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

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

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

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

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

From my Market Perspectives piece: JANUARY 18, 2017

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

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

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

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

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

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

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

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

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

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

Join our Billionaire’s Portfolio subscription service 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.

October 20, 2017, 4:00 pm EST

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

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

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

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

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

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

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

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

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

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

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

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. 

By Bryan Rich 

October 13, 2017, 3:30 pm EST

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

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

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

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

Copper

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

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

Crude Oil

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

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

​​Iron Ore

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

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

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

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

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.  

By Bryan Rich 

October 12, 2017, 7:30 pm EST              Invest Alongside Billionaires For $297/Qtr

For much of the summer, while the world has been obsessed with Trump tweets, we’ve talked about the sharp but under-acknowledged move in copper and the message it was sending about the global economy and China (the biggest consumer of commodities), specifically. As I’ve said, people should Stop Watching Trump And Start Watching Copper.

Why copper? It is often an early indicator of economic cycles. People love to say copper ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. And it tends to lead a bull market in broader commodities.

Well, copper bottomed on January 15. Fast forward to today; the most important industrial metal in the world is up 24% on the year and sniffing back toward three-year highs. While the world continues to focus on Washington drama, this continues to be the proverbial “bell” ringing to signal a pop in economic growth is coming, and a big run for commodities investors is ripe for the taking.

With that in mind, we’ve talked in recent days again about the research from the top minds in commodities investing, Leigh Goehring and Adam Rozencwajg (managers of the commodities funds, ticker GRHIX and GRHAX). We know they like oil. In fact they think we see triple-digit oil prices by early next year.

They love the commodities trade in general. They have one of the most compelling charts I’ve seen in my 20-year career, to support the view that there is a generational bull breaking lose in commodities.

Stocks minted billionaires in the 1980s. Currencies minted billionaires in the 1990s. Tech and housing (bust) minted billionaires in the early 2000s. Then it was equity activism (stocks). The next opportunity looks like commodities.

In this chart below you can see, as Goehring and Rozencwajg say, commodities are as cheap today as they have ever been. “Only in the depths of the Great Depression and at the end of the dying Bretton Woods Gold Exchange Standard did commodities reach this level of undervaluation relative to equities.”

With this, they say, for those that can block out the noise, “there is a proverbial fortune to be made if they invest today.”

Here’s an excerpt from their most recent investor letter on their work on the stocks to commodities valuation:

“When commodities are this cheap relative to stocks, the returns accruing to commodity investors have been spectacular. For example, had an investor bought the Goldman Sachs Commodity Index (or something equivalent) in 1970, by 1974 he would have compounded his money at 50% per year. From 1970 to 1980 commodities compounded anually in price by 20%. If the same investor had bought commodities in 2000, he would have also compounded his money at 20% for the next ten years–especially attractive considering the broad stock market indicies returned nothing over the same period.”

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.  

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 5, 2017, 4:00 pm EST

We looked at small caps last week when the the Russell 2000 broke to new highs.

​Remember, at that point, small–caps had done only 9% on the year at this point. That’s against 13% for the S&P and Dow.

Here’s the chart now…

The Russell 2000 is now up 12% since the lows of August (up 11% ytd) and if you bought the small cap index on the Monday before the elections last year, you’re up 26%.  But small caps continue to lag the bigger cap market. And that makes the last quarter a very intriguing opportunity to own small caps.

​Bull markets tend to lift all boats.  And with that, equal-dollar weighted small caps tend to outperform equal-dollar weighted large caps in bull markets (in some cases by a lot). This one (bull market) looks like plenty of room to go in that regard.  And small cap companies should have more to gain from a corporate tax cut as the tend to have fewer ways to shelter income (relative to big multinationals).

​Now, with that bull market assertion, let’s talk about the general uneasiness that seems to exist (and has for a while) from watching the continued climb in stocks.

As we’ve discussed, you often here the argument that the fundamentals don’t support the level of stocks.  It’s just not true.  The fundamental backdrop continues to justify and favor higher stocks.  We have the prospects of fiscal stimulus building, which will be poured onto an already fertile economic backdrop — with low rates, cheap commodities, record consumer high credit worthiness and low unemployment.

​As the old market adage goes, “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  I don’t think anyone could argue we are currently in the state of euphoria for stocks. And as the great macro trader Paul Tudor Jones has said, “the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic” (i.e. euphoria can last for a while).

