November 4, 2022
By Steve Blumenthal
“We’ve have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”
“The chance of a soft landing is likely to diminish.”
“The world is not going to be better off if we fail [to get inflation under control].”
– Jerome Powell, Chair of The Federal Reserve
Powell stepped up to the mic and delivered his message. Stocks initially rallied as investors cheered the FOMC statement, which said future decisions will account for “the cumulative tightening” so far as well as the “lags” with which monetary policy operates. Then the Q&A.
Asked for his reaction to the stock market rally, he hardened.
“It’s very premature, in my view, to think about or be talking about pausing our rate hikes,” Powell said. “We have a ways to go.” Stocks sank.
It was more than his words. Powell’s body language spoke volumes. A telling read from the most important man at the table. Inflation is a high-stakes game, and Powell is playing to win. Read the room, he holds all the aces. Bond yields shot higher, and stocks closed the day 2.5% lower.
Stocks were down yesterday and reversed gains earlier today.
Message delivered. Axios showed it this way:
Last week I shared what I felt was an excellent explanation of how the liquidity cycle works by Ray Dalio’s team at Bridgewater Associations. The black arrow points to where we are in the current cycle. Risk premiums mean the cost of capital, which means the level of interest rates. If you missed last week’s On My Radar: What Comes Next?, you can find it here.
The rise in risk premiums looks like this… from a few weeks ago (quick update: the 2-year Treasury Note yields 4.71% today, up from 4.61% yesterday):
Put me in Druckenmiller’s camp:
Today, let’s take a look at the history of just what market declines in a “deep recession” might look like if Druckenmiller and I are right. No guarantees, of course. As an aside, I do hope we are wrong.
Grab your coffee and find your favorite chair. I’m under the weather today. A respiratory virus invaded Susan’s high school soccer team, and we, too, both have the bug. With thirteen varsity players out sick, Coach Sue brought up five players from the JV team, four of them freshmen, for yesterday’s playoff game. One of the freshmen players put on the varsity jersey for the very first time and, to his surprise, got the starting nod. How about that for pressure? And the young man shined as did the others. It was a fun game to watch. More in the personal section below. The Random Tweets and Trade Signals sections also follow below. Wait until you see the Christine Lagarde tweet. She’s the President of the European Central Bank. You really can’t make this stuff up.
Thanks for reading. I appreciate the time you spend with me each week.
(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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A Look at Non-Recession Bear Market and Recession Bear Market Declines
Another recession indicator sent a warning signal to us data watchers. The last eight recessions in the U.S. were all preceded by an inversion of the 10-year Treasury and 3-month Treasury yield. When short-term rates yields rise above long-term yields, it’s a signal that the patient has a severe fever. Something is wrong within the economic system, and this particular temperature gauge has sent the patient to the hospital in each of the last eight recessions (data back to 1960).
Ned Davis Research puts out some of the best research in the business. Today, let’s take a look at some top-line data.
Looking at historical data back to 1948 for the DJIA, the average market declines were as follows.
- In Non-recessionary periods, the average Bear Market decline is 25%
- In the Recessionary periods, the mean Bear Market decline is 35.9% and lasted 280 days
If you are in the recession camp, the logical read is there is more downside to come.
The next big question is whether we will have a soft or hard landing.
Bear markets during severe recessions (hard landings) have seen larger losses and lasted longer than those that have occurred in the average recession.
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- 1957: -20% lasting 385 days (approximate)
- 1980: -17% lasting 415 days (approximate)
- 1982: -24% lasting 330 days (approximate)
- 2001: -30% lasting 435 days (approximate)
- 1970: – 36% lasting 370 days (approximate)
- 1974: -45% lasting 480 days (approximate)
- 2009: -52% lasting 355 days (approximate)
The 2000-2002 and 2007-2009 bear markets saw total declines of greater than 50%. Tech sold off more than 75%. Not too dissimilar from today.
I share these next two charts each week in Trade Signals. The first is a chart of daily prices, and the second is a chart of monthly prices.
In the daily chart, I’ve shown a red line at 3,900. That was the target for a pessimistic extreme recovery rally. That happened, and the market is back in a risk-off mode. Note the coming sell signal (red circle lower right in the chart).
In the monthly chart, I’ve noted the green “Fed Pivot Zone” target. You’ll also see that a decline to 3,000 is a 37.5% decline (red circle) from the peak early in the year. That fits nicely into the “recessionary bear market” averages, but really we have no way of knowing for sure exactly how this will all play out. Probabilities, logic, and risk management.
(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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Dalio – The Best Times Ever
Worth your attention. This crossed my inbox, hitting my Radar this week. Sharing it with you…
Next, I provide the text of Ray’s post (below the next picture). Do click on the link in the text “The Changing World Order is Approaching Stage 6 – The War Stage. That post was followed up the next day with this note of optimism, “Not Only Can We Avoid War, But We Can Have The Best Times Ever.”
In my post from yesterday (The Changing World Order is Approaching Stage 6 – The War Stage), I explained what I believe are the four big threats that should create worry and the one big force that should create optimism. The four big threats are the financial/economic threat, the internal conflict threat, the external conflict threat, and the acts of nature threats (drought, floods, pandemics, etc.) and the one big force that provides reasons for optimism is man’s capacity to adapt and invent ways of improving things. While these threats exist, the world is in the best position in history judging by most measures of well-being such as life-expectancy, real incomes, and real wealth, so if we handle these big worries well, things should be better than ever. Of course, averages hide the differences which are enormous, but the capacity to deal with these extreme differences exists, so the potential to have the best times ever exists if we can deal with the four big threats well.
