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March 18, 2024

It's a big week.  Nvidia kicked off its annual developers meeting this afternoon.  We have the Bank of Japan tonight.  And the Fed determines policy on Wednesday. 
 
As we discussed last week, there has been a clear effort by the Bank of Japan (BOJ) over the past several months to start setting expectations in markets that they will exit emergency level policies.  
 
Last week, there was talk that they might end negative interest rates tonight.  Today, the Nikkei Asia (a Japanese news source) suggested they will also end yield curve control and ETF purchases.
 
While they would continue with QE, this would be an aggressive exit from a very long period of ultra easy monetary policy.
 
Given the fragile nature of global financial markets, and the very deliberate telegraphing of policy moves made by the Fed and other major central banks for much of the past 15 years, this seems like it would be an unnecessarily abrupt move by the Bank of Japan.  It would create risks to global liquidity at worst, and global market stability and confidence at best.
 
Keep in mind, the major central banks of the world have coordinated policies and worked as partners throughout the crises of the past 15 years (they talk a lot).  With that, we should expect the Bank of Japan to be reluctant to cause any disruption in global markets.
 
On Nvidia:  As we've discussed here in my daily notes, since its May earnings call last year, Nvidia has become the most important company in the world.
 
When Jensen Huang speaks, founder/CEO of Nvidia, he's educating the world on the evolution of generative AI, and (as he calls it) the "rebirth of computing."
 
Today he did so to an arena full of the world's leading technologists.  He announced Nvidia's new chip.  And he says it will be the most successful product launch in the company's history.  Keep in mind, this is a company that nearly quadrupled in size over the past year, growing quarterly revenue by $16 billion (year-over-year).
 
As we've discussed earlier this month, Huang has said the future of accelerated computing is where "the digital world meets the physical world."  He talked more about this today.  

 

Nvidia's Omniverse technology will power it, and it will reshape $100 trillion worth of global industry.

 

Importantly, the richest and most powerful companies in the world are spending billions of dollars a quarter on Nvidia's AI chips, and partnering with Nvidia on projects ranging from infrastructure to research, to applications.  They are all-in.  And so is (virtually) everyone else.  These are companies collaborating with Nvidia … 

 

 

 

It's a new industrial revolution.  And it's still very early. 

 

 

 

 

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March 14, 2024

Stocks were broadly down today, globally.  Bonds were down, globally (yields up).  And most commodities (excluding energy) were down.
 
The selling was largely attributed to hotter than expected producer prices in February (another inflation data point).  And retail sales for February "rebounded." 
 
Does that mean the Fed's going to push the beginning of rate cuts out further.  Does it mean they won't cut?  Does it mean that might return to the view of raising rates again?
 
None of the above.  
 
Keep in mind, the producer price index has been under 2% (year-over-year change) for ten consecutive months.  And the "rebounding" retail sales, rebounded from a contraction in January, which was revised even lower in today's report. 
 
So, for perspective, if we look at where we are today, compared to where we were going into last Friday's jobs report:  The market has simply priced out a small possibility of a fourth rate cut this year.
 
Remember, the market view in early January was for six quarter point rate cuts this year (with a small chance of seven), while the Fed had projected just three.  And over the past two months, the Fed has successfully manipulated the market view to align with the Fed's projections, of just three quarter point cuts this year
 
That's where we stand heading into next Wednesday's Fed meeting, where the biggest news will likely be, what numbers the nineteen meeting participants determine to go in these yellow boxes (projections of PCE inflation and the end of year Fed funds rate).  
 
 
Now, we head into this Fed meeting with most advanced economies in the world preparing to cut interest rates (ease monetary policy) after the fight with four decade high inflation.  We should expect them to do it in coordination, as they did with the response to the pandemic, and with the response to the related inflation.
 
In coordination, the major global central banks were able to curtail record inflation, without having to raise interest rates above the rate of inflation — the historical inflation beating formula, but also a formula that would have crippled the economies of the Western world.
 
And as we've discussed along the way, that Western world victory over inflation has only been made possible by the liquidity that continued to pump into the global economy from Japan.
 
