We had a jobs report this past Friday. The unemployment rate is at 4.1%. We’re adding about 172k jobs a month on average, over the past twelve months. These are great looking numbers (and have been for quite some time). Yet employees, broadly speaking, still haven’t been able to command higher wages. Wage growth continues to be on the soft side.
With little leverage in the job market, consumers tend not to chase prices in goods and services higher — and they tend not to take much risk. This tells you something about the health of the job market (beneath the headline numbers) and about the robustness of the economy. And this lack of wage growth plays into the weak inflation surprise that has perplexed the Fed. And the weak growth that has perplexed all policy makers (post-crisis). That’s why fiscal stimulus is needed!
And this could all change with the impending corporate tax cut. The biggest winners in a corporate tax cut are workers. The Tax Foundation thinks a cut in the corporate tax rate would double the current annual change in wages.
As I’ve said, I think we’re in the cusp of an economic boom period — one that we’ve desperately needed, following a decade of global deleveraging. And today is the first time I’ve heard the talking heads in the financial media discuss this possibility — that we may be entering an economic boom.
Now, we’ve talked quite a bit about the run in the big tech giants through the post-crisis era — driven by a formula of favor from the Obama administration, which included regulatory advantages and outright government funding (in the case of Tesla). And we’ve talked about the risk that this run could be coming to an end, courtesy of tighter regulation.
Uber has already run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users (that would be a game changer). And we now know that Trump is considering that Amazon might be a monopoly and harmful to the economy.
With this in mind, and with fiscal stimulus in store for next year, 2018 may be the year of the bounce back in the industries that have been crushed by the “winner takes all” platform that these internet giants have benefited from over the past decade.
That’s probably not great for the FAANG stocks, but very good for beaten down survivors in retail, energy, media (to name a few).
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We talked last week about what may be the bottom in the “decline of the retail store” story.
Walmart may be leading the way back for traditional retail. And it’s doing so, in part, by pouring money into e-commerce to fight back against Amazon.
Just as the energy industry has been beaten down by the rise of electric vehicles and clean energy, the bricks and mortar retail industry has been beaten down by the rise of Amazon. But those energy and retail companies that have survived the storm may have magnificent comebacks. They’re getting fiscal stimulus, which will lower their tax rates and should pop consumer demand. And they may be getting help with the competition. The regulatory game may be changing for the Internet giants that have nearly put them out of business.
Over the past decade, the Internet giants of today have had a confluence of advantages. They’ve played by a different rule book (one with practically no rules in it). And many of the giants that have emerged as dominant powers today, did so through direct government funding or through favor with the Obama administration.
One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007. In 2008, the DNC convention in Denver gave birth to Airbnb. By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation.
The U.K.’s Guardian has a very good piece (here) on what this has turned into, and the power that has come with it, calling it “winner takes all capitalism.”
This all makes today’s decision to repeal “net neutrality” very interesting. Is this the event that will ultimately lead to the reigning in the powerful tech giants? For the big platforms like Google, Twitter, Facebook and Uber, will it lead to transparency of their practices and accountability for the actions of its users? If so, the business models change and the Wild West days of the Internet may be coming to an end.
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Forbes has just ranked the top 400 richest people in America for 2017.
Among the top 50, a fifth have created their wealth from some sort of Wall Street activity (mostly hedge funds, but also brokerage and asset management). There’s not much new there–the rich have gotten richer on Wall Street despite the challenges of the past decade. But as we’ve discussed, the torch was, in many respects, passed to Silicon Valley over the past decade, as the best spot to create–that’s where the biggest proportion of the wealthiest 50 have built their wealth.
But much of that technology wealth can be refined down to the very industries that are being displaced on the wealth list, such as publishing, energy and retail.
That makes you wonder how long some of these companies can command a software-like valuation when the core of their business models are rather traditional things like selling ads, distributing content, making cars or selling retail products.
To this point, as long as they started in Silicon Valley, they tend to get a very long leash. They can lose money with immunity.
Consider this: GM is valued at $66 billion. Telsa is valued at $57 billion. GM has made (net profit) $43 billion over the past six years. Tesla has lost$2.5 billion over the past six years. Meanwhile, Elon Musk, Tesla’s founder, has amassed a $20 billion net worth.
