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Bar Has Been Set Low To Manufacture Positive Surprises … And They Are Rolling In

April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected. This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%. Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1. Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December. Add to that, just days into the first quarter, the Fed told us they were done raising rates. Whatever headwinds the Fed was stirring up, quickly became tailwinds.

Yet we’ve been told an economic recession was coming and an earnings recession upon us. The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity. That sets the table for positive surprises. And positive surprises are fuel for stocks. Stocks are fuel for confidence. Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity. The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better. And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even. The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment). As we’ve discussed, we are well overdue for an economic boom period. We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment. You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …

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Bottoming in Chinese Data

April 17, 5:00 pm EST

Last month we talked about Chinese stocks has a key spot to watch for: 1) are they doing enough to stimulate the struggling economy, and 2) (more importantly) are they taking serious steps to get to an agreement on trade with the U.S.?

The signal has been good. Chinese stocks are up 34% since January 4th.

As I said back in March, Chinese stocks are reflecting optimism that a bottom is in for the trade war and for Chinese economic fragility. That’s a big signal for the global (and U.S.) economy.

Fast forward a month, and we’re starting to see it (the bottoming) in the Chinese data. Overnight, we had a better than expected GDP report. And industrial output in China climbed at the hottest rate since 2014.

For those that question the integrity of the Chinese GDP data, many will look at industrial output and retail sales. Retail sales had a better than expected number too overnight. And the chart (too) looks like a bottom is in.

Remember, by the end of last year, much of the economic data in China was running at or worse than 2009 levels (the depths of the global economic crisis).

The signal in stocks turned on the day that the Fed put an end to its rate hiking path AND when the U.S. and China re-opened trade talks (both on January 4th).

Trump Wants A Weaker Dollar, And Will Likely Get It

April 9, 5:00 pm EST

A key piece in the continuation of the global economic recovery will be a weaker dollar. It will drive a more balanced U.S. and global economy, and it will reflect strength in emerging markets (i.e. capital flows to emerging markets).

To this point, as we’ve discussed, higher U.S. rates have meant a stronger dollar. With global central banks moving in opposite directions in recent years, capital has flowed to the United States. But the emerging markets have suffered under this dynamic. As money has moved OUT of emerging market economies, their economies have weakened, their currencies have weakened, and their foreign currency denominated debt has increased.

But now we have a retrenchment from the Fed. And we have coordinated global monetary policy (facing in the same direction).

This sets up to solidify a long-term bear market for the dollar.

Let’s take a look at a couple of charts that argue the long-term trend is already lower, and the next leg will be much lower.

First, here’s a revisit of the long-term dollar cycles, which we’ve looked at quite a bit in this daily note.

Since the failure of the Bretton-Woods system, the dollar has traded in six distinct cycles – spanning 7.6 years on average. Based on the performance and duration of past cycles, the bull cycle is over, and the bear cycle is more than two years in.

With this in mind, if we look within this current bear cycle, technically the dollar is trading into a major resistance area – a 61.8% retracement. The next leg should be lower, and for a long period of time.

Trump wants a weaker dollar, and I suspect he’s going to get it.

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Chinese Stocks Signaling The Bottom In The Chinese Economy

April 8, 5:00 pm EST

As we discussed on Friday, the overhang of risks to markets, to the Trump administration and to the economy are as light as we’ve seen in quite some time.

With this in mind, we have a fairly light data week – which means the likelihood of a disruption in the rise in stocks and risk appetite remains low.

We get some inflation data this week, which should be tame, justifying the central bank dovishness we’ve seen in recent months. The ECB meets this week. They’ve already walked back on the idea that they might hike rates this year. Expect Draghi to hold the line on that. The Chinese negotiations have positive momentum, with reports over the weekend that talks last week advanced the ball. And we have another week before Q1 earnings season kicks in.

So, expect the upward momentum to continue for stocks. Just three months into the year and stocks are up big, and back near record highs in the U.S.. The S&P 500 is up 15% year-to-date. The DJIA is up 13%. Nasdaq is up 20%. German stocks are up 13%. Japanese stocks are up 11%. And Chinese stocks are up 32%.

Remember, we’ve talked about the signal Chinese stocks might be giving us, putting in a low on the day the Fed did it’s about face on the rate path, back on January 4th.

The aggressive bounce we’ve since had in Chinese stocks appears to be telegraphing the bottoming in the Chinese economy. That’s a big relief signal for the global economy. Commodities prices are supporting that view (sending the same signal). Oil is now up 42% on the year. And the CRB industrial metals index is up 24%.

