August 18, 2023
By Steve Blumenthal
“The Decisive Decade is cautionary and optimistic. Ward shows a path for America and the Free World to win the contest with the Chinese Communist Party. He calls for rebuilding American economic, industrial, and technological might, and identifies the technologies, industries, countries, and regions that are most consequential. This book is a call to action for all, but especially for business executives. Just as American military officers plan and execute the combat missions to win battles, corporate officers must plan and execute business strategies that enhance our security, promote prosperity, and help the Free World prevail in the most consequential competition of this century.”
– Lt. General H.R. McMaster (U.S. Army, Retired) – Forward to the book, The Decisive Decade
En route to the 2019 Camp Kotok—an annual meeting of economists, investment managers, and former Fed officials—an email came in asking if anyone could pick up Dr. Jonathan D.T. Ward at the airport in Bangor, Maine, and give him a ride to Grand Lake Stream. The timing worked perfectly for me, so I volunteered. The conversation we had was eye-opening.
Jonathan, who consults with various departments of the U.S. government and businesses, is an internationally recognized expert on Chinese global strategy and U.S.-China competition. He earned his PhD in China-India relations at the University of Oxford and his undergraduate degree at Columbia University, where he studied the Russian and Chinese languages. His company, Atlas Organization, works with global firms in key strategic industries, building a multi-sector understanding of U.S.-China competition and risk.
Jonathan had just published his first book, China’s Vision of Victory, which we discussed at length in a great, educational start to three days of fishing, discussions, and debates.
In the book, Jonathan wrote, “Given what is widely known about the Chinese Communist Party’s objectives and practices, it is not only appropriate but perhaps even humane that American and Allied grand strategy concentrates on putting an end to the economic ascendancy of this neo-totalitarian power and its ambitions to transform the world. A strategy of economic containment gives us a chance to turn the tide.”
I thought then, and I do even more today, that Jonathan is one of the most important patriots the free world has. That’s a strong statement, but I believe it is true. Most important, as he described it, “Ending our facilitation of China’s economic ascendancy is a matter of restricting technology, capital, and market access from America and the Allied World.” Essentially, our lights are on, but we have more work to do.
The challenge is educating big businesses—no easy task. Many businesses are responding by either friend-shoring or bringing manufacturing back home, or a combination of both. Will doing so cost more than what it cost to produce the same goods in China? Yes. We can think about that economically, but this end game is greater than profit. “Just as American military officers plan and execute the combat missions to win battles, corporate officers must plan and execute business strategies that enhance our security, promote prosperity, and help the Free World prevail in the most consequential competition of this century.”
Grab your coffee and find your favorite chair. I had the exceptional privilege to speak with Jonathan Ward this last Monday. His new book is out and is titled The Decisive Decade. We talked about what’s transpired since our time together in 2019 and about the critical steps we should be taking today. I recorded the conversation and posted the podcast on Spotify, and you can view the video recording on YouTube. Links are provided immediately below. It’s not all dire. I hope you find the conversation helpful.
Here are the sections in this week’s On My Radar:
- The Decisive Decade – Dr. Jonathan Ward
- Too Important to Ignore
- Personal Note: Through Denver to Nebraska
- Trade Signals: An Important High Yield Sell Signal?
(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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The Decisive Decade – Dr. Jonathan Ward
The goal of On My Radar is to identify major macroeconomic and geopolitical themes that may impact markets and the economy, and your wealth. Some of the major themes that have been identified in this decade include The Forth Turning, Mauldin’s Great Reset, George Freidman’s long-term cycle work, and Ray Dalio’s End of the debt supercycle Studies (see: Principles for Navigating Big Debt Crises).
It’s the Decisive Decade, indeed!
In my recent discussion with Jonathan Ward, we discuss these themes along with his message relating to China.
The Decisive Decade indeed! Following is a link to the video replay of our discussion on China.
And you can find the link to the Podcast discussion on Spotify here.
I had hoped to have a copy of the transcript of the call completed, but unfortunately, we ran short on time. We’ll have it transcribed next week. Send me an email if you’d like a copy.
