October 25, 2024
By Steve Blumenthal
“A failure to correct unsustainable fiscal trajectories poses major risks to growth, inflation, and financial stability.”
— Augustine Carstens, General Manager, Bank of International Settlements, October 22, 2024
Yes, precisely what he said!
On the global front, the probability is uncomfortably high that Israel will retaliate against Iran before the U.S. presidential election. Such a move would push us dangerously close to WWIII. Meanwhile, North Korea reportedly sent over 3,000 troops to Russia in mid-October, according to the White House. This follows Ukrainian President Volodymyr Zelenskyy’s statement that Ukrainian intelligence indicates North Korean soldiers are being prepped for combat in Ukraine, as reported by CBS News.
On the markets: Stocks hover near record highs, with valuations testing their loftiest levels in over a century. Last week’s OMR underscored this point. Long-term debt build-up and looming entitlement burdens remain the elephants in the room—issues that leadership continues to sidestep. Can kicked. Restructuring remains down the road in the latter half of the decade. Nothing new here.
Regardless of who wins the presidency, inflation is the dragon to be slain, and neither contender seems poised to wield the sword. Investors remain oddly unphased by high risks. Buckle up; hedges remain an intelligent strategy.
Grab a coffee, settle in, and don’t miss CNBC’s Andrew Ross Sorkin’s interview with Paul Tudor Jones—a quick nine-minute global macro masterclass. I’ve shared a text summary and provided you with the link below. The takeaway? “All roads lead to inflation.” We’ll also review asset categories that typically fare well in inflationary cycles. Effective positioning is vital. Plus, you’ll find a short AI-generated summary of my recent podcast with David Magerman and Nick Adams on the future of AI.
On My Radar:
- Paul Tudor Jones on CNBC
- Inflation Cycle Investing
- AI – Artificial Intelligence
- Junk Bonds Update III
- Personal Note: Anyway
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.
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Paul Tudor Jones on CNBC
“All roads lead to inflation.”
— Paul Tudor Jones
Here is a summary of Paul Tudor Jones’ views followed by a link to the nine-minute CNBC interview:
- Paul Tudor Jones believes the upcoming election on November 5th is a “macro Super Bowl” for the hedge fund world, as the market’s response will depend heavily on which candidate wins.
- He is skeptical of the political market indicators/betting markets that others point to that suggest former President Trump will win, as he believes these can be skewed by factors like home bias.
- Jones is concerned about the unsustainable trajectory of U.S. debt to GDP, which he projects could reach 200% over the next 30 years based on current fiscal policies and proposals from both presidential candidates.
- He believes the markets will not tolerate the level of deficit spending and tax cuts being proposed and expects a “Minsky moment” where there is a sudden recognition of the fiscal impossibility.
- As a result, Jones is positioning his investments to hedge against inflation. He is long gold, Bitcoin, commodities, and the NASDAQ, as he believes “all roads lead to inflation” as the way to reduce the debt burden.
- Jones emphasizes the importance of having a skilled Treasury Secretary and Federal Reserve leadership to navigate the fiscal challenges ahead. Given its large negative net international investment position, the U.S. relies on the “kindness of strangers.”
Jones has a bearish economic outlook and is positioning his portfolio for high inflation. He expects the government to use inflationary policies to address the unsustainable debt trajectory.
Bottom line: As long-time OMR readers know, this mirrors my view. Inflation wave number one is behind us; inflation waves two and three remain ahead. Milton Friedman said best: “Inflation is always and everywhere a monetary phenomenon.” We are spending two trillion a year more than we are taking in. The current U.S. government debt is more than $35 trillion. The annual interest cost on that debt is ~ $1.2 trillion. Higher than defense spending and Medicare and second only to Social Security. As the outstanding debt balance rises and the interest costs on the debt rise, pressure mounts. Until the next great Paul Volcker rises from the dead, the path the Fed and elected officials are on will not change. We sit at the end of a long-term debt accumulation cycle. What we are seeing today is not new. It has happened again and again over the millennia. Looking at the macro chess pieces on the board, the game is inflation until we reach a point where debt restructuring must occur. This is a stagflation (persistent high inflation, high unemployment with stagnant growth) story until it becomes a deflationary bust story. I hope I’m wrong; I fear I’m right. A significant restructuring of the debt and entitlement systems remains ahead – we have not yet reached our pain point.
