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On My Radar: Mauldin Economics 2023SIC – Thoughts From Week 1

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May 5, 2023
By Steve Blumenthal

“The five big forces that have driven and are driving just about everything:

1) the credit/debt/market/economic cycle,
2) the internal peace/conflict cycle that shapes the domestic order,
3) the external peace/conflict cycle that shapes the international order,
4) acts of nature (e.g., droughts, floods, and pandemics), and
5) human inventiveness/technology.“

– Ray Dalio

The annual Mauldin Economics Strategic Investment Conference is in full swing. Over the years, the conference has been held in various cities—San Diego, Pheonix, Dallas… For the last handful of years, the conference has been broadcast virtually, allowing presenters from afar to Zoom into our homes and offices. It also means you can listen to the recordings at your convenience. That’s exactly what I did on the flight home to Phila on Tuesday.

David “Rosie” Rosenberg from Rosenberg Research presented first, as he has for as many SIC conferences as I can remember. Of the five big forces listed in Ray Dalio’s quote above, Rosie’s presentation essentially hit on force #1.

Rosie’s talk and what followed it made for a superb Day 1. Neil Howe, author of The Fourth Turning: What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny, and “The Fourth Turning is Here” was interviewed by my good friend Ben Hunt and, later, John Mauldin interviewed Howard Marks.

Credit/debt/market/economic cycle? Check.
Internal and external peace/conflict? Check.

While I do miss attending the conference in person, I must admit, I very much enjoy that the virtual format provides the ability for endless replays. Pause, take notes, and hit play again.

Last week’s post, titled “The Liquidity Cycle and Asset Positioning,” was a roadmap of sorts as to where we find ourselves today.

The hard truth is we sit at a challenging point in the credit/debt/market/economic cycle. How do we know? Look at this next data point: There have been 70 major bankruptcies in the last four months, with Bed Bath and Beyond making the latest addition to the list. Only 2009 (the Great Financial Crisis) and 2020 (Covid) were worse. 

Source: Hat tip to MishTalk

Is the regional banking crisis contained? Despite soothing words from the Fed, the truth is: not yet.

  • First Republic Bank was taken into receivership by the FDIC. Stock and bondholders were wiped out. JPMorgan won the bid for what was left.
  • At end-of-day yesterday, Thursday, May 4, shares of PacWest were down over 70% just in the last five days. Next to collapse?
  • Arizona-based Western Alliance shares also dropped more than 50% in the last five days. They’re denying reports that they’re exploring a sale—also TBD.

The Fed seems to believe the banking crisis may help them accomplish their goals (cooling the economy and bringing inflation under control), apparently without causing a painful recession. Hubris? The Fed hiked rates another 0.25% on Wednesday, and its assessment of the banking system did not change from its March policy meeting.

On the surface, central bankers don’t seem worried.

Yet, they must be sweating on the inside. It’s the regional banks that know their local markets best. Given less capital, lending dries up.

I’m especially worried about the debt issued for commercial office real estate. It’s the regional banks that have the most commercial real estate loan exposure. A small, potential debt-quake sits ahead—but then again, maybe it won’t be so small. We can’t know for sure. I also worry about all the money running to the large, too-big-to-fail banks. But what would you do? The Fed is attempting to extinguish the fire created by its own 13-year policy of near-zero interest rates.

But for every ying, there is a yang. And the yang in the equation is both the potential for loss and the potential to gain. One of the main reasons I like the annual conference.

In the opportunity camp is the famous distressed debt investor Howard Marks. Distressed debt managers seek to pick up assets at steep discounts. The last decade required great patience for them, however. There was too much free money and too few events prompting discounted asset prices. Marks now sees an opportunity, and he wrote an excellent memo titled “Sea Change,” which you can hear about here.

In Marks’s discussion with Mauldin at the conference, he said that since the early 1980s, it’s like we’ve all been riding on an airport escalator. As we walked forward, we had the added benefit of the escalator assisting us, but while on the walk, we didn’t necessarily feel the added help. That is what 40 years of declining interest rates did for the economy.

Well, we are no longer on the escalator.

 

When liquidity dries, problems surface. Marks is patient, and the sea change he sees is the potential to make outsized returns, not seen since the Fed Funds rate hit zero in 2009. The key message is there is opportunity. 

Next, entering center stage are David Rosenberg, Dr. Lacy Hunt, Peter Boockvar, Karen Harris, Felix Zulauf, Barry Habib, Danielle DiMartino Booth, Jim Bianco, and Bill White, plus others. My goal is to help share some high-level takeaways summarizing what I learn.

