'The markets are in a raging mania'
Can't say I agree with my fellow Pittsburgher. But markets may be re-evaluating leadership.
I didn’t say that, Stan Druckenmiller did. Inflation eventually could rise by as much as 10%, the hedge-fund billionaire and Pittsburgh native said in a CNBC interview. He added that the Fed has created conditions that have valuations soaring. No argument on that latter point, but to get the inflation he thinks is possible would require consistent fiscal stimulus, an outcome that doesn’t seem all that likely with the two sides fighting over Phase 4. Monetary policy alone can’t do it. We’ve had 10 years of easy money without a sniff of real inflation. The bond market certainly isn’t sounding warning bells. The 10-year Treasury yield’s stuck in a historically low and tight trading range, and the breakeven on 10-year Treasury Inflation-Proctected Securities is around 1.7%, suggesting the Fed’s soft 2% target won’t be met 10 years out. For now, fundamentals and the macro environment—an ultra-accommodative Fed, an economic expansion that’s just starting (with housing booming and new ISM manufacturing orders at a 16-year high), a global deceleration in new Covid cases (with sharp declines in U.S. states hit the hardest)—are all supportive of a “V.” Arguably even more favorable is improving U.S. productivity. It rose in Q2 at its fastest pace since 1971. Cornerstone Macro views this as a game-changer that should drive a V-recovery in profits, too (earnings upgrades already outnumber downgrades for the first time since the summer of 2018). Capital expenditures (capex) are surging. Ironsides Macroeconomics estimates global capex ex-China is tracking at a 35% increase this quarter, with secular forces in the U.S. (reshoring/manufacturing renaissance) pointing to a prolonged uptrend.
It’s sometimes said the VIX should be thought of as a Celsius thermometer: humans tend to be most comfortable at between 15 and 21 degrees. Above 25, things start get to sticky and at 35, downright uncomfortable. Perhaps this explains why, even as the VIX ground higher from 21 to 26 in August, tech stocks did not seem to mind the rising heat. A more likely explanation, Gavekal Research says, is a number of stocks fell prey to large-scale market manipulation as suggested by media reports on Softbank’s activity in the options market. This fed into burgeoning day trading by young Robinhood investors. This revelation, along with seasonality and technicals that indicated Big Tech had gotten far ahead of (still-favorable) fundamentals, were apparent catalysts for the sharp 3-day Labor Day sell-off. Indeed, the rout largely was confined to large-cap tech stocks. The Nasdaq 100 corrected almost 11%—only four times before since March 2009 had it sold off so far so fast. By comparison, the S&P 500 has fallen 7% in three days on 20 other occasions over the same period, while the Russell 2000 has experienced falls of 5.5% over three sessions no fewer than 68 times. In looking at past periods of rising volatility when equities were making new highs, Ironsides Macro said two stood out: 1999-2000, during the tech bubble’s late stages, and early 2018, when euphoria over tax cuts gave way to trade-war fears and Fed tightening. None of the forces at work then are at work today.
A shift in leadership may be underway, but Strategas Research doesn’t see a March 2000-type top in tech. The sell-off wasn’t accompanied by any meaningful move in Treasury yields, a sign it was more about relieving positioning extremes. Evercore ISI believes value vs. growth is the wrong way to view this market. While broad economic reopening, positive Covid trends, and supportive monetary and fiscal policies will benefit a rotation into more economically sensitive stocks, it doubts mega-cap, cash-returning stocks that have led the S&P higher this year will experience significant outflows. To be sure, there is a lot to like about value stocks at this juncture. The P/E ratio for S&P 500 Value is around 17 times, hardly excessive relative to record-low bond yields. And small-cap valuations are as cheap as they’ve been since 2003. Wednesday’s strong rally saw broad participation beyond tech stocks. Renaissance Macro suggests buying the dips, with a focus on names that stand to benefit on cyclical breakouts amid an improving macro backdrop. From Fundstreet’s perspective, stocks still have massive upside. Investors remain cautious, with substantially more cash on the sidelines now than was the case at February’s highs—$4.5 trillion vs. $2.8 trillion then. Very bullish. 10% inflation? My dog-walking neighbor would agree. Me? I should defer to my far-wealthier, esteemed fellow Pittsburgher, but it’s hard to see anytime soon. Now, off to the beach to clear my head about this election!!
- Small businesses create the majority of new jobs NFIB small business optimism easily beat expectations and the good news ran deeper than the headline. Job openings surged and respondents were more worried about finding workers rather than demand for their goods and services, which had been the big concern during the pandemic. Capital spending plans also rebounded, echoing capex intention indicators in regional Fed surveys. Elsewhere, applications to form businesses have surged 14% so far this year, UBS reports, and the trend is global as business formation is rising in the U.K., France, Singapore and Japan.
- Mortgage boom With mortgage rates hovering near record lows and home-buying activity surging, this week’s purchase applications jumped 28% on a year-over-year (y/y) trend basis, the fastest pace in more than four years. Refi activity also strengthened, up 39% y/y.
- No 10% inflation yet, Stan Core producer prices rose slightly more than consensus, raising the y/y rate to a still extremely low 0.6%. The headline rate rose at half July’s pace and, y/y, remained negative.
- Jobs will determine shape of this recovery The latest initial jobless claims disappointed, unchanged from an upwardly revised prior week and, when the self-employed who filed for assistance are included, up a third straight week. The 4-week average remained just shy of 1 million, far above the worst months of any recession since the Great Depression. One potential positive: Manpower’s Q4 hiring outlook jumped the most in four decades to 14% of respondents.
- Two ways gold can keep winning The nearly 70% rally in gold prices over the past two years has outperformed the S&P by 40% over the same period—a trend BCA Research believes will continue under two disparate conditions. Either growth remains very weak and justifies low real rates for an extended period or inflation rises significantly faster and keeps real rates low as the Fed stays behind the curve. It expects the second scenario to prevail.
- And the rich get richer Financial repression has widened the gap between the rich and everyone else. This isn’t surprising, Strategas says, as the unintended consequences of low rates and the knowledge they will stay low for a long period of time tend to reward financial engineering over capital investment, resulting in weaker economic growth and societies themselves.
New Deal redux? While the New Deal did introduce much-needed protections for labor, sorely needed oversight of financial markets and impressive public works, Amity Shlaes argues in “The Forgotten Man” that capricious government policies (tariffs, tax hikes, more regulations) did more to lengthen the economic misery of the country than to relieve it. Almost all of the actions were well-intentioned attempts to help those suffering but predictably, capital went on strike and Ayn Rand was well on her way to becoming a literary success. In the end, the Dow didn’t surpass its 1929 high until 1954. Strategas wonders if this episode may be what is at stake in the November elections.
Times have changed In 1960, close to 80% of Americans polled agreed with the statement, “I trust government to do the right thing most of the time or just about always.” Today, the figure is closer to 20%.
A poll you can sink your teeth into TIS Group shares one of the more eclectic election indicators. Since 1984, Hanisch Bakery in Red Wing, Minn., along the Mississippi River just south of the Twin Cities, has been baking red/white/blue cookies with the names of each presidential candidate on top, then tabulating the amount sold under each name. Since its inception, this cookie indicator has never missed, forecasting the winner in the past nine elections. The tally this year (before the media picked up the story last week, arguably negating its predictive value)? Biden, 696; Trump, 2,576. The proprietor claims he has never seen anything like it.