September 21, 2020

Just when you thought the political landscape couldn't get crazier, it has, with the opening of a Supreme Court Justice seat.

Markets are broadly lower today (global stocks and commodities) on the idea that more fiscal aid is NOT coming, because of the (even uglier) partisan war that will now transpire over a new Justice nomination and confirmation.  

I've argued that another package wasn't coming anyway.  As we've discussed, the democrats lost their leverage last month, when Trump used executive order to extend the federal unemployment subsidy.

That federal unemployment check was the bargaining chip that the democrats were relying on, to force republicans to submit to nationwide mail-in voting legislation, "because people shouldn't have to risk their lives (i.e. risk getting Covid) to vote."  When Trump stripped the unemployment check out of the negotiations, the deal was dead – the dems lost their path to mail-in voting. 

With this in mind, for markets, does the uptick in political chaos mean there is more risk in markets today, than there was last week. No.  

Even if that were not true, knowing that the Fed is in full backstop mode (and will be there for a long time), the dip in broad stocks should be bought. 

Stocks are important to promoting confidence, stability and wealth.  If stocks were to get messy (i.e. a quick and "disorderly" decline), we know exactly what the Fed would do.  There is no doubt. 

They would outright buy stocks.     

In fact, they will do anything and everything to preserve stability and to preserve the recovery — and to protect the trillions of dollars that have been spent to manufacture that recovery.  

As a proxy on broader stocks, and broader risk appetite, this is probably the most important chart to watching in the coming day(s).

As you can see, Apple is testing this big trendline from the March bottom.  This line comes in at 105.88.  A sustained break here would project a move to the low-to-mid $90 area, which would represent a return to the late July levels.  That would be giving back all of the gains of big tech's (including Apple's) monster Q2 earnings, where it was revealed just how stacked the lockdown economy deck was in favor of the big tech monopolies.  

September 18, 2020

As we end the week, stocks have continued a September correction, today making lower lows on the month.

This, just days after a very market-friendly Fed meeting.

This looks very similar to June (which also coincided with a very market-friendly Fed meeting).  As you can see in the chart below, we’ve had a 9% correction in stocks in June.  We’ve had a 9% correction this time.

Similar to June, the chatter about rising cases has returned.

Back in June, businesses were reopening, and those going back to work were forced to test.  That did nothing but reveal the degree to which asymptomatic were walking around.  Still, the media and the politicians used it as ammunition to fuel their “respective” agendas.

The result of “spiking cases” this summer:  The rate-of-change in the death-to-cases ratio only declined more quickly as the rate-of-change in testing increased.

This time around, testing has ramped up for back to school.  Again, it’s only revealing the degree to which asymptomatic people are walking around. The death rate-to-case ratio continues to decline.

We’re eight months in since the first U.S. case was recorded.  And the death-to- diagnosed case rate is 2.9%.  If you believe the CDC that at least 10 times as many people have it or have had it (undiagnosed), that death rate falls to 0.29%.   Antibody tests from a July published study in JAMA suggest the multiplier could be as much as 24. 

Add to this, while the absolute number of cases diagnosed might be reaching new daily highs, the trajectory on the rate-of-change in daily cases, as you can see in the chart below, is down.


September 17, 2020

Yesterday, we talked about oil, as one of the most beaten down markets in a world where asset prices are resetting higher (by the design of policymakers).

Oil was up 5% yesterday.  The biggest mover of the day among global stock markets, currencies and commodities.  And today, it was up another 2%. 

Crude oil is up 11% since Tuesday. 

What happened on Tuesday?  Trump hosted the leaders of Bahrain, UAE and Israel to sign a peace treaty. 

Does the Middle East peace deal represent a catalyst for oil?  It may, to the extent that it may have increased the probability of the survival of the fossil fuels industry.   

There is clearly a global war against fossil fuels.  And it's a war the climate change activists have been winning. They are all in, and near the finish line.  Standing in the way has been Trump.

Climate change activists believe that climate change is an existential threat to the world.  And the financial backing is nearly unlimited.  A group called Climate Action 100+ has the most powerful investors in the world (representing $32 trillion in assets under management).  And they have been dictating how major energy companies are deploying capital on new projects – forcing the pivot to climate responsible initiatives.  And then you have major global government entities/cooperatives behind the activist movement, feeding the effort with cash and subsidies.   

