September 16, 2019
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 …
 |
|
What went up on the Iraq war catalyst?
Gold went up 25% over the next year … |
 |
|
And stocks went up 45% over the next year …
|
 |
|
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. |
 |
|
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 … |
 |
|
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).
Learn more about my premium stock-selection and portfolio service here.
September 12, 2019 The ECB restarted QE today, just nine months after ending their nearly four-year stimulus program.
So, they are back at it. And it's open-ended (no expiration). The Fed had it's QE infinity (which ran for more than two-years). This is the ECB's version of QE infinity. For the moment they have not changed the asset mix from their past asset purchases, which consists of corporate and sovereign bonds. Adding European equities would be the "bazooka." They didn't do it, yet. Instead, Draghi and company are pushing politicians hard to back them up with fiscal stimulus. It hasn't worked to this point. But with Lagarde taking over in November, the idea is that she will have more influence over the EU bureaucrats. Bottom line: We now officially have the Fed pointing south on monetary policy and the ECB and BOJ pumping liquidity into the global economy. And to be clear, this is all about managing the downside risk of an indefinite trade war! With this in mind, we've continued to talk about the reality that Trump is in the position of strength in the China negotiations, and therefore, he can make any concessions necessary to get 'a' deal done, claim victory, and remove the overhang of uncertainty on the global economy. Now, by his design, he has monetary policy tailwinds. That will only add fuel to the fire, following a China deal, of what would become a booming economy into next year's election.
Today, Trump may be setting the table. We had some positive headlines on the trade front – a goodwill offering from Trump to the Chinese. But the bigger news of the day: A Bloomberg report cited White House sources as saying a "limited trade agreement" is in the works. Could this be his "claim victory" move, to come AFTER next week's Fed rate cut?
Get a deal done. Get re-elected, and spend the next four years going after the big, meaningful demands on China.
Learn more about my premium stock-selection and portfolio service here.
September 10, 2019 With the ECB expected to restart QE on Thursday, we've talked about the prospects that they may start buying stocks, as a better transmission mechanism for promoting demand in the European economy.
With that, we know the Fed has successfully promoted stability and growth throughout the post-Great Recession era, by creating incentives for people to buy stocks. If Europe, in this next iteration of QE, were to overtly promote equity investing in Europe (reducing the risk-premium to attract capital), it may be a greenlight to buy the weakest stock markets in Europe. Remember, when Draghi stepped in with the promise of preventing a default in Europe's most vulnerable bond markets (namely Italy and Spain) back in 2012, those bond markets went on a tear. It may be time for the stock markets to catch up. If we look at Spanish stocks since July of 2012 (when Draghi said he would do "whatever it takes" to save the euro), the IBEX is up just 28%. Italian stocks (MIB index) are up 53% for the same period. Meanwhile, German stocks have done +92%. Moreover, while German stocks have gone on, to new record highs in the past two years, stocks in Spain and Italy remain deeply depressed from peak value. You can see the IBEX in this chart, peaked in 2007 … |
 |
|
And the FTSE MIB index (Italy) peaked in 2000, shortly after the launch of the euro …
|
 |
|
With the above in mind, if you had to choose between Italian and Spanish stocks, Spain (the IBEX) looks like the top prospect. Since Draghi's 2012 rescue of Italy and Spain, the Spanish economy has grown by 15%. The Italian economy has grown by just 3%.
The indicies on these ETFs are priced in Euros. So, 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. Learn more about my premium stock-selection and portfolio service here.
September 9, 2019 The big event of the week (and maybe the month) will be the ECB meeting on Thursday.
The expectation is that the ECB will restart QE. Remember, last month we talked about the correlation of the death spiral in global bnod yields, with the peak in the aggregate balance sheet of the big three central banks in the world (the Fed, the ECB and the BOJ). Interpretation: The global bond market has sent a very clear message that the central banks made a mistake trying to normalize policy too soon, in a world still on the mend from the global economic crisis. With that, the Fed has since stopped its quantitative tightening strategy. And the ECB is set to turn the liquidity spigot back on. Let's take a look at how the balance sheets of these three major central banks look, from the failure of Lehman (late 2008)-to-date. Here's the Fed… |
 |
|
As you can see, through multiple rounds of QE, the Fed expanded it's balance sheet 5x. And beginning in 2018, they attempted to start "normalizing" the balance sheet, sucking close to three-quarters of a trillion-dollars out of the economy. Things seemed to be going okay, so long as massive fiscal stimulus was being executed in the U.S., AND so long as the ECB and BOJ were offsetting the Fed's balance sheet reduction with QE.
But then the European Central Bank quit QE last December. And that was the tipping point for markets … |
 |
|
The lone shock absorber has been the Bank of Japan, but it has been clear that they can't do it alone.
|
 |
|
With that, until the rest of the world (namely Europe) follows the lead of the U.S. with aggressive fiscal stimulus, stability in the global economy is still dependent upon ultra-low rates and a nearly $15 trillion balance sheet of the big three central banks. Learn more about my premium stock-selection and portfolio service here.
September 6, 2019 The jobs report today continues to show a very healthy job market. And wages continue to grow at over 3% annualized.
This 3%+ annualized growth in wages is the best since the pre-crisis era, and has sustained for a full year now. That’s good news for consumers – good news for the economy.
So, let’s regroup on the state of the economy (after the noise of recession calls the past few weeks), and then I have a chart that adds some perspective as we head into the weekend.
We have continue to have record low unemployment. We have consumers sitting on record high household net worth, and record low debt service ratios. U.S. companies reported record profits in the second quarter.
Yet, all we hear about is looming recession.
The bond market, has of course, given signals of recession, finally providing some evidence for the economic and stock market bears.
