finance | Billionaire's Portfolio

News Flash: We Are In The Early Stages Of An Economic Boom

December 28, 12:00 pm EST

Last year this time, as we ended 2016, and looked ahead to 2017, it was clear that the dominant theme for the year ahead would be Trumponomics.

We had a global economy that had been propped up by central banks for the better part of eight years, and growth that was proving to be dangerously slow — with growing risks of a stall and another downward spiral.

That was clear in the summer of 2016, when global interest rates started to diving deeply into negative territory. That meant people were happy to pay governments for the security of parking their money in government bonds.

There was a clear lack of optimism about economic conditions and what the future may look like.

That changed with Trump’s election and his commitment to launch an assault on economic stagnation.

It flipped the switch on the lack of optimism that had been paralyzing business activity. And that optimism has led to a hotter economy this year than most expected, despite the lack of substantial policy action (which we didn’t get until later in the year).

So what will next year look like?

As we discussed yesterday, we have tax cuts that should drive corporate earnings and warrant another double digit year for the stock market (close to 20%).

And that doesn’t take into account the impact to corporate earnings from personal tax cuts, a healthier job market with employees that can command higher wages and companies that are confident to take cash and invest in new projects. So, by design, we have incentives coming into the economy for 2018 that will boost demand. And another pillar of Trumponomics, infrastructure, will be the focus early next year, which will fuel more jobs, more economic activity.

All of this and the Fed is projecting just 2.5% growth next year. And Wall Street and the economist community tend to anchor their forecasts on the Fed. But the Fed doesn’t have a very good record in forecasting – especially in recent history.

They overestimated growth and the outlook throughout much of the recovery period. Instead we got stagnation.

But in the past 18 months or so, they flipped the script. They became the “new normal” believers that we’re in for long-term slower growth.

With that, they underestimated the outlook for 2017, even with the prospects of fiscal stimulus coming (they ignored it, and continue to). They were looking for 2.1% growth. It will be closer to 3% for the full year 2017. And next year, while they are looking for 2.5%, we could have something closer to 4%. That’s my bet.

Remember, we’ve talked about the fundamental backdrop, with the addition of fiscal stimulus, that could have us in the early stages of an economic boom period. I think we’ll feel that, for the first time in a long time, in 2018.

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The Simple Math For Another Big Year Ahead For Stocks

December 28, 12:00 pm EST

While the President’s pro-growth plan had some wins this year, it was a slow start.

Going after healthcare first was a mistake. Fortunately, a pivot was made, and we now have a big tax bill delivered. And we have what will likely exceed a couple hundred billion dollars in government spending on hurricane/natural disaster aid underway (the early stages of a big government spending/ infrastructure package).

Last year this time, I predicted that Trump’s corporate tax cut would cause stocks to rise 39%. That’s a big number, that’s only been done a handful of times since the 1920s. We got a little better than half way there.

But, here’s the good news: We got there on earnings growth, ultra-low rates and an improving economy. All of that still stands for next year, PLUS we will have the addition of an aggressive tax cut that will be live day one of 2018.

With that, my analysis from last year still stands! Let’s walk through it (yet) again.

S&P 500 earnings grew by 10% this year. S&P 500 earnings are expected to grow at about the same rate next year. And that’s before the impact of a huge cut in the corporate tax rate. The corporate tax rate now goes from 35% to 21% – and for every percentage point cut in that rate, we should expect it to add at least a dollar to S&P 500 earnings.

With that, the forecast on S&P 500 earnings for next year is $144. If we add $14 to that (for 14 percentage points in the corporate tax rate) we get $158. That would value stocks on next year’s earnings, at today’s closing price on the S&P 500, at just 17 times earnings (just a touch higher than the long-term average). BUT, the Fed has told us that rates will continue to be ultra-low next year (relative to history). When we look back at ultra–low interest rate periods, the valuation on stocks runs higher than average—usually north of 20 times earnings.

