they came to the realization that Wall Street cash cow wasn’t going to return to the glory days.  And their buddies weren’t getting their jobs back.  And they’ve had market and economic crash goggles on ever since. Every data point they look at, every news item they see, every chart they study, seems to be viewed through the lens of “crash goggles.” Their bubble has been and continues to be dark.

Also, when we hear all of the messaging, we have to remember that many of the “veterans” on the trading and the news desks have no career or real-world experience prior to the great recession.  Those in the low to mid 30s only know the horrors of the financial crisis and the global central bank sponsored economic world that we continue to live in today. What is viewed as a black swan event for the average person, is viewed as a high probability event for them. And why shouldn’t it?  They’ve seen the near collapse of the global economy and all of the calamity that has followed. Everything else looks quite possible!   

Still, as I’ve said, if you awoke today from a decade-long slumber, and I told you that unemployment was under 5%, inflation was ultra-low, gas was $2.60, mortgage rates were under 4%, you could finance a new car for 2% and the stock market was at record highs, you would probably say, 1) that makes sense (for stocks), and 2) things must be going really well!  Add to that, what we discussed on Friday:  household net worth is at record highs, credit growth is at record highs and credit worthiness is at record highs.

We had nearly all of the same conditions a year ago.  And I wrote precisely the same thing in one of my August Pro Perspective pieces.  Stocks are up 17% since.

And now we can add to this mix:  We have fiscal stimulus, which I think (for the reasons we’ve discussed over past weeks) is coming closer to fruition.

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September 15, 2017, 4:00 pm EST              Invest Alongside Billionaires For $297/Qtr

We’ve past yet another hurdle of concern for markets this past week.  Last Friday this time, we had a potential catastrophic category 5 hurricane projected to decimate Florida. 

​Though there was plenty of destruction in Irma’s path, the weakening of the storm through the weekend ended in a positive surprise relative what could have been.

​So we end with stocks on highs.  And remember, we’ve talked over past month about the quiet move in copper (and other base metals) as a signal that the global economy (and especially China) might be stronger than people think.  Reuters has a piece today where they overlay a chart of economist Ed Yardeni’s “boom-bust barometer” over the S&P 500.  It looks like the same chart.

What does that mean? The boom-bust barometer measures the strength of industrial commodities relative to jobless claims.  Higher commodities prices and lower unemployment claims equals a rising index as you might suspect (i.e. suggesting economic boom conditions, not bust).  And that represents the solid fundamental back drop that is supporting stocks.

​With that in mind, consider this:  In the recent earnings quarter, earnings and revenue growth came in as good as we’ve seen in a long time for S&P 500 companies. We have 4.4% unemployment. The rise in equities and real estate have driven household net worth to $94 trillion – new record highs and well passed the pre-crisis peaks (chart below).

Now, people love to worry about debt levels.  It’s always an eye-catching headline.

But what happens to be the key long-term driver of economic growth over time?  Credit creation (debt).  The good news: The appetite for borrowing is back.  And you can see how closely GDP (the purple line, economic output) tracks credit growth.

But as I’ve said, it has proven to have its limits.  We need fiscal stimulus to get us over the hump – on track for a sustainable recovery.  And we now have, over the past two weeks, improving prospects that we will see fiscal stimulus materialize — i.e. policy execution in Washington.

​To sum up:  People continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.

August 21, 2017, 6:00 pm EST                                                               Invest Alongside Billionaires For $297/Qtr

After a week away, I return to markets that look very similar to where we left off 10 days ago.  Stocks lower.  Yields lower.  The dollar lower. But commodities higher!

Now, this takes into account, another week of political volatility in Washington.  It takes into account another week of uncertainty surrounding North Korea.

What’s important here, is distinguishing between a price correction and a real thematic change.  If we’re not making new record highs in stocks every day, and stocks actually retrace 5% or so, does that represent the derailing of the slow but steady economic recovery and, as important, the dismissal of potential policy fuel that could finally lift us out of the post-crisis stall speed growth regime?

The narrative in the media would have you believe the answer is yes.

But the reality is, the economic recovery is stable and continuing.  The policy stimulus has been a tough road, but continues to offer positive influence on the economy.  And there are strong technical reasons to believe we’re seeing the early stages of a price driven correction in stocks.

Remember, we looked at the big technical reversal signal (the “outside day”) back on August 8th.  That was the technical signal, and it was about as good a signal as it gets.  The Dow had been plowing to new highs for eleven consecutive days — culminating in another new record high before.  And the last good ‘outside day’ in the S&P 500 was into the rally that stalled December 2, 2015 and it resulted in a 14% correction.

Here’s another look at that chart, plus the first significant trend line that we discussed in my last note, August 11th.

I thought this line would give way, which it has today, and that we would see a real retracement, which should be a gift to buy stocks.  If you’re not a highly leveraged hedge fund, a 5%-10% retracement in broader stocks is a gift to buy.  Remember, the slope of the S&P 500 index over time is UP.

Prior to the reversal signal in stocks, we had already addressed the influence of the FAANG stocks.  And I suggested the miss in Amazon earnings was a good enough excuse to cue the profit taking in what had been a very lucrative trade in the institutional investment community.  Amazon is now down 12% from the highs of just 18 days ago.

What should give you confidence that the economic outlook isn’t souring? Commodities!

The base metals, as we’ve discussed in recent weeks, continue to move higher and continue to look like early stages of a bull market cycle — which would support the idea that the global economic recovery is not only on track, but maybe better than the consensus market view (which seems to be still unconvinced that better times are ahead).

The leader of the commodities run is copper.  We looked at this chart in my last note (Aug 11).  I said, “this big six-year trend line in copper (below) will be one to watch closely.  If it breaks, it should lead the commodities trend higher.”

Here’s an updated chart of Copper.  This trend line was broken today.

​
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