VRA Investment Update: Q3 GDP Growth Est Now 5.8%. Our Roaring 20's Megatrends Hard at Work. Buffet Loves Housing.
/Good Thursday morning.
Last year, and well into 2023, you could throw a rock at 100 mainstream economists…grouped together like sardines…and not hit a single one that wasn’t predicting a recession (outside of Evercore’s Ed Hyman, that is). It was essentially unanimous; the US was headed into a recession and it was barreling towards us like a freight train.
Oops.
As it turns out, there were two Texans telling you otherwise and we (daily) explained why there was no recession on the horizon. It was, in very large part, due to the Trump Economic Miracle. Trumps tax cuts, dramatic cuts to regulation and his America 1st, anti-China policies/tariffs have continued to power the US economy, even in the face of 41 year highs in inflation.
Roughly 4 months ago I was preparing to go on Charles Paynes “Making Money” show when the guest host (Lauren Simonetti) popped in just prior to my interview and started peppering me with questions about my VRA Letter that morning, where I laid out my “Trump Economic Miracle” analysis. Simonetti said something like “Kip, let me see if I understand this. Are you actually giving Trump credit for the current success of the economy??” She had that incredulous look on her face. I get that a lot, still.
But facts are facts. Trump told us on his way out of office…in fact in his last TV interview before leaving the White House…that the US economy would remain strong for a decade, thanks to his economic policies. Trump was right.
In yesterday's update to VRA Members, we covered the Atlanta Fed’s Q3 GDP growth estimate reaching 5%. That didn’t last long.
Their GDP growth estimate for Q3 is now up to 5.8%. Should the final Q3 GDP reading top 5% it will be the highest GDP growth rate since 2003.
Know this; in addition to the Trump Economic Miracle, there is a manufactured and coordinated attempt by central banks and governments (globally) to restore growth and at the same time pay down global debts with cheaply printed fiat currencies. It appears to be working, at least in the early innings.
Market watcher Bryan Rich has been reporting on this story for some time. Excellent work in fact. Rich says “we need a period of hot economic growth, rising wages (to restore the standard of living), and stable, but higher than average inflation to inflate away debt — not just domestically, but globally. And indeed, if we look at the policy moves by the Western world, since the covid lockdowns, that seems to have been the plan. Inflate asset prices. Inflate the nominal size of the economy. Inflate away debt.”
And with that, as you can see in the chart, the debt burden has been shrinking from the pandemic policy-response driven peak.
The Roaring 20’s. Our Big Bribe Megatrends Continue to Power “Everything”
We’re in a liquidity-fueled economic environment that continues to be the primary driver of “everything”, one of our primary “Big Bribe” megatrends. Home prices just hit a new all-time high, as did construction for multifamily housing (apartments). It’s no accident that housing stocks were among the first groups to bottom last October, followed by their parabolic move higher. Discounting mechanisms, indeed.
A few days ago we learned that Warren Buffet is aggressively long housing stocks. As we’ve been forecasting over the last year +, housing is in decade-long boom, driven by megatrend structural issues that will only continue to get stronger. Welcome to housing stocks, Warren. We own NAIL (3 x Housing ETF) with current gains of 118%.
At the root of it all is never-before-seen levels of liquidity, with thanks to Trump/Biden stimulus programs, the Feds QE and converging megatrends that will power the US economy and markets higher into 2030.
This morning the 10-year yield is up to 4.3%, barely a stones throw away from last Octobers highs of 4.33%. We’ll soon (1–2 months at most, IMO) reach an inflection point where significant, primary trend reversals will occur. Bond prices will bottom, interest rates will top, the US dollar will reverse lower and the current consolidation phase in equities will end.
However, one of our primary headwinds remains the fact that we are in the seasonally weak period of August/September. Should rates fly higher, past those October high yields, we shouldn’t be surprised to see a capitulation-style event. As in, the bad news builds to a crescendo, taking stocks to their final lows before what we will expect will be a dramatic move higher into year end.
The permabears are already out in force, following their hibernation after missing out on a mini-melt-up move higher from the 10/13 bear market lows. We want the bears to get aggressively short stocks again. Gives us more fuel for the fire as they’re…once again…forced to cover their shorts and then go long, again.
This is the exact character and personality of a new bull market.
Here’s some early evidence that the bears are back. Yesterdays equity put/call ratio hit 1.03, the highest level of put to call purchases since March. Then last night we learned that the AAII Investor Sentiment Survey showed bulls dropped 9 points to 35.9%, with bears jumping 4.5 points to 30.1%.
VRA Bottom Line: we expect the combination of disinflation (aided by the deflation being exported from China), combined with the “demand destruction” of a 5.5% Fed funds rate and 7.5% mortgages, will soon begin to impact the economy to the point of driving down interest rates. This is the demand destruction from the “lag effects” of Fed rate hikes, even as it butts up against the never-before-seen levels of liquidity in the system from Fed money printing (QE) and Trump/Biden stimulus programs. This is the ongoing battle that’s taking place in the bond market. Our view remains unchanged that the Fed’s unrelenting 11 straight rate hikes from last March will soon begin to fully kick in. The power of “lag effects” and the “innovation revolution” will result in “deflation” going forward which will take inflation down to the Fed’s 2% target in 2024. This will be followed by Fed “rate cuts” in 2024.
How We Want to Play It: we are witnessing a “great reset” of a different kind, as the next several years will bring deflation and MUCH lower rates.
- Bonds are a fabulous buy here, certainly in the 4% + levels of 2 to 10 year bonds. We see rates “plummeting” lower.
- Adjustable rate mortgages are the way to go on home purchases. They’ll be adjusting lower for many years to come.
- Tech stocks and semis will also be a primary beneficiary of deflation and lower rates. They will continue to lead..and lead hard.
-Precious metals and miners…which are currently being hit by a rising dollar and rates…will have a remarkable move higher in this future of lower rates, deflation and continued move lower in the US dollar, which has entered a long term bear market.
Final Thoughts
We’re witnessing “textbook” early bull market action. And while we can’t tell you exactly when this period of consolidation will end, we can tell you that all of the familiar permabears are coming out of hibernation, with warnings of an early end to this bull market. Listening to them will get you hurt.
We made the decision at the end of July, in advance of seasonal weakness, that we don’t want to get too cute with the VRA Portfolio. A couple of months back we took some profits by selling 1/2 positions in the semis and housing, but beyond that we want to remain long and strong. We’re too early in this bull market to lighten up too much. Instead, we are using discipline to wait before putting money back to work in the semis, tech and additional broad market positions. In other words, we’ll soon reach an inflection point where we’ll see snap-back moves in the other direction. These snap-back moves will take place in rates (lower) and bonds (higher), the US dollar (lower) and US broad market indexes (higher).
Buy the dip is still the play.
Until next time, thanks again for reading…
Kip
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