Daily Briefing – July 6, 2020

Published on
July 6th, 2020
Duration
30 minutes


Daily Briefing – July 6, 2020

Daily Briefing ·
Featuring Peter Cooper, Max Wiethe, and Ed Harrison

Published on: July 6th, 2020 • Duration: 30 minutes

Max Wiethe joins managing editor Ed Harrison to discuss sentiment, the 2020 election, and forward earnings and what sort of impact that will have on markets in the coming months. Max and Ed first break down Peter Atwater’s interview from last week on Real Vision, examining his thoughts on current market sentiment and US politics, which then leads them to consider what a Democratic sweep would mean for fiscal policy and how MMT policy would affect equities. They also talk about the growing consensus around the Fed’s indirect influence on equities, what variables would challenge the narrative of the Fed’s omnipotence, and how the growing number of companies suspending EPS estimates makes the future that much more unclear. In the intro, Peter Cooper shines a light on Warren Buffett's recent purchase of major natural gas pipelines from energy giant Dominion Energy.

Comments

Transcript

  • LB
    LUIS B.
    7 July 2020 @ 12:44
    Shouldn't we be looking at the multiples in terms of gold ounces instead of US Dollars? I mean, it seems a bit incorrect to keep using the historical averages without taking into consideration that the "measurement unit" of value has changed since 1971 and the purchasing power of the all fiat currencies keep falling. It is like having used the imperial system for decades then switching to the metric system without doing the unit conversion. When measured in constantly debased fiat currencies the multiples could keep climbing to higher and higher levels, it just becomes a matter of how much the fiat currency is being debased.
    • MW
      Max W. | Real Vision
      7 July 2020 @ 14:14
      No. P/E is a ratio of dollars-per-share to dollars-per-share, thus it comes out unit-less. If you want to focus on distortions of P/E you'd be better off focussing on the financial gymnastics going in to calculating earnings and the percentage of firms reporting non-GAAP. If you try and tie everything back to gold/fiat/central banks this is gonna be a long and tiresome game. It's very important to understand, but in this case you've let a world view corrupt a very straight forward financial concept that is completely unrelated.
    • LB
      LUIS B.
      7 July 2020 @ 23:34
      Think about the Cantillon Effect. The price per share is a first beneficiary of newly printed money, whereas the earnings are a later beneficiary.
    • LB
      LUIS B.
      7 July 2020 @ 23:37
      today's dollars are not the same thing as yesterday's dollars. The measuring unit of value keeps changing.
    • LB
      LUIS B.
      7 July 2020 @ 23:56
      but I agree that I could have expressed my thoughts better. The way I put it above does lead to confusion.
    • LB
      LUIS B.
      8 July 2020 @ 15:42
      kept thinking about this and I agree that I got a bit lost in the gold/fiat argument. There is more to the P/E than the gold/fiat argument and the accounting gymnastics do certainly play a role. However, I still think that the price per share is before earnings in the list of beneficiaries from monetary inflation.
  • CE
    Carl E.
    7 July 2020 @ 19:15
    Test Test Test
    • CE
      Carl E.
      7 July 2020 @ 19:34
      Test
    • BS
      Bevyn S.
      7 July 2020 @ 23:36
      Test
    • JB
      James B.
      8 July 2020 @ 05:01
      and Test
  • JB
    James B.
    7 July 2020 @ 18:06
    Quite digging the matching shirts, is Max forecasting shirt colours? I'm trying to learn, with all this, and ongoing, money creation, is the market just not pricing in the inflation to come? Feedback much appreciated.
    • MW
      Max W. | Real Vision
      7 July 2020 @ 21:10
      In a piece from April, Vincent Deluard argues that the market is bad at pricing in future inflation but generally tracks recent trends. Using the 10 year yield as his proxy for the markets pricing of inflation he plots it vs realized inflation over the past 10 years, and realized inflation over the next 10 years. It matches up much with the previous 10 years not the next. You could argue that the bond market is reactive and not predictive of inflation. You can find the chart on page 8 of the transcript here: https://www.realvision.com/rv/media/Video/52922a094fdf475c8d180e47d5794898/transcript