The question is how defensible are these businesses (Facebook, Netflix, Tesla, Twitter)? How wide is their moat? A couple of years ago, the answer was probably very wide–very defensible given the adoption, the scale, and the deep pocket investors that were willing to continue plowing money into them. But, as we’ve discussed, if the regulatory environment becomes less favorable and the money dries up (in the case of private companies, like Uber), the operating advantages can begin to evaporate. This bubble-up of regulatory scrutiny on tech is something to keep a close eye on. It may become one of the big themes in the coming year.
Today I want to take a look back at my March 7th Pro Perspectives piece. And then I want to talk about why a power shift in the economy may be underway (again).
Big Picture .. Market Perspectives March 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama. With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over? And is Snap the first sign?
Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.
In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.
Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S.
When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups).
Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more thanthree times the size of Avis, Hertz and Enterprise combined.
Will money keep chasing these companies without the wind any longer at their backs?”
Now, this was back in March. And that was the question — will it keep going under Trump? Can they continue to thrive/ if not survive without policy favors. Most importantly for the billion dollar startup world, will the private equity capital dry up. This is what it’s really all about. Will the money that chased the subsidies from D.C. to Silicon Valley for eight years (i.e. the trillion dollar pension funds) stop flowing? And will it begin chasing the new favored industries and policies under the Trump administration?
It seems to be the latter. And it seems to be happening in the form of a return to the public markets — specifically, the stock market.
And it may be amplified because of the huge disparity in what is being favored. In Silicon Valley, innovation is favored. Profitability? Remember, the 90s tech bubble. The measure of success for those companies was “eyeballs.” How much traffic were they getting to their websites? Today, when you hear a startup founder talk about the success benchmarks, it rarely has anything to do with with revenue or profit. It’s all about headcount (how many people they’ve hired) and money raised (which enables them to hire people). They are validated by convincing investors to fund them (mostly with our pension money).
Now, the other side of this coin: Trumponomics. Remember, among the Trump policies (corporate tax cuts, repatriation, deregulation, infrastructure spend), the most common sense play in the stock market has been flooding money into companies that make a lot of money. Those that make a lot of money have the most to gain from a slash in the corporate tax rate — it falls right to the bottom line. Leading the way on that front, is Apple. They make a lot of money. And they will make a lot more when a tax cut comes, making the stock even cheaper. That’s why it’s up 25% year-to-date. That’s 2.5 times the performance of the broader market.
Meanwhile, let’s take a look back at the Snapchat. Snapchat doesn’t make money. And even after a 1/3 haircut on the valuation, trades about 35 times revenue. And now, as a public company, probably doesn’t get the protection from the venture capital/private equity community that may have significant investments in its competitors. So the competitors (like Facebook) are circling like sharks to copy their business.
What about Uber? The Uber armor may be beginning to crack as well, with the leadership shakeup in recent weeks. Maybe a good signal for how Uber may be doing? Hertz! Hertz has bounced about 20% from the bottom this week.
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Yesterday, following the slide in stocks, we looked at some charts on stocks, gold and the dollar. We talked about the media and Wall Street’s need to fit price action to a story. And we asked if the story did indeed warrant fitting it to the price action. Was a crisis beginning or just a correction for stocks?The answer: It still looks like a market that values fiscal stimulus and structural change over political mudslinging and scandal. For stocks, the news may have been the catalyst to start a healthy technical correction.
Today, the market behavior appears to support that view.
Now, with the idea that a technical correction is (I think) underway for stocks, and maybe for months, until we get a better handle on policy action, remember this: a correction in stocks is a buying opportunity.
Major asset classes, over time, will rise (stocks, bonds, real estate). The value of these core assets will grow faster than the value of cash.
That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.
With that said, as an average investor that is not leveraged, dips in stocks, particularly U.S. stocks—the largest economy in the world, with the deepest financial markets—should be bought, because in the simplest terms, over time, the broad stock market has an upward sloping trajectory. Instead, dips in stocks tend to create fear, and fear creates selling, at precisely the time we should be buying.
With this in mind, we’ve had a brief dip of about 4% in stocks within the “Trump trend” (the post–election rise in stocks). A typical correction is around 10%. But strong bull markets tend to have shallow retracements. A 6%–10% correction in stocks would take us back to the 200–day moving average (minimum), and maybe as low as 2,200 in the S&P 500.
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After the past two weeks, that included a Fed decision, more BOJ action, the approval of Japanese fiscal stimulus, a rate cut and the return to QE for the Bank of England, and a strong jobs report, this week is a relative snoozer.
