May 15, 2020
By Steve Blumenthal
“There is no atheist in a foxhole; there is no capitalist in a crisis.”
– Jim Bianco, President and Macro Strategist, Bianco Research
(Mauldin Economics Virtual Strategic Investment Conference, 2020)
Rosenberg stepped to the plate. As leadoff hitter for more than a decade, he didn’t disappoint. On the mound, the Fed’s star pitcher and former capitalist Jerome Powell. Powell looked left, looked right, and fired a cannon of a fastball right down the middle. David smiled, then hardened—“That all ya got?” Next pitch: outta here. Game on: The 2020 Virtual Strategic Investment Conference had begun.
Like I said, perennial all-star and future hall-of-famer David “Rosey” Rosenberg didn’t disappoint. His summary stats are below. Game one was Monday, May 11, and the Free Markets line-up was loaded. Sam Rines was up next, followed by the Babe Ruth of power hitters: Dr. Lacy Hunt. And Hunt delivered… four for four, including a home run. Rines cruised around the bases. Markets 3, Fed 0.
Next up, Matt Ridley, author of The Evolution of Everything, The Rational Optimist, and How Innovation Works—And Why It Flourishes in Freedom. Powell looked confused. Four balls. Another man on first. Ben Hunt, author of Epsilon Theory, delivered one of the best performances of the day. Powell tried to confuse the young thinker but underestimated the kid’s Ph.D. (in Government from Harvard University) hitting power. A curve ball… Ben sent it deep… another home run. It was a game one blowout “W” for team Markets. Markets 5, Fed 0.
Mauldin grabbed the mic. Game one stars Rosey, Hunt, and Hunt huddled up. They answered Mauldin humbly, “Powell and team Fed seem to have unlimited firepower, but we’re pretty good.”
For me, one of the truly interesting highlights of the year is the annual Mauldin Economics Strategic Investment Conference. COVID-19 has me watching it via video conference—a great surprise. I’d prefer to have a glass of wine with Rosey and Lacy in Scottsdale, Arizona, but live stream works, too, and I find myself equally intoxicated by the content.
I’m up early trying to finish my note to you as today, Friday, May 15, is Day 3 of the conference. With the tension mounting between the U.S. and China, I’m really looking forward to good friend Jonathan D.T. Ward and China expert Michael Pettis, author of The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, sharing their views on where we go from here. Jonathan and I met last summer in Bangor, Maine, and we drove the hour and a half together to Grand Lake Stream for the annual Camp Kotok (“Shadow Fed”) fishing trip. Jonathan is author of China’s Vision of Victory. He opened my eyes to their game plan. I was naïve. He’s not saying that we shouldn’t do business with China; he’s advising a more intelligent approach and a crystal-clear understanding of their greater mission. We should all be concerned. The presentations will be followed by a panel discussion lead by China bull Mark Yusko.
Over the weekend, I’ll will re-watch day 1 and 2. Next weekend I’ll review days 3, 4 and 5. My goal is to organize my thoughts in a way that helps me better understand the period ahead. As you know from prior posts, I have my own views. But I want to challenge them, specifically in terms of the debt challenges and implications for the economy and the markets. You may feel the same way. As I’ve done in each of the last number of years, I’ll then share my high-level notes with you in bullet-point format. I’ll be zeroing in on the following:
Day 1 – May 11, 2020
Dr. Lacy Hunt
Day 2 – May 13, 2020
Day 3 – May 15, 2020
Jonathan D.T. Ward, Michael Pettis, and Mark Yusko
Day 4 – May 19, 2020
Amy Jaffe, Mark Cutis – The Future of Energy
Dr. Michael Roizen
Day 5 – May 21, 2020
Louis Gave, John Mauldin, Mark Yusko, David Bahnsen – Returning to the New Normal
Today, you’ll find a brief review of Rosey’s presentation and a must-read post from Ben Hunt titled, “A Truth That’s Told with Bad Intent.”
We are running an unimaginable experiment with Keynesian weapons. Bianco captured it well: “…there is no capitalist in a crisis.” $7.5 trillion in newly created dollars is proof enough. None of us know how this will all play out. Arguing the Fed has our back, some believe that team Fed wins the series in a game seven thriller. Adam Smith’s “invisible hand” sits in team Markets’ dugout. Every push has a pull.
