July 26, 5:00 pm EST
Tomorrow we get the second quarter GDP number. We’ve gone from a consensus view that didn’t believe in the economic momentum, or in the value of fiscal stimulus, to a consensus view that is now looking for more than 4% annualized growth for the second quarter. The switch has flipped in just the past few months.
As a goal for the economy, we hear the 3% growth number thrown around quite a bit. That’s right around long-term trend growth (trend growth is a little higher). But the GDP report that gets the most attention is a quarterly annualized number, which is more of a reflection of what the economy would look like if we moved forward over the next few quarters with similar economic activity. That can be a very volatile number. And we can see big numbers, in good economies and in bad economies. This is where the politicians like to find ambiguity to argue over. The pro-Trumpers will say we’re growing at 3%, something Obama never achieved. And the Obama defenders will point to several 3%+ annualized quarters in the Obama era.
What’s more informative is the average annualized growth over the past four quarters. That’s where you can see smoother trends and considerable improvements in the Trumponomics world.
On that note, we may finally hit that 3% number tomorrow. If the GDP number comes in tomorrow at the Atlanta Fed’s expectations (4.5%), we will have the hottest growth since June 2006.
A 4.5% second quarter number would put the four-quarter average annualized growth at 3.175%–the highest since the pre-financial crisis days. You can also see in the chart, the steady improvement in growth since the election, first driven by the optimism of pro-growth policies, and now driven by policy execution, as deregulation and tax cuts are working through the system.
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January 4, 4:40 pm EST
We kicked off the New Year continuing to discuss the theme of a hot stock market ahead (again) and a hotter than average economy (finally). Stocks continue to comply, with a big start – led by Japanese stocks today, up 2% on the day and up 4% on the year already.
It’s important to realize, the economic crisis was global. The central bank response was globally coordinated, led by the Fed. And, as we discussed early last year, everyone should hope Trumponomics works, because the global economy will benefit in coordination. And that’s what we’ve been seeing over the past year.
Of course, now we’re getting policy execution on that front, and we’re seeing the rising tide of the U.S. economy lifting all boats.
How high will that tide rise? As I said yesterday, if we add pro-growth policies that are being executed out of Washington, to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.
Let’s take a closer look at that economic growth picture.
Remember, in typical recessions, we should expect to get a big pop in growth to follow, due to policymaker responses to the slowdown and the natural upturn in the business cycle. In the Great Recession, we haven’t gotten it — after TEN years.
For the more than 50 years of history prior to the global financial crisis, U.S. economic growth averaged 3.5% (rolling four quarters). We’ve since averaged just 1.5% (over the past ten years). With that underperformance, the U.S. economy has foregone about $3 trillion dollars in real GDP growth, from being knocked off path by the global economic crisis. We’re due for a period to make up that ground.
On Tuesday we talked about the prospects of a return of “animal spirits” this year, for the first time in a long time. This is what can drive a period of economic growth that does better than the long term average. This animal spirits kicker may be the real theme of 2018.
But what is it?
Economics is about incentives. Economists think you’ll make rational decisions, with the incentive to best serve your interests. But emotions come into play. These emotions might cause you to be more risk-aversein times where policies incentivize you to take more risks, and vice versa.
This “emotion override” has been the problem over the past decade. The Fed gave us all abundant incentives to go out and borrow and spend, to stimulate the economy. But the scars of the housing crash, joblessness and overindebtedness were too great. People saved. They paid down debt. That didn’t trust the outlook. The Fed wanted us to take risk and they got risk aversion.
It has taken a regime change and an ultra-aggressive fiscal stimulus and structural reform response to finally break that mindset. The execution on tax cuts looks like the catalyst that has gotten more people off the fence, and believing in a rosier outlook. But I don’t think anyone would argue that confidence is broadly running hot (animal spirits) – much less, in a state of euphoria (which would justify concern of a top in markets and the recovery).
Robert Shiller (Yale economist) describes animal spirits like this: There are good times when people have substantial trust… They make decisions spontaneously. They believe instinctively that they will be successful.”
We’re not there yet, but we may begin seeing it/feeling it this year. And with that, we may see some hot growth over the coming years.
