April 12, 2024
By Steve Blumenthal

“The deficits today are even larger and occurring in boom times—not as the result of a recession—and they have been supported by quantitative easing, which was never done before the great financial crisis […] These markets seem to be pricing in at a 70% to 80% chance of a soft landing—modest growth along with declining inflation and interest rates. I believe the odds are a lot lower than that.”

– Jamie Dimon, JPMorgan Chase, Chairman and CEO (Source: Annual Letter to Shareholders)

Easy money appears to be the fiscal and monetary policy game plan of the U.S. and other developed countries—a plan that debases currencies and causes inflation. It’s hard to see an off-ramp.  

In Peter Boockvar’s Boock Report, he cited the following “real-world” examples of how gold is an inflation hedge against currency debasement: 

• In 1970, right before Nixon took us off what was left of the post-WWII Bretton Woods gold standard, $1 bought you about three gallons of gasoline.
• Today, that same $1 will buy about 27% of one gallon of gasoline.  
• In 1970, when the price of gold was fixed at $35 per ounce, an ounce bought you about 100 gallons of gasoline.  
• Today, at around $2,350 per ounce, an ounce of gold buys you about 650 gallons of gasoline—pretty good protection against inflation. 

To further his point, Peter highlighted another year: 2000, “when Greenspan was on the cusp of an unprecedented rate-cutting experiment,” and gold was in a 20-year bear market.  

• In 2000, $1 bought you about 2/3 of a gallon of gas, while one ounce of gold bought you about 167 gallons.
• Compare that to today’s numbers, where $1 will buy about 27% of a gallon, while one ounce of gold will buy you 650 gallons. 

How about the cost of education?  

• In 1970, the average cost of tuition for a four-year private college was $1,562. For the 2023-2024 school year, the average tuition for private institutions is $42,162, according to U.S. News & World Report. That’s 27x the amount from 1970.  
• Today, gold is up 67x what it was in 1970, while the U.S. dollar has lost 96% of its purchasing power. 

Peter concluded, “Is gold not an inflation hedge? Of course it is. There are times when it might lag, but over almost 55 years since the 1971 monetary system changed, it’s done a pretty good job.” 

Gold isn’t the only metal on the upward move. Dr. Copper has risen, too. Because copper is essential in numerous industries, its price can be a good indicator of economic health. Its current price—along with my other favorite recession-watch indicators—signals that the economy is doing OK. No imminent sign of recession here. As much as I’ve been anticipating a recession, the technical indicators say not yet. The price of copper is also a good predictor of inflation, and you can find a good explanation about it from Tom McClellan, the editor of The McClellan Market Report, here.  

I post the following chart of the long-term trend of the price of copper in Trade Signals each week. As you can see below, the long-term trend has turned up (green arrow bottom right). (Note that one could have done a pretty good job trading the 12-month Moving Average (MA), seen where the black price line crosses above or below the red MA line in the upper section.) 

(Source: StockCharts.com) 

During inflationary periods, certain asset classes historically performed better than others because they have characteristics that help hedge against the erosion of purchasing power. Here’s a look at some of those asset classes: 

Real Estate: Real estate often acts as a good inflation hedge because property values and rental income tend to increase with inflation. It can provide a steady income stream that may rise with inflation, helping to preserve the purchasing power of the income. This includes residential real estate, multi-family housing, data centers, cell towers, etc.   

Commodities: Including precious metals like gold and silver, commodities are tangible assets that often see price increases during inflation. Gold, in particular, seems to maintain its worth over time despite fluctuations in currency value. Oil, other natural resources, and agriculture are also potentially valuable in this arena.  

TIPS (Treasury Inflation-Protected Securities): TIPS are government bonds specifically designed to protect against inflation. The principal value of TIPS adjusts according to changes in the Consumer Price Index (CPI), with interest paid on the adjusted principal. Thus, if inflation rises, so does the principal value of the bonds, along with the interest payments. 

