Alan's Alert 8-9-2021

Even though I was off on Friday, I was still able to check in to see the unemployment rate get released.

It declined by 0.5 percentage points to 5.4% for the month of July. This beat the consensus estimate of 5.7% and is down considerably from the highs during the government shutdown of the economy. The news sent a wave across the economy. Any inflation safe-havens such as gold, oil, and silver were sent tumbling. The S&P500 got a big push up, while the Nasdaq fell. Traders are anticipating that the Fed will begin to slow their purchases of mortgage-backed securities and treasuries. This fall in inflation safe-havens was exacerbated by a $4 billion dollar sell order in gold when futures trading opened up on Sunday.

The price hit a low of $1,677.90/oz. The initial drop in gold on Friday, with the unemployment rate beating consensus estimates, was accelerated by a wave of selling as momentum traders had their stops hit. I had warned about this last week when I said that the Fed had their eyes on the gold market and interest rates. The Fed has stated that this inflation is transitory and they want to be believed, so they will exert their influence and bend the market to their will. This can work for short stretches of time but will eventually end in disaster. Robert Wenzel would have called this a buying opportunity. I’m taking more of a wait-and-see approach. I’m convinced right now, the place to be is soft-commodities such as corn, wheat, soybeans, cattle, cocoa, etc. These all have future’s tickers. For those that don’t trade futures, CORN, WEAT, SOYB, and DBA all have exposure to the soft commodity market.

Keeping with the employment theme. Today the JOLTs data was posted by the Bureau of Labor Statistics. JOLTs is an abbreviation for Job Openings and Labor Turnover survey. Job openings have continued to hit new all-time highs. Openings have risen by 590k from a month earlier. The current level of openings has reached over 10 million.

This is pretty incredible. We now have 1.37 million more job openings than people on unemployment. This leads me to two conclusions. When the pandemic related assistance ends in September and job seekers are looking for work, they will find it. The unemployment rate will crash shortly there-after and the economy is going to start running very hot. Also, since there will be a battle for workers as there are more openings than job seekers, employers will need to raise wage rates to attract them. We’ve already seen average hourly earnings increase above trend.

Now, I think we’ll see it really take off. The current wage data from July showed a 0.36% month-over-month increase. That is a 4.3% annual increase. For some context, prior to the shutdown of the economy, wages increased between 0%-0.3% month-over-month which equated to a 2.5%-3.5% year-over-year increase. We are currently looking at a 4.0% increase on a year-over-year basis. Last month’s reading was 3.8% year-over-year. Wage rates are really heating up. This leads to more disposable income in the pockets of consumers. They will open up their wallets and spend it, putting upward pressure on prices. If these trends continue, this fall looks like it will be one for the record books.

I had mentioned last week that I was working on two new projects. The first is that I’m moving!

I’ve been posting at blogspot for over two months now. After the honeymoon period, I’ve realized that their platform leaves some things to be desired. After speaking with a few others, I’ve decided to move my blog over to Substack. You can find it here; baerlocherbearing.substack.com. If you are already signed-up to receive my newsletter via email, there is nothing you need to do. Starting tomorrow, all email subscribers will be getting my post through Substack’s email portal. In addition, all past, present, and future posts will be on my page at Substack. If you aren’t subscribed to my alert via email, you can navigate over to my Substack page or click here to sign-up.

The second project is still in progress. I’m working on hosting all of Robert Wenzel’s past Daily Alerts that I have access to. My current archive goes back to December 2, 2013 (special thanks to Deken!). If anyone has emails from Robert going back further, please contact me. I would really love the opportunity to host them. You can see it in its under-construction phase here:

https://baerlocherbearing.blogspot.com/p/epj-daily-alert-link-page.html

Consider this a beta-test or early adopter version. In time, I’ll be looking for a way to sort and search the archive by topic.

Important and Potential Market Moving Events This Week

Wednesday, August 11

• 5.30am Consumer Price Index (July)

Thursday, August 12

• 5.30am Producer Price Index (July)

• 5.30am Initial & Continuing Claims (07/Aug)

Friday, August 13

• 5.30am Import/Export Prices (July)

• 7am Michigan Consumer Sentiment & Expectations (Aug)

Alan's Alert 8-5-2021

 

Weekly unemployment figures came out this morning. Initial claims dropped by over 20k on a non-seasonally adjusted basis. Continued claims also dropped. They are down by over 181k. This is good news on both fronts. We also had a reduction of nearly 77k off the pandemic assistance.

