Global Market Comments
November 30, 2017
Fiat Lux
Featured Trade:
(THE SILICON MELTDOWN FINALLY HITS),
(NVDA), (LRCX), (TSLA), (AMZN), (GS),
(THE GOVERNMENT'S WAR ON MONEY),
(TESTIMONIAL)
I remember 1900 like it was yesterday.
Work on the New York subway began. Women wore huge bustles under their skirts and cinched their waists to 18 inches to make themselves appear more attractive at social events.
The hot new consumer product of the day was the Edison wax cylinder player, the first device that allowed people to play music in their own homes.
The Dow Average brought in a pretty mediocre year, rising a scant 3.4% to close at $70.44.
There was one other thing I recall. The year 1900 was the last time stocks were priced as highly as they are today.
So says Goldman Sachs (GS) in a research report released today.
It was enough to set the cat among the pigeons with technology stocks, 2017's runaway market leaders, which in many cases saw whopping one day declines of 10%-15%.
Much beloved stocks I have been recommending to followers for years like NVIDIA (NVDA), Lam Research (LRCX), Amazon (AMZN), and Tesla (TSLA), running up 200%, 300%, and even 400% gains, we suddenly taken out to the woodshed for a beating.
Is it game over? Has the top been ticked? Should I panic and dump all my technology stocks?
We all knew this day would come.
The theory I have been proposing is coming true.
Technology would not roll over due to deteriorating earnings or a weakening business outlook. The sheer weight of high prices would do the trick, much like they did in Tokyo on the first trading day of 1990.
The Goldman report merely provided the match.
There are an unusual number of risks suddenly piling up for stocks as we rush pell-mell into yearend.
1) Passage of the tax bill could set off one of the greatest "buy the rumor, sell the news" dump of all time. Once the bill becomes law, what will be the next surprise to drive prices ever upward? Nothing.
2) The tax bill doesn't pass. That means we have to back out all the market gains of the fall, or a couple thousands Dow points.
3) An enormous amount of tax selling has been deferred to January to take advantage of perceived lower tax rates. When a ton of selling is about to hit the market in January, what do you do in December? Not much.
4) If you sell your technology stocks now you get paid your annual performance bonus in January. If you lose all your profits before then, you won't.
5) The bitcoin fever is becoming so overheated that it is starting to suck money out of other asset classes. Since Thanksgiving, 100,000 new bitcoin accounts have been opened, mostly by Millennials.
The global cash glut is becoming so severe that we are having to invent new assets out of thin air just to soak up the surplus. Welcome to bitcoin, where 2018 yearend forecasts are now exceeding $50,000.
6) Did I mention that the government is shutting down on December 8?
The tech wreck prompted a vicious sector rotation out of the FANG's and into financials and retail. The move into banks will be sustainable through all of 2018. The switch into retail won't.
Is this REALLY the end of tech?
I don't think so. While the sector periodically suffers serious draw downs, with lead stocks like Apple backing off 40%, they always come back.
That's because the actual technology produced by these companies is hyper accelerating, thanks to artificial intelligence.
Tech isn't dead. It is just resting.
And by the way, will readers please quit asking me if they should buy retailers because they have gone down so much? It is a sector that's NOT coming back. It's a lot like buying buggy whip manufacturers....in 1900.
No, It's NOT Dead
When I lived as a student in West Berlin during the 1960s, I had a nice little side business.
I organized weekend walking tours through the Berlin Wall at Checkpoint Charlie to visit East Berlin for American students too afraid to go alone.
To pay for it, I smuggled US dollars my customers paid me in my boots which I used to buy Ostmarks in the East at a 75% discount to the official price. I then covered lunch and all my other bills, booking a nice profit on the day.
That would be much more difficult to pull off today, as governments around the world have launched a war on cash that will not end until its ultimate demise.
The truth is governments hate cash.
This became clearly apparent when the government of India withdrew circulation of its two largest banknotes. Some 50% of Indian GDP is thought to take place in the underground economy in cash only.
The move caused a financial panic, as consumers sold gold (GLD) and other hard assets to meet bills because they were unable to settle accounts with the large denomination notes they had hoarded.
As we move towards an all-electronic economy, the few remaining purposes where cash is essential are largely illegal.
When I lived as a student in West Berlin during the 1960's, I had a nice little side business.
I organized weekend walking tours through the Berlin Wall at Checkpoint Charlie to visit East Berlin for American students too afraid to go alone.
To pay for it, I smuggled US dollars my customers paid me in my boots, which I used to buy Ostmarks in the East at a 75% discount to the official price. I then covered lunch and all my other bills, booking a nice profit on the day.
That would be much more difficult to pull off today, as governments around the world have launched a war on cash that will not end until its ultimate demise.
The truth is, governments hate cash.
This became clearly apparent when the government of India withdrew circulation of its two largest banknotes. Some 50% of Indian GDP is thought to take place in the underground economy in cash only.
The move caused a financial panic, as consumers sold gold (GLD) and other hard assets to meet bills because they were unable to settle accounts with the large denomination notes they had hoarded.
