April 15, 2021
Senior Vice President, Private Wealth Group, CMG Capital Management Group
- Segment 1 (03:40): Interview with John Mauldin, Chief Economist & Co-Portfolio Manager, CMG Capital Management Group
- Segment 2 (12:52): Interview with Steve Cucchiaro, President and Chief Investment Officer at 3EDGE Asset Management
Brian Schreiner: Hello. Welcome to the quarterly conference call for the CMG Mauldin Smart Core Investment Strategy. My name is Brian Schreiner. I am Vice President of the Private Wealth Group here at CMG.
The Mauldin Smart Core investment strategy is the culmination of over 30 years of economic thinking by one of the world’s leading economic writers.
John Mauldin is the Chief Economist and Co-Portfolio Manager of the CMG Mauldin Smart Core investment strategy. John believes that the end of the debt supercycle is one of the most profound trends that will impact your portfolio over the next several years – and he believes the period ahead will require you to think and invest differently to get through the “Great Reset.”
Instead of diversifying asset classes, Mauldin Smart Core diversifies among trading strategies. The strategies seek growth, have the ability to respond to the global economy on a daily basis and do so with a disciplined investment processes that seeks to minimize downside risk.
Think of Smart Core as four strategies in one managed account portfolio. The strategists utilize ETFs that enable them to trade across asset classes, countries, sectors, commodities and cash-like securities for safety.
Today’s call will be split into two segments. First we will hear from Co-Portfolio Manager John Mauldin on what he sees in today’s investment environment and economic landscape.
In the second segment, we will hear from one of the portfolio’s four asset managers: Steve Cucchiaro, President and Chief Investment Officer at 3EDGE Asset Management. Steve will give us his take on the current market environment and provide insights into one of the individual trading strategies within Mauldin Smart Core.
As you are listening to the call today, if you have any questions or if you’d like to learn more about our investment management services, please contact us by phone or email. Our phone number is 800-891-9092 and our email address is firstname.lastname@example.org.
Federal securities laws require us to make the following disclosure: Investing involves risk. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including CMG Mauldin Smart Core) will be profitable, be suitable for your portfolio or individual situation, or prove successful. No portion of this call should be construed as an offer or solicitation for the purchase or sale of any security. There are additional important disclosures in our Form ADV, which is available on our website.
It’s always an honor to introduce my friend and colleague, John Mauldin. In addition to serving as Chief Economist at CMG, John is a noted financial expert, a New York Times best-selling author, a pioneering online commentator and the publisher of the weekly letter, Thoughts from the Frontline. Together with Mauldin Economics, John hosts the Strategic Investment Conference every year, which brings together some of the world’s most respected economists, analysts and investment managers.
John, Thanks for joining us today!
John Mauldin: Brian, it’s always good to be with you. You caught me today, I’m putting the finishing touches on the Strategic Investment Conference – we’ve got such a powerhouse this year of speakers. This is simply the best conference we’ll ever do. Because we’ve had the luxury of being virtual, we can get people that you could never get to, spend three days flying in and out.
We’ve got Jeff Immelt and David Rubenstein, Ronald Baron, Felix Zulauf. I could go on and on people that are changing the mining industry, in addition to Louis Collum and Lacy Hunt, and some of the usual suspects Cathie Wood from Ark Investments is there, the Co-founder of Palantir Joe Lonsdale, fabulous venture capital investor is going to join us – it’s just a who’s who – just an amazing year. Anyway, let’s talk about the Mauldin Smart Core.
Brain Schreiner: By the way, just for any listeners, if you want to register for the conference, I know you guys are offering some early-bird discounts on the website right now you can just go to Malden Economics, and there’s a link there to register. Mauldin Smart Core is an opportunistic multi-asset, a multi-manager investment strategy that combines several investment strategies into one portfolio. The objective is to seek global growth opportunities while maintaining a level of protection in down markets. The fund has been performing well, it’s up 1.4% year-to-date, through the end of March. And over the last 12 months, the fund is up 16.5%. John, are you pleased with how the fund has been performing?
John Mauldin: Well, I am, because we’ve done that with very low volatility. And my goal was to give reasonable returns I’m not trying to match the market. I’m trying to be a trading strategy. That’s an absolute return strategy. But we seriously reduce the volatility normally associated with Bull and Bear Markets.
