May 6, 2022
By Steve Blumenthal
“MP3 reflationary policies produced massive injections of money and credit into economies, leading to high nominal growth, leading to self-reinforcing inflation, leading to a tightening of monetary policy which is now just beginning. Stagflation is the big risk and the war in Ukraine has added to that.”
– Ray Dalio, Bob Prince, and Greg Jensen
CIOs, Bridgewater Associates
The first week of the 2022 Strategic Investment Conference concludes today. David Rosenberg, the perennial lead-off hitter for as long as I can remember, kicked things off. Based on his insights, as one of my colleagues later texted, you may want to “hide the sharp objects.”
Rosenberg says the Fed will destroy demand to beat down inflation, and recession will arrive this year. The best asset classes, he added, are bonds, gold, cash, high and growing dividend stocks, and trading volatility.
When he was asked about his “transitory” call a year ago, he answered that he is sticking with it. He believes inflation continues to be transitory. He cited the war in Ukraine and China’s Covid policy and the resulting supply chain disruptions as reasons for extending inflation.
There is truth in that, of course. Since his “transitory” call at last May’s 2021SIC, the long-term bond is down 21% and it is down more than 35% in the last 6-months, which doesn’t feel transitory if it’s in your brokerage account. Rosey is sticking with his call for lower interest rates. In May 2021, the 10-year Treasury yielded 1.77%. It is at 3.12% today. Rosy thought last May and continues to believe today that the 10-year Treasury yield is heading down to 1%. A recession may make that happen.
Dr. Frank Luntz’s presentation followed Rosey’s and—in my view—stole the day. Think of the US population as one big family. Well, one big dysfunctional family in need of a lot of therapy to reconcile all of our differences. Think of Dr. Luntz as an objective therapist, someone who can clearly see and get to the root of the dysfunction.
Some quick background: Dr. Luntz pioneered the “instant response focus group technique.” He has written, supervised, and conducted more than 2,500 surveys, focus groups, ad tests, and dial sessions for more than 50 Fortune 500 companies and CEOs in more than two dozen countries and six continents over the past 30 years. His political and communication knowledge and skills are recognized globally. He’s the author of three New York Times Best Sellers: Words that Work: It’s Not What You Say It’s What People Hear; What Americans Really Want… Really, which addresses the private hopes, dreams, and fears of the American people and reached number 18 on the Best Seller list; and WIN, which reached number 2 on Amazon and number 3 on The New York Times Business Best Seller lists.
He began by telling the audience that if we could look into his mind, “I don’t think you would like what you see. It’s pretty dark out there. It’s not just about the economy. It’s about the divisions in society. It’s about our inability to interact with each other in a thoughtful fashion.”
Here’s the bottom line: He knows what he’s talking about, and he’s scared. Our issues are due to the divisions in society and our inability to interact with each other in a thoughtful way. We are pissed off at our leadership. We are angry about how politicians don’t seem to listen to us, or learn for us, or lead us. Hammering home his point: More than half of the country is willing to vote for a third-party candidate. We have never seen numbers so high.
Dr. Luntz is most concerned about how the media is getting it wrong. This isn’t the Great Resignation, this is the Great Rethink. Everything in our lives is up for reconsideration. He believes the 2022 elections are going to be controversial, and the 2024 election may be unprecedented in modern American History.
Following are a few of my bullet-point notes from Dr. Luntz’s conversation with Mauldin Economics’ Ed D’Agostino.
- The effort to get a third-party candidate for the ballet is already underway. Money has been raised and is already committed. The candidate needs about $125 million. About $25 million has already been raised.
- He believes that if Trump does get the ticket, and if we have Trump vs. Biden (or Harris) we will absolutely get a viable third-party candidate—and that candidate may be successful.
- He doesn’t believe Biden will win.
- This isn’t just “never Trump;” it’s “never Trump and never Biden.”
- 2022 is “The Inflation Election.”
- 53% of voters say inflation, affordability, and the rising prices they’re seeing in every category—from food to fuel—are influencing their political decisions.
- 36% of voters polled say our dependence on Russia and China for almost everything that matters, including energy, manufacturing, and natural resources, is a real problem.
- The priority is to end the supply-chain threat.
- The third-most-pressing issue is climate. We have come to accept that climate change is real and we need to do something now.
Luntz was extremely balanced in his presentation and did not take a political side. But he did say this: Overall, leaders on both sides of the aisle aren’t getting it.
His biggest concern is that this country’s divide is so fundamentally important to everything that is happening right now. And the consequences are just tremendous.
Dr. Luntz concluded his presentation with a call to action. He said:
You don’t have to accept my fear of what’s about to happen. I want to get this right. You have the ability, the people on this call have the ability to change the future. You have the power, you have the influence, you have the financial capability and the political wherewithal. But you have to want to do it. You have to participate. You have to use the right language. You have to do the right thing, not necessarily the easy thing. And I want to empower you to do that because I think you’ll (effect) change… I think we can be safe. You don’t have to have this dark future. We’ll have it if you don’t act. You will give us a much brighter future if you do. And I appreciate the hour to have this conversation because you now know more about what’s really happening than most Americans. That gives you the responsibility to fix it.
