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February 1, 2021

The Congressional Budget Office (CBO) published its Economic Outlook this morning.

Now, the CBO is said to be an "objective, impartial, and nonpartisan" group of experts with a mission of helping Congress make effective budget and economic policy.

Okay, with that, the CBO has projected that the U.S. economy will fully recover to new highs in economic output by the middle of this year, growing at an estimated 3.7% annualized rate. They also project that unemployment will fall to 5.3% this year, and inflation will remain a very soft 1.5%.

Let's take a look at those numbers with some historical context …

The above chart is 50 years of quarterly year-over-year change in U.S GDP (annualized). This line of regression (yellow line) is slighly downward sloping and comes in just under 2%. That happens to be about where economists have been saying, for years, is the "new normal" growth rate. This year, the projection from the CBO is for 3.7% growth.

With this in mind, we know that the fiscal and monetary response has been far bigger than the damage to economic output. The economy contracted by $2.2 trillion in 2020, from Q1 through Q2. And the response has been $3 trillion from the Fed (in balance sheet expansion) plus $2.7 trillion in fiscal stimulus from the federal government. The response has been greater than the damage.

Not surprisingly, as a result, we're getting hotter than normal growth in the recovery.

And not surprisingly, the jobs market has made huge gains.

On that note, here's a look at the projected unemployment rate …

As you can see, if we draw a line of regression (yellow line) over the past 35 years of monthly unemployment data, the CBO projected unemployment rate for 2021 comes in lower.

What about inflation?

Despite projections of hot growth and continued improvement in jobs, and despite the deluge of liquidity already deployed through fiscal and monetary policy, the CBO projects the same subdued inflation we've had for decades now.

Now, this is very important: These projections from the CBO assume that current laws on taxes and spending remain in place (as of January 12), and that no significant additional emergency funding or aid is provided.

So, to recap, this "impartial" team of experts tasked with helping Congress make informed decisions, thinks the economy will be pretty hot this year, with no concerns about inflation. And this is before any Biden policies, before any additional aid, and before any massive multi-trillion dollar clean energy economic transformation spend.

One might ask, why would Congress approve another $1.9 trillion in "aid?" '

They shouldn't.

But with aligned leadership in the White House and Congress, they will.

This should make us all very concerned about the inflationary consequences.

Pro Perspectives 1/29/21

January 29, 2021

Stocks are down, yields are up today. That's not a great combination – the selling of stocks and the selling of bonds.

Is there concern about market stability, given the events of the past few days (the short squeeze)? Yes.

Anytime you have an improbable event happen in markets (like a short squeeze that takes a stock from $42 to $483 in five days), there is likely some damage that comes with it. If counterparties (brokers and banks) were to begin fearing the creditworthiness of other counterparties you can quickly get destabilization across markets. Long Term Capital Management comes to mind.

LTCM required a $3.6 billion bailout coordinated by the Fed. Yesterday, within hours Robinhood raised a billion dollars. That's the difference of two decades. It's the difference between a Silicon Valley darling and a stealth Connecticut hedge fund. And it's the difference between the global liquidity environment of today, and 23 years ago.

To be sure, it's an unstable country, and an unstable world.

But remember, there were global crises in the late 90s (Asian Crisis, Russian Default, the blow up of LTCM), and yet it was a boom period for the economy and for stocks. There were plenty of shock risks coming out of the depths of the financial crisis (near debt defaults in Europe, U.S. debt ceiling sagas, government shutdowns, Russia's invasion into Ukraine, nuclear threats from North Korea, the Ebola scare) … and yet the broad stock market tripled in five years.

The shared feature in those cases: Intervention (or the threat of intervention).

We've had plenty of intervention over the past year. And we will have more, if needed, by central banks and governments to maintain stability.

For stocks, liquidity is king. And there is a tsunami of liquidity from global policymakers. And, as importantly, central banks stand ready to act, to absorb any potential shocks to confidence. The Fed is on red alert. The trajectory of asset prices will continue – up.

Pro Perspectives 1/28/21

January 28, 2021

The focus of the financial media over the past few days has been on the massive squeeze of the most heavily shorted stocks in the market.

What happened today?

The brokers stepped in to stop the insanity, putting restrictions on some of these stocks that had become targets for indiscriminate mob buying. We'll see if there's any wounds in the brokerage industry, resulting from losses. It's reported late this afternoon that Robinhood is drawing on credit lines.

For the broader market, the action of the past few days may have cleared the shorts from many heavily shorted/short-seller targeted stocks, for a while. As we discussed yesterday, in a world where asset prices are being explicity inflated by monetary and fiscal policy, this is not the environment to be betting against the nominal price of assets.

