May 10, 2024
By Steve Blumenthal
“The horizon leans forward, offering you space to place new steps of change.”
– Maya Angelou
Grab your coffee and find your favorite chair. This week, I will continue sharing several high-level takeaways from the Mauldin Economics 2024 Strategic Investment Conference.
As with most things in economics, there was no collective agreement on the economy’s current or future state, but there were some interesting arguments for inflation. Louis-Vincent Gave had a particularly interesting take that I had not considered before. Sitting back, taking in the information, and assessing the probabilities was (and is) enjoyable.
Let’s jump in and do that some more.
On My Radar:
- Louis-Vincent Gave – The Argument for Inflation
- A Few Quick Observations
- Random Tweets
- Personal Note: Dream a New Dream
- Trade Signals: May 8, 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.
Louis-Vincent Gave – The Argument for Inflation
Source: April 24, 2024 – Louis-Vincent Gave, Mauldin Economics SIC2024 conference presentation.
Entering the ring from France is the fan favorite, Louis-Vincent Gave, who gave a presentation titled, “The Unfolding Inflationary Boom.” The hard-hitting rugby player didn’t disappoint. Bottom line, he said: we are not going to have a recession, and inflation is going to stay high.
Here are some of his key points:
- “Will rising U.S. interest rates break the back of the stock and commodity markets?” Gave said is The Only Question That Matters.
- If yes, higher rates will eventually “break” economic growth. Thus, one would want to buy Treasury Bonds when real yields reach 2.5% to 3%.
- SB here: “Real” means after inflation is factored in. As of April 10, 2024, the current rate of inflation is 3.5%. The current 10-year Treasury yield is ~ 4.50%. The current real yield is 1%.
- If yes, higher yields will also force governments to cut back on spending. In this case, the areas government spends money on will not do as well.
- If no, we have reached the point where the U.S. government can’t increase tax revenue. This is a problem that emerging-market countries are familiar with but not one that developed markets, like the U.S., are.
Gave argued that we’re in an inflationary world and will stay in an inflationary world. He suggested we’ll need a one-two punch to knock out inflation; raising interest rates alone won’t do it. Raising interest rates is seldom enough to break a bull market’s back in an inflationary world because nominal growth tends to go up as fast as interest rates. He noted, too, that companies and individuals can pay off their debt.
You need the first punch to weaken things, but the second one knocks you out. And that second punch could be:
- The tightening of fiscal policy (government spending), or
- A big jump in energy prices.
Capitalism is a natural deflationary force. However, today, we find ourselves in a structurally inflationary environment.
Gave cited areas of the economy most of us can see and grasp easily:
- Governments around the world are spending more than they have.
- Protectionism is rising, and the world is splitting into two sides.
- There are wars, supply chain issues, changing demographics, etc.
But he also cited several areas where the economy has structurally changed. This is where his presentation got me thinking.
- His main point was that we’re seeing a profound shift in the labor force in the Western world.
- The gig economy has grown (think: Uber, Lift, Grubhub, etc.), as has the number of “help wanted” ads.
- People working at McDonald’s, Walmart, etc., are seeing the highest wage increases.
- The increase in the wages of lower-income workers is inflationary. And they are spending.
- He said obesity, aging, and drug use are inflationary. He cited the increase in drug-related deaths. In the U.S., it has gone from 50k per year to 110k per year. To put that in perspective, the U.S. lost 70k individuals in the Vietnam war.
- As sad as that is to think about, the increase in drug-related issues has economic impacts on companies.
- Think about the workers operating heavy machinery or those hauling goods. Insurance companies require businesses to drug-test their workers. Getting low-end workers who test clean, given that the drugs stay in your system for weeks on end, and who stay drug-free week in and week out, is extremely challenging. Companies have to pay those workers multiples of what they paid them previously.
- You earn more, you spend more.
- Also driving the inflationary boom is the boom in emerging-market economies that no one expected.
- The amount of money being sent home to Mexico from the U.S. by immigrants has gone from $2 billion a month to $6 billion a month in the last several years.
