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On My Radar: The Rest of the Story

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October 24, 2014
By Steve Blumenthal

Paul Harvey, The Rest of The Story

“Years ago a teacher in Detroit asked Stevie Morris to help her find a mouse that was lost in the classroom. You see, she appreciated the fact that nature had given Stevie something no one else in the room had. Nature had given Stevie a remarkable pair of ears to compensate for his blind eyes. But this was really the first time Stevie had been shown appreciation for those talented ears. Years later, he says that this act of appreciation was the beginning of a new life. You see, from that time on he developed his gift of hearing and went on to become, under the stage name of Stevie Wonder, one of the great pop singers and songwriters of the seventies.”

Each morning I open the email from our very own Mike Sciortino. He shares a quick story or short quote that is almost always inspiring and motivating in nature. This past Monday it was about appreciation. My mom used to teach me about kindness, as all our moms do, and she would spend so much time on how one simple act of kindness would ripple and expand farther than I might ever know. I wonder if Stevie Wonder’s teacher ever knew just how far she rippled through him.

Sometimes I shoot a quick text to my kids with one of Mike’s messages. I’m sure they think I’m nuts. I sure hope I didn’t shrug to my mom when she did her best to guide me but at 16 I probably did. If you need some quotes to share with your kids or grandchildren and even your clients and friends, feel free to sign up at CMG Advisor Central or follow us on Twitter @askcmg for Mike’s motivational missives.

Switching gears, let’s zero in this week on an outstanding piece by Dr. Lacy Hunt. At the end of each quarter I look forward to reading his quarterly outlook letter. He’s been in the slow growth deflation camp positioned in long-term treasury bonds. A tough 2013 has turned into an outstanding 2014 from a performance perspective for his clients. Keep in mind that at the beginning of the year, not one Wall Street economist was forecasting the 10-year Treasury to yield less than 2.90%. The consensus average forecasted a 3.25% yield by the end of 2014. With such risk concentration, imagine what his clients were reading and thinking going into 2014. Imagine how hard it was to hold that conviction last December. Not an easy business we are in. You’ll see below that he continues to believe that interest rates are heading even lower.

Some time ago I wrote a piece titled, The Problem is Debt. It is about slow growth caused by too much debt. I think I wrote something brilliant like “debt’s a drag man”. So with another nod to understanding the implications of too much debt and in my view the flaws in Keynesian ideology, this week I highlight Dr. Lacy Hunt’s most recent work. Put it in the “things that matter” bucket.

Personally, I am of the opinion that the great bubble of all bubbles is in the bond market and another crisis event lies ahead. There will be issues yet if properly prepared and positioned there will be many opportunities. Broadly diversify, hedge that equity exposure and over-weight tactical/flexible investment strategies.

Included in this week’s On My Radar:

  • Faltering Momentum – Dr. Lacy Hunt’s Quarterly Investor Letter
  • Global Recession Probability Model – Risk Grows
  • Trade Signals – Support Held, Big Mo Remains Bullish – 10-22-2014

Faltering Momentum – Dr. Lacy Hunt’s Quarterly Investor Letter

The U.S. economy continues to lose momentum despite the Federal Reserve’s use of conventional techniques and numerous experimental measures to spur growth. Following are some bullet points from Dr. Hunt’s Quarterly Review and Outlook as well as the link to the full piece.