With that, some of these stocks (definitely not all), have been unduly weighed down for years by short sellers (they've been targets). This shake out creates opportunities for investors to start picking through some of these names for value opportunities, in a market where valuations have been running hot.

If we look through a screen of $10 billion+ market cap stocks, with greater than 20% short interest, we have fourteen names. If we take it down to $2 billion+ market cap, we find a lot of old-line retailers on the top of the highly shorted and “cheap” list (Big Lots, Michaels, Dick's, Camping World).

Pro Perspectives 1/27/21

January 27, 2021

Let's take a look at the chart of the stock everyone has been talking about the past few days.

It's Gamestop …

Fourteen days ago this was a $20 stock. Today it traded as high as $380.

This was a heavily shorted stock. And in a world where governments and central banks (particularly in the United States) have explicitly trashed the value of money, which is repricing everything (in nominal terms), you don't want to own debt, and you don't want to be betting against the nominal price of something (i.e. you don't want to be a short seller of stocks).

Those buying stocks are emboldened by this backdrop. And that leads to the scenario we are seeing in Gamestop. The buyers are/have been squeezing the shorts out of their positions. And that is leading to a hunt for all highly shorted stocks, and short squeezes across the stock market.

This, I suspect, is a short-term phenomenon. It's a revaluation of stocks that have been misvalued, and controlled by short sellers (Gamestop, notwithstanding — that one is detached from any reality).

While this may be a short-term phenomenon, it may all be an early warning symptom of what's coming. We are seeing ballooning prices in financial assets. How long until we see ballooning prices of every day products and services in the real economy?

On that note, it's the Fed's job to manage price stability. In Jay Powell's press conference today, he said nothing to acknowledge that the Fed was prepared for a such a scenario of runaway prices.

In fact, he reiterated that they would "wait and see … and not react" to any spike in inflation. Moreover, he arrogantly explained that the disinflationary dynamics that have held, at least for the past decade, don't easily change. The Fed expects any spikes in inflation would be short-lived, and that the longer term trend of weak inflation, if not deflationary pressures, would persist.

With this, we should all expect the Fed to be caught off guard, and in the position of chasing inflation in the near future. And that would mean hot inflation is coming.

As I’ve said over the past ten months, you don’t want to hold cash in this environment. You want to be long asset prices.

Pro Perspectives 1/26/21

January 26, 2021

Microsoft reported earnings after the close today.

For the eighth consecutive quarter, they beat on earnings and revenues.

It wasn't too long ago that MSFT was a tech giant that was believed to be past its prime. If you bought the stock at the top in 1999, you were underwater for 16 years. If you bought it in 2000 for half price, it was dead money for 13 years (flat line). In April of 2013, Business Insider wrote a story titled: "Microsoft Could Be Obsolete By 2017."

So what changed?

The same month Business Insider wrote that article, a guy named Jeff Ubben took a $2 billion stake in Microsoft.

By September Ubben had secured a board seat, and he went to work, pushing for stock buybacks and a new strategy. He pushed out the CEO, Steve Balmer. He replaced him with Satya Nadella, who was running the Miscrosoft cloud business. Nadella's job was to turn Microsoft into a cloud computing company. He has done it.

Here's what has happened to the stock …

The stock has now gone up more than 8-fold in seven years. Today, instead of obsolescence, it's a $1.85 trillion-dollar company, thanks to Ubben. It's the most extraordinary activist campaign, if not investment and strategic turnaround, of all-time.

In my Billionaire's Portfolio, we just followed Ubben into his latest high conviction investment this afternoon. You can join us and get all of the details by subscribing here.

Pro Perspectives 1/25/21

January 25, 2021

We have a big earnings week. As we discussed on Friday, the numbers are already coming in better than expected for Q4. And we should expect that to continue.

Remember, companies are reporting on a quarter that the economy grew at an annualized rate between 4% (Reuters Poll) and 7% (Atlanta Fed Model projection). And these earnings numbers are being measured against a very low bar — the expectations that companies (and Wall Street) dialed down dramatically, to take advantage of a tumultuous environment.

So we have earnings that should continue to beat expectations, and overall, may turn out to show growth (instead of contraction) on a quarter-over-quarter basis, by the time the earnings season is over. Positive surprises are fuel for stocks. And the table has been set for positive earnings surprises — not just for the last quarter of 2020, but throughout 2021.

Another very important spot to watch for the week: The World Economic Forum.

