Yesterday we talked about the commodities bull market and the move underway in natural gas.
That all continued today, thanks in part to a comment by the U.S. Treasury Secretary, saying “obviously a weaker dollar is good for us.” When the dollar goes down, commodities prices tend to go up, since they are largely priced in dollars. As such, commodities were the top performers of the day – beginning to gain more momentum at multi-year highs.
But as we’ve seen from this chart, this recovery in commodities, which has dramatically lagged in the reflation trade, has a long way to go.
While the markets reacted as if Mnuchin, the Treasury Secretary, was talking down the dollar, the dollar is already in a long-term bear market cycle.
Remember, we looked at this chart (below) of the long-term dollar cycles back in June…
And I said, “if we mark the top of the most recent cycle in early January, this bull cycle has matched the longest cycle in duration (at 8.8 years) and comes in just shy of the long-term average performance of the five complete cycles. The most recent bull cycle added 47%. The average change over a long-term cycle has been 56%. This all argues that the dollar bull cycle is over. And a weaker dollar is ahead. That should go over very well with the Trump administration.”
The dollar is down about 8% since then and is breaking down technically now.
The dollar index is now down 14% in this new bear cycle. And these are the early innings. Based on the dollar cycle, it has a long way to go, and should last for another 5 to 7 years.
So, this dollar outlook is further support for the case for a big run in commodities we’ve been discussing. And as we observed yesterday, in the case of Chesapeake Energy (CHK), the second largest producer of natural gas in the country, the commodities stocks are still extremely underpriced if this scenario for commodities plays out.
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With a Fed decision queued up for tomorrow, let’s take a look at how the rates picture has evolved this year.
The Fed has continued to act like speculators, placing bets on the prospects of fiscal stimulus and hotter growth. And they’ve proven not to be very good.
Remember, they finally kicked off their rate “normalization” plan in December of 2015. With things relatively stable globally, the slow U.S. recovery still on path, and with U.S. stocks near the record highs, they pulled the trigger on a 25 basis point hike in late 2015. And they projected at that time to hike another four times over the coming year (2016).
Stocks proceeded to slide by 13% over the next month. Market interest rates (the 10 year yield) went down, not up, following the hike — and not by a little, but by a lot. The 10 year yield fell from 2.33% to 1.53% over the next two months. And by April, the Fed walked back on their big promises for a tightening campaign. And the messaging began turning dark. The Fed went from talking about four hikes in a year, to talking about the prospects of going to negative interest rates.
That was until the U.S. elections. Suddenly, the outlook for the global economy changed, with the idea that big fiscal stimulus could be coming. So without any data justification for changing gears (for an institution that constantly beats the drum of “data dependence”), the Fed went right back to its hawkish mantra/ tightening game plan.
With that, they hit the reset button in December, and went back to the old game plan. They hiked in December. They told us more were coming this year. And, so far, they’ve hiked in March and June.
Below is how the interest rate market has responded. Rates have gone lower after each hike. Just in the past couple of days have, however, we returned to levels (and slightly above) where we stood going into the June hike.
But if you believe in the growing prospects of policy execution, which we’ve been discussing, you have to think this behavior in market rates (going lower) are coming to an end (i.e. higher rates).
As I said, the Hurricanes represented a crisis that May Be The Turning Point For Trump. This was an opportunity for the President to show leadership in a time people were looking for leadership. And it was a chance for the public perception to begin to shift. And it did. The bottom was marked in Trump pessimism. And much needed policy execution has been kickstarted by the need for Congress to come together to get the debt ceiling raised and hurricane aid approved. And I suspect that Trump’s address to the U.N. today will add further support to this building momentum of sentiment turnaround for the administration. With this, I would expect to hear a hawkish Fed tomorrow.
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Stocks finished the week on record highs. We talked earlier in the week about Trump’s meeting with Japan’s Prime Minister and his economic and finance advisors.
I suspect that Trump will come away, after a weekend in Palm Beach with Abe, learning that Abenomics is good for the U.S., and good global growth and stability (in the current global economic environment).
And one of the keys to success in Abenomics is a weaker yen, which translates to a stronger dollar. As I’ve said, the weak yen has been pulled into the fray with Trump’s tough talk on trade imbalances, but his beef on currency advantage is really directed toward China – not Japan, not Mexico, not even Europe.
With that, and with the assumption that the yen may be pardoned for a while, the dollar bouncing against the yen as we head into the weekend. And it looks like we may see a technical breakout and an even higher dollar, lower yen in our future.
