September 26, 2014
By Steve Blumenthal
“Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”
– Albert Einstein
Feeling like a kid in a candy store, I raced to catch an early morning train. I was heading to the Bloomberg Markets Most Influential Summit in New York. Ray Dalio and Michael Bloomberg kicked off this past Monday’s all-day summit. New York Fed president William Dudley shared his most recent thinking, as did hedge-fund greats Leon Cooperman and Julian Robertson and Howard Marks and private equity legend Bill Conway.
Robertson was paired with Conway, the co-founder of the private equity firm Carlyle Group LP; they talked about the financial markets, the bond bubble, private equity, hedge funds and investment strategy. They were an absolute joy to listen to. The experience at the summit struck me on many levels. Put it in the “learn” category. Put it in the “never stop questioning” category. Boy, was I excited. Put it in the “that was an outstanding day” category.
Below, I share several high-level takeaways from my day. There was far too much content to cover in one piece, though, so I’ll save some of the material for next week. It’s high level and fast paced, so find a few minutes, grab a cup of coffee and jump in—I hope you find the journey both insightful and stimulating.
Included in this week’s On My Radar:
- Notes from the Bloomberg Influence Summit – Robertson and Conway
- Notes from the Bloomberg Influence Summit – Cooperman and Marks
- Rickards on the Dollar and Future Inflation
- Trade Signals – High Yield’s in Decline – 09-24-2014
Robertson and Conway
Bill Conway
- The economy is healing. Interest rates to stay low and asset prices to stay high
- Expect Less than 3% growth in 2015
- It makes sense for investors to take advantage of the opportunities like refinancing while they can, before the next bubble bursts.
Julian Robertson
- The economy is definitely getting better, but the cause is two bubbles that will bite us.
- It’s odd and unhealthy that countries buy their bonds to keep their economies moving.
- Rates on bonds are way too low. There is no place to put money but into stocks.
- Investors should play long stocks but hedge for protection.
- He Thinks Alibaba is a fabulous company.
Here is the link to the interview: http://www.bloomberglink.com/video/influentialbr-robertson-conway-bond-bubble-hedge-funds-pe/
Leon Cooperman and Howard Marks
Citing Warren Buffet’s famous quote, “The less prudence with which others conduct their affairs, the greater the prudence in which we must conduct our own affairs”, Howard Marks, chairman and co-founder of Oaktree Capital Management, said, “That’s today. There is not that much prudence around.”
Leon Cooperman does not see a recession on the immediate horizon and sees the market fully valued but not extremely overvalued. Here a some of his additional thoughts:
- The GDP gap suggests no recession on the immediate horizon, assuming no geopolitical events affect the economy.
- The bond market is way over-valued
- CalPERS (California Public Employees’ Retirement System) recently liquidated $4.5 billion or 1% of total assets from hedge fund investments. Cooperman says they were long private equity in 2008 and had trouble making capital calls. He finds it dubious they are selling out of HF’s now at the end of a hockey stick bull market.
- 2006 was the last time the Fed raised rates. From that point, there was over one year to market peak and over two years before the crash. Cooperman added, most of the current money managers were playing little league back then (man am I getting old). He said the market is likely to go nuts (when this turns).
- He worries that factory workers who were making a third of what CEOs were being paid are now making 1/ 900th of CEO pay. NOT right. NOT fair.
- Worries about the 75 million youth around the world are unemployed.
I particularly like a quote he shared from the great, Sir John Templeton,
“Bull markets are born in pessimism (despair), they grow in skepticism, they mature in optimism and they die in euphoria.”
He added that pessimism is long gone and we are now somewhere between skepticism and optimism. I’m not doing Mark justice in this note, but he was very strong. I recently mentioned Oaktree in one of my high-yield bond articles. They are raising billions for a distressed debt fund; they want to have cash to take advantage of what I and they believe is a coming default crisis.
