“Euphoria Is Increasing”: Goldman Doubles Down On Market Meltup Call, Sees $90BN In New Stock Buying This Week
Last weekend we published a note by Goldman flow trader, Scott Rubner, who explained why despite a huge wall of worry which included such worries as a stagflation, China property bust, China slowing, Covid, tapering, corporate margin fears, snarled supply chains, energy, rate hikes, global growth slowing, higher rates, etc, stocks would melt up for a handful of simple reasons including a flood of buybacks and equity fund inflows, collectively amounting to roughly $8 billion per trading day, muted buyside sentiment, gamma flipping positive, a buying thrust from Vol Control funds and favorable seasonals.
In retrospect, and with the S&P hitting new all time highs just a few days later, the Goldman trader was spot on.
Fast forwarding one week, some may ask if Goldman’s enthusiasm has tapered. The answer, as the flow trader wrote in his latest Tactical Fund Flow note, is not at all, and instead Rubner is doubling-down on optimism, once again predicting nothing but meltups for stocks in the weeks to come. If one had to summarize his sentiment with one word it would be FOMO – the money just keeps flowing into stocks as the mechanistic Pavlovian response to just keep buying because the Fed will never let stocks sink proves simply far too strong. As a result, the bank now expects a gargantuan $90 billion in global equity demand for the coming week (more below).
Global Equities logged >$1 Trillion dollars worth of inflows during the last 51 weeks and the start of positive vaccine news. This is the biggest market structure dynamic of the year. For context, the prior best rolling 51 week record was +$250 Billion. 2021 is 4x larger than the next best yearly inflow. I think the equity TINA money flow train keeps charging to close the year and accelerates aggressively in November. I calculate a significant, +$18B worth of non-fundamental equity demand every day this week and this increases with massive November monthly inflows and corporate demand after >47% of the S&P reports next week.
Below Rubner lays out his latest detailed take on why the most likely path for stocks is a continued meltup higher.
- 1. S&P 500 just logged its 55th new all-time high of 2021 after 7 straight gains and highest level since September 2nd. Watch CNBC “boo-ya Jim” headlines.
- 2. S&P 500 logged a new all-time high in every month so far this year and that has only happened one other time since 1928. (2014)
- 3. There have been 15 times since 1928, that the S&P is up >20% or more through October. The median return for the rest of the year (last two months only) is +5.92%, with an 80% hit rate. 2021 would be the 16th time.
- 4. As of Friday, Goldman Sachs Sentiment Indicator, which pulls in 9 positioning indicators, logged the lowest reading (-.9), since May 22nd, 2020 (covid times), which was 73 weeks ago. (SPX was 2,955.45 vs. SPX 4,532.65 currently).
- 5. We are entering the strongest month (and best two month period) of the year with a median return of 2.1% and positive hit rate of 71% going back to 1985. VIX below 15, through pandemic lows.
- 6. November Inflows is the biggest dynamic in the market next week. Goldman models +20bps of AUM ($23 Trillion) or +$46B of new demand (I expect double given money has completely halted going into bonds).
- 7. Improving tax headlines dampen my biggest flow-of-funds worry for December. I am reducing my probability of December selling, no selling of tech stocks is positive in itself.
- a) The timing of a potential capital gains tax rate hike has been a key focus of many investors. Long-term capital gains and qualified dividends are currently taxed at a maximum rate of 20%, along with a separate 3.8% tax on investment income. Vice President Biden has proposed taxing these as ordinary income for filers with over $1 million in annual income. This would roughly double the tax rate on capital gains and dividend income from 23.8% to 43.4%. Link
- b) Using Federal Reserve data, GS Research estimates the wealthiest households now hold around $1 trillion in unrealized equity capital gains. This equates to 3% of total US equity market cap and roughly 30% of average monthly S&P 500 trading volume.
- c) Past capital gains tax hikes have been associated with declines in equity prices and in total household equity allocations. In addition, high-momentum “winners” that had delivered the largest gains to investors ahead of the rate hike have usually underperformed. The Tech and Consumer Discretionary sectors have led the market this year and have also been the largest sources of capital gains within the US equity market during the last 3, 5, and 10 years.