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Lyft And Uber IPOs Mark Euphoric Stage Of Internet 2.0

April 3, 5:00 pm EST

We’ve talked about the prospects that Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

This uber-exuberant valuation reflects the regulatory and policy advantage Silicon Valley has enjoyed for the past decade (which is ending). It shows the displacement of capital from Wall Street to Silicon Valley (as a result of those advantages). And arguable, it shows the euphoric stage of a bull market for internet 2.0.

Bull markets are said to be born on pessimism, grown on skepticism, mature on opitimism and die on euphoria. For the euphoria stage, as Paul Tudor Jones describes it, there’s typically no logic to it and irrationality reigns surpreme. Given that markets have bought the notion that a hand full of apps would destroy enduring industries, millions of jobs, and life will be great (?) — It’s fair to say that irrationality is (and has) reigned supreme.

With this in mind, we talked about the beginning of the end, last year, when the regulatory screws began to tighten on the untouchable tech giants (namely, Amazon, Facebook and Google).

As I said back on September 4th, when Amazon crossed the trillion-dollar valuation threshold, “at 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries. That’s a bad bet. Much like China undercut the compeition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business. That tipping point (on retail) has well passed. And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed. But Amazon is now moving aggressively into almost every industry. This company has to be/will be broken up.”

A day later, Facebook and Twitter executives visited Capitol Hill for a Congressional grilling. Here’s an excerpt from my note that day: “If you listened to Zuckerberg‘s Congressional testimony in April, and today’s grilling of Jack Dorsey (Twitter) and Sheryl Sandberg (Facebook), it’s clear that they have created monsters that they can’t manage. These tech giants have gotten too big, too powerful and too dangerous to the economy (and society).”

In short, they are too big to manage, and Zuckerberg said just that in his Op-Ed this week, calling for global regulation. Remember, the irony is, regulation only widens the moats for these companies. The higher the cost of compliance, the smaller the chances that there will ever be another Facebook developed in a dorm room.

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For Tech Giants, Compliance Costs Will Change The Business Model

March 19, 5:00 pm EST

We’ve seen the verbal and Twitter shots taken by Trump at the tech giants since he’s been in office. And the threats have slowly been materializing as policy.

We get this today …

With this in mind, we’ve talked quite a bit about the domestic leveling of the playing field. The tech giants (Facebook, Amazon, Netflix, Google, Twitter …) are on the regulatory path to being held to a similar standard that their “old economy” competitors are held to. They may have to pay for real estate (i.e. bandwidth). They may be scrutinized more heavily for anti-competitive practices. And they may be liable for content on their site, regardless of who created it.

The latter was the subject of the Trump tweet today. And he was asked about it in a press conference. He said we “have to do something about it.” He called the discrimination and bias “collusion” from the tech giants.

The regulation is coming. And depending on the degree, at best, it changes the business models of these “disrupters.” At worse, it could destroy them. Imagine, Facebook and Twitter being held liable for things their customers are saying on their platforms. That’s endless compliance to ward of business killing liabilities.

As compliance costs go UP for these companies. The cost goes UP for consumers. The model is changed.

On a related note, remember, last September the S&P 500 reshuffled the big tech giants. Among the changes, they moved Facebook, Google and Twitter out of the tech sector and in to the telecom sector (re-named the “Communications” sector”).

Here’s what that sector ETF looks like since …

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Bottom May Be In For China

March 15, 5:00 pm EST

As we end the week, let’s take a look at what China is doing to stimulate the economy.

If the world has been worried about global growth, because of the toll that trade reform is taking on China, then the actions China has been taking, and has discussed overnight, should be THE focus for markets — in addition to the status of a U.S./China trade deal.

Remember, by the end of last year, much of the economic data in China was running at or worse than 2009 levels (the depths of the global economic crisis). It’s clear that the era of double-digit growth in China is over (at the expense of the rest of the world). The question is, how low can it go, without threatening an uprising against the regime. They seem to be willing to do ‘whatever it takes’ to defend the 6% growth number.

With that, as we’ve discussed, for a sustained recovery in global growth, expect others to follow the lead of the U.S. with big fiscal stimulus and structural reform (i.e. Europe, Japan …. and China). With the news overnight from Chinese Premier Li (who has been the pointman for U.S./China trade negotiations), China is preparing an assault on the growth slowdown. He’s promising an aggressive mix of monetary and fiscal stimulus.

They are looking to do large-scale tax cuts. They’ve promised billions of dollars infrastructure spending. They’ve already cut the reserve requirement for banks five times in the past year – and they are looking to do more to motivate bank lending. And they are targeting to create 13 million jobs this year in the manufacturing sector and in small business.

As we’ve discussed, Chinese stocks are reflecting optimism that a bottom is in for the trade war and for Chinese economic fragility.