And Japanese stocks look set to break out too, to catch up to the strength of U.S. stocks. The Nikkei is 8% off of the 2015 highs, while U.S. stocks are on record highs, and 8% ABOVE its 2015 highs.
Another catch up trade: German stocks. Despite the growing attention given to the French nationalist candidate, Le Pen, who has been anti-euro and anti-European Union, right or wrong the bond market isn’t showing any new interest in disaster insurance in Europe, nor is the euro.
With that, German stocks look very good, still about 8% from the 2015 highs, and the technical correction clearly ended last summer.
Lastly, let’s take a look at another big sleeper stock market, China…
You can see how Copper is on a big run (up 10% ytd). That typically correlates well with expectations of global growth. Global growth is typically good for China. Of course, China is in the crosshairs of Trump’s fair trade movement, but if you think there’s a chance that more fair trade terms can be a win for the U.S. and a win for China, then Chinese stocks are a bargain here.
Have a great weekend!
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Yesterday we looked at the slide in yields (U.S. market interest rates — the 10-year Treasury yield). That continued today, in a relatively quiet market.
Let’s take a look at what may be driving it.
If you take a look at the chart below, you can see the moves in yields and gold have been tightly correlated since election night: gold down, yields up.
As markets began pricing in a wave of U.S. growth policies, in a world where negative interest rates were beginning to emerge, the benchmark market-interest-rate in the U.S. shot up and global interest rates followed. The German 10-year yield swung from negative territory back into positive territory. Even Japan, the leader of global negative interest rate policy early last year, had a big reversal back into positive territory.
And as growth prospects returned, people dumped gold. And as you can see in the chart above of the “inverted price of gold,” the rising line represents falling gold prices.
Interestingly, gold has been bouncing pretty aggressively since mid December. Why? To an extent, it’s pricing in some uncertainty surrounding Trump policies. And that would also explain the slow down and (somewhat) slide in U.S. yields. In fact, based on that chart above and the gold relationship, it looks like we could see yields back below 2.10%. That would mean a break of the technical support (the yellow line) in this next chart …
Another reason for higher gold, lower yields (i.e. higher bond prices), might be the capital flight in China. Where do you move money if you’re able to get it out in China? The dollar, U.S. Treasuries, U.S. stocks, Gold.
The data overnight showed the lowest levels reached in the countries $3 trillion currency reserve stash in 6 years. That, in large part, comes from the Chinese central banks use of reserves to slow the decline of their currency, the yuan. Of course a weakening yuan only inflames U.S. trade rhetoric.
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We’re finishing the first full week under Trumponomics. And it’s been an active one.
It’s clear now that President Trump intends to follow through on his campaign promises. While that’s making waves with the media and with Washington types, it’s creating more certainty about the outlook for growth for the real economy and, therefore, for financial markets.
We close the week with the Dow above 20,000, on new record highs. And as we discussed yesterday, stock markets around the world are rallying too on the prospects of a stronger U.S. economy translating into a stronger global economy. We looked at the charts of Mexican and Canadian stocks yesterday–both of which are sitting on record highs. U.K. stocks are near record highs and German stocks are quickly closing in.
We already know that small business optimism in the U.S. has hit 12-year highs, jumping by the most in since 1980–on Trump’s pro-growth agenda. Today the consumer sentiment report showed sentiment is on the rise too–at 13-year highs.
Let’s talk about the data that we’re leaving behind. Fourth quarter GDP was reported today at just 1.9%. This, more than seven years removed from the failure of Lehman Brothers, an $800 billion stimulus package, seven years of zero interest rates and three rounds of quantitative easing, and the economy is running at about 60% of its normal pace. And even after taking the Fed’s balance sheet from $800 billion to $4.5 trillion, we have inflation running at less than 50% of its normal pace. This malaise is consistent throughout the world. And this is precisely why big, bold fiscal stimulus and structural change is desperately needed, and is being embraced by those that understand the dangers of the stall-speed global economy that has been kept alive by global central bank intervention. As I’ve said, at Dow 20,000, it’s just getting started.
Have a great weekend!
We are likely entering an incredible era for investing, which will be an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade. For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
We talked yesterday about the significance of Dow 20,000. Higher stock prices are fuel for higher stock prices. And higher stock prices are fuel for better economic growth. It’s all self-reinforcing, and we discussed the reasons why stocks can still go much, much higher from here.
