May 22, 2017

Yawning Owl

Expectations for U.S. growth continue to slow as distractions in Washington D.C. take away from the aggressive legislative agenda. The U.S. Dollar broke to six-month lows last week while the U.S. Yield Curve flattened to levels not seen since before the November election. For investors, this suggests that we continue to focus on international stocks and bonds that will benefit from the Dollar’s weakness, U.S. Multi-nationals that will also get a forex benefit, and Growth stocks which are less affected by the slowing U.S. economic growth outlook.

As we saw last week, the markets are still on edge to political situations both here in the U.S. and abroad. Last week it was Brazil’s turn to overshadow all the goings on in the White House. While Brazilian equities are still much cheaper than U.S. equities, all it took was a new Presidential corruption allegation to crack their market 15% in one day. Given the +100% move in the market from the 2016 lows, you could have guessed that the hot money would sell out of the market on any big, negative significant news event. But a 15% sell-off? That was an impressive move for any stock market index. I would expect Brazil to be volatile until the red dust settles. But for long-term investors looking to increase their EM exposure, this six-month break in prices will likely be looked at closely.

The largest and most liquid financial market in the world no longer believes that the U.S. economy is going to accelerate…

The differential between short-term and long-term interest rates, a popular gauge of the yield curve, has been drifting lower since a post-election spike. On Wednesday, the spread between the two-year and 10-year yields fell to 0.995 percentage point, dipping below the 0.998 percentage point seen on Nov. 8, according to Tradeweb. Investors often watch the yield curve for economic signals because long-term rates rise more than their short-term counterparts when the outlook for economic growth and inflation is rising.


Yield Curve Since Election

Another gigantically traded financial market instrument, the U.S. Dollar, agrees with the flattening U.S. Treasury yield curve…

US Dollar Chart

For the week, the final stats don’t even begin to tell the whole story…

You can see the wreck in the U.S. Dollar and the benefit to EAFE and International Treasuries. But what you don’t see is a -15% Brazilian equity and FX move on Thursday, or the -4% U.S. Bank move on Wednesday. In both cases, money just moved from Brazil to other EMs or from the Banks into other U.S. stock sectors. So, the big shocks continue but the market panic does not.

iShares Chart

(Priced 5/19/17)

This chart of EAFE (Developed International Equities) looks spectacular…

EFA Chart

Here is a look at the U.S. sectors…

Semis still lead. REITs bounce with Bonds. Banks and Biotechs pull up the rear.

Sectors Chart

(Priced 5/19/17)

The first big shock to hit the market last week came out of the Washington D.C…

As the list of issues to deal with by the White House lengthens, it takes away from all the work that needs to be done. One well known, conservative journalist sums up the State of D.C. below. No need to mention what the more liberal journalists are writing.

Forget the overly ambitious GOP agenda (healthcare, tax reform, trade renegotiation). It is hard to see how the White House will manage less august tasks (keeping the government open, completing a fraction of the political appointments). A chief executive who never understood the dimensions of the job will find it hard to function at all for very long under such conditions, especially when he does not trust his staff.

We face the prospect, a dangerous one, of an immobilized White House. A wounded president and paralyzed government pose a great enticement for foreign aggressors to strike. The chaos Trump creates will begin to affect markets, which abhor uncertainty. In short, Congress, the Justice Department and the FBI need to work diligently and quickly. The country requires a functioning chief executive and commander in chief. We will not have one as long as Trump remains in office.

(Washington Post)


Here is some quick ink written by a very smart capitalist about how he is thinking about the current political environment…

This isn’t normal. People weren’t this crazy 20 years ago. It was the beginning of crazy, but just the beginning. 20 years ago was right around the time that Drudge was first starting up, and Waco happened and Elian Gonzalez, and politics started to get a little more extreme. It has been a relentless trend towards extremism since then. Meanwhile, the country’s most popular Democrat is not even a Democrat, but a real Red Commie.

Like I said, me as credit analyst is downgrading the hell out of the U.S. right now.

This corresponds with a period of extreme overvaluation in pretty much every asset class–stocks, bonds, real estate (in some sectors). I could not think of a clearer sell signal for a country. This is like Japan 1990 but with political nonsense to go along with it.