As we move towards an all-electronic economy, the few remaining purposes where cash is essential are largely illegal.
Waitresses, babysitters, and bookies don't report income to the IRS. Nor do drug dealers.
This is a big deal because eight states legalized marijuana in the last election.
Since banks are still banned from handling pot proceeds, this booming business has to take place entirely in cash. Tales about of dealers making their runs with shopping bags full of $100 bills are rampant.
The IRS estimates that $460 billion in tax revenue is lost every year through unreported income, which is largely earned in cash.
Some half of the entire US paper money supply is held by foreigners, where it is used to evade taxes, bribe foreign officials, and finance terrorism.
The US government's war on cash is not a new thing. In 1929, it cut the size of US banknotes by one third to save money on the cost of high-grade paper.
In 1970 the US Treasury banned the circulation of the $10,000, $5,000, $1,000, and $500 bills to halt mafia money laundering. Since then, the IRS has been the biggest beneficiary of the move.
Large denominations US bills are now solely the domain of collectors.
The US government would love to get out of the cash business, as it is so expensive to run. It spends about $737.4 million a year just to print American $1, $2, $5, $10, $20, $50, and $100 notes.
Paper dollar bills, which are actually made of 75% cotton and 25% linen, are completely worn out and have to be returned in only 18 months.
Coins are even a bigger loser. It costs more than two cents to make a penny.
Since the advent of color printers, counterfeiting has exploded. North Korea runs almost its entire economy on fake $100 bills, which are said to be the best in the world.
Today, some 80% of the entire $1.34 trillion M1 notes and coins in circulation in America are in the form of $100 dollar bills. That works out to $4,200 per person. Where has all that money gone?
The US is now considering eliminating even this convenient denomination. While $1 million in $100's can fit into a tote bag, that quantity of $10 bills would weigh 220 pounds, a quantity much more difficult to sneak around.
An all-electronic economy would certainly pose some privacy problems, as it would leave a massive paper trail on everything you do.
When you get audited by the IRS, the first thing they do it obtain your past three years of bank and credit card records detailing your every transaction.
State authorities will pursue phone records to establish your physical presence to verify residency. So how long did you really spend in tax-free Florida last year?
It would also pare back illegal immigration, as this is another industry that runs entirely on cash. Once here, undocumented workers are often paid in cash in restaurants and on construction sites.
There is truly no place to hide.
Other countries are already well ahead in the war of cash. In Belgium, some 93% of all financial transactions take place electronically.
Sweden has also been pushing hard on this front, taking the M1 money supply there down by 27% over the past two years.
Many small businesses there now post signs saying they don't accept cash. The goal is to move to an all-electronic economy.
The preferences of Millennials are also moving us towards the cashless economy.
Have you every been in line at Starbucks and noticed that the kid in front of you just paid $2 for a cup of coffee with his credit card? Or maybe he swiped his Apple Pay account on his iPhone?
Whatever the means, it is clear that hard cash is about to become a dinosaur.
No Longer in Circulation
The confidence you have given me to enter the USD:JPY spot positions have returned me in excess of $1,500,000 in the last few months.
I'll be in California next year.
Can't wait to catch up. Dinner is on me, both times!
I know you said you aren't retiring until you're well into your seventies. Why so soon?
You're welcome to use this as a testimonial.
Cheers
Peter,
Australia
Global Market Comments
November 29, 2017
Fiat Lux
Featured Trade:
(STOCK POP, BANKS ROCK),
(BAC), (JPM), (GS), (MS), (WFC),
(PRINT YOUR OWN CAR),
(TESTIMONIAL)
Anyone who has listened to one of my Mad Hedge Global Strategy Webinars over the past six months has heard me recommend the same sector as the top market performer for the next three years:
Financials.
I am sticking to my guns, and it's not too late to get in.
If fact, I think leading names like Goldman Sachs (GS), JP Morgan (JPM), Citicorp (C), Bank of America (BAC), and Wells Fargo (WFC) could double over the next 2-3 years, and continue rising until the next recession hits.
Today, the market agreed with me in spades.
You can thank nominated Federal Reserve Governor Jerome Powell for the price action, who appeared in front of Congress today. The more he spoke, the higher bank shares rose.
He did his best to appear as a clone of outgoing governor Janet Yellen, who preceded over one of the most rapid increases in bank profits in history.
And what's good for Janet is good for the country.
One of the great appeals of the bull case for banks is that it is not all that hard to figure out.
I love banks, especially American ones.
I like those imposing, monumental edifices. I am attracted to those smooth marble surfaces. Those wrought iron grills at the teller windows are not to be trifled with.
They all reek of safety, stability, and certainty. What better place to park your life savings. And I never hesitate to grab one of those free breath mints on the way out the door.
What?
Didn't they get rid of those during a 1980's cost cutting binge? You always know that when they have to dump the breath mints to preserve their profit margin, there's a problem.
The airlines did it 40 years ago, and look what happened to them.
However, today, banks and financial shares in general offer some unique investment opportunities.