That kicked off this morning. This event, typically held in Davos, is held as a virtual meeting this year. Remember, this is where the global elites told us last year, exactly what they envisioned for the world: The end of Trump.

As we've discussed, Trump represented an existential threat 1) to the Chinese Communist Party, 2) to the global climate action plan, and 3) to the careers of entrenched politicians.

Solving that problem became priority, above all else, around this time last year. It dominated the Davos meetings in 2020. They didn’t hide it. It was all about Trump (anti-Trump). Not the global economy. Not even climate change.

Now with Trump out, China has been transformed from a position of vulnerability (following years of Trump ordered sanctions and a debilitating trade deal) to the position of strength on the world stage. In fact, as we've discussed here in my daily notes, with Biden's plan to "normalize relations" with China, the path has been cleared for China to overtake the United States as the global economic superpower.

With that, who is the keynote speaker for this year's event?

The Chinese Communist Party leader, President Xi.

He spoke this morning, calling for coordination and collaboration, emphasizing the globalist way forward for the world (in dealing with the global economy, crises and equal rights), and rejecting the "American first" type of ideology (an implied repudiation of Trump).

As the week progresses through the World Economic Forum agenda, expect to hear more reporting about the role of China in the world (in reverence), the Global Reset ideology (learn more here), and, of course, the rollout of the climate action plan. The U.S. election result has become the greenlight for all of this.

Pro Perspectives 1/22/21

January 22, 2021

There are members of Congress questioning why they should approve a $1.9 trillion aid package, when they just approved a $900 billion package that has yet to be deployed.

They're right, especially with an economy that will have, as of the end of this quarter, returned to new record highs in economic output.

With that, Biden is on a doom and gloom campaign, trying to convince us that they are "beginning from scratch on the vaccine distribution" and that "we are entering the toughest and deadliest period of the virus."

Meanwhile, the states that have held their economies hostage, in effort to get bailout money from a democratic led Congress, are magically opening up. They know the money is coming (with a Democrat controlled Senate and House), despite whatever push back there might be for grandstanding purposes.

This push to get the $1.9 trillion approved will come, over the next couple of weeks, alongside Q4 earnings season, which should continue the trend we've seen this week – i.e. big earnings beats.

Thus far, 86% of S&P 500 companies have reported better than expected earnings. And the expectation of a big 9% earnings decline for the quarter is quickly eroding. We may very well see earnings GROWTH in the fourth quarter of 2020 (compared to Q4 2019). This all doesn't jibe with the doom and gloom economic picture being painted by the new administration. So, the Biden team will be in a race (against improving economic data) to get the $1.9 trillion aid approved, and then will have to find a way to justify another massive trillion-dollar plus package to fund his "clean energy" plan.

Again, as we’ve discussed, this disconnect between (egregious) fiscal profligation and a solid economic recovery (supported by a vaccine in distribution) is a recipe for an ugly spike in inflation. And remember, the Fed has told us that they will sit back and watch inflation until they deem it to be sustainably above their target. That means they will be behind the curve, and chasing it.

On a related note, yesterday we talked about the outlook for much higher oil prices (given the policy headwinds on the fossil fuels industry). What is key in the inflation picture? Oil prices. Though the central banks like to say they look at inflation excluding food and energy, their actions speak louder than their words. When oil prices are on the move, the Fed goes on high alert, and tends to act.

Pro Perspectives 1/21/21

January 21, 2021

Biden has gone to work undoing Trump policies. Among them, reversing policies that led to U.S. energy independence.

With that and the "clean" energy agenda well telegraphed, the coveted stocks by Wall Street have been anything "green," and the shunned stocks have been anything fossil fuels. But guess what stocks have been booming since election day. The same stocks in the industry that Biden promises to end.

Exxon is up 45% since election day. Chevron is up 30%. Conocophillips is up 48%. Phillips 66 is up 55%. EOG resources is up 57%.

Why are these stocks booming? As I said in my November 10 note, 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.

And with the biggest investors in the world (i.e. Climate Action 100+) coordinating to withhold fresh investment in new oil exploration projects, the existing producers will just get more business, and sell production at higher and higher prices.

Since election day, the price of a barrel of oil has gone from $37 to $53. That's up 43%. And its going higher — much higher.

Pro Perspectives 1/20/21

January 20, 2021

We now have a new President. In his inauguration speech, he mentioned China exactly zero times.

In contrast, the Trump administration (Pompeo) spent the past six months calling the Chinese Communist Party "the greatest threat to democracy and freedom worldwide." That's a very clear statement on a very big issue.

