Weekly Update: Crypto-nite

09-15-2017

I haven’t been traveling these last two weeks, as they were scheduled for a European vacation which the Mr.’s health shenanigans inadvertently threw a wrench into. So, what should we talk about? What about the dollar and cryptocurrencies, i.e., digital currencies such as bitcoin? When on the road, I get occasional questions about bitcoin—is it a bubble, is it legitimate, what’s the price target, etc.? JPMorgan CEO Jamie Dimon this week called bitcoin a “fraud’’ that eventually will blow up. With the annual Gann date just around the corner—Sept. 22, the date the legendary financial speculator W.D. Gann observed had more market swings than any other—the price action in bitcoin and global currencies generally is attracting more and more attention. Contrarians argue that the U.S. dollar, which has surprised many by weakening faster than expected and by more than expected this year, is due for a real recovery. But the Institutional Strategist (TIS) thinks that, whether on Gann day or months later, the dollar is going much lower. This has broad implications for a number of asset classes. A low dollar is America’s best weapon in the trade wars—as it falls, the other side tends to be more willing to deal. Historical trends suggest dollar weakness also is positive for large-cap tech stocks and emerging markets. But a weakening dollar historically has proven inflationary—not that this has been the case so far this year—causing rates and yields to creep up. The U.S. 2-year to 10-year Treasury yield curve actually narrowed to 75 basis points last week, its flattest since July of 2016. Historically, the curve has inverted about a year after breaking below the 75 basis-point threshold, Strategas Research says, with market performance positive in the last four examples (1977, 1988, 1994 and 2005).

This has been a year of deteriorating market breadth, rarely a sign of a smooth road ahead. Cornerstone Macro notes the S&P 500’s recent all-time high came with just a few names also hitting fresh 52-week highs, ranking the latest high among the bottom third with respect to how many names within the index reached new highs too. It worries that a cyclical slowdown may be on the horizon, despite improvement in the latest data. The recent spike in gas prices because of Harvey could crimp discretionary spending in the critical fall season; at the least, it’s going to be hard to get a good read on the economy over the next few months as the macro data is sure to be noisy given all the destruction. Uncertainty has helped drive gold prices this year; could bitcoin be a better hedge? JPMorgan doesn’t think so. While there is no government to back up either gold or cryptocurrencies, gold has a track record of outliving governments and being used as a store of value since the beginning of civilization. There is no organized power behind bitcoin to ensure its long-term viability, secure trade, enforce its convertibility into other goods and services, or provide investor fraud protection. The claim of scarcity of cryptocurrencies via specific code implementation that limits their production is bogus as well. Virtually anyone can create a new cryptocurrency or modify algorithms on existing digital currencies. While the cryptocurrency market is valued at about $150 billion, JPMorgan sees few legitimate reasons to use it other than speculation.

Global growth continues to beat expectations and further upward revisions to the consensus forecast of 3.5% in 2017 and 2018 are likely. Goldman Sachs estimates the U.S., euro area and Japan are all growing near 3%—sharply above trend—and that growth is above trend in 90% of the countries under its coverage globally. The main drivers have been a big positive swing in financial conditions and a turn from substantial fiscal contraction to slight expansion. President Trump appears ready to add to this stimulus, aligning with the military and dealing with Democrats. This is a road map for more spending, a stronger economy and now with estimates of the damage from two hurricanes uncertain, a Congress and White House that will err on the side of promoting recovery, the TIS says. Risk on. Trump manipulates the media adroitly, despite his scathing criticism of the press. He even called both Nancy Pelosi and Chuck Schumer to remind them that the press coverage was great after their deal. So there will be more such deals, IESB says. Sure, there will be the inevitable drama as Congress moves tentatively toward a debt-ceiling agreement, fiscal 2018 budget and budget resolution—the latter, which would authorize tax cuts, could come within a month. (We wish them progress.) The overriding theme will be an abandonment of fiscal restraint as Trump and the Democrats—neither of whom care much about deficits—transform the political landscape in the wake of Harvey and Irma. Risk on. As for bitcoin, it’s experiencing its worst week since January 2015 amid crackdowns on its use by China and questions about its long-term viability. The reality, JPMorgan thinks, is cryptocurrency is more likely to be used in pyramid schemes and other frauds than as a legitimate currency. Legitimate investors probably should consider it akin to kryptonite.