With that, every headline this week seems to contain the word Trump. Clearly the media thought a post by the former Fed Chairman, the architect of the global economic recovery and interventionist strategies that continue to dictate the stability of the global economy (and world, in general) today, wasn’t quite as important as Trump watching.
On Monday, Ben Bernanke wrote a blog post that laid out what appears to be his interpretation of a shift in gears for the Fed – an important message. Don’t forget, this is also the guy that may have the most intimate knowledge of where the world has been over the past decade, what it’s vulnerable to, and what the probable outcomes look like for the global economy. And he’s advising one of the biggest hedge funds in the world, the biggest bond fund in the world and one of the most important central banks in the world (at the moment), the Bank of Japan. And it’s safe to assume he still has influence plenty of influence at the Fed.
My takeaway from his post: The Fed’s forward guidance of the past two years has led to a tightening in financial conditions, which has led to weaker growth, lower market interest rates and lower inflation.
Why? Because people have responded to the Fed’s many, many promises of a higher interest rate environment, by pulling in the reins somewhat.
To step back a bit, while still in the midst of its third round of QE, the Fed determined in 2012, under Bernanke’s watch, that words (i.e. perception manipulation) had been as effective, if not more, than actual QE. In Europe, the ECB had proven that idea by warding off a bond market attack and looming defaults in Spain and Italy, and a collapse of the euro, by simply making promises and threats. With that in mind, and with the successful record of Bernanke’s verbal intervention along the way, the Fed ultimately abandoned QE in favor of “forward guidance.” That was the overtly stated gameplan by the Fed. Underpin confidence by telling people we are here, ready to act to ensure the recovery won’t run off of the rails — no more shock events.
The “forward guidance” game was working well until the Fed, under Yellen, started moving the goal posts. They gave a target on unemployment as a signal that the Fed would keep rates ultra low for quite some time. But the unemployment rate hit a lot sooner than they expected. They didn’t hike and they removed the target. Then they telegraphed their first rate hike for September of last year. Global markets then stirred on fears about China’s currency moves, and the Fed balked on its first rate move.
By the time they finally moved in December of last year, the market was already questioning the Fed’s confidence in the robustness of the U.S. economy, and with the first rate hike, the yield curve was flattening. The flattening of the yield curve (money moving out of short term Treasuries and into longer term Treasuries, instead of riskier assets) is a predictor of recession and an indicator that the market is betting the Fed made/is making a mistake.
And then consider the Fed’s economic projections that include the committee’s forecasts on interest rates. By showing the market/the world an expectation that rates will be dramatically higher in the coming months, quarters and years, Bernanke argued in his post that this “guidance” has had the opposite of the desired effect — it’s softened the economy.
So in recent months, starting back in March, the Fed began dramatically dialing back on the levels and speed they had been projecting for rates. It’s all beginning to look like the Fed should show the world they are positioned to well underestimate the outlook, rather than overestimate it, as it’s implied by Bernanke. The thought? Perhaps that can lead to the desired effect of better growth, hotter inflation.
This post by Bernanke is reversing some of the expectations that had been set in the market for a September or December rate hike by the Fed. And the U.S. 10-year yield has, again, fallen back — from 1.62% on Monday to a low of 1.50% today. Still, the Fed showed us in June they expect one to two hikes this year. Given where market rates are, they may still be overly hawkish.
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Yesterday we walked through some charts from key global stock markets. As we know, the S&P 500 has been leading the way, printing new highs this week.
U.S. stocks serve as a proxy on global economic stability confidence, so when stocks go up in the U.S., in this environment, there becomes a feedback loop of stability and confidence (higher stocks = better perception on stability and confidence = higher stocks …)
That said, as they begin to capitulate on the bear stories for stocks, the media is turning attention to opportunities in emerging markets. But as we observed yesterday in the charts, you don’t have to depart from the developed world to find very interesting investment opportunities. The broad stock market indicies in Germany and Japan look like a bullish technical breakout is coming (if not upon us) and should outpace gains in U.S. stocks in second half of the year.
Now, over the past few weeks, we’ve talked about the slide in oil and the potential risks that could re-emerge for the global economy and markets.
On Wednesday of last week, we said this divergence (in the chart below) between oil and stocks has hit an extreme — and said, “the oil ‘sharp bounce’ scenario is the safer bet to close the gap.”
Sources: Billionaire’s Portfolio, Reuters
Given this divergence, a continued slide in oil would unquestionably destabilize the fundamentals again for the nascent recovery in energy companies.
