Shot heard round the world? Like the crack of a bat on a sunny summer afternoon. Like the gust of wind that seems to come out of nowhere and blow your garbage cans across the street. Like discovering a small plastic toy when cleaning out the garage, a toy that is probably far older than you are yourself and instantly reminds you of "Grandma's house". Zero-dark thirty. Perhaps I am wrong, but what little "real-time" financial media that seems to be available... appears to have missed the significance of what happened on Sunday night in New York, or rather Monday in the land of Koala Bears and Vegemite sandwiches.
Do I see something in these events as an obvious enthusiast in both the market impacts of monetary policy and my desire to see an eventual return to broad free market pricing for everything - and I mean everything - that just is not there? By "shot heard round the world", I refer not to that April day in 1775 when a handful of Massachusetts militia (early national guard) tried to stand up to roughly 700 British regular who had trekked way out from the relatively safe confines of Boston. Instead I refer to that late June day in 1914 when Austrian Archduke Ferdinand and his wife, the Duchess of Hohenberg were assassinated by a Serbian nationalist by the name of Gavrilo Princip. I won't get into the politics of the former Austro-Hungarian Empire, nor that of the many nations that once comprised the "cold war" era Socialist Federal Republic of Yugoslavia. I will say that the events of 28 June 1914 reverberated around the globe, and triggered a broad swath of coordinated acts of aggression by many who likely never understood why they were fighting, or why they would die.
The Reserve Bank of Australia (RBA) will announce the results of that central bank's latest decision on monetary policy at 14:30 Australian Eastern Daylight Time on Tuesday afternoon. That's 10:30 on Monday morning for those of us who live and work on the east coast of the United States. It was ahead of that announcement however, on Monday in Australia and Sunday night in New York that the RBA had announced the purchase of A$4B (US: $3.1B) worth of longer dated Australian paper. These numbers might seem smallish to Fed followers, but they are huge in Australia. Make no mistake. This was double expectations. 10 year Aussie yields collapsed, as did similar yields in New Zealand, then Asia, then Europe, and then even the United States.
What's the Big Deal?
On Sunday night while half of the planet was watching the Golden Globes (couldn't care less) and the other half spent the evening picking lint out of their navels, I watched algorithms snap up both US Ten Year Notes, as well as domestic equity index futures. The US Ten Year gave up just 1.38% at one point last night before sellers re-engaged, but (it is still very early) equity index futures remain elevated.
Should we care about Australia's central bank taking overtly aggressive action to reign in the long end of their yield curve? Yes, I think we should. The RBA also purchased A$3B worth of sovereign Australian debt on Friday in defense of that central bank's three year yield target. The RBA is trying to enforce YCC (yield curve control), and the big deal is this.... the Bank of Japan, the People's Bank of China, the European Central Bank, the Banks of England and Canada and the Federal Reserve Bank are watching. Perhaps provoking, perhaps planning some kind of coordination should the long end of global sovereign debt yield curves make another attempt at breaking out beyond the dividend yield of the S&P 500, which, if it was not quite obvious last week, sure looked like where there is support for the US Ten Year.
The FOMC does not release its next official policy statement until March 17th. Fed Chair Jerome Powell is slated to take questions in an online event hosted by the Wall Street Journal this Thursday. However, quite suddenly, this week has populated with speaking events featuring Fed officials, I kid you not, I checked this on Sunday night and more than half of these speaking engagements were not visible on the three such dockets that I follow.
Something big, or coordinated afoot? Perhaps I read too much into events that I think fit together. Or perhaps, while the FOMC officially sees rapidly increased selling at the long end of the Treasury curve, there is at least a plan being put together to flatten that curve to some degree. Could be as simply as pushing out average maturities across the Fed's balance sheet with or without increasing the monthly total of the Fed's current quantitative easing program. Could be as simply as a rebranding of the same "Operation Twist" that in all honesty failed quite miserably back in 2011, under the misguided leadership of former Fed Chair Ben Bernanke. Oh, that program was quite successful in suppressing long term rates... as well as the velocity of money, wages, and economic growth... but by all means, write a book about how brave you were.
Here's a crazy idea. How about we sit back and try to understand that the high speed electronic price discovery, the same kind of pricing that forced a perverted skew aggressively favoring price overshoot upon equity markets more than a decade ago, has finally come to debt markets. Hence, cages will be rattled, but let's see if the free market really thinks that the US Ten Year Note should pay more than the S&P 500. So far, not really. The level was pierced last week, but rejected on Friday. That yield fell hard on Sunday night in response to the events that took place in Australia, but sellers have reentered that arena since, and the Ten Year Note has pushed back toward that key 1.48% level.
Keep in mind, this dividend yield is a moving target. Ten days ago, the S&P 500 traded at 22.2 times forward (12 month) looking earnings. As of this weekend, the S&P 500 trades at "just" 21.5 times FPE. Of course, the S&P 500 surrendered 2.45% last week (as the Nasdaq Composite took a back alley beatdown of 4.92% even after rallying on Friday), but also understand that earnings growth expectations for the S&P 500 for calendar year 2021 are now up to 23.9%, up from 23.6% just a week ago, and 22.3% at year's end 2020. In other words both sides are pushing on the same string.
