November 11, 2022
By Steve Blumenthal
“What we have been anticipating for some time is now here. It is the other side of the bubble mountain.”
– Paul Elliott Singer, American hedge fund manager, activist investor, philanthropist, and the founder, president, and co-CEO of Elliott Management.
Much has happened this week, from a CPI print that showed modest improvement in inflation and a massive one-day spike in the equity markets to the fall of a former crypto king.
Samuel Bankman-Fried, commonly known by his initials SBF, is an American entrepreneur and investor. He is the founder and former CEO of FTX, a Bahamas-based cryptocurrency exchange, and FTX.US, its U.S. affiliate. He also had managed assets through Alameda Research, a quantitative cryptocurrency trading firm he founded in October 2017.
He filed for Chapter 11 bankruptcy protection today.
Bankman-Fried’s personal assets, as recorded by Bloomberg, peaked at around $26 billion in March of this year before plunging in value from a reported $16 billion to $0 over just a few days. Yesterday, The Wall Street Journal and Reuters reported that SBF had used $10 billion in customer funds from FTX to prop up his other crypto business, Alameda Research. (Source: The Verge)
A smart friend sent me this text this morning:
Timeline:
-
- FTX blows up in Q2, creating an $8b hole caused by the Terra / Luna collapse
- SBF pretends everything is fine, and uses FTT as collateral to get money to appear solvent; he knows that CZ (Binance CEO) can end him if he ever dumped his FTT but assumes he won’t
- SBF keeps a golden boy image, doing interviews, working with regulators, and meeting politicians
- SBF tweets a bunch that people should buy FTT and plans to launch a stablecoin to get himself out of the hole
- Brett Harrison and Sam Trabucco both decide to get out before it blows up; all employees and investors are in the dark; Caroline is brought in to manage Alameda because she is the only person he trusts
- SBF accidentally pisses off CZ with his proposed regulations that would harm Binance and a Tweet about CZ not being allowed in DC
- CZ dumps FTT in retaliation and exposes his fraud
- SBF comes clean to CZ and begs for a buyout
- CZ decides the hole is too big and declines
- SBF is now on the run
I’ll try to unpack this and share more with you next week. A caveat: I am far from a crypto expert, so know that as you read. I’ll be tuning in to my friend Mark Yusko’s weekly On The Margin podcast with great interest tomorrow. Mark is a crypto guy and former CIO of the University of North Carolina endowment.
Grab your coffee and find your favorite chair. A great quarterly update letter from Lacy follows, and I spent some additional time this week doing my best to write about the state of play in the economy and markets as I see it right now. No guarantees—I could be wrong.
Thanks for reading.
(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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Dr. Lacy Hunt, Hoisington Quarterly Letter
Lacy understands the Federal Reserve rules and economic functioning as well as anyone I know. Following is his conclusion… essentially Powell will stay on the inflation-fighting course. But do read the entire piece.
Conclusion (bold emphasis mine):
The FOMC greatly damaged their credibility when they allowed inflation to race far above their target. Sadly, the deteriorating economic prospects are a direct consequence of the Fed’s failure to execute their fiduciary responsibility to the American public. Almost universally, the other members of the FOMC have supported the Fed chair’s position that low inflation is of paramount importance to deliver a rising standard of living for all. If the Fed were to abandon its commitment to the inflation target, the FOMC would suffer a major double blow to its integrity, which would be increasingly more difficult to restore as Volcker so cogently argued. Failure of the Fed to achieve its target would also have the consequence of allowing an emergent money/price/wage spiral to become entrenched, causing a dismal replay of the two-decade span from the early 1960s to the early 1980s. The Fed’s mettle will be tested because highly over-leveraged institutions will fail as they historically have done in such situations. Bad actors or their enablers should be directed to bring their collateral to the discount window or, if necessary, to the bankruptcy process rather than be given bailouts that have severely widened the income and wealth divides in the U.S. while causing the Fed to sacrifice price stability that’s so essential for broad-based economic gains. These considerations suggest that the Fed’s current stance should continue. The long-term Treasury market is in the zone of digesting the rapid inflation of the past several quarters, and future Fed rate hikes. Barring any capitulation in the determination to quell inflation by the Fed, long Treasuries will increasingly reflect the looming recession and its deflationary circumstances.
SB Here: Sadly, it really is “all about the Fed.”
Click on the picture to link to Lacy’s Q3 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).
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Random Tweets
The other side of bubble mountain. We can’t rule out this level of risk.
Always fun to listen to what Grant has to say (click on the photo to link to the Tweet):
Daniele spoke on YouTube and said, The Fed Points to Smaller Hikes but Higher Ceiling. Worth the six-minute watch.
Here are a few more notable tweets:
An interesting look at gold market bottoms and tops. For the record, I like gold.
Ben Hunt with some common sense on share buybacks:
I agree with this next chart. The 30-year bull market in bonds (yields going lower) is done. Note the brake out recently. The best guess is that when we get slowing (hard landing/recession), yields will decline back down toward the 2.50% to 3% range. If you have not yet refinanced your house or are waiting for a new mortgage opportunity. Stay ready to be ready to act. We are in a different environment now.
