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December 8, 2022
 
Let's talk about China.
 
Both Chinese imports and exports crashed in November.  The economy has grown at just 3% through the first three quarters.  That's a fraction of its long-term average growth of the past two decades. 
 
Now after the recent social uprising against the Chinese Communist Party's Zero-Covid policy, and related lockdowns, the government has announced an easing of restrictions.
 
If it's true, what will it mean for markets/the global economy?
 
Will it be inflationary?  Keep in mind, this comes just as global central banks have, seemingly, hit the pain threshold for the level of interest rates.  And, in particular, in the U.S., just at the time inflation data is cooling (if not reversing).
 
A fully functioning Chinese economy is obviously positive for global demand.  But it should be especially positive for global supply (given the export nature of the economy).
 
On that note, the global central bank tightening campaign doesn't have the tools to deal with, what has been, supply shocks.  What they do have the tools to address is demand.  And they have explicitly been working to bring demand down to the level of supply.  
 
With that, an opening up of China can help address the supply side of the imbalance.  And we should note, that China has been an exporter of deflation for the past two-plus decades (i.e. they put downward pressure on global goods prices).
 
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December 7, 2022
 
In recent days we've talked about the signal the decline in the 10-year Treasury yield might be giving us.
 
Today, it closed another 10 basis points lower, at 3.42%.  At today's low, the most important market-determined interest rate in the world was down almost a full percentage point from the highs of late October.
 
This, as the Fed has been trying to set expectations for a stopping point in this tightening cycle (for the short term interbank lending rate it sets), somewhere around 5%.  That's about a full point higher than the current Fed Funds rate. 
 
Again, market-determined interest rates are going the other way.
 
Remember, this move in the 10-year yield started on Wednesday of last week, when Jerome Powell told us "I don't want to over tighten."
 
With that, as we've discussed here in my daily notes, there are reasons to believe that the Fed has already over-done it.  Instead of slowing the rate-of-change in prices (inflation), we may find it has induced a decline in prices (deflation).
 
We know from real-time CPI inputs (like new and used carsrents) that prices have been rolling over for months.  The government's report hasn't reflected it … yet
 
With this in mind, an astute Pro Perspectives reader (and very good hedge fund manager) reminded me yesterday, the Fed historically hasn't stopped a tightening cycle before taking the Fed Funds rate above the rate of inflation (headline CPI).
 
This is the condition of "positive real rates" (Fed Funds rate – inflation rate) Powell has talked about.
 
With that, if the Fed did nothing further from this point (stopped where they are), and the rate-of-change in prices was zero from this point, how long would it take to get to positive real rates?  
 
Let's take a look …

So, in this scenario, if the monthly change in prices went to zero (i.e. headline CPI stayed unchanged) over the coming months, by March we would have positive rates.
 
That said, with key inflation inputs rolling over, AND persistently lower oil prices, we could see negative monthly price changes in the coming months, which could get us to positive real rates sooner than March.
 
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December 6, 2022
 
We looked at this chart of the S&P 500 last week …

As we discussed, stocks closed above the 200-day moving average (the purple line) for three straight days.

 
Moreover, heading into this past Friday’s jobs report, stocks were trading into this big descending trendline (in yellow) that represents the eleven-month decline from record highs. 
 
As you can see, that trendline held.  
 
Stocks are down 4% from that point, and have now fully retraced the rise that was attributed to Jerome Powell’s (relatively) dovish statements at his Brookings Institution discussion last Wednesday. 
 
Importantly, what hasn’t retraced?  Yields
 
The yield on the 10-year Treasury closed at 3.52% today.  That’s  30 basis points lower than it was trading when Jerome Powell spoke last Wednesday.
 
This comes after Friday’s hotter than expected wage growth.  And it comes after yesterday’s hotter than expected ISM services report.  Remember, it’s “services” that have been a hot spot in the Fed’s assessment of inflation.
 
This behavior of the world’s benchmark interest rate (the 10-year yield) continues to send a signal. 
 
As we discussed last week, it may be signaling an over-restrictive Fed (already), which will translate into falling prices (deflation) in the coming months, perhaps starting to show as soon as next week’s November inflation report.  We will see. 
 
By the way, Bank of America has taken a look at the past thirteen Fed hiking cycles.  Dating back to 1954, when the Fed stops hiking, stocks rise, on average, 14% over the following twelve months. 
 
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December 5, 2022
 
Let's talk about oil. 
 
The Western world put a $60 price cap on Russian oil, beginning today. 
 
What does it mean?
 
The view from the politicians is that the price cap keeps Russian oil flowing to the world, but squeezes Russia's energy revenues (which fund almost half of the Russian federal budget).
 
Russia has said they will respond to a price cap by refusing to sell oil to those countries supporting the price cap.
 
Who has the leverage?
 
