May 19, 2023
By Steve Blumenthal
“Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb…Persistence and determination alone are omnipotent.”
As I step back and reflect on all I learned from this year’s Mauldin Strategic Investment Conference, I find myself hardened in my views. I’m not sure that’s a good thing, and of course, I’m keenly aware I could be wrong. My mind keeps clicking… What am I missing? I remain concerned.
Five content-filled days concluded on May 10, featuring economists and investors (David Rosenberg, Howard Marks, Dr. Lacy Hunt, Peter Boockvar, Karen Harris, Felix Zulauf, Liz Ann Sonders, Jim Bianco, William White, Danielle DiMartino Booth, and Louis-Vincent Gave), real estate experts (Barry Habib, John Burns), and geopolitical experts (Neil Howell, George Friedman, Elbridge Colby, Chris Bronk, Michael Rubin, Elmar Hellendoorn, Dr. Frank Luntz, and Andrew Yang). There was a heavy focus on politics—and rightfully so, as JP Morgan’s Jamie Dimon expressed recently, “I would take a mild recession happily right now. I’m far more concerned about geopolitics: Ukraine, trade, Russia, our relationship with China, etc.”
For me, the closing panel with Bill White, Felix Zulauf, John Mauldin, and Neil Howel stole the show. The key to thoughtful discourse is a good moderator, and David Bahnson did an excellent job pushing for specifics, stress-testing each panelist’s views and convictions as they expressed them.
Ahead, Zulauf sees a roller coaster–like ride with large declines and large rallies that result in little return ten years from now: down 30%, up 100%, then down 50% or more, with the end of the current secular bull market starting sometime in 2025.In his assessment, it’s a market timer’s environment.
That view matches my valuation work.
I left the conference reassured—not worried—about investment opportunities. There are plenty. Though, Zulauf did not paint a picture for basic index investing. He sees a good opportunity for traders and certain companies and advises active management over passive.
I am, however, worried about the general path we’re on. We are better together; yet, that doesn’t seem to be today’s mindset. At the very top of my macro worry list is debt. We’ve kicked the can down the road, and we are coming to the end of the road.
But it wasn’t all downward-trending. Howard Marks sees renewed opportunity in distressed credit, which has been absent for the last 13 years. There were also several upward-trending panels on the future of nuclear and renewable energy, as well as an exciting presentation on venture capital and AI. The message was clear: No need to ostrich our heads in the sand.
Post-conference, this week I interviewed John Mauldin for the On My Radar podcast. I was curious as to what he thought about the conference—his annual macroeconomic masterpiece. I can tell you, the artist was pleased. Had anything changed his “Great Reset” (for debt, pension, entitlement programs) outlook? His short answer is no. Next is a YouTube link to our discussion, and you can find the audio recording on Spotify here.
I woke up this morning fully intending to write about real estate and share more selections of my notes, but I changed my mind since the debt ceiling challenge is front and center. I did, however, get a chance to speak with my go-to expert on all things real estate, Barry Habib, and he wanted me to share his latest forecast on inflation with you.
It’s a positive inflation news shocker and way outside of consensus.
Barry noted that the next Fed meeting will take place on June 14, and the markets are predicting a 40% chance that the Fed will increase rates another 25 bps. However, on June 13, we get the next CPI print, and Barry thinks we’ll see a dramatic drop from 4.9%. He also believes it’ll show a year-over-year CPI at ~3.5% and expects PCE to drop to 3%, with a chance of dipping below 3% in July. In his view, all this talk about persistent inflation will go away.
Barry looks forward to the road in front of us. Like Wayne Gretzky skating to where the puck is going to be. The Fed always looks back through the rearview mirror. If Barry’s predictions are right, the numbers will shift the Fed’s thinking. We could see bond yields decline and bond prices rally, and mortgage rates may drop below 5.5%. I’ll be recording a short podcast with Barry next week. Stay tuned.
But for now, grab your coffee and find your favorite chair. We’re diving back into the debt ceiling mess. Yesterday, Ray Dalio shared his views on what he feels should be done about the debt ceiling. Hint: We need strong leadership from both sides—a bipartisan kumbaya. Vegas odds? You tell me. I personally found Ray’s piece thoughtful and balanced, and I like his focus on potential solutions.
As Calvin Coolidge once said, “Persistence and determination alone are omnipotent.” Amen to that. We’ll need a lot of them both.