And because they view Trump as a climate change denier, they have explicitly said he (Trump) is an existential threat to the world.  

With that, you might imagine how desperately they want him to "disappear" (in the words of George Soros). 

Now, what does this have to do with the Middle East deal? 

This deal may have increased the probability of a second term for Trump.  That's positive for the outlook/the survival of the fossil fuels industry.  And it may increase the global support (with Middle East) for Trump's stand against China.     

September 16, 2020

We heard from the Fed today.  As we discussed yesterday, we should expect the Fed to continue doing whatever it takes to preserve stability and to manufacture recovery.  And within that effort, we should expect them to continue to set our expectations that they will keep rates at zero for a long, long time.  Indeed, that's the message they delivered today.  

The intent is to get us spending, not saving.  And that is intended to drive demand, drive economic output, and drive inflation. 

That should all be taken as very optimistic for the economic outlook.  The Fed acted early and aggressively to avert an economic apocalypse.  And they make clear that they will continue to be there to manufacture the desired outcome. Maybe the statement of the day, from Jay Powell:  We remain "strongly committed to achieving our goals and the overshoot on inflation."

The theme we've been discussing here, since March, has been a global reset of asset prices.  By overshooting inflation, the Fed is telling us that, by policy, they are resetting asset prices.  

And according to their economic projections on economic output and employment, it (inflation) will be sooner than they want us to believe.

The Fed has revised up their GDP forecast for this year to just a 3.7% contraction.  And they are projecting 4% growth for 2021.  That would mean a recovery in GDP, to new record highs, by next year.   And they're looking for unemployment to recover to 5.5% by next year.  That would be a reflection of a hot economy.  And the Fed would still be at zero rates, with QE … and signalling for it to indefinitely continue. 

With this outlook, if we look across commodities, currencies, bond and stock markets, the worst performing market in the world this year has been oil. If  you're looking for a beaten down market to buy, crude oil is down 34% ytd.  It's the best performer on the day, up 5%, and back over $40. 

September 15, 2020

The markets seem to have gone range bound, for now. And without a fresh catalyst, things may very well stay this way into the debates (the first one, scheduled for September 29). 

We talked yesterday about the prospects of the U.S. being pulled into a China/India war.  That would be a catalyst for markets. 

Otherwise, some seem to be awaiting fresh stimulus out of Capitol Hill, as a greenlight to get more aggressive.

It will likely be a long wait.  The democrats lost their leverage last month, when Trump used executive order to extend the federal unemployment subsidy. With that, the daily posturing on stimulus, at this stage, is just politicking. 

Today we had more manufacturing data that continues to support the projections that Q3 will be a huge counterpunch to the 32% (annualized) economic contraction in Q2.  The Atlanta Fed's GDP model is now projecting +31% annualized for Q3. 

We have a Fed decision tomorrow afternoon.  We already know that the Fed has done and will continue to do whatever it takes to preserve stability and to manufacture recovery. 

Part of that effort has been a campaign to make us believe that they will keep rates at zero forever (not really forever, but for a very long time). 

Back in July, in a survey of primary dealers (trading counterparties to the New York Fed), they were already expecting the Fed to stay put, at zero, until 2024.  Since then, Jay Powell has made it Fed policy that they will let inflation run hot (sustainably over 2%) before they will even think about budging. So the expectation of zero rates has been pushed out even farther.  

That's all intended to promote an expectation that inflation is coming.  And that is intended to promote spending, not saving.    

September 14, 2020

I've said in my daily notes here that it seems like we are on path for some military action with China, before the election. 

The election is drawing closer.  Nothing yet.  Though China has made many provocative moves (handling of the virus, expansionist actions in the South China Sea, Taiwan and Hong Kong).

And the U.S. has stepped up rhetoric and action, with bans on Chinese technology companies, condemnation of China's human rights abuses, and calling out the broad threat of the Chinese Communist Party to the future of the free world.

Add to that, Trump has laid out, as part of his second term agenda, a plan to decouple the U.S. and Chinese economy.  

So, what could be the trigger to turn rhetoric and a 'cold war' into a 'hot war?'  

