August 20, 2021
By Steve Blumenthal
“To me, everything, everything–and I emphasize everything from
here going forward through the rest of the year and certainly
through 2022 and maybe into 2023–I believe is the inflation story.”
– Peter Boockvar,
Chief Investment Officer, Bleakley Advisory Group
Editor, The Boock Report
Earlier this week, I had the chance to sit down and record a podcast with Peter Boockvar. Peter is author of the widely followed Boock Report. You’ve likely seen him on CNBC, Bloomberg, and other financial media outlets. I first met Peter a number of years ago at Camp Kotok. We talked about his experience at the event, which was held last weekend, and then we got into the markets. Today’s OMR focuses on our discussion. You’ll find my summary notes and a link to the podcast below.
If you are a new OMR reader, Camp Kotok is a “by invitation” event initially developed and implemented by David Kotok in conjunction with Cumberland Advisors and the Global Interdependence Center. It brings together individuals associated either directly with Cumberland Advisors or with the financial industry—prominent economists, wealth managers, traders, heads of research, pundits, financial luminaries, and often a few journalists. The event features fishing, wine, and fantastic debate in an environment that enables participants to speak freely and trust that exchanges will remain confidential unless permission is given to share.
Regrettably, at the last minute, I decided to pass on this year’s excursion to Camp Kotok in Grand Lake Stream, Maine. Susan and I had made an impulsive trip to Mexico just before, and I felt our potential exposure to the Delta variant would put others at risk. We tested negative, but it’s always better to play it safe. Next year, I won’t make the same mistake. Smart people, strong convictions, and a platform for open debate. That’s why I find Camp Kotok so important.
There is a growing divide between those who believe inflation is transitory and those who believe it is far stickier. Two weeks ago, I wrote about it. It is in that vein that I share my conversation with Peter with you. Let me begin with the conclusion. From Peter: “Bottom line is inflation/stagflation is kryptonite to any central banker.”
Forget the coffee and put your sneakers on. Grab your earbuds and go out for a walk. You’ll find a select few bullet-point notes and the link to my podcast episode with Peter below. I hope you enjoy it. Thanks for reading/listening.
- Boockvar – Blumenthal Podcast (Notes and Link)
- Trade Signals – Overbought, Overvalued, Overleveraged, Euphoric…
- Personal Section – Penn State, Cornell, and an Empty Nest
Boockvar – Blumenthal Podcast (Notes and Link)
“If it is not transitory, and I hope it is,
then the weed of inflation grows and kills the garden.”
– Richard Fisher,
Former President and CEO, the Federal Reserve Bank of Dallas
Keep Fisher’s quote top of mind as you listen to the podcast. Following are a quick few bullet-point notes to help you understand the direction of our conversation. You’ll find a link to the podcast below as well.
Peter Boockvar: So, I think there’s a problem. We’re going to reach a point where the Fed is going to possibly be tapering soon. Are they going to focus and get scared about the economic slowdown because of [the] Delta [variant of COVID-19] and all these supply problems, or are they going to say we need to control inflation first? If we can control inflation by moderating demand, that will allow the supply chains to catch up. And they may reason this will improve real wages.
- That’s going to be the decision point that we’re going to reach here, and then you take it one step further. When you think about where this can all go, every notable stock market correction since 2010–outside of the Chinese Yuan devaluation in 2015 and COVID in 2020–was surrounded by Fed tightening by either ending QE or increasing rates.
- QE1 ended in March 2010. We rallied for three weeks, and we sold off 16%. QE2 ended June 2011; we traded elevated for three weeks, then we sold off 18%. QE3 came to a conclusion in the fall of 2014, and that coincided with a 10% correction, then weeks after [Fed Chair Janet] Yellen raised rates for the first time in December 2015. We had a sell-off then in 2016.
- The Fed didn’t raise rates until a year later, and what kept the market going in 2017 was the corporate tax cut, which elevated markets in 2017 and allowed us to weather more rate hikes.
- But then they raised again in December 2017, and we had the volatility blow-up in January–February 2018.
