Macros, LT Market Trends

By pjain      Published Jan. 19, 2020, 4:45 a.m. in blog Invest   


1% Very good at Market Timing!

  1. The uber-rich have 80%-95% wealth tied up in company stock (Bezos 95%, Zuck 99%)

  2. They keep getting MORE stock options but sell it all - esp "sitting fat and lazy" CXOs/boards

    • $11/$14b of HPE mcap bought back (issued to top mgt) yet # shares fell -15% in 5years! insider hold<0.2%
  3. The 90% CATCH FALLING KNIVES, but share of ownership declines rapidly on REAL rise

  4. Is it because they just don't have the cash to really buy stocks at bottoms, they are just DCA or are they just stupid ie stio buying at market bottoms?

  5. They get too happy with little gains, they sell out to 1% as market REALLY rises!

In the Goldman chart below, we can see that the share of equities owned by the 90% jumps just as recession begin.

  1. TELEOLOGICAL PRO-CYCLICAL 1% buy stock RAPIDLY and EARLY on recoveries, accumulate high ownership

  2. The 1% dump their stock to MCapWeighted 401k for lcap, and "At-any-price-get-rich-on-partials" daytrading Robinhood millennials The rich dump their stock to the poor just before the market crashes.

HFs, uber-Rich own the media and manipulate market - CONTRARIAN to "free advice" - REAL STORY different

Fiscal Policies of Developed World Governments

Rise and Rise of MMT

Role of US Elections in 2020, 2016 - has it changed?

Disconnect between Real Economy and Stock Market and Theories


Inequality Causes

Factors that create and maintain Inequality where economic growth that is powered and consumed by the wealthy (src: Ajay Kapur, at Citigroup)

  • Business-friendly government and tax policies

  • increasingly complex financial systems

  • control of the rule of law

  • globalization

  • technology changes

  • patent protection

Inequality: Top 10% Income Group owns 87% of all US Stocks

From 1980 to 2014, wages grew for the richest 1% much more than the rest of the population.

* SRC: Gabriel Zucman at UC Berkeley

Cutting Rates No longer Boosts Spending - Below 10-year 3.5%

Savings Rate Skyrockets to compensate for Ultra low Savings Rate forced by CBs

Deflation as Interest Rates lowered

The mandate of CBs to boost employment and keep low inflation.

But modern CBs have now amended this to healthy levels of inflation around 2%. Why?

Because now all developed economies have very high debt levels to GDP. Repayment of debt is made far far worse in deflation. Whereas, even small amounts of inflation, lowers the impact on debtors. But it has been impossible to achieve this 2% target, as first China undercut inflation globally, and now CBs are throwing trillions of "free money" around. Ironically, instead of chasing demand and boosting inflation, it is inducing consumers to cut spending, and making deflation happen.

Curse of Debts that will never be repaid!

Central Bankers (CBs) Roles - Continue Failed Japanification

Who Pulls the Chains of the Central Bankers - Fed owned by Private banks

  • Ironically, the owner of a Central Bank will look at its own interests! In the USA it is owned by Private banks, while for most CBs it is usually the Central Government that owns the majority.

BoJ Owns 80% of ETFs

"Anything it takes" - year after year, BoJ's Kuroda and ECB's Draghi said they will continue their insane monetary policy. Now the purchase of 80% of all Japanese ETFs is already accomplished ending all price discovery, and major strong Japanese companies are reduced to zombies.

The Federal Reserve is a total misnomer as it has no reserves, and it was and remains a private institution just like Federal Express - no matter its claims otherwise.

Fed Put over? signal no more cuts in 2020?

However the Fed says it is monitoring - could cut some more if turbulence.

ZIRP, NIRP global - Will Fed join in?

2020 Aug - No more Fed Financialization/Federal bailouts - if any - go to Main Street

The Federal government pumped in 2+ T of stimulus - PPP, Unemployment, bailout of many companies big and small. In doing so, the deficit skyrocketed.

FED. Unlike 2008, Fed rushed fast and much greater level of pumping money in March end 2020. The Federal Reserve is coming under increasing public criticism for how its policies and intervention are painfully exacerbating social inequity. The Fed may not be able to continue denying and deflecting, and may re-direct more of its future efforts to Main Street vs Wall Street, removing the key (only?) pillar supporting today’s asinine stock prices.

March end 2020 - Fed forced sharp V

This theory says the Fed is using its unlimited money-printing machine to single-handedly prop up the stock market. "The Fed is itself an important narrative," Shiller says. In reality, he says, the Fed's magic over the real economy is limited. But its statements clearly move markets, and it has lots of power as a storyteller.

Too much debt, ECB/Fed will NOT Let Stocks go down again

Thesis> there is too much debt, and too much liquidity, for stocks to drop

  • 1971 going off gold standard happened because US COULD NOT AFFORD to support USD as reserve currency by giving (France specifically) giving gold
  • The $3T injected in Q1'2020 by Fed will go to monetize fiscal deficit as $1+T regular adds onto $2T+ additional spending authorized => Spurt in US T-bill yields will be an indicator for inability to stand the surplus issuance
  • Globally $9T fiscal support or 12% of Global $76T GDP mainly in developed countries - roughly 50% in direct budget support and other half as loans, equity injections.
  • However govt debt-to-gdp ratio will jump from 88% '2019 to 105% by end 2020 - as Global GDP will fall be 5+% at least
  • Private companies saw massive declines in income and cannot furlough jobs fast or regulated against - so they issued $5T new debt in H1'2020, and another $2T H2'2020.
    • Overall pvt,household,non-financial corp Debt-to-GDP would rise from 155% 2019 to 173% by end 2020.

