Pro Perspectives 6/01/23

 

 

 

 

 

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June 01, 2023

For the second consecutive day, we have a voting Fed member publicly making the case to "skip" any rate action in the June meeting (which is two weeks away). 
 
Clearly, they don't want to use the word "pause," as the algorithms are probably locked and loaded to buy stocks if that word hits the newswires from a Fed speaker.
 
That said they had more supportive data for a pause this morning, in the ISM report.  Remember, the Fed was concerned earlier in the year that inflation might be bouncing back.  But it should be very clear now (not just domestically but globally) that the path is lower.  You can see in the chart below, the steep drop in the "prices paid" component in the manufacturing data from May.    
 
   
With this language of the past two days, the market has quickly swung from a bet for another quarter point hike, to bet on a pause (about 80% chance).
 
We get the jobs numbers tomorrow.  The expectation is for a sub 200k payroll number, which would be the second weakest in the post-lockdown era.  Anything in-line or weaker would cement a pause, and should provide fuel for the remainer of the stock market, which hasn't enjoyed the same performance success as the big-tech-regime (thus far, ytd). 
 
   

Pro Perspectives 5/31/23

 

 

 

 

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May 31, 2023

Two voting Fed members spoke today, and both used the word "skip" related to the coming monetary policy meeting.  
 
This was deliberate, and it's big news!  
 
This comes after 10 consecutive rate hikes.  The effective Fed Funds rate is above 5%.  The Fed's favored inflation guage (core PCE) is below 5%.  As we've discussed, this is where, historically, the Fed has taken rates, to get inflation under control (i.e. above the rate of inflation). 
 
That said, the headline CPI numbers, as we've also discussed are on path to plunge, as the "base effect" will considerably change the year-over-year comparisons. 
 
We talked about it last month after the media worked themselves into a frenzy over the UK inflation number, which came in above 10%.  
 
But it was clear that the next inflation number would be measured against a significantly higher data point from twelve months prior.
 
And it was very likely, even if April inflation in the UK were to be relatively hot, that the year-over-year CPI would come down to the 8% area.  That's exactly what happened.
 
The same is happening around Europe.  The year-over-year measures are dropping.  Spain has dropped from 4.1% to 3.2%.  France has dropped from 6.9% to 6%.  Germany has dropped from 7.2% to 6.1%. 
 
And in the U.S., as we discussed earlier this month (here), because of the base effect, by June, prices will be measured against a higher base (of the year prior), and that should deliver us a year-over-year inflation number in the mid 3s (percent), if not in the high 2% area. 
 
This would support the Fed's "expectations setting" today.
 
So, this comes after the "Nvidia moment" of last week which may have marked the starting line of a major technological transformation era.  The debt deal drama should be behind us by tomorrow.  And suddenly the word "skip" should become a very powerful, positive catalyst for stocks. 
 
Notably, the movers on the day (after the Fed comments) were small caps, which have underperformed.  
 
 

Pro Perspectives 5/30/23

 

 

 

 

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May 30, 2023

Change is what reprices stocks.  And as we discussed last week, we've had significant change introduced into markets.
 
First it was the game-changing earnings call from Nvidia, where the Founder/CEO of the world's leading player in AI compared the significance of the ChatGPT launch (in November of last year) to that of the iPhone, where all of the advancements in technology came together.
 
And now we have what looks like a debt ceiling deal. 
 
What about the bank shock from March?  To what extent has that resulted in credit tightening? 
 
Here's the latest from the Fed.  There is barely a wiggle in the expansion of credit … 
 
 
With all of the above in mind, the market had been pricing in cuts by year end.  It was 100% probability, a month ago.  Now it's a coin flip.  But unless we have a shock event, at this stage, a cut seems to be overpriced/overestimated at a coin flip (i.e. my view, given the above, more likely to be no cuts).
 
We've talked about the boom in productivity growth that should accompany the transformative generative AI technology.  And productivity growth drives economic growth.  
 
With that, the S&P trades at a forward P/E of 18.  The average P/E in the post-GFC era (Global Financial Crisis) is 21.6.  In the late 90s, the Fed Funds rate averaged 5.2% (between '95 and '99).  That's about where the Fed Funds rate stands now.  During that time (late 90s), the P/E averaged 25x.  Economic growth grew at a better than 4% annualized rate for the period.  Stocks averaged 28% a year.  

