April 28, 2023
By Steve Blumenthal
“It’s always about the Fed. It’s always been about the Fed. It will always be about the Fed. Don’t fight the Fed.”
“It’s liquidity that moves markets…”
– Stan Druckenmiller
US stocks rallied yesterday after a strong round of corporate earnings helped reverse a selloff earlier this week. The S&P 500 rose 2%, the Dow Jones Industrial Average rose 1.6%, and the Nasdaq Composite rose 2.4%. Stocks are higher again today.
The Fed’s preferred inflation measure came in hotter than expected at an annualized rate of 4.9%. The industry consensus is that the Fed will increase interest rates again when they meet next week. That pretty much sums up the week and gives us a feel for the short-term micro picture.
But where are we going? Today, let’s zoom out and look at the global macroeconomic and geopolitical picture to see where we sit in the cycle and how we might want to position assets.
Before we jump in, I want to come back to a quote from one of the world’s most successful investors, Stan Druckenmiller, who is famous for his successful track record managing the Duquesne Capital Management hedge fund. He is credited with making several prescient calls in the markets, including predicting the tech bubble burst of the late 1990s and the housing market crash of 2008.
I opened the newsletter today with one of Druckenmiller’s most famous quotes: “It’s always about the Fed. It’s always been about the Fed. It will always be about the Fed. Don’t fight the Fed.” This quote speaks to Druckenmiller’s belief that the actions of the US Federal Reserve have an outsized impact on the stock market and the economy as a whole.
He’s also famously said, “It’s liquidity that moves markets,” which refers to his belief that the Fed’s monetary policy decisions—such as interest rate changes and quantitative easing programs—have a significant impact on the amount of money available in the financial system. This, in turn, affects the price of assets such as stocks and bonds. In short, he’s suggesting that investors should pay close attention to the Fed’s actions and their impact on liquidity in the financial system.
I enjoy reading a great deal of market research—some for which I pay a lot of money (my research budget is ~$100,000 per year), but much of which is available for free to you and me. I find Twitter distracting, addicting (I’ve got to work on this), and at times helpful—a valuable nugget of insight found here and there. However, I prefer to listen closely to the thoughts of those with skin in the game, like Druckenmiller, Ray Dalio, Dr. Lacy Hunt, Jim Bianco, Felix Zulauf, Peter Boockvar, Barry Habib, Howard Marks, Seth Klarman, and Paul Tudor Jones, among others.
No one has more skin in the game than Bridgewater Associates, one of the world’s largest and most successful hedge funds, founded in 1975 by Ray Dalio. The company manages over $150 billion in assets for institutional clients, such as pension funds and endowments, and is known for its unique investment philosophy based on a systematic approach and a culture of radical transparency.
The firm has been recognized for its innovative thinking, advanced technology, and rigorous risk management practices. Dalio has long been a prominent figure in the financial industry and has authored several books, including Principles, in which he shares his principles for management and investment.
I greatly admire Bridgewater’s work. If I was ever asked to be a fly on the wall of one of their investment committee meetings, I’d jump at the offer (Except I’d much rather be a person than a fly). I’m sure I’m not alone in that. For me, it’d be like getting an invite to play golf at Pine Valley, Augusta National, or Cypris Point. Well, consider it my lucky day (and yours, too) because Bridgewater’s CIOs have been willing to share the research from their most recent meeting.
Here’s what they shared in a post on April 14 titled, “An Update from Our CIOs: The Tightening Cycle Is Beginning to Bite,” by Bob Prince, Greg Jensen, and Karen Karniol-Tamour. (For the full post and important disclosures, please visit Bridgewater’s website at the link.)
In the post, to determine what comes next, they consider short-term and long-term cycles, the levels of economic conditions and market prices, and the changes in policies and conditions along the way. And, importantly, liquidity!
From the CIOs:
“The cycle diagram below illustrates the typical sequence of changes pertaining to expansions and contractions of liquidity that drive near-term changes in economic conditions and asset pricing. As shown, across most of the developed economies of the West, tightening’s of monetary policy have reversed the flow of liquidity and driven money from assets to cash. That tightening has driven up discount rates (i.e., the discounted real yield of cash) but so far hasn’t had much impact on risk premiums or growth. That is likely what comes next.
(SB here: walk your way around the liquidity cycle and note the blue and red arrows. Bridgewater’s assessment of where we are today.)
What I really like about this next chart is how Bridgewater has mapped out how asset prices (the center section of the chart depicting equities and bonds) perform at different points in the liquidity cycle. I’ve inserted the blue arrow (US, UK, and EUR) and red arrow (China, Japan, Asia) to provide an estimated guess as to where we are in the cycle.
Bottom line: We sit at a negative point in the liquidity cycle for equities (Equities –) and a positive period for bonds (Bonds +). When interest rates move lower, bond prices move higher. Looks like a “Bonds +,” then “Bonds ++” period ahead for the US, UK, and Europe.
If my recession prediction for the fall of this year is correct, the blue arrow will move down, signaling a good point in the cycle for equities (Equities +) and a more bullish period for bonds (Bonds ++). Liquidity improvement means the Fed will cut rates and restate QE. That will be initially good for bonds because the positive message hidden within the weakening world economy is that inflation rates declining further will eventually set the condition for central banks to improve liquidity.
The big-picture conclusion is to favor the bond trade over equities in the US, UK, and Europe. Growth is clearly slowing, as reflected in yesterday’s 1.1% annualized GDP growth rate report. Yet, the Fed won’t begin to cut rates until inflation falls. In my view, we’re on the back end of inflation wave number one, but there is not yet enough evidence to prevent the Fed from tightening the screws another notch. I predict we’ll see a series of inflation waves over the course of the decade. Of course, we’ll continue to look for supporting data, as my view could be wrong.
In contrast to the US-UK-Europe situation, Japan, China, and much of the East are in the opposite stage of the cycle, wherein policymakers are supporting the flow of money and credit, which lowers discount rates and risk premiums and supports growth.
The Bridgewater Associates CIOs believe that there are three major equilibriums and two major policy levers that interact to drive markets and economies. They tied states of equilibrium to asset class performance. I particularly liked the following chart.
Investing is about looking 6 to 18 months ahead, and the Bridgewater Associates’ “Liquidity Cycle” chart provides a good visual of where we currently sit and where we are likely to go. This is as good of a roadmap as I’ve ever come across. Keep it top of mind.
However, there is more to factor into the equation. Over time, a series of short-term debt cycles grow to become a very large long-term debt accumulation problem. When too much debt is accumulated, it impedes growth and ultimately becomes unmanageable. At that point, some form of debt restructuring must occur. They tend to occur approximately every 75 years (give or take a plus or minus 25 years, according to Ray Dalio). There have been many examples of this throughout history—including the last one in the US, which was in the mid-1930s. Most of us have not lived through one.
The problem’s been growing, and massive debt infection exists in the bulk of the developed world. We may kick the can a few more times, but sometime in this decade, we’ll be forced to restructure our debt. And, of course, we must keep in mind the growing geopolitical challenges.
Ray Dalio wrote this week a piece titled, “Where We Are in the Big Cycle: On the Brink of a Period of Great Disorder”. It’s an excellent and important post.
So, grab your coffee and find your favorite chair. In addition to the link to Dalio’s “On the Brink” post, you’ll find a link to the Bridgewater Associates CIOs investment committee summary and source link.
I hope you find this information as helpful as I did. Thanks for reading—I so appreciate the time you spend with me each week.
Here are the sections in this week’s On My Radar:
- Where We Are In The Big Cycle: On the Brink of a Period of Great Disorder
- The Tightening Cycle Is Beginning to Bite
- Defining Current Account Deficit
- Trade Signals: The HY Market Canary Just Rolled Over
- Personal Note: Austin, Texas, Penn State, and NYC
(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.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Where We Are In The Big Cycle
By Ray Dalio:
“A year and a half ago, when I put out my book Principles for Dealing with the Changing World Order and an animated video of it, I described the five big forces that have driven and are driving just about everything:
1) the credit/debt/market/economic cycle,
2) the internal peace/conflict cycle that shapes the domestic order,
3) the external peace/conflict cycle that shapes the international order,
4) acts of nature (e.g., droughts, floods, and pandemics), and
5) human inventiveness/technology.
I explained how these interact together to drive just about everything in what I called the “Big Cycle” and how lessons I learned from studying history led me to believe that we are on a path toward a period of great disorder that includes financial turbulences and great conflicts within and between countries.” – Ray Dalio Source.
SB here: Let’s begin with Ray’s conclusion (bold emphasis in the quote is mine):
“I agree that history has shown that the pursuit of self-interest has proven to be a more powerful force than the pursuit of collective interests and that there is a good chance that movement to higher-level thinking and better outcomes is unlikely, so we also should be prepared for the worst. If we are prepared for the worst, we will be fine.”
Summary of the Big Cycle
Over the last several years, I observed a number of big forces happening in magnitudes that never existed in my lifetime but that had existed in these magnitudes during the 1930-45 period. This drove me to study the rises and declines of reserve currencies and the countries behind them over the last 500 years and the rises and declines of China’s dynasties over the last 2,000 years, which led me to see that the same things happen over and over again for pretty much the same reasons and to make a model of these changes. Based on a) my model for how the “machine” works, b) my measures of where things now stand, and c) the momentum behind these measures, the existing world order is on the brink of three to five painful seismic shifts that, if they happen, will disrupt domestic and world orders in ways that we have never seen in our lifetimes but have happened many times before in history.
Click on the photo to go to the full post:
(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.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
The Tightening Cycle Is Beginning to Bite
April 14, 2023, Bob Prince, Greg Jensen, Karen Karniol-Tambour
Last year’s historically large and rapid tightening is starting to constrict the financial system and slow the economy. This is necessary and will need to be sustained to restore equilibrium conditions.
The tightening cycle began roughly one year ago. It takes about that long for a tightening to have significant economic impacts, and signs are emerging that the effects are now spreading and deepening. Damage to the banking system is a manifestation of the tightening and is now likely to be a contributor. Economies rely on the steady flow of liquidity from cash and credit to assets and spending. This liquidity pipeline runs from the central bank as the originator, through the financial system as an intermediary, to the markets, and finally to spending and income. The combination of central banks raising interest rates and draining reserves with banks experiencing more constrained deposit and capital conditions and now tightening credit standards is very likely to constrain the flow of money and credit to markets and the economy, with impacts on spending and income. Manifestations of this are now showing up in the data, as we’ve described in recent research.
This is an excellent road map to investment positioning. Click on the photo to go to the full post:
Source: Bridgewater Associates
(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.)
If you are not signed up to receive the free weekly On My Radar letter, subscribe here.
Defining Current Account Deficit
In the Bridgewater piece, they discuss the Current Account Deficit. I thought I’d define if for you in case this is something you don’t fully understand.
A current account deficit occurs when a country imports more goods, services, and capital than it exports. In other words, it means that a country is spending more money abroad than it is earning from its exports and foreign investments.
The current account is a part of a country’s balance of payments, which is a record of all financial transactions between that country and the rest of the world over a specific period. The current account measures the flow of goods, services, and investment income between a country and the rest of the world.
The current account deficit can arise for several reasons, including:
- Trade imbalances: If a country imports more goods and services than it exports, it can lead to a current account deficit. For example, if a country has to import a lot of oil or raw materials, it can drive up its import bill.
- Capital inflows: If a country attracts a lot of foreign investment, it can lead to a current account deficit. This is because foreign investors bring in money that is used to buy goods and services, and the money is counted as part of the current account.
- Exchange rates: If a country’s currency is strong, it can make imports cheaper and exports more expensive, which can lead to a current account deficit.
A current account deficit can have both positive and negative effects on an economy. On the one hand, it can be a sign of economic growth and development, as it indicates that a country is importing more goods and services to fuel its economic expansion. On the other hand, a persistent current account deficit can be a sign of economic vulnerability, as it means that a country is relying too much on foreign financing to sustain its economic growth.
In the short term, a current account deficit can be financed by borrowing from abroad or by selling assets to foreign investors. However, in the long term, a persistent current account deficit can lead to a buildup of foreign debt, which can make a country vulnerable to external shocks and crises.
