Global Market Comments
December 18, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(WHAT EVER HAPPENED TO THE GREAT DEPRESSION DEBT?),
($TNX), (TLT), (TBT)
Global Market Comments
December 18, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(WHAT EVER HAPPENED TO THE GREAT DEPRESSION DEBT?),
($TNX), (TLT), (TBT)
With the national debt now at $36 trillion becoming a hot-button issue once again, it’s time to revisit one of my favorite stories.
When I was a little kid during the early 1950s, my grandfather used to endlessly rail against President Franklin Delano Roosevelt.
The WWI veteran, who was mustard gassed in the trenches of France and drove Red Cross ambulances with Earnest Hemingway in Northern Italy for a lifetime, died in the wool Republican. He said the former President Roosevelt was a dictator and a traitor to his class, who trampled the constitution with complete disregard by trying to pack the Supreme Court.
Republican presidential candidates Hoover, Landon, and Dewey would have done much better jobs.
What was worse, FDR had run up such enormous debts during the Great Depression, feeding the starving, that not only would my life be ruined, but so would my children’s and grandchildren’s lives.
As a six-year-old, this disturbed me deeply, as it appeared that, just out of diapers, my life was already going to be dull, brutish, and pointless.
Grandpa continued his ranting until a three-pack-a-day Lucky Strike non-filter habit finally killed him in 1977. When he was in the trenches, the Army handed them out for free, addicting him for life.
He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during his war, they referred to them as “coffin nails.”
He was stubborn as a mule to the end. And you wonder whom I got it from?
What my grandfather’s comments did spark in me a lifetime interest in the government bond markets, not only ours but everyone else’s around the world.
So, whatever happened to the despised, future-destroying Roosevelt debt?
In short, it went to money heaven.
And here, I like to use the old movie analogy. Remember when someone walked into a diner in those old black-and-white flicks? Check out the prices on the menu on the wall. It says, “Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.”
That is where the Roosevelt debt went.
By the time Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam had happened, and the great inflations that followed that wars always brought.
The purchasing power of the dollar cratered, falling roughly 90%. Coffee is now $1.00, a hamburger at MacDonald’s is $5.00, and a cheap steak at Outback costs $15.00.
The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.
Who paid for this free lunch?
Wealthy bond owners who received minimal and often negative real, inflation-adjusted returns on fixed-income investments for three decades.
In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as “certificates of confiscation” during the seventies and eighties.
This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, creating inflation, and then repaying the debt in devalued future paper money. The masses loved it.
This is one of the main reasons why we have governments and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
Ever wonder how the new, impoverished United States paid for the Revolutionary War?
It issued paper money by the bale, which dropped in purchasing power by two-thirds by the end of the conflict in 1783. The British helped, too, by flooding the country with counterfeit paper Continental money.
Bondholders can expect to receive a long series of rude awakenings.
The scary thing is that we will soon enter a new 30-year bear market for bonds that lasts until 2053.
This is certainly what the demographics are saying, which predict an inflationary blow-off in decades to come that could take short-term Treasury yields to a nosebleed 12% high once more.
That scenario has the leveraged short Treasury bond ETF (TBT), which has just cratered from $46 down to $30. Eventually, it will soar to $200, but not now.
If you wonder how yields could get that high in a decade, consider one important fact.
The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 7% of the total outstanding.
Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. China has already ceased buying our bonds completely. They are going to need the money at home to care for burgeoning populations of old-age pensioners.
So, who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI.
There is a lesson to be learned today from the demise of the Roosevelt debt.
It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra-low interest rates and spending it all.
With real, inflation-adjusted ten-year Treasury bonds now posting negative yields, they have a free pass to do so. Ten-year Treasuries currently yield less than 3.90% versus 5.25% for overnight money.
In effect, the government never has to pay back the money it borrows. But they do have the ability to reap immediate benefits, such as stimulating the economy with greatly increased infrastructure and defense spending.
I’m not the only one who has noticed that most of our major weapons systems are 50 years old, except for the B-52 bomber, which is 72 years old. The Air Force plans to use them until they are 100. Will you feel safe and protected by a plane that is a century old?
If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create only domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target.
