July 23, 2021

Yesterday we talked about the $5.5 trillion of additional government spending that appears very likely to be dropped onto an already hot economy. 

This will follow the (unimaginably bold, at the time) $3 trillion emergency stimulus that manufactured the fastest recovery last year, from the deepest recession in modern U.S. history. 

With this, the great macro trader and dot-connector, Stanley Druckenmiller, spent time this week meeting with Senators to warn them against pouring more fiscal gas onto the economic fire.  

He rightly pointed out, with the passage of these next two spending bills, that more than half (more like two-thirds) of the money that will ultimately be spent in the name of "crisis," will have come AFTER the economy already recovered.

He says, if he wanted to destroy the U.S. economy, this is exactly what he would do:  Aggressively spend into an already hot economy.

It's a recipe for bubbles and hot inflation — both of which historically lead to large economic declines.      

He says, after the "sugar rush" wears off, and the large economic decline ensues, "every dollar we spend now that we don't need, won't be available in a future crisis." 

Druckenmiller is a common sense investor.  And this is common sense:  Blow out spending AFTER the recovery, and you not only create future crisis, but you have no ammunition to fight the crisis.

So this all affirms the inflation case we've been discussing here in my daily notes for quite sometime.  For now, we continue to ride the wave of asset prices.  But the damage will come.  First, from inflation and lower quality of life.  And then, the economic decline is typically is triggered by the Fed.  When the Fed finally, 1) acknowledges the hot inflation, 2) stops fueling it, 3) starts chasing it, and 4) ultimately kills it with higher interest rates, then the economic damage will come.

The Fed is still at stage one (i.e. the fuel will continue for quite some time). 
 

I'll be away next week, so you will not receive a note from me.
 
In the meantime, I’d like to invite you to join my premium service, The Billionaire's Portfolio.  It's a great time to join.  Our portfolio is well positioned to capitalize on the liquidity deluge that continues to build, and the themes that will drive certain sectors higher than others.  If you join now, you can listen to my most recent quarterly call (from last week), where I stepped through every stock in our portfolio, talked about the influential billionaire investor involved, and the catalysts at work, to unlock value in the stock.  You can find more information here
 
Best Regards,
Bryan  

July 22, 2021

It has been clear since the Georgia Senate run-off, that the Biden administration will get whatever spending package they want across the finish line.

With an aligned Congress, the administration has since rammed through $1.9 trillion in additional "covid relief."  Last week, Biden announced a $3.5 trillion government spending plan (with the creative label of "budget agreement"), that will again be rammed through by an aligned Congress.  And for some reason, in the face of all of this, today the Republicans appear to have agreed to do another $579 billion — for "infrastructure." 

So, here's what the spending looks like thus far …

As you can see in this graphic, there remains about $1.5 trillion unspent from existing covid relief bills.  Add another $3.5 trillion for Biden's social and environmental bill, and roughly $600 billion that the Senate is near an agreement on, and we have over $5.5 trillion to be unleashed on the economy. 

With that, let's take a look at the charts of two key industrial metals that will, no doubt, get yet another big boost from this onslaught of spending.  

Copper has corrected from record highs recently.  This is a buying opportunity.  We could see $6+ copper.  
 

Same can be said for iron ore – a buying opportunity.  It's already near all-time highs, demand is already well outstripping supply, and yet more money is coming (more demand). 
 

We own two stocks in our Billionaire's Portfolio that give us leveraged exposure to the price of both copper and iron ore.  To get the details on these stocks, join us (details here). 

Best Regards,
Bryan

July 21, 2021

Yesterday, we talked about the buying opportunity in oil and oil and gas stocks.  

Today, oil was one of the biggest movers in global markets — up 4.5%, back above $70 a barrel. 

And energy stocks were the best performers on the day in the S&P 500, up 3.5% as a sector. 

This aligns with the big outperformance of small cap value over the past two days.

