April 5, 2024
By Steve Blumenthal
“It isn’t so much that hard times are coming; The change observed is mostly soft times going.”
– Groucho Marx
This is big. Lights on. Matters.
First, the news, then the explanation. On March 5, ISDA submitted a letter to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to urge them to implement targeted reforms to the Supplementary Leverage Ratio (SLR), the enhanced SLR framework, and the risk-based surcharge for global bank holding companies that are important for preserving the resilience of the US Treasury markets, the US economy, and the financial system more broadly.
The letter asserted that, to facilitate banks’ participation in US Treasury markets—including clearing US Treasury security transactions for clients—the agencies should revise the SLR to permanently exclude on-balance-sheet US Treasuries from total leverage exposure, consistent with the scope of the temporary exclusion for US Treasuries that the agencies implemented in 2020. (Source: ISDA)
Essentially, the banks are asking for a permanent exemption to the SLR., which would give them the ability to buy an unlimited amount of Treasuries with no capital requirements. Banks would be able to borrow at roughly 0% and earn 5.25% in short-term Treasuries and 4.35% in longer-duration Treasuries. How much would you do if you could earn that spread? Further, existing Treasury positions would be excluded from the SLR giving banks more room to leverage up their balance sheets further.
This would be QE initiated through the banks. Can you imagine the amount of liquidity it would inject into the system? Theoretically, this move alone could fund the government…indefinitely.
The most popular opening move in chess is known as the King’s Pawn Opening. This move involves moving the king’s pawn two spaces, and it has many strengths, including controlling the center.
Keep the bank’s “SLR” play on your radar. The grand game continues. Deflation has lost several chess pieces, and inflation just made another strong move.
I’ve been saying for a long time that the authorities will continue to choose the perceived easiest path to solve the debt problems created by their own mismanagement. But piling more debt on top of the current debt pile simply kicks the can down the road and only works until inflation grabs the easy money monster by the neck. That’s the path we are on, and it’s inflationary by nature. It’s still early innings. Watch inflation. Watch interest rates. Watch commodities. Watch oil, the dollar, and gold. Eyes wide open.
Total Treasury Debt: Note the spike of nearly $3 trillion in the last two years:
Next is a look since 1970. The inflationary pressures former Federal Reserve Chair Paul Volcker faced in the early 1980s were nothing like the ones Jerome Powell faces today. Then, debt-to-GDP was approximately 35%; now, it is approaching 122% (December 2023).
Source: US Treasury
Watch what the authorities are doing—not what they’re saying, but what they’re doing. Since the Great Financial Crisis in 2008, debt has skyrocketed from roughly $10 trillion to $34 trillion. During the crisis, the government bailed out numerous financial institutions, beginning with Bear Sterns (here is the full list of bailout recipients), and enacted TARP (the Troubled Asset Relief Program) to stabilize the financial system. There was QE1, QE2, and “not” QE3. Then, the Fed violated its charter and bought high-yield junk bonds in 2020. We helicoptered trillions of newly printed money into the hands of individuals during COVID-19. When inflation and interest rates spiked, the Bank Term Funding Program (“BTFP”) was created. In recent congressional testimony, Fed Chairman Powell is asking to revisit the BASIL rules. Inch by inch…can you see what is happening?
We have a worsening fiscal problem. Interest expense alone is nearing $800 billion annually, and that number is set to move significantly higher. $17 trillion of Treasury debt that was financed at 0.50% is rolling over at 5.25%.
Through the ISDA letter, the banks are signaling that they’re choking on their Treasury holdings and asking that current holdings and future holdings be exempt from their capital requirements. This would allow the banks the ability to lend more while providing a convenient way for the Treasury to issue more debt to fund the government—an unlimited amount, potentially, as there will not be a debt ceiling until at least 2025, when Congress revisits the issue. We’ve opened the door to the extraordinary, and the extraordinary is happening.
