June 1, 2020

As Mark Twain said, "history doesn't repeat itself, but it often rhymes."

In this case, it seems like we're seeing the major events of the twentieth century rhyme, in hyper-speed.  We have a 1918-like global pandemic, prior to which, the economy was set up for another roaring 20s-like era of economic prosperity.  Then suddenly, we have a 1930s depression-like economic contraction and unemployment (actually worse).  If we're not on the verge of another 1940s World War, we're certainly in another 1980s Cold War.  The 1950s-like family life has been reengaged through two-months of stay-at-home orders.  We have 1960s-like civil unrest.  And we have a 70s-like supply shock, which is brewing inflation.  Next up, the 80s?

On the supply shock front, we've talked about the building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch (from the reopening of the economy), and supply, which has been disrupted and will take time to rebuild.

We've already seen it in food/groceries.  Now, we're beginning to see it in retail. 

If you've been out shopping over the past couple of weeks, since stores have reopened, you may have noticed that inventory is light (if not bare).  In some cases, there are stores that haven't seen a truck with new inventory since they've reopened – and they don't know when they might see one.  This includes all sorts of consumer products (office supplies, computers, furniture, clothing).  

Add to this, you have a consumer sitting on a new record high savings rate.  That's too much money, chasing too few goods – the formula for inflation.

With that, let's take a look at copper prices, an industrial metal that tends to be an early signal on a turning point in the economy, and a good inflation hedge.  It traded today to the highest levels since early March, before the shut down. 


May 29, 2020

In a prepared speech today, Trump formalized many of the threats against China that we've heard over the past few months. 

This is all beginning to look like China will be put in the trade penalty box, not just by the U.S., but in coordination by the global democratic powers.  

In the near term, this confrontation with China will further disrupt global supply, which is already feeding into a formula for higher prices, which will soon be followed by higher wages. 

In the medium term, a globally coordinated hardline penalty for China would force the movement of the global supply chain sooner, rather than later, and force the restructuring of economies (for the better) of the United States, Europe and Japan.

The question is, how would China respond to an economic penalty box?  Likely with aggression.  The CCP can't politically withstand the suffocation of exports.  

And how would Russia align?  They would likely stand back and watch. 

There was a recent article in Foreign Policy (here) on this, laying out the reasons why Russia and China would not form an effective alliance against the U.S. (and allies). 
Here's the gist:  "history shows that autocratic allies tend to fight each other more than the enemy. In spite of the Molotov-Ribbentrop Pact, Adolf Hitler turned on and invaded the Soviet Union, betraying his partner Joseph Stalin. The major military action of the Warsaw Pact during the Cold War was attacking its own members, Hungary and Czechoslovakia. The last time China and Russia were aligned, they nearly fought a nuclear war with each other in the 1969 Sino-Soviet border conflict. And Putin invaded Ukraine and Georgia at a time when these countries were involved in the Russian-led Commonwealth of Independent States.

Moreover, there are many conflicts of interest between Russia and China that will push them apart without any help from the United States. Depopulation in Russia’s Far East has led to fears that an expanding China will attempt a land grab. Russian colleagues report that Russia’s new nuclear-armed intermediate-range missiles are not aimed at NATO but meant to deter a rising China. More broadly, Moscow was the senior partner during the Cold War, and Putin will not be keen to now play second fiddle to Beijing."

Interestingly, the move in stocks today was up, following Trump's speech.  If you have money in China or Hong Kong, you're getting it out. Where will it go?  U.S. stocks, treasuries, gold … bitcoin.  

May 28, 2020

We talked yesterday about the building path to confrontation between the U.S. and China.

Another step along the path came today, as the White House announced that Trump will  hold a press conference tomorrow, regarding China’s move to control Hong Kong.  

Stocks came off hard, late in the day, on the news.  And assuming this press conference doesn’t take place until late tomorrow afternoon, it’s a pretty safe bet that tomorrow will be a “risk-off” day for markets as we head into the weekend. 

Add to that, the President signed an executive order this afternoon, to pursue legislation to regulate social media platforms.  This should weigh on broader stocks too, as we end the week.   

