August 30, 2024
By Steve Blumenthal
Dr. Lacy Hunt argues that the Fed’s current policy stance is too restrictive for the economy’s growth rate. He points out that the average growth of real per capita GDP and GDI is around 1.4%, aligning with the long-term trend since the 1970s. With the Fed nearing its 2% inflation target (excluding questionable assumptions about shelter costs), Lacy suggests a more appropriate policy rate is 3.33%. Instead, the Fed’s current rate is significantly higher at 5.33%, which he believes is far too restrictive, and the Fed is not acknowledging that they are behind the curve.
– Dr. Lacy Hunt, Thoughtful Money with Adam Taggart Interview, August 27, 2024
With August 2024 coming to an end, the current federal funds rate is 5.33%. This is the highest level in over 22 years. Odds makers have a 65% probability of a 0.25% rate cut in September, the first reduction since the Fed began raising rates in March 2022. Jackson Hole is behind us, but all eyes are on September 18, day two of the Fed’s next meeting. A new rate-cutting cycle is about to begin.
As a quick reminder, the federal funds rate is the interest rate banks in the United States pay each other to borrow or loan money overnight. The Federal Open Market Committee, led by Fed Chairman Jerome Powell, sets the rate. The Fed meets eight times a year to decide whether to keep it the same or change it. Think of the process as a lever the Fed can push to tighten or pull down to stimulate the economy.
Share the following with your children and grandchildren. It is an excellent animated summary by Ray Dalio about How The Economic Machine Works.
The federal funds rate is an important benchmark that can affect other rates. As Dalio said, “Credit is the most important part of the economy and the least understood. It is the most important because it is the biggest part and the volatile part.”
In early 2022, the Fed’s federal funds rate was hovering near 0%, and the Fed was still pouring billions into bond purchases each month to keep the economy stimulated. Not only was that free money printed out of thin air, but it also enabled you and me to take advantage of ultra-low borrowing rates. Think about the juice that is provided to the system. The Fed kept its foot on the gas pedal even as U.S. inflation hit levels not seen in 40 years.
But when the Fed finally decided to tackle inflation, it didn’t hold back. In the past 2 1/2 years, the central bank has hiked the fed funds rate by over five percentage points. This aggressive move has started to cool off the runaway inflation that was eroding the purchasing power of everyday Americans.
One of the great economic thinkers of our day is Dr. Lacy Hunt. According to Lacy, a Fed Funds rate of 3.33% is the neutral rate. That is a full 2% below the current level. The Fed has indicated they will begin bringing interest rates down in September.
CMG’s Brian Schreiner sent me an excellent Dr. Lacy Hunt interview hosted by Adam Taggart. You’ll find the link below. In summary, it is not the nominal fed funds rate that matters; it’s the real (which means after inflation) fed funds rate. He is saying that with inflation coming down, the real Fed funds rate has increased, putting much more pressure on the economy. The Fed is behind the curve. Sadly, the Fed is always behind the curve due to its dependency on lagging data.
From Peter Boockvar’s Boock Report this morning, “As for the Fed, next week’s payroll figure and unemployment rate will be the swing factor between a 25 or 50 bps cut in mid-September. The former, though, will be revised about four more times before we know the final figure, but the latter is what it is and won’t be revised.”
Grab a coffee and find your favorite beach chair. I hope this note finds you with a good book and your loved ones by your side. Remember to relax, not sweat the small stuff, and keep smiling. Hakuna Matata! Magic happens when we are happy.
On My Radar:
- Dr Lacy Hunt: Both Presidential Candidates Will Only Make Our Debt Problem Worse
- 10 Facts About the US Treasury Market
- Random Tweets
- Personal Note: Game On
- Trade Signals: August 29, 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.
Dr.
Lacy Hunt: Both Presidential Candidates Will Only Make Our Debt Problem Worse
Here’s a high-level bullet point summary of Dr. Lacy Hunt’s views from the discussion (and you can find his most recent quarterly letter here):
- The U.S. economy is facing severe fundamental challenges.
- 5 consecutive quarters of negative national savings is a very rare and concerning development.
- Monetary and fiscal policy are overly restrictive, with the Fed behind the curve.
- Demographic trends in the U.S. and major trading partners are unfavorable for economic growth.
- Due to the size of debt obligations and the rapid pace of debt increase, Dr. Hunt expects a “grind downwards” in the trend rate of economic growth rather than a sharp downturn or crisis.
- He noted T.S. Elliot’s famous quote, “This is how the world ends. Not with a bang, but with a whimper.”
- He sees the risk of prolonged low growth and widening income/wealth divides.
- He is very critical of the Keynesian policies being pursued, which he believes will exacerbate the problems.
- Dr. Hunt is skeptical that either presidential candidate has viable plans to address the underlying economic challenges.
- In summary, Dr. Hunt paints a rather bleak long-term outlook for the U.S. economy based on structural factors and is concerned policymakers are making decisions based on flawed data and misguided economic theories.
Here are a few video presentation timestamps:
- Negative national savings and the disappearance of the “paradox of thrift” @ 2:00
- The “grind downwards” in economic growth rather than a sharp downturn @ 8:40
- Criticism of Keynesian policies and skepticism of presidential candidates @ 33:19
- Click on the photo of Lacy to watch the full interview.
Source: Adam Taggart, Thoughtful Money
Please see the important disclosures in the disclosures section below.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
10 Facts About the US Treasury Market
Sound advice from Appollo’s Chief Economist Torsten Slok:
Source: Apollo (Full chart pack here, well worth the short trip through the deck)
Please see the important disclosures in the disclosures section below.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Random Tweets
No Random Tweets this week.
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.
You can also listen to my podcasts on Spotify, and find me on LinkedIn.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Personal Note: Game On
“I’ve missed more than 900 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
– Michael Jordan
“I am a member of a team, and I rely on the team, I defer to it and sacrifice for it, because the team, not the individual, is the ultimate champion.”
– Mia Hamm
Game one is behind us and ended in a 3-1 victory. But it wasn’t easy. For the first 15 minutes, the boys were on their heels. I looked at Coach Sue and said, “Devon Prep is much better than anticipated.” They were giving us considerable problems in the midfield, and she was trying to figure out where the pressure was coming from. Were they pushing an outside back higher up or pulling their forwards back and in? We weren’t sure. Once she figured it out, the team could release the pressure and find the open player(s).
Teaching it to young people is incredible to watch.
After the game, the team huddled together. She always asks them two questions (not per individual but as one team): How was your effort level? How was your performance? The boys scored themselves a five (out of ten) on effort and a four on performance. Coach Sue responded that she thought the scores were higher on both metrics and added, “Great teams find a way to win, and you found a way to win today. We learned a lot today, and there are important things we are going to fix. Let’s get back after it tomorrow.”
For me, I see the future. I see hopes and dreams. I see good human beings, and I see different people coming together. I see tomorrow’s leaders.
I enjoy getting to know the boys, watching them grow, and watching my favorite coach teach them.
Game on! A 3-1 W and two more games next week.
Think a kind thought about one of your favorite people (your mother, father, teacher, or coach), raise that glass high, and send them some love.
Grateful!
With me on three: one, two, three TEAM!
Monday is Labor Day. Wishing you a fun-filled holiday weekend.
Kind regards,
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
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).”