If you would like to sign up to receive my deeper “Bullet-Point Note Reviews,” we’ll put you on the list and send them to you when each is complete. Sign up here (it’s free). I’ll do my best to tie it all together in terms of what these insights mean for our collective personal wealth.
Grab that coffee and find your favorite chair.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- David Rosenberg – The Bulls are in Fantasyland
- Ben Hunt – A Truth That’s Told With Bad Intent
- Trade Signals – Sell in May and Go Away (?)
- Personal Note – Not Everyone Gets a Trophy
By Dorothy Hinchcliff, Advisors Perspectives
This article is based on a presentation from John Mauldin’s 2020 Virtual Strategic Investment Conference, which is being held from May 11 to 21. To register for this conference, click here. The Strategic Investment Conference was just approved by CIMA and CFP for 14 hours of continuing education credits.
David Rosenberg bluntly told attendees Monday at John Mauldin’s Virtual Strategic Investment Conference 2020 that the stock rallies in recent weeks ignore reality and don’t recognize that the United States is likely entering a depression, facing double-digit unemployment for at least three years, secular changes in consumer spending and saving, and deflation followed by stagflation.
“Right now I would classify the equity market as exhibiting a level of hubris that is as amusing as it is disconcerting,” said the Toronto-based Rosenberg, who in January started his own economic consulting firm, Rosenberg Research & Associates, after working a decade as chief economist and strategist at Gluskin Sheff & Associates.
We are in “The Great Repression,” and the downside risks brought on by the COVID-19 pandemic are not being factored in by a lot of people, he said. “Seriously, fully 80% of the stock market rally since the end of March has taken place on the days of the seven-worst readings on initial jobless claims of all time,” Rosenberg noted. “It’s surreal that we got that huge rally on Friday following the payroll figure.”
The U.S. Labor Department reported Friday, May 8, that 20.5 million nonfarm payroll jobs were lost in April, catapulting unemployment to 14.7%. But Rosenberg maintained the loss was actually 27 million jobs. “When you account for the big drop in the participation rate and the errors that people made in classifying themselves erroneously that they’re still employed when they’re actually not, the real unemployment rate is currently over 20%, as if the reported 14.7% rate isn’t horrific enough. … We’re likely going to see another five to 10 million jobs lost in May, and the unemployment rate will probably test 30%, which we last saw in 1933.”
Real GDP may drop at a 50% annual rate in the second quarter, he told listeners. “Like I said, the hole we have to dig out from is just getting bigger, and the economic math is daunting, because to recoup a 50% plunge in GDP means it has to then surge 100% to make up for that deep loss.”
It’s also possible a “fiscal cliff” will be created when the government ends the income replacement programs currently helping laid-off workers and small businesses, he continued. “Keep in mind that this is no FDR New Deal stimulus, when we built the Golden Gate Bridge, the Hoover Dam, the Lincoln Tunnel, and Route 66. This is not fiscal stimulus with any future multiplier impact or payback; it’s simply government-assisted life support.”
Rosenberg reeled off statistic after statistic that he used to illustrate how pundits are seriously underestimating the permanent economic damage in the United States that’s already been done. Other examples: The labor force participation rate dropped from 62.7% in March to 60.2% in April, which is the lowest it’s been since February 1972; and the total number of employed people who didn’t even bother to get classified as unemployed, but just actually vacated the labor force altogether, skyrocketed by 3.6 million.
“The problem I have is that it’s pure fantasy to think that normalized earnings are not going to be seriously dented by the likely permanent loss of some 10 million workers in the future from what the baseline was prior to the crisis, which means lost labor income of roughly $1 trillion. Since it is an economy where 70% of GDP is derived from consumer spending, I just have a really tough time wrapping my head around the concept that the long-term trend line for corporate profits is miraculously going to be left unscathed,” Rosenberg said.
He added his firm’s research shows “the adjusted normalized P/E multiple currently sits at 20, residing in the top 10% evaluation extremes of all time. So, far too rich for my taste.”
