October 7, 2021

With the debt ceiling drama taking an intermission, and the anticipation of the strong jobs report coming tomorrow, global markets (and the global risk picture) were broadly positive today.

As we’ve discussed, the employment recovery has looked very good (at a 5.2% unemployment rate) — getting closer to the long-term average unemployment rate.  Add to that, the unemployed in half of U.S. states have now lost additional federal unemployment pay, and should be moving back into the work force — likely to be represented in this data we’ll see tomorrow morning. That means we should see a good report/ lower unemployment.

And we know, not only has the headline inflation rate been running well north of the Fed’s target level, but the wage component in these jobs reports has been running hot.  We don’t need to see it in a government report.  We can see it all around us.  Employers are short of labor.  And employees are commanding a higher wage, and getting it.

Throughout the post-financial crisis era, when the Fed was trying to produce some inflationary pressures (to avert the deflation threat), what was the one piece that wasn’t materializing for them?  Wage growth.  Now we have it.

So while the supply chain disruptions will, at some point, abate.  Higher wages will stick. That’s a tailwind for inflation.

Higher energy prices are driven by a structural supply shortage (not bottlenecks).  That’s sticky.  That’s a tailwind for inflation.

With the above in mind, the Fed’s dual mandate of price stability and full employment clearly doesn’t justify emergency level policies.

So, a strong report tomorrow will further validate the Fed’s plan to officially change-the-direction of monetary policy at their November 3rd meeting.

All of this said, if we look forward by a month or two, the question is: how will the Fed react if/when the unemployment starts to move back up, due to vaccine mandates? They may not taper for long.

October 6, 2021

In recent days, we’ve seen a persistent climb in energy prices — to new record highs by the day.  

And we entered today with that burden of the building energy crisis, combining with a politician-imposed deadline on raising the debt ceiling.

With that double whammy, stocks were sniffing around the lows of this recent correction this morning.

But by the afternoon, stocks had bounced aggressively (almost 2%), thanks to some well placed promises.

On the energy front:  After Dutch natural gas prices jumped 60% in two days, Russia said it would send record amounts of natural gas to Europe this year.  That was liberally interpreted as a promise.  Global energy prices dropped.

On the debt ceiling front:  As the President was hosting a meeting with some of the biggest corporate and banking leaders, laying out the consequences of a debt default to the American public, the other side (the Republican Senate) stepped up and floated an offer that would extend the debt ceiling deadline to December.  Stocks rallied.

Now, every time U.S. debt is brought into the crosshairs we can expect the politicians to leverage the situation, and to use every chance they have to posture in front of cameras, insulting our intelligence with scare/doom and gloom debt-default scenarios.

But in the post-global Financial Crisis and Pandemic era, we have plenty of visibility on this perceived disaster scenario.  We’ve seen the movie before.

Keep in mind, when a potential default in Greece threatened to destabilize the world, the major economic powers of the world stepped-in, providing support for Europe — helping to finance their rescue facilities and support the euro.

The takeaway:  Within this crisis era, they (the major economies of the world) are all on the same team.

Not only will foreigners not dump our Treasuries, they will buy our Treasuries.  In fact, even today, as this “default scenario” was being bandied about, the price of the 10-year Treasury was rising, as it did in the two debt ceiling dramas of the past ten years.

It all boils down to this:  The world’s governments and central banks (led by the Fed) crossed the line in the sand, in response to the financial crisis.  They all went all-in. They told us explicitly that they would do anything and everything to maintain stability and confidence in global markets.  That hasn’t changed.  In fact, the backstop powers have been wielded to a far greater extent in the pandemic response.

So, for perspective, a self-inflicted wound to the biggest economy in the world, that would destabilize global markets and threaten the global economic recovery, is highly unlikely (not going to happen).  

October 5, 2021

We’ve been talking about the building energy crisis. 

The melt up in energy prices continued today.  Crude oil broke $79.  Coal was up 12%.  And natural gas was up 9%.  Again, this is just today.

The national average for gas prices was $2.18 a year ago.  Today, it’s $3.20.  And for the reasons we’ve discussed for the better part of the past year, crude oil prices are going higher from here, not lower.  So is the price of gas.

That said, while the consumer is flushed with cash, and consumption has been running above trend levels, we should expect higher energy prices to start squeezing the consumer.

Add to that, we have a risk to the very healthy gains we’ve seen in the employment situation.

We’re starting to see early signals in New York, of layoffs and walkouts, driven by vaccine mandates.  The biggest healthcare provider in New York fired 1.8% of it’s staff on Monday.  And unlike the post-pandemic unemployment environment, these newly unemployed healthcare workers will, not only, not get a generous Federal unemployment check, they won’t qualify for state unemployment aid.

So we have higher prices, not just in energy, but practically all commodities and everyday consumption. And we now have prospects for rising unemployment. 

This is a clear formula for damaging what has been record-healthy consumer balance sheets.  And both components of this formula have been expressly manufactured by policies of the Biden White House.  I suspect this will create enough economic pain over the coming weeks (maybe months) to get the $4.7 trillion of additional fiscal spending across the line.