As for Dalio’s #5 force driving just about everything, “human inventiveness/technology,” I’m looking forward to hearing the venture capital panel discussion on advanced technology and AI as well as the energy panel discussion. I’ll be in the car tomorrow afternoon driving up to Penn State for my son Kyle’s documentary premiere. Rest assured; the conference audio files will be downloaded (some already are!) for replay during the drive.

Grab your coffee and find your favorite chair. Rosenberg is considered by many to be a permabear, and I think he tends to get a bad rap. His job, and I believe yours and mine, is to wake up each day thinking about what might blow up our ship, and to focus on creating wealth. To which, Rosie sees continued opportunity in the long Treasury bond trade, defense industry stocks, high and growing dividend stocks, and gold.

My goal over the next several weeks is to share my high-level thoughts with you. There is so much valuable information to digest, and I sure do feel like a kid in a macroeconomic candy store. Please know, I’m not affiliated with Mauldin Economics nor compensated in any way—just a big fan of John’s work. You can learn more about the conference here.

Here are the sections in this week’s On My Radar:

  • David Rosenberg – The Answer is “No”
  • Ray Dalio – What I Think Is Going On 1) with China-US Relations, 2) with Their Relations with Other Countries, and 3) in China
  • Random Tweets
  • Trade Signals: A Golden Day!
  • Personal Note: Emily’s Entourage, Penn State, and NYC

(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.)

If you are not signed up to receive the free weekly On My Radar letter, subscribe here.

David Rosenberg – The Answer is “No”

My Bullet Point summary notes:

  • There have been 14 Fed hiking cycles since 1950. 11 landed in a recession.
  • Everything he is looking at is telling him the recession has started.
  • The current recession is likely to last for three to four quarters, with the recovery possibly starting in late 2024.
  • He thinks that the recession will be harder and longer because of the Fed’s tightening policies and that the recovery will depend on fiscal stimulus and the wide divide.
  • SB Here: This is the steepest and fasted Fed rate hike cycle since 1980.
  • He believes that the Fed has already made a policy mistake by keeping rates higher for longer, which will amplify the business cycle.
  • In terms of China, Rosenberg is bullish on defense stocks and gold, and he questions the Chinese economy’s recovery and its impact on global inflation.
  • The recession will be harder and last longer due to the Fed’s mistake in tightening into the inverted yield curve and ignoring the supply curve.
  • The recovery is uncertain, and the fiscal situation and wide political divide are not favorable for a quick recovery.
  • The Fed will have to re-steepen the yield curve (cut short-term rates), which may happen in the fourth quarter of next year, and the recovery may happen in late 2024.
  • There may be a policy mistake on the back end, with the Fed keeping rates higher for longer.
  • Rosenberg believes that the cracks in the labor market are already emerging, and the unemployment rate may go up more than the Fed thinks, which may prompt the Fed to cut rates earlier than expected.
  • Rosenberg believes that there are well-established patterns that need to be addressed, such as finding a better equilibrium between bonds and stocks, lowering bond yields for the stock market, and improving stock market valuations.
  • He is waiting for 425 basis points for the classic sign of turning bullish again for the equity risk premium and for the yield curve to re-establish its positive slope, which normally happens at market lows.
  • Rosenberg predicts that he will turn from a perma-bear to a perma-bull if these levels are achieved (below 3,500 in the S&P 500 Index and a positively sloping yield curve – short-term rates about 140 bps below longer-term rates).
  • Rosie expects the Fed to cut rates before the end of the year.
  • He suggests buying 30-year zeros for the biggest bang for the buck in bonds if his rate forecast is correct. Sees a good target for the 10-year at 2.50%.
  • Rosenberg believes that the level of unemployment is immaterial and that what matters is the direction it is going in the next three to six months.
  • Notable: He says that unemployment tends to bottom three months into a recession and peaks three months after the recession ends.

I’m going to conclude this summary section with Rosie’s mention of our hero, Robert Farrell. The great Merrill Lynch market technician I religiously listened to during my time at Merrill and for many years past. “Not only are we going to retest the October lows of last year, we’re probably going to go through them and then rally in 2024.” I share that view…

(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.)

If you are not signed up to receive the free weekly On My Radar letter, subscribe here.

Ray Dalio – What I Think Is Going On 1) with China-US Relations, 2) with Their Relations with Other Countries, and 3) in China

Overview

From Ray,

“The purpose of this memo is to describe as accurately as I can what I believe to be true without any biased assessments of who is doing what right or wrong. My goal is simply to increase understanding to help minimize miscalculations. I will speak frankly, probably too frankly for some, because I believe in the power of collectively trying to objectively look at what’s true and explore what to do about it. At the same time please understand that while I believe the following to be true, I’m not certain of anything.