You can follow Dr. Luntz on Twitter: @FrankLuntz
Day two included Carlyle Group’s legendary founder, David Rubenstein; real estate expert Barry Habib; fund manager Ron Baron, and a heavyweight natural resource and energy panel that included Rene Aninao, (my fishing friend), Sam Rines, Glencore’s David Brocas, and Pickering Energy Partners’ David Pickering.
Barry Habib presented one of the most cogent arguments for recession that I’ve heard. And his co-presenter, Katie Stockton had some fantastic technical charts. Evidence suggests a bear market. Quoting Barry, the recession is coming. Barry is a good friend. He remains bullish on real estate and please stay tuned for a future OMR podcast discussion with Barry.
Meanwhile, Ron Baron shared his sage advice, helping to put investment worry to bed. Ron founded Baron Funds in the early 1970s with about $10 million in assets under management. Today’s it’s $46 billion. You’ll find a few more of my comments on Ron’s discussion in the Personal Section below.
And speaking of investment titans, Ray Dalio and his co-CIOs from Bridgewater Associates shared their thoughts on the Fed, inflation, and the markets in a note they put out this week. I believe it is always good to know what those behind the largest hedge fund in the world are thinking. You’ll find a short summary and link to the full note below. “Stagflation is the big risk.”
Trade Signals follows as well. You’ll see a lot of red and very little green. So, grab your coffee and find your favorite chart. Stay optimistic, read on, and do the cha-cha!
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A Note From the CIO’s at Bridgewater Associates
Here is the link to the full piece. Think of this note as a short summary of their current thinking. You’ll find a few highlights below that get to the heart of the matter. Note that you can subscribe to Ray and his team’s letters for free. From the letter:
MP3 reflationary policies produced massive injections of money and credit into economies, leading to high nominal growth, leading to self-reinforcing inflation, leading to a tightening of monetary policy which is now just beginning. Stagflation is the big risk and the war in Ukraine has added to that.
What Was Coming…
Last year, as it became clear that reflationary MP3 policies had produced a level of nominal spending growth that was far in excess of the capacity to produce, the natural result would likely be an increasing probability of a self-reinforcing inflation cycle, which would bring us to a transition in monetary policy from extremely stimulative to restrictive.
The source of this high nominal growth was the massive injection of nominal money and credit via coordinated monetary and fiscal policy (MP3). Fiscal stimulation via the monetization of government debt raised nominal income across all income groups. This provided the initial financing of a surge in nominal spending, which further raised incomes, leading to a self-sustaining, self-reinforcing process of nominal spending, financed by nominal income, financed by nominal spending.
Where Things Now Stand…
It’s been a while since we’ve been in an environment of high nominal growth, so it’s worth taking a moment to register the mechanics. Nominal growth is total spending as measured in dollars spent (or other local currency). Nominal spending is financed by money, credit, and income and breaks down into real growth and inflation. If output keeps up with nominal spending, you get more real growth. If output does not keep up, you get higher prices and inflation. Stagflation is when high nominal growth is absorbed by higher prices and leaves a low level of real growth.
They go deeper into some of the economic reaction functions and it’s worth reading to get a better feel for how the economic system works but I’ll jump to their conclusion and allow you to choose if you’d like to a deeper dive into their note.
Conclusion
Given this blend of considerations, odds favor moving too slowly and not enough, which would make the inflation cycle more entrenched and require more aggressive action later. The longer that current conditions persist, the more challenging it will be to simultaneously achieve the desired level of growth and the desired level of inflation.
SB here. My two cents: An inflation regime is upon us. I don’t believe it is transitory. I do believe it will ebb and flow, much like it did in the 1970s. If you are asking, What can I do about this? There is much you can do. More below and in future posts.
Full Bridgewater letter and disclosures here.
Trade Signals:Ten Year Treasury Tops 3%, Dr Copper Signals Economic Downturn, The ZBM and MACD Indicators Say Not Just Yet
May 4, 2022
Market Commentary
Notable this week:
As expected, the Fed raised interest rates by 50 basis points today. Not expected was Powell’s comment that the Fed wasn’t considering raising rates by 75 bps points. The market loved it! The S&P 500 Index spiked higher by nearly 3%. Speaking of 3%, the 10-year Treasury yield briefly breached 3% today (May 4, 2022) but settled lower after Powell’s press conference. Overall, I don’t believe there is any change in the macro picture.
Not to go unnoticed, the sharp rise in interest rates has caused the popular Vanguard Extended Duration Treasury ETF to decline by more than 30% in the last 4 1/2 months and minus 37% since mid-2020.
