December 6, 2024
By Steve Blumenthal
“If I have been able to see farther than
others, it was because I stood on the shoulders of giants.”
– Sir Isaac Newton
Despite current indicators suggesting a low probability of an imminent U.S. recession, it’s prudent to remember that recessions are inevitable. Believing “this time is different” can be risky, as history shows recessions’ substantial impact on markets.
Historically, bear markets accompanied by recessions have seen the S&P 500 decline by an average of 35.8%, compared to a 27.9% average drop without a recession. Source: Reuters
However, the severity varies with each downturn:
- Great Recession (Dec 2007 – Jun 2009): S&P 500 fell approximately 57% from its peak.
- Tech Bubble (Mar 2000 – 2002): S&P 500 declined about 50%, while the Nasdaq dropped around 75% from their peaks.
- COVID-19 Recession (Feb – Apr 2020): The index decreased by roughly 34% from its peak.
- Early 1980s Recessions: The S&P 500 saw smaller declines, such as 17% during the 1980 recession and 27% during the 1981–1982 recession. Source: Visual Capitalist
These examples highlight the varying market downturns during different recessions. Considering current economic factors—such as increased debt, leverage, Federal Reserve policies, and government spending deficits—it’s reasonable to anticipate that the next recession could be as challenging, if not more so, than the recent ones. This perspective underscores the importance of vigilance.
Understanding historical patterns offers valuable context for investors navigating economic downturns. One key indicator is the U.S. Treasury Yield Curve, which plots interest rates of bonds with varying maturities. Typically, it slopes upward, reflecting higher yields for longer-term bonds due to increased risks over time. However, when short-term rates exceed long-term ones—resulting in an inverted yield curve—it often signals investor expectations of an economic downturn. Historically, such inversions have preceded U.S. recessions, making the yield curve a reliable predictor of future economic activity.
The accompanying chart illustrates this relationship. The gray shaded areas represent past U.S. recessions, with wider bars indicating longer durations. A red arrow labeled “We are here (29 months)” marks the current position.
Focusing on the orange line, as of the end of November, the 6-month Treasury Bill yield was 24 basis points higher than the 10-year Treasury Note yield, indicating an inverted yield curve. The orange line below the horizontal dotted line at 0 signifies this inversion. A reading of 0 means the difference in yield between the two is zero, while the current reading is -24 bps.
Notably, the yield curve has remained inverted for an extended period. Historically, the median duration of inversion before a recession starts is 11 months, with the longest being 23 months. Currently, we are at 29 months.
It’s also important to know that recessions tend to follow the point when the yield curve becomes uninverted or normalizes (short-term yields lower than long-term yields). The orange line’s movement above the dotted line will be an important signal. If we liken this to a doctor monitoring a heart patient’s EKG above a certain threshold, the doctor and the patient should be concerned.
This data suggests that we are nearing that point.
I maintain a broader list of recession indicators to gauge the economy; currently, they indicate no imminent recession. Here’s a look:
Source: CMG Investment Research, NDR, StockCharts.com
Recently, I revisited works by Ayn Rand, Friedrich Hayek, and Ludwig von Mises—focusing on previous highlights and notes. Below, you’ll find a summary of my notes and a link to Dr. Lacy Hunt’s recommended reading list. A big hat tip to Lacy. Standing on the shoulders of giants, indeed.
On My Radar:
- Austrian Economics
- Dr Lacy Hunt, Recommended Reading
- Trade Signals: December 5, 2024 Update
- Personal Note: A Great Man
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.
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Austrian Economics
Austrian economics is a school of thought originating in the late 19th century with economists like Carl Munger, who emphasize methodological individualism, or how personal choices and preferences drive economic phenomena. Austrian economists of this mind advocate for minimal government intervention, arguing that free markets, guided by individual decisions, lead to efficient outcomes. These economists also highlight the significance of opportunity costs—the forgone value of the next best alternative when making a choice—and the production and consumption time structure. Overall, Austrian economics provides a framework that prioritizes individual decision-making and market processes in understanding economic activities.
These days, I spend a lot of time thinking about how the U.S. debt and entitlement system will be restructured. While we’re approaching the end game of a long-term debt supercycle and entitlements challenges, we’re not yet at a tipping point, and frankly, much of what happens depends on how badly our fiscal position worsens from here. I’m pretty sure we will keep kicking the can down the road, but for how long and which leaders might lead the change, no one yet knows. If $36 trillion in outstanding debt doesn’t wake us up, will $50 trillion? Sadly, we’ll likely see that number in less than ten years.
We can look at many examples of debt and interest-rate cycles throughout history. In The Price of Time: The Real Story of Interest, financial historian Edward Chancellor comprehensively examines the history and significance of interest rates in economic systems over hundreds of years. It is worth the read. Ray Dalio has also published much work on understanding long-term debt cycles (Google it).
As I mentioned, I spent the long holiday weekend rereading Ayn Rand, Friedrich Hayek, and Ludwig von Mises, who all share overlapping critiques of collectivism and advocate for individual liberty and free markets. However, their philosophical and methodological approaches differed significantly, reflecting their distinct intellectual priorities and perspectives.
