Pro Perspectives 12/9/20

December 9, 2020

There are now seventeen states that have joined Texas in the lawsuit that sits with the Supreme Court, and attempts to delay the Electoral College vote and prevent four states (Georgia, Michigan, Pennsylvania and Wisconsin) from casting their Electoral College votes for Biden.  

The Supreme Court has given the defendants (the four states) a deadline of Thursday at 3pm to respond. 

As a result, we are getting a tick up in the VIX today, and a slide in stocks. 

What would be the first stock to sell if the election outlook were to grow murkier if not overturn?  Telsa.

Tesla has made a huge run since the Pandemic was globally recognized back in early March.  As of this morning, the stock was up 12x from the lows of mid March. 

Why?  If you believed that the Pandemic would derail a Trump re-election, and clear the path for the Green New Deal, then Tesla represented the global climate action cooperation trade — the anti-oil trade.  As such, money has plowed into the stock, from around the world, seemingly indiscriminately. 

Tesla is priced like it is designed to destroy the auto industry.  At the close today, the market value of Tesla is equivalent to Toyota, Volkswagen, Daimler, GM, BMW, Honda and Ford combined.

That has made Elon Musk the second richest person in the world. 

How did he get there?

The Obama administration loaned $465 million to the broke electric vehicle company (at the time) back in 2009, at the depths of the financial crisis (under the strategy of "investing in emerging technology").  Tesla had a new CEO (Elon), was burning cash and amassing liabilities, and had yet to produce a consumer viable car.  The government money changed the game.  When the government money hit, big institutional money aggressively followed it. 

Fast forward eleven years, and we now have the auto industry killer, in Tesla.  

That era also spawned Facebook, the killer of traditional media.  Uber, the killer of the rental car and taxi industry.  Airbnb, the aspiring killer of the hotel industry.  It ignited Amazon, the killer of the retail industry.  And now, with the IPO of Doordash today, we have a company that looks like a partner for restaurants, but more likely designed to be the killer of restaurants.  Doordash in its public trading debut today is valued at $72 billion (worth more than Chipotle, Dunkin Brands, Outback Steakhouse and Darden Restaurants combined).  
 

Pro Perspectives 12/8/20

December 8, 2020

The negotiations continue over a second Covid relief package.  While both sides have shown optimism in getting a deal done, it seems like "smaller" is the likely outcome.  

McConnell seems to be dug in and confident that the Democrats are coming to his number, which won't include state and local government money. 

With that, the stock market has probably well priced in another half-a-trillion dollar bridge to get consumers and small businesses through the next few months.

Meanwhile, today is 'Safe Harbor' deadline for the election.  This is the final day to resolve election disputes, assuming the Electoral College would vote six days from now.  But the election challenges have now (as of today) been elevated to the Federal Supreme Court — one from Pennsylvania republicans, and the other, a lawsuit filed by the state of Texas, attempting to delay the Electoral College vote and prevent four states (Georgia, Michigan, Pennsylvania and Wisconsin) from casting their Electoral College votes for Biden.  Scotus has put the Texas suit on the docket. 

This is an event that markets have been ignoring and assigning virtually zero risk to.  The chances of an election overturn at the Federal Supreme Court may not be high.  But it's not zero.  

Meanwhile, the VIX ends the day near the pandemic-era lows. 

Pro Perspectives 12/7/20

December 7, 2020

Back in the depths of the Global Financial Crisis, while the world was suffering and asset prices were collapsing, China began stockpiling cheap commodities.  With about $1.7 trillion of U.S. dollar reserves, they went on a commodities buying binge, picking up the world's most valuable natural resources on the cheap. 

That led to charts like these …

Crude oil tripled from the 2009 bottom, in less than a year. 
And copper had a V-shaped recovery in 2009. 
 

China's inventory of base metals doubled in 2009.  Their copper inventory went up four-fold.  The binge included food (corn, pork, soybeans).  

Was this a power play?  It appeared that way.  China was doing well, while major developed market economies were suffering.  And not only did they stockpile key commodities, but they forced key commodity prices much higher, creating an greater burden for economic recovery for the rest of the world.  

