April 26, 2024
By Steve Blumenthal
“The greatest wealth is created by being an early investor in innovation. Making that investment requires believing in something before the majority of people understand it.
You will be mocked, ridiculed & criticized for your non-consensus action. It is absolutely worth it!”
– Mark Yusko
Kid candy stores are better than grown-up candy stores. As a kid, a whole group of us from the neighborhood, including my siblings and me, would walk to the nearest candy store together. It always seemed farther away than it was, and you could feel our excitement build as we got closer. Once we got there, I’d go straight for the Swedish fish. They were my go-to. And for 25 cents, I could get a lot of them.
Now that I’m grown up, I sure do miss those simpler times. You can’t get a lot of Swedish fish for 25 cents anymore, and you can’t get much of anything for 25 cents. Just look at the dollar, the yen, the yuan, gold, oil, butter, eggs…
This week marked the 20th annual Mauldin Economics Strategic Investment Conference, hosted by my dear friend John Mauldin. I attended virtually. Five full days of presentations from some of the smartest macro thinkers in the business—in exceptional form, David Rosenberg was the first to step to the plate.
Day 1 was Monday, April 22. Day 3 is today. The presenters for Days 1 and 2 included Dr. Lacy Hunt, Danielle DiMartino Booth, Jim Bianco, Liz Ann Sonders, Neil Howel, Dr. Pippa Malmgren, Leon Cooperman, Luis-Vincent Gave, Mario Gabelli, Peter Boockvar, Ed Yardeni, and several geo-political experts. Today, we got Barry Habib’s discussion of inflation, the Fed, and real estate, followed by presentations by Ron Baron and General David A. Petraeus, to name a few.
I tuned in to several of the live presentations over the week and spent evenings watching replays (except last night because of the Sixers–Knicks game. It’s an exciting playoff series. Go, Sixers!).
I love the fact that the conference provides video replays and transcripts of each session. Watch, read, watch again. There is so much to take in. This week, let’s start with some of my high-level takeaways from the Felix Zulauf – Grant Williams discussion in bullet-point format. Think of high-level macro/investment themes he believes matter most. It is a good starting place to set a foundation. Agree or disagree it’s important to understand. Felix summed it up well, “Wild times, interesting times, very challenging, and do not stay on the wrong side of the market.”
What I’m sharing with you today pales in comparison to the enormity of the information presented this week. It’s by far the best conference in the business, and I encourage you to subscribe. Please know I am not compensated for this endorsement, and the views expressed are those of the presenters and, where indicated, mine.
Grab your coffee and find your favorite chair. Better yet, ask Mom for $1.25, and let’s take a walk to the candy store together (must account for Swedish fish inflation). This week’s post is short, but there’s much to digest. And don’t miss the short video clip in the Personal Section – it’s sure to put a smile on your face. Lights on… Let’s go!
On My Radar:
- The Great Felix Zulauf
- Random Tweets
- Personal Note: Surround Yourself With People That Are Happy When You Succeed
- Trade Signals: April 24, 2024
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
The Great Felix Zulauf
“The US-centric unipolar world is in the process of ending, but the U.S. and its Western allies are trying to defend it. China, the rising challenger, keeps pushing for a multipolar order and has the support or sympathy of the Global South. This geopolitical conflict transmits regional conflicts like those in the Ukraine or the Middle East into proxy wars that take on a much more important meaning.”
– Felix Zulauf, Zulauf Consulting
Before we start, please know that I subscribe to Felix’s research letter. I believe he is one of the grand masters in the investment business. Like in the game of chess, channel your inner Bobby Fischer, Magnus Carlsen, or Garry Kasparov, look at the board, and make your first move. Let’s take a look at what the grandmaster had to say. My high-level bullet point notes from Felix’s interview with Grant Williams follow:
At the top of the list is the adversarial relationship between China and the U.S., a rising power challenging the existing power.
- Dr. Pippa Malmgren presented just prior to Felix. Felix agrees with her assessment that we are already in World War III and most people don’t see it. Take that in for a second.
- Felixsaid, normally, geopolitics and geopolitical events are really not important to financial markets, because you have short-term events and you get a short-term distortion in the trend, and then the market goes back to where it was.
- Today, geopolitical events matter. Regional conflicts that we see in Ukraine and in the Middle East, are not just regional conflicts, they are a global issue (with China aligned with Russia and Iran and the BRICs) vs. the U.S. and its allies.
