January 9, 2020

Just six days into the new year, and stocks are up 1.4% already, printing higher record highs. 

Since we’ve been looking for a repeat of the late 90s for the economy and for stocks, let’s take a look at the way stocks performed to open the latter half of the 90s (hint: it was good).

Remember, we’re talking about the period that followed the 1995 flip-flop by the Fed, where the Fed was forced to reverse course on monetary policy after aggressively tightening into a low inflation, tepidly recovering economy.

They cut rates.  Stocks went crazy. And within four quarters the economy was printing growth above 4% (annualized).

And as we’ve observed, that was just the beginning.  Stocks went on to do this over the next four years …

And economic growth went on to do this …

With this in mind, as we open 2020, following the 2019 Fed flip-flop, stocks are already off to a hot start.  But it doesn’t mean we should expect things to cool down.  Here’s a look at the “January effect” on the late 90s …

January 8, 2020

We talked about the early 2000s analog for oil yesterday, and the prospects for another run-up to $100 for oil prices. 

As of about 7:00 last night, it looked like it may be on its way, sooner rather than later.  As the day ends, oil made violent move up and a more violent move down, same with gold.  And stocks did the opposite, rallying from a deep sell-off overnight, and back to record highs.

By the day’s end, markets appear to have priced OUT the risk of war with Iran.

Will Iran truly “stand down” from this point?  As long as they are being economically suffocated with sanctions, probably not.  But who knows.

The bottom line, the potential for continued conflict remains a catalyst for oil and gold – an often it takes a catalyst (some sort of event or trigger) to reprice undervalued assets.  More importantly, the underlying tailwinds for oil, gold and commodities are blowing north.

Remember, we talked earlier in the week about the catalysts lined up to unleash above trend growth for the year (and perhaps several years of above trend growth).  In addition to ultra-easy global monetary policy, the economic-boom cocktail includes the introduction of 5G, a reduction of tariffs, and global fiscal stimulus (including progress toward a $2 trillion U.S. infrastructure spend).

This should finally lift broad commodities out of the decade-long depression. And that will resuscitate the inflation heartbeat, which has been pronounced by many as dead.

As you can see in the chart below, the trend change in commodities prices appears to be underway, and in the very early stages.  In addition, compared to the S&P 500 (the commodities index/S&P 500 ratio) commodities have never been cheaper. 

January 7, 2020

We opened the year with an escalation of U.S./Iran tensions.   With that, oil prices have become a front burner focus for markets.

Yesterday, we revisited the impact the Iraq war had on oil prices.  Ultimately, the Iraq invasion led to a near double in the price of oil over 18-months.

Will Iran be the catalyst for run at $100 oil? Maybe.

Remember, oil was trading north of $100 in the summer of 2014.  By November, prices were sub-$80, and the table was set for OPEC to cut production and stabilize oil prices.  They refused, triggering a crash in oil prices that ultimately sent oil down to as low as $26.  OPEC’s strategy: Kill off the emerging threat of the U.S. shale industry by forcing prices well below where they could produce profitably. To an extent it worked. More than 100 small oil-related companies in the U.S. filed for bankruptcy from 2014-2016.

While they nearly succeeded in killing the shale industry, these oil producing countries nearly killed their own economies in the process.  So, in effort to drive oil prices higher, to salvage oil revenues, they had to flip the switch in late 2016, cutting production for the first time since 2008.

And they did so, in a market that was already undersupplied.  And in a world where demand has been underestimated, and growing.  With that, oil bounced aggressively — from $26 in early 2016, to as high as $77 by late 2018.

Over the past few years we’ve discussed the work Leigh Goehring, one of the best research-driven commodities investors in the world.  He has been wildly bullish on oil and commodities.  And he has been looking for a return to $100 oil.

Here is an analog Leigh has been watching on oil:  he says “the last great bull market in oil started in 1999; by 2004, everyone was still bearish. You had four years of a bull market before anyone really began to accept it. Once they did, commodity prices really took off and the investments took off … I think the psychology is going to change. It’s going to realize that US oil shale is not enough to balance the market.

The parallels continue on this early 2000s analog, including the role of Middle East conflict.  Meanwhile, as you can see, while oil prices may still prove well undervalued (and poised for a revaluation), oil and gas stocks are (and have been) dirt cheap.

January 6, 2020

Happy New Year!  This time last year, we were talking about the prospects for a huge year for stocks, on the thesis that the Fed would be forced to reverse course on monetary policy, unleashing another 1995-like melt-UP in asset prices.  We had it.