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October 4, 2021

The correction in stocks continues.  We've been looking at this chart below, as our guide, following the break of the big uptrend. 

This yellow trendline in the chart, represents the 40% climb in stocks from election day, on anticipation of continued easy money, and a massive fiscal spend to fund Biden's clean energy agenda.

But now the Fed has set expectations for a change in policy direction
And the politicians on Capitol Hill are getting closer to firing of fiscal bazooka.

With that, we had a catalyst to trigger this correction. 
And if history is our guide, we should expect some more pain, maybe something in the 10% neighborhood.  Going back through almost 80 years of data, we have a 10% decline in stocks, on average, about once a year.  The 200-day moving average (the purple line) now comes in at 9% below the record highs.  I suspect we'll see that tested.    
That said, while stocks were down today, commodities were UP.  This is a clue. 
Unlike many of the declines in stocks we've seen in the post-financial crisis decade, this decline is not about demand.  It's about prices.  

The media will continue to harp on the Chinese property market, the U.S. debt ceiling and related infighting on Capitol Hill.  But this continues to look like the world is waking up to a materializing energy crisis.

Last week we looked at the storm that is brewing in global energy.  The record prices are reflecting a combination of the war on fossil fuels, meeting supply chain bottlenecks and a ramping of global demand (coming out of the depths of the pandemic). 
We looked at coal futures.  This is up another 12% since we saw this chart last Thursday. 

We looked at natural gas.  This has tripled from the pandemic lows. 
And global demand for natural gas and coal is now higher than pre-pandemic levels.  Yet supply has been choked off by the global climate agenda.  

So demand is turning to oil

And guess who's back in the driver's seat in determining oil prices? OPEC.   Not surprisingly, OPEC chose not to take measures to curb prices in a meeting today.  

And with that, we have this chart in oil …

After the OPEC news, oil broke above the big $77 level, to seven year highs.  As I've said, get ready for $100 oil.
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September 30, 2021

The Fed was due to deliver a report on the viability of a central bank-backed digital currency (CBDC) in September.  It's October 1st, and no report.

So, Powell was asked about his thoughts on a digital dollar in his latest post-FOMC press conference.  He didn't take position either way, but said it would ultimately be a government-wide decision — i.e. the decision would lie with Congress.

We know that Congress has already held a hearing on the prospects of a digital dollar, back in June.  It was led by Elizabeth Warren. She's in favor (so is the administration).  So, it's safe to expect that the "government-wide decision" will be a "yes."  It's coming.  And Warren made it clear, in the hearing, that a central bank-backed digital dollar would "help drive out bogus digital private money (bitcoin, stablecoins, etc.)."

So, this has become maybe the existential threat to bitcoin. 

But today, the private crypto market got some encouraging news.  The BIS issued a report from a consortium of the top central banks in the world (including the Fed), that seemed to evaluate CBDCs in a world that coexisted with private cryptocurrency.  Bitcoin jumped 10% on the news.

We will see if the stand-alone Fed report, which is supposedly coming soon, is as friendly.  If so, the Democrat Congress that will be voting on the Fed Chair's renomination (in February) probably won't be too happy about it.  

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September 30, 2021

We've talked a lot about the globally coordinated climate agenda for the better part of the past year. 

Remember, almost four years ago, a group called Climate Action 100+ was formed.  This group is comprised of every major asset manager and pension fund on the planet.  And the agenda of the group is/has been very clear:  defund fossil fuels and force energy transformation. 

With that, all of the oil giants have been ordered to transform to renewables.  Fall in line, or be shut-out of the capital markets (frozen out from new investment).  

What happens when you choke off investment in new production in traditional energy sources, in favor of building the "next generation" of energy?  You guarantee yourself a supply/demand imbalance — at least until" new energy" infrastructure is developed to the extent that it can balance the market.  That won't be anytime soon.  And with that, the climate actioners have guaranteed us an energy crisis. It's coming. 

Let's take a look at the price of energy inputs since Biden was elected, which cleared the impediment (i.e. Trump) for the global energy transformation.  

The price of coal has more than tripled…

Crude oil has doubled and looks like it can double again …

Natural gas is up 87% and on 7 year highs.  The last time natural gas prices were here, oil was $100 …

So, these prices are reflecting the storm that is brewing:  a combination of the war on fossil fuels, meeting supply chain bottlenecks and a global ramping of demand (coming out of the depths of the pandemic).  

We're seeing it in China.  Consumption is outpacing coal inventories and production.  They've having blackouts.  European power prices are at record highs.  In the UK, we're seeing images of gas lines.  As I said in my June note, get ready for $6 gas.   

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September 29, 2021

The Fed spent much of the year telling us that inflation is "transitory."  This was clearly intended to mean "temporary."

This, despite the $5 trillion growth in money supply, and despite the nearly $10 trillion in fiscal stimulus (either disbursed, in the process of being disbursed or on the table for Congressional approval).  And within these policies, wages were artificially reset higher by government subsidized unemployment.  And wages are a key driver in inflation formula.

