Tag: news

Global markets and S&P futures rebounded overnight, continuing their advance during Monday’s MLK holiday and recouping all of their Friday losses, tracking gains for shares in most of Europe and Asia on the back of frenzied buying Hong Kong shares by mainland China investors, as traders awaited a speech by Treasury Secretary nominee Janet Yellen in which she’s expected to call for expansive government action to bolster the U.S. economy.

In today’s main event Yellen is expected to speak before the Senate Finance Committee at 10 a.m. – a speech for which we won’t collect $200,000/hour from Citadel – in a discussion likely to cover topics including President-elect Joe Biden’s $1.9 trillion Covid-19 relief plan. She will tell lawmakers that low borrowing costs mean it’s time to “act big,” according to her prepared remarks because apparently doubling the Fed’s balance sheet to $7+ trillion in a few months is not “big enough.”

“Yellen is a positive,” said Mohit Kumar, strategist at Jefferies International. “We should have greater co-operation between the Fed and the Treasury, with both the monetary and fiscal policy working together and supportive. This is a good backdrop for risk sentiment.”

Investors have been “buoyed by the $1.9 trillion fiscal stimulus announced by Biden, the Federal Reserve’s willingness to support markets, the new president’s multilateral trade agenda and his plans for stepping up the vaccine rollout,” said Nigel Green, the founder and chief executive officer of financial-advisory firm deVere Group.

After gaining almost half a percent at the open, the pan-European Stoxx 600 index rose just 0.1% at 7am ET while Germany’s DAX and London’s blue-chip index rose 0.2% each. Tech stocks gained 0.4%, led by Logitech, which jumped 2.5% as it raised its 2021 sales growth and profit outlook for the third time, benefiting from a pandemic-driven boost in demand for work-from-home products and gaming accessories. UK-listed shares of Rio Tinto was flat despite reporting a 2.4% rise in fourth-quarter iron ore shipments, helped by industrial activity in top consumer China. Swiss chocolate maker Lindt & Spruengli fell 2.2% after it said organic sales fell 6.1% in 2020, with only a lukewarm improvement in the second half as COVID-19 restrictions and the absence of travel weighed.

The prospect of longer lockdowns in Europe kept investors on edge, with German Chancellor Angela Merkel set to agree with regional leaders to extend a lockdown for most shops and schools until mid-February, sources told Reuters. “With the extension of lockdowns, Q1 GDP growth will be negative, in Germany and euro area as well,” said Matthias Bausch, senior cross asset strategist at Commerzbank. “However, the current situation is not the important driver for equity markets. If investors realise that lockdowns might be extended into Q2 or Q3, there is a much bigger risk.”

European gains were fuelled by Asian stocks closing in on all-time highs as investors wagered China’s economic strength would help underpin growth in the region after data confirmed the world’s second-largest economy was one of the few to grow over 2020. Indeed, Asian stocks shook off recent doldrums and rose, with key indexes in South Korea and Hong Kong climbing more than 2% each. Tech stocks including Samsung Electronics and TSMC were the biggest boosts to the MSCI Asia Pacific Index, which was set to close at a new record high. The Hang Seng Index advanced to its highest level since May 2019, helped by continued inflow from Chinese investors buying national firms that had been sold off on U.S. restrictions.

Benchmarks in China slid as investors rotated into Hong Kong. In Seoul, the Kospi surged as domestic and foreign institutional investors snapped up cyclical stocks. Samsung group shares rebounded from sharp declines on Monday after the billionaire heir of the controlling family was ordered back to prison. Vietnam’s key equity gauge tumbled more than 5%, for its worst decline since July, amid record volume. Traders pointed to profit-taking after the market’s strong recent performance.

In rates, Treasuries were lower as U.S. trading resumes after Monday’s holiday, with 5- to 30-year yields cheaper by as much as 3.5bp. Most of the move occurred during Asia session, when risk assets rallied fueled by mainland buying flows as USD/JPY topped 104. The 10-year yield, 3.2bp cheaper on the day at ~1.12%, underperforms on the curve, cheapening 5s10s30s fly by 2bp; is also widened ~2bp vs bunds and gilts during European session. As noted above, Tuesday’s market focus for rates traders will be Janet Yellen’s 10am ET Senate confirmation hearing.  The hearing is expected to feature topics from foreign- exchange policy to taxes along with additional details on President-elect Joe Biden’s $1.9 trillion Covid-19 relief plan

In FX, the Bloomberg Dollar Spot Index fell as the greenback weakened against all Group-of-10 peers except the yen, while Scandinavian currencies led gains. The euro advanced for the first time in a week versus the dollar, rising to a session high after Germany’s ZEW survey beat estimates.