What is a manager to do when the stock market is at a century high valuation? You only buy cheap stuff.
What is a trader to do in a stock market characterized by rapid sector rotation? You only buy, you guessed it, cheap sectors.
Enter the banks.
You remember the banks, don't you? That was the sector that was priced for perfection in anticipation of eight consecutive quarter point interest rate raises starting in December 2015.
It only took a 10% stock market correction to rain on that parade, as the prospect of any further rate hikes was put on ice. Back stocks plunged 40% in a heartbeat.
Now that the April Open Market Committee minutes have put a rate rise back on the table, we're seeing that movie replayed one more time.
This time around, banks have attractions that were missing in past cycles.
Oversight is now at record levels of intensity.
Nearly a decade of new share issues has brought bank capital to record levels, and liquidity is at an all-time highs.
Book values are growing at a decent pace.
Energy loan losses were wildly over exaggerated by the rumor mill.
Share valuations are discounting a full scale recession that, worst case, is at least 2-3 years off. Earnings are at record highs.
Efficiencies are growing by leaps and bounds. One of the reasons that New York City has had the worst residential real estate market for the past couple of years is that bank layoffs have reached the hundreds of thousands.
Bank subleasing of office space has been so prodigious that is even starting to drag on the red-hot San Francisco commercial real estate market.
In fact, you could write off an entire new housing crisis now and still have more capital left over than last time.
Stocks could double over the next interest rate cycle. They offer a double discount in price to book value (70%) and earnings multiple to the main market multiple (9X versus 19X). Dividend yield are the highest in history.
Even Facebook (FB) and Apple (AAPL) are unlikely to beat that.
The fines and penalties that came out of the financial crisis are now a distant memory. They are even getting reversed in some cases, thanks to a friendly administration.
Bank shares are in fact a levered put on the bond market (TLT) and a call option on interest rates ($TNX).
There has been a lot of uninformed chatter about fintech eating the banks' lunch. But the reality is that the staggering regulation imposed on the banks by Dodd-Frank and the Treasury will act as an unassailable moat protecting the industry.
My guess is that entrepreneurs, developers, and coders will take one look at the morass of new rules and walk away to find some other industry to prey upon (real estate brokerage?).
The long-promised breakups of the big banks will never happen, lest the US give away its competitive advantage with the rest of the world. If they do, it will unlock massive shareholder value, enabling the shares to double yet again.
You could diversify and buy the basket through the Financial Select Sector ETF (XLK) (click here for their prospectus).
The smart regional bank play here is Comerica (CMA).
As a result of all of this, bank stocks are offering the lowest entry point in a generation.
The big question is if this is yet another bull trap and fake out with the banks, or whether this is the beginning of a long-term sustainable trend up.
We may well find out on December 13 when the Fed announces its next 25 basis point interest rate rise, or not?
Will Yellen's final commentary be hawkish, dovish, neither, or both?
If's she's smart, she'll talk about the weather.
Sticking to My Guns on Financials
I can't tell you how much I enjoy your blog. It is the first place I go every morning and I miss you on the weekends.
I stumbled upon your site about 4 months ago and have been addicted to it since day one. I really appreciate not only your insight into the markets, but also your global and historical perspectives.
All of this served up with your great sense of humor makes it a must read! Thanks for all your hard work.
Chip
"You make the most money when things go from terrible to only bad." said Tim Seymour of emerging market hedge fund, Triogem Asset Management.
Expect to hear a lot about ignition in the next year. No, I don't mean the rebuilt ignition for the beat up '68 Cadillac El Dorado up on blocks in your front yard.
I'm referring to the inauguration of the National Ignition Facility next door to me at Lawrence Livermore National Labs in Livermore, California.
Mention California to most people, and images of love beads, tie died T-shirts, and Birkenstocks come to mind. But it is also the home of the hydrogen bomb, which was originally designed amid the vineyards and cow pastures of this bucolic suburb.
The thinking at the time was that if someone accidently flipped the wrong switch, it wouldn't blow up San Francisco, or more importantly, Berkeley.
The $5 billion project aims 192 lasers at a BB sized piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy.
The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel conventional steam electric power plants.
There is no need for a four foot thick reinforced concrete containment structure that accounts for half the construction cost of conventional nuclear plants. The entire facility is housed in a large warehouse.
The raw material is seawater, and a byproduct is liquid hydrogen, which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you'd be right.
I worked with these guys in the early seventies, back when math was used to make things, and before it was used to game financial markets, and I can tell you, there is not a smarter and more dedicated bunch of people on the planet.
If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only.
The crude left in the Middle East will become worthless. Lumps of coal will only be found in museums, or in jewelry, its original use. If it doesn't work, it will melt the adjacent Mt. Diablo and take me with it.
If you don't get your newsletter tomorrow, you'll know what happened. Now what is this switch for?
Global Market Comments
November 28, 2017
Fiat Lux
SPECIAL INFLATION ISSUE
Featured Trade:
(THE GREAT INFLATION HEDGE YOU'VE NEVER HEARD OF)