With that, and given the rescue measures that global central banks extended in response to the oil bust earlier this year, it was good bet that the divergence in the chart above would be closed by a bounce back in oil.
That’s been the case as you can see in the updated chart below (the purple line rising).
Sources: Billionaire’s Portfolio, Reuters
At the peak today, oil had bounced 11% in just five trading days. Oil sustaining above the $40 is key for the stability of the energy industry (and thus the quelling the potential knock-on effects through banks and oil producing sovereigns). Below $40 is the danger zone.
In a fairly quiet week for markets (relative to last week), there was a very interesting piece written by former Fed Chairman Ben Bernanke yesterday.
Tomorrow we’ll dig a little deeper into his message, but it appears that the Fed’s recent downgrade on what they have been projecting for the U.S. economy (and the path of policy moves) is an attempt to stimulate economic activity, switching for optimistic forward guidance (which he argues stifled activity) to more pessimistic/dovish guidance (which might produce to opposite).
Remember, we’ve talked in recent months about the effect of positive surprises on markets and the economy. We’ve said that, given the ratcheting down of earnings expectations and expectations on economic data, that we were/are set up for positive surprises. Like it or not, that’s good for sentiment. And it’s good for markets. And it can translate into good things for the economy (more hiring, more investment, more spending).
The positive surprises have been clear in earnings. It’s happening in economic data. It looks like the Fed is consciously playing the game too.
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Today we want to look at some key charts as we head into the week.
First, to step back a bit, as we started last week, we had some big market events ahead of us. Japan was due to approve a big fiscal stimulus plan. The Bank of England was meeting on rates and the U.S. jobs report was on the docket to wrap up the first week of August.
As we discussed Thursday, the BOE announced they’ve returned to the QE game. Japan doubled the size of its stock buying plan. And the jobs report came in Friday with another solid report. As we thought, despite the volatility in the monthly numbers the media likes to overanalyze, the longer term trend continues to clearly argue the health of the job market is in good shape, and not a legitimate concern for the Fed’s rate path.
All together, the events of the week only solidified reasons to be long stocks.
Most importantly, stocks have been, and continue to be, a key tool for central bankers in this global economic recovery. They want and need stocks higher. A higher stock market provides fuel for economic activity by underpinning confidence and wealth creation, which encourages hiring, spending and more investment.
With that, as we’ve said, this is the sweet spot for stocks, where good news is good news for stocks (better outlook triggers capital flows out of cash and bonds, and into stocks), and bad news is good news for stocks (it triggers more stimulus).
When it comes to stocks, back on May 25th, we said “everyone could benefit by having a healthy dose of ‘fear of missing out.’ Stock returns tend to be lumpy over the long run. When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.”
Fast forward to today, and the S&P 500 has printed yet another new record high.
But the horse is not already out of the barn on global stocks (including U.S. stocks).
Let’s take a look at the chart on the S&P 500…
Sources: Billionaire’s Portfolio, Reuters
You can see, we’ve broken out in U.S. stocks (very bullish).
Next, in the UK, the place people were most afraid of, just a little more than a month ago, traded near 14-month highs today and is nearing a breakout to record highs, with support of fresh central bank easing from the Bank of England.
Sources: Billionaire’s Portfolio, Reuters
In the next two charts, we can see the opportunities to buy the laggards, in areas that have been beaten down on broader global economic concerns, but also benefiting directly from domestic central bank easing.
In the chart below, you can see German stocks have fallen hard from the highs of last year, but have technically broken the corrective downtrend. A return to the April highs of last year would be a 19% return for current levels.
Sources: Billionaire’s Portfolio, Reuters
In the next chart, Japanese stocks also look like a break of this corrective downtrend is upon us. A return to the highs of last year would be a 25% run for the Nikkei. As we discussed last week, the sharp ascent in the chart below from the lower left corner of the chart can be attributed to the BOJ’s QE program, which first included a 1 trillion yen stock buying program and was later tripled to three trillion (a driver of the run from around 15k to 21k in the index). Last week, that stock buying program was doubled to six trillion yen.
Sources: Billionaire’s Portfolio, Reuters
Given the trajectory of the charts above (global stocks), which both promote and reflect global confidence, and the given lack of consequence that QE has had on meaningful inflation, the world’s inflation-fear hedge, gold, looks like its run into brick wall up here.
Sources: Billionaire’s Portfolio, Reuters
Remember, we have a convergence of fresh monetary policy in the world this year, with fiscal policy in Japan, and the growing appetite for fiscal policy in other key economies. That’s powerful fuel for global economic growth, risk appetite and stocks.