Hedging costs in the euro are low on a relative basis, even as a plethora of risks are set to unfold in coming days such as monetary policy meetings by the European Central Bank and the Federal Reserve, President-elect Joe Biden’s inauguration, U.S. Treasury Secretary nominee Janet Yellen’s hearing at the Senate, as well as Italian political risks and the earnings season. The yen fell while the Australian and New Zealand dollars rose, bolstered by a rebound in risk appetite as stocks advanced.

In commodities, Brent oil rose past $55 a barrel — with some assistance from a weakening dollar — as the growing popularity of commodities outweighed signs that a resurgence of the coronavirus in Asia is starting to impact demand. The International Energy Agency lowered forecasts for global oil demand for this quarter by 600,000 barrels a day, as renewed lockdowns to contain the pandemic temper the recovery expected this year.

Looking at the day ahead now, and one of the main highlights will be Janet Yellen’s confirmation hearing as Treasury Secretary before the Senate Finance Committee. Earnings releases will include Bank of America, Netflix, Charles Schwab and Goldman Sachs. From central banks, the Bank of England Chief economist Haldane will be speaking, and data releases include the German ZEW survey for January.

Market Snapshot

• S&P 500 futures up 0.6% to 3,784.75
• MXAP up 1.2% to 210.41
• MXAPJ up 1.5% to 705.90
• Nikkei up 1.4% to 28,633.46
• Topix up 0.6% to 1,855.84
• Hang Seng Index up 2.7% to 29,642.28
• Shanghai Composite down 0.8% to 3,566.38
• Sensex up 1.8% to 49,411.86
• Australia S&P/ASX 200 up 1.2% to 6,742.62
• Kospi up 2.6% to 3,092.66
• Brent futures up 0.9% to $55.22/bbl
• Gold spot up 0.1% to $1,843.77
• U.S. Dollar Index down 0.2% to 90.59
• STOXX Europe 600 up 0.1% to 409.12
• German 10Y yield rose 1.0 bps to -0.517%
• Euro up 0.3% to $1.2114
• Italian 10Y yield rose 1.8 bps to 0.52%
• Spanish 10Y yield fell 0.4 bps to 0.074%

Top Overnight News from Bloomberg

• U.S. Treasury Secretary nominee Janet Yellen on Tuesday steps into a new role following more than a quarter-century in government: salesperson for economic policy after years of defending Federal Reserve thinking and actions
• The European Union will unveil its plan on Tuesday to strengthen the international role of the euro as it seeks to erode the dominance of the U.S. dollar and to insulate the bloc from financial risks, including U.S. sanctions
• France racked up record orders for its first sale of half-century debt in nearly five years, highlighting the continued strength of investor demand for euro-area bonds in 2021
• German Chancellor Angela Merkel is holding talks on a possible extension of the country’s lockdown to Feb. 15
• Prime Minister Giuseppe Conte waged a charm offensive Tuesday in the Italian Senate ahead of a vote that will decide whether his coalition can survive
• Bitcoin’s recent wobbles have turned the cryptocurrency spotlight onto other digital coins including Ether, whose gain this year has outstripped the performance of its bigger rival

A quick look at global markets courtesy of Newsquawk

Asian equity markets mostly rallied with risk appetite spurred as trade picked up from Monday’s holiday lull owing to the absence of US participants for MLK Jr. Day. ASX 200 (+1.2%) was lifted in which miners, industrials and financials spearheaded the broad gains across sectors, with quarterly production updates adding to the constructive mood after Rio Tinto reported higher Pilbara iron ore output and shipments Y/Y and OceanaGold guided stronger FY21 production. Nikkei 225 (+1.4%) was boosted as exporters benefitted from currency outflows and despite sources suggesting the BoJ is to consider scaling back ETF buying at the March review, as the reports also noted the central bank will look into making its ETF buying more flexible and that there was no consensus on how best to tweak guidance on ETF purchases, while KOSPI (+2.6%) was among the biggest gainers with the index helped as Samsung Electronics and its affiliates nursed yesterday’s losses that were triggered by the sentencing of the group’s de facto chief. Hang Seng (+2.7%) and Shanghai Comp. (-0.8%) were mixed with Hong Kong conforming to widespread optimism amid strong southbound Stock Connect flows which recently hit record highs and after the PBoC upped its liquidity efforts, although mainland China lagged on lingering tensions after China’s Foreign Ministry decided to impose sanctions on US officials for actions related to Taiwan affairs and with President Trump issuing an executive order instructing agencies to prioritize the removal of Chinese-made drones for government fleets. Finally, 10yr JGBs were choppy with prices initially subdued by the gains in stocks which also pressured T-note futures overnight, although JGB prices were later supported following the 20yr auction which showed a firmer bid-to-cover and higher accepted prices.

