Latest | Billionaire's Portfolio

March 2, 2021

Yesterday Jamie Dimon said he expects that we will have "a gangbuster economy in 2021, and maybe into 2022."

That's because the economy has nearly returned to its pre-pandemic operating rate (capacity utilization), and people have a lot more money than they did a year ago.

As we discussed on Monday, disposable income is 13% higher than it was before the pandemic. And the personal savings rate (at 20.5%) is more than double pre- pandemic levels, and more than double the average U.S. savings rate of the past sixty years. And yet another couple trillion dollars worth of fuel is about to be poured onto the liquidity fire.

With that, when we get to first quarter earnings (and more so, second quarter earnings), we are going to see some huge positive surprises, as companies report against earnings of a year ago, when the economy was in various stages of lockdown.

Q4 has already delivered big positive surprises. Wall Street was looking for an earnings decline of 9% (compared to Q4 2019). We're nearly through all of the reports, and earnings grew by 4% in Q4.

With this, the Wall Street earnings estimates for 2021 have been dialed UP. But these numbers will still be crushed. For Q1, they're looking for earnings growth of 21%. For Q2, growth of 50%. That sounds like a lot. But remember, these earnings will be measured against a very low base. When things are broadly bad, corporate America will always "take cover" from a broad economic crisis, to manufacture lower earnings. They did just that.

As we (easily) predicted, the banks threw the kitchen sink of loan loss provisions into earnings reports last year, even though the Fed, Treasury and Congress had already pumped trillions of dollars into the economy to keep consumers and businesses solvent. That was a direct backstop (protection) against bank loan losses.

So, as we look a little more than a month into the future, when Q1 2021 earnings start trickling in, and the reality of what full-year S&P 500 earnings will look like, sets in, we will find that stocks (at least at these levels) look cheap.

Even at the current estimate of $175 S&P earnings for full year 2021, FactSet says the twelve-month Wall Street forecast on the S&P 500 of 4,430 (about 15% higher than today).

Pro Perspectives 3/1/21

March 1, 2021

Trump signed a $900 billion stimulus package on December 30th.

As we reviewed on Friday, that has fueled a jump in, already lofty, personal income levels and in the personal savings rate.

Let's take a look at what this has done to asset prices, over just a two month period …

Now, consider what will happen to asset prices after another package is signed into law (maybe by the end of this week) that is twice as big, and will more than double (relative to the December package) the amount of money that is dropped directly into the hands of consumers.

Prices will run wild.

On that note, we had another inflation data point this morning. The Prices Paid component of the ISM Manufacturing report for February came in hot, again — one of the hottest readings in close to 20 years. It was the ninth consecutive month of price growth, and came from hotter demand AND "scarcity of supply chain goods" — that's a double-whammy.

I'm going to copy in the comments from the survey participants in the report. There is clear theme, inflation: supply shortages, labor shortages to deal with overwhelming demand and rising input prices …

With the above in mind, from a quality of life perspective, the wage growth picture has been as good as we've seen in a long time, but wages are going to have to surge aggressively to keep up with rising prices.

Pro Perspectives 2/26/21

February 26, 2021

As another $2 trillion spending package is due to pass the House later today, and move on to the Senate, where it will pass (likely with the help of the Vice President), let's take a look at what the politicians are calling, the "suffering" economy.

Remember, despite a high unemployment rate (which has improved dramatically), and forced business closures (in some, more than other, areas of the country) there has been incredibly aggressive aid disbursed along the way.

The Federal unemployment subsidy has, for lower wage earners, paid them more than they made while working (about 80% more than minimum wage). And this has put pressure under wages being paid to those that are working. The private sector has had to increase wages to compete with what the government has (maybe unintentionally) set as a new living wage (via the unemployment subsidy).

And within all of this, keep in mind, the economy was never completely shutdown. At the depths of the health and economic crisis, the economy was still running at 64% capacity (from 77% capacity, pre-crisis).

And as you can see in the chart, the economy is now nearly back to the pre-Pandemic operating rate.

With that backdrop, the latest Atlanta Fed GDP model is now projecting an 8.8% annual rate of growth for the first quarter. That’s three times faster than the pre-Pandemic Q4 2019 growth.

Personal income was up 10% in January (compared to December), thanks to stimulus checks from the $900 billion aid package in late December and the extended federal unemployment subsidy.

The personal savings rate was 20.5% in January. That's more than double pre-Pandemic levels, and more than double the average U.S. savings rate of the past sixty years.

And real disposable income is 13% higher in January, than it was in before the Pandemic.

