December 1, 2023
By Steve Blumenthal
“Take a look at the prevailing view before every major inflection point, and it has always been wrong.”
-Jamie Dimon, CEO of JPMorgan, speaking with Andrew Ross Sorkin at the November 2023 DealBook Conference
December 1. Hard to believe. Time is moving much too fast. Chin up, Steve. Ever forward…
Next week, I have the absolute pleasure of hosting a podcast with Felix Zulauf. I’ve been a subscriber to Felix’s institutional research service for years, and I must say, his grasp of the macro system is exceptional.
Zulauf is the Founder and CEO of Zulauf Consulting, a boutique research and consulting firm that offers investment advisory services to institutional investors and family offices. He has over 40 years of experience in financial markets and asset management and has served as a member of the Barron’s Roundtable for 30 years. He started as a trader with Swiss Bank Corporation in the early 1970s and received training in research and portfolio management thereafter with several investment banks in New York, Zurich, and Paris. Felix joined UBS in 1977 as a Portfolio Manager of global mutual funds; he subsequently became the company’s Global Strategist in 1982 and the head of the institutional portfolio management group in 1986. In 1990, Felix founded Zulauf Asset Management AG based in Switzerland. He then sold the majority of the firm in 2009 and spun off a family office. Today, he manages his family wealth.
This week, Felix presented his macroeconomic and investment outlook to his institutional clients. I listened intently. Some consider Felix a pera-bear, but that has not been my experience. He recently turned constructive on the stock and bond markets and expects a rally into Q1 2024. What he is always focused on is wealth preservation. We should all be aware of what might trip us up. Inflation has been and continues to be one of the most important, if not the most important, concepts we need to understand and get right.
For this reason, the following chart from Felix’s presentation stood out to me. Bloomberg superimposed the current trend in inflation (orange line) over the trend from 1966 to 1982 (blue line). If we are on the backend of inflation wave #1 (where the orange line stops), as I believe we are, what are the probabilities and implications of wave #2? What gets us there? What key indicators do we need to watch for? Probable timing?
If we follow along the path of the blue line, we’ll have a larger inflationary problem than the one we just experienced. This is not a 2024 problem; it is a 2026 or 2027 problem, maybe even 2028. I believe the trigger will be resetting the debt and entitlement obligations—Mauldin’s “Great Reset” theory. The hard truth is that there are very few ways out of the debt crisis. One is to buckle up, roll back entitlement benefits, cut back government spending, and increase taxes. But who’s going to vote for the candidate that promotes that idea? The most probable route is that governments choose to inflate their way out, meaning more QE, printing more money, and buying (monetizing) the debt. That is what will create wave #2. I’m interested in Felix’s thoughts on this, the probability and possible timing of this occurring, and the possible solutions he sees.
As for now, markets are calming down. It was an excellent month for stocks and bonds, in particular. The 10-year peaked at 4.99% and declined to 4.25% this week. Both the 10-year Treasury Weekly MACD (a momentum indicator) and the Zweig Bond Model are bullish, signaling lower yields and higher bond prices. All of this has happened on the heels of more favorable inflation and jobs data. With full faith in the Fed, investors believe the economy is on the path to a soft landing. A familiar drumbeat that preceded nine out of the last ten recessions. To me, it feels like 2008 all over again. I vote hard landing.
In his presentation, Felix showed a Bank of America chart that surveyed fund managers, asking if they believed there would be a “soft landing / no landing” or “hard landing” in 2024. 74% voted for soft or no landing, while 26% voted for hard landing. Felix then quoted the great Bob Farrell, “When all the experts and forecasts agree, something else is going to happen.”
I’ll rewatch the presentation and review my notes this weekend in preparation for my podcast interview with him next week. If you have any particular questions you’d like to ask Felix, email me at Blumenthal@cmgwealth.com, and I’ll try to weave them into our discussion. I look forward to sharing it with you in next week’s On My Radar.
Zulauf Podcast Discussion
Ultimately, investing is about positioning. My plan for our conversation is to start with the conclusion—how Zulauf believes investors should think about investment positioning—and walk through the key pieces we should track to understand why.
We’ll discuss:
- Investment positioning for the period ahead
- The inflation cycle
- Geopolitics, conflicts, and volatility
- Neil Howe’s book The Fourth Turning Is Here
- The debt and entitlement challenges, including systemic risks and timing
- The soft landing vs. hard landing debate
- US bond market trends and the direction of interest rates
- Stock market trends and the current outlook
- Human behavior
- Technical trading tools, like the MAC
- Conclusion – Investment positioning for the period ahead
Grab that coffee and find your favorite chair. It was an interesting week at the DealBook conference. Elon Musk lost his mind. Andrew Ross Sorkin navigated the riff as well as he could. I’ll hold back on my massive disappointment/disgust in Elon for now. The Jamie Dimon interview, however, is worth watching. He’s got an inside view of every segment of the global economy, and at the moment, he’s cautious. As he described it, the economy is coming off of a sugar high, which has led to a degree of quantitative tightening that we’ve never had to deal with before.
JPMorgan’s 2024 S&P 500 target is 4,200. You’ll find the link to Dimon’s interview below.
Put your sneakers on and plug in, or click play when you are in your car.
I hope you find them as interesting as I did. As always, this is not a recommendation to buy or sell any security.
Here are the sections in this week’s On My Radar:
- Jamie Diamond – Andrew Ross Sorkin DealBook Interview
- Howard Marks – On Private Credit
- Ken Griffin, CEO of Citadel
- Random Tweets and Charts
- Personal Note: Henry Kissinger and Charlie Munger
- Trade Signals: Weekly Update, November 29, 2023
(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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Jamie Diamond – Andrew Ross Sorkin DealBook Interview
(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.)