Dr. Copper Signals Economic Downturn
According to Bloomberg, traders have fully priced seven standard rate hikes in 2022. The Fed’s goal, of course, is to reduce inflation. The markets anticipate that the federal funds rate will exceed 3% by early 2023. I don’t share that view. Why? Perhaps best summed up by Ray Dalio and his leadership team at Bridgewater Associates.
“MP3 reflationary policies produced massive injections of money and credit into economies, leading to high nominal growth, leading to self-reinforcing inflation, leading to a tightening of monetary policy which is now just beginning. Stagflation is the big risk and the war in Ukraine has added to that.”
– Ray Dalio, Bob Prince, Greg Jensen
Investopedia defines Doctor Copper as “insider lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of an economy. This is due to copper being a fundamental raw material used as inputs in many industries and products.”
Dr. Copper is signaling an economic downturn is ahead (red arrow bottom right in the lower clip).
Dr. Copper is an early and historically excellent indicator signaling the economy’s direction. For traders, keep a close eye on the Zweig Bond Model and the 10-year Weekly MACD to signal a buy trade in long-term bonds. A 10-year Treasury yield of 3% is getting interesting. You can see how much the Vanguard Long Duration Treasury Bond ETF has lost in four and a half months. A recession will halt the Fed’s rate hikes and send interest rates lower. With seven rate hikes priced in, my personal view is the Fed won’t get past two more 50 bps rate hikes. Of course, I could be wrong. Therefore, keep a close eye on the Zweig Bond Model and the 10-year MACD indicators. Both are saying it is not yet time to make the trade.
I think David Rosenberg and Dr. Lacy Hunt’s fundamental calls for lower interest rates will be proven correct. One last dive lower in yields when the recession comes. Then QE4, more sugar and higher potentially even higher inflation. The problem with making a fundamental call is the time within the call that you are wrong. Wrong a little over a small window of time is ok. Wrong a lot over any period in time can be game over. That’s been the case for David and Lacy. Riding out the current 30+% decline is financially painful and in my view unnecessary.
When I go through the routine of updating Trade Signals each week, this may sound selfish, but I really do it for me and I openly share it with you. I want to make sure that the market’s technical behavior is supporting my fundamental view. If not, the technicals help guide my risk management. I want to avoid being wrong a lot over any window of time. The Zweig Bond Model has kept me on the right side of the trend in interest rates for many years. Not perfect, some whipsaws but overall it has been excellent. And no guarantees. My two cents remain: Risk manage positions and trade bonds; don’t buy and hold them. Inflation regimes are different.
The Dashboard of Indicators follows next. More red than green. Yellow arrows indicate a nearing change in signal.
Click HERE to see the Dashboard of Indicators and all the updated charts in Wednesday’s Trade Signals post.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon, and risk tolerances.
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Personal Note – It’s the Cha-cha
An OPTIMIST… “Someone that knows that taking a step backward after taking a step forward is not a disaster, it’s the cha-cha.”
– Robert Brault
By the time this week’s post hits your inbox, Susan and I will be halfway from Philadelphia to Penn State. Son Kyle graduates tomorrow, and we are really happy for him. Kyle is graduating with a dual degree in theater and entrepreneurship. He plans to head to LA and find an actor/writer/director/bartending job. Just, kidding son. This kid is excited, confident, and hungry. We’ve loved watching him create and can’t wait to see what he does next. Stay optimistic kid and do the cha-cha!
As I conclude my writing this week, I am watching Lous Gave, Charles Gave, and Anatole Kaletsky from GavKal present. I keep nodding my head up in agreement. Anatole went bullish in 2009 and turned bearish last month. He sees an inflationary regime ahead. Charles Gave agreed and talked about the beginning of his career in 1971. He said it took three years before people understood the investment (inflation) regime change. He believes a similar cycle has begun.
Rethink everything you are doing with your money. “Buy the dips” is now “sell the rallies.” Focus on wealth preservation. Seek tactical strategies. Buy-and-hold index investing is dead. In an inflationary environment, you cannot go forward without a hedged portfolio.
I’ll share more from the conference with you next week, along with my 30,000-foot views on how to invest in this environment. I continue to like 80% Core (defend your core wealth), and 20% Explore (seek asymmetric risk-on specialty opportunities).
It was great to listen to Ron Baron present this week. He invests in companies that are growing fast, has a competitive advantage, and are managed by exceptional people—companies he believes will be five or ten times their current price in five to ten years. And he commits to the long haul, investing in them for ten or more years. He focuses on the future value of his investments.
We consider the types of stocks he buys to be akin to what we’d put in the Explore portion of an investor’s portfolio. If you defend and protect your Core wealth, it enables you to do more exploring. And it is the EXPLORE investments that can create great wealth.
Stay optimistic and do the cha-cha. Hat tip to CMG’s Amy for sending me the great quote above. More on the conference next week!
Wishing you a great week,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
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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