October 25, 2019
By Steve Blumenthal
“Experts discern a pattern: a louder-than-usual howl against elites in countries where democracy
is a source of disappointment, corruption is seen as brazen, and
a tiny political class lives large while the younger generation struggles to get by.”
– Declan Walsh & Max Fisher, “From Chile to Lebanon, Protests Flare Over Wallet Issues,”
The New York Times (Oct. 23, 2019)
I remember reading about the Plunge Protection Team in the early 1990s. No way, impossible, not right, I thought at the time. But there were those occasional periods of suspicious trading in the futures markets. The mystery continued for years until more evidence appeared. What is the PPT? The PPT is the colloquial name given to the Working Group on Financial Markets, which was created by an executive order in 1988. From Investopedia:
Though not exactly a secret, the Plunge Protection Team isn’t widely covered and doesn’t release the minutes of its meetings or its recommendations, reporting only to the president. This behavior leads some observers to wonder if the government’s most important financial officials are doing more than analyzing and advising—in fact, that are actively intervening in the markets.
Conspiracy theorists have speculated that the group execute [sic] trades on several exchanges when prices are heading downward, collaborating with big banks, such as Goldman Sachs and Morgan Stanley in unrecorded transactions. They often point to a 1989 speech published in The Wall Street Journal by former Federal Reserve Board of Governors member Robert Heller, which suggested the Fed could directly support the stock market by purchasing index futures contracts.
How the Plunge Protection Team (PPT) Might Work
On Monday February 5, 2018, the Dow Jones Industrial Average (DJIA) experienced a drop that was twice as large as its biggest point decline in history. However, arbitrary and aggressive buying cut the decline in half in one day. On Tuesday and Wednesday of that week, stocks opened lower, and each time aggressive buying buoyed the markets. That aggressive buying, some say, was being orchestrated by the Plunge Protection Team.
Paul Craig Roberts held a sub-cabinet office in the Reagan administration. In a recent Zero Hedge post, Roberts said, “Thirty-eight years ago when I was in charge of United States domestic economic policy, the US Treasury and President Reagan believed that the purpose of economic policy was to serve the country, not Wall Street and the banks or the corporations or any of the various organized interest groups. Our idea was that policy could not be for this or that part of the economy. It had to be for everyone.”
He continued, “The Bush Republicans and Reagan’s Budget Director, David Stockman, were unable to understand the Supply-side policy. They could not get their minds out of demand-side economics. In demand-side or Keynesian economics, the purpose of cutting marginal tax rates is to increase consumer spending. As inflation was already a problem, the Bush Republicans and Federal Reserve Bank Chairman Paul Volcker thought that Reagan’s tax rate reductions would cause inflation to explode, driving up interest rates and collapsing the values of Wall Street’s stock and bond portfolios.
To restrain the expected inflation from Reagan’s Supply-side fiscal policy, Volcker slammed on the monetary brakes and caused a recession before the tax rate reductions went into effect. The deficits from Volcker’s recession were blamed on Reagan’s Supply-side policy. The appearance of the budget deficits convinced Bush Republicans that a stock market crash was in the cards. To prevent the expected crash from keeping Bush out of the White House, they set up the Plunge Protection Team to guarantee the price of financial assets.
The Team was not needed for that purpose. The success of the Supply-side policy caused inflation to fall and real output to rise despite the budget deficits. What the creation of the Plunge Protection Team did was to give the Federal Reserve enormous new powers. The Federal Reserve can now intervene in all financial markets, not merely the bond market. This intervention is never discussed in the financial press,” Roberts concluded.
To be clear, I’m in no way a fan of Paul Craig Roberts. He has a number of personal views I will never like! But I read, digest and in his recent post he is touching on an important narrative that has a growing voice. The Fed has our backs.
Within the global banking system, the Federal Reserve does not exist alone. The Bank of Japan owns 77½% of Japan’s ETFs. They have bought 23 trillion yen of their ETF market since 2013. The Fed has driven interest rates to zero percent, raised them and are likely back on the path to zero again. The European Central Bank owns assets equaling 40% of the entire eurozone economy. The Swiss National Bank is a big buyer of U.S. equities.
Maybe the world’s central banks have our backs.
“Permit me to issue and control the money of a nation, and I care not who makes its laws,” said Mayer Amschel Rothschild in 1790.
I’m concerned and would feel much better depending on the aggregate decisions of individual businessmen and women exercising individual judgment in a free economy. We are being injected with joy juice and I feel we may be falling for the “they have our back narrative.”
Hope for the stock market? Here are the big three I see today: China Trade, Fed QE and MMT:
Hope #1 – China Trade: Ultimately I believe this hope will not come true. A meaningful China deal is not in the cards. We now understand they are playing a different game. See China’s Vision of Victory. Trade wars will remain an issue, supply chains will be reoriented and in the disruption, economies will slow. Ok, we’ll rebalance and move on. Hope #1 won’t happen.