What should we expect for 2020?  More of the same.

Remember, that mid 90s flip-flop from the Fed, laid the ground work for a boom in the economy and in the stock market into the late 90s.

We enter 2020 with an economy that has run at sub-par pace for the past decade, and now we have the fundamentals in place, and catalysts in line to unleash above trend growth (perhaps several years of above trend growth).  That scenario has not been priced into markets.  That means positive surprises in growth and earnings can be among the biggest themes this year.

Among the other major themes at work that give us the chance to see above trend growth this year: 1) the introduction of 5G (this will make wireless internet ubiquitous, connecting nearly everything we do and own to the internet – the impact of which has been compared to the widespread adoption of electricity), 2) a reduction of tariffs and the visibility of an end to the trade war, and 3) global fiscal stimulus (likely to include progress toward a big U.S. infrastructure spend).

This looks like an economic-boom cocktail.  In fact, it looks a lot like the periods that bookended the Great Depression: the Roaring twenties (fueled by fiscal stimulus and innovation – like the automobile and the pervasive access to electricity) and the late 30s (fueled by reduction in tariffs, a big government spending/pulic works programs, and later, war spending).

On the latter, remember back in September, when Iran attacked Saudi oil supply, we talked about the prospects of war – and the way oil prices, gold and stocks behaved in the early 2000’s when the U.S. invaded Iraq. Let’s take a look at an excerpt from that September 16th note:

“We have a shock to global oil supply, and that has some predicting much higher oil prices… 

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 …

I suspect we’ve already seen the first down-leg for oil, following the September provocation.  The path from here is probably up, big.  

December 24, 2019

I want to extend my best wishes for a Happy Holiday and a profitable New Year!

I’ll be taking the remainder of the week, and next week, to spend time with my family. So this will be my last note for the year.

Thank you for being a loyal reader of my daily Billionaire’s Pro Perspectives.

It’s been an eventful year, and I hope you’ve gained some valuable bigger picture perspectives on markets, the economy and politics. On that note, next year promises to be even more eventful and full of huge opportunities, as we take advantage of massive economic stimulus and structural change.  Plus we’ll welcome a life-changing technological advancement, in 5G, that will make wireless internet ubiquitous, connecting nearly everything we do and own to the internet. 

This is all setting the stage for the type of economic boom period we should expect after coming out of the deepest global economic contraction since the Great Depression.

To best position yourself, I hope you’ll join me in my members-only service, the Billionaire’s Portfolio.

It’s a great deal for the money. And I think you’ll find it extremely valuable as we enter a huge year for the economy and what I think will be another big year for the stock market.

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I look forward to welcoming you aboard, and navigating together through the new year!

December 23, 2019

Last year at this time, as we ended 2018 and looked ahead to 2019, it was clear that the dominant theme for the year ahead would be an about-face by the Fed.

Not only have we had it, but global monetary policy is broadly back in an aggressive easing mode.  And with that fuel, stocks have had a huge year.

So what will next year look like?  

We should expect another big year for stocks. 

Let’s revisit the many compelling reasons why we should expect a boom in stocks to continue (and maybe in just the early stages): 

1) Global central banks are expanding balance sheets again.  The history of the past decades tells us: increased global liquidity equals higher stocks.   

2) Massive fiscal stimulus in the U.S. continues to work through the economy – and a $2 trillion infrastructure spend is coming. Japan is launching a huge fiscal stimulus program in 2020 (5% of GDP).  Expect the wheels to start turning in Europe to follow the lead of the U.S. and Japan. 

3) Seventy percent of GDP comes from consumption.  And the consumer is in a very strong position.  Unemployment is at record lows.  Wages are at 11 year highs. Household net worth is at record levels.  Consumer credit worthiness is at record levels.  The amount of money required for consumers to service debt every month, relative to their disposable income, is near record lows (debt service ratio). And companies are producing record profits. 

4) With a fundamentally strong economy, Trump has been in the driver’s seat to force structural reform.  And he’s done it (and continues to do it).  Don’t underestimate the value of dealing with global imbalances (i.e. trade imbalances that ultimately led to the global credit bubble and burst).  Stopping the global transfer of wealth to China is at the core of it.  Any movement is a win, and he’s gotten movement, and he’s changed the global perception of China’s role in the global economy.  

5)  The above all argues for an economic boom period.  Remember, we never had the big bounce back in growth, following the “Great Recession.”  Historically, significant economic downturns are followed by a big bounce back.  For the 10-years following the Great Recession, the economy has grown at right around 2% annualized.  Not only is that not a big bounce, but it’s well below trend growth.  