Top Asian News

• Blackstone, Meituan Are Among Bidders for China Logistics
• Hong Kong Stocks at 20-Month High as Record China Cash Floods In
• Hong Kong Unemployment Rises to Highest Since 2004

European bourses experience mixed trade (Euro Stoxx 50 +0.2%) following on from a mostly optimistic APAC handover where mainland China was the only major underperformer on the back of heightened US-Sino tensions. Markets thus far remain tentative and await more concrete catalysts as US players are set to return from their long weekend and will bring along with them more corporate earnings (Bank of America – 12:00GMT, Goldman Sachs – 12:30GMT, Netflix – 21:00GMT), and Incoming Treasury Secretary nominee Yellen’s confirmation hearing at 15:00GMT (full primer can be found here). Back to Europe, the FTSE MIB (+0.4%) modestly resides as one of top gainers after Italian PM Conte won a vital confidence vote at the Chamber of Deputies – but he faces a more difficult test at the Senate on Tuesday. Meanwhile, Germany’s DAX (Unch) gave up some gains after reports via Bild suggested German Chancellor Merkel is reportedly looking to extend the German lockdown to February 15th (vs. current end-Jan expiry). That being said, the paper quoted Merkel last week floating an 8-10 week extension, thus some argue this was shorter-than-expected, but does not omit the chance of another extension in the future – the meeting on further restrictions is poised to take place today at 13:00GMT according to Bild. Sectors are mostly higher with Tech and Banks leading the gains amid supporting demand and yields respectively. On the other end of the spectrum, Auto names are dented as EU27 December car registrations fell YY whilst the 2020 figure slumped 24% amid COVID-19 – the largest drop on record. Travel & Leisure meanwhile sees lacklustre trade as the sector balances vaccine rollouts with reports US President-elect Biden’s adviser stated the incoming administration does not intend to lift travel restrictions on Europe or Brazil on January 26th. In terms of individual movers, HSBC (+2%) is bolstered by the yield environment coupled with comments from its chairman Tucker who said the group is mulling revising its strategy and will focus on Asian expansions. Additionally, Tucker said they are looking at resuming dividends as soon as possible. Elsewhere, Rio Tinto (Unch) was firmer after reporting Y/Y increases in Q4 Pilbara iron ore production, shipments and aluminium output, albeit copper output fell modestly. The miner said China’s buying remains robust despite localised impacts from COVID-19 in some regions. Finally, Danone (+1.5%) is supported by reports activist investor Bluebell Capital has taken a stake in the Co. and is seeking the removal of Chairman and CEO Faber due to their underperforming share price.

Top European News

• Jailed Kremlin Critic Navalny Urges Sanctions on Putin Allies
• Europe’s Firms Face $720 Billion Capital Gap to Fund Rebound
• Italy’s Conte Wins First Crucial Vote for Government’s Survival

In FX, buck bulls have been impeded by a broad upturn in risk sentiment first and foremost, but the fact that the index failed to sustain gains through a key technical level in the form of the 50 DMA at 90.931 on Monday vs 90.927 today, and extend beyond 91.000 may also be telling. However, the DXY is holding around 90.500 on the way back down to keep chart proponents encouraged and it would be far too premature to suggest that the Dollar is set for a complete turnaround Tuesday in terms of its overall recovery from worst levels, barring a further, deeper retreat or something more detrimental from US Treasury Secretary nominee Yellen at her confirmation hearing – for a full primer of the event check out the headline feed at 8.30GMT.