Along with the growing geopolitical challenges, keep the SLR on your radar. It is a really big deal. We are in a macro environment that none of us have experienced in our lifetimes. I’m trying to shine a light on the situation and point out the signposts to watch along the way. The authorities are following an inflationary playbook—and as long as they keep printing money, I expect inflation pressures will continue to become increasingly challenging. From an investment perspective, this is good for some assets, but it spells trouble for others. It’s a bearish story for traditional buy-and-hold, fixed-income investing. And right or wrong, in my view, can a 4.35% 10-year Treasury really help a portfolio? The risk of persistently high inflation – and rising interest rates doesn’t jive with the return/risk profile.
The game plan is to outperform inflation over the balance of the decade and keep your wealth and its spending power well above water.
Grab your coffee and find your favorite chair. I hope you can see that I am not bearish—I’m bullish. I’m just not bullish on what has worked for the last 40 years. The long bull market in bonds is over. Yet there are many alternatives to consider. I, together with my team, wrote a paper last fall titled Understanding Private Credit. You’ll find the paper (updated) immediately below. It’s an area most investors are not familiar with. I hope you find it helpful. Also, I share three critical trend charts to watch: the 10-year Treasury, oil, and gold. And I share a few general investment ideas to consider in the personal section further below. Let’s hope Groucho Marx is right. “The change occurring is mostly soft times going.” Seems in line with the Fourth Turning.
On My Radar:
- Understanding Private Credit
- 10-Year Treasury Yield, Oil and Gold
- Random Tweets
- Trade Signals: April 3, 2024
- Personal Note: The Fourth Turning, Debt and Entitlement, and Restructuring
See Important Disclosures at the bottom of this page. 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.
Understanding Private Credit
Source: CMG Capital Management Group, Inc. October 2023 (updated April 2024)
Specialty Finance: Understanding Private Credit
When a company requires debt financing for various purposes—such as sustaining daily operations, expanding business, or making corporate acquisitions—it has several financing options to consider. Many companies choose to secure a loan from a bank. Larger corporations, however, may opt to issue equity or bonds that are subsequently traded in the public financial markets. A third viable option is private credit, where a company partners with a single lender to develop a custom-tailored capital solution.
At certain points in the economic cycle—especially in more economically challenging moments—banks may be less willing to lend. At the same time, some businesses may need capital quickly and need funding sources that can move quickly. This creates additional opportunities for private credit lenders.
Private credit offers several advantages for borrowers, not the least of which are a high level of certainty and an expedited execution process. They can secure funding more quickly.
Lenders, for their part, get a compelling investment opportunity and chance to diversify their portfolio and gain income, collateral protection, and risk mitigation. They require sufficient collateral to back the loan, and they may add loan origination and exit fees, to enhance the return for the risk they’re taking.
This paper provides a summary of various types of private credit investments.
Why Private Credit?
- An attractive feature of private credit instruments is that loans are linked to floating rates, such as SOFR (Secured Overnight Financing Rate). Private credit loans are typically made at SOFR, which was 5.34% in April 2024, plus an additional yield of 4% to 10%. For example, currently borrowers pay, and the private credit funds that lend to them earn between 9% and 15%. If SOFR rises, the lending rate increases, and if SOFR falls, the lending rate falls.
- This feature makes the floating-rate debt less susceptible to interest rate changes and an attractive investment alternative for investors.
- Over the past decade, private credit has outperformed traditional bond investing (public loans) by delivering average annual returns of approximately 10% in contrast to the yield on the 10-year Treasury Note, which was less than 3% for nine of the last ten years. Last year, yields rose above 4% for the first time in October 2022. Now, in April 2024, the yield is 4.35%. Other traditional fixed-income bonds, bond funds, and bond ETF investments offer investors unattractive yields against inflation, and investors risk the loss of capital in rising inflation and interest rate cycles.
Why Now?
The most important message we can express is that the world is structurally different now than it has been for the last 40 years. This is primarily due to the high level of sovereign debts and unfunded entitlement programs, which we believe will be restructured sometime in the second half of this decade.
The current set of conditions (interest rate volatility, inflation, and debt) is not new to humanity, but it is new to most of us today. We’re experiencing the typical challenges that have historically presented at the end of long-term debt accumulation cycles, which usually last 75-100 years. The last long-term debt cycle in the US peaked in the 1930s.
