December 10, 2021
By Steve Blumenthal

“Like a chess player, one has to observe the enemy’s moves as well as one’s own.”

― Muhammad ibn Ali ibn Sulayman al-Rawandi, Rahat al-Sudur wa Ayat al-Surur
(AD 1202-07)

Russia, China, and Iran. Important developments this week that are worth our attention. The Telegraph’s Ambrose Evans Pritchard penned it this way in a piece titled, “The West’s nightmare: a war on three fronts.” (Subscription required.)

The West faces escalating threats of conflict on three fronts, each separate but linked by unknown levels of collusion: Russia’s mobilization of a strike force on Ukraine’s border, China’s ‘dress rehearsal’ for an attack on Taiwan, and Iran’s nuclear brinkmanship.

Each country is emboldening the other two to press their advantage, and together they risk a fundamental convulsion of the global order.

You have to go back yet further to find a moment when Western democracies were so vulnerable to a sudden change in fortunes. Today’s events have echoes of the interlude between the Chamberlain-Daladier capitulation at Munich in 1938 and consequences that followed in rapid crescendo, from Anschluss to the Hitler-Stalin Pact.

The least reported, but perhaps the most immediate, is the rapid nuclear escalation of Iran’s Islamist hardliner, Ebra Raisi. American and Israeli officials think the regime could be as little as two or three weeks away from the threshold required to assemble a nuclear weapon, at which point the Mid-East balance of power changes instantly.

‘Iran’s enrichment of uranium at 60pc levels has taken it to the precipice. This is the highest level ever and the regime can easily make the leap to weapons grade level of 90pc,’ said Helima Croft, energy strategist at RBC Capital Markets and former oil analyst at the CIA.

Earlier this week, Biden’s White House announced that American diplomats will boycott the 2022 Winter Olympic Games in China and the President held a secure video call with Putin. Making clear the U.S. is ready to impose hard economic sanctions Russia invade Ukraine.

“Like a chess player, one has to observe the enemy’s moves as well as one’s own.”

Concerning.

My friend and China expert Jonathan D.T. Ward was in the news today discussing China. He is author of the book, China’s Vision of Victory. Worth the watch, you can find his interview here.

Grab that coffee, Trade Signals is next where I talk about the Don’t Fight the Tape or the Fed signal. Finally, I conclude with a few photos from last week’s trip to London. London rocks!

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Trade Signals – Don’t Fight the Tape or the Fed 

December 8, 2021

Posted each Wednesday, Trade Signals looks at several of my favorite equity markets, investor sentiment, fixed income, economic, recession, and gold market indicators.

For new readers – Trade Signals is organized into three sections:

• Market Commentary
• Trade Signals — Dashboard of Indicators
• Charts with Explanations

Market Commentary

Notable this week:

The Atlanta Fed posts a chart titled, “The Expected Future Path of the Three-Month Average Fed Funds Rate.” Expectations are for the Fed to raise the Fed Funds rate from 0% to 50 bps (0.5%) by next summer and to 1.25% by June 2023. Inflation, rising wage pressures, rising rent pressures, and full employment are calling the Fed’s hand. The direction of interest rates matters. The Fed is saying rates will rise; however, the Treasury bond market is saying, “Hold on there, maybe not so fast.”

A reader asked me to further explain Ned Davis Research’s “Don’t Fight the Tape or the Fed” signal model. The model looks at two things, the trend in the market (the “tape”) and the direction of interest rates (the “Fed”). It does not look at what the Fed is forecasting they will do, it looks at what is actually happening in the markets. Since 1980, history supports the model name. Here is a look at the data:

There are two components to the model, the first is Ned’s famous “Big Mo” indicator (a weight of evidence indicator that measures the trend and momentum of the stock market across a broad number of sectors. The idea is to measure the technical health of the broad equity market. I’ve followed it since the mid-1990s and while not perfect (some false signals) the overall history is very good.) When the Big Mo composite is bullish, a +1 score is attributed to the Don’t Fight the Tape or the Fed model. When neutral a +0 score is attributed, and when bearish, a -1 score is attributed.

The second component looks at the direction of interest rates. But instead of looking at the Fed’s Dot Plots, the Don’t Fight the Tape or the Fed model looks at what is actually happening in the bond market. Think of it as what is really happening vs. what the Fed is saying is going to happen. Watch what they do, not what they say. In the Don’t Fight the Tape or the Fed model, NDR compares the current 10-year Treasury yield to a 70-week moving average.