Current low interest rates are foreshadowing a prolonged deflationary output gap, which is bad for profit margins, Rosenberg said. The end of the recession, or depression, brought on by COVID-19 is completely contingent on an effective vaccine or treatment being developed, which could take months or even years.
An economic recovery is definitely not contingent on reopening the economy, he emphasized, because that won’t guarantee demand. People are still going to be afraid to get on planes and go out to eat. “As it stands, the U.S. Chamber of Commerce said that 25% of small businesses have already shut down and 40% have enough working capital on hand to last another two weeks, and that’s it. The AARP reports that 53% of American households have no emergency savings, so I don’t think they’re heading on a cyclical spending spree anytime soon.”
Rosenberg stressed it will not be business as usual, as the bulls will try to convince people, and the best the U.S. can hope for any time soon is a partial recovery.
“So even as the stock market is telling you that it is all figured out, I can assure you, what we face at this very moment is a highly uncertain economic future, and unfortunately, most of the longer-term risks are to the downside, not the upside. We are in a depression, not a recession. It’s a depression. I didn’t say the Great Depression; it’s a depression,” Rosenberg stressed. “And I think the dynamics of a depression are different than they are in a recession, because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end. At a minimum, depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure and a wave of bankruptcies.
“Asset markets, as I see them, still don’t reflect the economic depression. This sort of V-shaped revenue recovery, which I think you can tell, I believe is nothing more than pure fantasy. The best-case outcome is an L-shaped or I would say a backward J-shape recovery, and I repeat, that is the best-case scenario. That’s what I would call a slow, jobless recovery, and only made possible by continued and constant support from gaping fiscal deficits and Fed liquidity, and I don’t believe that a 20-multiple unnormalized earnings, based on my calculations, can be sustained in that unstable future.”
Rosenberg expects a retesting of the lows in the stock market. When looking at all the possible outcomes, the absolute best-case scenario would be a post-lockdown bounce that ends the deepest part of a recession, and the best case after that would be a painfully, slow recovery.
The 2.5% productivity decline in the first quarter announced last week received scant media attention, he said. “I would say consider that to be the thin edge of the wedge. Then think of a future with massive public deficits, debts, government intervention and regulation, and a world of reduced globalization and more localized supply chains, and an end to just-in time inventories.”
He added it’s “crystal clear” that rescue packages will be paid for not by labor but by capital, bringing higher tax rates on capital gains and corporate income. “The current surge in the deficit is not about shovels in the ground with some hope of future multiplier effects on the economy,” he said. “It is simply a transfer from some future taxpayer to today’s households and businesses, who are out of work and for some reason had no cash, no savings no liquidity to even get through even a few months of shutdown for public health and safety purposes. That says a lot right there.”
He added increased taxes financed the spending that helped the U.S. get out of the Great Depression in the 1930s. The corporate income tax from 1929 to 1939 rose from 11% to 19%, capital gains tax rates went up from 12.5% to 22.5% and personal income tax rates jumped from 24% to 62%, Rosenberg said.
“Think about this too. FDR, despite whatever you want to think about him from a fiscal policy standpoint, or anything else: He never ran a fiscal deficit greater than 7.5% of GDP during the Great Depression, and we are at least going to double that today. By 1938, five years after the New Deal was unveiled, the federal government was back in fiscal balance. The government debt-to-GDP ratio peaked that year in 1938, at 43%, half of what it is today. Why? because taxes actually back then were not a dirty five-letter word. There was a concept known among the upper classes called shared sacrifice. And there was productivity and revenue payback from that stimulus, as opposed to today’s income transfer.”
Many economists believe that the surge in the personal saving rate from 8% in February of this year to 13% in March represents some powder for future spending, but Rosenberg sees such saving rates as the “new normal.”
“According to President Trump, Rosenberg said we apparently had the greatest jobs boom of all time. And indeed, we went into this crisis with a 50-year low unemployment rate of 3.5%, and even with that, half of the household sector didn’t even have enough liquidity to make it through three months, if God forbid, they lost their job. Well, you can kiss that mentality goodbye. So even if the rose-colored glass crowd is right and recovery starts in earnest with no relapse by the third quarter, we can’t ignore the secular changes that are coming our way: changes to how people approach their cash positions, their spending and their balance sheets.”
