Pro Perspectives 12/18/19

December 18, 2019

It was a year ago that the Fed dealt damaging blow to the economy and the stock market, systematically hiking rates for the eighth time (in the post zero interest rate era), and promising to continue to systematically extract liquidity from the global markets. 

The stock market didn’t like it.  It went from ugly (down 10% for the month of December) to dangerous (down 18%) very quickly.

Heading into that December 19th Fed decision, there was already evidence that the Fed had miscalculated.

Here’s an excerpt from my December 17, 2018 piece, the day before the Fed’s two-day meeting:

“This is all setting up for a very big Fed decision on Wednesday.  The Fed has hiked three times this year.  They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.  

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns).  And it’s the first time since 1994 that cash has been the highest returning asset class.

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recovering economy — in anticipation that inflation would quicken.  It didn’t happen.  They ended up choking off growth.  The scenario this time looks very similar.  The Fed paused back early 1995, and then ended up cutting rates.  Stocks boomed, returning 36% on the year.”

Here we are a year later, and the Fed was indeed forced to reverse course, and stocks have indeed boomed: up 27% on the year.  Take a look at what the economy did following that Fed flip-flop … it averaged 4.5% growth through early 2000!  Who’s predicting this type of scenario for the next several years?  Not anyone I know, hear or read.

 
Pro Perspectives 12/17/19

December 17, 2019

Yesterday we revisited my contrarian thesis on the state of the economy. 

Most believe we are in the late stages of the country’s longest economic expansion.  I would argue that we’re in the early stages a real economic expansion (driven by fiscal stimulus and structural reform), coming out of a decade long depression-like era, buffered only by trillions of dollars of central bank intervention.

The glaring evidence?  The performance of commodities over the past decade (and inflation) — both dead.

Expect this to change.  Soon.  With tailwinds of central banks (all with the pedal to the metal), fiscal stimulus (in the U.S., Japan and soon to come in Europe), a rebalancing of global trade, and a record strong consumer, I suspect the inflation heartbeat is about to be resuscitated.

With this backdrop, expect commodities to make a big comeback.  And by the end of next year, the question will be, can the Fed manage a hot economy, without killing the boom.

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

Pro Perspectives 12/16/19

December 13, 2019

On Friday we talked about the outlook for commodities, as the spot that should be among the biggest beneficiaries in the economic environment over the next twelve months. 

Let’s look again at this long-term chart of the broad commodities index (the CRB Index)…

 

Now, the length of the economic expansion is often discussed in the media.  It’s the longest on record.  And with that, the Wall Street crowd has found it very difficult to get too optimistic on the outlook for stocks and the economy. 

But let’s think about this chart above:  Is this what commodities should do in the longest economic expansion on record?

You could say the same about inflation, which has been pronounced dead in headlines and magazine covers.  The two (inflation and commodities prices) go hand-in-hand.

What if this chart on commodities (and persistently low inflation) tells us that the decade that followed the financial crisis was indeed a depression, and central banks were only able to manufacture enough economic activity to buffer the pain (not a real economic expansion)?

And now, instead of at the tail end of one of the longest economic expansions on record, we’re in the early stages of a real expansion, driven by fiscal policies and structural reform that has started in the U.S. and will be implemented abroad (Europe, Japan, China).”

This logic (“early stages”) would align well with the script of the late 90s boom period that we’ve talked about.

Remember, after the Fed flip-flopped on monetary policy from ’94 to ’95, they set off a boom in stocks and the economy.  The stock market tripled into the end of the decade, and the economy grew by 4% annualized for eighteen consecutive quarters.  The CRB index nearly doubled from ’95 through late ’97, before take lower from the effects of the Asian Financial Crisis.

 

Pro Perspectives 12/13/19

December 13, 2019

Yesterday morning Trump tweeted, we are very close to a big deal. 

Yesterday afternoon, we had reports that both the U.S. and China had agreed to terms on a deal.

And this morning, both parties ANNOUNCED that a deal is done and in writing.  For those questioning whether or not China is fully on board:  they held a live, televised press conference, in China … at midnight (local time in China)!