With that, there has been a clear effort from the Bank of Japan (BOJ), over the past several months, to start setting expectations in markets that they will, at some point, exit emergency level policies.  And that communication to markets has been dialed up in recent days, telegraphing the end of negative interest rates in Japan.
 
Today there were rumors that it could come as early as next week's BOJ meeting.
 
Negative rates and QE in Japan have been the BOJ and Japanese government's strategy to fight decades of entrenched deflation.  Only with the post-pandemic global ballooning of money supply, might they have it beat.   
 
But an exit at this point seems premature, unnecessary, and dangerous.
 
What's dangerous about it?  Japan's negative rates (and unlimited QE) have promoted (implicit and explicit) investment into global stock and bond markets.  Importantly, the BOJ bought a lot of sovereign debt of the Western world to help keep important global rates in check, while central banks were fighting inflation. 
 
With that in mind, while the U.S. inflation data got a lot of attention this morning, it was another report that likely triggered the sell-off in stocks, and this spike (below) in yields.  News was circulating this morning that the BOJ could act as early as next week.
 
 
 

 

 

 

 

 

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March 12, 2024

We had the February inflation data this morning.

It looks like this …

As you can see, the headline Consumer Price Index (CPI) has stalled around the 3% mark.  And it happens to have leveled off from where the Fed made its last rate hike.

The speculation has been that the move from 3% to 2% will be longer and more difficult than the move from 9% to 3%.

But the Fed’s favored inflation gauge, the Personal Consumption Expenditures Price Index (PCE), has had a much cleaner path.  At the current 2.4% level, it’s not far from the Fed’s target.

What’s the story?  As we’ve discussed over the past few months, the insurance component of CPI has been a significant drag.  Jerome Powell said the same recently.

Take a look at the direction of household insurance …

And the direction of auto insurance …

As we’ve discussed here in my daily notes, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was almost a decade’s worth of money supply growth (on an absolute basis), dumped onto the economy in a span of two years.

That inflated asset prices.  And the insurance industry spent the past two years raising the price to insure those higher priced underlying assets.  But as we’ve also discussed this is a lagging feature (likely a late stage feature) of a hot inflationary period.

If we just pull out shelter from the consumer price index (which is influenced by changes in insurance premiums), CPI drops below 2%.

 

 

 

 

 

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March 11, 2024

As we discussed last week, the Bureau of Labor Statistics (BLS) has a history of making large revisions in the jobs data, under the Biden administration.
 
With that, going into last Friday's jobs report we talked about the potential for some downward revisions to dampen some of the enthusiasm on the employment situation.
 
Indeed, that was the case.  When the BLS reported the February jobs data, they also included downward revisions for both the January and December job growth — by a total of 167,000 jobs
 
So, adding up all of the revisions, they initially overreported 380,000 jobs in 2023.  That can influence policy making.  And it can influence consumer confidence and spending. 
 
Additionally, within Friday's report, the unemployment rate for last month came in higher, at 3.9%.  That's the highest in two years.
 
To be clear, the jobs numbers remain very good, but incrementally weaker than what had been in the Fed's calculus before Friday. 
 
With that, we get the Fed decision on policy next week.  And remember, there has been both formal and informal messaging from the Fed recently, that suggests they are worried about trading one problem for another (i.e. damaging a good employment situation by overly obsessing about the next tick in the inflation data, thus keeping rates too restrictive, for too long).
 
On that note, tomorrow we'll get the February inflation data.  The consensus view is for a 0.4% monthly change.  That's relatively hot, compared to the average of the past twelve months, but it should still push the change in year-over-year CPI to under 3%.
 
For a potential clue:  What did the third largest global retailer have to say about the price environment?  For the quarter ended Feb. 18th, Costco said prices for the quarter were flat (compared to a year ago).  And that follows the prior quarter of just 0%-1% inflation.  
 
We head into this inflation report with stocks again hugging this trendline, which originated from October, when Jerome Powell verbally signaled the end of the tightening cycle (similar line for Nasdaq) …
 
 
And with Nvidia, the proxy on the technology revolution, having posted a technical reversal signal on Friday (an outside day). 
 
 
So, technically the market looks vulnerable to a technical breakdown/ a correction.  And there are plenty of people in the investment community that would like to see it, to get a second chance to build positions in this technology revolution theme.
 
