September 27, 2024
By Steve Blumenthal

“The earlier you find your passion, the better—because it won’t seem like a chore to follow your dream, and you’ll outwork everyone in the process.”

— Todd Combs

Every week, I sift through the noise, searching for research that genuinely impacts the economy and markets. Most of what we encounter is just that—noise. As I read, there’s a rhythm in my mind: “Doesn’t matter, doesn’t matter, MATTERS.” The pieces that pass that test go straight into my Evernote, where I begin thinking about how to translate them for anyone outside the investment world.

Some weeks, the ideas flow. Other weeks, I revisit my notes and think, “Ugh, missed the mark.” But I’ve found that writing sharpens my understanding. It’s not always easy, and when I hit a wall, I’m grateful to have intelligent friends I can contact for guidance.

Thank you for reading OMR each week—it means more to me than you might realize.

So, grab a coffee and settle into your favorite chair. This week, I touch on China’s big QE move—bullish for China, no doubt, though I’ve chosen to steer clear for geopolitical reasons. And you’ll find my Big Picture-Forward Outlook, the lens we use here at CMG for investment positioning given the period we foresee ahead. The key takeaway: there are opportunities on the horizon. I finished today’s piece with a poem titled Go See Paris and how it relates to a story about a high school soccer player.

On My Radar:

China’s QE – A Big Deal?
Trade Signals: Big Picture-Forward Outlook
Random Tweets
Personal Note: “Go See Paris”

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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China’s QE – A Big Deal?

“Ultimately, markets are the complex social action of human beings. Because of that they are driven by human emotions: fear and greed.”

-Mark Finn

This week’s macro spotlight shines on China, where a surge of measures has been rolled out to boost financial markets and the broader economy, sparking a sharp rally in Chinese stocks.

The People’s Bank of China (PBOC) stepped up with an aggressive mix of monetary stimulus and property market support to tackle deflationary pressures and breathe life back into a sluggish economy. These are the most significant moves we’ve seen since the early pandemic, combining rate cuts, liquidity support, and a lowered reserve requirement ratio (RRR)—now at its lowest level since 2018—to free up substantial lending capacity. On top of that, they’ve introduced two new tools to energize the capital market: a $71 billion swap program to ease funding access for stock purchases and up to $42.5 billion in low-cost loans from the PBOC to support banks in funding share purchases and buybacks.

Here’s a breakdown of the specifics:

The PBOC lowered the reserve requirement ratio from 10% to 9.5%, unlocking about 1 trillion yuan (around $140 billion) for fresh lending.
The 7-day reverse repo rate was trimmed from 1.70% to 1.50%.
For homeowners, there’s a 50-basis-point reduction in the average interest rate on existing mortgages.
The minimum down payment, even for a second home, has been cut to 15% to spur home buying.
They’re also setting up a 500 billion yuan swap facility, which will make it easier for funds, insurers, and brokerages to borrow for stock purchases.
Finally, there’s a 300 billion yuan re-lending facility aimed at commercial banks, which enables them to lend to companies looking to buy back their stocks.
Source: Bloomberg

It wasn’t just Chinese equities that reacted—commodities jumped, too. On the announcement day, the Shanghai Composite rose 4.2%, the Hang Seng showed similar gains, and the Hong Kong H-share index surged by 5.1%. Crude oil rallied by $2, copper was up 2.7%, and iron ore soared 6.5%.

However, despite these bold measures, there’s some skepticism. Many analysts wonder if this will be enough to tackle the deeper economic challenges. The real question is whether monetary policy alone can revive weak consumer confidence and demand. Research firm Nomura suggests that more direct fiscal stimulus might be needed, especially to stabilize the struggling real estate sector, which remains a significant concern.

In summary, these steps are a positive signal and show Beijing’s determination to address the issues, but experts largely agree that further fiscal action will be needed to generate real economic demand and stabilize China’s economy over the long haul.