Here are the sections in this week’s On My Radar:
- What Should Be Done About the Debt Ceiling – Ray Dalio
- Random Tweet
- Trade Signals: Testing 4,100 – 4,200, May 18, 2023
- Personal Note: Arts Fest
(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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What Should Be Done About the Debt Ceiling Argument Between the Democrats and Republicans? By Ray Dalio
I was recently asked what I thought of the debt ceiling debate. To answer that question, I will first explain what I think is likely to happen, and then I’ll explain where I am coming from, which will give you background for my explanation of what I think should be done.
What I Think Will Likely Happen
I think that what’s most likely to happen is that the two sides won’t allow a default (or if they do, it won’t be for long) and they won’t deal with the big issues in a substantive way. Rather they will tweak things in ways that won’t matter much and that will look better than they really are (e.g., they will say that they will cut the deficit in future years, which they won’t when the time comes). I wouldn’t do that.
Where I’m Coming From
As you know, I’m a global macro investor focused on the five big forces: 1) the money/credit/economic force, 2) the political force within countries, 3) the geopolitical force between countries, 4) the acts of nature force, and 5) the learning/technology force. These are inextricably linked to each other, especially the money/credit/economic and political forces when it comes to the debt limit issue in the US. For that reason, in answering this question I will start with the political issue because I think that it is our greatest threat to good decision making.
As I see it, nowadays there are three political “types” of people: the hard-right type, the hard-left type, and the bipartisan moderate type. My examination of history showed that this is how the sides have always lined up in the pre-civil war phase of the Big Cycle that we are now in. I believe that everyone is by and large one of these types and that people will likely be increasingly forced to either pick a side and fight for it or hide by staying quiet. Think about it. If forced to pick to fight for one of these sides, which would it be, and would you fight or hide?
I’m a bipartisan moderate type who won’t hide. I’m a bipartisan moderate because I believe strongly that either or both of the extreme types (hard-right and/or hard-left) attempting to impose their views on others won’t work— it will just intensify the conflict, which will lead to a type of civil war that will make clear who has the power to determine what’s done. By “civil war,” I don’t necessarily mean violent conflict, though with so many guns in the hands of so many people who are willing to fight to protect the lives that they believe are at risk of being taken away by the other side, the risk of violent conflict is not nil. I think that it is more likely that the civil war will take the form of splits between red states and blue states, between the federal government and the state governments, and between the haves and the have-nots, especially in blue states and wherever wealth gaps are large, finances are bad, and social issues like drugs, mental illness, and crime are worst. In any case, because I believe that our financial/economic problems are great, I believe that significant bipartisan reforms are required to get us on the right track financially, economically, socially, and politically.
Because I believe these things to be true and because my expertise is in finance and economics, I believe that:
1. Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt. This will eventually lead to a disastrous financial collapse. Why? Because spending more than one earns and financing it with debt, which we have been doing for a long time, is easy, pleasurable, and not sustainable. It’s not sustainable because increasing debt assets and liabilities faster than income eventually makes it impossible to simultaneously pay lender-creditors a high enough real (i.e., inflation-adjusted) interest rate to have them hold the debt assets without having that real interest rate too high for the borrower-debtors to be able to service their debts. When debt assets and liabilities reach the point that the amount of debt sold is greater than the amount of debt that buyers want to buy, central banks are faced with a choice: they either have to let interest rates rise to balance the supply and demand, which is crushing to debtors and the economy, or they have to print money and buy the debt, which is inflationary and encourages holders of the debt to sell the debt, which makes this debt imbalance worse. In either case that creates a debt crisis that is like the runs on the banks that we have been seeing, but with government bonds being what is sold and the run on the bank being a run on the central bank. As explained in greater depth in Chapters 3 and 4 of my book Principles for Dealing with the Changing World Order, that is how all reserve currencies and big debt cycles have ended. From what I see, which I will cover in another post, we are approaching that tipping point in which the amount of debt sold by the government will be greater than the demand for it, which could lead to the central bank having to print money and buy bonds and a sale of government bonds that would put the central bank in that untenable position I just described. At the same time…
2. …not increasing the debt limit will lead to default and/or a cutting back on basics for those who can’t afford cutbacks, which will cause financial havoc and social upheaval.
What I Believe Should Be Done
I believe that we need a smart bipartisan plan not only to deal with the budget deficit issue but for dealing with all of our country’s financial, economic, and national debt issues. I think the system needs to be reformed.