China-US Relations

  • The United States and China are on the brink of war and are beyond the ability to talk.

There are many red lines that will be pushed up against with brinksmanship over the next 18 months. Each one is risky, and together they carry a lot of risk. Here are some:

  • A well-known Chinese red line is the United States or Taiwan coming out in favor of Taiwanese independence. Everyone knows that if that happens, it will be considered an act of war by China. Looking ahead, there is a relatively high probability that the United States government in some form will come out in favor of defending Taiwan’s separation from China militarily and will sell Taiwan lethal military equipment to do so. A visit by Kevin McCarthy to Taiwan carrying a strong message of support for defending Taiwan, especially increased arms sales, or even such statements made without a visit would be pushing the red line.
  • Chinese military planes and ships are testing previously established red lines because of what the Chinese say are previously uninitiated provocations and because they claim it is their sovereign right because they see Taiwan as indisputably a part of China.
  • China’s dealings with Russia are leading the US and China to probe each other’s red lines in this relationship. 
  • Economic sanctions, most immediately around the US cutting off China’s access to essential chips, is testing Chinese red lines. 
  • Controlling essential technologies and minerals to defend against being cut off from them, and being able to cut off the opponent’s essential technologies and minerals, is now being done and is provocative. This self-reinforcing, economic-war-intensification dynamic is happening in classic ways explained in depth in my book Principles for Dealing with the Changing World Order and is a leading indicator of war. It is leading to more onshoring and “friendshoring,” both of which are much less cost-effective and will reshape alliances. That is because virtually all countries are caught in the middle of the conflict; the choices they make will determine their alliances. For example, regarding the earlier-mentioned Micron Technology case, the US has already asked the South Korean government to influence its two major chip producers (Samsung Electronics and SK Hynix) to not increase sales to China if Micron is banned from selling its chips in China. What South Korea does in this case and other cases will define its relations with the United States and China. This dynamic is rapidly changing alliances. Another example is how Saudi Arabia’s relationships with the United States, China, and Russia have changed for logical reasons reflecting the relative changes in economic and military power—i.e., while the United States and Saudi Arabia used to have a very strong alliance in which the United States provided military protection and the KSA provided the US and its allies protections against oil supply and price disruptions, this has ceased to make sense as China and Russia now have more symbiotic interests with Saudi Arabia than the US does. This is also affecting currency and capital flows so that they align more with trade flows and geopolitical alliances. For these reasons, in an environment in which one wants to deal with “friends,” trade and investment is shifting to being more with allies than cost-effective sources. Watch the demand for key materials that can be squeezed—e.g., lithium, cobalt, rare earths, wafers and cells in solar energy technology, etc. We are on the brink of an economic resources war.
  • In addition to these things to argue over, there are many other types of disagreements happening—e.g., rules and protocols for doing business with Chinese companies, operating in outer space, cybersecurity, listing Chinese stocks on US exchanges, making investments in China, and too many others to list here. 

Most of these conflicts are likely to intensify over the next 18 months.

US-China relations are getting so bad that there is reason to worry that anti-China sentiment could make doing business with China like doing business with Russia, which would lead US-China trade to collapse. This would have similarly damaging economic consequences, though many times larger, severely hurting supply chains and trade. That would at a minimum cause severe economic consequences for the US, China, and the world and at a maximum could lead to military war.

These conflicts are affecting most countries’ and multinational companies’ relations and how the world is operating in innumerable ways that are intensifying.

What Would a War Look Like? CLICK ON THE PHOTO TO GO TO THE FULL LINK – INCLUDING DISCLOSURES.

(SB here: Well worth your time and attention.)

 

Source: Bridgewater Associates

(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.)

If you are not signed up to receive the free weekly On My Radar letter, subscribe here.

Random Tweets

No Random Tweets again this 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.)

If you are not signed up to receive the free weekly On My Radar letter, you can subscribe here.

Trade Signals: A Golden Day!

To subscribe to receive the weekly Trade Signals letter (sent to your inbox), click on the subscribe photo further below.

Following is a brief summary of what I wrote this week:

As expected, the Fed raised rates another 25 basis points yesterday. I wanted to wait a day before posting today’s Trade Signals to see how the market reacts. Equities moved lower again today with the S&P 500 Index closing at 4,061. The intermediate trend remains bearish. Here’s a look at the chart:

A Golden Day! Gold, on the other hand, gained more than 3%. Gold remains in a cyclical bull market. Next is a look at the popular GLD SPDR ETF:

If you are a Trade Signals subscriber, click on the “LOGIN” link below to view the most recent post. If you are not yet subscribed, you can join the Trade Signals tribe by clicking on the SUBSCRIBE link below. The cost is approximately the same as two Starbucks lattes each month. Hope you consider joining. Please email me at blumenthal@cmgwealth.com if you’d like a sample of this week’s Trade Signals or have any questions.