• EUR/AUD/XAU – The Euro and Aussie are vying for top spot among the non-Usd G10 currencies, with the former back above 1.2100 after breaching the 50 DMA at 1.2091, and the latter retesting 0.7700 where big option expiries reside (1.2 bn). Eur/Usd may also be deriving some traction from Italy following PM Conte’s vote of confidence from the Chamber of Deputies, though tonight’s Senate result will likely be a much tighter call as he needs 161 votes to survive vs current expectations of 154-158 in his favour. For the record, only modest upside in reaction to a firmer than forecast ZEW survey towards 1.2135 as Germany looks set to extend its lockdown until mid-February from the end of this month. Meanwhile, Aud/Usd could be gleaning support via Capital Economics contending that the RBA may stop QE in April as a counter to a 5.5% decline in payrolls over Xmas and New Year, per Australia’s Bureau of Statistics. Elsewhere, Gold is also benefiting from the Greenback’s retreat and a rebound in real yields as it eyes the 200 DMA just shy of Usd 1845/oz.
• NZD/CHF/GBP/CAD – Also paring recent losses vs their US rival, as the Kiwi regains 0.7200+ status, also with headwinds from Capital Economics that expects the RBNZ to hike rates in 2022, but acknowledging a significant improvement in Q4 NZIER business confidence as well. Similarly, the Franc has rebounded firmly from sub-0.8900 amidst less deflationary y/y and inflationary m/m Swiss producer and import prices, Sterling is back over 1.3600 and the Loonie has recovered from its close encounter with 1.2800 to trade nearer 1.2700 in advance of Canadian manufacturing sales and wholesale inventories before CPI and the BoC on Wednesday. Note, housing starts surpassed consensus by 1.3k in December according to data out yesterday.
• JPY – The major laggard due to its safe haven standing and closer correlation with US Treasury/JGB yield differentials, with the Yen trying to contain declines circa 104.00 in the run up to trade, CPI and the BoJ.
• SCANDI/EM – All drawing comfort from the more constructive market tone, though to varying degrees as the Sek outperforms and Zar is sufficiently buoyed by spot bullion to shrug off significantly weaker than anticipated SA mining production.

In commodities, WTI and Brent front month futures are grinding higher in the run up to the US entrance. Prices initially coat-tailed the softer buck and broader gains across stocks heading into the European open before being briefly knocked off-course by the IEA monthly report. The report lowered the IEA’s Q1 2021 demand growth forecast by a sizable 600k BPD followed by a 300k BPD downgrade to the overall 2021 view – amid resurgence of COVID-19 cases and slowing oil demand rebound. This report chimes more with the EIA STEO release whereby the agency cut its forecast for 2021 world oil demand growth forecast while OPEC kept theirs unchanged. Brent Mar resides just north of USD 55.50/bbl (vs high 55.45/bbl) while its WTI counterpart hovers above USD 52.50/bbl. It’s also worth bearing in mind that there are discrepancies between the WTI and Brent price changes an account of no WTI settlement yesterday due to MLK holiday, whilst Brent settled lower by USD 0.35/bbl. Elsewhere, gains in precious metals are carried by the weaker Buck coupled with some reflationary sentiment heading into incoming Treasury Secretary nominee Yellen’s confirmation hearing in which she is to sell the USD 1.9tln fiscal bazooka. Spot gold has rebounded from its 1835/oz low to hover in close proximity to its 100 DMA (1844.85/oz) ahead of its 50 DMA (circa 1859/oz) and 21 DMA (circa 1875/oz). In terms of base metals, LME copper is firmer and back above USD 8,000/t amid the weaker Dollar and ahead of Yellen’s speech. UBS expect copper prices at USD 9,500/T by mid-2021 and look for a short-term pullback. The bank notes that subsequently market conditions and reducing exchange inventories indicate an upward move. Elsewhere, Dalian iron ore pulled back from 4-week highs amid reported weakening steel margins in China.

US Event Calendar

• 4pm: Net Long-term TIC Flows, prior $51.9b

DB’s Jim Reid concludes the overnight wrap

I took advantage of the US holiday to watch a film on a week night last night. I can’t remember the last time I’d done that. Showing how up to date we are we watched the Oscar winner from two years ago, namely Korean film Parasite. It was completely different from what I expected. What a crazy film though. I can’t remember seeing anything like it. It was a bit like a British 1970s sitcom farce in some respects but overall was brilliant. An uncomfortable but great watch.

With the US out on holiday it was a pretty subdued session for markets yesterday with no Oscars for outstanding moves in either direction. Investors will now look forward to earnings season gathering momentum and the arrival of the Biden administration tomorrow. By the close in Europe, risk assets had made modest gains, with the STOXX 600 (+0.20%), the DAX (+0.44%) and the CAC 40 (+0.10%) all moving higher. And US equity futures followed a similar pattern, with S&P 500 futures paring back their morning losses to move into positive territory by the European close.

Overnight in Asia, markets are largely trading higher with the Nikkei (+1.40%), Hang Seng (+3.10%), and Kospi (+3.03%) all posting gains. An exception to this pattern is the Shanghai Comp which is down -0.11%. Futures on the S&P 500 are up +0.69% while yields on 10yr USTs are +3.1bps higher to 1.115%.

The week will get going today with earnings that include Bank of America, Goldman Sachs and Netflix but there will also be a lot of interest in Yellen’s confirmation hearing as the new Treasury Secretary before the Senate Finance Committee. Her prepared remarks include the line “Right now, with interest rates at historic lows, the smartest thing we can do is act big”. Expect lots of questions about debt sustainability and the role the Fed will likely play in that given her background.

