February 2, 2024
By Steve Blumenthal
“Adventure is the invitation to common people to become uncommon.”
“There are only four things you can do on skis: Turn right, turn left, go straight, or sell them.”
– Warren Miller
The last couple of weeks, we’ve been looking into the pressure cooker building in the commercial real estate market—more specifically, the risks in the commercial office space sector. Businesses need less space, so vacancy rates are up, building values are down, and $1.9 trillion in loans will come due over the next few years—and at higher interest rates.
Other commercial real estate market segments are in better shape, but in general, prices are down from their highs, with commercial office space hit the hardest. That makes it infinitely more difficult for borrowers to refinance maturing debt.
So, will we see a “Great Short” Part II?
After spending the last several weeks poring over Wall Street research reports and speaking with bankers, real estate sponsors, various industry analysts, and several senior trading friends who manage mortgage-backed trading desks, I don’t think so. But there will be some good short opportunities. I’m contemplating a short trade on a large Commercial Mortgage-Backed REIT heavily exposed to commercial office space. I suspect it will halve its current dividend and may see all of its capital wiped out.
COVID ushered in a new hybrid work culture. The gig is up for troubled property owners when the loans mature. It is unlikely there will a Great Short Part II, just some select short bets for those inclined to take the bets.
Liquidity drives the system, and certain property owners and a few banks will find themselves in trouble—similar to how the spike in interest rates impaired Silicon Valley Bank and others last spring.
The collateral impairment on bank balance sheets means they will need to write down the value of the underlying assets. At best, they have less capital to lend; at worst, they are insolvent. Think of all those keys jingling in empty envelopes as property owners drop them off at the banks when they default on their loans. Early innings, keep watch.
Global systems are complex, and there is fragility in the system. Raising the price of money, as the Fed has done by taking the Fed Funds rate from 0.25% to 5.25%, is like putting a bull in a china shop. Yet, I don’t see another Great Financial Crisis in the forecast. Maybe we lose a few dishes. Ultimately, I believe the Fed will try to avoid a major crisis by backstopping the system with another new inventive rescue program that will upset both you and me. Of course, there is no way to know for sure.
Why should this be front and center?
I promised you I would detail the potential size of the problem this week. I have some numbers, but the truth is, I’m still digging. Regrettably, I’ll have to punt my in-depth review to a future newsletter. Stay tuned.
Strong Employment Numbers
While everyone was hoping for the Fed to start cutting interest rates——on Wednesday, Fed Chair Jerome Powell dashed those hopes. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen,” Powell said. The consensus had been expecting six cuts in 2024. With this morning’s stronger-than-expected jobs report, the consensus took one on the chin. The base case is now five cuts.
Here’s what my good friend Peter Boockvar had to say in his newsletter The Boock Report:
Can We Be Even More Confused? While ADP said 107k private sector jobs were created in January, the BLS (The Bureau of Labor Statistics) said “never mind, it was 317k” and with a headline print of 353k. And the two prior months were revised up by a combined 126k.
The household survey was much more subdued, saying that 31k jobs were lost while the size of the labor force shrunk by 175k, thus keeping the unemployment rate unchanged at 3.7% for the third straight month. The all-in U6 rate actually ticked up by one-tenth to 7.2%. As part of this uptick—and of note, too—there were increases in ‘Slack work’ and ‘can’t find full time.’ If there was to be a big offset and fly to the large headline upside was hours worked tanked to just 34.1 from 34.3. Outside of Covid, that is the lowest since 2010, which means each worker is being used less on average. The participation rate saw no change at 62.5% while the employment to population ratio was up by one tenth to 60.2%.
Some gaming with the numbers? Maybe. In any event, it’s all about the Fed, and this morning’s employment report will put their inflation shorts back in a twist and those desperately in need of lower rates sweating even more.
Grab that coffee and find your favorite chair. In this OMR edition, you’ll find a recent post from Ray Dalio, an updated look at the intermediate-term trend in the S&P and Treasury yields, and a short story about skiing powder snow.
I think Warren Miller is right: “Adventure is the invitation to common people to become uncommon.” Thanks for reading.
On My Radar:
- 2024 Will Be a Pivotal Year, Ray Dalio
- Market Technicals: S&P 500 Index and 10-Year Treasury Yield
- Random Tweet’s
- Personal Note: It Must Be Heaven
- Trade Signals: Weekly Update, January 31, 2024
2024 Will Be a Pivotal Year, Ray Dalio
As explained comprehensively in my book Principles for Dealing with the Changing World Order, there are cause/effect relationships that tend to unfold in big cycles that, like people’s life cycles, can be measured to understand how healthy a country is, where it is in its life cycle, and what its prospects are. I use these measures to provide relatively good estimates of the next 10-year growth rates for 22 countries. I share these numbers periodically and am working on putting them out in the next month or so. This template gives my baseline projections. Then I watch how actual developments unfold relative to expectations.
What I will explore today is how actual developments are transpiring relative to the template explained in the book with a focus on 2024. As you will see, the world order is by and large changing according to the template.
