By Bryan Rich

October 5, 5:00 pm EST

We ended the week with the jobs report today.  The headline payroll number itself is less important. It’s been plenty good for the past seven years, and has averaged over 200,000 new jobs over the past twelve months.

Remember, the missing piece in this report, that has NOT confirmed a hot job market, has been wage growth.  Throughout much of the post-Great Recession environment, despite the low headline unemployment number that central banks were able to manufacture, workers had little leverage in the job market to maximize potential, much less command higher wages.  That means mid-level managers were happy to have a job and keep it, and college graduates were (have been) relegated to a career as a barista.  That’s not a sign of a hot economy.

That said, wage growth has been on the move, but slowly.  Today’s report of the September average weekly hourly wages was up 2.8% (compared to last year this time).  Here’s what the history of that number looks like:

So wages are on the rise, but not fast.  And that explains why inflation is on the rise, but not fast.

That should comfort those who think the interest rate market is about to run away.  Remember, the Fed hiked by another 25 basis points last month, and contrary to what we’ve seen throughout the Fed’s three-year tightening cycle, the bond markets are finally beginning to price some of it in.

For perspective, the Fed went by another 25 basis points in September, and the 10-year yield has since risen by 20 basis points.

As you can see in the chart, we’ve had 200 basis points of Fed tightening since December of 2015.  But the 10-year yield, since the Fed began “normalizing” policy three years ago, has risen less than half of that (<100 basis).  It’s far from a runaway train in the market-determined interest rate market.

As I said yesterday, the move in rates is a growth story, not a crisis (or end of growth) story.  With the optimism of economic momentum supported by fiscal stimulus and structural reform, the interest rate market is finally pricing OUT the risks of slow growth forever and post-Great Recession crises.

By Bryan Rich

September 17, 5:00 pm EST

The market is typically pretty good at pricing in what is known.  And it has been pretty clear that Trump has seen trade imbalances as a key piece of his structural reform plan.  And the strategy on correcting those imbalances has been to fight trade barriers with trade barriers.

While it has created plenty of fodder for political and economic debates, the markets seem to like it.

As we’ve discussed, any movement on trade, from a U.S. perspective, is success.  He has said as much with this statement on China:

Given the position of U.S. stocks (at or near record highs) relative to global trading partner stock markets (largely, negative on the year), the market seems to be fairly comfortably betting that movement will occur, given the position of strength from which Trump is negotiating (i.e. the biggest and most powerful economy behind him).

Now, this is the effort to level the playing field internationally. We’ve also talked about the ‘domestic’ leveling of the playing field on the Trump agenda.  And that has everything to do with the tech giants.  And it has most to do with Amazon.

With that, we’ve talked about the case for breaking up Amazon.  As I’ve said

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 competition 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.

Amazon was a big loser on the day today. Why?  Break-up speculation.

A Citibank internet analyst today called for the split of Amazon’s ecommerce and cloud computing business (AWS).  But the analyst recommended the company split itself to avoid regulators doing it for them.  That sounds like a recommendation for a pre-emptive strike in an effort to maintain the euphoric investor sentiment in the stock.

When we look back, the trillion-dollar valuation threshold in Amazon may have been curse.  On September 4th, it hit a trillion dollars. And that has been the dead top.   

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By Bryan Rich

August 24, 5:00 pm EST

The best investing advice over much of the past decade has been “don’t fight the Fed.”  The Fed needed stocks higher (to restore confidence and wealth — at least paper wealth).  And the Fed forced stocks higher. 

They did it through ultra-low interest rates and through a committment to backstop against any shock risks.  With that, despite the many threats along the path of the the global economic recovery, stocks went up.What’s the best investing advice of the post-election environment?

Don’t fight Trump.

Remember, we’ve talked about the “great handoff” on election night.  Trump finally represented an end to an era, where the global economy was surviving on central bank life support.  It was the handoff from a monetary policy-driven recovery, to a fiscal stimulus and structural reform-driven recovery.  And that handoff gave us a chance to get to a sustainable recovery — to escape post-recession stall-speed growth.

