By Bryan Rich

August 13, 5:00 pm EST

We have a currency devaluation in Turkey that is shaking up markets.  Let’s talk about what’s happening and why (if at all) it matters for the big picture outlook.

First, here’s a look at the Turkish lira chart (orange line moving up means a stronger U.S. dollar, weaker lira)…

 

Now, the problems in Turkey aren’t new.  The country is economically fragile.  But the collapse in the currency probably has more to do with its leadership – and the erosion of democracy in Turkey.

There are a lot of people comparing Turkey’s currency crisis to the Thai Baht devaluation in 1997 — which ultimately ignited a currency crisis in Asia, which culminated in a sovereign default in Russia.  That’s the fear: a currency crisis turning into a contagion of sovereign debt defaults.

But Thailand was about economic policy – specifically, the Thai currency policy.  Speculators attacked to close the valuation gap between the central bank managed currency and its economy.

This Turkey issue looks more like the collapse in the Russian Ruble in late 2014.  That was geopolitically driven.  Back in 2014, Putin was forcing his way into Ukraine – an affront to the Western world.  This was viewed as a proxy war against the West. That led to capital flight out of Russia and speculative attack on the currency.

With this chart on the Ruble (the orange line going up means a stronger dollar and weaker ruble), Russia was quickly made vulnerable and on a sovereign debt default watch.

But like Turkey, the contagion risk was driven by Russia’s foreign currency denominated debt (primarily euro denominated debt owed to European banks).

With that said, the world wasn’t “normal” in 2014, nor is it now.  Remember, the European Central Bank remains in quantitative easing mode.  That means, we should expect central bank (or policy) intervention (if needed) to quell any shock risks that could come from European bank exposure to Turkish debt.  So the ECB’s “ready to act” commitment of the post-financial crisis era should calm fears of contagion.

As for Turkey, the crippling effects of the currency attack should put pressure on the freshly re-elected Ergodan (i.e. should make him vulnerable to an uprising).

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By Bryan Rich

July 23, 5:00 pm EST

We have a big earnings week.  The tech giants report, along with about a third of the S&P 500.  And we get our first look at Q2 GDP.

As we’ve stepped through the year, we’ve had a price correction in stocks, following nearly a decade of central bank policies that propped up stocks.  This correction made sense, considering central banks were finally able to make the hand-off to a U.S. led administration that had the will and appetite (and alignment in Congress) to relax fiscal constraints and force the structural reform necessary to promote an economic boom.

From there, for stocks, it became a “prove-it to me” market.  Let’s see evidence of this “hand-off” is working — evidence the fiscal stimulus is working. That came in the form of first quarter earnings.  This showed us clear benefits of the corporate tax cut.  The earnings were hot, and stocks began a recovery.

The next steps, as fiscal stimulus works through the economy, we’ve needed to see that the uptick in sentiment (from the pro-growth policies) is translating into better demand and economic activity.  So, with Q2 earnings we should start seeing better revenue growth, companies investing and hiring.  And we should see positive surprises beginning to show up in the economic data.

We’re getting it.  Almost nine out of ten companies reporting thus far have beat (lofty) earnings expectations.  And about eight out of ten have beat on revenues.  This week will be important, to solidify that picture.  And though many of the economists all along the way of the past year didn’t see big economic growth coming, it has been steadily building since Trump was elected, and the Q2 number should push us to over 3% annual growth (averaging that past four quarters).

Now, let’s talk about the big mover of the day: interest rates.  The 10-year yield traded to 2.96% today, closing in on 3% again.

We’ve discussed, many times, the role that Japan continues to play in our interest rate market.  Despite 7 hikes by the Fed from the zero-interest-rate-era, our 10 year yield has barely budged.  That’s, in large part, thanks to the Bank of Japan.

As I’ve said in the past, “Japan’s policy on pegging its 10-year yield at zero has been the anchor on global interest rates. Forcing their benchmark government bond yield back to zero, in a world where there has been upward pressure on interest rates, has meant that they can, and will, buy unlimited amounts of JGBs to get the job done. That equates to unlimited QE. When they finally signal a change to that policy, that’s when rates will finally move.”

With that in mind, there were reports over the weekend that the Bank of Japan may indeed signal a change in that “yield curve control” policy at their meeting next week. And global rates have been moving!

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By Bryan Rich

July 20, 5:00 pm EST

We’ve been watching the Chinese currency very closely, as the Chinese central bank has been steadily marking down the value of its currency by the day, in efforts to offset U.S. trade tariffs.

