Month: May 2021

For the past several months we have warned about the pernicious effects soaring prices are having on both corporations (“Buckle Up! Inflation Is Here!“) and consumers (“”This Is Not Transitory”: Hyperinflation Fears Are Soaring Across America“), prompting even otherwise boring sellside research to get  (hyper) exciting, with Bank of America predicting that “Transitory Hyperinflation Lies Ahead.“

But none of this has spooked the Fed into conceding – or believing – that inflation is anything more than transitory. And maybe just this once, the Fed has a point because all else equal, by which we mean lack of rising wages, the best cure to higher prices is, well… higher prices.

Presenting Exhibit A: understanding that Biden’s stimmy bonanza is about to end and that soon they will have to live again within their means, Americans’ buying intentions (6 months from today) as measured by the Conference Board, have cratered across the 3 major spending categories: homes, automobiles and major household appliances.

The drop was so massive, it amounted to the biggest one-month drop in intentions to purchase appliances…

… and homes…

This confirms what we noted earlier, namely a record divergence between crashing homebuyer confidence (due to record home prices) and soaring homebuilder confidence (also due to record home prices). Guess which one will matter in the end.

This, for better or worse, screams stagflation: as Lynn Franco, senior director of economic indicators at the Conference Board, said while consumers’ assessment of present-day conditions improved, “consumers’ short-term optimism retreated, prompted by expectations of decelerating growth and softening labor market conditions in the months ahead.”

While it’s clear why stagflation will be “worse”, we say better because if nothing else these data confirm that US consumers are now tapped out, if not today, then certainly 6 months from today when Biden’s trillions in stimmies will have been long spent, and the spending spree will be over.

Oh, and for those saying wage hikes may be permanent we have some bad news: employers know very well that the extended unemployment benefits bonanza ends in September at which point millions of currently unemployed workers will flood back into the labor force sending wages sharply lower, and is why instead of raising base pay, most potential employers offer one-time bonuses, which – as the name implies – are one-time. As for higher wage pressures, well… just wait until October when everything reverses, Uncle Sam is no longer a better paying competitor to the US private sector, and wages slump.

What does that mean for the economy? Well, all those producers and retailers who got used to bumper demand and pushed their prices sharply and not so sharply higher, will face a stark choice: either drag prices right back down, or sell far fewer goods and services. That, or just await the next bailout.

One thing is certain: six months from today, the US economy will be far, far uglier.

Up until mid-May, the prevailing narrative and conventional wisdom on Wall Street (as the latest BofA Fund Manager Survey confirmed) is that an inflationary shockwave had been unleashed and the Fed would have no choice but to taper and hike rates much earlier than it has projected. Then, over the past two weeks, commodities finally cracked and the reflationary narrative got hammered, with benchmark 10Y yields, breakevens and real rates all sliding in unison as the real most popular trade on Wall Street (not bitcoin but “reflation”) was rapidly unwound and tech stocks spiked.

Well, there was positively a whiff of deflation from the just concluded sale of $60BN in 2Y notes which was by and far the strongest auction of 2 year paper not only in 2021 but for the past year.

Printing at a high yield of 0.152%, this was a 2.3bps drop from April and the same as March. Furthermore, printing 0.7bps inside the When Issued, this was the strongest auction as measured by the Stop Through going back to April 2020 when the world was caught in a deflationary collapse and everyone was rushing to the safety of TSYs.

The bid to cover was especially notable, soaring to 2.736 from 2.339 in April and the highest since August 2020.

Completing the deflationary picture – and surging demand for short-term paper – Indirects took down 57.1% of the auction, far above last month’s dismal 43.6% and the highest since February. And with Directs taking down 18.03%, Dealers were left holding just 24.9%, the lowest since November 2019.

Altogether, a blockbuster 2Y auction, and one which was more notable for what it signaled, and that is that the bond market is suddenly far less convinced that the Fed will be hiking rates in the next two years.