If we take the corporate tax cut driven earnings of $158 and multiply it times 20, we get 3,160 on the S&P 500. That’s 18% higher than current levels. This analysis doesn’t incorporate the impact of a potentially hotter than expected economy next year (thanks to the many other areas of fiscal stimulus). So, as we’ve discussed throughout the year, the backdrop continues to get better and better for stocks.

This Central Bank Will Trigger A Spike In U.S. Interest Rates

December 19, 4:00 pm EST

Remember, the Fed met last week and hiked rates for the third time this year, and the fifth time in the post-crisis hiking cycle. But as we discussed, the big event for interest rates wasn’t last week, it’s this week.

The Bank of Japan meets on Wednesday and Thursday. Japan‘s policy on pegging their 10-year yield at zero has been the anchor on global interest rates (weighing on global interest rates). When they signal a change to that policy, that’s when rates will finally move – and maybe very quickly.

With that in mind, we have the stock market continuing to climb north of +20% on the year. Economic growth is going to get very close to 3% for the full year of 2017, and yet the benchmark longer term interest rates determined by the market are unchanged for the year. The yield on the 10 year Treasury is 2.43% this morning (ticking UP today). We came into the year at 2.43%.

Again, this is the flattening yield curve we discussed last week. For a world that is constantly looking for the next potential danger or signal for doom, the flattening of the yield curve has been the latest place they’ve been hanging their hats (as what they believe to be a predictor of recession). But those people seem happy to assume this yield curve indicator is driven by the same behaviors that have led to recessions in past economic periods, ignoring the unprecedented and coordinated global central bank manipulation that has gotten us here and continues to warp the interest rate market.

So now we have the Fed, which has been moving away from emergency policies. The ECB has signaled an end to QE next year. And the Bank of Japan is next in line — it’s a matter of when.

So how do things look going into this week’s meeting? We know the architect of Japan’s economic reform plan, Prime Minister Shinzo Abe, has just followed the American fiscal stimulus movement with a corporate tax cut of his own, but only for companies that will start raising wages for their employees. He said today that Japan is no longer in a state of deflation. The head of the Bank of Japan has said the economy is in “very good shape.” And that they would consider what is the best level of rate targets to align with changes n the economy, prices and financial conditions. The recent Tankan survey showed sentiment in the manufacturing community hitting decade and multi-decade highs.

But inflation continues to undershoot in Japan, as it is in the U.S. Japan is targeting a 2% inflation rate and is running at just 0.8% annualized.

So it’s unlikely that they will give any signal of taking the foot off of the gas this week. But that signal is probably not far off — maybe in January, after U.S. tax cuts are in effect. What does that mean? It means our market rates probably make an aggressive move higher early next year (10s in the mid 3s and rates on consumer loans probably jump 150 to 200 basis points higher).

Playing Field Might Be Leveling For Silicon Valley Giants

December 15, 9:00 pm EST

Last week we had the merger of Fox and Disney, and the repeal of the Net Neutrality rule. And the tax bill continues to inch toward the finish line.

That said, this would typically be the time of year when markets go quiet as money managers close the books on the year, decision makers at companies go on holiday and politicians do the same.

But that wasn’t the case last year, as President-elect Trump was holding meetings in Trump towers and telegraphing policy changes. And it may not be the case this year, as the tax plan may be approved before year end. The final votes are said to come next week, and the bill is tracking to be on the President’s desk by Christmas.

With that, and with the lack of market liquidity into the year end, we may get a further melt-up in last trading days of the year.

Yesterday we talked about the other side of the Net Neutrality story that doesn’t get much acknowledgement in the press. In short, the tech giants that have emerged over the past decade, to dominate, have done so because of regulatory favor. This favor has decimated industries and has dangerously consolidated power into the hands of few. The repeal of this rule is turning that regulatory tide.

It looks like the playing field might be leveling. That means a higher cost of doing business may be coming for Silicon Valley, with fewer advantages and more competition from the old-economy brands that have been investing to compete online. That means potentially slower earnings growth for the big internet giants, for those that are making money, and an even more uncertain future for those that aren’t (e.g. Tesla).