We’ve talked about this slow moving “regulatory purgatory” for the tech giants, in my notes for the past two years.   

The tech giants have gotten too big to manage, too powerful and too dangerous for the economy (and society). 

But ironically, regulation only widens the moats for these companies, given their scale and maturity.  The higher cost of compliance, the smaller the chance that there will ever be another Facebook developed in a dorm room.    

That said, the regulation of the “disruptors” should open the door for the “disrupted” to survive.  But the position of dominance by Amazon, Facebook, Google (etc.) seems to have been set – the die has been cast. 

May 27, 2020

Stocks continue to hang around the big 200-day moving average in the S&P 500. 

The strength today was thanks to even more global stimulus.  This time from a combined $2 trillion of additional government spending/aid coming down the pike from Europe and Japan. 

This puts global fiscal stimulus at about $11 trillion, in response to the crisis.  That has come in the form of direct budget support, public sector loans and equity injections (backstops) and guarantees.   

That's more than 12% of GDP.  And that doesn't include the money created by central banks.

The question is, who will be the buyer of net new government debt issuance, when the entire world is deficit spending and creating more, less valuable paper currency? The buyer will be global central banks (of their own debt) – the buyer of last resort.  This means even more and less valuable currency will be sloshing around the world.  

As we've discussed, this is all a recipe for reduced buying power, of the money in your pocket, which translates into higher asset prices (stocks among them).

Now, let's talk about the building path to confrontation between China and the U.S. …

It's been a long and rocky path, which has included three decades of economic war.  Is something bigger coming, perhaps the seeds of which sowed by the virus? 

China's overt move to control Hong Kong looks like the tipping point.  Pompeo told Congress today that the U.S. no longer recognizes Hong Kong as autonomous from China.  There are some dominos that are lined up to fall.  

Keep an eye on the lynchpin:  The Hong Kong dollar. 

The currency peg in Hong Kong has been under pressure in for some time.  And now the risk of capital flight has just hit the most intense levels.  Chinese (and global money) leaving Hong Kong, in search for a safer haven, will be too much for the central bank in Hong Kong to fight off.  If they let the peg break, it will set off a domino effect — maybe another Asian Crisis like moment.  

May 26, 2020

Stocks open the week with a surge above key psychological levels (over 25,000 in the Dow and over 3,000 in the S&P 500).

That’s 37% from the lows of March — thanks to the sea of liquidity (both fiscal and monetary stimulus) pumped by the Fed and the Treasury (via Congress).

Now, this 3,000 level in the S&P happens to be spot-on the 200-day moving average.  We’ve been watching this big technical level for a while now.  I suspect that this will continue to represent the top of the range for while, until we get a better picture of how consumer psychology looks in the the economic reopening.

From the media tone, it seems like the psychology of fear, that has gripped the country over the past two months, might be worse than the virus.

But that doesn’t sync with the April survey from the University of Michigan on consumer expectations.  That report showed consumers considerably more optimistic than they were at the depths of the Global Financial Crisis.


So, is there a wide divide between how the consumer might behave as more businesses reopen, and how the media thinks they will (or should)?  That wouldn’t be too surprising.

For our guide on the economic reopening, let’s revisit the key data on how the health crisis is tracking:  With a month under the belt on state reopenings, we have no spike in cases, and importantly, a continued decline in deaths.

Add to this, last Wednesday the CDC’s published new, lower estimates on the severity of the disease.  Of five scenarios, the “best guess” scenario showed a case fatality rate of 0.4%.  The worst case scenario was 1% (of cases).  And the best-case scenario would be a case fatality rate of 0.2% – a small fraction of what was originally projected. These are all dramatically more optimistic projections than we saw early in the crisis.

With the above in mind, this Memorial Day weekend may have represented the defining “rip the band-aid off” moment for the economic crisis.

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May 22, 2020

As we head into the long holiday weekend, let’s take a look at a key chart.

In a world that has been gripped by fear, this chart plots the level of fear in the stock market (better known as the ‘fear index’).