From an investment perspective, I believe we must beat inflation, and there are ways to navigate wealth regardless of the accuracy of my prediction. If I’m right, the next wave of inflation will surpass the last, and the 10-year Treasury yield will rise towards 10%. That makes the current 4.2% yield (up over 1/2% since the Fed cut rates by 50 bps) a lousy investment, which loses to both inflation and a decline in principal.
Click on the photo of CNBC’s Andrew Ross Sorkin to watch the nine-minute interview. Jones is wonderfully blunt and to the point.
Source: CNBC, YouTube
To be clear, I believe the path to higher interest rates and inflation will be non-linear with an upside bias. For visual purposes only, my best fundamental guess on the path of interest rates is reflected in the dotted lines on the right-hand side of the chart. The current trend in yields is up. Note the MACD trend signals in the lower section—one of my favorite directional trend tools. I favor technicals confirming fundamentals and mostly defer to what price activity (the market technicals) tells us.
Source: StockCharts.com
Next is a longer-term yield chart. You can see that the generational low in interest rates occurred in 2020 at 0.39% (3.98 means 0.398%). The current yield is 4.21%. Note the callout box pointing to the breakout above the long-term downtrend line. 4.99% was the yield high point in late-2023. The monthly MACD indicator in this chart signals that the dominant long-term yield trend is down. However, I favor the Weekly MACD in the above chart for intermediate-term trading purposes. Also, note how well the monthly MACD navigated the long-term trends. Not perfect, but pretty good.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Inflation Cycle Investing
During inflationary periods, assets generally performing well tend to have intrinsic value or income-generation potential that keeps pace with rising prices. Of course, no guarantees can be made. Here are some assets to consider:
Commodities
- Precious Metals: Gold and silver are often seen as safe havens during inflation because they retain value even when currency purchasing power declines.
- Energy: Oil and natural gas prices typically rise during inflationary periods, benefiting energy stocks and commodities.
- Agricultural: As food prices increase, assets tied to agriculture, like wheat, corn, or soybeans, can provide a buffer.
Real Estate
- Direct Property Investment: Real estate often appreciates with inflation and rental income can be adjusted upward to keep up with rising prices.
- Real Estate Investment Trusts (REITs): REITs offer an accessible way to invest in real estate without direct ownership and often have the flexibility to increase rent in line with inflation.
- Energy infrastructure: Commodity-based Pipeline MLPs.
- Land
Stocks of Defensive and Dividend-Paying Companies
- Consumer Staples: Companies that produce essential goods tend to weather inflation better as they can pass higher costs onto consumers.
- Utilities: These tend to be more resistant to economic cycles as people still require basic utilities like water and electricity, making utility stocks relatively resilient.
- High and Growing Dividend-Paying Stocks: Companies with strong balance sheets and regular dividends, with corporate cultures that persistently increase dividend payouts to shareholders.
- Absolute Return focused Long/short and Macro Trading Strategies.
- AI – Artificial Intelligence and other disruptive technologies.
Floating Interest Rate Lending and Niche Credit Strategies
- First lien, senior secured, floating interest rate debt strategies. SOFR plus a spread of 6% or 7%. If rates rise, investor yields rise; yields fall if they fall.
- SOFR (Secure Overnight Funding Rate). SOFR is the cost of borrowing money overnight using Treasury securities as collateral. The current rate is 4.83%.
Inflation-Protected Bonds
- Treasury Inflation-Protected Securities (TIPS): These are government bonds adjusted with inflation, protecting rising prices while offering low risk.
- Corporate Inflation-Linked Bonds: Some corporate bonds are designed to adjust for inflation, providing higher interest payments when inflation rises.