Predictably, those that have never understood why Trump started the fight with China, are now scrutinizing the merits of the deal.  Bottom line:  Any movement from where we have been with China over the past three decades is a win!  And the Trump plan seems to be, take this win, de-escalate, and begin work on more demands (i.e. his “Phase Two”).

Add to this, we have more clarity on Brexit today. This, along with central bank tailwinds, sets up for further melt-up in stocks into the year-end.  And it sets up for a rebound in business confidence in the New Year.  That would drive positive surprises in data, within which the expectations bar has been set low.

Let’s take a look at the chart that should benefit the most from this outlook over the next twelve months:  Commodities.
Pro Perspectives 12/12/19

December 12, 2019

We talked yesterday about the surprisingly more dovish Fed communication yesterday.  

By this morning, Trump added to the melt-up formula with hints of a signed trade deal coming.  This afternoon reports said terms were officially agreed to by both parties.

With that, stocks have traded to new record highs today.  Yields traded to the highest levels in a month.  And commodities are moving.

Now, will all of this in mind, it’s very clear that confidence has waned, as time has passed, because of uncertainty about the trade war outcome.  Waning confidence has led to declining manufacturing output and weak business investment. That, in turn, has led to lower inflation expectations.  And this all has led to a pivot by global central banks to a (near) maximum easing stance.

Does a legitimate signed deal turn it all around?  My view: Yes.

As we’ve discussed for the past several months, with rate cuts under his belt, Trump can claim victory on the trade war whenever he wants (he has had the position of strength).  He can then turn back to Congress on the next pillar in Trumponomics — a $2 trillion infrastructure spend (which the Democrats want).  Remember, he’s the one that walked away from deal talks back in May (he’s in the position of strength).

This would set up for the economic boom scenario we’ve talked about for some time. 

Remember, coming out of the Great Recession, we haven’t had big bounce back in growth that is typical following a deep economic contraction.  In fact, at this point, we would need six-years of 6% growth to put us back on path of trend growth (from the 2007 peak in GDP).

We haven’t had growth like that since emerging from the Great-Depression.  The mid-30s bounce-back started with a reduction of tariffs and government spending programs.  That’s precisely what’s lining up (i.e. reduction of tariffs and government spending). 

 

Pro Perspectives 12/11/19

December 11, 2019

We entered the Fed meeting today expecting no surprises.  I would point out two statements that surprised me:

After three rate cuts in five months, and over $300 billion of asset purchases, Powell described monetary policy at this point as only “somewhat” accommodative.

Statement #2:  Remember Powell’s statement this summer that rate cuts were simply a “mid-cycle adjustment” (i.e. a reset in a longer term hiking cycle)?  It made Powell sound like he was in denial about the Fed’s mistakes of the prior year.  The markets didn’t like it.  Today, he walked that back by saying, “need for rate increases is less than it was in the mid 1990s cut cycle.”

Bottom line:  We were expecting a “we’re on hold, nothing else to talk about” tone from the Fed.  But we got a more dovish Fed communication.

You could argue that this all indicates that the Fed has no confidence that the global trade wars will be resolved.  I would argue that they now (finally) understand, given the persistently subdued inflation data, that the downside risks of being overly easy are less (maybe far less) than being overly tight.  The latter, the markets should like.

Pro Perspectives 12/10/19

December 10, 2019

The Fed meets tomorrow.  It should be a non-event. 

As we discussed yesterday, the Fed is no longer following the “wait and see” strategy when it comes the the potential of an endless trade war.   With three rates cuts and balance sheet expansion at a better than trillion-dollar annualized pace, they are positioned for the worst-case scenario — and not likely moving until proven otherwise.

With global QE back to full speed, and the growing likelihood that Europe will follow the lead of the U.S., and now Japan with aggressive fiscal stimulus (i.e. deficit spending), is it time to buy gold again?

Gold was unusually up today in a market that carried a relatively positive tone for the day.

But as you can see in the chart below, gold has been on the move lower since the Fed has been expanding the balance sheet.

At the depths of the global financial crisis, when the Fed launched QE, gold started the sharp climb from sub $700 to over $1,900 — all on the fear that QE would trigger runaway inflation.  It didn’t happen.  By the time QE2 and QE3 rolled around, the behavior of gold prices changed.  Gold went up in anticipation of QE.  But gold went down when the Fed actually starts expanding the balance sheet.