The main news yesterday happened after European markets closed, as the Italian government won a confidence vote in the lower House of Parliament as expected. The bigger challenge for Prime Minister Conte will be today in the Senate however, where the government is short of a majority following the departure of former PM Renzi’s Italia Viva party from the coalition. This means that Conte will need the support of MPs outside the government if he’s to win. There is some talk of Italia Viva abstaining which will make the arithmetic easier. Should Conte fail, then according to our European economists, the Democratic Party and the Five Star Movement would likely need to find a new PM and probably seek a compromise with Italia Viva, which currently appears difficult following their departure last week. Another option would be an “institutional government” led by a technocrat, as happened from 2011-13 under former EU Commissioner Mario Monti. And if that were to also fail, then early elections would come onto the table, although the likelihood of that is still low since it’s not in the interests of any of the government parties.

Ahead of the Italian vote, sovereign bonds sold off across Europe, although there was little movement in spreads, with 10yr yields on bunds (+1.4bps), OATs (+1.5bps) and BTPs (+1.7bps) all seeing similar moves higher. There was also a further rise in market-based inflation expectations, with German 10yr breakevens up to 1.03%, their highest level in almost a year, while Italian breakevens hit a 2-year high of 0.99%.

Other haven assets also performed reasonably, with gold (+0.70%) and silver (+2.36%) both making gains, while the Japanese Yen was the strongest-performing G10 currency, strengthening +0.15% against the US dollar.

Turning to the coronavirus pandemic, Chancellor Merkel will be meeting state premiers today to discuss lockdown measures, which could be extended until mid-February, amidst concern over the new variants. Elsewhere there was some positive news however, with the number of Italian cases falling beneath 10k for the first time this year, while in the UK, the 7-day case average fell below 45k for the first time since New Year’s Eve. The UK continues to be one of the fastest on the vaccine rollout, with over 4m having now had their first dose, including a majority of the over-80s. Furthermore, the vaccine minister said yesterday that an easing of restrictions could begin in the first or second week of March, which would be once the priority groups have had their vaccine by mid-February and immunity has had time to take effect. Elsewhere, the EU’s executive arm is likely to urge member states to set a target for vaccinating at least 70% of the bloc’s population by this summer. Overnight there was a bit of downbeat news on Moderna’s vaccine with California’s state epidemiologist recommending that distribution of more than 300,000 doses of Moderna’s vaccine be paused in the state after some people who received it had possible severe allergic reactions.

To the day ahead now, and one of the main highlights will be Janet Yellen’s confirmation hearing as Treasury Secretary before the Senate Finance Committee. Earnings releases will include Bank of America, Netflix, Charles Schwab and Goldman Sachs. From central banks, the Bank of England Chief economist Haldane will be speaking, and data releases include the German ZEW survey for January.

As the MSM continues to pump stories about the possibility of a military-led insider attack at Wednesday’s inauguration – with nary a mention of the millions of jobs still missing from the pre-pandemic days, or the millions more still on pandemic unemployment assistance and other benefits – Joe Biden and his team are doling out more details about the Biden team’s Day One immigration blitz.

We first noted a couple of days ago that the incoming Biden Administration is planning to implement new immigration reform that includes an eight-year path to citizenship for millions of illegals and long-term protected status for DACA recipients, among other details. According to ABC News, Biden will also switch up the border-control policies to rely more on technology and less on the Trump Administration’s strategy of treating the porous southern US border as a crisis.

Biden intends to send the bill to Congress immediately after his inauguration, all part of his 10-day blitz of new policies.

The Biden team tried to paint the VP’s policies as a continuation of his “work” as VP back in the Obama Administration. But the reality is the path of citizenship for millions – not just the DACA “Dreamers” – is far more radical than anything Obama managed to accomplish. Members of Biden’s team told ABC that the VP worked on addressing the “root causes of migration from Central American countries” during his time as VP, when there was, infamously, a crisis of unaccompanied minors arriving at the southern US border.

For those living in the US without legal status as of Jan. 1, Biden’s plan would provide a pathway to citizenship allowing for five years of temporary protected status, and the opportunity to earn a green card upon meeting the requirements like paying taxes and passing a background check. So, as long as migrants work, pay taxes, and don’t have a history or, say, gang involvement, they would have a pretty good shot at winning permanent legal status.

For the record, Biden hasn’t always spoken so highly of his “accomplishments” regarding immigration policy during the Obama years:  during the Oct. 23 presidential debate, he said “[W]e made a mistake. It took too long to get it right.”

Biden’s VP Kamala Harris also spoke about the administration’s immigration policy in a recent interview, previewing the eight-year pathway to citizenship, along with expanding protections for DREAMers and DACA recipients.