    • mL
      miya L.
      7 July 2020 @ 22:34
      It is definitely logical that the equity market could be pricing in the possibility of incoming inflation as the P/E ratios will naturally improve over time
  • JJ
    John J.
    7 July 2020 @ 16:21
    Both of you did a great job. Max is much more than a moderator and adds insight to the discussion. More Max!
    • CR
      Cory R.
      7 July 2020 @ 20:48
      I agree, more Max.
  • CR
    Cory R.
    7 July 2020 @ 20:48
    I agree, more Max.
  • CR
    Cory R.
    7 July 2020 @ 00:11
    Bravo to Max Wiethe for such great questions today. fwiw he raised a question I posed here in the comments last week about what are the actual mechanics of how QE makes its way into increased stock prices. Ed did his best to answer and his take is that.. it is the psychology of the Fed having the market's back that makes market participants bullish and bid up stocks. I had never understood how QE actually makes stock market go up, so thanks for this q&a guys. I personally feel that there is some way the Fed (using Black Money) has a way to directly bid up stocks by getting their henchmen (select hedge funds) to directly buy stocks and the Fed pays them back in cash under the table. Because Max has a great point.. if it is just Psychology that the Fed is using to ensure markets go up, itsn't this leaving a lot to chance? The market could decide not to cooperate with this QE "psychology" and where would that leave things? I personally feel the Fed has found a way to secretly directly buy stocks. Thanks again gentlemen.
    • BS
      Bevyn S.
      7 July 2020 @ 00:34
      I think it's about short term interest rates (pinned by fed) and flattening the yield curve via QE (if the fed buys enough bonds they can pin the curve). This pushes people out on the risk/duration curve, due to need of returns and low risk free hurdle rate. Mark Spitznagel does a good job of explaining this in his book Dao of Capital (highly recommended!). He makes the argument with the Faustman equation that the value of the assets are essentially inversely proportional to interest rates (and thus +PE ratios don't really have an upper bound)... And that's all just "traditional" QE talk... They're buying corporate bonds for gods sake lol... This pushes down cost of capital even further (further encouraging longer term investment)
    • BS
      Bevyn S.
      7 July 2020 @ 00:41
      I.e. as risk free rate approaches zero, PE valuation approaches infinity
    • SL
      Sean L.
      7 July 2020 @ 02:25
      If the Fed is buying bonds in the secondary market won't this then enable the seller of the bonds to use the cash for other purposes i.e. invest in the stock market?
    • BS
      Bevyn S.
      7 July 2020 @ 02:35
      Yes, and they would chose to either except a lower return or go further out on the risk curve
    • BS
      Bevyn S.
      7 July 2020 @ 02:35
      *accept ugh
    • JB
      James B.
      7 July 2020 @ 12:59
      Druckenmiller did a good interview on this he basically said that with the Fed buying bonds from hedge funds ("such as his") they end up with a bunch of cash and they're not going to go back to the bond market so they move out the risk curve and into equities etc
  • TS
    Thomas S.
    6 July 2020 @ 23:17
    Just a suggestion, only one person's opinion: I've got too many places I can go to where they freely share their political opinions, election prognostications, virus predictions, etc. There's plenty of content for that. It would be refreshing to see RealVision step back from political and epidemic predictions. I get that you're trying to handicap the election for investors, and you think you've read some truly insightful stuff on where the "epidemic" is going. I just don't value the insight much. I'd prefer to see less focus on Corona virus and November and more focus on other topics. Again, just one subscriber's opinion.
    • TM
      Tom M.
      7 July 2020 @ 12:50