For these reasons, I believe that to try to settle this issue in a few meetings and move to an expeditious answer, as has been done 78 times before, won’t fix our basic problems and will eventually lead to a terrible outcome. I believe that more structural changes are required. I believe that one of those temporary, quick, kick-the-can-down-the-road type moves as is now in the works should happen, but it should be accompanied by a smart bipartisan plan that will take adequate time to be developed. I emphasize the words 1) smart, 2) bipartisan, 3) plan, and 4) adequate time. (FOOTNOTE: The closest recent examples of something like this were the 2010 Simpson-Bowles plan and the committee formed in 2011 after debt ceiling negotiations between Obama and Boehner. Both bipartisan commissions failed to reach the required agreements on how to reduce the deficit and we still have the same problems more than a decade later, only worse. These failures are bad precedents, but there isn’t another good alternative path to addressing the debt/finance problem than a smart bipartisan one.)
To produce something that actually works, the leaders from both sides—Biden and McCarthy—would have to agree and overcome the objections of the more extreme members of their parties who either don’t want to lift the debt ceiling or aren’t willing to compromise on a long-term approach to budgeting that works both economically and socially. To me, that battle between moderates who are willing to compromise and do practical things and extremists who aren’t will need to be fought someday soon, so it might as well be fought now. As mentioned, I hope to see the smart bipartisan moderates band together to fight the extremists of both parties. I think that the leader(s) who come out in favor of this kind of smart bipartisan path should receive huge bipartisan support rather than the alternative path of not finding a smart bipartisan approach, which assuredly will lead us toward disaster. If one side doesn’t agree to this, the other side should openly throw down the gauntlet and show that the other side is not willing to work on this problem in a cooperative way. Unfortunately, the primary political system encourages extremism in well-recognized ways that I don’t have to recount. Strong leaders in pursuit of the best outcomes via bipartisanship would have to have the courage to make this move. Maybe in the end, bipartisan moderates from both parties will band together in a third political party. Anyway, as I said, history and common sense tell me that smart bipartisanship is the only way we are going to get through this well together. The middle needs to overtake the extremes. Do I think these things will happen? I don’t think that it is probable. The most likely path is toward there being a big clash of these forces.
As for the actual plan to do what needs to be designed, it isn’t complicated, though it’s tough to get people to agree. Four years ago, I wrote an article explaining “Why and How Capitalism Needs to Be Reformed” that lays out my thinking more completely than I can do here. In a nutshell, what I believe needs to happen is to make the reforms that are required for us (Americans) to collectively earn more than we spend and both grow the pie and divide the pie well, with sustainable government finances.
Remember that I was asked what I would do, not what I think will be done, so that’s what I’m giving you. But of course, my own views about how that should be done are much less important than there being a bipartisan plan created by skilled moderates who are willing to fight against the extremists to defend their plan. One of the biggest problems is that everyone fights for exactly what they want, so I don’t want to do that—i.e., I don’t care if the plan includes what I think is best as much as I want it to contain what a smart bipartisan group of designated people thinks is best and will fight the extremists to get. I think this is an opportunity for some brave moderates to get together and do this, despite the huge political costs.
I won’t get into what I’d like to see in a plan because what I want isn’t particularly important and because explaining this would be too much of a digression. However, in case you’re interested, I believe that productivity is the much shunned and yet the most necessary ingredient to get to a healthy financial state without cutting our living standards. That is because improving productivity is the only way incomes can rise to be greater than expenditures, and that’s what’s required to manage debts well. Why don’t both sides of the political divide focus on productivity? Because most people are focused on what they get rather than what they produce to exchange with others so they can get what they need. Improving productivity and dividing its benefits so that most people benefit is the only path that will work, and that must be done cost-effectively to achieve a double bottom line, which is an investment that is both financially viable and produces a social good. There are many good double bottom-line investments in education, infrastructure, fighting the drug problem, addressing mental illness, and other programs that produce broad-based opportunities. And of course, a debt management/restructuring plan would need to be part of any sensible plan. But as I said, what is most important is that we have a smart bipartisan plan so that the pie is grown and divided well.
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Random Tweet
Only one tweet to share this week. Microsoft’s $MSFT stock performance each full year since going public.
