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May 9, 5:00 pm EST
Yesterday we talked about the tool China will use to offset tariffs, if a deal does not materialize and the tariff penalty increases.
They will devalue their currency.
With a “no deal” potential outcome, there’s a lot of wealth in China looking for ways out.
In recent years, they have found a way out through Bitcoin. And, no coincidence, Bitcoin is again on the move.
With that, let’s take a look at the timeline on Bitcoin…
The 2016-2017 ascent of Bitcoin coincided perfectly with the crackdown on capital flight in China. 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 — restricting movement of capital out of China, from transfers to foreign investment.
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 to over $19,000). China cryptocurrency exchanges were said to account for 90% of global bitcoin trading.
Chinese capital flows were confused for Silicon Valley genius.
But in late 2017, China cracked down 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.
So, as Chinese officials visit the White House for a deal or no deal on trade, China has been moving their currency lower — and bitcoin has (again) been moving higher. Perhaps the Chinese are finding new ways to buy Bitcoin.
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May 8, 5:00 pm EST We talked about China’s currency yesterday, as the key proxy on a U.S./China trade deal. Let’s revisit some background and context on the whole trade negotiation.
China’s currency manipulation (i.e. weak currency policy) is at the core of the global trade imbalances that precipitated the global financial crisis. With that, the currency is a key piece of the trade and structural reform demands from the Trump administration.
After using its currency to corner the world’s export markets for more than a decade, which led to China’s rise to a global economic power, you can see how China has been maneuvering to pacify currency tensions over the last decade:
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(In the chart above, the falling line represents a strengthening yuan versus the U.S. dollar, and vice versa)
1) They slowly allowed the currency to climb (against the dollar) following threats of a big tariff on China from Graham and Schumer (yes, Schumer) back in 2005.
2) When the global economic crisis hit, they went back to a peg to protect their ability to export.
3) They went back to a slow crawl higher as tensions rose, and people began to believe the developed market economies might be passing the torch to China for economic leadership.
4) It became clear that China can’t grow fast enough in a world where developed market economies are struggling. So, they went back to weakening the currency to protect their ability to export.
5) They strengthened the yuan when Trump was elected to try to ward off a trade war.
6) Trump wasn’t placated and tariffs were launched. They weakened the currency with the idea that a threat of a big one-off devaluation in the currency might create some leverage.
7) After trying to hold-out, it seemed clear earlier this year that they needed to get a deal done, as the economy continued to sink. They walked the currency higher again – a signal that they are willing to make aggressive concessions to get a deal done.
But now, with a hard deadline and threat of a tariff escalation, the Chinese made one of the largest devaluations in the yuan in years (a warning shot).
Here’s a look at the chart going into the deadline …
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If we get a no deal/ tariff escalation on Friday, we can expect the Chinese to continue weakening the yuan to offset some of the tariff burden.
So, tariffs have been a tool of retaliation for the U.S., to counter nearly three decades of currency manipulation by the Chinese. If we don’t get reform, the Chinese will retaliate with … more currency manipulation.
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May 7, 5:00 pm EST As we get closer to the hard deadline on a U.S./China trade deal, markets are adjusting for the potential of a no deal/ tariff escalation. What does that look like? U.S. stocks are now off 2% from the highs of the year. That still puts us up 15% year-to-date. The bigger adjustment is coming in China. As we discussed yesterday, China is in the position of weakness in these negotiations. The U.S. economy is strong. China’s economy has been very weak. A more expensive and indefinite trade dispute puts downward pressure on both economies (and the global economy), but it puts the Chinese in dangerously slow economy — which becomes politically dangerous for the Chinese Communist Party. As such, here’s what Chinese stocks have done in the past eight days …
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And, perhaps as a warning shot, China is starting to move their currency. As we’ve discussed, China has used their currency (a weak currency) as the primary tool to achieve their extraordinary economic ascent over the past two decades — cornering the world’s export market. We should expect, when their backs are against the wall, with a dim economic outlook, they will go back to weakening the yuan. That’s what they have been doing since Trump’s tariff threat on Sunday. They adjusted down the yuan yesterday by almost 1%. That doesn’t sound like much, within China’s currency regime, it’s a big move. We saw a one-off move like that once last year. The other time was August of 2015, which led to fears that China might devalue the yuan. That set off a global market rout. With the above said, China is sending Hui for the meetings that are scheduled to run Thursday and Friday. Hui has been the point-man on trade negotiations. His presence, in light of the tariff threats, give some encouragement that China has intentions to get a deal done. If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential. Join now and get your risk free access by signing up here. |
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May 6, 5:00 pm EST Late last week, the White House floated the idea that a trade agreement with China could come by this coming Friday (May 10). And then Trump did this yesterday …
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Why would Trump risk complicating a deal, even more, by threatening China with a deadline/ tariff increase? Because he has leverage. He has a stock market near record highs, and a strong economy and the winds of ultra-easy global monetary policy at his back. China, on the other hand, has an economy running in recession-like territory, with key data just (recently) bouncing from global financial crisis era levels. And Chinese stocks, after soaring 34% since January 4th, have given back 12% from the highs, in just seven days. And they’ve just fired a ton of fiscal and monetary policy bullets to stimulate the economy – which could be diluted by a more expensive and indefinite trade war. So, Trump has a win-win going into the week. If the threat works, he gets a deal done, and likely gives less to get it done. If China backs off, stocks go down, and he gets the Fed’s rate cut he’s been looking for – stocks go back up. If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential. Join now and get your risk free access by signing up here. |
May 3, 5:00 pm EST
If you are a regular reader of my daily notes, you’ll know we’ve been discussing the setup for positive surprises all year.