About Trade Signals

Trade Signals provides a weekly snapshot of current stock, bond, currency, and gold market trends. We provide a summary of technical indicators to help you identify where we sit in short, intermediate, and long-term cycles. We track important valuation metrics to determine the probability of future returns (i.e. when return opportunity is best/least). Trade Signals also tracks investor sentiment indicators and economic and select recession watch indicators. Trade Signals is now a low-cost subscription service, about the cost of two Starbucks lattes every month. You can find the archive of weekly Trade Signals posts (2008 through 2-15-23) by clicking here.

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Personal Note: Emily’s Entourage, Penn State and NYC

I raced home from Austin, Texas, this past Monday to pick up Susan and attend my friend Phil Wachs’s charity gathering for Emily’s Entourage, a nonprofit organization that raises money and awareness to help find a cure for rare mutations of cystic fibrosis (CF). CF is a hereditary disorder that causes the production of abnormally thick mucus, leading to the blockage of the pancreatic ducts, intestines, and bronchi, and often results in respiratory infection.

Years ago, I invested in a Venture Capital fund that was the lead investor in a fund called Royalty Pharma—the largest investment in the fund. I remember when RP invested $3.5 billion to buy the rights to future royalties on a cystic fibrosis (CF) drug called Trikafta, which Vertex Pharmaceuticals owns.

Last year, my wife Susan came home from coaching her high school boy’s soccer team with a big smile on her face. She’d had a warm and emotional exchange with a mother whose son was trying out for the team. This young man had recently started taking Trikafta, and his life immediately improved. It was a wonderful day to see the boy compete (let alone run), and the boy’s mom couldn’t hold back her tears. Susan couldn’t either.

We are all stewards of capital, and not all stories turn out this well. Doing well by doing good. It’s so nice to experience the good.

Trikafta is a game-changer. It works for approximately 90% of people with CF. However, the remaining 10%—approximately 40,000 people—for some unknown reason, don’t experience relief with the drug, which brings me back to my friend Phil Wachs and his wife, Juliet. They are dear friends with Liza Kramer and her powerhouse daughter, Emily Kramer-Golinkoff, co-founder of Emily’s Entourage. Emily is among the 10% of people with cystic fibrosis for whom Trifakta does not work.

At the charity event, Emily, now 38 years old, shared that she is on a mission to find a cure for this “lost 10%.” Emily presented over Zoom—quarantined in her home since Covid began in 2020—in a clear, intelligent, positive, and passionate way. What a force, I kept thinking to myself. What a force.

The hard truth is that a subset of 40,000 patients limits the number of research dollars large pharmaceutical companies might invest to find a cure.

Emily’s Entourage speeds up lifesaving research and drug development for individuals in the 10% of the cystic fibrosis (CF) community that do not benefit from currently available mutation-targeted therapies, including those with nonsense mutations of CF.

I spoke with Dr. Chandra Ghose, Emily’s Entourage’s chief scientific officer, after Emily presented, who shared that there is some hope that combining a statin with Trikafta may be a solution. Susan and I left the event with our hearts touched and spirits lifted. The world needs more Emilys!

If you’d like to learn more about Emily’s Entourage and Emily’s story, click here or on her photo. If you’d like to join Susan and me in making a donation, click here.

 

Emily!

 

 

Phil, Steve, and Marty

Tomorrow afternoon, I’ll be in my car listening to the Mauldin 2023 SIC sessions I missed today while writing to you. I’m en route to my son Kyle’s big event. Dad’s really excited—I’ll be watching with pride. And buying post-event drinks for family and friends.

We’ve got some golf planned with Kyle, Brianna, and Matthew on Sunday at Stonewall. Gratefully, four of our six kids are home for the weekend. My stepson Conner just finished finals and will be coming home with us, too. To sleep, no doubt.

A big dinner is planned for Sunday. Good weather is in the forecast, and I’ll be manning the grill.

I’ll be in NYC for meetings and dinner next Tuesday. Stay tuned for more of my bullet-point notes from the conference next week. It’s a bit of a cathartic process for me. I find that listening, writing, and reviewing helps me think, challenge my own personal views, and do my best to protect and grow. Interesting times we are in… Ever forward we go!

I hope you find the dialogue helpful as well.

Have a great week.

Kind regards,

Steve

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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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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