No Random Tweets this week. Rushing to finish the post, and my edit team is waiting—more next week.
(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.)
If you are not signed up to receive the free weekly On My Radar letter, you can subscribe here.
Trade Signals: The HY Market Canary Just Rolled Over
Several weeks ago, I wrote about keeping an eye on the HY bond and Small Cap equity markets. I have two indicators I favor, and both rolled over this week. It was the subject of this week’s Trade Signals post. I have no idea of knowing if this is THE signal, but it has been ten months since the yield curve inverted, inflation remains problematic, and banking jitters are a legitimate economic threat; our lights should be on.
If you are a Trade Signals subscriber, click on the “LOGIN” link below to view the most recent post. If you are not yet subscribed, you can join the Trade Signals tribe by clicking on the SUBSCRIBE link below. The cost is approximately the same as two Starbucks lattes each month. Hope you consider joining. Please email me at blumenthal@cmgwealth.com if you’d like a sample of this week’s Trade Signals or have any questions.
About Trade Signals
Trade Signals provides a weekly snapshot of current stock, bond, currency, and gold market trends. We provide a summary of technical indicators to help you identify where we sit in short, intermediate, and long-term cycles. We track important valuation metrics to determine the probability of future returns (i.e. when return opportunity is best/least). Trade Signals also tracks investor sentiment indicators and economic and select recession watch indicators. Trade Signals is now a low-cost subscription service, about the cost of two Starbucks lattes every month. You can find the archive of weekly Trade Signals posts (2008 through 2-15-23) by clicking here.
100% Spam-free. No list sharing. No solicitations. Opt out anytime with one click.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
Not a recommendation for you to buy or sell any security. For information purposes only. Please discuss needs, goals, time horizons, and risk tolerances with your advisor. Investing involves risk. You can lose some or all of your money.
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here.
Personal Note: Austin, Texas, Penn State, and NYC
The forecast for Philadelphia this weekend includes rain with temperatures in the high 50s, but it will be sunny and warm in Austin, Texas. Thankfully, I’m headed there, flying out early tomorrow morning to join my good friends Joe Q and John M and their advisor team for their firm’s annual gathering. A few years ago, we went to Bandon Dunes to play golf together, and once a year, they come to join me at Stonewall, where we stay in the cottages on the course—two days of golf, brainstorming, and great fun.
The conference starts Saturday night with a trip to a local winery for dinner. Meetings follow on Sunday and Monday; then, I race home on Tuesday morning to attend a charity event for cystic fibrosis hosted by a very good friend.
Monday begins the Mauldin Economics Annual Strategic Investment Conference, which will play out over five alternating days (May 1, 3, 5, 7, and 10). The lineup is exceptional. I’m particularly interested in listening to what Neil Howel has to say. He just released his book; The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End. You can find it on Amazon.
Other speakers include David Rosenberg, Dr. Lacy Hunt, political strategist and pollster Dr. Frank Luntz, Ben Hunt, Howard Marks, Jim Bianco, Peter Boockvar, real estate expert Barry Habib, Steven Roache, Britt Harris, Grant Williams, Felix Zulauf, Karen Harris, Danielle DiMartino Booth, William White, and others.
You can get your virtual pass here. All the sessions are recorded and transcribed for later viewing and reading. (Note: I have zero affiliation with Mauldin Economics and am not compensated in any way if you subscribe to attend the virtual conference.)
I want to thank my good friend Wade for the $2 he handed to me following an exciting match that concluded on the 18th green. I’ve stored it in my bag to hand it back to him at some future date. That’s pretty much how it goes. The time together is priceless.
I’m heading to Penn State for a screening of my son Kyle’s short film titled, Pray for Me. It premiers May 6. He wrote, directed, and acted in the film, and I couldn’t be prouder. I’ll follow that up with a trip to NYC for meetings and dinner on May 9.
Hope this note finds you happy and well. Enjoy your week.
Kind regards,
Steve
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
If you are not signed up to receive the free weekly On My Radar letter, you can sign up here. Follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.
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.
Investing involves risk. 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.