As we’re near the end of Q1 earnings season, clearly we’re getting it. With 78% of the companies in the S&P 500 now reported on Q1 earnings, 76% have beat earnings estimates.
And we’re getting positive surprises in the economic data. We had a huge positive surprise for Q1 GDP this week. And today we had a blow out jobs report.
There were 263k jobs added in April. The market was expecting just 185k. That gives us a 12-month average of 218k, well above pre-financial crisis average monthly job growth! The unemployment number was 3.6% — the lowest since 1969.
Remember, we’ve been told all year long that we were headed for both earnings and economic recession. It’s not happening.
Moreover, the two missing pieces of the economic recovery puzzle, have been productivity and wage growth. And these pieces are emerging. Wage growth has been on the move for the past 18 months, now sustaining above 3%. And we had a huge positive surprise in productivity this week.
With the above in mind, given the contrast of media narrative and reality, how are people getting it so wrong? 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.
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May 1, 5:00 pm EST As we discussed yesterday, the interest rate market has been signaling that the Fed made a mistake in December, when it hiked rates one last time, into a stock market that was in a steep decline. In today’s post-Fed meeting press conference with the Fed Chairman, markets were expecting signals from Jay Powell that they might be looking to take that hike back, if the current subdued inflation levels persisted. But Powell was reluctant to give much of a leaning toward a cut. In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negoations), have been largely improving. He’s right. He said the economy was solid. He’s right. Still, stocks came off sharply into the close. After today, you have to ask the question: Can stocks force the hand of the Fed, again? Remember, stocks fell 8% in just four trading days after the Fed’s December hike – penalizing a tone deaf Fed. In a market that was already down 9% on the month, the slide was exacerbated by the further Fed tightening. That stock fallout soon led to a response from the U.S. Treasury, as Mnuchin called out to major banks and the President’s Working Group on Financial Markets (which includes the Fed) to “assure normal market operations.” That put a bottom in stocks. And within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed’s rate path — signaling a pause. The Fed’s pivot has fueled a V-shaped recovery in stocks. So, we’ve just come off of a four-month run in stocks that gave us a full recovery of the late 2018 losses — and a new record high in the S&P 500. That was the best four month gain since 2010. Now we enter May with this chart …
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As you can see, with the decline this afternoon, the S&P 500 put in a key reversal signal — a bearish outside day. That’s tough to ignore, given that we’ve had a 16% gain in stocks to open the first four months of the year. This signal may be enough to stop the momentum, for now, as we wait for the word on a China deal — which is now said to ‘possibly’ come by next Friday.
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April 29, 5:00 pm EST We ended last week with a positive surprise for Q1 GDP. Today, we had more soft inflation data. The Fed’s favored inflation gauge, core PCE, continues to fall away from it’s target of 2%. Here’s a look at the chart …
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With a Fed meeting this week, they remain in the sweet spot. They have trend economic growth, subdued inflation and a 10-year yield at 2.5%. They can sit and watch. They could cut! That’s highly unlikely, but less unlikely by the summer, if current conditions persist. The market is pricing in about a 60% chance that we’ll see a rate cut by year-end. It doesn’t sound so crazy, if you consider that it would underpin/if not ensure the continuation of the economic expansion — perhaps even fueling an economic boom period. Remember, we’ve talked about the 1994-1995 parallels. In 1994, an overly aggressive Fed raised rates into a recovering, low inflation economy. By 1995, they were cutting. That led to a 36% rise in stocks in 1995. And it led to 4% growth in the economy through late 2000 — 18 consecutive quarters of 4%+ growth. Stocks tripled over the five-year period. This, as the S&P 500 is already sitting on new record highs? As I said earlier this year, with yields back (well) under 3%, we should see multiples on stocks expand back toward 20x in this environment. The forward 12-month P/E on the S&P 500 is currently 16.8. If we multiply Wall Street’s earnings estimate on the S&P 500 ($175) times a P/E of 20, we get 3,500 in the S&P 500. That’s 19% higher than current levels. But keep in mind, the earnings estimate bar has been set low. And already 77% of companies are beating estimates on Q1 earnings. I suspect, we’ll see higher earnings over the next twelve months than Wall Street has estimated, AND a higher multiple paid on those earnings (i.e. an outlook for an S&P 500 > 3,500). If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential. Join now and get your risk free access by signing up here. |