September 26, 2019
The drama machine on Capitol Hill and in the media continues to suck people in, and cloud their judgement on the economy and markets.
Remember, earlier this month, we looked at this chart from Pew Research that explains this bifurcated view on what we hear from the media and some of Wall Street, relative to what is happening in markets and the economy.
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The bottom line: Democrats are largely expecting a recession. Republicans are expecting a boom.
In addition to good economic fundamentals and ultra-low rates (which is designed to incentivize risk taking), this political sentiment division is adding more fuel for stocks. It's the proverbial wall of worry that tends to be constructive for bull markets. Why does it work? Because it breeds positive surprises. Meanwhile, we have just two days remaining in the third quarter. And we will soon have some earnings to evaluate. Remember, never underestimate the appetite for Wall Street and corporate America to dial down expectations when given the opportunity. They dialed down earnings estimates for Q4. We got positive surprises. Same for Q1. Same for Q2.
With that, as we head into Q3, as you might expect, estimates have been lowered – again. As ended the second quarter, Wall Street was looking for a slight decline in year-over-year earnings for Q3 — a 0.3% decline. That number has since been ratcheted down, looking for earnings contraction of -3.8%. That sets the table for positive surprises.
September 25, 2019 While the Democrats are moving forward with an impeachment inquiry, the DOJ has stated its conclusion on the phone call in question: it was diplomacy, not intelligence. When the notes from the call were released this morning, stocks went UP, bonds went down, gold went down, the VIX went down. That's a "nothing to see here" statement by the markets. Yesterday we talked about the plunge in Bitcoin. Today it was gold and silver. Gold fell more than 2% from the highs overnight. Silver was the biggest mover of the day across global financial markets, down 3%. You can see the parallels in the chart below of the performance of Bitcoin and Silver this year. Both have had huge runs over the past four to six months. So has gold. |
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As I alluded to yesterday: Are these declines over the past 24-hours, in these key stores of value, signaling a U.S./China deal in the offing?
Trump said this morning, to reporters: "it could happen sooner than you think."
September 24, 2019 The impeachment threat has been made by the Democrats for the better part of the past two years. They now have a new 'smoking gun' issue they have rallied around: a phone call with Ukraine. But as the impeachment anticipation began to build today, Trump killed the buzz by announcing that he'll release the transcripts of the alleged "treasonous" call. For our guide, the Clinton investigations took about a year, and by the time Congress officially voted to move forward with an impeachment inquiry, stocks bottomed and resumed what was already a big multi-year bull market. Despite the noise of impeachment swirling today, the big loser of the day wasn't stocks. It was Bitcoin, down as much as 19% from the highs of the day. Let's take a look at the chart … |
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Now, we've talked about the rise, fall and rise of Bitcoin over the past few years. It has had everything to do with Chinese capital flows.
On that note, let's revisit an excerpt from my June Pro Perspectives note … Remember, this first run-up had everything money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption. In late 2016, with rapid expansion of credit in China, growing non-performing loans, a soft economy and the prospects of a Trump administration that could put pressure on China trade, capital was moving aggressively out of China. That's when the government stepped UP capital controls — better policing movement of capital out of China, from transfers to foreign investment (individuals can move just $50,000 out of the country a year). Of course, resourceful Chinese still found ways to move money. Among them, buying Bitcoin. And that's when Bitcoin started to really move (from sub-$1,000). China cryptocurrency exchanges were said to account for 90% of global bitcoin trading. Capital flows were confused with Silicon Valley genius. But in September of last year China crackdown on Bitcoin – with a total ban. A few months later, Bitcoin futures launched, which gave hedge funds a liquid way to short the madness. Bitcoin topped the day the futures contract launched. And a few months later it was worth 1/6th of its value at the top. Is this time different? Is this real traction for Bitcoin, or is this just Chinese capital flows looking for a parking place, again? Likely, the latter. It's probably no coincidence that as the prospects of a 'no deal' with China have elevated in recent months, Bitcoin has again been on the move … … they [China] fight tariffs with a devaluation of the yuan. With those prospects, if you have money in China, you have been getting it out! While cryptocurrency exchanges have been banned in China, owning and buying Bitcoin in China is not banned. The Bitcoin futures market and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens to respond to potential devaluation in the yuan. With the above in mind, this round of Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal (which seems unlikely until, at least, we get past the July Fed meeting). With the above in mind, is the move in Bitcoin today signaling a U.S./China deal in the offing?
