June 2019 Newsletter Part I: Putting Trade Cards on the Table

With the Fed Put Coming, in the Trump TV Show, 30 Days Is a Lifetime

Dear Subscriber,

First off-- this newsletter will be a whining-free newsletter from yours truly! With the Fed "Put" in (i.e., the implicit guarantee to support the stock market in times of geopolitical risk or inverted 2/10 yields that Fed research says means "economic expansion in danger-) and the China/US trade terms basically on the table ("If you promise to not KILL Huawei and to not add the next $300 billion in tariffed goods at 25% during a six month cease-fire truce, China will accept a few of the US demands and let the various trade team members straighten this mess out by early December for a nice Holiday for us all").

That is the base case priced into the market. July Fed rate cut of 25 basis points--75 basis points by Dec priced in as well. The risk, of course, is the Chinese national fever has been so jacked up via the non-stop "This American aggression is just like the old Opium Wars of the 1830's/40's" that the Chinese think they can walk away and turn on their massive liquidity tap, trash the yuan and show the round eyes that they chose the wrong people to "bully" (more on this in a moment.)

Key Point: But here are the facts: the rapidly deteriorating global economic case is why the US and China can't afford to blow up the trade deal and walk away and go all Defcon 1 on each other with $trillion of tariffs--literally almost every global economic and sentiment data point has been negative since the early May escalation of hostilities.

1) Next week we will likely to see the JPMorgan global manufacturing PMI slide further into contraction territory, according to last week’s preliminary PMI readings. It has fallen for 13 months.

It’s a full-blown global theme: Data on trade and manufacturing continue to shock.

The Bloomberg Economic Surprise Index for the U.S. has been slightly negative all year. The equivalent for the euro area has been negative for nine months. And, yet, economists haven’t changed their forecasts for global growth since the trade war escalated in May. Work that one out: The data pre-tariffs consistently came in below expectations, and then the world’s two largest economies imposed a bunch of tariffs. And yet the consensus expectation for 2019 world GDP growth is unmoved since April. Maybe they being optimistic and don’t want to slash economic forecasts ahead of the G20, only to be compelled to upgrade them again in July if the U.S. and China achieve a deal. But if we don't at least get a truce, this bearish economic prognosis could easily become the market's new economic base case.

Suddenly, all the US economic "surprises" as in negative surprise turned ugly in June.

As mentioned in many reports we get from China, in May the propaganda communication on mainland China shifted immeasurably. Previously, any tensions with the U.S. were played down. But after talks broke down in May, the tense situation with the U.S. has almost been hyped up domestically, with frequent mainland media references to imperial aggression and a new Long March. Then all these references to the mistakes of the treaties of the Opium War era -- signed between 1842 and 1860. There’s little reason to doubt the sincerity of China when it states that a trade deal can only be established when negotiated on "equal terms."

NO ONE at this point should believe that Trump will suddenly surrender his fight and abandon almost all demands on China, either. At best, this weekend brings a handshake, some statements of mutual respect, a 6-month trade war truce 2.0 ala the Buenos Aires truce and of course the expressed desire to reach a deal.

But the data says that in subsequent weeks, a gloomier economic reality will become apparent--and I am counting on that reality to light a fire under both sides to not amp this reality show into an existential clash of cultural and economic titans.

Then there is this: The Fed/ECB/Japan Reserve Bank Taxing Risk-Free Assets

Why The Markets Codependency on the “Doved-Up” Fed is So Strong

I love the term “Doved-Up” —in the 10-year stock market rally, the most important thing for investors needed to understand is that central bank accommodation (whether that takes the form of rate cuts, large-scale asset purchases or forward guidance) is the real power of equity asset value increases )+ $2.4 trillion of stock repurchases + 40% corporate income tax rate cut). But the Central Bank firehose is so powerful because its a uniquely binary strategy: it's designed for one purpose—to drive investors into riskier corners of the market. There is nothing secretive about this. It is, quite literally, how “accommodative” monetary policy works; it stimulates risk taking by making zero risk investing a guaranteed negative return (after inflation) loser.