Via SchiffGold.com,

In many ways, it appears the economy is beginning to recover from the shocks of the coronavirus pandemic. GDP growth is way up. The stock market is soaring.  A lot of people are optimistic. But during an appearance on the Ben Shapiro Show, Peter Schiff said this isn’t a real recovery, and he explains how all of the government “help” is actually wrecking the economy, distorting the job market and destroying the dollar.

The economy is actually sicker now than it was before COVID. And what’s really been hurting it was not the disease but the government’s cure.”

Peter said government shutdowns were at the root of the problem. When the economies closed, people stopped producing goods and services. When people aren’t productive, they need to reduce their consumption. You can’t consume stuff that’s not produced. But the government didn’t want people to stop spending even though it ordered them to stop working.

Enter the Federal Reserve.

The Fed simply printed money out of thin air. The government then handed that money out in the form of stimulus checks, enhanced unemployment and other COVID relief programs.

So, you have an economy where we’re producing less, but everybody wants to spend more. That’s not economic growth. That’s massive inflation. And what we’re seeing now is the byproduct of everybody spending all this money that we just printed, and that’s what’s goosing the GDP. But this is not a real economy.”

Peter noted the ballooning trade deficit.

What we’ve done is we’ve substituted real economic growth, real goods production, for money printing. And we’re about to pay the price in terms of an enormous increase in the cost of goods and services.”

Peter said we’re ultimately looking at an inflationary depression.

All of this government spending is actually hindering the recovery, because when the government spends money, it deprives the free market of resources. Government spending is effectively taxation – even if the government doesn’t collect direct taxes.

Once the government decides to spend money, the question is: how do we pay for it?”

If the politicians don’t have the guts to actually raise taxes to cover the spending, then they borrow it and ask the Fed to print money.

But that doesn’t mean we get the government for free. It just means the government is robbing us of the purchasing power of our money. And that’s what’s happening. The government is creating money, putting it into the economy, giving it to people to spend — these people are bidding up prices. And that’s what’s driving the GDP. It’s higher prices and more spending as we are producing less.”

On top of rising prices, we’re seeing lots of shortages in the economy. The Fed wants us to believe this is “transitory.” Peter said this is exactly the attitude the central bankers had about the subprime mortgage market in 2005 and 2006.

They told us, ‘Ignore what’s happening in the subprime mortgage market. It’s contained. It’s not going to be a problem for the mortgage market. It’s not a problem for housing. It’s not a problem for the economy. Just ignore it. It’s no big deal.’ Well, the Federal Reserve was completely wrong about the subprime market being contained. They’re now just as wrong, if not more so, about inflation being transitory. We’re at the beginning of a huge escalation in the cost of living. And they are throwing gasoline on the fire right now by continuing to spend more money paid for by the printing press.”

Peter also mentioned the out-of-whack job market. The government is creating perverse incentives for people to stay at home and collect big unemployment checks. Meanwhile, businesses can’t find people willing to work.

It is more lucrative not to work than to go and get a job. And of course, it’s far more enjoyable to have a vacation and get paid more than you would get if you return to work. So, the government is paying people not to produce, and then giving them money to buy the stuff that they didn’t produce — this is going to be an inflationary apocalypse.”

Biden’s tax plan will put a further drag on the economy. A lot of people aren’t concerned because the taxes will target the rich. But it’s the money the rich invest in businesses that drive the economy. People making under $400,000 might not have to worry about a higher tax bill. But they may well end up unemployed when the rich guy can no longer invest in his business.

Peter said the inflationary chickens will really come home to roost when the rest of the world loses confidence in the purchasing power of the dollar.

I think the next real recession is going to be triggered by inflation. As the costs go up so much, businesses start firing people because they need to stay in business. And consumers, even though they’re spending a lot of money, they’re spending it on food. They’re spending it on energy. So, they don’t have money left over to buy other stuff.”

