September 18, 2017, 4:30 pm EST Invest Alongside Billionaires For $297/Qtr
As I said on Friday, people continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.
We constantly hear about how the fundamentals don’t support the move in stocks. Yet, we’ve looked at plenty of fundamental reasons to believe that view (the gloom view) just doesn’t match the facts.
Remember, the two primary sources that carry the megahorn to feed the public’s appetite for market information both live in economic depression, relative to the pre-crisis days. That’s 1) traditional media, and 2) Wall Street.
As we know, the traditional media business, has been made more and more obsolete. And both the media, and Wall Street, continue to suffer from what I call “bubble bias.” Not the bubble of excess, but the bubble surrounding them that prevents them from understanding the real world and the real economy.
As I’ve said before, the Wall Street bubble for a very long time was a fat and happy one. But the for the past ten years, they came to the realization that Wall Street cash cow wasn’t going to return to the glory days. And their buddies weren’t getting their jobs back. And they’ve had market and economic crash goggles on ever since. Every data point they look at, every news item they see, every chart they study, seems to be viewed through the lens of “crash goggles.” Their bubble has been and continues to be dark.
Also, when we hear all of the messaging, we have to remember that many of the “veterans” on the trading and the news desks have no career or real-world experience prior to the great recession. Those in the low to mid 30s only know the horrors of the financial crisis and the global central bank sponsored economic world that we continue to live in today. What is viewed as a black swan event for the average person, is viewed as a high probability event for them. And why shouldn’t it? They’ve seen the near collapse of the global economy and all of the calamity that has followed. Everything else looks quite possible!
Still, as I’ve said, if you awoke today from a decade-long slumber, and I told you that unemployment was under 5%, inflation was ultra-low, gas was $2.60, mortgage rates were under 4%, you could finance a new car for 2% and the stock market was at record highs, you would probably say, 1) that makes sense (for stocks), and 2) things must be going really well! Add to that, what we discussed on Friday: household net worth is at record highs, credit growth is at record highs and credit worthiness is at record highs.
We had nearly all of the same conditions a year ago. And I wrote precisely the same thing in one of my August Pro Perspective pieces. Stocks are up 17% since.
And now we can add to this mix: We have fiscal stimulus, which I think (for the reasons we’ve discussed over past weeks) is coming closer to fruition.
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Stocks are sliding more aggressively today. Wall Street and the media always have a need to assign a reason when stocks move lower. There have been plenty of negatives and uncertainties over the past seven months — none of which put a dent in a very strong opening half for stocks.
But markets don’t go straight up. Trends have retracements. Bull markets have corrections. And despite what many people think, you don’t need a specific event to turn markets. Price can many times be the catalyst.
If we look across markets, it’s safe to say it doesn’t look like a market that is pricing in nuclear war. Gold is higher, but still under the highs of a month ago. The 10 year yield is 2.21%. Two weeks ago, it was 2.22%. That doesn’t look like global capital is fleeing all parts of the world to find the safest parking place.
Now, on the topic of North Korea, the media has found a new topic to obsess about– and to obsessively denounce the administration’s approach. With that, let’s take a look at the Trump geopolitical strategy of calling a spade a spade.
As we know, Mexico was the target heading into the election. Trump’s tough talk against illegal immigration and drug trafficking drew plenty of scrutiny. People feared the protectionist threats, especially the potential of alienating the U.S. from its third biggest trading partner. We’re still trading with Mexico. And the U.S. is doing better. So is Mexico. Mexican stocks are up 11% this year. The Mexican currency is up 13% this year.
China has been a target for Trump. He’s been tough on China’s currency manipulation and, hence, the lopsided trade that contributed heavily to the credit crisis. Despite all of the predictions, a trade war hasn’t erupted. In fact, China has appreciated its currency by 5% this year. That’s a huge signal of compliance. That’s among the fastest pace of currency appreciation since they abandoned the peg against the dollar more than 12 years ago (which was China’s concession to threats of a 30% trade tariff that was threatened by two senators, Schumer and Graham, back in 2005). And even in the face of a stronger currency (which drags on exports, a key driver of the economy), stocks are up 5% in China through the first seven months of the year.
Bottom line: It’s fair to say, the tough talk has been working. There has been compromise and compliance. So now Trump has stepped up the pressure on North Korea, and he has been pressuring China, to take the side of the rest of the world, and help with the North Korea situation – and through China is how the North Korea threat will likely get resolved.