Brain Schreiner: And your most recent thoughts from the frontline letter. You said the traditional 60 40 stock-bond portfolios are broken. Why do you think that?
John Mauldin: Well, there’s several things. Number one: bond portfolios, the position it had, the 40% was supposed to be a place where you can get reasonable income. And it would also balance out the volatility from the stock market side, or the zero-interest-rate world. Bonds don’t do that. If you invested in a 10-year bond at the beginning of this year, you’re down almost 6%, at 1.7% is going to take you more than three years to get the money back that you’ve already lost from the capital appreciation and rising rates. That’s not what bonds are supposed to do for you. The stock market is broken to the extent that valuations are so stretched. But it doesn’t mean they can’t get more stretched.
The government is throwing huge amounts of money into the system. We’ve had more capital inflows into stock funds in the last 12 months than we had in the last 12 years. And so, you wonder what happened since March, why we had this incredible bull run? Well, there’s an enormous amount of money piling into the stock markets. And some of that’s coming from smaller investors who get money and say, well, we want to try to save it and put it to work and invest in. And when I say “getting money,” I mean they get government money. And God bless them. But now we’re getting another round of stimulus, we’ve got the Federal Reserve, putting $120 billion back into the marketplace every month. The stimulus that we’re getting is powerful. It’s $5 trillion here in the last year or so, post the COVID world that shows up.
And what happens when that money stops coming in – and it will stop at some point – I worry about what will keep the balancing act up. Maybe the Fed just decides to double down instead of 120 billion a month, it becomes 200 billion a month. If they did that, I wouldn’t be surprised. I don’t know what they could do to surprise me now. They could do something different; I’d pay attention. But I don’t know that it was surprised me. Mario Draghi was famous for saying, “We’ll do whatever it takes.” Jerome Powell is pretty much in the “We’ll do whatever it takes mode.”
Brain Schreiner: Yes, even if he doesn’t say it. I think it’s implied.
John Mauldin: Yes.
Brain Schreiner: Well, I talked to several of your readers every week. And I can tell you that many of them, maybe even most of them are very concerned about inflation. And I thought about your comments. This last letter was interesting. I think you share some of their concerns. But in your recent letter, you said that you would not be surprised to see inflation rise to 3% in the coming months. But then you agree with Jerome Powell and other Federal Reserve officials that say that this is likely to be transitory. And as we get back to normal supply chains get fixed. You expect that the inflation numbers may go down maybe as low as 2%. What are your inflation expectations in the near term? And what about the longer term as well?
John Mauldin: In the near term, 3% or 4% wouldn’t shock me at all. That’s just kind of the world we live in, we have very low comparisons from March, April, May, when COVID hit last year, so prices fell out of bed. So, now we’ve got low comparisons. So, it’s going to make the year-over-year numbers look worse. But at the end of the day, you talked about things going back to normal. I’m arguing in a piece that I’m writing right now, that the word normal doesn’t mean what it used to. And it certainly doesn’t mean what a lot of us think of is when we think of it, it’s normal, it’s stable. We now live in a fluid normal. And normal just keeps changing.
We have to adapt and change with it. Now, I think that when we get the supply change, issues solved, and good things get sorted out, that we will still be in a world of potential abundance, okay. And if we’re in a world of abundance, we’re doing less business with China, we’re doing more sourcing in the US for drugs and other things. That abundance is in and of itself, deflationary. Now, if the US government can’t find any will not to spend 5 trillion deficit dollars a year, then all bets are off. I just don’t know how long they can continue to do that.
Brain Schreiner: Agreed. I don’t want to keep you much longer today. I know you’ve had a long week with us. I know we just, in fact, did a kind of a long-form webinar on the idea that the traditional 60 40 portfolios are broken. And we went in-depth with you Steve Blumenthal and Kevin Malone from Greenrock. So, if any listeners want to hear that, and watch that webinar, we talked about specific strategies we’re using in our client portfolios, and it is requiring us to be more creative than ever in portfolio construction. So, please let us know if you’d like a link to that. It’s recorded and it’s on our website. Other than that, John, anything you want to cover?
