March 24, 2017
By Steve Blumenthal
“First, if the bubble were to collapse on its own, would the effect on the economy be exceedingly large?
Second, is it unlikely that the Fed could mitigate the consequences?
Third, is monetary policy the best tool to use to deflate a house-price bubble?
My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”
– Janet Yellen, September 27, 2005
(quoted in Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America,
by Danielle DiMartino Booth (Portfolio Penguin 2017)).
We touched down late last night in Salt Lake City. Susan, the boys, Brianna and me along with a dozen bags. It’s a long-standing family tradition and let’s just say everyone is really excited. A snowstorm just ended and my Snowbird app says 11” of fresh new snow.
There’s an old saying on the ski mountain, “there are no friends on a powder day.” Any skier who has felt that high-speed soft feeling knows… it’s the epic natural high and it won’t last long. My good friend, today is a powder day! I’ve got to beat the locals and catch the first tram.
This week’s post is selfishly short. “No friends,” I’ll ask forgiveness later. But I do want to share something I believe is important as it relates to the economy, the markets and your net worth.
Bridgewater Associates is out with a piece this week entitled, “Populism: The Phenomenon.” It begins:
Populism is not well understood because, over the past several decades, it has been infrequent in emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in developed countries. It is one of those phenomena that comes along in a big way about once a lifetime—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was in the 1930s, when most countries became populist. Over the last year, it has again emerged as a major force.
To help get a sense of how the level of populist support today compares to populism in the past, we created an index of the share of votes received by populist/anti-establishment parties or candidates in national elections, for all the major developed countries (covering the US, UK, Japan, Germany, France, Italy, and Spain) all the way back to 1900, weighting the countries by their population shares. We sought to identify parties/candidates who made attacking the political/corporate establishment their key political cause. Obviously, the exercise is inherently rough, so don’t squint too much at particular wiggles. But the broad trends are clear. Populism has surged in recent years and is currently at its highest level since the late 1930s (though the ideology of the populists today is much less extreme compared to the 1930s).
I share highlights from Bridgewater’s piece with you below along with the link to the full paper. First, let me get started with this next chart and note the parallels between the mid-1930s and today.
Source: Bridgewater Associates, LP
I appeared on Fox Business News’ “Countdown to the Closing Bell with Liz Claman” on Monday. Ashley Webster filled in for Liz Claman. Ashley pointed to Amazon and Google and the great moves they’ve had – a recent proof statement that all is well. We humans are herd beings. I answered… if you do nothing else, put a 200-day moving average stop-loss on everything you own. Here’s the clip:
The Trump rally has been amazing. The equity market trend remains bullish. I’m pleased. Risk remains elevated as we sit at the second most expensively priced market in history and the Fed is raising, not lowering, interest rates. I’m cautious.
Take a careful look at the similarities Ray Dalio and his Bridgewater team draw between the 1930s (the last time we sat at the peak of a long-term debt cycle) and today. The issue is debt. We’ll find a way to the other side. Deleveraging will happen. Beautiful or ugly? We just don’t yet know what we are going to get.
As a quick aside, I read about half of Danielle DiMartino Booth’s book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America, on the plane ride to Salt Lake City last night. It is a behind the curtain view of the culture at the Fed. Danielle was a senior analyst for former Dallas Fed President Richard Fisher. The book is great. Buy it… and if you are holding out hope that the Fed will save the day, DON’T. They’ve got issues, we’ve got issues.
The intro quote is from Danielle’s book. Mindful the Fed is not omniscient.
Sobering, but think of the opportunities. Grab that coffee and find your favorite chair. Today’s post is short. Wishing you the best!
♦ If you are not signed up to receive my weekly On My Radar e-newsletter, you can subscribe here. ♦
Included in this week’s On My Radar:
- “Populism: The Phenomenon” by Bridgewater Associates
- Trade Signals – Extreme Investor Optimism Yet Bull Equity Trend Remains in Place (posted 03-15-2017)
- Personal Note – Snowbird
“Populism: The Phenomenon”
By Ray Dalio, Steven Kryger, Jason Rogers and Gardner Davis
Populism is not well understood because, over the past several decades, it has been infrequent in emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in developed countries. It is one of those phenomena that comes along in a big way about once a lifetime—like pandemics, depressions, or wars. The last time that it existed as a major force in the world was in the 1930s, when most countries became populist. Over the last year, it has again emerged as a major force.