The Western leaders would have us believe they can suffocate the Russian economy, and therefore force an end to the war in Ukraine.
 
But guess which of the largest economies in the world aren't part of the oil price cap coalition?  China.
 
And guess who has become China's largest oil supplier?  Russia.
 
Given the structural global supply deficit in the oil market, China should be happy to snap up all of the oil Russia can sell to them (and then stockpile it, or sell it to the Western world).  And no surprise, they have been importing oil at record levels for much of the past two years.  
 
Not only is the world undersupplied of oil, we are (most importantly) underinvested in new supply.  And it's all by the design of the global clean energy transformation, which is coordinated by:  the Western world (the purveyors of the price cap).
 
Leverage doesn't appear to be on our side.  And that's apparent through OPEC's response to the Russia price cap, which was a threat of further production cuts (i.e. less supply)
 
With that, this price cap should ultimately give us lower global supply, and higher prices. 
 
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December 2, 2022
 
After hearing from Jerome Powell on Wednesday, the markets were set for liftoff this morning, upon the catalyst of a weak jobs report. 
 
Remember, in this world, bad news is good news (for stocks and the economy), as it builds the case for an end to this Fed tightening cycle. 
 
The catalyst didn't happen. The November jobs report came in mostly on trend, but (a big but) the wage growth was hotter. 
 
If we were to believe what the Fed has been selling, up to this week, we would expect such a report to embolden the Fed to follow through on their rhetoric, "to keep at it" (i.e. keep raising rates).
 
With that, after falling 85 basis points from the highs of just six weeks ago, with a hot wage number this morning, most would have expected the 10-year yield to rocket higher. 
 
Indeed it had a bounce this morning.  But by the end of the day, the 10-year yield completely reversed and closed at the lowest level since September 20.  That's below 3.5%
 
So, the market-determined interest rate (widely viewed to be the smart money) has returned to levels prior to the last 150 basis points of Fed tightening
 
My view: The Fed has gone too far already.  The 10-year yield is telling us the lag effect from the Fed action hasn't hit just yet.  But it's coming.  And Jerome Powell, in his discussion on Wednesday, definitely (finally) showed more humility about how this lag may play out.
 
When you take the Fed Funds rate from zero to 3.75% in eight months, and spike mortgage rates from 2.75% to near 8% that quickly, you're going to get damage, and a retrenchment in economic activity — and maybe even deflation
 
We've seen the damage in the global financial system, with a near blow up in UK and European sovereign debt over the past several months.  We've seen some retrenchment in the economy (U.S. and global manufacturing/PMIs back in contractionary territory). 
 
We haven't seen falling prices yet in the stale government inflation data.  But we may see it finally showing up, when we get the next inflation report, which will come on December 13th.  Again, the 10-year yield may be giving us that message.    
 
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December 1, 2022
 
Yesterday Jerome Powell told us "I don't want to over tighten, and that's why we're slowing down."  And he said there was still a path of a soft landing, without a severe recession.  
 
As we know stocks had a huge day.  And now we sit on this big trendline heading into tomorrow's big job report

What markets are giving us clues that this line will resolve in a breakout (higher) in stocks?
 
Yields, gold and the dollar. 
 
As of today's close, Powell's speech and Q&A session yesterday has triggered more than a quarter point drop in the benchmark 10-year Treasury yield.  This is now 85 basis points off of the highs of October. 
 
Related to this, the dollar looks very vulnerable to a much deeper decline (this, after already falling 8% since late September).
 
And gold has been on a tear the past 24 hours.  Gold has now bounced 11% from the lows of just weeks ago.
 
What have these markets been telling us since putting in respective highs (dollar and yields), and lows (gold)?  The Fed will be forced to take its foot off of the brakes.  And that's what Powell indicated yesterday.   
 
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November 30, 2022
 
Second only to the midterm elections, inflation and (related) Fed policy continue to be a key theme influencing the market and economic outlook.
 
On that note, we heard from the central figure in this theme today, Jerome Powell. 
 
He gave a prepared speech at the Brookings Institution, and took questions.  
 
Unlike the very friendly post-FOMC Q&A sessions, where financial media tend to lob soft questions at Powell, in this Brookings environment, he's speaking to peers, and was questioned by market participants (banks, funds).
 
The outcome?  Markets liked it. 
 
We've been watching this big 200-day moving average in stocks (the purple line)…  

As you can see, that broke today.  Not only do we get a close above this important technical level, but it's the only close above the 200-day moving average since the Fed has been engaged in this rate hiking cycle.
 
And as you can see in the chart, we should get a test, over the next two days, of the big descending trendline, which frames this Fed-induced drawdown in stocks.  
 
In this world, where the Fed has been pursuing a weaker job market, a negative surprise in Friday's jobs report would be a positive catalyst for stocks.  For clues, we can look at this morning's ADP jobs report.  It was weak.  In fact, it showed the weakest job gains since the start of 2021.  Again, bad news is good news.
 