John Mauldin: No, I think we’ve pretty much covered the gamut. Thank you for making sure that I hit my quarterly talk with you and that we get out to clients. And I want to thank all the clients for reading me and for being our clients. Thank you very much.
Brain Schreiner: Thank you, John. Have a great afternoon.
Brain Schreiner: Ok, we’re back for the second segment of the Mauldin Smart Core Quarterly Conference call for the first quarter of 2021. As a reminder, if you have any questions or you would like to learn more about our investment management services, please contact us by phone at 800-891-9092 or by email at email@example.com.
I am very glad to be here with Steve Cucchiaro, President and Chief Investment Officer at 3EDGE Asset Management. Steve oversees the 3EDGE Total Return Strategy which accounts for 25% of Mauldin Smart Core.
Steve has over 35 years of experience studying the global capital markets and managing investment portfolios. Steve was the founder and served as President and Chief Investment Officer of Windward Investment Management Inc., which managed over $20 billion in client assets and was acquired by Charles Schwab in November 2010 and in 2016 Steve founded 3EDGE Asset Management.
Steve appears frequently in the media – you may have seen him on television on CNBC or quoted in the Wall Street Journal. He has a degree in Mathematics from M.I.T. and an MBA in Finance from the Wharton School.
Steve, welcome to the call today!
Steve Cucchiaro: Well, thank you, Brian. It’s a real pleasure to speak with you again. And on behalf of my colleagues at 3EDGE. I just want to say how pleased we are to be part of the Smart Core team.
Brian Schreiner: Thanks, Steve. A few days ago, you guys hosted a quarterly call for your clients. And you asked the question, are we in a regime shift? You talked about a range of issues, such as monetary versus fiscal stimulus, asset price inflation versus consumer price inflation, capital friendly policies versus labor-friendly policies. You talked about Wall Street versus Main Street, falling interest rates versus rising rates, growth equities versus value equities, fixed income versus real assets. Which of these trends, do you think to have the most force behind them and what opportunities do they provide for investors?
Steve Cucchiaro: Well, we do think this is a very important question because if there truly is a regime shift, which just happens once in a great while, that can change the rules of the game of investing. And what it means is that the investment strategies that work best over the last several years are unlikely to be the best over the next few years. Now, you’ve covered a lot of the different trends that could be changing as part of this regime shift, but want to go back to the fundamental reason why this is all potentially happening and happening now or soon. And that is that there’s been massive market intervention by the world’s central banks, by the Federal Reserve Board, by governments and especially the US government now.
And there’s a big passing of the baton, between over-reliance on monetary stimulus ever since the financial crisis of 2008. And now what we’re seeing is extreme fiscal stimulus, especially as practiced by the US government. The reason why this makes the potential for a true regime shift is that monetary stimulus from central banks, like the Federal Reserve Board, largely stay in the market, the Federal Reserve Board, unlike the market cannot spend, they can only lend. So, what they create in reserves they use to buy other market securities. And some of that goes in the real company, most of it stays in the market economy. And we get the inflation of asset prices, not the inflation of the real economy.
Well, now, we have a passing of the baton, where now we’re seeing massive fiscal stimulus. This is the government that can spend directly put money in the hands of people into the real economy. This is a sea change from what we’ve had for many years. And what can happen is that those securities that are more tied to the fortune of growth in the real economy can now start to outperform. Whereas before, we had securities that were benefiting from being able to increase their earnings without the requirement that the real economy is growing so fast. So, this is part of a sea change.
Brian Schreiner: In our previous segment with John Mauldin, Steve, we touched on inflation. I know, you and your team at 3EDGE see inflation is having five phases and I thought that was very interesting. Can you just walk us through the model, the way that you think about inflation, and what your expectations are for the near term, and then also for the longer term?
Steve Cucchiaro: Yes, there’s so much debate right now about inflation. But when you study inflationary cycles over market history, you recognize that there’s a sequence of phases that occur. And this current inflationary cycle that we’re in is no different. The first phase is when you get an increase in monetary stimulus printing of money and or devaluation of a currency. And that kicks off the inflationary cycle. And then the second phase is you start to see it reflected in gold prices, gold prices are very sensitive to changes in monetary policy. And we certainly had phase one in spades over the last few years, and we’ve had phase two now gold prices have escalated in price over the last couple of years. The next phase is when you start to see a pickup in commodity prices, and producer prices.
