Pro Perspectives 1/14/21

 

January 14, 2021

Biden is set to unveil his stimulus plan tonight. 

This comes as Congress just passed $900 billion of aid in late December, about half a trillion of which was unspent from the original Cares Act from March.

Meanwhile, we have a vaccine in distribution.   The economy is nearly back to pre-pandemic economic output levels.  And even leaders of locked-down states and cities are changing their tune, pushing to open up.

So, one might ask, why do we need another multi-trillion dollar aid package?

We already have an exploding deficit and asset prices are ratcheting up day-in and day-out, eroding the buying power of the dollars in our pocket.  Why pour (more) gasoline on the fire?

Over the past 10 months, we’re now looking at three tranches of federal stimulus/aid, that total $4.5 trillion — all borrowed.  And there’s talk that he wants a separate/additional package to address his economic transformation/ clean energy plan.  With an aligned Congress, he will get it.

If that type of deficit spending doesn’t sound like something you would like to be a creditor too, you’re not alone.

And that’s why global investors are selling U.S. Treasuries, and those willing to buy (lend) are commanding higher compensation (higher yields).  And with that, it’s early days in a new long-term bear market for U.S. government bonds.  That means higher rates.  It’s a matter of how high, and how fast they move.

Pro Perspectives 1/13/21

January 13, 2021

The Washington Post ran a story at noon on January 20, 2017 with the headline, The campaign to impeach President Trump has begun. 

While much of the the next three years was under the cloud of impeachment threats, the actual impeachment vote in the House didn't come until December 19, 2019.  The Senate trial started on January 22nd, 2020 — and it ended on February 5th in acquittal.   

So, just a year later, and they have voted on a second impeachment.  But its reported that the Senate won't reconvene (prior to the inauguration) to hold a trial. 

So it’s not about removal.  Among the motivations of the democrats is to disqualify Trump from running for President again (as Pelosi admitted in her recent 60-Minutes interview).  With that, the Senate may try this after Trump is out. 

Importantly, this political chaos in the U.S. has weakened the U.S. economically, not just in this pandemic recovery, but over the course of the four-year term.  And it has opened the door for China to emerge as the global economic superpower. 

Remember, we looked at this China superpower scenario prior to the election.

As I asked then, what rational person thinks it's a good idea for a communist country to become the global economic superpower?  I suspect they won't be promoting democracy. 

And you can see in this survey we looked at last October (from Pew Research) China is nearly there already, i.e. global economic superpower …

This is a sample population survey, asking people around the world who they believe to be the leading economic power in the world.  This results of this study demonstrate where China has been buying influence (on that front, many gains were made in the global financial crisis) and how China’s neighbors feel about the prospects of a world led by China (i.e. not so fond of the idea).
 
With this in mind, while most of the world continues the pursue an exit from pandemic-induced recession, China is set to do the hottest growth (better than 7%), in four years (since Trump got entered office).  
 

Pro Perspectives 1/12/21

January 12, 2021

Global assets have been repricing over the past ten months, driven by the Fed's decision to go all-in to support the economy back on March 23rd. 

But oil has been a laggard, still about 20% off of the highs of last year. 

Remember, last year the May oil futures contract traded negative, deeply negative (as low as -$41/bbl).    

Why?  The largest oil ETF didn't factor in a scenario where the global economy would lockdown, and then two of the most powerful oil producers would collude to flood the world with oil supply.  

 
That created a situation where there was little-to-no storage around the world for oil.   And when this large ETF was forced to roll its May contract (i.e. sell it to move into the new front-month contract), there were no buyers.  Prices went negative. 

So, this was technical issue.  I suspect you were never paid to gas up the car.  And the price of oil has since made its way back to as high as $53 today. 

 
But this oil price recovery is in the face of structural headwinds for the oil industry.  
 
Remember, the money that has been pouring into the electric vehicle stocks (e.g. Tesla), has represented the anti-oil trade. 

The Biden clean energy plan vows to kill the fossil fuels industry in the U.S.

With that, most would expect oil prices to be heading toward zero.

As you can see in the chart, that's not the case.  In fact, since the election, it's risen alongside Tesla. 

Why?  If Biden regulates the U.S. shale industry into extinction, OPEC will be back in charge.  And oil prices will go much higher, even in a world that’s transitioning to cleaner alternatives to oil. 
 

Pro Perspectives 1/11/21

January 11, 2021

We talked about the push higher in yields last week. 

That continues today.  The 10-year yield is now trading up to 1.14%.  That’s still very low.  But the rate of change is huge.  That's a rise of 25 basis points in a week, against a very low base. 

This is a potential disruptor to keep an eye on, for stocks. 

Remember the taper tantrum? 