As I said, this serves as a validation marker for some that have been waiting to see what the Trump effect might be on markets. If you’ve listened to the consensus voice on Trumponomics, they’ve told you over and over how disastrous the protectionist rhetoric would be the U.S. economy and for the world. I’ve said, given the position of the world, post-Great recession, that Trump’s tough talk is leverage that can be used to ultimately create a fair playing field on trade, which can ultimately lead toward a rebalancing of the global economy — something that has to take place to put the world back on a path of sustainable growth, and end the cycle of booms and busts. That’s a win-win for everyone.
We’ve seen it working with industry leaders (they’re playing ball). And expect a similar outcome on the geopolitical front. This approach doesn’t work in normal times, but we’re not in normal times, almost a decade after the onset of the global financial crisis — where global economies remain weak and vulnerable.
With this in mind, Mexico and Canada are in focus with the announcement this week of the NAFTA renegotiation, the wall and the Keystone pipeline. And the media is hot and heavy on the cancellation of a trip to the White House by the Mexican President.
Let’s take a look at how Trumponomics is working for our two biggest trading partners, thus far.
This is the chart of the dollar versus the Mexican Peso. The rising line represents the dollar strengthening and the peso weakening, and vice versa.
If we look at this exchange rate as a gauge of trade partner health, we’ve seen the peso hit hard through the campaigning period under the protectionist fears of a Trump administration – and post election. That has represented a negative-scenario message for Mexico. But since the inauguration, the peso has been strengthening (not weakening), even as President Trump signed an executive order to renegotiate NAFTA. The message behind that usually means: the U.S. does better, Mexico does better.
What about Mexican stocks? Similar story. As the U.S. stock market is on record highs, the Mexican stock market too, is sitting on record highs. When the prospects are better for U.S. growth, our trade partners do better.
What about Canada? The same story. The Canadian stock market is on record highs.
The worst-case scenarios are good fodder for attracting readers and viewers. That’s why the media is obsessively focused on the potential negatives. But with some perspective on the bigger picture, and with respect to the position of the world coming out of the crisis period, those worst-case scenarios have lower probabilities than they think, and would have you believe. That’s why reality is crafting a very different story.
We are likely entering an incredible era for investing, which will be an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade. For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
The new President Trump has wasted no time on carrying out his plan on trade. He met with 12 major U.S. company leaders today and told them that they would pay to build outside of the U.S., but (importantly) they would save to build here. And he wrote an executive order to withdraw from the Trans-Pacific Partnership, and one to renegotiate NAFTA.
There are plenty of people that have focused on the risks and the dangers with the Trump trade policies. Meanwhile, those most directly affected aren’t quite as draconian on the outlook — quite the opposite. The executives that have walked out of Trump Tower, and now the White House have largely been optimistic. The same is said for trade partners. Whether they mean it or not, they understand the value of doing business with the U.S. consumer.
As I’ve said, there are clear opportunities for win-wins – especially in a world that must rebalance trade to avoid more cycles of the booms and busts, like the boom-bust we experienced over the past two decades. The administration has the leverage of power (with a Republican Congress), but they also have the leverage of rewards. Despite what the media tells us, behind closed doors the new administration seems to negotiate by carrot rather than stick. Trump comes to meetings bearing gifts, and that creates buy-in.
When you bring American CEOs in and tell them that you’re going to give them a 20 percentage point tax cut, you’re going to slash the regulation burden (by “75%” as he said today), you’re going to give them a 30+ percentage point tax cut on repatriating offshore money, and your going to launch a trillion dollar infrastructure spend, all in an effort to juice the economy to a 4%+ growth rate, they’re going to be very excited — even if you tell them they can no longer access the cheapest production in the world.
In the end, they’d rather have a hot economy to sell into, than a stagnant economy, even if it comes with a higher cost of production. And we may find that, in the end, the after-tax profit margins of these big U.S. corporates may be better given all of these incentives, even if they make things here. Better revenues, and maybe better margins to go with it.
Remember, the optimism of U.S. small business owners made the biggest jump since 1980 on the prospects of growth-friendly Trump policies. GDP equals Consumption + Investment + Government Spending + Net Exports. Ultra easy monetary policies have made borrowing cheap, saving expensive and created the economic stability necessary to get hiring over the past several years. That has all kept consumption going.
The “build it here” policies are a recipe for capital investment to finally ramp up. Add to that, a big government infrastructure spend, and we’re getting the pieces of the puzzle in place to see much better economic growth. A hotter U.S. economy will mean a hotter global economy. With that, I suspect net exports will ultimately pick up as well, with a healthier, more sustainable global economy.
