By Larry McDonald, author of the Bear Traps Report
Ladies and Gentlemen, the VIX is up 20% since August 31 with stocks 2% off the highs and only 37 new highs on the NYSE Tuesday.
One thing is for sure: markets have stopped, at least for 2 weeks, going up on good news. Think CPI, soft in September (stocks sell-off), HOT CPI in June (stocks rip higher). This is meaningful. The market is pricing in two Bank of England rate hikes in 2022, 70+ hikes across Emerging Markets are expected over the next year and the Fed is still buying $120B a month of Treasuries and Mortgage-Backed Securities - all while promising no planned hikes until well into 2023-2024? The market is telling us the Fed will have a very hard time keeping up this sales pitch - especially with an ESG Backfire conundrum triggering a global energy crisis.
Dollar at Key Level
As we stressed last year in our commodity bull case, it is a Highly Orchestrated US Dollar Containment Strategy - let the other central banks lead this time. The fastest-growing emerging market countries - looking at the current rate hike path - see their expectations below. While the Fed still endlessly searches for “substantial progress” on inflation / jobs data: Looking out 12 Months - it is seventy-three 25bp hikes from EM central banks, twenty-four months: 101 hikes globally. Inflation risk is driving other central banks into pulling back accommodation, NOT the Fed so far. Unsustainable, the market is sending a message. We MUST listen.
Risk - Reward is Extremely Poor Short Term
With trouble on the way in Washington, pay-fors, debt ceiling, fiscal cliff - you are supposed to sell the S&P 500 here with a stop. The colossal divergence between Fed and RoW (rest of the world) central banks is unsustainable. The Fed desperately needs a fiscal boost, cannot afford a $1.5 to $2T fiscal cliff.
US Fiscal Deficits
- 2020: $3T
- 2021: $3T
- 2022: $1T???
"Pay-Fors" Piling Up
Ways and Means Committee - Pay Fors Piling Up - House Democrats this week are advancing through committee the tax provisions to pay for President Joe Biden’s economic agenda with the intention of completing work by Wednesday on "revenue raisers" worth some $2 trillion (Bloomberg), the media used to call these taxes.
S&P 500 New Highs - Smell to High Heaven
New 52 Week Highs - one of the lowest marks since May. It makes little sense to chase stocks near the highs with smelly data like this, risk-reward is poor.
Gas Black Swan in Europe
Dirt cheap natural gas has powered global manufacturing for a decade - NO more- ESG Backfire (see "Why One Bank Thinks ESG Could Trigger Hyperinflation"), colossal profit margin pressures - we count warnings from over 22 companies - GS now recommending gas consumers in Europe "protect themselves" from a winter black swan via buying out of the money calls - all after a 140% up move in gas prices.
S&P 500: 20 and 50 Day Moving Averages - 20 Day Break
When the S&P 500 has closed below the 20 day moving average, it has commonly led to tests of the 50 day moving average. The pattern worked once again on Tuesday, as the S&P 500 closed just above its 50 day after a selling-off throughout the day
Buy High - Do NOT Buy Low
Off 2% since August 20 - MSFT announced another $60b via buybacks, of course, they passed on the buybacks in Q2-Q3 last year with the stock at $180 in May 2020 ($303 today). Microsoft made its first corporate bond sale 12 years ago, now has $82B in debt, much issued in recent years, 10yrs ago MSFT (AAA at S&P) generated $24b in FCF, today it generates $56b/yr. over that period BBB yield went from 4.4% to 2.2%. net debt/equity negative every year. SPX companies repurchased close to $180B billion of shares in Q1 2021, +37% from Q4, and 2x the $90B in Q2 2020.. S&P 500 Buybacks are on pace $730B in 2021 vs $520B 2020 year-end.
S&P 500 Covid Wedge
The S&P 500 has been consolidating inside of a large wedge since the March 2020 bottom. Last week we broke below support and this week we have thus far failed at the same trend from below. 50 day support looks extra important, a gap-down below the 50 day overnight would be very bearish...
