20 November 2024

Charlie posted an interesting fact.  Over time almost 60% of stocks do NOT outperform Treasuries.  This makes the case for not investing in the whole market via index funds.  The SP500 is not the whole market and only the more successful make it into the index, so it would be interesting to know about this group.  I assume that the Russell 2000 has a lot that do not beat Treasuries in the long run.  

We have to also consider that until 2008 the Fed did not repress Treasuries.  We just lived through a period that was distorted and Treasuries were forced to under perform and this created lower interest expense and higher stock prices.  So my view is the catch down phase is coming for stocks, but we can never get the lost Treasury yield back (G fund yields repressed).  

I believe today over half of the smallest 2000 stocks (Russell 2000) have negative earnings and most are junk rated.  Hell the SP500 is turning to junk ratings to or should be with the amount of leverage built up.

We've had kind of a winner-take-all market with monopolies and the Magnificent Seven (or is it 8 or 9).  

The non-SP500 have a larger swing from the favorable season to unfavorable, but also in bear markets.  It is in the bear markets many small companies swing into bankruptcy and their stocks get wiped out.  

If Trump executes half of his promises on Tariffs and Deportations and Federal agency cuts, then we will be in a pretty deep recession for awhile.  It seems many think the deficit will just go away with cuts and this is why the market is doing okay today.  They have no clue what is coming.

And with these false mental economic models, they will call for MORE cuts when everything heads down.  

One positive.  Trump is interviewing qualified Treasury and potential future Federal Reserve Chairman until his Defense, DNI and Justice picks.

I wonder why?  Treasury Secretaries protect the billionaires first and foremost. 

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Kevin Warsh who is interviewing again for the Treasury job in a recent video.  It's excellent.  I think he will not get the job.  Some say he will replace Powell at the Fed in 2026.  Wall Street would not like him because he wants to focus policy on the economy instead of asset prices.

One of his main criticisms of the Fed today is their policy is unanchored.  They say they are data dependent and are forced to keep changing the data they say they are dependent on because NONE of it points to needing interest rate cuts, but they cut anyway.

They cut again this week.

But let's watch the market rates reaction, because I think they lost control.

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I read a paywalled article last week that says the reason high yield credit spreads have tightened (our risk indicator) is because of the explosive growth of private credit diminishing the supply of high yield bonds for financing.  In other words, low supply drives up price and pushes yields down close to risk free yields.

This would explain a lot and forces a broader look at indicators and market internals to avoid mistakes.

14 November 2024

The stock market is taking a breather during the weak part of November.  If it manages to trade flat, then expect another good rally into December.  

Credit spreads are crazy tight even for High Yield (High Risk) bonds.  It's as if investors do not think defaults are possible anymore.  I see this as due to a strong economy, high liquidity and surging Republican sentiment.  It tells me more about investor behavior that carries over to the stock market, than the actual state for the economy or banking system.  

So I see positive sentiment driving the market until sometime in 2025 when reality starts to sink in.

What reality to look for: 

Once they get to cutting and deporting it will slow down the economy probably into a recession by the end of 2025.  The market will see it coming.  

Also interest rates do not come down to save the housing market or economy in general.  Mortage rates are back above 7% again.  Inflation is settling in above 3% and Trump's policies of deportation and tariffs would kick in another round of higher inflation (hang on to those I-series Treasuries if you have them). 

Lower corporate taxes equals higher retained earnings and higher post taxes profit margins, but the effective tax rate on corporations today is only 14% with the 21% statutory rate.  So bringing the rate down to 15% would probably only bring the effective rate down to 10% which is not a massive bump compared to the first cut from 35% to 21%.

To get this new cut, Trump wants tariffs.  So the corporations simply pass this extra cost onto the customer who now has less to spend on other products and we have a mild quantity sold recession as opposed to a dollar spent recession.  This will cut into profits.

I think the AI bubble begins to unravel in 2025 no matter who was elected.  They are finding limits to AI's performance and never figured out how to increase profits on AI other than the few companies building it out for the mega cash rich companies.  

