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).

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.

October 9, 2017, 4:00 pm EST

As we know, one of the pillars of the Trump administration’s growth policies has been deregulation.  With that, today the head of the EPA signaled the withdrawal from the Clean Power Plan – an Obama regulation to fight climate change.

​What does this mean for coal stocks?

Let’s take a look at the two largest American coal producers, both of which filed bankruptcy last year: Peabody Energy and Arch coal.

​These are now two post-bankruptcy stocks!  ​Peabody emerged from bankruptcy earlier this year after shedding about $5 billion in debt. Similar story for Arch coal.  They filed early last year and emerged from bankruptcy late last year, eliminating $5 billion in debt in the process. So shareholders were wiped out and debt holders became stock holders in new low debt, cash flow positive companies with deregulation coming down the pike.  With that, you would think the stocks would be screaming higher.  That hasn’t been the case.

​Here’s a look at the charts…

So we now have Peabody Energy, the leading coal producer in America with a $3 billion market cap.  And Arch Coal, number two, has just a $1.7 billion market cap.

Are these cheap stocks?

​Let’s take a look at who owns them…

The biggest shareholder in Peabody is billionaire Paul Singer’s hedge fund, Elliott Management.  They own half a billion dollar’s worth of the stock and it’s a top ten position.  As for ARCH – the top shareholder is the $5 billion hedge fund Monarch Alternative Capital. ARCH makes up 20% of their highly concentrated long equity portfolio (their biggest single stock position).  If you’re going to dip your toe in the water on a post-bankruptcy stock, there are few better places to look for guidance than Paul Singer – a former attorney, turned one of the most influential and successful investors in the world.

October 6, 2017, 4:00 pm EST

As we head into the weekend, today I want to talk a bit about the 401k. 

​I’m looking today at a relatives 401k offering.  Nothing has made Wall Street richer than the advent of the 401k. They get a constant monthly stream of fresh capital to skim fees and commissions from, and you get all of the market risk.

​For the average person, selecting from the “options” in their 401k plan is a practice of picking the highest number. No surprise, the fund providers know that, and play plenty of games to show you the best numbers possible.

​Here’s an example:  As I’m looking through the limited choices in this particular 401k plan provider, there is a common theme in the “inception date” of most of the company’s mutual fund offerings.  They tend to have track records that start in 2002 at or near the bottom of the internet bubble-induced stock market crash, OR they start in 2009 AFTER the 50% collapse in stocks, OR they start in late 1987 AFTER the crash.

Clearly the long-term returns will look quite a bit better when you’re starting from a bottom, after a crash. And clearly returns will look better without hanging a negative 30%-50% in 2008 and then another negative 30%-40% in the early 2000s.

Maybe they are newer, better strategies and had the good fortune of launching at the right time?

More often, they close them down and reopen them under a new, tweaked name.  Add to that, they are constantly launching and running hundreds, if not thousands of funds, so that at any given time they can cherry pick the best performers over a certain period, to put them in front of a captive audience.

Bottom line: Big mutual fund giants are mass asset gatherers feeding on the passive 401k flow of capital, rather than astute investment managers. And the long term returns, after fees, prove it. People are locking their money up for a very long time, and getting a fraction of the market return.

When Congress invented the 401k in the 70s to transfer risk and obligations from the employer (traditional defined benefit pensions) to the employee (defined contributions), they didn’t do you any favors.

October 4, 2017, 4:00 pm EST

The media is giving more attention today to the potential change in power at the Fed.  We talked about this on Monday. Remember, the President said last week that he expected an announcement to be made in the next two or three weeks on the future Fed Chair.

Along with any advancement on the fiscal stimulus front, the appointment of the next Fed Chair will be the most important news for markets and economy this year (though Yellen isn’t officially done until January of 2018).

​Back in March I made the case for Trump ousting Yellen and hiring the Fed newbie, Neel Kashkari.  Admittedly, I didn’t think Yellen would last this long.  While Bernanke (the former Fed Chair) can be credited for averting a global apocalypse and keeping the patient alive, for as long as it took to bridge the gap to a real recovery.  Under Yellen’s leadership, the Fed has been doing it’s best to kill the patient, at precisely the time the real recovery could be taking shape, with the assistance of fiscal stimulus finally in the works.