At this point, it looks like, if anything, it could be the border dispute in India

For the past several months, China has ramped up the bullying of India, over a long disputed stretch of Chinese/Indian border.  It has resulted in plenty of military flexing.  There were 20 deaths from a ground fight back in June.  And shots were fired last week, for the first time in 45 years. 

The CCP's voice on Twitter, the Editor of the Global Times, has been posting threats and war propaganda.  Below is the latest, from this morning …  

So, where does the U.S. come down on this?  

Trump has said over the summer that he would be a mediator.  But Pompeo has been out alliance building with democratic nations to stand against the Chinese Communist Party.  As he said in his July speech at the Nixon Library, "maybe it's time for a new grouping of like-minded nations, a new alliance of democracies."  India is the largest democracy in the world.  And Pompeo was just there in late July.  And in his Congressional testimony he named India as a friend (along with Australia, Japan and the UK) that is working in coordination with the U.S. to discourage China's actions in the South China Sea. 

What does it all mean?  If this China/India dispute were to escalate into military action, the U.S. would be drawn in, to take a side — and it seems clear that it would be supporting India.  That would put us in the middle of a war, which would further complicate a very high stakes election.  But as we’ve said, incumbent Presidents, when they’ve actively sought a second term in war time, have a 6-0 record. 

September 11, 2020

The tech giants have all given up significant ground over the past seven trading days.  And as a proxy on global risk appetite and the global economy, broader markets have followed the lead of the big tech giants. 

With that, let's take a look at the chart of Apple, and some analysis (my view) on the story …

As you can see, the past seven days have matched the first leg of the Covid-driven decline. That was back in late February.  Apple dropped as much as 36% from peak to trough, until it was turned by the Fed intervention on March 23. We're comparing this move to the onset of global Pandemic, yet with no catalyst.  That seems very aggressive.  But this the upside down "V" in the chart, might give us some perspective.  

What's notable in this Apple chart, and in the chart of many of the other tech giants, is this big spike in late July.  That's the day that followed blowout earnings for Apple, Amazon, Facebook and Google.  And Apple announced a 4 for 1 stock split. 

At that time, the hysteria from the media and the politicians about a "second wave" of the virus was running high, and the tech giants were performing like a global store of value. 

There are trillions of dollars of fresh money printed around the world.  When the outlook looks grim on the virus, plow your money into the tech giants as relative safety.  The monopolies only get stronger and more powerful in a pro-longed lock down scenario — and the Q2 earnings confirmed it.  

But a little more than a month later, and the perception surrounding the virus outlook has improved dramatically.  Schools have opened.  Sports are underway. It looks like the post Q2 earnings money (that flooded in) is moving out.  

September 10, 2020

With 53 days until the election, as we discussed on Tuesday, we have a vacuum to be filled with uncertainty and speculation.  

That's a formula for choppy markets.  That's what we're getting.

Let's take a look at how the election is sizing up …

Despite the reports that the polls have swung in recent weeks to a very tight race, Reuters still has it at a seven point spread in Biden's favor.  The FT has it a eight points.   

In the Reuters surveys, a "robust plan for covid" leads the list of determining factors for choosing the next President.  Second is restoring trust in the government.  And third is "strong on the economy." 

Safe to assume there's a solid bias in all of these polls, given the media's position on Trump ("coverage bias"), and given the propensity of Trump supporters to decline a survey (nonresponse bias). 

If a "robust plan for covid" is top of the list, and the virus were indeed consider "a war", then history is on Trump's side.  Remember, incumbent Presidents, when they’ve actively sought a second term in war time, have a 60 record.  

For now, markets seem to be numb to the daily anti-Trump "bombshells" delivered by the media, on a loop.  The debates (assuming they happen) will be where the needle gets moved.  

Here's a look at that schedule …

September 9, 2020

One of the great macro-traders of all time, Stan Druckenmiller, was interviewed this morning. 

This is a particularly interesting interview because, 1) he tends to understand the big picture as well or better than anyone, because 2) his view is shaped by global liquidity … and 3) he has a lot of influence.   

As we know, with the Fed and Treasury acting in coordination (together and with other global central banks and governments), the world is swimming in money. With that, in environments where central banks are active, Druckenmiller tends to have very valuable perspective. 

