By Bryan Rich

July 20, 5:00 pm EST

We’ve been watching the Chinese currency very closely, as the Chinese central bank has been steadily marking down the value of its currency by the day, in efforts to offset U.S. trade tariffs.

Remember, in China, they control the value of their currency. And they’ve now devalued by 8% against the dollar since March. They moved it last night by the biggest amount in two years. That reduces the burden of the 25% tariff on $34 billion of Chinese goods that went into effect earlier this month.

But Trump is now officially on currency watch. Yesterday in a CNBC interview he said the Chinese currency is “dropping like a rock.” And he took the opportunity to talk down the dollar.

The Treasury Secretary is typically from whom you hear commentary about the dollar. And historically, the Treasury’s position has been “a strong dollar” is in the countries best interest. But Trump clearly doesn’t play by the Washington rule book. So he promoted his view on the dollar (at least his view for the moment)–and it may indeed swing market sentiment.

The dollar was broadly lower today. We’ll see if that continues. If so, it may neutralize the moves of China in the near term. Nonetheless, the U.S./China spat is reaching a fever pitch. Someone will have to blink soon. Trump has already threatened to tax all Chinese imports. The biggest risk from China would be a big surprise one-off devaluation. As we discussed yesterday, that would stir up a response from other big trading partners (i.e. Europe and Japan). And they may coordinate, in that scenario, a threat to block trade from China all together.

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By Bryan Rich

June 11, 5:00 pm EST

Last week we stepped through all of the components of economic output and talked about the setup for positive surprises.  Keep in mind, the economy is running at near a 3% pace already.  And if Trumponomics is just in the early stages of materializing in the data on consumption, investment, government spending and exports, then we may be in for a big growth number.

On Friday we talked about the exports (i.e. the trade) component.  On that note, the media was stirring over the combative tone from G7 events over the weekend.  What I heard was the potential for big movement (i.e. gains on U.S. exports, which will drive gains in GDP).  Trump went in and proposed taking down all trade barriers.  That’s negotiating from an extreme.  And that typically brings about movement.  Quickly, trade partners were discussing “reducing” barriers.

With hotter than expected growth coming, how will that effect Fed policy?

We will soon see.  The Fed meets this week.  They continue their path of normalizing rates.  They’ve hiked once in 2015, once in 2016, three times in 2017 and once, thus far, this year.  The market is nearly fully pricing in a second hike for the year on Wednesday.  And expectations are for another hike in September.   We’ll see this week if they’re adjusting uptheir growth forecasts.

As for the rate path:  Remember, Powell is a Trump appointee, and from what we’ve heard from him thus far, he sounds like someone that’s not going to risk chipping away at the recovery by jumping ahead with overly aggressive rate hikes.  Unlike the last regime, he will likely take a “whites of inflation’s eyes” approach.

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By Bryan Rich

June 7, 5:00 pm EST

We’ve talked about the set up for positive surprises in the data.  We’ve looked at the first two components of GDP (consumption and investment) both of which are set up for positive surprises.  Today let’s look at government spending.

It’s typical for debt to balloon in economic downturns.  Not only did our debt/gdp ratio balloon in the U.S. but it ballooned everywhere. With that, as the global economy was being propped up by central banks, for the better part of the past decade, the politicians were reluctant to help on the fiscal side.  Instead, they went the other way.  They went the path of austerity.  They focused on debt when the economy desperately needed growth.

Fiscal tightening in a widespread global recession is a recipe for tipping it all into depression. That required the central banks to do more, and more, and more to keep the economy from entering into a deflation spiral — fighting the drag of fiscal belt tightening. And it all began tipping over the edge in mid-2016.

But that changed with Trump election.  Trumponomics has been all about restoring growth and breaking from the rut of economic stagnation.  And a key pillar in that plan has been infrastructure and government spending.

On that note, he’s been pushing for a trillion dollar infracture spend over 10 years.  And as we’ve discussed, while adding debt isn’t popular for the politicians to approve, natural disasters last year gave them an excuse to approve spending packages.  Fast foward just six months and we’ve had more than $200 billion in aid approved from Congress.  And now we’ve had an increase of $400 billion in government spending as part of the lastest government budget.

So the government spending piece has been in motion.  And expect the rest of the world to follow.  As we’ve discussed in recent weeks, we’ve seen the populist push back across the world, from Grexit, to Brexit, to the Trump vote, and now to the “Italy first” movement.  The real fight in the “populist movement” is against economic stagnation.  And much of that is due to mistakes on policy in response to the global economic crisis.  And the core mistake has been austerity.   Growthsolves a lot of problems.