With that, now that the Fed has changed its tune and is prepping for an end of emergency policies, we should expect markets to question the Fed's judgement (too soon?).  With that, we've had the knee jerk selling in stocks. 

But as we've discussed throughout the year, the Fed's "transitory" tune was clearly a campaign to manipulate inflation expectations (lower).  The Fed was singing a tune that was in complete contradiction to the inflationary data and the underlying drivers of inflation.  With that, as we've discussed in my daily notes, there's a very good chance that we will see double-digit inflation over the next year, and a Fed that ends up behind the curve and ultimately chasing inflation higher (with aggressive rate hikes).

We're already seeing it in Brazil.  The Brazilian central bank hiked rates by 100 basis points last week.  That's 425 basis points since March.  And they are doing so, because of this chart …

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September 28, 2021

Last week, we had a big technical breakdown in stocks, and we discussed the reasons to believe there may be some more pain ahead. That seems to be playing out.  

That "pain" catalyst is mostly driven by the breakout (up) in interest rates.  After all, as we also discussed last week, a change in the direction of monetary policy (from easing to tightening direction) is historically bad for stocks. 

But in the current case, given that the Fed is moving away from emergency level policies, the policy stance will remain highly stimulative for quite some time (even as they taper, and even as they begin raising rates from the zero line).  That stimulative monetary stance will ultimately continue to promote higher asset prices. 

For the moment though, the combination of: 1) a Fed change in direction, 2) concern about the Chinese financial system and 3) a potential U.S. government shutdown, has been enough to trigger what looks like a technical correction for stocks.

Let's take a look at an updated technical picture …

We observed the break of this big trendline last week.  This is an important line.  It represents the 40% climb from election day, on anticipation of a massive fiscal spend.  Now this line is broken, and we have a peak-to-trough decline thus far has been 5%. 

After retracing back to the trend break, it looks like we could test the lows of last week (maybe in the coming days).  A break of those lows would open up the scenario of a deeper decline toward the 200-day moving average (the purple line).  That comes in just shy of a 10% correction.  And as I've said, it will be a dip to buy.    

Billionaire's Portfolio

September 27, 2021

We’ve talked quite a bit about the relationship between interest rates and small cap value stocks.

Specifically, when rates are rising, as a result of an economy recovering from recession, small cap value stocks tend to outperform larger cap growth.  And that outperformance, coming out of recession, has historically held for the decade forward. 

With that in mind, today the 10-year yield traded above 1.5%.  That’s nearly a quarter point higher than the levels of just two weeks ago.  And while the broader market was down today (the S&P 500), small cap stocks were up 1.7% (the Russell 2000).  

Let’s take a look at this small cap/rates relationship in a chart …

As you can see, coming out of recession, and with the catalyst of an election that telegraphed a massive fiscal spend, small caps (the orange line) aggressively followed the recovery of interest rates (the purple line) from near record low levels.  

But rates rolled over in April, and small cap value stocks have since gone sideways.

So now, we’re nine months through the year, and in a hot economic recovery, yet small cap value is underperforming the S&P 500 for the year (15.5% versus 18.3%, respectively). 

But rates are on the move again, and that’s driven by a change-in-the-direction of monetary policy (a big catalyst).

That should provide fuel for new record highs in the Russell 2000 into the end of the year, and a resumption of a very strong bull trend.     

Not surprisingly, in relationship with the rising rates picture (on both the growth and inflation picture), oil and gas stocks were the best performing sector of the day — up better than 3%. And this a key constituent of the small cap value universe.

With that in mind, oil is closing in on the seven-year highs. And the path we’ve been talking about, to $100 oil, is getting closer. As I said in my note just after the election last year, with the Biden climate agenda well telegraphed, “until we’re all driving Teslas, and the energy grid has been completely ‘green’ transformed, we will still be using a lot of oil.  We’ll just be paying a lot more for it.” 

If you want to take full advantage of the tailwinds for small value stocks, join us in my Billionaire's Portfolio subscription service.  You can invest alongside my portfolio, full of stocks with the potential to do multiples.  You can learn more here
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September 24, 2021

Overnight the Chinese government declared all cryptocurrency activity is officially illegal.

Global governments have made it very clear that they have no interest in competing with a private digital monetary system.  If we listen to them, we should have the expectation that they will regulate private cryptocurrencies out of existence.  

Remember, over 60 global central banks (the BIS) are already at some stage of considering a central bank-backed digital currency.  The Fed is due to issue a report this month on the viability of a digital dollar.   Powell said this week, that it will be a government-wide decision.  But we already know the majority vote in government will favor it. 

The Chinese central bank has already announced a 2022 launch of a digital yuan.

Let's revisit an updated chart from one of my May notes, and take a look at how the chart of the bubble in Chinese stocks back in 2015 compares to the chart on bitcoin. 

With this chart in mind, and with the declared ban in China on all crypto activity in mind, consider this:  China accounts for 60% of global bitcoin mining … the largest trading volume in bitcoin comes from China … and third largest holders of bitcoin in the world are in China.   
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