To have better times than ever we need to:
1) Get our finances in order through a mix of a) being more productive by investing in those things that make us more productive and benefit most people (such as education), and b) engineering a “beautiful deleveraging” that spreads out and reduces the real debt liabilities and assets relative to real incomes. (If you want an explanation of how to engineer a beautiful deleveraging, see my book Principles for Navigating Big Debt Crises).
2) Develop a strong and smart political middle that represents the majority of people and can defeat the extreme populist minority so that we can work and live well together. Because the policies that the majority of people want are both most acceptable and more sensible than the policies that the extremists are fighting for, it should not be all that difficult to put together a platform that represents what the majority in the middle wants. How would such bipartisanship work? For elections it can occur in a variety of ways that I won’t digress into explaining here and now. As for governing, it can occur in a number of ways if leaders want it, such as the next president choosing to have a bipartisan Cabinet of smart people and to initiate a bipartisan “Manhattan Project” type initiative to make economic reforms that would both significantly improve productivity and benefit the majority of people.
3) Have rival countries develop agreements and protocols that would minimize the chances of military wars. This could involve having each leader delegate teams to look at the existential threats posed by other nations and negotiate paths for minimizing the risk of fighting over them. If parties could work on minimizing the existential risks of the other parties, that would go a long way to avoiding wars.
4) As for acts of nature, I will defer to others more knowledgeable than I am to suggest ways to cost-effectively deal with them.
5) As for man’s ability to adapt and invent, I think that is naturally happening in the greatest way ever. That’s because of the development of technologies that help people think about how to make such improvements and because of the development of venture capital markets to finance entrepreneurs with good ideas in numbers and amounts that are unprecedented.
While we might think that the odds of doing these things are improbable, they are certainly possible and could even become probable if most people demanded that their leaders and political parties move in directions like these.
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Random Tweets
Foreshadowing of a Fed Pivot?
Grant is spectacular… follow him:
From Rosey:
El-Erian… good point!:
Absolutely astonishing from Christine Lagarde, President of the European Central Bank! This one is depressing:
This one is funny:
And my Philadelphia Phillies need some love, losing last night in a close game and going into the weekend down 3 games to 2 in a best-of-7 World Series vs. Houston. Last night’s game ended after midnight eastern time. I’ll be watching:
More Random Tweets next week. Please follow me on Twitter, where I do my best to tweet, retweet, and like what I feel is most important… @SBlumenthalCMG
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Trade Signals: The Ceiling is 3,900, and The Floor (Best Guess) is 3,000
Market Commentary
November 4, 2022
S&P 500 Index — 3,721
- Take a look at the unemployment rate as a recession indicator or, more specifically, the cyclical troughs in the unemployment rate as a recession indicator. The next chart features a 12-month moving average of the unemployment rate with the troughs highlighted. As the inset table shows, the correlation between the 12-month moving average troughs and recession starts is remarkably close.
- When the unemployment (red dot) moves above the (blue) 12-month moving average, recession follows.
Bottom line: This morning’s unemployment report will keep Jerome Powell up at night. The Fed is not yet done raising rates. Watch for the unemployment rate to rise above its 12-month MA to signal imminent recession. Recession will drive unemployment higher. Higher interest rates will likely lead to a recession. As the next chart shows, the Fed is moving quickly. Both inflation and higher rates will lead to recession. The impact of higher rates on mortgages, personal debts, corporate debt, and government debt is enormous. And our starting conditions are worse than ever.
Something will break.
The balance of the indicators remains in sell signals – mostly red arrows across the dashboard.
Click HERE to see the Dashboard of Indicators and all the updated charts in this week’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizons, and risk tolerances.
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Personal Note: The Prize is Worth the Price
Oh, the beauty of sport, business, and of course, life.
It has so much fun being next to my wife Susan, watching her coach and lead young men. Susan asked me after yesterday’s playoff 0-1 loss if I had anything to say. Quoting someone every Philadelphia sports fan knows, Jason Kelsey, I said, “Underdogs are hungry dogs, and hungry dogs run faster,” and boy, did you run faster.
Tampa, Dallas, Thanksgiving, and California
I’m traveling to Tampa next Tuesday for a due diligence meeting, dinner, and some morning golf at Old Memorial Wednesday am. Then home by dinner time. Mauldin and I were hoping to host a dinner next Wednesday evening, but plans have changed. John and I are co-hosting a dinner with our partners from Skyway Capital in Dallas on Wednesday, November 16. Location to be determined. If you read John and me, stay tuned, we’ll send an invitation notice in next week’s letters.
Here is a toast to creating, growing, failing, improving, winning, and, most importantly, enjoying life’s journey.
Btw, in the section immediately below, you’ll find a link to the On My Radar Spotify page, where I post a recording of each week’s missive along with a podcast or two. Please let me know what you think, your ideas, and your requests.
Go Phillies, Go Union, and Go your favorite team, too, unless it is against mine. Then it’s you vs. me, and the loser buys the drinks. 🙂
Wishing you and yours the very best.
Every forward!
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
OMR Audio Replay and Podcast Link
Click on the next photo to link to Spotify, where you can find a link to each weeks On My Radar audio recordings.
Not a recommendation to buy or sell any security. See important disclosures below and on the Spotify On My Radar home page.
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.
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