​If the Fed continues on its path, borrowing costs (or, as importantly, the perception of where they may go) may strangle the economy before fiscal stimulus gets out of the gate. This is why I’ve said Kashkari should be the President’s best friend at the Fed. He’s the lone dissenter on the rate hiking path, and he’s been vocal about leaving monetary policy alone until the inflation data warrants a move. 

​Kashkari released an essay on Monday where he blames the Fed for creating its own low inflation surprise by tightening money and forecasting a tighter path for monetary policy, therefore creating a contractionary effect on the economy as consumers/businesses anticipated the negative effects of higher rates on the economy.

Guess who made this same case?  Bernanke.  He did so in a blog post last year, around this time. It was just as the world was spiraling into negative rates.  He said the Fed shot itself in the foot by publishing an overly optimistic trajectory and timeline for normalizing rates. And that the communication alone resulted in an effective tightening.

​This is why the ten year yield (still at just 2.34% after four rate hikes) is pricing in something that looks a lot more like recession than a hot economy.

​​With the above in mind, there has been a roster of candidates for Fed Chair floated today, which did not include Neel Kashkari.  That was until word began to circulate that Jeff Gundlach, manager of the world’s biggest bond fund, said yesterday that he thinks Kashkari will get the nod, because he’s the most easy money guy. Still, it was refuted in the media that he was even a candidate.

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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Stocks are sliding more aggressively today.  Wall Street and the media always have a need to assign a reason when stocks move lower.  There have been plenty of negatives and uncertainties over the past seven months — none of which put a dent in a very strong opening half for stocks.

​But markets don’t go straight up.  Trends have retracements.  Bull markets have corrections.  And despite what many people think, you don’t need a specific event to turn markets.  Price can many times be the catalyst.

If we look across markets, it’s safe to say it doesn’t look like a market that is pricing in nuclear war.  Gold is higher, but still under the highs of a month ago.  The 10 year yield is 2.21%.  Two weeks ago, it was 2.22%.  That doesn’t look like global capital is fleeing all parts of the world to find the safest parking place.

​Now, on the topic of North Korea, the media has found a new topic to obsess about– and to obsessively denounce the administration’s approach.  With that, let’s take a look at the Trump geopolitical strategy of calling a spade a spade.

​As we know, Mexico was the target heading into the election.  Trump’s tough talk against illegal immigration and drug trafficking drew plenty of scrutiny.  People feared the protectionist threats, especially the potential of alienating the U.S. from its third biggest trading partner.  We’re still trading with Mexico.  And the U.S. is doing better.  So is Mexico.  Mexican stocks are up 11% this year.  The Mexican currency is up 13% this year.

​China has been a target for Trump.  He’s been tough on China’s currency manipulation and, hence, the lopsided trade that contributed heavily to the credit crisis. Despite all of the predictions, a trade war hasn’t erupted.  In fact, China has appreciated its currency by 5% this year.  That’s a huge signal of compliance.  That’s among the fastest pace of currency appreciation since they abandoned the peg against the dollar more than 12 years ago (which was China’s concession to threats of a 30% trade tariff that was threatened by two senators, Schumer and Graham, back in 2005). And even in the face of a stronger currency (which drags on exports, a key driver of the economy), stocks are up 5% in China through the first seven months of the year.

​Bottom line:  It’s fair to say, the tough talk has been working.  There has been compromise and compliance.  So now Trump has stepped up the pressure on North Korea, and he has been pressuring China, to take the side of the rest of the world, and help with the North Korea situation – and through China is how the North Korea threat will likely get resolved.

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July 19, 2017, 4:00 pm EST               Invest Alongside Billionaires For $297/Qtr

As we know, inflation has been soft.  Yet the Fed has been moving on rates, assuming that they have room to move away from zero without counteracting the same data that is supposed to be driving their decision to increase rates.