I suspect the time to buy gold will be the trade war overhang is officially cleared, and the global economic data starts producing positive surprises, especially in inflation.

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

Pro Perspectives 12/9/19

December 9, 2019

On Friday we talked about the big ECB meeting on the agenda for Thursday.

This will be Christine Lagarde’s debut as ECB President.

She inherits the job after a decade of global stimulus that has left the eurozone economy running at 1% growth and 1% inflation.

Her predecessor, Mario Draghi, recently restarted another bond buying program (QE) in Europe, with no clear end in mind.  And that’s not only because of the sluggish economy, but because the economy has been deteriorating from weak levels. 

Friday’s German industrial production data was a good example (chart below) …

We already know that Lagarde is making her plea to eurozone lawmakers for fiscal stimulus, with hopes to follow the leads of the U.S., and most recently Japan (which just announced the intent to launch a quarter of a trillion dollars worth of fiscal stimulus).

But will she do something more aggressive and creative on the monetary stimulus front?  Over the past few months, we’ve discussed the prospects of the ECB following the path of Japan, by outright buying European stocks.

It all boils down to the risks of the trade war ramping up in Europe.  As we’ve seen, global central banks (namely the Fed and ECB) made the mistake last year of ignoring the potential outcomes from the trade war.  The markets threw a penalty flag on them, and this year, they’ve been reversing course and positioning for the worst-case scenario.  There is far less downside from being positioned defensively and getting a positive surprise, than trying to react to a negative surprise. 

With this ECB meeting coming down the pike, let’s take a look at the recent trends in some key European data.

You can see, the trough in economic sentiment in Europe was back in 2012, when Draghi came to the rescue to ward off a debt default in Italy and Spain.  The ECB became the “do whatever it takes” backstop against all risks.  And confidence came roaring back. But sentiment/ and the outlook turned when Trump launched tariffs on China.  

Similarly, the PMIs in Europe topped out and have been on the slide since Trump acted early last year on his tariff threats. 

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

Pro Perspectives 12/6/19

December 6, 2019

Stocks continued to complete the “V” shaped recovery on the week, following the big jobs report this morning. 

Let’s take a look at some charts as we end the week.

First, here’s a look at the “V” in the S&P 500, as we close back near record highs today …

And as we discussed yesterday, we had a similar “V” in the interest rate market …

Today, the notable mover was copper – up 3.2% on the day.  This is where you see some early bets of upside surprises coming for the economy (which fits the theme we’ve been discussing). 

Now, let’s take a look at the sleeper market for next week.  Spanish stocks (and European stocks, in general).  

The media will be focused on the Fed next week, but the bigger event might be in Europe.  As we discussed yesterday, Christine Lagarde will make her debut as the ECB President in her first policy-setting meeting with the governing council.

In recent months, we’ve talked about the prospects of the ECB ramping up the QE program by outright buying European stocks.   Curiously, this week, as U.S. stocks were in an ugly slide, European stocks were holding positive most of the day.  Was the ECB involved?  Maybe.  We will find out next week. 

This data point today on German Industrial Production (down 5.3% year-over-year) will contribute to the case for pulling all of the levers at the ECB. 

 

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Pro Perspectives 12/5/19

December 5, 2019

Yesterday we talked about the “V” shaped move in stocks to open December — a sharp down move, followed by a sharp recovery.

We’ve had the same in yields.

As you can see in the chart below, since Monday, the U.S. 10-year government bond yield has done a (near) round trip …

What didn’t move was the market’s expectations on the Fed next week.  The fed funds futures market has been pricing in a zero chance of a cut on Wednesday.  That hasn’t changed, despite the sharp move lower in stocks and market interest rates to start the week.

But as we know, the Fed already has the peddle to the metal – with three rate cuts this year, and with a resumption of balance sheet expansion.  As you can see in the chart below, that has been good for stocks …
Add to this, we now have the BOJ following the lead of the Fed with big, bold fiscal stimulus (5% of GDP).  And expect Christine Lagarde’s debut next week as ECB President, to include pleas to European lawmakers for fiscal stimulus.  With this backdrop, a formal deal with China would unleash a U.S. (first) and (then) a global economic boom.