Hope #2 – Fed QE: I had a drink with the great Art Cashin at Bobby Van’s Steakhouse, next to the NYSE last Monday. We talked about the Fed’s recent announcement to inject $60 billion per month into the economy. In addition to $60 billion in Treasury bills, the Fed is buying up to $20 billion every month in a wider range of Treasury securities to replace maturing mortgage securities. “Come on, it’s QE,” Art said. Hope #2 is happening and will continue.
Hope #3 – MMT: I wrote about Modern Monetary Theory in an On My Radar piece titled, The Magic Money Tree Explained. Essentially, the Fed prints and money is used to monetize government debt, bail out student loans, bail out underfunded pensions, bail out consumer credit cards, auto debts… there is no end once you begin. A politician’s dream. We’ll print our way out. The stage is being set for Hope #3.
MMT in some form is coming over the next 10 years. It’s part of the Great Reset (debt and pension fixes). I’m not saying I like it and I’m not saying it’s responsible. I’m saying it’s coming.
Your job and mine is to navigate the cycles. In the end, we’ll have inflation. That will be a totally different investment regime. It’s nearing… and there is time to prepare.
For now, the stock market is testing new highs and all of our equity market trade signals remain bullish. Fixed income and gold signals are also positive. So party on… with plan in place.
We sit overvalued, extended and coming 10-year annualized equity market returns are in the low single-digit range. The narrative is the Fed and the PPT have our backs. We sit late bloated in debt and we sit way north of long-term trend. Trust the narrative? I don’t trust the narrative.
The belief in the narrative changes when confidence in governments and central bankers is lost. People scream, “No more.” This is a global issue and the screams are growing louder. A movement is afoot… and maybe that’s a good thing. “Experts discern a pattern: a louder-than-usual howl against elites in countries where democracy is a source of disappointment, corruption is seen as brazen, and a tiny political class lives large while the younger generation struggles to get by.”
The S&P 500 Long-term Trend
I have shared this next chart with you a few times. What it shows is that over time markets cycle above and below a long-term growth trend line. Businesses grow at a relatively predictable rate and produce a return over time. However, at times individuals bid up prices above the growth rate and at other times they panic and prices revert back to and often below the long-term growth trend. Fortunately for us, this can be measured. Stay with me, the chart is busy but you’ll get the point.
Here is how you read the S&P 500 Long-term Trend chart:
- First, the conclusion: Prior to the current reading, there were just four times since 1928 when the S&P 500 Index was far above its long-term growth trend. Those dates are listed in the middle section of the chart: 1929, 1966, 2000 and 2008. In all prior periods, bear market declines took the S&P 500 back to the long-term growth line (that is the red dotted line in the middle of the chart).
- Second, note that the index doesn’t just revert back to the growth line, it has almost always fallen below the line. Market move from overvalued to undervalued and on and on again over time.
- Third, in periods of time when the market was in the “Top Quintile” or most over extended above its long-term trend, returns are lowest over the coming five and 10 years. Note the “Not Good Enough Yet” arrows in the upper middle section of the chart.
Source: Ned Davis Research; CMG Investment Research
Look at the 2019 “We are Here” arrow. This visual is simply telling us we are late cycle and should be cautious. The stock market needs to drop from 3,000 to 2,000 to get back to trend. There was just one other time in history when the market was this far above trend. That year was 2000. More defense than offense today. More offense again when the market trades back at its long-term trend line (red dotted arrow in the middle section of the chart).
“Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process.” I shared this Peter L. Bernstein quote with you last week. It makes sense to revisit it today.
Success is understanding when the odds are tilted in your favor and when they are not. It’s about cycles, probabilities and risk management.
Grab a coffee and find your favorite chair. There is a corner in the bar at Bobby Van’s that is reserved for Art Cashin and his friends. It’s called Cashin’s Corner. Art asked me if I could point him to any information supporting buy-and-hold or reasoning against such approach. I found a few things and shared it with Art and share it with you today. I also share a fun story about Irish Caviar. A special hat tip to the great Art Cashin.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- My Note to Art Cashin
- Trade Signals – Don’t Fight the Tape or the Fed
- Personal Note – Irish Caviar
My Note to Art Cashin
Dear Art,
It was so nice to be with you again yesterday. Thanks for the Irish Caviar! Susan and I had a glass of wine when I arrived home. She asked if I was hungry. I said I ate. She almost fell over when I told her I had Irish Caviar.
You asked me for some material on market timing. There are a few readings I recommend:
- First, “Mastering the Market Cycles” by Howard Marks. I wrote about him here. In short, he says it best. He talks about how the great investors he knows are able to get the odds in their favor. That markets cycle above and below long-term trend growth and that there are periods investors should play more defense than offense and others when they should play more offense than defense. “Mastering the Market Cycles” is a must-read for every investor… in my view.
- Second, Fidelity did this study…
But the study is misleading. It is more important to miss the 10 worst days than capture the 10 best days, due to the merciless mathematics of compound interest. But neither outcome is going to happen.
Here is the link to the Fidelity report.
- This is why the often touted (by Wall Street buy side firms) study is misleading. Here is what happens if you miss the 25 best days and 25 worst days.