But, unlike past yield curve inversions, we have global central banks that have pinned down the long-end of the curve now for the past decade (i.e. distortion). That makes for a hard comparison … “this time is different.”
So what is driving this persistent gloomy messaging? As I’ve said over the past year, I suspect we are seeing plenty of people make the mistake of letting politics cloud their judgement on the economy and the outlook for stocks.
With that, this chart from Pew Research appears to have this bifurcated view, we hear from the media and Wall Street, nailed.
|
 |
|
Learn more about my premium stock-selection and portfolio service here.
September 5, 2019 In the past few weeks, we've talked about the important signal to be taken from stocks. Despite the weight of bad news, stocks held steady, and ultimately that can turn the tide of sentiment.
Learn more about my premium stock-selection and portfolio service here.
September 4, 2019 Stocks continue to look well supported, with a path toward new record highs — maybe very soon. Remember, we've talked about the significance of the President and Treasury Secretary's emergency call with the heads of the big banks in mid-August. Since that call, despite more grim rhetoric surrounding U.S./China trade relations, heightened tensions in Hong Kong, an inverted U.S. yield curve, stocks have been unbreakable. Now we head into an ECB and Fed meeting over the next two weeks that should offer more support for global stocks. While most have been worried about recession, and a market swoon, the higher probability for stocks is probably a melt-up (maybe even without a China deal). We've talked about the prospects that the ECB may start outright buying European stocks as a strategy to reduce the risk premium in stocks — to drive investment and ultimately demand. Let's revisit the case made by Blackrock's Larry Fink back in July, for the ECB to turn to the stock market. He argued that 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 ("they don't have an equity culture"). |
 |
|
Here's a look at the Euro Stoxx 50 (Europe's leading blue-chip index) over the past 10-years compared to the S&P 500. The S&P is up 181%. The Euro Stoxx 50 is up 22%. Fink thinks the equity culture in the U.S. has been the advantage for the U.S. relative to Europe and Japan, coming out of the Great Recession. We know Japan is already outright buying stocks (trying to change the culture). Will Europe follow their lead? From commentary last month, we know an ECB council member (Ollie Rehn) has already floated the idea. Learn more about my premium stock-selection and portfolio service here.
September 3, 2019 We start the month of September with another record low in German yields.
It will cost you almost three-quarters of a percent to lend your money to the German government for 10-years.
Not only is the 10-year yield negative in Germany, the entire yield curve is negative. In August, Germany sold almost a billion dollars worth of 30-year government bonds at a negative yield.
You buy these bonds if you think paying the government to park your money is the best alternative you have (and the highest probability of seeing your money again, less the interest). Or, you buy these bonds if you think the yields are going even deeper into negative territory (seeking a capital gain).
With this signal of fear about the future, the ECB is under pressure to restart QE at their meeting next Thursday.
Remember, they just quit QE back in December. Arguably, that move, in combination with another Fed rate hike just six days later (which included the Fed's verbal commitment to QT), is what crushed stocks in December, and sent global bond yields into a death spiral. That one-two punch from the ECB and the Fed, sent a clear message/reality check to markets that the more than $14 trillion in global liquidity that the big three central banks have pumped into the world–which promoted stability and little to no inflation–was getting sucked out.
Given the state of global government bond yields, the world has made the judgement that the central banks made a mistake exiting emergency policies.
With that, the Fed has already reversed course of rates and the ECB is on deck to respond. They already launched a trial balloon to prepare markets for more stimulus in the middle of last month. Today "sources" are saying a new package is coming, to include a rate cut, guidance for "lower for longer" rates, assistance for banks to deal with negative rates, and maybe more/new asset purchases (i.e. QE).
We've talked about the prospects of the ECB following the lead of Japan and launching a plan to outright buy stocks. That would be the last bold move before Draghi (the architect of Europe's QE program and economic crisis management) passes the baton to Christine Lagarde in November. August 30, 2019 As we head into the holiday weekend, let's revisit the China story (briefly). Then I have two must-watch interviews for you.
As we know, China has used a weak currency to leapfrog almost the entire world over the past 30+ years, capturing 15% of the global economic market share and rising to an economic power. They've gone from a $350 billion economy in the early 90s, to a $13 trillion economy today (ascending from the eleventh largest country in the world to the second largest economy in the world). That's 37 times bigger. Over the same period, the U.S. economy has grown by 3x. How has China done it? By undercutting the global export market on price, collecting our dollars, then offering our dollars back to us in the form of credit, so that we can buy more from China. As long as China can maintain a cheap currency, this cycle continues, and so does the cycle of global credit booms and busts. Meanwhile China stockpiles/sucks foreign currency (most importantly, dollars) from the rest of the world.
Clearly, this story ends well for China, and no one else, if left unchecked. That's why it has become the top priority for Trump (and a critical piece of Trumponomics). Reforming the way the U.S. (and the world) deals with China is the root of the global structural reform that is necessary for the world to sustainably emerge from the global financial crisis era.
With the above in mind, there are two very important interviews everyone should see, regarding how this may ultimately play out with China … Interview #1) Like him or not, when Steve Bannon speaks it's a good idea to listen. Bannon clearly had a lot to do with Trump policies. And Trump policies are driving the global economy and represent the risks and opportunities from here. With that, Bannon has been vocal on the subject of China. Earlier this year, he said the "economic war is about to go to another level." He was right. In this interview (here) he lays out China's grand strategy. Interview #2) In this next interview (here), an exiled Chinese billionaire (close to Bannon) gives unique perspective on China, and describes the motivations of the Chinese Communist Party. Both interviews are conducted by Kyle Bass – and recently released on YouTube. Bass a well-respected hedge fund manager known for his research-based, theme-driven trades, which includes capitalizing on the sub-prime crisis. He's also a known China bear, for the reasons that are clear in the interview. |