1987: +124.8%🟢
1988: -1.8%🔴
1989: +63.4%🟢
1990: +73%🟢
1991: +121.8%🟢
1992: +15.1%🟢
1993: -5.6%🔴
1994: +51.7%🟢
1995: +43.6%🟢
1996: +88.3%🟢
1997: +56.4%🟢
1998: +114.6%🟢
1999: +68.4%🟢
2000: -62.8%🔴
2001: +52.7%🟢
2002: -22%🔴
2003: +6.8%🟢
2004: +8.9%🟢
2005: -1%🔴
2006: +15.8%🟢
2007: +20.8%🟢
2008: -44.4%🔴
2009: +60.5%🟢
2010: -6.5%🔴
2011: -4.5%🔴
2012: +5.8%🟢
2013: +44.3%🟢
2014: +27.5%🟢
2015: +22.7%🟢
2016: +15.1%🟢
2017: +40.7%🟢
2018: +20.8%🟢
2019: +57%🟢
2020: +42.5%🟢
2021: +52.5%🟢
2022: -28%🔴
2023*: +29.2% (So Far)🟢
Source: Twitter – @StockMktNewz
(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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Trade Signals: Testing 4,100 – 4,200, May 18, 2023
No major signal changes to report today. Optimism for a debt ceiling deal drove yesterday’s positive price action. Debt-related challenges remain in the US and the bulk of the developed world. It’s concerning that the US government’s annual interest expense just surpassed $1 trillion (about $3,100 per person in the US) and is now a larger line-item expense than the US defense budget. We’ll get a deal, and the debt ceiling will be raised. If not, put your helmet on.
Investor sentiment continues to lean pessimistic (a short-term positive supporting equity markets). The NDR CMG Long-Flat Indicator remains modestly bullish just above the important 50-point threshold. However, both the short and intermediate-term MACD indicators for the S&P 500 Index signal a downtrend, and one of my favorite technical market indicators, Volume Demand (buyers) vs. Volume Supply (sellers), turned negative in January 2022 and has remained in a sell signal, with one brief exception. The current signal moved to a sell in February 2023. If you’d like a copy of the chart, please send me a note.
Overall, let’s call the weight of evidence for stock market indices neutral to negative. Score it the same for international and emerging market equity indices. The S&P 500 Index continues to test the 4,100 to 4,200 resistance area. I’ve been calling for a market top in this range. Remain defensive. We are in a trading range environment due to excessively high stock market valuations. It is a sell-the-rallies (or hedge), buy-the-dips trading game until valuations reset lower. The dollar is in a bullish uptrend, treasury and high-yield bonds are in sell signals, and gold remains in a bullish uptrend. The dashboard of indicators is next, followed by the charts with explanations. Please reach out to me if you have any questions.
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Personal Note: Art’s Fest
“Action is the foundational key to all success.”
– Pablo Picasso
“Art should be something that liberates your soul.”
– Keith Haring
I hope you had a wonderful Mother’s Day celebration. No one on the planet is more important than our moms.
My mom passed away far too many years ago. She had an entrepreneurial spirit and an endless love for art. I fondly remember the frequent smell of oil-based paint wafting through our home and the many meetings she held there, bringing together artists and businesspeople alike. Those meetings led to the founding of the Art Alliance of Central Pennsylvania in 1968. The year prior, the same group of people started the popular Art Festival (nicknamed Arts Fest), which is still held on Penn State’s campus every July, as a way for local artists to showcase and sell their art. Thousands pour into town every year. If you are a Penn Stater, you’ve experienced the party.
In those days, the 60s and 70s, women’s fashion embraced bold colors, geometric patterns, and miniskirts. They wore big hairstyles, too—do you remember the beehive? Men wore thick black glass frames, tailored suits, and slim ties, and sported longer hairstyles, like the Beatles’ moptop. Eventually, miniskirts and tailored suits made way for bell bottoms, denim jeans, and a more free-spirited, earthy aesthetic.
It was a vibrant and experimental time, reflecting the changing cultural and social dynamics. This energy and these styles filled our living room most Tuesday nights of my childhood, and I remember it fondly. (Though perhaps one of my favorite memories is sneaking cookies with my siblings as the grown-ups planned. We thought we were so smart.)
Speaking of the Penn State Arts Fest, by the time this week’s OMR hits your inbox, I’ll be en route to the “Happy Valley” to attend an art show in honor of Mom. It is 55 years since the Art Alliance was founded and almost 43 years since Mom passed. I’ll be celebrating with her (in spirit), Susan, my sister Amy, family, and some of Mom’s old friends.
Portraits of Deanna Blumenthal hang among her artwork at The Art Alliance of Central Pennsylvania on Thursday. The Art Alliance is celebrating its 55th anniversary with an exhibit featuring a founder, Blumenthal, and current abstract artists. Abby Drey adrey@centredaily.com. Read more at: https://www.centredaily.com/news/local/community/article275510611.html#storylink=cpy
If you are in the area, please stop by and say hello. The event is 7 pm to 9 pm tonight, May 19, at the Central Pennsylvania Art Alliance building in nearby Lemont, Pa.
Grab your glass and hold it high—a special toast to your mother, my mother, and all moms everywhere.
Wishing you a wonderful week,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.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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