With this in mind, at the moment Amazon is valued at twice the size of Walmart. Uber is valued at almost 40 times the size of Hertz. And Tesla, which has lost $2.5 billion over the past five years is valued the same as General Motors, which has made $43 billion over the same period.

Next year could be the year these valuation anomalies correct.

Why Yields Have Done Nothing Despite Five Fed Rate Hikes

December 14, 2:19 pm EST

The Fed decided to hike interest rates by another quarter point yesterday. That was fully telegraphed and anticipated by markets. That’s the third rate hike this year, and the fifth in the post-crisis rate hiking cycle.

Still, the yield on the 10-year Treasury note (the benchmark market determined interest rate), moved lower today, not higher — and sits unchanged for the year.

We talked earlier in the week about the biggest central bank event of the month. It wasn’t the Fed, but it will be in Japan next week. Japan’s policy on pegging their 10-year yield at zero has been the anchor on global interest rates.

When they signal a change to that policy, that’s when rates will finally move.

With this divergence between what the Fed is doing (setting rates) and what market rates are doing (market-determined), people have become convinced that the interest rate market is foretelling a recession coming — i.e. short term rates have been rising, while longer term rates have been quiet, if not falling. For example, when the Fed made it’s first rate hike in December of 2015, the 30-year government bond yield was 3%. Today, after five rate hikes on the overnight Fed determined interest rate, the 30-year is just 2.72% (lower, not higher than when the Fed started).

This dynamic has created a flattening yield curve. That gets people’s attention, because historically, when the yield curve has inverted (short term rates rise above long term rates), recession has followed every time since 1950, with one exception in the late 60s.

And it turns out, this “flattening of the yield curve” indicator, historically (and ultimate inversion, when it happens), is typically driven by monetary policy (i.e. rate hikes — check). In these cases, the market anticipates the Fed killing growth and eventually leading rate cuts! They find more certainty and stability in owning longer term bonds (leaving short term bonds pushing those rates up and moving into long term bonds, pushing those rates down — inverting the curve).

The question, is that the case this time? Or is this time different. It’s rarely a good idea in markets to think this time is different than the past. But in this case, following trillions of dollars of central bank intervention and a near implosion in the global economy, it’s probably safe to say that this time is certainly different than past recessions. Though the Fed is in a hiking cycle, rates remain well below long term averages. And, as we know, we have unconventional monetary policies at work in other key areas of the world — stoking liquidity, growth and skewing demand for U.S. Treasuries (which suppresses those long term interest rates).

So the flattening yield curve fears are probably misplaced, especially given big fiscal stimulus is coming. And when Japan moves off of its “zero yield policy,” the U.S. yield curve may steepen more quickly than people think is possible.

Wall Street Should Be Listening To Small Business Owners For Guidance On Growth

by Bryan Rich

December 12, 4:00 pm EST

This morning we got a report that small business optimism hit the second highest level in the 44-year history of the index.

Here’s a look at that history …

optimism

Remember, last year, following the election, this index that measures the outlook from the small business community had the biggest jump since 1980 (as you can see in the chart).

Why were they so excited? For most of them, they had dealt with a decade long crisis in their business, where they had credit lines pulled, demand for their products and services were crushed, healthcare costs were up and their workforce had been slashed. If they survived that storm and were still around, any sign that there could be a radical change coming in the environment was a good sign.

A year ago, with a new administration coming in, half of the small business owners surveyed, expected the economy to improve. That was the largest agreement of that view in 15 years.

They’ve been right.

Now with an economy that will do close to 3% growth this year, still, about half of small business owners expect the economy to improve further from here.

No surprise, they are more than pleased with the tax cuts coming down the pike. They’ve seen regulatory relief over the past year. And, according the chief economist for the National Federation of Independent Businesses, small business owners see the incoming Fed Chair (Powell) as more favorable toward business (and market determined decisions) than Yellen. And he says, “as long as Congress and the President follow through on tax reform, 2018 is shaping up to be a great year for small business, workers, and the economy.”

