January 5, 2024
By Steve Blumenthal
“Another massive beat on the latest US labor-market data, with wages actually increasing to 4.1% year over year from 4% in November. The market reaction is as you’d expect – yields higher, with fewer rate cuts being priced in for 2024.”
– Lisa Abramowicz, Bloomberg January 5, 2024
Data released by the US Department of Labor at 8:30 a.m. this morning showed that US payrolls increased by 216,000 in December. The number was much better than the 170,000
expected by economists. The unemployment rate held steady at 3.7%, and wages were up 4.1% year-over-year. There is no sign of recession in the data. In fact, bond yields initially spiked higher. There is debate on what Lisa Abramowicz’s “massive beat” means.
In this morning’s Boock Report, my friend Peter Boockvar wrote, “December payrolls rose more than expected, but the longer-term trends continue to weaken.” Here’s how he dissected the data:
- Most of December’s job gains were concentrated in three sectors: government (52K jobs added), private education/health (74K), and leisure/hospitality (40K). The total number of jobs added between these sectors amounted to 166,000 of the 216K total. The job gains in government and private education/health are obviously very non-cyclical
- A large drop in the labor force kept the unemployment rate at 3.7%.
- The reduction in “average weekly hours” worked points to lower labor demand as well as employers’ reluctance to shed hard-to-find workers.
Here’s a look at the drop in hours worked from ECRI @businesscycle:
Two more points from Peter:
- We saw more involuntary part-time work and individuals holding multiple jobs, which points to underlying weakness.
- Job growth is increasingly concentrated in the government and healthcare sectors. Private sector job growth is slowing but remains positive.
Just after the morning data release, bond yields spiked higher and stock futures lower. Both have since settled down.
I think the Fed will find the data unsettling. Counter to the current “soft landing” consensus view anticipating three to six Fed interest rate cuts in 2024, the Fed may, in fact, be more likely to raise rates than cut them. Asset positioning is tied to that view, and any change to that narrative will move markets sharply. My best guess is, that if we see a recession (a “hard landing”), expect lower interest rates, resulting in a bullish bond and bearish stock market. On average, stocks decline by 32% during recessions. If we do see a stock market decline, though, I think the Fed will act quickly, making a recession less severe. If we see moderate growth, no Fed rate cuts, or even a rate increase, that would shatter the consensus view of a soft landing and prompt bearish markets for stocks and bonds.
At midday today, January 5, 1024, the 10-year Treasury yield is trading higher at 4.03%.
Grab your coffee and find your favorite chair. Today, I share what I believe are three critical indicators to keep on your radar as we navigate the cyclical trends in interest rates, along with an exceptional recession-watch indicator. There’s no current sign of recession, so go into the weekend with a cold beer held high. Cheers! Head to the personal section at the end for a fun story from a podcast I listened to with my daughter Brianna about how important it is to be “a creature of discomfort.” Thanks for reading.
Here are the sections in this week’s On My Radar:
- Peter Boockvar – What to Expect from the Fed in 2024 on the Coming Treasury Supply Tsunami
- Three Key 2024 Indicators
- Random Tweet – Zombie Companies
- Personal Note: A Creature of Discomfort
- Trade Signals: Weekly Update, January 3, 2024
(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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What to Expect from the Fed in 2024 – Peter Boockvar on the Coming Treasury Supply Tsunami
Peter is a good friend of mine and has one of the sharpest minds in the investment business. I hope to get a podcast interview with him on the books, so stay tuned for that. In the meantime, I want to share a CNBC interview he gave in late 2023, in which he discussed his outlook on treasury bonds, oil, and commodities. (He also shared his thoughts on the direction of interest rates, which I highlight in the next section.) Here are Boockvar’s key points on the direction of Treasury Bond Yields (slowing economy vs. supply tsunami):
- “It was only a few months ago that we were all worried about excessive Treasury supply to plug the hole of the rising budget deficit. And I don’t think that that goes away… 2024 is still going to be defined by the Fed doing QT (quantitative tightening), foreigners buying less U.S. Treasuries, banks reducing the size of treasuries on their balance sheet, and the US Treasury selling at least $2 trillion worth of new bonds.” In his view, we may see a cut in interest rates in the short term but could also likely see a rise in long-term rates—potentially a retest of the recent 5% yield on the 10-year Treasury.