Remember, in China, they control the value of their currency. And they’ve now devalued by 8% against the dollar since March. They moved it last night by the biggest amount in two years. That reduces the burden of the 25% tariff on $34 billion of Chinese goods that went into effect earlier this month.

But Trump is now officially on currency watch. Yesterday in a CNBC interview he said the Chinese currency is “dropping like a rock.” And he took the opportunity to talk down the dollar.

The Treasury Secretary is typically from whom you hear commentary about the dollar. And historically, the Treasury’s position has been “a strong dollar” is in the countries best interest. But Trump clearly doesn’t play by the Washington rule book. So he promoted his view on the dollar (at least his view for the moment)–and it may indeed swing market sentiment.

The dollar was broadly lower today. We’ll see if that continues. If so, it may neutralize the moves of China in the near term. Nonetheless, the U.S./China spat is reaching a fever pitch. Someone will have to blink soon. Trump has already threatened to tax all Chinese imports. The biggest risk from China would be a big surprise one-off devaluation. As we discussed yesterday, that would stir up a response from other big trading partners (i.e. Europe and Japan). And they may coordinate, in that scenario, a threat to block trade from China all together.

If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.

 

By Bryan Rich

July 19, 5:00 pm EST

Yesterday CNBC hosted their Delivering Alpha conference. This conference is primarily an opportunity for investors to hear views and ideas from some of Wall Street’s best.

However, the bigger picture geopolitical environment is far more important for the market at the moment, than what a big hedge fund manager thinks about valuation (for example).

On that note, there were some interesting takeaways from yesterday’s event. As we discussed yesterday, we heard from Larry Kudlow, the White House Chief Economic Advisor. And we also heard from Steve Bannon, the former White House Chief Strategist.

Bannon has been given plenty of unappealing labels by the media in recent years, but his perspective on the White House game plan and how it’s executing is invaluable. I think everyone would agree that the communication on the economy and foreign policy could be handled better by the White House.

And Bannon articulates the issues in the Trump plan, maybe better than anyone. It’s an interview everyone should watch (here’s a link).

As we’ve discussed here in my Pro Perspectives piece since I started writing this nearly three years ago, the trade war is nothing new. And it’s all about China. As Bannon said, China has been waging an economic and cyber war with the U.S. for the better part of the past 25 years. Now they’ve run into a wrecking ball in Trump: someone with the leverage and the credibility to act on threats to end the gutting of global economies (including the U.S. and other major developed market economies). Bannonsays we’re in the early stages of a “reorientation of the supply-chain around freedom loving countries.”

As we’ve discussed, the best reflection of China’s strategic response to Trump’s pressure is their currency. What are they doing with it? They continue to walk it lower every day. This is a signal that they have no options–playing by the rules and getting slower economic growth isn’t an option for the ruling regime in China. They can only fight back by offsetting tariffs with a weaker currency. And that may ultimately lead to blocking China trade completely.

If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.

By Bryan Rich

June 18, 5:00 pm EST

For much of last summer, we talked about the building bull market in commodities.

The price of crude oil has nearly doubled since that time. But broader commodities have yet to take off.

Remember, we’ve looked at this chart of commodities versus stocks quite a bit.

You can see the clear divergence in these two key asset classes over the past five years.

As we’ve discussed, the only two times commodities have been this cheap relative to stocks were at the depths of the Great Depression in the early 30s and at the end of the Bretton Woods currency system in the early 70s.

And from deeply depressed valuations, commodities went on a tear, both times.

Now, since last summer, the trajectory of commodities has been up. But so have stocks. Still, this gap has narrowed a bit. Stocks are up 13% in the past year. The CRB index is up 17%.

The big difference between this year and last year, is the level on the 10-year yield. Last year this time, yields were 2.20%. Today, yields are closer to 3%. That’s because the economy is hotter, and inflation is finally reaching the Fed’s target of 2%.

What asset class should perform the best in a rising inflation environment? Commodities. As we’ve discussed in recent weeks, the data on the economy is lining up for some big positive surprises. That will be fuel for commodities prices.

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By Bryan Rich

June 13, 5:00 pm EST

Watching the media and expert community digest the Fed decision is always interesting.

They are all programmed to home in on the worst-case scenario. It’s very similar to the way they parse politics.

In this case, the Fed projected an extra rate hike this year. They were projecting three hikes for 2018.  Now they are projecting four hikes for the year (two of which are now in the rear-view mirror).  Why an extra hike?  Is it because they want to disrupt the recovery and undo all of their efforts of the past decade to manufacture that recovery?  No.  It’s because they think the economy is good!  In fact, Powell (the Fed Chair) said “the main takeaway is that the economy is doing very well.”