A San Francisco Fed report that was recently published looked at the longer-run economic consequences of 15 pandemics from the 14th century on. The major finding shows a secular shift toward greater precautionary savings and a decline in investment demand, exerting a lasting downward impact on interest rates, and that’s why negative bond yields can’t be ruled out, says Rosenberg. The report concluded that following a pandemic, the natural rate of interest declines for decades, reaching its nadir about 20 years later, he said.
Rosenberg noted some investments that may be good bets, given the profound influences from the COVID-19 pandemic on the way we live and how we conduct ourselves in our personal and commercial lives. “For example, working from home is certainly going to be a more dominant force, with obvious negative implications for commercial real estate, but positive implications for internet infrastructure, hardware and video conferencing,” he said. “There’s going to be a sharp reduction in travel to work, travel in general, that means fewer cars on the road, so all the ESG reasons to avoid energy before will now be accentuated. And nothing here is very good news for the auto sector, not to mention office REITs. But they’re going to be bullish themes that emerge from this too, as I’ve outlined. We’re going into an era of elevated personal savings rates where people are going to focus on what they need, not what they want.”
Another theme that might benefit investors is to focus on stable dividends. Rosenberg expects dividends to become scarce and a reliable payout growth will be more important than dividend yield.
One of Rosenberg’s key investment themes is to invest in physical gold, which he says is a very good hedge against the instability that would be brought on by the extremes of deflation and inflation. “If there is deflation and interest rates remain low or go negative, the opportunity cost of holding gold is nil. Then if there’s inflation, gold will do well as a store of value.”
He argued a strong case can be made over three or five years that stagflation will emerge as a secular theme coming from the pandemic crisis, once demand stabilizes. “Which means dusting off the 1970s playbook might not be a bad thing to thing to at least to start to think about. Either way, physical gold comes out a winner.”
A truth that’s told with bad intent
Beats all the lies you can invent.
William Blake (1757-1827)
That’s Isaac Newton in William Blake’s painting, one of the major villains in Blake’s philosophy. Why? Because Newton was a modeler, a proponent of Science with a capital S, the most repressive force in the modern age.
I think Blake was absolutely right.
Our narratives of COVID-19 are all lies.
They are lies of a particular sort, political narratives that have a nugget of truth within them, but are told with bad intent. They are told this way because it works. Because the nugget of truth hides a deeper, unpleasant truth. And a Big Lie.
Some are narratives of the political left. Some are narratives of the political right.
They are all narratives of betrayal, meaning that they seek to excuse or promote policies designed for institutional advantage rather than the common good.
Clockwise from Donald Trump, that’s Fox’s Sean Hannity, the CDC’s Robert Redfield, Surgeon General Jerome Adams, Speaker of the House Nancy Pelosi, Harvard President Larry Bacow, the White House’s Larry Kudlow, and Vox co-founder Ezra Klein. They all get their moment of shame in our magnum opus on the ubiquitous institutional betrayals here in the early days of the pandemic age – First the People.
How do you recognize a political narrative of betrayal?
It’s always based on a model.
A political narrative of betrayal is always a top-down application of social abstraction, where a behavioral model is treated as the thing unto itself, falsely elevated as the subject and object of policy, rather than relegated to the analytical toolbox where it belongs. A political narrative of betrayal will always use “model” as a noun rather than “model” as a verb. A political narrative of betrayal always BEGINS with a prescriptive model of mass behavior – a model that by the most amazing coincidence serves the institutional advantage of the narrative creator – and ENDS with a forced fit to the individual citizen.
All political narratives of betrayal start like this, with a disembodied, modeled abstraction like “the American way of life” or “the economy” or “the market” or “public health” or “national security”. An abstraction that is then defined for you in such a way as to logically require the willing abdication of your individual rights, first as an American and ultimately as a human being.
A political lie always starts by establishing a disembodied, modeled abstraction like “the economy”. From there, the political lie will then start talking about the “sacrifices” that we citizens need to make for this disembodied, modeled abstraction.
Nothing makes me angrier.