Foreign Currencies and Foreign Bonds
- Inflation-Resistant Currencies: During domestic inflation, certain foreign currencies (often from countries with low inflation or strong commodity exports) can offer some protection.
- Foreign Bonds: Bonds denominated in foreign currencies may help diversify and hedge against inflation in your home currency.
Cryptocurrencies
- Bitcoin: Some see it as “digital gold,” but it has shown resilience during inflationary trends, although it remains volatile.
- Stablecoins: If held in savings accounts with attractive yields, stablecoins may provide some inflation protection within the crypto ecosystem.
Each asset has pros and cons depending on individual goals, risk tolerance, and investment time horizons. This is NOT A RECOMMENDATION FOR YOU TO BUY OR SELL ANY INVESTMENT. I do not know your situation, income needs, time frame, risk tolerance, and goals. Speak with your advisor or contact us if you’d like to explore any of these categories further or want insights on specific assets!
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
AI – Artificial Intelligence
“Technology is best when it brings people together.”
— Matt Mullenweg, Co-founder of WordPress
I recently hosted a webinar with Nick and David, two partners at Differential VC (I shared the link with you last week). In true AI fashion, I had one of my team members download the text into ChatGPT and ask it to provide a high-level summary of the discussion.
Here you go:
AI is everywhere, but not all of it is built to last.
David and Nick offered some sharp insights into the intersection of artificial intelligence and venture capital. David, a seasoned computer scientist with a PhD from Stanford, has been working on natural language processing since the 1980s. His career took him from early research to a 20-year stint at Renaissance Technologies, where he helped build the backbone of quantitative trading systems. Now, he’s leveraging that data science and finance expertise to invest in the emerging AI economy.
Nick’s background is also impressive—he’s spent years in enterprise technology and AI, scaling U.S. operations for a European company before diving into venture capital.
Together, they co-founded Differential VC with one mission: to invest in data-driven businesses at the cutting edge of technology. However, as we discussed during the session, not every AI company is poised for success. David strongly points out the hype around generative AI and large language models. He likened today’s AI landscape to the internet boom of 1998—filled with excitement but lacking the depth needed to solve real-world problems. He didn’t hold back in his critique: while generative AI systems may be flashy, they often stumble when it comes to understanding context and nuance, which is crucial in practical applications.
That’s not to say AI doesn’t have its place. Both speakers shared examples of how AI can be effective, particularly in fields like database management and code generation. But their focus is on “hybrid AI” solutions—those that combine traditional AI with generative models to tackle specific challenges. This is a more pragmatic approach, one that’s grounded in solving real problems rather than chasing trends.
Nick also shared a glimpse into Differential VC’s investment process. Their strategy combines inbound referrals with proactive, data-driven sourcing. Every decision is rooted in rigorous research, from the initial assessment to technical review and market analysis.
One success story they highlighted was a company called Personal AI, which creates personalized AI clones based on individual data. It’s a fascinating concept with the potential to transform industries by replicating the most productive employees. But even with all the promise, Nick and David caution that the road ahead won’t be smooth. They predict an economic roller coaster—hiring sprees followed by layoffs—as companies adopt AI technologies that may not always stand the test of time.
Looking to the future, they’re optimistic about AI’s potential but skeptical about the scalability of projects like autonomous vehicles and robotaxis. David said that real-world driving conditions are far too complex for current AI systems, and the limitations of today’s technology are still a significant hurdle.
Ultimately, the takeaway was clear: AI’s future is bright, but success will come to those who truly understand the problems they’re solving and build sustainable solutions. It’s not about jumping on the latest AI bandwagon; it’s about seeing the bigger picture and staying grounded in data.
The following are the links to watch or listen to the replay. I hope you enjoy the discussion as much as I did.
Click here to listen on Spotify.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Junk Bonds III
In the last two OMR posts, I shared two of my favorite market and economic early warning charts. Both are back in bear trend signals this week. I’m uber-focused on them as they tend to lead to changes in the cyclical trends in the stock market and the economy. It’s not a guarantee; it’s just another critical data point to watch.