And when asked about the impact of tax cuts, he said, we’ve yet to see the benefits. But, it should “provide significant support to demand over the next three years … encourage greater investment … and drive productivity.”  This is exactly what we stepped through last week in my Pro Perspective notes (here).  We laid out the components of GDP (consumption, investment, government spending and net exports) and we talked about the setup for positive surprises feeding into an economy that’s already running at near 3% growth — because pro-growth policies are just beginning to show up in the data!

With that, it should be no surprise that the Fed feels more comfortable telegraphing another hike, from what is still very low levels of interest rates.

Now, what is the negative scenario the pundits have been harping on?  The yield curve.  With the Fed gradually walking up short term rates (rates they set), the benchmark market interest rates (namely the 10-year government bond yield) has been soft.  That creates yield curve flattening, which gets the bears excited that a yield curve inversion could be coming (a good historical predictor of recession).

Why is the 10 year yield soft?  As we’ve discussed, the two major central banks that are still in the QE game have been anchoring longer term interest rates through their outright purchases of global government bonds (including lots of U.S. Treasuries, which keeps a cap on yields).

On that note, we have the ECB tomorrow.  And the Bank of Japan will meet on monetary policy tomorrow night.  The trajectory of global monetary policy is UP.  And the more the Fed does, the more it forces that timeline elsewhere in the world to follow the Fed’s path on normalizing rates.  The ECB will be following the Fed normalization path soon.  And the Bank of Japan will be last.  And when we get hints that it’s coming sooner rather than later, the yield curve will start steeping, and the bears will have a very hard time justifying their “sky is falling” view.

By Bryan Rich

June 11, 5:00 pm EST

Last week we stepped through all of the components of economic output and talked about the setup for positive surprises.  Keep in mind, the economy is running at near a 3% pace already.  And if Trumponomics is just in the early stages of materializing in the data on consumption, investment, government spending and exports, then we may be in for a big growth number.

On Friday we talked about the exports (i.e. the trade) component.  On that note, the media was stirring over the combative tone from G7 events over the weekend.  What I heard was the potential for big movement (i.e. gains on U.S. exports, which will drive gains in GDP).  Trump went in and proposed taking down all trade barriers.  That’s negotiating from an extreme.  And that typically brings about movement.  Quickly, trade partners were discussing “reducing” barriers.

With hotter than expected growth coming, how will that effect Fed policy?

We will soon see.  The Fed meets this week.  They continue their path of normalizing rates.  They’ve hiked once in 2015, once in 2016, three times in 2017 and once, thus far, this year.  The market is nearly fully pricing in a second hike for the year on Wednesday.  And expectations are for another hike in September.   We’ll see this week if they’re adjusting uptheir growth forecasts.

As for the rate path:  Remember, Powell is a Trump appointee, and from what we’ve heard from him thus far, he sounds like someone that’s not going to risk chipping away at the recovery by jumping ahead with overly aggressive rate hikes.  Unlike the last regime, he will likely take a “whites of inflation’s eyes” approach.

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By Bryan Rich

June 7, 5:00 pm EST

We’ve talked about the set up for positive surprises in the data.  We’ve looked at the first two components of GDP (consumption and investment) both of which are set up for positive surprises.  Today let’s look at government spending.

It’s typical for debt to balloon in economic downturns.  Not only did our debt/gdp ratio balloon in the U.S. but it ballooned everywhere. With that, as the global economy was being propped up by central banks, for the better part of the past decade, the politicians were reluctant to help on the fiscal side.  Instead, they went the other way.  They went the path of austerity.  They focused on debt when the economy desperately needed growth.

Fiscal tightening in a widespread global recession is a recipe for tipping it all into depression. That required the central banks to do more, and more, and more to keep the economy from entering into a deflation spiral — fighting the drag of fiscal belt tightening. And it all began tipping over the edge in mid-2016.

But that changed with Trump election.  Trumponomics has been all about restoring growth and breaking from the rut of economic stagnation.  And a key pillar in that plan has been infrastructure and government spending.

On that note, he’s been pushing for a trillion dollar infracture spend over 10 years.  And as we’ve discussed, while adding debt isn’t popular for the politicians to approve, natural disasters last year gave them an excuse to approve spending packages.  Fast foward just six months and we’ve had more than $200 billion in aid approved from Congress.  And now we’ve had an increase of $400 billion in government spending as part of the lastest government budget.

So the government spending piece has been in motion.  And expect the rest of the world to follow.  As we’ve discussed in recent weeks, we’ve seen the populist push back across the world, from Grexit, to Brexit, to the Trump vote, and now to the “Italy first” movement.  The real fight in the “populist movement” is against economic stagnation.  And much of that is due to mistakes on policy in response to the global economic crisis.  And the core mistake has been austerity.   Growthsolves a lot of problems.

