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December 21, 2020

A year ago, as we were approaching a new year, we talked about the prospects of seeing another late 90s type of boom for the economy and the stock market.

The big theme that paralleled the late 90s boom: An overly aggressive Fed that was tightening into a low inflation, slowly recovering economy.

That's what we had in 1994. That's what we had in 2018.

What happened in '95? The Fed was forced to do an about-face, and by July they were cutting rates. Same thing in 2019, to the month, the Fed was forced to stop tightening and start aggressively easing again.

What happened to stocks, and the economy in 1995. Stocks went crazy, up north of 36% (including dividends). And within three quarters of the Fed's first cut back in '95, the economy was printing above 4% growth.

Similarly, in 2019, stocks had a huge year, finishing up 31.5% (with dividends). And the economy was fundamentally strong, and set up for a big year, coming into 2020. The consumer was in a very strong position. Unemployment was at record lows. Wages were at 11 year highs. Household net worth was at record levels. Consumer credit worthiness was at record levels. The amount of money required for consumers to service debt every month, relative to their disposable income, was near record lows (debt service ratio). And companies were producing record profits.

Despite that setup, instead of having the first hot year for the economy in a long time, we've had the deepest economic contraction in history.

But, now we have visibility toward a fully reopened economy again. And we have a massively stimulative fiscal and monetary backdrop. Meanwhile, household net worth has already recovered to new record highs. The debt-service ratio for consumers remains near record lows. And as more people get back to work, we have a formula for a big 2021.

Add to that, don't forget we have a very big "boom catalyst" ahead.

Remember, the year 2020 was supposed to be the year that 5G (high-speed, omnipresent wireless internet) went mainstream.

How big of a deal is 5G? The CEO of Qualcomm said it will have a similar impact to the introduction of electricity. This is expected to dwarf the lifestyle changes we've seen in the first two phases of the internet.

It's a full-blown fourth industrial revolution. Yet, while the global focus has been the pandemic, the 5G rollout has been, relatively quietly, underway. The next two years are expected to be transformative for the global economy.

This all sets up for something that still looks like a replay of the late 90s boom, when stocks did this …

Remember, that period too, was abound with economic shockwaves (Asian Crisis, Russian Default, the blow up of Long Term Capital Management).

Pro Perspectives 12/18/20

December 18, 2020

We're nearing the finish of a chaotic year at (or near) some important round numbers in key markets. The S&P 500 is around 3,700. Oil near $50. The 10-year yield nearing 1%. And the dollar index is at 90.

Translation: Stocks are on record highs. Interest rates are near record lows. The dollar is weak. And energy is relatively cheap.

If you just had that information to go on, you would probably say the outlook looks very good for economic activity.

As we end the week, let's take a look at some key charts …

First, let's take a look at stocks.

As we discussed earlier this week, small cap stocks historically perform best coming out of recession. And you can see in this next chart, that dynamic has really kicked in over the past six weeks.

Now, we've talked about the repricing of global assets, thanks to the explicit devaluation of money by global central banks. And as you can see in this chart of broad commodities, it's still in the very early stages.

And with most commodities priced in dollars, the outlook for a continued bear market for the dollar (and maybe acceleration of the decline) is fuel for the young bull market in commodities.

Pro Perspectives 12/17/20

December 17, 2020

What’s going on with bitcoin?

Since yesterday morning, the value of bitcoin has ripped by almost 25%, to nearly $24,000 (at the highs today).

That’s a quadrupling in value since March, when global central banks, led by the Fed, pulled out the monetary policy bazooka (an explicit devaluation of money).

So, bitcoin offers a disruptive currency alternative. It also offers an inflation hedge. And as an asset with little to no correlation with major asset classes, it offers some diversification.

These are legitimate reasons to buy bitcoin. With the above in mind, we’ve heard many influential investors come off of the fence, in recent months, in support of the case for bitcoin.

Does that warrant this chart?

Does anyone think the events of the past three months warrant a view that we’re going to see 144% inflation? The Fed doesn’t think we’re going to see anything over 2% inflation in “the long run.”

Paul Tudor Jones, one of the great macro traders of all-time, made the comparison of bitcoin to gold and the Swiss franc.