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June 2, 2017, 3:30pm EST Invest Alongside Billionaires For $297/Qtr
|Join the Billionaire’s Portfolio to hear more of my big picture analysis and get my hand-selected, diverse stock portfolio following the lead of the best activist investors in the world.As we end the week, we have some remarkable market and economic conditions. U.S. stocks printing new record highs by the day. Yields today broke down. The 10 year yield now trades 2.15%. Oil is under $50.We’re set up to massively stimulative fiscal policies launch into an economic environment that is about as primed as it can possibly get.The stock market is at record highs. The unemployment rate is 4.3%. Inflation is low. Gas is cheap ($2.38), and stable. Mortgage rates are under 4%, and stable. You can borrow money at 2% (or less) to buy a car.
This has all put consumers in as healthy a position as they’ve been in a long time.
As I’ve said, the two key tools the Fed used to engineer a recovery was housing and stocks. That restores wealth, which restores confidence, which gets people spending, hiring and investing again. So stocks are at record highs. And housing (as you can see in the chart below) continues to climb back toward pre-crisis levels.
As a result, we have well recovered and surpassed pre-crisis levels in household net worth, and sit at record highs …
What is the key long-term driver of economic growth over time? Credit creation. In the next chart, you can see the sharp recovery in consumer credit (in orange) since the depths of the economic crisis. This excludes mortgages. And you can see how closely GDP (the purple line, economic output) tracks credit growth.
So credit is back on track. Meanwhile, consumers have never been so credit worthy. FICO scores in the U.S. have reached all-time highs.
With all of this said, the consumer looks strong, but the big missing link and structural drag on the economy in this story has been wage growth. What’s the solution? A corporate tax cut. The biggest winners in a corporate tax cut are workers. The Tax Foundation thinks a cut in the corporate tax rate would double the current annual change in wages.
So think about this backdrop. If I told you at any point in history that these were the conditions, you would probably tell me that the economy was already in, or will be in, an economic boom period. I think it’s coming. And it will drive earnings significantly, which will make the valuation on stocks cheap.
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September 26, 2016, 3:45pm EST
All eyes are on the Presidential debate/face-off tonight. Heading into the event, stocks are lower, yields are lower and the dollar is lower — all a “risk-off” tone.
And the VIX (implied S&P 500 vol/an indicator of uncertainty) has popped higher from the very low levels it had returned to as of Friday. Speculators are out today making bets on a political firework show tonight, and thus betting on more uncertainty in the outcome and in post-election policy making.
If we step back a bit though, given the difficulties in getting through the legislative process, the biggest potential market influence from the election may be more about the prospects of getting a fiscal stimulus package done, rather than the many promises that are made on an campaign trail. Both candidates have been out promising a spending package to boost the economy. And on the heals of a package from Japan, and the unknown risks from Brexit, the idea is becoming more politically palatable.
As we discussed on Friday, the Fed has taken a strategically more pessimistic public view on the economy, in effort to underpin the current economic drivers in place (stability, low rates and incentives to reach for risk).
Following the Fed and BOJ events last week, the 10-year yield is back in the 1.50s and sitting in a big technical level. This will be an important chart to keep an eye on tomorrow.
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June 2, 2016, 3:25pm EST
In the middle of June we have perhaps the two biggest events of the year. On June 15 the Fed will decide on rates. And hours later, that Wednesday night, the Bank of Japan will follow with its decision on policy.
This is really the perfect scenario for the Fed. The biggest impediment in its hiking cycle/”rate normalization process” is instability in global financial markets. Market reactions can lead to damage to consumer sentiment, capital flight and tightening in credit—all the things that can spawn the threat of a global economic shock, which can derail global recovery. Clearly, they are very sensitive to that. On that note, the Brexit risk, while a hot topic in the news, is priced by experts as a low probability.
So, the Fed has been setting expectations that a second hike in its tightening cycle could be coming this month. But the market isn’t listening. The market is pricing in just a 23% chance of a hike in June. But as we’ve said, markets can get it wrong, sometimes very wrong. We think they have it wrong this time. We think there is a much better chance. Why? Because they know the BOJ is right behind them. If they do hike, any knee jerk hit to financial markets can be quelled by more easing from the BOJ.
Remember, as we’ve discussed quite a bit in our daily notes, central banks remain in control. The recovery was paid for by a highly concerted effort by the world’s top economic powers and central banks. And despite the perceived hostility over currency manipulation, the powers of the world understand that the U.S. is leading the way out of recovery, and that Europe and Japan are critical pieces in the global recovery. The ECB and BOJ have been passed the QE torch from the Fed to both fuel recovery and promote global economic stability. And playing a major role in that effort is a weaker euro and a weaker yen.
The Bank of Japan is operating with one target in mind, create inflation. Now three years into their massive program, they haven’t posted a positive monthly inflation number since December. Inflation is still dead, just as it has been for the past two decades. So, not only do they have the appetite and global support to do more, but the data more than justifies more action.
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