Here is my shopping list:
$1 trillion – new Interstate freeway system
$1 trillion – national defense weapons upgrade
$1 trillion – conversion of our energy system to solar
$1 trillion –investment in Southern border upgrades
$1 trillion – investment in R&D for everything technology-related
The projects above would create 5 million new jobs quickly. Who would pay for all of this in terms of lost purchasing power? Today’s investors in government bonds, half of whom are foreigners.
The bottom line of all this history is that the US government isn’t borrowing too much money, it is not borrowing enough!
How did my life turn out? Was it ruined, as my grandfather predicted?
I did pretty well for myself, as did the rest of my generation, the baby boomers.
My kids did OK, too. One son just got a $2 million, two-year package at a new tech startup, and he is only 34. Another is deeply involved in the tech industry, and my oldest daughter runs Stanford’s online courses. My two youngest girls are getting straight As in Computer Science at the University of California. They complain it’s too easy.
Not too shabby.
Grandpa was always a better historian than a forecaster. But did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows big borrowing binges.
Do you know the five acres that sit under the Bellagio Hotel in Las Vegas today? That’s the land he bought in 1945 for $500. He sold it 32 years later for $10 million.
Not too shabby either.
40 Years of 30-Year Bond Yields
Grandpa’s Impulse Buy for $500
Mad Hedge Technology Letter
August 23, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS LAUNCHED INTO ORBIT BY JEROME)
($COMPQ), ($TNX)
The job is done – The Fed won against inflation.
When is the parade?
That was largely the message that was delivered to us this morning by U.S. Federal Reserve Chairman Jerome Powell.
Migrating into rate-cutting mode means that tech stocks ($COMPQ) are about to explode into orbit.
We will only know how much higher tech stocks will go when we can understand how much Powell’s Fed will cut.
If he cuts the Fed Funds rate from 5.25% to 2% then tech stocks will be up at least another 50% from these levels.
What is bizarre is that Powell is cutting rates ($TNX) with housing prices, grocery costs, stock market, and a price for one ounce of gold at all-time highs.
Things are about to get more expensive – that is guaranteed.
Ironically, the Fed is planting the seeds for the next rip-roaring wave of inflation, because 3% inflation levels will be the new floor and not the ceiling.
Once the CPI hit 2.9% just a few days ago, the Fed went into the “the job is done” mode which is extremely dangerous.
Either way, tech stocks are in for a spectacular monster rally heading into the year's close and we just added a big position in chip stock Micron (MU).
There should be two to three .25% cuts by the end of the year which is highly bullish for equities.
"The direction of travel is clear," Powell added.
Powell acknowledged recent softness in the labor market in his speech and said the Fed does not "seek or welcome further cooling in labor market conditions."
The July jobs report rattled markets earlier this month, revealing that there were just 114,000 jobs added to the economy last month while the unemployment rate rose to 4.3%, the highest since October 2021.
Data earlier this week also showed that 818,000 fewer people were employed in the US economy as of March, suggesting reports have been overstating the strength of the job market over the last year.
Powell's remarks on Friday were reminiscent of those he delivered at Jackson Hole in 2022, in which the Fed chair offered a direct assessment of the economic outlook and, at the time, the need for additional rate increases.
The similar part of the speech was his call to action to change the direction of policy and he did just that.
We are about short-term trading and trade alerts here in what moves the market with tech trades.
I do believe long-term, what Fed chair Jerome Powell did, will turn out to be a policy mistake that will result in a lot higher bond yields.
The Fed's slow walking the rate hikes on the way up and then now slow walking the rate cuts on the way down is a recipe for disaster and the wrong way to approach this problem.
The ironic thing here is that tech stocks are the only equities, apart from energy and supermarket stocks, to do well in a higher inflation backdrop and part of that has to do with their monopolistic power which continues unabated.
Not that tech needed any help, but help is arriving in terms of lower rates and I do believe tech stocks will do well as we move closer to year-end.
Buckle up, put on your cowboy hat, and enjoy the tech rally!
Mad Hedge Technology Letter
August 16, 2024
Fiat Lux
Featured Trade:
(BIG RISKS TO TECH DISSIPATE)
($COMPQ), ($TNX), (FXY)
I don’t believe the tech sector is toast and it isn’t true to say that the burnt crust is the only part left over.