You can find the full article here.
My best two cents is that Howard Marks is correct. You can put the odds in your favor and there are times to play more defense than offense and vice versa. I have forever studied investor sentiment and did work with Ned Davis Research to see if we could find a systematic signal (buy when everyone else is panicking and sell when greed is palpable). Nothing was consistently viable. What does work are simple risk management rules – like a moving average rule. But not always, so one has to stay disciplined (as you well know). I post a handful of charts each week in my Trade Signals blog. My go-to is the NDR CMG U.S. Large Cap Long/Flat model. But it too is not perfect… perfect doesn’t exist as much as I sought to find it when I was in my 20s.
The reality is that 75% of the money now sits in the hands of pre-retirees and retirees. Emotion will rule reason and I fear the world of buy-and-hold investors are unlikely to stay the course. I continue to believe we sit late cycle (very late) and the market sits way above trend. But who am I to tell the master. I know you have forgotten more than I may ever know.
Mastering the market cycle… If this next chart doesn’t help shape the risk-return odds, I don’t know what will. [I shared the S&P 500 Trend Chart above and re-share a version of it below.]
We all need to buckle up and be mentally prepared.
Source: Ned Davis Research; CMG Investment Research
Finally, what is perfect is time with you. Thanks for sharing your fun stories and jokes. Great being with you at “Cashin’s Corner.”
With great admiration!
Your friend,
Steve
Trade Signals – Don’t Fight the Tape or the Fed
October 23, 2019
S&P 500 Index — 2,996
Notable this week:
One signal change since last week’s post: the Don’t Fight the Tape or the Fed model moved from a bullish +1 reading to a neutral “0” reading. The following data reflecting the hypothetical gain per annum for the S&P 500 based on the model score. Readings of +1 and +2 are best. These indicators are a combination of a Ned Davis Research (NDR) Multi-Cap Tape Composite and the 10-Year Treasury Yield. In simple terms, when the weight of trend evidence for the market is favorable, the market tends to perform best and the trend in the yield on the 10-Year Treasury note is trending lower (below its 70-week trend) stock markets tend to perform best. When the reverse is true, the stock market performs worse. The idea here is that the wind is at your back when scores are +1 and +2 and it is harder to move forward when the wind is in your face (scores of -1 and -2). The current reading is neutral.
What are the latest charts telling us about the trend in the equity, fixed income and gold markets? The weight of trend evidence for the U.S. equity, high quality fixed income and gold markets remains bullish. Extreme investor sentiment also supports the bullish trend. The High Yield bond signal has moved back to a buy signal. There is no change in the recession watch data. Finally, I asked NDR for permission to share their Value vs. Growth model. Recall in 1999 how heavily investors were positioned into technology and other growth oriented stocks (especially tech). No one was interested in value-oriented stocks. That all changed in 2000 and, for the next 10 years, value considerably outperformed growth. I like to keep an eye on this next chart. Focus in on the bottom section. When the model reading is in the “Model Favors Value Index” zone, returns for value indices are almost 50% better than returns for growth indices (using the S&P 500 Citigroup Value and Growth Indices). When the model reading is in the Model Favors Growth Index zone, growth stocks have historically done best. Zero in on the data box in the upper left hand section of the chart.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
Personal Note – Irish Caviar
Time with Art Cashin is priceless. He’s humble, smart and has seen just about everything in his nearly 60 years on the floor of the New York Stock Exchange. For many years, Art has been the person who helps the floor brokers and specialists resolve trade disputes. Always asking, “What is in the best interest of your client?” And for the world, when crisis hits, the financial media turns to Art. He’s always calm, always balanced.
Now if you don’t know Art, he is full of fun stories and knows more jokes than anyone I know. As we talked, he ordered Irish Caviar. I quietly thought to myself, “There is no way I’m eating that.” A few minutes later John, the bartender, showed up with a few dozen Pigs in a Blanket – small hot dogs wrapped in pastry, dipped in mustard… yum. I have to say I love Irish Caviar. And I sure do love Art.
The weather looks excellent in Philadelphia tomorrow. The leaves are falling and the colors are bright orange, red and are just beautiful. Fall is my favorite time of year. Golf is on the schedule for tomorrow with a close friend and Penn State plays at 3:30 pm. I’ll be watching.
I may just have to find me some Irish Caviar to go with a cold IPA. A shaky win last week over Michigan leaves my Nittany Lions at 7-0 and ranked 6th in the country. Two big games remain, Minnesota and Ohio State. The latter is the biggest challenge. At the end of the season, the top four teams make the football playoffs giving them a shot at the national championship. I’m a probability guy and let’s just say Ohio State is really good this year. Ever hopeful, my fingers are crossed.
Imagine a stadium full of 110,000 people after hours of tailgating. It’s a non-stop, upbeat, music blasting, rockin’ fun party. This YouTube video recorded by a student gives you a feel for the fun. Yes, I’m biased but hey, why not… (I can just see Susan rolling her eyes at me now.)
Thanks for indulging me. Enjoy your weekend… and do something fun for you!
Warm regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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