The key takeaway is that the world’s second-largest economy is turning on the printing presses. In the following Big Picture-Forward Outlook, I’ll continue to outline why I believe we’re in for a challenging decade, with two or three significant inflationary waves. The first is behind us. I’ll share my thoughts on when the second is likely to hit.

With China and the U.S. back in the QE game following the recent 50 bps rate cut, the real question is how big these fiscal and monetary responses will ultimately be.

I see no Paul Volcker-like power on the immediate horizon. Expect more sugar from governments. We must keep watch.

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.

Trade Signals: Big Picture-Forward Outlook September 2024

I shared the following with Trade Signals subscribers earlier today and am sharing it with you in OMR today.

It’s a summary or blueprint for my and CMG’s thinking on the significant secular changes we foresee.

The Global Economies, Bonds, Dollar, Gold, Commodities, and Equities.

As we head into the final quarter of 2024, let’s examine the big picture—what I believe are the critical issues impacting the markets.

Global Economies:

Rising power (China) is challenging the existing power (U.S.). The entire global economic manufacturing framework is shifting from partnership to protectionism. Reshoring/friend-shoring of goods production net-net increases inflationary pressures vs. the deflationary benefits we experienced over the last thirty years.
It’s highly probable that the developed world authorities (central banks and governments) will continue to pursue/expand QE policies (money printing) in response to debt challenges. We expect the U.S. economy will experience several waves of inflation. Wave one is behind us. The timing and depth of wave two will depend on the pace and size of government responses.
China fired a new QE cannon this week.
Janet Yellen and the Treasury have been spending $2 trillion a year more than they are taking in from tax receipts by issuing new Treasury Bills. That money is new money in the system. A backdoor QE if you will.
The Fed cut interest rates 50 bps on Sept 18. Betting markets anticipate they will cut rates by another 100 bps by year-end.
The economic challenges differ from country to country, but overall, the world economies are slowing. We are seeing the beginning of the next wave of economic stimulation (QE), which we believe will lead to wave two of inflation sometime in late 2025 or 2026.
Sadly, we see little political will to reverse this behavior. The world is moving from a long secular period of disinflation to inflation/stagflation.
Inflation is too much money chasing too few goods. Reckless money printing is the root cause. Focus on the world government’s policy response, especially the largest economies.
World War III, unfortunately, is a genuine risk.
We have been and continue to expect a recession. Governments will provide the most significant injections of new sugar during recessions.

Bonds

Our outlook is for declining interest rates in the short term, with a target on the 10-year Treasury yield of 3% before wave two of inflation begins. It is currently yielding 3.77%. This presents an opportunity to trade out long-duration bonds, refinance higher-yielding mortgages, etc. As we move into inflation wave number two, favor shorter-duration bonds whose yields increase at rates rise. We believe the next wave of inflation will be worse than last.
Several leading recession indicators signal a slowing economy. Recessions typically begin when the yield curve normalizes, when long-term interest rates are higher than short-term interest rates (aka, when the inverted yield curve re-inverts). That has just happened.
As mentioned, China and the U.S. have begun providing stimulus.
The size of the debt and entitlement promises is problematic and worsening. We believe we are on a path toward a great restructuring or, as our friend John Mauldin calls it, the “Great Reset.”
Due to our current starting conditions, we believe the next wave of inflation will be bigger than the last. If so, we would not be surprised to see the 10-year Treasury yield reach 8% or higher.
The secular shift in bonds is from a long period of declining interest rates to rising interest rates. The bottom was in 2020 when the 10-year Treasury yield was 0.35%.

Dollar

All of the above leads us to believe the dollar is peaking and will begin a long-term secular decline. Government mismanagement and policy response are the root causes.

Gold, Commodities, and Equities

Gold is in a long-term secular bull market – likely to continue through the remainder of the decade. Given the challenges the developed world faces, it is a favorable asset class as described above. Accumulate gold on price pullbacks. The Weekly MACD indicator we share in Trade Signals each week is our favorite entry timing tool.
Commodities have been out of favor for a long time. The macroeconomic backdrop we foresee favors the beginning of a secular bull market in commodities—areas such as farmland, oil, industrial minerals, uranium, and agriculture.
Equities: Value stocks are generally reasonably priced, while growth stocks are extremely overvalued. We particularly like high and growing dividend stocks. Overall, we favor a shift to value from growth.