“These are some of the things that we’re going to do on our immigration bill, and we believe it is a smarter and a more humane way of approaching immigration,” Harris said during an interview last week.

While we recognize it’s not quite as high-priority for Biden, we look forward to eventually hearing his team’s plan to crack down on the burgeoning amount of drugs, including fentanyl-laced heroin, meth and cocaine, millions of tons of which flow into the US each year, killing tens of thousands of Americans.

Amid crippling US-led sanctions on Iran and a continually weakened currency, enterprising young Iranians are taking advantage of the country’s cheap electricity to mine Bitcoin, however, it’s coming at a huge cost to fellow citizens as the immense power-sucking process of mining the cryptocurrency has contributed to a national electricity shortage and rolling blackouts.

Worse, major cities across Iran have over the past month been observed covered in a blanket of smog, which many worry could be toxic, given reports that desperate power plant operators have been resorting to burning low-grade fuel oils to generate electricity. 

Despite official denials by Oil Minister Bijan Namdar Zanganeh that power plants have taken such extreme measures, prominent state newspapers have lately featured images of a toxic smog descending on densely-packed residential areas from the fuel burning. 

While third-world countries with socialist systems offering free electricity like Venezuela have recently been in the news due to the rise of crypto-mining on the cheap, this is the first instance of illegal mining occurring on such a level as to contribute to major power outages. 

Bloomberg describes the surge in cryptocurrency interest followed in the wake of devastating Washington sanctions after Trump withdrew the US from the Iran nuclear deal:

The outages have been compounded by the mining of Bitcoin and other cryptocurrencies, which uses banks of high-powered computers to verify the legitimacy of transactions and create units of digital coin, government officials have said. US sanctions that have isolated Iran from global financial institutions have fueled a surge in cryptocurrency mining in the Islamic Republic, which has some of the cheapest electricity in the world.

All of this also comes as the coronavirus pandemic continues to ravage the country and has shown no signs of slowing, especially given the sanctions have squeezed hospitals and health care along with sectors specifically targeted by the sanctions.

Iranians Defy Warning and Share Pictures of Bitcoin Mining in Mosque — https://t.co/F7sC3n9eTh via Bitcoin News#bitcoins #Bitcoin2019 #cryptocurrency #cryptocurrencies #Crypto pic.twitter.com/OEsuFEjnow

— Bill Gellman (@wsgellman) June 29, 2019

The combination of the pandemic, US sanctions, and government mishandling of the health crisis has set off “an economic depression that could be worse than any in Iran’s modern history,” according to one analyst’s assessment.

Iranians turning to Bitcoin might be a bright ray of hope for some, but authorities see it as sinister and greedy exploitation of the Islamic Republic’s already strained resources and are trying to hunt down the mining operations. “The strains on the electricity grid led the government to start cracking down on illegal mining operations, and about 6,000 mining machines were recently confiscated in Markazi province, the managing director of the Markazi Electricity Supply Co., told ISNA,” Bloomberg details.

“A spokesman for the country’s electricity industry apologized for the shutdowns on state TV and said power supplies to Bitcoin miners and industry have been strictly limited to meet domestic needs,” the report continues. 

Some outspoken advocates pushing for greater global adoption of cryptocurrency as a prime medium of exchange have said precisely that it could be used by governments to beat sanctions. Venezuela, Iran, or even Russia could one day be the first test cases for such as scenario as their economies continue to be severely strained by US punitive economic measures.

Authored by Lance Roberts via RealInvestmentAdvice.com,

In September 2019, I wrote “NFIB Survey Trips Economic Alarms,”  Of course, it was just a few short months later the U.S. economy fell into the deepest recession since the “Great Depression.” The latest NFIB survey is sending a strong warning to investors piling into small-cap stocks.

While the mainstream media overlooks the NFIB data, they really shouldn’t. There are currently 30.7 million small businesses in the United States. Small businesses (defined as fewer than 500 employees) account for 99% of all enterprises, employ 60 million people, and account for nearly 70% of employment. The chart below shows the breakdown of firms and jobs from the 2019 Census Bureau Data.

Despite all the headlines about Microsoft, Apple, Tesla, and others, small businesses drive the economy, employment, and wages. Therefore, what the NFIB says is relevant to what happens in the economy.

NFIB Shows Confidence Drop

In December, the survey declined to 95.9 from a peak of 108.8. Notably, many suggest the drop was “politically driven” by conservative owned businesses. While there was indeed a drop following the election, the decline continues what started in 2018.

As I discussed when the index hit its record high previously:

“Record levels of anything are records for a reason. It is the point where the sustainability of activity can not be increased further. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY, of a cycle.” 