Interestingly, both gold and the swiss franc have historically been safe-havens — a parking place for money when global investors become uncertainty about global risk (including geopolitical risk).

On the health care crisis front, with a vaccine in distribution the world is a lot less uncertain today, than it was nine months ago. If we believe the election is done deal, then the world today is much less uncertain than it was in September. Yet, bitcoin has more than doubled since September.

What gives?

Part of this safe-haven value in bitcoin, is “hiding.” Back in 2017 bitcoin soared as Chinese citizens circumvented government ramped enforcement of government capital controls, which restricts individuals from moving more then $50,000 out of the country in a year. The Chinese (especially the wealthy) looked to bitcoin as a way to get money out of China. In fact, China cryptocurrency exchanges were said to account for 90% of global bitcoin trading.

Then the Chinese government responded with a total ban on crypto trading activities in China. A few months later, bitcoin futures launched, which gave hedge funds a liquid way to short the madness. Bitcoin topped the day the futures contract launched. A few months later, it was worth 1/6th of its value at the top.

Now we have a new high in bitcoin (three years later). And we discussed the rational reasons for buying bitcoin. But I suspect the furious recent rise might have something to do with money looking for a safe parking place/hiding place. The Department of National Intelligence is due to share its report on foreign election interference to Trump and to Congress any day now. And under a national emergency declaration Trump signed back in 2018 (here — and renewed in September of this year), if any foreign entity is found to be interfering or undermining a U.S. election, or if any American is found to be aiding a foreign entity, assets can be frozen by the Secretary of Treasury.

Pro Perspectives 12/16/20

December 16, 2020

A few weeks ago, at a congressional testimony, Jay Powell talked of "upside risks" to the medium-term outlook — meaning the economy could grow faster and inflation could be hotter than expected.

In today’s post-FOMC press conference, he didn't go there. Even with a large fiscal package coming down the pike (now said to include direct payments to people), he focused on deflationary pressures.

In line with that dovish message today, Powell has told us many times, throughout the year, that he (the Fed) would want to see sustained inflation above their target, before they consider ending emergency policies. That is meant to set expectations that the Fed will be providing maximum support for years.

With that, we can be assured that at some point the Fed will be forced out of their position, and will be chasing inflation.

And it seems pretty clear, that's what they want. After fighting against the risk of a deflationary spiral for the better part of the past 11 years, they want to see inflation. Inflation, they can ultimately tame. Deflation is far more dangerous (potentially untamable).

For markets, we can see this policy reflected in asset prices. Global assets have been/ and continue to be repriced against the currencies that the Fed (and other global central banks) are printing.

With the exception of bonds, as you can see below, there has been virtually no asset left behind.

Pro Perspectives 12/15/20

December 15, 2020

Stocks are up big today as it looks like Congress will agree on a stimulus package that strips our state and local government aid (better known as bailouts for the fiscally irresponsible).

If that's a go, the number is said to be around $700 billion.

That's a fraction of Pelosi's $3+ trillion dollar initial proposal. For the democrats to agree on a much smaller and very targeted package (to aid small businesses and extend the federal unemployment subsidy) they must be confident they can get another package done early next year (to address the Green New Deal agenda), which would indicate they are confident that Biden will be inaugurated AND they will get the Georgia senate seats.

Clearly, getting aid into the hands of people and small businesses removes a huge risk to the economic recovery. What's the state of the recovery? Despite the ramped up restrictions in certain states, Q4 is running a lot hotter than economists have expected.

As you can see in the chart below, the Atlanta Fed is projecting 11.2% annualized growth in Q4, with just a couple of weeks left in the quarter.

Accelerating the bounceback in economic activity is most stimulating for small cap stocks. Why? Which stocks historically perform best coming out of recession? Small cap value.

In recessions, small cap value has a deeper decline than larger cap stocks, but that tends to be followed by an explosive bounce back, and a persistent outperformance over the next ten years (compared to large caps). If we look at performance from the lows of this year, the Dow is up 70%. The Russell 2000 is up more than 100%.

On a final note, the Fed will decide on monetary policy tomorrow. This comes a week after the ECB announced another $600 billion in QE. With that, if they are confident that a U.S. fiscal package is getting done, and foresee the prospects of another package early next year, I suspect they will begin setting expectations for upside risks to inflation. That would get market interest rates moving UP.