But we should expect the Biden administration to walk back on it. Biden has said himself he will "normalize relations with China." And even though his Secretary of State nominee said yesterday that "China poses the the most significant challenge of any nation to the United States" — the language is softer, and actions will be even (much) softer.

With that, China is positioned to be a big winner, as we discussed earlier this month. China goes back to the business that got them so close (pre-Trump) to becoming the global economic superpower — ramping up the global supply chain and manipulating the currency to ensure they maintain global dominance in exporting. That means as the trillions of dollars in U.S. stimulus becomes U.S. consumption, a lot of those dollars will be sent to China for stuff.

This all puts China back on the path of 7%+ growth. They haven't seen it since the first half of 2017 (when Trump entered office). The IMF expects it (7%+ growth) this year.

And that growth is fuel for Chinese stocks, which are bumping up against the Trump-era highs. As U.S. stocks are at record highs and valuations continue to rise, Chinese stocks remain 30% off of 2015 highs.

Pro Perspectives 1/19/21

January 19, 2021

Fourth quarter earnings has kicked off with the big banks. We heard from JP Morgan, Citi and Wells Fargo on Friday. And today we heard from Bank of America and Goldman Sachs.

Were the numbers good? Yes. All beat earnings estimates. Goldman had record revenues. JP Morgan had record profits in the quarter.

Will the numbers get much better as we step through 2021, yes.

Remember, if we look at the economic contraction of last year, the maximum drawdown in economic output, based on the Fed's quarterly readings, was $2.2 trillion. During the same period, the Fed's balance sheet has expanded by $3.2 trillion. And the Federal government doled out $2.2 trillion, with another $2.4 trillion coming down the pike (about $0.5 trillion of which is new money from the December aid, along with Biden's latest $1.9 trillion ask — which will all likely followed by another $1 trillion+).

So, the easy math tells you, the response has far outweighed the damage.

And no coincidence, the value of annualized GDP will have, by the end of this quarter, fully recovered all of the pandemic-induced losses.

With the above in mind, the banks are big winners on a number fronts.

First, the Fed's early and aggressive response to the economic lockdown addressed the stability of the banks immediately. The banks were de-risked, as the Fed became the lender of last resort (the backstop). Credit risks, worn by the banks, were transferred to the Fed. Moreover, the Fed encouraged, if not forced, the banks keep liquidity flowing (make loans).

So while the economy was in various stages of lockdown, business at the banks was good. Deposits soared, mortgages and trading was hot and the banks made millions of ppp loans. But as all of corporate America does, when things get broadly bad for the economy, you take any losses you can and you dial down expectations. In my July Pro Perspectives note, just ahead of Q2 bank earnings, we talked about this …

"We should expect all of corporate America to take this opportunity, in their Q2 earnings reports, to put all of the bad news they can muster on the table.

In a widespread economic crisis, this is their chance to write down the value of anything they can justify, take loss provisions on as much as they can, and set the bar as low as they can, so that in the quarters ahead, they can outperform expectations…

We'll see the kitchen sink of loan loss provisions (i.e. guesses on what losses may materialize in the future) in these reports. They will put these out there, because they can. But remember, the Fed, Treasury and Congress have already pumped trillions of dollars into the economy to keep consumers and businesses solvent. That's a direct backstop (protection) against these ‘provisional loan losses.’

Add to that, the Fed has created tremendous revenue opportunities for the banks. They've eliminated the reserve requirement for banks — taking the ratio from 10% to zero. The banks are now incentivized to make an infinite amount of loans. The Fed has also become a buyer of corporate bonds, reducing risk in the credit markets, which has driven record first half volume in new corporate debt issuance. That drives investment banking business at the big banks. And the liquidity deluge from the Fed has created a broad stock market boom, which drives trading revenue.

With all of this said, don't be surprised if the bank earnings (ignoring loan loss provisions) come in better, and maybe much better, than expected."

The above has all played out. The banks did indeed build a war chest of capital. And the banks did indeed set a low bar of expectations, that they've been beating handily. And now, with a recovering economy and even more stimulus dollars to flood the economy, the banks are in position to begin turning "loan loss provisions" into earnings — at their sole discretion.

As an example, Citi did $11 billion in net income for the full year. That’s after while setting aside $10 billion for loan loss reserves. So, much of that $10 billion will ultimately find it's way to its proper home — the bottom line of the income statement.

Now, add this fuel to the fire: The investment banking business has been red hot with the proliferation of SPACs and IPOs over the past year. But I suspect that's nothing, compared to what's coming. With a multi-trillion dollar clean energy economic transformation plan coming, under Biden and the Dem Congress, the investment banking business is positioned to boom, for the banks.