So no wonder, the influence of Trump on markets and global stability, is much like the influence of the central banks of the past decade.

Trump wants a booming economy. 

We need a booming economy to escape the stall-speed growth of the post-global recession world. So we have major economic and geopolitical undertakings in play to achieve a booming economy.  And just as the central banks wouldn’t let shocks undo the trillions of dollar they had committed to the recovery, Trump won’t either.  The central banks intervened often, either verbally, or through policy.  And Trump has intervened often.  Also, a lot of verbal, and plenty of policy responses.

The dollar and the Fed are the latest examples.  And today, we saw the influence and the outcome.  Trump has hand-selected the Fed Chair that is continuing the program of gradual rate hikes.  But Trump he sees higher rates, uncessarily threatening to curtail the growth picture, he’s “intervening.”

Below is some of his jawboning against higher rates …

 

And today, we heard from the Fed Chair at Jackson Hole.  People were looking for any indication that the Fed Chair might be influenced by Trump’s comments.

And here are the money headlines from his speech…

The Fed explicitly said under Yellen one time, that they opted against a rate hike because they were no signs that the economy was overheating.  That makes the second comment above very interest, regarding the expectations on the Fed’s movees for the remainder of the year.  And if they don’t see inflation accelerating above 2% (the first comment) then why raise rates again.

The market seemed to agree with that interpretation today.  The prospects of steady rates is a recipe for higher stocks, higher commodities and a lower dollar. And that’s what we had today.  I expect it will continue.  And this may have finally been the catalyst to get commodities moving again.

Have a great weekend!

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By Bryan Rich

May 17, 5:00 pm EST

We talked yesterday about the building pressure in emerging markets, driven by weakening currencies and rising dollar-denominated oil prices.

With that bubbling up as a potential shock risk, gold hasn’t exactly been telling the story of elevated risks.

You can see in this chart above, since the tax cuts were passed in late 2017, rates have been rising (the purple line). This is a hotter economy, pick-up in inflation story. And, as it should, gold stepped higher with rates all along–until the last few weeks. You can see the divergence in the chart above.

I suspect we’ll see gold snap back to reflect some increasing market risks, and especially to reflect a world where central banks are beginning to finally see inflation pressures build. The gold bugs loved gold when inflation was dead. And now that it’s building, they are surprisingly very quiet.

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By Bryan Rich

April 23, 5:00 pm EST

Yields continue to grind higher toward 3%.  That has put some pressure on stocks, despite what continues to be a phenomenal earnings season.  This creates another dip to buy.

Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%.   [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014.  Yields soared, and stocks had a series of slides.

My rebuttal: The domestic and global economies are fundamentally stronger and much more stable.  But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment.  We have fiscal stimulus doing a lot of heavy lifting.

Let’s look at a couple of other reasons people are concerned about stocks as yields climb:

[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?

My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.

[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).

My Rebuttal:  In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior.  If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade.  If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road.  Coming out of a zero-interest rate world, bond prices are going lower/not higher.

Remember this chart …

The bond market has become a high risk-low reward investment.  Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper.  That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.

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By Bryan Rich

January 25, 7:00 pm EST

Yesterday we talked about the commodities bull market and the move underway in natural gas.

That all continued today, thanks in part to a comment by the U.S. Treasury Secretary, saying “obviously a weaker dollar is good for us.”  When the dollar goes down, commodities prices tend to go up, since they are largely priced in dollars.  As such, commodities were the top performers of the day – beginning to gain more momentum at multi-year highs.

But as we’ve seen from this chart, this recovery in commodities, which has dramatically lagged in the reflation trade, has a long way to go.

While the markets reacted as if Mnuchin, the Treasury Secretary, was talking down the dollar, the dollar is already in a long-term bear market cycle.

