economy | Billionaire's Portfolio

Central Banks Remind Us Of The Post-Crisis Script: ‘Whatever It Takes’

January 24, 5:00 pm EST

With two big central bank meetings behind us this week, and the Fed on deck for next week, let’s remind ourselves of where the global central banks stand, more than 10 years after the crisis.

There’s one thing we know, following the events of the past decade: The global central banks will do “whatever it takes” to preserve stability and manufacture economic growth. As long as global economies remain interconnected (which they are), this is the script they (global central banks, in coordination) will follow. They crossed the line long ago. There’s no turning back.

So, with all of the continual talk in past years about another big shock or “shoe to drop,” people have failed to acknowledge the key difference between the depths of the financial crisis and now. Back then, we didn’t know how policymakers would respond. That’s a lot of uncertainty. Now we know. They will change the rules when they need to. That removes a lot of uncertainty.

With this in mind, remember on January 4th, in response to an ugly December for the stock market, the Fed marched out Bernanke, Yellen and Powell to walk back on the tightening cycle. For a world that was expecting four rote rate hikes this year, that was an official response – effectively easing, intermeeting.

Next up, the Bank of Japan. They met this week. With the ECB now done with QE, the BOJ is now the lone global economic shock absorber. Not only have they been executing on their massive QQE plan since 2013, in 2016 they crafted a plan that gave them greenlight to do unlimited QE as long as their 10-year government bond yield drifted above the zero line. So, as global yields pull Japanese yields higher, the BOJ responds by buying bonds in unlimited amounts to push it all back down. That has been the anchor on global interest rates. And given that they see inflation continuing to run well below their target of 2%, through 2020, the BOJ will be printing for the foreseeable future (remaining that anchor on global interest rates).

What about Europe? A few months ago, some thought the ECB might be following the Fed footsteps — with a first post-QE rate hike by the middle of this year. Today, Draghi put that to bed, saying risks are now to the downside, and that the market has it right pricing in a rate hike for next year – assuming all goes well. But Draghi also wants us to know that the ECB stands ready to act if the economy falters (i.e. they can/will go the other way).

So, for perspective on where the global economy stands, we still have central banks pulling the levers to keep it all together. That’s why Trump’s big and bold fiscal stimulus and structural reform was/is absolutely necessary. And that’s why the rest of the world will likely have to follow the U.S., with fiscal stimulus, if we are to ultimately and sustainably put the crisis period behind us.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

How China Became The Most Dangerous Country In The World

January 22, 5:00 pm EST

China reported the slowest growth since 1990 on Monday (+6.4%).

This an interesting period to reference because, at that point, China was in the latter stages of executing on an economic plan. At the core of that plan was currency manipulation — i.e. devaluing it’s currency (i.e. trashing it) so that they would have a distinct advantage on price when competing for world exports (i.e. they would always be the cheapest).

It worked. The Chinese economy grew at an average of 12% the following five years (1991-1995). From 1991 to 2009, leading up the global financial crisis, China grew at 10.5% annual rate. That’s 18-years of double-digit annualized growth, on average.

That’s why the Chinese economy has ascended from a $350 billion economy to a $12 trillion economy since 1990.

Here’s what that looks like in a chart ….

Thanks to decades of uncontested currency manipulation, China is now the second largest economy in the world and on pace to be the biggest soon (though it still has just an eighth of the per capita GDP as the U.S.).

Why does it matter?

When they maintain a cheap currency, to undercut the world on price, they become the world’s sellers to everyone. That means they accumulate a mountain of foreign currency as a result (which they have). China is the holder of the largestsforeign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars? They buy our Treasuries, which keeps our rates low, so that U.S. consumers can borrow cheap and buy more of their goods — adding to China’s mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth. And so the cycle goes.

This has proven to be a recipe for booms and busts (big busts), and a destructive global wealth transfer.

So coming out of a decade long global economic slog, U.S. growth (driven by fiscal stimulus) has put us in a position of strength to negotiate reform in China.

An economy running at 6% in China is recession territory and makes them vulnerable to an uprising against the regime. And trade tariffs put more and more downward pressure on the growth number. That’s why they’ve been willing to talk. Here’s what President Xi said yesterday about the ruling party’s outlook for retaining power in China: “The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment … The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Maybe The Real Economic Expansion Is Just Beginning

January 8, 5:00 pm EST

The expectations have been dialed down dramatically over the past few months for markets and the economy.

If indeed it’s all detached from reality, as the fundamentals would suggest, how might markets look if we have another 3%+ year growth in the U.S. in 2019, and if the weight of the China trade dispute lifts, and emerging market growth rebounds?