Here is the link to the 19 minute interview. http://www.bloomberglink.com/video/influentialbr-cooperman-marks-investment-strategy/
Rickards on the Dollar and Future Inflation – Six Major Flaws in the Fed’s Economic Model
It has been a good two months for the dollar. My mother-in-law is thrilled with her Japanese Yen short via the ETF symbol YCS. “Steve,” she asks, “what should I do?” It’s always a bad idea to give advice to those you love, most especially when it comes to money. Gasp . . . I told her to hold on. I expect further gains to come. (Past performance means nothing. This advice is not suitable for all investors, and it’s sure to make Thanksgiving dinner more challenging. etc., etc., etc.)
In the global currency game (war), the dollar seems to be the best looking in the global currency beauty contest. The ultra- low U.S. interest rates are higher than Europe’s and Japan’s, and we are on the back end of QE while they are at the beginning. That, in my mind, favors our dollar. At least for now.
On the other side of that argument is my friend, the super-smart James Rickards. He is more bearish on the dollar, and I do believe that we have undertaken policies that will ultimately devalue the dollar. The question is when.
Following is a piece Jim recently published. I share it with you today. We have to always question our views.
The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.
The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in the world.
The Fed may have some legitimate role as an emergency lender of last resort and as a force to use liquidity to maintain price stability. But, the lender of last resort function has morphed into an all-purpose bailout facility, and the liquidity function has morphed into massive manipulation of interest rates.
The original sin with regard to Fed powers was the Humphrey-Hawkins Full Employment Act of 1978 signed by President Carter. This created the “dual mandate” which allowed the Fed to consider employment as well as price stability in setting policy. The dual mandate allows the Fed to manage the U.S. jobs market and, by extension, the economy as a whole, instead of confining itself to straightforward liquidity operations.
Janet Yellen, the Fed chairwoman, is a strong advocate of the dual mandate and has emphasized employment targets in the setting of Fed policy. Through the dual mandate and her embrace of it, and using the dollar’s unique role as leverage, she is a de facto central planner for the world.
Like all central planners, she will fail. Yellen’s greatest deficiency is that she does not use practical rules. Instead she uses esoteric economic models that do not correspond to reality. This approach is highlighted in two Yellen speeches. In June 2012 she described her “optimal control” model and in April 2013 she described her model of “communications policy.”
The theory of optimal control says that conventional monetary rules, such as the Taylor Rule or a commodity price standard, should be abandoned in current conditions in favor of a policy that will keep rates lower, longer than otherwise. Yellen favors use of communications policy to let individuals and markets know the Fed’s intentions under optimal control.
The idea is that over time, individuals will “get the message” and begin to make borrowing, investment and spending decisions based on the promise of lower rates. This will then lead to increased aggregate demand, higher employment and stronger economic growth. At that point, the Fed can begin to withdraw policy support in order to prevent an outbreak of inflation.
The flaws in Yellen’s models are numerous. Here are a few:
1) Under Yellen’s own model, saying she will keep rates “lower, longer” is designed to improve the economy sooner than alternative policies. But if the economy improves sooner under her policy, she will raise rates sooner. So, the entire approach is a lie. Somehow people are supposed to play along with Yellen’s low rate promise even though they intuitively understand that if things get better the promise will be rescinded. This produces confusion.
2) People are not automatons who mindlessly do what Yellen wants. In the face of the embedded contradictions of Yellen’s model, people prefer to hoard cash, stay on the sidelines and not get suckered by the bait-and-switch promise of optimal control theory. The resulting lack of investment and consumption is what is really hurting the economy. Economists call this “regime uncertainty” and it was a leading cause of the length, if not the origin, of the Great Depression of 1929-1941.
3) In order to make money under the Fed’s zero interest rate policy, banks are engaging in hidden off-balance sheet transactions, including asset swaps, which substantially increase systemic risk. In an asset swap, a bank with weak collateral will “swap” that for good collateral with an institutional investor in a transaction that will be reversed at some point. The bank then takes the good collateral and uses it for margin in another swap with another bank. In effect, a two-party deal has been turned into a three-party deal with greater risk and credit exposure all around.