​Thus far, after four (quarter point) increases to the Fed funds rate, the moves haven’t resulted in a noticeable tightening of financial conditions.  That’s mainly because the interest rate market that most key consumer rates are tied to have remained low.  Because inflation has remained low.

​A key contributor to low inflation has been low oil prices (though the Fed doesn’t like to admit it) and commodity prices in general that have yet to sustain a recovery from deeply depressed levels (see the chart below).

​But that may be changing.

Commodities have been lagging the rest of the “reflation” trade after the value of the index was cut in half from the 2011 highs.  Remember, we looked at this divergence between the stocks and commodities last month. Commodities are up 6% since.

Things are picking up.  Here’s the makeup of the broadly followed commodities index.

July 13, 2017, 4:00 pm EST               Invest Alongside Billionaires For $297/Qtr

With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come.  It’s Japanese stocks.

First, a little background:  Remember, in early 2016, the BOJ shocked markets when it cut its benchmark rate below zero. Counter to their desires, it shook global markets, including Japanese stocks (which they desperately wanted and needed higher). And it sent capital flowing into the yen (somewhat as a flight to safety), driving the value of the yen higher and undoing a lot of the work the BOJ had done through the first three years of its QE program. And that move to negative territory by Japan sent global yields on a mass slide.

By June, $12 trillion worth of global government bond yields were negative. That put borrowers in position to earn money by borrowing (mainly you are paying governments to park money in the “safety” of government bonds).

The move to negative yields, sponsored by Japan (the world’s third largest economy), began souring global sentiment and building in a mindset that a deflationary spiral was coming and may not be leaving, ever—for example, the world was Japan.

And then the second piece of the move by Japan came in September. It was a very important move, but widely under-valued by the media and Wall Street. It was a move that countered the negative rate mistake.

By pegging its ten-year yield at zero, Japan put a floor under global yields and opened itself to the opportunity to doing unlimited QE.  They had the license to buy JGBs in unlimited amounts to maintain its zero target, in a scenario where Japan’s ten-year bond yield rises above zero.  And that has been the case since the election.

The upward pressure on global interest rates since the election has put Japan in the unlimited QE zone — gobbling up JGBs to push yields back down toward zero — constantly leaning against the tide of upward pressure. That became exacerbated late last month when Draghi tipped that QE had done the job there and implied that a Fed-like normalization was in the future.

So, with the Bank of Japan fighting a tide of upward pressure on yields with unlimited QE, it should serve as a booster rocket for Japanese stocks, which still sit below the 2015 highs, and are about half of all-time record highs — even as its major economic counterparts are trading at or near all-time record highs.

June 30, 2017, 7:00 pm EST               Invest Alongside Billionaires For $297/Qtr

Without a doubt, there was a significant shift in the outlook on central bank monetary policy this week.  In fact, the events of the week may represent the official market acceptance of the “end of the easy money” era.

Draghi told us deflation is over and reflation is on.  Yellen told us we should not expect another financial crisis in our lifetimes.  Carney at the Bank of England told us removal of stimulus is likely to become necessary, and up for debate “in the coming months.” And even the Finance Minister in Japan joined in, saying Japan was recovery from deflation.

​With that, in a world where “reflation” is underway, rates and commodities lead the way.

​Here’s a look at the chart on the 10-year yield again. We looked at this on Tuesday.  I said, the “Bottom May Be In For Oil and Yields.”  That was the dead bottom. Rates bounced hard off of this line we’ve been watching …

This reflation theme confirmed by central banks has put a bid under commodities…

That’s especially important for oil, which had been trading down to very dangerous levels, the levels that begin threatening the solvency of oil producers.

That’s a 9% bounce for oil from the lows of last week!

​This all looks like the beginning of another leg of recovery for commodities and rates (with the catalyst of this central bank guidance). Which likely means a lower dollar (as we discussed earlier this week).  And a quieter broad stock market (until growth data begins to reflect a break out of the sub 2% GDP funk).

​Have a great weekend.

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