My guess: stocks and commodities will be much, much higher by year end.

For stocks, Q4 earnings season kicks off next week with the banks. Given the deterioration in sentiment last quarter, the estimates on earnings have been dialed down. We’ve gone from a full year of earnings growth north of 20% (in 2018) to earnings growth expectations in 2019 at just 7%. That sets up for positive earnings surprises this year. And at 14 times next year’s earnings, the market is already dirt cheap — better earnings would make stocks even cheaper.

As for commodities, the economic expansion has been called “late cycle” by many, but commodities haven’t participated, as you can see in the chart below.

What if this chart tells us that the decade that followed the financial crisis was indeed a depression, and central banks were only able to manufacture enough economic economic activity to buffer the pain (not a real economic expansion)? And now, instead of at the tail end of one of the longest economic expansions on record, we’re in the early stages of a real expansion, driven by fiscal policies and structural reform that has started in the U.S. and will be implemented abroad (Europe, Japan, China).

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

U.S. Steelmakers That Should Win From ‘The Wall’

January 7, 5:00 pm EST

The Fed sent a message to markets on Friday that they will pause on rates hikes, if not stand ready to act (i.e. cut rates or stop shrinking the balance sheet), unless market conditions improve.

With that support, stocks continue to rebound. But as the market focus is on stocks, the quiet big mover in the coming months might be commodities.

Over the weekend, the President confirmed that the $5 billion+ border wall would be made of steel — produced by U.S. steel companies. Add to that, it’s fair to expect that the next item on the Trumponomics agenda, will be a big trillion-dollar infrastructure spend (an initiative believed to be supported by both parties in Congress).

Trump has also threatened to move forward with the wall under an executive order, citing national security. With that, the execution on the wall, regardless of the state of negotiations on Capitol Hill should be coming sooner rather than later.

Let’s take a look today at a few domestic steel companies that should benefit.

Nucor Corp (NUE)

Nucor corp is the largest steel producer in the United States.

U.S. Steel (X)U.S. Steel is the second largest domestic steel producer.

Cleveland-Cliffs (CLF)Cliffs is the largest supplier of iron units to North American steel mills.

As you can see, these stocks all benefited early on (post election) on the prospects of Trump’s America First economic plan. But, like the broader market, these stocks are all well off of the 2018 highs now — driven by the intensified trade dispute with China over the past year, the uptick in global economic risks, and the concern over Trumponomics policy execution with a split Congress. They look very, very cheap considering the outlook for domestic steel demand.

Disclosure: We are long Cliffs (CLF) in our Billionaire’s Portfolio.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

The Fed Has Just Reinstated The Put For Stocks

January 4, 5:00 pm EST

Stocks had a huge bounce today.

And it was driven by: 1) the central bank in China stepping in with an injection of over $100 billion in liquidity into the economy through a cut to the bank reserve requirement ration, and 2) the three most powerful central bankers in the world (over the past 10 years) sitting on stage together and massaging market sentiment on the path of interest rates.

We entered the year with the idea that the Fed would need to walk back on its rate hiking path this year (possibly even cutting, if the stock market environment persisted). And today, just days into the new year, we get the Fed Chair Powell, former Fed Chairs Yellen and Bernanke telling us that the Fed is essentially done of the year, unless things improve.

Remember, last year was the first since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). The culprit for such an anomaly: An overly aggressive Fed tightening cycle in a low inflation recovering economy. The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%). Now, we’re getting the Fed standing down, and committing to “responsiveness to the data and markets.”

Yellen voluntarily drew the comparison to today to early 2016 – where the Fed had to respond to sour markets that were beginning to feed into the economy.

In 2016, the oil price crash prompted a coordinated response by global central banks to avert another financial crisis. For the Fed’s part, they took two of the four projected rate hikes they had guided for 2016 off of the table (effectively easing). This coordinated easing from global policymakers put a bottom in stocks and oil in early 2016. Oil doubled by the end of the year. Stocks finished 2016 up 25% from the oil-price crash induced lows.

Here’s a look at the chart on oil today…

You can see this big trendline that represents the plunge from $76 has broken today.

And here’s a look at stocks …

We broke a big level today on the way up in the S&P 500 (2520) and it looks like a V-shaped recovery is underway, to take us back to where stocks broke down on December 3rd. That would be 12% from current levels.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Market Decline Is Geopolitical, Not Economic

December 21, 5:00 pm EST

As we head into the holidays and the end of the year, let’s take a look at the 2018 performance for the world’s biggest asset classes, currencies and commodities.

As you can see, there’s a lot of red. Global stocks are down. Bonds are down. Major commodities, down. Gold, down. Foreign currencies, down.