The VIX tracks the implied volatility of the S&P 500.  It’s not actual volatility, as might be measured by the dispersion of data from its mean. Implied vol has more to do with the level of certainty that market makers have or don’t have about the future.

When big money managers come calling for an option, to hedge against a potential decline in stocks, a market maker prices the option with some very objective inputs.  But also with a very important subjective variable, called implied volatility.  When uncertainty is rising, this implied volatility value rises, to include a very healthy (sometimes absurdly high) premium over actual volatility.

To put it simply, if you are an options market maker, and you think the risk of a sharp market decline is rising, then you will charge more to sell downside protection (ex: puts on the S&P) to another market participant  just as an insurance company would charge a client more for a homeowner’s policy in an area more likely to see hurricanes.  And, in this vein, market makers are quick to aggressively raise the “insurance premium” if they are confronted with a shock event that leaves them with little-to-no information from which to evaluate risks.

That translates into the violent spikes in the VIX that you can see on the chart.

But, it’s important to note, betting a high VIX to persist, has been a bad bet.

Now, with this in mind, as we’ve discussed in historical crises Wall Street panics well before Main Street panics.   And by the time Main Street panics and starts purging stocks, Wall Street is buying.  That’s precisely what we’ve seen, this time around.  In line with these actions, as you can see in the VIX chart, “the fear” on Wall Street, related to the health crisis, has subsided dramatically.

That’s the world of financial markets.  But don’t underestimate the financial market mechanism for pricing in all of the information and laboriously weighing the risks and rewards.

So, what’s the takeaway:  The market is telling us that that the psychology of fear on Main Street (which continues to be high) is way out of line with the reality of the health crisis (the status and outlook of which has improved dramatically).  With businesses reopening and people returning to work, that Main Street fear should subside — maybe quickly, as people return to their life-learned patterns and behaviors.

Have a safe Memorial Day weekend!

If you are hunting for the right stocks to buy and need some help navigating the changing investing environment, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

May 21, 2020

We’ve been talking about this building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch, and supply, which has been disrupted and will take time to rebuild. 
The demand light switch:  Stay-at-home orders are lifting, businesses are opening, people are getting back to work, and they are doing so with a 45-year high savings rate.  So, not only is their pent-up demand, they have money — the latest data shows a spike of savings up to 13% of disposable income – a near double from the beginning of the year. 

Meanwhile, the supply of goods and services has been disrupted, if not completely shut down, in some cases.  So we have a situation where money will be chasing fewer goods and services.  That tends to lead to higher prices. 

With this in mind, recessions have historically brought about housing price downturns.  I suspect not this time. 

Remember, the intent of policymakers (here and globally) to combat the global economic shutdown by flooding the world with money, was to ultimately inflate economies and deflate debt.

This was an explicit devaluation of cash against asset prices.  And as we’ve discussed, these policy moves will reset the price of everything (consumer stables, consumer products, services, labor … and also stocks, real estate, commodities … everything). 

So as people have been expecting housing prices to fall.   The early indicators are signaling the opposite. 

On the supply side, Redfin says the supply of homes was down 24% in April.  In addition, the recent new housing starts data showed a sharp plunge, as you can see in the chart below …

New listings on Redfin were down 42% in April …
What about demand?  Houses sold six days faster in April, compared to a year earlier.  And 27% sold above listing price.  And only one market of the 85 largest metra areas had a year-over-year decline in median sale prices.  

Again, we’ve seen early signals of the supply/demand mismatch in food prices.  Now we’re seeing evidence in real estate.  As economies reopen, expect more to come. 

May 20, 2020

The Senate passed a bill today which could require Chinese firms, listed in the U.S., to de-list from U.S. exchanges or agree to audited financial reporting, just like any other company listed on U.S. exchanges.

This still has to go through the house.  But if this passes, this would likely lock out a lot of big Chinese companies from U.S. capital markets. Among them, one of the biggest e-commerce platform company in the world, Alibaba.  And China’s biggest e-retailer, JD.com.  This, while BABA’s stock is just 6% off of all-time highs, and JD.com was sitting on record highs. 

