June 14, 2024
By Steve Blumenthal
“I’ll reiterate my belief again that after the inflation spike and inflation slow down, we are not just magically coming down to around 2% and staying there. Inflation volatility is here and will be for a while.”
– Peter Boockvar, The Boock Report
There was a good deal of activity on the data front this week. The 10-year note auction was met with decent demand, while the 30-year bond auctions saw above-average demand. The yield on the 10-year Treasury is down to 4.21%—below the important threshold of 4.33%.
I had lunch with Barry Habib, Dan Habib, Peter Boockvar, and our good friend Rory Riggs last Sunday in New York City at 5 Napkin Burger. It was great fun, with wide-ranging conversation—plus one excellent grilled tuna burger and a vanilla milkshake—a non-meat diet for me. Don’t tell my Susan about the milkshake.
We discussed our thoughts on inflation and employment in advance of the Fed’s two-day meeting this week, as these two metrics determine the Fed’s next move. Today, I share parts of our discussion and some follow-up thoughts based on the data released this week.
First, some color: Barry is CEO of MBS Highway and is my go-to on all things real estate and mortgages. He is a three-time Crystal Ball Award Winner by Zillow and Pulsenomics for the most accurate Real Estate forecasts out of 150 of the top economists in the U.S. He provides advice on the direction of interest rates, mortgage rates, and activity in the real estate market. If you are a mortgage broker, real estate person, or interested learner, consider following him. Here is his short video note on 6-11-24, just prior to the CPI report. It will give you a good feel for his and his team’s work. Interestingly, he also discusses the coming National Association of Realtors August 17 ruling changes around the 8-minute mark and provides some great advice. I appreciated the kind words about me around the 5:40-minute mark.
Peter writes the popular Boock Report, a daily big-picture summary that helps readers see how data and policy fit together in the broader picture to identify both short-term market reactions and longer-term trends. Peter is an independent economist, market strategist, and CNBC contributor. He’s also the Chief Investment Officer of Bleakley Financial Group, a registered investment adviser. His newsletter mainly focuses on global macroeconomic data and how it drives policy, which are the main drivers of markets.
Needless to say, we had a lot to talk about. It was a big data week, and the Fed concluded its two-day meeting on Wednesday. Let’s take a look at the takeaways.
Consumer Price Index
From MBS Highway: The May Consumer Price Index (CPI) report showed that overall inflation was 0% for the month—cooler than estimates of 0.1%. Year over year, inflation decreased from 3.4% to 3.3%, which is softer than a lot of estimates projecting an unchanged reading. Helping the headline was a drop of 2% in energy prices, with gasoline falling 3.6%.
The Core rate, which strips out food and energy prices, increased by 0.2%, which was also one-tenth below estimates. Year over year, Core CPI declined from 3.6% to 3.4%. Let’s break down the internals:
- While the entire reading of Core CPI was 3.4% year over year, almost all of the inflation came from Shelter and Motor Vehicle Insurance. Everything else only rose 0.21% from last year.
- Shelter costs, which make up 45% of the core index, changed slightly, as expected, because the higher replacement figure fell out of the annual calculation from last year. Overall, shelter rose 0.4%, causing the year-over-year reading to decline from 5.5% to 5.4%.
- Rents rose 0.4% last month and are up 5.3% year over year (but down from 5.4% in the previous report).
- Owner’s equivalent rent, which tries to capture the increase in homeownership costs, also rose 0.4% and is up 5.7% year over year (down from 5.8% in the last report).
- While we did not see much progress on shelter, it did moderate a bit, and the monthly readings have been trending lower and somewhat tamer.
- Looking ahead, next month, the figure falling off the annual calculation is 0.41%, which will make it hard to make additional progress unless we see monthly readings beneath 0.4%. However, we will likely see a big benefit in September and January, as those are very high comparisons.
- Motor vehicle insurance—the other area responsible for most of the recent inflation—finally cooled off after a string of very high monthly readings and caught up to the rise in car prices two years ago. If the trend continues, it will help inflation move lower.
- Airline fares, which fell 3.6% last month, also helped in the cooling process.
Here’s what Barry’s MBS Highway had to say about mortgage applications (my bullet point note format):
- Last week, mortgage applications spiked 16% as rates declined over the first four days of the week. This shows just how sensitive applications are to rate changes and how much demand there is waiting on the sidelines for rates to normalize.
- Interest rates fell from 7.07% to 7.02% over the entire week, but that includes the big spike we saw on Friday after the Jobs Report. Rates were even lower over the majority of the week, causing activity to surge. In general, rates last week were a little more than 0.25% higher than they were at this time last year.