Pro Perspectives 5/26/23

 

 

 

 

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May 26, 2023

In just a few days, the pendulum has swung from despair to building enthusiasm.
 
This morning, the May consumer sentiment survey was reported.  As you can see in this chart, it has been plunging back to levels of the Global Financial Crisis, and the 2011 debt ceiling standoff (which was also accompanied by a sovereign debt crisis in Europe).  
 
 
This chart is, indeed, reflecting despair. 
 
But there's good news:  We have new information entering the mix, just over the past few days. 
 
As we've discussed, the Nvidia earnings call on Wednesday, revealed a retooling of computing technology that's underway (and in early stages), and (related) transformative economic outcomes that are coming, via generative AI.   
 
Add to that, by early this morning, it was leaked that a deal was coming together on the debt ceiling.
 
With all of the above in mind, as we discussed yesterday, the markets were already giving signals of change.  
 
We end the week, with the interest rate market now pricing in a 71% chance of another rate hike next month.  A week ago, it was just 17%. 
 
And the probability of rate cuts coming by year-end are being priced-out, rapidly.
 
This rate outlook is not driven by a firm inflation number this morning.  This is incorporating the shifting view toward bright economic growth prospects.  And that view changed on Wednesday, with the Nvidia report. 
 
As I've said here in my daily notes, we need this following formula to grow out of, and inflate away, the debt burden:  a period of hot growth + stable (but higher than average) inflation + rising wages. 
 
On that note, the AI transformation should bring us a productivity boom.  And a productivity boom should bring about the above formula. 

Pro Perspectives 5/25/23
 
 

 

 

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May 25, 2023

Nvidia neared the $1 trillion market cap level today. 

As I said yesterday, the Q1 earnings report, the incredible growth guidance for the rest of the year, and the discussion on customer demand for “re-tooling” for the generative AI transformation was a big wake-up call. 

Maybe the most important thing said yesterday:  The founder and CEO of Nvidia, the leading provider of technology that powers AI, said “when the ‘ChatGPT moment‘ came (the November 30, 2022 launch) … it helped everybody crystallize how to transition from the technology of large language models to a product and service…”  

That (ChatGPT) was the defining “moment” for the industry.  We’re just six months in. 

Just as the world is pondering recession, if not depression (and deflationary bust), this earnings call (the “Nvidia moment”) might be the defining moment for the rest of us — the moment that resets the perspective on the next decade, for perhaps a boom period. 

The interest rate markets seem to be reorienting toward this.  The 10-year government bond yield has risen from 3.27% to 3.60% in just two weeks. 

Of course, the narrative surrounding that has been “debt default.”  But at the peak of the debt default frenzy, gold was on record highs.  It’s now 6% lower, and falling.  The dollar is rising.  The Nasdaq just made another new high for the year.  And the interest rate market has swung, over the course of one month, from pricing in an absolute certainty of rate cuts by year end, to about a coin flips chance – and, moreover, now pricing in the chance of another rate hike.

Remember, AI will drive productivity growth.  Productivity growth drives economic growth.  And it’s early.   
Pro Perspectives 5/24/23

 

 
 

 

 

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May 24, 2023

We talked about the “AI effect” on the stock market yesterday.  And with the booming stock performance in the tech giants this year, where AI powers are heavily concentrated, there were building expectations that the earnings report by Nvidia this afternoon might undershoot.

That was not the case.  In fact, it was the opposite.  This Nvidia report might be the big wake-up call on the massive technological transformation underway (and in just the early stages).

After the bell, Nvidia reported a huge earnings and revenue beat.  With an even bigger upgrade in guidance.

They grew revenues at 19% since last quarter (Q1). 

And they think they will grow revenues for Q2 by 33% —  driven by “a steep increase in demand” related to generative AI and large language models. 

Again, that’s quarter-over-quarter growth. 

A key question in the earnings call: Can they continue that kind of growth? 

The answer:  “We have visibility (on demand) that is probably extended out a few quarters … Yes.  We are expecting a substantial increase in second half compared to first half.”

And, importantly, they say they have secured “substantially higher supply for the second half of the year,” to meet surging demand.

For perspective:  Nvidia is the leader in producing graphic processing units (GPUs) which enable the move from “general purpose computing” (powered by CPUs) to “accelerated computing” (powered by GPUs).

On the earnings call, they say the world’s $1 trillion worth of global data center infrastructure is based on CPUs — and there is aggressive demand to “re-tool” (across industries) to accelerated computing.

