March 5, 2021
By Steve Blumenthal
“No generation has a right to contract debts greater than can
be paid off during the course of its own existence.”
– George Washington to James Madison (1789)
New week, same poker game. Powell studied the table and played his hand. I hold, he said. No change in the Fed’s asset purchases to tackle the recent jump in yields. The 10-year Treasury yield spiked to 1.53%.
The others expected Powell to step up the Fed’s purchases of long-term bonds. That buying would push down interest rates. We all know: He’s all in.
Do you read Ben Hunt’s Epsilon Theory? If not, take a look. He’s smart, witty, and one of the really good guys. This, from Ben:
The thing that moves markets isn’t what you believe or what everyone believes … it’s what everyone believes that everyone believes. It’s common knowledge.
Today’s common knowledge is that inflation is a problem.
In 2008, the US housing market––together with a Fed that thought the subprime crisis was “contained”––delivered the mother of all deflationary shocks.
In 2021, the US housing market—together with a Fed that thinks inflationary pressures are “transitory”—risks delivering the mother of all inflationary shocks.
From Epsilon Theory, March 3, 2021:
Every morning, we take the previous day’s financial news––all of it––and run it through the Narrative Machine to see if any interesting clusters pop out as a topic for us to write about in one of these quick Zeitgeist notes. And when I say clusters, I literally mean clusters––the building blocks of a graphical representation of linguistic connectivity.
But when I say clusters, what I really mean is patterns. I really mean changes in the narrative structure.
We’re not doing this to learn new facts. We’re not really interested in the specifics of what people are saying. We are very interested, though, in how people are saying it. We’re looking for changes in how we talk about what is important in markets and investing.
We’re looking for changes in the water in which we swim.
That water is changing today. It’s changing a lot.
Common knowledge is that inflation is coming. Common knowledge is that Powell has the strongest hand.
In 2008, Fed Chair Alan Greenspan thought and most everyone thought he had the strongest. When it comes, it will be inflation and rising bond yields that calls his bluff.
A pretty good poker face.
Fed Chair Jerome Powell
Powell spoke yesterday (3-4-21), and the markets didn’t like his response…
Dow Sinks and Treasury Yields Spike on Powell’s Inflation Comments… Stocks end sharply lower as Wall Street focuses on comments about inflation from Federal Reserve Chairman Jerome Powell. Source: Street.com
Stocks Selloff Accelerates After Powell’s Comments… A dayslong selloff in the stock market intensified and Treasury yields jumped Thursday as the latest comments from Federal Reserve Chairman Jerome Powell did little to assuage fears about the recent rise in yields. Source: WSJ
Fed Chairman Powell says economic reopening could cause inflation to pick up temporarily. Source: CNBC
Powell Confirms Fed to Maintain Easy-Money Policy… Fed chairman says economy is far from employment and inflation goals; he gives no sign the central bank would seek to step rise in Treasury yields. Source: WSJ
Inflation is kryptonite for bonds.
If you are looking to bail out debtors, inflation is a good thing. And it can be good if you own inflation assets such as real estate and commodities. It can be a positive for certain equities. But it is a very bad thing for the large segment of population living paycheck to paycheck, for the divide between the haves and the have nots. Overall, inflation isn’t a very good thing.
John Mauldin and I had a call this week with the Chief Investment Officer of a $60 billion endowment. He’s also teaching leadership to the generation, who will need to help us clean up the mess their predecessors helped create.
For global macro geeks like us, it was one of those moments when you hang up the phone intoxicated by a chance encounter and the knowledge shared and gained. In short, our new friend sees bubbles almost everywhere, challenges for fixed income investors, and the likelihood of an investment environment favoring assets that do better during inflation regimes.
We are at the opposite end of the “Whip Inflation Now” game plan Fed Chair Paul Volker executed in late 1970s and early 1980s. That was forty years ago. I was 19. Treasury yields peaked at 15%. They bottomed below 0.50% last year. The fight today is not inflation. It is deflation. And the weapons to fight it are likely destructive to the U.S. dollar and inflationary in form. Volker won. I believe Powell will win, too.
My new friend and his team foresee an inflationary regime ahead. That’s bad news for bonds, it’s bad news for the large institutions like big insurance company portfolios, pension plans, and endowments that have relied on the return and stability bonds have provided. (Notes: In this regard, small investors have the upper hand over large institutions—source niche well collateralized short-term private credit lending funds. Mid- to high-single-digit to low double-digit-like returns exist. Too small in offering sizes to move the return needles for the big funds.)
Here is my friend Ben Hunt’s U.S. Equity Narrative Map at last month’s end:
Source: Epsilon Theory
Trade bonds. Don’t buy and hold. I believe one needs to lean on good timing systems with the knowledge that none of them are perfect. The Zweig Bond Model and our inflation models are currently flashing red. See the Trade Signals section below.
Our friends David Rosenberg and Dr. Lacy Hunt argue for deflation and lower rates.