My view is monetary and fiscal policy were propping up the financial bubbles.  And the Fed is done with the propping saying that QE (money printing) was a mistake.  They would need to be forced back into printing but that leads to other problems.  And Trump's temporary pain is going from positive fiscal spending to negative.  So the stool is about to get kicked out from under the markets in 2025 and 2026.  And I am assuming they will not do half of what they say.

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Anybody remember Rick Perry of TX who bashed the Department of Energy for oil prices and policy for years and also when he ran in the primaries against Trump the first time.  Trump ended up making Rick Perry the Secretary of the Department of Energy to "fix it".

Imagine him showing up to work his first day and finding out the Dept of Energy had nothing to do with oil or energy prices... they manage our nuclear arsenal which is why most previous Secretaries had very technical backgrounds.

The lesson here is do not assume politicians know what the govt Departments do and especially billionaire CEOs.  We have heard repeatedly they want to shut down the Department of Education which wastes money and pushes non-conservative policies (vouchers for private schools which voters trashed by voters this election).  

So I decided to look where the Dept of Education money goes...

Mostly financial aid for college and trade schools.

Then to schools (not college)

A bit to special ed programs

Very little to admin

The admin manages the financial aid programs working with parents, students and colleges. 

Are they getting rid of financial aid?  It sounds like it or will they find out the Department mostly does stuff they know nothing about.

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I'm hoping we get the middle ground, meaning the extreme talk is designed to make the middle ground more palatable to push through.  

Here is our favorite historian discussing the news today:

Excerpt from Heather Cox Richardson...

The gulf between Trump’s promises to slash the government and voters’ actual support for government programs is not going to make the Republicans’ job easier. Conservative pundit George Will wrote today that “the world’s richest person is about to receive a free public education,” suggesting Elon Musk, who has emerged as the shadow president, will find his plans to cut the government difficult to enact as elected officials reject cuts to programs their constituents like.

Musk’s vow to cut “at least” $2 trillion from federal spending, Will notes, will run up against reality in a hurry. Of the $6.75 trillion fiscal 2024 spending, debt service makes up 13.1%; defense—which Trump wants to increase—is 12.9%. Entitlements, primarily Social Security and Medicare, account for 34.6%, and while the Republican Study Group has called for cuts to them, Trump said during the campaign, at least, that they would not be cut.

So Musk has said he would cut about 30% of the total budget from about 40% of it. Will points out that Trump is hardly the first president to vow dramatic cuts. Notably, Ronald Reagan appointed J. Peter Grace, an entrepreneur, to make government “more responsive to the wishes of the people” after voters had elected Reagan on a platform of cutting government. Grace’s commission made 2,478 recommendations but quickly found that every lawmaker liked cuts to someone else’s district but not their own.

Will notes that a possible outcome of the Trump chaos might be to check the modern movement toward executive power, inducing Congress to recapture some of the power it has ceded to the president in order to restore the stability businessmen prefer.

Franklin Delano Roosevelt was himself a wealthy man, and in the 1930s he tried to explain to angry critics on the right that his efforts to address the nation’s inequalities were not an attack on American capitalism, but rather an attempt to save it from the communism or fascism that would destroy the rule of law.

“I want to save our system, the capitalistic system,” FDR wrote to a friend in 1935. “[T]o save it is to give some heed to world thought of today.”

The protections of the system FDR ushered in—the banking and equities regulation that killed crony finance, for example—are now under attack by the very sort of movement he warned against. Whether today’s lawmakers are as willing as their predecessors were to stand against that movement remains unclear, especially as Trump tries to bring lawmakers to heel, but Thune’s victory in the Senate today and the widespread Republican outrage over Trump’s appointment of Gaetz and Hegseth are hopeful signs.

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10 November 2024

Great graphs from Maverick Equity Research.  I added comments in red.  The light plot is 2016 the last time Trump (Republican) was elected.

I still believe we are in the positive sentiment phase based solely on a Republican being elected.  Remember the top 10% own 93% of equities and mutual funds.  And a majority of them are Republican and so it impacts their investment decisions. 

On the other hand, once the honeymoon is over reality sets in.  The last time households equity allocations were this high... it was all over shortly after.  

Shortly can still be December or even the 1st quarter of 2025. The point is, once investors are all-in, there is little more that can flow in... and a lot that can flow out.

We are close, but no signs yet.