So, what does the Fed do? The normal prescription for a recession is to print more money. But if you have an inflation problem, can you pour gasoline on that fire in order to put it out?

The Fed is in a box that they can’t get out of.”

Peter goes on to explain why the money printing and stimulus didn’t lead to this kind of upward pressure on prices after 2008.

Just another Tuesday in Liberal-run Minneapolis where a reporter and his news team ducked for cover after a hail of gunfire was heard near the intersection where George Floyd died. 

AP’s Philip Crowther was shooting live video from 38th and Chicago when as many as 30 gunshots were heard one block from the intersection where George Floyd was killed last year. 

Reporter Philip Crowther was interrupted by what are believed to be gunshots, as he was reporting on the anniversary of George Floyd’s murder in Minneapolis for CGTN. Crowther reports 30 shots fired. No immediate injuries were reported on the scene. pic.twitter.com/VBkbh5cDPF

— CGTN America (@cgtnamerica) May 25, 2021

Minneapolis Police Department responded to reports of a shooting at around 1000 local time around 3800 block of Elliot Ave. South, or about a block away from Floyd’s memorial. Witnesses on the ground saw a vehicle speed away from the scene. 

“Very quickly, things got back to normal,” Crowther said. “People here who spend a significant amount of time, the organizers, were running around asking, ‘Does anyone need a medic?’ It seems like there are no injuries.”

The intersection was recently transformed into a memorial since his death this day last year. A gathering has been planned for later this afternoon to mark the anniversary. 

Nevertheless, defunding police is not going so well in Minneapolis, with the metro area transforming into a chaotic and violent hellhole. 

Authored by Steve Watson via Summit News,

Outspoken host Tucker Carlson outlined Monday how the possibility of a lab leak causing the coronavirus outbreak was dismissed and lied about for over a year by those directing the pandemic response, and is only now emerging as a serious prospect because of the persistence of those who refused to be silenced.

“Pretty much every sane person acknowledges at this point that the government of China likely caused the single worst man-made disaster in human history,” Carlson noted, citing the release of a US intelligence document acknowledging that workers at the Wuhan Institute of Virology were hospitalised in November 2019.

The host noted that Anthony Fauci has admitted that he had no idea about the revelations, even though they were first brought to light in January, and rumours about the workers getting sick have been known for over a year.

“Fauci’s own employers, the U.S. government, publicly released compelling evidence that the virus that he has devoted his life to fighting, did not come from food, but instead escaped from the very bio lab that Tony Fauci has sent American tax dollars to fund,” Carlson announced.

“Yet somehow Tony Fauci didn’t know this… Can we really believe that? No, of course, we can’t,” Carlson continued, adding “right around the time those Chinese researchers became the world’s first COVID patients, the government of Thailand contacted the CDC and Tony Fauci’s office to say its intelligence service had picked up ‘biological anomalies’ around the lab in Wuhan. In other words, there had been a leak.”

Carlson continued “several other allied foreign governments, including the governments of France and Australia, have gathered evidence showing the virus escaped from a Chinese lab. Yet Tony Fauci, who runs the whole thing, didn’t know any of this? Come on. Of course he did.”

“Fauci has known from the beginning the virus may very well have come from that lab. Many people have known that. Fauci just lied about it for more than a year,” Carlson urged.

Watch:

Carlson went on to explain how Fauci’s public statements regarding the outbreak and the Communist Chinese government are remarkable in this context.

“Tony Fauci was perfectly aware that China may have created this virus, and he knew for a fact that the government of China was lying, covering its tracks, and pushing the world health organization to do the same,” Carlson charged.

The host added that “the most galling part” of this is the fact that while Fauci and the health authorities lied, “those few journalists and scientists who told the truth about what happened in Wuhan were punished for telling the truth.”

“They were attacked by CNN, censored by Facebook, denounced by their colleagues. They were destroyed in some cases. Where’s their apology? Who’s paying into their reparations fund? No one of course.,” Carlson emphasised.