4) Yellen’s zero interest rate policy constitutes massive theft from savers. Applying a normalized interest rate of about 2% to the entire savings pool in the U.S. banking system compared to the actual rate of zero, reveals a $400 billion per year wealth transfer from savers to the banks from the zero rates. This has continued for five years, so the cumulative subsidy to the banking system at the expense of everyday Americans is now over $2 trillion. This hurts investment, penalizes savers and forces retirees into inappropriate risk investments such as the stock market. Yellen supports this bank subsidy and theft from savers.
5) The Fed is now insolvent. By buying highly volatile long-term Treasury notes instead of safe short-term treasury bills, the Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries these notes on its balance sheet “at cost” and does not mark to market, but if they did they would be broke. This fact will be more difficult to hide as interest rates are allowed to rise. The insolvency of the Fed will become a major political issue in the years ahead and may necessitate a financial bail-out of the Fed by taxpayers. Yellen is a leading advocate of the policies that have resulted in the Fed’s insolvency.
6) Market participants and policymakers rely on market prices to make decisions about economic policy. What happens when the price signals upon which policymakers rely are themselves distorted by prior policy manipulation? First you distort the price signal by market manipulation, then you rely on the “price” to guide your policy going forward. This is the blind leading the blind.
The Fed is trying to tip the psychology of the consumer toward spending through its communication policy and low rates. This is extremely difficult to do in the short run. But once you change the psychology, it is extremely difficult to change it back again.
If the Fed succeeds in raising inflationary expectations, those expectations may quickly get out of control as they did in the 1970’s. This means that instead of inflation leveling off at 3%, inflation may quickly jump to 7% or higher. The Fed believes they can dial-down the thermostat if this happens, but they will discover that the psychology is not easy to reverse and inflation will run out of control.
The solution is for Congress to repeal the dual mandate and return the Fed to its original purpose as lender of last resort and short-term liquidity provider. Central planning failed for Stalin and Mao Zedong and it will fail for Janet Yellen too.
Jim Rickards for The Daily Reckoning
William Dudley, president of the Federal Reserve Bank of New York, spoke at the Bloomberg conference as well. (I recently tweeted a link to “Dudley Opens New Front for Fed Doves With Dollar Warning.”) Here is the link to the article and video interview: http://www.bloomberg.com/news/2014-09-24/dudley-opens-new-front-for-fed-doves-with-dollar-warning.html.
Keep Rickards comments in mind when listening to Dudley.
Trade Signals – Too Few Bears – 09-26-2014
My commentary here is unchanged from last week. The charts are all updated, and I include an additional high-yield bond trend chart—with the creatively boring title, “HYs in Decline.” Note the red arrow in the upper right of the following chart.
Click here for a link to Wednesday’s Trade Signals (updated market and sentiment charts)
Conclusion
At one point near the end of the interview, Dalio cited a Harvard study on happiness that, he said, found little correlation between money and happiness. What showed the highest correlation with happiness was a sense of community. Bloomberg quickly added, “But don’t forget happiness can’t buy you money.” A lot of laughs from the crowd followed.
The discussion was about business development and culture. I think about that a lot in my firm. Honestly, there is so much I need to learn. I have a bad habit of being impatient—put that in the “needs improvement” category.
Anyway, if you have more in you, here is one last link as two titans, Dalio and Bloomberg, discussing their business strategies and careers. http://www.bloomberglink.com/video/bloomberg-markets-influentialbr-bloomberg-dalio-discuss-business-strategies/
Finally, let’s conclude with a Friday night toast. Hold your glass high – here is to your happiness and your financial success. Let’s get ‘em both.
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG Global Equity FundTM and CMG Tactical Futures Strategy FundTM are distributed by Northern Lights Distributors, LLC, Member FINRA. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. 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. 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 (http://www.cmgwealth.com/disclosures/advs).