As we walk down the path to a “Great Reset,” as my friend John Mauldin coins it, I find their perspectives great food for thought and debate. Below are a few of my notes. (Please know, I’m not trying to impose my thinking, or theirs, on you.)
Similarities between Rand, Hayek, and Mises:
Critique of Collectivism and Central Planning:
- All three thinkers were staunch opponents of socialism and central economic planning, arguing that such systems undermined individual freedom and economic efficiency.
- They believed that markets, guided by voluntary exchange and private property, were superior mechanisms for organizing society and ensuring prosperity.
Defense of Capitalism:
- Each promoted capitalism as the only moral and practical economic system. They emphasized the importance of private property, entrepreneurship, and the profit motive.
- They rejected government interference in the economy, viewing it as both ethically wrong and practically destructive.
Individual Freedom:
- Rand’s, Hayek’s, and Mises’s philosophies emphasize individual liberty. They believe a free society allows individuals to pursue their interests, leading to greater innovation and overall well-being.
Differences between Rand, Hayek, and Mises:
Ayn Rand
- Philosophical Foundation: Rand’s philosophy, known as Objectivism, emphasizes rational self-interest as the highest moral purpose. Her defense of capitalism was rooted in its alignment with her ethical view that individuals have the right to pursue their own happiness.
- Focus: Primarily ethical and philosophical rather than technically economic, Rand celebrated the moral heroism of entrepreneurs and creators, emphasizing their role as drivers of progress.
- Government’s Role: Rand supported a minimal state limited to protecting individual rights (e.g., through the police, courts, military, etc.) but rejected anarchism.
- Distinctive Approach: Unlike Hayek and Mises, Rand dismissed religion and emphasized atheism as integral to her philosophy, focusing on reason as man’s primary tool for survival.
Friedrich Hayek
- Philosophical Foundation: Hayek focused on the limits of human knowledge, emphasizing how decentralized decision-making in markets utilizes dispersed knowledge more effectively than any central authority could.
- Key Contribution: The concept of spontaneous order: how complex societal structures arise organically through individual actions rather than top-down design.
- Government’s Role: While critical of central planning, Hayek accepted a limited role for government in providing a safety net and enforcing the rule of law to ensure a functioning market system.
- Distinctive Approach: Hayek’s arguments were more pragmatic and empirical, targeting policymakers and intellectuals rather than building a moral philosophy.
Ludwig von Mises
- Philosophical Foundation: Mises adhered to a strict praxeological approach, which grounds economics in human action. He argued that economic laws were universal and could be deduced through logical reasoning rather than empirical observation.
- Key Contribution: Mises pioneered the Austrian School of Economics, focusing on the role of entrepreneurship, monetary theory, and the impossibility of economic calculation under socialism.
- Government’s Role: Like Rand, Mises was a strict advocate for laissez-faire capitalism, opposing any government intervention in the economy.
- Approach: Mises’s work was highly technical and theoretical, aimed at economists and scholars rather than the general public.
Key Distinctions
- Rand: Passionate, moralistic, and controversial; addressed a general audience through novels and essays (e.g., Atlas Shrugged).
- Hayek: Moderate and nuanced; wrote for intellectuals and policymakers, blending economics, law, and sociology (e.g., The Road to Serfdom).
- Mises: Rigorous and scholarly; targeted academic economists and philosophers (e.g., Human Action).
Conclusion
While Rand, Hayek, and Mises shared a commitment to free markets and individual liberty, their methods, audiences, and emphasis diverged. Rand offered a moral defense of capitalism, Hayek explored the practical advantages of market systems, and Mises provided a foundational theoretical framework for understanding economic phenomena. Together, they represent complementary yet distinct facets of the broader intellectual movement championing freedom.
Dr Lacy Hunt, Recommended Reading
While we’re on the topic of things to read, my friend and economic hero, Dr. Lacy Hunt, recently compiled a collection of his recommended readings that I, too, highly recommend––more homework for you if you want to dive deeper.
Lacy’s intro:
Sir Isaac Newton said, “If I have been able to see farther than others, it was because I stood on the shoulders of giants.” I, too, feel my work depended on the amazing effort and scholarship of many others, and I have assembled this reading list to introduce non-economists to some of the field’s giants. I’ve edited this reading list many times over the years, and I will continue to update it because economics is a science. As our understanding increases, we must examine old beliefs.
For instance, when I graduated from Temple University with a Ph.D. in 1969, fiscal and monetary policy were both considered extremely powerful tools for economic stabilization. Then, the prevailing view held that (1) a large multiplier on private economic activity occurred when the U.S. government spent borrowed funds, and (2) the velocity of money was thought to be stable, meaning that increases in money would flow directly into GDP. Since then, scholars have discredited both views. If I could give anyone starting out a piece of advice, I’d say this: Do not assume that your knowledge of economics (or any subject, really) is ever complete.
Click on the image to read on.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Market Commentary:
The U.S. stock market trend remains bullish. Although interest rates are trending lower, the longer-term indicators signal higher rates.
