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07 January 2021
Video commentary for January 6th 2021
Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Democrat clean sweep points to outperformance of cyclicals, mega-caps continue to weaken, gold eases. emerging markets and UK firm, Dollar remains weak, bitcoin extends uptrend.
Banks, Small Caps Power Stock Rally as Tech Drops
This article from Bloomberg may be of interest to subscribers. Here is a section:
Investors poured into financial assets that benefit from a stronger economy after Democrats looked set to take control of Congress, potentially unleashing a torrent of federal spending to revive growth.
Banks and energy producers led gains in the S&P 500 as the Russell 2000 Index of smaller companies climbed 3%. The Nasdaq 100 fell as traders sold out of high-flying stocks such as the Apple Inc. and Amazon.com Inc. The Dow Jones Industrial Average outperformed.
Democrats claimed one of the two Senate seats contested in Georgia and led in the other tight race. Two wins would give President-elect Joe Biden’s party control of Congress and smooth the path for some of his spending policies. That’s fueled bets that increased stimulus will boost the economy and spark inflation. The 10-year Treasury yield powered past 1% for the first time since March, and the dollar fluctuated after earlier weakening toward a six-year low.
“The growth-into-value rotation may be reinforced after the results of the Georgia Senate election amid the prospect of a higher fiscal stimulus bill and steeper yield curve, which would benefit banks and other non-tech companies,” David Bahnsen, chief investment officer of the Bahnsen Group in Newport Beach, California, wrote in a note to clients.
Eoin Treacy's view
Control of the Senate will give the Democrats greater power to remake policy. It won’t all be plain sailing since such a slim majority will require total unanimity but it certainly means they will have an easier time passing spending measures. If debt financing and Modern Monetary Theory were likely before, they are doubly so today.
Waiting For The Last Dance
Thanks to a number of subscribers for this article by Jeremy Grantham which may be of interest.
The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.
This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.
All bubbles end with near universal acceptance that the current one will not end yet…because. Because in 1929 the economy had clicked into “a permanently high plateau”; because Greenspan’s Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that “U.S. house prices merely reflect a strong U.S. economy” as he perpetuated the moral hazard: if you win you’re on your own, but if you lose you can count on our support. Yellen, and now Powell, maintained this approach. All three of Powell’s predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.
Eoin Treacy's view
The challenge for value investors is they tend to see trouble coming way before the rest of the crowd. For many funds the high Cyclically Adjusted P/E ratio has ensured they have been underinvested for years so bearishness is not a new phenomenon even if some are now doubling down on their view.
Wealth Taxes Are Going Global, From California to Germany
This article by Ben Steverman and Benjamin Stupples for Bloomberg may be of interest to subscribers. Here is a section:
Driving the idea’s revival is the need for revenue. The pandemic has devastated government finances around the world, boosting spending by trillions of dollars, from India to Canada, while slashing tax collections.
The situation in the U.K. — which now faces its widest fiscal deficit since World War II — has brought the idea of taxing wealth back into the discussion. An independent commission last month called for a one-off levy to raise about 260 billion pounds ($354 billion) — more than a third of the U.K.’s tax receipts in the latest financial year. Raising that much money would require taxing individual wealth above 500,000 pounds at 1% annually for five years, affecting 8 million people.
“There’s been quite a lot of murmurings about reforming existing taxes on wealth, but everyone’s just effectively treated a wealth tax as being off the ‘serious’ agenda,” said
London School of Economics assistant law professor Andy Summers, one of the report’s authors. “Partly, that’s because barely anyone in the U.K. has studied it since the 1970s.”
Eoin Treacy's view
Wealthy individuals represent a ripe target for taxation. So do wealthy companies with hundreds of billions sitting in cash. The time to look at trusts, real assets like gold or property, gifting to children, deferring income, options programs, internationally diversifying where wealth is held and potentially looking at alternative accommodations was yesterday.
Eoin's personal portfolio: stock market trading position opened December 18th
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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