March 8, 2024
By Steve Blumenthal
“Emotional Intelligence grows through perception. Look around at your present situation and observe it through the level of feeling.”
– Deepak Chopra
I’ve been in Park City this week at the annual WallachBeth 2024 Winter Symposium, attending with numerous other investment professionals who are integral to the plumbing that makes our capital markets system run. This includes leaders in private equity and private credit, institutional fund managers, investment managers, the head of options from the NYSE, the head of ETF listings at Nasdaq, the head of Dow Jones Indices, the CBOE, BNY Mellon, Milliman, Invesco, State Street, Alliance Bernstein, Goldman Sachs, JPMorgan, Grayscale, hedge fund managers, and advisors.
What began fourteen 14 years ago as an ETF-focused conference hosted by WallachBeth, one of the preeminent trade firms in the business, the symposium has since expanded to cover all facets of the investment industry. The presentations this year were valuable, the skiing great, and the dinners excellent. But it’s the relationships you cultivate here that are the most important part.
Since I’m a macro guy, let’s talk macro. The following are a few of my high-level takeaways from the week.
Private Equity and Private Credit
First, did you know there were approximately 8,000 publicly traded U.S. equities ten years ago, and there are 4,000 today? This helps to explain the growth in the private equity market. Bank regulations post-2008 have led to the growth in private credit. Today’s access to private markets is at the level the ETF industry was at 15 years ago. Few portfolios held ETFs then; today, everyone knows how they work. According to Michael Bell, CEO of the private equity firm Meketa, the average allocation to privates is 2% today. He said Appolo predicts it will increase to 50%. (Our firm wrote a paper titled “Understanding Private Credit.” You can sign up to receive a copy here.)
Second: Blockchain. I learned more about blockchain on one chairlift ride than I have in the past several years. The person explaining it to me likened blockchain today to the early days of the Internet.
Goldman Sachs’ Global Head of Macro Strategies, John Townsley, said that interest rate movements are impacting the economy differently today, causing rolling recessions. “Ed Yiardeni got it right,” Townsley said. The hard economic data (e.g., the number of cars, homes, and permits) are still statistically positive. But the soft data (e.g., sentiment, confidence, how people feel about the economy, etc.) shows real pessimism. Townsley said that “how people feel” soft data is not as reliable as it was years ago. After all, a lot of the soft data comes from surveys, and who picks up survey calls nowadays? If you don’t recognize the number, you ignore the call. Those who do answer are more prone to share their frustrations.
Noting the absence of a financial bubble, Goldman Sachs doesn’t see extreme leverage in the economy. Though they were in the recession camp last year, they’re in the soft landing camp in 2024. Townsley had much more to say, but unfortunately, he ran out of time. I’m awaiting the presentation deck and will share more with you next week.
JPMorgan’s global market strategist, Jordan Jackson, said, “Consumers are bending but not yet breaking.” The following are a few highlights from his talk (Source: Opinions/views are JPMorgan’s):
- Foreign investors own 40% of U.S. Debt. We will reach a point where the bond vigilantes will call the government to task. Think aggressive selling and little buying. That will send interest rates higher. We are not yet at that point, and it could be a few years away.
- JPMorgan believes we’ll see earnings growth at 7% to 8% this year, with 50% of it coming from the magnificent 6 (not a typo) stocks and 50% coming from the rest of the market. (Wow!)
- They see the high Cap-weighted index stock concentration continuing, noting that the top 10 stocks make up 30% of the market and approximately 25% of all earnings.
- Growth companies are in good shape and are investing in R&D. The future earnings outlook is good.
- AI will be transformative. JPMorgan sees a 1.5% to 3% boost to GDP from AI alone. I’m not sure when that starts.
- Value vs. Growth? They see growth stocks continuing to lead the charge.
- Small-cap stocks? Not yet. Forty percent of the Russell 2000 companies are not profitable, and 40% percent have debt tied to floating interest rates.
- Interest rates? Yields coming down to between 3.5% andto 3.75% by year-end.
- Inflation? The base case is that it moves down to 2%.
- Risks? Geopolitical risk is high; supply chain risk is high. JPMorgan sees input costs increasing.
- Fed cuts? The base case is that we’ll see three interest rate cuts (June, September, and December).
- They do not see the 10-year above 5%.
- Investor demand for investment-grade bonds at 5.25% yields and HY bonds at 7.60% remains strong. They note that people are not selling their HY bonds.