      How are they supposed to give useful insight while NOT mentioning the global pandemic?
  • AB
    Ameet B.
    7 July 2020 @ 11:39
    Great conversation. I also just watched an interview on youtube with Gary Schilling. Having him on RV would be amazing to explore in detail his bullish views of bonds and his very bearish view of stocks.
  • DC
    D C.
    7 July 2020 @ 09:28
    History so far has proven that the current gov is just as likely to deploy MMT as the dems. So it would be silly to vote on that topic, it's bipartisan. I think the Dems will push taxes up, having a negative affect of employment. I'd vote specifically for that reason. Dems are more likely to crash the market.
  • AL
    Aaron L.
    7 July 2020 @ 09:21
    Solid daily briefing guys, nice one
  • MC
    Michael C.
    7 July 2020 @ 04:22
    You do a great job Max. You are very engaging and ask good challenging questions. Gopd to see you challenge Ed's answers. The $1.6trn TGA balance would have been a good topic to bring up. Thats a very big thing that looks likely to be deployed in the next few months as well, esp as the news at the margin gets worse..
  • mw
    michael w.
    7 July 2020 @ 02:53
    The investment banks literally buy stocks. Thats how.
  • JR
    Jacob R.
    6 July 2020 @ 23:54
    If the Democrats use the MMT framework to justify high multiplier spending on things that are not saved - Medicare for all, free education, UBI, etc - that would strongly increase consumer demand, and therefore may be a positive for the stock market. Corporate taxes may go up but consumer demand may also go up. Stronger companies that serve the consumer better would do better than companies looking for government handouts.
    • BS
      Bevyn S.
      7 July 2020 @ 01:05
      This would cause inflation at some point, which eventually causes PE multiple contraction despite increasing earnings (assuming you have pricing power) High inflationary periods are correlated with low PEs (and higher interest rates)
    • BS
      Bevyn S.
      7 July 2020 @ 01:06
      Not saying there isn't room to eat up excess capacity that's out there...
    • PP
      Patrick P.
      7 July 2020 @ 02:19
      Jacob... Remember the government doesn't produce one damn thing... they steal from one citizen to give it to another more favored citizen. Mostly to buy votes. This MMT framework as you put it will end badly....and most of the stronger companies your talking about are getting plenty of government handouts already.
    • BS
      Bevyn S.
      7 July 2020 @ 02:37
      Lol. It's the classic battle of labor and capital. Can't love with 'em, can't live without 'em... Some form of democracy helps to ensure suffering isn't too high to cause instability... Currently the wealth / income gap ensures instability...
  • DS
    David S.
    6 July 2020 @ 22:37
    Great intro Mr. Cooper. Other corporations might follow Mr. Buffett in buying assets and not corporations during the pandemic. Buying the assets leaves most or all the corporate liabilities with Dominion Energy. It is a clean natural gas play. Mr. Buffett was not born yesterday. DLS
    • PP
      Patrick P.
      7 July 2020 @ 02:31
      When it comes to the energy sector ... Buffett has been a disaster....Energy Future Holdings....Conoco Phillips ....Lubrizol Corp ..To name few of his mistakes. He might have done well here ...but time will tell.
  • BB
    Bob B.
    7 July 2020 @ 01:28
    A cursory look at overall economic direction suggests to me that inequality is shifting from people to corporations. Who's 'back' does the Fed really have? Certainly not the Russel 2000. Phrases like 'too small to save' are popping up. What might be the lag before the unprecedented rate of bankruptcies? Common sense suggests restructuring and starting new businesses to fill opportunities takes many months or years. In the interim can the markets become bifurcated - The 'Fed' winners and the untouchables?
    • CR
      Cory R.
      7 July 2020 @ 02:29