But it didn't last.  Soon, it became clear that the Chinese economy couldn't sustain, without healthy global trading partners.  The Chinese economy ultimately plunged, and commodity prices plunged with it.

This time around, with a new global economic crisis, China appears to be on another commodities binge.  And this time they have a bigger war chest of dollars to work with, and they are leading the world in economic activity coming out of the global recession.  We should expect them to continue stockpiling key commodities, and driving prices much higher. 
 

Pro Perspectives 12/4/20

December 4, 2020

The jobs report this morning had few surprises. 

However, it is being positioned as a "dire" report, as a political tactic to gain more leverage in stimulus talks.

Let's look at the facts …

The new jobs added in November came in lower than expected, but still well above the average pre-pandemic monthly job gains.  Slower job growth shouldn't be too surprising given that certain states went back into economic restriction mode over the past month.  

The unemployment rate ticked down to 6.7% (the lowest post-Pandemic level).  Wage growth came in at 4.4% in November, a bit better than expected.  That's good news. 

The labor force participation rate has been steady since June. 
And the underemployment rate continued to tick down, for the seventh consecutive month.
Now, given the context of a vaccine coming around the corner, this jobs report proves the recovery has been good and remains in a good place.

In fact, with the addition of the economic data of the past week, the Atlanta Fed's GDP model is now projecting 11.2% annualized fourth quarter growth. If that were to hold, we would have a down 5% Q1, a down 31.4% Q2, an up 33.1% Q3 and an up 11.2% Q4 (all annualized numbers). 

 

That would reflect a recovery of all of the economic output losses from the Pandemic — inside of one calendar year. 

That's thanks to the effectiveness of the policy response (both monetary and fiscal).  And from this policy response, despite the hardships, the personal savings rate (at 14%) remains elevated, at the highest levels since the mid-70s.  Liquidity remains plentiful.  That's why asset prices continue to float higher and higher. 

Pro Perspectives 12/3/20

December 2, 2020

Yesterday we talked more about the set-up for inflated economic growth next year, inflated prices and higher wages.  

With that, let's talk about tomorrow's jobs report, which will include a read on wages.

First, unemployment is expected to continue the move lower.   

Within the jobs report we will get November average hourly earnings (wages). 

This is an important number.  Remember, this (wage growth) was one of the missing pieces in the decade-long slow economic recovery from the Global Financial Crisis. Despite what looked like a hot jobs recovery, it did not come with wage pressures. That was a reflection of underemployment issues (the barista and gig economy) and a structurally flawed economy (driven by the damage from global trade imbalance).  With that backdrop, we got sluggish growth and weak inflation — an unusually weak recovery from a recession.

This time around, in the recovery from the Global Health Crisis, wages will have to reset, higher.  The monetary and fiscal response this time was bigger, bolder and with major inflation ramifications (maybe extreme). We're already seeing it in asset prices.  And it's early days in the reset of commodities prices.  To keep up with higher cost of living, wages will have to go higher. 

The good news:  We're already seeing it.  As you can see in the chart below, thanks to hazard/essential worker pay increases and Federal unemployment subsidies, wages have spiked.  But, importantly, as the unemployment rate comes down, people going back to work are commanding higher wages.  Wages are sustaining in the 4%+ area (well above the wage growth of the past decade).  The expectation from the report tomorrow is for 4.3% yoy wage growth in the month of November.  

Pro Perspectives 12/2/20

December 2, 2020

Powell and Mnuchin have been on Capitol Hill the past two days.

Yesterday, the Fed chair said that "in the medium term there is upside risk."

"Upside risk" to the economy means, hotter growth … driving hot inflation. 

This is what you get when trillions of dollars in government and Fed stimulus meets the prospects of a 'return to normal' (via a vaccine). 

We've seen inflation in asset prices already.   We're going to see (more, and persistent) inflation in daily living expenses.  And to maintain the standard of living, we will have to see wage inflation (higher wages). 