Nothing makes me angrier than a politician like Chris Christie, a man whose idea of personal sacrifice is a regular order of fries, shaking his finger at us and telling us how reopening the local Arby’s is just like fighting Nazi Germany, how OUR deaths then and now are a “necessary sacrifice” in order to “stand up for the American way of life.”
The American Way of Life™ does not exist. It’s not a thing.
What exists is the way of life of Americans.
Start with the individual American. Start with their political rights. Start with the citizens themselves. This is how a legitimate government acts in both words and deeds.
The government’s job – its ONE JOB – is to protect our individual rights in ways that we cannot do ourselves. That’s not an easy job. At all. There are trade-offs and gray areas, and clear-eyed/full-hearted people can disagree on how to accomplish that job. But it is the job.
Its job is NOT to create “alternative” facts like modeled seasonal flu deaths or modeled herd immunity or modeled COVID-19 deaths in nudging service to institutional goals. Its job is NOT to champion the rights of the politically-connected few and ignore the rights of the politically-unconnected many. Its job is NOT to deny the rights of any citizen in service to a politically convenient abstraction like “the American way of life” or “the economy” or “public health”.
When individual rights conflict in unavoidable ways or we are faced with an immediate and overwhelming threat to our system of individual rights, a legitimate government based on the consent of the governed may be forced to decide which citizens’ rights must be temporarily suspended. This is a legitimate government’s last resort.
Today it is our government’s first resort.
Today it is the first choice of our political leaders – White House and statehouse, Democrat and Republican – to decide which rights to prioritize and which rights to deny in service to THEIR conception of what society should look like. All wrapped up in a nugget of truth told with bad intent.
This is how an illegitimate government acts.
Model-driven Narrative #1
Whatabout the Flu?
- Political goal: COVID-19 threat minimization.
- Truth nugget: The seasonal flu is a nasty (and mitigatable) disease.
- Deep Truth nugget: We are shockingly blasé about all sorts of largely preventable deaths, and we warehouse our elderly parents in horrible places.
- Big Lie: This isn’t a big deal.
- Policy prescription: Wash your hands, boys and girls!
- Embedded model: Laughably inaccurate models of seasonal flu deaths, designed to nudge popular adoption of annual vaccinations.
As the US death toll mounts, this narrative fades farther and farther into the background of our collective memory, but “Whatabout the Flu?” dominated the early weeks of American policy debates. And while it’s easy to find examples of this narrative from the political right, let’s not forget that CNN and Vox were beating this drum as hard as they could when Trump was shutting down some flights from China.
People don’t believe me when I tell them that we don’t actually count flu deaths, that the numbers thrown around by the Dr. Guptas and the Rush Limbaughs are taken from CDC models of pneumonia deaths. But it’s true. Basically we count pediatric flu deaths and hospitalized adult flu deaths, multiply by six, and intentionally generate an inflated flu death total. Why intentional? Because you need to be nudged into taking your annual flu vaccine.
If we compare, for instance, the number of people who died in the United States from COVID-19 in the second full week of April to the number of people who died from influenza during the worst week of the past seven flu seasons (as reported to the CDC), we find that the novel coronavirus killed between 9.5 and 44 times more people than seasonal flu. In other words, the coronavirus is not anything like the flu: It is much, much worse. – Scientific American (April 28, 2020)
On an apples-to-apples, counted deaths versus counted deaths basis, there is no comparison between COVID-19 and the flu. It’s pure narrative. Pure hokum. All based on a laughably inaccurate model. All geared towards the political lie of COVID-19 minimization.
Model-driven Narrative #2
- Political goal: Preservation of economic status quo.
- Truth nugget: Massive unemployment is devastating.
- Deep Truth nugget: Massive unemployment is particularly devastating to incumbent politicians.
- Big Lie: In the meantime, we can protect the olds and the sicks.
- Policy prescription: Hey, you’ll probably be fine! I mean … probably.
- Embedded model: Laughably inaccurate models of COVID-19 infection spread and severity, designed to nudge fantasies of V-shaped recoveries in the stock market and commercial real estate prices.
Again, it’s easy to find examples of this narrative from the political right, but let’s not forget that the most prominent national example of “Herd Immunity!” policy is driven by the leftwing Social Democrats – Green Party coalition in Sweden. Again, the politicization of these narratives is not a left/right thing, it’s a power thing.