​Finally, let’s revisit this analysis from billionaire Larry Robbins on the influence of low interest rates, Fed policy and oil on markets.  He says every time ONE of these (following) conditions has existed, the market has produced positive returns.
​
Here they are:

• When the 30 year bond yield begins the year below 4%, stocks go up 22.1%.
• When investment grade bonds yield below 4%, stocks go up 16%.
• When high yield bonds yield below 8%, stocks go up 11.6%.
• When cash as a % of asset for non-financials is above 10%, stocks go up 17.6%.
• When the Fed tightens 0-75 basis points in the year, stocks go up 22%.
• When oil falls more than 20%, stocks go up 27.5%.

Again, his study showed that there has NEVER been a down year stocks, when any ONE of the above conditions is met.

It worked in 2015. It worked in 2016.  And now, not only does ONE of these conditions exist, but ALL of these conditions are (or have been) met for 2017.

October 2, 2017, 4:00 pm EST

Stocks open the week with another record high.  The dollar continues to do better. And as we open the new month, yields are now up 32 basis points from the lows of early last month.

​That’s a dramatic shift in the interest rate environment.  And in recent days, underpinning that strength, is the idea that a hawk could be taking over for Janet Yellen when her term ends at the end of January.

​Over the past few days the President has met with candidates for the Fed Chair job, and has said he will be announcing his decision in the next two to three weeks.  That’s a big deal for markets and the economy — something to keep a close eye on.

​His interview last Thursday was with a known hawk, former Fed governor Kevin Warsh  – who has publicly criticized the Fed for keeping rates too low.  He was also a hawk through some of the darkest days of the recovery – he’s been proven wrong for that view.  As for Yellen:  She has been among the most dovish Fed members throughout the crisis but has been leading the rate normalization phase (i.e. higher rates), which has proven to be questionable judgment, with missteps along the way resulting from the Fed’s overly optimistic and hawkish outlook.

​​Interestingly, though Trump criticized the Fed for keeping rates too low throughout the recovery, it’s higher rates, now, that are a significant threat to his growth policies.  So he needs the Fed to step out of the way, and do no harm to the hand-off from a monetary policy-driven recovery, to a fiscal policy driven-recovery.  Higher rates can choke off the positive effects of tax cuts and government spending.

​On that note, his friend on monetary policy should be (and I think will be) Neel Kashkari (a new Fed member).  Kashkari has been the lone dissenter on the Fed’s tightening path, arguing along the way to let the economy run hot, to ensure a robust recovery, before moving on rates.

​Over the past two years, Yellen has blamed their pauses in their tightening program to the lack of evidence that the economy is overheating.  It’s safe to say that the economy is not overheating (nor has it been), with both growth and inflation still undershooting long run averages.

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

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

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

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

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

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

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

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

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

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

September 14, 2017, 4:00 pm EST              Invest Alongside Billionaires For $297/Qtr

Yesterday we looked at the charts on oil and the U.S. 10 year yield.  Both were looking poised to breakout of a technical downtrend.  And both did so today.

​Here’s an updated look at oil today.

We talked yesterday about the improving prospects that we will get some policy execution on the Trumponomics front (i.e. fiscal stimulus), which would lift the economy and start driving some wage pressure and ultimately inflation (something unlimited global QE has been unable to do).

​No surprise, the two most disconnected markets in recent months (oil and interest rates) have been the early movers in recent days, making up ground on the divergence that has developed with other asset classes.

​Now, oil will be the big one to watch.  Yields have a lot to do, right now, with where oil goes.

Though the central banks like to say they look at inflation excluding food and energy, they’re behavior doesn’t support it.  Oil does indeed play a big role in the inflation outlook – because it plays a huge role in financial stability, the credit markets and the health of the banking system.  Remember, in the oil price bust last year the Fed had to reverse course on its tightening plan and other major central banks coordinated to come to the rescue with easing measures to fend off the threat of cheap oil (which was quickly creating risk of another financial crisis as an entire shale industry was lining up for defaults, as were oil producing countries with heavy oil dependencies).

​So, if oil can sustain above the $50 level, watch for the inflation chatter to begin picking up. And the rate hike chatter to begin picking up (not just with the Fed, but with the BOE and ECB). Higher oil prices will only increase this divergence in the chart below, making the interest rate market a strong candidate for a big move.

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.