If you’ve got the contrarian chops, a Rosie-Lacy-Shilling-Minard bond-bull trade is setting up nicely. But it’s a short-term trader’s market for bonds. I could be early, but it’s safe to say the bond market is a broken asset class and there are better places to look to improve the return/risk characteristics bonds have historically provided.
Dead? broken? This poker game will go on long into the night.
Let’s take another quick look at interest rates…
I often hear that rates don’t matter for stocks. Since 1965, the data is pretty clear that they do. I shared this chart with you last week. It updates every Friday evening and following is the most recent, dated 2-26-21. It measures the rate of change in the Moody’s Baa Bond Yield. It’s not the level per se, but the speed of the ascent.
Here’s how to read the chart:
- A move above the upper dotted line (middle section of the chart) occurred last week.
- I’ve inserted red arrows to mark other examples of sharp rate increases (the upper and lower arrows match in terms of dates in time.)
- The bottom data box plots the market’s return history based on the rate of change in rates.
Last Friday’s close triggered a sell. When I shared it with you a week ago, it was in the -3 to 6 zone. It’s now above 6. Mr. Interest Rate, in dark shades and ball cap pulled to just above his eyes, is laser focused on Powell, while coldly tossing a few more chips on the pile.
At tables 2, 3, 4, 5, and 6, a similar game is being played. Interest rates are rising globally:
If you have some time this weekend, check out the podcast I did with Steve Cucchiaro from 3EDGE Asset Management. Steve is MIT- and Wharton-educated and has an outstanding performance record since 1994. CNBC’s Bob Pisani called Steve “the most successful ETF strategist ever.”
We talked about what his models are telling him, where he’s seeing opportunity, and how he is positioning globally. I hope you gain a few insights. Put your sneakers on and get out for a walk. Plug in and click below for the 35-minute discussion.
Trade Signals follows next. We take a look at the weight of evidence for the global equity markets. Hint: It’s still bullish.
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Trade Signals – A Short-term Look at the S&P 500 Index and a Long-term Look at Global Equities
March 3, 2021
S&P 500 Index — 3,881
Notable this week:
Short-term weakness in the S&P 500 Index. Support at the 50-day moving average line is being tested (red line). A MACD sell signal was triggered in the third week of February. If we are experiencing an overdue correction, a likely target is in the 3500 to 3550 support area (thin red horizontal line). With interest rates rising, stocks are under pressure. The intermediate-term trade signals I share with you each week, including the Ned Davis Research CMG U.S. Large Cap Long/Flat Index remain bullish.
Both the U.S. stock market trend and momentum remain bullish on an intermediate-term and long-term trend basis. See “Trade Signals — Dashboard of Indicators” below.
Foreign readers often ask me why Trade Signals is U.S. market focused. Today we are all global investors and one of my favorite global ETF investors is a strategy up on the shelf on CMG’s platform. A bit of a “shame on me” for not broadening the Trade Signals dashboard to include the global markets. I’ll get to work on that.
In this direction, I often I take a look at NDR’s “Bear Watch Report” that has a hypothetical history of being reliable in turning bearish before double-digit declines in the MSCI All Country World Index. The report looks at 10 indicators, including global stock momentum, global stock market and breadth, the percentage of ACWI markets at 252-day new lows, direction of advance/decline lines, volatility as measured by VIX, world stock market volatility, and a global investor sentiment composite. Bearish signals are generated when five or more of the 10 indicators turn bearish.
With permission, Ned Davis Research allowed me to share their summary chart with you. Note the vertical dashed lines. They indicate points in time when the percentage of indicators in the Bear Watch Report was 50% (5 of 10) or greater. Middle section plots the score in red. Upper section reflects decline in the MSCI World Index after 5 or more of the 10 indicators turned bearish. A collective weight of evidence signal approach. There have been nine cases since 1985.
Bottom line: The Bear Watch Report remains bullish.
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 – A Better Day
I usually click on Instagram to follow my kids. I also follow someone named Jon Gordon, who authored a book called The Hard Hat: 21 Ways to Be a Great Teammate. The Hard Hat is an unforgettable true story about a selfless, loyal, joyful, hard-working, competitive, and compassionate lacrosse player named George Boiardi, who got hit in the chest with a lacrosse ball. The impact of the hit was so hard, it shut down his system. He passed away.
My wife Susan’s friend Lauren Gallagher co-wrote a book with Gordon called, The Hard Hat for Kids. It’ describes ten ways to be a great teammate.
Once a season, one freshman on the Cornell University lacrosse team wins the Hard Hat Award. It’s a real honor for the winner, recognizing their role as a team player and a great leader.
I sat in the back of the room a few years ago when Lauren presented to Susan’s young soccer players. Eyes glued forward… a wow moment for the kids, and a happy moment for me.
Jon Gordon posts positive messages frequently. Looking at my Instagram app last night, I particularly liked this one:
5 Ways to Make Today a Better Day
- Look for the good.
- Appreciate the little things.
- Be a helper.
- Tell someone they matter.
- Give more than you take.
I’m going to make a few phone calls with number 4 in mind. I don’t think I’m doing that enough. Thanks for reading, I appreciate the time you share with me each week. You matter!
Have a great week,
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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