It’s a high-functioning sociopath thing.
What do I mean by sociopathy and division?
I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill the old rather than the young, as if that matters for our policy choices, as if older Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.
I mean the way our political and economic leaders beat the narrative drum about how this virus prefers to kill those with “pre-existing conditions”, as if that matters for our policy choices, as if chronically ill Americans are lesser Americans, as if we should think of them differently – with less empathy – than Americans who are more like “us”.
I mean the way our political and economic leaders beat the narrative drum about how this virus hits certain “hotspot” regions, as if that matters for our policy choices, as if hotspot regions are lesser regions, as if we should think of Americans who live there differently – with less empathy – than Americans who are in “our” region.
And once you stop thinking in terms of trade offs, once you stop thinking in terms of probabilities and projected mortality rates and cost/benefit analysis and this expected utility model versus that expected utility model … once you start thinking in terms of empathy and Minimax Regret … everything will change for you. – Once In A Lifetime
Model-driven Narrative #3
Flatten the Curve!
- Political goal: COVID-19 threat maximization.
- Truth nugget: Lockdowns prevent a surge in cases which can overwhelm the healthcare system.
- Deep Truth nugget: When we’ve got everyone freaked out about staying alive, there’s no end to the crazy authoritarian stuff we can get away with.
- Big Lie: We can get R-0 down to zero.
- Policy prescription: You’ll find these ankle monitors to be surprisingly light and comfortable to wear!
- Embedded model: Laughably inaccurate models of COVID-19 deaths, malleable enough to serve the political aspirations of both the White House and their opponents.
Of the three politicized narratives, “Flatten the Curve!” has morphed the most from its original form, as its early success in convincing even Donald Trump that lockdowns were necessary to prevent a healthcare system meltdown gave both its White House missionaries and its state house missionaries free rein to use this narrative to fill a wide range of policy vacuums.
The original goals of “Flatten the Curve!” – to prevent a surge in COVID-19 cases with the potential to overwhelm the healthcare system – were achieved. The flood in New York City crested … and fell. Other cities that seemed as if they might follow in NYC’s footsteps … did not. Mission accomplished! But in the grand tradition of other initially successful emergency government interventions (“Quantitative Easing!”, anyone?) “Flatten the Curve!” is well on its way to becoming a permanent government program.
Today, “Flatten the Curve!” has become the narrative rationale for a range of extraordinary executive actions – on both the left AND the right – that would make Lincoln blush. This is the narrative that will propel the Surveillance State into a permanent feature of American life. This is the narrative that will propel the final transformation of capital markets into a political utility. This is the narrative that will propel us into a war with China. If we let it.
If we let it.
Okay, Ben, how do we stop it? How do we turn this misbegotten process of political lying on its head? How do we reject top-down, model-derived policies and their narratives? How do we BEGIN with the biology of this virus and the rights of individual citizens and build a policy framework from THAT?
This virus is 2-6x more contagious/infectious than the seasonal flu (depending on environment), and 10-20x more deadly/debilitating (depending on whether or not your local healthcare system is overwhelmed). It hits men harder than women, and the old harder than the young. Those are the facts. They’ve been the facts since January when we first studied this virus. The facts have not changed.
Knowing these biological facts, what social policies would you design around THAT?
As a 56 year-old man in just ok physical condition, I figure I have a 1% chance of death or disability if I catch COVID-19 when my local healthcare system is in good shape, maybe 4% if my healthcare system is overwhelmed. Both of those odds are completely unacceptable. To me. Other 56 year-old citizens may feel differently. Other 25 year-old citizens may feel the same. Each of us has a right to life, liberty and the pursuit of happiness, and the legitimacy of our government is predicated on preserving those rights for each of us. Liberty and justice for ALL … imagine that.
Knowing these foundational rights, what social policies would you design around THAT?
If you’ve read notes like Inception and The Long Now: Make, Protect, Teach and Things Fall Apart: Politics, you know that I am a full-hearted believer in acting from the bottom-up, in bypassing and ignoring the high-functioning sociopaths who dominate our top-down hierarchies of markets and politics. I still believe that.
But it doesn’t work with COVID-19.