You can find the last week’s post here. Scroll down to the Junk Bonds II section in the post. If you are interested, I post the weekly charts in Trade Signals (let me know if you want a TS sample).
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
In Trade Signals, we combine a fundamental view with our arsenal of technical indicators to help with investment entry points and risk management.
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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Personal Note: Anyway
I was talking to a good friend and client this week and loved what he shared (thank you, JP). He told me about a book called Do It Anyway by Kent M. Keith. Keith first articulated his principles as a student at Harvard in the 1960s. Since then, unbeknownst to Keith, they have been quoted, circulated, and appropriated by countless people around the world and back again. They even served as a source of inspiration for Mother Teresa. Source: Amazon
Here are a few:
- People are illogical, unreasonable, and self-centered – Love them anyway.
- If you do good, people will accuse you of selfish ulterior motives – Do good anyway.
- If you are successful, you will win false friends and true enemies – Succeed anyway.
- The good you do today will be forgotten tomorrow – Do good anyway.
- Honesty and frankness make you vulnerable – Be honest and frank anyway.
- The biggest men and women with the biggest ideas can be shot down by the smallest men and women with the smallest minds—think big anyway.
This is good advice for many situations in life. Still, boy, oh boy, the next several weeks will be particularly emotionally charged as we approach the U.S. presidential election on November 5 and the following days. I make it a point to keep my opinion about the election private. Heck, I can’t even have a civil conversation with my son. Though, I’m crazy in love with him anyway.
No matter who wins, the macroeconomic (late debt cycle stuff) and geopolitical backdrop over the coming four years will be challenging which leads me back to “all paths lead to inflation.”
Winston Churchill famously quipped, “You can always count on Americans to do the right thing—after they’ve tried everything else.” The line captures his witty yet astute view of America’s resilience and determination. Though the phrase humorously acknowledges that the U.S. makes its share of mistakes, it ultimately speaks to its enduring ability to learn, adapt, and choose the right path forward. Democracy, as a system, is imperfect, can be messy, and fraught with trial and error, but it ultimately steers toward progress. I think we will come together – anyway.
Whatever your personal views, I’m open to thoughtful discussion and polite debate. And most importantly, I’ll honor you anyway.
Sports update:
Coach Sue (my wife) and me
It’s been a good week and a half for Coach Sue’s Malvern Prep Friars. Two wins and a tie have the team in the right direction. Tomorrow, it’s Homecoming for the boys, and they face the first-place Haverford School.
Picture this: After dinner last night and with a glass of red wine in hand, Susan placed eleven pistachio nuts on the table in a four-, four-, two-pattern formation. Think of four defenders on the back line, four midfielders (see the red diamond in the following chart), and two forwards. This soccer formation is known as a diamond four.
After playing Haverford earlier in the year and watching game films, she knows that is their formation. And this is where I get all geeked out. How do you play against that formation? The part of the diamond on the left side of the chart marked DCM (defensive central midfielder) is where Haverford’s best player is positioned.
He’s the key to the game. The player is strong, intelligent, and extremely physical. Coach Sue plans to place our most physical mid-field defender on him, hoping to mark him out of the game. She made the position adjustments in practice last night, leaving our current offensive central midfielder concerned. She told him she believed he would have more success and freedom to use his attacking skills by moving to the left or right side of the midfield. He was a very skilled pistachio, but we need a giant pistachio for this game.
We discussed why our usual formation—four defenders, three midfielders, and three attackers—won’t work in the game. If you look at the diagram, take the ACM out of the middle and put it up top (three midfielders and three forwards). As she shifted the pistachios around, Susan pointed out where it left the team more vulnerable. She’s a tachitcal genus. It was helpful for me.
Only three games remain before the state playoffs. Tomorrow is a big one. Game time is 9:30 a.m. I’ll be beside Susan on the sideline with a notebook in hand, focusing on Diamond Four, how we are matched up, and whether our physical player is doing the job. Watching her coach the boys is a great joy. I love it!
Win or lose, we learn and move forward. I’m enjoying family, friends, teammates, and life. And I hope you are, too!
Ever forward!
Steve
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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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