Pro Perspectives 12/14/20

December 14, 2020

State electoral votes are being cast today.

And the Pfizer vaccine is being distributed.

Yet stocks finish down on the day. Pfizer, finishes down almost 5%.

But for Pfizer shareholders, this must just be profit taking, right?

Not exactly. If you were a Pfizer shareholder in late January, before it was known that latest coronavirus would become a global pandemic, you have made exactly nothing on your investment by the close of business today, despite having held shares in the first company in the world to inject a vaccine into the arm of a patient.

dec 14 pfe

On that note, if you bought Gilead at the close on April 29, the day Fauci called Giliead’s new drug Remdesivir the new “standard of care” for treating covid, you would be down 28% on your investment.

So, despite winning the race, the shareholders of these giant drugmakers weren’t winners. The real winners in the vaccine race were the tiny biotech companies that received 10-figure gifts from the federal government to pursue a vaccine.

This is what happens to a stock when inject $1.6 billion dollars into an $18 million revenue company. The market cap of NVAX has gone from $700 million to almost $8 billion …

dec 14 nvax 2

Moderna did $60 million in revenue in 2019. The government gave them a billion dollars. The market cap has gone from $6 billion to $61 billion.

dec 14 mod

The lesson: When government money is being deployed in stimulus or emergency aid, the big winners are the small early-stage companies. This was also clear in the Great Financial Crisis (ex. Tesla).

Pro Perspectives 12/11/20

December 11, 2020

The media has given little coverage of the election dispute. And the market has been giving little respect to the associated risk to market stability.

That said, we enter the weekend with eighteen states supporting a lawsuit brought by Texas, against four swing states, and it sits with the Supreme Court.

Let's take a look at it …

This would be a narrow focus for the Supreme Court. It would be about interpreting the constitutionality of state officials changing voting procedures, without going through the legally established protocols (without ratification by the state legislature).

Here’s a good summary of that from the Texas/Trump filing…

If the Supreme Court takes the case, and finds the states to be in violation of the constitution, it would give the state legislatures in these defendant states (all republican-majority) the confirmation of “irregularities” in the vote, and therefore, confirm their mandate to choose the electors to send to the Electoral College.

That would be a path for a Trump win. If, after such a Supreme Court determination, neither candidate were to achieve the necessary 270 electoral votes, the vote would go to the House of Representatives, where each state would represent one vote. The U.S. State House delegation has a republican majority.

We may hear from the Supreme Court later today. We may hear something over the weekend.

Again, the market has been assigning virtually zero probability of disruption. The odds aren’t high, but I suspect greater than zero. That said, the clock is ticking, as the Electoral College appointees are due to vote on Monday.

Pro Perspectives 12/10/20

December 10, 2020

This morning the European Central Bank added more fuel to the fire.

They extended their QE program another nine months and and added another $600 billion. That brings Europe's total monetary response to the pandemic at $2.2 trillion.

Meanwhile, they have a $2 trillion fiscal stimulus package on the table, orginally agreed to in July, but has been held up by opposition from Hungary and Poland.

With that, the heavy lifting, to keep the euro zone economy alive, has been left to the ECB — as it was after the wreckage of the Global Financial Crisis.

The question is, will the ECB follow the lead of Japan at some point, and begin outright buying European stocks? Even the Fed has entered the stock market this year, outright buying corporate bond ETFs.

You can see in the charts below, the impact of the BOJ on Japanese stocks.

Japan started buying ETFs back in 2013, as part of their QE program. They went on to triple the initial amount, and then double that amount. The Nikkei did this (below)along the way. And then the BOJ doubled its annual target for ETF purchases in March, in response to the Pandemic — stocks go up!

Not coincidently, when the Fed announced it would become a buyer of bond ETFs on March 23rd, this year, that was the bottom in broad stock market. Stocks are up 69% since. And you can see what the biggest corporate bond market ETF has done …

With the above in mind, in a world of inflating stock markets, there remains good value in European stocks. The broad European stock market remains 11% from the record highs.

Moreover, if the ECB were to broaden the asset purchase scope to include stocks, they would likely follow the path they have for government debt — the weak spots. With that, as you can see, the Italian stock market could use some help.

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.