Trump tariffs kick in tomorrow … is oil on the list? … inflation comes in as expected, but still high … Bitcoin’s next move … where Eric Fry is investing now
It appears that new Trump-tariffs are a go.
From the BBC:
US President Donald Trump has said he will follow through with his threat to hit imports from Canada and Mexico with 25% border taxes, known as tariffs, on 1 February.
Trump has told reporters that the decision is intended to force Canada and Mexico to stem the flow of undocumented migrants and fentanyl coming across U.S. borders.
Meanwhile, China is expected to be hit with a 10% tariff tomorrow, with potentially more and higher levies on the way.
The wildcard issue is whether Trump will include oil on his tariff list for Mexico and Canada. Doing so could jeopardize the President’s campaign promise to bring down the cost of energy. Roughly 40% of the crude that flows through U.S. refineries is imported (mostly from Canada).
(Why the world’s largest oil producer imports 40% of our crude oil is a question for another Digest.)
But if oil makes the tariff list, it will have serious ramifications.
Higher oil prices won’t just impact Americans at the pump, or when they buy airline tickets (the airline companies pass through the cost of fuel to fliers as often as they can). Oil/gas is used in countless sectors and in all sorts of consumer goods. A few examples include cameras, coffee makers, golf balls, lipstick, sunglasses… it’s an enormous list.
So, tariffs on oil substantially increases the risk of reinflation. We’ll keep you updated.
In more encouraging news, the latest inflation reading this morning brought no curveballs
In December, the Personal Consumption Expenditures (PCE) price index climbed 2.6% on a year-over-year basis. Core PCE, which strips out volatile food and energy prices, rose 2.8%. Both readings were in line with expectations.
On a monthly basis, headline PCE climbed 0.3%, while core PCE was up 0.2%. Again, these numbers matched forecasts.
While the results are good news, keep in mind that the Fed’s favorite inflation gauge – core PCE – remains 40% higher than the Fed’s target rate of 2.0%.
This underscores the following comment from Fed Governor Michelle Bowman this morning:
There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make further adjustments to the target range.
I’m still scratching my head as to why the Fed has slashed rates 100 basis point.
One line item in this morning’s report to watch closely…
Energy prices jumped 2.7%. Any tariffs on oil could be a substantial upward influence on future PCE readings. And that could influence Fed policy as we move toward the summer.
If you’re looking to make money on a short-term Bitcoin trade, bet on the downside
That’s the quick takeaway from master trader Jeff Clark, editor of Market Minute.
For newer Digest readers, Jeff is a market veteran with more than four decades of experience, who profitably trades the markets regardless of direction – up, down, or sideways. He uses a suite of momentum indicators and moving averages to provide clues about where stocks are going next.
And per Jeff’s analysis from Wednesday, those clues are giving the edge to a bearish Bitcoin trade.
But before we get there, let’s begin with some perspective.
After surging in the wake of President Trump’s win in November, Bitcoin topped out at just over $108,000 on December 17.
Since then, it’s pulled back and traded sideways, bouncing between roughly $92,000 and $106,000.
Chart showing Bitcoin trading sideways, bouncing between roughly $92,000 and $106,000.
Source: TradingView
As I write Friday, it trades as roughly $105,700.
This sideways action wasn’t unexpected
Bitcoin surged more than 50% after the Trump win. That enormous buying pressure resulted in overbought conditions on two technical indicators that Jeff uses: the Relative Strength Indicator (RSI) and the Moving Average Convergence Divergence (MACD) Indicator.
The RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as mean reversion kicks in) while a reading below 30 means it’s “oversold” (and poised to climb, also thanks to mean reversion).
Meanwhile, the MACD indicator reflects changes in a price trend’s strength, direction, momentum and duration. Traders use this tool by analyzing the location of the MACD line relative to its signal line.
Here’s Jeff with what’s happened to these overbought indicators, and what their current readings suggest now:
This consolidation phase has relieved the overbought conditions.