Looking back thousands of years, in most instances of long-term debt accumulation, governments chose money creation as the best solution. These fiscal misbehaviors resulted in periods of high inflation and low growth. I point you to Edward Chancellor’s excellent book, The Price of Time: The Real Story of Interest, for an extensive look at 5,000 years of interest rates, and Ray Dalio’s paper, Principles for Navigating Big Debt Crises. on Long-term Debt Accumulation Cycles. How our debt accumulation issue will get resolved this time remains uncertain, but evidence suggests more money-printing is likely.
When governments create too much new money, challenges mount, because “too much money chasing too few goods” causes inflation. The US, and much of the developed world with similar debt and entitlement challenges, will likely choose to print new money to solve the debt mess they have created. Not surprisingly, this has happened in the U.S. and much of the developed world since 2008 and, more significantly, since 2020. In fact, the US printed nearly half of all the dollars it ever has printed in just the last few years. It took more than 246 years to print $10 trillion, and since 2020, another $10 trillion has been created, so we should not be surprised by the current rates of inflation.
The path to what John Mauldin calls “The Great Reset”—a restructuring of our debt and entitlement systems—is a slow-moving event. The issue crescendos when our debt and inflation reach a point of no return—like when Wile E. Coyote finds himself out over the cliff’s edge with nowhere to go but down. At that point, everyone will know that what we’ve been doing did not work, which will produce the political will to restructure. That is our current working hypothesis.
The winds have shifted, and the benefit of nearly 40 years of declining interest rates is gone. Because of the accumulation of massive debt and entitlement obligations, probabilities favor a prolonged period of higher inflation, higher interest rates, and slower growth.
The Advantages of Short-term Private Credit Funds
Short-term private credit funds offer a compelling investment opportunity with several advantages for investors seeking income generation, collateral protection, risk mitigation, and portfolio diversification.
First, short-term private credit funds typically focus on lending to small and medium-sized enterprises (SMEs) and other non-traditional borrowers. This presents an opportunity to earn higher yields compared to traditional fixed-income investments like government or corporate bonds. The shorter duration of these loans means lenders can access their capital relatively quickly, providing liquidity advantages.
Second, short-term private credit funds are less susceptible to interest-rate fluctuations. Loans are short-term with a floating interest rate structure, which mitigates the impact of rising interest rates on portfolio values, reducing interest rate and inflation risks for investors.
Third, these funds often correlate less with traditional asset classes like stocks and bonds. By adding short-term private credit funds to a diversified portfolio, investors can enhance risk-adjusted returns and reduce overall portfolio volatility. Furthermore, investing in short-term private credit funds may offer an element of downside protection. These funds typically prioritize senior secured loans or collateralized debt, which can provide a degree of protection in case of borrower defaults.
Lastly, the private nature of these funds means they tend to be less susceptible to market sentiment. Active management allows fund managers to respond swiftly to changing economic conditions and credit risk, potentially enhancing returns.
Diversification is a crucial consideration in the realm of private credit. Various private credit strategies exhibit differing levels of exposure to the overall well-being of the economy, which impacts the well-being of corporate borrowers, consumers, and real assets. For instance, corporate and real assets often track closely with the ups and downs of the economic cycle. In contrast, strategies like distressed and opportunistic credit may display more counter-cyclical tendencies, meaning they tend to identify more appealing opportunities during economic downturns. Some specialized credit strategies also show reduced sensitivity to the broader economic cycles.
Analyzing Private Credit
In private credit, the landscape is diverse, with each type of loan carrying its own distinct set of risks and potential returns. These returns can be broken down into two main components: yield and capital appreciation.
Let’s explore the spectrum of private credit strategies:
1. Senior, Secured Loans: These loans are positioned at the safer end of the spectrum. They offer a relatively steady yield and are characterized by lower risk compared to other private credit strategies. They come with the advantage of being secured, reducing the likelihood of loss in the event of a default.