As we've discussed here in my notes for the better part of last year, we should expect small caps and value to outperform large caps and growth stocks coming out of recession, and moreover, persistently outperform large caps over the next ten years

Indeed, that has been the case.  From the fourth quarter of last year, through the first quarter of this year, small cap value outperformed large cap growth by the widest margin since World War II. 

Coming out of recession, small caps tend to follow the path of interest rates (climbing rates, suggests more optimistic outlook).  With that, as interest rates (the 10-year yield) rose from as low as 31 basis points last year, to as high as 1.78% this year, small cap value stocks soared. 

And as interest rates have rolled-over the past two months, so have small caps — creating this divergence in the chart below. 

Fast forward to today:  As the fear of more restrictive policies surrounding the virus variant seems to be waning, rates are bouncing, and small caps are bouncing.  With that, the divergence in the chart above is beginning to close aggressively.  

This dynamic favors our Billionaire's Portfolio (my premium subscription service).  Our small-cap value oriented portfolio has been up as much as 30% this year, before giving back some of that outperformance over the past two months.  You can buy the portfolio on a dip by joining us today (details here). 

Best Regards,
Bryan

July 20, 2021

We had a big bounce back in markets today. 

By midday, stocks had fully recovered the slide of yesterday.

And, importantly, the big trendline from the lockdown-induced low of last year, has held in the benchmark S&P 500.

Let's take a look at the updated chart from my note yesterday …

Interestingly, following the declines of yesterday, driven by news of rising covid cases and increasing global restrictions, the big movers of today's bounce back (within the S&P 500) were some of the most vulnerable to a lockdown environment:  cruise lines, airlines, retail and restaurants.  

My takeaway:  That shows confidence from the investment community that the environment for stocks and the economy will continue to run full-tilt (no hiccups).  

Another interesting chart, with a significant trend that remained intact through the broad declines of yesterday:  Oil. 

The news from OPEC+ on Sunday that a standoff between the Saudis and UAE has endedadds to the bullish outlook for oil (still a supply/demand mismatch).  With that, this knee-jerk decline yesterday on concerns about global lockdowns, presents a buying opportunity for oil and oil and gas stocks.
 

July 19, 2021

Last Monday we talked about the foreseeable "spiking case" narrative, as cover for the Fed and for the government to maintain their ultra-aggressive policy stance.  

Indeed, in the face of hot inflation data last Tuesday and booming earnings reported throughout the week, the Senate democrats announced a $3.5 trillion stimulus plan (with the creative label of "budget agreement").  Then Biden called on Congress for another $1 trillion for infrastructure.  And then Jerome Powell visited Capitol Hill, confusingly continuing with his "inflation is transitory" drumbeat.  

After today, the "pedal to the metal" policies perhaps get a degree of validation (a  "shot in the arm”).  

The headlines are now kicking in, to drive the "soaring case" narrative. 

 

Though, like the inflation data, the case narrative comes with considerable "base effects."  Cases, driven by the variant, are rising, but compared to very low levels, as you can see in the chart below. 

Still, Australia has locked down two of its biggest states.  And the chance of the U.S. administration returning to a lockdown is not zero.  With that, markets reacted today. 

Stocks traded below, but closed back above this very important trendline (see the chart below). 

 

This line represents the rise from the lockdown-induced lows of last year — the bottom of which was marked by the Fed's announcement that it would start buying corporate bonds. 
 

To be sure, this trendline will be key to watch.  A break would likely bring about a deeper, and likely quick decline. 
 

But as we've discussed, these declines in the post-financial crisis world, where the Fed is already aggressively engaging in intervention, tend to be short-lived (i.e. fully recovered inside of one month, in the majority of cases — and on to new record highs). 
 

July 16, 2021

Both Jay Powell and Janet Yellen publicly promoted the "transitory" case for inflation this week.  They will not flinch in the face of obvious data and real world observations of rising prices. 

They continue to dismiss on the grounds of "base effects" and "bottlenecks."  They say price data only looks high because it's measured against a very low base of last year, when the economy was virtually shut down ("base effects").  And then they go to the supply chain "bottlenecks" argument.  The disruption in the supply chain will normalize.  All reasonable. 

