trump | Billionaire's Portfolio

Gridlock In Washington Should Give The Fed An Excuse To Pause

November 14, 5:00 pm EST

Later today Fed Chair Powell will be speaking at a Dallas Fed event. We’ve talked over the past two days about the potential for Powell to use this opportunity to dial down expectations of a December rate hike.

Overnight, Japan reported a contraction in their economy for the third quarter. And this morning Germany’s GDP report showed the first contraction in more than three years. Meanwhile, U.S. core CPI came in softer than expected this morning. And the headline number will be hit, in the next reading, by a 28% plunge in oil prices.

Add this to the outlook for gridlock in Washington on any further pro-growth policy-making, and Powell has the perfect excuse to start telegraphing a pause on rate hikes.

If he does, expect stocks to respond very favorably. We will see. He speaks at 6:05pm EST.

Here’s a look at stocks and the decline of the past month, as we head into this Fed discussion on the economy …

Technically, today the S&P and the Dow both hit a big retracement level and bounced aggressively. This sets up nicely for the Fed discussion.

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Election Results Should Simply Clear The Fog For Another Run In Stocks

November 5, 5:00 pm EST

The elections tomorrow are said to be a referendum on Trump’s Presidency.

And given the sentiment, I think it’s fair to say the surprise scenario for markets would be for Republicans to retain control of Congress. For that to happen, it looks like the Republicans would need to win 61% of the “toss up” races in the house. Of those, 84% are currently Republican held.

That scenario would be a vote of confidence for the Trump economic agenda. And for markets, it would be “risk on,” which would likely draw more attention to the inflation outlook, and the speed at which market interest rates will move. Trump would retain his leverage over China on trade concessions.

Scenario two, would be a split Congress. If we get a split Congress, the Trump economic plan would likely turn to infrastructure. The belief is that a Democrat led house would likely be a partner to Trump on a big infrastructure spend.

Though I suspect, given the political atmosphere, they may work to block any further progress on the economic stimulus front, in effort to position themselves for the 2020 Presidential election. On China trade negotiations, I suspect a split Congress would begin to fight against Trump’s executive order-driven trade wars. This scenario would mean, gridlock in Washington.

However, after the cloud of election uncertain lifts, both scenarios should be a greenlight for stocks.

Remember, we already have an economy running north of 3%, with record low unemployment, and consumers are sitting on record high household net worth and record low debt service ratios. Companies are growing earnings at over 20% (yoy), and growing revenues at over 8% (yoy). And corporate credit market debt is near the lowest levels (relative to market value of corporate equities) of the past 70 years.

So there is plenty of fuel in the economy to continue the trajectory of economic boom. Maybe most importantly, following the October correction, the tech giants have been pricing out the “monopoly scenario” which paves the way for a broader-based bull market for stocks.

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Why We Won’t See Another Big Silicon Valley Internet Giant

November 2, 5:00 pm EST

If you are a regular reader of my daily notes, you’ll know I’ve suspected we are seeing an end to the “wild west” days in Silicon Valley.

I think we’ve finally seen it play out in the stock market in the past month.

The media has spent the past month pontificating about big macro economic stories and how these risks have driven this correction stocks. But the intermarket correlations don’t support it. Despite the sharp slide in stocks, money hasn’t fled to the safety of bonds. The currency market has shown little to no stress. And gold has been relatively quiet. This is all antithetical to what you would find in a world shaken from elevated global risks.

Ultimately, this correction has been about repricing the tech giants. And one of the power players in Silicon Valley said about as much this week.

Peter Theil, founder of PayPal and the first investor in Facebook said he doesn’t expect to see another innovative breakthrough consumer internet company. I agree (for a number of reasons).

With that, I want to revisit my note from March of 2017, as Trump was just getting his feet wet as President:

TUESDAY, MARCH 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama.

With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over?

Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.

In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.

Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the ‘the discovery, development and implementation of various technologies.’ In June 2009, the government loaned Tesla $465 million to build the model S.

When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups).

Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more than three times the size of Avis, Hertz and Enterprise combined.

Will money keep chasing these companies without the wind any longer at their backs?“

Again, this note above was from about 18 months ago. And administration change has indeed become a problem for these emerging monopolies.

Trump’s scrutiny has come, and so has the regulatory scrutiny. But admittedly is has taken longer than I expected.

Still, it has become clear now to lawmakers (in the U.S. and abroad) that the lack of regulatory oversight of these companies (if not regulatory favor) has created a “winner takes all” environment. And the power transfer into so few hands has quickly become a big threat.

Now these companies look forward to the next decade of regulatory purgatory. But given the maturity of these tech giants, higher regulation only strengthens their moat. That means there will never be a competition to Facebook emerging from a dorm room or garage. The compliance costs will be too high.

But regulation on the tech giants also creates the prospects for those “old-economy” competitors that have survived, to bounce back.

