Remember, it wasn’t too long ago that the world was sitting on every word uttered by a central banker. Those days are likely over — at least to the extreme extent of the past decade. For now, Trump has supplanted central bankers as the most powerful policy maker in the world.
Still, the Fed will meet following their rate hike last month, the second in their very slow hiking cycle – 1/4 point hike twelve months apart. They’ll do nothing this week, but the data tends to be going as desired by the Fed, and other major central banks for that matter (aside from Japan) — meaning, inflation has recovered and is nearing the target zone.
Remember, this time last year, the world was staring down the barrel of DE-flation again. Inflation, central bankers have tools to combat. Deflation is far more difficult, and far less predictable. It can spiral and grind economies to a halt. When consumers are convinced prices will be cheaper in the future, they wait. When they wait, economic activity stalls. With that, deflation tends to create more deflation. The fear of that scenario, and the potential of an irreversible spiral, is why central bankers were cutting rates to negative territory last year.
Where was the imminent deflationary threat coming from? Slow economic activity, but mostly a crash in oil prices.
Central bankers have the tendency to change the rules of the game when it suits them. When inflation is running hot, they may hold off on tightening money by pointing to hot “food and energy” prices. These are temporary influences, as they say. Interestingly, they are much more aggressive, though, when oil prices are creating a deflationary threat – as they did last year.
With that, oil prices have doubled from the lows of last February. So it shouldn’t be too surprising that inflation numbers are rising, and getting close to the desired targets (around 2%) of the central bankers of the U.S., Europe and England.
So will we see a turning point for global central banks (not just the Fed) in the months ahead? The world has already been pricing in the likelihood that the pro-growth policies coming from the Trump administration will take the burden of manufacturing economic recovery off of the central banks.
But we may find that “transitory oil prices” will be the excuse for more inaction by the Fed, and continued QE from the ECB and BOE in the months ahead, which may result in a slower pace of rate hikes than both the Fed projected in December and the market has been anticipating.
Higher rates at this stage: 1) creates problems for the housing recovery, 2) promotes more capital flight from emerging markets like China (which means more dollar strength),and 3) threatens to neutralize the fiscal stimulus and reform coming down the pike for the U.S.
In December, the Fed dialed back their talk about letting the economy run hot (i.e. staying well behind the curve on inflation to make sure recovery is robust). We’ll see if they switch gears again and start explaining away the inflation numbers to oil prices.
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The Trump agenda continues to dominate the market focus as we entered the second week of Trumponomics.
To this point the market focus has been on the pro-growth agenda. With that, stocks have been higher, yields have been higher, the dollar has been higher, and global commodities have been broadly rising. Meanwhile, gold (the fear trade) has been falling and the VIX has been falling, toward ultra-low levels. The VIX, like gold, is a good market indicator of uncertainty and/or fear.
Let’s talk about the VIX…
The VIX measures the implied volatility of options on the S&P 500. This is a key component in the price investors pay for downside protection on their portfolios.
So what is implied volatility? Implied volatility measures both actual volatility and the options market maker community’s expectations (or perception of certainty) about future volatility. When market makers feel confident about the stability in markets, implied vol is lower, which makes the price of options cheaper. When they aren’t confident in stability, implied vol goes up, which makes the price of an option go up. To compensate those that are taking the other side of your trade, for the lack of predictability, you pay a premium.
With that in mind, on Friday, the VIX traded to the lowest levels since the days before the failure of Lehman Brothers. That indicates that the market had (or has) become a believer that pro-growth policies, combined with ultra-easy central bank policies have created a buffer against the downside in stocks. But that perception of downside risk is changing today, with the more vocal uprising against Trump social policies. You can see the spike (in the far right of the chart) today…
So as big money managers were closing the week last Friday, looking at Dow 20,000+ and a VIX sliding toward levels not too far from pre-crisis levels, buying downside protection was dirt cheap. This morning, they’re paying quite a bit more for that protection.