To help get a sense of how the level of populist support today compares to populism in the past, we created an index of the share of votes received by populist/anti-establishment parties or candidates in national elections, for all the major developed countries (covering the US, UK, Japan, Germany, France, Italy, and Spain) all the way back to 1900, weighting the countries by their population shares. We sought to identify parties/candidates who made attacking the political/corporate establishment their key political cause. Obviously, the exercise is inherently rough, so don’t squint too much at particular wiggles. But the broad trends are clear. Populism has surged in recent years and is currently at its highest level since the late 1930s (though the ideology of the populists today is much less extreme compared to the 1930s).
Given the extent of it now, over the next year populism will certainly play a greater role in shaping economic policies. In fact, we believe that populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal policies). It will also be important in driving international relations. Exactly how important we can’t yet say. We will learn a lot more over the next year or so as those populists now in office will signal how classically populist they will be and a number of elections will determine how many more populists enter office.
In any case, we think now is the time to brush up on our understandings of populism and what to watch out for. While we’re not experts in politics, we wanted to share our research to understand the phenomenon.
In this report, we describe what we see as the “archetypical populist template,” which we built out through studying 14 past populist leaders in 10 different countries. In that way, we can show their similarities and differences. While no two cases are identical, most cases are similar—so much so that one might say that there is a “populist playbook.” By knowing these historical cases well, we will then be able to compare the developments of contemporary cases with those of the past, both to better understand the phenomenon and to better visualize how it might develop.
The Archetypical Populist Template
Populism is a political and social phenomenon that arises from the common man, typically not well- educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them. These sentiments lead that constituency to put strong leaders in power. Populist leaders are typically confrontational rather than collaborative and exclusive rather than inclusive. As a result, conflicts typically occur between opposing factions (usually the economic and socially left versus the right), both within the country and between countries. These conflicts typically become progressively more forceful in self- reinforcing ways.
Within countries, conflicts often lead to disorder (e.g., strikes and protests) that prompt stronger reactions and the growing pressure to more forcefully regain order by suppressing the other side. Influencing and, in some cases, controlling the media typically becomes an important aspect of engaging in the conflicts. In some cases, these conflicts have led to civil wars. Such conflicts have led a number of democracies to become dictatorships to bring order to the disorder that results from these conflicts. Between countries, conflicts typically occur because populist leaders’ natures are more confrontational than cooperative and because conflicts with other countries help to unify support for the leadership within their countries.
In other words, populism is a rebellion of the common man against the elites and, to some extent, against the system. The rebellion and the conflict that comes with it occur in varying degrees. Sometimes the system bends with it and sometimes the system breaks. Whether it bends or breaks in response to this rebellion and conflict depends on how flexible and well established the system is. It also seems to depend on how reasonable and respectful of the system the populists who gain power are.
In monitoring the early-stage development of populist regimes, the most important thing to watch is how conflict is handled—whether the opposing forces can coexist to make progress or whether they increasingly “go to war” to block and hurt each other and cause gridlock.
Classic populist economic policies include protectionism, nationalism, increased infrastructure building, increased military spending, greater budget deficits, and, quite often, capital controls.
In the period between the two great wars (i.e., the 1920s-30s), most major countries were swept away by populism, and it drove world history more than any other force. The previously mentioned sentiments by the common man put into power populist leaders in all major countries except the United States and the UK (though we’d consider Franklin D. Roosevelt to be a quasi-populist, for reasons described below). Disorder and conflict between the left and the right (e.g., strikes that shut down operations, policies meant to undermine the opposition and the press, etc.) prompted democracies in Italy, Germany, Spain, and Japan to choose dictatorships because collective/inclusive decision making was perceived as tolerance for behaviors that undermined order, so autocratic leaders were given dictatorial powers to gain control. In some cases (like Spain), strife between those of conflicting ideologies led to civil war. In the US and UK, prominent populist leaders emerged as national figures (Oswald Mosley, Father Charles Coughlin, Huey Long), though they didn’t take control from mainstream parties.