- He said we can argue over who is provoking whom, but that won’t get us very far. The fact is we are trapped in this Thucydides Trap. Felix believes we have moved from a U.S.-centric unipolar world order, a U.S. dominated world, to a multi-polar world with the rise of China.
- China believes the world order favors the U.S., and the current structure is unfair. China is pushing for a multipolar world order, and the U.S. is trying to defend it.
- So we are in a war environment, and Felix believes the war environment will intensify due to a complete lack of diplomacy on the U.S. lead Western side. For example, Biden has not talked to Putin for over two years, and even during the Cuban missile crisis, the US president and the Russian president kept talking to each other all the time. He doesn’t see the unipolar world order surviving; we are going to a multipolar world order eventually.
The problem is, how do we get there?
- Two ways, either via diplomacy or via war. And the way he sees it, the odds are much higher that we get there through war and the bigger conflicts overall.
- Like Pippa said, “The war will not be that Chinese tanks riding down Pennsylvania Avenue,” it will be more like cyber-attacks, sanctions, protectionism, there will be missile attacks, etc.
This will change the economic framework for businesses.
- Suddenly, investors in Russian assets that they thought were cheap got much cheaper, worthless overnight. It could happen with Chinese assets. This is a different world, and therefore you cannot approach it the way you approached it in the past.
- We have had 40 years of disinflation, declining inflation rates, declining interest rates, and rising asset prices. It was a great environment for asset markets.
This game is over.
- We are moving to a world economy that is less efficient and, therefore, less productive, and therefore, goods and services will become more expensive.
- We are now in an environment of secular rising inflation and secular rising interest rates.
Quick note for non-economic people – A secular market is a market that is driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period. In a secular bull market, positive conditions such as low-interest rates and strong corporate earnings push stock prices higher. (That is the dominant cycle in place since the early 1980s). In a secular bear market, where flagging corporate earnings or economic stagnation leads to weak investor sentiment, stocks experience selling pressure over an extended period. Source: Investopedia
Macro investors want first to identify the macro-economic cycle, and position assets accordingly.
Back to Felix.
- He believes we are in a different ball game. So far, we have seen the first up cycle in inflation and are currently on the back end of inflation wave number one. Inflation wave number two likely follows (more on that further below).
- Felix believes the current inflationary down cycle may run a little bit further and that we may have a recession beginning sometime this year and lasting into next year. However, he says he’s not sure it will occur or to what extent (mild, deep, etc.).
- He sees more money from the U.S. government (from the fiscal side) and is concerned about the rising fiscal deficit, especially because we are in a war environment. He sited the $95 billion just passed by Congress to support Ukraine, Israel, and Taiwan. (The bills provide $60.84 billion to address the conflict in Ukraine, including $23 billion to replenish U.S. weapons, stocks, and facilities; $26 billion for Israel, including $9.1 billion for humanitarian needs, and $8.12 billion for the Indo-Pacific, including Taiwan.)
In a war, deficits continue to go up.
- That means rising deficits and fiscal spending, and basically, underwriting the economy, which has some chronic problems that Lacy Hunt outlined so well in his speech.
- Therefore, we go into an expansive fiscal policy that the central bank has no other choice but to accommodate.
The national savings rate is negative right now. That means you cannot finance all the deficits that you have. You either rely on foreign capital, or you have to print the money.
- Felix thinks there is a high chance that the U.S. will print the money.
- It’s the same in Europe, as they have a similar problem. Most of the Western world is in a similar situation.
That’s the big-picture long-term framework, which means you have to consider the impact on asset prices.
- He believes bonds are completely out as long-term investments and believes the bond market will melt. It’s obvious that some governments will go bust over the coming years. He thinks it’ll start in Europe, not with the U.S.
- He said the US government has many assets it can sell, like land—and if it sells the land, it can improve the government’s balance sheet.
- That’s not true in Europe. A number of European countries that will probably go bust over the next few years.
So, we are dealing with governments that could default, a bond market meltdown, and a probable currency crisis.
Most people do not understand that the US dollar has lost 87% versus gold since 2002. 87%! It has lost 98.5% versus gold in the last 50 years. And it has lost about 98% in the last 100 years in terms of purchasing power. This trend is going to accelerate.
He talked about Neil Howe’s (The Fourth Turning) work on cycles. Complimenting Neil for explaining it so well.
- Eventually, the cycle will turn, and Felix said he thinks the cycle will turn sometime in the early 1930s. But until then, we will go through this cleansing process that includes crisis.