- Bottom line in 2024: 2% inflation, 0 chance of recession, 2% GDP growth and 4% unemployment.
Neither Goldman Sachs nor JPMorgan addressed what I believe is the big elephant in the room—the massive debt and entitlements crisis we’re speeding toward and likely to reach by the 2028 election.
There was much more on the agenda. Gary DeMoss, from Invesco, spoke about how to present. Although the room was filled with 160 financial professionals, Gary’s presentation was really useful for anyone in any industry. I’m going to write more about it next week.
For now, let’s change course and return to a note Peter Boockvar sent to his subscribers this week. I asked him if I could share it with you.
It wasn’t just the title that caught my eye; it followed an email I’d received earlier on the same point from a good friend and client, Jim T.
Before we look at Peter’s Boock Report, this from Jim:
Article from The Hill, “Powell: ‘There will be bank failures’ caused by commercial real estate losses”: Jim believes this is just the start and that it will be worse than Powell is stating. Regional and sub-regional banks will be hit hard. “When you start hearing about ‘Mark to Market’ in the near future, run for the hills,” Jim wrote in his email. it is not necessarily bank failures (insolvency) but more like incompetence, no ability to lend, no idea how to handle repossessed properties. Consolidations will be common. The net is much wider than almost all people understand.” Jim is a real estate developer in a strong market. He is on the front line and seeing what others have yet to see.
Now, back to Boockvar (article copied as printed):
A lot here but a must read…
A few comments on New York Community Bank and CRE. With Janet Yellen and the federal government now implicitly guaranteeing all uninsured deposits as after all, if they bailed out a bunch of venture capitalists and their portfolio companies, are they not going to bail out others, it takes the drama out of these stressed bank balance sheet situations when looking big picture. The NYCB’s, definitely somewhat self inflicted, that are out there will be dealt with via the shareholders taking pain and maybe even some bondholders. And with the slow moving train wreck that is commercial real estate if one is overlevered and has debt coming due this year or next, there will be more small bank trouble. But, there is nothing systemic I believe. It is more about the viability of some over stretched banks and a multi year process of working through CRE pain.
The other issue we face from challenges with mostly regional banks is the reduced credit being loaned out. In nominal terms, US GDP grew by about $1.5 Trillion in 2023. However, the amount of C&I loans outstanding shrunk by almost $40b. Could this be a form of a credit crunch? Or if one doesn’t want to use those words, credit tightness? Or just less demand for loans? The CFO of Bank America spoke yesterday at the RBC conference and said this on loan demand from both the consumer and commercial side, “Well, it was a little slower than we would have liked last year. Normally you think GDP plus and you hope for a good GDP number and you hope for a lot of loan growth and was just a little quieter last year…It’s less about us extending commitments to clients, it’s more about clients finding it less interesting to borrow when the base rate is now at 5% plus…That’s continuing a little bit. I’d say loan growth this first quarter, we’re off to a slowish start.” That said by him, many small businesses are likely facing tougher loan officers at smaller banks where they might have some demand but see little supply.
Also of note was this from the NY region in yesterday’s Beige Book: “Activity in the region’s finance sector remained sluggish. Small to medium sized banks in the region reported ongoing declines in loan demand and weaker financing activity. Banking contacts also indicated that credit standards tightened, particularly for business loans and commercial mortgages. While deposit rates held steady, loan spreads narrowed, and delinquencies continued to rise.”
From Philly region: “Banks and business clients agreed that higher interest rates had lowered demand for loans, while tighter access to credit had lowered the potential supply.”
From Richmond: “Financial institutions continued to report a modest softening of demand across all loan types. Higher interest rates and continued uncertainty with the overall economy continued to be the reasons noted for this softening.”
From Atlanta: “Lending at Sixth District financial institutions flattened since the previous report, given tighter underwriting standards and weaker demand for loans, including commercial real estate, commercial and industrial, and consumer loans. Multifamily is the only portfolio segment that experienced any notable uptick in growth.”
Now on commercial real estate, listening to Powell and others, one would think this is just an office pain point. While structurally that is true for a building that is not Class A, it is also very much a balance sheet issue for ANY piece real estate. As I’ve laid out the math a few times before, you could have a building (any building, multi family, industrial, student housing, etc…) that is 98% occupied but if the 3% loan priced pre 2022 is coming due this year and it’s repricing at 8-9%, and there is too much debt in the capital structure, that landlord is in trouble with that property. Thus, ANY piece of real estate is vulnerable this year that has too much debt coming due. There is by the way about $900b of CRE loans maturing this year.