      Good point. Could this be happening by design, at least partially? Taken from another perspective, markets have evolved from being a businessman's platform to the government's platform. The govt. now needs the market to never go down chiefly because the indebtedness is way too much. Corporations need to refinance loans and that cannot be done with low priced share prices. Share prices need to keep steadily higher and higher to keep financing the debt. The govt. is now deeply involved via the Fed because many corporations are of a "national security" character now and the whole thing needs to be "managed".
  • SS
    Steve S.
    6 July 2020 @ 23:17
    Love Max. Never met a person from Ohio who wasn't an extremely nice guy. I have a bunch of friends from there.
    • PP
      Patrick P.
      7 July 2020 @ 02:23
      Go Bucks!
  • TW
    Thomas W.
    6 July 2020 @ 23:50
    Donald Trump loves two things more than anything else; being popular and building things. He might actually be the MMT candidate because congress will hold back Joe Biden’s spending much more effectively. Though Mr Biden certainly is leaning increasingly to the left; ultimately he is a moderate and he will better balance concerns across the political spectrum. How people speculate about future spending will drive markets in the near term but if wrong there will be a swing back fairly quickly as the reality emerges.
    • PP
      Patrick P.
      7 July 2020 @ 02:22
      Thomas .. you should be a comedy writer...(Hold back Biden's spending ?) That is really a scream.
  • SP
    Simon P.
    7 July 2020 @ 00:50
    What is a cheap PE ratio when 10 years are below 1%?
    • MW
      Max W. | Real Vision
      7 July 2020 @ 01:55
      Hard to say. If you read the first edition of securities analysis by Graham and Dodd they discuss valuing equities using a price to dividend ratio, sometimes in the single digits. Many of the valuations we look back on fondly as remnants of a saner time were once scoffed at in the same way many look at today’s valuations.
  • SL
    Steven L.
    7 July 2020 @ 00:29
    How bout a black shirt with a RealVision logo?
    • cs
      connor s.
      7 July 2020 @ 01:06
      lmao pls no
    • MW
      Max W. | Real Vision
      7 July 2020 @ 01:50
      How about short shorts? Only $420.69 (plus S&H). Free with Black List membership.
  • SB
    Steve B.
    6 July 2020 @ 23:20
    Ed, what kind of bike do you ride? I have a specialized allez. Looking to upgrade to a carbon fiber soon.
    • EH
      Edward H. | Real Vision
      7 July 2020 @ 00:39
      I ride an S-Works Tarmac Disc for road and a Ridley X-Trail for gravel.
  • DG
    Dave G.
    6 July 2020 @ 23:00
    Shouldn't we start to see earnings estimates in the next couple weeks when companies start reporting. I don't think we need to wait 2or 3 months, unless they don't give forward estimates again.
    • MC
      Michael C.
      7 July 2020 @ 00:38
      I feel like it's Donald Rumsfeld time...lol. The known unknown. It's pretty certain Q2 earnings will stink up the joint. Question is whether the companies will give guidance and I don't know that giving estimates are in their interests unless the analysts start to really chop EPS for the year. One could have that ridiculous whisper game sometime into mid/late Q3 which would tie to Ed's scenario. My bottom up work doesn't show much price appreciation opportunity 2-3 years at current levels.
  • MP
    Matthew P.
    7 July 2020 @ 00:19
    Is there a data source (or platform) where we can track/identify (at least at a high level) where the 7.1 trillion goes?
    • MP
      Matthew P.
      7 July 2020 @ 00:20
      And Max - well done mate, you're doing a great job!
  • BS
    Bevyn S.
    7 July 2020 @ 00:13
    Great job Max... Keep it up. Glad to have you on RVDB.
  • SS
    Sheldon S.
    7 July 2020 @ 00:08
    Max and Ed are really good together.
  • JS
    John S.
    6 July 2020 @ 23:59
    BTW Biden has dementia!
  • CR
    Colin R.
    6 July 2020 @ 23:44
    Interesting, thanks. Could anyone tell what's behind USDTRY for the last 15 days it's like it's pegged... but I haven't seen such news
  • KH
    Ken H.
    6 July 2020 @ 23:02
    Ed, it's good to hear you are a fellow cyclist! Some of the people that I have met while cycling have been changing over the years. Enjoy the ride!
  • MT
    Mark T.
    6 July 2020 @ 22:48
    I like what Max brings to the Daily Briefing. Good job.