This reflects the theme we’ve talked about all year: the importance of fiscal stimulus to bridge the gap between the weak economic recovery that the Fed has manufactured, and a robust sustainable economic recovery necessary to escape the crisis era. This small business survey tends to correlate highly with consumer confidence. Consumer confidence drives consumption. And consumption contributes about two-thirds of GDP. So, by restoring confidence, the stimulative policy actions (and the anticipation of them) has been self-reinforcing.

Economic Boom Period Coming

December 10, 4:00 pm EST

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).

Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.

Here’s What Billionaire Investors Think About Bitcoin

December 7, 2017, 10:00 pm EST

With all that’s going on in the world, the biggest news of the day has been Bitcoin.

People love to watch bubbles build. And then the emotion of “fear of missing out” kicks in. And this appears to be one.

Bitcoin traded above $16,000 this morning. In one “market” it traded above $18,000 (which simply means some poor soul was shown a price 11% above the real market and paid it).

As we’ve discussed, there is no way to value bitcoin. There is no intrinsic value. To this point, it has been bought by people purely on the expectation that someone will pay them more for it, at some point. So it’s speculation on human psychology.

Let’s take a look at what some of the most sophisticated and successful investors of our time think about it…

Billionaire Carl Icahn, the legendary activist investor that has the longest and best track record in the world (yes, better than Warren Buffett): “I don’t understand it… If you read history books about all of these bubbles…this is what this is.”

Billionaire Warren Buffett, the best value investor of all-time: “Stay away from it. It’s a mirage… the idea that it has some huge intrinsic value is a joke. It’s a way of transmitting money.”

Billionaire Jamie Dimon, head of one of the biggest global money center banks in the world: “It’s not a real thing. It’s a fraud.”

Billionaire Ray Dalio, founder of one of the biggest hedge funds in the world: “Bitcoin is a bubble… It’s speculative people, thinking they can sell it at a higher price…and so, it’s a bubble.”

Billionaire investor Leon Cooperman: “I have no money in bitcoin. There’s euphoria in bitcoin.”

Billionaire distressed debt and special situations investor, Marc Lasry: “I should have bought bitcoin when it was $300. I don’t understand it. It might make sense to try to participate in it, but I can’t give you any analysis as to why it makes sense or not. I think it’s real, as it coming into the mainstream.”

Billionaire hedge funder Ken Griffin: “It’s not the future of currency. I wouldn’t call it a fraud either. Bitcoin has many of the elements of the Tulip bulb mania.”

Now, these are all Wall Streeters. And they haven’t participated. But this all started as another disruptive technology venture. So what do billionaire tech investors think about it…

Billionaire Jerry Yang, founder of Yahoo: “Bitcoin as a digital currency is not quite there yet. I personally am a believer that digital currency can play a role in our society, but for now it seems to be driven by the hype of investing and getting a return, as opposed to transactions.”

Mark Cuban: He first called it a “bubble.” He now is invested in a cryptocurrency hedge fund but calls it a “Hail Mary.”

Michael Novagratz, former Wall Streeter and hedge fund manager. He once was a billionaire and may be again at this point, thanks to bitcoin: “The whole market cap of all of the cryptocurrencies is $300 billion. That’s nothing. This is global. I have a sense this can go a lot further.” He equates it to an alternative to, or replacement for, the value of holding gold – which is an $8 trillion market… “over the medium term, this thing is going to go a lot higher.” But he acknowledges it shouldn’t be more than 1% to 3% of an average persons net worth.

Now with all of this in mind, billionaire Thomas Peterffy, one of the richest men in the country and founder of the largest electronic broker in the U.S., Interactive Brokers, has warned against creating exchange traded contracts on bitcoin. He says a large move in the price could destabilize the clearing organizations (the big futures exchanges) which could destabilize the real economy.

With that, futures launch on Bitcoin on Sunday at the Chicago Mercantile Exchange. This is about to get very interesting.

It’s hard to predict the catalyst that might prick a market bubble. And there always tends to be an interconnectedness across the economy to bubbles, that aren’t clear before it’s pricked (i.e. some sort of domino effect).

Is Bitcoin An Investment?