We want to add another category to this post: Tangible assets

Real estate (multi-family and single-family), land, sports franchises, well-managed business franchises, and cryptocurrencies.

Conclusion

We believe the goal for the period ahead is to beat inflation.
We don’t believe a 4% yielding 10-year fixed-rate bond will provide an efficient return for portfolios, especially if rates increase to the high single digits as we anticipate. Such bonds will lose to inflation and price declines. After all, who wants your 4% yielding bond if they can get 8%? You’ll have to either hold to maturity or sell at a discount.
There are certainly assets that can perform. It is a question of portfolio positioning. We don’t believe the popular 60% stocks and 40% bonds buy-and-hold portfolio is the correct approach. It’s excellent when valuations are attractively priced, and yields are higher. That day will present again. In our view, this is not the current state.

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TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES

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.

Random Tweets

Tweet 1: Income and Expenditure by Quintile

Source: Torsten Slok, Apollo Chief Economist

Tweet 2: Car Insurance Costs

Tweet 3: Labor Market… At Risk of More Rapid Weakening

Source: @lisaabramowicz1, Bloomberg

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to cha

Personal Note: “See Paris First”

Last night, over a glass of red wine, Susan shared the poem “See Paris First” with me. We had just finished celebrating the Friars’ 3-0 win, her high school boys’ soccer team. Everything tastes sweeter with a victory.

We dissected the game, player performances, formations, what went right, and what they can work on. Standing next to Susan on the sidelines is a great pleasure—watching the boys grow and navigate life’s everyday challenges and the glimpses of who they are inside. One boy, in particular, stood out—caught in the grip of that oh-so-common ‘fear of performance.’ It was his story that brought Susan to share the poem titled, See Paris First:

Suppose what you fear could be trapped and held in Paris.

Then you would have the courage to go everywhere in the world.

All the directions of the compass open to you, except the degrees east or west of true north that lead to Paris.

Still, you wouldn’t dare to put your toes smack dab on the city limit line.

And you’re not really willing to stand on a mountainside miles away and watch the Paris lights come up at night.

And just to be on the safe side, you decide to stay completely out of France.

But then danger seems too close even to those boundaries, and you feel the timid part of you covering the whole globe again.

You need the kind of friend who learns your secret and says,

“See Paris first.”

—M. Truman Cooper

“Suppose what you fear could be trapped and held in Paris… You need the kind of friend who learns your secret and says,“See Paris first.” That’s a valuable friend.

It’s a piece about facing uncertainty, breaking out of fear, and embracing new experiences. But more than that, it’s about having friends who challenge us and teammates who lift us higher.

To that young player: Paris is right across the touchline. Step in, make those mistakes and learn from every single one. It’s the only way to grow.

The weather is disastrous in Florida. Hurricane Helene hit today with 140-mph winds, making it the first known Category 4 storm to hit Florida’s Big Bend region since records began in 1851. So far, twenty-two people have died. Our thoughts and prayers are with you.

A weekend of golf is ahead. I’ll be hosting my friend Taxter at Stonewall on Saturday and then teeing off at the famed Merion Golf Club (click on the hotlink for photos) on Sunday. A special thank you to Graham M. for that opportunity. It’s ranked number six in the world—feeling lucky and grateful.

October travel: NYC, Puerto Rico (good friend John Mauldin’s 75th b-day celebration), Virginia Beach, California, and Denver.

Raise your glass high. Here’s to our greatest friends.

To that young player, Paris is just across that touchline. Get in the game and make as many mistakes as you can. Each one will make you better.

Kind regards and stay safe,

Steve

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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

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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This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.

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Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.Please take note of the following text:

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:

On My Radar: China’s QE, Big Picture-Forward Outlook

Personal Note: “See Paris First”

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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