The core problem with any rights-based approach to public policy is dealing with questions of competing rights. Under what circumstances could your right to liberty and the pursuit of happiness come into conflict with my right to life? Under most circumstances, neither of us is forced to compromise our rights, because we have the choice to NOT interact with each other. If my laundromat requires you to wear a mask to enter, but you think wearing a mask is an affront to your liberty, then the solution is easy: go wash your clothes somewhere else. And vice versa if I think your restaurant does a poor job of enforcing social distancing and food safety: I’ll take my business elsewhere.
Let me put this a bit more bluntly. I think that COVID-19 deniers and truthers are idiots. I think that people who minimize or otherwise ignore the clear and present danger that the biology of this virus presents to themselves and their families are fools. And there’s no perfect way to insulate their idiocy and foolishness from the rest of us. But if these idiots and fools want to take stupid risks alongside other idiots and fools, if their vision of liberty and the pursuit of happiness is to revel in some death cult, but in a way that largely allows us non-death cultists to opt out … well, I believe it is wrong for a government to stop them. Yes, there are exceptions. No, this isn’t applicable on all issues, all the time. But I believe with all my heart that if we are to take individual rights seriously, then we must take individual responsibility and agency just as seriously. Even self-destructive agency. Even in the age of COVID-19. Especially in the age of COVID-19.
There are three common and important circumstances, however, where this choice to NOT interact doesn’t exist, where the rights of yes, even idiots, to liberty and the pursuit of happiness as they understand it will inexorably come into conflict with the right to life of those who understand all too well the highly contagious and dangerous biology of this virus.
Only government can provide the necessary resources and the necessary coordination to resolve these conflicts of rights peacefully and without trampling the rights of one set of citizens or another.
You have no idea how much it pains me to say that.
It pains me because I think there’s a snowball’s chance in hell that our government will do that.
Here’s how a legitimate government would deal with the three inevitable and irreconcilable conflicts of rights in the age of COVID-19:
Healthcare workers and first responders have no choice but to risk their right to life in caring for all citizens who are sick, regardless of the agency or lack thereof behind that sickness.
How does a legitimate government resolve this conflict?
By mobilizing on a war-time basis to provide personal protective equipment (PPE) to ALL healthcare workers and social workers and first responders and public safety officers and anyone else who must serve the sick.
Workers who believe that their employer does not provide sufficient protection against this virus have no choice but to risk their right to life in their return to work, as unemployment insurance typically is unavailable for people who “voluntarily” quit their job.
How does a legitimate government resolve this conflict?
By providing a Federal safe harbor to unemployment claims based on COVID-19 safety concerns, AND by maintaining unemployment benefits at the current (higher) CARES Act level throughout the crisis.
All citizens who use public transit or use public facilities have no choice but to trust that their fellow citizens share a common respect for the rights of others, even if they may differ in their risk tolerance and private beliefs regarding the biology of the virus.
How does a legitimate government resolve this conflict?
By mobilizing on a war-time basis to provide ubiquitous rapid testing in and around all public spaces, starting today with symptom testing (temperature checks) and required masking to limit asymptomatic spread, and implementing over time near-instant antigen tests as they are developed.
It’s just not that hard.
But it is impossible. Politically impossible.
So what do we do?
“I have no idea what’s awaiting me, or what will happen when this all ends. For the moment I know this: there are sick people and they need curing.”
— Albert Camus, The Plague (1947)
We do what we can. We howl our discontent. We resist. We help our neighbors. We make. We protect. We teach. We keep the small-l liberal virtues and the small-c conservative virtues alive in our hearts and our minds.
So what do we do?
For the moment I know this: there are sick people and they need curing.
May 13, 2020
S&P 500 Index — 2,865 (open)
Notable this week:
No meaningful changes in this week’s Trade Signals post. Let’s take another look at the S&P 500 Index chart I shared with you last week. The short-term MACD sell signal triggered on Monday (5-11-2020). Also note that it came at a point of meaningful technical resistance. A short-term double top at 2,950. This may be the beginning of the seasonal “Sell in May and Go Away” period. I suspect that this may be the beginning of a re-test of the March low.