What about the debt?

The media loves to talk about the $20 trillion dollar debt load, as if we are going to default and/or the rest of the world is going to dump our Treasuries and send interest rates skyrocketing and implode our economy.

Government debt and deficits are judged (by global trade partners, allies, global allocators of capital) on a relative basis – size relative to GDP.  Again, our debt relative to GDP has ballooned since the global financial crisis.  But it also has for everyone else in the world.  That’s why people/countries are still plowing money into our Treasury market for virtually no return, because lending the U.S. money is still the safest place and way to preserve wealth.

The only alternative in this post global financial crisis environment is to focus on growth.  Growth can solve a lot of problems, including the debt and deficit relative to GDP problems.  As growth goes up, our debt relative to size of the economy goes down.

If we get the economy back on a sustainable growth path, then, in good times, we can work on the structural flaws that led us to the crisis. That’s the only option.

So, when we look at the components of GDP, the policy execution in Washington has been driving lift-off in all of the components.  And yet the experts have still underetimated the potential for a growth boom.  We’ve talked about the positive surprises that are coming down the pike in consumption, investment and govenment spending.  Tomorrow, we’ll take a look at the trade piece.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

By Bryan Rich

June 6, 5:00 pm EST

We’ve talked the past couple of days about economic growth and the likelihood that we’re just beginning to see the positive surprises from Trumponomics materialize in the economic data.

Yesterday we talked about the consumption component of GDP.  Today, we’ll take a look at investment.

Businesses invest when they’re confident about the outlook.  And that was anything but the case for the decade following the global financial crisis.

Why?  Because the politicians spent their time playing politics in Washington, instead of addressing an economy that was in desperate need of fiscal stimulus and structural change.  Instead, they swung the regulatory pendulum too far in the opposite direction.  And they played political football with debt and deficits, instead of acting to restore growth and stability.  They stifled growth, just as the Fed was desperately throwing everything at the economy to keep it going.  And it was all coming to a head by mid-2016 when global interest rates started turning negative.

But with the election came optimism.  There was at least a chance of a return of good economic times (not just domestically but globally).  We had a President with an aggressive economic stimulus plan, and a Congress in place to approve it.  With that, small business optimism popped and has soared to record highs.

And companies are now investing again. Capital goods orders (the chart below) are nearing record highs again.

Get this:  An ISM survey shows businesses were forecasting just 2.7% capital spending growth for 2018 when they were asked back in December.  When they were asked again last month, they revised that number UP to 10.1% growth.   A big positive surprise coming down the pike.

Again, as with the consumption picture we talked about yesterday, not only is the back drop solid, but we have stimulus that is still in the early stages of feeding through the economy, which is setting the table forpositive surprises in the economic data as we head toward the second half of the year.

And with that, we finally have the pieces in place for the aggressive bounce back in growth that is characteristic of post-recession recoveries.  And that should continue to fuel stocks.

If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. 

 

By Bryan Rich

June 5, 5:00 pm EST

We’ve talked the past couple of days about economic growth and the likelihood that we’re just beginning to see the positive surprises from Trumponomics materialize in the economic data.

The formula for GDP is consumption + investment + government spending + net exports.  So you can see in these components, the direct targeting of economic stimulus in the Trump economic plan to drive growth: tax cuts, deregulation, repatriation, infrastructure and trade negotiations.

Now, consumption makes up about two-thirds of GDP.  Let’s look at consumption today, and we’ll step through the other contributors to GDP over the next few days.

First, what is the key long-term driver of economic growth over time?  Credit creation.  When credit is used to buy productive resources, wealth goes up.  And when wealth goes up consumption tends to go up.  With that in mind, in the chart below 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.

And we have well recovered and surpassed pre-crisis levels in household net worth — sitting at record highs now (up another $2 trillion since we last looked at it) 

A large contributor to the state of consumption is the recovery and stability in housing.  We are now back to new highs on the broad housing index …

When we consider this solid backdrop, remember, we’ve yet to have a return of ‘animal spirits’ —  a level of trust and confidence in the economy that fuels more aggressive hiring, spending and investing.
And with that, as we discussed yesterday, while we are in the second longest post-War economic expansion, we’ve yet to have the aggressive bounce back in growth that is characteristic of post-recession recoveries.
But we now have the pieces in place to see the return of animal spirits and a big pop in economic growth.  And that should continue to fuel for much higher stock prices. And there are stocks that will do multiples of what the broader stock market does.
If you are hunting for the right stocks to buy on this dip, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers.