March 20, 2024
By Steve Blumenthal

“While Powell seemingly can’t wait to cut rates to take some edge off the current levels, at the end of the day, about half the committee wants 3 cuts this year and about half put its dots in for 2, about where we stood before the meeting in terms of market expectations. The real reveal was the ‘fairly soon’ expectations of tapering QT, though it could run longer and end up at the same place. If there is one thing Powell clearly did not do, [it] was push back on the current very easy financial conditions.” 

 

The 10-year continues to flirt with important technical resistance at 4.33%. It’s backed off to 4.22% at the time of this writing. A break above 4.33% puts 4.75% to 5% back in play.  

Consensus expectations for six rate cuts this year have now dropped to three. In Wednesday’s Trade Signals post, I noted that another Camp Kotok fishing friend, Jim Bianco, predicts no rate cuts this year. He was on CNBC earlier in the week saying the economy is too strong for interest rate cuts, citing low inflation and a robust consumer. He argues that rates will continue to rise due to stubbornly persistent inflation in the 3% to 4% range. Source: CNBC 

Supporting Jim’s position is the next chart, courtesy of a Kyle Bass tweet. It shows that nearly $2 trillion in liquidity has been injected into the U.S. system since mid-2023. Source: @jkylebass  

 

In response to the Powell presser, gold is higher. Peter Boockvar concluded his daily Boock Report yesterday by saying, “Watching gold rip higher (which we remain long and bullish on) in particular is not something a central banker wants to see if price stability is their main goal. Also, the 5-year inflation breakeven is now at a one-year high… Right now, they (the Fed) are trying to catch the inflation-falling knife.” 

The Role of Interest Rates 

After reading last week’s OMR, my good friend Sean M sent me a snapshot of the following excerpt from Edward Chancellor’s book, The Price of Time: The Real Story of Interest: 

“[Joseph] Schumpeter himself saw interest as arising from the profits of creating destruction. ‘The true function of interest,’ he wrote, ‘is, so to speak, the break, or governor’ on economic activity.’ A ‘necessary break’, in Schumpeter’s opinion. Interest turns time into a cost of production. Time is money. Entrepreneurs who save time in production, who bring goods most quickly to market, emerge as winners in the game of creative destruction. Interest rations capital. From this perspective, interest is not a deadweight but a spur to efficiency—a hurdle that determines whether an investment is viable or not. The rate of interest, Schumpeter wrote, ‘enters into every economic deliberation’. 

“Matthew Klecker, a Chicago-based investor, compares the interest rate to the shot clock in professional basketball, whose purpose is to speed up the game. According to the NBA rules, players on the offensive team have only 24 seconds of possession in which to score. ‘Zero-percent rates,’ writes James Grant, ‘institutionalize delay in everyday business and investment transactions. They lead to postponement of needed adjustments.’” 

Zero-bound interest rates completely removed the shot clock from the game. If the NBA’s 24-second rule were dropped to 12 seconds, the game would go faster. If it was 48 seconds, the game would go slower. The impact of interest rates on the economy is similar. Lower interest rates result in faster economic growth; higher interest rates result in slower growth. In the investment game, the Fed controls the clock.  

We often hear the idiomatic phrases “glass half full” and “glass half empty” in reference to a person’s perspective on life and the way they tend to view the world. The phrase “glass half full” reflects an optimistic perspective, used to describe someone who chooses to focus on the positive aspects of a situation rather than dwelling on the negatives. Adopting a “glass half full” outlook tends to encourage resilience, gratitude, and hope, even in the face of adversity, and suggests that you can find a silver lining in most circumstances. This perspective is often juxtaposed with its counterpart, “glass half empty,” which represents a more pessimistic viewpoint, where silver linings seem to be few and far between.  

I am an optimistic person by nature—more of a “glass half full” kind of guy. But I do wake up each day wondering what event(s) might blow up my family and the families I serve wealth. Why? Perhaps it’s best summed up in Albert Einstein’s famous quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it; He who doesn’t, pays it.” 

In the big picture, one must understand the merciless mathematics of loss. Most risk to the economic system boils down to the cost of money. Risk to your portfolio boils down to the cost of money. Interest rates are the cost of money. Leverage is always the underlying issue. It builds up in cycles and goes largely unnoticed for long periods of time. It creates instability in the system. Interest rates (higher) are the match that lights the fuse. Therefore, watch the Fed, the 2-year Treasury yield, and the 10-year Treasury yield: Push, pull, pull, push. Tick, tick, tick.  

There is an excellent opportunity in Schumpeter’s “creative destruction.” When thinking about wealth, protect your CORE wealth. The game, over time, is about mitigating downside risk and allowing compound interest to work its magic. It’s just the way the math works. Avoiding the big mistakes is the key. And with the CORE wealth well-protected, you can seek aggressive, risk-on, disruptive opportunities—what we call EXPLORE investments—that may meaningfully accelerate your wealth. Things like gene editing, AI, advances in technology, medicine, agriculture, etc.— opportunities that are not dependent on the general direction of the stock markets. “Glass half full,” indeed. 

Grab your coffee and find your favorite chair. I conclude my WallachBeth Park City Symposium notes this week by highlighting the presentation of Goldman Sachs’ Global Head of Macro Strategies, John Townsley. You’ll also find a chart I’ve shared with you previously showing what the trend in small-cap stocks is telling us about the high-yield bond market and, more broadly, the current state of the economy. And look at the Random Tweets section this week.  