On that note, if we look at the USD/Mexican Peso exchange rate as a gauge of trade partner health, we’ve seen the peso hit hard through the campaigning period under the protectionist fears of a Trump administration. Interestingly, since the inauguration, the peso has been strengthening, even as President Trump signed an executive order today to renegotiate NAFTA. The message behind that usually means: the U.S. does better, Mexico does better.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
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President Trump officially took office today. From the close of business on November 8th, as people across the country were still voting, the S&P 500 has climbed 6% – from election night through today. The dollar index has risen 2.8. The broad commodities index is up 6%. The 10 year Treasury note is down 4% — which means the yield is UP from 1.80% to about 2.50%.
His policy agenda has clearly been a game changer.
But if you recall, the broad sentiment going into the election was that a Trump Presidency would cause a stock market crash. These were people that weren’t calibrating the meaningful shift in sentiment that came from projecting pro-growth policies in a world that has been starved for growth. That event (the election) alone did more to cure the global deflation risk than the trillions of dollars that central banks have been pouring into the global economy.
But many still aren’t buying it. I don’t often read financial news. I’d rather look at the primary sources (the data or hear from the actors themselves/ the horse’s mouth) and interpret for myself. But today, I had a look across the web. Four of the five top headlines on a major financial news site, on inauguration day, ranged from negative to doom-and-gloom — all laying blame on the dangers of Trump.
Because Trump has talked tough on trade, the common threat most refer to is a potential trade war. But remember, Trump has also talked tough on U.S. companies moving jobs overseas. Thus far, he hasn’t created enemies, he’s gotten concessions and has created allies. He’s used leverage, and he’s negotiated win-wins. Expect him to do the same with trade partners. With pro-growth policies coming down the pike and a meaningful pop in U.S. economic growth coming, no country, especially in the current state of the global economy, will want to be locked out of trade with the United States.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
As we near the year end and near a new administration and policy stance, the geopolitical risks have risen.
I’ve talked about the China threat quite a bit. China’s currency regime was at the core of global economic crisis, and is inching us all toward what looks like an ultimate military crisis. The seizure of an American drone by the Chinese on Friday was another step toward that end.
Remember, back in January, I talked about six global market themes that would rule for 2016. Among those, I said “China’s currency manipulation will come home to roost…..China’s currency manipulation (i.e. keeping their currency weak relative to the rest of the world, to corner the world’s export business) was a big contributor to the global credit bubble and subsequent economic crisis. Only after being persistently pressured by key trading partners (namely the U.S.) have they allowed their currency to slowly appreciate over the past several years. But now their economy is slowing, a dangerous scenario for China. Meanwhile, China is losing export prowess to Japan, a country that has weakened its currency by almost 35% in the past two years. The easy fix, in the minds of the Chinese, is to jumpstart exports. How do they do it? Weaken the currency, which is precisely what they have started doing (beginning in August of last year). But, longer term, expect such a reversal on formerly agreed to concessions by China, to be an act of economic war, which may, over the next decade or two, lead to military war (U.S., Europe, Japan v China, Russia, N. Korea).”
Since January (when I discussed the above) China has continued to weaken it’s currency. They’ve blamed it on capital flight. But with the economy still running at recession speed, they want and need a weaker currency, and they are walking it down. They know what works. A cheap currency drives exports. Exports have drive prosperity in China.
But they’ve run into new leadership in the U.S. that is talking tough and has the credibility to act (unlike the outgoing administration). That has money in China seeking the exit doors as more bumps appear to be ahead for the economy (not the least of which are threats of tariffs). And with that uptick in money leaving the country, the monetary authorities have clamped down on capital controls, more onerously restricting the movement of money out of China.
A weaker currency, tightening capital controls, and an eroding confidence in doing business in China all reinforces a weaker and weaker economy.
Still, as I’ve said before, while many think Trump will provoke a military conflict, that’s far from a certainty. With the credibility to act, however, Trump’s tough talk on China creates leverage. And from that leverage, there may be a path to a mutually beneficial agreement, where the U.S. can win in trade with China, and China can win. But it may get uglier before it gets better. In the end, growth solves a lot of problems. A hotter growing U.S. economy (driven by reform and fiscal stimulus), will ultimately drive much better growth in the global economy. And China has a lot to gain from both. Though in a fair trade environment, they won’t get as much of the pie as they’ve gotten over the past two decades. But it has the chance of leading to a more balanced and sustainable economy in China, which would also be a win for everyone.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 24% this year. You can join me here and get positioned for a big 2017.
With a Fed decision queued up for 
Stocks finished the week on record highs. We talked earlier in the week about Trump’s meeting with Japan’s Prime Minister and his economic and finance advisors.