Howard Marks – On Private Credit
(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.
Ken Griffin, CEO Citadel
“The marginal buyer of Treasury’s is going to have to be American savers. No ifs, no ands, no buts.”
– Ken Griffin, CEO Citadel Source Bloomberg
Citadel founder Ken Griffin said the Federal Reserve risks a hit to its reputation if it cuts interest rates too quickly. Griffin also discussed the recent volatility in the Treasury markets, artificial intelligence, and geopolitics in a wide-ranging exclusive one-on-one interview with Bloomberg’s Sonali Basak at the inaugural Citadel Securities Global Macro conference in Miami.
Not a recommendation to buy or sell any securities. Opinions expressed may change at any time.
Random Tweets
The Magnificent 7
It was one of the worst drawdowns in the history of the bond market.
The 10-year Treasury Yield and Weekly MACD
After the massive decline in bonds, a bullish move was welcomed and expected. I post this next chart in Trade Signals each week. Note the red horizontal line in the next chart (upper right corner). There is important technical support at 4.33%. And as of noon today (Friday, December 1, 2023), the yield is 4.25% (last red bar upper right in the chart).
Note how yields move up and down over time. Since 1982, the major trend in yields has been down. The down move bottomed in 2020 at 0.50% (shown in chart July/Aug 2020).
The weekly MACD (a momentum indicator) has identified the intermediate-term trends in interest rates (green arrows are buy signals, red arrows are sell signals). The current signal remains bullish on bonds (green arrow bottom right).
SOFT-NO Landing vs. HARD Landing
“Take a look at the prevailing view before every major inflection point, and it has always been wrong.”
– Jamie Dimon, CEO of JPMorgan, speaking with Andrew Ross Sorkin at the November 2023 DealBook Conference
Keep the quote in mind when viewing the next chart:
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.
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Personal Note: Henry Kissinger and Charlie Munger
Some reflections on the passing of Henry Kissinger and Charlie Munger. Two important figures. One a diplomat, the other a great investor.
Ray Dalio penned the following piece about his friend, Henry Kissinger.
Henry Kissinger was the most extraordinary man I knew and a very special friend, so I feel his passing deeply and I have the deepest empathy for those who were closest to him, especially for Nancy because they had such a loving relationship for fifty years. Henry was and will remain a hero of mine, and many others, in an era of great cynicism when we no longer have heroes in public life. Why do I say he was a great hero? Here are some of the facts.
He had an unparalleled perspective. No living person had simultaneously studied history as deeply, been as profoundly involved in shaping it, known personally and influenced as many world leaders, and more generously shared meaningful insights than Henry Kissinger. He was blessed by a unique ability to see things through all relevant parties’ eyes and think strategically about where they would likely go or should likely go. Until his end, he had a multidimensional understanding that extended from ancient times through the most contemporary developments in geopolitics, artificial intelligence, and other elements of human behavior.
These facts should be apparent to any sensible person who has read Henry’s books or talked with him, which I have been fortunate to have done frequently. I personally learned an enormous amount from Henry and have come to adore him because he has generously shared his extraordinary perspective with me and with so many others. I also loved his wit. I was blessed to enjoy the gift of a wonderful relationship with this great man whom I have admired for most of my life. We shared a passion for history and for understanding what is happening now, but from different perspectives learned through our different experiences—his from the geopolitical and mine from the economic. He was also very warm and considerate. For example, when I had a great personal loss, he went out of his way to help console me. Even at 100, he was still contributing to global affairs and was deeply engaged in some of the most important topics of our time.
While losing him is a very painful loss, our having had him in such good shape for over a hundred years was a great gift.
Charlie Munger was Warren Buffett’s partner at Berkshire Hathaway.
Munger and Buffett had been friends for over 60 years, first meeting in 1959 at a dinner party. Munger joined Buffett at Berkshire Hathaway in 1978, where he served as Buffett’s second-in-command for decades. He was frugal. One funny story was the argument with Warren about the company’s purchase of a corporate jet. Buffett sold a jet it had purchased three years earlier for $850,000 and replaced it with a used jet that cost $6.7 million. Buffett said Munger found the purchase extravagant, pointing to his business partner’s travel habits. “His idea of traveling in style is an air-conditioned bus, a luxury he steps up to only when bargain fares are in effect,” Buffett said of Munger.
What a partnership! I was looking to find a quote from an interview CNBC’s Becky Quick did with Munger a few weeks ago. He was talking about how important failure is to capitalism and how awful it is to bail everyone out. Stay tuned. I’m going to keep looking for that clip. In the meantime, the following are two short clips that I think you’ll enjoy. Click on the photos. I’m going to miss Charlie’s humorous, dry wit.
Two more small (huge) pieces of advice from Charlie:
- “We all start out stupid and we all have a hard time staying sensible, and you have to keep working at it,” Munger told an audience at the University of Redlands in California in 2020. That requires reading constantly—and not just in your own area. “I never liked [specialization],” he said. “I like romping over a whole field.”
- My wife Susan sent me this excellent clip she came across on Instagram. “Students of America go elite business schools and law schools and they learn corporate finance the way it is now taught and investment management the way it is now taught. And some of these people write articles in the newspaper and other places and they say that the whole secret to investing is diversification. That’s teh mantra. They’ve got it exactly back asswards. The whole secret to investment is to find places where it is safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor, not for the professional.” Click on the photo to watch the clip.
Wine glasses up high: Welcome home, Henry and Charlie. Welcome home.
Wishing you a great week!
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Trade Signals: Weekly Update, November 29, 2023
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
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