Source: Bloomberg, @biancoresearch, @profplum99

 

I retweeted this next one earlier this week. 

Source: Bol, Bloomberg, Apollo Chief Economist, Game of Trades

The end of the long-term debt accumulation cycle? The world’s biggest growth challenge. By the way, the chart doesn’t include unfunded liabilities like social security and Medicare. In the US, total liabilities, including SS and Medicare, are approximately $214 trillion. The world debt number is actually bigger than what is presented in the next chart. Source: usdebtclock.org.  

The big elephant in the room is the massive leverage in the system:  

Source: Bloomberg, Game of Trades

According to Goldman Sachs, the market cap of the largest stock is now 750 times the market cap of the 75th percentile stock. 

Source: Compustate, Kenneth French, Goldman Sachs Global Investment Research, @kobeissiletter

Underloved and out of favor? Copper and commodities in general. I can’t help but hear the great Sir John Templeton’s words quietly whispering in my head, “The secret of my success is I buy when everyone else is selling and I sell when everyone else is buying.” 

Source: Bloomberg, Tavi Costa

I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep my eye on.

You can follow me on X (formerly Twitter) @SBlumenthalCMG.

“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.” 

– Charlie Munger

Notable this week:

The Fed holds interest rates steady and signals three rate cuts are coming. The Fed kept the following comment in its post-meeting statement: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

The 10-year Treasury Yield is still flirting with the 4.33% resistance line. Both the Daily and Weekly MACD signals are pointing toward higher interest rates. The Zweig Bond Model also remains in a bear trend signal with a score of minus four.

My Camp Kotok fishing friend, Jim Bianco, was on CNBC on Tuesday. He believes the Fed won’t cut interest rates this year and shares his view in a quick 3-minute video. Click here to watch the video replay. It’s worth the watch.

Jim’s view is not the consensus view, and it is not what market participants are counting on. If he is correct, the stock and bond markets won’t like it. 

The dashboard of indicators, along with charts with explanations, follows. 

About Trade Signals: 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.   

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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.

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Personal Note: March Madness

Welcome to spring. Best of luck to you and your NCAA March Madness bracket picks. I saw Oakland stunned powerhouse Kentucky last night.

Instead of watching Oakland v. Kentucky, Susan made some awesome salmon for us and her son Tyler, and we watched the U.S. National Soccer team play Jamaica.

Talent-wise, the U.S. had the edge, but they didn’t look great. Jamaica played well with a larger-than-normal number of players tucked back on defense. It was actually a tough game to watch. With just one second to go in the game, a cross was headed forward toward the goal, and the ball immediately struck the head of a Jamaican player, deflecting into the goal. We screamed, Shiloh (our dog) jumped, and the game went into overtime. The U.S. came out on top, 3-1, which means we’ll move on to play Mexico in the final on Sunday. If we play against Mexico like we did against Jamaica, I doubt we’ll be as lucky with a win.

While Christian Pulisic (our boy wonder) is the star of the U.S. team, the hero of the game is Haji Wright. Wright wasn’t originally on the roster for the game. In fact, he was at the airport, about to leave on vacation with his girlfriend and family, when he got a call from U.S. Coach Gregg Berhalter asking him to dress for the game. Another player had gotten injured, so his spot opened up. Berhalter gave Wright a few minutes to decide, and Wright soon called back with an “I’m in.” It was Wright who put two goals in the back of the net in overtime. That was fun to watch.

Susan (our ‘Coach Sue’) pointed out the “system of play” that the U.S. and many top teams in the world are utilizing today. The players position themselves in such a way as to narrow the field. This means that if you look down at a field from above, from one goal to the other, you will see most of the players compacted on either the right side, up the center spine of the field, or on the left side in a narrowed formation vs. players being spread out wide from side line to side line.

Teams with highly skilled players can shine in tight spaces. Further, if a team loses the ball, they can immediately put pressure on the opponent to quickly win the ball back. The thinking is that the narrow formation reduces the risk of an opponent’s counterattack and increases the probability of winning the ball back.

On offense, it also provides space on the open side of the field, allowing an outlet and opportunity to switch the point of attack quickly. The next time you watch a game, focus on the players that are not on the ball. It’s much like watching a football receiver run its route. For me, the joy comes in watching these players move when they don’t have the ball and how those movements can create opportunities to score.

After graduating from Penn State in 1983 and playing soccer for legendary coach Walter Bahr, I moved to Philadelphia and wanted to give back to the game. I met a guy named Biff Sturla, who ran a local soccer club. I coached with him and thought I knew everything. I think he thought I knew a lot. It turns out that I really didn’t know very much. I’ve learned much over the years and sure wish I knew then what I know now. Just that the body doesn’t seem to want to do what it could do then. I do enjoy learning from Susan.

The more you learn, the more you see just how beautiful the game is… And this is true for most sports. A quick piece of advice for all young coaches. Find a mentor, learn how to teach, stay humble, and hold on to the joy of learning.

As my old man would say, “the prize is worth the price.”

It looks like rain in the Northeast tomorrow and some sun with a high of 50 on Sunday. It’s still chilly, but Spring is here, and that is a giant happy pill in and of itself.

Good luck with your bracket(s).

Have a great week,

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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.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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