In 2013, just a few months into QE3, the Fed began setting the table for reducing the size of its bond buying program, and telegraphing a QE exit strategy.  Rates went crazy.  In four months the 10-year traded up to 3% from 1.6%.   As a result, in June of 2013, mortgage rates jumped a half a percentage point in a week (the biggest one week move since 1987).  And that was in a very, very fragile housing market.  Stocks had an 8% drawdown and then a 5% drawdown within those four months.  

So it created volatility, but stocks ended the year up big in 2013.  

This time around, a sharp move higher in rates would be painful for confidence, especially if it involved foreign selling of U.S. Treasuries.  But importantly, we don't have to wonder if/when the Fed might respond to a destabilizing force.  We know they are on red alert and will do anything/everything to maintain confidence and stability — even if it means outright buying stocks.  
 

Pro Perspectives 1/8/21

January 8, 2021

We've talked this week about yields, as the spot to watch for the signal that the market is coming to the conclusion that, not just some inflation, but hot inflation is coming.

With that in mind, here's the chart on the U.S. 10-year yield …

Rates are breaking out – up 21 basis points, just six days into the year.
 
This reflects a Democrat Congress and President with a plan to pour gasoline on a fire of global liquidity (through another stimulus package). And that reflects the expectations that inflation is coming down the pike.
 
Now, add to this, one of the missing pieces in the inflation puzzle of the post-Great Financial Crisis era was the lack of wage growth.  That has changed. 

This morning's jobs report showed wages growing at 5.1% year-over-year (chart below)…
This reflects demand for labor that's competing with a government paycheck. You have to pay them more to them back to work.  And it reflects raises and bonuses that were given to essential employees at the depths of the health crisis.  Not surprisingly, those pay increases are proving to be "sticky." 

We've talked about this dynamic since the Fed went all-in back in March.  We were looking at a reset of asset prices.  We were looking at a reset of wages. We’re getting both.  

Pro Perspectives 1/7/21

January 7, 2021

Congress formally certified Biden overnight.  So, we officially have a Biden presidency and an aligned Congress.  With that, we know what's coming. 

The Biden Plan calls for a "100% clean energy economy" and "net-zero emissions no later than 2050."  This is a "tranformation of the economy" undertaking, and now he will have support in Congress to fund it and execute on it. 

That means something in the neighborhood of another trillion-dollars of deficit spending is coming.  And expect re-allocation of whatever is needed out of the $908 billion stimulus recently passed. 

The clearest manifestation of this bet on Biden has been Tesla, which has now risen more than 12x since March … 

Tesla is now valued at $770 billion because it makes cool cars, it's a clean energy company.  The biggest, most well funded and most powerful. This company gets to start the U.S. clean energy transformation in the pole position.  With that, the Green New Deal will likely make Tesla the Amazon of energy. 

The next big winner in the Biden presidency will be China.  Biden wants to "normalize" relations with China. That means 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 China can get back to 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.  
Expect Wall Street to return to the Obama-era mantra of:  investing in China, and passing of the economic torch to Asia. 

Pro Perspectives 1/6/21

January 6, 2021

We've talked about the prospects for increased risk to confidence, surrounding the Electoral College count.

The expectation was that the risk to confidence would involve the objections to certain state delegates, and the potential for those states to be asked to clarify the constitutionality of the vote on those delegates.  

The debate on the first objection was just getting underway this afternoon when the Capitol was overtaken by protestors.

Despite that, stocks held up throughout the afternoon. That's because the Senate race in Georgia looks like a democrat sweep, which would flip the Senate under a Biden presidency. 

That scenario means a big government spend coming down the pike.  And to be sure, adding a multi-trillion-dollar spend to the existing mix of fiscal and monetary stimulus means the value of your cash is being trashed. 

With that, it's (continued) lift off for asset prices today.  Translation: the value of your money goes down, the price of things go up. 

And as we discussed yesterday,  the 10-year yield is the spot to watch for the signal that the market is coming to the conclusion that, not just some inflation, but hot inflation is coming — and that the Fed will be caught behind the curve.

With that, even though the Fed continues to gobble up Treasuries, the yield on the 10-year traded as high as 1.05% today — the highest since March 20th.   

Add to that, if you're a global investor holding U.S. Treasuries, the domestic chaos today gives you even more reason to exit what has long been deemed the safest, most liquid investment in the world (the U.S. Treasury market).  That, of course, puts more downward pressure on Treasuries, upward pressure on rates — which would mean an even bigger challenge is ahead for the Fed. 
 

Pro Perspectives 1/5/21

January 5, 2021

As we discussed yesterday, a democrat sweep in today’s Georgia Senate race would likely lead to a multi-trillion dollar government spend on a clean energy plan, under a Biden presidency and aligned Congress. 