This is another huge signal that the trade war of the past two years, may be considered moot in the very near future.  The U.S. appears to be going to full protection mode, to counter the three-decade economic war that China has used to ascend from a $350 million economy, to the second largest economy in the world.  

For a country (the U.S.) that is just beginning to turn demand back on, through re-opening of businesses, this dynamic of increasing conflict with China, doesn’t bode well for an already disrupted supply chain.  We may find that the timeline for bringing manufacturing back home, will be much quicker than anyone expects — out of necessity to meet basic needs.   

May 19, 2020

As we discussed yesterday, stocks were challenging the top of the range (post-crash), where some big technical resistance resides.  We have a big retracement level at 2,930, and the widely watched 200-day moving average, which comes in below 3,000 now (the purple line the chart below).

As you can see in the chart, for a third time, stocks have backed off of this area.

Still, the market sentiment is gradually improving for all of the reasons we’ve been discussing in my daily notes:  1) New York, the hotspot for the virus, now has the lowest new Covid hospitalizations in more than two months, 2) the opening of state economies has, thus far, come with no spike in infections, and 3) the expectations bar has been reset on the vaccine timeline (reset to sooner, rather than later).

Now, as people are getting back to work and back into the community, demand has been turned on like a light switch.  So we have pent-up demand meeting what I suspect will be revealed as a severe supply shock, as businesses attempt to build inventory in a world where the supply chain has been disrupted.  As I’ve said, add this to wage subsidies, and we have a formula for higher prices.  

What’s the play for higher prices?  Commodities.   

May 18, 2020

Stocks open the week very strong – and up 4.5% since Friday afternoon.  This challenges the top of the range (post-crash).
Let's talk about why …

First, on Friday afternoon, Trump announced "Operation Warp Speed" which includes the funding and manufacturing of vaccine candidates, which would (in theory) have a vaccine ready to roll out the moment it's approved.  Who approves a vaccine?  The FDA.  Who has already proven to have tremendous influence over the FDA timeline?  The President.  

In short, the expectations have been reset on the vaccine timeline.  

As we've discussed, the expectations bar on the health crisis has already been set very low.  That sets the table for positive surprises.  And markets like positive surprises.  Add to this, we had news this morning on success in a Phase 1 trial from Moderna's vaccine.  

So, aside from a vaccine (which may or may not ever materialize), where are looking for clues on how the reopening of the economy is going?  Georgia.  

With that, remember Georgia reopened for business on April 24th.  We are now twenty-five days in.  This is well within the window of time where we would see symptomatic people tested, and show up in the new infections/new case data.   

As you can see in the chart above, a spike hasn't happened. The path has continued lower, following the peak in mid-April.

Again, as we discussed last week, what’s the difference between now and two months ago, that might give us more confidence about the path?  1) Symptomatic people can get tested (much more easily) and quarantine.  2) There are behavior and process changes (both from consumers and businesses).  3) There are treatment options.  


So Georgia has been the spot to watch, to gauge how optimistic (or not) we should that the bottom is in for the economy.  All looks good. 

Speaking of the bottom in the economy, (Fed Chair) Jay Powell followed the script of his predecessor Ben Bernanke last night, and spoke directly to the public through an exclusive 60 Minutes interview. These interviews, where the Fed chair is explicitly reassuring the American people, has become a buy signal for stocks. 

Back in March 2009, Bernanke (Fed Chairman at the time) sat in front of a camera in an interview on 60 Minutes, explained what the Fed had done to support the economy, and said he was seeing signs of "green shoots" in the economy.  If you bought stocks at the open the next day, you felt 11 points of pain in the S&P 500 over the next 24-hours, and then 2,643 points of gain over the next eleven years (i.e. that was the bottom). 

Now, this is Powell's second time in front in front of the prime time camera.  Last March, in response to a 4% one-day plunge in Chinese stocks and some loss of momentum in the U.S. stock market rebound, Powell did a 60 Minutes interview, to reassure the public that the economy was in good shape, and that the Fed was there to ensure stability.  If you bought stocks on Monday morning, you made 8% in two months and went on to new record highs.