- d) The wealthiest 1% were the biggest net sellers of equities across US households around the last capital gains rate hike in 2013. In the three months prior to the hike, the wealthiest households sold 1% of their starting equity assets, which would equate to around $100 billion of selling in current terms.
Just in case his euphoria outlook was not clear enough, Rubner then repeats what he wrote in various client chat rooms this week, explaining – again – he expects another epic liftathon.
- 1. CTA – GS systematic strats estimate $47B to buy over the next 1 week assuming a flat tape. (and $23B to buy in a down 2.5 standard deviation move lower). ~$10B of global equity demand per day.
- 2. Corporates – US Corporates are expected to purchase $3.80B shares per day. 47% of S&P reports next week.
- 3. Retail – This week Global equities logged +$25B worth of inflows or ~5B per day.
- 4. Retail (2) – US households currently own 38% of the $75 Trillion US Corporate Equity Market. There is a max frenzy around the new Bitcoin ETF launches. Pull up the DWAC SPAC, Euphoria is increasing.
- 5. That is roughly $18B worth of global equity demand per day, every day this week, according to Goldman’s calculations.
- 6. Positioning on the discretionary HF side remains low / negative / short, and Goldman is looking for any dip to be shallow.
Last but not least, seasonals from here are up, up and away.
FT-IGM Survey for December
The FT-IGM survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s some of the results….
For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.
Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (teal), FT-IGM December survey (teal squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.
Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).
The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).
Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (teal squares), 90th percentile and 10tth percentile implied levels (blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
On unemployment, the median forecast is for a deceleration in recovery,
Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (teal square), 90th percentile and 10th percentile implied levels (blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.
Source: FT-IGM, December 2021 survey.
On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).
Source: FT-IGM, December 2021 survey.
The entire survey results are here.
Is anyone in Ottawa going to do anything about inflation?
The government needs to cut taxes and stop borrowing, but politicians want to raise taxes and spend billions more The federal government is putting on…
The government needs to cut taxes and stop borrowing, but politicians want to raise taxes and spend billions more
The federal government is putting on a masterclass about how to increase the cost of living. It’s doing everything from raising taxes during the middle of a pandemic to massive government borrowing and money printing. Now the question is: will any politician do anything to fight inflation?
The latest report from Statistics Canada shows prices jumping 4.7 per cent over the year. That’s the highest annual price increase in nearly two decades.
A primary driver of this inflation is soaring energy prices.
“Energy prices were up 25.5 per cent year over year in October, primarily driven by an increase in gasoline prices,” according to Statistics Canada.
Making it more expensive to fuel your car and heat your home is the goal of the federal carbon tax, which has increased twice during the pandemic. In April, the carbon tax will rise again, this time to 11 cents per litre of gasoline.
Carbon tax hikes don’t stop there. Prime Minister Justin Trudeau said he will increase his carbon tax to nearly 40 cents per litre by 2030 and impose a second carbon tax through fuel regulations that could add an extra 11 cents to the per litre pump price.
What has the Official Opposition said about rising gas prices?
Conservative Party Leader Erin O’Toole wants to impose two carbon taxes of his own that will soak a family for $20 every time they fuel up their minivan.
“The reduction in excise duty on petrol and diesel will also boost consumption and keep inflation low, thus helping the poor and middle classes,” reads the Indian government’s news release.
Canadians are even facing higher taxes every time they pick up a six-pack or a bottle of wine. Taxes now account for about half of the price of beer, 65 per cent of the price of wine and more than three-quarters of the price of spirits.
Another source of higher prices is the government’s printing press, which has been on overdrive during the pandemic. When the government prints more dollars, the dollars in your salary and savings account buy less.
The central bank has created $370 billion during the pandemic by purchasing financial assets such as government debt. That 300-per-cent growth in the Bank of Canada’s assets far outpaces the growth that occurred during the recessions of the 1970s, 1980s and 1990s. In fact, it far outstrips the growth from the beginning of 2008 until the beginning of the pandemic.