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Catalyst For Both Corrections This Year Has Been Saudi Selling

October 23, 5:00 pm EST

As we discussed yesterday, despite all of the drama about China, Italy,
Brexit, rates and the elections, what seems more likely to have driven the recent correction in stocks is Saudi selling.

In fact, I think it’s clear that there has been a Saudi liquidation (of U.S. and global assets) which was the catalyst for the correction in stocks earlier this year, and this recent decline.

Remember, in November of last year, the Saudi Crown Prince Salam, successor to the King, ordered the arrest of many of the most powerful Saudi Princes, country ministers and business people in Saudi Arabia on corruption charges. Over $100 billion in assets were claimed to be under investigation (a third frozen) in what was called the “Saudi purge.”

These subjects were detained for nearly three months. The timing of their release and the market correction of early this year is where it all begins to align.

They were released on Saturday, January 27. S&P futures open for trading on Sunday night. Stocks topped that night and proceeded to drop 12% in six days. And rallies in stocks were sold aggressively for the better part of the next seven months.

Fast forward to this month, and we have the murder of the journalist that was a public critic of the Crown Prince Salam. As the details of story pointed back to Salam, on Oct 3, U.S. bond markets got hit (to the hour of news hitting the wires) and stocks topped that day, and have proceeded to drop by more than 8%.

Clearly, the destabilization in Saudi Arabia has put considerable assets in jeopardy. With that, those in control of those assets have likely been scrambling to protect them, as U.S. Congress pushes for sanctions, which could include freezing Saudi assets.

This Market Correction Is Driven By Saudi Liquidation

October 22, 5:00 pm EST

As the events surrounding Saudi Arabia continue to unfold, it is beginning to look more and more like the market shakeup of the past three weeks was triggered by Saudi selling.

The top in stocks and the heavy selling came just as news was hitting wires that Khashoggi never exited the Saudi consulate in Turkey – disputing the story of the Saudi government.

Stocks put in a top that day.

And that was the day the bond market also made it’s move — the 10-year yield spiked from 3.08% to 3.18%.

Here’s what hit the news wires that triggered the selling in bonds/rise in market rates – to the hour.

So, was the catalyst for this market correction triggered by money from Saudi Arabia moving to escape a potential asset freeze? It looks possible.

We constantly hear predictions of impending corrections, pointing to all of the clear evidence that should drive it, but corrections are often caused by events that are less pervasive in the market psyche. The Saudi story would qualify.

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Gold Is The New Bonds

October 11, 5:00 pm EST

Yesterday we talked about the repricing of the tech giants as the catalyst for the slide in global stocks. That slide continued today.

But the brunt of the punishment is back on the Dow, which was down another 2%. At the lows today, that takes us back to flat on the year for the DJIA … up 1% for the S&P 500. And the Nasdaq, at the lows today, was up just 4.8% on the year.

As they say, stocks go up in an escalator and down in an elevator.

Interestingly, in this slippery slide for stocks, money has NOT been piling into bonds. This is the flight to safety trade we’ve seen throughout the post-financial crisis era. It doesn’t seem to be happening this time. The 10-year yield remains in sniffing distance of 3.25% (closing today at 3.14%).

So, where is the money going? Gold.

Gold is on the move — the top performer in global markets today. And it looks like it’s just getting started. As I said last week, “the set up for a bounce in gold here looks ripe. The level to watch will be 1,214.”

You can see in the chart, the 1214 level gave way today, and we had a break of the downtrend of the past six months.

Now, when we discussed gold last week, we were talking about the potential for China to perhaps try a few shenanigans over the next month, in order to influence the outcome of the November elections.

Here’s an excerpt from that October 3rd note: “China remains the holdout on making a deal with Trump on trade. And it looks likely that they are holding out to see what the November elections look like.

Will Trump retain a Republican led Congress? I suspect we may see China do what it can to influence that outcome. As we know, the Republicans will be promoting the economy as we get closer to voting day.

What can China do to rock that boat?

They can sell Treasuries, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets–which has a way of shaking confidence in the economy.“

I suspect we may be seeing precisely this above scenario play out.

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Time To Watch China’s Currency Closely

October 8, 5:00 pm EST

China was on holiday last week (Golden Week). So today, with China back to work, we saw the response in Chinese markets, for the first time, to the spike in global bond yields (and the slide in global stocks).

Chinese stocks fell by 3.7%. The yuan slid back to the 21-month lows. And the PBOC stepped in with the fourth cut of the year to its reserve ratio.

Now, China has been running sub-7% growth since late 2015. And in China, that’s recession like economic activity. The Chinese government’s sensitivity to this level of growth is clear through the behavior of the central bank’s use of RRR cuts and the currency (the yuan). Cutting the required reserves for banks is a way to stimulate the economy – to promote lending. Weakening the currency is a way to stimulate exports.

You can see in the chart below, that has been the path for both (the currency and the RRR) since late 2015.

You can also see in the chart, a period where the yuan strengthened sharply. What gives?