What about the debt?

The media loves to talk about the $20 trillion dollar debt load, as if we are going to default and/or the rest of the world is going to dump our Treasuries and send interest rates skyrocketing and implode our economy.

Government debt and deficits are judged (by global trade partners, allies, global allocators of capital) on a relative basis – size relative to GDP.  Again, our debt relative to GDP has ballooned since the global financial crisis.  But it also has for everyone else in the world.  That’s why people/countries are still plowing money into our Treasury market for virtually no return, because lending the U.S. money is still the safest place and way to preserve wealth.

The only alternative in this post global financial crisis environment is to focus on growth.  Growth can solve a lot of problems, including the debt and deficit relative to GDP problems.  As growth goes up, our debt relative to size of the economy goes down.

If we get the economy back on a sustainable growth path, then, in good times, we can work on the structural flaws that led us to the crisis. That’s the only option.

So, when we look at the components of GDP, the policy execution in Washington has been driving lift-off in all of the components.  And yet the experts have still underetimated the potential for a growth boom.  We’ve talked about the positive surprises that are coming down the pike in consumption, investment and govenment spending.  Tomorrow, we’ll take a look at the trade piece.

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By Bryan Rich

June 4, 5:00 pm EST

On Friday, we talked about the building momentum in the economy. We’ve already had huge positive surprises in corporate earnings for the first quarter. And we’re probably just beginning to see the positive surprises on economic data roll in.

Remember, despite the execution success on Trumponomics over the past year (deregulation, repatriation, tax cuts and $400 billion in new government spending approved), the Fed is still expecting growth to come in well below trend (3%), at 2.7%. That’s just 20 basis points higher than they projected prior to the execution of massive tax cuts in late December.

The good news: Positive surprises are fuel for confidence and fuel for stocks.

Remember, we’ve yet to have a return of ‘animal spirits’–a level of trust and confidence in the economy that fuels more aggressive hiring, spending and investing. We should see this reflected in wage growth. Wage growth has been the missing piece of the economic recovery puzzle.

On that note, we’re now near the best wage growth in nine years, and that tax rate cut is still in the early stages of working through the economy.

Don’t underestimate the value of confidence in the outlook (and the return of “animal spirits”) to drive economic growth higher than the number crunchers in Washington can imagine. Remember, these are the same experts that couldn’t project the credit bubble, and didn’t project the sluggish ten years that have followed.

Remember, while we’re in the second longest post-War economic expansion, we’ve yet to have the aggressive bounceback in growth that is characteristic of post-recession recoveries. We now have the pieces in place to finally get it.

So, as we’ve discussed throughout the year, the backdrop continues to get better and better for stocks.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

 

By Bryan Rich

May 25, 5:00 pm EST

As we head into the long holiday weekend, let’s look at some key charts.

First, just a week ago, the U.S. interest rate market was spooking investors, as 10-year yields were hanging around 3.10%.  The fear was, would 3% yields quickly turn into 4% yields, and hit economic activity.

As of today, we’re trading closer to 2.90% again, back below 3%.

But you can see, we run into this big trendline that represents this ascent in rates for 2018, which also reflects the outlook of a hotter economy, thanks to tax cuts (fiscal stimulus).

Bottom line here:  The concern in interest rates is speed, not trajectory.  The trajectory should continue to be UP, which is a signal that the economy is improving, and finally gaining the tracking to perform at trend, if not better than trend growth.  The concern about ‘speed’ should be far less than it was a week ago.

Next, here’s a look at the S&P 500.

You can see in the chart above, we’ve broken the downtrend of this correction cycle.  The longer-term trend is UP.  And this bull trend started, not coincidentally, at the bottom of the oil price crash in 2016, when global central banks stepped in with measures to stem the slide in confidence.

So, we’ve had a healthy 12% correction in stocks, we’ve held the 200-day moving average, we’ve maintained the longer-term trend, and we’ve broken out of the downtrend of the correction.  Small cap stocks have already returned to new record highs.  And we have an economy on pace to grow at 3% this year or better, with corporate earnings expected to grow at 20% for the year.  So, the second half of the year should be very good for stocks.

Have a great Memorial Day weekend!

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

 

By Bryan Rich

May 24, 5:00 pm EST

We have a lot of geopolitical noise surrounding markets.

Let’s step through them:

1) Yesterday, we discussed the Trump trade threats with China:

How is it playing out?