And the last few months we’ve seen commodity prices come alive. We’ve been in a big bear market with commodities now since the financial crisis until several months ago. And now we’re starting to see a strong pickup in commodities. In just a few days ago, we saw the biggest print in the producer price index we’ve seen in many years, 4.2% year over year inflation. The fourth phase is consumer price inflation. And this is something that we haven’t seen in a big way for a long time. And even the Federal Reserve Board says don’t worry, we might get some temporary blip, but it’s just a temporary blip. It’s all going down. But we see this as the fourth phase in a cycle. And just earlier this week, on Tuesday, we saw a print of the CPI headline inflation at 2.6% higher than it’s been in a while. And our estimate is that next month and the month after we’re going to see more than 3% year over year inflation.
And then finally, the fifth phase is when it starts to translate into core inflation, which is inflation, excluding food and energy. Now ironically, it’s this fifth phase, core inflation that the Fed focuses on the most and always has, and it’s the caboose in the train, if you will of the inflationary cycle. So, it’s the very last phase of inflation that pops up is the one that the Fed watches and it’s why historically, the Fed has often been behind the curve because, by the time that happens, the inflation’s out of the gate. It takes months before the Fed change in policy affects the real economy. And so that’s why they’re typically late. Well, now, there’s even a risk that the Fed will be later than normal because they’ve abandoned their policy of trying to anticipate when that might happen. In the normal cycle, they would start to tighten monetary policy about now to try to forestall the projected rise in inflation.
But they’ve come out and said they’re going to abandon the past practice, what they’re going to do is treat any increase in inflation as temporary. And they have said that they want to hold interest rates at zero until the year 2024. So, it’s like calling a big bluff. Maybe it’s trying to set people’s inflation expectations not to get out of hand. But if inflation should prove stickier, then there’s a risk that we could ever experience like the 70s, where the Fed always follows a step behind, never quite catches up to inflation, and it just starts to get the momentum of its own. So, that is the risk that the market isn’t building in yet.
Brian Schreiner: Well, thinking about the investment strategy that you use in Mauldin Smart Core, the total return strategy, you have a variety of methods and analysis that doing to that, including valuation metrics, measures of investor psychology and behavior, as well as multiplayer game theory. And use those to understand how policy actions by different market actors might influence the direction of the capital markets. Whereas you guys are looking at these factors within the investment strategy, which are the factors that are most at play? And what role are they playing in your asset allocation framework?
Steve Cucchiaro: Well, they’re all important. But right now, thinking about the multiplayer game theory, we have the most massive intervention by Central Banks and Governmental Authorities than the markets have ever seen. And so, this is having a huge impact, not just on an economy, but on the markets. And when we model the expansion of the central bank balance sheets over the last few months, it’s been extraordinary. And that directly feeds into remodels of stimulus coming in and fueling the markets. Right now, the Federal Reserve Board, still today is printing $120 billion of reserves out of thin air and using those to buy treasuries and other securities. So, there’s still tremendous fuel, elevating these markets higher.
Now, when we get to market psychology, what our algorithms are saying is that there’s still very much a trend-following momentum following fear of missing out on elements in the markets. That’s also compounding the fuel that was started by the Fed. And now the fiscal stimulus. So, if you think of the market like a rocket ship, there’s a lot of fuel propelling it higher, then we get to valuation. And what we see is that the US stock market by certain measures of valuation has never been more overvalued in its history. And what we know about valuation is that valuation measures are a very poor predictor of what the markets going to do in the very short term, traders mostly ignore it, in the short term, however, valuation is an uncannily excellent, extraordinarily good predictor of what market returns are going to be over the longer term.
So well, one could ignore valuation in the very short term, it will always come back to adjust the market. So, I think at this rocket ship with a lot of fuel fueling at higher, this market could continue to run but the valuation extremes are being hit, we now have, for instance, the highest price to sales ratio and the S&P 500 in the history of the US stock market higher than any other time in while interest rates are very low and justify some of that when we build very comprehensive earnings discount models going well out into the future. Unless interest rates stayed at record lows for the next 100 years. These markets are overvalued, even if they stay very low for 20 years and then revert to a longer-term average, these markets are very overvalued.