But the inflation data is unlikely to provide the catalyst. 
 
The CPI data should continue to demonstrate falling inflation, which should give the Fed more confidence to start moving on rates, which is good news for stocks.
 

 

 

 

 

 

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March 07, 2024

After hearing testimony from Jerome Powell the past two days on Capitol Hill, and after hearing from a slew of Fed speakers over the past week, the takeaway is that the Fed is comfortable not messing with an economy that seems to be doing well (for the moment) with a Fed Funds rate above 5%.

Still, despite highly restrictive monetary policy, we head into the February jobs report tomorrow morning with stocks on record highs.

On jobs, as we discussed yesterday it was a hot January jobs report and a big upward revision of the December payroll number that sent yields screaming higher in early February (to the tune of almost 50 basis points).  That said, the 10-year yield is down almost 25 basis points in just the past nine days.  Perhaps in anticipation of some downward revisions to come (in the jobs data)?

If we’re looking for a trigger in the economic data, at this point, that might disrupt the current drum-beat narrative of the Fed, it would be a softer employment situation (i.e. a threat to the “maximum employment” component of the Fed’s mandate).

Let’s take a look at gold …

Gold is making new record highs by the day.  Today was the sixth consecutive higher high, and higher closing price.  That has coincided with five consecutive lower daily closes on the dollar index.

If we look back at the events that aligned with the prior highs in the chart above, we have 1) the oil price shock and broad inflation shock of early 1980… 2) the collapse of Bear Stearns … 3) thirty-one years later gold finally surpassed the 1980 highs, and the catalyst was rising global sovereign debt risks, in the aftermath of the global credit bubble burst (gold spiked on the downgrade of U.S. debt and a European sovereign debt crisis)… 4) global war risk on Russia’s invasion of Ukraine … 5) 2023 bank runs and risk of contagion … 6) an 18% two month rise to a new record level originating from the October Hamas attack (global war risk) … and 7) currently gold is, unusually, sustaining these record high levels.

Notably, with the explosion in the money supply, the new record high prices in gold are clustering — which is bullish. 

With that, we’ve often looked at this longer term chart of gold over the years.

This is a classic C-wave (from Elliott Wave theory). This technical pattern projects a move up to $2,700ish.  The price of gold has continued to make progress along that path.  

How do you play it? 

Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD. 

Full disclosure, we are long gold miners, including Barrick Gold in our Billionaire’s Portfolio 

 

 

 

 

 

 

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March 06, 2024

We heard from Jerome Powell today, at his semiannual Congressional testimony.  His prepared statement, which he’ll repeat in a visit with the Senate tomorrow, was short and uneventful.  

So was the Q&A.  For those looking for clues on some sort of incremental change, there were no clues.  In the prepared remarks, he said “our restrictive stance of monetary policy is putting downward pressure on economic activity.”  But he repeated the recent mantra of needing “more confidence” to make a move on rates (i.e. more data to assure the low level and falling inflation trajectory is sustained).

He did acknowledge increases in insurance prices as “adding meaningfully to inflation.”  And as we’ve discussed in my daily notes, the good news is, this (rising insurance premiums) is a lagging feature (likely a late stage feature) of a hot inflationary period.

Now, we talked yesterday about the recent Fed commentary on risks to employment, if the Fed were to stay too restrictive, for too long.  

On that note, we get the February jobs report on Friday.

This will be a big one.  It was the January jobs report (which came in on February 2nd) that reset the market outlook on interest rates

As you can see in the chart of the 10-year yield, a hotter jobs number sent the 10-year yield from 3.87% to as high as 4.35% by the end of last month. 

And the interest rate market swung from fully pricing in 50 basis points of rate cuts by June, to now pricing in a bit better than a coin flips chance for just a 25 basis point cut by June.

So, what was that hot payroll number?  It was 353,000 new jobs added.  Expectations were for 185k.  Moreover (maybe more importantly), there was a big upward revision to the December jobs number.  It was revised up from 216k to 333k

Now, this is especially interesting, as we head into Friday’s numbers, because the Bureau of Labor Statistics has a history of making large revisions in the jobs data, under the current administration.  