That’s the bet being placed today across financial markets.  A big government spend would add even more fuel to the asset price fire, putting “inflation risk” (and maybe hot inflation) in the crosshairs. 

With that “hot inflation” scenario in play, commodities are up big today.  The dollar is down.  And rates are on the move, up. 

The 10-year yield will be the spot to watch in the first half of the year as the market begins to project this scenario where the Fed, for the first time in a long time, will be caught behind the curve on inflation. 

But despite the big move in gold yesterday, and the despite the follow through today of this 2021 inflation theme, I suspect we can take very little information from the first two trading days of the year, at this point.  That is, unless tomorrow’s joint session of Congress produces no drama.  Every indication points to the opposite.   

Yet, with a VIX today at 25, the markets continue to underprice the risk of chaos surrounding the Electoral College count tomorrow.

 
The likely scenario is for the session to play out beyond tomorrow (to follow objection procedures), with the potential that the six states that sent competing slates of delegates be asked to clarify which should be counted (which could open the door to a special session in those states and an investigation).  Bottom line, it’s unlikely to be a quick and tidy stamp for Biden.  Markets won’t like that, and we should see “risk off.”  Perhaps the market that has been giving us that signal the clearest, since election day:  Bitcoin.  

Pro Perspectives 1/4/21

January 4, 2021

Happy New Year!  This time last year, we were talking about the prospects another late-90s type of boom for the economy and for stocks, as the Fed was forced to reverse course on overly tight monetary policy (making 2019 similar to 1995).   

We also entered 2020 with the introduction of 5G on the agenda, the end to the trade war, and global fiscal stimulus underway (beginning with Japan).

With this economic-boom cocktail, it looked like another "roaring twenties" was ahead.  Instead we kicked off the new decade with a global pandemic.  But the ingredients remain in place for another roaring twenties. 

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), the 2020s will be defined by innovation (omnipresent connectivity via 5G).   Add to that, we now have trillions of dollars of new money floating around to fund this next wave of the information revolution. 

Now, we also had economic shock risks as we entered last year (even prior to the virus), with an escalation of U.S./Iran tensions. 

This new year, we have plenty of risks to consider.  

Tomorrow we get the state senate runoff in Georgia.  A democrat sweep would open up a scenario of a Biden presidency and aligned Congress, which would likely lead to a multi-trillion dollar clean energy spend.  That would add even more fuel to the asset price fire, putting "inflation risk" (and more likely hot inflation) in the crosshairs.  We saw some of that view materialize in markets earlier today with gold and broad commodities higher, the dollar lower.   Going into tomorrow's election, both the oddsmakers and the polls have the edge going toward both democrat candidates.

On January 6th, Congress will formally count the electoral college votes.  The expectation is that it will be objected by members of the Senate and the House.  It should be a wild day — and stocks have just started pricing-in some of that risk today.  

Pro Perspectives 12/23/20

December 23, 2020

It’s been an eventful year, and I hope you’ve gained some valuable bigger picture perspectives on markets, the economy and geopolitics.
 
On that note, next year promises to be even more eventful and full of huge opportunities in a year that will be transformative in a number of ways.  We have trillions of dollars in global monetary and fiscal tailwinds meeting the adoption of 5G, which Qualcomm’s CEO calls the most revolutionary technological advancement since electricity. 
 
We’ve had another great year in my private, members-only service, the Billionaire’s Portfolio — and with the dynamic I’ve just mentioned above, I expect to do even better next year.
 
With that, if you’ve found my daily notes useful over the years, I hope you’ll join me by becoming a member for the new year.
 
It’s a great deal for the money. And I think you’ll find it extremely valuable as we enter a huge year for the economy and what I think will be another big year for the stock market.
 
Here’s what long-time subscribers have to say about it …
 
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Many of these members have been in the service from inception – for eight years, and span the gamut, from novice investors to experienced investors … from those early in their careers to those accomplished and retired … from financial advisors to high profile institutional investors.

Our members are a discerning group: young professionals, entrepreneurs, C-suite executives, investment bankers, doctors, lawyers, professional investors, academics, engineers – you name it.

They all have one thing in common: they understand the value of having an edge in investing.   
 
You can join them, by clicking here to subscribe. When you do, you will get immediate online access to see my full portfolio of billionaire-owned stocks, all primed to capitalize on a changing economy in 2021. And you will see every recommendation, past, present and future, in the portfolio.
 
I look forward to welcoming you aboard, and navigating together through the new year! 

Thanks very much for being a loyal reader of my daily Billionaire’s Pro Perspectives.
 
I'll be taking off the remainder of the week and next week to spend time with my family. So this will be my last note for the year.
 
My best wishes to you and your family for a Happy Holiday and a profitable New Year!