By Bryan Rich

May 17, 5:00 pm EST

We talked yesterday about the building pressure in emerging markets, driven by weakening currencies and rising dollar-denominated oil prices.

With that bubbling up as a potential shock risk, gold hasn’t exactly been telling the story of elevated risks.

You can see in this chart above, since the tax cuts were passed in late 2017, rates have been rising (the purple line). This is a hotter economy, pick-up in inflation story. And, as it should, gold stepped higher with rates all along–until the last few weeks. You can see the divergence in the chart above.

I suspect we’ll see gold snap back to reflect some increasing market risks, and especially to reflect a world where central banks are beginning to finally see inflation pressures build. The gold bugs loved gold when inflation was dead. And now that it’s building, they are surprisingly very quiet.

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By Bryan Rich

April 23, 5:00 pm EST

Yields continue to grind higher toward 3%.  That has put some pressure on stocks, despite what continues to be a phenomenal earnings season.  This creates another dip to buy.

Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%.   [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014.  Yields soared, and stocks had a series of slides.

My rebuttal: The domestic and global economies are fundamentally stronger and much more stable.  But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment.  We have fiscal stimulus doing a lot of heavy lifting.

Let’s look at a couple of other reasons people are concerned about stocks as yields climb:

[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?

My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.

[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).

My Rebuttal:  In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior.  If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade.  If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road.  Coming out of a zero-interest rate world, bond prices are going lower/not higher.

Remember this chart …

The bond market has become a high risk-low reward investment.  Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper.  That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.

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By Bryan Rich

January 25, 7:00 pm EST

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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By Bryan Rich 

November 3, 2017, 4:00pm EST

BR caricatureAs we head into the weekend, we’re closing in on the holidays and year-end. The performance of stocks continue to reflect a world where companies are strong, and consumers are strong.

With 81% of the S&P 500 companies reported for the third quarter, the numbers have continued to be very good – 74% have beat the street’s earnings estimates, 66% have beat on revenues. So we’ve now had 13.9% yoy growth in S&P 500 earnings in the first quarter, 11.3% yoy earnings growth in the second quarter, and 5.9% yoy growth in the third quarter. And these are companies that are as lean and financially sound as they’ve been in a long time.

And as we’ve discussed, we’re getting fiscal stimulus into an economy that’s already fundamentally strong.

With that, you would expect the price of everything to be rising. Here’s a look at major global stocks, commodities, currencies and interest rates year-to-date.

Almost everything is rising.

image

Housing is strong. The stock market is strong. The broad commodities markets are strong. But as you can see, interest rates have barely budged. While asset price inflation has been hot, the Fed’s favored measure of inflation (core PCE) has not.

But as I’ve said, although the Fed likes to say they ignore volatile energy prices, with crude oil on the move (the highs of the year today), expect that to make its way into their inflation readings.

The oil price crash of last year gave them nightmares of deflation fighting. The higher oil prices go, the more the Fed will begin stepping UP their inflation forecasts. And market interest rates could have a violent catch up to the rise across the other asset classes.

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By Bryan Rich 

November 1, 2017, 4:00pm EST

BR caricatureThe Fed decision today was a snoozer, as expected. The market continues to think we get a third rate hike for the year in December (fourth since the election).

Thus far, with three hikes, we’ve had just about the equivalent (just shy of 75 basis points) priced-in to the 10-year Treasury market. Yields popped from about 1.70% on election night (just about a year ago) to a high of 2.64%. We’ve had some swings since, but we sit now at roughly 2.40% (70 basis points higher over the past year).

We revisited yesterday, the prospects for some significant wage growth (and therefore inflation), with the fuel of fiscal stimulus feeding into an already tight (but underemployed) labor market.

The Treasury market isn’t pricing that scenario in, at all.

In fact, the yield curve continues to look more like a world that doesn’t fully believe fiscal stimulus is happening (or will happen), and does believe the Fed is more likely damaging the economy through its rate “normalization.”

That’s a bet that continues to underprice the prospects of fiscal stimulus. And, therefore, that’s a bet that continues to be disconnected from the message other key markets are sending. Over the past six months, we’ve talked the case for stocks to go much higher. We’ve talked about the opportunities in European and Japanese stocks (German stocks hitting new record highs and Japanese stocks nearing new 26-year highs today). We’ve talked a lot about the building bull market in commodities. We’ve talked about the positive signals that copper has been sending, as the leading indicator of a global economic turning point. We’ve talked about the outlook for much higher oil prices – oil hit $55 today. (July 30: Explosive Move Coming For Oil And Commodities Stocks).

And oil prices, whether the central banks like to admit it or not, heavily impact inflation, inflation expectations and policy making decisions.

With that, this next chart suggests that market interest rates are about to make a move (higher).

image

Source: Billionaire’s Portfolio

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By Bryan Rich 

October 16, 2017, 4:00 pm EST

BR caricatureOn Friday we talked about the biggest market movers: oil, copper and iron ore.

​Oil was up 5.3% on the week.  Copper was up 4%.  And iron ore reversed sharply on Friday to jump 6%.

​All were stronger again today.

​Remember, China is the world’s largest consumer of commodities.  And the import data late last week out of China showed hotter imports in copper and copper products (26.5% growth, year over year), iron ore (record high imports, up 10% from a year earlier), and crude oil imports hit the second highest level on record (up 12% year over year).

​This leaves us wondering:  Is China’s economy doing better than most think?  And/or is this China hoarding commodities again?