We have an economy that is leading the global economic recovery.  China wants and needs to be part of it.  Trump’s bark, with the credibility to bite, is creating movement. It’s creating compliance.  That’s becoming a very positive catalyst for global economy and for geopolitical stability (the exact opposite of what the experts have predicted these tactics would produce).

2) We’ve talked about the shock-risk developing in Europe.  A coalition government forming in Italy, with an “Italy first” approach to the social and economic agenda, has created some flight of Italian bond market capital toward safety. This has people skittish about another blowup threat of the euro zone.

How is it playing out?

The last time Italy was on default/blow up watch, the 10 year yields were 7% (unsustainable levels).  At those levels, the ECB had to intervene.

This recent move in the Italian bond markets leaves yields at just 2.4% …

This looks like Grexit, Brexit and the Trump election. It creates leverage for the third largest economy in the European Union (excluding Britain). In this case, we may see it result in a loosening of fiscal constraints in the European Union – and an EU wide fiscal stimulus plan to follow the lead of the U.S.

3)  The North Korean nuclear threat …

How is it playing out?

Eight months ago, North Korea launched a missile over Japan.  Markets barely budged, and the world continued to turn.  Now, we’ve quickly gone from an imminent threat to potential denuclearization. And now a meeting has been cancelled.  With that, on the continuum of this relationship, I’d say it’s closer to its best point, rather than its worst.

Bottom line, these risks should do little to stop the momentum of the economy and the stock market.  

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By Bryan Rich

May 23, 5:00 pm EST

There has been a lot of attention over the past couple of days on China and trade relations.

China has moved down tariffs on auto and auto parts imports. And a source today said the government has “encouraged” China’s largest oil refiner to buy more U.S. crude oil. Based on the reports, China is now taking about 8 times the daily volume of U.S. crude imports, compared to averages a few months ago.

These are concessions! This is a distinct power shift. Not long ago, the world was afraid to rattle the cage of China. They (global trading partners) tiptoed around touchy matters like Chinese currency manipulation prior to the global financial crisis a decade ago, and even more so after the crisis.

But now, you can see the leverage that has been created by Trump. This is exactly what we talked about the day after the election.

Here’s an excerpt from my November 9, 2016 Pro Perspectives note, back when the experts were predicting Draconian outcomes for poking the China giant: “As we’ve seen with Grexit and Brexit, the votes came with dire warnings, but have resulted in creating leverage. Trump’s complaints about China are right. And a threat of slapping a tariff on Chinese goods creates leverage from which to negotiate.”

Now, we have an economy that is leading the global economic recovery. China wants and needs to be part of it. And we have a President that has a loud bark, and the credibility to bite. And that is creating movement. Let’s revisit, also from one of my 2016 notes, why this China negotiation is so important …

TUESDAY, SEPTEMBER 27, 2016

China’s biggest and most effective tool is and always has been its currency. China ascended to the second largest economy in the world over the past two decades by massively devaluing its currency, and then pegging it at ultra-cheap levels.

Take a look at this chart …

In this chart, the rising line represents a weaker Chinese yuan and a stronger U.S. dollar. You can see from the early 1980s to the mid-1990s, the value of the yuan declined dramatically, an 82% decline against the dollar. China trashed its currency for economic advantage—and it worked, big time. And it worked because the rest of the world stood by and let it happen.

For the next decade, the Chinese pegged its currency against the dollar at 8.29 yuan per dollar (a dollar buys 8.29 yuan).

With the massive devaluation of the 1980s into the early 1990s, and then the peg through 2005, the Chinese economy exploded in size. It enabled China to corner the world’s export market, and suck jobs and foreign currency out of the developed world. This is precisely what Donald Trumpis alluding to when he says ‘China is stealing from us.’

China’s economy went from $350 billion to $3.5 trillion through 2005, making it the third largest economy in the world.

This next chart is U.S. GDP during the same period. You can see the incredible ground gained by the Chinese on the U.S. through this period of mass currency manipulation.

And because they’ve undercut the world on price, they’ve become the world’s Wal-Mart (sellers to everyone) and have accumulated a mountain for foreign currency as a result. China is the holder of the largest foreign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars? They buy U.S. Treasurys, keeping rates low, so that U.S. consumers can borrow cheap and buy more of their goods—adding to their mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth (and the cycle continues).

This is the recipe for big trade imbalances — lopsided economies too dependent upon either exports or imports. And it’s the recipe for more cycles of booms and busts … and with greater frequency.”