Positives

Businesses confident August's NFIB optimism index matched its second best reading of the year and held near a 13-year high on expectations for higher sales and expansion. Almost a third of small businesses surveyed said they plan to increase capital expenditures, the most since October 2006. Optimism about the economy did slip in Duke University/CFO Magazine’s quarterly survey, but remained well above where it was prior to last year’s election and close to its highest level since Q4 2007. The findings bode well for growth going into Q4.

Jobs robust The number of job openings rose to a record high in July, according to the Labor Department’s JOLTS report. Hires also increased to near a 2-year high, lifting the hire rate to its highest level since March 2007. Although the level of long-term unemployed and discouraged workers remains elevated—a sign of structural employment issues—the number of unemployed per job opening fell to its lowest level since January 2001, suggesting significant tightening in the labor market. Manpower’s quarterly outlook for Q4 matched its average over the past five quarters, reflecting broad strength and steady hiring plans.

Global recession risks remain low The global OECD leading indicator posted its largest gain in nearly seven years in July, reaching its highest level since October 2014 on broad-based gains across countries. It was the 17th straight gain in the indicator and the third straight month it’s been above its long-term average of 100. Global PMIs also were robust, with August’s composite measure having its best month in 10, rising to a 2½-year high. Global industrial production is up 3.8% from a year ago, the second-fastest pace of growth since February 2014.

Negatives

Retail sales disappoint but … With a nod to Harvey’s impact on auto and gas sales and other component data—an issue likely to be the case for months to come across a range of metrics (see below)—August retail sales came in much weaker than expected. Headline sales actually fell 0.2%, while sales ex-autos rose 0.2%, well below forecasts, and sales ex-autos and gas (which jumped on soaring prices) declined 0.1%. The report, and downward revisions to prior months’ increases, threw a bit of cold water on other recent reports suggesting positive momentum on consumer spending going into the fall season. That said, consumers’ moods appear to be holding up as Michigan’s preliminary read on September slipped but remained robust and came in above consensus.

Industrial production disappoints but … It fell nearly 1% in August vs. expectations for an increase as forced outages because of Harvey caused utility output to plunge, oil and natural gas output to decline and manufacturing output to slip. With Irma adding to data woes for this month, it’s unlikely production will turnaround anytime soon despite improvements in some of the regional reports, such as this morning’s very strong reading from the Empire survey, which jumped on the strongest increase in new orders in eight years.

Inflation watch Both headline and core producer prices rose less than expected in August, although the year-over-year (y/y) core rate did hit 2%, suggesting a modest pickup in inflation. Fueled by a spike in gas prices related to Harvey, headline CPI jumped the most in seven months. But ex-energy and food, the core rate remained subdued, with the y/y rate increasing at its slowest pace since January 2015. These subdued core inflationary pressures, when combined with uncertainty over the economic impact of hurricanes Harvey and Irma and December’s approaching budget and debt-limit deadlines, are likely to push the next Fed increase out into 2018.

What else

Political watch A Rasmussen poll found two-thirds of likely voters surveyed welcomed Trump’s outreach to Democrats, while only 19% believe Trump should rely on Congressional Republicans to pass his agenda. The TIS says this should force Congress to move faster, which is what Trump wants. It makes a tax cut and a more robust military buildup much more likely. While some veteran Republican tax wonks are incredulous that the president is willing to consider tax hikes on the wealthy, Trump just wants to get moving. The looming infighting is too complicated for him; he understands that all that matters for the markets and his political base is movement.

Pay attention to me! Sick of seeing the nation's largest state reduced to irrelevancy in picking a president, California lawmakers are expected to pass a bill making the state’s primary the most dominant in the early voting season—just after Iowa, New Hampshire, Nevada, South Carolina, etc. Gov. Jerry Brown has indicated he will sign it. Whoever wins the primary would be in the catbird’s seat for the nomination, so this naturally has fueled speculation on who will run. Three California names keep popping up: Sen. Kamala Harris, the insiders' pick to become the nominee; Los Angeles Mayor Eric Garcetti, a near-certain entrant and … Brown, who is fit but 79. Brown has told associates that he hasn’t ruled out running.

Happy days are here again? Real median household income rose 3.2% last year to $59,039, on top of 2015’s 5.2% gain—the largest back-to-back annual increases since the ’60s, the Census Bureau said.