Remember, we looked at this chart (below) of the long-term dollar cycles back in June…

And I said, “if we mark the top of the most recent cycle in early January, this bull cycle has matched the longest cycle in duration (at 8.8 years) and comes in just shy of the long-term average performance of the five complete cycles.  The most recent bull cycle added 47%. The average change over a long-term cycle has been 56%.  This all argues that the dollar bull cycle is over.  And a weaker dollar is ahead.  That should go over very well with the Trump administration.”

The dollar is down about 8% since then and is breaking down technically now.

The dollar index is now down 14% in this new bear cycle. And these are the early innings.  Based on the dollar cycle, it has a long way to go, and should last for another 5 to 7 years.

So, this dollar outlook is further support for the case for a big run in commodities we’ve been discussing.  And as we observed yesterday, in the case of Chesapeake Energy (CHK), the second largest producer of natural gas in the country, the commodities stocks are still extremely underpriced if this scenario for commodities plays out.

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By Bryan Rich 

November 3, 2017, 4:00pm EST

BR caricatureAs we head into the weekend, we’re closing in on the holidays and year-end. The performance of stocks continue to reflect a world where companies are strong, and consumers are strong.

With 81% of the S&P 500 companies reported for the third quarter, the numbers have continued to be very good – 74% have beat the street’s earnings estimates, 66% have beat on revenues. So we’ve now had 13.9% yoy growth in S&P 500 earnings in the first quarter, 11.3% yoy earnings growth in the second quarter, and 5.9% yoy growth in the third quarter. And these are companies that are as lean and financially sound as they’ve been in a long time.

And as we’ve discussed, we’re getting fiscal stimulus into an economy that’s already fundamentally strong.

With that, you would expect the price of everything to be rising. Here’s a look at major global stocks, commodities, currencies and interest rates year-to-date.

Almost everything is rising.

image

Housing is strong. The stock market is strong. The broad commodities markets are strong. But as you can see, interest rates have barely budged. While asset price inflation has been hot, the Fed’s favored measure of inflation (core PCE) has not.

But as I’ve said, although the Fed likes to say they ignore volatile energy prices, with crude oil on the move (the highs of the year today), expect that to make its way into their inflation readings.

The oil price crash of last year gave them nightmares of deflation fighting. The higher oil prices go, the more the Fed will begin stepping UP their inflation forecasts. And market interest rates could have a violent catch up to the rise across the other asset classes.

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By Bryan Rich 

November 1, 2017, 4:00pm EST

BR caricatureThe Fed decision today was a snoozer, as expected. The market continues to think we get a third rate hike for the year in December (fourth since the election).

Thus far, with three hikes, we’ve had just about the equivalent (just shy of 75 basis points) priced-in to the 10-year Treasury market. Yields popped from about 1.70% on election night (just about a year ago) to a high of 2.64%. We’ve had some swings since, but we sit now at roughly 2.40% (70 basis points higher over the past year).

We revisited yesterday, the prospects for some significant wage growth (and therefore inflation), with the fuel of fiscal stimulus feeding into an already tight (but underemployed) labor market.

The Treasury market isn’t pricing that scenario in, at all.

In fact, the yield curve continues to look more like a world that doesn’t fully believe fiscal stimulus is happening (or will happen), and does believe the Fed is more likely damaging the economy through its rate “normalization.”

That’s a bet that continues to underprice the prospects of fiscal stimulus. And, therefore, that’s a bet that continues to be disconnected from the message other key markets are sending. Over the past six months, we’ve talked the case for stocks to go much higher. We’ve talked about the opportunities in European and Japanese stocks (German stocks hitting new record highs and Japanese stocks nearing new 26-year highs today). We’ve talked a lot about the building bull market in commodities. We’ve talked about the positive signals that copper has been sending, as the leading indicator of a global economic turning point. We’ve talked about the outlook for much higher oil prices – oil hit $55 today. (July 30: Explosive Move Coming For Oil And Commodities Stocks).

