In his Daily Market Notes report to investors, while commenting on the sell-off in Chinese stocks linked to Archegos, Louis Navellier wrote:
Fed's Peacetime Spending Spree
Heavy sector rotation has defined the market landscape for the past several weeks: Banking, machinery, materials, chemicals, oil and steel stocks have rallied strongly and reignited sentiment that just maybe this isn’t a one-off rally or bull trap that fades, as has been the case for “old economy” stocks in years past.
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The year 2021 began with the 10-year Treasury Note yield at 0.90%. That rate has now almost doubled to 1.75% as of the recent high quote of 1.75% on March 18. Because investors have been so well rewarded in a low-growth, low-rate, low-inflation economy for so long, the notion of this paradigm undergoing such a seismic shift in such a short period of time has caught much of the investing world flat-footed.
This Fed’s peacetime spending spree has the potential to radically alter inflation expectations going forward. Higher taxes and higher minimum wage laws will be passed on, via higher prices for goods and services – market forces that the government can’t control. We’ve been here before. These modern-day Great Society programs will not be America’s first rodeo combining strong growth with rising inflation.
The market is already digesting the likelihood of bigger spending and higher taxes, and until there is real evidence that inflation threatens to rise above 2.5%, the market should trend higher on robust sales and earnings projections. The combined efforts of easy Fed monetary policy to stoke inflation and the fiscal firehose of Congressional spending has the Dow and S&P 500 trading at new all-time highs.
GDP's Goldilocks Syndrome
The third tranche of Gross Domestic Product (GDP) statistics for the previous quarter came out on March 25 and is the most authoritative. With it comes a much larger and more comprehensive measure of total spending in the economy, Gross Output (GO), which includes the supply chain as well as final demand. The data for 4Q’20 revealed that GO grew significantly faster than the GDP at the end of 2020, which is an advance sign of potentially strong economic growth in 2021.
The good news is that we’re back to Goldilocks growth after a way-too-cold second quarter (-31.4%, annualized from the previous quarter) and a torrid third quarter (+33.4%). The fourth quarter was “just right,” at +4.3%, up from February’s 4.1% estimate.
The bond market is pushing long rates up for the Fed while its balance sheet is growing at $120 billion per month. Because the Fed does not want to do any tightening, even though it expects to see an uptick in inflation because of the pending reopening of the economy, it seems likely the present rise in Treasury yields is welcomed by the Fed. I think they would prefer to see European and Japanese buying of Treasuries cap this rise, as their financial institutions do not have any such option in the local bond markets.
If the bank leverage evident in the Archegos sell off is systematic it could be the tip of the iceberg. Especially if there is a broad market correction anytime soon.
The selling pressure in many Chinese stocks is appears linked to the Archegos as well which is run by former Tiger Asia manager, Bill Hwang, who was forced to liquidate up to $30 billion in Chinese stocks. This liquidation is also triggering what will likely be substantial losses for Credit Suisse and Nomura Holdings who were apparently handling the liquidation for the Archegos Hedge Fund.
The hedge fund’s forced liquidation also hit media companies like Discovery and ViacomCBS. The liquidation spread to Goldman Sachs and Morgan Stanley, who were quick to dump stocks affiliated with Archegos.
The CFDs (cash for difference) arrangements between Archegos and Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Nomura Holdings, UBS and Wells Fargo gave the hedge fund exposure to upside and downside in equal measure.
The selloff was triggered is due largely to the fact that, absent 13-F filings, many big Wall Street firm did not know what positions other firms had and “tripped” over each other. Archegos was registered as a family office, and was exempt from 13-F filings. Ironically, Goldman Sachs had in the past refused to trade with Bill Hwang due to a previous hedge fund fiasco. We will see the call for more regulation of family offices as this sell off plays out.
Gold Bullion Looks Strong
Gold looks strong. If real rates remain negative for a while, as I expect, there’s little selling pressure for bullion. Gold bullion is down from last summer’s record highs and declined to levels last seen before COIVD became a global pandemic in March 2020. With deficit spending up, one could argue that the fundamentals for gold have rarely looked this good yet we are nearly $300 off the all-time highs.
All other precious metals have been outperforming gold bullion of late as their uses are primarily industrial in nature and industrial metals are on fire on the global reopening. A lot is hanging on this reopening being successful and recent developments from Europe and South America are not encouraging with a third COVID wave accelerating.
The removal of the blockage in the Suez canal is positive for sentiment. The downside is a reckoning that just in time inventory management does not contemplate these kinds of setbacks. Recovery may take several weeks and will accentuate the glitches that we've seen in automobile production.
Amazon Alabama warehouse vote for unionizing is significant. The record gap in income levels between the Haves and Have Nots might lead to a new push for unionizing well beyond Amazon.
With multiple vaccines hitting the market it would be reasonable to expect that COVID will be on the decline by the end of 2021. Any other outcome would rattle both stock and bond markets globally.