At the depths of the financial crisis, China opportunistically stepped in and started gobbling up global commodities on the cheap (at the time).

oct16 china

Remember, China has $3 trillion in currency reserves, about $2 trillion of which are in U.S. dollars.  Commodities are a good way to put those dollars to work.

​And there always seems to be currency play at work in China, to gain some sort of advantage.  You can see in the chart below, as the PBOC has weakened the yuan, commodities prices have fallen.  And as they’ve been strengthening the currency this year, we may be seeing commodities coming back as a result.

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By Bryan Rich 

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

 

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

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

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

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

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

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

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

FBPP_chart_101217.jpg

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

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

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

Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.  

By Bryan Rich 

October 10, 2017, 3:00 pm EST

BR caricatureCrude oil was the biggest mover of the day across global markets, up almost 3%, and back above the $50 level.

Though oil has been stuck, oscillating around this $50 mark for some time, we’ve talked about the prospects for much higher oil prices.  So, when?

Remember, back in May I spoke with one of the best research-driven commodities funds on the planet, led by the star commodities investor Leigh Goehring and his long-time research head Adam Rozencwajg.  They do some of the most thorough supply/demand work on oil and broader commodities.

Earlier this year, they were pounding the table on the fundamental case for $100 oil again.  Since then, as oil prices haven’t complied.  With that, we’ve seen Andy Hall’s departure from the market, of one of the biggest oil bulls, and one of the best and most successful tactical traders of oil in the world.

Meanwhile, the fundamentals have continued to build in favor of much
higher oil prices.  We’ve seen supply drawdown for the better part of the past seven months – to the tune of more than $60 million barrels of oil taken out of the market.

I checked back in with Goehring and Rozencwajg and they are now more bullish than before.  They say demand is raging, supply is faltering, and the world has overestimated what the shale industry is capable of producing – and the market is leaning, heavily, the wrong way (i.e. “maximum bearishness”).  They think we’ve now hit the tipping point for prices – where we will see the price of oil accelerate.

They’re calling for $75-$110 oil by early next year, based on their historical analysis of price and inventory levels.

We’ll talk more about their work on the oil market in the coming days, and their very interesting work on the broader commodities markets – both of which support the themes we’ve been discussing in recent months.

By Bryan Rich 

October 9, 2017, 4:00 pm EST

BR caricatureAs we know, one of the pillars of the Trump administration’s growth policies has been deregulation.  With that, today the head of the EPA signaled the withdrawal from the Clean Power Plan – an Obama regulation to fight climate change.

What does this mean for coal stocks?

Let’s take a look at the two largest American coal producers, both of which filed bankruptcy last year: Peabody Energy and Arch coal.

These are now two post-bankruptcy stocks!  Peabody emerged from bankruptcy earlier this year after shedding about $5 billion in debt. Similar story for Arch coal.  They filed early last year and emerged from bankruptcy late last year, eliminating $5 billion in debt in the process. So shareholders were wiped out and debt holders became stock holders in new low debt, cash flow positive companies with deregulation coming down the pike.  With that, you would think the stocks would be screaming higher.  That hasn’t been the case.

Here’s a look at the charts…

 



So we now have Peabody Energy, the leading coal producer in America with a $3 billion market cap.  And Arch Coal, number two, has just a $1.7 billion market cap.

Are these cheap stocks?

Let’s take a look at who owns them…

The biggest shareholder in Peabody is billionaire Paul Singer’s hedge fund, Elliott Management.  They own half a billion dollar’s worth of the stock and it’s a top ten position.  As for ARCH – the top shareholder is the $5 billion hedge fund Monarch Alternative Capital. ARCH makes up 20% of their highly concentrated long equity portfolio (their biggest single stock position).  If you’re going to dip your toe in the water on a post-bankruptcy stock, there are few better places to look for guidance than Paul Singer – a former attorney, turned one of the most influential and successful investors in the world.

By Bryan Rich 

October 6, 2017, 4:00 pm EST

BR caricatureAs we head into the weekend, today I want to talk a bit about the 401k. 

I’m looking today at a relatives 401k offering.  Nothing has made Wall Street richer than the advent of the 401k. They get a constant monthly stream of fresh capital to skim fees and commissions from, and you get all of the market risk.

For the average person, selecting from the “options” in their 401k plan is a practice of picking the highest number. No surprise, the fund providers know that, and play plenty of games to show you the best numbers possible.

Here’s an example:  As I’m looking through the limited choices in this particular 401k plan provider, there is a common theme in the “inception date” of most of the company’s mutual fund offerings.  They tend to have track records that start in 2002 at or near the bottom of the internet bubble-induced stock market crash, OR they start in 2009 AFTER the 50% collapse in stocks, OR they start in late 1987 AFTER the crash.

Clearly the long-term returns will look quite a bit better when you’re starting from a bottom, after a crash. And clearly returns will look better without hanging a negative 30%-50% in 2008 and then another negative 30%-40% in the early 2000s.

Maybe they are newer, better strategies and had the good fortune of launching at the right time?

More often, they close them down and reopen them under a new, tweaked name.  Add to that, they are constantly launching and running hundreds, if not thousands of funds, so that at any given time they can cherry pick the best performers over a certain period, to put them in front of a captive audience.

Bottom line: Big mutual fund giants are mass asset gatherers feeding on the passive 401k flow of capital, rather than astute investment managers. And the long term returns, after fees, prove it. People are locking their money up for a very long time, and getting a fraction of the market return.

When Congress invented the 401k in the 70s to transfer risk and obligations from the employer (traditional defined benefit pensions) to the employee (defined contributions), they didn’t do you any favors.