With that said, this pop in the VIX and the Dow trading off by more than 100 points today gets a lot of attention. But is there justification to think that market turbulence will begin to reflect the turbulence and division in public opinion toward Trump policies? Just gauging the extent of the market reaction from the VIX today, it’s unlikely. The chart below is the longer term view of the VIX.
My observations: The VIX has had a small bounce from very, very low levels. On an absolute basis, vol is still very cheap. When there is real fear in the air, real uncertainty about the future, you can see from the spikes in the longer term chart above, the premium for the unknown gets priced in quickly and aggressively. Given that there has been virtually no risk premium priced into the market for any falter in the Trump Presidency, or the execution of Trump policies, the moves today have been very modest. And gold (as I write) is barely changed on the day.
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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As we kick off inauguration week, we have a continuation of this “buy the rumor, sell the fact” trade going on in markets.
We often see this phenomenon–it’s a reflection of investors pricing new information in anticipation of an event, and then selling into the event on the notion that the market has already valued the new information. And as we discussed last week, it looks like we’ve already been working on this “sell the fact” phase. Stocks have stalled, the dollar has pulled back a bit and global interest rates have slid off of the post-election highs. But as I said, these retracements should be shallow and short-lived.
Why? Because we appear to finally be in an environment where optimism (not hope) is outweighing fear. Contrary to the narrative of skepticim coming from the media, the markets, the data and the players are all sending very positive signals on the policy outlook.
The media has warned about the dangers of Trump’s rhetoric. Meanwhile, those that have been most directly targeted haven’t become enemies, they’ve quickly become allies and advocates of the Trump administration, making concessions and buying into the growth outlook. We’ve seen it at the corporate level (from GM to Alibaba). And we’ll likely see it at the sovereign level. The threats of taxes and fines have leveraged jobs with U.S. corporates. Tariffs can leverage better trade deals in a world and time that everyone can greatly benefit from better U.S. growth, which can ultimately lead to better and more sustainable global growth.
On the data front, small business optimism is running at the highest level in 37 years. And, as we’re getting into the heart of earnings seasons, the positive surprises are already coming in bigger and at a hotter pace. That’s for the fourth quarter, with just a sliver of post-election certainty priced in.
Add to that, the most troubled industries through the post-financial crisis period have been energy and financials. Financials now have the tailwind of rising interest rates and an outlook for softer regulation. Energy companies have spent that past couple of years cutting costs and reducing debt in the oil price crash. With oil back above $50 and with good prospects to go higher as they ramp up production, they will become earnings machines. This is all fuel for hotter earnings and higher stocks.
Plus, on the earnings note, people are just beginning to wake up to the fact that a better growth environment and a dramatic cut in the corporate tax rate will pump up broad market earnings next year–perhaps as much as 15%-20% better than what’s already projected for 2017.
With all of this in mind, it’s unlikely that investors will retrench over the coming months and wait for proof that Trump promises will be kept and Trump policies will be executed well. Instead, following the swearing in of the new President on Friday, we’ll probably see the “reflation” rally resume.
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Jobs, jobs everywhere there’s jobs. The President-elect yesterday said he will be the “greatest job creator God ever created.”
Since December, when the President-elect announced that Carrier, an air conditioner manufacturer in Michigan, would keep 1,000 jobs in the U.S. instead of moving them to Mexico, other companies have been lining up to announce big, bold hiring plans.
It was immediately clear that Carrier won priceless exposure and good-will. From that point, the Japanese billionaire Masayoshi Son took a visit to Trump Tower and followed with an announcement that his Softbank technology holdings company would invest $50 billion in U.S. businesses and create 50,000 new jobs. Softbank owns more than 80% of Sprint, and Sprint has followed with an announcement of 5,000 jobs to come.
Alibaba’s founder Jack Ma visited Trump Tower yesterday and left saying he would create 1 million jobs in the U.S.
Amazon, who’s CEO Jeff Bezos had a visit to Trump Tower last month, said today they plan to add 100k jobs.