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The Bond Markets Is Sending A Signal: Manipulation

March 14, 5:00 pm EST

Wall Street has a lot of adages that many follow, and few question (but they should).

One of them: The bond market is smarter than the stock market.

The logic is that bond market investors are better and quicker at interpreting news and information than stock investors. As such, the belief is that bonds will be pricing in the more probable outcome before stocks.

So, is there a signal to be taken from the behavior of the 10-year yield? While stocks have fully recovered the losses of December, you might expect the bond market to reflect the ease in uncertainty (i.e. moving back higher, along with stocks). But bond yields are back near the lows of early last year, and appear to be pricing OUT some (and threatening to price out all) of the optimism that followed the Trump election.

With that, at 2.60% on the U.S. 10-year government bond yield (a global benchmark interest rate), is there an element of worst-case scenario for the global economy being priced in? I’d say with the U.S. economy growing at 3%, and stocks at these levels, even when the 10-year was at 3.25%, bonds were (to some degree) pricing the worst-case scenario.

So, why are bond yields as low as 2.60%? Smarter market participants? No. It’s intervention/manipulation. Sure, the Fed has put the brakes on its policy direction. The ECB has reversed course on policy! China is easing. But, most importantly, the Bank of Japan is still executing on an unlimited QE campaign.

The Bank of Japan’s yield targeting policy gives it the license to buy unlimited assets. They have been and will continue to buy U.S. government bonds, and they continue to be the anchor for global interest rates. And it’s safe to say, they are acting with plenty of coordination with the other major central banks in the world (namely, the Fed).

Bottom line: The interest rate picture is signaling one very clear action. The Bank of Japan is still engaging in full throttle QE.

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Big Trendline Break In Stocks

January 30, 5:00 pm EST

Remember, over the past three weeks, the major central banks in the world (the Fed, the ECB and the BOJ) reminded us of the script they have followed, and continue to follow, since the global financial crisis. They will do ‘whatever it takes‘ to keep the economic recovery going.

It took an ugly decline in stocks in December to resurrect the defensive stance from the architects of the decade-long global economic recovery. Confidence matters, as it relates to the economic outlook. And stocks heavily influence confidence.

With that, the Fed raised the white flag on January 4th when they marched out Bernanke, Yellen and Powell at an economic conference to reset the market expectations on monetary policy (moving from a four rate hike forecast for 2019 to a ‘wait and see’ approach). They solidified that stance today.

Removing this risk, of the Fed offsetting the benefits of fiscal stimulus, is continuing to prime global markets. And we get a break of this trendline today in stocks — from the correction that originated from the record highs of October.

With the Fed behind us, the attention turns to the U.S./China meetings, which are underway. Let’s revisit the one indicator from China that they are working to pacify the Trump administration. It’s the Chinese currency.

Remember, we looked at this chart back on January 11 of the U.S. dollar/Chinese yuan exchange rate …

In this chart, the falling orange line represents the Chinesestrengthening their currency. And, as we can see, they have been showing a willingness to make concessions, walking it higher since the December “trade truce.” Make no mistake, the trade war is all about China’s currency. Ultimately, a free floating currency in China would be the solution to the trade imbalances and dangerous wealth transfer of the past few decades. To this point, it has been reported that they are presenting a plan to balance trade with the U.S. in six years. Maybe currency is part of it. We shall see.

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Setup for a Big Upside Surprise In Global Growth

January 23, 5:00 pm EST

The financial media has been focused on Davos this week — the host of the World Economic Forum, which is attended by the world’s top global government and corporate leaders.

Coming off of an ugly December for global financial markets, it’s no surprise the conversation is all about “slowdown.” It’s an odd conversation, given that the U.S. economy is growing at 3%, corporate earnings are running at record levels, inflation is low and unemployment is low. Even the IMF could only justify a small markdown on their 2019 global GDP forecast — from an already high level.

For perspective, the IMF is now looking for 3.5% growth for 2019. Here’s how that looks relative to the past ten years ….

So, what’s the story?

As we discussed yesterday, it’s China, and the pressure of tariffs and reform demands on a vulnerable large economy that’s already drowning.

And the broader view is that trade is being hampered by the Trump/China standoff – and therefore dragging on growth. With that in mind, listening to some interviews from Davos, the one that stuck out to me was the DHL CEO (the world’s leading mail and logistics company). He said trade is not at all on the back foot, rather its flowing more than ever before.

So, the global growth slowdown talk is all about what might happen, not about what is happening. It’s about risk. With that, if China does make the concessions necessary to get a deal done (and they seem to have few options), we may end up getting a big upside surprise in global growth – especially given the very accomodative global monetary policy backdrop.

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