And let’s conclude with this… WOW!:
More Random Tweets next week. Please follow me on Twitter, where I do my best to tweet, retweet, and like what I feel is most important… @SBlumenthalCMG
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Trade Signals: The CPI Surprise, Big Picture Update
Market Commentary
November 11, 2022
S&P 500 Index — 3,956
Notable this week:
The Consumer Price Index came in lower than expected, increasing 0.4% for the month of October and 7.7% from a year ago. Dow Jones had estimated increases of 0.6% and 7.9%, respectively. I guess you call this a move in the right direction; however so slight. The markets loved the news. The S&P 500 gained 5.54%, and the NASDAQ, 7.35%. Short sellers were taken to the woodshed.
Fundamental picture:
Despite the small bright spot from the CPI, the broader picture is still on the grim side: China is in a recession, Europe is in a recession, and the U.S., if not officially in one yet, will follow soon. The global economy remains weak, and central banks are raising rates and withdrawing liquidity from the system. Inflation continues to impact almost everyone everywhere. Companies in tech and banking have announced massive layoffs in recent weeks. Mortgage rates are high, and the housing sector is slowing. Across the developed world and China, debt keeps climbing, and pension systems, in aggregate, remain underfunded and unstable. Prices in agriculture, oil, and most commodities are significantly higher.
How do inflation and higher interest rates not impact consumer spending plans and the overall growth of the economy and corporate profits? An earnings recession is up next.
It will be interesting to watch Powell’s response to yesterday’s inflation print. I believe he’ll stay firm in his inflation fight. The Fed has now hiked rates at six consecutive meetings—something it hasn’t done since 2005. The Fed Funds target rate sits between 3.75% and 4.00%, but they haven’t raised interest rates by 3.75% in a single year since the 1980s. The market anticipates another 50 bps in December and another 50 bps in Q1 2023.
Further, and importantly for risk assets, the Fed is pulling $95 billion in liquidity out of the system per month. QT is the exact opposite of QE, so I can’t see how we’ll get the same bullish market outcome that we’ve experienced over the last dozen years.
Politics in play:
The geopolitical picture is troubling. President Xi Jinping was reappointed as China’s president for a third five-year term, and his first move was to remove the last remaining Western-friendly individual from his government. China is no longer the economic engine of the world; it’s also no longer a low-cost manufacturer. Supply chains are changing. We are reshoring and friend ‘shoring our manufacturing and trade partnerships. Gas and diesel prices are up, so transportation costs, commodity prices, and other input costs must also go up. Those increased costs hurt profits. It’s the same as if you earn $100,000 yearly, for example, and everything you buy now costs more at the grocery store. You have less money left over.
My friend Jonathan Ward wrote a book titled China’s Vision of Victory, which details China’s rise in power over recent decades and its vision of a “great rejuvenation of the Chinese nation” at the purported cost of American dominance. That vision is now clear to all. A realignment of allegiances is afoot, with China, Russia, Iran, and Saudi Arabia on one side and the West on the other. Take the oil chokehold Russia has on Germany and Europe—what a strategic blunder. The war in Ukraine is tragic and seemingly far from over. Winter is near.
We have a slowing global economy with rising costs. How is this good for global trade? How is this good for profit margins? Prepare for a hard landing ahead.
Powell must win the inflation fight, and he seems postured to do it. When he does, it will reduce inflation (best guess down to 4% or 5%) and increase unemployment (rate TBD), giving Powell the cover to pivot and go back to QE. At that point, I believe we’ll have a risk-on bull market again. But we’re not at that point yet. Keep your defense on the field.
Yesterday’s sharp rally was a combination of pent-up demand for a “Fed pivot,” based on marginally better CPI (inflation) data, and a massive short squeeze. Investors positioned short the market, seeking to profit on stocks falling and quickly unwinding the short positions (if you sell a stock short at $100 per share thinking the price will decline, you hope to buy it back at a lower price—say $70 per share—and make a profit, in this case $30.) With so much money on the bearish side of the bet, any good news can exasperate the move to the upside. Algo’s and other traders can jam in buy orders and force the shorts to rush to cover their bets. That provides more buying, and when it all occurs in a small window of time, you get extreme moves. The better-than-expected CPI data and early hopes for a Fed pivot drove the type of bear market rally we experienced yesterday.
As you’ll see next, investor sentiment reached record “Extreme Pessimism.” In the Dashboard of Indicators (below if you are reading Trade Signals on the web page or clicking through for the full post with the link below if you are reading this in your email inbox), you’ll see it’s been a series of bullish green arrows for weeks.
Note for new readers: Extreme Pessimism is bullish for stocks. Extreme Optimism is bearish for stocks. The idea is to trade in the opposite direction of the majority of the crowd at extreme points, which present infrequently. Here’s a look at the historical data that supports this point. This is not a trade signal. It is more to get a feel for investor behavior/mood/sentiment.