Carlson concluded by warning that “The WHO, which followed China’s instructions and told the world that COVID wasn’t really transmissible by air, now has the full support of the Biden administration.”

“This is despite the fact American intelligence can prove that the WHO lied, and people died as a result of those lies. Even as of now, the U.S. government has not launched any broad and serious investigation into where the coronavirus came from.” Carlson added.

In a separate Fox News broadcast Monday, former Secretary of State Mike Pompeo, who has continually spoken about the evidence of a lab leak, expressed his disgust at witnessing government scientists over the past year dismissing the possibility of COVID-19 originating from a lab “when they surely must have seen the same information that I had seen.”

“That includes, certainly, Dr. Fauci as well,” Pompeo noted:

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Amazon shares skidded to session lows just before noon ET on Tuesday after Washington DC’s Attorney General Karl Racine unveiled a new anti-trust lawsuit against the e-commerce giant, alleging that the company’s practices have unfairly raised prices for consumers while suppressing competition and innovation.

As a result, the lawsuit is seeking to end Amazon’s use of allegedly illegal price agreements to edge out competitors, recover damages and impose penalties. The lawsuit alleges that Amazon’s conduct made it virtually impossible for third-party sellers to offer goods at a better price than Amazon.

Washington DC AG Karl Racine

The lawsuit, filed in Washington DC Superior Court, alleged that Amazon illegally maintained monopoly power by using contract provisions to prevent third-party sellers on its platform from offering their products for lower prices on other platforms. The attorney general’s office claimed the contracts create a “an artificially high price floor across the online retail marketplace,” according to a press release. The AG claimed these agreements ultimately harm both consumers and third-party sellers by reducing competition, innovation and choice.

Until 2019, Amazon included a clause in its third-party seller agreement that they couldn’t offer goods on Amazon at a higher price than they were offered on other third-party platforms. Amazon eventually removed that provision amid growing anti-trust scrutiny.

The lawsuit comes as state AGs and the DoJ filed antitrust lawsuits against Google and Facebook; Amazon is also reportedly in the sights of federal regulators. But Tuesday’s action comes from Racine’s office alone.

Racine said on a call with reporters on Tuesday that the central focus of the lawsuit – contracts known as “most favored nation” agreements – was something that he felt should be taken on independently due to the sheer amount of work involved in bringing these types of lawsuits.

China’s crackdown on crypto may have a silver lining after all.

While Beijing’s bitcoin battering efforts – for myriad reasons including a lack of centralized control (translation: use our CBDC or else), a pathway for capital outflows (translation: use our CBDC or else), and the latest somewhat humorous “crypto does not meet China’s carbon goals” – have, along with Elon’s tweets, tamped down enthusiasm for the cryptocurrency; the perhaps unintended consequence of the actions of Musk (reversing his advocate position by highlighting the anti-ESG case) and China’s regulatory crackdown (again) will be the ‘greening’ of crypto and inevitably enabling more progressive asset allocators to move reserves its way.

“In recent days, crypto-currency trading has been too hot in China which attracted many individual investors. It’s necessary that the government rolls out warnings in case any large risks materialize,” Cao Yin, managing director of Digital Renaissance Foundation and a bitcoin investor, said.

And it could be happening sooner than expected as China’s Global Times (broadly considered Beijing’s mouthpiece) reports that China’s recent ban on bitcoin-related activity will reshape the landscape of the global mining industry and force more Chinese miners to migrate overseas, such as to the US.

“Chinese miners account for over half of the global crypto network’s processing power, and this will also weigh on the development of the global mining industry in the long run,” the insider said. 

Some bitcoin mines use thermal power sources that can’t pass the government’s environmental impact assessments, and thus run counter to the country’s carbon-neutrality goals, Cao said.

