Rotation from US to International markets – Does that make sense?
- Our thesis has been that US vaccination rates in excess of ROW have helped drive relative market returns
- Vaccination rates in Europe now in excess of US; EM continuing to play catch up, US stagnating
- Delta variant in US showing early signs of abating; this could refuel “re-opening” play in US
- London, Paris, and Milan now all have traffic levels above 2019 pre-pandemic levels
- China has specific set of issues – are we close to the end? Perhaps, but over levered property development and Macau now taking center stage
- El Salvador adopting bitcoin as legal tender – botched and volatile rollout – others are watching
- Valuation differentials are wide and favor non-US equities
- Structurally we like the US markets still, but are watching ROW markets closely
U.S. tax proposals not as bad as feared, Biden wanted more to offset spending
- Corporate rate to 26.5% vs. current 21%, individual to 39.6% vs. 37%, cap gains to 25% vs. 20%
- Democrats aim to pass legislation via budget reconciliation – still need every Dem Senator vote
- A few Democrats pushing back on cutting prescription drug prices – interesting!
- ~ $75 billion will be invested in IRS tax enforcement, rate increases retroactive to date proposed
- Europe and Latin Am countries also increasing taxes, so while US plan not good, it is still a relative winner
- Short-term impact of higher taxes is minimal but will have substantial impact longer term
- Growth estimates for 2022 likely too high if tax increases go through, provide further boost to Republicans in mid-term elections
US economy is slowing, and budget deficit is increasing…tricky time for the Fed!
- As noted last week, Fed will play ball with the administration, Powell wants to be re-nominated
- Fed must balance financing gov’t expenditures, tapering and keeping inflation under control…??
- How does Fed do this? Greater financial suppression that restricts M2 from entering economy
- M2 velocity continues to decline, suppression is working
- T-bills rates are already lower, long end of curve flattish and high yield spreads still tight
- Inflation thesis as temporary continues to play out in latest dataset (August) = gives Fed a pass
- Financial markets are not overly concerned with size of Fed balance sheet – AT THE MOMENT!
- Shadow banking companies will do very well in the near and medium term
September and October are upon us…still no 5% pullback in the market!
- Fed’s aggressive monetary stance and earnings recovery supporting asset prices
- TINA, there is no alterative…money flowing to stock market – better than residential RE..?!
- AMC and GME meme stocks hold steady, Uranium and Natural Gas now join the party
- Meme ETF, NextGen AI Sentiment Leaders Index (BUZZ), up 50%+ TTM (thru 9/16)
- Robinhood now targeting college students to open accounts
- Of course, we will see a 5% pullback again…probably even in 2021!