What is the central bank buying with its freshly printed dollars? Government of Canada debt makes up 85 per cent of the assets the Bank of Canada buys. That means the government is financing a good chunk of its deficits by devaluing your money.
The obvious first step to rein in this inflation tax would be to stop creating so much government debt for the Bank of Canada to purchase in the first place.
But every federal party leader just spent the last election promising more government borrowing. The Liberal Party, Conservative Party and New Democratic Party promised to increase spending by $78 billion, $51 billion and $214 billion respectively.
Families are getting soaked by higher prices while politicians are asleep at the wheel. The government needs to cut taxes and stop borrowing, but politicians want to raise taxes and spend billions more. It’s time for politicians to wake up from their slumber and provide Canadians with a concrete plan to stop these rising prices.
By Franco Terrazzano
Canadian Taxpayers Federation
Franco Terrazzano is the Federal Director of the Canadian Taxpayers Federation.
Courtesy of Troy Media.
Where Is China Going?
Where Is China Going?
Authored by Bill Blain via MorningPorridge.com,
“When the winds of change blow, some build walls while others build…
Where Is China Going?
“When the winds of change blow, some build walls while others build windmills..”
Evergrande will default, but the Chinese economy will probably avoid a property contagion crisis as the government becomes increasingly interventionist. Longer term, how will China evolve to cope with Covid, Growth and Demographics?
I’m going to go off on something of a tangent on China today. It can hardly come as much of a surprise to markets that S&P says Evergrande’s default is “inevitable”. (One of my highly coveted No Sh*t Sherlock awards is on its way to the US debt rating firm for stating the downright bleeding obvious).
Evergrande’s quietus will be a step towards China’s managed deflation of its property bubble, and it’s got massive implications for current and future investors in the economy. Let me stress I don’t believe China’s economy is about to vanish in a cloud of evaporating property dreams, or that a social revolution is around the corner on deflating consumer expectations. But, change will occur.
I expect China will successfully avoid Evergrande contagion destabilising the economy, and manage a soft-landing, but there is fundamental shift underway – a slowing economy, lethargic growth, and a shift away from capitalism towards a more interventionist state-controlled economy is underway.
Growth expectations are now around 5% – far below numbers we assumed were deemed necessary by the party just a few years ago. Even that number could be under pressure as the scale of the property effect on the economy comes into play, while China’s isolationist response to Covid means the fast spreading Omicron variant could play havoc with reopening the economy.
The Thoughts of Chairman Xi now absolutely dominate and set the internal debate – begging the question: just how will China emerge from the immediate uncertainties of a Property Wobble, Covid and Geopolitical Tension, and the long-term question of how China fits into an evolving global economy?
And, all the time, hiding in the background is the demographic reality:
Can China get rich before its aging demographic leaves it struggling?
It’s increasingly difficult to say where China is headed. There is an article in the WSJ: “China Increasingly Obscures True State of Its Economy to Outsiders” summing up how the economy is being shut to outsiders, and the lack of real intelligence available to anyone trying to figure out what’s rea going on. The best we can do is listen to comments around issues like “disorderly expansion” and “stability” – and figure what it means for investment opportunities in China. (Making barely educated guesses with little real information is stock in trade for any market strategist… )
What is clear is the CCP sees danger and has now embarked on economic stimulus to reinvigorate activity – easing policy in terms of lower Minimum Lending Requirements for banks, and lowering rates even as the global trend is towards tightening. Meanwhile, the economy is being reconstructed to away from free-enterprise towards greater state control and intervention, with regional governments given responsibility for sorting the property mess.
It all sounds fine in principal, but the history of China includes a critical sub-thread of pernicious regional corruption. That’s a sweeping charge to make, but the Chinese are remarkable traders and entreprenuers – give them space (as happened under Deng Xiaoping) and they thrive pursuing wealth, culminating in the success of China’s many billionaires. Close that door, and the road to riches is more likely to be perceived to be via the state bureaucracy.