US 10 Year Yield
Pricing in a $2T fiscal cliff, bond investors are nervous - once the bill is passed in November, they will be sellers, uncertainty high next 45 days - US 10 year yields failed to break above the 1.38% level 3 times over the past months and are now falling below trend support after CPI inflation came-in relatively soft. In our view, inflation beneath the surface is more sustainable than the consensus believes.
Median Inflation Creeping Higher
"I like to look at inflation data in a median sense (so rather than having one crazy category drive it all, we look at the center of the distribution, across 82 categories, equally weighted). On this metric, this CPI number was not low (here shown in 12-month space). The broadening is really quite a bit more important than what used car etc prices do month to month." - with Jens Nordvig
CPI Inflation Contribution
Delta Cooling Hot CPI Sectors: "Larry - So we have a CPI miss driven by drop in used cars, air fares, and hotels likely due to delta. Still gives enough room for Fed to delay rate hikes while talking up tapering, so delta normalization, global cases rolling over fairly hard, gets you a higher cpi trend looking forward." CIO in CT.
We agree here.
Travel Impact on Soft CPI
"Global cases are plunging, nearly 6 billion jabs, if team Biden solves the covid problem, they have a colossal CPI problem."
Large CPI miss drivers, travel, and services - Airline fares down 9.1% MoM due to Delta-v (Covid). The White House and the Transitory Message
The White House will sell transitory very hard, they need large fiscal.
"August CPI, most benign headline reading since January... but in a reversal from previous months the underlying trends were somewhat worse than the headline. The underlying trend many have focused on was about the same as previous months."
"Larry, What's the deal with OER only rising 0.25%? Moratoriums?" PM in NYC
OER Owners Equivalent Rent Lags Housing Prices
Although some expected a much larger jump in OER (Owners Equivalent Rent), the CPI component tends to lag housing prices. We see much higher OER (over 20% of CPI) in the coming months. The impact of the massive rise in US house prices has only just started to show up...
Watch the $10T
- Apple AAPL $2.5T
- Microsoft MSFT $2.3T
- Google GOOGL $1.9T
- Amazon AMZN $1.8T
- Facebook FB $1.1T
- Tesla TSLA $0.75T
*As of Q1 2021, 401(k) plans held an est $6.9T in assets, represented 1/5 of the $35T US retirement market. The Nasdaq 100 is worth $17-$18T vs. $1.5T in the XME Metals and Mining, XLE Energy ETFs combined.
Capital is Long Deflation Winners
In our view, once inflation PCE normalizes off insane YoY base effects at a HIGHER plain than prior decades, $2 to $4T will come out of the NDX, into inflation hedges such as commodity exposed equities. Core CPI is close to 4.30% vs 2.00% from 2016-2019, if the new level is 2.7% to 3.7% 2021-2014, there are trillions of dollars in the wrong place.
Bloomberg Commodity Index Surge
To put the current commodity price rally into some context: in more than 50 years of data, the Bloomberg Commodity Spot Index has only settled above the current level during 20 torrid days between April and May 2011. One big difference between today and 2008 in commodity markets: policymakers and lawmakers have not (as yet) blamed hedge funds, speculators, and long-only funds for the price rally. And the CFTC hasn't launched (yet) a nationwide investigation. And $6T in 2020-2021, 18% of GDP of fiscal deficits vs. $2T in 2009-2010 of 8% of GDP. Covid > Lehman.
Bloomberg Dollar Index
The soft CPI print means the Fed is less likely to be hawkish at the September meeting. The US Dollar is now falling below recent trend support. This is supportive for non-US risk assets and commodities.
The Fed continues to run QE at $120B per month with PPI at 8.3% and CPI at 5.3%. In 2019, the Fed cuts rates 3 times with unemployment at 3.5%. USD containment.