Within each Big Cycle arc of history, there is a string of years that have events of varying significance in them. While most years fade into insignificance, a few (e.g., 1914, 1917, 1918, 1929, 1933, 1939, 1941, 1944, 1971, 1982, 1989, 1991, 2001, 2008, 2020) stand out. 2024 will likely be one of those years that stands out because all five major forces are approaching or are on the brink of seismic shifts. To clarify, I don’t mean that 2024 will necessarily be a year of seismic shifts that will end democracy in the US and/or take the world over the brink into a war (like 1914, 1929, 1939, 1941, etc.)—I think that there is only a 20% chance of that, which is still too high for comfort. But I do mean that 2024 will almost certainly be a pivotal year in a number of ways—for example, we will find out whether the existing democratic order in the US will or won’t hold up well, and whether or not the world’s international conflicts will be contained. Of course, like all years, 2024 and the events in it will be just small parts of the long string of years and events that make the Big Cycle arc of history, which is what is most important to pay attention to. What follows are my quick thoughts about the status of the five big forces as they will likely affect 2024.
Market Technicals: S&P 500 Index and 10-Year Treasury Yield
I’m keeping a close eye on the Weekly MACD moving average trend indicators for both the S&P 500 Index and the 10-year Treasury yield. Both remain in bullish trend signals, and I’ve updated their charts below.
The S&P 500 Index
Here’s how to read the chart:
- Stock prices move up and down, and the swings can be large.
- Take a look at the lower section of the chart, which plots a MACD of two moving average lines (a 12-week and a 26-week). Signals occur when the lines cross. Green arrows signal a rising price trend in the stock market. Red arrows signal a declining price trend.
- The top section of the chart plots the relative strength index (or RSI), a technical indicator that compares recent price gains against recent price losses. Traders use it to identify overbought and oversold conditions in the market.
- The top line shows an RSI of 70 (overbought extreme); the current reading is 70.63.
- The bottom line shows an RSI of 30 (oversold extreme). The oversold extreme was reached in March/April 2020 (COVID). There were few other oversold periods in the last five years. Generally, readings near 40 are good entry points.
- If you’re a trader looking to sell the rallies and buy the dips, RSI may be helpful.
- Overall, MACD continues to support the bullish price trend. However, we are late in the move with RSI above 70.
The 10-Year Treasury Yield
At the time of this post, the 10-year Treasury yield is 4.04%, up from 3.80% yesterday. If you look at the Open, High, Low, and Last numbers on the upper right-hand top of the chart below, the Last is the current yield (40.41 means 4.041%). The jobs data showing stronger employment than expected is the culprit for the increase.
Here’s how to read the chart:
- Yields move up and down, and the swings are large. The tag boxes show various levels, with the most recent high of 4.99% in Q3 2023.
- The yellow highlighted zone estimates a possible target for rates, which is 3.75% on the high end and 2.75% on the low end.
- You can see that rates declined from 4.99% to 3.785%, touching the top end of the yellow zone, and closed Friday, January 25, at 4.13%.
- The lower section of the chart again plots a MACD of two moving average lines (a 12-week and a 26-week). Signals occur when the lines cross. Green arrows signal rates dropping. Red arrows signal rates rising.
- Bottom line: Technical evidence suggests the intermediate-term direction in interest rates is down. As you can see, signals can last for months.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Bloomberg’s Lisa Abramowicz:
Spending on debt interest now exceeds the defense budget and is soon to surpass the entire Social Security budget:
Mortgage demand or lack thereof:
Historically high concentration:
Follow me on X (formerly Twitter) @SBlumenthalCMG.
Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.
Personal Note: It Must Be Heaven
“There is nothing in the world like going out onto an untouched, open, virgin mountain slope drenched under a thick blanket of new powder snow. It gives a supreme feeling of freedom, mobility. A great sense of flying, moving anywhere in a great white paradise.”
– Hans Gmoser, September 1974
Skiing powder snow is often described as one of the most exhilarating and purest experiences in skiing. Imagine floating effortlessly across a soft, fluffy canvas that stretches endlessly in every direction. It feels like you float across the deep, untouched snow as it softens as you descend. The softness of the powder mutes the usual sounds of skiing, so it’s almost surreally quiet, punctuated with gentle swooshes on every turn as the snow blows gently past your face.
I love the way mountaineer Hans Gmoser described it in 1974. “There is nothing in the world like going out onto an untouched, open, virgin mountain slope drenched under a thick blanket of new powder snow,” he said. “It gives a supreme feeling of freedom, mobility—a great sense of flying, moving anywhere in a great, white paradise.”
Skiing through powder requires a different technique than skiing on groomed snow. There’s a unique joy in leaving the first set of tracks on a pristine slope—a sense of exploration and a connection with the natural world.
I remember the look on each of my kids’ faces when they had their first successful powder runs. “There it is, there it is…” The look on their faces at the bottom of the run—pure joy. Mine too.
I just looked at the Snowbird weather forecast and smiled. Five to nine inches today, another six to ten tonight, and another one to three tomorrow. I land in Salt Lake at 9:30 am. Snowbird is about 40 minutes away from the airport without traffic, but the new snow will slow the drive up the canyon. New snow equals lots of traffic, but the prize is worth the price.
I was a young 18-year-old in 1979 when Dad first took my sister and me to Snowbird. He put us on skis early in our lives. Wood skis, Cubco bindings, and leather ski boots that laced up like hockey skates. He got us hooked. It’s been a yearly tradition ever since. We lost Dad in 2011. I like to say he “graduated” then, but I feel him with me from time to time, especially on the slopes. The first run down is always for my old man, and I’m sure he’ll be smiling alongside us.
At the end of the day, with a nice glass of red wine held high, we toast Pop again.
Here’s a wish for your old man. Give him a call and let him know how much you love him.
Wishing you a wonderful week,
Trade Signals: Weekly Update – January 24, 2024
“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.”
– Charlie Munger
Each week, we update our dashboard of indicators covering stock, bond, developed, and emerging markets, along with the dollar and gold charts. We monitor inflation and recession as well.
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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