November 29, 2017, 4:30 pm EST

The adoration for Bitcoin has been growing by the day, though no one understands how to value it.

CNBC went on “watch” the other day for Bitcoin $10,000. Today it traded above $11,000 and then fell as much as 21% from the highs.

Here’s a look at the chart.

I heard someone today say, everyone should have a small portion of their net worth in Bitcoin. That sounds an awful lot like the mantra for gold. Gold has been sold all along as an inflation hedge. But unless you have Weimar Republic-like hyperinflation, you’re unlikely to get the inflation-hedge value out owning it.

Remember, gold went on a tear from sub-$700 to above $1,900 following the onset of global QE (led by the Fed). Gold ran up as high as 182%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still, nine years after the Fed’s first round of QE and massive global responses, we’ve been able to muster just a little better than 1% annualized inflation. So gold is a speculative trade. It’s a fear trade. And it’s volatile.

If you bought gold at the top in 2011, the value of your “investment” was cut in half just four years later. That’s a lot of risk to take for the prospect of “hedging” against the loss of purchasing power in the paper money in your wallet.

Now, Bitcoin is becoming a pretty polarizing “asset class.” The gold bugs get very emotional if you argue against the value of owning gold. Those that own Bitcoin seem to have a similar reaction. But Bitcoin, like gold, is a tough one to value. You buy it because you hope someone is going to buy it from you at a higher price.

So is Bitcoin (cryptocurrencies) an investment? Sophisticated investors that are involved, likely see it as similar investment to a startup. It has traction. It has a lot of risks. It could go to zero. Or it could pay them multiples of what they pay for it. But they thrive on diversification. When they have a large portfolio of these types of bets, when a few payoff, they put up nice returns. Bitcoin may be one of the few, or it may not.

Wall Street Underestimated The Rise In Stocks, By A Lot

November 28, 2017, 4:30 pm EST

Stocks continue to rise today, up another 1% on the Dow. So year-to-date, the Dow is up 20% now, the S&P 500 is up 17% and the Russell 2000 is up 13%. Remember, most of Wall Street was expecting 3%-4% returns for stocks this year.

What did they miss? Mostly the rise in optimism surrounding the incoming pro-growth government.

With consumer and corporate balance sheets as good as we’ve seen in a long time, unemployment at 4.1% and corporate earnings growing at a 10% clip through the first three quarters, and tax cuts coming, we should expect almost everything to go up.

As for tax cuts, that got a step closer today, as it was approved by the Senate budget committee. Now it goes to a vote on the floor of the Senate.

All of this, and market interest rates are going nowhere. The 10-year yield, at 2.33%, is just about where we started the year. That’s, in part, being weighed down by some comments by incoming Fed Chair Jerome Powell.

Today, Powell gave prepared remarks and took questions for his confirmation hearing with the Senate today. The general view has been that Powell is a like-thinker to Yellen, but with partisan alignment for the president.

But under Yellen’s leadership at the Fed, the overly optimistic forecasts about inflation and the rate path affected consumer behaviors and nearly stalled the recovery last year. They had to reverse course on their projections and game plan early in 2016. And then we had the election, and the prospects of fiscal stimulus, and the Fed (under Yellen) went back to the script of telegraphing a more restrictive rate environment.

Now, with that in mind, I thought early on that Trump would show Yellen the door. And I expected him to appoint a new Fed Chair that was a clear dove–someone that would leave rates alone (given the weak inflation) and let fiscal stimulus feed into the recovering economy, to finally fuel some animal spirits. Do no harm to the economy. Even Bernanke suggested the Fed should let the economy run hot, warning not to kill the recovery by setting expectations for tighter credit coming down the pike.

From Powell’s comments today, it sounds like we may be getting less Yellen than people have believed. In his short prepared remarks, he made an effort to say he strives to support the economy’s progress toward full recovery. He implied the job market needs more improvement, and that he favors easing the regulatory burden on banks. This doesn’t sound like a guy that thinks the economy can withstand mechanically stepping rates higher in the face of weak inflation and sub-trend growth.