With the Bank of Canada leaving its base rate at 5% as expected, Governor Macklem also said “It’s still too early to consider lowering the policy interest rate.” And they repeated this, “The council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation.” Higher for longer.
A quick comment here on commodity prices, the CRB raw industrials index closed yesterday at the highest level since mid October. The job of central bankers is pretty complicated right now. We’ll hear from the ECB today.
CRB Raw Industrials Index
Source: Bloomberg, Peter Boockvar
Stock market sentiment got more extreme over the past week. Investors Intelligence said Bulls rose to 59.4 from 57.6. Seeing anything over 60 is a rare occurrence and that Bull read is the highest since the summer of 2021. Bears fell to just 16, the lowest since the summer of 2021. AAII said Bulls rose 5.2 pts to 51.7. That is within 1.2 pts of the highest read since April 2021 which was around the time of peak meme stock euphoria. As seen over the weekend, the Citi Panic/Euphoria index remained at .33, just below the Euphoric threshold of .41. The CNN Fear/Greed index after being in ‘Extreme Greed’ last week is just below that at 74, back in just ‘Greed.’ Bottom line, again, be aware of your current giddy surroundings as the bull boat is pretty full and if it was just a Bull Boat measuring the II survey, it would be standing room only.
The yen is rallying again and to the highest level since early February and JGB yields are up. A few things here pointing to nearing the end of NIRP. Nikkei news is reporting that “Japan’s largest labor confederation said Thursday that wage rise demands by its member unions hit a 31 year high, setting the stage for large pay increases that could prompt the central bank to start lifting interest rates.” This is the ‘shunto’ process where unions and companies negotiate wages around the beginning of the April fiscal year.
There was also another ‘people familiar with the matter’ story from Bloomberg News that said “The Bank of Japan has a tacit greenlight from some government officials to end its negative interest rate either in March or April as prospects for wage hikes look promising…Several government officials say the central bank shouldn’t miss an opportunity to end the world’s last negative rate with its first hike since 2007, as they see sufficient evidence of a virtuous cycle typing wages to price gains, said the people.” The 10 yr JGB yield rose 1.4 bps to 73%, the 40 yr yield got back above 2%. The 2 yr yield is at the highest level since 2011.
JGB 2 yr yield
Source: Bloomberg, Peter Boockvar
The consumer spending and retail comments from the Fed’s Beige Book are what stood out to me when reading it yesterday. There are definite pockets of softness that seemed to increase with consumers very price conscious, but other areas holding steady, particularly travel. Source: Boock Report, Peter Boockvar
SB Here: Peter goes on to share a summary of comments from the various Fed districts: Boston, NY, Phila, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The full Boock Report is worth the read.
Peter is the Chief Investment Officer at Bleakley Advisory Group and a CNBC contributor. Each day, The Boock Report provides summaries and commentary on the macro data and news that matter, analyzing what it all means and how it fits together. You can subscribe to Peter’s report here.
$900 billion in commercial real estate loans are maturing and will need to be refinanced at higher rates. For some owners, that means the gig is up. How systemic this is to the entire system remains to be seen. Higher interest rates are taking their toll.
By the way, if you listened to my podcast discussion with Peter and Barry Habib, Peter humbly says this is the most confusing economic period he’s witnessed in his career. Your job and mine is to be aware of the risks and guide our wealth accordingly.
Grab your coffee and find your favorite chair. I conclude this week’s OMR by highlighting Christa Kuberry’s presentation on meditation, breathing, and emotional intelligence. Finding balance in the Utah mountains? Priceless.
On My Radar:
- The Treasury Yield Curve
- Random Tweet’s
- Personal Note: Emotional Intelligence
- Trade Signals: Weekly Update, March 6, 2024
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.
The Treasury Yield Curve
I’ve been sharing the following chart with you each month for the last 12 months. It is a recession indicator that many are poo-pooing today. I don’t think we should ignore it. The median lead time from the first inverting inversion to the start of a recession is 11 months. We are currently at 20 months. Grey lines mark past recessions.