- Purchase applications rose 9% last week and are now down 12% from this time last year. Refinances rose (albeit from low levels) by a whopping 28% and are now up 28% from this time last year. Refinances made up 35% of all applications, so make sure you are getting your share and using the debt consolidation tool.
That concludes Barry’s comments on CPI.
Inflation and unemployment levels are the key inputs that determine the Fed’s next move. At the beginning of the year, market economists predicted that we’d see six rate cuts in 2024. But on Wednesday, the Fed signaled that we should expect interest rates to stay higher for longer, forecasting only one rate cut in 2024.
In Boockvar’s note on This Week’s Jobless Claims Number, he wrote, “Initial jobless claims popped to 242k, which was much greater than the estimate of 225k and up from 229k last week. Also of note, continuing claims rose back above 1.8mm at 1.82mm, 25k more than expected and still hovering around the highest since November 2021. That’s the biggest one week count of unemployment benefit filers since August 2023 and puts the 4-week average at 227k from 222k, the highest since September 2023.” Peter added, “The biggest question coming out of this period is: Is this another one-week quirk explained by some state’s reporting issue? We’ll see whether next week’s claims figure reflects that or not. And if not, we might be on the cusp of a change in tone regarding firings, just as we’ve seen with hirings.” I read Peter’s daily newsletter on Substack. It is superb. You can learn more and subscribe here.
Our collective view is that inflation will not decline to the Fed’s 2% target. Instead, we will likely experience a series of “waves of inflation.” A 3% inflation rate in the near term is more probable than 2%.
I hold a longer-term perspective that the fiscal and monetary responses to the debt and entitlement challenges will be inflationary by choice. No Paul Volker to be found—inflation is the feature, not the bug. I see the Fed Funds rate at its current level to be neutral. I believe portfolios should be positioned to deal with a higher-for-longer inflation and interest rate world.
At lunch, Peter shared an interesting conversation he had with a former senior Fed official. The former Fed insider said the unemployment rate is the key data point to watch. According to this insider, the Fed is very used to and comfortable with unemployment in the 5.5% to 6% range. Considering that the current unemployment rate is 4.00% (up from 3.90% in April and 3.70% a year ago), we’ll need to see a big increase, perhaps above 6%, before the Fed takes action. The insider sees no interest rate cuts this year. So, expect the Fed Funds rate to remain unchanged unless we have a recession, which would lead to a large increase in unemployment.
The following is a look back in time. You can see that the unemployment rate varied from as low as 1% during World War I to as high as 25% during the Great Depression. It reached notable peaks of 10.8% in November 1982 and 14.7% in April 2020. Note the spike higher during recessions (grey bars).
Worth noting: The 10-year yield is down to 4.21% (green circle in chart). The short-term trend remains bullish (green down arrow in MACD section), and the stock market is closing the week at a record high.
Source: StockCharts.com
Grab your coffee and find your way to a beach chair. And a hat tip to you and your father. Happy Father’s Day, dads!
On My Radar:
- The Yield Curve and Recession
- Extreme Concentration and GMO’s 7-Year Real Return Forecast
- Random Tweets
- Personal Note: Read Backwards
- Trade Signals: June 12, 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 Yield Curve and Recessions
The yield curve first inverted 23 months ago. The “median lead time for recessions” is 11 months (upper red arrow). The longest period on record (data back to 1958) was 23 months (see below—late 1960s). I think it is safe to guess that we will not go into recession this month. A new record 24 months sits immediately ahead. The economy remains juiced up with nearly $2 trillion in annual deficit spending from the government. With no debt ceiling limit in place, the US National Debt is racing higher; now $34.8 trillion and climbing. Source: usdebtclock.org
I post a dozen ‘Economic and Select Recession Watch Indicators’ each week in Trade Signals. The bulk of the indicators have signaled no recession for many months, and that remains the case today. However, I would not discount the power of the inverted yield curve. I’ll share this chart with you again next month and provide an alert if we are seeing a broad deterioration in the watch indicators.
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.
Extreme Concentration and GMO’s 7-Year Real Return Forecast
Extreme concentration – you get the point…
GMO 7-Year Real Return Forecast
Real means after inflation. These are estimates only. Note the negative annualized return forecast for US Large and Small Cap stocks. I’m guessing they are using a 3% inflation rate based on the US bond return forecast.
Source: GMO.com
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Random Tweets
A cumulative daily A-D Line is calculated by tabulating the number of stocks going up every day (Advances) and subtracting the ones who close down (Declines). That daily A-D difference is known as “the daily breadth”. An A-D Line is a running tabulation of all prior data, and it changes each day by the value of the daily breadth number.