2. Unsecured Subordinated and Mezzanine Strategies: As we move further down the capital structure, we encounter higher-yielding opportunities. These strategies compensate investors for taking on additional credit risk. In some cases, these loans may also include additional securities that allow investors to participate in potential equity gains, adding an extra layer of potential return.
3. Specialty and Alternative Credit Opportunities: This category encompasses a wide range of opportunities, each with its unique risk-return profile. These opportunities often generate cash yield and can span the entire risk spectrum, offering options that cater to various investor preferences and risk tolerances.
4. Distressed and Opportunistic Strategies: At the far end of the spectrum are strategies that target companies facing significant challenges. These investments have the highest potential for dispersion of outcomes, making them the riskiest option. Unlike the others, these strategies typically lack a yield component but come with the prospect of substantial upside as distressed companies undergo restructuring.
In summary, when delving into private credit investments, it’s crucial to understand that risk and return are intimately linked. While it’s difficult to mathematically analyze private credit in a portfolio due to the lack of market-to-market returns (Sharpe ratios become irrelevant), we can glean the portfolio benefits of private credit by looking at longer-term returns, identifying superior fund managers, and allocating to specific types of private credit strategies within the economic cycle.
Higher potential returns are often associated with increased risk, and we encourage investors to carefully consider their risk tolerance and investment goals when choosing among these various private credit strategies.
Below, we provide a short primer on private credit to help you better understand the opportunities and risks this asset class provides for your investment portfolio.
Current Market Backdrop Positive for Floating-Rate Debt
While private credit returns have been impressive over the past ten years, with average annual returns near 10%, they did so in an environment of ultra-low interest rates. The Federal Reserve’s zero interest rate policy took the Fed Funds rate to 0% and remained low until most recently. As a result, base lending rates also remained low until most recently.
Current market conditions see the Fed Funds rate over 5% and the base lending rate, SOFR, at 5.35%. Add in the spread over SOFR lenders earn, with current yields in the 10% to 15% range, and it is easy to see the current market backdrop is more favorable for floating-rate funds.
CMG believes the 40-year bull market in bonds (rates declining) is over. This secular (long-term) interest rate shift gives a floating-rate investment an inherent advantage. Credit conditions are deteriorating, and bank lending standards have tightened. Small to mid-sized banks, in particular, are leveraged and capital-constrained. Further, they are saddled with bad CRE (commercial real estate) loans, which reduces their capital structure, leaving them less able to take advantage of credit opportunities.
Many private credit funds are bespoken in their lending operation, providing the market with niche, custom lending frameworks. The private credit market is positioned to fill this gap.
With this said, private credit is a broad category with various strategies, and the risk associated with those strategies can vary. They range from first-lien senior secure loans to unsecured distressed credit.
The Private Credit Eco-System
Not all private credit is the same, and diversification is an important consideration. The chart below provides a general view of where various private credit strategies may benefit in the economic cycle. The chart shows the major private credit fund types, but not all.
Source: Cambridge Associates, LLC
Private credit funds encompass a wide range of investment strategies and structures, each designed to meet specific investor needs and risk profiles.
Types of Private Credit Funds:
Direct Lending Funds:
These funds lend money to businesses, typically middle-market or small and medium-sized enterprises (SMEs). They offer customized financing solutions with varying terms and structures. Most loans are made at SOFR plus a spread. For example, the current SOFR rate is 5.31% (October 1, 2023), and many, not all, loans are written with front-end origination and back-end maturity fees.
Mezzanine Debt Funds:
Mezzanine debt funds provide subordinated loans with higher interest rates to companies needing capital. They often combine elements of debt and equity, offering greater potential returns and higher risk.
Special Situations Funds:
These funds focus on unique or opportunistic credit situations, such as lending to niche businesses where the manager has a special understanding of the underlying collateral (royalties, for example), trade financing, credit protection insurance, financing for mergers and acquisitions, recapitalizations, or other specific corporate events.
Real Estate Debt Funds:
Real estate debt funds provide loans for projects, including commercial properties, residential developments, and infrastructure. These funds can target various stages of the real estate lifecycle, from construction to bridge financing.