Now, as we’ve discussed, major moves in markets are often triggered by a very specific catalyst, and then prices tend to drive sentiment change, and sentiment then tends to exacerbate the move in markets.

There are always plenty of stories, at any given time, that can sound like rational explanations to fit to the price. In the case of the declines across asset classes this year, we’ve heard many viewpoints from very smart and accomplished investors over the past week, with concerns about the Fed, debt, deficits, slowdown, the end of an expansionary cycle, etc.

With all of this said, often times the driver behind these moves in markets is specific capital flows (forced liquidations), not an economic narrative. With that, in rear view mirror, a lot of times (historically) all of the pontifications surrounding markets like these end up looking very silly.

For example, let’s take a look at the run-up in oil prices back in 2007-08. Oil prices ran from $50 to almost $150 in about 18 months. Everyone was telling the world was running out of oil — “peak oil.” Did everyone get supply and demand so wrong that the market was adjust with a three-fold move that quickly?

The reality: the price of oil was being driven by nefarious activities (manipulation). A major oil distributor was betting massively on lower oil prices and ran out of cash to meet margin requirements, as they were consequently squeezed (forced to liquidate) by predatorial traders that pushed the market higher. Among the predatorial traders, the largest oil trading company in the world, Vitol, was found to have been essentially controlling the oil futures market. When the CFTC (the regulators) finally came knocking to investigate, that was the top in oil prices.

In the case of recent declines, the catalyst looks to be geopolitical (not economic), which then has given way to an erosion in sentiment (which can become self-fulfilling).

The geopolitics: We’ve talked about the timeline of the top in stocks back in January, and how it aligns perfectly with the release of very wealthy Saudi royal family members and government officials, after being detained by the Crown Prince for three months on corruption charges. And then the decline from the top on October 3rd (both stocks and oil prices) aligns, to the hour, with the news that the Crown Prince would be implicated in the Khashoggi murder.

These two events look like clear forced liquidations by the Saudis to retrieve assets invested in U.S. (and global) markets (assets that are vulnerable to asset seizures or sanctions).

Beyond this selling, we also have a party that might have an interest in seeing the U.S. stock market lower: China. Trump has backed them into a corner with demands they can’t possibly fully agree to. If they did, their economy would suffer dramatically, and the ruling party would be highly exposed to an uprising. Could China be behind the persistence in the selling. Quite possibly.

Bottom line: The lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Why This Looks Like 1994

December 20, 5:00 pm EST

In recent days we’ve discussed the parallels between this year and 1994. In ’94 the Fed was hiking rates into a low inflation, recovering economy.

The Fed has done the same this year, methodically raising rates into a low inflation, recovering economy. And like in 1994, the persistent tightening of credit has sent signals that the Fed is threatening economic growth. Asset prices have swooned, and we have a world where cash is the best performing asset class (just as we experienced in 1994).

But remember, the Fed was forced to stop and reverse by early 1995. Stock prices exploded 36% higher that year.

With this in mind, over the past couple of weeks, several of the best investors in the world have publicly commented on the state of markets.

Among them, was billionaire Paul Tudor Jones. Jones is one of the great global macro traders of all-time. He’s known for calling the 1987 crash, where he returned over 125% (after fees). And he’s done close to 20% a year (again, after fees) spanning four decades.

Let’s take a look at what Jones said in an interview on December 10th …

He said the Fed has gone too far (tightened too aggressively). But he thinks the Fed is near the end of its tightening cycle.

With that, he expected to see more swings in stocks. He said he thinks we could be down 10% or up 10% from the levels of December 10th. But historically when the Fed ends a tightening cycle, after going too far, he says it has been a great time to be in the stock market.

The sentiment that the Fed has gone “too far” increased dramatically across the market this week — in the days up to yesterday’s Fed meeting. As such, because the Fed followed through with another hike yesterday, and telegraphed more next year, stocks continued to slide today. In fact, stocks have now/already declined 9.4% from the levels where Paul Tudor Jones made his comments about down 10%/up 10%. Again, he made those comments just 10 days ago.

With the above in mind, here’s what he said he would do if he saw itdown 10%: “I’m going to buy the hell out of ten percent lower, for sure. To me, that’s an absolute lay-up.”

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Will The Fed Respond To Stocks?

December 17, 5:00 pm EST

As I said on Friday, stocks clearly have a significant influence on confidence. And confidence ultimately feeds into economic activity.

So, stocks matter.

On that note, the slide in stocks has started to inflict some damage. The consensus view surrounding stocks and the economy seems to have rapidly deteriorated over just the past week.