Here is how to read the chart:

• The middle section plots the yield (orange line) and compares it to a 70-week linear regression (think of the dotted black line as a more sophisticated moving average).
• The meat of this model is in the bottom section of the chart. A +1 score is attributed to the Don’t Fight the Tape or the Fed when interest rates are below the 70-week regression line (the blue line is below the lower dotted line);
• a 0 score is attributed when between the brackets; and
• a -1 score is attributed when the blue line is above the upper dotted line.

In sum, the “Tape” (as measured by Big Mo) is currently in the neutral zone producing a +0 score and the “Fed” as measured by the above chart is producing a +1 bullish score, making the total Don’t Fight the Tape or the Fed Model produce a +1.

Take another look at the model’s performance history since 1980. I’ve written before, “What Out for -2” and I think that is the message today and always.  Let’s keep watch.

Here at CMG, I favor the Ned Davis Research CMG Large Cap Long/Flat Index (although Big Mo is a far cooler name) and my favorite intermediate-trend indicator for the direction of interest rates is the Zweig Bond Model. I share both of these charts with you each week in Trade Signals. A modified version of the Don’t Fight the Tape or the Fed could look at these two models. The message is the same; Neutral on the stock market and the Zweig Bond Model is bullish on bonds. Of course, no guarantees can be made. (Hat tip to my friend from London who asked the question about Don’t Fight the Tape or the Fed. I enjoyed revisiting how NDR plots the current interest rates vs. a 70-week linear regression line.)

One last note on interest rates courtesy of my friend Mark Grant. As you look at the next sovereign debt yields, ask yourself which offers the better return and then think about where the money is going to flow. Take a look at just how much more attractive the US 10-year Treasury is vs. much of the developed world. This dynamic likely keeps somewhat of a lid on higher rates (until inflation and debt restructure come into play):

Country	Rate	Spread/Difference
U.S.	1.484%
Belgium	-0.039%	-152.3
Denmark	-0.103%	-158.7
France	-0.027%	-151.0
Germany	-0.374%	-185.7
Italy	0.916%	-56.8
Japan	0.055%	-142.9
Netherlands	-0.239%	-172.3
Spain	0.341%	-114.3
Sweden	0.076%	-140.8
U.K.	0.735%	-74.9

Source: Tullett Prebon via FactSet (the -185.7 is the spread between the U.S. yield and German yield)

The dashboard of indicators follows next. No major changes.

Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon, and risk tolerances.

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Personal Note – Photos from London Visit

The quick trip to London was fantastic. I loved the city, the history, the culture, the people, and the food. I stayed at the NYX Hotel London Holborn. It was excellent. The hotel was about a quarter of a mile from son Kyle’s “flat.” I hit a café called Salt and Pepper for coffee. The owner, Aaron, is from Turkey and makes a delicious avocado toast with thinly sliced salmon and two poached eggs on top. Paired well with the extra hot latte. Check out Salt and Pepper and tell Aaron Kyle’s dad sent you.

Kyle and I visited the British Museum, Big Ben, and the Houses of Parliament, the National Gallery, Piccadilly Circus, and Trafalgar Square. We walked alongside the River Thames and Westminster Abbey. Westminster Abbey was founded by Edward the Confessor in 1065 as his place of interment. From his burial in 1066 until that of George II almost 700 years later, most sovereigns were not only crowned there but were buried there, too.

One of the highlights of the trip was London Stadium where we watched West Ham United beat Chelsea by a score of 3-2. The winning goal was the result of a miss hit cross from well outside the 18-yard box that found its way into the upper left-hand corner of the goal. That goal is pictured below and you can click on the photo to watch the highlights from the game including the winning goal.

America’s Christian “Captain America” Pulisic came into the game late for Chelsea and as much as we root for “boy wonder,” Kyle and I went crazy in celebration with the 70,000 West Ham fans. In a surprise to many, West Ham United sits in fourth place.

Here are a few photos:

It’s nice to be home with Susan. Much to do around the house this weekend, and as usual, I need to kick the holiday shopping into gear. Hope you and your family are well. Thanks for indulging in my adventures.

All the very best,

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

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