However, we are still a long way from getting back to pre-pandemic levels. This means the Fed will still have license to buy treasuries and mortgage-backed securities. Their day of taper is still well out in the distance.

I had previously reported that the market was pricing in an announcement at the Jackson Hole Fed meeting this month. I believe the market is going to be sorely disappointed. The continued slow pace of the unemployment picture will either cause the Fed to go off-script and taper early or delay their taper announcement until later in the year.

This brings me to the meat of today’s alert; crowded trades.

As a former follower of Robert Wenzel’s daily alert, I was well informed of the coming inflationary wave. By continuing to follow the cues from the money stock reports, we can be prepared for added inflationary pressure. Since this data is publicly available, anyone with a eye on the Fed can also be informed of the rapid expansion of the money supply. Many doubt the Fed’s transitory stance. The thinking goes; they’ve been wrong in the past, they are probably wrong on this, we should position for it.

When this happens, the market gets skewed. Players in the market can overplay their hand. Then the Fed can come in and remind everyone who the boss is.

In reality, I should add an 8th rule to my list of trading rules; don’t fight the Fed. The Fed has way more staying power than your portfolio. If you aren’t prepared to cut your losses and be patient, you could end up like this:

So, when is the best time to get off a crowded train? As soon as you can. When you are trading with the herd, you’ll get stomped when they stampede for the exits. So what’s a trader to do? Be patient. If you’ve been following along, you know that this inflation is going to stick around. We are slowly getting confirmation of this trend. Once the market comes to the same realization, we’ll know where to be; silver, oil, gold, and short interest rate ETFs.

Tony Greer sat down with Real Vision a little over two weeks ago. Tony does macro analysis at his website TGMacro.com. He is a momentum guy and has tons of market experience. His interview with Real Vision is worth a listen. At one point he talks about gold. It seems that he knows, gold is where to be in the future. Right now, he cautions to stay away because of the Fed. When the momentum guys see that the Fed is involved, they don’t want to fight that battle. All seasoned traders know not to go toe-to-toe with the Federal Reserve. His advice; soft commodities and oil. If the Fed is keeping their eye on interest rates and hard commodities, you need to go somewhere else to watch your market thesis play out.

Alan's Alert 8-4-2021

 

“Will it blend” was a marketing campaign for a line of blenders.  The guy pictured above (Tom Dickson) is the founder of the company.  He had this viral campaign to put all sorts of things into the blender to see how it would perform.  This spun off into all sorts of appearances on late night tv and the history channel.  Will it blend was a huge hit.  I bring this up because we have a new campaign to follow.  It’s called…  will it pass?

The infrastructure bill has been talked about since Biden was sworn in.  It started off as a $3.5 trillion dollar package but has slowly been losing steam.  It looked like such a sure thing back in February when the administration was meeting with lawmakers to hammer out the details.  Since then, it has gyrated between committees in the House and Senate.  It was cut down to $2 trillion and the green wing of the democrat party started to get in on the process.  Now it has been blended down to a $1 trillion dollar price tag.  Still, it looks questionable if it will pass.  The Hill reports that close to 300 amendments have been filed to be debated and possibly added to the bill and this is just the Senate side of the bill.  Since Nancy Pelosi has recessed the House for 7 weeks, we won’t see the House debate this until late September at the earliest.  Senators currently are warning that a rush to hold a vote would be a mistake.  That means it could drag out for several weeks for the Senate to come to a compromise. 

When the infrastructure bill was first being debated, Robert Wenzel had indicated that this would be “madness on top of madness”.  I agree as there is no money for such a large plan and there are only three ways to finance such a boondoggle; print money, borrow it through bond issuance, or increase taxes.  If money is printed, it just adds more gas to the fire.  The CPI and the money stock reports coming from the Fed would go crazy.  If the proposal is funded through bond issuance, the Fed would have to find a way to monetize it as the pool of bond buyers has been slowly evaporating.  The final route, raising taxes, would cut private sector capital investments and translate to lower productivity and ultimately, upward pressure on consumer goods.  There are no good options here.  The best answer would be to see if the 2700 pages of the bill plus the roughly 300 amendments would blend. 