September 23, 2019 It was just 11 days ago that the ECB announced it would restart QE, promising to buy 20 billion euros a month, indefinitely, starting in November. That plan might be scrapped before it starts. It might not be enough. This morning, a September estimate on German manufacturing data was reported. It was the weakest in seven years. That seven-year comparison has unique significance when it comes to Europe. It was mid-2012 when Europe was on the brink of cascading sovereign debt defaults. Italy and Spain were the teetering dominos. The disaster was only averted because Draghi pulled out the central bank bazooka, promising to do 'whatever it takes' to stave off a melt-down. This weak reading on current manufacturing should seal the fate for a German recession (two consecutive quarters of negative GDP growth). That would mean technical recession in the biggest economy in the euro zone. So, as I said, the ECB's new QE plan may get scrapped before it starts. Europe may need something bigger and bolder. As I suggested going into the last ECB meeting, we may see them ultimately outright buy European stocks. They need a strategy to reduce the risk premium in stocks — to drive risk-taking, investment and ultimately demand. Negative rates haven't worked in Europe, because the policies aren't forcing savers into higher risk assets — because it's not in their culture to buy stocks. With that, through the past decade of global QE, U.S. blue chip stocks (S&P 500) have outperformed European blue-chips (Stoxx 50) by eight times (eight-fold). |
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As you can see in the chart above, the Euro Stoxx 50 remains almost 40% off of the 2000 highs.
September 20, 2019 As we end the week, let's talk step back and look at the past fifty days.
On July 31, as stocks were sitting near record highs, the Fed officially changed direction on monetary policy, cutting rates (after a nearly four year tightening cycle) and stopping the shrinkage of its balance sheet. Trump complained (not enough). Stocks swung around. But by the following morning, we were back near record highs.
Then Trump escalated the trade war. Stocks dropped by 4% over just three days, and finished down 1.8% for August . What did that (the trade war escalation) accomplish? By September, the rise in the probability of a prolonged trade war, and the rising probability of it turning into something more (an ultimate path toward military war), put global central banks on full alert, and in a defensive/risk management stance. Maybe most importantly (for global financial market and economic stability), it forced the ECB to restart QE. So twenty days into September, and we now have the ECB vowing to buy 20 billion euros a month, indefinitely. And we now have a second quarter point rate cut under the belt of the Fed. We end the week with stocks up 2.5% month-to-date. Year-to-date, stocks are up 20% (better than double the long-term average). So, let's ignore the noisy status of the trade talks for a moment. We can look back to the swoon in markets late last year, and the 20% gain this year, to new record highs, and attribute it to the mistakes and repentance of global central banks (namely the Fed and the ECB). It was policy mistakes that have shaken markets ($17 trillion in negative yielding global sovereign debt), albeit these policy mistakes were due to their lack of willingness to adjust policy for the uncertainty of the trade war. Remember, as a consequence of the Fed's 'quantitative tightening' plan, the balance sheet of the three most powerful central banks in the world peaked in the third-quarter of last year. Then the ECB started what they believed to be a path to follow the Fed's normalization program, by quitting QE in December of last year. With the combination of the Fed's QT and the ECB ending QE, by the end of last month, almost a quarter of a trillion dollars was removed from the global economy. |
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But that liquidity is about to be returned, via ECB balance sheet expansion, and likely via Fed balance sheet expansion, which is already happening as you can see in this chart below … |
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September 19, 2019 Last week we looked at the case for the Spanish stock market, with the renewed tailwinds of QE from the ECB.
Back in 2012, both Spain and Italy were the dumpster fires in Europe that nearly set off a cascade of sovereign debt defaults. Speculators were hammering away at the bond markets in these weak spots, sending yields screaming higher, to unsustainable-default watch levels. It took Draghi ripping up the script of the EU and EMU to prevent it from happening. What did he do? He fought off bond market speculators by promising to become the buyer of unlimited government bonds in these weak spots of Europe. That was enough to scare off the speculators, and to reverse yields from the ticking time-bomb of 7%+, to (now) under 1%. This ECB intervention salvaged the global economy from a spiral into the abyss. And the global economic recovery resumed. Since that point, German stocks have outpaced Spanish stock by three-to-one. And while German stocks have gone on to new record highs in the past two years, stocks in Spain remain deeply depressed from peak value, despite a recovering economy. As I said last week, this might be the best prospect for a big run in Europe. But this is investable (for non-euro investors) only if you think the euro rises from here — which I do. Remember, the ECB just announced a new round of QE. What did the euro when the ECB launched QE in 2015? It went down in anticipation of QE, and when they launched QE, it bottomed, and rose over the following four years. What about the dollar? Despite all of the talk about a "strong dollar", we've been in a bear cycle for the dollar for almost three years. |
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We've looked at my dollar cycles chart above many times. If we mark the top of the most recent full cycle in early January of 2017, the bull cycle matched the longest cycle in duration (at 8.8 years) and came in just shy of the long-term average performance of the five complete cycles. This argues for a weaker dollar ahead, which aligns well with the desire of the Trump administration.