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November 27, 2017, 4:30 pm EST
U.S. stocks printed new record highs again today, as numbers come in for the Black Friday period, which carries through Cyber Monday.
The National Retail Federation has projected about 4% growth in the number from last year, which is better than the past two years, but a bit softer than 2014, 2011 and 2010.
But it’s a safe bet we’ll see better than expected numbers before the shopping season is over. If we take the Atlanta Fed’s GDP forecast for the fourth quarter (which admittedly changes like the wind), we’re on pace to have the second hottest growth for the year, since the Great Recession. And, of course, consumers are in as healthy a position as they’ve been in a long time—housing prices are nearing pre–crisis levels, household net worth is on record highs, consumer credit is on record highs, but so is consumer credit worthiness.
Add to that: The stock market is at record highs. The unemployment rate is 4.1%. Inflation is low. Gas is cheap ($2.38), and stable. Mortgage rates are under 4%, and stable. And you can borrow money for five years at 2% to buy a car.
And then there’s the confidence the economy is improving and that a raise is coming (through tax cuts and a corporate tax cut which should ultimately drive wages higher). Here’s a look at the Conference Board’s Consumer Confidence Index—at 17–year highs…
Later in the week we’ll hear from OPEC on their plans to extend their production cuts to keep the upward pressure on oil prices. We’ve talked about the case for an explosive move higher in oil prices, given the impact the oil price crash of last year has had on supply. Meanwhile demand has picked up, and OPEC has been cutting production into this scenario. As we sit about 20% higher in oil prices since OPEC announced its first production cut in eight years (last November), there are now some building voices for much higher oil prices as we head into this week’s meeting.
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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March 1, 2017, 4:00pm EST Invest Alongside Billionaires For $297/Qtr
As we discussed last week, the Presidential address to the joint sessions of Congress last night was a big market event. And as I discussed yesterday, growth and fiscal stimulus needed to be moved to the front burner of the daily narrative. The President delivered last night.
After he began speaking, one of the early headlines on my Reuters feed last night: TRUMP SAYS HE WILL BE ASKING CONGRESS TO APPROVE LEGISLATION THAT PRODUCES $1 TRILLION INVESTING IN INFRASTRUCTURE FINANCED THROUGH BOTH PUBLIC AND PRIVATE CAPITAL.
Bingo! There’s a lot of talk about the inspiration of the speech, but growth is king in this environment, after 10 years of malaise and no improvement in sight. And the focus has shifted to growth. Stocks have had a huge day. Meanwhile, yields have been up but relatively tame. Gold has been down, but relatively tame. And the dollar has been up, but relatively tame.
German 2 year yields, which have been the sour spot, as they’ve slipped toward -1% in the past week, were up bouncing nicely today.
It’s not uncommon to see big global market participants ignore all else in key market moments, and just focus on one spot. That has been the case. And that spot is the stock market. The U.S. stock market is where the impact of a trillion dollar infrastructure spend, a massive tax cut, and broad deregulation can be most directly influenced and, as importantly, stocks are capable to absorbing large, large amounts of capital.
Now, it’s time to revisit some great catch up trades I’ve discussed for a while: German and Japanese stocks. A better U.S. is better for everyone, make no mistake. Hotter growth here, will mean hotter global growth, and it gives Europe and Japan a shot at recovery, especially with their central banks priming the pump with big QE, still.
On that note, let’s take a look at the charts …
So you can see the same period here for U.S., German and Japanese stocks, dating back to 2012, when the European Central Bank stepped in with intervention in the European sovereign bond market (at least promised to do so), that turned global economic sentiment and then then Japan came in months later with promises of a huge stimulus program. All stocks went up.
But you can see, stocks in Europe and Japan have yet to regain highs of 2015, after the oil price crash induced correction.
These stock markets look like a big catch up trade is coming, and it may be quick, following the catalyst of last nights U.S. Presidential address.
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February 23, 2017, 4:30pm EST Invest Alongside Billionaires For $297/Qtr
Yesterday we talked about the warning signal flashing from the German bond market. That continues today.