That point of “exuberance” was the peak of the economy.

Before we dig into the details, let me remind you this is a “sentiment” based survey. Such is a crucial concept to understand as “Planning” to do something is a far different factor than actually “doing” it.

An Economic Boom Will Require Participation

Currently, many analysts expect a massive economic boom in 2021. The basis of those expectations is massive “pent-up” demand when the economy reopens.

I would agree with that expectation had there been no stimulus programs or expanded unemployment benefits. Those inflows allowed individuals to spend during a recession where such would not usually be the case. Those artificial inputs dragged forward future or “pent-up” consumption into the present.

However, the NFIB survey also suggests much the same.

Small businesses are susceptible to economic downturns and don’t have access to public markets for debt or secondary offerings. As such, they tend to focus heavily on operating efficiencies and profitability.

If businesses were expecting a massive surge in “pent up” demand, they would be doing several things to prepare for it. Such includes planning to increase capital expenditures to meet expected demand. Unfortunately, those expectations peaked in 2018 and are lower again.

There are important implications to the economy since “business investment” is a GDP calculation component. Small business capital expenditure “plans” have a high correlation with real gross private investment. The plunge in “CapEx” expectations suggests business investment will drop sharply next month.

As stated, “expectations” are very fragile, and reality is often quite different.

Employment To Remain Weak

If small businesses think the economy is “actually” improving over the longer term, they would also be increasing employment. Given business owners are always optimistic, over-estimating hiring plans is not surprising. However, reality occurs when actual “demand” meets its operating cash flows.

To increase employment, which is the single most considerable cost to any business, you need two things:

1. Confidence the economy is going to continue to grow in the future, which leads to;

2. Increased production of goods or services to meet growing demand.

Currently, there is little expectation for a strongly recovering economy. Such is the requirement for increasing employment and expanding capital expenditures.

Now you can understand the biggest problem with artificial stimulus.

Yes, injecting stimulus into the economy will provide a short-term increase in demand for goods and services. When the funds are exhausted, the demand fades. However, small business owners understand the limited impact of artificial inputs. As such, they will not make long-term hiring decisions, an ongoing cost, against a short-term artificial increase in demand. 

Also, given President Biden is focused on more government regulation and higher taxes (which falls squarely on the creators of employment), increased costs will further deter long-term hiring plans.

The Big Hit Is Coming

Retail sales make up about 40% of personal consumption expenditures (PCE), which comprises roughly 70% of the GDP calculation. Each month the NFIB tracks both actual sales over the last quarter and expected sales over the next quarter. There is always a significant divergence between expectations and reality.

While stimulus may lead to a short-term boost in consumption, the impact of higher taxes, more regulations, and weak employment growth will suppress consumption longer-term.

The weakness in actual sales explains why employers are slow to hire and commit capital for expansions. As noted, employees are among the highest costs associated with any enterprise, and “capital expenditures” must pay for themselves over time. The actual underlying strength of the economy, despite cheap capital, does not foster the confidence to make long-term financial commitments to anything other than automation.

Despite mainstream hopes, business owners must deal with actual sales at levels more commonly associated with ongoing recessions rather than recoveries. 

Of course, this remains an argument of ours over the last couple of years. While the media keeps touting the strength of the U.S. consumer, the reality is quite different. If such were indeed the case, there would be no requirement to inject billions of dollars in stimulus to keep individuals afloat.

So what does all this have to do with small-caps?

Small Caps May Disappoint

With this background, it is easier to understand why the recent exuberance in chasing small-cap stocks may be premature. While small-cap companies do historically perform well coming out of recession, the basis was an organic recovery cycle of increasing productivity.

Currently, the run-up remains the assumption that the stimulus-fueled recovery is sustainable. Such is only the case if the stimulus becomes a regular benefit and increases in size annually. However, since deficit-based spending is deflationary, the outcome will fall well short of expectations.

“in 1998, the Federal Reserve “crossed the ‘Rubicon,’ whereby lowering interest rates failed to stimulate economic growth or inflation as the ‘debt burden’ detracted from it. When compared to the total debt of the economy, monetary velocity shows the problem facing the Fed.”

Such is a critical point as it relates to small-cap companies given their high correlation to small-business confidence. There has only been one other period in history that small-caps detached from underlying confidence, and the outcome for investors was not good.

Given that investors continue to push the small-cap index to historical deviations from long-term means, the risk of disappointment is extremely high. The data above suggests the economic recovery won’t be strong enough to justify current prices for small-cap companies.

Furthermore, small-cap companies’ valuations on a 2-year forward estimate all but guarantee a poor outcome for investors in the future.