Another measure of investor sentiment is the CBOE Put/Call ratio. It’s a real-time measure of investor betting positions. Put options go up in price when the stock market declines. Call options go up in price when the stock market gains. When more investors own puts than calls, it shows investor sentiment (bullish or bearish). Same rules as above—we’re looking for extreme readings. The following is from Schwab’s Liz Ann Sonders a few days ago—the largest bearish reading since 2008:
Keep an eye on investor sentiment, moving towards “optimism,” and also on the S&P 500 Index Daily MACD Indicator shown next. The MACD Indicator moved to a short-term buy signal the week of October 10, and it remains in a buy signal today (see the red circle low on the right-hand side of the chart). Not perfect—nothing is—but it’s pretty good.
My two cents is that the bear market bounce will be short-lived. Best guess, looking at the technical evidence, is that the equity market remains in a long-term bear market, with the trading range between ~ 4,100 on the upside and ~ 3,000-3,200 on the downside. I’ll switch my view when the long-term technical trend evidence turns from bear to bull (charts shared if you link through to the full piece). Stay tuned.
For the first time in over three months, the weekly gold indicator moved to a buy signal this week.
The Dashboard of Indicators follows next with more red than green. Note that the high-yield trend moved back to a buy signal today, November 11, 2022.
Click HERE to see the Dashboard of Indicators and all the updated charts in this week’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizons, and risk tolerances.
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Personal Note: Bar Bathroom Light
I came home uber-frustrated the other night. Normally, I can clear my head pretty easily, but that night I was having a hard time. Susan grabbed a Bordeaux and poured two glasses, and we went to our den area. Sitting in my favorite chair, wine in hand.
I closed my eyes, focused on nothing but my breathing, and attempted to recenter myself. Susan, as she often does, put on some soft music, and soon came a love song by Mt. Joy titled “Bathroom Light.” I particularly loved this part:
What a life under big stars and a good woman in charge
Got me falling in, got me falling in hard
So, come on, baby, let’s do this right
I think I like falling in love in the bar bathroom light
I don’t question it, I don’t mess with it, I just go, go grab it
Tell your friends, tell your ma that you love who they are
‘Cause someday we must return the movies in our brains
And these moments we can’t fake
Yes, the angels never leak the expiration date, so
So, come on, baby, let’s do this right
I think I like falling in love in the bar bathroom light
I won’t question it, I won’t mess with it, if it’s there, go grab it
Tell your friends, tell your ma that you love who they are
I was instantly rebooted to a happier place. (Watch Mt. Joy’s video of the song on YouTube, or listen here on Spotify.)
Up Next: Dinner with Mauldin in Dallas on November 16, 2022
Next Wednesday, I’m flying to Dallas for a business dinner with my partner John Mauldin, where we’ll talk about the economy, markets, and inflation, and answer some questions. There are always opportunities, and we’ll share a few ideas.
Thanksgiving is approaching, and all of our kids will be home. I can’t wait to tell them how much I “love who they are.”
Speaking of wine, Dad better get the wine cabinet restocked. They now know the good stuff from the average…and the good stuff is mostly gone.
Sports Update: Philadelphia Union and the Phillies (Ugh)
It was a heartbreaking Saturday evening last week. First, the Philadelphia Union lost to LAFC. We were tied 2-2, and the game went into two 15-minute overtime periods. The Union scored first and then nearly got a second goal on a breakaway. But LA’s goalie came out hard, fouled the Union sticker, and prevented a goal. That foul led to a broken leg for the LA goalie and his red card suspension from the game. Playing up a man, the Union appeared to be in control. With about two minutes remaining in the second overtime, I looked at Susan and said, “I am so happy for Jimmy.”
Jimmy Curtain is the Union head coach. Little known fact: When he retired from playing professional soccer and moved to Philadelphia, Susan was his first boss. She’d built a young-person soccer program at YSC (later renamed The Philadelphia Union Academy), and Richie Graham, the owner, had yet to find a spot for Jimmy, so he asked Jim to help Sue. They’ve remained good friends ever since.
Back to overtime. Sadly, my joy was short-lived. A minute after I expressed my happiness, Gareth Bale scored the game-tying goal that sent the MLS Championship game into a penalty-kick shootout. The Union lost.
Later that evening, my Phillies went down hard in game six of the World Series, losing to a strong Houston Astros team. Congrats to the Astros. I owe Len and Lyn dinner, and I’ll be sure to make good on that bet. And to all other readers who are Astros fans: As promised, I owe you a beer, too.
2022 World Cup
Speaking of Gareth Bale, who is one of the all-time greatest soccer players, you can watch him play for his home country, Wales, on November 21 against the USA in the World Cup.
There are eight groups in the World Cup, Groups A through H, and the top two teams from each group advance to the knockout round. We are in Group B. Go USA!
Wishing you and yours the very best.
Every forward!
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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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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