Structured Credit Funds:
Structured credit funds invest in complex credit instruments like collateralized loan obligations (CLOs), collateralized debt obligations (CDOs), and asset-backed securities (ABS). These funds often involve more sophisticated strategies and may have exposure to a wide array of underlying assets.
Private Equity Funds with Credit Strategies:
Some private equity funds incorporate credit strategies alongside their equity investments. They may offer a combination of equity, mezzanine, or senior debt investments within a single fund.
Senior Secured Debt Funds:
These funds primarily invest in senior secured loans with a higher claim on a company’s assets in the event of default. They tend to have a lower risk compared to subordinated debt or equity; thus, they typically are considered an all-weather strategy since these debt holders have a superior rank of repayment if there are any company finance issues. The cash yield drives the returns, thus investors interested in income might consider these types of funds.
Venture Debt Funds:
Venture debt funds provide debt financing to early-stage or high-growth startups. This type of private credit aims to support companies needing capital but may not yet be profitable.
Credit Opportunities Funds:
Credit opportunity funds have flexible mandates to pursue a wide range of credit investments. They may shift their focus based on market conditions and available opportunities.
Business Development Companies (BDCs):
BDCs are publicly traded investment companies that finance small and mid-sized businesses. They often take the form of closed-end funds and must distribute at least 90% of their taxable income to shareholders.
Each type of private credit fund has its risk-return profile, investment horizon, and target borrowers. Investors should carefully consider their investment objectives, risk tolerance, and the specific strategy of the fund before investing in private credit funds. Additionally, due diligence and understanding the fund manager’s expertise are crucial when selecting a private credit fund that aligns with one’s investment goals.
At the current part of the cycle, CMG favors first-lien, senior secure, floating-rate debt. We like short-term specialty finance funds. We consider these allocations to be a CORE component, or anchor position in an investment portfolio, providing attractive income opportunity and portfolio protection in a tightening credit cycle. We favor these types of strategies over low-yielding government, municipal, and corporate bonds and bond funds. For certain investors, we also encourage a close look at distressed credit funds as we anticipate opportunities in the default cycle that we believe will present in the next recession.
The above chart is from an excellent Goldman Sachs paper on Private Credit. You can find the full article here.
Risk Drivers and Due Diligence
There is risk in all investing, and the objective is to mitigate the risks as best you can. Conduct background checks, senior team member background checks, third-party reference checks, and audit reviews. Speak with the independent fund administrators, auditors, industry references, and back-channel vendor checks. Operational expertise and scale. Overall fund size relative to their target opportunity. Carefully review and monitor leverage exposure. Of course, there is more to the process, but the above is a good start. It doesn’t guarantee you against risk but can help mitigate risk. Ensure you have an experienced research/due diligence team engaged to review and analyze the dangers thoroughly.
The macroeconomic cycle is a crucial factor and risk for identifying the type of fund to invest in. Interest rate risks must be considered, as rate direction for floating rate funds and credit spreads impact returns.
The use of leverage must be considered, even within a senior secure credit fund. If a fund utilizes leverage, you have inherited an additional layer of risk. Thus, it is an essential consideration for your needs, goals, and risk profile. Leverage is not bad in and of itself.
Diversification and portfolio sizing within a fund include the type of credit allocated, diversification among various industries, and the fund sizing of risk exposures (or concentration of exposures). Diversification of strategies can mean increased AUM for a fund manager, but can the private debt fund properly deploy the additional investment dollars effectively (and efficiently), and does it have the operational back office to handle scale?
Manager expertise: some fund managers are better than others.
Find an experienced advisory team with a network of relationships within the industry to source opportunities. Make sure they have the due diligence capabilities and the business understanding necessary to analyze various opportunities, with the ability to understand the underlying investments within the fund, assess the manager’s expertise and the depth of their business structure, and consider where we are in the economic cycle with the objective of selecting the best investment options for the future.
For many investors, private credit is an unknown asset class, or low-quality bond funds have burned investors; however, from a portfolio perspective, private credit deserves careful consideration as it may provide higher cash flow vs. trade traditional fixed-income investing.