The inverted yield curve is an important economic indicator because it signals that a potential recession is likely in the near future. Normally, long-term debt instruments have a higher yield compared to short-term debt instruments due to the risks associated with time, such as inflation and uncertainty. However, the yield curve inverts when short-term interest rates exceed long-term rates. This inversion suggests that investors have little confidence in the near-term economy and are willing to accept lower yields for long-term securities, betting that rates will fall as the central bank cuts rates to support economic growth.
Moreover, the inverted yield curve has historically been a reliable predictor of economic recessions. It reflects the market’s expectation of future economic slowdowns, where investors anticipate that future interest rates will be lower than they are now due to the central bank’s actions to stimulate a weakening economy. As businesses and consumers cut back on spending in anticipation of a downturn, the economy can slow, making the inverted yield curve a self-fulfilling prophecy. Hence, policymakers, investors, and economists closely monitor the yield curve for signs of economic health and direction.
“We are here (20 months)” – Few are calling for a recession. Most predict a soft landing, and some predict continued growth.
The heat is rising in the kitchen. I wouldn’t take the inverted yield curve for granted.
Understanding Long-Short Investment Strategies
We are writing a series of papers to educate investors on various types of investments they can use to navigate the challenges we foresee ahead. We’ve just published our most recent paper, “Understanding Long-Short Equity Investment Strategies.” For access to that paper and our paper on Understanding Private Credit, click on the “download PDF” image below and provide us with some basic information. You will then be taken directly to the paper. Please feel free to leave us a comment.
(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.)
More Stocks Have Higher Valuations Today Than at 2000 Peak:
Source: @jessefelder, Bloomberg
Rosenberg, Boockvar and Harris:
Source: @EconguyRosie
Ian Bremmer – Helps explain what got us here, politically:
Source: @ianbremmer
You can 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.
Personal Note: Emotional Intelligence
“People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
– Maya Angelou
“We define emotional intelligence as the subset of social intelligence that involves the ability to monitor one’s own and other’s feelings and emotions, to discriminate among them and to use this information to guide one’s thinking and actions.”
– Peter Salovey and John D. Mayer
Dr. Christa Kuberry is an internationally recognized yoga and wellness educator and executive with experience in both academic and corporate settings.
One morning this week at the WallachBeth Winter Symposium, Dr. Kuberry looked out at a less-filled room of about 145 people. Her session was the 7 am session, and a handful (mostly the rookies) didn’t make the wake-up call after a late night in downtown Park City. She instructed us to close our eyes and take six deep breaths. “Fill your lungs, hold your breath as long as you can, and slowly let it out,” she said. “On each breath out, relax your shoulders, relax the muscles in your face, and focus 100% of your mind on your breathing.”
She then had us stand on one leg with the bottom of the opposite foot placed against the standing leg—what yogis call “tree pose.” Balancing on one leg, with eyes closed, she instructed us to reach out and touch the hand of the person on our left and/or right. It’s fair to say that afterward, Let’s just say we all felt a little more connected with each other—which was certainly part of Dr. Kuberry’s plan.
After our short yoga and breathing tutorial, Dr. Kuberry gave a presentation on Emotional Intelligence or EQ.
She shared, a 40-year study at UC Berkeley found that EQ is 400% more powerful than IQ when predicting who will have successsucceed in their field. Self-awareness, self-management, empathy, and relationship management play key roles. In other words, EQ is more important than IQ.
You can reach Dr. Kuberry at christakuberry@gmail.com or by calling 303-931-3247. She works and consults with businesses of all sizes. You and your team will love her work.
I’m finishing writing this from my hotel room. The plan is to ski for a few hours this afternoon, then get dinner in town before grabbing an Uber to the airport for a red-eye flight home at 11:30 p.m. I want to learn more about stock option-based ETF strategies and all things crypto, which I believe can be important components in a portfolio.
Finally, I want to say a heartfelt “thank you” to David Beth and his team at WallachBeth. It is the best conference in the business, led by my dear, high-on-life, endlessly energetic friend Andy McOrmond and his exceptional teammates (Eric, Dana, Mo, Scott, Will, Andrea, Sara, Christian, Sam, and Alan). I’ve had a wonderful time.
Christian, Andy, and Steve (with a cold IPA)
And as for my feelings… I’m feeling good. I hope you are, too.
Wishing you a great week,
Trade Signals: Weekly Update – March 6, 2024
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
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Each week, we update our dashboard of indicators covering stock, bond, developed, and emerging markets, along with the dollar and gold charts. We monitor inflation and recession as well.
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Stephen B. Blumenthal
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