(Jared Dillian)


The most important building in Washington D.C. right now?

FBI Headquarters

(FBI Headquarters)

Given all that will be happening this summer with Mueller and Comey, here is an insightful long read that you will want to bookmark…

When Jim Comey first learned that Andrew Card and Alberto Gonzales were on their way to the George Washington Hospital room of John Ashcroft, his first call for help was to Bob Mueller. Comey knew that the White House chief of staff and the White House counsel would try to push the attorney general to renew the National Security Agency’s Terrorist Surveillance Program, code-named STELLAR WIND. Comey, who was then Ashcroft’s deputy, had spent the preceding weeks leading the charge against the White House and especially Vice President Dick Cheney against the program, which the Justice Department’s lawyers had determined was illegal. For days, Comey had weathered intense pressure to reauthorize STELLAR WIND, the debate escalating as the program’s expiration date neared. Cheney’s office had told Comey in no uncertain terms that if the program wasn’t OK’d, Americans would die—and their blood would be on Comey’s hands.

That night, though, Comey knew he had an ally to call. He asked Mueller, the ramrod-straight FBI director, to meet him at the hospital, but as his own car raced toward the hospital—its grill lights flashing and siren wailing—Comey realized that Mueller wouldn’t make it before the White House officials, so he asked for help: Don’t let them remove me, he asked Mueller.



Looking at equity flows, while the dollar shift from active to passive remains positive, the second derivative is now definitely negative…

The continued reduction in asset and equity correlations will continue to reward those taking more active risks. How long until the flows into active become positive? How will this affect a certain 500 U.S. stocks?

U.S. Equities Chart

(@Financial_Orbit, WSJ/DailyShot)

Speaking of ETF flows, I am guessing that BRZU saw redemptions last week…

Largest ETF Decline in History

(Pension Partners)

The fastest growing cities have a big problem, not enough workers…

After eight years of steady growth, the main economic concern in Utah and a growing number of other states is no longer a lack of jobs, but a lack of workers. The unemployment rate here fell to 3.1 percent in March, among the lowest figures in the nation. Nearly a third of the 388 metropolitan areas tracked by the Bureau of Labor Statistics have an unemployment rate below 4 percent, well below the level that economists consider “full employment,” the normal churn of people quitting to find new jobs. The rate in some cities, like Ames, Iowa, and Boulder, Colo., is even lower, at 2 percent.

That’s good news for workers, who are reaping wage increases and moving to better jobs after years of stagnating pay that, for many, was stuck at a low level…

But labor shortages are weighing on overall economic growth, slowing the pace of expansion in northern Utah and other fast-growing regions even as unemployment remains stubbornly high in Rust Belt cities like Cleveland and in regions still recovering from the 2008 recession, like inland California.

To Todd Bingham, the president of the Utah Manufacturers Association, “3.1 percent unemployment is fabulous unless you’re looking to hire people.”

“Our companies are saying, ‘We could grow faster, we could produce more product, if we had the workers,’” he said. “Is it holding the economy back? I think it definitely is.”

(NY Times)


For older small cities that are long on environment and short on economy, this is a great solution…

All across the county, single-resource towns are building trails where they once harvested timber or mined ore to attract a new source of revenue—mountain bikers.

“We’re an untapped resource,” says Andy Williamson, who manages IMBA’s Epic Trails and Ride Centers as the organization’s director of program development. “The idea of dirt bag mountain bikers going to places and sleeping in their cars isn’t really relevant anymore. We want to really experience the places we visit, and the communities that really embrace that are the ones that can take full advantage of us.”

According to a Singletracks.com survey of more than 1,400 cyclists across the country, 62 percent of mountain bikers travel to ride, make an average of two trips a year, and spend about of $382 each trip. So at a relatively cheap $50,000 per mile of top-flight, professionally-built mountain bike trail, the return on investment can be “truly amazing,” Williamson says.

Oakridge, Oregon, has become a poster child for the movement. Once a thriving lumber town in the heart of an old-growth forest, Oakridge took a nosedive in the 1990s after the local mill closed. In 2004, it received a grant to develop a trail plan, and the city began working to brand itself as mountain-biking destination. Today, it has over 380 miles of trails in the surrounding mountains. According to one 2014 study, mountain bike tourism generated $98.6 million in goods and services a year for the town.