Short-Term Private Credit vs. Traditional Fixed Income
Yield Potential: Short-Term Private Credit: Short-term private credit funds often offer higher yields than traditional fixed-income investments. They primarily target non-traditional borrowers and SMEs, which can result in higher interest rates and potentially more significant income for investors. Traditional Fixed Income: Traditional fixed-income investments like government, municipal, or investment-grade corporate bonds tend to have lower yields due to their lower credit risk profile.
Duration and Interest Rate Risk: Short-Term Private Credit: These funds typically have shorter durations, reducing their sensitivity to interest rate fluctuations. Loans generally are made at SOFR plus a spread. This results in a higher yield and helps mitigate interest rate risk, making them attractive when interest rates rise. Traditional Fixed Income: Longer-duration bonds are more sensitive to changes in interest rates. When rates rise, the value of existing bonds can decline, potentially leading to capital losses for bondholders.
Credit Risk: Short-Term Private Credit: While short-term private credit funds may offer higher yields, they also come with increased credit risk, as they often lend to SMEs or non-traditional borrowers. Default risk is a concern, and investors should carefully assess the creditworthiness of borrowers. Traditional Fixed Income: Traditional fixed income investments like government bonds are typically considered safer, with lower credit risk. Investment-grade corporate bonds also offer a degree of credit quality.
Liquidity: Short-Term Private Credit: These funds may offer relatively quicker access to capital due to their shorter loan durations. However, liquidity can vary depending on the specific fund and underlying assets. Traditional Fixed Income: Traditional fixed-income securities like government bonds are highly liquid, and investors can easily buy or sell them in the secondary market but are subject to the risk of loss should interest rates increase.
Diversification: Short-Term Private Credit: Investing in short-term private credit can add diversification to a portfolio due to its lower correlation with traditional assets like stocks and bonds. Traditional Fixed Income: Traditional fixed-income investments can also provide diversification benefits but to a lesser extent than short-term private credit.
Conclusion
Short-term private credit funds offer an attractive investment alternative for investors seeking higher income, risk diversification, and protection against interest rate volatility. However, it is essential to understand the risk characteristics and liquidity provisions of private credit funds. Some funds may come with higher credit risk, and different funds offer varying levels of liquidity.
We hope you found this paper helpful. If you have any questions, email me at blumenthal@cmgwealth.com.
See Important Disclosures at the bottom of this letter.
This is not a recommendation to buy or sell any security for educational discussion purposes only. Consult your advisor.
10-Year Treasury Yield, Oil and Gold
I favor using the Weekly MACD signal to identify changes in trend. The green arrows in each of the following three charts indicate bull trends; the red arrows indicate bear trends. In the case of the 10-year Treasury Yield, the red arrow indicates rising yields (which is bearish for bond prices).
Interest rates broke above an important resistance area at 4.33%. At the time of this writing, the yield is 4.36%, which puts 5% back in play:
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Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
“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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I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Personal Note: The Fourth Turning, Debt and Entitlement, and Restructuring
“A 17th-century economist, Richard Cantillon, provided even more accurate descriptions of the current global situation when he said back then, ‘When a national bank turns on the printing press and buys up government debt, the newly created money is initially trapped within the financial system, where it inflates financial assets rather than consumer prices, and only slowly seeps out into the wider economy.’”
This thesis is evident in how Covid relief measures (rate cuts and bond buying/money printing that doubled the Fed’s balance sheet from $4 trillion to $8 trillion) exacerbated the inflation, first towards financial assets in 2020–2022, and then spilling over into the economy in the form of severe inflation. According to Chancellor, “the acceleration of these tendencies brought them closer to an endpoint”—a potential disaster that never ends well for any of the examples from history. (Source: The Price of Money, by Edward Chancellor.)
Neil Howe and William Strauss’s book, The Fourth Turning, explores a cyclical theory of history which posits that societies experience cycles of about 80-100 years, which are divided into four “turnings”: (1) a High, (2) an Awakening, (3) an Unraveling, and (4) a Crisis. Each turning is characterized by a specific mood and societal behaviors, reflecting the generational attitudes and experiences of that time. The book suggests that America (and possibly other societies) is on the cusp of “the Fourth Turning,” which promises to be a period of profound challenges and transformation that will redefine structures and values—much like the Great Depression, Civil War, and American Revolution. This cycle theory offers a predictive framework for understanding the past and anticipating future challenges.