Keep in mind, before today’s report, Nvidia was the seventh most valuable company in the world ($770 billion market cap).  With this explosion in growth, Nvidia may be challenging Microsoft and Apple as the biggest company in the world very soon (joining the multi-trillion dollar market cap club).

As I said yesterday …

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), we have the formula here for another “roaring 20s.”

 

Pro Perspectives 5/23/23

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May 23, 2023
 
Stocks put in a technical reversal signal today.  It happened first in the dollar-denominated Nikkei (which was up 20% on the year, at the highs overnight).  And then in the Nasdaq (up 24% ytd at the highs).  The S&P also finished with a bearish outside day.
 
Small caps were bucking the trend on the day, up 1.3%, but reversed in the afternoon to close down on the day. 
 
What's going on?  
 
The noise about the debt ceiling continues.  The speculation about a June pause by the Fed continues. 
 
But this looks more like profit taking on the artificial intelligence trade going into tomorrow's Nvidia earnings. 
 
Nvidia is considered to be the leading provider of technology that powers AI, including ChatGPT.  The stock has more than doubled since the beginning of the year, making it the sixth most valuable company in the world.  Seven of the top ten are involved in AI (which, by market cap, is about a third of the S&P 500).
 
I suspect the markets are hoping for an earnings miss tomorrow, from Nvidia, for the opportunity to buy it cheaper.
 
More on AI …  
 
I've been using it since it launched in November, ChatGPT, and more recently Google's AI.  
 
My view:  The automobile is to mobility, as AI is to productivity.
 
A productivity boom is coming, and it is well needed.
 
Productivity growth is the key to improving living standards.  As ChatGPT says, "sustained productivity growth of around 2% per year has historically been associated with positive economic outcomes and improvements in living standards." 
 
We averaged just 1% for the decade prior to the pandemic, and negative 0.7% since the fourth quarter of 2020.
 
Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), we have the formula here for another "roaring 20s." 

Pro Perspectives 5/22/23

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May 22, 2023
 
Last week we looked at charts on Japanese and German stocks.  And we looked at the U.S. benchmark (S&P 500).  All continue to trade around technical breakout levels (you can revisit that Thursday note, here).
 
This is the Vanguard Total World ETF.  This too, after retracing to pre-covid levels, is at a similar inflection point.   
Interestingly, the chart on Chinese stocks looks like the inverse. 
As we know China is still recovering from the zero-covid policies (finally abandoned in December of last year).  But exports are well above pre-pandemic levels.  The economy is growing at near 5% (above estimates), which is fast relative to the rest of the world, but still in recession-like territory for China. And the PBOC is allowing the yuan to weaken, nearing the levels of the 2019 (trade war) lows — which is intentionally stimulative to exports. 
 
Add to the above, in the past two weeks, in a "reopening quarter" the big four tech constituents of this Chinese ETF (FXI) all beat earnings estimates.
 
Valuation:  The P/E of FXI is 11 (ttm).  The P/E of the S&P 500 is 21 (ttm).
 
All of this said, coming out of the Great Financial Crisis/ Great Recession, Wall Street told us the era of developed world dominance had come to an end, and that the future of investing was in China.  By 2010, it was obvious that China couldn't thrive while the Western world economies were suffering.
 
Here we are again, coming out of a global crisis, but this time Western world economies are dealing with booming, rather than busting, nominal growth. This should be a time for a booming bounce-back in Chinese growth — unless the Western world decides to push back on China's economic and geopolitical ascension (and related, power).
 
It may be the last chance. 
 
And based on the G7 leaders meeting that took place through this past weekend, it may be happening.
 
The G7 communique mentioned China 20 times.  That's the most since 2014 (when the communique expressed concerns about human rights, trade practices and military expansion).  This is the first time since 2019 (in the depth of the Trump trade war), that the G7 leaders said they would work toward "diversifying" supply chains, to reduce reliance on China.  They addressed Taiwan, human rights, China's ability to influence Russia, and the importance of "playing by international rules."
 
What did China think about this?  China's state-controlled media called the G7 meeting, an "anti-China workshop."
 
Now, keep in mind, China intentionally, and aggressively, ramped it's influence building in Western world economies over the past 15-year (post-GFC, particularly in Europe).  And with that, the approach on dealing with China has appeared influenced.  Mike Pompeo called China enemy number one.  In contrast, Biden has called China a "tough competitor."  This, as Xi has continued to explicitly state his goal of world domination.
 