- One area of cleansing is the extreme overconcentration in just a few stocks. This will present a problem for the market when the momentum turns down, and some selling begins because the only stuff they can sell in large quantities are those same stocks.
- He noted that there is a lot of room on the downside for extremely overvalued stocks to get back to fairly valued, and usually, prices don’t drop to fair value; they drop below and become undervalued.
It’s quite feasible that we have a big decline that has already started, which could last into late this year or early next year and easily cause the stock market to be down 30% or so.
- That’s the bad thing.
- The good thing is that if that happens, then the authorities will come in.
- You would have a new administration in place from early next year on, and they would expand fiscal policy to underwrite the economy if there were a problem.
- They would, of course, accommodate and stimulate on the monetary side, and you would likely have another run-up.
The run up would probably go to 6,000, 7,000 on the S&P, new highs. That is what he said he is expecting. [Those] new highs could then top out sometime, let’s say, in ‘26 or so. Then, at that point of time, if that happened, we would have the second wave of rising inflation (due to all the stimulation that would go on).
- That would lift commodity prices quite dramatically, and that would lift inflation, and that would lift interest rates and bond yields.
If the Fed were to lean against it and try to pursue yield curve control, it would crash the dollar because, like what happened in Japan. Yield curve control would weaken the currency.
Then, at some point, higher interest rates will create too much pressure on the stock market, and then you have another decline. (SB here: In my podcast discussion with Felix a few months ago, he believes if the picture he painted plays out, we will have a 50+% decline in the stock market—maybe as much as 80%—what he calls a “Granddaddy Bear market.”
So, big-picture, he sees a roller coaster up-down-up-down market cycle ahead.
- Along with a fiscal crisis and the challenges of war…
- So, a real mess, and that messy situation will probably end sometime late this decade or early next decade, and then the system gets cleansed.
- We may have a few new currencies, and the question is what to do about it.
Importantly, Felix thinks that if you can time the cycle or try to, you should do it because the roller coaster can give you tremendous returns on both sides of the market.
- If you cannot time the cycle, he would recommend going one-third into gold and one-third into commodity stocks (or index-type ETFs heavily weighted towards commodities), and one-third into value-oriented stocks.
- He would overweight value stocks and he believes value begins to outperform growth.
- That means that financial assets begin to underperform real assets, and commodities will become more important. It also means that the U.S. market may begin to underperform foreign markets, emerging markets in particular, as they are more geared to the back end of the cycle.
- So, this is a big change he sees coming. He said, “Wild times, interesting times, very challenging, and do not stay on the wrong side of the market.”
That pretty much concludes Felix’s opening comments. Grant Williams went on to ask Felix a number of questions and then there were excellent questions from the audience. I do hope to get permission to share the video replay with you. Stay tuned.
I’ve asked permission to share the full video replay with you in a future letter. Fingers crossed.
This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Opinions are subject to change. Consult your advisor.
Random Tweets
Click on the photo to find the full post. Source: Pracap.com. @gave_vincent, @ronstoeferle
Source: Bloomberg, Tavi Costa
Source: @KobeissiLetter
I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.
You can follow me on X (formerly Twitter) @SBlumenthalCMG.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Personal Note: Surround Yourself With People That Are Happy When You Succeed
Coach Sue (my beautiful wife) sends me several Instagram posts each week. She bookmarks the ones she wants to share with her soccer teams, and she shares some of them with me. Motivational, life lessons, failing, learning, growing, succeeding.
Great coaches encourage failure—fail-fix, fail-fix—and a positive heads-up, every forward mindset. In certain moments, something great happens. While our eyes are fixated on the competitor, few are watching what goes on behind the scenes (the emotions of parents, siblings, teammates, friends, and coaches).
And then the win. And then the joy.
The title above has a wonderful message. The following clip captures why it is so important to surround yourself with people who are happy when you succeed.
This short clip is pure joy!
Click on the photo. Make sure you unmute it so you can hear the music.
Click on the photo watch.
Oh, to be alive! I hope you enjoy it as much as I did!
Wishing you a great week.
With kind regards,
Steve
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“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
The 10-year Treasury yield is nearing 4.75%. The Zweig Bond Model and Weekly MACD sell signals weeks ago were prescient, the Daily and Weekly MACD for the S&P 500 Index remains in bear market trend signals, and Gold remains in a bull trend signal.
The dashboard of indicators and charts with explanations is updated. Notable is the Weekly MACD Bear Trend Signal on the S&P 500 Index.
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