Back in early December of 2018, Druck said he was "on red alert" for markets to crack.  At the time, the Fed and the ECB were combining to land a one-two punch for global markets and the global economy.  The Fed was overly aggressive in tightening into a slow growth, low inflation economy, while the ECB was simultaneously ending its three-year QE program.  Liquidity was being extracted. 

Despite some warning signals, the Fed went through with another rate hike in mid-December, and stood its ground on the policy path — that was the gut punch. U.S. stocks collapsed 18% in fifteen days, and by the beginning of the year the Fed was walking it back and ultimately reversed course.   

As we headed into 2020, Druckenmiller was interviewed again.  This time, he thought the Fed was on the wrong side again — swinging the pendulum to far in the opposite direction (overly easy). He thought global growth would positively surprise.  And he thought the Fed would be caught behind on inflation.  

A month into the year, all appeared to be on the path, until the pandemic hit.

So, for a "liquidity" driven investor, we now have trillions of dollars of new money in the economy.  This is his wheelhouse.  What does he think now? 

He thinks we are set up for an inflationary boom (if they get it right), or a deflationary bust (if they don't) — with a low chance of getting it just right (perfect). 

He says valuation on stocks doesn't matter, because of the Fed/Treasury liquidity. 

And he says he thinks inflation could hit 10% in the coming years. 

This is in line with much of what we've been discussing here in my daily notes.  For what it means, let's look back at an excerpt from my Aug. 27 note …

"Remember, this will be a recovery juiced by trillions of dollars of excess money from the policy response (well in excess of the damage).  That means the Fed will likely have to chase inflation at some point, to contain it, with a rapid succession of rate hikes. But they will still let it run hot, early on. This is still a good scenario.  That bad scenario, is deflation, due to economic collapse, which means a very bad outcome for all, and unlikely salvageable by even aggressive policy actions. 

Let's stick with the optimistic (high probability) outcomes …

Guess what will 'inflate' along the way in these inflation scenarios:  Nominal GDP. 

GDP measures the market value of the goods and services.  So, price goes up, GDP goes up. 

If we look back to the inflation spikes of the early 70s and early 80s, nominal GDP grew by an annual rate of better than 10% during those periods. 

If we had a similar spike, we would regain peak levels of GDP by middle-to end of next year, and we would be on the way to a $30 trillion economy by 2024, which would (by design) go a long way toward repairing, if not resolving, our debt as a percent of GDP problem."

September 8, 2020

Yesterday, Trump laid out an agenda for the second term in a prepared speech. 

This was an important speech, as he laid out the path forward with China.  And it’s an aggressive one. 

Remember, we’ve been talking about the likelihood of seeing the U.S. and democratic global allies taking a stand against the Chinese Communist Party, putting China in the “penalty box” – a global retaliation against China’s multi-decade predatory economics. 

That seems to be the gameplan. 

Here’s what the timeline looks like on this escalation …

After plenty of jawboning and tweeting, for years, back on May 29th, Trump formalized his threats against China in a prepared speech, following China’s takeover of Hong Kong.  He made his case to the American people. 

From that point, Pompeo has been out building a coalition (of global allies) against China.  Within that effort, he made a speech at the Nixon Library calling on “every leader of every nation,” for the “future of the free world,” to set the standard for dealing with the Chinese Communist Party.  He called for an alliance of like-minded democracies, to “act now” against the CCP, or let them “erode our freedoms and subvert the rules based order that our societies have worked so hard to build.”

With that backdrop, yesterday Trump got more specific about the scale.  He said would “make America into the manufacturing super power of the world.”  That’s a big statement.  And with that, he said he would end our reliance on China.  No federal contracts for companies that outsource to China. And a “big tax” for those that do.  This is not just moving the supply chain out of China, but it’s bringing the supply chain home.  

Lastly, he said “we will would hold China accountable for allowing the virus to spread around the world.”  This probably means Trump and company have some leverage to get allies on their side for, at best, sanctions …or at worst, military action. 

For market, this leaves a 55 day vacuum to fill with uncertainty and speculation.  Markets clearly don’t like it.  Let’s take a look at how stocks behaved throughout the U.S./China trade war (from the announcement of the first tariffs, to the signing of the “phase one” deal).