- He also showed several charts highlighting the sharp increase in global trade between emerging-market countries—outside of the U.S. dollar.
- Countries are buying commodities and capital goods directly. That is a structural change.
Source: GavekalResearch
Pulling all this together, Gave argues we are in an “Inflationary Boom” cycle.
- Bonds are not a good investment in rising inflation–rising interest rate cycles.
- He suggested Energy is a better portfolio alternative than bonds.
- Commodities look to be ready to break out to new highs. The momentum in gold is impressive.
He said the U.S. equity market accounts for 70% of the total global equity market cap, yet it accounts for only 18% of global GDP. He asked, “Can 18% of global GDP account for 70% of global profits for the coming decade?”
SB here: I take issue with the above simply because it considers public equities and the earnings from those companies in the total market cap. We’ve gone from ~ 8,000 publicly listed U.S. stocks in 1996 to ~ 4,000. 87% of all jobs come from private companies, and the private company market is many times the size of the public market. Also of note is that ~ 40% of the 4,000 publicly traded companies are not generating positive earnings. My point is that the math should consider all companies in the U.S. and globally to paint the larger picture. I’ll see what data I can find and share it in a future letter. Overall, though, Gave’s point is important.
Gave concluded that we’re in an inflationary cycle, with big forces behind it that are not going to change anytime soon.
The investment implications, per Gave:
- Momentum in precious metals is strong. He said it’s hard to see what derails the move outside of a “massive China/India bust or a much more hawkish Fed.”
- He is bullish on Chinese big tech. The Chinese stock market has been crushed, and they’re giving stocks away for pennies on the dollar. (SB here: Of course, there is the geopolitical risk. It could all go poof.)
- He is bullish on energy, seeing energy beginning to pick up. He particularly likes offshore drillers, refiners, and coal (a deep value play).
- He likes EM companies (staple-oriented) and Latam bonds.
One last little bit of food for thought… As for the 2024 U.S. presidential election, Gave shared this:
Source: GavekalResearch
The views expressed above are Louis’s. Source – Louis-Vincent Gave, Mauldin Economics SIC2024 conference presentation.
His discussion about the impact of higher wages on spending and inflation and the rising costs associated with drug use was notable for me. The growing non-USD, emerging market–to–emerging market trade is a major shift from the U.S. dollar-denominated world we’ve been in for decades and must be front and center on our radars. Think: China buying oil from Russia using renminbis, not dollars. India buying oil from Russia using rupees, not dollars. If we can’t see that we’re moving to a multipolar world, our eyes are not open wide enough.
I remain bearish long-term on the U.S. dollar, which has inflationary implications for U.S. citizens and businesses.
This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Opinions are subject to change. Consult your advisor.
A Few Quick Observations
It’s hard not to buy into the economic truths supporting the hard landing–—recession view. Dr. Lacy Hunt continues to make a strong case for a nearing recession and lower interest rates, and Danielle DiMartino Booth shares a similar outlook. Both are Fed insiders. Higher interest rates and higher inflation are killing the economy. A recession will follow. In fact, Danielle believes it has already started. In some sectors, like consumer discretionary, the answer is yes. In other areas, no signs. Source: Mauldin Economics SIC2024
Felix Zulauf, for his part, sees a secular period of rising inflation and interest rates. Secular cycles are long-term cycles. His presentation was outstanding, as usual, and he shared things in a way people could better understand. In his view:
- We have had 40 years of disinflation, declining inflation rates, declining interest rates, and rising asset prices. This was a great environment for asset markets, but the game is over.
- We are moving to a world economy that is less efficient and, therefore, less productive, which means that goods and services will become more expensive.
- He said the current inflationary down cycle may run a bit further and that we may have a recession beginning sometime this year and lasting into next year. However, he says he’s not sure it will occur or to what extent (mild, deep, etc.).
- He sees more money coming from the U.S. government (from the fiscal side) and is concerned about the rising fiscal deficit, especially because we are in a war environment.
Is it possible that we’ll get a recession and persistent inflation in the shorter-term cycle (2024-2025)? Yes.