There are close parallels between what’s happening in China and Soviet Russia’s economic history last century – after the revolution a period of chaos and civil war, near economic collapse, before a period of economic reform and liberation of free markets (the New Economic Policy period), before authoritarian figures seized back control of the economy to pre-empt political reform that might have seen them replaced. (In China, as I’ve written about before, it also a case of factions: What’s the Driving Force in China.)
The CCP is now trying to engineer a soft landing – a survivable property crash-landing, which will have internal and external effects.
Domestically, housing costs are unsustainably high, but a crash would devastate China’s middle classes.
Internationally, its going to be fascinating to see how defaulting property firms deal with offshore investors – do they ensure they are well treated in default to secure future engagement, or is China willing to risk long-term offshore disappointment by leaving foreign bond holders with the bulk of losses?
(Trading defaulted China property debt is going to be a fascinating market – how to play it when the rules are changing?)
However, the real issues aren’t just the tactical questions of how many other Chinese property developers will tumble, how it may impact local banks, or what local governments do, but the strategic issues determining what direction the Chinese Communist Party (CCP) takes next.
There are a number of key themes emerging:
How does the CCP replace Property as the core driver of the remarkable growth of China over the last decades? Property accounted for 33% of GDP growth – a massively distorting share. Growth was achieved by persuading Chinese consumers to leverage themselves into property – effectively their wealth is aligned with the success of Government avoiding a messy collapse. Call it Stockholm syndrome if you want – but its little wonder the Chinese middle classes are willing to go do the increasingly strident “patriotic” line pushed by the CCP on issues like Taiwan or the coming Winter Olympics.
I’ve read much about China becoming the world’s renewable energy builder – but frankly, solar panels and wind turbines are the easy options. China can do them, but hasn’t developed the more difficult technologies we need to diversify renewable energy – that really would be value added.
The past 30 years of spectacular China growth was not achieved on the back of home-grown technology innovation, productivity gains across Chinese industry, or a financial revolution propelling Chinese banks to the forefront of the global economy and financial system.
China remains a follower rather than leader in key technologies and industries. It has tried to address its perceived weakness with strategies like the Belt & Road project and debt-diplomacy – enthusiastically lending on infrastructure projects to promote growth likely to boost Chinese exports. These are perceived badly in the West – which is equally keen to protect markets it sees as theirs.
As the government flexes its increasing control of the economy you have to wonder where China’s private sector fits in – and thus its investibility. The big billionaire names have been “disciplined” and the stock prices of the big firms have suffered in line. The jury is out on how to invest in an increasingly closed China economy.
Goldman Sachs Downgrades US Growth Forecast Amid Omicron Fears
Will US Inflation Continue To Accelerate?
Is Omicron a Dud? Investors and Traders Think So – Focus Now On Growing China Stimulus
Inflation-Indexed Treasuries Lead US Bond Market Returns In 2021
“In Our Time” – Jeff Gundlach Webcast Live
Nokia’s Comeback Story Is Finally Starting to Solidify
7 Stocks to Buy as Biden Picks Powell For Fed Chair
China Shifts To An Easing Mode While “Ex-China” Is On A Tightening Path
Evergrande Default Is “Inevitable” – S&P Warns As Chinese Developer Misses Dollar Bond Payments
Precious Metals12 hours ago
New Found Gold Neighbor Canstar Resources Might Be Sitting on Canada’s Next Big Gold Discovery
Precious Metals13 hours ago
NEO Lithium’s Closest Neighbor Gets Ready to Drill
Precious Metals9 hours ago
Canstar Completes $5.2M Financing For Continued Exploration of Newfoundland Gold Rush Prospects
Economics13 hours ago
Precious Metals8 hours ago
3 ‘Must Watch’ Mining Stocks For Your Year End Watchlist
Energy & Critical Metals11 hours ago
Metal of the Future? 2021 Copper Price Peaks May Just Be the Start
Economics15 hours ago
Will US Inflation Continue To Accelerate?
Precious Metals5 hours ago
M&A: Kinross Announces Acquisition of Great Bear Resources