 

If the infrastructure bill does find a way to pass, it would be a boon for copper.  Copper plays a huge role in renewable energy technology, given its conductivity characteristics.  Freeport-McMoRan (FCX) and Southern Copper Corporation (SCCO) would be the place to be.  They had a big run from September 2020 to late February 2021.  Did the market realize at the end of February that the proposed infrastructure package wouldn’t make it through Congress?  Because both companies have flat-lined. 

 

Changes are coming to the alert over the next week.  I’ve got two projects I’m working on.  One will be completed this week, the other I hope to have done in two weeks’ time.  Stay tuned as I’ll have an update and unveiling on Monday.  There will be no alert on Friday as I’ll be on vacation (yeah!).

 

Alan's Alert 8-3-2021

 

A question that has plagued new investors for time immemorial is, how do I make money in the stock market?  Volumes upon volumes of books have been written on the topic.  Many well-known, some not as popular.  Possibly the most famous is Ben Graham’s book, “The Intelligent Investor”.  Ben Graham was Warren Buffet’s mentor.  Ben’s work has influenced an untold number of investors, but making money in the market doesn’t always equate to following someone else’s formula.  The question of making money in the market can be boiled down further into: what determines which stocks go up and which go down?  This question is solved by economics 101, supply and demand.  When the supply of buyers is large and the number of sellers is small, the price has to go up to find an equilibrium.  The same is true in reverse.  If the quantity of sellers is large and the pool of buyers small, the price must go down to find equilibrium.

So, we want to find stocks that have a large pool of buyers and a small pool of sellers.  How do we find these stocks?  This line of questioning begins to lead us into the psychology of the participants of the market.  Lance Roberts of RealInvestmentAdvice.com said it best when he said, “Price measures the current psychology of the herd and is the clearest representation of the behavioral dynamics of the market.”  What Lance is saying here is that the herd (a large pool of buyers) controls the price of a stock and that price reflects the current mindset of the herd.  If the herd has been whipped into a buying frenzy, the stock could skyrocket.  If the herd has concerns about the future profitability or other’s opinions on the stock, the stock could plummet.

The true key to profits in the market then is this: buy the stock before the herd and sell before they change their minds.  Amazing right?  You simply… buy low and sell high.  This worn-out phrase has been around forever.  Unfortunately for most, they struggle to determine what “low” means and how to define “high”.  Just because a certain stock looks high-priced, does not mean it is “high”.  This also works on the flipside; stocks priced cheaply are not necessarily “low”.  In Daniel Kahneman’s book, “Thinking Fast, & Slow”, he looked at investors who thought they were buying low.  What he found was that individual investors liked to “lock-in” their gains by selling the “winners” and that they would hang on to the “losers”.  However, the recent winners had a tendency to do better than the recent losers in the short run.  This leads to my second trading rule, “Let winner runs; sell losers short”.  You do not want to get stuck with a loser in your portfolio.  This is why a stop point is important.  Once the trade has gone against you, you need to have a system for selling it.  Whether that is a percentage loss or a time frame is up to the individual investor.  Losers in your portfolio not only influence your trading mentality but they are a drag on your portfolio.

It is important to respect the herd’s current mentality when it comes to the price of a stock.  The herd determines the trend and the trend is your friend.  No one is bigger than the herd and no one can run against the trend.  You may feel that you know something the herd doesn’t.  We could know with certainty that inflation we are witnessing is perpetual and that gold is the place to be to preserve buying power, however this doesn’t mean the herd will change its mind.  The herd can run against you and make you bankrupt before it changes its mind.  This is why patience is so important.  There should never be a rush to make an investment and there is nothing wrong with sitting in cash until a good deal comes along.  This isn’t baseball.  We don’t get called out after 3 strikes.  We can look at 20 strikes before we decide to swing.  We could look at 100 strikes.  The only way to get called out in this game is if you run out of capital.

“Don’t worry about missing a rally.  Worry about losing your money” – Dr Michael Burry

 

Without further ado, here are my seven trading rules:

1. For every buyer, there must be a seller
2. Let winners run; sell losers short
3. Respect the trend, no one is bigger or smarter than the market
4. Be patient
5. This time is never different
6. Always go against the herd
7. Know yourself

 

You know the rules, and so do I.  So, let’s...