May The Force Be With You
Are you on the right side of the force? Will the force be your enemy. Or your ally? Which force are we talking about? Good questions. On the one side, Johnson & Johnson's (JNJ) vaccine appears to have passed all bureaucratic hurdles with flying colors, and a third effective and safe vaccine joins the fight against this awful pandemic, a battle that both Pfizer (PFE) and Moderna (MRNA) had already been engaged with. The two vaccines had already managed to seriously dent the trajectory of the spread of Covid-19, even in areas where mutations have been known to occur. This makes the reopening trade a reality. This is one serious reason why recent U.S. macroeconomic performance has been sporadic, yes, but nearly spectacular as well.
The weakest link, among others has been the data covering labor markets over the short to medium term as well as labor force productivity over the long-term. This is where I worry. The reopening trade will certainly bring with it increased demand for labor. The stimulus bill just passed by the House of Representatives this past weekend will, if passed by the Senate, bloat, money supply, the Fed's balance sheet, and the Treasury department's collective IOU. Never mind that there remains more than $1 trillion worth of unused cash created by the stimulus bills that were passed during the Trump era, by all means borrow another $1.9 trillion, roughly half of which has anything to do with anything pertinent.
Need I remind you all, that while this all sets the stage, there can be no, broad increase in consumer level inflation and/or sustained (of course the comps are easy this year... duh) breakout economic growth. There can be no whimsical new 'Roaring Twenties" without a correlative increase in velocity. A big fat monetary base is nothing more than window dressing unless demand for goods and services actually chases the supply side.
Like it or not, and I like it, this economy will move at least part of the way toward a renewal of some mini version of President Reagan's supply side style economics. (Oh this brings back fond memories of taking economics classes away from my professors back in the day. Honestly LOL... warning to students... do not try unless you know you are further along in the field than are your professors.) Oh, don't get me wrong, we are more than likely to see the opposite of the lower taxation and decreased regulation that are the hallmarks of supply side economics, but there is no doubt that there will be more than ample supplies of services offered to a public that has largely gone without the joys of what had been the experiential economy for a full year.
The question will be... will consumer demand chase that supply? This returns us to the health of the labor markets. Labor markets have three components. Demand for labor. That's one. Quality of that demand. That's two. I'm an economics nerd, you simply call number two.. wages. Then there is productivity. I think we'll surely see number one. Without number two, and above pre-pandemic trend growth for number three, we may not see the kind of velocity we need to see in order to create the kind of inflation the federal government craves nor the kind of growth that the central bank will try to provoke. Maybe you can not have both. We will find out. This Friday's data dump by the BLS will be the most important short-term information placed upon our marketplace this week, or perhaps any time soon.
You Did Notice?
That Best Buy (BBY) basically ripped the cover off the ball in 2020, yet reduced payroll and aggressively turned over already reduced retail floor space into e-commerce fulfillment operations. This is what I mean about demand for labor and the quality of demand. Progress works against the labor markets. The employer does not necessarily have to do worse in order to reduce headcount. Now, multiply this by the entire economy and what do you have? An aging labor force that is less productive chasing fewer jobs. How much progress has the pandemic brought forward. How unprepared are potential employees to enter this new arena? This story on the broad scale is a long way from over.
Rotate? Sell big tech? Go ahead. I'll wait here. I see a good reason to get long some cyclical groups. Sure I increased my Wells Fargo (WFC) long last week. I also see the lower prices, as opportunity for tech and growth. Going away? Lower valuations? Perhaps. That's why I also loaded up on gold and silver. Doesn't sound like you sold much Sarge? I really did not, though I did reduce some underperformers. So what did you add, Sarge? Okay, here goes... I do not claim to be a genius, I only claim to hunt when others fear. Always have. That does not make me right, but over time has served me better than simply joining the crowd.
Last week, at or close to the daily lows, and on multiple days, I either added to or initiated long positions in Palentir (PLTR) , Nvidia (NVDA) , Salesforce (CRM) , Home Depot (HD) , Apple (AAPL) , Amazon (AMZN) , Advanced Micro Devices (AMD) , Zscaler (ZS) , Qorvo (QRVO) , Lockheed Martin (LMT) , and ServiceNow (NOW) . Oh, and Kratos Defense (KTOS) . Boooo !!
Definitely not bragging, I could be wrong, but I can easily see that I was buying what everyone else was selling. On top of that, I told my readers, opening myself up to being second guessed. Why does this not bother me? Easy. I have a roof over my head, access to both heat and a source of clean water. I'm already the luckiest guy in the world. Fear? Fear is but for the wicked. So, let the wicked tremble as they hear my approach. Always Faithful.
Sarge Names Headlining The Week
Readers should be fully aware that the Microsoft (MSFT) Ignite Conference runs from March 2nd through the 4th, which is this Tuesday through Thursday, with CEO Satya Nadella and Alex Kipman (Microsoft's honcho for Artificial Intelligence and Mixed Reality in the Cloud). In addition, on Wednesday, March 3rd, Advanced Micro Devices will introduce the latest member of the Radeon RX family of high performance graphics cards, staying in step with Nvidia (NVDA) .
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Feb-F): Flashed 58.5.
10:00 - ISM Manufacturing Index (Feb): Expecting 58.7, Last 8.7.
10:00 - Construction Spending (Jan): Expecting 0.7% m/m, Last 1.1% m/m.
The Fed (All Times Eastern)
09:00 - Speaker: New York Fed Pres. John Williams.
09:05 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (XRAY) (.64)