Howe’s newest book, The Fourth Turning Is Here, suggests that the fourth turning has arrived. Howe predicts that this period of turbulence, characterized by societal polarization, the threat of civil conflict, and global war, “will culminate in a transformative climax by the early 2030s, potentially ushering in America’s next golden age.” (Source: Simon & Schuster Books)
Howe’s analysis is both alarming and hopeful. He suggests that despite the high risk of catastrophe—including insurrection, civil conflict, or authoritarian rule—there’s also a bright future ahead. By the 2040s, he anticipates a reversal of current negative trends, leading to higher living standards, lower income inequality, a flourishing culture, and a renewal of civic society and family life. This transformation, according to Howe, will be driven by the Millennial generation, who will emerge as communitarian leaders committed to solving the crises of their time.
Inflation can certainly lead to conflict. It changes everyone’s mood. It really pisses people off.
As much as I’d like to paint a picture of sunshine and roses, I find it hard not to see the inputs affecting the economic machine. Your job and mine is to make sure we get from here to the early 2030s with our wealth, family, and friends happy, healthy, and in good shape. That is something we can do.
What might a future debt restructure look like? In the solution category, there is something like $75 and $100 trillion of assets in the hands of Baby Boomers (ages 60 to 78) and the Greatest Generation (ages 79 plus). Much of that money will pass to their heirs over the next 25 years. I believe we will reach a point when restructuring is forced upon us, and we’ll elect leaders specifically to reset the system. It will involve a mix of higher income and estate taxes and reduced Social Security and Medicare benefits. Until then, more money printing, persistent inflation, and managed devaluation (as best the authorities can) of the FIAT money systems. The developed world will continue to debase their currencies.
Consider hard assets like gold, private credit over traditional fixed income, select equities, active management, disruptive technologies, select real estate, oil, commodities, agriculture, uranium, art, gold, bitcoin, etc. The US is restoring and strengthening its industrial complex, and money is being targeted toward infrastructure. Own good-quality, fairly priced assets, expect a bumpy ride and see market setbacks as opportunities. Add to positions when fear is extreme.
Savannah was great fun—a special hat tip to my host. Golf on a warm 80-degree day was a nice way to celebrate my birthday. That was a treat. I’m in NYC next Thursday for meetings followed by a NY Rangers vs. Flyers hockey game. And, oh boy, the Masters is just around the corner. I’m checking in happy, and I hope you are as well!
Have a great week!
Kind regards,
Steve
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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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IMPORTANT DISCLOSURE INFORMATION
This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice.
Investing involves risk.
This letter may contain forward-looking statements relating to the objectives, opportunities, and future performance of the various investment markets, indices, and investments. Forward-looking statements may be identified by the use of such words as; “believe,” anticipate,” “planned,” “potential,” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular market, index, investment, or investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, Federal Reserve policy, and other economic, competitive, governmental, regulatory, and technological factors affecting markets, indices, investments, investment strategy and portfolio positioning that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties, and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements or examples. All statements made herein speak only as of the date that they were made. Investing is inherently risky and all investing involves the potential risk of loss.
Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by CMG), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CMG. Please remember to contact CMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. CMG is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice.
No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, has not been independently verified, and does not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods. See in links provided citing limitations of hypothetical back-tested information. Past performance cannot predict or guarantee future performance. Not a recommendation to buy or sell. Please talk to your advisor.
Information herein has been obtained from sources believed to be reliable, but we do not warrant its accuracy. This document is general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purposes.
In a rising interest rate environment, the value of fixed-income securities generally declines, and conversely, in a falling interest rate environment, the value of fixed-income securities generally increases. High-yield securities may be subject to heightened market, interest rate, or credit risk and should not be purchased solely because of the stated yield. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). Investment-grade investments are those rated from highest down to BBB- or Baa3.
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.
In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professional.
Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.