And oil prices, whether the central banks like to admit it or not, heavily impact inflation, inflation expectations and policy making decisions.

With that, this next chart suggests that market interest rates are about to make a move (higher).

image

Source: Billionaire’s Portfolio

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By Bryan Rich 

October 16, 2017, 4:00 pm EST

BR caricatureOn Friday we talked about the biggest market movers: oil, copper and iron ore.

​Oil was up 5.3% on the week.  Copper was up 4%.  And iron ore reversed sharply on Friday to jump 6%.

​All were stronger again today.

​Remember, China is the world’s largest consumer of commodities.  And the import data late last week out of China showed hotter imports in copper and copper products (26.5% growth, year over year), iron ore (record high imports, up 10% from a year earlier), and crude oil imports hit the second highest level on record (up 12% year over year).

​This leaves us wondering:  Is China’s economy doing better than most think?  And/or is this China hoarding commodities again?

At the depths of the financial crisis, China opportunistically stepped in and started gobbling up global commodities on the cheap (at the time).

oct16 china

Remember, China has $3 trillion in currency reserves, about $2 trillion of which are in U.S. dollars.  Commodities are a good way to put those dollars to work.

​And there always seems to be currency play at work in China, to gain some sort of advantage.  You can see in the chart below, as the PBOC has weakened the yuan, commodities prices have fallen.  And as they’ve been strengthening the currency this year, we may be seeing commodities coming back as a result.

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By Bryan Rich 

October 12, 2017, 7:30 pm EST              Invest Alongside Billionaires For $297/Qtr

 

BR caricatureFor much of the summer, while the world has been obsessed with Trump tweets, we’ve talked about the sharp but under-acknowledged move in copper and the message it was sending about the global economy and China (the biggest consumer of commodities), specifically. As I’ve said, people should Stop Watching Trump And Start Watching Copper.

Why copper? It is often an early indicator of economic cycles. People love to say copper ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. And it tends to lead a bull market in broader commodities.

Well, copper bottomed on January 15. Fast forward to today; the most important industrial metal in the world is up 24% on the year and sniffing back toward three-year highs. While the world continues to focus on Washington drama, this continues to be the proverbial “bell” ringing to signal a pop in economic growth is coming, and a big run for commodities investors is ripe for the taking.

With that in mind, we’ve talked in recent days again about the research from the top minds in commodities investing, Leigh Goehring and Adam Rozencwajg (managers of the commodities funds, ticker GRHIX and GRHAX). We know they like oil. In fact they think we see triple-digit oil prices by early next year.

They love the commodities trade in general. They have one of the most compelling charts I’ve seen in my 20-year career, to support the view that there is a generational bull breaking lose in commodities.

Stocks minted billionaires in the 1980s. Currencies minted billionaires in the 1990s. Tech and housing (bust) minted billionaires in the early 2000s. Then it was equity activism (stocks). The next opportunity looks like commodities.

In this chart below you can see, as Goehring and Rozencwajg say, commodities are as cheap today as they have ever been. “Only in the depths of the Great Depression and at the end of the dying Bretton Woods Gold Exchange Standard did commodities reach this level of undervaluation relative to equities.”

FBPP_chart_101217.jpg

With this, they say, for those that can block out the noise, “there is a proverbial fortune to be made if they invest today.”

Here’s an excerpt from their most recent investor letter on their work on the stocks to commodities valuation:

“When commodities are this cheap relative to stocks, the returns accruing to commodity investors have been spectacular. For example, had an investor bought the Goldman Sachs Commodity Index (or something equivalent) in 1970, by 1974 he would have compounded his money at 50% per year. From 1970 to 1980 commodities compounded anually in price by 20%. If the same investor had bought commodities in 2000, he would have also compounded his money at 20% for the next ten years–especially attractive considering the broad stock market indicies returned nothing over the same period.”

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