A Look at MACD
The S&P 500 Index is testing the upper end of its trading range at 2,950 as shown in the following chart. The lower section plots a short-term MACD trading signal. Moving Average Convergence Divergence (MACD) is a technical trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. I like to keep an eye on the weekly and monthly MACDs, both of which are bearish. The short term has done a good job of late – turning negative (red arrow) near the market peak and turning positive (green arrow) near the market bottom. I’ve inserted an orange arrow showing the short-term MACD is about to cross lower, signaling a sell. We’ve rallied back to a high probability technical level that in my view holds. I remain of the view that we will test the March lows.
In viewing the Dashboard of Trade Signals indicators, you’ll see that signals continue to favor government bonds and gold. I believe it is important to diversify to several different trading strategies and then let the processes work for you. No single indicator is perfect. When combined in a portfolio, they generally work well together. It has the effect of systematically scaling down market risk exposure and then scaling back in as the weight of trend evidence improves. The Ned Davis Research CMG U.S. Large Cap Long/Flat Index remains in a buy signal, as does the NASDAQ Index 200-day MA rule. Volume Supply vs. Demand, the S&P 500 Index 200-day MA rule and the S&P 500 50-day vs. 200-day MA cross is in a sell. Investor sentiment remains bearish, which is a short-term positive for equities.
The Zweig Bond Model remains in a buy signal, suggesting long exposure to high quality bonds (lower yields), the CMG Managed High Yield Bond Program remains in a sell signal and the intermediate-term trend in gold remains bullish.
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.
Click here for this week’s Trade Signals.
Not everyone gets a trophy… and I believe that is a good thing. I really love to win. But I know that losing is likely the most important factor in enabling our greatest successes.
When I didn’t perform well, Coach Bahr gave me “that look” (I hated that look) and sat my backside on the bench. Losing is no fun, but it is one of our great teachers. When we lose, we work harder, show up earlier, stay later, ask questions, and seek new insights. We learn that taking risks may not be as terrifying as we thought. Losing is often a spark that lights the fire within.
When your child or grandchild takes the field, I bet you’re rooting for their team. You watch the others and probably compare your star player’s skill level to theirs. You watch the coach, too, paying close attention to how they treat your kid. Like me, you may have said a thing or two on the way home that you wish you could take back.
But here’s the thing: Coaches know who works hardest in practice, who’s got the talent to fill a particular role the team. They are constantly looking to upgrade their talent, whether that means skill building with promising players or bringing on new ones. For the team’s members, there is risk of loss, there is risk of being benched, and there is risk of being removed from the team entirely.
My family has six kids. Three from my previous marriage and three from my wife Susan’s. The youngest is eighteen. A few years ago, he was cut from a top club soccer team. Susan is a coach in the same club.
When it happened, she said nothing to her colleagues, made no calls, asked for zero favors. Instead, she told young Kieran he had a choice to make. “You can let this lift you up or put you down. Your choice,” she said. He went to work. A year later, he made it back on that top team.
What did his failure teach him? What risks did he take to succeed? What might this lesson mean to him as he paves his own path through life?
We parents can try to cushion the blow. We can impart all sorts of wisdom, which is often met with an eye roll or two. Ultimately, nothing is greater than personal experience.
My point in all of this is not everyone should get a trophy. No one wins all the time. Losing may be the pathway to our greatest growth—the new invention, the next great business. In the moment it sucks, yes, but that’s just one moment.
The potential of loss is also the difference between capitalism and socialism.
Every push has a pull. The Fed is misallocating resources in a way that prevents the system from clearing. No capitalist in crisis… I did a short video interview with Greenrock Research’s Kevin Malone in which I talked about the Fed’s Special Purpose Vehicles (“SPVs”) and why they trouble me so much. Please click below to watch the brief video.
Look, we can debate the benefits of bailout money. I do believe we must get funds in the hands of individuals, but I have a problem with bailing out poor stewards of capital. They should be allowed to fail. As our youngest son, and so many others have learned, it’s actually a good thing.
Here’s to earning the trophy! Here’s to taking risks! Here’s to capitalism! While not perfect, there is no better system yet to be invented that exists on the planet.
Have a great weekend!
We will win! Stay safe, stay well, hang tough!
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.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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