These numbers are doing to go one direction after this next $2 trillion package hits: UP.

Sounds great. But as we've been discussing in my daily notes, this will all be accompanied by prices going UP, maybe a lot.

Let's revisit the chart from the early 70s, the last time we had a sharp spike inflation.

This chart shows the dramatic move in inflation from a “shock event.” In the early 70s, OPEC blocked oil exports to the U.S., sending oil prices up four fold in 1973. Broader prices in the U.S. economy followed, spiking by double digits.

Pro Perspectives 2/25/21

February 25, 2021

Stocks got hit today. What's going on?

It's about inflation.

And the signal is in this chart …

This move in the 10-year yield is clearly quickening. We've gone from 1% to 1.6% in less than a month. This is the market's judgement on the impact of the additional $2 trillion package coming down the pike from democrat-led Congress. That interpretation is: inflationary at best, and recklessly extravagant, at worst.

The media and politicians have pretended that there is some bipartisan debate and negotiation going on, on Capitol Hill, about the size and scope of the latest fiscal "stimulus" proposal. But this package has been (all but) signed, sealed and delivered since the Georgia Senate elections gave control of the Senate to the democrats. The 50/50 split in the Senate, gives the deciding vote on legislation to the Vice President, Kamala Harris. It's a done deal.

So even though the $900 billion aid package passed in late December is just in the early stages of being disbursed, another $2 trillion of deficit spending is being poured on the liquidity fire.

Remember, Jay Powell just admitted this week that the economy could run as hot as 6% growth this year. That's before any new stimulus. So, with the onslaught of more money, we should expect nominal growth and nominal returns this year to surprise to the upside (maybe double digits). But so will inflation.

This is the chart to watch as the next spending package gets rammed through…

Pro Perspectives 2/24/21

February 24, 2021

Keeping with the inflation theme we've been discussing, let's take a look at "hard assets." This is the best performer, historically, in times of high inflation.

We've talked quite a bit about commodities. Let's take a look at other physical, tangible assets that are on the move.

Here's a look at real estate/housing …

Keeping with the inflation theme we've been discussing, let's take a look at "hard assets." This is the best performer, historically, in times of high inflation.

We've talked quite a bit about commodities. Let's take a look at other physical, tangible assets that are on the move.

Here's a look at real estate/housing …

As you can see in the far right of the chart, the slope of the rise in prices has increased since the initial policy response to the pandemic. The index had it's largest monthly increase (in January) since 2007.

There are a few vintage watch indicies. Here's a look at a tracking of used Rolex watches …

This index (from Japan) is up over 20% since June of last year.

Pro Perspectives 2/23/21

February 23, 2021

Inflation was a hot topic in Jay Powell's testimony to Congress this morning.

Some of the senate was clearly concerned about the risks of a spike in inflation. Powell, was not.

Even with the aggressive move in asset prices, hot import/ export prices, hot economic data and an economy that, Powell admits, could run as hot as 6% growth this year (even before another massive fiscal spending package), he continued to downplay concerns about inflation.

Moreover, he said the greater risk to inflation is on the downside.

Does he mean it? I doubt it. But it's his job to signal to markets that rates will stay ultra-low and QE will continue. As part of that signaling, Powell (and the Fed) continue to promote an extremely passive plan toward addressing a ramp in inflation when/if it rises above their target of 2%.

Make no mistake, this is meant to set expectations that the Fed will be providing maximum support for years. The intent is to keep the constraints off of the recovery, at this stage.

When we do get a rise in the Fed's favored inflation measures, I suspect we will see them act, not sit on their hands. And perhaps the Spanish Flu era inflation is a good lesson on why they need to be ready. From 1917 to 1920, U.S. inflation averaged 16%. Stocks did well to, but produced little-to-nothing after adjusting for inflation.

Pro Perspectives 2/22/21

February 22, 2021

Back in April of last year, a couple of weeks after the decision by policy makers (Fed and Congress) to go "nuclear" in response to the health crisis and economic shutdown, we discussed what this would mean for prices.

Here's an excerpt from my April 14 note …

"With trillions of dollars of relief/aid/stimulus money beginning to work it's way into the economy, the early stages of the global “asset price reset” is under way.

When global policymakers print money and drop it on your doorstep, the purchasing power of the cash in your pocket goes down. Inflation."

This is where we began talking about this theme: the "global reset of asset prices." Practically all asset classes have gone up (dramatically) in price since.

This is creating the mirage of wealth. That's revealed in household net worth, which has returned to record levels.