  • The U.S. economy continues to lose momentum despite the Fed’s use of conventional techniques and numerous experimental measures to spur growth.
  • Real GDP expanded at a paltry 2.2% annual rate over the last five years.
  • This compares to 3.9% per annum from 1791 to 1999.
  • In 1999 the combined public and private debt reached a critical range of 250% – 270% of GDP.
  • Econometric studies have shown that a country’s growth rate will lose about 25% of its “normal experience growth rate” when this occurs.
  • Further, as debt relative to GDP worsens above the critical range, economic activity actually worsens at a grater rate.
  • The post 1999 record is consistent with these findings as the U.S. debt-to-GDP levels swelled to a peak as high as 360%.
  • It appears that year-over-year growth in real GDP for the just ended third quarter period is unlikely to exceed the 2.2% pace of the past five years.
  • Based on the latest available data, aggregate debt in the U.S. stands at 334%, compared with 46-% in the 17 economies in the euro-currency zone and 655% in Japan.
  • The more advanced the debt level, the worse the economic performance, and this theory is in fact validated by the real world data.
  • Given that inflation is already so minimal in both the U.S. and Europe, even the mildest recession could put both economies in deflation. (SB – Note Global Recession watch chart in next session)
  • Falling worldwide inflation is notable today and lower inflation is, in fact, almost as much a hallmark of recessions as is deceasing real GDP.
  • Economist Irving Fisher would not be at all surprised by the current impact of excessive debt since he argued in his famous 1933 paper “The Debt-Deflation Theory of Great Depressions”, that falling money velocity is a symptom of extreme over-indebetedness.
  • The poor trend in the velocity for the U.S., Europe and Japan indicates that monetary policy for these countries is not a factor in influencing economic activity in any meaningful way.
  • Declining V is witnessed in all three major economic areas though U.S. V is higher than European V, which in turn is higher than Japanese V.
  • Hunt sites important new research on debt. Conclusion: “contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growth, breaking new highs.”
  • From 2009 to present, the monetary base has surged from $1.7 trillion to $4.1 trillion. However, even as the base has exploded and stock prices have soared, the U.S. economy has experienced the worst economic expansion on record.
  • Princeton professor Main and University of Chicago professor Sufi demonstrate that increasing the flow of credit is extremely counterproductive when the fundamental problem is too much debt, and excessive debt can fuel asset bubbles.
  • The late MIT professor Charles Kindleberger, author of one of the greatest books on capital markets “Manias, Panics and Crashes”, stated: the process of excess liquidity fueling higher prices in the face of faltering fundamentals can run for a long time, a phase Kindleberger called “overtrading”.
  • But eventually, this gives way to “discredit”, when the discerning few see the discrepancy between prices and fundamentals. Eventually, discredit yields to “revulsion”, when the crowd understands the imbalance, and markets correct.
  • Dr. Hunt believes that with the nominal growth trajectory extremely soft, U.S. Treasury bond yields are likely to continue working lower. He is still bullish on Treasury bonds.

Here is the link to the full piece. The highlighted sections are mine.

Global Recession Probability Model – Risk Grows

Recession starting dates are only known in hindsight. The following chart has done a pretty good job at predicting recessions before or near their beginnings.

Recession occurred nearly 90% of the time the indicator moved above the dotted red 70 line. Recession occurred 50% of the time where the indicator is today (yellow highlight).

10.24.1

 

Trade Signals – Support Held, Big Mo Remains Bullish – 10-22-2014

Big Mo and the 13/34-Week EMA remain in cyclical bull market trends. Sentiment is extremely pessimistic (which is also bullish) and support held. The Zweig Bond Model continues to signal long-term bond exposure and high yield is back in a buy signal.

Included in this week’s Trade Signals:

  • Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish (as measured by NDR’s Big Momentum indicator and separately by the 13/34-Week EMA S&P 500 Index Trend Chart)
  • Weekly Investor Sentiment Indicator – NDR Crowd Sentiment Poll: Extreme Pessimism (Bullish for the Market)
  • Daily Trading Sentiment Composite: Extreme Pessimism (ST Bullish for the Market)
  • The Zweig Bond Model: Cyclical Bull Trend for Bonds (supporting longer-term treasury and Corporate bond exposure)
  • Demand/Supply Chart – Quickly Back to a “BUY” Signal

Click here for the full link, including updated charts, to Wednesday’s Trade Signals post (trend and sentiment charts)

Conclusion

I’ve been thinking about my mom a lot lately. Maybe that’s why Paul Harvey’s story about Stevie Wonder touched me. I sure do wish she was here to pour more of her great wisdom into me.

I’m concluding today’s piece in seat 3A on a US Air flight home from meetings in Denver. Chicago and beautiful Lake Michigan are to my left and the stewardess just poured me a glass of a pretty good tasting red wine (though not nearly as my good friend Steve Finn’s private collection). So, here is a toast to you, our mothers and all the great teachers in our lives. Much appreciation… And that’s “The Rest of the Story”.

Have a wonderful weekend! I’m going to see if I can make a few ripples happen.

With kind regards,

Steve

Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.

CMG Advisor Central and Other CMG Related Links

Please know that we here at CMG Capital Management Group are committed to bringing you the latest intelligence on the markets and tactical investing strategies.

We launched Advisor Central six months ago to offer advisors a quick read on trade signals in the fixed income and equity markets, commentary on economics and investing, and trends in the financial advisory business.

You can sign up here at CMG Advisor Central for updates and you’ll get a weekly digest delivered to your in box.

We also created a LinkedIn Showcase Page devoted to tactical investing. Tactical investing has been our sole focus for 20+ years. We aim to give this investing style clear definition and scope as investor awareness of ‘tactical’ develops. Follow the LinkedIn Tactical Investing page here for periodic updates.

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