Remember, the chart of commodities tells us that we haven’t been in the longest expansion on record, but rather, we’ve been in a depression — the pain only buffered by trillions of dollars of central bank intervention.  We should see a period of better than trend growth to put us back on the path of the long-term trend.

6) This aligns well with the 1994-1995 analog we’ve been discussing all year long, where the Fed is forced back into an easing stance, and triggers a late 90s type of boom and stocks and the economy.  Following the Fed’s pivot in ’95, the economy went on to average 4.5% quarterly annualized growth through the end of the 90s.  And stocks did this … 

dec 20 ann returns

7) Aside from the very strong tailwinds of monetary and fiscal stimulus, plus structural reform, we have another (very big) “boom catalyst” coming down the pike.  2020 will be the year that 5G (high-speed, omnipresent wireless internet) goes mainstream.  This will dwarf the lifestyle changes we’ve seen in the first two phases of the internet. This is a full-blown fourth industrial revolution.  The CEO of Qualcomm has said this global infrastructure that will connect nearly 30 billion devices over the next three years will have a similar impact to the introduction of electricity.  

All of this and the Fed is projecting just 2% growth next year. And Wall Street and the economist community tend to anchor their forecasts on the Fed. Once again, the bar has been set low.  This sets the table for positive surprises next year. 

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December 20, 2019

As we end the last full trading week of the year, let’s review the comparison we’ve been making all-year-long to the 1995 period. 

As we’ve discussed many times, in 1994 the Fed was aggressively tightening into a low inflation, slowly recovering economy.  That year, the best return on your money was sitting in cash!  Fast forward to 2018, and the Fed was aggressively tightening into a low inflation, slowly recovering economy.  And again, the best return on your money was sitting in cash (for a whopping 1.5% return).

What happened in ’95?  The Fed was forced to do an about-face, and by July they were cutting rates.  Same thing this year, to the month, the Fed was forced to stop tightening and start aggressively easing again.

What happened to stocks, and the economy in 1995.  Stocks went crazy, up north of 36% (including dividends, up 34% excluding dividends).  And within three quarters of the Fed’s first cut back in ’95, the economy was printing above 4% growth.

This time around (2019), stocks have been on a tear higher too.

We looked at this below chart back in March. It’s a side-by-side chart of the stock market from 1995 compared to the 2019 chart (screenshot in March after the Fed started telegraphing a rate cut).


Here’s what that comparison looks like now … with two weeks left in the year, the S&P 500 has indeed tightly tracked that ’95 path …

So, we’ve talked about what happened to the economy in the last 90’s, following the Fed’s pivot.  It boomed!  What about stocks?  Here’s a look at the annual returns on the S&P 500 from 1996-1999.  Stocks averaged 26% per year. 

December 19, 2019

As we discussed yesterday, it was a year ago (today), that the Fed dealt a damaging blow the economy and the stock market, by 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. 

A year and a month ago, the famed macro hedge fund trader, Stanley Druckenmiller, predicted a global market fallout, and the trigger.  Here’s what Druckenmiller said in November 2018 interview: 

“It’s always about liquidity … And my assumption is one of these hikes … is going to trigger this thing. And I am on triple red alert … I thought markets would anticipate there’s no more Euro ECB money spilling over into the U.S. equity market at the end of the year. So this is a good time to take a shot … I could see myself taking a big shot somewhere around year end.”

As we know, the Fed went forward with another rate hike, the ECB went ahead with its plan to quit QE, and U.S. stocks collapsed 18% in fifteen days. 

He was right.  It’s was about liquidity.  The Fed spent three years tightening into a low inflation, low growth U.S. economy, and (still) fragile global economy. And it was the one-two punch by the Fed and ECB in December was the final blow to send it all (market chaos) into motion.

So, Druck was interviewed again yesterday.  What did he say about the current environment?

He thinks the Fed is again on the wrong side, swinging the pendulum to far in the opposite direction. He likes commodities.  He likes commodity currencies. He likes rates higher.  He thinks global growth with positively surprise.  He thinks the Fed will be caught behind on inflation.  This is pretty close the view we’ve discussed in recent days.

What will trigger another downturn, in his view? 1) If there’s a political event, a change in the White House (to an anti-capitalist).  2) If we started getting enough inflation that the Fed started tightening.  3) If we have another credit event.

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.


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.

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