As you can see in the chart below of stocks, we touched the February correction lows late in the day today.

This is all setting up for a very big Fed decision on Wednesday. The Fed has hiked three times this year. They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns). And it’s the first time since 1994 that cash has been the highest returning asset class.

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recovering economy — in anticipation that inflation would quicken. It didn’t happen. They ended up choking off growth. The scenario this time looks very similar. The Fed paused back early 1995, and then ended up cutting rates. Stocks boomed, returning 36% on the year.

Also, noteworthy, oil prices closed below $50 today. As I’ve said on the way down, the Fed doesn’t like to admit that they factor in oil prices in their inflation view, but their actions (historically) tell a different story. They have a history of moving when oil moves, because material adjustments in oil prices matter (up and down for inflation). And we’ve just had a big one (down).

The last time oil had a dramatic fall (2016), re-igniting deflationary forces through the global economy, global central banks responded. The Bank of Japan intervened in the currency markets (which likely resulted in buying dollars/selling yen, and buying oil with those dollars). China followed with stimulative policies. And the Fed responded by withdrawing guidance of three rate hikes that year (effectively easing).

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Stocks Trading On Fear, Not Reality

November 16, 5:00 pm EST

Stocks end the week on a strong note.

We’ve talked all week about the catalysts to fuel the continuation of recovery in the stock market. The Fed’s signalling that their rate normalization program is in the final steps was a big one. We’ve also possibly cleared the overhang of the potential for broad sanctions on the Saudi government. And now we’re getting movement on the China/U.S. trade negotiations.

Again, just in the past few days we’ve cleared a lot of the fog that has been hanging over stocks.

With that, as we head into the weekend, let’s take a look at a few charts …

On Wednesday, we looked at this chart above. This big retracement level was setting up nice, technically, for another leg higher in the post correction recovery for stocks. It looks like we’re getting it.

And I continue to think this may all end in a sharp V-shaped recovery. In the chart below, you can see what the slope of that move may look like.

The stock market fears are driven by “what-ifs.” Meanwhile the reality (the “what is”) is clearly supportive of much higher stock prices: strong economic growth, subdued inflation, strong corporate earnings and cheap valuations.

Have a great weekend!

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

Fed Signals End Of Rate ‘Normalization’

November 15, 5:00 pm EST

One of the spots weighing on the market has been the Fed’s persistent increase in interest rates. With that, and with some soft spots showing in the global economy and a more challenging policymaking environment ahead in Washington, we were watching Fed Chair Powell’s remarks very closely late yesterday (after the market close) for some signalling that a pause on rate hikes might be coming.

Unlike past Fed heads, Powell is a plain spoken guy. And he tends to be very clear in his messaging. With that, he didn’t seem to have an agenda for sending a clear signal to markets yesterday. But he did have some dovish takeaways. He said they are at the point where they have to take seriously the risk of moving too far and stifling the recovery and not moving far enough to manage inflation. On that note, he acknowledged that the level of interest rates are weighing on the house market. And he said signs of a global slowdown are concerning. So, he tells us they’re watching the data closely for next moves, and then he tells us some data is suggesting slowing.

Now, it’s common for other Fed governors to be out talking, between meetings, in an effort to set market expectations. With that said, the bigger signalling came today. The Atlanta Fed President and a voting Fed governor on monetary policy (Bostic), had a prepared speech in Madrid today. He said the Fed is in the final steps of getting to the neutral rate (which means neither accommodative nor restrictive). He said that’s where they “want to be” and then said he thinks the neutral rate is between 2.5% and 3.5%. Rates are currently 2%-2.25% (almost the low end of his neutral range). And he said they should proceed cautiously with rate increases. Bottom line: These statements suggest the Fed could be done with the ‘normalization’ process of rates after one or two more hikes.

So, we were looking for the Fed to use the weakening global growth data this week (from Japan and Europe), some softer global inflation data, and the changes in Congress, as an excuse to dial down the market’s expectations for the path of rates. It was subtle, but I think we’ve seen it.

Indeed, stocks ripped higher on Bostic’s comments this afternoon. The Dow jumped about 1.5% today as the comments hit the news wires.

Moreover, we’ve had some more uncertainty removed from marketsin the past 24-hours. We now have trade discussions re-opened between China and the U.S. And today, the U.S. Treasury has named the individuals that will be sanctioned in Saudi Arabia, regarding the murder of Khashoggi. To this point, the Saudi Crown Price isn’t one of them, which means the Saudi government is not being sanctioned.

It’s been a violent six weeks for stocks, but the lows from late October remain well intact. And we may now be clear for another recovery leg of this recent broad market correction.

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.