Following is a quick look at the latest “Dashboard of Indicators” I post weekly in Trade Signals.
- The top section summarizes market technicals, fundamentals, macroeconomics, and investor behavior (sentiment). I share my current fundamental Outlook/Comments in the right-hand column. There are no guarantees, and the information is subject to change.
- The middle section highlights the current equity market trend (green arrows are bullish, red bearish, and orange signals a potential change in trend is near).
- The bottom section highlights the current trends in fixed income, gold, commodities, oil, and recession probability. (There are no guarantees; views are subject to change.) I post this weekly in Trade Signals and have done so for years, as it gives me a feel for market trends.
Important: 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.
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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.
Personal Note: Art Cashin – A Great Man!
“F-E-A-R has two meanings:
1) ‘Forget Everything And Run’
2) ‘Face Everything And Rise.’
The choice is yours.”
– Zig Zigler
Art Cashin – A great man!
Wall Street’s Art Cashin, a legendary figure at the New York Stock Exchange, died this week at 83. He was renowned for his financial acumen, rich storytelling, and quick wit. One of his most memorable anecdotes dates back to the Cuban Missile Crisis in 1962. As tensions escalated, a rumor spread on the trading floor that Russian missiles were en route to the United States, with an estimated impact 11 minutes away. In the ensuing panic, Cashin attempted to short the market but found no buyers. When the missiles didn’t arrive, he recounted the incident to his boss, who imparted a lasting piece of wisdom: In the face of apocalyptic rumors, the best move is to go long because “if the world is ending, who are you going to settle the trade with?”
This story sums up Art, his humor, and his deep understanding of market psychology—a trait that made him a beloved figure on the NYSE floor. Watching him every morning for decades on CNBC speaking from the floor of the exchange, I always admired his witty, humble, and honest way.
I had the great privilege of spending time with Art over the years. In fact, I wrote a piece on September 14, 2018, titled “Your Word Is Your Bond,” in which I shared a story about my first time dining with Art at Bobby Van’s Steakhouse at the invitation of John Mauldin. That night, Art talked about how he secured his first job on the NYSE floor in 1959. His father had recently passed away, and following his uncle’s advice, Art approached a contact at Thomson McKinnon, expressing his desire to work in trading rather than in operations. This pivotal moment set the stage for his illustrious career. We met a half dozen or so more times at 4:05 PM at Bobby Van’s over the years. Art’s daily ritual after the stock market closing bell rang was a Dewars on the rocks at his reserved seat at the bar (in the second photo).
The first time I met Art, he shook my hand, looked me in the eyes, and said, “Enjoyed your letter last Friday. How’s Susan doing?” he asked. I thought to myself, OMG, Art reads On My Radar! As time went on, he occasionally sent me notes. He’d ask about Penn State –– knowing my love for the school. He was always kind. He truly appreciated other people and was focused on what was important to them, never on himself.
On the floor of the NYSE, Art was the person everyone looked to to resolve issues. Everyone trusted him. As Zig Zigler said, “Face Everything and Rise.” And Art did. I loved him and I’m sure you loved him, everyone.
Welcome home, Art! I can only imagine the enormity of the celebration that greeted you upon your transition. You are loved!
I’ll be in NYC with some of Art’s best friends in a few weeks to celebrate his life. I’m looking forward to that!
The following links to a short remembrance piece CNBC did about Art. Click on the first photo to watch.
Source: CNBC, YouTube
Steve, Art, and John (Bobby Van’s in 2018)
Thanksgiving Day Scramble Update
Scramble we did. Our team came in at -4, with our low handicappers, Steve Oh and Matt, keeping us in the game. We thought the leaders would come in around -9 (in golf, a lower negative number is better), but the winning score was -14. The greenskeeper must have had a good night’s sleep as only two pins were placed in crazy spots––like at the top of a steep slope on the green. Miss the hole, and the ball rolls back down the hill to your feet. But that’s part of the fun.
I later learned that the winning team had three players who regularly scored under par. Stonewall is a challenging par 70 course. The winner’s gross score was an impressive 56. It was cold, really cold, but the Basil Haydon Old Fashioned I had at the post-lunch get-together warmed me up well. The big win was being together. I’m checking in happy and thankful. I do hope your Thanksgiving was fantastic, too!
Steve, Steve, and my children Matthew, Brianna, and Kyle (Stonewall Black Friday Scramble)
Speaking of Penn State, if you don’t have a horse in the race, send some love to my Nittany Lions. We face #1 ranked Oregon in the Big Ten Championship game on Saturday at 8 pm ET. If you’re a Michigan fan, I’m sending you a giant “thank you” for unexpectedly topping Ohio State last Saturday, 13-10. That moved Penn State from #4 to #3 and allowed us to face the Ducks. The winner gets a first-round bye in the 12-team NCAA Championship playoffs. This is year one of the 12-team playoff format. Win or lose, it will be an exciting four weeks. Best of luck to your favorite team!
Ever forward!
Steve
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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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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