So, with this G7 statement, maybe the G7 leaders are finally prepared to hold China to account on what they call "economic coercion" (a term, before this past weekend, which has never been used before in a G7 communique, related to China).   
 
And with that, maybe FXI (the Chinese stock ETF) is rightly  communicating the geopolitical risk (i.e. vulnerable to breaking down).

Pro Perspectives 5/18/23

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May 18, 2023
 
Yesterday, we talked about the significant movement in the debt ceiling negotiations.  We went from no movement in the prior week, to this statement from Biden yesterday:  “we have to move on.” 
 
With that, the risk premium in markets is being unwound.  That means stocks are up.  
 
We’ve been looking at this chart on the S&P …
At the end of the first quarter, we had a break of the big descending trendline that describes the bear market of last year (the yellow line).  And we’ve been watching this 4200 level (specifically 4208, the high of the year).  This looks like a breakout today.  We traded up to 4215.
 
This, as the market has been heavily short, or underweight equities, as per the CFTC’s Commitment of Traders report, and Bank of America’s Asset Manager survey, respectively.  As we’ve discussed, a market that is leaning the wrong way tends to exacerbate a breakout like this, as they are forced to chase the market higher in order to reposition.
 
If we look around, globally, there’s support for the breakout scenario in stocks. 
 
German stocks made a 16-month high today.  And as you can see in the chart, this is knocking on the door of new record highs.  
And Japanese stocks have been marching higher by the day, just half a percent away from the highest levels since July of 1990. 

Pro Perspectives 5/17/23

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May 17, 2023
 
We had some surprisingly good commentary on the debt ceiling negotiations today.  
 
It started with this statement from Biden this morning, signaling a deal by Sunday.  He also said, importantly, “to be clear, this negotiation is about the outline of what the budget will look like, it’s is not about whether or not we will pay our debts.”  
 
McCarthy followed a half our later and said “a deal by Sunday is doable.”
 
Stocks did this …     
That said, we need the government to get out of the way, and let the liquidity that is already in the system do its job – to ensure a sustainable recovery from the 2020 economic damage. 
 
But what about rates?  We've never seen rates go from zero to 5% in a year's time. 
 
True.  But we've also never seen ten-years worth of money supply growth dumped onto the economy over a two-year period (the pandemic response).  
 
The tidal wave of new money should trump the adoption of what is (at 5%) an historically normal interest rate.
 
This money supply explosion should have resulted in inflation.  And it did.  But it also should have resulted in boom-time economic activity. 
 
Coming out of the pandemic recession, the economy should be in the midst of multi-year double-digit nominal growth (before the effects of inflation), and well above trend in real growth (after stripping out the effects of inflation).  Instead growth has been petering out.   
 
The good news:  The pandemic emergency policies and all of the subsidies and moratoriums that came with it, are over (or coming to an end).  This should normalize the labor supply (which has been in a shortage).  And we need higher wages (a reset in wages to offset the reset in prices) — to restore the standard of living.
 
That being the case, we could be looking at a boom in economic growth, just as people have been looking for recession.
 
On a related note, I want to revisit some of my analysis of the long-term path of the stock market.
This chart shows us what it would take to put us back on path of 8% annualized growth in the S&P 500.  

The blue line represents what the S&P 500 would have looked like, had it continued to grow at its long-run annualized rate of 8%, from the 2007 pre-Great Financial Crisis peak.  

The orange line is the actual path of stocks (which includes the deep financial crisis decline and the subsequent recovery). 

Through the years of looking at this chart above, there has been plenty of chatter along the way about the performance and status of the stock market — plenty of bubble and overvaluation talk.  But the reality is, we were knocked off of the path of the long-term trajectory of stocks (the orange line).  And that path of a long-term 8% annualized appreciation has never been regained (the blue line). 

What can we attribute this gap to?

 
Post-recession economic recoveries in stocks are typically driven by an aggressive bounce-back in growth, to return the economy to "trend growth."
 
We didn't get it in the post-great recession era.  Growth was dangerously shallow and slow.  Deflationary pressures persisted.
 

However, the pandemic fiscal response, unlike the great recession fiscal response, put cash in the hands of consumers.  And you can see what the short-lived boom-period did to close that gap in the chart (the orange line converging to the blue line).