September 18, 2019 Nine months ago, the Fed raised rates for the ninth time, in its attempt to normalize interest rates. And Powell told journalists at the press conference that followed, that their program to shrink the balance sheet was on "auto-pilot."
The world was net raising rates in 2018, following the lead of the Fed. But the Fed led the world down the wrong path, tone deaf to the risks of an indefinite trade war. Today, the Fed cut rates for the second time in 49 days. A week ago, the European Central Bank restarted QE (after ending it last December). And along the path of the past nine months, there have been over 100 actions take by global central banks to lower interest rates. The world is now prepared for a worst case scenario on trade. That sets up a lopsided risk/reward for financial markets (i.e. asymmetrical outcomes). With central banks pointed in the direction of defense, and standing ready to act (as a preventer of bad outcomes, as they were throughout the post-financial crisis environment), the reward for investors on a U.S./China trade agreement far outweighs the downside of an indefinite trade war. That’s good for investors … very good! On that note, as I’ve said, we should pay close attention to the signals that Trump and his team are giving about the potential of a cut-down version of the trade deal. Remember last week, Trump said he would be open to an interim deal.
September 17, 2019 Markets head into tomorrow's Fed meeting relatively quiet — except for one market: the global market for short-term interbank dollar liquidity.
The cost (interest rate) for swapping euros for dollars (for one week) in the global interbank market doubled overnight. This sounds like 2008 stuff. To curtail the dollar shortage, the Fed had to step in for the first time in about a decade, injecting about $50 billion into the short term market for dollars. This is effectively emergency QE, and has people speculating that the Fed will be forced to return to balance sheet expansion (i.e. QE4) — to replenish the dollars they have sucked out of the system via their balance sheet "normalization." The repo bond market participants have explained away the squeeze in short term dollars as not a systemically threatening signal — just a confluence of events hitting at once (the Treasury raising dollars to fund budget shortfalls, and corporate tax payment date). A systemically threatening event would certainly spike the VIX (i.e. downside protection seeking by the investment community). That didn't happen. Instead, we head into tomorrow's Fed meeting (with expectation of a second quarter point cut for the year) with the VIX trading at a very tame level … |
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September 16, 2019 The Fed meets on Wednesday. On Friday the market was pricing in a 78% chance of a quarter point cut. Today it's pricing in a 63% chance?
Why? Oil prices. With the Iranian attack on Saudi oil supply on Saturday, oil prices popped as much as 15% when futures markets opened last night. While the Fed likes to say they exclude volatile energy prices from their assessment of inflation, their behavior says otherwise. When oil prices move sharply, they tend to react. With that, we have a shock to global oil supply, and that has some predicting much higher oil prices. If that were to play out, we should expect the Fed to get nervous about inflation. But I suspect we'll see oil prices, first, go the other way. This all looks like the timeline is setting up for a rate cut, a cut-down China deal, and then the U.S. greenlighting an attack on Iran. What happened to oil prices when we invaded Iraq in 2003. Prices first went down, big. Here's a look at the 2003-2004 crude oil chart … |
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What went up on the Iraq war catalyst?
Gold went up 25% over the next year … |
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And stocks went up 45% over the next year …
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September 13, 2019 As we discussed yesterday, Trump seems to be setting the table for an agreement on a cut-down version of the trade deal … AFTER the Fed cuts rates next week.
That would unshackle the U.S. economy and unleash a boom, especially if he turns to the next pillar in Trumponomics — an infrastructure spend. With that, the biggest winners over the next twelve months could be commodities. Copper is the commodity known to be an early indicator of turning points in the economy. And if we look at markets today, copper is signaling this scenario. Let's take a look at the charts on copper and the broader commodities index. |
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Copper has moved 10% in the past nine trading days! But as you can see in the chart above, it remains more than 40% off of the post-global financial crisis highs.
Here's a look at broader commodities … |
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You can see in this chart above, the commodities market has been telling us the world has been in depression (only artificially kept moving by global central bank life support). With some structural reform on the trade front (assuming a cut-down deal), and aggressive fiscal stimulus in the U.S. (already in motion, and likely to be followed in Europe), we should see commodities finally reflect a real, sustainable recovery (i.e. a big recovery in broad commodities prices).
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