- Concerns about supply will continue. While the Fed says they’ll cut rates three times in 2024, it’ll depend on how strong the economy is. If it’s weak, they could cut rates six times, which would drive up the national deficit and the Treasury supply. “I see a lot of big-time trade-offs in 2024 and not the easy street that the markets are pricing in right now.”
- Will slow growth drive interest rates down, or will the tsunami of new debt issuance and the need to refinance existing debt drive interest rates up? “I still think that after a forty-year bond bull market, this bond bear market doesn’t end in just two or three years. We have more pain to come in the longer end, while shorter-term treasuries, I think, are much safer to own.”
Peter is bullish on the direction of oil and commodities in 2024.
(Click on the photo to watch the 4-minute 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.)
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Three Key Interest Rate Indicators
1) 10-Year US Treasury Yield Index
If we’re going to be on a challenging roller-coaster ride with generally higher interest rates and large swings up and down in rates over the balance of the decade, the following Weekly MACD chart may serve us well in identifying the swings in Treasury yields. I use the Weekly MACD chart and the Zweig Bond Model, below, to help me stay on the right side of the trend.
Here’s how to read the MACD chart:
- The bottom section compares two weekly moving average price lines. A shorter-term, 12-week moving average vs. a longer-term, 26-week moving average.
- Signals occur when the lines cross.
- Green arrows indicate a bullish downtrend in interest rates.
- Red arrows indicate bearish cyclical periods when interest rates are rising.
- I believe a secular low for bond yields occurred in 2020. And my current hypothesis is that we’ll get more free money from authorities when the next crisis hits. In my view, more free money will lead to a second, and even higher, wave of inflation.
- If I’m right, the 10-year yield could reach the high single digits. That would make owning a 4.03% yielding 10-year Treasury Note a bad decision.
- The probability zone is highlighted in yellow. In the near term, I think rates bottom in that zone. No guarantees.
2) The Zweig Bond Model
Here’s how to read it:
- The model indicator process is detailed in the upper left-hand corner.
- The objective is to identify the dominant trend in the bond market.
- The current reading is highlighted in yellow in the lower section of the data box.
3) The High Yield Junk Bond Market and Small Cap Stocks:
High-yield junk bonds and small-cap stocks are extremely sensitive to the economy and serve as a good “canary in the coal mine” indicators to signal potential recession.
Here’s how to read the next chart:
- The data box in the lower section shows the hypothetical performance of the High-Yield Bond Market price performance when both the current price of the S&P 600 Index (small-cap stock index) and the advance-de
- 36-day and 40-day smoothed moving average lines. (Return data does not include the yield, which is generally a reason why investors buy high-yield bonds.)
- Currently, the price (orange line) and the advance-decline line (light blue line on the bottom) are above their respective moving averages. That signal occurred on 11-22-23.
- When both move below their respective moving average lines, that’s when we should turn our recession lights on. Think of this as a leading indicator of recession.
- Bottom line: Grab a cold beer—no recession worries at the time of this writing.
Not a recommendation to buy or sell any securities. Opinions expressed may change at any time.
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Jim Bianco – 5.5% 10-Year Yield in 2024?
Another Camp Kotok fishing friend, Jim Bianco, President of Bianco Research, sees the 10-year Yield rising to 5.5% in 2024—a level we haven’t seen since 2001. Few are forecasting that extreme of a move. I wrote a few weeks ago that while I’m in the “hard landing” camp for 2024, Jim is in the no –recession-continued-favorable-growth camp. Neither of us is with the majority who say we’ll see a “soft landing.”
I see three potential outcomes:
- If I’m correct in my hypothesis, the 10-year may drop to between 3.00 and 3.50% with an outside shot at 2.5% (though that is a small probability). If so, bond investors will see profits and the stock market will decline by roughly 20%. The average decline in a recession is approximately 32%. As I said above, my base case is that the Fed, joined by legislators, will come in to provide support in the way of more free money. If so, a decline of 20% is more likely than a one of 32%. I believe the Fed will be quick to act. Then, we’ll rally towards 6,000 in the S&P 500 Index into 2025—similar to prior market responses to massive liquidity injections. The excess money will first go toward buying risk assets, not general spending. Inflation wave #2 will follow, with higher inflation and interest rates than we experienced in wave #1 (which is currently receding).