But, as Global Times writes, according to Cao, some bitcoin mines in China are now ready to purchase carbon emissions quotas. The exodus started in 2017 but is now speeding up, as mines look for regions with cheaper electricity rates and more friendly policies.

“It’s possible that bitcoin mines may eventually move out of China, but production and exports of bitcoin mining machines won’t stop in China because of market demands,” Cao said.

The rotation from relatively power-hungry Proof-of-Work currencies to less power-intensive Proof-of-Stake currencies remains but has lost some of its sheen recently…

Circling back to where we started, China could be about to become bitcoin bulls’ best friend…

China is the bitcoin bears biggest friend: as long as bitcoin can be mined in China it is “dirty”

Once China bans bitcoin mining there, the anti-ESG case collapse

— zerohedge (@zerohedge) May 21, 2021

Of course, this all comes a day after Elon Musk and Michael Saylor “spoke with North American Bitcoin miners. They committed to publish current & planned renewable usage & to ask miners WW to do so. Potentially promising.”

It wasn’t immediately clear if any Chinese bitcoin miners are part of this organization – they should be, after all the dirtiest bitcoin mining takes place in China’s infamous Xinjiang region – but it’s a start, and if indeed we are about to see mining standardization, one which pushes more output to the US and other “clean” regions, this could be just the catalyst that eliminates the biggest ESG complaint against cryptos.

Authored by Lance Roberts via RealInvestmentAdvice.com,

“I take my hat off that you are able to continue picking up pennies in front of a steamroller. Reading your newsletter, I scratch my head in amazement at your ability to increase your exposures in a market you admit is the most expensive ever.” – @mlevin999

That was a comment I got on Twitter following a recent newsletter.  where I discussed increasing our exposure concerning our short-term “buy signals.” To wit:

“The uptick in money flows did allow us to add some exposure to portfolios in holdings we had taken profits in with the previous ‘sell’ signal.”

I can understand the confusion when this past week I discussed the issue of “If everyone sees it, is it still a bubble?” 

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth ‘real McCoy’ bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we’re in one.” – Jeremy Grantham

How do you square a long-term “bearish” outlook on future returns with a short-term “bullish” bias?

Fundamentals 

As discussed in “There Is No Way, This Doesn’t End Badly,” virtually every measure of fundamental analysis suggests the markets are very expensive.

“10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has never been a previous period with the ratio climbing to near 3x.”

Whether it is Market Capitalization to GDP, CAPE, Tobin’s Q, or Price-to-Sales, the problem with all valuation measures is they are horrible market-timing indicators. As shown in the chart below, if you had gone to cash when the S&P first crossed into “expensive” territory greater than 23x CAPE, you would have missed most of the current bull market cycle. 

Being doggedly attached to valuations and fundamentals can prove just as dangerous to long-term returns as getting caught in a bear market. While a bear market does indeed destroy capital, not participating in a bull market has an equal impact on ending results. 

An excellent example of the problem, shown below, with purely using fundamentals to manage a portfolio is the performance chart between “momentum” and “value” since 2009.

Of course, this is the direct result of sustained ZIRP (Zero Interest Rate Policy) and successive rounds of monetary stimulus by the Federal Reserve.

So what other choice do you have?

Technicals

Such is where technical analysis can provide some assistance. However, we also have to make some important distinctions:

1. Most individuals dismiss technical analysis as “voodoo” primarily due to a lack of understanding.

2. Specifically, we are not discussing the use of technical analysis for short-term day-trading or “market timing,” which is being “all in or all out” of a position or market.

3. Importantly, as opposed to mainstream commentary, technical analysis is not infallible. While there are times it fails, such does not mean it does not work. The goal of technical analysis is to improve the “odds” of success by understanding overall market psychology in the short term. 

4. As noted, in the short term, fundamental analysis has a near-zero correlation to performance outcomes. Therefore, a tool is needed to measure and control overall investment risk. 