So back to Powell.  What did he say today that markets responded so well to?
 
Mostly, that it now "makes sense to moderate the pace" of rate increases.  Moreover, the "time for moderating the pace of rate increases may come as soon as the December meeting."
 
Now, in the Q&A session (where there's a chance for some candor to slip through the typically well measured words of the Fed chair), Powell said two very important things:  
 
1) He said, "I don't want to over tighten."  This is news.  To this point, the Fed has told us they would err on the side of over tightening.  
 
2) He said, it's "not appropriate (to execute some shock and awe strategy) to crash the economy and clean up afterwards."  That's good news, given that their language to this point, has suggested that destroying the economy is precisely the strategy.
 
So, we enter December with some positive developments.  As we've discussed in my notes, stocks historically do well in the twelve months following midterm elections.  Now, add to this, the data is beginning to reflect the impact of the Fed's rate hikes, which should give the Fed impetus to take its foot off of the brakes on the economy.
 
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November 29, 2022
The month ends tomorrow, and as it stands, the price of crude oil is down 9% in November.
 
This will factor into the inflation number we’ll see on December 13th.
And it will factor in favorably (i.e. a negative drag on inflation).  And, of course, that will factor into the Fed’s view of the rate path.  Conveniently, the Fed’s next decision on rates is December 14th (a day after the inflation report).
 
Remember, last month Jerome Powell said, “we do need to see inflation coming down decisively, and good evidence of that would be a series of down monthly readings.”
As we’ve discussed here in my daily notes, observing real-time inflation data over the past few months (on things like car prices, housing prices and rents, etc), rather than relying on the stale data within the government’s inflation report, we should expect negative monthly price changes coming down the pike.
Indeed, this November report is setting up for a negative monthly reading (i.e. a decline in prices from October to November).
 
We’ll have a big negative input for energy prices.  And if the spike in layoffs in the tech industry, in November, are any indication that the job market is softening, we have a formula for a retrenchment in prices.
 
On the jobs front, we’ll get more information over the next three days.  

 

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November 28, 2022
 
We looked at the chart below heading into the Thanksgiving Day holiday.

Stocks, for a third time since the Fed started it's tightening campaign earlier this year, were testing the big 200-day moving average (the purple line).  And as of today's close, we're 2% off of this level (i.e. lower).
 
​What's going on?  Is it social unrest in China?  Is it a potential railroad strike looming next month?
 
Nothing is more important for markets, at the moment, than the inflation outlook, and (related) Fed policy.  On that note, the geopolitical landscape continues to be noisy, and a potential contributor to the inflation picture.  But we also have meaningful data lined up this week for the Fed to digest.  It's jobs week. 
 
And what has Jerome Powell (Fed Chair) told us, explicitly, about jobs?  
 
He wants to bring the number of job openings into balance with the number of job seekers.  The prior report shows 1.7 job openings for every job seeker.  
 
Why does the Fed want to induce a softer job market?  Wages.
 
In a labor supply shortage, employees have leverage in negotiating higher wages, particularly in what has been a hot inflation environment.  With that, the Fed fears an upward spiral in wages, where wages feed into higher prices, which feed into higher wages … and so the self-reinforcing cycle goes. 
 
So, on Wednesday we'll get the October JOLTS report.  This will tell the Fed if the job openings/job seeker gap is narrowing.  But again, it's an October report.  If we look at more current data, covering the month of November, clearly the jobs market is softening. 
 
Here's a look at a chart of layoffs in the tech industry …
The tech industry shed as many jobs in November as in the prior four months combined. 

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November 23, 2022
 
We head into Thanksgiving Day with stocks trading back into this key technical level …  

The purple line in this chart is the 200-day moving average.  As you can see, it rolled over in April, and has been declining ever since (i.e. the trend is down).  And you can also see, it has contained any rallies, since.  

 
So, now we’re testing this 200-day moving average again. 
 
Will we get a technical breakout into the end of the year?  We will see.
 
What we do know, is that the odds are lining up in favor of positive stock performance over the next twelve months.
 
As we discussed last month, heading into the midterm elections, among the many major influences on markets in this environment, none are bigger than what happened on November 8th.
 
Remember, the midterm elections are historically good for stocks. 
 
How good?  Going back to 1950, there has never been a 12-month period, following a midterm election, in which stocks were down.
 
So, according to history, the probability of a positive return for the stock market one-year after a midterm election is 100%.  And the average one-year return following the eighteen midterm elections of the past seventy years was 15% (about double the long-term average return of the S&P 500).
 
With that, for those readers who aren’t already members in my premium service, The Billionaire’s Portfolio, I’d like to include an invitation for you to join us.
 
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Happy Thanksgiving!
 
Best,
Bryan