- If Bianco is correct and we see continued growth, then the three to six rate cuts economists expect will not happen. He believes—outside consensus—the 10-year yield could reach 5.5% in 2024, which would mean that bonds and stocks would both lose money, as hopes in the Fed pivot would fade.
- If the majority is right and we get a “soft landing” in 2024, bond yields should stay relatively steady, and stock prices should increase by about 5%. I’m restraining the upside due to excessively high current valuations.
Nothing has changed in my overall view that we are heading towards some form of debt jubilee where a large portion of the debt will get monetized, entitlement benefits will be lowered, and taxes will go up. I expect the balance of the decade to be a roller-coaster ride… big swings up and down, all ending pretty much where we started. Call it 4,500 on the S&P 500 Index ten years from now. Interest rates will swing up and down as well.
Based on today’s current high equity market valuations, the coming 10-year total returns for the S&P 500 will likely be in the -2% to +2% annualized return range—nothing to write home about.
That’s the current macro backdrop. There are many other ways to make money.
Not a recommendation to buy or sell any securities. Opinions expressed may change at any time.
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Random Tweet – Zombie Companies
Zombie Companies
When you view the next clip, take a step back and think about the big picture in the message. The Russell 3000 Value Index is a market-capitalization weighted value stock index maintained by the Russell Investment Group and based on the Russell 3000 Index.
The thirty thousand-foot view is that a high percentage of firms are:
- Zombies are companies that earn just enough money to continue operating and service their debt.
- Zombie companies have no excess capital to spur growth and are considered close to insolvency.
- Zombies are high-risk investments, and not for the faint-hearted.
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: A Creature of Discomfort
If you are like me and still in the New Year resolution phase of 2024, a surprise gift came my way courtesy of my daughter Brianna. It came as encouragement while listening to a podcast Brianna put on while we were driving in the car together. “Dad, you have to listen to this.”
First, some background. My family is a big Andrew Huberman fan—especially the kids. Andrew Huberman, Ph.D., and longevity health expert. He is a neuroscientist and tenured professor in the neurobiology and behavioral sciences department at Stanford School of Medicine. He has made numerous significant contributions to the fields of brain development, brain function, and neural plasticity, which is the ability of our nervous system to rewire and learn new behaviors, skills, and cognitive functioning.
In the podcast episode link below, Huberman interviews Dr. Adam Grant, Ph.D., a professor of organization psychology at The Wharton School of the University of Pennsylvania, an expert in the science and practical steps for increasing motivation, maximizing and reaching our full potential, and understanding how individuals and groups can best flourish.
The part I love begins at 2:21:53, where Dr. Grant talks about how important it is to be a creature of discomfort. Basically it’s about not being afraid to put yourself in a challenging – uncomfortable spot.
Dr. Adam Grant tells Huberman… the secret sauce of what you can do to realize your full potential, realize unexpected growth, and achieve more than you think you are capable of:
1. Become *a creature of discomfort*. Embrace things that are unpleasant or awkward for you.
2. Be *a sponge* and soak up information. Gather all you need and *filter* out what you don’t need.
3. Be an *imperfectionist*. Know when to aim for excellence and when to settle for good.
Click on the photo or click the link. Then, under the Episode description, click on “Show more.” Then click on “Timestamp 2:21:53” to jump to the “Skills to Realize Potential, Perfectionism” portion of the podcast. The entire podcast is fantastic. I hope you enjoy it as much as Brianna and I did.
I hope your new year is off to a great start and that whatever you set your sights on, you accomplish with great ease and confidence.
I’m going to be an “imperfectionist” and quickly hit the send button. I’m past my publishing deadline, and while aiming for excellence, I hope you find this week’s OMR good.
Best wishes,
Steve
Trade Signals: Weekly Update – January 3, 2024
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Notable this week:
A look at “median fair value” based on the median price-to-earnings ratio over the last 58 years. You’ll see that the market remains overvalued. The current median PE is 26.1, and the 58-year median PE is 17.6. That puts the median fair value for the S&P 500 Index at 3,224, approximately 32.4% below the December close at 4,769.83.
The dashboard of indicators and the stock, bond, developed, and emerging market charts, along with the dollar and gold charts, are updated weekly. We monitor inflation and recession as well. If you are not a subscriber and would like a sample, reply to this email, and we’ll send you a sample.
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Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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