This backdrop means higher market interest rates are coming.  And the government bond market is beginning to reflect it. As you can see in the chart below, the ten-year yield is threatening the break of a multi-year downtrend. This would support the thesis we discussed last month, that the vaccine announcement may have been the catalyst to end of the nearly forty-year bull market in bonds (bond prices go lower, interest rates go higher).

This theme is also very positive for gold.  And gold has given us a gift over the past few months, to buy into an 18% correction.  That correction looks like it's over now. With that, here is another look at the upside target for gold we discussed last week ($2,700) …

Pro Perspectives 12/1/20

December 1, 2020

Stocks were up big today on news that the Senate had a bi-partisan proposal for a second relief/stimulus package.

The number was $908 billion.  That's far short of what Pelosi has looking for.  And, if deployed prior to January 20th, that's far short of what Biden would need to implement the big clean energy/economic transformation plan.

So, as we've been discussing, it's unlikely to happen.  What today's proposal could do, is open the door for Trump to repurpose the nearly half a trillion-dollars in unused funds from the original Cares Act, and deploy it by Executive Order. 

The prospect of a second stimulus package, bridging the economy to a vaccine, is yet more fuel for the fire under asset prices.  With U.S. stocks on record highs, there is money searching for value. 

With that, let's take a look at a couple of charts (outside of the U.S.) that look like there is plenty of room to run, in a world where cash is being devalued against asset prices …

Pro Perspectives 11/30/20

November 30, 2020

The broad stock market (S&P 500) finishes the month of November up 11%.  

Among the biggest movers for the month have been those companies that would benefit from the Biden economic plan, which outlines a wholesale transformation of the economy, to clean energy.

Within that bunch of clean energy stocks, electric vehicle stocks have been the favored bet.  None have been more favored than Tesla.  Telsa was up as much as 52% for the month.   At the close today, the stock is up 584% on the year. 

Let's take a look at six publicly traded electric vehicle companies that are fighting for market share.  

Lordstown …

Nikola …

Fisker …

Nio Inc. …

Li Auto …

X Peng …

As you can see, these stocks have all soared since election day.  That’s on the underlying bet that Biden will make good on regulating away the oil industry.

But given these charts, I think it’s fair to say, the risk to the presumed election outcome is being priced at zero (zero risk).  I suspect it’s higher than that – maybe a lot.  

With that, Tesla has a key reversal signal today (an outside day, circled below). That’s worth paying attention to …

Pro Perspectives 11/25/20

November 25, 2020

Stocks have aggressively moved higher from the lows of March.
 
The crash in stocks was fierce, but the recovery has been even more fierce — up 66% now, from the March 23rd lows. 

And we are just beginning to see what asset prices look like when the visibility on a “return to normal” meets an unprecedented sea of global liquidity. 

 
Just how big is the sea (of liquidity)?  Remember, not only has the Fed and other global central banks flooded the world with trillions and trillions of new money, but the Fed removed the reserve requirement ratio for banks.  It's now zero.  At a zero reserve requirement ratio, the stock of money could increase infinitely.

Translation:  The value of money has been destroyed, which means the price of assets go up!

 
Cash is the worst place to be.  Be long asset prices.  
 
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Pro Perspectives 11/24/20

November 24, 2020

Stocks are back at record highs. 

Real estate prices are at record highs.

Bond prices, are (still) near record highs. 

Copper, an industrial metal that tends to be an early signal of an economic turning point, is nearing a breakout to a seven-year high.

All of this, while oil, the most highly traded commodity in the world, remains more than 30% lower than the highs of just this year. 

But oil is on the move.  

The day before the election, oil made a low of $33.64 a barrel.  It's now up 34% from that level. 

And as you can see in the chart below, the yellow line is the highest price traded in the crude oil market in the past eight months.  That was broken today. 

What's most interesting, is that this move in oil comes as money is pouring into electric vehicle related stocks (the anti-oil trade). 
 

This demand for electric vehicle stocks is, of course, driven by the clean energy/Biden plan.   And with a presumed next President that has vowed to kill the fossil fuels industry in the U.S., most would expect oil prices to be heading toward zero. 

But as we discussed earlier this month, 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.