There is still vitality in it at the core of the tech sector ($COMPQ).
Granted, the trajectory left isn’t enough to propel tech stocks to a meteoric rise, but tech stocks should perform quite robustly in the run-up to the next earnings report.
So for all that are waiting for the bubble to burst – wait a little longer my friends.
In the meantime, let’s take a quick barometer of some of the outsized risks to big tech and ponder about the idea that outside or indirect events could possibly takedown tech shares.
China bailed the world out of the last three recessions and now they are a risk to drag down the rest of the world.
In each case, China's high growth and massive issuance of stimulus kick-started global expansion, and now that is gone with the wind.
China's model of economic development which worked so brilliantly in the boost phase, is now out of potency.
If American tech shares are sideswiped by global contagion, don’t bet on China to come bail out the radical overlords of Silicon Valley. China has its own problems and is entirely focused on that.
The era of zero-interest rates and unlimited government borrowing has ended. As Japan has shown, even at insane low rates ($TNX) of 1%, interest payments on skyrocketing government debt eventually consume virtually all tax revenues.
Japan was the black swan that could have cratered the tech market. Instead, it was a mild selloff yet manageable selloff creating a beautiful entry point for most of tech stocks.
Money is coming off the sideline to join in on a sharp rally into the U.S. presidential election so in the end the Japanese currency (FXY) risk was basically much-a-do-about-nothing.
At the start of the cycle, global debt levels (government and private sector) were low. Now they are high. The boost phase of debt expansion and debt-funded spending is over, and we're in the stagnation-decline phase where adding debt generates diminishing returns.
The era of low inflation has also ended for multiple reasons, but the tech shares have proven they can unequivocally march higher in an era of high inflation.
This is ironically due to tech being better positioned than other industries on a relative basis, because of their strong moats and iron-clad balance sheets.
The resilience in tech also echoes the idea that every company has become a tech company by integrating its products and revenue streams into daily business operations.
Tech productivity boom is hardly a one-off so as readers fret, please don’t think shares will magically drop to zero.
Dips are being bought and prices will go higher in the short term.
Economists were in awe in the early 1990s by the productivity stemming from the tremendous investments made in personal and corporate computers, a boom launched in the mid-1980s with Apple's (AAPL) Macintosh and desktop publishing, and Microsoft's Mac-clone Windows operating system.
By the mid-1990s, productivity continued to rise and the emergence of the Internet triggered the adoption of most of the population to get online and do business.
All the doomsday prophets who said high debt and high interest rates were the cocktails to finally stop tech stocks in their tracks got it completely wrong.
I am not saying debt and high interest rates are positive for equities, but tech has been able to skillfully navigate the headwinds with their excellent management skills and pivot towards leanness.
The buzz around AI holds still has a lot to prove, but the market is still celebrating its deflection of the Japanese yen carry trade.
I am not saying that tech shares will never have to confront anything that can drag them down meaningfully, but many of the high risks have either been postponed or dealt with.
We are in a position where tech should steamroll into the end of the year barring some type of crazy event.
Mad Hedge Technology Letter
August 14, 2024
Fiat Lux
Featured Trade:
(POSITIVE SIGNAL FOR THE TECH RALLY)
($COMPQ), ($TNX)
We received highly bullish news from the fiscal policy side today.
Conditions are everything in the short-term which is why macro events sometimes steal the whole show by destroying or propping up market sentiment.
Scare events can shock investors and become the impetus to take profits to protect capital.
Fortunately, the data from the CPI index has most likely given the green light for the US Central Bank to officially initiate its easing cycle next month.
My guess is that Fed Governor Jerome Powell cuts by 25 basis points and it could turn out to be a hawkish cut.
This is massively bullish for tech stocks ($COMPQ) leading up to the next earnings report in October.
This sets the backdrop for tech stocks to motor towards the upper left in upcoming months.
Lower rates ($TNX) translate into lower costs of capital for tech stocks to borrow money for paying stuff like salaries, software, and hardware.
The high-rate environment has translated into a dearth of companies going public and has stifled the creative juices at the formative stages of Silicon Valley.