Conclusion

Given that debt-driven government spending programs have a dismal history of providing the economic growth promised, disappointment over the next year is almost a guarantee.

However, suppose additional amounts of short-term stimulus deliver higher rates of inflation and higher interest rates. In that case, the Federal Reserve may become contained in its ability to continue to provide an “insurance policy” to investors.

There are risks to assuming a strong economic and employment recovery over the next couple of quarters. The damage from the shut-down on the economy, and most importantly, small business, suggests recovery may remain elusive.

While there is nothing wrong with being optimistic, when it comes to your investment portfolio, keeping a realistic perspective on the data will be essential to navigating the risks to come. For small-cap investors, the time to take profits and move to “safer pastures” has likely arrived.

Newsflash: Federal Reserve policy is making the rich much richer.

Certainly that’s not something we need to harp upon for most of our readers, who understand exactly how the Fed printing trillions of dollars over the course of months has further bifurcated the wealth gap in the United States. But, what is worthy to point out is that the mainstream media now appears to be getting wise to the concept – and all it took to realize what was going on was billionaires reaping another collective $1.3 trillion while the rest of the country suffered from agonizing depression. 

For example, over the weekend, Bloomberg published a piece called “The Rich Are Minting Money in the Pandemic Like Never Before”. The sub-heading of the article simply said: “Country’s most well-off benefit from Federal Reserve policies”. 

The report wonders how it is possible that some people are struggling for food, shelter and jobs while the rich cash in. “It’s a difficult thing to fathom,” the piece starts, but “there’s a whole class of people — at least the top 20% or so of earners — who’ve had to worry little about such matters.”

Clearly, the report’s authors don’t read Zero Hedge – because it’s not that difficult to fathom. In fact, it’s been going on for decades.

The report goes on to note how mortgage refinancing, working from home and the stock market has helped along the “haves” while the “have nots” continue to struggle. These wealth gains “obscure” the plight of the middle and lower class, which has seen hundreds of thousands of businesses shut down and more than 10 million unemployed.

Peter Atwater, an adjunct professor at William & Mary, said: “There has probably not been a better time to be wealthy in America than today. So much of what policy makers did was to enable those that were wealthiest to rebound fastest from the pandemic.” 

Employment for the bottom quartile of workers, making less than $27,000 per year, remains 20% lower than January 2020 levels. 30 million adults lived in households where there wasn’t enough to eat, according to the report – up 28% since prior to the pandemic. In Louisiana, 1 in 5 citizens faces food scarcity. 

Meanwhile, employment for the top quartile of workers earning over $60,000 per year has “already recovered to levels from a year ago”. Many of Americans were also able to redirect money they would have used on entertainment and travel to savings and investments. Thanks to the Fed, these types of redirections have paid off well.

Hilariously, Bloomberg places blame on the bifurcation to “challenges” regarding money distribution: “By easing credit conditions via the Fed, lawmakers were able to quickly prop up large corporations and wealthier individuals. But distributing aid to smaller firms and low-income workers has turned out to be a lot more challenging.” But, the truth is that it isn’t more challenging – the Fed and the government choose to distribute newly printed money disproportionately. The government doesn’t seem to understand the problem and the Fed simply doesn’t seem to care. 

Jerome Powell said in December: “The Fed cannot grant money to particular beneficiaries. Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources.”

Amanda Fischer, policy director at the Washington Center for Equitable Growth, commented: “If your wealth is captured by financial assets, you were back up and running in no time. It’s the lowest income folks who don’t even have to file taxes that have the highest barrier to climb.”

She continued, alluding to what sounds like eventual direct payments from the Fed: “Congress did a pretty good job of getting money to people, but we didn’t manage to fix decades of rusted plumbing. The fact that the Fed has infrastructure to do a bond-buying program but not do to anything else is a choice, not an inevitability.”

Heidi Shierholz of the Economic Policy Institute said: “Without more aid they will have to make more cuts, and cut services and that will disproportionately affect lower income families and communities. You cannot have a sustainable economy and political system where you have a small population who believe they are invincible and a growing population who feel defeated. It’s in capitalism’s best interest to close this gap.”

And while it does sound a bit like more socialism on top of socialism, she isn’t terribly wrong about the idea of at possibly returning to some semblance of normalcy by attempting to close this gap and right some wrongs that have been perpetrated by the Fed over the last several decades, before turning things back over to the free market. 

But time is not on the side of the middle and lower class. Bradford Botes, a principal at bankruptcy law firm Bond & Botes in Birmingham, said: “People simply feel that they are nearing or at rock bottom. We are hearing a lot more hopelessness. [Stimulus] money was used by people just to get by. The additional stimulus has not been sufficient to make any type of difference for average Americans.”