But they never talk about the 30% growth in money supply.  There is 30% more money in the economy, chasing a relatively fixed (more like smaller) amount of services and goods.  That's inflationary. 

Meanwhile, both Powell and Yellen (the Fed and Treasury), can't see any reason to be concerned about expanding the money supply even further, with additional multi-trillion dollar deficit spending packages. They support it.  Yellen promotes it (not surprisingly, as part of the administration).  

What they both continue to talk about is this concept of  "inflation expectations."  In normal times, if the Fed can do a good job manipulating consumer confidence in a way that produces a perception of stability, for consumers, then they can manage behaviors, and therefore prices, to achieve their desired outcome (stable prices).  At least they strive to do that.  That's why they fear moves in inflation expectations more than the inflation data itself. 

In this case, things aren't exactly normal.  We have an economy that's on fire, and we have excess money sloshing around, with more coming. 

Still, they seem to think they can manipulate perception, to get their desired outcome.  As far as they see it, as long as you don't think prices are going to run away, you'll behave normally in your consumption (i.e. you won't spend hastily to save against higher prices and you won't big UP prices in bidding wars). 

So they are constantly telling us that these rising prices are temporary — no need to rush out and buy that widget now.  

In addition, the Fed seems to be using a tool that is in their complete control of right now, to send a message to people.  It's the Treasury market.  They have pinned the yield on the 10-year Treasury note back down to 1.3%, in the face of an economy running at better than 7% growth and in the face of prices (on a month-over-month basis) rising at a double-digit annualized rate.  

This chart has the institutional community confused and becoming manipulated into believing there is no inflation problem.  They think market forces, in this chart, are giving them a message.  More likely, the Fed is giving them a direct message: "promote a tame inflation outlook."   With that, a July fund manager survey says 70% of fund managers think inflation is temporary.  

July 15, 2021

We talked last month about the building conversations in Washington about a central bank-backed digital currency (CBDC). 

The Fed Chair just spent two days on Capitol Hill giving testimony on the state of the economy.  And the digital currency topic was addressed both days.

The Fed is due to deliver a report in early September, Powell says, on the risks and benefits of adopting a CBDC.  As we discussed in June, this looks like it's coming.  It was a hot topic at the G7 meetings last month.  The Senate Banking committee held a hearing on it last month, with expert witnesses arguing the benefits of CBDCs.  And the Bank for International Settlements (the BIS, a consortium of the world's top central banks) has promoted CBDCs as "the future of the monetary system." 

This issue will probably be the determining factor on whether or not Jay Powell is reappointed.  If he's for it, he probably stays Fed Chair.

Just as the "build back better" and clean energy transformation is an agenda highly coordinated by major global economic powers, so is the concept of CBDCs.  The BIS consists of 63 global central banks, and nearly 90% of them are having conversations about adopting a CBDC.  

 

Among the many risks of global central banks going to digital money: privacy and consumer protections.  It’s a good time to own some gold. 

July 14, 2021

After a few weeks of theater on Capitol Hill, as the Biden administration acted as if they were seriously pursuing an infrastructure package that both parties would support, they have now revealed the extent of extravagance they will ram through Congress, with the power of a democrat controlled Senate (+ the VP) and House. 

That number?  $3.5 trillion. 

But if that weren't obnoxious enough, they still want and expect to tack on the minimum package that Senate Republicans proposed back in May — another trillion dollars in the name of infrastructure.

As we know, this is not about covid relief.  It's about transforming the economy and the country in the globalist vision.
 

That was clear at the G7 leaders meeting last month.  The most powerful developed market countries are all-in on the climate and equality movement.  While they told us last month that they would continue supporting the economy, they also told us that they will do so with the focus on “future growth,” not crisis response (in their words, you can read their communique here). 