- And then of course we know what happened in the fourth quarter of 2018: the market fell 20% as Powell kept on hiking.
Steve: And inflation wasn’t an issue those prior times.
Peter: Right, it was just the Fed that said okay, you know, seven years of keeping rates at zero, enough is enough. Six and a half years after the recession and enough is enough. Let’s start raising interest rates because they also realize that you need to normalize in order to refill their ability to then ease again.
- If you just have rates of zero forever, then you totally lose effectiveness–a/k/a Bank of Japan and the ECB–where then you have nothing to respond to economic downturns.
- But now, because of inflation entering (the equation) and because of stagflation being part of this equation, the bottom line is that inflation/stagflation is kryptonite to any central banker. It is the one thing that can reduce their powers, just like kryptonite was the one thing that could hurt Superman.
- And that is what we’re now facing from an investing standpoint, which is what the two of us both do.
- I argue that [inflation] is going to make things tough. It’s going to make things more challenging because it’s a landscape that many are not used to.
Peter concludes the podcast with a few investment ideas to consider. (Please note: This is not a recommendation for you to buy or sell any security. Please read the important disclosures below.)
Please let me know if you like the podcast. I intend to do more. Also let me know if you have any questions.
Trade Signals – Overbought, Overvalued, Overleveraged, Euphoric…
August 18, 2021
Posted each Wednesday, Trade Signals looks at several of my favorite equity market, investor sentiment, fixed income, economic, recession, and gold market indicators.
For new readers – Trade Signals is organized into three sections:
- Market Commentary
- Trade Signals — Dashboard of Indicators
- Charts with Explanations
Notable this week:
The Trade Signals (equity market) Dashboard remains predominately green… Moderately bullish. However, the overbought, overvalued, overleveraged, euphoric conditions remain in play. I’ve suggested an August peak with the seasonally challenging August-September period. I expect a sharp sell-off. Of course, I could be wrong. What is clear is that risk remains high. Hedge.
The Zweig Bond Model remains in a bullish trend buy signal (lower interest rates, higher bond prices). The HY Bond market signal remains in a sell.
Click HERE to go to the balance of 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.
Personal Note – Penn State, Cornell, and an Empty Nest
By the time this note hits your inbox, I’ll be moving stepson Connor into his dorm room at Penn State. We are grabbing ice cream at Meyer Dairy (French vanilla for dad), picking up Connor’s room key, then moving him into his room. That evening, things get even better: Penn State plays Bucknell University in a pre-season soccer exhibition match. Years ago, Susan coached a young Zach Hurchalla in a youth soccer league, and later during his high school years at Malvern Prep in suburban Philadelphia. He is now the starting left back for Bucknell. I’m crediting “Coach Sue” with his success, but my love goggles make me biased. In truth, it has everything to do with Zach, his talent, and his commitment.
A bit more to the story. Zach played high school soccer with our youngest son Kieran, and both he and Kieran interned at CMG this summer. While I love Zach and wish him well, I’ll be rooting for the blue and white. This former PSU soccer alum just can’t see it any other way. It’s just in the blood.
Zach’s father is a dear friend. We are meeting at State College for a pregame beer, then we’ll enjoy the game together and head out for dinner afterward. We are staying in town, will awake early, hit the Waffle Shop for breakfast, and then go back home. It’s just two hours and twenty minutes from Penn State to Stonewall.
Susan will miss the game. She and Kieran are en route to Cornell. Last year’s online learning is over, and that means this is Kieran’s first year on campus. Do you remember those times? That feeling of excitement, adventure, and independence. They’re good feelings, and I’m excited for our kids to experience them.
The fall will be quiet around the Blumenthal house. We’ll miss the early evening chaos in the kitchen, the ubiquitous “What’s for dinner?” question. And we’ll miss the boys. With son Kyle doing a semester in London and our other three oldest now on their own, Susan and I are officially entering the “empty nester” phase of life. We’re going into it grateful and happy.
Wishing the young people in your life great joy. Here’s a toast to their successes and to the excitement they bring you! Thanks for indulging me each week. Ever forward…
All the best,
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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