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As we’ve said, oil has been quietly sliding over the past three weeks. It closed yesterday more than 20% off of the highs of the year.
And we looked at this chart and said, this divergence has hit an extreme, something has to give.
Source: Billionaire’s Portfolio, Reuters
Yesterday it was stocks. Today it was a sharp bounce in crude – up 4%. The oil “sharp bounce” scenario is the safer bet to close the gap on the chart above.
Alternatively, oil under $40 puts it in the danger zone for the global economy and broad financial market stability. With that, we had a close in the danger zone, under $40, yesterday. But it may turn out to be just a brief visit.
If we look at the longer term chart, the 200 day moving average comes in right in this $40 area ($40.67). Again, we had a close below yesterday, but a close back above the 200 day moving average today.
Sources: Billionaire’s Portfolio, TradingView
For technicians, two consecutive closes below the 200 day moving average would create some concern for this post-oil price bust recovery.
In that case, many companies in the struggling energy sector would be back on bankruptcy watch. But the global economic recovery can’t afford another bout with weaker oil prices, and the ugly baggage that comes with it (oil company defaults, which would lead to financial system instability and sovereign defaults). If two of the best billionaire oil traders in the world are right about oil, and we see $80 in the next year, this dip is a great buying opportunity (for the underlying commodity and energy stocks).
Tomorrow, we hear from the Bank of England. The expectations are that the BOE will cut rates to support economic activity in the face of Brexit uncertainty. But there’s also a decent bet being wagered that the BOE will return to QE (a second post-global financial crisis bond buying program). History tells us that, in this environment, central banks like to save bullets for the moments when crisis and fear is peaking. With that, the BOE may disappoint tomorrow. If so, it could pour some gas on the nascent rise in market rates that started yesterday in Japanese, German and American 10-year yields.
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Yesterday we pointed to the renewed risk that oil represented for stocks.
The persistent bleed in the price of oil for the past three weeks has been with little attention. Even the energy stocks, which have had huge runs since oil bottomed in February, were largely ignoring the slide in the most significant input for those businesses.
As we said yesterday, oil continued to leak lower, even as stocks printed a fresh record high yesterday. As oil went out at the key $40 level, the divergence between oil and stocks had reached an extreme. We said something has to give.
Today, it’s been stocks. Stocks have fallen back, following the lead of further declines in crude — which settles BELOW $40 today.
Why is oil important for stocks?
As we’ve said in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.
Now, we’ve talked a lot about the divergence between yields and stocks too. In this post-global financial crisis world, when people feel better about the global outlook, they take risk. That means they buy stocks and they move money OUT of the “safe-haven” treasury market. That means yields should move higher, while stock move higher.
That hasn’t been the case. Yields have continued to trade toward the record lows in recent weeks, even as stocks have traded to new record highs. Why? It’s being driven by capital flows and speculation related to central bank action in Japan and Europe. U.S. Treasuries are offering both a relative safe haven, and a positive yield in a world of negative yields. That keeps freshly printed global money flowing into U.S. Treasuries, which drives up price, and drives down the yield.
With that, logic has again been tossed on its head today. Stocks are falling, along with oil. This is typically a trigger for some elevated risk aversion. One would think Treasuries would be rallying today, pushing yields lower. It has been the opposite.
It may have a lot to do with the fiscal stimulus package that was approved today (overnight) in Japan. The central banks have had the pedal pinned to the floor on monetary policy for the better part of the past seven years, and they’ve gotten no help from governments on fiscal stimulus. Today’s move in Japan may represent a changing of the stimulus guard. With that, the bet on lower yields is being reversed, not just in the U.S., but in Europe and Japan.
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We talked last week about what may be the bottom in the “decline of the retail store” story.
Forbes has just ranked the top 400 richest people in America for 2017.
Yesterday, following the slide in stocks, we looked at some charts on stocks, gold and the dollar. We talked about the media and Wall Street’s need to fit price action to a story. And we asked if the story did indeed warrant fitting it to the price action. Was a crisis beginning or just a correction for stocks?The answer: It still looks like a market that values fiscal stimulus and structural change over political mudslinging and scandal. For stocks, the news may have been the catalyst to start a healthy technical correction.
After the past two weeks, that included a Fed decision, more BOJ action, the approval of Japanese fiscal stimulus, a rate cut and the return to QE for the Bank of England, and a strong jobs report, this week is a relative snoozer.