That's why the "response" has been far bigger than the damage (from the global healthcare crisis).  It's about transformation, not relief.  And that's why the administration keeps pouring gasoline on the fire. 

The damage done:  The U.S. economy contracted $2.2 trillion in 2020, from Q1 through Q2.  In response, if you pile on the spending plans above, we're now looking at $9.1 trillion in deficit spending.  Clearly that's more than enough to plug a $2.2 trillion gap. 

 

That's why economic growth and prices are on fire. 

Again, this is all about the global agenda of "building back better," not restoring the economy to growth.  With that, not only do they not seem to care about inflation, they are intentionally inflating (i.e. devaluing money and devaluing debt).  And the global powers are all-in.  That's why there isn't a devaluation of currencies, relative to each other.  There is a devaluation of currencies relative to the price of stuff.  And it's far from over.   

July 13, 2021

As expected earnings season has kicked off with a bang. 

JP Morgan crushed earnings expectations, nearly tripling the earnings from last year.  Goldman Sachs earned almost 50% more than the Wall Street estimates – more than doubling the earnings from a year ago. 

Don't forget, the banks have a war chest of loan loss reserves that they will continue to move to the bottom line at their discretion.  That means they have a large inventory of positive earnings surprises they will present to us for several quarters to come.

So these big beats are no surprise.  But in addition to the position of strength they have in managing earnings, business is booming.  Deposits at JP Morgan are up 25% from the same period last year.  And the value of investment assets are up 36%. 

That's all, in large part, thanks to the four-trillion-dollar growth in the country's money supply over the past year. Banks benefit, directly! 

With that, we hear from Citi, Bank of America and Wells Fargo tomorrow. 

The cheapest of the big four banks is Citi.  JP Morgan has a book value of $84.  The stock trades at $155.  Citi has a book value of $88.  The stock trades at $68. We own Citi in our Billionaire's Portfolio (my member's-only premium subscription service). 

Now, yesterday we also discussed the prospects for a hot inflation number in today's economic reports.  We got it. 

By now the media has been trained by the Fed to explain away hot inflation data as "transitory," based on the argument that the data is/will continue to be measured against very low comparable of a year ago (when the economy was in lock down).  They want us to focus on the year-over-year change in prices. 

But the real information is glaring in the month-over-month data.  Inflation in June (both nominal and core) soared almost 1%.  That's for the month of June! 

Moreover, that's three consecutive months of a monthly increase in the measure of prices near 1% (April +0/9%, May 0.7% and June 0.9%). 

Forget the comparisons to last year.  Extrapolate this monthly data out, and we are already seeing clear evidence of double-digit annual inflation.
 

July 12, 2021

As we kick off earnings season this week, stocks are new record highs, again. 

As we’ve discussed, these earnings numbers will be big.  The positive surprises will be big.  

And the inflation data we’ll see tomorrow, from the month of June, will likely be hot. 

This, and the data that will follow over the coming weeks (from the second quarter), should all make clear that the Fed’s QE bazooka should be ended, immediately.  And these data should make clear that there is no need for continued fiscal support:  no more unemployment subsidies, no more direct payments, no more “stimulus” (which will next come packaged as a multi-trillion dollar spend on “infrastructure”).  

However, to be sure, the Fed will continue doing what it’s doing.  And the administration (with the help of an aligned Congress) will continue along it’s path of fiscal profligacy. 

Why?  The virus.  The variant will give them plenty of justification to stay put on red alert/emergency policies.   And the media will certainly stoke the uncertainty.  We should see plenty of these headlines coming, like Bloomberg ran today:  ” US Cases Soar.” 

Let’s take a look at how that translates, with some perspective on the history of the past 16 months.

 

The CDC says the Delta variant was found in the United States in March.  As you can see, the case trajectory from there, is lower

 

And as you can see below, the trajectory of deaths, related to covid, has continued to decline.

Still, with all the above in mind, hot earnings and economic data, combined with the impetus to see fiscal and monetary policy to continue at full-throttle, we should have the recipe for even higher asset prices.