Remember, we talked about this back in January (here).  As you can see in the table below, the BLS revised UP eleven of the twelve months of nonpayroll numbers in 2021.  And it was significant.  For the full year, the initial monthly reports UNDER reported job creation by 1.9 million jobs

So, the job market was much stronger than was initially reported in 2021.  And the view of a relatively modest job market recovery was used to justify the Fed’s claim that inflation was “transitory.”  And the Fed’s claim that inflation was “transitory” was used to rationalize Congress’s pursuit of even more fiscal stimulus (which was more fuel on the inflation fire). 

You could argue the opposite has happened in 2023 …

With a December revision remaining, the BLS has OVER reported job creation by over 300k jobs.  They’ve revised DOWN ten of the twelve months.   

So, 2023 looks like the opposite of 2021.  And the Fed has the opposite policy stance of 2021 — now highly restrictive, with job growth that is weaker than was initially reported.

With the above in mind, we may see some meaningful revisions to the December and January data, within Friday’s job report. 

 

 

 

 

 

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March 05, 2024

Stocks traded broadly lower today, with the Nasdaq leading the downturn — uncharacteristic of late. 
 
And even though it was only down a little more than 2%, and off of record highs of just one day ago, the market behavior suggested some hedging was taking place (bonds up, the VIX up).
 
That said, by the end of the day, Nvidia had reversed to close in positive territory.  The takeaway:  Even the very shallow dip was bought in the most important company in the world (the leader in delivering the technology to power generative AI).
 
Let's talk about the recent messaging from the Fed, and the events of the next two days …
 
Jerome Powell will give the first half of his semiannual Congressional testimony tomorrow (second half on Thursday).  This comes exactly two weeks before the March Fed meeting. 
 
We come into this testimony with the interest rate market having dramatically dialed down expectations on interest rate cuts this year.  
 
Remember, in early January, the market was pricing in seven rate cuts (175 basis points) by the end of the year. 
 
Now, it's just three
 
And as we've discussed, that swing in the outlook has come from very deliberate perception manipulation by Fed officials.  One of the more vocal voting Fed members, the Atlanta Fed President, has been on the media tour projecting only two cuts by year end.
 
Keep in mind, the Fed has real interest rates (Fed Funds rate minus inflation) at nearly 300 basis points — very tight levels.
 
And also keep in mind, in December, the Fed projected inflation to be at 2.4% by year end, and to be accompanied by three rate cuts (75 basis points).  Inflation is there now, but the Fed has made no progress on reducing interest rates.
 
That said, Jerome Powell's prepared remarks tomorrow will likely repeat the recent mantra of "needing more confidence" in the falling inflation trend, in order to start executing rate cuts.
 
But given the subject matter of Fed speeches in recent days, we should also expect him to talk about the risks to the employment situation, if the Fed stays too tight for too long.  After all, they have been mandated by Congress to pursue both price stability AND maximum employment.  
 
As voting member, Austin Goolsbee, recently said, if they stay this restrictive for too long, they will turn one problem (inflation) into another problem (unemployment).  Not coincidentally, his colleague at the Fed (and voting member), Adrianna Kugler, addressed just that in a speech this past Friday.
 
Moreover, we should expect Jerome Powell to address the Fed's balance sheet tomorrow:  discuss when and how to begin the end of quantitative tightening.  Not coincidentally, Fed Governor Chris Waller addressed this topic in a recent speech.
 
With all of the above in mind, it's unlikely that we will hear anything from Jerome Powell that would represent a hawkish surprise for markets.  Rather, both the market expectations and the likely subject matter set up for a dovish surprise  — which would be fuel for markets.  We will see. 

 

 

 

 

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March 04, 2024

Bitcoin will likely test the record highs tonight.  Gold recorded the highest closing price on record today.  The Japanese stock market (Nikkei 225) is now trading above 40,000.  It has surpassed the 1989 record highs. 
 
Microsoft is a $3 trillion company.  It added a trillion-dollars in market value inside of two years.  Nvidia is a $2 trillion company and it added a trillion-dollars in market value inside of just seven months.  And it looks like that record might be shattered on the next trillion-dollars.
 