Equities: Certain stock market sectors, like energy, basic materials, and consumer staples, can also serve as effective inflation hedges because they deal in essential goods and services whose demand remains stable regardless of economic conditions. Value-oriented stocks in general and high and growing dividend payers more specifically. 

Inflation-Linked Bonds: Similar to TIPS, these are bonds issued by non-U.S. governments that are indexed to inflation. They help protect investors from the loss of purchasing power as inflation rises. 

Each of these asset classes has its own set of risks and may perform differently depending on the specific conditions and causes of the inflationary environment. It’s also important to consider diversification, as it can help manage risks associated with any single investment or asset class. None of this commentary is a recommendation to buy or sell any security. All investing involves risk. Consult your investment advisor.  

Grab your coffee and find your favorite chair. This week, I share a number of valuation metrics with you with an interesting take on 10-year subsequent annualized returns. You’ll also find a link to a Bridgewater discussion with Ray Dalio—an update on his thoughts regarding the “Five Big Forces” shaping the markets and the world.  

On My Radar:

Here’s how to read the chart:

• When Household Equity as a Percentage of Total Household assets (Equities, Bonds and Cash) is high, subsequent 10-year annualized returns are low. When the percentage is low, subsequent returns are high. 
• The upper red arrow starts at the peak in the early 2000s (blue line). The dotted orange line plots the actual subsequent 10-year total return. Note the low subsequent 10-year returns.
• The lower green arrow starts at the market trough in 2009. Note the high subsequent 10-year return.
• Bottom line: The blue line plots the equity percentage at each quarter’s end, and the orange line plots the subsequent 10-year returns. There is a high correlation between both lines. The current reading is circled in the upper right (We are here). It forecasts a negative equity market return over the coming 10 years.  A much better entry point for investors is when the Household Equity as a Percentage of Total Household assets (Equities, Bonds, and Cash) is below 50. Keep that number in mind. Such periods tend to present in when markets correct. 

Long-Term Trend

Here’s how to read the chart:

• This chart measures how far the stock market is above and below its long-term trend, which is plotted in the center section.
• The lower section plots the deviation from the trend. You can see over time that there were a few periods when the price of the S&P 500 Index was elevated above its trend (1929, 1937, 2000, 2022… and today).
• The box in the upper left plots the subsequent 1-, 3-, 5- and 10-year S&P 500 Total Return. The small red arrow is our current state. We’d be better off at the green arrow.

Median PE

One of my long-time favorite valuation metrics is NDR’s Median PE. A good target to keep in mind is 3,494.14 (the green arrow in the lower section). This level matches the 60.1-year median PE of 17.6. The current median PE is 26.5. 

Source: NDR

This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Consult your advisor. 

 

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.

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Personal Note: Sunday at The Masters

Just before hitting the send button today, Bryson DeChambeau and the red-hot Scottie Scheffler are tied for first at -7. Tiger Woods finished the day at +1 and is going to make the cut. He’s in the hunt, and his swing looks good. If you recall, Tiger was in a near-death car accident a few years ago. He says he has one more major win in him. I certainly hope so. 

I fly to Atlanta on Saturday evening and drive to Augusta early Sunday morning. Sometime shortly after noon Eastern Time, I’ll be sitting behind the twelfth tee box with my old man’s spirit beside me. As a kid, I used to watch the Masters with my dad, lying on the carpet with a pillow propped up beneath the coffee table: Jack, Arnie, Gary, Tom, and many more. The game has grown, and I’m sure the Masters Tournament played a big role. 

I’m putting a small wager on a Sunday hole-in-one on hole 12 for fun. If it hits, Michelob Ultras are on me—Dad’s favorite. (Though, I’ll be reaching for a cold IPA. Don’t tell Dad!)  

Here’s a toast to remembering good memories… and creating new ones.

Kind regards,

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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

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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.

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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.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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