Pre-Covid Macro Drivers

2019 Reelection Dominates - All's well!

  1. Fed in 2019 hinted at a more dovish tone leading to the possibility on 1 or 2 rate cuts this year. That leaves trade policy as the big driver for the markets.

  2. Trade and Tariffs is second Near term, the market wants to see forward momentum on China trade talks. Our view, which is the bullish view, is that a China trade deal will get done sometime this fall, and both sides will say it’s great. Tariffs will also come down, and there will be no more new tariffs or threats. We may have 1 or 2 rate cuts by then too.

  3. As a result, business confidence will pick back up, resulting in business investment and capital spending. This will lead to an acceleration in GDP in 2020; perfect timing for the election.

FOMO theory - BTFD in our lifetimes - suckers sold out!

"I think the fear of missing out is a prominent thing amongst investors," Shiller says. Time and time again, the stock market has tanked and then rebounded, and investors have been conditioned to put their money in even when things look bad.

No Alternative theory, Bond Yields SUPER Low and TONS of savings sloshing around!

Then there is the "there is no alternative" theory, aka TINA. It basically says that with interest rates so low, stocks are the only moneymaking game in town. Economist Paul Krugman has floated a version of this. And Shiller thinks it's plausible. "You have to put your money somewhere," he says.

Related to the TINA theory is a theory known as secular stagnation. Economists have been telling us about this issue for years. Basically, the economy has slowed, resulting in fewer good investment opportunities. Meanwhile, people and institutions have a crapload of savings and nowhere to put it. It explains why interest rates have been so low .

The efficient market theory - "LOOKS AHEAD"

The efficient market theory paints the stock market as a supermachine for information processing, where knowledge about the happenings of the world are aggregated by super smart investors who rationally buy and sell stocks based on the best information about their future performance. The theory basically says stock prices are always right and that stock markets are efficient. Under this theory, the rally of the stock market over the last few months reflected rational investors seeing signs that the pandemic wouldn't be too bad and that the recovery was going to be really good.

Disconnects happen - voting vs rational machines

Shiller says we've seen this head-scratching disconnect between the stock market and the real economy before. Despite the mass unemployment and turmoil of the Great Depression, he says, "we had a huge boom in the stock market from 1933 to 1937."

Shiller is critical of the efficient market theory. He's a behavioral economist who believes we're not the perfectly rational creatures that the theory assumes. Instead, he believes, we're prone to all sorts of quirks and cognitive biases, and we're influenced by narratives that may — or may not — have a good relationship to what's actually happening. This, he believes, matters for assessing the stock market.

MIT economist Paul Samuelson famously joked that big drops of the stock market had predicted nine out of the last five recessions.

== 2020 Macros, Economic Key Factors, Problems and Concerns

Covid-19 cases reemerged globally - markets ignoring reality

27 Red states pushed to reopen, and new cases spiked, many had to reimpose lockdowns. In contrast NY remains in tight control, and finally both deaths and new cases declined.

Market sentiment remains high "solved", yet covid-19 cases are resurging across the US. If cases and deaths continue to build momentum from here and force a roll-back of lifted restrictions, stocks will be forced to price in the additional damage to the economy.

  • Lower income, black and hispanics 3-4x more likely to get Covid
  • more likely to work low-paid "essential" jobs at grocery stores, pharmacies, etc.
  • Take public transit 5x more than whites - subways, busses to work - more exposure but elevated infection and mortality rates impact all people who take public transit, regardless of racial or economic status.
  • Limited access to paid sick leave - cannot afford to stay away from work when sick - making others also sick
  • Residential segregation (the old urban-suburban divide)
  • Uneven access to health care.

Oil supply Brent>$60 but Iran/disruptions in the Middle East

Any commodity price spikes could depress consumer demand

Downside in corporate earnings - stagnation after 2018 tax cut, '19 stagnant

Street estimate for '19 SPY earnings of $170 * 16.5x PE = 2805

-ive US GDP slowing down ~2.5% '19? Less in 2020

  • 2019 Q1 3.2%

+ive STRONG Jobs report Nov'19

Surveys point to steady or improving growth in the domestically oriented services sector as jobs remain plentiful and as rising wages give consumers the confidence to keep buying.

Though hiring may be slowing we take heart in the Milwaukee PMI which shows blue collar employment at an expansionary 57.0 versus white collar employment at 41.1. Blue collar employment is a leading indicator.

+ive Consumer is strong and rates are low - spending high

Falling interest rates may continue to favor spending over saving

The American consumer is two thirds of US GDP but 17% of the global economy. Their actions can cover over slower manufacturing (11%) of the economy for some time, though not forever.

US households are very healthy with rising real incomes and far lower debt and default levels for what you might expect this far into an expansion. This spending has helped offset falling business investment. Also, despite fears that 2019 earnings would show weakness, they have so far been resilient and surpassed the 2018 record level.

-ive Strong USD still hurting MNCs EPS - though tax cuts compensated in 2018

+ve Lower mortgages may boost housing

-ive CEO confidence waning (due to trade), lack of capex spending

Lack of investment that drives productivity 18-24 months out and improving productivity allows wages to grow without destroying corporate margins.
However some high quality companies are issuing debt to buy equipment

+ive Stock buybacks are continuing - good for stocks

AAPL is an example

Tariffs, Trade war fears totally discounted - not climbing a wall of worry!

2020 elections -> Trump keeping markets ==> THEN WHAT?? like 2020, 2008?


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