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Too Important to Ignore
Many believe the next round of trouble will be met with another Fed bailout. Not to worry, all will be well.
I’ve written for some time that inflation is kryptonite to Fed policy: zero bound-interest rates and $4 plus trillion of free money (collectively QEs 2 and 3) are the root cause. As Ray Dalio wrote in his latest missive on LinkedIn, the day of reckoning with those policies is now here. If you missed last week’s OMR, here’s the bottom line of what Ray had to say:
“Does it matter that the central governments and central banks have such bad balance sheets and income statements if the real economy is in pretty good shape? Of course, it does!
“As with people and companies, governments that borrow have debt service payments and eventually have to pay back principal, which is painful. The only differences in their finances are that governments can confiscate wealth through taxes and print money via the central bank (so that’s what we should expect to happen). Will this be a big problem? The answer is probably not much over the near term but probably a lot later.”
He followed this with his view of the road ahead. Here’s a brief summary of his points:
- Over the near term, if there isn’t a big supply/demand imbalance of government debt in which the amount of debt assets sold overwhelms the demand for them, we’re likely to see a period of mild stagflation with tolerably slow growth and tolerably high inflation. This hinges, however, on many outside influences (g., politics, geopolitics, the environment, technology, etc.) that can and will play a role.
- Over the long term, history shows us that central governments’ deficits will almost certainly be large and likely to grow at an increasing rate as debt-service and budget costs compound.As costs increase, governments will need to sell more debt, which will produce a self-reinforcing debt spiral, including market-imposed debt limits and central banks printing more money and buying more debt to counter their losses.
- The losses experienced by central banks to this point have not yet affected monetary policy, but it’s not inconceivable that they will follow the classic late–big cycle dynamic.
- If deficits compound enough that there is more supply of government bonds than demand, either interest rates will rise, or central banks will have to buy more bonds to try to hold interest rates down. In either case, the losses and resulting negative net worth of central banks could reach magnitudes and have adverse effects on monetary policies.
Ray added, “To be clear, I’m not saying this will happen; I’m not sure about anything…”
In my view, we’ll see either inflation or wealth confiscation, or both. A challenging decade for bonds as they lose value in rising interest rate/inflationary cycles and, with higher costs, it is not good for growth, regardless. To every push, there is a pull. There is no free lunch!
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
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Random Tweets
No Random Tweets this week.
Personal Note: Through Denver into Nebraska
I’m up early this morning, finishing today’s newsletter. My son Matthew and I landed in Denver yesterday and then drove five hours to reach our destination: Sands Hill Golf Club in Mullen, Nebraska. The course was designed by Ben Crenshaw and Bill Coore in 1995. It is a Top 100 ranked course, and interestingly, open only four months a year. We’re quite excited to play the course—bucket list kind of stuff.
Click on the following photo to get a feel for the course.
Matt is confident he’ll be winning more money from Dad’s pocket. If past performance is any indication of future returns, he may be right, but I’m not going down without a fight.
The really big win, of course, is being with my son.
I’m hitting the send button early this week. Hug your kids and let them know how much you love them. Time moves way too fast!
Wishing you and your family the very best!
Trade Signals: Important High Yield Sell Signal?
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
The high-yield bond market is the canary in the coal mine for the economy and the stock market. Historically, it has served as an early warning signal. The canary just rolled over yesterday.
While this does not guarantee the current signal will mark the trend top, it does signal caution. I’m particularly concerned due to the many zombie companies dependent on debt and kept alive in the free money era.
The following chart plots the trend in the S&P 600 Small Cap Stock Index (orange line in the center of the chart) and the trend in the S&P Index 600 advance/decline line (blue line in the lower section). Data back to 1995.
A sell signal occurs when the trend is below the 36-day smoothed moving average (Small Cap Stock Index) and below the 40-day moving averages (Small Cap Advance/Decline line).
Both sit below their respective moving averages. Note the shaded area in the data box at the bottom of the chart.
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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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