In July, Planet Money, a podcast put on by NPR, recently dove into their archives and uncovered a gem.  They remastered a classic and re-posted it to their website.  It’s called, “The Great Inflation Classic” and has a great look into the mentality of herds.  I highly recommend a listen.  They interview Paul Volcker and question why he had to raise interest rates as high as he did.  The plain and simple answer, to break the herd’s mentality that inflation would continue.  In time, we could see the herd’s mentality surrounding inflation change again.

Alan's Alert 8-2-2021

 

Over the weekend I dove head-first into what the odds of another lockdown truly are and what it would actually look like.  I came to the realization that it is probably going to happen.  The government is trapped in an echo chamber.  They are desperate to keep a stranglehold on the power that they got from the first round of lockdowns.  In fact, roughly an hour ago, Posobiec tweeted again:

 

What will be interesting this time around will be the public’s reaction.  The first round of lockdowns worked because the public had been whipped into a frenzy about covid.  It was a completely unknown disease and the media pounded the “novel” portion into the public’s head.  It was constantly repeated that this wasn’t the flu.  The reports out of China looked dire.  Anybody remember seeing the videos of people falling down face first in the streets of China?
 
This time around, things are different.  We have several vaccines available, some people now have had the virus and have natural immunity, and the public has witnessed the devastation that a lockdown has on the economy.  To be able to pull off a repeat of the March 2020 lockdown, looks like a tall task.  If it happens, I believe we will have a bifurcation.  Blue states will jump at the chance to lockdown once more.  Red states will be leery.
 
There is a chance that this is completely overblown and there will be no lockdown.  The administration could authorize some other kind of emergency measure and avoid a shutdown of the economy. 
 
Ultimately, my job as an investor isn’t to decide what policy is best, it is to see through the smoke and mirrors to understand what the market’s reaction will be.  Unfortunately, we have only one instance of data on what a lockdown does to the stock market and that data isn’t good.  The last lockdown saw a deep drawdown of the all the general market indices.  Even silver crashed by 30%.  Oil by 68%.  However, had you bought at the end of March, you would be sitting on terrific gains.  Since this lockdown could look different, it is anyone’s guess how the market will react.

 

 

 

 

 

 

Construction spending continues to decline from its pre-shutdown peak.  This is bad news for the continued expansion of the economy.

 

Construction spending is split into two categories, residential and non-residential.  A closer look reveals a big slowdown in non-residential construction.  This tells me that businesses reliant on providing services to construction companies will begin to contract.  This should worry anyone who believes in the skyscraper effect.  The theory was put forth by a British economist named Andrew Lawrence in 1999.  It has been refined over the years by Dr. Mark Thornton.  Dr. Thornton has a book named, “The Skyscraper Curse” which you can read for free on Mises.org.  I’ve not read it but I’ve listened to several of Mark’s interviews and read a few of his articles on the subject.  These two stand out to me in particular; Skyscrapers and Business Cycles and this interview with the Mises Institute.  The takeaway, when the construction of new skyscrapers stops, economic hardship is not far behind. 

 

 

The Federal Reserve posted new data for the assets and liabilities of commercial banks in the US on Friday.  The decline of commercial and industrial loans continues while non-commercial loans and leases saw a small increase.

 

 

 

It looks like the economy is running out of steam.  How will the economy continue its expansion phase without new loans and business expansion?  Where will new growth come from?  Meanwhile, deposits at banks continue to run above trend.

 

 

Consumers are now sitting on a stockpile of cash in the bank.  Ironically, the banks don’t want it.  They’ve been furiously sending it back to the Fed in hopes of achieving any sort of return.  Even if that return is 0.05%

 

 

Earlier this year, New York Fed President John Williams had indicated that the repo markets were working as expected.  The Fed has spilled liquidity into the banks, now the Fed is mopping up the excess through these facilities.

 

 

Finally, I wanted to take a quick look at interest rates.

 

The 10-year minus the 2-year treasury is still in positive territory.  The spread has come down sharply since the peak at the end of March. 

 

Looking at the big picture, rates appear to be flatlining.

Typically, this is great news for investors.  Flat/declining rates mean that investors should go long growth vs value stocks.  Fixed income is also a good buy.  Emerging markets and commodities would struggle.  The trouble is that the rates at starting so low that they don’t have far to fall.  This could be a very short rally for this trend.