Some numbers for your noggin on solar…

Curves: In 2010, the IEA projected it would take 14yrs to install 180 gigawatts of global solar capacity; it took 7yrs to hit 290 gigawatts. A 15 megawatt solar plant in Cali cost $55mm to build in 2010. The same size installation now costs $15mm and produces 40% more electricity. Solar panel costs have fallen 80% since 2009. Sales of plug-in vehicles jumped 42% in 2016; 8x faster than overall auto sales. The storage capacity of large lithium ion battery systems doubled last year. It takes 50-60yrs for mankind to shift from one dominant fuel source to another.

Anecdote: “They made the bet,” said the Valley Boy. “We all saw the opportunity,” he said, pointing to the sky. “Pretty hard to miss.” Mankind’s energy usage from all combined sources is equivalent to 0.0125% of the 120,000 terawatts of solar energy hitting earth daily. Since Lucy roamed Africa 3.2mm years ago, we’ve consumed the equivalent of just 2.6 days of sunshine. “When people started talking peak oil, solar soared.” China had no R&D so it bought as much fabrication equipment as we’d sell. Silicon feedstock prices surged to $400/kg. “The valley’s engineers were too smart for their own good, and focused on making complex solar cells with cheaper materials. All the while, China incubated their silicon-based industry, scaled it.” Free loans, cheap labor, light regulations and hungry global markets driven by government incentives fueled demand. “Then silicon prices collapsed, it’s the 2nd most abundant material in earth’s crust.” And the highest single input cost for a solar cell. “As prices fell from $400/kg to $15/kg anyone who developed silicon alternatives grabbed their ankles.” New industries sprung up around China’s solar-cell producers to provide panel components. The resulting industrial ecosystem became unassailable. “10yrs ago, solar-energy made incumbent power producers and utilities yawn. They’re now crying fowl, searching for silly arguments to legally slow the installation pace.” The US has 1,000 gigawatts of total electricity capacity. In 2016 China installed 35 gigawatts of solar domestically. By 2020, China is targeting 50 gigawatts annually. By 2030 they’re targeting 200 gigawatts — 20% of America’s existing electricity infrastructure, every year. China and Taiwan totally dominate the future of solar cell production. They produce 85% of all cells; it was our market to lose, we lost it. “American’s hate government getting involved, we don’t want politicians to pick winners,” said the Valley Boy. “But Beijing made the bet, and won big.”

(Eric Peters/WkndNotes)


Here is a return for the record books: 30.04% annualized return over 33 years…

Jean-Michel Basquiat’s painting of a skull sold for $110.5 million at Sotheby’s in New York, setting an auction record for American artists and providing a windfall for the daughter of two collectors who purchased it for $19,000 in 1984.

The buyer was billionaire Yusaku Maezawa, founder of a Japanese fashion website, and a new force in contemporary art. The work led four days of bellwether auctions in New York where the world’s wealthiest investors and families dropped more than $1.5 billion on Impressionist, modern, postwar and contemporary art. The results surpassed the target of $1.3 billion and the series conclude on Friday.

Basquiat’s canvas was last purchased at auction three decades ago by the late New York collectors Jerry and Emily Spiegel. It then disappeared from the public view until the couple died in 2009 and their art trove passed on to their two feuding daughters, according to people familiar with the matter.


Jean-Michel Basquiat Skull Painting

Finally, some solid advice from Bill for new college grads (as well as forward-looking students)…

New college graduates often ask me for career advice. I was lucky to be in my early 20s when the digital revolution was just getting under way, and Paul Allen and I had the chance to help shape it. (Which explains my lack of a college degree—I left school because we were afraid the revolution would happen without us.) If I were starting out today and looking for the same kind of opportunity to make a big impact in the world, I would consider three fields.

One is artificial intelligence. We have only begun to tap into all the ways it will make people’s lives more productive and creative. The second is energy, because making it clean, affordable, and reliable will be essential for fighting poverty and climate change. The third is the biosciences, which are ripe with opportunities to help people live longer, healthier lives.

(Bill Gates)


And Lastly…
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