Is this all reflecting global capital seeking store-of-value?  Is it reflecting devaluation of paper currencies?  Is it reflecting flight to relative safety, and shock risk surrounding government shutdown, wars, domestic or geopolitics?
 
Or is it all reflecting the outlook for growing the size of the economic and stock market pie, driven by the technology revolution?
 
History would suggest the latter is the overwhelming economic force – the power of technological advancement.
 
As we've discussed, generative AI might be the most productivity enhancing technological advancement of our lifetime.  Hot productivity gains promote wage growth, which is needed to reset wages to the increased level of prices (which restores quality of life).  And it can fuel wage growth without stoking inflation.  And as Jerome Powell presented back in 2016, productivity growth is a driver of the long-term potential growth rate of the economy.
 
This brings us back to the point we've been discussing over the past several years here in my daily notes.  We need a period of hot nominal growth (an economic boom), to inflate away the massive debt boom of not just the post-pandemic era, but the post-Global Financial Crisis era.
 
We hear a lot about the $30+ trillion government debt load.  That said, the absolute value of the government debt doesn't mean much.  The debt relative to the size of the economy is what matters.  And as you can see in the chart below, debt has nearly doubled relative to the size of the economy since the Great Financial Crisis.
 
 
It has to be inflated away.  That comes through hot nominal growth.  It looks like it might happen, despite Congress's best efforts to squander trillions of dollars of fiscal spending that should have fueled it.   

 

 

 

 

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February 29, 2024

In this morning's PCE report, the Fed's favored inflation measure showed a continued fall in year-over-year inflation for the month of January.  That's four consecutive months under 3%, and approaching the Fed's target of 2%. 
 
We have one more inflation data point before the Fed's March meeting: February's CPI, which will come on March 12.
 
As we've discussed over the past few months, insurance continues to be the hot feature of the inflation data.
 
This is the impact of rising insurance premiums on shelter, physician services and (mostly) transportation.
 
The change in the motor vehicle insurance component of CPI was up 20.6% compared to January of 2023.  It's now up 39% from pre-covid levels.  Here's an update to the chart we looked at this past December …
 

 
And as we also discussed back in December, the good news: this is a lagging feature (likely a late stage feature) of a hot inflationary period.

 
Remember, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was almost a decade's worth of money supply growth (on an absolute basis), dumped onto the economy in a span of two years.
 
That inflated asset prices.
 
And the insurance industry spent the past two years raising the price to insure those higher priced underlying assets.
 
With that, heading into Q4 earnings season, insurance companies were expected to grow earnings by 26% for full year 2023.  It turns out they doubled that growth rate (53% year-over-year earnings growth).
 
This chart of Allstate looks like many of the insurance stocks …
 
 
 

 

 

 

 

 

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February 28, 2024

We get the big inflation data tomorrow.  Remember, the Fed is watching its favored measure of inflation, likely to hit 2.3%-2.4% in tomorrow's report — as it continues to stairstep lower toward the Fed's target of 2%.
 
Going into last month's PCE report, which was December data (reported end of January), the 10-year yield was trading 4.11%. 
 
The data in that report showed that inflation continued to fall in December.  Two weeks later, we had January CPI.  It was the lowest reading of the prior seven months.  The core measure was the lowest of the inflation cycle.  After all of that, we go into tomorrow's report with yields higher, not lower (at 4.26%). 
 
Meanwhile, stocks are 3% higher than a month ago, and have continued to hug this trendline, which originated from October, when Jerome Powell verbally signaled that the tightening cycle was over. 
 
 
The most important difference going into tomorrow's report, relative to the prior PCE report:  On January 26th, the interest rate market was pricing in a 4.0% Fed Funds rate by year end.  It's now pricing in a 4.6% Fed Funds rate by year end.
 
So, the market has repriced to align with the Fed's guidance, which is inarguably very conservative (on the rate outlook) given that inflation is running just a few tenths of a percentage point from the Fed's 2% target.  
 
And remember, within the Fed's Summary of Economic Projections, they've told us where they think the Fed Funds rate should be, when inflation is at target.  As you can see below (framed in orange), it's 2.5%
 
The current Fed Funds effective Fed Funds rate is 5.33%.  Clearly, that's much higher/much tighter than where the Fed sees sustainable real rates.