That last jobs report offered new signs of a cooling labor market, which stoked fears that the Fed may have waited too long to start lowering interest rates after keeping them at a 23-year high for the last year.
A milder inflation reading released Wednesday removes one of the last hurdles the Federal Reserve needed to clear before cutting rates in September.
The Consumer Price Index (CPI) increased 2.9% over the prior year in July, down from June's 3% annual gain in prices. On a "core" basis, which strips out the more volatile costs of food and gas, prices in July climbed 3.2% over last year — down from 3.3% in June. That was the smallest increase since April 2021.
The new numbers are the latest confirmation that inflation is in fact dropping off a cliff after heating back up during the first quarter of the year, a development that prompted the Fed to warn at one point that rates would likely stay higher for longer.
Fed Chair Jerome Powell made it clear at the end of last month that a cut in September was “on the table” as long as the data supported it. He and other policymakers have said they want to be sure that inflation is in fact moving “sustainably” down to their 2% goal.
Tech stocks have positively correlated with interest yields since 2020, which is counterintuitive.
What this really means is that the growth rate of tech has overpowered the 5% Fed Funds rate which is quite impressive.
That high rate was supposed to pummel tech stocks and that fear-mongering failed to materialize.
No doubt the AI boom delivered a helping hand to tech shares as well.
Tech stocks were one of the few sectors in the public market that remained attractive in the face of aggressive rate hikes.
With the Fed almost to the point of reversing hawkish policy, I do believe it is “all systems go” for tech stocks in the short-term and this removes yet another possible black swan event off the table.
I am bullish on tech shares in the short-term.
Mad Hedge Technology Letter
July 12, 2024
Fiat Lux
Featured Trade:
(ROTATION HITS THE TECH SECTOR)
($COMPQ), ($TNX), (IWM)
Bond yields ($TNX) diving and the market pricing in a 25 basis point rate cut in September surely translates into another swift leg up in tech stocks ($COMPQ), right?
Hold your horses.
The price action resulted in the exact opposite with big names like Tesla down over 4%.
It was ugly but orderly which is a victory and not of the pyrrhic sort.
The sharp selloff stemmed from a lower-than-expected CPI number.
Decreasing CPI is a strong signal that price inflation is coming down and that is highly conducive to higher stock prices.
However, every inflation report reflecting lower inflation doesn’t guarantee tech stocks in unison will go up.
Tech stocks have done exceptionally well during a backdrop of high rates and high inflation which is extremely unusual.
The market took this opportunity to rotate out of tech and into cheaper stocks that look to benefit more from lower rates.
That’s not saying that tech stocks don’t benefit from lower rates, they certainly do, but the best of the rest has been so beaten down behind the woodshed during this higher rate story that many companies have been on life support and are due for a quick bounce.
The bounce, however, could be short-lived and the bounce could also be given back swiftly.
I suspect a temporary slowdown of tech stocks for the moment will take place while beaten-down sectors get their 15 minutes of fame before they disappear into the background.
I do believe once this short event has worked itself through the system, tech will be off to the races again.
It’s hard to keep tech stocks down because nothing of note has and looks like toppling them.
Presiding over iron-clad balance sheets with Teflon business models and wielding cash cows is the secret recipe to success.
The worst-performing sector in 2024 — real estate — had its best day this year. The Russell 2000 (IWM) climbed 3.6% — the most since November.
US inflation cooled broadly in June to the slowest pace since 2021 on the back of a long-awaited slowdown in housing costs, sending the strongest signal yet that the Fed can cut interest rates soon.
I find this rotation highly beneficial for the overall health of the stock market and it is honestly about time.
Higher rates were starting to turn the screws on many smaller companies.
Many have been in survival mode forcing management into maneuvers like cutting staff, doubling up workloads, trimming expenses, and reducing prices for products.
I do believe that this scarcity mentality will come to an end and this does give more room for other tech companies other than the Magnificent 7 to overperform.
To be honest, the over-reliance on 7 tech stocks to power the tech market is getting a little long in the tooth, and the narrow concentration of alpha is highly irregular and negative for the long-term sustainability of the tech sector.
I would tell readers to get your gunpowder ready because we are setting up for an optimal entry point into tech stocks for the next leg up.
Just be patient.
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