Most of the time, the NYSE’s A-D Line will echo what prices are doing. That is the normal behavior. But I watch the NYSE’s A-D Line carefully all the time, because historically a bearish divergence like what we are seeing now has been a big sign of trouble. Most price indices are dominated by the largest capitalization stocks, but every stock gets an equal vote in the A-D Line.
That can be useful because when liquidity starts to dry up, it typically affects the smaller capitalization stocks first. That poor liquidity eventually comes around to bite the big stocks. So the A-D Line functions like the canaries in the coal mines of Newcastle 200 years ago, being more sensitive to the bad gases, and providing an early warning of impending problems for the coal miners.
A-D Line studies can also be useful because it is hard to manipulate those data. While it may be possible for big traders to manipulate a single stock, or perhaps even the big stocks which move the major averages, it is functionally impossible to manipulate all of the stocks (unless you are the Fed, doing quantitative easing).
I prefer the NYSE’s A-D Line because it has a much better track record of working. The Nasdaq’s A-D Line, by contrast, is a horrible indicator because of its persistent bearish bias.” – Tom McClellan
Long-time readers know I’m bullish on oil, and my view has not changed. Of course, nothing guarantees I’ll be proven right. So size appropriately and invest with solid operators (good people).
Anyway, the following caught my eye.
Source: @TaviCosta
Source: @gameoftrades_
A record $9.3 trillion maturing over the next 12 months! Refinances at 5+%. Interest expenses to exceed defense expenses:
Source: @Kobeissiletter
And speaking of debt, the CRE debt maturity wall is upon us – focus on the blue office bar (office CRE):
Cold shower – click on the photo if interested in the 9 benefits. I’m doing this… it’s no fun:
Click on the photo. Source: @seekwiser_
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: Read Backwards
I am traveling to Dallas on Tuesday next week for an energy-related due diligence meeting. On Wednesday evening, June 19, I am hosting a small dinner for clients and friends in Dallas. Our room is almost full. If you’d like to join me, please email amy@cmgwealth.com, and she will get right back to you. I’ll be in NYC on Monday, June 24, and in Denver on July 25 for meetings.
I’m subscribed to Randell Stutman’s daily Field Notes email, Admired Leadership. This one from June 9 caught my eye, and I thought I’d share an excerpt with you.
Active learners are voracious readers who consume a tremendous amount of information from many sources. To stay abreast of events and news and to advance their thinking, many leaders have learned to read with speed. […]
Examine a learner who is not as focused on speed as on efficiency and superior comprehension and you are likely to see someone who does something very odd. […] They read backwards.
This approach operates from the premise that if a reader knows the conclusion or ultimate endpoint of a nonfiction book, article, or essay, then returning to the beginning of the work with this knowledge makes discerning what is important to comprehend and retain more obvious. This, in turn, allows the reader to breeze through the main body of the text, picking out the arguments, examples, and stories that are more critical to the thesis.
As he points out, by reading for efficiency in this way, instead of for speed, you end up spending less time reading but have greater comprehension. I’m going to give it a try. Check out the rest of Stutman’s piece here.
It’s summertime. Take a cold shower and find a great book. Both seem to be good for us. Let me know if you have a good book recommendation—something uplifting and good for the soul.
With a cold IPA held high in the air, I am so grateful to be a father! All the best to you and your old man.
Have a wonderful weekend,
Steve
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
The dashboard of indicators and charts with explanations is updated.
Past performance does not predict future performance. See important disclosures below.
If you previously logged in, you will go straight to the Trade Signals members page. If you are a new subscriber, you can click and log in.
Each week, we update our dashboard of indicators covering stock, bond, developed, and emerging markets, along with the dollar and gold charts. We monitor inflation and recession as well.
If you are not a subscriber and would like a sample, reply to this email, and we’ll send you a sample.
It is designed for traders and investors seeking a better understanding of current macro trends. Click on the link below to subscribe or log in. The letter is free for CMG clients.
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.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
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.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
IMPORTANT DISCLOSURE INFORMATION
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.
Investing involves risk.
This letter may contain forward-looking statements relating to the objectives, opportunities, and future performance of the various investment markets, indices, and investments. Forward-looking statements may be identified by the use of such words as; “believe,” anticipate,” “planned,” “potential,” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular market, index, investment, or investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, Federal Reserve policy, and other economic, competitive, governmental, regulatory, and technological factors affecting markets, indices, investments, investment strategy and portfolio positioning that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties, and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements or examples. All statements made herein speak only as of the date that they were made. Investing is inherently risky and all investing involves the potential risk of loss.
Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
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.
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, has not been independently verified, and does 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. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purposes.
In a rising interest rate environment, the value of fixed-income securities generally declines, and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield securities may be subject to heightened market, interest rate, or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
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 professional.
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:
“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).”