That was China’s response to the Trump election. The Chinese ran the currency back UP, in hopes of pacifying Trump and staying above the trade dispute fray. It didn’t work. As we know, they have found themselves at the center of Trump’s trade offensive. As such, they have dug in, and returned to weakening the yuan — the best way they know, to defend/drive growth in their economy (i.e. undercut the world on price). The USD/CNY rate here will probably become the most important market to watch in the coming days and weeks. A return to 7 yuan per dollar would be the weakest level of the Chinese currency since 2008, pre-Lehman. That will cause some geopolitical fireworks.

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Bond Market Is Still Short Of Pricing In Fed’s 200 BPS Of Hikes

October 5, 5:00 pm EST

We ended the week with the jobs report today. The headline payroll number itself is less important. It’s been plenty good for the past seven years, and has averaged over 200,000 new jobs over the past twelve months.

Remember, the missing piece in this report, that has NOT confirmed a hot job market, has been wage growth. Throughout much of the post-Great Recession environment, despite the low headline unemployment number that central banks were able to manufacture, workers had little leverage in the job market to maximize potential, much less command higher wages. That means mid-level managers were happy to have a job and keep it, and college graduates were (have been) relegated to a career as a barista. That’s not a sign of a hot economy.

That said, wage growth has been on the move, but slowly. Today’s report of the September average weekly hourly wages was up 2.8% (compared to last year this time). Here’s what the history of that number looks like:

So wages are on the rise, but not fast. And that explains why inflation is on the rise, but not fast.

That should comfort those who think the interest rate market is about to run away. Remember, the Fed hiked by another 25 basis points last month, and contrary to what we’ve seen throughout the Fed’s three-year tightening cycle, the bond markets are finally beginning to price some of it in.

For perspective, the Fed went by another 25 basis points in September, and the 10-year yield has since risen by 20 basis points.

As you can see in the chart, we’ve had 200 basis points of Fed tightening since December of 2015. But the 10-year yield, since the Fed began “normalizing” policy three years ago, has risen less than half of that (<100 basis). It’s far from a runaway train in the market-determined interest rate market.

As I said yesterday, the move in rates is a growth story, not a crisis (or end of growth) story. With the optimism of economic momentum supported by fiscal stimulus and structural reform, the interest rate market is finally pricing OUT the risks of slow growth forever and post-Great Recession crises.

Market Rates Are Finally Adjusting To Fed Tightening

October 4, 5:00 pm EST

The move in rates continued to spook markets today. The 10-year yield traded as high as 3.23%.

Now, despite the dramatic tone you’ll find on CNBC when stocks go down, a 10-year yield at 3.23% isn’t a crisis. And a stock market that is down 1% from all-time highs isn’t a crisis or even a “sell-off.”

For perspective, the Fed has now moved 8 times off of zero. The leaves the benchmark (short term) rate set by the Fed at 2-2.25%, still well below long-term average rates. And that leaves the market determined (longer term) interest rate, just below 3.25%, still well below the long-term average. With that, rates are still low. In fact, if we took the record low in the 10-year yield, set in July of 2016, and applied the Fed’s 200 basis points of hikes, we would have a 10-year of 3.34%. We are still south of that. I would argue at current levels, the interest rate market is finally pricing in sustainable economic recovery (pricing out risks of another post-economic crisis shock/slump).

Now, when rates are on the move, people immediately start talking about debt service. On that note, consumers and companies are in as good a financial position as they’ve been in a very long time (record high household net worth, record profits) . Household debt service ratios are at record lows.

Bottom line, the move in rates is a growth story, not a crisis story. We have 3%+ economic growth, with low inflation and solid employment. We may have finally returned to the level of trust and confidence in the economy that fuels “animal spirits.”

China’s Leverage On Trump Tariffs

October 3, 5:00 pm EST

China remains the hold-out on making a deal with Trump on trade. And itlooks likely that they are holding out to see what the November elections look like.

Will Trump retain a Republican led Congress? I suspect we may see China do what they can to influence that outcome.

As we know, the Republicans will be promoting the economy as we get closer to voting day.

What can China do to rock that boat?

They can sell Treasuries, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets – which has a way of shaking confidence in the economy.

As we’ve discussed, the economy can withstand a 10-year yield in the low 3s. But what has spooked market this year (namely stocks) is the fear that a 3% 10-year could quickly turn into a 4% 10-year.

We may have seen a taste of it today. We had a run from 3.08% to 3.18%. That’s the highest level since 2011. And stocks came off of the highs.

If China was the culprit, or if China chooses to dump some Treasuries over the next month, in attempt to stir up some instability in markets, we should see them move that money elsewhere. The likely recipient of that capital would be gold.

It wasn’t evident with the behavior gold today. Gold had a big dayyesterday, but backed off today, even as rates ran. But as you can see in the chart below, the set up for a bounce in gold here looks ripe. The level to watch will be 1214.