In summary, populism is…
- Power to the common man…
- …Through the tactic of attacking the establishment, the elites, and the powerful…
- …Brought about by wealth and opportunity gaps, xenophobia, and people being fed up with government not working effectively, which leads to:
- …The emergence of the strong leader to serve the common man and make the system run more efficiently…
- …Protectionism…
- …Nationalism…
- …Militarism…
- …Greater conflict, and…
- …Greater attempts to influence or control the media.
The table shown immediately below points out the major populist politicians from the interwar period and what characteristics they shared:
For the most part, the populist patterns were clear (e.g., the conflicts within the countries intensified) though they played out in somewhat different ways and to varying degrees in the different cases.
What follows is an examination of 14 of those populists listed above, in 10 countries—some 55 pages of it. It is both too long and too short. It’s too long because 50-plus pages is more than many of you are going to want to read. It’s too short because describing multi-decade careers of major historical figures in an average of four pages is woefully inadequate in conveying the picture. If you think it’s too much, we recommend that you pick the particular characters that you’re interested in and review them. To help you do this, a table of contents is provided (note that we don’t include full profiles of a couple of the people listed in the tables above):
This is really great research from some of the brightest minds among us. Bridgewater Associates is the largest hedge fund manager on the planet. They manage north of $150 billion and have a history of excellent investment performance.
I encourage you to read the report.
Trade Signals – Extreme Optimism Beginning to Reverse, Looking For Pessimism; Equity Trend Signals Remain Bullish
S&P 500 Index — 2,346 (3-22-2017)
Notable this week: Our bond market signals remain in “Sell,” signaling short-term bond market duration exposure is favorable over longer-term bond maturities. The trend for fixed income remains negative (bonds don’t do well when interest rates rise.) Both the gold signals are in a sell (however, both are turning/nearing buy signals). The equity market trend evidence remains bullish. The extreme investor optimism (which is short-term bearish for equities) is beginning to reverse. Let’s keep an eye out for “extreme pessimism” – a better entry point so long as the trend remains bullish.
Click here for the charts and explanations.
Personal Note — Snowbird
“The secret to my success is I buy when everyone else is selling
and I sell when everyone else is buying.”
– The great Sir John Templeton (… a whisper of wisdom)
There is a bubble in developed world government debt; there is a bubble in public pension plans. There is a herding of money into passive index funds, but I just don’t yet sense the irrational buying exuberance that comes at market tops. The equity market trend is bullish and as we trend followers love to say, “The trend is your friend.” For now anyway.
My best two cents: Have a risk-minded plan in place, stay flexible, diversified and manage your money in a way that mindfully limits your downside risk.
I’m rushing out to the mountain as I hear my beautiful wife whispering in my ear, “be smart, you’re 55, not 25.” OK — got it. Powder day…
We are happy and high on life and I hope this note finds you and those you love most feeling awesome.
I’ll be in Dallas next Tuesday and Wednesday for a meeting with a dozen advisors kicked off with a chili dinner at Mauldin’s house. John fancies himself as a bit of a chef as does his beautiful daughter, Tiffani. It’s a chili cook-off. I’ll let you know who wins next week. My money is on Tiffani.
If you are in the Philadelphia area on April 5, stop by the Philadelphia Ritz-Carlton for the Bloomberg/Invesco PowerShares ETF event. I have the privilege of presenting and I will be talking about fixed income ETF trading approaches and making the point that there are ways to navigate the ultra-low interest rate, high-risk fixed income environment we find ourselves in today.
A trip to Sonoma and San Francisco follows on April 24-26. If you are an independent advisor and would like to learn more about the Mauldin Solutions platform and specifically how we are partnering with a select group of advisors, shoot me a note.
No friends on a powder day. Gotta go… Wishing you a wonderful weekend!
Susan and Brianna
The Gang
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With kind regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules-based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
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