Not to be outdone, Taco Bell (part of YUM Brands), said today it would add 1.6 million jobs in the U.S. Does this mean Taco Bell is about to go on a massive expansion increasing their store count by 5x — putting a Taco Bell on every corner in America?
Or, is this all just a public relations ploy? Are they all hoping to gain favor with the administration? Yes and yes. But it’s also all self-reinforcing. A better outlook for jobs is driving confidence. Confidence can drive a better outlook for jobs. More employed, more confident consumers can drive economic growth. And better growth drives more jobs.
Now, all of this said, the headline unemployment number is already down to 4.7% (near what is considered “normal”). The number that measures underemployed and those that have stopped looking is down to 9.2%. It’s much higher than the headline rate, but relative to history, it’s returning close to normal levels too. With the prospects of hotter growth coming, and new job creation, we could be headed for a very tight labor market. What does that mean? Higher wages are coming, to finally begin making up for two decades of wage stagnation.
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.
For two full months the Trump rally has consisted of higher stocks, higher yields, a higher dollar and higher commodity prices — all on the prospects of hotter growth and a sustainable period of prosperity ahead.
Since the night of November 8th, it’s been “buy it now, prove it to me later” market. But people are expecting there will be a period of time where the markets begin trading in “prove it to me” mode.
Often we see a “buy the rumor, sell the fact” phenomenon in markets — it’s a reflection of investors pricing new information in anticipation of an event, and then selling into the event on the notion that the market has already valued the new information. With that, the period surrounding the January 20th inauguration could be the “sell the rumor” moment (in fact, we may be working on it now).
Many are hoping it could be the second chance given to those that have been left behind in the great Trump reflation rally. The question is, how deep or shallow that correction might be, and how long or short-lived it might me.
I would argue, it’s going to short-lived and shallow (maybe very shallow), for all of the reasons I’ve discussed in this daily note, not the least of which, is a world starving for a return to meaningful and sustainable growth, and the perception that this is the best chance we’ve had and might have, to get the global economy back on track. Trump’s tone today, in his press conference, indeed, indicated that he would waste no time executing on his plan. That favors a short-and-shallow correction scenario for the Trump rally. And shallow corrections are typical of strong trending markets.
With that said, since the election, here’s a view of key markets (taking the last price before the election night whipsaw):
The yield on the 10-year has gone from 1.85% to over 2.64% on the Trump effect. But despite a surprisingly hawkish Fed on December 14th, and even more hawkish fundamental data since, the high in yields, thus far, was marked the day after the Fed meeting last month. And today yields traded just below 2.33%, the lowest since November 30th! For technicians, the 38.2% (Fibonacci) retracement of the entire move is 2.34%. That would be considered a shallow retracement.
The dollar (index) has gone from 97.68 to 103.82, and today trades at 101.28 which is the lowest level since December 14. Commodities (the broad commodity index) have gone from 183 to 193, and today trades at 191. Both have room for another 1% or so lower. The dollar looks very strong.
What about stocks? The S&P 500 has gone from 2,138 to 2,278, and now trades at 2,262. A shallow retracement for stocks of the Trump rally would be about 2,225 (which is about 2% lower from here). Given the policy outlook, those wishing for something deeper may not get the chance – a couple of percentage points from here may be the gift.
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 2017. You can join me here and get positioned for a big 2017.
As the Trump rally continues across U.S. stocks, the dollar, interest rates and commodities, there are some related stories unfolding in other key markets I want to discuss today.
The Fed: Janet Yellen was on Capitol Hill today talking to Congress. As suspected, she continues to build expectations for a December rate hike (which is nearly 100% priced in now in the markets). And she did admit that the economic policy plans of the Trump administration could alter their views on inflation — but only “as it (policy) comes.” I think it’s safe to say the Fed will be moving rates up at a quicker pace than the thought just a month ago. But also remember, from Bernanke’s suggestion in August, Yellen has said that she thinks it’s best to be behind the curve a bit on inflation — i.e. let the economy run hotter than they would normally allow to ensure the economic rut is left in the rear view mirror. That Fed viewpoint should support the momentum of a big spending package.