Last week, following Mario Draghi's dovish comments in Sintra, the Fed's successful effort to deliver on market expectations for extreme dovishness and cautious outlooks from the BoE and the BoJ, the global stock of negative-yielding debt surged above $13 trillion.
As BAML’s Barnaby Martin noted in his latest research missive, "around 85% of German government debt now yields below zero and ~60% of German quasi-sovereign debt is negative too."Meanwhile, nearly 80% of French covered bonds are negative-yielding, 70% of Japanese sovereign bonds yield less than zero and nearly half of Spanish government bonds now have sub-zero yields."

Key Point: When You TAX $14 trillion of riskless assets, institutional investors that are sitting on cash are forced to buy things with actual yield and upside to make up for the 100% guaranteed losses on the sovereign debt they usually have to own because of pension rules.

Hence the best performing June since 1938--the world banks have again created nuclear powered TINA--there is no alternative--and in the land of the blind (negative bond yields) the one-eyed man (the country with 300 basis point higher yields) is king. Is this related to the new speculative bubble in Bitcoin? Why not? It's the "new gold", right? A "store of value" (ahem--its a currency of paying cyber extortion, ransoms, sex slaves, weapons and drugs--digital tulip bulbs for some--non-taxable and traceable crime funds for others).

Moral of the Story: Who is more powerful when it comes to stocks--Trump, Xi or World Central Bank rates cuts and continued Quantitative Easing (buying sovereign debt at negative interest rates)? No contest--Central Banks. With the risk of continued hard economic landing for everyone OTHER than China, bad economic news IS bad economic news and that gets 75 basis points (3/4 of one percent) BACK from the US Fed as "recession insurance." That gives Xi and Trump the extra time to work SOMETHING that gives "Face" (dignity and prestige) to China and to candidate Donald J. Trump. The long term existential Sino/American/European Union cultural and economic battle is now fully out-in-the-open and the structural differences between Chinese state-sponsored mercantilism capitalism, the European safety net and US winner takes most capitalism will not be resolved by import tariffs. IMHO the leading economies of the Western world are going to ALL get on the same page and make the case (with the real threat of tariffs and other restrictions) to bring China to comply with the WTO rules they agreed to in 1994 and have mostly ignored for 25 years.

Our First Half 2019 Portfolio Report Card: 2.3X Outperformance of SP 500
Staying long and overweight our semiconductor Superstars (AMD/NVDA/XILINX) and SaaS Cloud play Chegg has once again shown how unstoppable transformational technological change is the way to keep our 55.4% annual returns (appreciation and dividends) going.

We have updated the Buy Under and Target Prices--in part 2 we will add a few new transformational sectors that are now ready to rumble with transformational regulatory and technological leadership (solar energy, more 5G, chronic healthcare cost busters, OLED)

First Half 2019 Transformity PRO Performance (Double Listing means 2X Weight)

Position YTD

AMD

Nvdia

Chegg

BE-Bloom Energy

Xylinx (XLNX)

S&P 500

TR Growth Stocks

MORL

MRRL

BDCL

NEWT

NRZ

MIC

SMHB

AMZA

Total High Income Ballast

Cash Reserve Yield: PFFA

First Half Growth + Div

67.00%

62.00%

23.50%

34.79%

5.10%

38.70%

16.50%

38.73%

22.68%

25.68%

21.98%

32.21%

29.21%

37.25%

25.74%

18.56%

18.27%

17.17%

10.89%

6.20%

24.09%

9.20%

Date Sold

30-May

2.3X Outperformance

30-May

30-Apr

30-May

Buy Under

$30.00

$160.00

$40.00

$12.00

$120.00

$14.00

$14.50

$20.00

$16.00

$42.00

$22.25

$5.50

Target

$38.00

$225.00

$55.00

$25.00

$180.00

$16.00

$22.00

$18.00

$55.00

$25.00

$8.00

Update on Bloom Energy too--lots of traction coming to then 2H--and then the wildfires, hurricanes, floods, and tornados continue to drive businesses, utilities, governments, healthcare and education facilities that HAVE TO make their facilities 24/7 powered.

Congrats to the US Women Soccer Team!

Toby

PRO NewslettersTobin SmithJune 28, 2019