So, picture this rocket, it’s continuing to be fueled higher and higher. But picture a big rubber band that’s getting stretched more and more, but it’s not letting go. And at some point, when the fuel stops, the rubber bands going to bring the rocket back to Earth. So, we need to consider all the factors you mentioned. We need to consider that the market could still propel higher based on all these forces, levitating it the market intervention, but we should also be very concerned that we want to watch carefully the warning signs of when that rubber band is so stretch it’s going to start to pull back when the fuel starts to dissipate and things we’re looking at in the short term, our yield curves, which continue to steepen.
If they start to flatten, that’s a warning sign, we’re looking at credit spreads that continue to narrow and now we’re at record tight credit spreads when they start to widen, that’s a warning sign. Inflation, the markets are anticipating that the Fed is right inflation will just have a temporary tick and come back. Well, if inflation proves sticky, and people lose faith in the Fed, then that could upset the markets. And then there could be geopolitical instability as well.
Brian Schreiner: So, if I was to put you on the spot, and ask for your outlook for your stocks, bonds, commodities, does that mean your outlook for stocks, is bullish in the sense that momentum is still in play and then longer-term or less bullish or maybe even bearish?
Steve Cucchiaro: So, with the equities, you’re right, we have a high allocation to equities right now, because all the shorter-term factors are continuing to propel the markets. But we’ve been rotating away from what we consider the most overvalued and dangerous markets into those markets, which are relatively undervalued, which perhaps have underperformed over the last several years, but have the better chance of outperforming the future. And especially because their fortunes are more tied to growth to the real economy. What that means is that we have emphasized less or fewer US equity allocations. In more international equity allocations.
If you think about the international equity markets, they’re much more concentrated with what you would call value stocks or stocks that perform well when the economy does well. Whereas the US stock market has a huge allocation to technology and high growth stocks, the benefit whether or not the economy is doing well or not. And that’s been what’s been popular. Now we see what the regime shift, we’re going to see the chance for the other stocks that have fallen behind to catch up. And whether they start now to rally even more strongly than US stocks, or whether they’re just a safer place to be so that when things settle down, they have a lot less scope to fall because they’re not so overvalued. We think that rotation makes sense.
Brian Schreiner: And how are you thinking about bonds right now? How are you advising clients on the bond portion of their portfolios?
Steve Cucchiaro: Well, as part of an overall diversification strategy, we always think it’s good to have some portion of the portfolio in bonds just to versified, he gets the unexpected event of a recession coming out of the blue, we are at what we call our minimum allocation of bonds, we have a range. And if we find bonds to be very attractive, we could be at the maximum end of the range of we find bonds to be attracted with the minimum, we are at our minimum, if you buy treasury bonds, at any duration, you’re getting a rate of return, that’s not even equal to expected inflation at that duration, and not a good deal. You’re effectively subsidizing the government.
If you then in striving to get reaching for higher yields, you go into the corporate bond market. Well, because of the Fed intervention last year, those spreads are so tight, that there’s very little room for further tightening. And what that means is that, in our opinion, investors are not being properly compensated for the risk of investing in corporate bonds while corporate bonds have been benefiting from high expected growth in very tight credit spreads and very low-interest rates, if any of those change in the future, corporate bonds could be very risky. So, we’re at our minimum allocation bonds right now.
Brian Schreiner: Steve, thanks for your insights, I want to remind listeners, if you want to get more insights from 3EDGE, they do a nice job of keeping investors updated on their website and 3edgeam.com. And if you click on View From the Edge, there’s a series of updates including videos and market commentary, just a great resource. So, we thank you for that too. Steve, thanks again. And we look forward to having you back down the road in a few quarters with another update.
Steve Cucchiaro: Well, thank you. I always enjoyed speaking with you, Brian, and appreciate that very much.
Brian Schreiner: Thanks for listening to our conference call today. And please be sure to listen again next quarter. When we will again host John Mauldin and Asset Manager Brian Lockhart or his colleague Jeff Eliason of Peak Capital Management. Thanks again. Have a great day.
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Investing involves risk. Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc. (or any of its related entities, together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 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.
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