Again, China has to be dealt with. And we’re starting to see signs of progress on that front. Good news.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

By Bryan Rich

May 22, 5:00 pm EST

Yesterday we talked the set up for a turn in the dollar (lower) and in commodities (higher).  The broad commodities index hit a fresh three-year high yesterday, and hit another one today – led by natural gas and copper.

This is where we will likely see the next big boom:  commodities.

Throughout the post-financial crisis period, we’ve had a disconnect between what has happened in global asset prices (like the recovery in stocks and real estate) and commodities.

Stocks have soared back to record highs.  Real estate has fully recovered in most spots, if not set new records.  But commodities have been dead.  That’s because inflation has been dead.

And that has created this massive dislocation in valuation between commodities and stocks.

You can see in this chart below from Goehring and Rozenzwajg.

The only two times commodities have been this cheap relative to stocks was at the depths of the Great Depression in the early 30s and at the end of the Bretton Woods currency system in the early 70s.  Commodities went on a tear both times.

The last time commodities were this cheap, relative to stocks, a broad basket of commodities returned 50% annualized for the next four years – up seven-fold over 10 years.  With the economy heating up, and inflation finally nearing the Fed’s target, it’s time for commodities prices to finally catch up.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

 

By Bryan Rich

May 21, 5:00 pm EST

Last week, rising market interest rates in the U.S. were becoming a concern.  But as we discussed on Friday, we ended the week with a big bearish reversal signal in the 10-year yield.  This week, the market focus seems to be shifting toward a lower dollar and higher commodities.

Friday’s bearish signal in rates seems to have foreshadowed the news coming into today’s session, that Italy is putting forward an agreement for a coalition government that would break compliance from EU rules (an “Italy first” approach to an economic and social agenda).

That has created some flight to safety in the bond market.  You can see in this chart below, money moving out of Italian bonds (yields go up) and into German bonds (yields go down).

And that means money goes into U.S. Treasuries too.  So you can see U.S. yields (the purple line in the chart below) backing off of the highs of last week, and with room to move back toward 3% (or below) if this dynamic in Italy continues to elevate the risk environment.

Now, with the rate picture softening, the dollar may be on the path of softening too.  That would be a welcome site for emerging market currencies.  We discussed last week how the push higher in U.S. yields was putting pressure on emerging market currencies.  And the combination of weaker currencies and higher dollar-denominated oil prices was a recipe for economic strain.

Today, Larry Kudlow, the Chief Economic Advisor to the White House, carefully crafted a response on the dollar, as to not say they favored it “stronger.”  That’s probably enough, given the rising risks in emerging markets, to get the dollar moving lower (to alleviate some of the pain of buying dollar-denominated oil for some of the EM countries).

And it may be the signal for commodities to start moving again.  Because most commodities are priced in dollar, commodities prices tend to be inversely correlated to the dollar.

Today we had a fresh three-year high in the benchmark commodities index (the CRB Index).

Here’s an excerpt from one of my Forbes Billionaire’s Portfolio notes back in June, on the building momentum for commodities: “The technology sector minted billionaires over the past decade.  It’s in commodities that I think we’ll see the new billionaires minted over the next decade.  The only two times commodities have been this cheap relative to stocks was at the depths of the Great Depression in the early 30s and at the end of the Bretton Woods currency system in the early 70s.  Commodities went on a tear both times.”

We’ll take a closer look at this tomorrow.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

By Bryan Rich

May 18, 5:00 pm EST

We’ve talked this week about the pressure that rising U.S. market interest rates are putting on emerging markets.

The fear surrounding the big 3% marker for U.S. 10-year yields is that 3% may quickly become 4%. And a 4% yield, much less a quick adjustment in this key benchmark interest rate, would cause some problems.

Not only does it create capital flight out of areas of the world where rates are low, and monetary policy is heading the opposite direction of the Fed, but a quick move to a 4% yield on the 10-year would certainly cloud the U.S. economic growth picture, as higher mortgage and consumer borrowing rates would start chipping away at economic activity.

With that said, we may have a reprieve with the action today in the bond market.

As we head into the weekend, today we get a softening in the rates market. And that came with a big technical reversal pattern (an outside day).

You can see in the chart above, the engulfing range of the day. This technical phenomenon, when closing near the lows, is a very good predictor of tops and bottoms in markets, especially with long sustained trends.

I suspect we may have seen some global central bank buyers of our Treasurys today (which puts downward pressure on yields) to take a bite out of the momentum. We will see if this quiets the rate market next week, for a drift back down to 3%. That would calm some of the nerves in global currencies, and global markets in general.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers.