November 30, 2021
We've parsed the words of the Fed Chair, Jay Powell, many times.
Despite the clear evidence of inflation, driven by the 30% growth in money supply since early last year, he (and the Fed) have called the rise in prices transitory (short-lived). This has, for some time, looked like maybe a monumental policy error in the making.
Today, he flipped the script. He telegraphed an "accelerated" taper and warned of persistently higher inflation!
That said, as we've discussed in the past, knowing the history of the Fed, especially the history of the post-financial crisis environment (the past thirteen years), the Fed well practiced in perception manipulation.
Let's take a look at how the perception manipulation by Powell (the Fed) has evolved, up to its latest iteration.
Throughout the year, as he has defended the drumbeat of "transitory." He told us that the deflationary trend of nearly four decades, just "doesn't change on a dime."
He told us the "short-term" inflation is simply a product of "bottlenecks" and "base effects." And he deflected responsibility on supply chain induced price pressures, saying the Fed's "tools don't do much for supply constraints."
Then he told us, sure prices have soared, but transitory means they just won't continue soaring at the same rate.
Along the way, over the past eleven months, taking the cover of the "no inflation problem" theme from the Fed, the politicians in power on Capitol Hill passed another $1.9 trillion in spending, and advanced their plans to pour an additional $4.5 trillion (at the time) onto the fire, to fund their agenda — again, pointing to the Fed to refute any concerns about a dangerous inflationary impact. With that, so far, the ticket on another $1.2 trillion has recently been punched. And another $2+ trillion is lined up.
With the inflationary fire already burning, finally, earlier this month, the Fed began the end of emergency level policies, but telegraphed a cautious pace.
This all leads up to Powell's re-appointment last week, by the President. As I said in my note here a couple of weeks ago, "it does seem like Powell has made a concerted effort to keep himself in the running for another term, through his maneuvering of the past year. Among those maneuvers, sticking to the 'transitory inflation' talking point far longer than he should have."
As we know, the alternative candidate to Powell, was Lael Brainard, who is among the most dovish on the Fed, and maybe the most political (aligned and committed to the administration's broad agenda).
Did Powell do what he had to do to get the re-appointment? And if so, is he now, after successfully winning the re-appointment, prepared to start the inflation fight, far more aggressively than almost anyone thinks?
Or, is he changing the perception on inflation, so that the Senate doesn't have justification to allow the big Biden agenda spending plan to pass, which could be an inflationary bomb, and could do irreversible damage, from a policy standpoint, to the country.
Maybe both.
November 24, 2021
Earlier this month, the Fed laid out a timeline and plan for ending emergency level monetary policies. Today we got some insight into the conversations they had to arrive at that plan.
The broad takeaway from the minutes of the Fed's meeting: a Fed that sounds compelled to move even faster than they publicly telegraphed.
That means an end to asset purchases, maybe sooner than June of next year. And a rate liftoff, also maybe sooner than June of next year (maybe as early as March). With that, not surprisingly, there are some Fed members out doing some media interviews in recent days, to start setting expectations for a more aggressive timeline to rate hikes.
A more aggressive path to a tightening cycle: Is this good or bad for markets and the economy?
Consider this chart …
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As you can see in the chart above, despite what the Fed and politicians would like us to believe about inflation (i.e. "transitory"), consumers have their own views. And those views tend to be led by the reality of prices that are impacting their daily lives. Prices up. Sentiment down. And ultimately consumer sentiment dictates consumer behavior.
The Fed clearly knows they are dangerously close to the point of losing control of consumer behavior. So, a faster path to normalizing rates (and stabilizing prices and sentiment) should be good for market and economic stability.
Happy Thanksgiving to you and your family!
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November 23, 2021
As we discussed yesterday, the big tech trade has run into what looks like a catalyst for some unwinding. The catalyst? The re-nomination of the Fed Chair, Jay Powell, which confirms a new tightening cycle for interest rates.
We ended yesterday looking at the key technical reversal signal on the Nasdaq chart. We have the same signal on the S&P 500 chart. Of course, both are heavily weighted and influenced by high growth tech.
Why don't high growth stocks do as well in rising rate environments?
Higher rates tends to bring about lower valuations. When Wall Street analysts start plugging in a higher a discount rate (interest rate) into their cash flow models, they will get a lower price target (in some cases, much lower).
Now, with this said, this should further confirm the shift in market focus to value stocks.
Among the most interesting value stocks, we've talked a lot about the beaten down oil and gas sector.
With that, I want to copy in an excerpt from my note from six months ago (May 20th) on the oil situation …
The globally coordinated "Clean Energy Revolution" promotes higher
oil prices, not lower. That's the structural driver for oil prices. Funding for new exploration has been choked off. So, foreign oil producers (particularly from bad acting countries) will be in the driver’s seat. That movement is underway. And these producers will command/demand higher prices, especially in a less competitive, lower supply world.
As we discussed this dynamic back in February, I said "get ready for $4 plus gas." With the monetary and fiscal backdrop that has evolved, and the inflationary pressures already bubbling up, it will probably be more like $6 gas.
It will be self-fulfilling, and yet it will become the justification for the move to "clean energy."
So, this has all come to pass. And today, in an attempt to bring gas prices down, the President announced that he will be releasing oil from the Strategic Petroleum Reserve.
This only further solidifies the trajectory of oil prices (up).
Not only have we, and much of the world, committed to defunding new oil exploration, and regulating down domestic supplies, we are now (adding insult to injury) drawing down our reserves.
OPEC+ countries will be even happier now to sell us all the oil we will need (until we are all driving Teslas) just at higher and higher prices. And so will the domestic producers that have survived, thus far, this planned supply destruction of the fossil fuels industry.
On the latter, these remaining domestic producers have become cash machines, producing at wider and wider margins, and distributing the cash to shareholders.
How are we positioned in our Billionaire's Portfolio for this oil market dynamic? Join us here to find out.
November 22, 2021
As we discussed on Friday, few things will create more uncertainty in markets than uncertainty surrounding the path of monetary policy — especially, when its related to "who will lead Fed policymaking."
With that, there was strange price action across markets last week, as there was a growing view that we might be in for a change in Fed leadership. Markets started pricing in the prospects of a Fed that would be "easier for longer" (maybe forever), with the idea that a Brainard-led Fed would make the White House agenda an input in Fed policymaking.
With the goal of stability in mind, there was good news this morning.
Before the market opened, the financial media was tipped off that Biden would re-nominate Jerome Powell.
What does it mean for markets?
It means the Fed policy that has been telegraphed (tapering asset purchases with prospects for a June liftoff in rates) remains on path.
That should remove the lid on the interest rate market, which has been suppressed, given the economic and rate picture. The 10-year yield traded up to 1.63% today. And now we may see rates march higher, to test of the highs of the year (perhaps before year end).
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What suffers when we get a confirming event (the Fed renomination) of a new tightening cycle for interest rates?
Growth stocks — particularly, the much-loved big tech stocks.
No coincidence, the Nasdaq was among the worst performers on the day. Moreover, the decline on the day produced a big technical reversal signal (an outside day).
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This will be the spot to watch this week. Will the air come out of the Nasdaq into the end of the year? Conversely, what benefits from rising rates, into a recovering economy? Small caps and value stocks.
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November 19, 2021
We end the week without an announcement on the Fed Chair. The White House says it will come next week.
We also end the week, with the crescendo of government spending plans passing through the House.
We will soon see if the two Democrat Senators that have resisted the package, will put an end to the madness, or fold to the pressure.
Let's take a look at some key charts as we enter the final active trading weeks of the year.
Tech stocks continue to march to new record highs, trading into the top of this one year channel …
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Meanwhile rates have, once again, failed to hold above 1.6%, despite the underpinnings of hot inflation …
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This rate picture, perhaps driven by the growing possibility of the installment of a new (more dovish) Fed Chair, has taken some wind out of the sails of small caps (which should be leading the way in a recovering economy/rising alongside interest rates).
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Add to some of the pain in small caps (oil and gas stocks) this week, is the pressure that has been applied on oil prices, from some interventionist jawboning from the White House. Oil prices were down 6% on the week.
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What's the takeaway? Markets continue to look like there is plenty of uncertainty out there. That said, few things will create more uncertainty in markets than murkiness in the path of monetary policy (in this case, who will lead it).
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November 18, 2021
Yesterday we talked about the prospects of more direct government and Fed intervention.
We've already seen unprecedented intervention through monetary and fiscal policy.
Will the Biden administration take it further, and attempt to manipulate commodities prices (lower)?
He took a step yesterday, alleging price gouging from the domestic oil and gas industry and calling for an investigation into producers.
Is this the China playbook?
The Chinese government intervened in the domestic iron ore market in this past summer. Iron prices had more than doubled from pre-covid levels. The government stepped in, in May — with investigations and inspections into producers and speculators. Prices are down 58% since May.
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The Chinese government intervened in the domestic coal market in late October. Coal prices had tripled over the prior twelve-months. Coal prices are now 40% lower, in just one month.
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In September, China made a move to stabilize oil prices by releasing oil from its strategic reserves, for the first time ever. Prices went up, not down.
What's the difference? China is the biggest producer of coal in the world. China is one of the biggest producers of iron ore in the world. China has less control over oil supply. And now, given that the U.S. has regulated away and is defunding new domestic oil exploration, the U.S. has less control over supply too.
So, the news today that Biden and Xi (China) discussed releasing strategic oil reserves should do little to change the trajectory of higher oil prices. It doesn't address the structural supply/demand imbalance.
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November 17, 2021
We talked yesterday about Biden's impending decision on who will lead the Fed for the next four years.
As we discussed, the incumbent, Jay Powell, doesn't seem to fit the mold of what the administration wants – though he's the consensus favorite. The highest probable candidate that could replace him, does fit the mold (Brainard).
The "mold," in this case, is (seemingly) someone that will carry the water for the White House's agenda.
With that in mind, markets seem to be pricing in some uncertainty about the situation.
We are living in a world of policymaker intervention. The Fed's involvement in the Treasury, mortgage and corporate bond markets over the past year is intervention. The pandemic response from Congress (stimulus, rent moratoriums, direct checks, etc.) is intervention.
But the Fed has now telegraphed a path where they could be out of the intervention business by June. And if the infrastructure package is the last bullet fired by Congress, they could be nearing the end of the pandemic-response intervention business too.
But this Fed appointment, and actions Biden took today on the oil and gas market, suggest we may get more intervention, not less.
What are two markets that create problems for the economic recovery? Runaway oil prices, and runaway interest rates.
On the former, we have an administration (and global initiative) that has restricted domestic oil supply, and given the control of prices to foreign producers. And now we have a threat of runaway oil prices.
On the latter, we have the hottest inflation we've seen in thirty years, following continued massive deficit spending. That's a recipe for higher rates, maybe runaway rates.
Will there be intervention?
Today, Biden launched an investigation into domestic oil producers, claiming producers were price gouging. This claim sounds a lot like the claim that resulted in the Nixon-era gas price controls. It led to much higher, not lower, prices.
On rates: Brainard has been an advocate for yield curve control (managing market interest rates to stated target levels). Just as the Fed is exiting the intervention business, they could be right back in it. This would keep market interest rates from running away, and choking off economic activity — but market interest rates are a market mechanism to curtail inflation. Inflation could run wild.