But the reset of prices has yet to be felt at the every day consumption level. It's coming. And that is what will put the policy response into perspective. Even with an improving job market, the rise in everyday prices will expose the wealth effect of rising asset prices, as a mirage — especially after another $2 trillion is poured onto an already heating up inflation situation. The consequence will be a lower standard of living.

Adding to the inflation pain, will likely be the fact that not many, still, are expecting it — as you can see in the chart below …

As we discussed much of last year, you don't want to hold cash in this environment. The value is being explicitly destroyed. Hard assets have a history of being the best protection in times of inflation, followed by commodities. On that note, we've talked about the historically favored inflation hedge, gold. We talked about the buying opportunity in gold last week, on the dip into the $1,775 area. Gold was a good mover today, back above $1,800.

Pro Perspectives 2/19/21

February 19, 2021

We talked about copper yesterday. What was the biggest mover in global markets today? Copper.

Copper was up 4% on the day.

Here's another look at the chart, comparing this move to the move from the depths of the global financial crisis…

If we compare the absolute price move, it projects a move to the mid $5 area (another 30% higher). If we compare the percentage move, it projects a move to $7.67 (87% higher).

Considering the glut of currency being printed and the unending deficit spending, this time relative to the post-financial crisis response, I would argue the extreme of the two projections, is in store for the price of one of the world's most important metals. This aggressive repricing in copper should be a good warning of where broad consumer prices are going in the coming years.

Now, this sharp rise in copper prices has put a fire under the profitability of producers.

Here's a look at the Freeport McMoran chart, the world's largest producer of copper.

As you can see, you get leveraged exposure to these commodities through the producers. Freeport stock has gone up 8-fold on a just double in the price of copper.

As we discussed on Wednesday, I suspect gold miners may be set up for a similar opportunity, to get leveraged exposure to gold prices, which have pulled back 14% from the August highs — disconnected, at the moment, from this inflation theme.

Pro Perspectives 2/18/21

February 18, 2021

Building on the inflation theme we've been discussing, we had more price data this morning (import and export prices).

Both came in hotter than expected.

Export prices were up 2.5%. As you can see in the chart below, that's the biggest monthly change on record.

The monthly jump in import prices was the biggest jump since 2012.

What's the driver of the hot prices? For imports, it's oil. Fuel import prices were up 7.4% from December to January. So, we're in the early stages of seeing the impact of Biden energy policies on fuel prices. As we discussed, the "clean energy" plan puts OPEC back in charge of oil prices. We will still buy a lot of oil. We will just buy more for foreign sources, and at higher prices.

On the export front, the hotter prices are driven by agricultural exports.

Remember, we've talked about China's buying spree of global commodities. They bought record volumes of crude oil, copper, iron ore and coal in 2020. They also imported a record amount of corn, wheat and soybeans.

What happened to commodity prices the last time China went on a commodities binge in a global recession (a decade ago)? Prices spiked.

What's happening this time? Prices are spiking. And it's far from over.

Let's look at corn prices …

And let's revisit the chart of copper prices, which traded to nine-year highs today …

Pro Perspectives 2/17/21

February 17, 2021

With rates on the move, now back to pre-pandemic levels, what's the difference between now and February of last year?

We have an economy producing about the same level of output, utilizing about the same level of capacity. Household net worth is at record highs. And by the end of the year, the CBO (Congressional Budget Office) is projecting the U.S. economy will grow at a 3.7% annualized rate (hotter than pre-pandemic growth). They also project that unemployment will fall to 5.3% this year, about right at the average unemployment rate of the past 50 years.

But corporate net worth is down, about $1.2 trillion from last February.

U.S. government net worth is down $2.2 trillion as of the end of Q3. We know that number continues to rise.

So, how do politicians and central banks fix this discrepancy? Inflation. Inflate the nominal value of assets and output … and inflate away the cost of debt. That's happening, and there is more to come.

With that, most charts you pull up these days look like a nice 45 degree line from the bottom left to the top right of the screen (if not a hockey stick). These charts clearly demonstrate the “inflating” of assets.

What's not participating in this “inflating everything” market? The one market that should be on fire, given the situation laid out above: gold.

Gold has had five consecutive lower daily closes, now trading down to $1776. That's down 14% from the August 2020 record highs.

Given the explicit devaluation of cash (through unlimited Fed QE and seemingly unlimited deficit spending aspirations), this is a correction to buy. It’s a second chance.

How do you play it? Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD.

Full disclosure, we are long Barrick Gold in my Billionaire's Portfolio.