While global stocks and commodities are reflecting broad optimism about the new pro-growth government in the U.S., the yield on 2-year German government bonds is sending a negative message — it hit record lows yesterday, and again today — trading to negative 90 basis points. You pay almost 1% to loan the German government money for two years.
Here’s a longer term look at German yields, for perspective…
And here’s the divergence since the election between German and U.S. 2 year yields…
This divergence is partially driven by rising U.S. yields on optimism about the outlook, about inflationary policies, and about the Fed’s response. On the other hand, German yields have gone the other way because 1) the ECB is still outright buying government bonds through its QE program (bond prices go up, yields go down), and 2) capital flows into bonds, in search of safety, because a Trump win makes another populist vote in Europe more likely when the French elections role around in May.
So that bleed to new lows in the German 2-year yield sends a warning signal to global markets. Today we have a few more reasons to think this could be a signal that the optimism being priced into U.S. markets at the moment could take a breather here.
Trump’s Secretary of Treasury, Mnuchin, was doing his first rounds on financial TV this morning and gave us some guidance on a timeline for policies and impact. Most importantly, he says we’ll see limited impact from Trump policies in 2017, and that the growth impact won’t come until 2018.
Let’s consider how that can impact where the Fed stands on their forecasts for monetary policy.
Remember, they spent the better part of 2016 walking back on the promises they had made for 4 rate hikes last year. And then, when they finally moved for thefirst time this past December, following the election and a rallying stock market, they reversed course on all of the dovish talk of the past months, and re-upped on another big rate hiking plan for 2017.
Though they don’t like to admit it, we can only assume that when they considered a massive fiscal stimulus package coming, like any human would, they became more bullish on the economy and more hawkish on the inflation outlook.
So now as Mnuchin tells us not to expect a growth impact from Trump policies until next year, maybe the Fed lays off the tightening rhetoric for a while.
With all of this in mind, another interesting dynamic in markets today, the Dow shrugged off some weakness early on to trade higher most of the day, posting another new record high. Meanwhile small caps diverged, trading weaker all day. And gold traded to the highest level since November 11. Remember this chart we’ve looked at, which looks like higher gold to come (a lower purple line), and lower yields.
This would all project a calming for the inflation outlook, which would be good for the health of markets. Among the biggest risk to Trumponomics is hot inflation, too fast, and a race higher in interest rates to chase it.
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January 2, 2017, 4:00pm EST
Happy New Year! We’re off to what will be a very exciting year for markets and the economy. And make no mistake, there will be profound differences in the world this year, with the inauguration of a new, pro-growth U.S. President, at a time where the world desperately needs growth.
I’ve talked a lot about the “Trump effect.” Clearly, when you come in slashing the corporate tax rate, creating incentives for trillions of dollars of capital to come home, and eliminating overhead and hurdles associated with regulation, you’ll get hiring, you’ll get spending, you’ll get investment and you’ll get growth.
But there’s more to it. Ray Dalio, one of the richest, best and brightest investors in the world has said, there is a clear shift in the environment, “from one that makes profit makers villains with limited power, to one that makes them heroes with significant power.”
The latter has been diminished over the past 10 years.
Clearly, we entered the past decade in an economic and structural mess. But while monetary policy makers were doing everything in their power (and then some) to avert the apocalypse and, later, fuel a recovery, it was being undone by law makers and a lack of fiscal support, swinging the pendulum too far in the direction of punishment and scapegoating.
With that, despite the continued wealth creation of the 1% over the past decade, and the widening of the inequality gap, the power of the wealth creators has been diminished in the crisis period – certainly, the public’s favor toward the rich has diminished. And most importantly, the incentives for creating value and creating wealth have been diminished.
With all of the nuances of change that are coming, and the many opinions on what it all means, that statement by billionaire Ray Dalio might be the most simple and clear point made.
Another good point that has been made by Dalio, as he’s reflected on the “Trump effect.” It’s the element that economists and analysts can’t predict, and can’t quantify. The prospects of the return of “animal spirits.” This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mis-trust of the system.
All along the way, throughout the recovery period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset appears to finally be underway. And that gives way to a return of animal spirits, which haven’t been calibrated in all of the forecasts for 2017 and beyond.
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