In our management process, we are long-term investors with a fundamental bias. As discussed in “Fully Invested Bears:”

“Our job is to participate in the markets with a bias toward capital preservation. As noted, the destruction of capital during market declines has the most significant impact on long-term portfolio performance.

From that view, as a portfolio manager, the idea of ‘fully invested bears’ defines the reality of the markets we live with today. Despite the understanding that the markets are overly bullish, extended, and valued, we must stay invested or suffer potential ‘career risk’ for underperformance.”

An Example Chart

With this understanding, we use basic technical analysis to determine when the overall market risk exceeds potential returns in the short term. From that basis, we can adjust portfolio risk accordingly. The chart below is a simplified chart for example purposes only.

As shown, we are not talking about “going all to cash” during a “sell signal” but instead just reducing exposure, taking profits, and rebalance overall portfolio risk. When “buy signals” are triggered, it is just a process of reversing actions.

Are there times when we increase the size of the “risk” adjustments? Absolutely. A good example was in February 2020 as the market was pushing well into 3-standard deviations above the 50-dma (pink shaded areas), and a “reduce” signal got triggered. Such required a more significant reduction in “risk” as the market began a much deeper correction. As the correction ensued, we continued to reduce risk accordingly.

However, therein also exposes a problem with technical analysis. While price action, which is a reflection of market psychology, can undoubtedly help mitigate portfolio risk, technical analysis does not distinguish between a short-term pullback (0-10%), a correction (10%-20%), or a full-blown bear market (a reversal of the bullish trend.) Unfortunately, the magnitude does not get revealed until after it has started.

As such, it is essential to treat every signal with the same respect and act accordingly. For most investors, by the time they realize a correction is in process, it is too late for them to do anything about it.

A Delicate Balance

Managing money, either “professionally” or “individually,” is a complicated game in the long term. In the short term, particularly amid a speculative mania, it seems exceedingly easy. However, as is the case with every bull market, a strongly advancing market covers up the many investing mistakes investors make. It is the ensuing bear market that reveals them in the most brutal and unforgiving of outcomes. 

The marriage of fundamentals and technicals is always a delicate balance. Fundamentals provide the basis for successful long-term returns but can lead to underperformance during momentum-driven markets. Technical analysis, likewise, has short-term benefits but can provide long-term challenges. Blending the two is like a “marriage of opposites.” Such can be highly successful, but it requires a lot of work.

Let me be very clear. You can not successfully “time the market.” Trying to be “all in or out” of every twist and turn of the market is impossible. However, that doesn’t mean you must be passive and let it all wash all over you.

There is a clear advantage to providing risk management to portfolios over time. The problem is that most individuals cannot manage their own money because of “short-termism.” (As shown by shrinking holding periods)

Of course, with the media and Wall Street pushing the “you are missing it” mantra as the market rises, can you blame the average investor “panic” buying market tops and selling market bottoms?

Conclusion

Yes, given we are in a strongly trending bull market, driven by massive amounts of exuberance and liquidity, I am going to keep “picking up pennies in front of a steamroller.” 

Such is why we overlay analysis to align expectations with reality. Implementing a solid investment discipline and applying risk management leads to the achievement of those expectations.

“Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s or the past lost decade on Wall Street. Why didn’t more people do so? Doubtless, they all had their reasons. But I wonder how many stayed fully invested because their brokers told them ‘You can’t time the market.”‘ – Brett Arends

I do understand there is a significant risk. If Jack Bogle is correct, things could be very disappointing. Or, as Seth Klarman from Baupost Capital once stated:

“Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

We saw much of the same mainstream analysis at the peak of the markets in 1999 and again in 2007. New valuation metrics, IPO’s of negligible companies, valuation dismissals as “this time was different,” and a building exuberance were common themes. Unfortunately, the outcomes were always the same. 

Our goal is to prepared.

“History repeats itself all the time on Wall Street”  – Edwin Lefevre