Louis-Vincent Gave argued that we are in an “Inflationary Boom” cycle.
I believe inflation is the dominant macro trend, and if this is right, investors should position accordingly. The big unknown is fiscal and monetary policy leadership, especially on the fiscal side. I don’t see either candidate as fiscally responsible. The debt and entitlement trap we are in begs for a hard solution, but we will most likely get more pixie dust (as in more economic stimulus). That’s, though that’s not going to happen in 2024.
I suspect the inflation pain will be even greater by the time the next election rolls around, and at that point, the candidates will rise in the ranks who possess the smarts and leadership skills to stop the free money insanity will rise in the ranks. Until then, we will kick the can and kick the can, overspend, and overspend, and give patchwork bailouts to all the material problems that present. Thus, we will have an extended secular cycle of rising inflation and rising interest rates.
War is an additional wild card (inflationary). And de-dollarization is real and, ultimately, inflationary. We import so many goods. If the dollar buys you less, you must spend more to get the same amount. Costs go up. Gave’s discussion highlighting the trend in trade away from the dollar in trade opened my eyes to how entrenched this trend has become.
Everyone loses to inflation. The objective is to minimize the loss and outperform inflation. My take: WATCH THE DOLLAR AND WATCH THE THE TEN-YEAR TREASURY YIELD.
I post those two Weekly MACD charts each week in Trade Signals. The dollar trend is currently higher, as is the yield trend. If you’d like a copy of the most recent post, reply to this email or email Amy@cmgwealth.com, and we’ll forward the report to you. You can also subscribe to StockCharts.com and follow them on your own. I like the Weekly MACD signal.
My wife Susan often reminds me that it’s easy to complain, and great leaders are those who encourage their team members to come to the table with solutions. In that direction, here are my suggestions:
- The environment favors active stock selection over passive, buy-and-hold, cap-weighted index investing.
- Expect a roller coaster ride in the U.S. stock market. Have a shopping list of companies that run good businesses, pay high dividends, have low leverage, and consistently grow cash flow. Look for disruptive technologies with good management, going after a very large market.
- We’ll have another major market dislocation. Be ready to buy when that occurs.
- Avoid leverage.
- Traditional bond investing won’t cut it. In a rising inflation—rising interest rate cycle, a 4.50% 10-year Treasury yield will struggle to beat inflation, and if rates rise to five, six, seven, or eight percent or higher, your principal will be crushed.
- My friend Jim Bianco presented that bonds are giving you two-thirds of the historic 8% stocks for the long-haul average annual returns. That’s not good enough, especially when there are better, higher-yielding alternatives—source: Mauldin Economics SIC2024.
- Trade bonds don’t buy-and-hold bonds.
- Consider assets that do well in inflationary cycles: Hard assets, select real estate, commodities, oil and gas, energy, metals, long-short active stock selection, multi-strategy funds, first lien senior secure floating rate private credit, specialty finance strategies.
This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Opinions are subject to change. Consult your advisor.
Random Tweets
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.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Personal Note: Dream a New Dream
“You are educated. Your certification is in your degree. You may think of it as the ticket to the good life. Let me ask you to think of an alternative. Think of it as your ticket to change the world.”
Tom Brokaw
We had a wonderful graduation celebration at Penn State last Sunday. I can never quite get over the Harry Potter–like outfits the professors and administrators wear. I do love the ritual. Penn State’s new president, Neeli Bendapudi, was particularly impressive. As the procession made its way down the center aisle to the stage, I noticed one engaging woman warmly greeting the students as she walked past them. I thought, How nice, how genuine. It was President Bendapudi.
Steve, Connor, and Susan
I’ll be in NYC next Tuesday, May 14. I’m attending the afternoon Mets vs. Phillies game, followed by a dinner with partners and clients. Oh, and I just looked at the weather for tomorrow here in Phila: sunny with a high of 63. That’s good news!
Let’s close today’s OMR with a beautiful C.S. Lewis quote appropriate for all of us: “You are never too old to set another goal or dream a new dream.”
Dream a new dream! Let’s toast to that…
Wishing you the very best,
Steve
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