The euro: The euro has been falling sharply since the Trump win, for two reasons. First, the dollar has been broadly strong, which on a relative basis makes the euro weaker (in dollar terms). Secondly, the vote for change in the America (like in the UK and in Greece, last year) is a threat to the euro zone, the European Union and the euro currency. With that, we have a referendum in Italy coming December 4th, and an election in France next year, that could follow the theme of the past year — voting against the establishment. That vote could re-start the clock on the end of the euro experiment. And that would be very dangerous for the global financial system and the global economy. The government bond markets would be where the threat materializes in the event of more political instability in Europe, but we’ve already seen some of this movie before. And that’s why the ECB came to the rescue in 2012 and vowed to do whatever it takes to save the euro (i.e. they threatened to buy unlimited amounts of government bonds in troubled countries to keep interest rates in check and therefore those countries solvent). With that, the events ahead are less unpredictable than some may think.
The Chinese yuan: As we know, China’s currency is high on the priority list of the Trump administrations agenda. The Chinese have continued to methodically weaken their currency following the U.S. elections, moving it lower 10 consecutive days to an eight year low. This has been the trend of the past two years, aggressively reversing course on the nine years of concessions they’ve made. This looks like it sets up for a showdown with the Trump administration, but as history shows, they tend to take their opportunities, weakening now, so they can strengthen it later heading into discussions with a new U.S. government. Still, in the near term, a weaker yuan looked like a positive influence for Chinese stocks just months ago — now it looks more threatening, given the geopolitical risks of trade tensions.
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We talked last week about the Trump effect on stocks. With a new President promising aggressive growth polices and a supportive Congress in place to make it happen, the Trump plan is now being coined as Trumponomics.
As we discussed last week, the markets are reflecting this hand-off, from a Fed driven economy to a pro-growth government driven economy, positively — pricing in a period of hot growth. And it couldn’t come at a better time — in fact, it may come at the perfect time.
The Fed has been able to manufacture stability but not demand and inflation. Fiscal stimulus is designed to fill that void — to boost aggregate demand and inflation. That’s why the bond market has shifted gears so dramatically, now reflecting a world with a trillion dollar infrastructure spend on the table, tax cuts, deregulation and incentives to get $2.5 trillion of U.S. corporate capital repatriated. Prior to last week, despite all of the best efforts from global central banks, and a Fed that was telegraphing a removal of emergency policies, the bond market was reflecting a world that was in depression, with the 10-year yield well below 2% in the U.S. and negative rates throughout much of the world. Today the U.S. 10 year traded above 2.25%, returning to levels we saw last December, when the Fed made its first post-crisis rate hike.
As we’ve discussed, growth has a way of solving a lot of problems, including our debt problem. Politicians and economists love to scare people by emphasizing the enormity of our debt (close to $20 trillion). But our debt size is all relative — relative to the size of our economy, and relative to what’s going on in the rest of the world.
You can see, in a major economic downturn, debt tends to rise. And it has for everyone. The downturn has been global. And the rise in debt has been global.
The fears that a big debt load will lead to a dumping of the dollar, hyper-inflation and runaway interest rates don’t fit in this picture of a broadly weak recovery from a paralyzing global debt bust. Coming out of the worst global recession since World War II, inflation hasn’t been the problem. It’s been deflation. Inflation will be a concern when the structural issues are on the mend, employment is robust, confidence is high and the real economy is working. That hasn’t happened. But an aggressive and targeted government spending plan can finally start changing that dynamic.
And the markets are telling us, an inflationary environment is welcomed – it comes with signs of life.
Gold is the widely-loved inflation hedge. And gold isn’t rising out of concerns of overindebtedness. It’s falling hard in the past week, in favor of growth.
With this in mind, we may very well be entering an incredible era for investing – after a long slog. And an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade, or more. For help, 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 16% this year. That’s 2.5 times the performance of the broader stock market. Join me here.