It has allowed the moving averages to coil together, building energy to fuel the next move. And, since the height of the consolidation pattern is $14,000, the next move is going to be BIG.
If Bitcoin breaks out to the upside, then it could rally to $120,000.
On the other hand, a breakdown below $92,000 could target $76,000 – which would wipe out all of the gains since Election Day.
Watch out below
Jeff begins by outlining the bullish case. In short, he argues that we’ve seen high-level consolidation since mid-December, and since the various short-term moving averages have morphed into a bullish formation, we’re more likely to see an upside breakout.
But Jeff is leaning toward the bearish case due to the negative divergence he’s seeing between Bitcoin’s indicators and its price.
To illustrate, below, note below how Bitcoin’s price has remained rangebound, yet its MACD and RSI readings have been dropping since last November.
Chart showing Bitcoin’s price remaining rangebound, yet its MACD and RSI readings have been dropping since last November.
Source: StockCharts.com
Back to Jeff:
For my money, I’m leaning more bearish than bullish at this point – simply because Bitcoin is near the top of its consolidation range. That creates a good short trade from a risk/reward perspective.
Bitcoin has edged back to the top of its recent trading range, so we’re watching closely. We’ll circle back after the granddaddy crypto makes its move.
While we’re talking cryptos, circle next Thursday February 6 on your calendar
At 10 AM Eastern, our digital currency expert Luke Lango will launch “The Great American Crypto Project.”
We’ll bring you more details in the coming days, but in short, Luke will highlight three steps that he believes President Trump will make that will ignite the biggest crypto super-cycle we’ve ever seen.
He’ll then walk through a quant-based approach that tackles the greatest challenge facing crypto traders: how do you pick the winners?
With meme cryptos like “Fartcoin” surging hundreds of percent in just a few days, it’s obvious that fundamentals aren’t driving returns. Instead, momentum and price action are preeminent. And that’s where having a quantitative approach engineered to find surging momentum is an enormous advantage.
Luke will cover this and far more next Thursday, explaining why he believes returns of 10X, 50X, and even 100X are on the table – in 90 days or less.
Stay tuned. More information is coming…
Finally, our global macro expert Eric Fry says it’s time to look east for a compelling investment opportunity
Regular Digest readers know that I’ve been highlighting nosebleed valuations in U.S. stocks for months. Despite this, we’ve remained in the market because bullish momentum trumps lofty valuations.
However, eventually, valuations matter.
Numerous studies have illustrated how starting valuations are enormously predictive of ensuing 10-year returns. The higher the starting valuation, the lower the typical 10-year return and vice versa.
So, as a foil to the U.S. market – now trading at the highest valuation on record by some metrics – is there another market offering far more attractive valuations?
Yes, according to Eric: Japan.
The case for buying Japanese stocks today
After detailing Japan’s market bubble in the 1980s that culminated in the 1992 meltdown (and ensuing “lost decades”), Eric writes:
But from that low-water mark, the Japanese stock market started a long road back to respectability and relevance. Finally, last February, the Nikkei surpassed its ancient all-time high of 38,957…
Japanese stocks are beginning to reflect positive [economic] trends, but their valuations remain subdued, relative to both their own history and to U.S. stocks.
At 15 times earnings, the MSCI Japan Index is trading nearly 20% below its 30-year median level… and 43% below the current valuation of the S&P 500.
But these depressed valuations may not persist for long.
As to why, Eric points toward three tailwinds driving Japanese stocks:
Japanese companies are more devoted to returning capital to shareholders
The Japanese government is incentivizing individual investors to buy stocks in their retirement accounts
Mergers and acquisitions activity is accelerating, with a growing number of Japanese companies, flush with cash, acquiring other companies
To play the opportunity, Eric just recommended a Japan-focused ETF in his flagship newsletter, Investment Report.
Back to Eric:
Importantly, this trade offers a compelling way to diversify from U.S. stocks.
Assuming the Japanese economy continues its current growth trajectory, this play could produce solid double-digit gains for several years – even if the U.S. stock market falters somewhat.
